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. About the Impact of COVID-19

In the Dispensing Pharmacy Business, the effects of the COVID-19 pandemic continue, as the number of prescriptions decreases while the average prices of prescriptions are increasing. This is partially because medical institutions are placing controls on outpatient examinations and increasing the number of days for each prescription, and also because patients are refraining from visiting medical institutions due to shelter-in-place measures and other changes in lifestyle patterns. All this has had an impact on the Group’s business performance. In pharmacy operations, we have put in place thorough measures to prevent patients visiting pharmacies from becoming infected, and we are working on measures to minimize the amount of time that these patients need to spend at those pharmacies, for example by using the Okusuri Techo electronic medication notebook to send prescriptions in advance.

In the Medical Professional Staffing and Placement Business, the effects of the pandemic have brought about a substantial reduction in nationwide demand for the temporary staffing of pharmacists, and this has had a huge impact on the pharmacist staffing business, particularly in urban areas.

These effects on business are expected to continue in the future as well, and if the number of prescriptions continues to decline due to further spread of COVID-19, or if it becomes difficult to continue pharmacy operations, for example due to infected persons being identified at our pharmacies or main branches, then this could have an even greater impact on the Group’s business performance.

Meanwhile, amid the continuing effects of the pandemic, the Company is expected to undertake aggressive activities targeting digital transformations in the healthcare field; for example, in the form of online guidance in drug administration and online verification of insurance eligibility. The NIHON CHOUZAI Group has led the industry in this regard (e.g., with plans for full operation of online insurance eligibility verification at all outlets), and we will put in place further structures to ensure that patients can use these pharmacies with peace of mind.

2. 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.

3. 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.

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.

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 at the Dispensing Pharmacy Business is 16,093 million yen at the end of the consolidated fiscal year. In the event that business performance deteriorates at outlets that have posted goodwill from acquisitions, resulting in impairment losses, this could have an impact on the Group’s earnings performance, including on profit attributable to owners of parent.

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.

Drug price levels tend to decrease with each revision, in order to control increases in healthcare costs in the backdrop of national fiscal reforms. These Drug Price Standards will now be revised each year, rather than once every two years, as in the past.

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, products could be recalled or sales could be suspended in some cases; for example, if some new and unexpected adverse drug reactions arose or if impurities were discovered in a product, or if it was determined that products had been manufactured using a method other than an approved manufacturing procedure. Such cases could have an impact on the Group’s business performance.

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.