Research Coverage Report by Shared Research Inc.

4350

Medical System Network
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Coverage initiated on: 2018-05-02
Last update: 2022-03-29

INDEX
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.
Key financial data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.
Recent updates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.
Trends and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.
Quarterly trends and results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16..
Business model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16..
Market and value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25..
Industry peers (dispensing pharmacy chains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30..
Strengths and weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32..
Historical performance and financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34...
Income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34..
Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35..
Cash flow statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36..
Historical performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37..
News and topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45..
Other information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46..
Company profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50..

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2

Executive summary
Business overview
Medical System Network operates the Nanohana Pharmacy chain. It also provides a wide range of pharmacy management
support services (from pharmaceuticals procurement to pharmacist training) to dispensing pharmacies and medical
institutions including directly operated pharmacies and non-group affiliates that register to become members of thecompany’s network. The core of these services is the one-stop supply chain management service that comprises pricenegotiations with drug wholesalers, drug ordering, and settlement of bills. Medical System Network receives commissions
from its network members based on the amount of drug orders they place. As of end-FY03/21, there were 6,116 network
members (+871 from end-FY03/20) comprising 416 directly operated pharmacies and 5,700 affiliates. The company hasreorganized its business segments in FY03/20, moving the Pharmaceuticals Network and Dispensing Pharmacy businesses,
as well as the manufacture and market pharmaceuticals business previously included in the Other business, under theCommunity Pharmacy Network segment. The Leasing and Facility-related business and the Food Service business areunchanged. In the Other business, since the manufacture and market pharmaceuticals business is transferred out, the main
business comprises home-visit nursing care.
Nanohana Pharmacies, the company’s directly operated pharmacies, are generally located near large medical institutions orin medical malls or complexes that integrate multiple clinics and hospitals. According to the Ministry of Health, Labour andWelfare, there were 60,171 dispensing pharmacies in Japan at end-March 2019, but the market is highly fragmented; the top
10 pharmacies with nationwide chains, including Medical System Network with 0.7% share of pharmacies, have a combined
market share of less than 10%. Because mid-tier regional chains with roots in local communities and small, family-owned
pharmacies account for 90% of the domestic market, the primary growth strategy of major pharmacy chains is opening new
pharmacies and expanding through M&A. Through this increase in affiliates to the Pharmaceuticals Network, the number of
network members as of end-March 2021 had exceeded 10% of the market share.
In FY03/21, Community Pharmacy Network accounted for 95.2% of sales, Leasing and Facility-related 2.2%, Food Service
2.4%, and Other 0.2%. The Community Pharmacy Network segment is a new segment following a segment change in
FY03/20 that initially combined the former Pharmaceuticals Network and Dispensing Pharmacy segments with manufacture
and market pharmaceuticals business (previously part of Other segment), but the digital shift business was added from
FY03/21. The Community Pharmacy Network segment comprises the Pharmaceuticals Network, Dispensing Pharmacy, andmanufacture and market pharmaceuticals, and digital shift businesses. The company discloses operating status of eachbusiness under the Community Pharmacy Network segment, but does not provide a sales and profit breakdown by business.

Trends and outlook
FY03/21 results: For FY03/21, the company reported full-year consolidated sales of JPY104.3bn (-0.9% YoY), operating profitof JPY3.4bn (+112.3% YoY), recurring profit of JPY3.5bn (+123.0% YoY), and net income attributable to owners of the parentof JPY2.2bn (versus loss of JPY895mn in FY03/20). Performance was strong at the mainstay Community Pharmacy Network
segment’s Pharmaceuticals Network business, and while the Dispensing Pharmacy business saw a YoY decline in the numberof prescriptions filled due to the COVID-19 pandemic, it benefited from efficiency gains. As a consequence, operating profit
was 2.1x the prior-year figure. The company also turned into the black at the net income level, thanks in part to JPY907mn inproceeds from the sale of shares in a non-equity-method affiliate, booked as an extraordinary gain.
At the time of the Q3 results announcement on February 4, 2022, the company made upward revisions to its FY03/22
earnings forecast. The revised forecast calls for sales of JPY106.5bn (+2.2% YoY), EBITDA of JPY6.8bn (+5.8% YoY), operating
profit of JPY3.8bn (+10.8% YoY), recurring profit of JPY4.2bn (+20.7% YoY), and net income attributable to owners of theparent of JPY2.3bn (+4.6% YoY). In the dispensing pharmacy industry, earnings traditionally have been at the mercy ofbiennial NHI drug price revisions, but the first-ever "off-year" revision took place in April 2021. Going forward, drug pricerevisions will take place annually, and Medical System Network foresees further deterioration in the business climate fordispensing pharmacies. However, the company's current business performance has been favorable, with the prescription unit
price at its directly operated pharmacies and the pharmaceutical transaction volume at its network members trending above
initial plan. The company therefore raised its full-year sales forecast by JPY800mn compared to the initial plan. In the Leasingand Facility-related business, the company continues to aim for 90% occupancy rates for serviced elderly housing facilities.
On the profit front, the company revised up its forecast for operating profit by JPY300mn as it successfully curbed travel andtransportation expenses. It has revised up the net income forecast by JPY500mn in light of a gain on the sale of investment

Medical System Network/ 4350
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3securities and a lower tax burden due to the absorption of a subsidiary. From FY03/22, Medical System Network has
adopted EBITDA as one of its profitability yardsticks.
Medical System Network announced its fifth medium-term plan spanning a four-year period ending FY03/22 (previous planscovered three-year periods). The latest plan sets out five basic policies: (1) expansion of the Pharmaceuticals Network
business with a view to offering greater support for community-based medical care and streamlining drug distribution; (2)raising the caliber of group pharmacies; (3) expanding manufacture and sales of quality generic drugs; (4) strengthening
collaboration among group businesses in order to better provide community care functions considered essential to acommunity-based integrated care system; and (5) improving cash flows as a means of fortifying the financial base.

Strengths and weaknesses
Strengths: a management support network service available to small and mid-tier pharmacies; certified pharmacist training
support system that appeals to pharmacies struggling with the pharmacist shortage; and regional dispensing pharmacy
strategy in line with administrative guidance. Weaknesses: potential conflict of interest between M&A-driven pharmacy chain
expansion and support services for small pharmacies; low profit margins for dispensing pharmacies without drugstore
function; and relatively small assets being a disadvantage in acquisitions. (See the Strengths and weaknesses section for
details.)

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4Key financial data
Income statement

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

FY03/21

FY03/22(JPYmn)

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Est.

Sales

54,827

66,18275,54887,71588,865

93,977

98,232

105,241

104,257

106,500
2.2%

YoY
Gross profit
YoY

-

20.7%

14.2%

16.1%

1.3%

5.8%

4.5%

7.1%

-0.9%

19,412

22,73728,47632,801

34,16436,60737,271

40,21442,412

-

17.1%

25.2%

15.2%

4.2%

7.2%

1.8%

7.9%

5.5%

Gross profit margin

35.4%

34.4%

37.7%

37.4%

38.4%

39.0%

37.9%

38.2%

40.7%

Operating profit

2,047

2,091

2,641

3,783

2,113

3,163

1,428

1,615

3,429

3,800

-

2.2%

26.3%

43.2%

-44.1%

49.7%-54.9%

13.1%

112.3%

10.8%

Operating profit margin

3.7%

3.2%

3.5%

4.3%

2.4%

3.4%

1.5%

1.5%

3.3%

3.6%

Recurring profit

1,912

2,020

2,540

3,860

2,109

3,250

1,501

1,560

3,479

4,200
20.7%

YoY

YoY

-

5.6%

25.8%

52.0%

-45.4%

54.1%-53.8%

3.9%

123.0%

Recurring profit margin

3.5%

3.1%

3.4%

4.4%

2.4%

3.5%

1.5%

1.5%

3.3%

3.9%

Net income

756

668

885

1,720

571

1,022

462

-895

2,198

2,300

YoY
Net margin--11.6%

32.4%

94.4%

-66.8%

79.0%-54.8%

-

-

4.6%

1.4%

1.0%

1.2%

2.0%

0.6%

1.1%

0.5%

-

2.1%

2.2%

25,97025,97025,97029,89029,89030,52330,64330,64330,643

-

29.1

27.7

37.1

60.1

19.3

34.5

15.3

-29.5

72.5

76.2

Per-share data
Shares issued (year-end; '000)
EPS
EPS (fully diluted)

-

-

-

-

-

34.3

15.0

-

-

-

Dividend per share

8.0

8.0

8.0

9.5

10.0

10.0

10.0

10.0

10.0

12.0

Book value per share

222.9

214.7

243.3

334.9

345.3

351.4

354.8

310.4

-

-

Balance sheet (JPYmn)
2,092

3,106

2,499

2,081

2,252

10,201

11,703

11,722

10,118

Total current assets

8,271

10,941

11,023

10,783

11,09818,736

21,055

20,57819,313

Tangible fixed assets

Cash and cash equivalents

11,472

15,976

17,24920,253

21,24624,12925,721

25,126

24,634

Investments and other assets

2,783

3,798

3,759

4,329

4,559

4,847

5,922

6,143

6,926

Intangible assets

8,263

12,39913,554

13,481

13,833

15,045

16,235

14,615

13,572

Total assets

30,78943,11445,587

48,84750,73762,75968,93566,46464,448

Accounts payable

5,616

7,798

8,598

9,525

9,144

9,416

10,19810,021

9,258

Short-term debt

5,119

12,922

9,214

6,910

3,863

7,463

9,158

8,905

10,210Total current liabilities

14,37524,88021,626

21,061

16,92021,76923,84423,29625,418Long-term debt

8,758

10,94815,391

14,85920,18626,32929,73928,653

22,348

Total fixed liabilities

10,17812,882

17,826

17,52023,17230,40434,32933,74927,841

Total liabilities

24,55337,76239,452

38,58140,092

52,174

58,17357,04553,260Total net assets

6,236

5,352

6,136

10,265

10,644

10,584

10,761

9,418

11,187

Total interest-bearing debt

13,87723,87024,605

21,76924,04933,79238,89737,55832,558Cash flow statement (JPYmn)
Cash flows from operating activities

3,790

3,706

3,838

6,409

3,084

6,699

2,840

4,232

5,205

Cash flows from investing activities-5,425-7,559-3,958-5,040-3,909-6,848-5,921-2,383-1,485

Cash flows from financing activities-5,312

1,654

4,864

-483

-1,792

998

8,050

4,338

-1,687

ROA (RP-based)

6.7%

5.5%

5.7%

8.2%

4.2%

5.7%

2.3%

2.3%

5.3%

ROE

13.7%

12.2%

16.2%

21.9%

5.7%

9.8%

4.3%

-8.9%

19.7%

Equity ratio

18.8%

11.9%

12.7%

20.3%

20.1%

16.9%

15.6%

14.2%

17.3%

Financial ratios

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Medical System Network/ 4350
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5Segment sales and profit）

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

Segment sales and profit）

FY03/19

FY03/20

FY03/21

FY03/22(JPYmn

Act.

Act.

Act.

Act.

Act.

(JPYmn

Act.

Act.

Act.

Est.

Sales

75,54887,71588,865

93,977

98,232

Sales

98,232

105,241

104,257

106,500

YoY

14.2%

16.1%

1.3%

5.8%

4.5%

YoY

Pharmaceuticals Network

2,814

3,235

3,237

3,639

3,951

Community Pharmacy Network

YoY

-1.0%

15.0%

0.1%

12.4%

8.6%

YoY

-

7.9%

-0.4%

1.9%

% of total

3.6%

3.6%

3.5%

3.8%

4.0%

% of total

93.3%

94.7%

95.2%

94.9%

Dispensing Pharmacy

71,74382,00281,65087,17290,706

Three other businesses

6,622

6,389

5,644

5,381

YoY

13.9%

14.3%

-0.4%

6.8%

4.1%

YoY

-

-3.5%

-11.7%-4.7%% of total

91.8%

90.5%

89.0%

89.8%

91.7%

% of total

6.7%

6.1%

5.4%

5.1%

Leasing and Facility-related

1,517

2,430

2,046

2,031

3,320

YoY

15.1%

60.2%

-15.8%

-0.7%

63.5%

% of total

1.9%

2.7%

2.2%

2.1%

3.4%

Food Service

1,932

2,830

4,667

4,103

3,161

218.3%

46.5%

64.9%

-12.1%-23.0%

2.5%

3.1%

5.1%

4.2%

YoY
% of total

4.5%

7.1%

-0.9%

2.2%

92,284

99,617

99,214

101,119

3.2%

Other

182

143

163

92

261

YoY

-55.3%-21.4%

14.0%-43.6%

183.7%% of total

0.2%

0.2%

0.2%

0.1%

0.3%

Segment sales adjustments-2,641-2,926-2,900-3,063-674

Segment sales adjustments

-674

-764

-601

-612

Operating profit

2,641

3,783

2,113

3,163

1,428

Operating profit

1,428

1,615

3,429

3,800

YoY

26.3%

43.2%

-44.1%

49.7%-54.9%

YoY-54.9%

13.1%

112.3%

10.8%

Operating profit margin

3.5%

4.3%

2.4%

3.4%

1.5%

Operating profit margin

1.5%

1.5%

3.3%

3.6%

Pharmaceuticals Network

1,549

1,776

1,718

1,949

2,331

Community Pharmacy Network

3,313

3,743

5,703

6,070

YoY

5.0%

14.7%

-3.3%

13.4%

19.6%

-

13.0%

52.4%

6.4%

Operating profit margin

55.0%

54.9%

53.1%

53.6%

59.0%

Operating profit margin

3.6%

3.8%

5.7%

6.0%

Dispensing Pharmacy

2,377

3,412

2,314

3,060

1,068

Three other businesses

-150

-70

-20

68

YoY

29.2%

43.5%

-32.2%

32.2%-65.1%

YoY

-

-

-

-

Operating profit margin

3.3%

4.2%

2.8%

3.5%

1.2%

Operating profit margin

-

-

-0.4%

1.3%

Leasing and Facility-related

25

129

-143

-182

-84

-

416.0%

-

-

-

1.6%

5.3%

-7.0%

-9.0%

-2.5%

-1,733-2,057-2,253-2,338YoY
Operating profit margin
Food Service

45

34

-

-

-

-

-24.4%

-0.7%

-3.1%

-2.8%

1.1%

1.1%

Other

-76

-109

-163

-97

-101

YoY

-

-

-

-

-

Operating profit margin-41.8%-76.2%-100.0%-105.4%-38.7%

Segment profit adjustments-1,221-1,335-1,482-1,610-1,733

YoY
Operating profit margin

-13

-89

-129

YoY

Segment profit adjustments

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company changed its segments from FY03/20. The new segmentation integrates the former Pharmaceuticals Network and Dispensing Pharmacy businesses with the
manufacture and market pharmaceuticals business (included in the Other business) under the Community Pharmacy Network business. The Leasing and Facility-related andFood Service segments are unchanged, but they are included under “Other businesses” in the above table with the home-visit nursing care business (previously included in
the Other segment).

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

6Recent updates
Revision to its full-year earnings forecast and year-end dividend
forecast
2022-02-07

On February 4, 2022, Medical System Network Co., Ltd. announced revisions to its full-year earnings forecast and year-end
dividend forecast.

Medical System Network/ 4350
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7

Trends and outlook
Quarterly trends and results
Cumulative

FY03/20(JPYmn)FY03/21

FY03/22

FY03/22

Q1

Q1–Q2

Q1–Q3

Q1–Q4

Q1

Q1–Q2

Q1–Q3

Q1–Q4

Q1

Q1–Q2

Q1–Q3

Sales

25,59952,21678,943

105,241

25,162

51,04578,167104,257

25,914

52,16979,868

YoY

7.3%

9.8%

8.5%

7.1%

-1.7%

-2.2%

-1.0%

-0.9%

3.0%

2.2%

2.2%

Gross profit

9,839

19,81930,22540,214

9,704

20,502

31,66542,412

10,73821,86133,443

YoY

8.4%

10.8%

9.8%

7.9%

-1.4%

3.4%

4.8%

5.5%

10.7%

6.6%

5.6%

Gross profit margin

38.4%

38.0%

38.3%

38.2%

38.6%

40.2%

40.5%

40.7%

41.4%

41.9%

41.9%

SG&A expenses

9,504

19,022

28,99738,599

9,765

19,14728,892

38,982

10,071

19,99930,379

YoY

7.2%

9.3%

9.5%

7.7%

2.7%

0.7%

-0.4%

1.0%

3.1%

4.4%

5.1%

SG&A ratio

37.1%

36.4%

36.7%

36.7%

38.8%

37.5%

37.0%

37.4%

38.9%

38.3%

38.0%

Operating profit% of Est.

FY Est.

75.0%

106,500
2.2%

334

796

1,228

1,615

-61

1,355

2,773

3,429

667

1,862

3,063

YoY

57.5%

67.2%

18.1%

13.1%

-

70.2%

125.8%

112.3%

-

37.4%

10.5%

Operating profit margin

1.3%

1.5%

1.6%

1.5%

-

2.7%

3.5%

3.3%

2.6%

3.6%

3.8%

Recurring profit

323

784

1,208

1,560

-62

1,397

2,770

3,479

935

2,235

3,485

YoY

68.2%

79.0%

19.6%

3.9%

-

78.2%

129.3%

123.0%

-

60.0%

25.8%

Recurring profit margin

1.3%

1.5%

1.5%

1.5%

-

2.7%

3.5%

3.3%

3.6%

4.3%

4.4%

97

218

326

-895

-201

578

2,013

2,198

583

1,431

2,144

YoY

-4.0%

83.2%

-12.4%--

165.1%

517.5%--

147.6%

6.5%

4.6%

Net margin

0.4%

0.4%

0.4%

-

-

1.1%

2.6%

2.1%

2.2%

2.7%

2.7%

2.2%

Net income

Quarterly

FY03/20(JPYmn)FY03/21

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Sales

25,59926,617

26,727

26,29825,162

25,88327,122

26,09025,91426,255

27,699

YoY

7.3%

12.3%

6.1%

3.2%

-1.7%

-2.8%

1.5%

-0.8%

3.0%

1.4%

2.1%

Gross profit

9,839

9,980

10,406

9,989

9,704

10,798

11,163

10,747

10,738

11,123

11,582

YoY

8.4%

13.3%

7.9%

2.5%

-1.4%

8.2%

7.3%

7.6%

10.7%

3.0%

3.8%

Gross profit margin

38.4%

37.5%

38.9%

38.0%

38.6%

41.7%

41.2%

41.2%

41.4%

42.4%

41.8%

9,745

10,09010,071

9,928

10,380

9,504

9,518

9,975

9,602

9,765

9,382

YoY

7.2%

11.4%

9.9%

2.6%

2.7%

-1.4%

-2.3%

5.1%

3.1%

5.8%

6.5%

SG&A ratio

37.1%

35.8%

37.3%

36.5%

38.8%

36.2%

35.9%

38.7%

38.9%

37.8%

37.5%

Operating profit

334

462

432

387

-61

1,416

1,418

656

667

1,195

1,201

YoY

57.5%

75.0%

-23.4%-0.3%-

206.5%

228.2%

69.5%--15.6%-15.3%

Operating profit margin

1.3%

1.7%

1.6%

1.5%

-

5.5%

5.2%

2.5%

2.6%

4.6%

4.3%

Recurring profit

323

461

424

352

-62

1,459

1,373

709

935

1,300

1,250

YoY

68.2%

87.4%

-25.9%-28.3%-

216.5%

223.8%

101.4%--10.9%-9.0%

Recurring profit margin

1.3%

1.7%

1.6%

1.3%

-

5.6%

5.1%

2.7%

3.6%

5.0%

97

121

108

-1,221

-201

779

1,435

185

583

848

713

YoY

-4.0%

572.2%-57.3%--

543.8%

1,228.7%

-

-

8.9%

-50.3%Net margin

0.4%

0.5%

0.4%

-

-

3.0%

5.3%

0.7%

2.2%

3.2%

2.6%

Net income

3,800
10.8%
3.6%

83.0%

4,200
20.7%
3.9%

93.2%

2,300

FY03/22

Q1

SG&A expenses

80.6%

4.5%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Quarterly sales and operating profit

Source: Shared Research based on company data

Quarterly results
By segment (cumulative)

FY03/20(JPYmn)FY03/21

FY03/22

Q1

Q1–Q2

Q1–Q3

Q1–Q4

Q1

Q1–Q2

Q1–Q3

Q1–Q4

Q1

Q1–Q2

Q1–Q3

Sales

25,59952,21678,943

105,241

25,162

51,04578,167104,257

25,914

52,16979,868

YoY

7.3%

9.8%

8.5%

7.1%

-1.7%

-2.2%

-1.0%

-0.9%

3.0%

2.2%

2.2%

24,22449,29074,637

99,61723,922

48,53974,36899,21424,65749,66375,986

YoY

7.4%

10.2%

9.1%

7.9%

-1.2%

-1.5%

-0.4%

-0.4%

3.1%

2.3%

2.2%

% of total

94.1%

93.6%

93.8%

94.0%

94.5%

94.5%

94.6%

94.6%

94.6%

94.6%

94.5%

Community Pharmacy Network

Leasing and Facility-related

760

1,829

2,659

3,425

723

1,438

2,194

2,940

739

1,536

2,461

YoY

26.7%

21.3%

11.6%

3.2%

-4.9%

-21.4%-17.5%-14.2%

2.2%

6.8%

12.2%

% of total

3.0%

3.5%

3.3%

3.2%

2.9%

2.8%

2.8%

2.8%

2.8%

2.9%

3.1%

Food Service

730

1,434

2,128

2,797

612

1,248

1,874

2,474

586

1,166

1,752

YoY

-7.4%

-9.6%

-10.7%-11.5%-16.2%-13.0%-11.9%-11.5%

-4.2%

-6.6%

-6.5%

% of total

2.8%

2.7%

2.7%

2.6%

2.4%

2.4%

2.4%

2.4%

2.2%

2.2%

2.2%

38

79

122

165

51

110

171

229

74

152

232

15.2%

-13.2%-26.5%-36.8%

34.2%

39.2%

40.2%

38.8%

45.1%

38.2%

35.7%

Other
YoY

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

8

% of total

0.1%

0.2%

0.2%

Segment sales adjustments
Operating profit
YoY

0.2%

0.2%

0.2%

0.2%

0.2%

0.3%

0.3%

-154

-417

-603

-764

-154

-292

-442

0.3%
-601

-143

-350

-563

334

796

1,228

1,615

-61

1,355

2,773

3,429

667

1,862

3,063

57.5%

67.2%

18.1%

13.1%

-

70.2%

125.8%

112.3%

-

37.4%

10.5%

825

1,736

2,764

3,743

434

2,369

4,329

5,703

1,202

2,885

4,663

YoY

28.5%

41.5%

18.5%

13.0%

-47.4%

36.5%

56.6%

52.4%

177.0%

21.8%

7.7%

Operating profit margin

3.4%

3.5%

3.7%

3.8%

1.8%

4.9%

5.8%

5.7%

4.9%

5.8%

6.1%

-8

68

67

45

6

16

34

32

-2

32

53

-

580.0%----76.5%-49.3%-28.9%-

100.0%

55.9%

Community Pharmacy Network

Leasing and Facility-related
YoY
Operating profit margin
Food Service
YoY
Operating profit margin

-

3.7%

2.5%

1.3%

0.8%

1.1%

1.5%

1.1%

-0.3%

2.1%

2.2%

-12

-34

-38

-43

-19

-13

-2

-21

-1

1

7

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-21

-39

-56

-71

-11

-13

-17

-31

-7

-12

-10

YoY

-

-

-

-

-

-

-

-

-

-

-

Operating profit margin

-

-

-

-

-

-

-

-

-

-

-447

-934

-1,508-2,057-472-1,003-1,569-2,253-523-1,043-1,650

Other

Segment profit adjustments

FY03/20
Sales
YoY

FY03/21

FY03/22

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

25,59926,617

26,727

26,29825,162

25,88327,122

26,09025,91426,255

27,699

7.3%

12.3%

6.1%

3.2%

-1.7%

-2.8%

1.5%

-0.8%

3.0%

1.4%

2.1%

24,22425,06625,34724,98023,922

24,61725,82924,846

24,65725,00626,323

YoY

7.4%

13.1%

7.0%

4.6%

-1.2%

-1.8%

1.9%

-0.5%

3.1%

1.6%

1.9%

% of total

96.6%

93.3%

94.2%

94.4%

94.5%

94.6%

94.7%

94.7%

93.5%

94.5%

94.3%

Community Pharmacy Network

Leasing and Facility-related

760

1,069

830

766

723

715

756

746

739

797

925

YoY

26.7%

17.7%

-5.0%

-18.3%-4.9%-33.1%

-8.9%

-2.6%

2.2%

11.5%

22.4%

% of total

3.0%

4.0%

3.1%

2.9%

2.9%

2.7%

2.8%

2.8%

2.8%

3.0%

3.3%

730

704

694

669

612

636

626

600

586

580

586

YoY

-7.4%

-11.8%-12.8%-14.1%-16.2%

-9.7%

-9.8%

-10.3%

-4.2%

-8.8%

-6.4%

% of total

2.9%

2.6%

2.6%

2.5%

2.4%

2.4%

2.3%

2.3%

2.2%

2.2%

2.1%

38

41

43

43

51

59

61

58

74

78

80

YoY

15.2%

-29.3%-42.7%-54.7%

34.2%

43.9%

41.9%

34.9%

45.1%

32.2%

31.1%

% of total

0.2%

0.2%

0.2%

0.2%

0.2%

0.2%

0.2%

0.2%

0.3%

0.3%

0.3%

Segment sales adjustments

520

-263

-186

-161

-154

-138

-150

-159

-463

-207

-213

334

462

432

387

-61

1,416

1,418

656

667

1,195

1,201

57.5%

75.0%

-

206.5%

228.2%

69.5%--15.6%-15.3%

Food Service

Other

Operating profit
YoY-23.4%

-0.3%

825

911

1,028

979

434

1,935

1,960

1,374

1,202

1,683

1,778

YoY

28.5%

80.0%

61.4%

-

-47.4%

112.4%

90.7%

40.3%

177.0%-13.0%-9.3%

Operating profit margin

3.4%

3.6%

4.1%

-

1.8%

7.9%

7.6%

5.5%

4.9%

6.7%

6.8%

-8

76

-1

-22

6

10

18

-2

-2

34

21

-

-

-

-

-

-86.8%---

240.0%

16.7%
2.3%

Community Pharmacy Network

Leasing and Facility-related
YoY
Operating profit margin

-

7.1%

-

-

0.8%

1.4%

2.4%

-

-0.3%

4.3%

-12

-22

-4

-5

-19

6

11

-19

-1

2

6

YoY

-

-

-

-

-

-

-

-

-

-66.7%-45.5%

Operating profit margin

-

-

-

-

-

0.9%

1.8%

-

-

0.3%

1.0%

Food Service

Other

-21

-18

-17

-15

-11

-2

-4

-14

-7

-5

2

YoY

-

-

-

-

-

-

-

-

-

-

-

Operating profit margin

-

-

-

-

-

-

-

-

-

-

-

-447

-487

-574

-549

-472

-531

-566

-684

-523

-520

-607

Segment profit adjustments

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

(Reference) Former Pharmaceuticals Network segment sales

Source: Shared Research based on company data
Notes: Undisclosed from Q2 FY03/19
The former Pharmaceuticals Network segment was integrated into the new Community Pharmacy Network segment from FY03/20

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

9Quarterly trends in prescription volume and price per prescription (drug price + technicalfees; Dispensing Pharmacy business; all stores)

Source: Shared Research based on company data
Note: NHI drug price and dispensing fee revisions were put into effect on April 1, 2014, April 1, 2016, and April 1, 2018.

Distribution of network members (as of December 31, 2021)

Source: Shared Research based on company data

Number of dispensing pharmacies by region
Directly operated pharmacies

Affiliates

Total

Hokkaido

Area

124

193

317

Tohoku

24

432

456

Kanto and Koshinetsu

96

2,053

2,149

Tokai and Hokuriku

43

1,258

1,301

Kinki

53

961

1,014

Chugoku and Shikoku

21

698

719

Kyushu and Okinawa

63

984

1,047

Total

424

6,579

7,003

Source: Shared Research based on company data (as of December 31, 2021)

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp10

Q3 FY03/22 earnings results (out February 4, 2022)
Overview
Q3 FY03/22 (April–December 2021) earnings results
Sales: JPY79.9bn (+2.2% YoY)
Operating profit: JPY3.1bn (+10.5% YoY)
Recurring profit: JPY3.5bn (+25.8% YoY)
Net income attributable to owners of the parent: JPY2.1bn (+6.5% YoY)
Company response and business conditions
Performance was steady in the core Community Pharmacy Network segment, with sales growing 2.2% YoY over cumulative
Q3. The trend in the main business areas was as follows. In the Pharmaceuticals Network business, the number of new
network members increased steadily. In the Dispensing Pharmacy business, the average prescription price dropped, but the
number of prescriptions filled recovered to some extent.
Gross profit increased 5.6% YoY to JPY33.4bn, and GPM improved 1.4pp to 41.9% due to profit growing in the
Pharmaceuticals Network business on an increase in the number of network members. According to the company, increased
profitability of dispensing operations (due to a rise in the ratio of technical fees in the breakdown of prescription unit price)in the Dispensing Pharmacy business contributed to GPM improving, in addition to growth in sales and profit in the
Pharmaceuticals Network business. SG&A expenses also increased 5.1% or JPY1.5bn YoY to JPY30.4bn due to expenses
rising with the opening of new dispensing pharmacies, but the impact was offset by higher gross profit. As a result, operating
profit grew 10.5% YoY and OPM rose 0.3pp to 3.8%. Meanwhile, net income attributable to owners of the parent increased
6.5% YoY as a result of gains on the sale of investment securities and tax benefits from the absorption-type merger withconsolidated subsidiary Home-Visit Nursing Care Station Himawari Co., Ltd. in July 2021.

Breakdown of Q3 FY03/22 (April–December 2021) results bysegment
Community Pharmacy Network
Segment sales: JPY76.0bn (+2.2% YoY; including intra-group sales and transfers between segments, same applies
below)
Segment profit: JPY4.7bn (+7.7% YoY)
This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy
business, and the manufacture and market pharmaceuticals business (mainly Feldsenf Pharma) previously included in
Other. A digital shift business that utilizes instant messaging app LINE was added to the segment from FY03/21.

Pharmaceuticals Network
The number of new network members continued to increase, driven by the need for improved operating stability fordispensing pharmacies amid harsh business conditions in the industry, including annual NHI drug price revisions starting in
April 2021. As of end-December 2021, network members numbered 7,003 (+887 versus end-FY03/21), consisting of 424
directly operated pharmacies and 6,579 affiliates. This was 74.9% of the company's target of 1,184 network members by endMarch 2022.
Dispensing Pharmacy
The average prescription price dropped due to the drug charge per prescription decreasing, but the number ofprescriptions filled during the period recovered to some extent. As a result, dispensing fees increased 3.4% YoY across allstores and 2.0% YoY at existing stores. As of end-December 2021, the group had 424 dispensing pharmacies, one care plan
center, and eight cosmetics/drug stores.

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

11Manufacture and market pharmaceuticals
This business aims to provide a stable supply of good-quality, low-priced generic drugs. As of end-December 2021, thecompany was selling 41 different ingredients and 80 products. The company plans to increase the number of clients it sells
to, starting with stores it operates directly, before expanding sales to network members.
Digital shift
Subsidiary PharmaShift Co., Ltd. was established on October 1, 2020, to create a “new pharmaceutical platform” for thedigital age. In March 2021, the subsidiary launched the “Tsunagaru (connected) Pharmacy” service utilizing its official LINE
account. The introduction of this service is designed to support the "family pharmacy" functions of dispensing pharmacies. At
end-December 2021, the official LINE account had more than 250,000 registered users, with 745 stores having introduced
the service. These numbers continue to grow, with the number of registered users having reached 271,000 and stores 788 at
end-January 2022.

Leasing and Facility-related
Segment sales: JPY2.5bn (+12.2% YoY)
Segment profit: JPY53mn (+55.9% YoY)
Operating conditions of serviced elderly housing facilities
Property leasing revenue was generally strong and orders for construction projects increased. However, occupancy rates atthe company’s serviced elderly housing facilities remained sluggish. As of end-December 2021, the company reported stable
occupancy rates at three of its five properties, while for the remaining two, at Wisteria Senri-Chuo it reported an occupancy
rate of 78.1% (with 64 out of 82 units occupied), and at Wisteria Minami Ichijo it reported an occupancy rate of 69.8% (with81 out of 116 units occupied).

Food Service
Segment sales: JPY1.8bn (-6.5% YoY)
Segment profit: JPY7mn (versus a loss of JPY2mn in the previous year)
Segment turns profitable
Despite a drop in the number of meals supplied due to the pandemic, the segment turned profitable in Q2 as the company
revised its operations and changed its suppliers. The segment remained in the black in Q3.

Other (mostly home-visit nursing care)
Segment sales: JPY232mn (+35.7% YoY)
Segment loss: JPY10mn (versus a loss of JPY17mn in the same period last year)

Company forecast for FY03/22
Recent performance and FY03/22 company forecast
FY03/20(JPYmn)Sales
YoY

1H Act.
52,216

FY03/212H Act.

FY Act.

53,025105,241

1H Act.
51,045

FY03/222H Act.

FY Act.

53,212104,257

1H Act.

2H Est.

FY Est.

52,16954,331

106,500

2.1%

2.2%

9.8%

4.6%

7.1%

-2.2%

0.4%

-0.9%

2.2%

Cost of sales

32,39732,63065,02730,54231,303

61,84530,307Gross profit

19,81920,39540,21420,502

21,91042,412

21,861Gross profit margin

38.0%

38.5%

38.2%

40.2%

41.2%

40.7%

41.9%

SG&A expenses

19,022

19,57738,59919,147

19,83538,982

19,999

SG&A ratio

36.4%

36.9%

36.7%

37.5%

37.3%

37.4%

38.3%

796

819

1,615

1,355

2,074

3,429

1,862

1,938

3,800

67.2%

-14.0%

13.1%

70.2%

153.2%

112.3%

37.4%

-6.6%

10.8%

Operating profit
YoY
Operating profit margin

1.5%

1.5%

784

776

1,560

1,397

2,082

3,479

2,235

1,965

4,200

YoY

79.0%

-27.0%

3.9%

78.2%

168.3%

123.0%

60.0%

-5.6%

20.7%

Recurring profit margin

1.5%

1.5%

1.5%

2.7%

3.9%

3.3%

4.3%

3.6%

3.9%

Net income

218-1,113

-895

578

1,620

2,198

1,431

869

2,300

Recurring profit

1.5%

2.7%

3.9%

3.3%

3.6%

3.6%

3.6%

YoY

83.2%

-

-

165.1%--

147.6%-46.4%

4.6%

Net margin

0.4%

-2.1%

-0.9%

1.1%

3.0%

2.1%

2.7%

1.6%

2.2%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

12

Sales: JPY106.5bn (versus previous forecast of JPY105.7bn)
EBITDA: JPY6.8bn (versus previous forecast of JPY6.5bn; adopted as a new yardstick for profitability)
Operating profit: JPY3.8bn (versus previous forecast of JPY3.5bn)
Recurring profit: JPY4.2bn (versus JPY4.0bn)
Net income attributable to owners of the parent: JPY2.3bn (JPY1.8bn)
EPS: JPY76.23 (JPY59.69)
At the time of the Q3 results announcement (February 4, 2022), the company revised its full-year earnings forecast as above.
This was mainly to reflect the higher-than-expected average prescription price in the Dispensing Pharmacy business of theCommunity Pharmacy Network segment.
Forecast by segment
Community Pharmacy Network business: sales of JPY101.1bn (+1.9% YoY; JPY100.1bn previously), segment profit of JPY6.1bn(+6.4% YoY; JPY5.7bn previously)
Other three businesses: sales of JPY6.1bn (+7.9% YoY; JPY6.2bn previously), segment profit of JPY67mn (versus a loss of
JPY20mn in FY03/21; JPY167mn previously)
Adjustment: -JPY707mn for sales (-JPY612mn previously), -JPY2.3bn for segment profit (-JPY2.4bn previously)
Background to earnings forecasts
In the dispensing pharmacy industry, earnings traditionally have been at the mercy of biennial NHI drug price revisions. The
first-ever “off-year” revision took place in April 2021, with revisions applied to some 70% of all pharmaceuticals on the NHI
drug price list. Going forward, drug price revisions will take place annually (incorporating the off-year revisions), andMedical System Network foresees further deterioration in the business climate for dispensing pharmacies, heightening theneed for operational stability. On the other hand, the company noted progress has been made in winning the understandingof wholesalers on previously promoted improvements to drug distribution. Shared Research sees that the company is making
progress toward its goal of building a relationship with pharmaceutical wholesalers as business partners.
Revisions to forecasts announced on February 4, 2022 centered on the Dispensing Pharmacy business of the Community
Pharmacy Network. At the time of the Q3 results announcement, the company revised up its full-year sales forecast for the
Dispensing Pharmacy business by JPY800mn, as the prescription unit price at its directly operated pharmacies and thepharmaceutical transaction volume at its network member pharmacies have trended above the initial plan in this business. In
addition, the company revised up its operating profit forecast by JPY300mn to reflect the upward revision to its sales forecast
for the Dispensing Pharmacy business and cuts to expenses. It has revised up the forecast for net income by JPY500mn inlight of a gain on the sale of investment securities and a lower tax burden resulting from the absorption-type merger with
Home-Visit Nursing Care Station Himawari Co., Ltd.
The company sees the changing business climate as an opportunity for the Community Pharmacy Network segment’s
Pharmaceuticals Network business to continue expanding the number of network members by providing a dispensing
pharmacy operating platform. The company aims to increase the number of network members by 1,184 to 7,300 by endMarch 2022, but it thinks continuing to steadily increase the number of members after this point will lead to further growth.
In the Dispensing Pharmacy business, the company aims to restore sales and continue improving profitability by focusing on
filling more prescriptions through strengthening family pharmacy functions, utilizing its LINE official account to enhancecommunication with customers and enhancing the quality of pharmacists through introduction of the new education system(CP Step). At the Leasing and Facility-related business, the company seeks to stabilize earnings by targeting 90% occupancy
for all serviced residences for the elderly.

Medium-term plan (out May 8, 2018)
Core strategies of the fifth medium-term plan
Comparison with fourth medium-term plan
Medical System Network announced its fifth medium-term plan (FY03/19–FY03/22) at the time of its earnings
announcement for FY03/18. The company had previously reviewed its medium-term plans every three years. The fourth
medium-term plan that ended in FY03/18, was preceded by a plan covering FY03/13–15. Starting from the fifth medium-

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13term plan, however, the company changed the term to four years, which would be in line with the cycle of medical treatment
fee revisions.

Core strategies: Details and company targets
The core strategies of the fifth medium-term plan are as follows. The first four are in response to the NHI drug price anddispensing fee revisions implemented in April 2018. The third strategy is linked to the company’s full-scale entry into thegeneric drug business (manufacture and sales), and the company expects earnings contribution from its consolidated
subsidiary Feldsenf Pharma, which will have a central role in managing the business. Regarding the fifth strategy, given thatthe construction of a new serviced elderly housing facility was near completion as of end FY03/18, the company intends tofocus on boosting occupancy rates for these units. Also, having made continued investments into these new facilities up until
now, the company sees the period covered by the fifth medium-term plan as a time to focus on stepping up its financial base.
Drive collective efforts of all network members to expand the pharmaceuticals network and provide management support
to small and mid-tier pharmacies that help sustain community-based medical care; also improve drug distribution
efficiency through collective efforts.
Position directly operated pharmacies as medical institutions and raise their caliber; promote their family pharmacy
functions, allowing them to take initiative in resolving issues surrounding community medical care.
Assist government-driven efforts to increase generic drug utilization and help develop efficient drug distribution systems
by expanding manufacture and sales of quality generic drugs.
Strengthen collaboration among group businesses and take a unified approach in providing community care functions(medical care, long-term care, and disease prevention) that are considered essential to the community-based integrated
care system.
Improve cash flows, take further steps to achieve efficient management structure, and fortify financial base.
We understand that in the mid- to long-term, Feldsenf Pharma, a generic drugs subsidiary (manufacture and sales)
established by the company, will take on a significant role in Medical System Network’s generic drug business cited in thethird strategy. In the final year of the fifth medium-term plan, the company plans on sourcing around 50% of its consolidated
operating profit from the Supply Chain Management (SCM) business, which is the combination of the generic drugs businesscentering on Feldsenf Pharma, and the Pharmaceuticals Network business.
Medical System Network has not changed its basic policy outlined above, even after the change in business environment
due to the spread of COVID-19 in FY03/20. It provides specific policies for each business in the core Community Pharmacy
Network segment. In the Pharmaceuticals Network business, the company will continue to maintain and increase network
members. In the Dispensing Pharmacy business, the company aims to strengthen the family pharmacy function of its directly
operated Nanohana Pharmacies. In the manufacture and market pharmaceuticals business, the company seeks to increase
the product lineup of generic drugs sold as well as the number of network members that sell its products. In May 2021, thecompany announced a change to its fifth medium-term plan final year (FY03/22) sales and profit forecasts to reflect the
impact of the COVID-19 pandemic.

Feldsenf Pharma’s generic drugs supply chain

Source: Shared Research based on company data

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14

According to information released by the company in February 2018, Feldsenf Pharma’s product lineup only comprised six
generic drug APIs and 13 products, but the subsidiary looks to expand and improve the lineup, which would also include
existing generic drugs. At end-FY03/20, Feldsenf Pharma’s product lineup had grown to 23 generic drug APIs and 51
products, with a target of 100 products at end-FY03/22. Feldsenf Pharma is unmatched by industry peers in that it can lower
transport costs, control production based on demand from network members (affiliates and directly operated pharmacies),and has a strategy to reduce delivery charges. We believe Feldsenf Pharma, by fulfilling its given role, will not only help
raise the generic drugs ratio at Medical System Network pharmacies but also contribute to the company’s consolidated
results. The company targets an increase in the number of pharmacies selling its products to 1,000 at end-FY03/21.

Numerical targets (as of when plan was announced)
The company outlined numerical targets for FY03/22 (the final year of the fifth medium-term plan) as follows: JPY120.0bn insales, JPY5.0bn in operating profit (consolidated EBITDA of JPY7.5bn), equity ratio of over 30%, and 5,000 network members(when initially announced).
The number of pharmacies looking to become network members continues a steady increase. With more pharmacies having
sought to become network members since the April 2018 NHI drug price revision, the company cleared the 5,000-member
target in FY03/20, two years earlier than initially planned. In FY03/21, the number network members surpassed 6,000,
exceeding a market share of 10% (number of pharmacies basis). In terms of earnings forecasts, the company revised its
FY03/20 forecasts to reflect the impact of COVID-19 and associated significant change in the operating environment. The
company initially issued its full-year FY03/21 forecast in a range form and revised the forecast on November 6, 2020. As forthe numerical targets for FY03/22, the final year of its fifth medium-term plan, the basic policy is unchanged but announced
when reporting FY03/21 results that the forecasts need to reflect the continuing impact of COVID-19 pandemic and NHI
price revisions.

(Reference) Numerical targets for the fifth medium-term plan (at time of announcement)
FY03/17(JPYmn)Sales

FY03/18

Act.

Act.

88,865

93,977

FY03/19
Act.

(JPYmn)FY03/20

FY03/22

Est.

Targets

98,232 Sales

105,241

120,000-

Pharmaceuticals Network

3,237

3,639

3,951 Community Pharmacy Network

97,461

Dispensing Pharmacy

81,65087,17290,706 Three other businesses

6,113

-

Operating profit

2,113

3,163

1,428 Operating profit

1,615

5,000

Pharmaceuticals Network

1,718

1,949

2,331 Community Pharmacy Network

4,783

-

Dispensing Pharmacy

2,314

3,060

1,068 Three other businesses

-240

-

EBITDA

4,717

5,711

4,200 EBITDA

-

7,500

Recurring profit

2,109

3,250

1,501 Recurring profit

1,560

-

Recurring profit margin

2.4%

3.5%

1.5% Recurring profit margin

1.5%

-

Net income

571

1,022

462 Net income

-895

-

Equity ratio

20.1%

16.9%

15.6% Equity ratio-

30% or higher

Pharmaceuticals Network members

1,770

2,509

3,790 Pharmaceuticals Network members

5,000

5,000

377

399

-

-

No. of regional pharmacies

420 No. of regional pharmacies

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Segment figures include internal transactions.

Medical System Network/ 4350
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Business model
Medical System Network provides dispensing pharmacy support services to its own pharmacies and to affiliates. Based on the
FY03/19 results reported under the former segment classifications, approximately 90% of the company’s sales came fromthe operation of dispensing pharmacies (Dispensing Pharmacy business*). The dispensing pharmacy support service(Pharmaceutical Network business*), while highly profitable, accounts for a smaller portion of overall sales than operation ofdispensing pharmacies. As such, the company can be considered a pharmacy chain that also extends its services to nondirectly operated pharmacies.
*The Dispensing Pharmacy business and the Pharmaceutical Network business were formerly independent reportablesegments. The two businesses were consolidated into the new Community Pharmacy Network segment in FY03/20.
The dispensing pharmacy support service developed by Medical System Network is provided not only to directly-operated
pharmacies but also to non-group dispensing pharmacies (affiliates). The Dispensing Pharmacy business generated about 30%of operating profit (unadjusted for internal transactions) in FY03/19 while the Pharmaceuticals Network business accounted
for about 70%, suggesting high OPM for the latter considering the segment’s small share of sales.
Dispensing pharmacies in Japan are regulated by the nation’s universal healthcare insurance system governed by the Ministryof Health, Labour and Welfare (MHLW). The system requires the separation of prescription and dispensary practices, where
patients receive prescriptions from physicians at medical institutions and have them filled at dispensing pharmacies by apharmacist. Under the universal healthcare insurance system, the cost of medication is split between patients and theirinsurance plans. When a pharmacy dispenses drugs, it collects the patient co-payment (30% of total cost for most company
employees) in cash and obtains dispensing fee receivables for the insurance plan portion (70%), for which a reimbursement
claim is later submitted. The prices for drugs and medical services are set by the regulatory authorities.

Overview of business segments
Medical System Network comprised five business segments until FY03/19. The mainstay segments were Pharmaceuticals
Network and Dispensing Pharmacy. These two segments were consolidated into the Community Pharmacy Network segment
along with the manufacture and market pharmaceuticals business (previously included in the Other business and operated by
Feldsenf Pharma). PharmaShift Co., Ltd, was established on October 1, 2020 to operate the Family Pharmacy Support
Service. The new Community Pharmacy Network segment from FY03/21 comprises the Pharmaceuticals Network,
Dispensing Pharmacy, manufacture and market pharmaceuticals, and digital shift businesses. The company does not disclosea sales and profit breakdown by business.
As peripheral business in healthcare and care-related businesses, the company maintains its three segments; Leasing andFacility-related, Food Service, and Other businesses. The main business in the Other business segment is home-visit nursing
care. Each business segment continues to be operated by respective core subsidiaries.

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16Affiliated companies (as of May 31, 2021)
Segment

Company

Location

Hokkaido Institute for Pharmacy Benefit Co., Ltd.
Nanohana Hokkaido Co., Ltd.

Sapporo, Hokkaido
Sapporo, Hokkaido

100.0%
100.0%

Clinics Co., Ltd.
Nanohana Tohoku Co., Ltd.

Sapporo, Hokkaido
Hachinohe, Aomori

100.0%
100.0%

Nanohana East Japan Co., Ltd.
Metro Pharmacy Co., Ltd.
Nanohana Central Co., Ltd.

Minato-ku, Tokyo
Minato-ku, Tokyo
Nagoya, Aichi

100.0%
100.0%
100.0%

Nanohana West Japan Co., Ltd.
Total Medical Service Co., Ltd.

Toyonaka, Osaka
Kasuya, Fukuoka

100.0%
100.0%

Nagatomi Pharmacy Co., Ltd.
Feldsenf Pharma Co., Ltd.

Oita, Oita
Sapporo, Hokkaido

100.0%
80.0%

Digital Shift
Leasing and Facility-related
Food Service

PharmaShift Co., Ltd.
Paltecno Co., Ltd.
Sakura Foods Co., Ltd.

Minato-ku, Tokyo
Sapporo, Hokkaido
Kasuya, Fukuoka

51.0%
100.0%
100.0%

Other

Agrimas Corp. *Home-Visit Nursing Care Station Himawari Co., Ltd.

Ota-ku, Tokyo
Nerima-ku, Tokyo

77.7%
100.0%

Community Pharmacy Network

Ratio of voting rights

Source: Shared Research based on data from the company website.
Notes: *Not consolidated**Company names for Apotec Co., Ltd. and Kyoei Pharmacy Co., Ltd. were changed to Nanohana Tohoku Co., Ltd. and Nanohana West Japan Co., Ltd. as of April 1, 2019.
***Home-visit Nursing Care Station Himawari will be consolidated through absorption-type merger from July 1, 2021 (announced in May 2021)

Community Pharmacy Network
The Community Pharmacy Network business is a new segment created in FY03/20 from consolidating the Pharmaceuticals
Network, Dispensing Pharmacy, and a part of the Other (manufacture and market pharmaceuticals business) segments. The
new Family Pharmacy Support Service business was also added from FY03/21.
The company cited following two reasons for the reorganization:
To accommodate expansion of the company’s business scope to the entire supply chain accompanied by the rise inpharmaceuticals network members and full-scale development of the manufacture and market pharmaceuticals
business
To transition to a structure that can provide value to the entire supply chain while taking into account possible conflictsof interest between business segments due to the aforementioned changes

Pharmaceuticals Network business (former Pharmaceuticals
Network segment)
The core Pharmaceuticals Network business offers comprehensive support for operating pharmacies, ranging from thesourcing of drugs to pharmacist training and financing. It can be broken down into four major functions: Pharmaceuticals
supply chain management, slow moving inventory clearance, pharmacist training, and financing.

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17Network members and pharmaceuticals transactions

Note: Figures for FY09/04 are totals of directly operated dispensing pharmacies and affiliates only.
Source: Shared Research based on company data

Four functions(1) Pharmaceuticals supply chain management
Medical System Network negotiates terms of business with drug wholesalers on behalf of its network members. Typically,
dispensing pharmacies have to negotiate prices separately with each wholesaler. However, the company represents its
network members collectively in negotiations with wholesalers around the country. The wholesalers benefit from thecompany’s services in a number of ways. They can receive payment from all network members two months after closing
instead of the standard three months, which reduces interest expenses. The company’s collection service helps themminimize the cost of recovering outstanding payments for pharmaceutical products. The online ordering system improves
and optimizes inventory control for pharmacies, reducing order frequency and emergency deliveries, thus loweringwholesaler costs. These cost-saving advantages give the company the power to negotiate better prices with wholesalers. Pricenegotiation is crucial to dispensing pharmacies that interact with multiple drug wholesalers since the difference between theactual drug sourcing cost and official price of prescription drugs represents their profit stream, but it is also a source of heavy
operational burden.
In negotiating terms with wholesalers, Medical System Network adopts the law of one price. Instead of using order volume asbargaining power (making lower price a condition for large orders), it negotiates with all wholesalers based on a common
price per each pharmaceutical product. Further, the company does not get involved in the transactions and relationships
between the pharmacies and their regular suppliers* (wholesalers). Members can choose which wholesaler to buy from on
the basis of service and other conditions, not price. This system lowers the hurdle for dispensing pharmacies thinking of
joining the network, but wants to keep existing trading accounts with their regular suppliers, and appeals to wholesalers as
well, because they can maintain relationships with existing customers. It is thus a win-win for both retailers and wholesalers.
The company also benefits, because it can attract new network members by allowing them to maintain their existingaccounts.
Medical System Network is also focusing on handling generics, whose use is being strongly promoted by MHLW. The
company gathers and analyzes detailed information such as interview forms** mainly about drugs added to the NHI list thatit receives from pharmaceutical companies. The company then negotiates with wholesalers about stable supply of the
product, price, and other conditions, and provides information on the product to network members if it concludes that it canbe dispensed safely by the pharmacists. The company also provides a substantial support system to its affiliates to increase
their handling of generics, including an inventory management system with the same features as the generic drug
recommendation system used by its directly operated pharmacies.

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18

*Regular supplier/trading account: A relationship between retailer and wholesaler whereby the retailer has a trading
account with the wholesaler. For a retailer, a regular supplier is a wholesaler with which it has a history of doing
business.
**Interview form: Pharmaceutical Interview Form (IF), whose purpose is to supplement information that is not fully
covered in package inserts of prescription drugs. These forms are supplied by pharmaceutical companies and provide
all-round product information. Japan Society of Hospital Pharmacists (JSHP) sets IF drafting guidelines and instructs
pharmaceutical companies to distribute the forms. Historically produced by pharmacists interviewing companies, thecurrent format was established in 1988.

(2) Slow moving inventory clearance service (dead stock exchange)
This system allows for the exchange of dead stock pharmaceuticals among network members. A pharmaceutical product canno longer be dispensed once it expires, so the disposal of dead stock becomes a cost burden on dispensing pharmacies. The
primary objective of the system is to reduce inventory disposal losses substantially by registering members’ dead stock in thesystem and matching the stock with other members that can use it. Charges for matched dead stock can be settled together
with order placement commissions to Medical System Network, so member pharmacies do not need to make payments toeach other.
The MHLW has identified wasted pharmaceuticals as a cost burden that needs to be addressed in healthcare reforms. Notethat Medical System Network has acquired a patent for this system.
(3) Pharmacist training support
An attractive training system can improve staff loyalty and draw talented recruits to dispensing pharmacies. The company
holds nationwide training courses for pharmacists including those working at network pharmacies in collaboration withtraining organization Iyaku Sogo Kenkyukai (ISK). These workshops are run by dispensing pharmacies and online courses arealso available. The workshops cover topics such as simulated patient training, POS* training, case studies, and customer
relations training. Certification by Japan Pharmacists Education Center (JPEC; a public interest incorporated foundation)requires attendance at, and gaining credits for workshops run by JPEC and registered organizations that provide group andpractical training sessions such as Japan Society of Hospital Pharmacists (JSHP) and Japan Pharmaceutical Association (andtheir regional chapters).
ISK is one of the few private-sector organizations registered as a provider of various certification programs for pharmacists.
Medical System Network and ISK help pharmacies run training sessions and apply for accreditation, which enables them tobecome members of the ISK organization and run JPEC accredited training courses. ISK issues attendance stickers topharmacists who attend these courses. This is an incentive for network pharmacies, because it helps them recruit pharmacists.
*POS: Problem Oriented System. A predetermined logical and scientific resolution approach used in team medicalcare, wherein patient information and healthcare professionals’ records are shared to clearly ascertain patient medical
problems from each professional’s point of view.

(4) Financing support
In Japan, the cost of prescription drugs is borne by patients and the public health insurance programs (such as social
insurance for company employees and the National Health Insurance [NHI] for non-employees). Dispensing pharmacies
receive the patient co-payment over the counter when dispensing drugs and the portion covered by insurance becomesdispensing fee receivables until it gets monetized two months later when pharmacies receive payment from the insurance
programs. Under the company’s financing support service (optional), these receivables are purchased and securitized, anddirectly operated pharmacies are provided cash funding more than a month earlier than the payment from insurance
programs. This service offers dispensing pharmacies stable low-cost financing, as unlike financing from a bank, no collateral isrequired. There are also no restrictions on how the funds can be utilized. Social insurance and NHI claims can be securitizedseparately. Dispensing fee receivables are converted into small-lot securities through financial institutions and sold toinvestors for capital recovery.

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19Dispensing Pharmacy business (former Dispensing Pharmacy
segment)
Scale
The Dispensing Pharmacy business (operation of dispensing pharmacies) is a core business that accounts for about 90% of thecompany’s sales and about half of its operating profit. The group’s dispensing pharmacies had been operating under theumbrella of a holding company Pharmaholdings Co., Ltd., which was the company’s subsidiary until October 2017, when it
was absorbed by the company. As of May 2019, the group’s dispensing pharmacies are operated through seven consolidated
subsidiaries. Another subsidiary, Hokkaido Institute for Pharmacy Benefit Co., Ltd., publishes specialized books forpharmacists and other healthcare professionals and analyzes pharmaceuticals-related data.
The Dispensing Pharmacy business operates the group’s directly operated pharmacies. The company provides support
services through its pharmaceuticals network to both its directly-operated pharmacies and non-directly operated pharmacies(affiliates). Directly operated pharmacies and affiliates make up the company’s pharmaceuticals network, but the affiliates are
not included in the scope of the Dispensing Pharmacy business. The numbers of both affiliates and directly operated
pharmacies continue to rise. The total value of drug orders (which dictates the company’s commission revenue) tends to risein line with the increase in network members, although there have been periods when the value declined due to drug pricerevisions.
Affiliates and directly operated pharmacies are found in most areas nationwide, although the home base of Hokkaido has thehighest concentration of the latter followed by the Kanto and Koshinetsu area. The highest concentration of affiliates is in the
Kanto and Koshinetsu area followed by the Tokai and Hokuriku area (for recent regional patterns see the figures Distributionof network members and Number of pharmacies by region in the Trends and Outlook section). As of end-March 2021, thenumber of directly operated pharmacies and non-directly operated pharmacy members of the Pharmaceuticals Network(affiliates) stood at 6,116, exceeding 10% of the 60,171 pharmacies in Japan (MHLW survey) and ranking first in the domestic
market. The total value of drug orders was JPY391.7bn (+16.3%), representing the largest scale in Japan.

Directly operated pharmacies
Functions provided by the company’s directly operated dispensing pharmacies do not dramatically differ from those of otherdispensing pharmacies, although one distinguishing characteristic is that they tend to be located in residential areas where
homes and medical institutions coexist (categorized by the company as the medical mall format including medical plazas). As
such, they are well suited to take on the “family pharmacy” function advocated by MHLW. The company aims to strengthen
the family pharmacy functions of its pharmacies by offering consultation services concerning nutrition, health, and self-care.
The company regularly provides guidance to directly operated pharmacies. It sets a bar for their financial performance, andwhen the pharmacies fail to meet those targets, the company investigates the cause and seeks possible solutions. It also
advises pharmacy managers, on matters including potential closures. With such guidance, the company continues topromote revitalization of pharmacies, and in FY03/19 it closed 15 outlets while opening eight new stores and acquiring
three through M&A.

Market position of directly operated Nanohana Pharmacy
The number of Nanohana brand pharmacies totaled 416 at end-March 2021. The following table compares sales andpharmacy numbers for other major pharmacy chains as of their fiscal year-ends. Unlisted companies and companies mainly
operating dispensaries within drugstores are excluded. While Medical System Network brand pharmacies rank within the top
10, it has far fewer outlets than the top-ranking pharmacy chains.

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20Number of dispensing pharmacies
FY endSales (JPYmn)

No. of pharmacies

April

292,615

1,088

March

161,832

811

96,124

777

March

-

748

March

278,951

670

March

96,439592-

193,700

580

8 Medical System NetworkMarch

90,706416

9 Aisei Pharmacy

March64,185396

May40,417312

1 Ain Holdings
2 Qol
3 Toho Holdings

March

4 Sogo Medical Holdings
5 Nihon Chouzai
6 Suzuken
7 Kraft

10 Pharmarise Holdings

Source: Shared Research based on data from each company’s websites and materials
Note: Sales figures are aggregate of dispensing pharmacy segment, Aisei Pharmacy Co., Ltd. and Kraft Inc. (Sakura Pharmacy) are unlisted, Sogo Medical Holdings wasdelisted in April 2020, and companies that are primarily drugstore chains were excluded.
Note: Based on earnings announcement data disclosed as of June 2021.

Initiatives in line with the distribution improvement guidelines
The company has taken steps in line with the MHLW objective of reducing medical expenses through streamlining
distribution to establish a more efficient supply chain that bolsters online ordering, reduces product returns, and lowers
delivery frequency. Particularly noteworthy is its local network initiatives.
A local network aims to foster collaboration among local affiliates of the company’s pharmaceuticals network within acommunity with the following four objectives:
Information sharing by affiliates of available pharmaceuticals and inventories
Enhanced distribution for the entire region
Cooperation on at-home medical care, facility sharing, holding study sessions and exchange meetings
Product sharing, interaction and collaboration among employees, and knowledge sharing

Efforts to streamline Nanohana Pharmacy operations
Several measures have been taken to streamline operations of the directly operated pharmacy chain, Nanohana Pharmacy.
Reduce time required to input medication history and register drugs to be reviewed: Tablet computers are provided
to each pharmacist thus making work more flexible and enabling utilization of free time between dispensing work.
Average time required for this task was reduced from 60 minutes to 30 minutes a day.
Reduce time spent on ordering drugs: Full adoption of in-house developed automated drug ordering system reduced
the time spent on ordering drugs from a daily average of 30 minutes to less than 10 minutes.
Reduce patient waiting time: Improvement of waiting time measurement system helped identify causes of longwaiting time. A successful case showed that waiting time was cut by about five minutes three months after theidentified problem was solved.
Optimization of staffing: Setting standard working hours for pharmacists and staff (appropriate number of staff) for each
pharmacy and installing management tools enabled the company to gauge appropriate staffing for any given week or
any given day of the week.

Manufacture and market pharmaceuticals business (formerly in
the Other business)
Business overview
The manufacture and market pharmaceuticals business was transferred from the Other business to the Community
Pharmaceutical Network business in FY03/20. It is operated by consolidated subsidiary Feldsenf Pharma Co., Ltd., which wasestablished in September 2016 to manufacture and market ethical drugs. It does not have manufacturing capabilities or
facilities but aims to develop an efficient pharmaceutical distribution system from manufacturing through the filling ofprescriptions at the pharmacy by building a collaborative relationship with pharmaceutical manufacturers with capability toprovide a stable supply of high-quality, lower-priced generic drugs. In 2018, it formed a business alliance with Daito
Pharmaceutical Co., Ltd. (TSE1: 4577), which manufactures and supplies ethical drugs to Feldsenf Pharma.
Feldsenf Pharma started marketing generic drugs from 2018. It mainly supplies directly-operated pharmacies and network
members, but eyes expanding its lineup of in-house brand generic drugs to become a supplier to dispensing pharmacies andMedical System Network/ 4350
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21

medical institutions nationwide.

Business scale, profit trends
In FY03/19, Feldsenf Pharma started out with 17 active pharmaceutical ingredients (API) across 34 items, and expanded to
34 API across 68 products at FY03/21. Management aims to further expand the product lineup of in-house drugs and sales
tie-up products. In FY03/21, the company supplied its products to directly-operated pharmacies and to 1,116 network
members. It reported sales exceeding JPY1bn and it was profitable at the operating level.

Digital shift business (established in FY03/21)
Family Pharmacy Support Service
The company established a Joint venture, PharmaShift Inc. in September 2020 with OPT, Inc. (unlisted; company name laterchanged to Re:teigi, Inc.), a core subsidiary of Digital Holdings (TSE1: 2389). Medical System Network holds a 51% equity
stake while RePharmacy, Inc. (wholly-owned subsidiary of Re:teigi, Inc.) holds the remaining 49%.

PharmaShift’s main business is Family Pharmacy Support Service. Medical System Network created the digital shift businessas a new business with establishment of PharmaShift. In the joint venture, PharmaShift is mainly in charge of customer
development while RePharmacy focuses on system development.
Family Pharmacy Support Service engages in and pursues the following three points:
Facilitates smooth communication between patients and pharmacies by leveraging official LINE accounts andaggregating patients’ medical information
Contributes to strengthening functionality and enhancing efficiency of family pharmacies while also supporting nondispensing businesses such as health and nutrition counseling
Building an information infrastructure that can be linked with various other businesses such as physicians byaggregating information obtained from having strengthened functionality of family pharmacies

Utilization of official LINE accounts
The plan is to integrate various functions based on the LINE communication app to facilitate communication between
patients and pharmacies using the official LINE account. Specifically, Medical System Network looks to incorporate functions
such as prescription transmittal, electronic medication records, surveys of pharmacy visits, and follow-ups during medication.
In collaboration with OPT, it aims to develop products using the LINE official account based on a common platform fordispensing pharmacies so that it can provide the products not only to directly-operated and network member pharmacies, but
to all pharmacies nationwide.
In FY03/21, the Family Pharmacy Support Service utilizing the official LINE account launched from March 15, 2021 and thenumber of registered friends grew from 10,000 on April 2 to over 30,000 as of May 6. As of end-March 2021, 36
pharmacies had adopted the service, expanding to 168 pharmacies by end-April. According to the company, the number ofprescriptions sent to pharmacies that have adopted the service more than double that of those that have not. Safe
management of personal information is a high priority, so proactive measures being taken include no need to fill out
personal information on the LINE Talk screen, making service available on external website apps, and utilizing highly securedomestic servers.
LINE is a messaging application developed and operated by LINE Inc (unlisted). The LINE messaging application has
achieved substantial market penetration in Asian countries such as Japan, Thailand, and Taiwan.

Leasing and Facility-related
Planning and development of medical buildings and medical plazas
In addition to private practice clinics, the company engages in the planning and development of facilities that house multiple
medical clinics (medical buildings and medical plazas). The real estate business is mainly operated by subsidiary Nihon

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22Leben, which was a subsidiary, but was absorbed in October 2017.
This business supports development of clinics that goes beyond just real estate brokerage. The focus is on providing a broad
range of support to physicians looking to start a practice, beginning with the stage of formulating a basic business plan for theclinic, and spanning the creation of a management philosophy and strategy, investigating the medical area, selecting realestate property, overseeing design and construction, financing, and processing the business start-up application.
The company develops medical malls* where multiple medical institutions are located in one area, which benefit bothpatients and physicians. Grouping various medical institutions in the same premises provides patients with opportunities toreceive one-stop treatment from multiple specialists. It is also more efficient for physicians, as they can lower costs by sharing
facilities and benefit from synergies in patient traffic and advertising.
*Medical mall: Where several specialized clinics and dispensing pharmacies are located in the same building or area. It
is called a medical building when they are in the same building and a medical plaza when they are located in the samearea.
Medical malls have different formats. For the building format where tenants are only clinics and dispensing pharmacies,
the building is often constructed based on the assumption that clinics will move in, so the floor space and specifications
are designed accordingly. Another type is a medical area located within a shopping mall or a commercial facility
attached to a train station; since station users and local residents frequent these commercial facilities, they can see their
physicians after shopping or on their way home. A third format is a congregation of multiple detached clinics in thesame area, often established along suburban main roads where land is easy to acquire.

An example of a medical building developed by the company is the Leben Building in Sapporo, Hokkaido. Standing near ageneral hospital in Sapporo, in an area where multiple specialty clinics are also located, the building houses four clinics,
including surgery and internal medicine, and a Nanohana Pharmacy. An example of a medical plaza is the Shizunai Aoyagi
district, located in Hidaka, Hokkaido, with five clinics, including internal medicine and otolaryngology, and two Nanohana
Pharmacies. The company notes the latter is a medical mall with roots in the local community, and has been attracting
attention as a model case for supporting regional medical care in cities experiencing depopulation and aging.

Planning and development of long-term care facilities
The company plans and develops serviced elderly housing facilities that collaborate with medical institutions, long-term carecenters, and dispensing pharmacies to ensure an environment where residents can live safely with peace of mind. Wisteria
N17, located in Sapporo, Hokkaido, is the company’s first serviced elderly housing facility. Standard services include daily
safety checks and 24-hour on-call emergency service while fee-based services such as meal catering and long-term careservices are also available. Wisteria N17 is also networked with local medical institutions such as the general hospital,
specialty clinics, dental clinics, and dispensing pharmacies. The company’s fourth facility, Wisteria Senri-Chuo (Toyonaka,
Osaka Prefecture), was launched in 2016, and the fifth facility, Wisteria Minami Ichijo (Sapporo, Hokkaido), was opened in
November 2018.
According to the company, investment for expansion of serviced elderly housing facilities came to an end in FY03/19, and it
is now taking measures to boost occupancy rates at the Wisteria series facilities, especially for the Wisteria Senri-Chuo and
Wisteria Minami Ichijo. The company plans to focus on building a community where medical care and long-term care areoffered as one, with dispensing pharmacies, hospitals, and long-term care and childcare facilities surrounding the serviced
elderly housing facilities.

Food Service
The company provides meals to hospitals and welfare facilities. The meal catering service is provided by Total Medical
Service, Kyushu Iryo Shoku Co., Ltd. (merged with Total Medical Service in April 2018), and Sakura Foods Co., Ltd. (wholly
owned subsidiary of Total Medical Service) in the Kyushu and Chugoku areas (Fukuoka, Saga, Nagasaki, Oita, Kumamoto,
Miyazaki, Kagoshima, and Yamaguchi prefectures).

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Other
The major business in this segment is home-visit nursing care carried out by subsidiary Home-Visit Nursing Station HimawariCo., Ltd., which is slated for an absorption-type merger from July 1, 2021. In addition, the manufacture and market
pharmaceuticals business, conducted by subsidiary Feldsenf Pharma Co., Ltd., was consolidated into the newly established
Community Pharmacy Network segment from FY03/20.
The home-visit nursing care business dispatches specialized nurses to patients’ homes to check on their conditions, andprovides appropriate nursing care and advice. It collaborates with physicians, healthcare and long-term care professionals,
and pharmacists at the company’s Nanohana Pharmacy.

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24Market and value chain
Continued growth in the dispensing pharmacy market
Dispensing pharmacies fill prescriptions issued by medical institutions. This is based on the separation of prescribing anddispensing functions, in an effort to raise the quality of medical care by letting physicians focus on examining patients anddetermining appropriate treatment while allowing pharmacists to specialize in dispensing drugs, managing medication
history, and providing guidance on usage. According to the Japan Pharmaceutical Association (JPA), the separation
accelerated sharply from 1997 when the Ministry of Health and Welfare (the predecessor of MHLW) instructed 37 national
hospitals to adopt complete separation (more than 70% of prescriptions must be filled outside the hospital). The out-ofhospital dispensing ratio exceeded 50% nationwide for the first time in 2003. According to JPA estimates, the average ratiorose to 70% by 2016.
The number of dispensing pharmacies steadily increased as separation of prescribing/dispensing advanced and pharmacies
that previously marketed OTC drugs became dispensing pharmacies. There was also a pronounced increase in independent
pharmacies operating near large hospitals—so-called “monzen” (Japanese meaning “in front of the gate”) pharmacies.
Another factor driving growth has been the expansion of drugstores into the dispensary business. Prescription volumes
issued by medical institutions have also been rising.

Number of dispensing pharmacies

Source: Shared Research based on MHLW’s Report on Public Health Administration and Services
Note: 2010 does not include some of Miyagi or Fukushima Prefectures’ data.

Developments surrounding dispensing pharmacies

Source: Shared Research based on MHLW’s Report on Public Health Administration and Services

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Prescription volume

Source: Shared Research based on MHLW’s Trends in Prescription Medicine Costs

Relative to the increase in the elderly population, the number of dispensing pharmacists has not kept pace with the increasein pharmacies, and securing sufficient staffing is a pressing issue, particularly for small and mid-tier pharmacies.

Pharmacist numbers

Source: Shared Research based on MHLW’s Report on Survey of Physicians, Dentists and Pharmacists

A 2018 Nippon Pharmacy Association (NPhA) survey of member pharmacies showed that the percentage of pharmacies
planning to embark on home-based medication management and guidance services, one of the new roles being promoted
by MHLW, is not expanding. Most respondents cited labor shortages as the main reason. MHLW is also advocating for 24hour availability as a means to improve patient convenience, but this service will also likely increase labor costs fordispensing pharmacies.

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Survey results on home-based medication management service

Source: Shared Research based on data from Nippon Pharmacy Association Committee for Expansion of Pharmacist Functionality, Report on 2017 Survey of Member
Pharmacists (February 2018)

Reasons cited for not providing home-based medication management service

Source: Shared Research based on data from Nippon Pharmacy Association Committee for Expansion of Pharmacist Functionality, Report on 2017 Survey of Member
Pharmacists (February 2018)

The motivation behind MHLW’s push to expand these roles for pharmacies is a response to steadily rising medical costs inJapan, and, as the Japanese population ages, reducing unnecessary drug use will be essential to maintaining soundhealthcare spending. For the same reason, MHLW is also encouraging pharmacies to take on a more patient-centeredapproach rather than to focus primarily on pharmaceuticals.

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(Reference) Drug expenditures

Source: Medical costs and dispensing drug expenditures compiled by Shared Research based on MHLW’s Statistics of Medical Care Activities in Public Health Insurance

MHLW wants dispensing pharmacies to expand their role from just filling prescriptions to providing comprehensive care topatients as a family pharmacy. This push has made the shortage of pharmacists an even more pressing issue.

Role of dispensing pharmacies in community-based integrated
care system: transforming to family, regional pharmacies
Environment facing smaller pharmacies: dispensing fee revisions
The dispensing fee revision implemented in April 2014 reduced the basic dispensing fee for pharmacies that receive morethan 90% of their prescriptions from specific medical institutions. The government enacted the changes after reassessing
medical care finances amid chronic fiscal deficits, a health insurance program on the verge of collapse, and continually
expanding long-term care expenditures. Further reductions in dispensing fees are likely. In addition, faced with concerns ofrising medical costs, the government opted to expand the functions of pharmacies rather than increase physician numbers.
Thus, it has promoted home medical care services such as prescription delivery and offered preferential treatment todispensing pharmacies that can provide a 24-hour on-call service. These trends put smaller pharmacies (such as those nearlarge hospitals) at a disadvantage. At a time of flat dispensing fee expenditures, it is crucial for community pharmacies tostrengthen their family pharmacy functions and strengthen services that directly earn revenues such as technical fees.

Dispensary charges

Source: Shared Research based on MHLW’s Trends in Prescription Medicine Costs

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MHLW initiates “Guidelines for the Improvement of Commercial Transaction Practices of
Ethical Drugs”
The “Guidelines for the Improvement of Commercial Transaction Practices of Ethical Drugs” (so-called distribution
improvement guidelines) were adopted starting April 2018. Issued by MHLW, the guidelines targeting industry members
reflect the ministry’s initiative to shift the role of spearheading improvement in prescription drug distribution from the
distributors to the government. Items of note on the relationship between drug wholesalers and medical
institutions/dispensing pharmacies include the avoidance of excessive discounts. According to these guidelines, offering
prices involving excessive discounts that do not reflect the actual value of pharmaceuticals, such as using a benchmark
without considering transaction terms, is incompatible with the current NHI drug price system (where individual drug pricereflects the value). The guidelines urge wholesalers and medical institutions/dispensing pharmacies also to consider
distribution costs and stable provision/sourcing of pharmaceuticals, and to take a comprehensive perspective on each pricenegotiation, seeing it as an extension of the price negotiations between drug manufacturers and wholesalers.
Key points from the “distribution improvement guidelines”
Items of note between manufacturers and wholesalers:Elimination of negative primary margins, presentation of appropriate prices
Items of note between wholesalers and medical institutions/dispensing pharmacies:
Rapid settlement of transaction prices and promotion of individual drug unit price transactions
In principle, all drugs should have individual drug unit prices (no bundling contracts)
At a minimum, the percentage of individual drug unit price contracts must exceed previous year levels
Adjustment of excessive price discounts that do not reflect pharmaceuticals value and distribution costs
Ensured efficiency and safety of distribution
Avoidance of costly practices such as frequent and emergency deliveries that can impede stable supply
MHLW will establish a consultation office to support guideline compliance and plans to proactively disclose cases as theycome up. In addition to confirming compliance, it will also check to see if the guidelines’ intent and substance are reflected
in medical fees.

FY2020 medical fee revision
The FY2020 medical fee revision called for a 0.46% net medical fee reduction, comprised of a 0.55% increase in core
medical fees and 1.01% reduction in NHI drug prices (official price of medicines).
Net medical fee revision -0.46% = core medical fee +0.55% + drug reimbursement price -1.01%
The increase in the core medical fee includes +0.53% for medical fees, +0.59% for dental fees, and +0.16% for dispensing
fees. In contrast, the reduction in the NHI drug prices includes -0.99% for pharmaceuticals prices and -0.02% for medical
material prices. The result of the revisions is a shift from a merchandise-based approach to a patient-centered one, evidenced
by the expansion of guidance fees for pharmacists who interact with patients, and the recognition of pharmacies that
contribute to community-based medical care such as through provision of medication information to hospitals.

Medical fee revision (%)
Year of revision

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Core medical fees (actual)

-1.30

±0.00

-1.36

+0.38

+1.55

+1.379

+0.10

+0.49

+0.55

+0.55

＋0.00

Dispensing fee

-1.30

-0.60

+0.17

+0.52

+0.46

+0.04

+0.17

+0.19

+0.16

Drug prices (actual)

-1.40

-1.05

-1.80

-1.20

-1.36

-1.375

-1.36

-1.33

-1.74

-1.01

NHI basis

-6.30

-4.20

-6.70

-5.20

-5.75

-6.00

-5.64

-5.57

-7.48

-4.38

-

-

-

-

-

-

+1.36

-

-

-

-2.70

-1.05

-3.16

-0.82

+0.19

+0.004

+0.10

-0.84

-1.19

-0.46

Consumption tax addition
Total (nominal)

Source: Shared Research based on company data

The key point regarding dispensing fees raised around the time of the FY2018 revision is a reassessment of the role ofdispensing pharmacies with an emphasis on patient-centered service. Specifically, it promotes evaluation of family
pharmacies and pharmacists, patient-centric businesses and at-home medical care; and promotes the use of generic drugs. It
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29

also encourages the proper assessment of large pharmacies operating near medical institutions. On generic drug utilization,
MHLW is continuing efforts to improve utilization rates, and the FY2020 medical fee revision includes components that willfurther stimulate generic drug use.

Mid-year revision of NHI drug price
NHI drug price revisions, previously held once every other year, were shifted to an annual basis effective from 2021 with thefirst mid-year revision conducted in April 2021. The reasoning behind the shift was that the stance of the Japanese
government and MHLW intending to reduce healthcare expenditures by reflecting the drop in market values more quickly
onto the official reimbursement pricing.
As of May 2021, about 14,228 drugs were listed as ethical drugs used in healthcare services provided by health insurance forreimbursement under the NHI scheme and 12,180 of them were subject to this mid-year price revision. The first mid-year
revision was applied to drugs for which the pricing differential between official reimbursement price and actual market price
was 0.625x of the average 8.0% divergence (divergence of 5.0% or higher). A breakdown of the 12,180drugs for which
reimbursement prices were revised shows 1,350 were new drugs (59% of new drugs), 1,490 were long-listed drugs (88% of
long-listed drugs), 8,200 were generic drugs (83% of generic drugs), and 1,140 were products in the other categories
commercialized before 1967 (31% of other drugs). Most of generic and long-listed drugs were subject to this price revisions.
Shared Research anticipates the impact of the NHI price revision will be far-reaching, not limited to generic and brand drug
manufacturers but extended to pharmaceutical distribution-related companies and dispensing pharmacies.

Generic drug ratio

Source: Shared Research based on MHLW’s Recent Trends of Dispensing Medical Costs (electronically processed)

Industry peers (dispensing pharmacy
chains)As industry peers we selected listed companies that operate dispensing pharmacies as their mainstay business. Comparing
the operating profit margin of the business segments that operated dispensing pharmacies, Ain Holdings (TSEI: 9627) had
the highest OPM. Profit margins declined across the board in FY2017 owing to the diminished impact of major drugs forhepatitis C. The whole industry was affected by the NHI medical fee revision in FY2019, with almost all companies recording
lower profit margin than in the previous fiscal year. Medical System Network’s segment profit for the Dispensing Pharmacy
business ranks around the middle among its peers.

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp30Comparison of profit margins of industry peers’ pharmacy operation segments
TickerFY endFY2016FY2017FY2018FY2019FY20202796 Pharmarise Holdings

May

2.6%

2.0%

3.5%

2.3%

3.4%

-

3034 Qol

Company

March

5.8%

5.1%

6.4%

4.7%

4.7%

4.4%

3341 Nihon Chouzai

March

5.6%

5.0%

6.0%

4.2%

4.2%

4.3%

4350 Medical System Network

March

4.2%

2.8%

3.5%

3.6%

3.8%

5.7%

March

5.0%

6.3%

6.5%

5.0%

-

-

7649 Sugi Holdings

February

5.6%

5.3%

5.4%

5.3%

5.5%

5.6%

9627 Ain Holdings

April

9.1%

8.6%

9.5%

7.5%

7.9%

-

-

Sogo Medical Holdings

FY2021

Source: Shared Research based on each company’s data and websites (as of end-May 2021)
Notes:* Values for Medical System Network are profit margins of the Community Pharmacy Network business from 2019.
** Sogo Medical Holdings: FY2016 earnings are total profit margins as segment information is regional, transitioned to a holding company (9277) in October 2018 anddelisted on April 17, 2020.
*** Sugi Holdings: Total company profit margins since there is only one segment.

Main industry peers
Latest FY results
TickerCompany

Sales

Operating profit margin

ROE(JPYmn)(%)(%)

Business description (segment as % of total sales)

2796 Pharmarise Holdings

51,0301.9%

Middle-tier pharmacy chain. Leverages partnerships with regional drug wholesalers to acquire
9.6% local dispensing chains. Has a reputation for community care support. Established joint
ventures with Higuchi and FamilyMart to develop pharmacies.

3034 Qol

161,832

4.6%

8.2%

3341 Nihon Chouzai

278,951

2.9%

Second-ranked dispensing pharmacy chain. Nationwide expansion centered on monzen
7.3% pharmacies in Kanto-Koshinetsu area. Established generic drug manufacturing subsidiary, also
developing in-house drugs. Referral & placement of medical staff such as pharmacists.

4350 Medical System Network

98,232

1.5%

4.3%

Dispensing pharmacy holding company that also operates a pharmaceutical informationintermediary network business. Started in Hokkaido, but expanding nationwide through M&A.

7649 Sugi Holdings

602,510

5.6% 11.0%

Developed drugstore/dispensing pharmacy, Sugi Pharmacy, in its stronghold Tokai area. The
holding company also has discount stores.

-

-

-

Started with hospital room TV and equipment rental business. Entered dispensing pharmacy- business, and expanded from local Kyushu to Kinki, Chubu, and East Japan areas. Also
engages in medical practice support and hospital revitalization consulting business.

292,615

5.5%

Top-ranked dispensing pharmacy chain. Originated in Hokkaido, expanded into metropolitan
8.5% areas, with nationwide coverage of mainly monzen pharmacies. Concluded capital andbusiness tie-up with Seven & i Holdings.

Sogo Medical Holdings

9627 Ain Holdings

Major pharmacy chain. Started as monzen pharmacy. Opened stores with Lawson and Bic
Camera. Also developing MR and pharmacist dispatch business.

Source: Shared Research based on company data
Note: Sogo Medical Holdings (4775) became Sogo Medical HD (9277) in October 2018 and delisted on April 17, 2020.

Medical System Network ranks among the top ten dispensing pharmacy chains by sales. They all have negative cash flowfrom investment activities, which we attribute to their strategies of achieving growth by absorbing smaller local dispensing
pharmacies (these smaller pharmacies account for 90% of the market). In contrast, Medical System Network has two growth
options: integrate pharmacies into the Nanohana Pharmacy group through capital investment, or allow the smaller pharmacy
to continue operating independently and bring them into the company group as affiliates (i.e., network users).

Financials of industry peers
Medical System Network (4350)(JPYmn)Pharmarise Holdings (2796)

Qol Holdings (3034)

FY03/19

FY03/20

FY03/21

FY05/18

FY05/19

FY05/20

FY03/19

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Sales

98,232

105,241

104,257

54,562

51,72851,030144,783

165,411

161,832

Gross profit

37,271

40,21442,412

7,950

7,342

7,391

17,86321,094

21,102

SG&A expenses

35,842

38,59938,982

6,771

6,702

6,403

10,812

13,361

13,737

Operating profit

1,428

1,615

3,429

1,179

640

987

7,050

7,733

7,364

Recurring profit

1,501

1,560

3,479

1,092

590

976

7,208

8,024

7,403

Net income

462

-895

2,198

-28

23

526

3,970

4,067

3,365

ROE

4.3%

-8.9%

21.3%

-0.5%

0.4%

9.6%

10.5%

10.3%

8.2%

ROA (RP-based)

2.3%

2.3%

5.3%

4.5%

2.4%

3.9%

7.9%

8.1%

7.3%

Operating profit margin

1.5%

1.5%

3.3%

2.2%

1.2%

1.9%

4.9%

4.7%

4.6%

68,93566,46464,44824,26524,21725,22894,236

102,872

100,571
41,834

Total assets

FY03/20

FY03/21

Net assets

10,761

9,418

11,187

5,624

5,619

5,895

39,01741,001Equity ratio

100.0%

100.0%

100.0%

21.8%

21.9%

22.4%

41.1%

39.4%

40.9%

Operating CF

2,840

4,232

5,205

1,330

895

1,572

5,773

4,468

12,912

Investing CF-734-8,287

Financing CF

4,338-1,687-5,312

-894

354

-766

2,906

-225

-6,114

Cash and deposits

11,520-5,921

11,722-2,383

10,118-1,485

3,643

4,393

4,464

193

15,766

19,498Interest-bearing debt

38,89737,55832,55810,550

11,138

10,37528,87332,65029,721

Net debt

27,377

25,83622,440

6,907

6,745

5,911

28,68016,884

10,223

Nihon Chouzai (3341)

-527

-501

Sugi Holdings (7649)-8,670-3,065

Sogo Medical Holdings (-)

FY03/19

FY03/20

FY03/21

FY02/19

FY02/20

FY02/21

FY03/19

FY03/20

FY03/21

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Sales

245,687

222,147

278,951

488,464

541,964

602,510

144,630--

Gross profit

41,97546,372

49,374

142,300

162,182

181,291

22,715--

SG&A expenses

35,242

38,77941,267

116,483

132,420

147,590

17,303--Operating profit

6,733

7,593

8,106

25,817

29,76233,701

5,411

-

-

Recurring profit

6,077

7,405

8,409

27,23731,47335,333

5,607

-

-

Net income

3,792

6,697

3,538

17,94020,782

21,120

3,246

-

-

ROE

9.2%

15.2%

7.3%

10.9%

11.9%

11.0%

8.7%

-

-

ROA (RP-based)

3.3%

4.1%

4.5%

10.5%

10.9%

10.7%

6.1%

-

-

Operating profit margin

2.7%

2.8%

2.9%

5.3%

5.5%

5.6%

3.7%

-

-

Total assets

178,677

185,551

186,262

265,481313,757

345,933

93,560--Net assets

41,07347,072

49,868

166,563

182,750

200,629

38,669--Equity ratio

23.0%

25.4%

26.8%

62.7%

58.2%

58.0%

41.0%

-

-

Operating CF

13,572

13,192

11,21322,89445,35334,027

3,852

-

-

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Investing CF-1,770-2,731-7,767-22,362-18,422-29,254-6,624--

Financing CF-10,516-7,955-2,806-13,897-4,895-5,274-945--

Cash and deposits

29,74932,25432,89334,311

56,34755,845

10,733--

Interest-bearing debt

82,391

63,62444,36500022,373--Net debt

52,642

31,37011,472-34,311-56,347-55,845

11,640--Ain Holdings (9627)
FY04/18

FY04/19

FY04/20

Cons.

Cons.

Cons.

Sales

268,386

275,596292,615Gross profit

47,99345,363

46,861

SG&A expenses

28,37129,29530,793Operating profit

19,623

16,067

16,068Recurring profit

20,130

16,637

16,822

Net income

10,567

9,029

9,179

ROE

13.5%

9.0%

8.5%

ROA (RP-based)

11.8%

8.9%

8.8%

Operating profit margin

7.3%

5.8%

5.5%

Total assets

183,435

189,021

193,451

Net assets

96,733103,922

111,003

Equity ratio

52.7%

54.9%

Operating CF

21,657

14,78817,747

Investing CF-5,282-19,985-11,474

Financing CF

17,623-10,681-7,837

Cash and deposits

63,23347,49545,931

57.3%

Interest-bearing debt

18,861

11,957

6,074

Net debt-44,372-35,538-39,857

Source: Shared Research based on each company’s data
Note: *Sogo Medical (4775) became Sogo Medical HD (9277) in October 2018 and delisted on April 17, 2020.

Strengths and weaknesses
Strengths
Management support network service available to small and mid-tier pharmacies:
Small pharmacies and mid-tier regional chains (90% of the market) fall behind major nationwide chains in buying power
versus drug wholesalers and means to optimize pharmaceuticals inventory. However, by joining the company’s network andbecoming an affiliate, they can tap into majors-class strength and infrastructure without giving up their autonomy to a major
pharmacy chain. The process does not involve a business transfer, so the hurdle for joining the network is relatively low. The
company has a network system boasting the largest pharmaceuticals order volume in Japan, and negotiates procurement
terms with suppliers on behalf of its members. It is also the only company that offers a dead stock clearance service, whichmatches members’ inventory surpluses with deficiencies to reduce costly write-offs. This service cuts operating costs of
network members by 1.3% (company estimate) on average even after factoring for the network usage fee. From thecompany’s standpoint, an increase in network members translates to revenue growth from rising commissions and greaterbuying power in the pharmaceuticals market.
Certified pharmacist training support system that appeals to pharmacies struggling with pharmacist shortage:
The company’s Pharmaceuticals Network business collaborates with a training organization to support pharmacists (bothnetwork member pharmacists and others) enrolled in a certification program authorized by the Japan Pharmacists Education
Center (JPEC). Aimed at raising the skill level of pharmacists, the JPEC program certifies those pharmacists who havecompleted their credit requirements through participation in various training courses (40 credits within four years and 30
credits every three years thereafter). The certification is one of the criteria of a “family pharmacist,” whose pharmacy
becomes eligible to charge an additional family pharmacist guidance fee. The company mainly utilizes its directly operated
pharmacies and affiliates to help the training organization Iyaku Sogo Kenkyukai (ISK) run its accredited training courses
nationwide. The service strengthens pharmacists’ loyalty to their employers and improve recruitment outcomes. ISK is one of
the few private-sector organizations registered with JPEC as a training organization and is authorized to issue the proof of
attendance stickers that JPEC issues at its training courses.
Regional dispensing pharmacy strategy in line with administrative guidance:
A distinguishing feature of the company’s dispensing pharmacies is their high concentration in medical malls. This is in linewith MHLW’s vision for the role of pharmacies in the face of an aging society, and the company’s outlet-location strategy
benefits from the revised insurance point system. MHLW has revised dispensing fees to encourage a shift away from thepharmacy model linked to specific hospitals (pharmacies operating adjacent to large hospitals) and toward the family
pharmacy and regional medical care models that accept prescriptions from a wide range of medical institutions. The
company’s strategy of opening pharmacies in medical complexes is in line with MHLW guidance and works to its favor interms of dispensing fee eligibility.
Medical System Network/ 4350
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32

Weaknesses
Potential conflict of interest between M&A-driven pharmacy chain expansion and support services for small pharmacies:
The Pharmaceuticals Network business provides non-directly operated pharmacies (i.e., affiliates) access to the company’s
proprietary system, thus allowing them to maintain management independence, but this has the potential negative effect ofimpeding growth of the Dispensing Pharmacy business. While the company’s peers are expanding through acquisition ofsmaller pharmacies, the availability of membership to the Pharmaceuticals Network system is a possible lifeline to smaller
pharmacies that could encourage them to delay M&A action.
Low profit margins for dispensing pharmacies without drugstore function:
The Dispensing Pharmacy business OPM of about 3.0% (based on disclosed data through FY03/19) is 2–5pp below that ofother major chains. This is mainly because most of the company’s dispensing operations are limited to prescription drugs andare not accompanied by drugstore functions handling items such as OTC drugs, long-term care products, and toiletries. Manyof the other major chains have adopted the strategy to boost pharmacy profit margins by integrating drugstore operations
with added floor space for food products and cosmetics. The company is looking to expand its product offerings to include
various long-term care products like adult diapers as part of a family pharmacy service, but it will take time to transition to thisbusiness format.
Relatively small assets a disadvantage in acquisitions:
The company is at a disadvantage versus the major players in terms of asset scale when it comes to acquisitions targeting
pharmacy chain expansion. Looking at the M&A-based increases in outlet numbers over the past three years, industry leader
Ain Holdings acquired more than 100 pharmacies while Medical System Network was flat YoY in FY03/21. From theperspective of regional expansion, about 30% of the company’s pharmacies are located in Hokkaido while less than 10% arelocated in Tokyo and Osaka, despite their high population density. In total assets, an important indicator of the buyer’s
financial strength in an M&A deal, comparable companies range in the JPY100.0bn mark and over, while Medical System
Network significantly falls behind at around JPY64.0bn. In order to advance acquisitions and increase pharmacy outlets inregions other than its home ground Hokkaido, the company will need to be able to demonstrate its financial strength to thesell-side companies’ management as well as M&A intermediaries.

Medical System Network/ 4350
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33

Historical performance and financial
statements
Income statement
Income statement

FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

FY03/21(JPYmn)

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Sales

25,411

54,827

66,18275,54887,71588,865

93,977

98,232

105,241

104,257

YoY

-

-

20.7%

14.2%

16.1%

1.3%

5.8%

4.5%

7.1%

-0.9%

Cost of sales

16,45135,41543,44547,072

54,91354,70057,36960,96165,027

61,845Gross profit

8,960

19,412

22,73728,47632,801

34,16436,60737,271

40,21442,412

-

-

17.1%

25.2%

15.2%

4.2%

7.2%

1.8%

7.9%

5.5%

35.3%

35.4%

34.4%

37.7%

37.4%

38.4%

39.0%

37.9%

38.2%

40.7%

SG&A expenses

7,603

17,365

20,64625,83529,01832,05033,44435,842

38,59938,982

SG&A ratio

29.9%

31.7%

31.2%

34.2%

33.1%

36.1%

35.6%

36.5%

36.7%

Operating profit

1,357

2,047

2,091

2,641

3,783

2,113

3,163

1,428

1,615

3,429

-

-

2.2%

26.3%

43.2%

-44.1%

49.7%-54.9%

13.1%

112.3%

3.5%

4.3%

2.4%

3.4%

1.5%

1.5%

3.3%

457

275

378

405

288

361

YoY
Gross profit margin

YoY

37.4%

Operating profit margin

5.3%

3.7%

3.2%

Non-operating income

81

150

250

Non-operating expenses

124

284

321

349

380

279

291

333

343

312

1,315

1,912

2,020

2,540

3,860

2,109

3,250

1,501

1,560

3,479

Recurring profit
YoY

-

-

5.6%

25.8%

52.0%

-45.4%

54.1%-53.8%

3.9%

123.0%

5.2%

3.5%

3.1%

3.4%

4.4%

2.4%

3.5%

1.5%

1.5%

3.3%

Extraordinary gains

25

59

155

169

88

57

19

49

48

914

Extraordinary losses

41

65

404

415

470

260

976

128

1,586

426

Income taxes

702

1,018

1,073

1,315

1,599

1,262

1,271

962

918

1,769

Implied tax rate

44.6%

Recurring profit margin

54.1%

53.4%

60.6%

57.3%

46.0%

66.2%

55.4%

67.7%

4,172.7%

Net income attributable to noncontrolling interests

78

133

29

92

158

72

0

-2

0

0

Net income

518

756

668

885

1,720

571

1,022

462

-895

2,198

-

-

-11.6%

32.4%

94.4%

-66.8%

79.0%-54.8%-293.7%-345.6%

2.0%

1.4%

1.0%

1.2%

2.0%

0.6%

1.1%

0.5%

-0.9%

2.1%

YoY
Net margin

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Changed fiscal year-end in FY03/12; started fifth medium-termplan from FY03/19
Medical System Network changed its fiscal year-end from September to March effective FY03/12, resulting in an irregular
six-month term for October 2011–March 2012; sales in FY03/12 were approximately half the FY09/11 figure.
The third medium-term plan (FY03/13–FY03/15) began the following year. We believe the company has also applied plantargets to its business strategy from FY03/16 and beyond (the fourth medium-term plan), i.e., to increase the number of
network member pharmacies and grow its own dispensing pharmacies. The five key initiatives of the fifth medium-term plan,
which started in FY03/19, are as follows. We note that OPM has remained in the 1% range in FY03/19 and FY03/20 amid asevere business environment such as NHI medical fee revisions and price negotiations with wholesalers but recovered to the
3% level in FY03/21 owing to growth of the Pharmaceuticals Network business and improved profitability of the Dispensing
Pharmacy business.
1. Expand Pharmaceuticals Network business
2. Strengthen family pharmacy functions of company-run dispensing pharmacies
3. Grow generics drugs business
4. Enhance collaboration between group companies to provide community care functions needed under the communitybased integrated care system as a group
5. Strengthen financial position

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

34

SG&A expenses
SG&A expenses

FY03/12

FY03/13

FY03/14

FY03/15(JPYmn)

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Salaries and allowances

2,806

6,364

7,489

9,266

FY03/16
10,406

12,08812,481

13,467

14,195

Provision for employee bonuses

582

685

724

939

1,062

1,133

1,418

1,333

1,393

Retirement benefit expenses

88

172

195

264

329

361

466

457

596

Provision for directors' bonuses

32

64

68

76

55

47

35

33

41

33

52

38

33

35

3,870

4,479

4,374

4,420

4,692

5,691

945

Provision for directors' stock benefits
Taxes and dues

853

Depreciation

1,913

270

2,350
802

FY03/18

FY03/19

FY03/20

1,029

1,052

1,491

177

487

669

849

917

1,009

1,056

1,147

1,217

Other

2,142

5,509

6,612

7,537

8,486

9,630

9,559

15,827

16,648

Total

7,603

17,365

20,64625,83529,01832,05033,44435,842

38,599Amortization of goodwill

658

FY03/17

1,624

1,811

Source: Shared Research based on company data

Extraordinary losses in excess of JPY400mn were booked in each of the three years between FY03/14–FY03/16; thesewere mainly impairment losses at pharmacies that failed to reach projected earnings. The company monitors the profitabilityof each pharmacy based on specific criteria and provides guidance when they are not met. If improvements are not madewithin a specified period of time, the company closes the pharmacy and sells off the business rights. In FY03/20, thecompany booked an impairment charge on fixed assets of existing stores and shares in acquired companies to reflect the
impact of the spread of COVID-19.

Balance sheet
Balance sheet

FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cash and deposits

2,072

2,092

3,106

2,499

2,081

2,252

10,201

11,703

11,722

10,118Notes and accounts receivable

2,597

1,514

2,802

2,484

2,614

2,223

2,332

2,420

2,313

2,646

Inventories

1,796

2,219

2,732

3,846

3,431

4,053

3,520

4,297

4,452

4,408

629

614

664

709

927

958

868

1,528

940

994

-3

-6

-6

-7

-7

-10

-11

-12

-12

-12

Total current assets

8,902

8,271

10,941

11,023

10,783

11,09818,736

21,055

20,57819,313

Total tangible fixed assets

9,976

11,472

15,976

17,24920,253

21,24624,12925,721

25,126

24,634

Total intangible assets

5,040

8,263

12,39913,554

13,481

13,833

15,045

16,235

14,615

13,572

54

179

157

524

583

812

726

483

397
6,549

(JPYmn)FY03/21

AssetsOther
Allowance for doubtful accounts

Investment securities
Long-term loans
Other

2,728

2,771

3,645

3,631

3,838

4,008

4,066

5,217

5,686

Allowance for doubtful accounts

-43

-42

-26

-29

-33

-32

-31

-21

-26

-20

Investment and other assets

2,685

2,783

3,798

3,759

4,329

4,559

4,847

5,922

6,143

6,926

Total fixed assets

17,701

22,51832,17334,56438,06339,63944,02347,87945,88545,134

Total assets

26,60330,78943,11445,587

48,84750,73762,75968,93566,46464,448Notes and accounts payable

5,158

5,616

7,798

8,598

9,525

9,144

9,416

10,19810,021

9,258

Short-term debt

3,856

5,119

12,922

9,214

6,910

3,863

7,463

9,158

8,905

10,210Liabilities

Income taxes payable

582

459

578

599

1,065

413

1,135

695

454

1,556

Other

3,097

3,181

3,582

3,215

3,561

3,500

3,755

3,793

3,916

4,394

Total current liabilities

12,693

14,37524,88021,626

21,061

16,92021,76923,84423,29625,418Long-term debt

7,029

8,758

10,94815,391

14,85920,18626,32929,73928,653

22,348

1

1

1

1

1

1

Deferred tax assets
Other

1,200

1,419

1,933

2,434

2,660

2,985

4,075

4,590

5,096

5,493

Total fixed liabilities

8,230

10,17812,882

17,826

17,52023,17230,40434,32933,74927,841

Total liabilities

20,92324,55337,76239,452

38,58140,092

52,174

58,17357,04553,260Capital stock

1,091

1,091

1,091

1,091

1,932

1,932

2,097

2,128

2,128

2,128

Capital surplus

924

901

901

901

1,742

1,742

1,160

1,185

1,183

1,182

3,281

3,836

4,300

4,980

6,467

6,735

7,459

7,616

6,414

8,305

Treasury stock

0-45-1,181-1,147

-328

-302

-275

-233

-206

-344

Valuation differences on securities

-5

3

2

11

15

49

143

83

-37

-24

53,154

Net assets

Retained earnings

Foreign currency translation
adjustments
Other

-52

-40

-31

-28

-17

23

52,31658,23956,945

Non-controlling interests

436

493

273

338

469

514

2

0

0

23

Total net assets

5,680

6,236

5,352

6,136

10,265

10,644

10,584

10,761

9,418

11,187

Total liabilities and net assets

26,60330,78943,11445,58848,84650,73662,75968,93566,46464,448-765-1,883-2,265-2,268-3,480-2,868-3,564-3,481-3,256-2,204

Total interest-bearing debt

10,885

13,87723,87024,605

21,76924,04933,79238,89737,55832,558Net debt

8,813

11,785

20,76322,12019,70821,814

23,591

27,19425,83622,440Working capital

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Assets: Assets expanded from 2012–13 on business growth
The company’s business transformed in 2012–13, due in part to the formulation of its third medium-term plan. The
company’s consolidated subsidiary Pharmaholdings Co., Ltd., which operates dispensing pharmacies, entered a businessalliance in December 2012 with Hanshin Dispensing Pharmacy Co., Ltd. (later became a subsidiary of Hanshin Dispensing
Holding Co., Ltd. [merged into I&H Co., Ltd. in November 2019]). In July 2013, the two companies established a joint
venture, H&M Co., Ltd. The main purpose of the joint venture was joint sourcing and distribution of pharmaceuticals,
purchase of medical devices, and clearance of dead stock. H&M’s chief goal is not to win pricing concessions from drug
Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

35wholesalers as a result of buying power due to large-volume procurement, but to collaborate with drug wholesalers to set
economically rational prices. This is the core objective of the company’s Pharmaceuticals Network business.
Assets have continued to increase under the fourth medium-term plan and beyond. The company has sought to increase thenumber of dispensing pharmacies by M&A, but has carefully monitored the performance of pharmacies and booked
impairment charges or disposed of those whose earnings have not improved. Under the fifth medium-term plan, assets haveshrunk reflecting the impact of the COVID-19 pandemic since FY03/20. The company booked an impairment charge of
JPY1.5bn in FY03/20.

Liabilities: External financing
Liabilities rose during this period as the number of directly operated pharmacies increased in line with a rising network
member count. The increase in current assets, which is working capital, was especially pronounced in FY03/14, when in
addition to the increase in current assets, tangible fixed assets increased JPY4.5bn (+JPY2.5bn for buildings, +JPY1.9bn forland) and intangible fixed assets increased JPY4.1bn (JPY4.1bn increase in goodwill). Assets also increased in FY03/15(buildings and structures +JPY237mn, land +JPY640mn, goodwill +JPY961mn). Growing demand for funds was met primarily
through external financing. Short-term borrowings increased by about JPY7.0bn to JPY102.7bn in FY03/14, while long-termborrowings increased by about JPY4.5bn to JPY14.2bn in FY03/15 and has continued to gradually rise. Short- and long-termborrowings have been over JPY30.0bn since FY03/18. Profits increased in FY03/21 while interest-bearing debt declined
YoY.

Net assets: Capital stock increase in FY03/16
The company increased capital and retired treasury stock in FY03/16, lifting the equity ratio in line with one of the third
medium-term plan targets of achieving a ratio of 20% or higher. At the same time, management shored up the balance sheet
through reducing short-term borrowing by JPY6.2bn YoY. Improving its financial position remains a key initiative of its fifth
medium-term plan.

Cash flow statement
Cash flow statement

FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

FY03/21(JPYmn)

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cash flows from operating activities (1)

1,566

3,790

3,706

3,838

6,409

3,084

6,699

2,840

4,232

5,205

Pre-tax profit

1,298

1,907

1,770

2,294

3,479

1,906

2,293

1,422

22

3,967

Depreciation

354

841

1,077

1,209

1,362

1,594

1,491

1,624

1,811

1,859

Amortization of goodwill

177

487

669

849

917

1,009

1,056

1,147

1,217

1,136

Change in accounts receivable

-325

1,739

382

935

191

812

496

500

285

-239

8

-74

-173

-689

455

-472

759

-620

-140

72

102

-558

365

-295

683

-765

-569

69

-328

-864

-1,248-5,425-7,559-3,958-5,040-3,909-6,848-5,921-2,383-1,485-805-1,625-4,180-2,360-3,674-2,170-4,050-3,094-1,351-1,375Purchase of intangible assets

-1

-13

-44

-93

-273

-192

-190

-82

-107

-154

Purchase, sale, and redemption of
investment securities

2

1

129

-267

-19

-39

-16

102

18

Change in inventories
Change in accounts payable
Cash flows from investing activities (2)Purchase of tangible fixed assets

Change in loans (short- and long-term;
net)

18

-245

-56

-106

-106

-38

-95

-3

-102

-233

Free cash flow (1+2)

318-1,635-3,853

-120

1,369

-825

-149

-3,081

1,849

3,720

Cash flows from financing activities

425

1,654

4,864

-483

-1,792

998

8,050

4,338

-1,687-5,312

Change in short-term borrowings

1,293

685

7,255

-4,334-2,314-3,241

2,598

1,471

-505

0

Change in long-term borrowings

-489

1,846

-250

4,816

-896

5,292

7,292

3,701

-376

-4,6340-129-1,155

1,005

0

-162

-276

-221

-229

-297

-297

-304

-305

0

Acquisition of treasury stock
Dividends paid

-190

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Cash flows from operating activities
Cash flow from operating activities since FY03/12, when the accounting period was changed, has trended around JPY3.7bn–
3.8bn, approximately half of which is derived from pre-tax profit, except for FY03/16–FY03/17 when profits fluctuatedsharply. FY03/16–FY03/17 earnings were impacted by a number of temporary factors and a changing business environment
owing to NHI drug price and dispensing fee revisions. The company notes temporary factors that boosted FY03/16 profits
such as JPY242mn in gains from the sale of real estate, JPY100mn in subsidies for opening a serviced elderly housing facility,
and a JPY90mn tax benefit from acquisition of subsidiary shares. The decline in FY03/17 profits was exacerbated by factors
such as drug price and dispensing fee revisions, a winding down of major hepatitis C drug sales, and the absence oftemporary factors that boosted FY03/16 profits. Operating cash flow in FY03/19 declined by half YoY owing to the April
2018 NHI price revision, but turned positive again in FY03/20 and FY03/21 as earnings recovered.
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36

Depreciation and goodwill have been steadily increasing (except during the abbreviated accounting period) on businessexpansion owed to an upswing in the number of directly operated pharmacies, and this has had a positive impact on cash
flow. Accounts receivable and accounts payable tend to fluctuate from year-end to year-end, showing no set pattern as thetiming of receivable collections and the debt repayment period varies. Further, fiscal years with negative cash flow for
inventory assets are common. We think this is due to the nature of Medical System Network’s business of handlingprescription drugs, which calls for the maintenance of sufficient inventories to avert shortage versus prescriptions.

Cash flows from investing activities
Cash flow from investing activities has been consistently negative for the 10 years through FY03/17 owing to a businessexpansion strategy that leverages alliances and M&A. The cash flow deficit from investing activities has been especiallypronounced since the third medium-term plan was initiated in FY03/13. Prior to that, it was typically in the JPY1.0bn–3.0bn
range, but then expanded to the JPY4.0bn–7.0bn range. In FY03/14, the company posted its largest cash flow deficit in 10
years, but this was mostly due to acquisition of tangible fixed assets: JPY4.2bn for serviced elderly housing facilities andland/buildings for new pharmacies and JPY4.2bn for shares acquired through M&A and from business transfers. Even inother fiscal years, the acquisition of land and buildings had a major impact on cash flow from investing activities—JPY3.7bn in
FY03/16 and JPY3.1bn in JPY03/19, accounting for the bulk of the deficit in both years. The company commented that
Wisteria Minami Ichijo would be the last elderly housing planning and development project for a while.
The company aims to make its network system an industry standard by expanding the number of affiliates and to improve theprofitability of the Dispensing Pharmacy business, and these remain objectives of the fourth medium-term plan and fifth
medium-term plan starting in FY03/19, which targets expansion of its network and improving profitability of the Dispensing
Pharmacy business. As the company continues to invest in business expansions, free cash flow has been negative since thestart of the third medium-term plan, with the exception of FY03/16 when free cash flow turned positive due to temporary
factors that sharply lifted profits, and FY03/20 and FY03/21, when there were few M&A deals.

Cash flows from financing activities
Financing will be indispensable as the company looks to continue expanding its business. In addition to using internal funds,
the company raises funds through short- and long-term borrowing. We list the relatively large-scale financings of the past 10
years below. Most were short- and long-term borrowings, of which a large majority was for business expansion, such aspurchase of real estate for new pharmacies and M&A.
In FY03/14, there was a JPY1.2bn cash flow deficit due to a share buyback accompanying the restructuring of an affiliatedcompany. In FY03/16, cash flow saw a JPY2.8bn surplus as the company increased capital and sold treasury shares to improve
its financial standing. Total borrowing also increased JPY5.2bn in FY03/19, but JPY3.9bn was invested in M&A, including theacquisition of Nagatomi Pharmacy. There were few M&A deals in FY03/20 and FY03/21 because the company prioritized
improving profitability of existing stores.

Historical performance
1H FY03/22 earnings results (out November 5, 2021)
Overview
1H FY03/22 (April–September 2021) earnings results
Sales: JPY52.2bn (+2.2% YoY)
Operating profit: JPY1.9bn (+37.4% YoY)
Recurring profit: JPY2.2bn (+60.0% YoY)
Net income attributable to owners of the parent: JPY1.4bn (+147.6% YoY)
Company response and business conditions
Sales were up 2.2% YoY, driven by a 2.3% sales increase in the mainstay Community Pharmacy Network segment. Of thefour businesses that make up the Community Pharmacy Network segment, Pharmaceuticals Network and Dispensing
Pharmacy businesses contributed to segment sales and profit growth. Sales were up both in the Pharmaceuticals Network

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37

and Dispensing Pharmacy businesses, owed to steady growth in new network members in the former, and to a certain degreeof recovery in the number of prescriptions filled in the latter. Operating profit rose 37.4% YoY, also driven by growth in the
Pharmaceuticals Network and Dispensing Pharmacy businesses. Net income attributable to owners of the parent increased
147.2% as a result of profit from the sale of investment securities and tax effect of the absorption-type merger with Home-Visit
Nursing Care Station Himawari Co., Ltd.

Breakdown of 1H FY03/22 (April–September 2021) results bysegment
Community Pharmacy Network
Segment sales: JPY49.7bn (+2.3% YoY; including intra-group sales and transfers between segments, same applies
below)
Segment profit: JPY2.9bn (+21.8% YoY)
This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy
business, and the manufacture and market pharmaceuticals business (mainly Feldsenf Pharma) previously included in
Other. A digital shift business that provides services utilizing the company subsidiary's (PharmaShift) official LINE
(instant messaging app) account was added to the segment from FY03/21.
Pharmaceuticals Network
In 1H FY03/22, of the JPY1.1bn YoY increase in overall sales, growth in the Pharmaceuticals Network business accounted for
JPY156mn. In Japan, dispensing pharmacies sought to improve operating stability amid harsh business environments in theindustry, including the start of annual NHI drug price revisions in April 2021. As a result, there was increased demand
among pharmacy operators to join the company's pharmaceuticals network in the hopes of streamlining operations involvedin negotiations with wholesalers and ordering. The number of new network members continued to increase steadily, with
network members totaling 6,700 (+584 versus end-FY03/21) at end-September 2021, consisting of 419 directly operated
pharmacies and 6,281 affiliates. On the profit front, of the JPY507mn increase in company-wide operating profit in 1H,
JPY156mn was from the Pharmaceuticals Network business.
Dispensing Pharmacy
In 1H, of the JPY1,124mn increase in overall company sales, growth in the Dispensing Pharmacy business contributed
JPY1,059mn. Price per prescription dropped due in part to the NHI drug price revisions, but the number of prescriptions
filled recovered to some extent. As a result, in Q2 FY03/22 all-store dispensing fees for the directly managed Nanohana
Pharmacy chain grew 3.7% YoY. As of end-September 2021, the group had 419 dispensing pharmacies (up three versus endFY03/21), one care plan center, and eight cosmetics/drug stores. On the profit front, the Dispensing Pharmacy business
contributed JPY331mn to company-wide operating profit growth of JPY507mn.
Manufacture and market pharmaceuticals
This business aims to provide a stable supply of good-quality, low-priced generic drugs. As of end-September 2021, thecompany was selling 39 different ingredients and 77 products. The company said Feldsenf Pharma, the main subsidiary
operating the business, has continued operating in the black.
Digital shift
Subsidiary PharmaShift Co., Ltd. was established on October 1, 2020 to create a “new pharmaceutical platform” for thedigital age. In March 2021 the subsidiary launched the “Tsunagaru (connected) Pharmacy” service utilizing its official LINE
account. Main services include electronic medication records, prescription transmittal, follow-up medication management,
online medication guidance, and payment services. The company receives a monthly service usage fee of JPY10,000 fromdispensing pharmacies that have introduced the service. As of end-September 2021, the official LINE account had more than
170,000 friends (users), with 552 stores having introduced the service.

Leasing and Facility-related
Segment sales: JPY1.5bn (+6.8% YoY)
Segment profit: JPY32mn (+100.0% YoY)

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Operating conditions of serviced elderly housing facilities
In 1H FY03/22, property leasing revenue was generally strong and orders for construction projects increased. However, thespread of COVID-19 limited sales activities for the company’s serviced elderly housing facilities, leading to sluggish growth inoccupancy. As of end-September 2021, the company reported stable occupancy rates at three of its five properties, while forthe remaining two, at Wisteria Senri-Chuo it reported an occupancy rate of 78.1% (with 64 out of 82 units occupied), and at
Wisteria Minami Ichijo it reported an occupancy rate of 70.7% (with 82 out of 116 units occupied).

Food Service
Segment sales: JPY1.2bn (-6.6% YoY)
Segment profit: JPY1mn (versus loss of JPY13mn in 1H FY03/21)
Despite a drop in the number of meals supplied due to the pandemic, the segment turned profitable in 1H FY03/22 as thecompany revised its operations, including changing its suppliers.

Other (mostly home-visit nursing care)
Segment sales: JPY152mn (+38.2% YoY)
Segment loss: JPY12mn (versus loss of JPY13mn in 1H FY03/21)

Q1 FY03/22 earnings results (out August 6, 2021)
Overview
Q1 FY03/22 (April–June 2021) earnings results
Sales: JPY25.9bn (+3.0% YoY)
Operating profit: JPY667mn (loss of JPY61mn in Q1 FY03/21)
Recurring profit: JPY935mn (loss of JPY62mn in Q1 FY03/21)
Net income attributable to owners of the parent: JPY583mn (loss of JPY201mn in Q1 FY03/21)
Company response and business conditions
The Pharmaceuticals Network business recorded a steady increase in new network members in general, and the Dispensing
Pharmacy business saw some recovery in the number of prescriptions filled despite a drop in the average prescription price.
The increase in Pharmaceuticals Network business network members contributed to profit growth.

Breakdown of Q1 FY03/22 (April–June 2021) results bysegment
Community Pharmacy Network
Segment sales: JPY24.7bn (+3.1% YoY; including intra-group sales and transfers between segments, same applies
below)
Segment profit: JPY1.2bn (+177.0% YoY)
This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy
business, and the manufacture and market pharmaceuticals business (mainly Feldsenf Pharma) previously included in
Other. A digital shift business that utilizes instant messaging app LINE was added to the segment from FY03/21.

Pharmaceuticals Network
The number of new network members continued to increase, driven by the need for improved operating stability amid harshbusiness environments in the dispensing pharmacy industry. As of end-June 2021, network members numbered 6,367 (+251versus end-FY03/21), consisting of 417 directly operated pharmacies and 5,950 affiliates. By end-June 2021, the company’smarket share exceeded 10%.

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39Dispensing Pharmacy
The number of prescriptions filled during the period recovered to some extent, despite a drop in the average prescription
price. As of end-June 2021, the group had 417 dispensing pharmacies, one care plan center, and eight cosmetics/drugstores.
Manufacture and market pharmaceuticals
This business aims to provide a stable supply of good-quality, low-priced generic drugs. As of end-June 2021, the company
was selling 37 different ingredients and 74 products.
Digital shift
Subsidiary PharmaShift Co., Ltd. was established on October 1, 2020, to create a “new pharmaceutical platform” for thedigital age. In March 2021 the subsidiary launched the “Tsunagaru (connected) Pharmacy” service utilizing its official LINE
account. As of end-June 2021, the official LINE account had more than 87,000 friends (users), with 350 stores having
introduced the service.

Leasing and Facility-related
Segment sales: JPY739mn (+2.2% YoY)
Segment loss: JPY2mn (profit of JPY6mn in Q1 FY03/21)
Reasons for segment loss
In Q1 FY03/22, the spread of COVID-19 limited sales activities for the company’s serviced elderly housing facilities, leading
to sluggish growth in occupancy. The company also incurred increased expenses for implementing counter-infection
measures. As of end-June 2021, the company reported stable occupancy rates at three of its five properties, while for theremaining two, at Wisteria Senri-Chuo it reported an occupancy rate of 78.1% (with 64 out of 82 units occupied), and at
Wisteria Minami Ichijo it reported an occupancy rate of 67.2% (with 78 out of 116 units occupied).

Food Service
Segment sales: JPY586mn (-4.2% YoY)
Segment loss: JPY1mn (versus loss of JPY19mn in Q1 FY03/21)

Loss improved
Losses narrowed due to a decline in the number of meals supplied due to the pandemic, withdrawal from unprofitablefacilities, and changes in suppliers.

Other (mostly home-visit nursing care)
Segment sales: JPY74mn (+45.1% YoY)
Segment loss: JPY7mn (versus loss of JPY11mn in Q1 FY03/21)

Full-year FY03/21 earnings results (out May 7, 2021)
Overview
FY03/21 (April 2020–March 2021) earnings results
Sales: JPY104.3bn (-0.9% YoY)
Operating profit: JPY3.4bn (+112.3% YoY)
Recurring profit: JPY3.5bn (+123.0% YoY)
Net income*: JPY2.2bn (versus loss of JPY895mn in FY03/20)*Net income attributable to owners of the parent

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp40Company response and business conditions
Sales declined 0.9% YoY with the mainstay Community Pharmacy Network business declining 0.4% and the other threebusinesses falling a combined 11.7%. Among the Community Pharmacy Network business, the Pharmaceuticals Network
business recorded a steady increase in new network members, while the Dispensing Pharmacy business saw a 9.4% drop in
the number of prescriptions filled owing to fewer medical examinations as a result of the COVID-19 pandemic. This decline
in the number of prescriptions filled was the main reason for the drop in sales.
On the profit front, profit margins improved due to an increase in Pharmaceuticals Network business network members,
progress promoting the switch to generics in the Dispensing Pharmacy business, streamlined operations, improved
productivity, and reduced expenses. Of the JPY1.8bn increase in operating profit, JPY1.4bn was derived from the Dispensing
Pharmacy business. The company also turned into the black at the net income level, due to JPY907mn in proceeds from thesale of some shares in a non-equity-method affiliate in December 2020, booked as extraordinary gains.

Breakdown of FY03/21 (April 2020–March 2021) results bysegment
Community Pharmacy Network
Segment sales: JPY99.2bn (-0.4% YoY; including intra-group sales and transfers between segments, same applies
below)
Segment profit: JPY5.7bn (+52.4% YoY)
This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy
business, and the manufacture and market pharmaceuticals business (mainly Feldsenf Pharma) previously included in
Other.
Pharmaceuticals Network
Despite the loss of some major customers due to the emergence of competitors, the number of new network members
continued to increase, driven by the need for improved distribution efficiency. As of end-March 2021, network members
numbered 6,116 (+871 versus end-FY03/20), consisting of 416 directly operated pharmacies and 5,700 affiliates. By endMarch 2021, the company’s market share (number of pharmacies basis) exceeded 10%.
Dispensing Pharmacy
Reflecting the decline in medical examinations in the wake of the pandemic, the number of prescriptions filled during theperiod declined 9.4% despite a 7.7% hike in average prescription prices due to an increase in long-term prescriptions.
However, the company notes segment profits increased thanks to efforts to promote the switch to generics as an economic
alternative with stable supply, as well as to streamline operations, optimize personnel deployment, and reduce overtime. Asof end-March 2021, the group had 416 dispensing pharmacies, one care plan center, and eight cosmetics/drug stores.
Manufacture and market pharmaceuticals
This business aims to provide a stable supply of good-quality, low-priced generic drugs. As of end-March 2021, the company
was selling 34 different ingredients and 68 products. Sales exceeded JPY1bn and the business turned profitable.
Digital shift
Subsidiary PharmaShift Co., Ltd. was established on October 1, 2020, to create a “new pharmaceutical platform” for thedigital age. In March 2021 the subsidiary launched the “Your Family Pharmacy” service utilizing its official LINE account. The
number of registered friends increased from 10,000 as of April 2, 2021 to over 50,000 by May 28, 2021. Furthermore, thenumber of pharmacies adopting the service reached 168 as of April 2021.

Leasing and Facility-related
Segment sales: JPY2.9bn (-14.2% YoY)
Segment profit: JPY32mn (-28.7% YoY)

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41

Reasons for declines in sales and profit
In FY03/21, the spread of COVID-19 limited sales activities for the company’s serviced elderly housing facilities, leading tosluggish growth in occupancy. There were also pandemic-related postponements of certain construction projects. As of endMarch 2021, the company reported stable occupancy rates at three out of its five properties, while for the remaining two, at
Wisteria Senri-Chuo it reported an occupancy rate of 78.1% (with 64 out of 82 units occupied), and at Wisteria Minami Ichijo
it reported an occupancy rate of 67.2% (with 78 out of 116 units occupied).

Food Service
Segment sales: JPY2.5bn (-11.6% YoY)
Segment loss: JPY21mn (versus loss of JPY43mn in FY03/20)
Loss improved
While there was a decline in the number of meals supplied due to the pandemic, losses narrowed owing to the company’s
withdrawal from unprofitable facilities.

Other (mostly home-visit nursing care)
Segment sales: JPY229mn (+38.6% YoY)
Segment loss: JPY31mn (versus loss of JPY71mn in FY03/20)

Q3 FY03/21 earnings results (out February 5, 2021)
Overview
Consolidated results for cumulative Q3 FY03/21 (April–December 2020)
Sales: JPY78.2bn (-1.0% YoY)
Operating profit: JPY2.8bn (+125.8% YoY)
Recurring profit: JPY2.8bn (+129.3% YoY)
Net income*: JPY2.0bn (+517.5% YoY)*Net income attributable to owners of the parent
Business conditions and company initiatives: The Pharmaceuticals Network business recorded a steady increase in new
network members. The Dispensing Pharmacy business saw a drop in the number of prescriptions filled owing to an increasein long-term prescriptions as the COVID-19 pandemic led to fewer medical examinations. The Community Pharmacy
Network segment as a whole reported a 0.4% YoY fall in sales. Among other three businesses, sales also decreased YoY at the
Leasing and Facility-related business and the Food Service business, and consolidated sales were down 1.0% YoY as aconsequence.
At the profit level, operating profit improved by 125.8% YoY. Within the Community Pharmacy Network segment, theDispensing Pharmacy business registered profit growth on measures to promote the switch to generics, streamline
operations, improve productivity, and reduce expenses. The Pharmaceuticals Network business also put up a solid
performance, contributing to profit growth. Although the Leasing and Facility-related business experienced lower profit, theFood Service business and Other (home-visit nursing care) business both managed to rein in losses. All of the above
combined to produce a sharp increase in companywide operating profit. YoY growth in net income attributable to owners of
the parent expanded as the company booked extraordinary gains in connection with the sale of some shares in an equitymethod affiliate in December 2020.

Breakdown of results by segment
Community Pharmacy Network
This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy business, andthe manufacture and market pharmaceuticals business (mainly Feldsenf Pharma) previously included in Other.

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42Results for cumulative Q3 FY03/21 (April–December 2020)

Segment sales: JPY74.4bn (-0.4% YoY; including intra-group sales and transfers between segments, same applies
below)
Segment profit: JPY4.3bn (+56.6% YoY)
Pharmaceuticals Network: The number of new network members continued to increase, driven by the need for improved
distribution efficiency. As of end-December 2020, network members numbered 5,745 (up 500 versus end-FY03/20),
consisting of 413 directly operated pharmacies and 5,332 affiliates. As of end-January 2021, the number was 5,845; thecompany grew network member numbers by 100 in one month, despite increased competition.
Dispensing Pharmacy: Reflecting the decline in medical examinations in the wake of the pandemic, the volume of long-termprescriptions increased while the number of prescriptions filled during the period was down. As the result of the decline in
the number of prescriptions filled, growth in the drug charge per prescription (9.9%) exceeded growth in the technical fee
per prescription (4.1%). Consequently, on a companywide basis, the prescription unit price (comprised of the drug charge
per prescription and technical fee per prescription) grew 8.6% YoY. Shared Research believes that profitability in the
Dispensing Pharmacy business is improving, as following September 2020 revisions to the Pharmaceutical and Medical
Device Act, the company has sought to streamline negotiations for procurement prices. In addition, it has worked to promote
the switch to generics as an economic alternative with stable supply, streamline operations, optimize personnel deployment,
and reduce overtime. As of end-December 2020, the group had 413 dispensing pharmacies, one care plan center, and nine
cosmetics/drug stores.
Manufacture and market pharmaceuticals business: This business aims to provide a stable supply of good-quality, low-priced
generic drugs. As of end-December 2020, the company was selling 33 different ingredients and 66 products.
Digital Shift: Spearheaded by subsidiary PharmaShift Co., Ltd., the Digital Shift business was established to promote digitaltransformation of dispensing pharmacies. When reporting earnings for cumulative Q3 FY03/21, the company disclosed
results from a PharmaShift trial of the Family Pharmacy Support Service (utilizing an official LINE account) at 10 directly
operated pharmacies. According to Medical System Network, results were even better than anticipated, with one in threepharmacy customers and roughly half of those using LINE agreeing to “friend registration.” The company also has organizeda Digital Pharmacy Consortium comprising seven companies who will now progressively implement the Family Pharmacy
Support Service across their pharmacy networks, with an initial goal of rolling out the service at 2,000 pharmacies by endDecember 2021. With the aforementioned September 2020 revisions to the Pharmaceutical and Medical Device Act,
pharmacists are now obliged to follow up with customers during drug use periods. For dispensing pharmacies, building
closer relationships with patients is a pressing issue to be addressed.

Leasing and Facility-related
Results for cumulative Q3 FY03/21 (April–December 2020)
Segment sales: JPY2.2bn (-17.5% YoY)
Segment profit: JPY34mn (-49.3% YoY)
The decline in sales and profit reflected pandemic-related postponements of certain construction projects; on the plus side,
the company saw solid growth in leasing revenues and occupancy numbers at its serviced elderly housing facilities. As of
end-December 2020, the company reported stable occupancy rates at three out of its five properties; as for the remaining
two, at Wisteria Senri-Chuo it reported an occupancy rate of 76.8% (with 63 out of 82 units being occupied), and at Wisteria
Minami Ichijo it reported an occupancy rate of 66.4% (with 77 out of 116 units being occupied). According to the company,
Wisteria Senri-Chuo turned profitable in 1H and remained in the black in Q3 (October–December 2020). Wisteria Minami
Ichijo remained in the red in Q3 as growth in occupancy stalled against the backdrop of the pandemic. Medical System
Network plans to carry out sales activities targeting an occupancy rate of over 90% at all facilities. The company continues its
marketing efforts aimed at getting its occupancy rate up to 90% by end-FY03/21 while taking all due precautions to prevent
COVID-19 infections.

Food Service
Results for cumulative Q3 FY03/21 (April–December 2020)

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp43Segment sales: JPY1.9bn (-11.9% YoY)
Segment loss: JPY2mn (versus loss of JPY38mn in cumulative Q3 FY03/20)
Loss shrank: Sales fell as the COVID-19 pandemic led to a decline in the number of meals supplied and the company
withdrew from unprofitable facilities. At the same time, though, the exit from unprofitable facilities caused losses to narrow,as did price negotiations and improvement in costs for food ingredients procurement.

Other
The main business is home-visit nursing care.
Results for cumulative Q3 FY03/21 (April–December 2020)
Segment sales: JP171mn (+40.2% YoY)
Segment loss: JPY17mn (versus loss of JPY56mn in cumulative Q3 FY03/20)

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44News and topics
Revisions to earnings forecast
2021-10-28

Medical System Network Co., Ltd. announced revisions to its earnings forecast.

Revisions to 1H FY03/22 consolidated earnings forecast (announced on October 28,
2021)
Sales: JPY52.2bn (previous forecast: JPY51.9bn)
Operating profit: JPY1.9bn (JPY1.4bn)
Recurring profit: JPY2.2bn (JPY1.8bn)
Net income attributable to owners of the parent: JPY1.4bn (JPY750mn)
EPS: JPY47.41 (JPY24.87)
Reasons for revision
The company now forecasts 1H FY02/22 consolidated sales of JPY52.2bn (up 0.6% from its previous forecast), largely
because the price per prescription and number of prescriptions filled were higher than expected at the Dispensing
Pharmacy business. It also forecasts operating profit of JPY1.9bn (up 32.9%), due to higher sales, reduction in travel andother such expenses, and the deferral of some expenses expected in 1H to 2H; recurring profit of JPY2.2bn (up 27.4%); andnet income of JPY1.4bn (up 90.7%), owing to a gain on the sale of investment securities held and the tax effect of theabsorption-style merger of consolidated subsidiary Home-Visit Nursing Care Station Himawari Co., Ltd., in July 2021. The
company made no change to the full-year consolidated earnings forecast announced on May 7, 2021.

Termination of the capital alliance with EPS Holdings, Inc. andthe business alliance with EP-Sogo Co., Ltd.
2021-06-18

On June 18, 2021, Medical System Network Co., Ltd. announced the termination of the capital alliance with EPS Holdings,
Inc. and the business alliance with EP-Sogo Co., Ltd.
The company announced that at a meeting held on the same day, its Board of Directors resolved to terminate the capitalalliance with EPS Holdings (TSE 1: 4282) and the business alliance with EP-Sogo (unlisted).
The company entered into a business alliance with Sogo Rinsho Holdings Co., Ltd. (current EP-Sogo) in 2015, and since thenhas maintained a capital alliance (which was later transferred to EP-Sogo’s parent company, EPS Holdings). The company
resolved to terminate the capital and business alliances mainly because it has already achieved results from the businessalliance with EP-Sogo and it will accept a tender offer for its shares in EPS Holdings made public in May 2021. Despite thetermination of the capital and business alliances, the company intends to maintain good, cooperative relationships with EPS
Holdings and EP-Sogo.
The dates of termination of the capital and business alliances are both set for July 15, 2021. The company expects to book an
extraordinary gain of JPY112mn arising from the sale of shares in EPS Holdings, but said that the termination of the businessalliance will have a negligible impact on its consolidated earnings.

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Other information
History
Data
Sep 1999

Description
Established Medical System Network ( capital stock :JPY 10mn ) in Chuo-Ward, Sapporo, to streamline hospital operation andpharmaceuticals distribution

Mar 2002

Registered shares on Osaka Stock Exchange NASDAQ Japan market ( now JASDAQ )Dec

Acquired 100% of Pharmaholdings and Nihon Leben shares, making them wholly owned subsidiaries
Established joint venture MM net with Mitsui & Co. ( capital JPY 200mn, Medical System Network held 51% equity stake, but dissolved
alliance and absorbed MM net in 2013 )Feb 2005
Oct

Pharmaholdings acquired 100% of Sunmedic Co., Ltd. (now Nanohana East Japan Co., Ltd.) shares, making it a wholly owned
subsidiary
Pharmaholdings acquired 100% of Hankyu Kyoei Pharmacy ( now Kyoei Pharmacy ) shares, making it a wholly owned subsidiary

Jan 2007
Mar

Acquired 100% of CR Medical ( now Nanohana central Co., Ltd. ), making it a wholly owned subsidiary
Acquired 100% of Hokkaido Hiclips ( now SMO-MDS ) shares, making it a wholly owned subsidiarySep 2008

Listed shares on the Second Section of the Tokyo Stock Exchange

Jun 2010

Listed shares on the First Section of the Tokyo Stock Exchange
Formed Business alliance with Hansin Dispensing Pharmacy( Switched to alliance with parent Hansin Pharmacy Holdings when the holding company was established in December 2012 )Nov 2012
May 2013

Formed business alliance with FamilyMart

Jul
Nov

Pharmaholdings and Hansin Dispensing Holdings established joint venture, H&M Co.
Pharmaholdings acquired 98.96% of Total Medical Service shares through public tender offer, making it a subsidiary

Jan 2015

Concluded comprehensive strategic alliance with Fuyo General Lease Co., Ltd.

Mar
Apr

Formed business alliance with Sogo Clinical Holdings ( now EP-Sogo )Formed business alliance with EM Systems

May
Jun

Concluded capital tie-up with Sogo clinical Holdings ( now EP-Sogo )Formed Business alliance with Yakuju Corporation

May 2016

Pharmaholdings acquired 100% of Home-Visit Nursing Care Station Himawari Co. shares and entered home-visit nursing care business

Oct
Jan 2017

Formed business alliance with Zoo Corporation
Formed business alliance with Career Brain

May
Jun

Formed business alliance with Okura Information System
Sold shares of SMO-MDS ( no longer a subsidiary )OctAbsorbed subsidiaries System Four, Pharmaholdings, and Nihon Leben

Jan 2018

Acquired all shares in Apotec and made it a wholly owned subsidiary
Formed business alliance with Polaris Co., Ltd.

Feb
Jun

Feldsenf Pharma Co., Ltd. formed Business alliance with Daito Pharmaceutical Co., Ltd.
Feldsenf Pharma Co., Ltd. started sales of generic drugs

Jan 2019

Acquired all shares in Nagatomi Pharmacy Corporation and made it a wholly owned subsidiaryApr
Feb 2020

Acquired A-System Co., Ltd. in a absorption-type merger
Dissolved H&M Co., Ltd, terminating business tie-up with I&H Co., Ltd.

Oct

Established PharmaShift Co., Ltd., a joint venture with Opt, Inc. (now Re:teigi, Inc.)

Source: Shared Research based on company data (as of March 2021)

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46Corporate governance and top management

Source: Shared Research based on company data

Top management
President and director (Representative Director) Inao Tajiri
Mar 1974
Jan 1981

Joined Ichino Yamagata Pharmaceutical Co., Ltd.
Joined Medical Yamagata Pharmaceutical Co., Ltd.

Nov 1989

Representative director of Medical Yamagata Pharmaceutical Co., Ltd.

Jun 1991
Sep 1999

Director of Akiyama Aiseikan Co., Ltd. (now Suzuken Co., Ltd)
Established Medical System Network and became representative director and president (current)

Apr 2000
Dec 2004

President (current) of Social Welfare Corporation Nomad-Fukushikai
Representative director of Nihon Leben Co., Ltd.

Feb 2005

Representative director of MM Net Co., Ltd.

Apr 2013
Jul 2013

President and representative director of SMO-MDS Co., Ltd.
Vice president and representative director of H&M Co., Ltd.

Jun 2015
Jan 2016

President and representative director of H&M Co., Ltd.
President of Social Welfare Corporation Hokushikai

Sep 2016

President and representative director of Feldsenf Pharma Co., Ltd.

Jun 2020

President and representative director (current) of Feldsenf Pharma Co., Ltd.

Source: Shared Research based on company data (as of June 2020)

Corporate governanceThe company recognizes the importance of legal compliance and corporate ethics, and aims to continuously enhance
corporate value through rapid decision-making and improved management soundness. While looking to aggressively
expand its business in line with growth of the overall medical market, Medical System Network is aware of the importance ofensuring a fair management system and accordingly maintains a flexible meeting of the board of directors, has developed asystem to monitor business execution, and has enhanced internal controls. The company further recognizes thatmanagement of subsidiaries is especially crucial to internal control, and thus aims to enhance corporate governance byensuring thorough compliance, building a risk management system, and establishing a system for reporting financial andother important matters.

Board of directors
A board of directors with 12 members (including three outside directors) was established as the decision-making body.
Regular board meetings are held monthly and extraordinary meetings are also conducted as needed. The company adopted
an executive officer system in June 2017, and developed a system to enhance and clearly separate management decisionmaking, management oversight, and business execution functions.
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Board of auditors
The board of auditors is comprised of three members (two full-time corporate auditors and one part-time) and meets once
monthly in addition to extraordinary meetings as needed. Two of the three members are outside auditors.

ComplianceManagement has established the Medical System Network Group Charter of Corporate Behavior, a Code of Conduct forcorporate ethics and compliance, and the basic regulations to clarify the company’s basic stance on corporate ethics andcompliance. The company appoints an officer in charge of compliance as stipulated in its group compliance basic
regulations, under whose supervision a compliance department has been established to develop a compliance system for thegroup.

Risk management
The company has established an organization and management system based on Medical System Network Group Risk
Management Basic Rules that enables efficient execution of duties through the clarification of directors’ authorities andresponsibilities. Discussions of important matters by each group company’s board of directors are held after preliminary
consultations with the company. In addition, appropriate management control of subsidiaries is conducted in accordance withmanagement regulations for affiliated companies. Reports of business results, financial status, and important matters arereceived at regularly scheduled Board of Directors and other important meetings. A system is in place for the prompt
reporting of serious risk factors such as compliance violations.

Internal and corporate audits
The Internal Audit Office is in charge of internal auditing and its manager is responsible for drafting the basic internal audit
plan prior to the start of the fiscal year, obtaining approval by the President and Representative Director, and formulating animplementation agenda based on the basic internal audit plan. Three corporate auditors (including two outside auditors)
attend regular and extraordinary meetings of the board of directors to observe the performance of duties by company
officers such as directors and Internal Audit Office managers as part of a system to audit performance of directors and thestatus of internal controls. Auditing efficiency is further enhanced through mutual cooperation and information-sharing withthe accounting auditor and the Internal Audit Office.

Dividend policy
The company’s basic policy on dividends is to maintain stable disbursements to shareholders in line with earnings while
retaining sufficient internal reserves to reinforce its financial position, expand business operations, and develop humanresources. Since FY03/13, dividends have been paid twice a year—an interim dividend and a fiscal year-end dividend. The
dividend decision-making bodies are the general shareholders meeting for year-end dividends and the board of directors forinterim dividends. The articles of incorporation stipulate the board of directors has the authority to decide on interim
dividends through a resolution.

Major shareholders
Top shareholders
QUINTET PRIVATE BANK (EUROPE) S.A. 107704
S&S G.K.
Yasuyuki Okinaka
Jiro Akino
The Master Trust Bank of Japan, Ltd. (Trust Account)
Custody Bank of Japan, Ltd. (Trust Account)
EPS Holdings, Inc.
Inao Tajiri
Medical System Network Employees Stochkholding Association
Tsuyoshi Nakamura
SUM

Shares held Shareholding ratio
2,863,900
9.36%
2,769,100
9.05%
2,506,000
8.19%
2,220,200
7.26%
1,396,400
4.56%
996,200
3.25%
950,000
3.10%
712,800
2.33%
666,300
2.17%
494,600
1.61%
15,575,500
50.93%

Source: Shared Research based on company data (as of March 31, 2020)

Medical System Network/ 4350
Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

48Employees
Segment

No. of employees

No. of temporary employees

Total

Pharmaceuticals Network

2,866

486

3,352

Pharmacists
Leasing and Facility-related

1,376
120

61
15

1,437
135

184
27

278
12

462
39

Food Service
Other
Corporate (administration)
Total

129

8

137

3,326

799

4,017

Source: Shared Research based on company data (as of March 31, 2020)
Note: The sum of temporary employees does not equal to the total due to differences in rounding methods (based on eight-hour work days).

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Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

49

Profile
Company Name

Head Office

Medical System Network Co., Ltd.

24-3 Kitajujo-Nishi, Chuo-ku, Sapporo, Hokkaido

Phone

Listed On（011）612-1069

First Section of the Tokyo Stock Exchange

EstablishedExchange Listing

1999-09-16

2002-03-18

WebsiteFiscal Year-End

https://www.msnw.co.jp/

Mar

IR Contact

IR Web

Corporate management Department

https://www.msnw.co.jp/eng/

IR Phone

IR Email--

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50About Shared Research Inc.
We offer corporate clients comprehensive report coverage, a service that allows them to better inform investors and other stakeholders by
presenting a continuously updated third-party view of business fundamentals, independent of investment biases. Shared Research can be foundon the web at https://sharedresearch.jp.

Contact Details
Company namePhone

Shared Research Inc.

+81 (0)3 5834-8787

AddressEmail3-31-12 Sendagi Bunkyo-ku Tokyo, Japan

info@sharedresearch.jp

Websitehttps://sharedresearch.jp

Disclaimer
This document is provided for informational purposes only. No investment opinion or advice is provided, intended, or solicited. Shared
Research Inc. offers no warranty, either expressed or implied, regarding the veracity of data or interpretations of data included in this report.
We shall not be held responsible for any damage caused by the use of this report. The copyright of this report and the rights regarding thecreation and exploitation of the derivative work of this and other Shared Research Reports belong to Shared Research. This report may be
reproduced or modified for personal use; distribution, transfer, or other uses of this report are strictly prohibited and a violation of the copyrightof this report. Our officers and employees may currently, or in the future, have a position in securities of the companies mentioned in thisreport, which may affect this report’s objectivity.
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to the company are interpretations made by Shared Research. We represent that if this report is deemed to include an opinion from us that
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