The Group has established the Risk Management Basic Rules in order to respond to the occurrence of management risks or situations that could develop into management risks and to prevent the occurrence of management risks. The Risk Management Basic Rules and related manuals are periodically reviewed and improved by the Group Compliance and Risk Management Committee. The CEO of the Group undertakes the role of chairperson of the Group Compliance and Risk Management Committee and periodically carries out early detection/comprehension of risk factors, improvement of the risk prevention system and formulation of countermeasures at the time of occurrence of a risk.

The major risks relevant to business operations and other matters of the Company and the Group are described below. Forward-looking statements in the following sentences were determined by the Company at the end of the consolidated fiscal year ended March 31, 2024 and they do not cover all the risks of the businesses and other aspects of the Company and Group.

≪Risk≫
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's financial performance may be affected by the occurrence of cases that deviate from these laws and regulations and are subject to guidance or action by regulatory authorities, or by the status of permits and approvals.
In March 2022, TOHO PHARMACEUTICAL, our consolidated subsidiary, received a cease and desist order and a surcharge payment order for violating the Antimonopoly Act in connection with bidding on the supply of ethical  pharmaceuticals to the Japan Community Health care Organization (JCHO). Additionally, in March 2023, Kyushu Toho, our consolidated subsidiary, received a cease and desist order and a surcharge payment order in accordance with the Antimonopoly Act in connection with bidding by the Headquarters of the National Hospital Organization for ethical pharmaceuticals that were to be purchased by hospitals located in the Kyushu area. The amount of loss expected to be incurred as a result of these incidents has been recorded as provision for loss on Antimonopoly Act.
In the operation of dispensing pharmacies, compliance matters are strictly stipulated in legal regulations such as the Act on Pharmaceuticals and Medical Devices and the Health Insurance Act. If any relevant laws and regulations are violated or revised, the Group’s financial performance may be impacted by such a violation or revision of the laws. 

 

≪Countermeasure≫
The Group established the Code of Ethics as a code of conduct to be observed by officers and employees in order to comply with various laws and regulations related to our business operations. In this Code of Ethics, the Group regards the Antimonopoly Act and the Pharmaceuticals and Medical Devices Act as important related laws and regulations to be complied, and ensures that all employees are fully aware of the implementation of the Code.
At the same time, the Group is working to further strengthen compliance by conducting compliance training for the Antimonopoly Act and other important related laws and regulations for all employees and making specialized training for employees who are engaged in duties that require a particular understanding of the Pharmaceuticals and Medical Devices Law and other laws.

≪Risk≫
The prescription pharmaceuticals that constitute the 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. Expected revisions to the NHI Drug Price Standards and the health insurance system reforms could impact the Group’s sales as well as profit resulting from the influence on sales price for medical institutions, manufacturer invoice prices, sales rebates and sales incentives. Accordingly, the Group’s earnings may be affected.

 

≪Countermeasure≫
The Group is focusing on expanding its handling of specialty products, for which market growth is expected, and on building new businesses through aggressive investment in medical-related fields and products for which growth is anticipated. In addition, we are striving to secure appropriate profits by offering prices to medical institutions that are commensurate with product value and distribution costs.

≪Risk≫
In the ethical pharmaceutical wholesale industry, which the Group is driving as 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.

 

≪Countermeasure≫
We set prices for each product according to its product value and strive to sell products at reasonable prices by operating a price lock system in which approval authority is granted only to the head office if the price falls below the set price.

≪Risk≫
Since April 1, 2019, the “Guidelines for providing sales information of ethical drugs” have been in effect to regulate inappropriate sales and information provision activities. If an action that violates the Guidelines is committed, this may affect the Group’s financial performance.

 

≪Countermeasure≫
As a supervision section, the Group has established a specialized department to manage and supervise compliance with the Guidelines in its pharmaceutical wholesaling subsidiaries, including TOHO PHARMACEUTICAL, and is working on compliance with the Guidelines by preparing various manuals to conduct activities appropriately and providing guidance to employees in charge of sales on the preparation and storage of business records.

≪Risk≫
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, Labor 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.

 

≪Countermeasure≫
The Group pharmacies are working to improve safety through employee education and the introduction of equipment to prevent dispensing errors. In addition, by subscribing to against dispensing accidents, the Group has established a compensation system in the event of an accident.
With regard to staffing, the Group has established a system for promptly adjusting and hiring staff by stipulating the optimal number of staff based on store characteristics and by monitoring changes in staff in real time. In addition, the Group hires new graduates based on the number of annual trends in retirement and leave of absence and plans to open new stores. With regard to the revision of drug prices and dispensing fees, the Group has established a system to collect information on items that are expected to increase or decrease based on past revision trends, the financial situation of medical insurance, and other factors, and to promptly take action.

≪Risk≫
The pharmaceutical manufacturing and sales business manufactures and sells generic drugs, and manufactures injection drugs on consignment. The occurrence of unexpected adverse reactions or quality/safety problems in the procurement and manufacturing processes that lead to product recalls or discontinuation of sales or manufacturing may have an impact on the Group’s business results.
In addition, manufacturing or raw materials may be affected in the event of stagnation or delays in the procurement and manufacturing processes arising from disasters and pandemics.

 

≪Countermeasure≫
We strive to ensure manufacturing control, quality assurance and safety in the process from procurement of raw materials and other materials to each production process and shipment in accordance with the GMP Ordinance (the “Ministerial Ordinances on Standards for Manufacturing Control and Quality Control for Drugs and Quasi-drugs”), the GQP Ordinance (the “Ministerial Ordinance on Standards for Quality Assurance for Drugs, Quasi-drugs, Cosmetics and Medical Devices”), the GVP Ordinance (the “Ministerial Ordinance on Standards for Post-Marketing Safety Control of Drugs, Quasi-drugs, Cosmetics, Medical Devices, and Regenerative Medicine Products") and other relevant laws and regulations.
The Group is also working to minimize the impact of disasters and epidemic diseases by formulating a business continuity plan (BCP). 

≪Risk≫
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. In addition, if it is judged that it is reasonable to take the value reflecting future excess earning power, etc. as the real value, the Group examines the necessity of impairment accounting using the real value instead of the amount of net assets. 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 or the real value, the Group’s business results and financial position may be affected.

 

≪Countermeasure≫
When making capital investments, the Company strives to reduce risks by making investment decisions after fully considering the profitability of investment recovery, such as the income earned from the investment and the costs incurred.
After making capital investments, the Company periodically monitors the progress of business results.
When making investments in stocks and other investment securities, the Company strives to reduce risks by investigating and analyzing the financial condition of the investee, the feasibility of the business plan, the return on investment, etc. and making investment decisions after thorough examination by the investment committee, etc.
Furthermore, after making investments, the Company periodically monitors the financial condition of the investee and the progress of the business plan.

≪Risk≫
The irrecoverable amount is estimated and provided as the allowance for uncollectible accounts on accounts receivable against trade partners and customers. However, if uncollectible receivables that exceed the expected amount occur owing to deterioration in business conditions or bankruptcy, etc. of a business partner or customer, this may affect the Group's business performance. 

 

≪Countermeasure≫
By referring to credit information, etc. and taking into account qualitative information from sales sites, the Group strives to strengthen its credit management system and thoroughly preserve receivables while periodically reviewing customers' credit risk.

≪Risk≫
The Group depends on computer systems and their networks to conduct its operations. Therefore, if a system failure occurs owing to large-scale system problems or unexpected unauthorized access from outside, this may impact the Group's earnings. 

 

≪Countermeasure≫
To prepare for the above situation, the Group has established a backup system that fully duplicates its mission-critical systems and peripheral systems. As for countermeasures against unauthorized access from outside, we consolidate the connection points of the Group's network to the outside and outsource the monitoring and handling of such access to a specialized outside vendor. With regard to cybersecurity measures, the Group regularly receives vulnerability assessments for the networks and applications from external IT vendors and makes timely improvements to the identified issues.

≪Risk≫
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.

 

≪Countermeasure≫
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, automated logistics centers, installation of in-house generators and regular training. 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.

≪Risk≫
The Group is handling a substantial amount of personal information concerning health professionals and patients, including sensitive information that requires special consideration, as well as internal information such as various management information. Although the Group has established an information security management system and strictly control such information, there is a possibility of a serious loss of public trust or liability for compensation in the event of a leak due to any irregularity in handling them or an unforeseen event such as a cyber attack.

 

≪Countermeasure≫
The Group has established basic rules concerning information security, and is striving to establish information security management and appropriately manage information assets. The Group has also established the Information Security Committee as an organization that plans and executes information security management, conducts risk assessment and risk management, and promotes and educates employees.
In addition, 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 Ethics and the Personal Information Handling Regulations stipulated by the Company.