The following are major risks that management recognizes as having the potential to materially affect the financial position, operating results, and cash flows of the consolidated companies, among the matters related to business conditions, accounting conditions, and other matters described in the Annual Securities Report. To address these risks, the Group has established a risk management system and monitors and manages risks, but not all risks can be completely avoided.
The risks listed below are those that may have a significant impact on investors' decisions from the viewpoint of materiality, and are not an exhaustive list of all risks. Forward-looking statements are based on the judgment of the Group as of the date of submission of the Annual Securities Report.
1．Risk Management System of the Group
The "Risk Management Committee and Compliance Promotion Committee," chaired by the director in charge of risk management, has been established to oversee the Group's risk management and compliance efforts. The committee is chaired by the director in charge of risk management. The committee is responsible for formulating important items for risk management and compliance, identifying risks of high importance, responding appropriately to risks, and sharing information and implementing countermeasures when risks emerge.
In selecting risks of high importance to the Group, risks are identified and evaluated from multiple perspectives, including the external environment, internal environment, and business operations. Risks are selected by each Group company and department, and are also identified and consolidated from the perspective of the Group as a whole to select the risks with the highest priority. The Risk Management Committee monitors the status of selected risks and responses to them to promote group-wide risk management. In addition, the Risk Management Committee and the Sustainability Committee work together to position risks related to sustainability issues as targets for Group-wide risk management and promote responses.
2．Risks of High Materiality to the Group
(1) Risks related to changes in the healthcare system
We recognize that the Group's core businesses of dispensing pharmacy and pharmaceutical manufacturing and sales are in a period of major change. In order to achieve its management goals, the Group is formulating and promoting business strategies that take into account the direction of the healthcare system and changes in the social environment. The Group's business performance may be affected by future revisions of the NHI drug price standards and dispensing fees, depending on the details of such revisions. In addition, the Group's business plans and performance may be affected if it is unable to maintain competitiveness due to new competition resulting from major changes in the medical care system.
While dispensing sales are exempt from taxation under the Consumption Tax Law, purchases of pharmaceuticals and other products are taxed under the same law. In the dispensing pharmacy business, the Group is the final payer of consumption tax, etc. The consumption tax, etc. paid by the Group to its suppliers is included in selling, general and administrative expenses. If the consumption tax rate is revised in the future and the NHI drug price standard is not linked to changes in the consumption tax rate, the Group's business performance may be affected.
(2) Risks Related to Goodwill and Non-current Assets
In the dispensing pharmacy industry, M&A activity is increasing due to a shortage of pharmacists, a shortage of successors, and a lack of information technology capabilities among small- and medium-sized pharmacies. The Group has positioned the use of M&A as an effective means of expanding its dispensing pharmacy business, and is undertaking M&A based on sufficient scrutiny and consideration of the profitability of each transaction.
Goodwill and non-current assets acquired through M&A and non-current assets acquired through the opening of new dispensing pharmacies may affect the Group's business results, including net income attributable to shareholders of the parent company, if the recoverability of such assets declines and an impairment loss is recorded due to deterioration in the business performance of the target pharmacies or other factors. Assumptions for significant accounting estimates regarding impairment of goodwill and non-current assets in the dispensing pharmacy business are described in the Annual Securities Report.
In addition, the Company is expanding and promoting investment in the digital transformation area to respond to changes in the healthcare system and social environment. However, if differences arise between our strategy and the direction of healthcare reform or changes in social needs, additional investment may be required, or if the recoverability of the investment declines, resulting in the recognition of an impairment loss, the Group's business results may be affected.
(3) Risks related to safety of dispensing operations and quality and side effects of drugs
The Company is taking various measures to prevent medication errors in its dispensing pharmacy business, including adherence to written operating procedures for the safe use of pharmaceuticals, implementation of medical safety training, training of highly specialized pharmacists to cope with advanced pharmacological knowledge, introduction of automated drug check systems and the implementation of focused inspections of high-risk drugs. In addition, the Company has established a supervisory function for improving medical safety and quality control in dispensing operations, and is promoting company-wide efforts to prevent errors. However, if a dispensing error were to occur and a large amount of compensation were to be paid, or if existing customers' trust and social credibility were to be damaged as a result, the Company's business performance could be affected.
In the pharmaceutical manufacturing and sales business, the Company is strengthening and expanding its production and product management systems based on GMP. Since the efficacy and safety of generic drugs, which we manufacture and sell, have been confirmed for many years with brand-name drugs and are marketed after reexamination, the risk of unexpected serious side effects is considered to be small. However, the occurrence of unknown or serious side effects or a product recall or discontinuation of sales due to a serious defect in product quality could have an impact on the Group's business performance.
(4) Risks related to violation of laws and regulations
There are a wide variety of laws and regulations related to the Group's business operations, including the "Act on Quality, Efficacy and Safety Assurance of Drugs and Medical Devices" (hereinafter referred to as the "Pharmaceutical Affairs Law"), the Pharmaceuticals Law, the Worker Dispatching Act, and other domestic as well as overseas laws and regulations. The Group recognizes that compliance with laws and related regulations is an extremely important corporate responsibility and positions it as one of its top management priorities in promoting its business. However, revisions to laws and regulations and changes in various regulations may affect the Group's ability to incur response costs, provide services, develop products, manufacture, and conduct sales activities.
For example, the dispensing pharmacy business and pharmaceutical manufacturing and sales business are subject to regulations such as those related to the Pharmaceutical Affairs Law, and require permission, designation, registration, licensing, and notification by the respective prefectural governors. In the unlikely event of a violation, the regulatory authorities may suspend business operations or revoke licenses and approvals, which could affect the Group's business performance. In addition, although we have obtained approval from the Minister of Health, Labour and Welfare for each of the manufacturing and marketing items developed and applied for in this business, if these approvals are not obtained as planned, the Group's business performance may be affected.
(5) Risks Related to Information Systems, Information Security, and Personal Information Management
The Group formulates and promotes the DX strategy as an important business strategy, and the importance of information systems in its business operations is increasing. In addition, the dispensing pharmacy business and the medical professional staffing and placement business handle personal information such as patients' medical and pharmaceutical histories and the backgrounds of dispatched workers, and all businesses hold confidential business and technical information. To prevent unauthorized access, falsification, destruction, leakage, or loss of such information due to cyber-attacks, etc., we have established information security regulations and implemented various security management measures and education for employees to prevent information security incidents such as cyber-attacks and information leaks.
However, it is not possible to completely avoid risks such as leakage of confidential or personal information due to cyber attacks or shutdown of information systems due to trouble with communication lines or equipment, and depending on the scale of the damage, our group's business performance may be severely affected. In the unlikely event of a leakage of personal information, the Group's business performance could be affected by the payment of large amounts of compensation, administrative penalties, and the resulting loss of trust in existing customers and social credibility.
(6) Risks Related to Securing Human Resources
We recognize that human resources are one of the most important issues in the execution of our group's business strategies and expansion of our business, and we have secured professional human resources and developed employee training programs.
For example, we have developed programs for improving skills and broadening work experience as pharmacists, support programs for acquiring professional qualifications, and educational programs aimed at expanding DX human resources. In addition, based on the recognition that respecting the diversity of employees is essential for realizing management goals and business strategies, the Company is working to implement and expand various human resource policies. However, depending on the situation with regard to securing human resources and the shortage of human resources due to intensifying competition for human resources and the outflow of human resources outside the company, it may become difficult to achieve our business strategy, which may have a significant impact on the financial position and business performance of our Group in the future.
In the dispensing pharmacy business, the Pharmaceutical Affairs Law and an ordinance of the Ministry of Health, Labour and Welfare regulate not only the assignment of pharmacists to pharmacies but also the number of pharmacists assigned, requiring the assignment of one pharmacist for every 40 prescriptions received per day. Therefore, if the required number of pharmacists cannot be secured, our plans for opening new pharmacies and business performance may be affected.
(7) Risks Related to Human Rights
As a company that contributes to society through healthcare, our group plays a role in supporting healthy lives for people, and we recognize that respect for human rights is an important foundation upon which our group's business can continue. In addition, in light of changes in the environment surrounding our business, we must appropriately recognize the impact of human rights risks on our management and ensure that we respond to them. The Group respects the fundamental human rights stipulated in the International Bill of Human Rights and the International Labour Organization's (ILO) Declaration on Fundamental Principles and Rights at Work, supports international codes of conduct such as the Guiding Principles on Business and Human Rights, and will implement initiatives based on these principles. Based on the "Nihon Chouzai Group Human Rights Policy" established in accordance with the "United Nations Guiding Principles on Business and Human Rights" and other guidelines, we are promoting efforts to respect human rights, while assessing the direct and indirect human rights impacts of the Group's business activities and promoting specific measures. In addition, we will work with our suppliers and other related parties to address any supply chain issues that are recognized, in accordance with the Nihon Chouzai Group Basic Procurement Policy.
(8) Risks Related to Supply Chain
In the pharmaceutical manufacturing and sales business, efforts are being made to ensure a stable supply by duplicating important sources of APIs and securing appropriate inventories. However, due to trends in world affairs, infectious diseases, natural disasters, accidents at suppliers, and factors in the generic drug industry, the purchase of raw materials and products may be delayed or curtailed, and the manufacture and supply of products may be suspended or curtailed. In addition, in the manufacturing and sales of some pharmaceutical products, the Group supplies products to the market in the form of outsourcing or by selling the pharmaceuticals manufactured and sold by the manufacturer. In such cases, the Group's business performance may be affected.
(9) Risks Related to Fluctuations in Interest Rates and Raw Material Market Conditions
The Group raises funds mainly through borrowings to open new dispensing pharmacies, conduct mergers and acquisitions, and make capital investments in the pharmaceutical manufacturing and sales business. If interest rates on new loans rise significantly in line with future economic conditions and interest expenses increase, the Group's business performance may be affected.
In addition, if raw material market conditions change significantly due to global conditions or climate change, and energy-related costs, raw materials, and material prices rise, the Group's business plans, performance, etc. may be affected, such as an increase in the cost of manufacturing generic drugs.
(10) Risks Related to Climate Change
The Group recognizes climate change-related issues as important for business management and has established a Sustainability Committee, chaired by the President and CEO, to discuss approaches to climate change issues. In recognizing the impact of climate change on our business management, we refer to long-term hypotheses and scenarios published by the IPCC and the IEA, identify physical and secondary risks and opportunities, and evaluate and consider the degree of impact and countermeasures. Risks of transition to a decarbonized society with an eye on future climate change include: increased operating costs due to the introduction of carbon taxes, emissions trading schemes, etc.; price hikes due to changes in regulations and the supply-demand balance in raw materials such as blister packaging materials that use plastic; transportation costs due to changes in the supply-demand balance for petroleum fuels. We are also aware of the changes in the energy mix electricity supply-demand balance, including the shift to renewable energy, and the resulting soaring electricity prices.
In addition, as physical risks that future climate change may have a significant impact on our business performance and financial position, we are aware of the increase in infectious diseases caused by rising temperatures and an increase in animal-borne infectious diseases due to heavy rainfall and flooding, and losses resulting from the refraining from medical examinations caused by such diseases; damage to our bases and disruption of distribution networks caused by extreme weather disasters due to severe Losses are expected to be incurred due to response costs and business stoppages caused by damage to bases and disruption of logistics networks due to extreme weather disasters.
In light of these circumstances, we have established an environmental policy and have begun to consider and implement countermeasures at each stage of the supply chain of our business.
(11) Risks related to large-scale disasters and spread of infectious diseases
The Group's business operations may be affected by the occurrence of a large-scale natural disaster or the spread of a serious infectious disease over a wide area. Therefore, the Group has taken measures such as dispersing its business bases and formulating business continuity plans. For example, in our pharmaceutical manufacturing and sales business, we have dispersed our production bases to Tsukuba City, Ibaraki Prefecture and Tokushima City, Tokushima Prefecture, and our distribution bases to three locations nationwide, in preparation for the event of a disaster or other such event.
However, the Group's business activities are conducted in a wide range of regions, and including the supply chain of the business, the Group cannot completely avoid damage in the event of natural disasters and outbreaks of infectious diseases, which could have a significant impact on the financial position and business performance of the Group in the future. For example, in the event of a major outbreak of a new infectious disease, the Group's business activities could be affected by patients avoiding visits to medical institutions, medical institutions curtailing outpatient care, prescriptions taking longer to fill, and a decrease in demand for dispatched pharmacist referrals. Therefore, we are pursuing convenience and quality of medical care through proactive efforts in the medical version of DX, such as online medication guidance and the use of electronic medication registers, and are developing a system that patients can use with peace of mind.
(12) Risks related to business model transformation due to technological innovation
Continuous changes in recent years, such as the development of new services and products using new technologies, for example, the rapid spread of telework and increased use of new online services triggered by the spread of the Covid-19, have transformed the way people behave in society as a whole. We are taking these changes in the environment as an opportunity to expand our business by utilizing new technologies. However, if our Group's response to these changes is inferior, it may lead to a decline in our competitiveness in the industry, which may have a significant impact on our financial position and business performance.
(13) Risks Related to Litigation, etc., and Risks Related to Patents and Intellectual Property
In the pharmaceutical manufacturing and sales business, the Company develops products with due attention to intellectual property rights and unfair competition prevention laws. However, due to the characteristics of generic drugs as products, patent lawsuits may be filed by manufacturers of brand-name drugs. In addition to this, there is a possibility that we may become a party to lawsuits or other actions related to our business. If a judgment is made against our group in these lawsuits, our business performance may be affected.