Interview with the COO

[Photo]Kenji Sukeno President and Chief Operating Officer

Q1 Tell us about progress on the medium-term management plan VISION2019, looking back at the fiscal year ended March 2018 (FY2018/3)

The Fujifilm Group is engaging in business activities aimed at achieving our medium-term management plan VISION2019, which extends through the fiscal year ending March 2020 (FY2020/3). VISION2019 maps out three stages for businesses—improving profitability, accelerating growth, and investing for the future. Through well-modulated allocation of business resources, the plan targets expansion of revenues and profits and solid growth for the Group as a whole. It designates key challenges as strengthening business growth in the healthcare and highly functional materials fields and dramatically reinforcing document business.

In FY2018/3, the first fiscal year of the medium-term management plan VISION2019, sales grew in the electronic imaging business, medical systems business, electronic materials business and other areas, and consolidated revenue rose 4.8% year on year to JPY 2,433.4 billion. Operating income decreased 24.1% year on year to JPY 130.7 billion, owing to the posting of one-time expenses related to structural reforms aiming to strengthen document business operations. On an actual business activity basis excluding one-time expenses, operating income increased 13.8% year on year to JPY 200.7 billion. Net income attributable to FUJIFILM Holdings reached a record high of JPY 140.7 billion. Both the Imaging Solutions and Healthcare & Material Solutions segments achieved revenue and income growth. The Document Solutions segment attained income growth on an actual business activity basis in a challenging market environment. Steadily executing strategies rooted in VISION2019 in each business field enabled us to get off to a good start.

In FY2019/3, we are making solid headway towards our business performance targets. In the Imaging Solutions segment, business is brisk and we raised our sales target for instax instant cameras from 9 million units to 10 million units. In the Healthcare & Material Solutions segment, businesses such as medical systems and electronic materials continue to do well. We are accelerating business expansion in the bio CDMO business and other growth fields by actively investing, while building a foundation to underpin pharmaceuticals, regenerative medicine, and other businesses in the future and tying our efforts to the swift generation of profits. In the Document Solutions segment, structural reforms and other fundamental reinforcements are making steady progress. We will consistently implement such measures to deliver record operating income of JPY 230 billion and net income attributable to FUJIFILM Holdings of JPY 150 billion in FY2020/3, the final fiscal year of VISION2019.

In addition, Fujifilm plans on shareholder returns of JPY 300 billion comprising JPY 100 billion in dividends and JPY 200 billion in share buybacks over the three-year period to FY2020/3. Fujifilm bought back JPY 50 billion in shares in FY2018/3 and launched a JPY 100 billion share buyback from August in 2018. By pursuing profitability exceeding the cost of capital in each business and promoting a capital policy of striking a good balance between growth investments and shareholder returns, we plan on raising return on equity (ROE) to 7.3% in FY2020/3 and 8% in FY2021/3.

Q2 What headway has been made in strengthening corporate governance?

We would like to express our deepest regrets to everyone for concerns caused by inappropriate accounting at some of Fuji Xerox’s overseas subsidiaries in 2017. The Fujifilm Group is working to bolster governance, which we have designated as crucial to developing the foundation for promoting our business strategy. To strengthen governance with a sense of urgency, the Group established the Committee for Strengthening Governance, where I serve as Chairman, and launched projects for enhancing the five fields—management of Group companies, accounting, auditing, compliance, and IT governance. We integrated the financial accounting function of Fujifilm and Fuji Xerox with the Accounting and Finance Division of FUJIFILM Holdings. We have also put in place organizations and mechanisms such as the Global Audit Division, which we established to strengthen the audit function throughout the Group. In addition, we established the FUJIFILM Holdings Hotline, an internal reporting gateway with support in 22 languages. Before, the internal reporting system was established within each Group company and region, but now the hotline goes directly to FUJIFILM Holdings so that the Company can oversee all the reporting worldwide to rapidly detect and promptly respond to signs of misconduct or legal violations in the organization. Moreover, to instill anew the open, fair, and clear mindset espoused in our corporate vision, we conduct compliance education covering all Group employees in Japan and overseas, while myself and other management repeatedly convey messages about compliance.

The compliance awareness survey we conducted in late 2017 showed that over 90% of employees understand this ethos. Initiatives on this front have no end goal. We will continue to constantly strive to strengthen governance and ensure thorough compliance as we work to maintain the trust placed in us.

In addition, Ms. Makiko Eda as an independent outside director was newly appointed at the general meeting of shareholders on June 28, 2018 to enhance corporate governance and ensure the diversity of the Board of Directors. This brought the number of directors on the Board to 10, including 4 outside directors. Ms. Eda is the Company’s first female outside director. We look forward to her active participation in discussions at Board of Directors meetings, leveraging her corporate management background and ample overseas experience. Furthermore, we established the Nomination and Remuneration Advisory Committee as a voluntary advisory organization comprising a majority of outside directors and an independent outside director serving as the Chairman. The committee discusses the succession plan of the CEO and the basic policy and procedures related to compensation for directors. We aim to increase management transparency through these measures.

Q3 Tell us about the growth strategy for the priority business field of healthcare and progress therein.

We are expanding business with the aim of being a total healthcare company covering the fields of “diagnosis” where we started out with X-ray film in 1936 shortly after our founding, “prevention” including cosmetics and supplements, and “treatment” including pharmaceuticals and regenerative medicine. Accelerating growth in the healthcare field is also a key task in our medium-term management plan, VISION2019.

While reinforcing and expanding the medical systems and bio CDMO businesses, which are currently doing well, we look to bring the pharmaceuticals and regenerative medicine businesses into the black through efficient R&D while making necessary investments, driving strong growth in such areas as a core business for the future.

Fujifilm’s medical systems business boasts an extensive product lineup unrivaled by peers. It includes X-ray imaging diagnostic systems, medical IT systems, endoscopes, ultrasound diagnostic equipment, and in-vitro diagnostic (IVD) systems. Additionally, we are strengthening comprehensive solution proposals centering on highly competitive medical IT solutions. Fujifilm is also proactively advancing business through national projects in Saudi Arabia where protecting women’s health is a social issue. In January 2018, we signed a Memorandum of Understanding with the government of Saudi Arabia regarding an agreement to collaborate on the establishment of the country’s first women’s health checkup center. And in Russia, we are contributing to the resolution of other issues in the healthcare field such as enhancement and advancement of healthcare services. In May 2018, Fujifilm signed a distribution agreement with a major Russian pharmaceutical company JSC R-Pharm for medical devices and dietary supplements in Russia.

In emerging countries where growth is remarkable, our goal is to solve social issues by providing products and services meeting local needs while expanding business at the same time. Through such initiatives, we aim to raise the profitability of the medical systems business overall and deliver annualized sales growth of 7%.

Within the pharmaceuticals business, the market is growing by leaps and bounds for biopharmaceuticals as they are likely to have few side effects and be highly effective. FUJIFILM Diosynth Biotechnologies has expertise in areas such as advanced biotechnology and process management spanning from culturing to extraction and purification. With FUJIFILM Diosynth Biotechnologies at the core of our biopharmaceuticals business, we will accelerate growth by deploying the quality control technologies and standardized manufacturing process technologies we have amassed via photographic film development and manufacturing to develop highly efficient and productive technologies, and by proactively making capital investments.

In new drug development, we will work to efficiently conduct R&D, narrowing down themes to areas such as cancer and Alzheimer’s disease where there are significant unmet medical needs. In the drug delivery system (DDS) field, encompassing the delivery of the necessary amount of medicine to the necessary location in the body at the required rate, we are working on commercial application of formulation technology that utilizes our proprietary technologies. For example, we began a U.S. Phase I clinical trial of FF-10832 for advanced solid tumors in May 2018. This liposome-based agent harnesses Fujifilm’s advanced nano-dispersion, analysis, and process technologies cultivated through the photographic film business to encapsulate the existing water-soluble anti-cancer agent gemcitabine* in liposomes. By encapsulating the anti-cancer agent in liposomes, FF-10832 is expected to realize selective delivery of the drug to the tumor, suppressing side effects and enhancing pharmacological efficacy.

In the DDS field, Fujifilm will broaden the application of this liposome formulation technology and micro-needle technology from existing drugs to promising next-generation drugs such as nucleic acid pharmaceuticals and gene therapies.

Further, in July 2018, we decided to make a consolidated subsidiary of Toyama Chemical Co., Ltd., which researches, develops, manufactures, and markets small-molecule pharmaceutical products, and merge it with FUJIFILM RI Pharma Co., Ltd., which researches, develops, manufactures, and markets radiopharmaceuticals, to form a new company, FUJIFILM Toyama Chemical Co., Ltd. in October 2018. In the increasingly competitive market for small-molecule pharmaceuticals products, we aim to accelerate the development of new diagnostic and therapeutic drugs while strengthening ties between “diagnosis” and “treatment.”

In the regenerative medicine business, we are aggressively investing business resources as “investing for the future.” In June 2018, we made Irvine Scientific Sales Company, Inc. and IS JAPAN CO., LTD., leading companies in cell culture media, consolidated subsidiaries.

With all three key components for regenerative medicine—“cells,” “culture medium,” and “scaffolds”—within the Group, we look to bolster systems enabling unified development while accelerating expansion of the culture media business where strong growth is expected.

Additionally, we will fully unleash synergies with Group companies such as Japan Tissue Engineering Co., Ltd., which launched Japan’s first regenerative medicine product, FUJIFILM Cellular Dynamics, Inc., a leading developer and manufacturer of iPS cells, and FUJIFILM Wako Pure Chemical Corporation, a comprehensive reagent manufacturer with advanced technologies related to culture medium/cytokine, to speed up R&D in the regenerative medicine field.

While actively undertaking these measures, we aim to make pharmaceuticals, CDMO, and regenerative medicine collectively profitable by FY2020/3, and generate revenue of JPY 500 billion and operating income of JPY 40 billion in the healthcare field in FY2020/3.

* An anti-cancer drug (generic name: gemcitabine, brand name: Gemzar) developed by the U.S. company Eli Lilly and Company. It is a first-line treatment for pancreatic cancer, and also indicated for a wide range of other cancers including lung cancer and ovarian cancer.

Q4 Tell us about growth strategies and the future outlook for the document business.

VISION2019 takes on the challenge of fortifying the document business so that it can secure profit even in a tough business climate.

We are first setting out to improve earnings and profitability and transform the corporate structure into a solid one by carrying out drastic structural reforms to completion. We are making steady headway on that and expect benefits amounting to JPY 27 billion in FY2019/3 and JPY 55 billion in FY2020/3 onward, compared with FY2017/3, from cost cuts including a workforce reduction of 10,000 personnel in total in Japan and overseas.

Moreover, we are emphasizing profitability and scaling back business negotiations in areas that are not very profitable such as low-end printer business. In the first quarter of FY2019/3, revenues declined year on year but income improved due to the effects of these steps.

As for future business growth, Fuji Xerox will leverage its proprietary technologies in the fields of artificial intelligence (AI), Internet of Things (IoT) and Internet of Humans (IoH) under the new value proposition strategy, Smart Work Innovation, announced in March 2018, to deliver new industryand operation-specific solutions and services, thereby assisting customers in improving productivity and bolstering competitiveness.

Through these activities, we aim to achieve an operating income margin of 10% in the document business in FY2020/3, one year ahead of the initial deadline of FY2021/3 set in the medium-term management plan.

On January 31, 2018, we announced an agreement with Xerox Corporation to combine Fuji Xerox and Xerox Corporation and acquire a majority 50.1% stake in the combined company. However, a subsequent lawsuit filed by Xerox Corporation shareholders opposed to the merger resulted in a New York state court ruling a temporary injunction. As we are fundamentally strengthening Fuji Xerox’s business, a combination with Xerox Corporation is preferable but it is not a necessity. Since we still believe the proposal for a business combination structured as announced on January 31, 2018, would be best for both companies and their shareholders, we will thoroughly explain its validity and legitimacy in the courts.

Q5 What is your message to stakeholders?

As we develop operations across an extensive range of business fields, the Fujifilm Group will accelerate business growth and fortify its portfolio by appropriately deploying measures in tune with the status of each business, continuing to create services and products that enhance the quality of people’s lives via innovation. We ask our shareholders for further support and to look forward to seeing the Fujifilm Group develop business with greater strength and speed as it continues to grow.

The medium-term management plan, VISION2019

The VISION2019 maps out each of our businesses to the following three stages according to their growth phase: (1) improving profitability, (2) accelerating growth, and (3) investing for the future. Key measures are improving profitability to generate stable cash flow, accelerating the growth of main business areas to expand revenues and profits, and investing in businesses that will constitute the pillars of our future business operations. Through these measures, we will also pursue further growth by enhancing our overseas sales foundation, established through existing business operations, while accelerating overseas deployment of healthcare products and new highly functional products.
Fujifilm plans shareholder returns of JPY 300 billion with JPY 100 billion in dividends and JPY 200 billion in share buybacks over the three-year period to FY2020/3. Though various initiatives, we look to achieve JPY 2,600 billion in revenues, JPY 230 billion in operating income, and ROE of 7.3% in FY2020/3. Moreover, we intend to realize growth surpassing the medium-term management plan through strategic M&A investment.