R

Medical System Network / 4350
COVERAGE INITIATED ON:

2018.05.08

LAST UPDATE:

2021.06.18

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is toprovide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate,
objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will
always present opinions from company management as such. Our views are ours where stated. We do not try toconvince or influence, only inform. We appreciate your suggestions and feedback. Write to us at
sr_inquiries@sharedresearch.jp or find us on Bloomberg.

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R
Coverage

Medical System Network / 4350
LAST UPDATE: 2021.06.18

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

INDEX
How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent
earnings. First-time readers should start at the business section later in the report.

Executive summary ----------------------------------------------------------------------------------------------------------------------------------- 3
Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 5
Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 7
Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------7
Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 8
Quarterly trends and results -----------------------------------------------------------------------------------------------------------------------------------8
Business ------------------------------------------------------------------------------------------------------------------------------------------------ 18
Business model --------------------------------------------------------------------------------------------------------------------------------------------------- 18
Overview of business segments ---------------------------------------------------------------------------------------------------------------------------- 18
Market and value chain ---------------------------------------------------------------------------------------------------------------------------------------- 26
Industry peers (dispensing pharmacy chains) --------------------------------------------------------------------------------------------------------- 32
Strengths and weaknesses------------------------------------------------------------------------------------------------------------------------------------ 34
Historical performance and financial statements------------------------------------------------------------------------------------------ 36
Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 36
Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 38
Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 40
Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 42
Other information ---------------------------------------------------------------------------------------------------------------------------------- 49
History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 49
News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 50
Corporate governance and top management --------------------------------------------------------------------------------------------------------- 54
Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 55
Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 56
Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 56
Profile---------------------------------------------------------------------------------------------------------------------------------------------------------------- 57

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Coverage

Medical System Network / 4350
LAST UPDATE: 2021.06.18

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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-FY03/19) 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, aswell 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 or in

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 filled fewer prescriptions becauseof 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 in proceeds from the saleof shares in a non-equity-method affiliate, booked as an extraordinary gain.

◤ Full-year FY03/22 forecast: The company forecast calls for full-year consolidated sales of JPY105.7bn (+1.4% YoY), EBITDA of

JPY6.5bn (+1.2% YoY), operating profit of JPY3.5bn (+2.1% YoY), recurring profit of JPY4.0bn (+15.0% YoY), and net income

attributable to owners of the parent of JPY1.8bn (-18.1% YoY). In the dispensing pharmacy industry, earnings traditionallyhave been at the mercy of biennial NHI drug price revisions. The first-ever “off-year” revision took place in April 2021, withrevisions applied to some 70% of all pharmaceuticals on the NHI drug price list. Going forward, drug price revisions will takeplace annually (incorporating the off-year revisions), and Medical System Network foresees further deterioration in thebusiness climate for dispensing pharmacies, heightening the need for operational stability. The company sees this change inthe business climate as an opportunity for the Community Pharmacy Network segment’s Pharmaceuticals Network business to

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Coverage

Medical System Network / 4350
LAST UPDATE: 2021.06.18

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

expand via growth in the number of network members. In the Dispensing Pharmacy business, the company will focus on
filling more prescriptions by strengthening family pharmacy functions and utilizing its LINE official account to enhancecommunication with customers. At the Leasing and Facility-related business, the company seeks to stabilize earnings bytargeting 90% occupancy for all serviced residences for the elderly. From FY03/22, Medical System Network also 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; andrelatively small assets being a disadvantage in acquisitions. (See the Strengths and weaknesses section for details.)

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Medical System Network / 4350
LAST UPDATE: 2021.06.18

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Key financial data
FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

FY03/21(JPYmn)Income statement

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

105,700
1.4%

YoY
Gross profit
YoY
Gross profit margin
Operating profit
YoY
Operating profit margin
Recurring profit
YoY
Recurring profit margin
Net income
YoY
Net margin

-

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

FY03/22

-

17.1%

25.2%

15.2%

4.2%

7.2%

1.8%

7.9%

5.5%

35.4%

34.4%

37.7%

37.4%

38.4%

39.0%

37.9%

38.2%

40.7%

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%

2.1%

3.7%

3.2%

3.5%

4.3%

2.4%

3.4%

1.5%

1.5%

3.3%

3.3%

1,912

2,020

2,540

3,860

2,109

3,250

1,501

1,560

3,479

4,000

-

5.6%

25.8%

52.0%

-45.4%

54.1%-53.8%

3.9%

123.0%

15.0%

3.5%

3.1%

3.4%

4.4%

2.4%

3.5%

1.5%

1.5%

3.3%

3.8%

756

668

885

1,720

571

1,022

462

-895

2,198

1,800

3,500

-

-11.6%

32.4%

94.4%

-66.8%

79.0%-54.8%---18.1%

1.4%

1.0%

1.2%

2.0%

0.6%

1.1%

0.5%

-

2.1%

1.7%

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

59.7

Per-share data (JPY)
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

10.0

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

Cash and cash equivalents

8,271

10,941

11,023

10,783

11,09818,736

21,055

20,57819,313
24,634

Tangible fixed assets

11,472

15,976

17,24920,253

21,24624,12925,721

25,126

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

64,44830,78943,11445,587

48,84750,73762,75968,93566,464

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

TotTotal 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

1,654

4,864

-483

-1,792

998

8,050

4,338

-1,687-5,312Financial ratios
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%

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

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Medical System Network / 4350
LAST UPDATE: 2021.06.18

Segment sales and profit

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

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

Act.

Act.

Act.

Act.

Act.

75,54887,71588,865

93,977

98,232

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

% of total

3.6%

3.6%

3.5%

3.8%

4.0%

% of total

Dispensing Pharmacy

71,74382,00281,65087,17290,706

YoY

13.9%

14.3%

-0.4%

6.8%

4.1%

YoY

% of total

91.8%

90.5%

89.0%

89.8%

91.7%

% of total(JPYmn）
Sales

Leasing and Facility-related
YoY% of total
Food Service
YoY% of total
Other
YoY

1,517

2,430

2,046

2,031

3,320

15.1%

60.2%

-15.8%

-0.7%

63.5%

1.9%

2.7%

2.2%

2.1%

3.4%

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%

3.2%

182

143

163

92

261

-55.3%-21.4%

14.0%-43.6%

183.7%
0.3%% of total

0.2%

0.2%

0.2%

0.1%

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

-674

2,641

3,783

2,113

3,163

1,428

Operating profit

Segment sales and profit(JPYmn）
Sales

Three other businesses

Segment sales adjustments
Operating profit
YoY

FY03/19

FY03/20

FY03/21

Act.

Act.

Act.

FY03/22
Est.

98,232

105,241

104,257

105,700

4.5%

7.1%

-0.9%

1.4%

92,284

99,617

99,214

100,146

-

7.9%

-0.4%

0.9%

93.3%

94.7%

95.2%

94.7%

6,622

6,389

5,644

6,166

-

-3.5%

-11.7%

9.2%

6.7%

6.1%

5.4%

5.8%

-674

-764

-601

-612

1,428

1,615

3,429

3,500

YoY

26.3%

43.2%

-44.1%

49.7%-54.9%-54.9%

13.1%

112.3%

2.1%

Operating profit margin

3.5%

4.3%

2.4%

3.4%

1.5%

Operating profit margin

1.5%

1.5%

3.3%

3.3%

Pharmaceuticals Network

Community Pharmacy Network

3,313

3,743

5,703

5,733

-

13.0%

52.4%

0.5%

3.6%

3.8%

5.7%

5.7%
167

1,549

1,776

1,718

1,949

2,331

YoY

5.0%

14.7%

-3.3%

13.4%

19.6%

YoY

Operating profit margin

55.0%

54.9%

53.1%

53.6%

59.0%

Operating profit margin

Dispensing Pharmacy

2,377

3,412

2,314

3,060

1,068

YoY

29.2%

43.5%

-32.2%

32.2%-65.1%

Operating profit margin

3.3%

4.2%

2.8%

3.5%

1.2%

25

129

-143

-182

-84

-

416.0%

-

-

-

1.6%

5.3%

-7.0%

-9.0%

-2.5%

-13

-89

-129

45

34

-

-

-

-

-24.4%

-0.7%

-3.1%

-2.8%

1.1%

1.1%

-76

-109

-163

-97

-101

-

-

-

-

-

-41.8%-76.2%-100.0%-105.4%-38.7%-1,221-1,335-1,482-1,610-1,733

Leasing and Facility-related
YoY
Operating profit margin
Food Service
YoY
Operating profit margin
Other
YoY
Operating profit margin
Segment profit adjustments

Three other businesses

-150

-70

-20

YoY

-

-

-

-

Operating profit margin

-

-

-0.4%

2.7%

-1,733-2,057-2,253-2,400

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 andFacility-related and Food 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).

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Coverage

Medical System Network / 4350
LAST UPDATE: 2021.06.18

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

Recent updates
Highlights
On June 18, 2021, Shared Research updated the report following interviews with Medical System Network Co., Ltd.

On May 7, 2021, the company announced earnings results for full-year FY03/21; see the results section for details.

For previous releases and developments, please refer to the News and topics section.

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Medical System Network / 4350
LAST UPDATE: 2021.06.18

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

Trends and outlook
Quarterly trends and results
Cumulative(JPYmn)FY03/20
Q2

Q1

Q3

Q4

Q1

FY03/21
Q2

Q3

Q4

Sales

25,59952,21678,943

105,241

25,162

51,04578,167104,257

YoY

7.3%

9.8%

8.5%

7.1%

-1.7%

-2.2%

-1.0%

-0.9%

Gross profit

9,839

19,81930,22540,214

9,704

20,502

31,66542,412

YoY

8.4%

10.8%

9.8%

7.9%

-1.4%

3.4%

4.8%

5.5%

Gross profit margin

38.4%

38.0%

38.3%

38.2%

38.6%

40.2%

40.5%

40.7%
38,982

SG&A expenses

9,504

19,022

28,99738,599

9,765

19,14728,892

YoY

7.2%

9.3%

9.5%

7.7%

2.7%

0.7%

-0.4%

1.0%

SG&A ratio

37.1%

36.4%

36.7%

36.7%

38.8%

37.5%

37.0%

37.4%

Operating profit

FY03/21FY Est.
% of Est.
101.2%

103,000
-2.1%

334

796

1,228

1,615

-61

1,355

2,773

3,429

YoY

57.5%

67.2%

18.1%

13.1%

-

70.2%

125.8%

112.3%

Operating profit margin

1.3%

1.5%

1.6%

1.5%

-

2.7%

3.5%

3.3%

323

784

1,208

1,560

-62

1,397

2,770

3,479

YoY

68.2%

79.0%

19.6%

3.9%

-

78.2%

129.3%

123.0%

Recurring profit margin

1.3%

1.5%

1.5%

1.5%

-

2.7%

3.5%

3.3%

97

218

326

-895

-201

578

2,013

2,198

YoY

-4.0%

83.2%

-12.4%--

165.1%

517.5%--Net margin

0.4%

0.4%

0.4%

-

-

1.1%

2.6%

2.1%

1.9%

Q3

Q4

Q1

26,727

26,29825,162

Recurring profit

Net income

Quarterly(JPYmn)FY03/20
Q2

Q1

Sales

FY03/21Q2
25,883Q3

Q427,122

26,09025,59926,617

YoY

7.3%

12.3%

6.1%

3.2%

-1.7%

-2.8%

1.5%

-0.8%

Gross profit

9,839

9,980

10,406

9,989

9,704

10,798

11,163

10,747

YoY

8.4%

13.3%

7.9%

2.5%

-1.4%

8.2%

7.3%

7.6%

Gross profit margin

38.4%

37.5%

38.9%

38.0%

38.6%

41.7%

41.2%

41.2%
10,090

SG&A expenses

9,504

9,518

9,975

9,602

9,765

9,382

9,745

YoY

7.2%

11.4%

9.9%

2.6%

2.7%

-1.4%

-2.3%

5.1%

SG&A ratio

37.1%

35.8%

37.3%

36.5%

38.8%

36.2%

35.9%

38.7%

Operating profit

334

462

432

387

-61

1,416

1,418

656

YoY

57.5%

75.0%

-23.4%-0.3%-

206.5%

228.2%

69.5%

Operating profit margin

1.3%

1.7%

1.6%

1.5%

-

5.5%

5.2%

2.5%

323

461

424

352

-62

1,459

1,373

709

YoY

68.2%

87.4%

-25.9%-28.3%-

216.5%

223.8%

101.4%

Recurring profit margin

1.3%

1.7%

1.6%

1.3%

-

5.6%

5.1%

2.7%

97

121

108

-1,221

-201

779

1,435

185

YoY

-4.0%

572.2%-57.3%--

543.8%

1228.7%-

Net margin

0.4%

0.5%

0.4%

-

-

3.0%

5.3%

0.7%

Recurring profit

Net income

100.9%

3,400
110.5%
3.3%

102.3%

3,400
117.9%
3.3%

109.9%

2,000

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

Quarterly sales

Quarterly operating profit(JPYmn)Q1

120,000
100,000
80,00060,00040,00098,23225,478Q3(JPYmn)

Q4

Q1

3,500

105,241

104,257

26,29826,09025,19423,70423,856
FY03/19

26,727

26,617

27,122

25,883

FY03/20

25,162
FY03/21

Q3

Q4

3,429
656

2,500

1,500
1,000
500

25,599

Q2

3,000

1,418

2,000

20,000
0

Q2

0
-500

1,428
388
564
264
212

FY03/19

1,615
387
432
462

1,416

334
-61
FY03/20

FY03/21

Source: Shared Research based on company data

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Coverage

Medical System Network / 4350
LAST UPDATE: 2021.06.18

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

Quarterly results

Sales
YoY
Community Pharmacy Network
YoY% of total
Leasing and Facility-related
YoY% of total
Food Service
YoY% of total
Other
YoY
% of total
Segment sales adjustments
Operating profit
YoY
Community Pharmacy Network
YoY
Operating profit margin
Leasing and Facility-related
YoY
Operating profit margin
Food Service
YoY
Operating profit margin
Other
YoY
Operating profit margin
Segment profit adjustments

Q1
25,5997.3%
24,224
7.4%
94.1%
760
26.7%
3.0%
730
-7.4%
2.8%
38
15.2%
0.1%
-154
334
57.5%
825
28.5%
3.4%
-8
-12
-21
-447

Sales
YoY
Community Pharmacy Network
YoY% of total
Leasing and Facility-related
YoY% of total
Food Service
YoY% of total
Other
YoY
% of total
Segment sales adjustments
Operating profit
YoY
Community Pharmacy Network
YoY
Operating profit margin
Leasing and Facility-related
YoY
Operating profit margin
Food Service
YoY
Operating profit margin
Other
YoY
Operating profit margin
Segment profit adjustments

Q1
25,5997.3%
24,224
7.4%
96.6%
760
26.7%
3.0%
730
-7.4%
2.9%
38
15.2%
0.2%
520
334
57.5%
825
28.5%
3.4%
-8
-12
-21
-447

FY03/20
Q2Q3
Q452,21678,943 105,241
9.8%
8.5%
7.1%
49,29074,637
99,617
10.2%
9.1%
7.9%
93.6%
93.8%
94.0%
1,829
2,659
3,425
21.3%
11.6%
3.2%
3.5%
3.3%
3.2%
1,434
2,128
2,797
-9.6%
-10.7%-11.5%
2.7%
2.7%
2.6%
79
122
165
-13.2%-26.5%-36.8%
0.2%
0.2%
0.2%
-417
-603
-764
796
1,228
1,615
67.2%
18.1%
13.1%
1,736
2,764
3,743
41.5%
18.5%
13.0%
3.5%
3.7%
3.8%
68
67
45
580.0%
3.7%
2.5%
1.3%
-34
-38
-43
-39
-56
-71
-934
-1,508-2,057
FY03/20
Q2Q3
Q426,617
26,727
26,298
12.3%
6.1%
3.2%
25,06625,34724,980
13.1%
7.0%
4.6%
93.3%
94.2%
94.4%
1,069
830
766
17.7%
-5.0%
-18.3%
4.0%
3.1%
2.9%
704
694
669
-11.8%-12.8%-14.1%
2.6%
2.6%
2.5%
41
43
43
-29.3%-42.7%-54.7%
0.2%
0.2%
0.2%
-263
-186
-161
462
432
387
75.0%
-23.4%
-0.3%
911
1,028
979
80.0%
61.4%
3.6%
4.1% 76
-1
-22
7.1%
-22
-4
-5
-18
-17
-15
-487
-574
-549

Q1
25,162-1.7%
23,922
-1.2%
94.5%
723
-4.9%
2.9%
612
-16.2%
2.4%
51
34.2%
0.2%
-154
-61
434
-47.4%
1.8%
6
0.8%
-19
-11
-472
Q1
25,162-1.7%
23,922
-1.2%
94.5%
723
-4.9%
2.9%
612
-16.2%
2.4%
51
34.2%
0.2%
-154
-61
434
-47.4%
1.8%
6
0.8%
-19
-11
-472

FY03/21Q2
Q3
Q451,04578,167 104,257
-2.2%
-1.0%
-0.9%
48,53974,36899,214
-1.5%
-0.4%
-0.4%
94.5%
94.6%
94.6%
1,438
2,194
2,940
-21.4%-17.5%-14.2%
2.8%
2.8%
2.8%
1,248
1,874
2,474
-13.0%-11.9%-11.5%
2.4%
2.4%
2.4%
110
171
229
39.2%
40.2%
38.8%
0.2%
0.2%
0.2%
-292
-442
-601
1,355
2,773
3,429
70.2%
125.8%
112.3%
2,369
4,329
5,703
36.5%
56.6%
52.4%
4.9%
5.8%
5.7%
16
34
32
-76.5%-49.3%-28.9%
1.1%
1.5%
1.1%
-13
-2
-21
-13
-17
-31
-1,003-1,569-2,253
FY03/21Q2
Q3
Q425,88327,122
26,090
-2.8%
1.5%
-0.8%
24,61725,82924,846
-1.8%
1.9%
-0.5%
94.6%
94.7%
94.7%
715
756
746
-33.1%
-8.9%
-2.6%
2.7%
2.8%
2.8%
636
626
600
-9.7%
-9.8%
-10.3%
2.4%
2.3%
2.3%
59
61
58
43.9%
41.9%
34.9%
0.2%
0.2%
0.2%
-138
-150
-159
1,416
1,418
656
206.5%
228.2%
69.5%
1,935
1,960
1,374
112.4%
90.7%
40.3%
7.9%
7.6%
5.5%
10
18
-2
-86.8%
1.4%
2.4%
6
11
-19
0.9%
1.8%
-2
-4
-14
-531
-566
-684

FY03/21% of FYFY Est.
101.2% 103,000-2.1%
101.3%
97,908-1.7%

100.9%
103.9%-590
3,400
110.5%
5,489
46.6%-2,126

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

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Medical System Network / 4350
LAST UPDATE: 2021.06.18

Coverage

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp(Reference) Former Pharmaceuticals Network segment sales(JPYmn)
1,000
900

44

55

800
41

700

43

44

42

600
336

500

326

251

270

48
44

45
264

244

269

21

46

252

242

54

82

51

341
270

256

46

51
53

247

212

293

281

43

43

50
283

306

42

370

274

282

400
300
200

356

351

Q1

Q2

399

384

382

368

Q3

Q4

Q1

Q2

434

417

Q3

Q4

458

447

Q1

Q2

527

481

493

468

Q4

Q1

Q2

529

494

546

526

Q1

Q2

611

553

637

100
0

FY03/14

FY03/15Q3

FY03/16

Order placement fees

Q3

Q4

FY03/17

System sales

Q3

Q4

FY03/18Q1
FY03/19

Other

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

Quarterly trends in prescription volume and price per prescription (drug price + technical fees; Dispensing Pharmacy business; all stores)('000)

Number of prescriptions

3,000

(JPY)

Price per prescription (right axis)

11,50010,931

10,77010,701

2,500

10,73010,533
10,447

10,378

2,000

9,949
9,901
9,869
9,590

10,072
9,958
9,909
9,780

9,573

10,264
9,918 9,957
9,797
9,862
9,828
9,754
9,750
9,702

10,000

9,825

9,486
9,430

9,500

9,220

2,169
2,287
2,354
2,267
2,257
9,000
2,079
2,195
2,1702,092
2,264
2,079
2,077
2,031
2,027
1,964
1,787
1,999
1,904
1,885
2,072
1,829
1,997
1,675
1,781
1,921
1,898
1,666
1,666
1,803
1,573
8,500
1,4161,405

500

010,500

9,642

9,491

1,500

1,000

9,896

11,0008,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/207,500

FY03/21

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.

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Coverage

Medical System Network / 4350
LAST UPDATE: 2021.06.18

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

Distribution of network members (as of March 31, 2021)
Hokkaido area: 293
Network affiliates: 173
Directly operated pharmacies: 120

Chugoku and Shikoku area: 608

Tohoku area: 371

Network affiliates: 587
Directly operated pharmacies: 21

Network affiliates: 348
Directly operated pharmacies: 23

Kanto and Koshinetsu area: 1,859
Network affiliates: 1,767
Directly operated pharmacies: 92

Kyushu and Okinawa area: 919
Network affiliates: 859
Directly operated pharmacies: 60

Tokai and Hokuriku area: 1,206
Network affiliates: 1,161
Directly operated pharmacies: 45

Kinki area: 860
Network affiliates: 805
Directly operated pharmacies: 55

Source: Shared Research based on company data

Number of dispensing pharmacies by region
RegionDirectly operated
pharmacies

Affiliates

Total network
members

Hokkaido

120

173

293

Tohoku

23

348

371

Kanto and Koshinetsu

92

1,767

1,859

Tokai and Hokuriku

45

1,161

1,206

Kinki

55

805

860

Chugoku and Shikoku

21

587

608

Kyushu and Okinawa

60

859

919

Total

416

5,700

6,116

Source: Shared Research based on company data (March 31, 2021)

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Medical System Network / 4350
LAST UPDATE: 2021.06.18

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

Full-year FY03/21 earnings results (out May 7, 2021)
Overview
FY03/21 (April 2020–March 2021) earnings results▷

Sales:▷

Recurring profit: JPY3.5bn (+123.0% YoY)▷▷

JPY104.3bn (-0.9% YoY)

Operating profit: JPY3.4bn (+112.3% YoY)

Net income*:

JPY2.2bn (versus loss of JPY895mn in FY03/20)*Net income attributable to owners of the parent

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 thenumber of prescriptions filled owing to fewer medical examinations as a result of the COVID-19 pandemic. This decline in thenumber 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, andreduced 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 the sale 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 by segment
Note: Reported sales and earnings at the segment level include intra-group sales and transfers between segments.

Community Pharmacy Network▷

Segment sales:▷

This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy business, and▷

JPY99.2bn (-0.4% YoY)

Segment profit: JPY5.7bn (+52.4% YoY)

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 end-March
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 the period
declined 9.4% despite a 7.7% hike in average prescription prices due to an increase in long-term prescriptions. However, thecompany notes segment profits increased thanks to efforts to promote the switch to generics as an economic alternative withstable supply, as well as to streamline operations, optimize personnel deployment, and reduce overtime. As of end-March 2021,
the group had 416 dispensing pharmacies, one care plan center, and eight cosmetics/drug stores.

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Medical System Network / 4350
LAST UPDATE: 2021.06.18

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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 the digitalage. In March 2021 the subsidiary launched the “Your Family Pharmacy” service utilizing its official LINE account. The number ofregistered friends increased from 10,000 as of April 2, 2021 to over 50,000 by May 28, 2021. Furthermore, the number ofpharmacies 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)

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
end-March 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 itreported 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)

For details on previous quarterly and annual results, please refer to the Historical performance and financial
statements section.

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Medical System Network / 4350
LAST UPDATE: 2021.06.18

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Company forecast for FY03/22
Recent performance and FY03/22 company forecast
FY03/21

FY03/20(JPYmn)Sales

1H Act.
52,2162H Act.

FY Act.

53,025105,241

1H Act.
51,045

FY03/222H Act.

FY Act.

1H Est.

2H Est.

FY Est.

53,212104,257

51,85053,850105,700

1.6%

1.2%

1.4%

YoY

9.8%

4.6%

7.1%

-2.2%

0.4%

-0.9%

Cost of sales

32,39732,63065,02730,54231,303

61,845Gross profit

19,81920,39540,21420,502

21,91042,412

38.0%

38.5%

38.2%

40.2%

41.2%

40.7%

SG&A expenses

19,022

19,57738,59919,147

19,83538,982

SG&A ratio

36.4%

36.9%

36.7%

37.5%

37.3%

37.4%

Operating profit

796

819

1,615

1,355

2,074

3,429

1,400

2,100

3,500

YoY

67.2%

-14.0%

13.1%

70.2%

153.2%

112.3%

3.3%

1.3%

2.1%

Operating profit margin

1.5%

1.5%

1.5%

2.7%

3.9%

3.3%

2.7%

3.9%

3.3%

784

776

1,560

1,397

2,082

3,479

1,750

2,250

4,000

YoY

79.0%

-27.0%

3.9%

78.2%

168.3%

123.0%

25.3%

8.1%

15.0%

Recurring profit margin

1.5%

1.5%

1.5%

2.7%

3.9%

3.3%

3.4%

4.2%

3.8%

Net income

218-1,113

-895

578

1,620

2,198

750

1,050

1,800

YoY

83.2%

-

-

165.1%

-

-

29.8%

-35.2%-18.1%Net margin

0.4%

-2.1%

-0.9%

1.1%

3.0%

2.1%

1.4%

1.9%

1.7%

Gross profit margin

Recurring profit

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

▷

Sales:

JPY105.7bn (+1.4% YoY)▷

EBIDTA:

JPY6.5bn (+1.2% YoY; adopted as a new yardstick for profitability)

Operating profit:

JPY3.5bn (+2.1% YoY)

Recurring profit:

JPY4.0bn (+15.0% YoY)

Net income*:

JPY1.8bn (-18.1% YoY)EPS:

JPY59.70 (-17.7% YoY))

▷
▷
▷
▷

*Net income attributable to owners of the parent

Sales forecast by segment
Community Pharmacy Network segment: Sales of JPY100.1bn (+0.9% YoY), segment profit of JPY5.7bn (+0.5% YoY)
Other three businesses: Sales of JPY6.2bn (+9.2% YoY), segment profit of JPY167mn (versus a loss of JPY20mn in FY03/21)
Adjustments: -JPY612mn for sales, -JPY2.4bn for segment profit

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), and Medical System
Network foresees further deterioration in the business climate for dispensing pharmacies, heightening the need for operational
stability. On the other hand, the company noted progress has been made in winning the understanding of wholesalers on
previously promoted improvements to drug distribution.
The company sees this change in the 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 end-March 2022. 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

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Medical System Network / 4350
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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.

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Medical System Network / 4350
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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-term plan, however, thecompany 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 the genericdrug 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 that the construction of a newserviced elderly housing facility was near completion as of end FY03/18, the company intends to focus on boosting occupancy
rates for these units. Also, having made continued investments into these new facilities up until now, the company sees theperiod 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 tosmall 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 caresystem.
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 the third 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 business centering 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 tothe 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 ofgeneric drugs sold as well as the number of network members that sell its products. In May 2021, the company announced achange to its fifth medium-term plan final year (FY03/22) sales and profit forecasts to reflect the impact of the COVID-19
pandemic.

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Feldsenf Pharma’s generic drugs supply chain
Medical System
Network

Stake:80％

Daito PharmaceuticalCo., Ltd.

Stake:20％

Business alliance

Nanohana
Pharmacy

Manufacturingoutsource

Generic drug

Sales

Manufacture and sales of drugs

manufacturers

Generic drug
wholesaler

Feldsenf Pharma Co., Ltd.

Sales

Manufacturing

Network members

Source: Shared Research based on company data

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 atarget 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 increasein 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 in sales,
JPY5.0bn in operating profit (consolidated EBITDA of JPY7.5bn), equity ratio of over 30%, and 5,000 network members (wheninitially 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 for thenumerical targets for FY03/22, the final year of its fifth medium-term plan, the basic policy is unchanged but announced whenreporting 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)(JPYmn)Sales

FY03/17

FY03/18

FY03/19

FY03/20

Act.

Act.

Act.

Est.

Target88,865

93,977103,000

120,000-

98,232 Sales

FY03/22

Pharmaceuticals Network

3,237

3,639

3,951

Pharmaceuticals Network

97,461

Dispensing Pharmacy

81,65087,17290,706

Three other businesses

6,113

-

2,113

3,163

1,428 Operating profit

2,500

5,000

Operating profit
Pharmaceuticals Network

1,718

1,949

2,331

Pharmaceuticals 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

2,400

-

RPM

2.4%

3.5%

1.5%

RPM

2.3%

-

Net income

571

1,022

462 Net income

650-

Equity ratio

20.1%

16.9%

15.6% Equity ratio

Pharmaceuticals Network members

1,770

2,509

3,790 Pharmaceuticals Network members

377

399

No. of regional pharmacies

420 No. of regional pharmacies- 30% or higher
5,000

5,000

-

-

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.

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Business
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 from theoperation 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 of dispensing
pharmacies. As such, the company can be considered a pharmacy chain that also extends its services to non-directly operated
pharmacies.
*The Dispensing Pharmacy business and the Pharmaceutical Network business were formerly independent reportable segments. 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 forabout 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 Ministry of
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 a pharmacist.
Under the universal healthcare insurance system, the cost of medication is split between patients and their insurance plans. Whena pharmacy dispenses drugs, it collects the patient co-payment (30% of total cost for most company employees) in cash andobtains 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 withthe 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 newCommunity Pharmacy Network segment from FY03/21 comprises the Pharmaceuticals Network, Dispensing Pharmacy,
manufacture and market pharmaceuticals, and digital shift businesses. The company does not disclose a 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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Affiliated companies (as of May 31, 2021)

Segment
Dispensing Pharmacy

Company

Location

Ratio ofvoting rights

Hokkaido Institute for Pharmacy Benefit Co., Ltd.

Sapporo, Hokkaido

100.0%

Nanohana Hokkaido Co., Ltd.

Sapporo, Hokkaido

100.0%

Clinics Co., Ltd.

Sapporo, Hokkaido

100.0%

Nanohana Tohoku Co., Ltd.

Hachinohe, Aomori

100.0%

Nanohana East Japan Co., Ltd.

Minato-ku, Tokyo

100.0%

Metro Pharmacy Co., Ltd.

Minato-ku, Tokyo

100.0%

Nanohana Central Co., Ltd.

Nagoya, Aichi

100.0%

Nanohana West Japan Co., Ltd.

Toyonaka, Osaka

100.0%

Total Medical Service Co., Ltd.

Kasuya, Fukuoka

100.0%

Nagatomi Pharmacy Co., Ltd.

Oita, Oita

100.0%

Feldsenf Pharma Co., Ltd.

Sapporo, Hokkaido

80.0%

Digital Shift

PharmaShift Co., Ltd.

Minato-ku, Tokyo

51.0%

Leasing and Facility

Paltecno Co., Ltd.

Sapporo, Hokkaido

100.0%

Food Service

Sakura Foods Co., Ltd.

Kasuya, Fukuoka

100.0%

Other

Agrimas Corp. *Ota-ku, Tokyo

77.7%

Home-Visit Nursing Care Station Himawari Co., Ltd.

Nerima-ku, Tokyo

100.0%

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 conflicts ofinterest 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 the sourcingof 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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Network members and pharmaceuticals transactions
Directly operated dispensing pharmacies

7,000

Network affiliates(JPYbn)Pharmaceuticals transactions (right axis)

450
391.7

6,000

336.8

350

5,000

300
233.7

4,000
169.2

3,000
2,000
1,000
0

400

11.8

12.1

181

47
157

17.6
128
153

29.3

39.8

274
161

335
164

47.4

53.7

373
172

393
204

94.8

70.4
41.5
526
214

631
223

112.4

97.7

123.7

764

842

855

1,047

269

321

345

353

250
4,829

137.4

5,700

150

3,370
1,393
377

200

100

2,110

50
399

420

416

416

0

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 the company’s services
in a number of ways. They can receive payment from all network members two months after closing instead of the standard threemonths, which reduces interest expenses. The company’s collection service helps them minimize 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 lowering wholesaler costs. These cost-saving advantages
give the company the power to negotiate better prices with wholesalers. Price negotiation is crucial to dispensing pharmacies
that interact with multiple drug wholesalers since the difference between the actual drug sourcing cost and official price ofprescription 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 priceper each pharmaceutical product. Further, the company does not get involved in the transactions and relationships between thepharmacies 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 canmaintain 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 existing accounts.
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 that it receives frompharmaceutical companies. The company then negotiates with wholesalers about stable supply of the product, price, and otherconditions, and provides information on the product to network members if it concludes that it can be dispensed safely by thepharmacists. 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.
*Regular supplier/trading account: A relationship between retailer and wholesaler whereby the retailer has a trading account with the wholesaler. For aretailer, a regular supplier is a wholesaler with which it has a history of doing business.

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Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp**Interview form: Pharmaceutical Interview Form (IF), whose purpose is to supplement information that is not fully covered in package inserts ofprescription 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, the current 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 can nolonger be dispensed once it expires, so the disposal of dead stock becomes a cost burden on dispensing pharmacies. The primaryobjective of the system is to reduce inventory disposal losses substantially by registering members’ dead stock in the system andmatching the stock with other members that can use it. Charges for matched dead stock can be settled together with orderplacement commissions to Medical System Network, so member pharmacies do not need to make payments to each other.
The MHLW has identified wasted pharmaceuticals as a cost burden that needs to be addressed in healthcare reforms. Note that
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 with training
organization Iyaku Sogo Kenkyukai (ISK). These workshops are run by dispensing pharmacies and online courses are also 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, andgaining credits for workshops run by JPEC and registered organizations that provide group and practical training sessions such as
Japan Society of Hospital Pharmacists (JSHP) and Japan Pharmaceutical Association (and their 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 to become members of
the ISK organization and run JPEC accredited training courses. ISK issues attendance stickers to pharmacists who attend thesecourses. 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 medical care, wherein patient informationand 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 forcompany employees and the National Health Insurance [NHI] for non-employees). Dispensing pharmacies receive the patientco-payment over the counter when dispensing drugs and the portion covered by insurance becomes dispensing 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, and directly operated pharmacies areprovided 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 is required. There are also no restrictions on
how the funds can be utilized. Social insurance and NHI claims can be securitized separately. Dispensing fee receivables areconverted into small-lot securities through financial institutions and sold to investors for capital recovery.

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 wasabsorbed 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 for pharmacists
and other healthcare professionals and analyzes pharmaceuticals-related data.

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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 rise in line with the increase in
network members, although there have been periods when the value declined due to drug price revisions.
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 Distribution of
network members and Number of pharmacies by region in the Trends and Outlook section). As of end-March 2021, the numberof 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 thefamily 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, and when
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 to promote
revitalization of pharmacies, and in FY03/19 it closed 15 outlets while opening eight new stores and acquiring three throughM&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 and pharmacy
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.
Number of dispensing pharmacies

FY endSales (JPYmn)

No. ofpharmacies

1

Ain Holdings

April

292,615

1,088

2

Qol

March

161,832811

3

Toho Holdings

March

96,124777

4Sogo Medical Holdings

March

-

748

5

Nihon Chouzai

March278,951

670

March

96,439592-

193,700

580

90,706416

6Suzuken

7

Kraft

8

Medical System Network

March

9

Aisei Pharmacy

March64,185396

10 Pharmarise Holdings

May

40,417

312

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.

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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 toestablish 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 a community
with the following four objectives:▷

Information sharing by affiliates of available pharmaceuticals and inventories▷

Cooperation on at-home medical care, facility sharing, holding study sessions and exchange meetings▷▷

Enhanced distribution for the entire region

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 timerequired 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 timespent 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 long waiting time. A
successful case showed that waiting time was cut by about five minutes three months after the identified 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 of prescriptions at thepharmacy by building a collaborative relationship with pharmaceutical manufacturers with capability to provide a stable supply ofhigh-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 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.

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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), a core subsidiary of
Digital Holdings (TSE1: 2389). Medical System Network holds a 51% equity stake while RePharmacy, Inc (wholly-owned
subsidiary of OPT, Inc) holds the remaining 49%. PharmaShift’s main business is Family Pharmacy Support Service. Medical
System Network created the digital shift business as a new business with establishment of PharmaShift. In the joint venture,
PharmaShift is mainly in charge of customer development while OPT 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 and aggregating
patients’ medical information*Contributes to strengthening functionality and enhancing efficiency of family pharmacies while also supporting non-dispensing
businesses such as health and nutrition counseling*Building an information infrastructure that can be linked with various other businesses such as physicians by aggregating
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 patientsand pharmacies using the official LINE account. Specifically, Medical System Network looks to incorporate functions such asprescription 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 for dispensing
pharmacies so that it can provide the products not only to directly-operated and network member pharmacies, but to allpharmacies 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 of prescriptions sent topharmacies 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 secure domestic 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 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 real estate
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 both patientsand physicians. Grouping various medical institutions in the same premises provides patients with opportunities to receive

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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 same area.
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 the same
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, locatedin 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 casefor 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 care services are alsoavailable. 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), waslaunched 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 are offered 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).

Other
The major business in this segment is home-visit nursing care carried out by subsidiary Home-Visit Nursing Station Himawari Co.,
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, and provides
appropriate nursing care and advice. It collaborates with physicians, healthcare and long-term care professionals, andpharmacists at the company’s Nanohana Pharmacy.

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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-of-hospital dispensing ratio
exceeded 50% nationwide for the first time in 2003. According to JPA estimates, the average ratio rose 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. Anotherfactor 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
62,00060,171
59,61359,13858,32658,678
57,78457,07159,00055,79754,78053,64253,30453,00152,53951,952
51,23350,60049,95649,332
48,25256,00053,00050,00046,76347,00045,171
44,08544,00041,00042,41240,31038,000Source: 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
1970s

Early 1990s

Separation of medical and dispensary practice (1974)
Abolition of pharmacy distance regulation per
Pharmaceutical Affairs Act (1975)

Late 1990s

Early 2000s

Late 2000s

Abolition of drug resale system (1977)

Early 2010s

Late 2010s

New system of OTC sales started (2009)

Full liberalization of drug resale price (1997)

Ban on online sales of drugs lifted (2013)

Sales of designated quasi-drug started (1999)
371 drugs redefined as new range quasi-drugs (2004)
Sales of 371 new range quasi-drugs started (2004)

Dispensing
pharmacy

Privately run and"monzen" stores
Partial entry

General pharmacy

Industry
consolidation

M&A among mediumsize stores accelerated

Progress in chain store
development

Privately run
storesBusiness tie-up between
dispensing pharmacy chains

Partial entry

Drugstore

Market entry ofcompanies indifferent industries

Commencementof chain store
development

Business tie-up between dispensing
pharmacy chains and drugstores

Entry of dispensing
pharmacy business

Consolidation among major
drugstores

Alliance between convenience store
chains and drugstore or dispensing
pharmacy chains

Entry of electronic
appliance mass retailers

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

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Prescription volume(mn prescriptions)
850

843

800

750

700
650
650

600

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 increase inpharmacies, and securing sufficient staffing is a pressing issue, particularly for small and mid-tier pharmacies.
Pharmacist numbers('000)

Pharmacies

Hospitals and clinics

Other

350
300
250
200
150

241
77
48

252
78
49

268
82
50

277
79

74

52

53

100
50
0

280

288
72
55

301
71
58

311
71
60

136

146

153

161

180

125

172

116

FY2004

FY2006

FY2008FY2010FY2012FY2014FY2016FY2018Source: 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 planningto 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 24-hour availability as ameans to improve patient convenience, but this service will also likely increase labor costs for dispensing pharmacies.

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Survey results on home-based medication management service
100%
90%

18.0

23.4

18.3

13.5

11.3

53.5

57.6

6.6

13.5

15.3

80%
70%

50.9

60%

40%

60.6

62.1

50%

66.7

70.0

63.5

30%
20%
10%
0%

42.5

33.0
13.2

12.0

14.9

Feb. 2011

Jan. 2012

Jan. 2013

Planning to implement

Jan. 2014

31.1

Jan. 2015

Under consideration

25.9

22.5

Jan. 2016

Jan. 2017

Jan. 2018

Not planning to implement

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

Not enough staff

81.7％(Jan. 2018 survey)

No demand in sight

Unprofitable

Physicians being negative

Patients being negative

0.0

10.0

20.0

30.0

40.0

50.0

Jan. 2018

Jan. 2017

Jan. 2016

Jan. 2015

Jan. 2014

Jan. 2013

60.0
Jan. 2012

70.0

80.0

90.0

(%)

Feb. 2011

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 in Japan,
and, as the Japanese population ages, reducing unnecessary drug use will be essential to maintaining sound healthcare spending.
For the same reason, MHLW is also encouraging pharmacies to take on a more patient-centered approach rather than to focus
primarily on pharmaceuticals.

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Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp(Reference) Drug expenditures(JPYtn)Dispensing technical fee

Dispensing drug fee

Outpatients

Hospitalization

45.0
40.0
35.0
30.0

31.4
2.5

25.0
12.7

32.4

32.4

2.6

2.5

13.0

13.0

33.4

34.1

2.5

2.6

35.3
2.5

14.0

36.6
2.6

14.9

37.8

38.4

2.7

2.7

15.2

15.0

39.3

40.0

2.7

2.8

15.8

16.0

13.4

13.6

12.7

13.0

13.3

13.4

13.6

13.8

12.4

4.0

4.3

4.4

4.9

4.9

5.2

5.4

Dentistry
41.5

41.3

2.8

2.9

16.4

16.5

14.2

14.2

6.0

5.6

20.0
15.0
10.0

11.9

12.2

12.1

12.4

3.0
1.2

3.3
1.3

3.4

3.8

1.4

1.4

1.5

1.5

1.6

1.6

1.7

1.7

1.8

1.8

1.8

FY2004

FY2005

FY2006

FY2007

FY2008FY2009FY2010FY2011FY2012FY2013

FY2014FY2015FY20165.0
0.0

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 more than
90% of their prescriptions from specific medical institutions. The government enacted the changes after reassessing medical carefinances amid chronic fiscal deficits, a health insurance program on the verge of collapse, and continually expanding long-termcare expenditures. Further reductions in dispensing fees are likely. In addition, faced with concerns of rising medical costs, thegovernment 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 to dispensing pharmacies that can provide a
24-hour on-call service. These trends put smaller pharmacies (such as those near large hospitals) at a disadvantage. At a time offlat dispensing fee expenditures, it is crucial for community pharmacies to strengthen their family pharmacy functions andstrengthen services that directly earn revenues such as technical fees.
Dispensary charges
Technical fee(JPYbn)Drug fee

Dispensing medical fee

9,000
7,875

8,000
7,000
6,000
5,000
4,000

4,593

4,747

5,167

5,440

5,870

4,349

6,082

4,438

6,560

6,643

4,859

4,877

1,644

1,702

7,038

7,199

5,244

5,371

1,737

1,768

5,978

7,495

7,713

7,475

7,746

5,578

5,741

5,483

5,711

1,849

1,912

1,931

1,977

3,000
2,000
1,000
0

1,454

1,591

1,828

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019

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 theavoidance 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 thecurrent NHI drug price system (where individual drug price reflects 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 price negotiation, 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:▷

Items of note between wholesalers and medical institutions/dispensing pharmacies:

▷
▷
▷
▷
▷
▷
▷

Elimination of negative primary margins, presentation of appropriate prices

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 they comeup. 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 feesand 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
Core medical fees (actual)
Dispensing fee
Drug prices (actual)
NHI basis
Consumption tax addition
Total (nominal)

FY2002

FY2004

FY2006

FY2008FY2010FY2012FY2014FY2016FY2018FY2020

-1.30

±0.00

-1.36

+0.38

+1.55

+1.379

+0.10

+0.49

+0.55

+0.55
+0.16

-1.30

＋0.00

-0.60

+0.17

+0.52

+0.46

+0.04

+0.17

+0.19

-1.40

-1.05

-1.80

-1.20

-1.36

-1.375

-1.36

-1.33

-1.74

-1.01

-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

Source: Shared Research based on company data

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The key point regarding dispensing fees raised around the time of the FY2018 revision is a reassessment of the role of dispensing
pharmacies with an emphasis on patient-centered service. Specifically, it promotes evaluation of family pharmacies andpharmacists, patient-centric businesses and at-home medical care; and promotes the use of generic drugs. It also encourages theproper 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 will further stimulate genericdrug 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 the first
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 0.625xof 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 theimpact of the NHI price revision will be far-reaching, not limited to generic and brand drug manufacturers but extended topharmaceutical distribution-related companies and dispensing pharmacies.
Generic drug ratio
85.0%

Mar. 2020
80.4%

80.0%
75.0%
70.0%
65.0%
60.0%
55.0%
50.0%

Apr. 2013
46.5%

FY2013

FY2014FY2015FY2016FY2017FY2018

Feb

Oct

Dec

Aug

Apr

Jun

Feb

Oct

Dec

Aug

Apr

Jun

Feb.

Oct.

Dec.

Aug.

Apr.

Jun.

Feb.

Oct.

Dec.

Aug.

Apr.

Jun.

Feb.

Oct.

Dec.

Aug.

Apr.

Jun.

Feb.

Oct.

Dec.

Aug.

Apr.

Jun.

Feb.

Oct.

Dec.

Aug.

Apr.

40.0%

Jun.

45.0%

FY2019Source: Shared Research based on MHLW’s Recent Trends of Dispensing Medical Costs (electronically processed)

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Industry peers (dispensing pharmacy chains)
As industry peers we selected listed companies that operate dispensing pharmacies as their mainstay business. Comparing theoperating profit margin of the business segments that operated dispensing pharmacies, Ain Holdings (TSEI: 9627) had thehighest OPM. Profit margins declined across the board in FY2017 owing to the diminished impact of major drugs for hepatitis 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.
Comparison of profit margins of industry peers’ pharmacy operation segments

TickerCompany

FY endFY2016FY2017FY2018FY2019FY20202796
3034

FY2021

Pharmarise Holdings

May

2.6%

2.0%

3.5%

2.3%

3.4%

-

Qol

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%

4775

Sogo Medical Holdings

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%

-

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
and delisted on April 17, 2020.
*** Sugi Holdings: Total company profit margins since there is only one segment.

Main industry peers
Latest full-year earnings
TickerCompany

Sales

OPM

ROE

Description(JPYmn)2796

Pharmarise Holdings

51,0301.9%

9.6%

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

3034

Qol

161,832

4.6%

8.2%

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

3341

Nihon Chouzai

278,951

2.9%

7.3%

Second-ranked dispensing pharmacy chain. Nationwide expansion centered on monzen
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.

ー

Sogo Medical Holdings--

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 inmedical practice support and hospital revitalization consulting business.

9627

Ain Holdings

5.5%

8.5%

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

-

292,615

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 flow frominvestment 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).

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Financials of industry peers
Medical System Network (4350)(JPYmn)Sales

FY03/19

FY03/20

Pharmarise Holdings (2796)

FY03/21

FY05/18

FY05/19

Qol (3034)

FY05/20

FY03/19

FY03/20

FY03/21

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

98,232

105,241

105,241

54,562

51,72851,030144,783

165,411

161,832

Gross profit

37,271

40,214

40,214

7,950

7,342

7,391

17,86321,094

21,102

SG&A expenses

35,842

38,59938,599

6,771

6,702

6,403

10,812

13,361

13,737

Operating profit

1,428

1,615

1,615

1,179

640

987

7,050

7,733

7,364

Recurring profit

1,501

1,560

1,560

1,092

590

976

7,208

8,024

7,403
3,365

Net income

462

-895

-895

-28

23

526

3,970

4,067

ROE

4.3%

4.3%

4.3%

-0.5%

0.4%

9.6%

10.5%

10.3%

8.2%

ROA (RP-based)

2.3%

2.3%

2.3%

4.5%

2.4%

3.9%

7.9%

8.1%

7.3%

Operating profit margin
Total assets

1.5%

1.5%

1.5%

2.2%

1.2%

1.9%

4.9%

4.7%

4.6%

68,93566,464

66,46424,26524,21725,22894,236

102,872

100,571
41,834

Net assets

10,761

9,418

9,418

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

4,232

1,330

895

1,572

5,773

4,468

12,912

Investing CF-5,921-2,383-2,383

-527

-501

-734

-8,287-8,670-3,065

Financing CF

4,338-1,687-1,687

-894

354

-766

2,906

-225

-6,114

Cash and deposits

11,520

0

0

3,643

4,393

4,464

193

15,766

19,498Interest-bearing debt

38,89737,55837,55810,550

11,138

10,37528,87332,65029,721

Net debt

27,37737,55837,558

6,907

6,745

5,911

28,68016,884

10,223

Nihon Chouzai (3341)

Sugi Holdings (7649)

Sogo Medical Holdings (-)

FY03/19

FY03/20

FY03/21

FY02/19

FY02/20

FY02/21

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

FY03/19Cons.

FY03/20Cons.

FY03/21Sales

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

-

-

Cons.

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%

-

-

2.7%

2.8%

2.9%

5.3%

5.5%

5.6%

3.7%

-

-

Total assets

Operating profit margin

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

-

-

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)

Sales

FY04/18

FY04/19

Cons.

Cons.

FY04/20Cons.

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%

57.3%

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

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.

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Medical System Network / 4350
LAST UPDATE: 2021.06.18

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Strengths and weaknesses
Strengths◤ Management support network service available to small and mid-tier pharmacies: Small pharmacies and mid-tierregional 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 and becoming 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 systemboasting 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, which matches 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 the company’s standpoint, an increase in network
members translates to revenue growth from rising commissions and greater buying 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 thecompany’s dispensing pharmacies is their high concentration in medical malls. This is in line with MHLW’s vision for the roleof 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 the pharmacy model linked to specifichospitals (pharmacies operating adjacent to large hospitals) and toward the family pharmacy and regional medical caremodels that accept prescriptions from a wide range of medical institutions. The company’s strategy of opening pharmacies inmedical complexes is in line with MHLW guidance and works to its favor in terms of dispensing fee eligibility.

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 thecompany’s proprietary system, thus allowing them to maintain management independence, but this has the potential
negative effect of impeding growth of the Dispensing Pharmacy business. While the company’s peers are expanding throughacquisition of smaller 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 ofabout 3.0% (based on disclosed data through FY03/19) is 2–5pp below that of other major chains. This is mainly because

most of the company’s dispensing operations are limited to prescription drugs and are not accompanied by drugstore
functions handling items such as OTC drugs, long-term care products, and toiletries. Many of the other major chains haveadopted the strategy to boost pharmacy profit margins by integrating drugstore operations with added floor space for foodproducts 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 this business format.
◤ Relatively small assets a disadvantage in acquisitions: The company is at a disadvantage versus the major players interms of asset scale when it comes to acquisitions targeting pharmacy chain expansion. Looking at the M&A-based increases

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Coverage

Medical System Network / 4350
LAST UPDATE: 2021.06.18

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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 the perspective of regional expansion, about 30% of the company’s
pharmacies are located in Hokkaido while less than 10% are located 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 advanceacquisitions and increase pharmacy outlets in regions other than its home ground Hokkaido, the company will need to beable to demonstrate its financial strength to the sell-side companies’ management as well as M&A intermediaries.

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Medical System Network / 4350
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Historical performance and financial statements
Income statement
FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20(JPYmn)Income statement

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

FY03/21

-

-

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%
1,357

31.7%
2,047

31.2%
2,091

34.2%
2,641

33.1%
3,783

36.1%
2,113

35.6%
3,163

36.5%
1,428

36.7%
1,615

37.4%
3,429

YoY
Gross profit margin

Operating profit

-

-

2.2%

26.3%

43.2%

-44.1%

49.7%-54.9%

13.1%

112.3%

5.3%

3.7%

3.2%

3.5%

4.3%

2.4%

3.4%

1.5%

1.5%

3.3%

Non-operating income

81

150

250

457

275

378

405

288

361

Non-operating expenses

124

284

321

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

-

-

5.6%

25.8%

52.0%

-45.4%

54.1%-53.8%

3.9%

123.0%
3.3%

YoY
Operating profit margin

Recurring profit
YoY
Recurring profit margin

349

5.2%

3.5%

3.1%

3.4%

4.4%

2.4%

3.5%

1.5%

1.5%

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

54.1%

53.4%

60.6%

57.3%

46.0%

66.2%

55.4%

67.7%

4172.7%44.6%

Net income attrib. to non-controlling interests
Net income
YoY
Net margin

78

133

29

92

158

72

0

-2

0

0

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%

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-term plan 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 plan targets
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, whichstarted in FY03/19, are as follows. We note that OPM has remained in the 1% range in FY03/19 and FY03/20 amid a severebusiness 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 thecommunity-based integrated care system as a group

5.

Strengthen financial position

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Medical System Network / 4350
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SG&A expenses
FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19(JPYmn)

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Salaries and allowances

2,806

6,364

7,489

9,266

10,406

12,08812,481

13,467

14,195

SG&A expenses

FY03/20

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

Provision for directors' stock benefits
Taxes and dues

853

1,913

2,350

3,870

4,479

4,374

4,420

4,692

5,691

Depreciation

270

658

802

945

1,029

1,052

1,491

1,624

1,811

177

487

669

849

917

1,009

1,056

1,147

1,217

Other

Amortization of goodwill

2,142

5,509

6,612

7,537

8,486

9,630

9,559

15,827

16,648

Total SG&A expenses

7,603

17,365

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

38,599Source: 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; these were mainly
impairment losses at pharmacies that failed to reach projected earnings. The company monitors the profitability of each
pharmacy based on specific criteria and provides guidance when they are not met. If improvements are not made within a
specified period of time, the company closes the pharmacy and sells off the business rights. In FY03/20, the company 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.

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Medical System Network / 4350
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Balance sheet
Balance sheet(JPYmn)FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

FY03/21

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.
10,118ASSETSCash and deposits

2,072

2,092

3,106

2,499

2,081

2,252

10,201

11,703

11,722

Notes 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

Other

629

614

664

709

927

958

868

1,528

940

994

Allowance for doubtful accounts

-3

-6

-6

-7

-7

-10

-11

-12

-12

-12

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

2,728

2,771

3,645

3,631

3,838

4,008

4,066

5,217

5,686

6,549

-43

-42

-26

-29

-33

-32

-31

-21

-26

-20

2,685

2,783

3,798

3,759

4,329

4,559

4,847

5,922

6,143

6,926

Total current assets

Investment securities
Long-term loans
Other
Allowance for doubtful accounts
Investment and other assets
Total fixed assets

17,701

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

Total assets

26,60330,78943,11445,587

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

10,210

Income taxes payable

582

459

578

599

1,065

413

1,135

695

454

1,556

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

Other

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

NET ASSSETS

Retained earnings

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
53,154Foreign 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 business alliance inDecember 2012 with Hanshin Dispensing Pharmacy Co., Ltd. (now equity-method subsidiary Hanshin Dispensing Holding Co.,
Ltd.). 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 wholesalers as a result of buying power due to large-volume procurement, but tocollaborate 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 have shrunk reflecting
the impact of the COVID-19 pandemic since FY03/20. The company booked an impairment charge of JPY1.5bn in FY03/20. .

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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 theincrease in current assets, tangible fixed assets increased JPY4.5bn (+JPY2.5bn for buildings, +JPY1.9bn for land) 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-term borrowings increased by about
JPY4.5bn to JPY14.2bn in FY03/15 and has continued to gradually rise. Short- and long-term borrowings 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.

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Cash flow statement
FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20(JPYmn)Cash flow statement

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

FY03/21Cons.

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

Goodwill amortization

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

Change in accounts payable

102

-558

365

-295

683

-765

-569

69

-328

-864

Cash flows from investing activities (2)-1,248-5,425-7,559-3,958-5,040-3,909-6,848-5,921-2,383-1,485Purchase of tangible fixed assets-805-1,625-4,180-2,360-3,674-2,170-4,050-3,094-1,351-1,375Purchase of intangible fixed assets

-1

-13

-44

-93

-273

-192

-190

-82

-107

-154

Purchase, sale, and redemption of inv estment securities

2

1

129

-267

-19

-39

-16

102

18

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 inventories

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

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

-162

-276

-221

-297

-304

-305

0

Acquisition of treasury stock
Dividends paid

-190

1,005

0

-229

-297

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 fluctuated sharply.
FY03/16–FY03/17 earnings were impacted by a number of temporary factors and a changing business environment owing to NHIdrug price and dispensing fee revisions. The company notes temporary factors that boosted FY03/16 profits such as JPY242mn ingains 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 of temporary 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.
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 the timing ofreceivable collections and the debt repayment period varies. Further, fiscal years with negative cash flow for inventory assets arecommon. We think this is due to the nature of Medical System Network’s business of handling prescription drugs, which calls forthe 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 thiswas mostly due to acquisition of tangible fixed assets: JPY4.2bn for serviced elderly housing facilities and land/buildings for new
pharmacies and JPY4.2bn for shares acquired through M&A and from business transfers. Even in other fiscal years, the acquisitionof 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

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Pharmacy business. As the company continues to invest in business expansions, free cash flow has been negative since the start of
the third medium-term plan, with the exception of FY03/16 when free cash flow turned positive due to temporary factors thatsharply 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, thecompany 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 as purchase ofreal 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.

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Historical performance
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 increase inlong-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 a consequence.
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, the Food 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 equity-method affiliate in December
2020.

Breakdown of results by segment
Note: Reported sales and earnings at the segment level include intra-group sales and transfers between segments.

Community Pharmacy Network
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.

▷

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

Segment sales:

JPY74.4bn (-0.4% YoY)

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; the▷company 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 thenumber of prescriptions filled, growth in the drug charge per prescription (9.9%) exceeded growth in the technical fee per

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prescription (4.1%). Consequently, on a companywide basis, the prescription unit price (comprised of the drug charge perprescription 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, thecompany has sought to streamline negotiations for procurement prices. In addition, it has worked to promote the switch togenerics 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 resultsfrom 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 three pharmacy
customers and roughly half of those using LINE agreeing to “friend registration.” The company also has organized a 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 end-December
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 withpatients 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)▷▷

Segment sales:

JPY1.9bn (-11.9% YoY)

Segment loss:

JPY2mn (versus loss of JPY38mn in cumulative Q3 FY03/20)

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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 pricenegotiations 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)

1H FY03/21 earnings results (out November 6, 2020)
Overview
Consolidated results for 1H FY03/21 (April–September 2020)▷

Sales:

JPY51.0bn (-2.2% YoY)▷

Operating profit:

JPY1.4bn (+70.2% YoY)

Recurring profit:

JPY1.4bn (+78.2% YoY)

Net income*:

JPY578mm (+165.1% YoY)▷▷*Net income attributable to owners of the parent▷

Business conditions and company response: The Pharmaceuticals Network business recorded a steady increase in new affiliates,
posting a sales increase of JPY359mn YoY, while the Dispensing Pharmacy business saw a drop in the number of prescriptions
filled owing to fewer medical examinations as a result of the COVID-19 pandemic, resulting in sales declining JPY1.2bn. On the
profit front, the Pharmaceuticals Network and Dispensing Pharmacy businesses contributed JPY342mn and JPY255mn
respectively to profit growth; at the latter, mainly the shift to generic drugs and reductions to labor and other costs were morethan sufficient to offset the adverse impact of lower prescription volumes.

Breakdown of results by segment
Note: Reported sales and earnings at the segment level include intra-group sales and transfers between segments.

Community Pharmacy Network
This is a new segment disclosed from FY03/20 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.

Results for 1H FY03/21 (April–September 2020)▷

Segment sales:

JPY48.5bn (-1.5% YoY)▷

Segment profit:

JPY2.4bn (+36.5% YoY)

Pharmaceuticals Network division: The number of new affiliates continued to increase steadily in Q2 (July–September 2020),▷

driven by strong needs for improved pharmaceutical distribution efficiency. As of end-September 2020, network members
numbered 5,636 (+391 versus end-FY03/20), consisting of 409 directly operated pharmacies and 5,227 affiliated pharmacies,
despite the loss of some major customers. The company launched the inventory management system Medisys VAN in Q2

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FY03/21 and as of end-September 2020, the system, along with Drug VAN, had been adopted by 1,023 network members▷(+110 versus end-FY03/20; excludes directly operated pharmacies).
Dispensing Pharmacy division: In 1H, dispensing fees were down 2.4% YoY for all pharmacies and down 3.4% on acomparable-store basis. Although the number of prescriptions filled is on a recovery trajectory, in 1H the number was down
YoY due to the decline in medical exams in the wake of the pandemic. Prescription volumes in Q2 FY03/21 totaled 4.0mn(-10.8% YoY) for all pharmacies and 3.9mn (-11.6% YoY) on a comparable-store basis. Looking at monthly trends since April,
the pace of decline was the fastest in May 2020 for both all pharmacies and on a comparable-store basis and has slowed during
Q2 (July–September 2020). On the profit front, Shared Research thinks the division has reduced costs thanks to progress inefforts to lower labor and others costs at directly operated pharmacies and the switch to generic drugs. As of end-September▷

2020, the group had 409 dispensing pharmacies, one care plan center, and eight cosmetics/drug stores.
Manufacture and market pharmaceuticals division: This business aims to provide a stable supply of good-quality, low-priced
generic drugs. As of end-September 2020, the company was selling 32 different ingredients and 63 products. In 1H, thecompany reinforced marketing to affiliates.

Leasing and Facility-related
Results for 1H FY03/21 (April–September 2020)▷

Segment sales:

JPY1.4bn (-21.4% YoY)▷

Segment profit:

JPY16mn (-76.5% YoY)

The decline in sales and profit reflected pandemic-related postponements of certain construction projects to 2H or later; on the▷plus side, the company saw solid growth in leasing revenues and occupancy numbers at its serviced elderly housing facilities.
As of end-September 2020, the company reported stable occupancy rates at three of its five properties; as for the remaining
two, at Wisteria Senri-Chuo it reported an occupancy rate of 81.7% (with 67 out of 82 units occupied), and at Wisteria Minami
Ichijo it reported an occupancy rate of 62.1% (with 72 out of 116 units occupied). It seems all commercial units available fortenants have already been taken. The company plans to continue taking all due precautions to prevent novel coronavirus
infections while continuing its marketing efforts aimed at getting its overall occupancy rate up to 90% by the end of the fiscal
year.

Food Service
Results for 1H FY03/21 (April–September 2020)▷

Segment sales:

JPY1.2bn (-13.0% YoY)▷

Segment loss:

JPY13mn (versus loss of JPY34mn in 1H FY03/21)

Loss narrowed: The decline in sales reflected the company’s withdrawal from unprofitable facilities and a decline in the number▷of meals supplied in the catering service in the wake of the pandemic, but the company has reassessed costs such as foodingredients procurement.

Other
The main business is home-visit nursing care.

Results for 1H FY03/21 (April–September 2020)▷▷

Segment sales:

JPY110mn (+39.2% YoY)

Segment loss:

JPY13mn (versus loss of JPY39mn in 1H FY03/20)

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Q1 FY03/21 earnings results (out August 7, 2020)
Overview
Q1 FY03/21 (April–June 2020) earnings results▷

Sales:

JPY25.2bn (-1.7% YoY)▷

Operating loss:

JPY61mn (profit of JPY334mn in Q1 FY03/20)

Recurring loss:

JPY62mn (profit of JPY323mn in Q1 FY03/20)

Net loss*:

JPY201mn (profit of JPY97mn in Q1 FY03/20)▷▷*Net income/loss attributable to owners of the parent▷

Company response and business conditions: Performance was strong at the core Community Pharmacy Network segment. The
Pharmaceuticals Network business recorded a steady increase in new affiliates, while the Dispensing Pharmacy business saw arise in the average value of prescriptions filled in tandem with growth in long-term prescriptions filled, but the number ofprescriptions filled stagnated owing to fewer medical examinations as a result of COVID-19.

Segment performance
Community Pharmacy Network
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.

Q1 FY03/21 (April–June 2020) segment earnings results▷

Segment sales:

JPY23.9bn (-1.2% YoY; includes internal sales or transfers between segments; same hereafter)▷

Segment profit:

JPY434mn (-47.4% YoY)

Pharmaceuticals Network division: The number of new affiliates continued to increase, driven by the need for improved▷▷

distribution efficiency. As at end-June 2020, the number of network members was 5,617 (up 372 from end-FY03/20). Thisconsisted of 415 directly operated pharmacies and 5,202 affiliates.
Dispensing Pharmacy division: The average value of prescriptions filled rose in tandem with growth in long-term prescriptions
and an increase in high-value prescriptions filled, but the number of prescriptions filled fell sharply due to fewer medical
examinations as a result of COVID-19. As at end-June 2020, there were 415 dispensing pharmacies, one care plan center, and▷eight cosmetic/drug stores.
Manufacture and market pharmaceuticals division: This business aims to provide a stable supply of good-quality, low-priced
generic drugs. The company sold 29 ingredients and 60 products as of end-June 2020.

Leasing and Facility-related
Q1 FY03/21 (April–June 2020) segment earnings results▷

Segment sales:

JPY723mn (-5.0% YoY)▷

Segment profit:

JPY6mn (loss of JPY8mn in Q1 03/20)

The reason for lower sales and profit improvement: Although leasing revenue and rise in occupancy at the company’s serviced▷

elderly housing facilities were generally brisk, the postponement of some construction projects associated with COVID-19
contributed to the sales decline. The number of occupied units as of end-June 2020 was 67 out of 82 units total (occupancy
rate: 81.7%) at Wisteria Senri-Chuo, and 73 out of 116 units total (occupancy rate: 62.9%) at Wisteria Minami Ichijo. The
company is carrying out sales activities that take into account measures to prevent the spread of COVID-19 toward achieving
its target occupancy rates of 90%.

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Food Service
Q1 FY03/21 (April–June 2020) segment earnings results▷

Segment sales:

JPY612mn (-16.2% YoY)▷

Segment loss:

JPY19mn (loss of 12mn in Q1 FY03/20)

Loss expands: Withdrawal from certain unprofitable facilities and a decrease in the number of meals supplied due to COVID-19▷

hurt profits.

Other
The main business is home-visit nursing care.

Q1 FY03/21 (April–June 2020) segment earnings results▷▷

Segment sales:

JPY51mn (+34.2% YoY)

Segment loss:

JPY11mn (loss of JPY21mn in Q1 FY03/20)

Full-year FY03/20 earnings results (out May 8, 2020)
Overview
FY03/20 (April 2019 to March 2020) earnings results▷

Sales:

JPY105.2bn (+7.1% YoY)▷

Operating profit:

JPY1.6bn (+13.0% YoY)

Recurring profit:

JPY1.6bn (+3.9% YoY)

Net loss*:

JPY895mn (profit of JPY462mn)▷▷*Net income/loss attributable to owners of the parent▷▷

Business environment: NHI drug price and dispensing fee revisions were conducted in April 2018. Dispensing pharmacies had
to streamline their management structures following the implementation of the MHLW’s “Guidelines for the Improvement ofCommercial Transaction Practices of Ethical Drugs,” whose purpose was to ensure stable supply of ethical drugs.
Company response and business conditions: Performance was strong at the core Community Pharmacy Network segment,
fueled by steady expansion in the Pharmaceuticals Network business and contributions to the Dispensing Pharmacy businessfrom pharmacies acquired in FY03/19 via M&A. There was also a rise in the average value of prescriptions filled in tandem withgrowth in long-term prescriptions and an increase in high-value prescriptions filled, which contributed to sales. However, since
January 2020, the number of prescriptions filled stagnated owing to fewer medical examinations as a result of the spread of
COVID-19 and a low rate of influenza transmission compared to previous years. As a result, the number of prescriptions filled▷

was fewer than expected at the Dispensing Pharmacy business, which weighed on profits.
The company posted a net loss, because it booked a JPY1.5bn impairment loss consisting mainly of a JPY1.3bn charge on fixed
assets of stores whose profitability had deteriorated in the Dispensing Pharmacy business and goodwill of acquired subsidiaries,
and a JPY112mn charge related to the Food Service business. Shared Research thinks that the increased impairment loss is due
in part to preparing ahead for a worsening business environment due to the spread of COVID-19.

Segment performance
Community Pharmacy Network
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.

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Full-year FY03/20 (April 2019 to March 2020) segment earnings results▷

Segment sales:

JPY99.6bn (+7.9% YoY; includes internal sales or transfers between segments; same hereafter)▷

Segment profit:

JPY3.7bn (+13.0% YoY)

Pharmaceuticals Network division: The number of new affiliates showed a strong increase driven by the need for improved▷

distribution efficiency. As at end-March 2020, the number of network members was 5,245 (up 1,455 from end-FY03/19). Thisconsisted of 416 directly operated pharmacies and 4,829 affiliates. Membership has been increasing steadily amid worsening
business conditions for dispensing pharmacies, such as annual NHI drug price revisions and price negotiations with▷wholesalers.
Dispensing Pharmacy division: In addition to the contribution from stores acquired via M&A, sales at existing pharmacies
remained steady. However, the number of prescriptions filled slowed in Q4 due to the effects of the COVID-19 outbreak, suchas a drop in customer traffic (associated with an increase in long-term prescriptions) and a reduction in the number of influenza
patients as a result of rigorous antivirus measures to prevent the spread of COVID-19. Accordingly, Q4 saw a rise in the priceper prescriptions due to the increase in long-term prescriptions, but the number of prescriptions filled turned down. This wasreflected in solid sales, but difficulty in adding value such as technical fees charged per prescription, which led to lower profits.
Overall, the company’s sales surpassed the initial forecast, but OPM was 0.9pp lower than expected. As at end-March 2020,▷

there were 416 dispensing pharmacies, one care plan center, and eight cosmetic/drug stores.
Manufacture and market pharmaceuticals division: This business aims to provide a stable supply of good-quality, low-priced
generic drugs. The company sold 23 ingredients and 51 products as of end-March 2020.

Leasing and Facility-related
Full-year FY03/20 (April 2019 to March 2020) segment earnings results▷

Segment sales:

JPY3.4bn (+3.2% YoY)▷

Segment profit:

JPY45mn (loss of JPY84mn in FY03/19)

The reason for sales and profit growth: Steady inflow of leasing revenue and rise in occupancy at the company’s serviced▷

elderly housing facilities contributed to earnings growth. The number of occupied units as of end-March 2020 was 67 out of
82 units total at Wisteria Senri-Chuo, and 71 out of 116 units total at Wisteria Minami Ichijo. The number of occupied units istrending up, and the company continues to carry out aggressive sales activities targeting an occupancy rate of over 90%.

Food Service
Full-year FY03/20 (April 2019 to March 2020) segment earnings results▷

Segment sales:

JPY2.8bn (-11.5% YoY)▷

Segment loss:

JPY43mn (profit of 34mn in FY03/19)

Business reforms: Despite withdrawal from certain unprofitable facilities and pricing adjustments made to contracts, segment▷

profit fell from higher labor costs as the company employed temporary resources in response to staff shortage. The company
booked a JPY112mn impairment loss in FY03/20.

Other
The main business is home-visit nursing care.

Full-year FY03/20 (April 2019 to March 2020) segment earnings results▷▷

Segment sales:

JPY165mn (+17.1% YoY)

Segment loss:

JPY71mn (loss of JPY101mn in FY03/19)

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Other information
History
Date

Description

Sep

1999

Established Medical System Network (capital stock: JPY10mn) in Chuo Ward, Sapporo, to streamline hospital
operation and pharmaceuticals distribution

Mar

2002

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

Dec
Feb

Acquired 100% of Pharmaholdings and Nihon Leben shares, making them wholly owned subsidiaries
2005

Established joint venture MM Net with Mitsui & Co. (capital JPY200mn, Medical System Network held 51%
equity stake, but dissolved alliance and absorbed MM Net in 2013)
Pharmaholdings acquired 100% of Sunmedic Co., Ltd. (now Nanohana East Japan Co., Ltd.) shares, making it
a wholly owned subsidiary

Oct

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 subsidiary

Sep

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

Nov

2012

Formed business alliance with Hanshin Dispensing Pharmacy(switched to alliance with parent Hanshin Pharmacy Holdings when the holding company was established in
December 2012)

May

2013

Formed business alliance with FamilyMart

Jul

Pharmaholdings and Hanshin Dispensing Holdings established joint venture, H&M Co.

Nov

Pharmaholdings acquired 98.96% of Total Medical Service shares through public tender offer, making it asubsidiary

Jan

2015

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

Mar

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

Apr

Formed business alliance with EM Systems

May

Concluded capital tie-up with Sogo Clinical Holdings (now EP-Sogo)

Jun
May

Formed business alliance with Yakuju Corporation
2016

Oct
Jan

Pharmaholdings acquired 100% of Home-Visit Nursing Care Station Himawari Co. shares and entered homevisit nursing care business
Formed business alliance with Zoo Corporation

2017

Formed business alliance with Career Brain

May

Formed business alliance with Okura Information System

Jun

Sold shares of SMO-MDS (no longer a subsidiary)

Oct
Jan

Absorbed subsidiaries System Four, Pharmaholdings, and Nihon Leben
2018

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

Feb

Feldsenf Pharma Co., Ltd. formed business alliance with Daito Pharmaceutical Co., Ltd.

Jun

Feldsenf Pharma Co., Ltd. started sales of generic drugs

Jan

2019

Apr
Feb
Oct

Acquired all shares in Nagatomi Pharmacy Corporation and made it a wholly owned subsidiary
Acquired A-system Co., Ltd. in an absorption-type merger

2020

Dissolved H&M Co., Ltd, terminating business tie-up with I&H Co., Ltd.
Established PharmaShift Co., Ltd., a joint venture with Opt, Inc.

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

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News and topics
February 2021
On February 5, 2021, the company announced revisions to its full-year earnings forecast.

Revised full-year FY03/21 consolidated earnings forecast▷

Sales:

JPY103.0bn (previous forecast: JPY103.0bn)▷

Operating profit:

JPY3.4bn (JPY2.5bn)

Recurring profit:

JPY3.4bn (JPY2.5bn)

Net income*:

JPY2.0bn (JPY1.4bn)

EPS:

JPY65.94 (JPY45.50)▷▷▷*Net income attributable to owners of the parent

Reasons for revision
The company revised up its profit estimates at all levels, because profitability of its core Community Pharmacy Network segment
is likely to be better than expected. In cumulative Q3, the total value of drug orders by network members were ahead of forecastin the Community Pharmacy Network segment, and although the number of prescriptions filled declined as expected in the
Dispensing Pharmacy business, the price per prescription trended higher than expected. The company also made more progress
than expected in group-wide efforts to streamline operations, improve productivity, and cut costs through rigorous control of
expenses. All of these factors contributed to the upward revision of profit estimates.

On the same day, the company announced an additional contribution to its Board Benefit Trust (BBT).
At the Board of Directors meeting held on the same day, the company resolved to contribute additional funds to its Board Benefit
Trust (BBT). The additional contribution is summarized below (see company press release for details).
1) Date of additional contribution to BBT: February 19, 2021 (planned)2) Amount of additional contribution: JPY120mn
3) Type of shares to be acquired: Common stock issued by the company
4) Period when shares are acquired: February 19–April 22, 2021 (planned)
5) Method of acquiring shares: Open market purchase

December 2020
On December 15, 2020, the company announced the recording of extraordinary gains (gains from the sale of shares in an
affiliate) and revisions to its full-year consolidated earnings forecast.
At the Board of Directors meeting held the same day, the company resolved to sell a portion of its shareholding in Genex Inc.
(headquartered in Nagoya, Aichi Prefecture; hereinafter, Genex), an affiliate not accounted for by the equity method. It expects
to record gains from the sale of shares in the affiliate as extraordinary gains in Q3 FY03/21 parent and consolidated results.

Reason for the share transfer
Medical System Network invested in Genex in December 2015 with the aim to strengthen its purchasing power, build a logistics
system, and improve distribution efficiency in generic drugs. Under the terms of the investment, Genex supplied generic drugs
to the group’s directly operated pharmacies and pharmaceuticals network affiliates. Genex now wishes to accept the
management participation of a fund run by private equity company J-STAR Co., Ltd. (headquartered in Chiyoda-ku, Tokyo), in
order to further raise its enterprise value and take measures toward listing on the stock exchange in the future. To realize this,
Genex asked Medical System Network whether it could purchase a portion of the Genex shares held by Medical System Network.
The company agreed to the request after carefully considering Genex’s management plan and the effects of the change in its

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capital policy. Further, the company concluded that there would be no significant change in its business relationship with Genex
and that the favorable collaborative relationship between the two companies would be maintained following the transfer.
As a result of the above share transfer, Genex will be excluded from the company’s scope of an affiliate not accounted for by theequity method. Medical System Network will record extraordinary gains from the transfer and has revised its forecast for full-year
FY03/21 accordingly, as shown below.

Revised full-year FY03/21 consolidated earnings forecast
Sales:

JPY103.0bn (previous forecast: JPY103.0bn)

Operating profit:

JPY2.5bn (JPY2.5bn)

Recurring profit:

JPY2.5bn (JPY2.5bn)

Net income*:

JPY1.4bn (JPY750mn)

EPS:

JPY45.50 (JPY24.73)*Net income attributable to owners of the parent

November 2020
On November 6, 2020, the company announced a revised forecast for the full-year FY03/21.

Revised full-year FY03/21 consolidated earnings forecast
Sales:

JPY103.0bn (previous forecast: JPY103.5–105.5bn)

Operating profit:

JPY2.5bn (JPY1.2–2.2bn)

Recurring profit:

JPY2.5bn (JPY1.1–2.1bn)

Net income*:

JPY750mn (no forecast given previously)

EPS:

JPY24.73 (no forecast given previously)*Net income attributable to owners of the parent

Reasons for revision
At the time of its FY03/20 results announcement on May 8, 2020, the company issued range estimates for FY03/21 sales,
operating profit, and recurring profit, explaining that it did not have a good basis at that time on which to make more precise
estimates as to how much the COVID-19 pandemic would impact full-year earnings. Although exactly when the pandemic will
come to an end remains to be seen, with the first six months of the fiscal year in the rearview mirror and more data in hand, thecompany has been able to fine-tune its projections and revise its forecast based on this new information.
The main impetus for the revision at this time is the Dispensing Pharmacy business, where the company had initially expected tosee the worst of the pandemic-driven downturn (resulting from cutbacks in patient exams at hospitals among other factors) nolater than July, with performance then gradually recovering from there. However, the company sees the fallout from thepandemic lingering through the end of the fiscal year, and with this weighing on its performance, does not expect the recovery it
is currently seeing to take this business back to where it was last year. With prescriptions related to the flu, hay fever, and othertypes of seasonal maladies also expected to be down this year, the company sees consolidated sales for the full year coming in
below the lower end of its initial range estimate. In contrast, the company sees full-year earnings coming in above the upper endof its initial range estimate, owed to its promotion of the shift to generic drugs (which have the advantage of being affordable
and can be reliably procured) and accelerated efforts to increase worker productivity and cut costs through optimal staff
allocation and reductions in overtime.

September 2020
On September 28, 2020, the company announced that it had signed an agreement to establish a joint venture with OPT, Inc.
The company announced that it had signed an agreement to establish a joint venture with OPT, Inc. (core subsidiary of Digital
Holdings, Inc. [TSE1: 2389]). The purpose of the joint venture is to create a new pharmaceutical platform suited for the digitalage by maximizing use of the two companies’ management resources.

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The joint venture is to be established on October 1, 2020 and scheduled to begin services in January 2021. Details are as follows:▷

Company name: PharmaShift Co., Ltd.

▷

Main business: Family pharmacy support business▷▷▷

Location: Minato-ku, Tokyo

Capital: JPY50mn
Shareholding: Medical System Network 51.0%, RePharmacy (wholly owned subsidiary of OPT) 49.0%

The three main business objectives of the joint venture are as follows:1)

Provide means for stress-free communication between patients and dispensing pharmacies and integrate medical
information provided by patients by using official LINE account2)

Support pharmacies in strengthening their family pharmacy functions and streamlining their businesses so that they can3)

In the longer term, improve the efficiency of healthcare and augment the value of dispensing pharmacies by integrating

enhance non-dispensing services such as health and diet counselinginformation gained by pharmacies strengthening their family pharmacy functions and building an information platform
shared by other medical professionals such as doctors, as well as professionals in other fields
The impact of this joint venture on the company’s FY03/21 forecasts is unknown at this stage.

August 2020
On August 17, 2020, the company announced that its subsidiary Feldsenf Pharma obtained approval to manufacture and market
generic drugs.
The company announced that as of the same day, its consolidated subsidiary Feldsenf Pharma Co., Ltd. (headquartered in
Sapporo, Hokkaido) obtained approval to manufacture and market one generic drug API and three products (pregabalin orally
disintegrating [OD] tablets 25mg/75mg/150mg). See the company press release for details.

July 2020
On July 15, 2020, the company announced the launch of inventory management system Medisys VAN.
The company announced it will promote its own branded version (Medisys VAN) of Okura Information System Co., Ltd.’s(headquarters: Marugame, Kagawa Prefecture) drug inventory management system Drug VAN to its pharmaceuticals network
affiliates.
Drug VAN is a long-established (commercialized for over 15 years) system with an installed base of 3,000 users that has been
continuously upgraded to reflect user requests. The company notes the system will streamline pharmacy operations throughadditional functions such as automatic calculation of optimized inventory corresponding to medical billing data, automatedordering, and inventory information sharing among multiple pharmacies.
Medisys VAN is the company’s pharmaceuticals network service that incorporates the company’s patented dead stock exchange(slow moving inventory clearance service) and generic drug recommendation functions. Affiliate pharmacy owners are the target
users. Adoption of the company’s system will help optimize overall network inventory management and streamline drug
distribution through reduced frequency of returns and emergency deliveries and expansion of drug inventory sharing among
affiliates.

June 2020
On June 19, 2020, the company announced the launch of sales of generic drugs (five ingredients and eight products) byconsolidated subsidiary Feldsenf Pharma Co., Ltd.

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The company announced that consolidated subsidiary Feldsenf Pharma began selling five generic drug APIs and eight products
from June 19, 2020, the date NHI drug prices applied.
On the same day, the company announced management changes at its consolidated subsidiaries.
The company announced changes to representative directors at its consolidated subsidiaries Paltecno Co., Ltd. and Feldsenf
Pharma Co., Ltd.
1. Paltecno Co., Ltd. (effective June 11, 2020)
Name:

New position

Current position

Tatsushi Muraoka

ChairmanPresident

Fumitaka Nakamura* President-* Also serves as General Manager of Project Promotion Office at Medical System Network
2. Feldsenf Pharma Co., Ltd. (effective June 18, 2020)
Name:

New position

Current position

Inao Tajiri*

ChairmanPresident

Kiwamu Nakada

President

Director*Also serves as President of Medical System Network

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Corporate governance and top management
General shareholders' meeting
Appointment and dismissal

Appointment and dismissal

Appointment and dismissal

Board of directors
Directors

Representative director
Accounting audit
Internal control audit

Sales division

Audit

Risk
management

Establishmentof structures
Administrative
divisionInternal audit
officeExecutives incharge ofcompliance

Risk management
office

Audit

Audit

Group companies

Coordination

Coordination
Accounting auditors
Coordination

Audit & Supervisory
Board

Source: Shared Research based on company data

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

Joined Ichino Yamagata Pharmaceutical Co., Ltd.

Jan 1981

Joined Medical Yamagata Pharmaceutical Co., Ltd.

Nov 1989

Representative director of Medical Yamagata Pharmaceutical Co., Ltd.

Jun 1991

Director of Akiyama Aiseikan Co., Ltd. (now Suzuken Co., Ltd)

Sep 1999

Established Medical System Network and became representative director and president (current)

Apr 2000

President (current) of Social Welfare Corporation Nomad-Fukushikai

Dec 2004

Representative director of Nihon Leben Co., Ltd.

Feb 2005

Representative director of MM Net Co., Ltd.

Apr 2013

President and representative director of SMO-MDS Co., Ltd.

Jul 2013

Vice president and representative director of H&M Co., Ltd.

Jun 2015

President and representative director of H&M Co., Ltd.

Jan 2016

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 inline with growth of the overall medical market, Medical System Network is aware of the importance of ensuring a fairmanagement system and accordingly maintains a flexible meeting of the board of directors, has developed a system to monitor
business execution, and has enhanced internal controls. The company further recognizes that management of subsidiaries is
especially crucial to internal control, and thus aims to enhance corporate governance by ensuring thorough compliance, building
a risk management system, and establishing a system for reporting financial and other important matters.

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Board of directors
A board of directors with 14 members (including three outside directors) was established as the decision-making body. Regularboard 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 decision-making,management oversight, and business execution functions.

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 the group.

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 are received
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 planprior 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 the status of internal
controls. Auditing efficiency is further enhanced through mutual cooperation and information-sharing with the 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 human resources. 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 for interim
dividends. The articles of incorporation stipulate the board of directors has the authority to decide on interim dividends througha resolution.

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Major shareholders
Top shareholders

Shares held Shareholding ratio

KBL EPB S.A. 107704 (Standing proxy: Mizuho Bank, Ltd. Settlement Dept.)

3,528,800

11.51%

S&S G.K.

2,769,100

9.03%

Yasuyuki Okinaka

2,506,000

8.17%

Jiro Akino

2,218,800

7.24%

Japan Trustee Services Bank, Ltd. (Trust Account)

1,748,600

5.70%

The Master Trust Bank of Japan, Ltd. (Trust Account)

1,326,400

4.32%

EP-Sogo Co., Ltd.

800,000

2.61%

Inao Tajiri

689,900

2.25%

Medical System Network Employees Stochkholding Association

609,500

1.98%

Yoshiaki Homma

400,100

1.30%

16,597,200

54.16%

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

Employees
Segment

No. of employees

No. of temporary employees

Total

Pharmaceuticals Network

2,755

466

3,221

Pharmacists

1,315

283

1,598

Leasing and Facility-related

116

17

133

Food Service

192

310

502

Other

25

10

35

Corporate (administration)

117

8

125

3,205

812

4,017

Total

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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ProfileCompany Name

Head Office

Medical System Network Co., Ltd.

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

Phone

Exchange Listing+81-11-612-1069

First Section of the Tokyo Stock Exchange

Established

Listed On

September 1999

June 2010

WebsiteFiscal Year-End

http://www.msnw.co.jp/

March

IR Contact

IR Web

Corporate Planning Department

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

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