ROE1 is now being emphasized in Japan, and I get many questions about this metric from shareholders and investors. However, the financial target we have set in our mid-term business plan IBI 18 is Core EPS CAGR.2 The reason for this is that we are aiming for sustained growth in absolute return over the medium and long term.

ROE is the product of the ratio of profit to revenues (the net profit margin), asset turnover and financial leverage. In Chugai's case, a large portion of our business is biopharmaceuticals, for which the manufacturing process is relatively lengthy, and we hold adequate safety stock to fulfill our duty of providing reliable supply. For these reasons, there are certain limitations on increasing turnover. In addition, to maintain our management independence based on our alliance with Roche, we must keep Roche's equity share within a certain range. Therefore, we cannot reduce shareholders' equity with share buybacks and treasury share cancellation as easily as some other companies can.

Therefore, improving margins is our main driver for improving ROE, and the best indicator of sustained growth in absolute terms from the viewpoint of shareholders is Core EPS CAGR.

Companies obviously have a responsibility to efficiently use the capital provided by shareholders to achieve a level of profits higher than they expect. At Chugai, we also work diligently to optimize turnover by managing inventories and the cash conversion cycle (CCC),3 and to adjust shareholders' equity with a dividend policy that emphasizes balancing shareholder returns and investment for future growth.

In addition, we conduct management using OPAC,4 which is adjusted for cost of capital, and draw up strategies in formulating mid-term business plans to clarify the gap with targets that consider the capital spread. In assessing the business feasibility of investments and development themes, the concept of the cost of capital is built into our internal management decision-making processes and mechanisms in ways such as discounting present value at the WACC.5 While we have only announced financial targets for Core EPS, we are by no means disregarding ROE and the cost of capital.

As of December 31, 2017, we held net cash of more than ¥240.0 billion. Cash inflow from operating activities is expected to increase as long as Core EPS continues to grow.

Whenever we invest funds to bring new products to market or for in-house discovery and development, they are expensed on the income statement. However, most investments in future growth, such as in-licensing of technologies or development candidates, equity alliances, and capital expenditures, which require significant funding, are accounted for on the balance sheet. Chugai plans to invest aggressively in these areas.

For the time being, our main use of cash flow will be for investments in facilities and equipment. We are expecting to generate a steady stream of innovative projects through the use of our antibody engineering technologies and other means. To handle the simultaneous development of multiple projects and rapid product launches, we have been making investments for expansion of antibody API production capacity during the last few years. The new production facility (UK3) at the Ukima Plant is one example. It is expected to begin test production in 2018, with the start of full-scale commercial production planned for 2019.

Also coming up are major investments for expanding and enhancing our next-generation R&D infrastructure. We will complete the purchase of 170,000 m² of land for business use (Yokohama, Kanagawa Prefecture) at the end of 2018, and plan to commence construction of a new research laboratory there in 2019.

In addition, we will make strategic investments, such as in alliances with outside partners and in-licensing. Based on our agreement with Osaka University for comprehensive collaboration with IFReC related to immunology research, we will provide ¥10 billion over 10 years. Due to rapid advances in science and technology, we are on the threshold of an era in which disruptive innovation has the potential to dramatically alter industry structures built on former technologies and business models. We need to identify emerging trends, create opportunities for ourselves and draw up growth scenarios. The Science & Technology Intelligence Department was established in April 2017 as a specialized unit to handle such intelligence functions. It will actively look outward for acquisition of new technologies and partnerships with companies that possess innovative technologies, and will also seek opportunities for open innovation.

First of all, we want to meet the expectations of shareholders by enhancing shareholder value. To accomplish that, we plan to continuously increase corporate value by creating groundbreaking drugs and innovative services. We will then return the resulting profits in the form of stable and steadily increasing dividends.

Over the past several years, we have targeted a payout ratio of 50 percent of Core EPS on average. As long as Core EPS continues to grow, we will be able to increase dividends, but we cannot neglect strategic investments for sustained growth. For the time being, we believe that we can fund investments with cash inflow from operating activities every year while maintaining net cash at the current level.

If I were to describe Chugai with one word, that word would be “integrity.” It has several definitions in the dictionary, but in my view the essence of integrity is “an attitude of sincerely facing yourself, your organization and society as a whole, and honestly pushing for what you think is best.”

When I joined Chugai 35 years ago, I was taught that “pursuit of economic performance,” “pursuit of social awareness” and “pursuit of human development” were the Company's principles of conduct. I learned that as a public entity, a company cannot survive if any of these elements is lacking, and that pursuit of social awareness and human development were especially important for Chugai, whose business is closely related to life.
I also think that ESG, which has been gaining attention recently, means conducting management with integrity and respect for society and humanity.

In terms of pursuing the principles of conduct that have been passed down through the generations at Chugai, ESG represents the aspects that companies must never forget if they want to grow sustainably in co-existence with society. Accordingly, I want to give stakeholders a detailed view of our activities, including these non-financial aspects.

One of my key responsibilities as CFO is to gain stakeholders' support by ensuring appropriate and timely disclosure of both qualitative and quantitative information to give them an understanding of Chugai as it is. I will not limit this to one-way communication. I will use dialogue to get a full understanding of stakeholder expectations, and reflect those expectations in the Company's management. I look forward to hearing our stakeholders' candid opinions and requests.