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, 2021, 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 sold after obtaining the necessary license, registration, designation and permission in accordance with applicable laws and regulations including the Act on Securing Quality, Efficacy and Safety of Products including Pharmaceuticals and Medical Devices (Act on Pharmaceuticals and Medical Devices.) The Group established the Code of Ethics in 2003 as a code of conduct to be observed by officers and employees in order to comply with these regulations. In 2017, the Group revised the Code of Ethics, positioning it as an important related law to comply with the Antimonopoly Act and the Pharmaceuticals and Medical Devices Act, and making all employees fully aware of the implementation of the code. Moreover, the Company restructured the organization of pharmaceutical affairs within the Group as of May 1, 2020. Pharmaceutical Affairs Headquarters was newly established within the Company to manage the pharmaceutical affairs of the Group and further strengthen the governance, along with the Pharmaceutical Affairs Department (the name was changed to Medical Information Department) of TOHO PHARMACEUTICAL, our subsidiary engaged in the pharmaceutical wholesaling business.
However, on December 9, 2020, TOHO PHARMACEUTICAL, our consolidated subsidiary, and one of our employees were accused by the Japan Fair Trade Commission and indicted by the Tokyo District Public Prosecutors Office on suspicion of violating the Antimonopoly Act in connection with bidding for prescription pharmaceuticals ordered by JCHO in 2016 and 2018. Consequently, there is a possibility that penalties, surcharges and forfeit will be paid in the future; therefore, we have estimated possible losses in the future and posted the amount as a loss associated with the Antimonopoly Act. In addition, based on the results of the prosecution mentioned above, including future judgments and administrative dispositions, there is a possibility that transactions with TOHO PHARMACEUTICAL will be restricted for a certain period by local governments and other customers, and this may affect the Group’s business results.
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. Under the fundamental reforms of the drug pricing system in April 2018, the drug price survey and NHI drug price revisions during an interim period have been conducted since 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 is a 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
In the dispensing pharmacy business, while dispensing sales are tax-exempt under the Consumption Tax Act, purchases of pharmaceuticals and other materials are taxed under the said act. 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. Pharmaceutical manufacturing and sales business
The pharmaceutical manufacturing and sales business manufactures and sells generic drugs, and manufactures injection drugs on consignment. We strictly monitor the quality of our products based on our own verification system in the process from procurement of raw materials and other materials to each production process and shipment. However, the occurrence of unexpected adverse reactions or quality/safety problems in the procurement and manufacturing processes that lead to discontinuation of sales or manufacturing may have an impact on the Group’s business results.
In addition, there are products that depend on specific suppliers for their manufacturing or raw materials, which may be affected by stagnation or delays in the procurement and manufacturing processes.
8. 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 and financial Position.
Furthermore, with respect to investment securities with no market value, if the amount of net asset value per share is less than 50% compared with the acquisition value, and it cannot be judged that there is a possibility of a recovery to the acquisition value within a reasonable period, the amount of such decrease shall be treated as a loss on valuation of investment securities, and shall be treated as a loss for the period. Therefore, if the business plans of the stock-issuing companies held by the Company are not achieved due to changes in the market environment, status of product development, status of competitors, etc., and it is judged that there is no possibility of a recovery in net assets per share, the Group’s business results and financial position may be affected.
9. System Trouble
The Group depends on computer systems and their networks to conduct its operations. The mission-critical systems and peripheral systems have been fully duplicated to create a backup system, although the occurrence of major system problems may affect the Group’s earnings.
10. Natural Disasters / Pandemics
As a precaution against natural disasters, pandemics and other emergencies, the Group has established crisis management frameworks, prepared a complete copy of its mission-critical systems together with its peripheral systems, and automated logistics centers. In addition, we have formulated a disaster response plan that clarifies risks associated with climate change and other matters for each area and summarizes issues and countermeasures. However, a disaster or a pandemic larger than anticipated could interfere with the Group’s operations in the form of the closure of offices, logistics centers and retail shops, and may have a negative impact on the Group’s earnings depending on the degree of decreased net sales and restoration duration/costs. In particular, with regard to the impact of the spread of COVID-19, a decrease in the number of prescriptions has been observed recently due to the limited clinic visits by patients who are alter to risk of infection, and this may also have an impact on sales and distribution functions. The impact of the pandemic, including when it will subside, is difficult to forecast as of this moment, and may have a significant impact on the Group’s business activities and performance.
11. Control of Personal Informationt
The Group is handling a substantial amount of personal data concerning health professionals and patients. Considering the importance of protection of personal data, the Group complies with the Act on the Protection of Personal Information and other regulations, and has built a management system to handle personal data in accordance with the Code of Ethical Practice of Kyoso Mirai Group and the Personal Information Handling Regulations stipulated by the Company. However, 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.