Change and Innovation Create New Value
Current Priority Management Issues and Business Strategy Masakazu Tokura President November 27, 2018 Current Priority Management Issues and Business Strategy 1-1- Contents Create New Value
Performance Trends 3-6
Progress on Corporate Business Plan (Overall) 7-18 Business Strategy and Topics (by Sector) 19-39 Direction of Future Business Strategy 40-59
Current Priority Management Issues and Business Strategy 2-2- Performance Trends
Current Priority Management Issues and Business Strategy 3 Create New Value FY2018 1H vs. FY2017 1H
(Billions of yen) FY2017 FY2018 Change 1H 1H Sales Revenue 1,040.3 1,122.1 +81.8 Core Operating Income 127.0 102.1 -24.9 Operating Income (IFRS) 136.1 91.9 -44.2 Net Income Attributable to Owners of the Parent 77.1 61.5 -15.6
Naphtha Price ¥37,600/kl ¥51,100/kl Exchange Rate ¥111.04/$ ¥110.26/$
Current Priority Management Issues and Business Strategy 4 Create New Value FY2018 1H Core Operating Income by Sector vs. FY2017 1H (Billions of yen) FY2017 FY2018 1H 1H Change Reasons for Change Specialty Chemicals 85.9 69.4 -16.5 Energy & Functional Materials 10.3 12.8 +2.5 Sales increase of separators IT-related Chemicals Sales increase of 9.0 14.8 +5.8 polarizing films Health & Crop Sciences Loss on equity method in 8.4 2.5 -5.9 Nufarm Temporary gains on Pharmaceuticals 58.1 39.3 -18.9 the transfer of business in FY2017 Bulk Chemicals 41.9 35.4 -6.5 Petrochemicals & Implementation of periodical Plastics 41.9 35.4 -6.5 maintenance shutdowns in FY2018 Others -0.7 -2.7 -2.0
Core Operating Income 127.0 102.1 -24.9
Current Priority Management Issues and Business Strategy 5 Create New Value Dividend Policy
We consider shareholder return as one of our priority management issues andhavemadeitapolicy to maintain stable dividend payment, giving due consideration to our business performance and a dividend payout ratio for each fiscal period, the level of retained earnings necessary for future growth, and other relevant factors.
Interim dividend (left axis) Year-end dividend (left axis) (¥) Commemorative dividend (left axis) Net income attributable to owners of the parent (right axis) (¥Billion) 25 200
20 12 11 160 133.8 130.0 15 120 2 90.7 93.9 85.5 6 81.5 10 64.5 80 7 63.1 3 7 2 6 3 3 0 3 6 52.2 5 333 6 10 11 40 34.3 3 6 24.4 66 666 37.0 6 6 7 30.2 31.1 4 5 3333 14.7 3 5.6 0 0 0 -5 -40 -51.1 -59.2 -10 -80 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (FY) (Forecast) J-GAAP IFRS * J-GAAP used through FY2016, IFRS adopted from FY2017.
Current Priority Management Issues and Business Strategy 6 Progress on Corporate Business Plan (Overall)
Current Priority Management Issues and Business Strategy 7 Create New Value Corporate Business Plan: Basic Policy
Last 10 Years Where We Are Where We Are Going
Enhance financial strength Further improve business portfolio
Rigorously Improve Allocate Improve Identify areas of select asset resources to profitability strength Pave the way for investments efficiency prioritized areas future growth (Tackle three priority management issues) Restructure businesses Generate more cash flow Increase Make Streamline profit active and Implemented Rabigh Project Exit Improve balance above cost disciplined underperforming business sheet businesses portfolio of capital investments Launched DSP and acquired Sepracor/BBI
Established and expanded IT-related Chemicals Sector Accelerate the launch of next-generation businesses
Environment Life Sciences ICT Crossover areas and Energy
Globalization Promote globally integrated management
Ensure full and strict compliance, establish and maintain safe and stable operations
Current Priority Management Issues and Business Strategy 8 Create New Value FY2018 Forecast vs. FY2018 Target
(Billions of yen) FY2018 FY2018 Change Forecast Target Sales Revenue 2,490.0 2,540.0 -50.0 Core ± Operating Income 240.0 240.0 0 Operating Income (IFRS) 205.0 190.0 +15.0 Net Income attributable to owners of the parent 130.0 110.0 +20.0
Naphtha Price ¥47,000/kl ¥45,000/kl Exchange Rate ¥110.00/$ ¥120.00/$
* Forecast and target both based on IFRS
Current Priority Management Issues and Business Strategy 9 Create New Value Corporate Business Plan: Medium- to Long-term vs. FY2018 Performance Targets
FY2018 FY2018 Medium- to Forecast Corporate Long-term Targets Business Plan Consistently achieve the following targets:
ROE 13.4% 12% over 10%
ROI 7.4% 7% over 7%
D/E Ratio approx. 0.7 times 0.6-0.7 times* approx. 0.7 times
Dividend Payout Ratio 28% - approx. 30%
Profit Growth - - over 7% per year
* Including the effects of strategic M&A investments
Current Priority Management Issues and Business Strategy 10 Create New Value
Capital Expenditure and Investment Forecast for FY2016-FY2018 (decision-making basis)
(¥ Billion) Capital expenditure and investment Strategic M&A 800
700 More than half of 600 the planned expenditure and investment for Up to 500 FY2016-FY2018 ¥300 billion decided during FY2016 400
300
200
100
0 FY2016 FY2017 FY2018 FY2016-2018 Total FY2016-2018 Total (Forecast) (Forecast) (Corporate Business Plan)
Current Priority Management Issues and Business Strategy 11 Create New Value Capital Expenditure and Investment Plan for FY2016-FY2018 (decision-making basis)
Energy & Functional Materials Pharmaceuticals □ Expand separator production capacity □ Acquired Parkinson’s disease treatment □ Entered cathode materials business □ Acquired a leukemia treatment, among others
General
Capital expenditure and Petrochemicals investment plan for & Plastics FY2016-FY2018 Specialty chemicals (decision-making basis) account for: 75% Approx. ¥690bn Health & Crop Sciences □ Increase methionine IT-related Chemicals production capacity □ Expanded touchscreen □ Acquired Indian agrochemicals panel production capacity company, Excel Crop Care Ltd. □ Built and expanded □ Acquired insecticidal compounds semiconductor materials manufacturer Botanical Resource production capacity Australia Group □ Flexible display materials □ Expanded R&D
Current Priority Management Issues and Business Strategy 12 Create New Value Research and Development Expenses Plan for FY2016-FY2018
Energy & Functional Materials □ Battery materials Petrochemicals & Plastics General
IT-related Chemicals Estimated R&D Expenses for Specialty chemicals □ Flexible display FY2016-FY2018 account for: 90% materials □ Compound Approx. bn semiconductors ¥490
Pharmaceuticals Health & Crop Sciences □ Napabucasin / Amcasertib （Cancer stemness inhibitor） □ Next-generation blockbuster □ Dasotraline crop protection chemicals （Treatment for attention-deficit hyperactivity □ New rice varieties disorder (ADHD)/binge eating disorder (BED)） □ Active ingredients for □ LONHALA® MAGNAIR® nucleic acid medicines （Treatment for chronic obstructive pulmonary disease (COPD)）
Current Priority Management Issues and Business Strategy 13 Create New Value Major Investments and Commercialization Schedule (Overall)
Corporate Business Plan Corporate Business Plan Investments for FY2016 to FY2018 for FY2019 to FY2021 Investment Total 2016 2017 2018 2019 2020 2021 Growth in a wide range of industries, Rabigh Phase II Project $9.1 billion USD (PRC’s total investment) particularly in Asia
Building and expansion of Approx. Growth of the electric vehicle and heat-resistant separator 25 billion yen energy storage system markets plants (Expansion) Expansion of Growing demand for aircraft and automotive structural materials polyethersulfone A few billion yen and high performance membranes production capacity
Expansion of Approx. flexible touchscreen panel Shift of smartphone screens to OLED and flexible screens production facilities 9 billion yen
New plants for high-purity A few billion yen semiconductor chemicals Growth of the semiconductor market (Xi’an and Changzhou, China) each
Increase of stake in Chinese polarizing film manufacturing (Non-disclosure) Growing demand for polarizing film in China subsidiary
Growing methionine demand Expansion of methionine Approx. (increasing global population/ production capacity 50 billion yen growing demand for meat)
■ Petrochemicals & Plastics ■ Energy & Functional Materials ■ IT-related Chemicals ■ Health & Crop Sciences ■ Pharmaceuticals : Investment decision made Current Priority Management Issues and Business Strategy 14 Create New Value Major Investments and Commercialization Schedule (Overall)
Corporate Business Plan for FY2016 to FY2018 Corporate Business Plan for FY2019 to FY2021 Investment Total 2016 2017 2018 2019 2020 2021 Research and development Approx. Accelerating discovery and development of facilities （Brazil, North America, and Takarazuka） 10 billion yen new crop protection chemicals
Construction of new LNG Approx. Reducing environmental burden through *1 thermal power plant 35 billion yen fuel and raw material conversion
Construction of regenerative Approx. Building a GMP production framework/ medicine and cell therapy Manufacturing allogeneic iPS cell-derived products manufacturing plant 3.6 billion yen
Acquisitions
Acquisition of Approx. High growth in India’s agrochemicals market Excel Crop Care 13.9 billion yen (Expansion of food production driven by population growth)
Acquired Growing demand for insecticides for crop protection and Botanical Resources undisclosed Australia Group household, vector control applications.
Acquisition of Approx. Improved convenience for patients Cynapsus Theruapeutics 66 billion yen (film formulation to replace administration by injection) Approx. Acquisition of Providing options for treatment of 23.6 billion yen Tolero Pharmaceuticals refractory acute myeloid leukemia (upfront payment)*2 ■ Petrochemicals & Plastics ■ Energy & Functional Materials *1 Including power plant construction expenses and investment in the complex ■ IT-related Chemicals ■ Health & Crop Sciences : Investment decision made ■ Pharmaceuticals *2 Not including payments for development and sales milestones Current Priority Management Issues and Business Strategy 15 Create New Value Change in Business Portfolio Change in core operating income and its composition *Through FY2015: sum of operating income and equity in earnings of affiliates under J-GAAP.
(¥ billion) New record high 300 2,627 2,400 250 Core Operating Income* 1,847 200 150 100 50 0 (50) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (FY) （Forecast）
Specialty Specialty Specialty Bulk Chemicals Bulk Chemicals Chemicals Bulk Chemicals Chemicals Chemicals 26% 36% 26% FY2015 74% FY2017 65% FY2018 74%
Steady increase in profitability of specialty chemicals business
Current Priority Management Issues and Business Strategy 16 Create New Value Changes in Our Business Portfolio
Changes in Asset Structure* 100%
90% Total assets of Bulk Chemicals 80% business
70%
60%
50% Total assets of 40% Specialty Chemicals 30% business 20%
10%
0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (End of the fiscal year) (Forecast)
Basic Chemicals Petrochemicals & Plastics Fine Chemicals Energy & Functional Materials IT-related Chemicals Health & Crop Sciences Pharmaceuticals * Excluding Others and Eliminations Current Priority Management Issues and Business Strategy 17 Create New Value Management of Cash Flow
Trends of Interest-bearing Liabilities and D/E Ratio （Billions of yen） （times） 1,600 1.6 Interest-bearing liabilities (left axis) 1,400 1.4 Debt to Equity ratio (right axis)
1,200 1.2
1,000 1.0
800 0.8
600 0.6
400 0.4
200 0.2
0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 201620172018 *1 (Forecast)*2 *1 J-GAAP used through FY2016, IFRS adopted from FY2017. (End of the fiscal year) Information for FY2016 restated in accordance with IFRS. *2 Including investment in Rabigh Phase II Project
Current Priority Management Issues and Business Strategy 18 Business Strategy and Topics (by Sector)
Current Priority Management Issues and Business Strategy 19 Create New Value Petrochemicals & Plastics: Challenges and Business Strategy and Progress Status
□ Maintain a high operating rate at Petro Rabigh Challenges □ Enhance high value-added business in Singapore
Business Strategy Progress Status
Rabigh Phase I Project: Maintaining high and stable operation (since Q2 2017) Stable operation
Rabigh Phase II Project: Construction and Shipment started for all products start of operation
Modified polypropylene lines (from automotive use to food packaging use) Enhance high value-added Launched polypropylene for separators (TPC) business Enhanced polypropylene compounding capacity (capacity expansion in the US and China, new facilities constructed in India)
Restructure Restructuring of caprolactam business businesses (under consideration)
Current Priority Management Issues and Business Strategy 20 Create New Value Petrochemicals & Plastics: Expanding the Technology Licensing Business Line-up of technologies available for licensing Licensee facilities steadily increasing PO-only Process （KTA） (Cumene PO-only Process) 1,400 No byproducts PO-only Process Higher yields impact, lower environmental 1,200 Hydrochloric acid Hydrochloric acid oxidation process 1,000 oxidation process Significantly saves energy Recycling by-product into raw materials 800
Others Technologies 600 ● LLDPE ● LDPE（EVA） ● PP ● MMA / PMMA ● EPDM ● C4’s 400
Decision to Enhance 200 Catalyst Production Capacity PE・PP Catalyst PO Catalyst 0 11 12 13 14 15 16 17 18 19 20 21 22 23 (CY) Start of operations Q1 FY2019 Q3 FY2019
Expand technology licensing and → Achieve stable revenue catalyst sales business
Current Priority Management Issues and Business Strategy 21 Create New Value Petrochemicals & Plastics: Rabigh Phase II Project
Progress of the Phase II Project As of November 2018 2019 Currently preparing Commercial operation for full operation ・・・ March 2018 planed to start All products complied with specifications End of 2017 Commissioning 2017 Construction completed Naphtha reformer Aromatics plant
Configuration （Capacity 1,000t/year） Phase I Phase II Project
Paraxylene/Benzene Nylone-6 Naphtha Naphtha （1,300/400） (75) Oil refining reformer facilities Propylene Phenol/Acetone （ ） （250/150） 900→1,100 MMA/PMMA （90/50） EPDM/TPO（70/10） EVA/LDPE（70/80） Ethane Ethylene Cracker （1,300→1,600）
Current Priority Management Issues and Business Strategy 22 Create New Value Energy & Functional Materials: Challenges and Business Strategy/Progress
□ Develop the battery materials business into Challenges a core business □ Build eco-friendly car components business
Business Strategy Progress
Enhance the lineup Entered cathode materials business of battery materials (Acquired a majority stake in Tanaka Chemical Corp.) and increase Expand separator production capacity production capacity (Production capacity: 100 million m2/year to 400 million m2/year)
Expand the use of Expanded PES production capacity our existing products (Production capacity: 3,000t/year to 6,000t/year) in eco-friendly car components PES adopted for use in engine control valves
Restructure Decided to exit the DPF business underperforming Restructured S-SBR business businesses (Established ZS Elastomer Co., Ltd.)
Current Priority Management Issues and Business Strategy 23 Create New Value Energy & Functional Materials: Expand the Lithium-ion Secondary Battery Separators Business Studying possible production capacity Separator Production Capacity expansion in South Korea (Daegu) Currently studying the Separator Market Trend next phase of expansion in response Amount (left axis) Volume (right axis) to growing demand (Billions of yen) (Millions of m2) 1,400 18,000 400 Million m2 1,200 South 1,000 12,000 800 Korea 2 600 200 Million m 400 6,000 200 Japan 0 0 2016 2017 2018 2019 2020 2025 2030 Phase I Phase II Phase III (Estimate) (Forecast) CY2016～ CY2017～ (Source) “Future Outlook of Energy, Large Scale Secondary Battery, and Materials 2018; Energy Devices” by Fuji Keizai Initiatives to Expand Business Responding to existing customers’ increasing demand Adopted by new customers in Japan Currently working with prospective customers outside SSLM Co., Ltd. Japan, primarily in China and Europe
Quickly responding to increasing demand of new and existing customers
Current Priority Management Issues and Business Strategy 24 Create New Value Energy & Functional Materials: Expansion of Liquid Crystal Polymer (LCP) business
LCP for Supporting Next-Generation Mobile Trends in high-frequency substrate materials market 12,000 Telecommunications (5G) Society (thousands of ㎡) Characteristics of 10,000 High-Frequency Materials Required by 5G 8,000 LCP Low permittivity/low dielectric loss tangent 6,000 Low water absorption 4,000 (under high temperature and high humidity) 2,000
The characteristics of LCP well match 0 (CY) these requirements. 2017 2018 2019 2020 2021 2022 2023 2024 2025 ■Millimeter-wave automotive radar ■Next-generation (5G) communications ■Others Our product lineup Melt type with excellent processability
Solution type most suitable for thin film
Firmly seize business opportunities in next-generation high-speed communications
Current Priority Management Issues and Business Strategy 25 Create New Value IT-related Chemicals: Challenges and Business Strategy/Progress on Strategic Initiatives
Develop and launch new materials supporting the advance of display technology Challenges Strengthen the foundations of Sumitomo Chemical’s semiconductor materials business, which is expected to grow on the back of digital transformation
Business Strategy Progress
Expanded sales of circularly polarizing film Launched and expanded applications for Expand liquid crystal coated-type polarizing film OLED materials and Enhanced production capacity for touchscreen panels (Glass, Film) components business Full-scale launch of polymer OLED materials business (acquired new shares in JOLED) Accelerate Studied mass production of window film the development of flexible display materials Development of multi-functional materials and components in progress and components
Optimize Expanded production capacity for photoresists production capabilities (Osaka Works, Dongwoo Fine-Chem) (for photoresists, high-purity chemicals and other high- Expand and strengthen production capacities for performance materials) high-performance chemicals in China (Xi’an, Changzhou)
Current Priority Management Issues and Business Strategy 26 Create New Value IT-related Chemicals: Business Development for Medium-size Displays Applications
Full-scale Launch of Polymer OLED Materials Business
資金調達 JOLED’s Nomi Site Target
Medium-size displays （10 to 32 Inch） Capital raise by share placement
Billions of Subscriber yen
DENSO 30 Start operation in 2020 Toyota Tsusho 10
Sumitomo Construction of 5 Chemical printed OLED display Screen Finetech commercial production line 2 Solutions To supply our polymer Total 47 OLED materials High-end monitors
Anticipating printed OLED displays will be used in a wider range of applications such as automotive use
Current Priority Management Issues and Business Strategy 27 Create New Value IT-related Chemicals: Commercialization of Polymer OLED Materials
LG Display’s Plan for OLED Investment Advantages of the Printing Method for Guangzhou Works, China Paju Works, South Korea Polymer OLEDs Substrate size: Gen. 8.5 Substrate size: Gen. 10.5 Manufacturing process Total investment: Total investment: 2.6 trillion won* 2.8 trillion won* White Vapor-Deposition RGB Printing Method * LG Display invested 70% of * For TFT substrate production Method the total investment. equipment only In a vacuum
Expansion of OLED Expansion of White-OLED (W-OLED, Printed OLED*) * Started evaluation of devices Mask Vapor equipped with printed OLED Light-emitting material deposition source (Millions of units) OLED TV Market 20.0 Advantages 15.0 White Printed OLED OLED method No expensive masking required 10.0 High material-use efficiency 5.0 Excellent resolution (8K) 0.0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Data based on IHS Markit, Technology Group, Display Long-term Demand Forecast Tool, Q2 2018. （CY) Results are not an endorsement of Sumitomo Chemical. Any reliance on these results is at the third party’s own risk. Visit technology.ihs.com for more details. Commercial production expected to start as early as in FY2019
Current Priority Management Issues and Business Strategy 28 Create New Value IT-related Chemicals: Compound Semiconductor Business Development for Automotive Applications
Growing Demand for GaAs epiwafer VCSEL Wafer Market for Use in VCSEL* 3D Sensors 1000 units, 6inch equivalent GaAs epiwafer Light Output 700 600 Smartphones Automobiles p-metal contact 500 Pad-metal oxide aperture p-DBR 400 Q.W. 300 200 Polyimide 100 0 n-DBR 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Substrate （CY) * Vertical Cavity Surface Emitting Laser n-metal contact (Souce) Daiwa Capital Markets, June 2018 VCSEL applications Smartphone, 3D imaging Present (face authentication) and Future Automotive applications others
＋
Driver Attentive Eye openess Blinks per minute Gaze vector
＋
Driver monitoring Driving support Autonomous driving
GaAs epiwafer market expected to expand driving by demand growth in automotive applications
Current Priority Management Issues and Business Strategy 29 Create New Value Major Products in the Mobility Sector *Including projects under development
Front Window, Roof Materials Products of Petrochemicals & Plastics Sector Developed PMMA-based transparent resin Products of Energy & Functional Materials Sector
Products of IT-related Chemicals Sector
Aluminum Super Engineering Plastics PES Resins Electrodeposition Paint LCP PP
PP compounds Lithium-ion Battery Materials
TPE Separators
PMMA Cathode materials
ABS High purity alumina
EPDM Display materials Tire-related products
Polarizing films Resorcinol
GaAs epiwafers (for VCSEL) Polymer OLED materials S-SBR
Current Priority Management Issues and Business Strategy 30 Create New Value Health & Crop Sciences: Challenges and Business Strategy/Progress on Strategic Initiatives
Build a global business foundation as a solutions provider Challenges課題 in crop protection and environmental health businesses
Business Strategy Progress
Enhance Acquired Excel Crop Care Ltd., an Indian agrochemicals company, which will merge with our global footprint Sumitomo Chemical India
Accelerate Development of B2020 in progress development of （Registration applications filed for a product） new products Alliances with major agrochemical companies (B2020, A2020) Expanding R&D facilities and test fields
Expand Acquired a plant growth regulator business our differentiated from Kyowa Hakko Bio. businesses Acquired Botanical Resources Australia Group （biorational and rice businesses) Entered into the rice business
Expand Commercial production begun at our new plant methionine business Expand sales through collaboration with ITOCHU
Current Priority Management Issues and Business Strategy 31 Create New Value Health & Crop Sciences: Strengthening Crop Protection Business India Merger of Excel Crop Care Ltd. and Sumitomo Chemical India Growth of India’s crop protection market ECC SC India Growing at approx. 6% Strong sales channel in Strong sales channel in （Millions of USD） per annum northwest India southeast India 3,500 6th largest market in the world Sales channels to 2,800 Sales channels to 2,100 over 4,700 wholesalers over 9,000 wholesalers 1,400 Three production bases Two production bases 700 0 Broad product portfolio Strong sales in 2010 2015 2017 2022 (Year) the specialty area
Aiming to become Crop protection market the market leader in India by 2020 by Company in India Profile of the new company （Millions of USD） 2nd largest when The surviving company：Sumitomo Chemical India 300 combined (2016) ECC 250 Sumitomo Chemical’s shareholding ratio: 75% after listing 200 SC India To be merged in 2019 150 252 Major synergies 100 180 144 50 90 90 90 Sales expansion by 0 SCIPL +ECC Syngenta SCIPL +ECC Phosphorus United Dow Dhanuka Rallis Bayer leveraging the Launch and Establish respective companies’ promotion of a global production sales channels and mixture products network (Source) Phillips McDougall product portfolios
Contribute significantly to increasing our presence in the fast growing crop protection market in India
Current Priority Management Issues and Business Strategy 32 Create New Value Health & Crop Sciences: Progress in Pipeline Development B2020 Full-scale Compound Use Evaluation Registration development TM Agricultural fungicide INDIFLIN Completed Submitted (inpyrfluxam) e.g. Soybean rust in 2017 PAVECTOTM Agricultural fungicide Completed Submitted (methyltetraprole) e.g. Septoria in 2018 TM Plan to submit ALLES Agricultural insecticide Completed (oxazosulfyl) e.g. Major rice pests etc. in Q1 2019 Product Name Agricultural fungicide Undecided Completed e.g. Field crop and vegetable diseases (pyridaclomethyl) A2020 Next generation herbicide effective Full-scale development Pipeline A against weeds having resistance issue started Full-scale development Agricultural plant growth regulator Pipeline B in progress Botanical insecticide for agriculture and Pipeline C Full-scale development household hygiene in progress Agricultural insecticide to control Evaluation in Pipeline D insecticide-resistant pests progress
Business Potential: approx. ¥150-200 billion
Current Priority Management Issues and Business Strategy 33 Create New Value Health & Crop Sciences: Expansion of Our Biorational Business
Expansion of our Biorational Business Biorationals Market Annual Year Topics Market size growing rate Purchased microbial pesticides business from 2000 Abbott laboratories For agricultural use: ¥50 billion → Established Valent Biosciences (VBC) Microbial 9-11% pesticides For household and 2014 Built Valent Biosciences LLC, Osage Plant (Iowa) public hygiene: ¥11.7 billion 2015 Purchased Mycorrhizal Applications Plant growth Signed two agreements on licensing, ¥33 billion 3-5% regulators 2016 development and commercialization cooperation with Lidochem and with Rizobacter Biorational ¥28 billion 10-12% Purchased biorational business from rhizosphere 2017 Kyowa Hakko Bio 2018 Built Biorational Research Center Total sales of our biorational business
¥45 billion ¥26 billion
2017 2020
Current Priority Management Issues and Business Strategy 34 Create New Value Pharmaceuticals: Progress on Strategic Initiatives
□ Sustained growth after the LATUDA business transition period Challenges □ Manage the effect of public policy measures to promote the use of generic drugs
Business Strategy Progress
In-license and acquire Launched COPD treatments (Peak revenue: Approx. 50 billion yen) third-party products NDA field for Parkinson’s treatment under development (Peak revenue: Approx. 50 billion yen)
Accelerate Acquired Cynapsus Therapeutics (Parkinson’s treatment) the development of Acquired Tolero Pharmaceuticals (hematologic cancer treatment) products in late-stage development Acquired the license for diabetes treatment Imeglimin
Accelerate Began operation of the regenerative medicine and cell therapy the development of manufacturing plant regenerative and Began physician-initiated clinical trials for cellular medicine Parkinson’s disease treatment Implemented an early retirement program in Japan Reform the structure of (Sumitomo Dainippon Pharma) our pharma business Established the Japan Business Unit as a cross-functional in Japan virtual organization for strengthening domestic business
Current Priority Management Issues and Business Strategy 35 Create New Value Pharmaceuticals: Initiatives in Regenerative Medicine & Cell Therapy Business
Proposed indication, Region Clinical research/ Partnering World’s First Commercial etc. (planned) Clinical study Manufacturing Facility for Chronic stroke North Phase 2b study SanBio (SB623) America in progress*1 Allogenic iPS Cell-derived AMD Healios Medicines”SMaRT” (age-related macular Japan Preparing for RIKEN degeneration) clinical study Aim to GMP Compliant launch in Closed production lines* for Parkinson’s disease FY2022*2 Kyoto Univ all processes (Designated as a Global Clinical study started CiRA august 2018 Independent HVAC systems for "SAKIGAKE") each production zone
Preparing for Retinitis pigmentosa RIKEN Global clinical research Keio Univ Preparing for Spinal cord injury Osaka National Global clinical research Hospital
*1 Planning to conduct Phase 3 study, but aiming to apply for accelerated approval, * Raw materials and products are not exposed to the depending on Phase 2b study results. outside environment (non-sterile environment) *2 Launch schedule is based on our plan and not agreed on by partners. • Commence full-fledged • Advance development of five • Launch a product in commercialization of multiple projects in Japan and the U.S. 3rd Stage 2nd Stage Japan and the U.S. (around 2030) products in Japan and the U.S. 1st Stage • Build a GMP production (late 2020s) • Enhance and expand • Roll out new businesses (early 2020s) framework next-generation pipeline • Continue striving for next-generation technologies Expected to grow into a core business of the Pharmaceuticals sector by 2030
Current Priority Management Issues and Business Strategy 36 Create New Value Status of LATUDA® ANDA litigations (U.S. Patent No.9,815,827 / 9,907,794) Litigations filed in February 2018 Focused efforts concerning ‘827 patent, while reserving the right to dispute the court’s construction of claim and assert infringement regarding ‘794 patent in an appeal Claim construction ruling (Markman Ruling) issued by the court on October 5, 2018 Preparing for the trial, expected to be an intensive one for a week in late November to early December 2018 In parallel with the preparation for the trial, the court has required that, under its direction, DSP/Sunovion participate in separate settlement negotiation with each defendant Number of defendants has been reduced from the original 16 defendants to 10 defendants (as of October 29, EST), thanks to settlement efforts made so far
Litigations newly filed after May 2018
Subsequent to May 2018, we filed, similarly to the above February litigation, three additional lawsuits to assert ‘827 and ‘794 patents (one filing each in August, September and October) against three generic manufacturers who newly filed ANDA The trial schedule of the February litigations not affected by these new litigations, as these litigations proceed independently of the above February litigations
(Source) Dainippon Sumitomo Pharma Investors Meeting Presentation for Q2 FY2018 presented on October 30, 2018 Current Priority Management Issues and Business Strategy 37 Create New Value Pharmaceuticals: Initiatives in Nucleic Acid Medicine
Biological Nucleic Acid Medicine DNA mRNA Protein Response Next-generation treatment following small molecule pharmaceuticals and Transcription Regulation Action biopharmaceuticals, such as antibody drugs Bonac nucleic acid Action: Regulation of mRNA breakdown and translation
News Sumitomo Bonac Chemical Phase I clinical trials have begun for nucleic acid medicine TRK-250 (idiopathic pulmonary Equity investment Drug fibrosis treatment), jointly developed by and development business alliance Bonac and Toray Industries.
Unique Manufacturing of Compliant with GMP SC is to supply nucleic acid active ingredients High yield the active ingredient platform Scalable Medical examinations
Safety evaluation Seek to enhance synergies of the alliance, including application of the long-chain nucleic acid synthesis technology to gene therapy
Current Priority Management Issues and Business Strategy 38 Create New Value Pharmaceuticals: Nihon Medi-Physics Expansion of Healthcare Businesses
Theranostics Theranostics = Therapeutics Diagnostics
Basic Concept of Theranostics Construction of CRADLE*3 Building (planned for completion Sep 2019) Identical core Identical Research and development of radioactive structure diagnostic agents, and manufacturing and RI RI shipment of radioactive therapeutic agents diagnostic Diagnostic RI Treatment RI therapeutic agent agent • Collaborate with neighboring Nihon Medi- Physics Chiba Works and Research Center • Total construction costs: 3.3 billion yen e.g. e.g. 18F 225Ac
Utilize an identical Selectively deliver core structure both diagnostic agent (including molecules and therapeutic agent and antibodies) to the affected area Adopted in CiCLE*1 of AMED*2
Develop Theranostics as soon as possible
*1 CiCLE: Cyclic Innovation for Clinical Empowerment *2 AMED: Japan Agency for Medical Research and Development *3 CRADLE: Consortium for Radiolabeled Drug Leadership
Current Priority Management Issues and Business Strategy 39 Direction of Future Business Strategy
Current Priority Management Issues and Business Strategy 40 Create New Value Management Strategy and Performance Trends from the early 21st century
Three priority Excessive yen management issues appreciation Recession Change & Innovation
Drastically enhanced the Enhance financial strength （¥ Billion） competitiveness of bulk chemicals Secured a critical mass in 4,000400 Further improve life sciences Profitability decreased and financial strength declined business portfolio 3,500350 Developed new businesses Accelerate the lauch of 3,000 300 Invested in major projects next-generation businesses 2,500250 ■J-GAAP Ordinary income(loss) 2,000200 ■IFRS Core operating income 1,500150
1001,000
50500
0 Previous Corporate Current Corporate Business Plan Business Plan -50-500 FY2013~FY2015 FY2016~FY2018
2000 2005 2010 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 （FY） （Forecast） J-GAAP IFRS
Current Priority Management Issues and Business Strategy 41 Create New Value Current Management Strategy and Performance Trends: Management by Phase
Change and Innovation Change and Innovation For the next hundredth anniversary Create New Value Phase 1 Phase 2 Phase 3 （¥ Billion）
4,000400 Enhanced financial strength Generate more cash flow
3,500350 Improved business portfolio Further improve business portfolio Developed Accelerate the launch of 3,000300 next-generation businesses next-generation businesses 2,500250 Radical improvement ■ J-GAAP Ordinary income (loss) of productivity through 2,000200 ■ IFRS Core operating income digital innovation
1,500150 Initiatives for global environmental issues 1,000100 Acceleration of innovation 50050
0 2013 2014 2015 2016 2017 2018 2019 2020 2021 (FY) (Forecast) J-GAAP IFRS Towards achieving continuous value creation
Current Priority Management Issues and Business Strategy 42 Create New Value Initiatives for Global Environment Issues
Change in Global Temperatures from 1800A.D. to 2100A.D. (Observed and Forecast)
(℃) 6.0
5.0 Up to a 4.8℃
4.0 increase*
3.0
2.0
1.0
0.0
-1.0
1800 1900 2000 2100 (year)
* The difference between the average temperatures from 1986-2005 and forecasted average temperatures from 2081-2100 (Source) IPCC 5th Assessment Report
Current Priority Management Issues and Business Strategy 43 Create New Value Initiatives for Global Environment Issues
Risk of extinction for many species G 4℃ G Risk of crisis in global food production Loss of ice sheet in large scale, F F sea level rise E 3℃ E Loss of biodiversity in many areas
D D Loss of usable water
Hold the increase in 2℃ C temperature from C Regional decrease in crop production yields pre-industrial levels High risk to systems, such as coral reefs or arctic sea ice below 2℃ B Expansion of tropical infectious diseases, such as malaria B 1℃ It is assumed that temperatures have Increased damage from abnormal weather, A already increased by A such as heat waves and floods approx. 0.8 ℃
(Source) Partially modified https://www.wwf.or.jp/activities/2015/08/1279626.html (based on IPCC AR5 WG2 SPM)
Current Priority Management Issues and Business Strategy 44 Create New Value Initiatives for Global Environment Issues
Participation in external initiatives Since August 2018: Joined in the “TCFD Study Group,” led by Ministry of Economy Trade and Industry for mobilizing green finance through proactive corporate disclosure
Studying how to improve disclosure so that TCFD: Task Force on Climate-related Financial Disclosures, established by the Financial Stability Board Japanese companies’ strengths will be fully valued
Our Efforts Expanding Opportunities Risk Management (Contributing through own business)
Sales of environmentally friendly products October 2018, first certified among Sumika Sustainable Solutions diversified chemical companies Expand sales of the products designated as SSS
Reduction of emissions throughout Fuel conversion Technology development the product life cycle
Reduction of emissions Contribution through ＋ from our own operations environmentally friendly products
Current Priority Management Issues and Business Strategy 45 Create New Value Initiatives for Global Environmental Issues
Our greenhouse gas reduction targets have been certified by the SBT Initiative Committed Companies: 503
Certified Companies: 156 including 32 Japanese companies (As of November 21, 2018)
Scope 1＋2 *1 Scope 3 *2 By FY 2030 By FY 2050 By FY 2024 Reduce by Reduce by *5 ※4 Have major suppliers 30%*3 57%*4 set reduction targets
*1 Scope1 : Direct emissions from factory operations, such as fuel use in manufacturing processes *4 Compared to FY2013. In addition to Scope1 and Scope2 GHG Scope2: Indirect emissions from purchases of power and heat from outside the factory emissions reduction, the company provides solutions to significantly *2 Scope3 : Emissions from the manufacturing and transportation of purchased raw materials reduce GHG emissions across the value chain. *3 Compared to FY2013 *5 Engage major suppliers (suppliers who in aggregate account for 90% of purchased raw materials on a weight basis) in the SBT efforts so that they set their own science-based GHG reduction targets.
Current Priority Management Issues and Business Strategy 46 Create New Value The Issue of Plastic Waste Our commitment through participation in external initiatives
Collaboration ① Plastic waste with partners Problems related to the use, Implementation disposal and recovery of plastics of specific measures of industrialization ② Microplastic Ingestion by marine organisms International alliance ➡Hazardous substances Scientific taken into the body system verification Clarification of definition Social Awareness Information ICCA CP&H LG*1 sharing and ③ Alternatives ICCA communication Effectiveness of the replacement Microplastic Task Force by biodegradable plastics JaIME*2
*1 International Council of Chemical Associations, Chemical Policy & Health Leadership Group *2 Japan Initiative for Marine Environment
Current Priority Management Issues and Business Strategy 47 Create New Value The Issue of Plastic Waste Flowchart of disposal and recovery of domestic plastic waste, 2016
(1,000 tons) (1,000 tons) Utilized Mechanical Mechanical recycling plastic waste 2,060 23% recycling 7,590
Blast-furnace, coke-oven 84% Feedstock raw materials, among 4% Total recycling others 360 plastic waste discharge ・Densified-refuse derived Energy fuel 8,990 ・ Incineration with power 57% recovery generation 5,170 16% ・Incineration without Non-utilized power generation or heat Non-utilized plastic utilization facility 16% ・Landfilling plastic waste waste 1,400 1,400
(Source) PWMI (Plastic Waste Management Institute),“An introduction to Plastic Recycling in Japan 2018”, partially modified by Sumitomo Chemical
Current Priority Management Issues and Business Strategy 48 Create New Value Drastic Improvement of Productivity through Digital Innovation From Introduction of Prototypes to Full-scale Rollouts Next Steps Full-scale High-performance of Introduction of S/4 HANA production by Previous Initiatives leveraging AI Business Standardization and Work Style Reform Partial Partial introduction Digital Digital introduction of of AI-IoT Plant SCM S/4HANA (Including marketing)
Partial Digital Digital Partial introduction of introduction of R&D Office Materials RPA Informatics Introduction of More efficient, (MI) Office365 Full-scale high-performance R&D introduction of by leveraging AI RPA Use Integration of MI into Vitalization of own standard R&D tools communication
Promote value creation through digital innovation
Current Priority Management Issues and Business Strategy 49 Create New Value Digital Innovation in Production and Research
Digital Plant Decreasing Global commitment Efforts to secure working to low-carbon international population society competitiveness Digital Innovation
Sustainable Production Operations Increase data scientists People and data engineers
Safety Quality Productivity
Facilities Software AI
Support Monitor the Stabilize and Optimize Streamline decision operation of automate production work flows facilities for signs making of malfunction operations operations
Current Priority Management Issues and Business Strategy 50 Create New Value Digital Innovation in Production and Research
Digital R&D Electronic Laboratory Notebook Materials Informatics Development of for all Researchers Data Platform
Database Create and Expand Human New Value Resource Data Development Scientists
Development of Predictive Data Analysis Technology Data Engineers Materials Informatics Platform
Current Priority Management Issues and Business Strategy 51 Create New Value Initiatives to Accelerate Innovation Accelerate new business development by further strengthening in-house technology development and more actively promoting external collaboration
In-house developed technology
Academia
Advanced Stage Gate Open Innovation Management Accelerate New Business Start-ups Development
Create autonomous and sustainable innovation
Current Priority Management Issues and Business Strategy 52 Create New Value Collaboration with Start-up Companies
Commercialization Phase Development Phase CDT Research Phase (Polymer OLED for displays) SanBio (Chronic stroke) CDT Bonac (Polymer OLED for (Nucleic Acid lightings) Medicine) Nileworks CDT Healios (Precision agriculture) (Polymer LED for organic photodiodes) (Age-related macular degeneration) Renaissance Plant Genome Energy Research Center * (CO2 separation (Rice seeds) membrane)
* Included in Rice Business
Accelerate the development of Collaboration with startup companies → next-generation businesses
Current Priority Management Issues and Business Strategy 53 Create New Value Promote Open Innovation
Basic Research RIKEN Environment and Energy ImPACT*3 Next-generation environment & NIMS*4 Tough polymer energy-related (High-toughness materials Materials transparent resin) Open Platform
JAPERA*1 RIKEN Materials for printed electronics New applications of devices ES/iPS technologies Sumitomo Chemical ICT in agriculture Group
NEDO*2 Odor sensor BASF Chemical safety Purdue Danforth assessment system University Image diagnosis *1 Japan Advanced Printed Electronics Image diagnosis technology for Technology Research Association plant roots *2 New Energy and Industrial Technology technology for plants Development Organization Life Sciences (above-ground) *3 Impulsing Paradigm Change through Disruptive Technologies Program *4 National Institute for Materials Science
Current Priority Management Issues and Business Strategy 54 Create New Value Promote Open Innovation
Business Development Environment and Energy
Tanaka Conagen Chemical Renaissance Biochemicals Energy Research Cathode materials for automotive CO2 separation batteries membrane
Bayer RIKEN （Monsanto） ImPACT Development of NIMS ISORG ICT next-generation weed control Development of system RIKEN JAPERA Organic Photodiode Sumitomo Chemical IVCC Nufarm Group Development of Nagoya NEDO novel insecticide Joint development of BASF Institute of products for mixture products Technology mosquitoes that Purdue Compound Danforth transmit malaria University Nileworks semiconductor materials Precision agriculture with autopilot drones Bonac SanBio Kyoto University, and data science by RIKEN, Oligonucleotides partnering with Regenerative Keio University, etc.* Nileworks medicine and cell therapy Drug discovery and regenerative Joint research implemented by Life Sciences medicine using iPS cells, etc. Sumitomo Dainippon Pharma * Research Center Network for Realization of Regenerative Medicine Current Priority Management Issues and Business Strategy 55 Create New Value Initiatives for Sustainability
Sumika Sustainable Solutions Top Commitment Designated 10 additional T SDGs products and technologies Top Badge Sales of SSS-Designated Products and Commitment （¥Billion） Technology 6,000600 Third round of designation Promoting Second round of designation Sustainability 5,000500 First round of designation Double S P 4,000400 Solutions Participation 3,000300
Through Business Full Participation 2,000200 Sumika Sustainable Sustainable Tree Solutions □ OlysetTM Net 1,000100 □ Separators and others 0 2015 2016 2017 2018 2020 （FY）
Current Priority Management Issues and Business Strategy 56 Create New Value Held the Second Sustainability Promotion Committee
Sustainability Promotion Committee SOLUTION Contribute to the sustained growth of Organization society through our business Board of Directors INITIATIVE Report / Direction Participate in international initiatives Report / Sustainability Promotion Committee Advise Chairman ：President ENGAGEMENT Members ：Executive officers responsible Communicate with stakeholders for each business sector ：Presidents of regional headquarters Oversee the Group’s overall activities to 1. promote sustainability Secretariat Purpose 9 Corporate Perform bird’s-eye evaluation of Departments 2. the contributions of the Group’s operations to sustainability Business Corporate Sectors Departments 3. Accelerate integrated efforts to solve issues in society, such as the SDGs
Oversee the Group’s overall activities and take an integrated approach
Current Priority Management Issues and Business Strategy 57 Create New Value Initiatives for Sustainability (External Evaluation)
Received the Deputy Chief’s Award Sumitomo Chemical’s Initiatives (by Minister for Foreign Affairs) covered by the White Paper on the in the Japan SDGs Awards Environment (2017 Ver.)
(Reasons for the award) Sumitomo Chemical was the only Track record in initiatives to achieve the SDGs private-sector company featured as a “company incorporating the SDGs into Evaluated: Over 280 companies and corporate strategy.” organizations applied Recipients: 4 companies and 7 organizations Recognized as a Lead Participant in the UN Global Compact
34 companies and organizations have been recognized for their contribution to the Global Compact, two of which are Japanese companies.
Current Priority Management Issues and Business Strategy 58 Create New Value What Sumitomo Chemical Strives To Be
Commit ourselves to creating new value by building on innovation Work to contribute to society through our business activities Business Develop a vibrant corporate culture and continue to be a company that Philosophy society can trust
Capabilities to develop Core innovative solutions Capabilities to reach Competence by leveraging Loyal employees its technological global markets expertise in diverse areas
Challenges Solve issues facing society Environment Food Resources and energy & Business Opportunities Improve quality of life and build an affluent and comfortable society Health promotion Comfortable life
Achieve sustained growth by creating new value through innovative technologies
Current Priority Management Issues and Business Strategy 59 Create New Value
Cautionary Statement
Statements made in this document with respect to Sumitomo Chemical’s current plans, estimates, strategies and beliefs that are not historical facts are forward-looking statements about the future performance of Sumitomo Chemical. These statements are based on management’s assumptions and beliefs in light of the information currently available to it, and involve risks and uncertainties.
The important factors that could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to, general economic conditions in Sumitomo Chemical’s markets; demand for, and competitive pricing pressure on, Sumitomo Chemical’s products in the marketplace; Sumitomo Chemical’s ability to continue to win acceptance for its products in these highly competitive markets; and movements of currency exchange rates.
Current Priority Management Issues and Business Strategy 60