Of the matters regarding business status and accounting status described in the securities report, major risks which the management has judged as likely to have a significant impact on the financial position, operating results, and cash flow of consolidated companies are described below. 

 

The NIHON CHOUZAI Group recognizes these risks and we have a policy to appropriately handle the risks in case the risks materialize; however, the decision for investment should be made after carefully considering this section and contents other than this section in this document. 

 

The matters about the future described below are decided by the Group as of the date of submission of the securities report, and the matters may differ from actual results due to various factors.

Matters about Each Business Segment

1. Dependency on interest-bearing debts

The NIHON CHOUZAI Group opens new stores in the dispensing pharmacy business and makes capital investments in the pharmaceutical manufacturing and sales business by raising funds from mainly loans payable. We will continue to open new stores and make capital investments by loans payable and other borrowing, in that case interest expenses may increase. Additionally, in case of failure to gain enough cash from management in each business operation, due to some problems such as difficulty in gaining additional loans payable, business plans or performance of the Group may be affected. Furthermore, the rates of most loans payable are a fixed interest rate at this point; however, an increase of interest expenses due to rising interest rates may affect the performance of the Group.

2. Personal information management

The NIHON CHOUZAI Group handles personal information such as medical history and medication history of customers, and personal history of temporary employees in the dispensing pharmacy business and the medical professional staffing and placement business. In the Group, we strictly manage personal information. In case of leaking the personal information, there is a possibility that we are liable to pay a larger amount of compensation for damages when compared to the case of the leakage of general personal information such as addresses and names. Additionally, regarding protection of personal information, in case the entities handling personal information including NIHON CHOUZAI and consolidated subsidiaries provide the personal information to a third party without obtaining the consent of the person, administrative sanctions shall be imposed and, in some cases, criminal penalties may be imposed by “Act on the Protection of Personal Information.” Moreover, most of our employees who handle personal information in dispensing pharmacies are pharmacists and serious confidentiality obligation is legally imposed on pharmacists (Article 134 of the Penal Code). In the Group, therefore, in case information leakage occurs, the performance of the Group may be affected by a large amount of reparation payment, administrative sanctions, and a decrease in credibility from existing customers and society accompanying the payment and sanctions.

3. Social insurance contributions

The NIHON CHOUZAI Group has all the people who are eligible for social insurance join in the insurance. In case of an increase in insurance rate due to system amendment such as reform of medical care system for the elderly and improvement of employment insurance, and a significant increase in the amount of contributions by the company due to the change in the scope of insured person regarding a temporary employee, the performance of the Group may be affected.

4. Influence by disasters and other emergencies

The NIHON CHOUZAI Group’s performance may be affected by factors including the weather, such as excessively hot or cold summers, large-scale natural disasters, and pandemics of serious infectious diseases. In our pharmaceutical manufacturing and sales business, we have production bases distributed between Tsukuba City, Ibaraki Prefecture and Tokushima City, Tokushima Prefecture, and Group companies have taken measures such as formulating business continuity plans in case of disasters and other emergencies. However, we recognize that it is necessary to take more concrete measures, since the headquarters functions of each company are mainly consolidated in Chiyoda ward, Tokyo.

5. About the Impact of COVID-19

The single-year results of the NIHON CHOUZAI Group, particularly the dispensing pharmacy business, could be impacted depending on when the COVID-19 pandemic situation is brought under control. At the same time, as noted on our page detailing business environment and challenges , changes in patient tendencies and restructuring of the dispensing pharmacy industry could accelerate. The risk of single-year results being impacted, specifically in the dispensing pharmacy business, is that earnings could be affected, primarily in the form of fewer prescriptions due to patients avoiding examinations at medical institutions and medical institutions putting outpatient treatment on hold or lengthening the duration of prescriptions. Changes in patient tendencies could create increased demand for non-face-to-face examinations and medication guidance, requiring us to take early action. Our Group has been actively working on remote medication guidance in specific districts and strengthening and promoting partnerships with medical institutions, but it may become necessary to establish such a structure with a greater sense of urgency. There is also a possibility that the spread of COVID-19 could create an even more difficult management situation for dispensing pharmacies, accelerating restructuring in the dispensing pharmacy industry. Anticipating this restructuring, our Group has been actively promoting investment in human resources and ICT to strengthen the footing of individual pharmacies, but it may become necessary to work on separation of functions with a greater sense of urgency.

Dispensing Pharmacy Business

1. Legal regulations for dispensing pharmacy business

(1) Opening dispensing pharmacies

When NIHON CHOUZAI opens and manages pharmacies, in case we cannot receive required authorization, designation, registration, or license by each prefecture, in case we fail to proceed for renewal and registration/notification, in case we violate related laws and regulations, or in case these laws and regulations are amended, our store opening plans and performance may be affected.

 

Main relevant legal regulations are “License for pharmacy,” “Health insurance pharmacy designation” and others, and we obtain required permission in all stores. Regarding reasons for disqualification for permission, they do not apply to us as of the date of submission of the securities report.

(2) Securing pharmacists

Regarding dispensing pharmacies, Article 19 of the Pharma - cists Act forbids, in principle, dispensing by anyone other than pharmacists. By “Act on Securing Quality, Efficacy, and Safety of Products including Pharmaceuticals and Medical Devices” (“Pharmaceuticals and Medical Devices Act” is used as an abbreviation. This was called “Pharmaceutical Affairs Act” before amendment) and an Ordinance of the Ministry of Health, Labour, and Welfare, not only pharmacist arrangement in a pharmacy, but also the number of arranged pharmacists is strictly regulated, and it is required to arrange one pharmacist per 40 sheets of received prescriptions a day. Therefore, in case of failure to secure the required number of pharmacists, our store opening plans and performance may be affected.

(3) Dispensing operation

NIHON CHOUZAI takes various measures to prevent dispensing errors. For example, we introduce automatic check systems for dangerous drugs that produce serious symptoms due to a dispensing error, and pharmacists intensively conduct inspections for the dangerous drugs. In addition, we take measures that mitigate an impact to performance by signing up “Pharmacist liability insurance” at all stores just in case. However, in case a dispensing error occurs resulting in a large amount of reparation payment and a decrease in credibility from existing customers and society, our performance may be affected.

2. The business environment in the Dispensing Pharmacy Business

(1) Trends in the rate of separation of prescribing and dispensing

The separation of prescribing and dispensing has been promoted as a national policy to improve the quality of medical care by devoting medical institutions to medical practices such as medical examinations, and having dispensing pharmacies conduct medication history management and medication consulting. In case of decline in the growth rate of separation of prescribing and dispensing in the future, the performance of the NIHON CHOUZAI Group may be affected. 

(2) Reform of the medical care system

[1] Revisions of the NHI Drug Price Standards and dispensing fees

The dispensing sales in the dispensing pharmacy business, which is the core business of the NIHON CHOUZAI Group, are the total amount of drug income based on the drug price standards regulated primarily by Ministry of Health, Labour, and Welfare notifications, and the income from technical dispensing based on dispensing fee points regulated by Ministry of Health, Labour, and Welfare notification acts. Therefore, in case the NHI drug price standards are reduced by the revisions of NHI drug price standards, while the actual purchase price is not reduced to the same degree, or in case dispensing fee points are reduced by the prescription dispensing fee revision, the performance of the Group may be affected.

 

[2] Other reforms of systems

In recent years, various system reforms have been made to simultaneously curb rising medical costs and provide high-quality medical services. Depending on trends in various system reforms, it is possible that the performance of the Group may be affected by a decrease in the number of patients and other factors.

3. Business development

Regarding the dispensing pharmacy business, we have a policy to increase the number of stores centered on NIHON CHOUZAI pharmacies, but also including acquisition of stores. In case we cannot open or acquire stores as planned due to not being able to secure the property that conforms to the conditions of store opening or acquisition, in case initially planned sales cannot be posted after opening a store due to the state of competitions, in case store sales decrease due to relocation or discontinuance of medical institutions, or in case store operation cannot be continued or deposits and guarantees cannot be repaid due to business circumstances of a property owner, business plans or performance of the NIHON CHOUZAI Group may be affected.

4. Seasonal variation of sales

The sales in the dispensing pharmacy business account for a large proportion in the sales composition of the NIHON CHOUZAI Group, and the performance changes of the dispensing pharmacy business greatly affect the performance changes of the Group. Regarding the dispensing pharmacy business, depending on increasing or decreasing prescriptions for influenza, etc., which prevails in winter, and pollinosis (allergic rhinitis), which mainly develops in the beginning of spring, the sales may be affected.

5. Impacts from consumption taxes

In the dispensing pharmacy business, dispensing sales are exempted from taxes by the Consumption Tax Act, whereas the purchase of pharmaceuticals is taxed by the Act. In the dispensing pharmacy business, NIHON CHOUZAI is the final tax payer, and the consumption taxes we paid to suppliers are included in the section of selling, general, and administrative expenses. When the consumption tax rate was revised in the past, increased amount of the consumption tax rate was taken into account on the occasion of the NHI drug price standard revisions. However, in the future, if the consumption tax rate is revised and the NHI drug price standards of drugs are not linked to the variability of the consumption tax rate, the performance of the NIHON CHOUZAI Group may be affected.

6. Impairment risk of goodwill

In the dispensing pharmacy business, M&A have become active in the dispensing pharmacy industry due to factors such as the shortage of pharmacists in small and medium sized pharmacies, the shortage of successors, and the lack of capability to adapt to ICT. NIHON CHOUZAI Group has positioned the use of M&A as an effective means of expanding the operation of the dispensing pharmacy business, and is working actively on M&A on the premise of sufficient scrutiny and examination of profitability and other factors for each case. The balance of goodwill increased by 2,442 million yen from the end of the previous consolidated fiscal year to 16,994 million yen at the end of the current consolidated fiscal year. If the actual number of prescriptions made at stores acquired through M&A, which is an important assumption for looking at future cash flows, is below goals at the time of acquisition, and the number is subject to impairment, it may affect the performance of the Group, including profit attributable to owners of parent company. NIHON CHOUZAI Group will scrutinize matters with greater precision, including the profitability of each project, and strengthen efforts such as training and streamlining of human resources after acquisition.

Pharmaceutical Manufacturing and Sales Business

1. Legal regulations for Pharmaceutical Manufacturing and Sales Business

Regarding the Pharmaceutical Manufacturing and Sales Business of the Group, we mainly manufacture generic drugs at our own factory. The legal risks involved in the product liability, and the risk factors for this business including the legal regulations regarding manufacturing and sales of the medicines for medical treatment may greatly affect the performance of the Group. Manufacturing and sales of the medicines for medical treatment is regulated by laws and regulations related to the Pharmaceuticals and Medical Devices Act, and it is required to receive authorization, designation, registration, or license by each prefectural governor and submit notification. The main things are “First-class Marketing Authorization,” “Second-class Marketing Authorization,” and “Wholesale Distribution License” for medicines and others. In case there is violation of laws and regulations, suspension of business and revocation of approval and authorization are conducted by the competent authorities. This may affect the performance of the Group. Additionally, regarding the developed and applied manufacturing and selling items in this business, we have obtained the approval for each item from the Minister of Health, Labour and Welfare. However, in case of failure to obtain these approvals as planned, the performance of the Group may be affected.

2. The business environment in the pharmaceutical manufacturing and sales business

Regarding the medicines for medical treatment, according to the NHI Drug Price Standards established by the Ministry of Health, Labour and Welfare, drug prices are established, which is the basis for the drug cost calculation in dispensing fees at medical institutions and dispensing pharmacies. In order to control increasing medical costs influenced by Japan’s financial reforms, the government has decided on a policy to transition from making biennial revisions to making annual revisions for NHI drug price standards, which tend to decline with each revision. This trend of revisions to NHI drug price standards may affect the Group’s product prices and potentially impact the performance of our pharmaceutical manufacturing and sales business. Additionally, in the manufacturing and sales market for generic drugs mainly handled in the business, there is the possibility that competition may intensify in the future and affect the performance of the Group.

3. Outsourcing of pharmaceutical manufacturing

In this business, in accordance with the manufacture and sales approval system based on the revised Pharmaceutical Affairs Act (the present Pharmaceuticals and Medical Devices Act) enforced in April 2005, we distribute products to the market in the form of outsourcing the manufacturing section of generic drugs manufacture and sales with the national approval, or in the form of selling the drugs, which we have the manufacture and sales approval, through our own distribution channel. We conclude the continuous contracts for the product supply with several generic drug manufacturers; however, there is a possibility of not being able to supply products due to contract termination or contract changes of a product for some reasons of a manufacturing subcontractor. In these cases, the performance of the Group may be affected.

4. Patent litigation

In this business, we develop products by paying full attention to intellectual property rights and the Unfair Competition Prevention Act; however, there are cases where an original drug manufacturer files a patent lawsuit because of the characteristic particular to the generic drug product. If such situation occurs, the performance of the Group may be affected.

5. Product recall and discontinuation of sales

Generic drugs have the use results in which the efficacy and safety had been confirmed throughout a period of time in the original drug. In addition to that, they go on sale after reexamination, so it is considered that the occurrence risk of a serious side effect other than that of an original drug is extremely small. However, in case unexpected new side effects occur or an accident including mixture of impurities into a product, we may be forced to recall products or discontinue sales. This may affect the performance of the Group.

6. Purchase of raw materials and merchandise

At suppliers of raw materials and merchandise, in case it becomes impossible for us to purchase raw materials and merchandise due to regulation problems, disasters including fire/earthquakes, and accidents during transportation, the production and supply of products may stop. This may affect the performance of the Group.

Medical Professional Staffing and Placement Business

1. Legal regulations for Medical Professional Staffing and Placement Business

Regarding the Medical Professional Staffing and Placement Business of the Group, permissions from the Ministry of Health, Labour and Welfare, such as “License for General Worker Dispatching Undertakings” and “License for Employment Placement Businesses” are required. This business is also regulated by “A guideline on measures to be taken by dispatching business operators” and “A guideline for employment placement business providers, persons conducting recruitment of workers, commissioned recruiters, and labor supply business providers to take appropriate actions regarding equal treatments, clear indication of working conditions, treatment of personal information of job seekers, responsibility of employment placement business providers, and accurate indication of details of recruitment” established by the Ministry of Health, Labour and Welfare. In case the permissions were revoked due to violation of the laws and regulations, and the guidelines, the performance of the NIHON CHOUZAI Group may be affected.