The major risks relevant to business operations and other matters of the Company and the Group are described below. Forward-looking statements in this report were determined by the Company at the end of the consolidated fiscal year ended March 31, 2019, and they do not cover all the risks of the businesses and other aspects of the Company and Group.
1. Legal Regulations, etc.
The Group’s core businesses and products are governed by applicable laws and regulations including the Act on Securing Quality, Efficacy and Safety of Products including Pharmaceuticals and Medical Devices. The Group is engaged in sales and marketing activities, after obtaining necessary approvals, registrations, permits and licenses from such legal regulations.The circumstances regarding approvals and licenses from supervisory authorities may affect the Group’s business performance.
2. Ramifications of Revision of the NHI Drug Price Standards and Reform of the Health Insurance Regime
The prescription pharmaceuticals that constitute the Toho Holdings Group’s primary line of products are listed in the National Health Insurance Drug Price Standards. The standards provide for the scope of use of pharmaceuticals available under the coverage of health insurance and the prices chargeable for pharmaceuticals administered by medical institutions. This means that basically the NHI Drug Price Standards act as ceilings for the sale prices of ethical pharmaceuticals.
The Ministry of Health, Labor and Welfare carries out a survey on the prevailing prices of prescription pharmaceuticals in the marketplace (“drug price survey” hereinafter) and revises the NHI Drug Price Standards once every two years to reflect its findings. It is expected that there will be drug price cuts associated with the upcoming consumption tax hike in October this year, and that there will be another round of regular drug price revisions in April 2020. Under the fundamental reforms of the drug pricing system in April 2018, the drug price survey and revision of drug prices will be conducted even during an interim period, beginning in April 2021. Accordingly, expected revisions to the NHI Drug Price Standards and the health insurance system reforms could impact the Group’s earnings.
3. Unique Business Practices
In the prescription pharmaceutical wholesale industry,which the Group isa part of through its main business, there is a unique form of transactions that has continued from long ago in which pharmaceutical products are delivered to medical institutions and dispensing pharmacies while their prices have not yet been decided, and prices are negotiated later. This practice stems from the understanding that pharmaceutical products are life-related products so deliveries must not be delayed. The government and private sector have been working together to improve this distribution practice, but in cases where negotiations do not go smoothly, the Group books a reasonable estimate of the final price as sales. Cases in which price negotiations drag on for a long period or instances in which the decided prices are different from initial estimates could affect the Group’s financial performance.
4. Sales Suspensions, Product Recalls, Etc.
Cases in which sales must be suspended for products handled by the Group or the products need to be recalled or other steps need to be taken owing to unexpected side effects, contamination, etc. could impact the Group’s earnings.
5. Dispensing Operations
If any error occurs in dispensing operations due to the characteristics of prescription pharmaceuticals, this may damage human bodies. If a dispensing error occurs due to human error, the pharmacy concerned may not only face claims for substantial damages, but also impair credits within existing customers and the society. In this case, the Group’s financial results may be affected according to severity of the error. Ordinances of the Ministry of Health, Labour and Welfare strictly regulates the number of pharmacists stationed in pharmacies. If we are unable to secure the necessary number of pharmacists, it may affect the Group’s earnings.
Furthermore, the dispensing pharmacies business generates income mainly from the sale of prescription pharmaceuticals based on NHI drug prices as well as dispensing fees and pharmaceutical management fees based on dispensing fee points set forth in the Health Insurance Act. As such, the Group’s financial performance may be impacted by revisions of NHI drug prices or dispensing fees; and reform of the health insurance regime depending on the contents of the reform.
6. Consumption Tax
Prescription pharmaceuticalsthat dispensing pharmacies sell to patients are not subject to the consumption tax under the Consumption Tax Act, but prescription pharmaceuticals that dispensing pharmacies buy from wholesalers are subject to the consumption tax under the same law. As such, the dispensing pharmacies business bears the final burden of the consumption tax, and it books the consumption tax as an expense. Therefore, if the consumption tax is revised in the future and NHI drug prices are not revised in accordance with the consumption tax change, then that may affect the Group’s earnings.
7. Impairment Losses
Under impairment accounting for fixed assets, the book value of fixed assets is reduced up to the recoverable amount, and the reduction amount is booked as an impairment loss in the same fiscal year. In the case where the profitability of fixed assets owned by the Group decreases or their market value falls sharply, for example, the application of impairment accounting on fixed assets may make it necessary to book an extraordinary loss, and this may affect the Group’s financial performance.
8. System Trouble
The Group depends on computer systems and their networks to conduct its operations, so the occurrence of major system problems may affect the Group’s earnings.
9. Natural Disasters
As a precaution against natural disasters and other emergencies, the Group has established crisis management frameworks and prepared a complete copy of its mission-critical systems together with peripheral systems. However, a disaster larger than anticipatedcould have a negative impact on the Group’s earnings such as decreasednet sales and increased restoration costs.
10. Control of Personal Informationt
The Group is handling a substantial amount of personal data concerning health professionals and patients. With respect to the personal data on health professionals and patients, if there is any irregularity in handling them, the Group may face more severe impairment of credit and claims for compensation compared with leakage of general personal information, due to its value as an asset and high degree of confidentiality.