Medical System Network / 4350
COVERAGE INITIATED ON:

2018.05.08

LAST UPDATE:

2020.06.29

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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Medical System Network / 4350
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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 ----------------------------------------------------------------------------------------------------------------------------------- 9
Quarterly trends and results -----------------------------------------------------------------------------------------------------------------------------------9
Business ------------------------------------------------------------------------------------------------------------------------------------------------ 19
Business model --------------------------------------------------------------------------------------------------------------------------------------------------- 19
Overview of business segments ---------------------------------------------------------------------------------------------------------------------------- 19
Market and value chain ---------------------------------------------------------------------------------------------------------------------------------------- 26
Industry peers (dispensing pharmacy chains) --------------------------------------------------------------------------------------------------------- 33
Strengths and weaknesses------------------------------------------------------------------------------------------------------------------------------------ 35
Historical performance and financial statements------------------------------------------------------------------------------------------ 37
Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 37
Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 39
Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 41
Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 43
Other information ---------------------------------------------------------------------------------------------------------------------------------- 51
History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 51
News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 52
Corporate governance and top management --------------------------------------------------------------------------------------------------------- 52
Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 53
Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 54
Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 54
Profile---------------------------------------------------------------------------------------------------------------------------------------------------------------- 55

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Medical System Network / 4350
LAST UPDATE: 2020.06.29

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

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-FY03/20, there were 5,245 network
members (+1,455 from end-FY03/19) comprising 416 directly operated pharmacies and 4,829 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 Regional Bureaus of Health andWelfare, there were approximately 58,000 dispensing pharmacies in Japan in April 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.
◤ In FY03/20, Community Pharmacy Network accounted for 94.7% of sales, Leasing and Facility-related 2.5%, Food Service

2.6%, and Other 0.2%. The Community Pharmacy Network segment is a new segment following a segment change in
FY03/20, combining the former Pharmaceuticals Network and Dispensing Pharmacy segments with manufacture and market
pharmaceuticals business (previously part of Other segment). The Community Pharmacy Network segment comprises the
Pharmaceuticals Network, Dispensing Pharmacy, and manufacture and market pharmaceuticals businesses. The company
discloses operating status of each business under the Community Pharmacy Network segment, but does not provide a sales
and profit breakdown by business.

Trends and outlook◤ In FY03/20, consolidated sales were JPY105.2bn (+7.1% YoY), operating profit was JPY1.6bn (+13.0% YoY), and recurring

profit was JPY1.6bn (+3.9% YoY). The company reported a net loss attributable to owners of the parent of JPY895mn (versus a
JPY462mn profit in FY03/19). Sales, operating profit, and recurring profit all were broadly in line with the revised full-year
forecast issued on March 25, 2020. In the Community Pharmacy Network segment, there was solid growth in network
member counts at the Pharmaceuticals Network business, mainly among small and mid-tier pharmacies. However the
Dispensing Pharmacy business saw decreases in the number of prescriptions filled and downward pressure on generic drug
prices as a consequence of NHI drug price revisions. The company also assessed potential for recovering investments indispensing pharmacies whose profitability had worsened amid deterioration in the business climate, subsequently booking
JPY1.5bn in impairment losses (JPY1.49bn of which was booked in Q4) in connection with fixed assets of the group’s
Dispensing Pharmacy business, and goodwill associated with shares in subsidiaries acquired via M&A. This led to Medical
System Network reporting a net loss.
◤ The company issued its full-year FY3/21 forecast in range form, citing uncertainty over the extent of effects from the spread of

COVID-19. It is projecting full-year consolidated sales of JPY103.5–105.5bn (-1.7% to +0.2% YoY), operating profit of JPY1.2–
2.2bn (-28.8% to +33.1% YoY), and recurring profit of JPY1.1–2.1bn (-29.5% to +34.6% YoY), with no forecast for net income(losses) attributable to owners of the parent. It targets an earnings recovery driven by growth in the number of network
members at the Pharmaceuticals Network business, contributions to the Dispensing Pharmacy business from stores acquired

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Medical System Network / 4350
LAST UPDATE: 2020.06.29

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

via M&A, diminished investment in dispensing pharmacy IT systems, and increased occupancy at serviced elderly housing
facilities run by the Leasing and Facility-related segment. Medical System Network has chosen to issue forecasts in range form
as the spread of COVID-19 already has caused a downturn in the number of prescriptions filled (one of the main factors that
affect profitability of the Dispensing Pharmacy division), and it remains difficult to predict when the disease outbreak will becontained as of the beginning of FY03/21.
◤ Medical System Network announced its fifth medium-term plan spanning a four-year period ending FY03/22 (previous planscovered three-year periods). Numerical targets for the final year of the plan are as follows: 5,000 network members,
JPY120.0bn in consolidated sales, JPY5.0bn in consolidated operating profit (consolidated EBITDA of JPY7.5bn), and equity
ratio of over 30%.

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: 2020.06.29

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Key financial data
FY03/12

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.

Cons. Est.

Sales

25,411

54,827

66,18275,54887,71588,865

93,977

98,232

YoY

-

-

20.7%

14.2%

16.1%

1.3%

5.8%

4.5%

7.1%

8,960

19,412

22,73728,47632,801

34,16436,60737,271

40,214Gross profit

105,241 103,500– 105,500

YoY

-

-

17.1%

25.2%

15.2%

4.2%

7.2%

1.8%

7.9%

GPM

35.3%

35.4%

34.4%

37.7%

37.4%

38.4%

39.0%

37.9%

38.2%

Operating profit

-

1,357

2,047

2,091

2,641

3,783

2,113

3,163

1,428

1,615

1,150– 2,150

YoY

-

-

2.2%

26.3%

43.2%

-44.1%

49.7%-54.9%

13.1%

-

OPM

5.3%

3.7%

3.2%

3.5%

4.3%

2.4%

3.4%

1.5%

1.5%

-

1,315

1,912

2,020

2,540

3,860

2,109

3,250

1,501

1,560

1,100– 2,100-

Recurring profit
YoY

-

-

5.6%

25.8%

52.0%

-45.4%

54.1%-53.8%

3.9%

RPM

5.2%

3.5%

3.1%

3.4%

4.4%

2.4%

3.5%

1.5%

1.5%

-

Net income

518

756

668

885

1,720

571

1,022

462

-895

-

YoY

-

-

-11.6%

32.4%

94.4%

-66.8%

79.0%-54.8%-293.7%

-

2.0%

1.4%

1.0%

1.2%

2.0%

0.6%

1.1%

0.5%

-

-

6,492

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

-

5.0

29.1

27.7

37.1

60.1

19.3

34.5

15.3

-29.5

-

EPS (fully diluted)

-

-

-

-

-

-

34.3

15.0

-

-

Dividend per share

3.8

8.0

8.0

8.0

9.5

10.0

10.0

10.0

10.0

-

Book value per share

50.5

222.9

214.7

243.3

334.9

345.3

351.4

354.8

310.4

-

Net margin
Per share data (JPY)
Shares issued (year-end; '000)
EPS

Balance sheet (JPYmn)
Cash and cash equivalents

2,072

2,092

3,106

2,499

2,081

2,252

10,201

11,703

11,722

8,902

8,271

10,941

11,023

10,783

11,09818,736

21,055

20,578

Tangible fixed assets

9,976

11,472

15,976

17,24920,253

21,24624,12925,721

25,126

Investments and other assets

2,685

2,783

3,798

3,759

4,329

4,559

4,847

5,922

6,143

Intangible fixed assets

5,040

8,263

12,39913,554

13,481

13,833

15,045

16,235

14,615

Total current assets

Total assets

26,60330,78943,11445,587

48,84750,73762,75968,93566,464

Accounts payable

5,158

5,616

7,798

8,598

9,525

9,144

9,416

10,19810,021

Short-term debt

3,856

5,119

12,922

9,214

6,910

3,863

7,463

9,158

8,905

12,693

14,37524,88021,626

21,061

16,92021,76923,84423,296

Total current liabilities
Long-term debt

7,029

8,758

10,94815,391

14,85920,18626,32929,73928,653

Total fixed liabilities

8,230

10,17812,882

17,826

17,52023,17230,40434,32933,74957,045

Total liabilities

20,92324,55337,76239,452

38,58140,092

52,174

58,173

Net assets

5,680

6,236

5,352

6,136

10,265

10,644

10,584

10,761

9,418

Total interest-bearing debt

10,885

13,87723,87024,605

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

1,566

3,790

3,706

3,838

6,409

3,084

6,699

2,840

4,232

Cash flows from investing activities-1,248-5,425-7,559-3,958-5,040-3,909-6,848-5,921-2,383

Cash flows from financing activities

425

1,654

4,864

-483

-1,792

998

8,050

4,338

-1,687

Financial ratios
ROA (RP-based)

5.1%

6.7%

5.5%

5.7%

8.2%

4.2%

5.7%

2.3%

2.3%

ROE

10.2%

13.7%

12.2%

16.2%

21.9%

5.7%

9.8%

4.3%

-8.9%

Equity ratio

19.7%

18.8%

11.9%

12.7%

20.3%

20.1%

16.9%

15.6%

14.2%

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: 2020.06.29

Segment sales and profit(JPYmn）

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

FY03/15 FY03/16 FY03/17 FY03/18 FY03/19

Segment sales and profit

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

Leasing and Facility-related

1,517

2,430

2,046

2,031

3,320

YoY

15.1%

60.2%

-15.8%

-0.7%

63.5%

% of total

1.9%

2.7%

2.2%

2.1%

3.4%

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%

Sales

Food Service
YoY% of total
Other
YoY
% of total

0.2%

0.2%

0.2%

0.1%

0.3%

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

-674

2,641

3,783

2,113

3,163

1,428

YoY

26.3%

43.2%

-44.1%

49.7%-54.9%

Pharmaceuticals Network

1,549

1,776

1,718

1,949

2,331

Operating profit(JPYmn）
Sales

Three other businesses

Segment sales adjustments

FY03/19

FY03/20

Act.

Act.

98,232

105,241

4.5%

7.1%

92,284

99,617

-

7.9%

93.3%

94.7%

6,622

6,388

-

-3.5%

6.7%

6.1%

-764

-

1,615

1,150– 2,150

YoY-54.9%

13.1%-

Community Pharmacy Network

3,313

3,743

5.0%

14.7%

-3.3%

13.4%

19.6%

YoY

-

13.0%

55.0%

54.9%

53.1%

53.6%

59.0%

OPM

3.6%

3.8%

Dispensing Pharmacy

2,377

3,412

2,314

3,060

1,068

-150

-69

YoY

29.2%

43.5%

-32.2%

32.2%-65.1%

YoY

-

-

OPM

3.3%

4.2%

2.8%

3.5%

1.2%

OPM

-

-

25

129

-143

-182

-84

YoY

-

416.0%

-

-

-

OPM

1.6%

5.3%

-7.0%

-9.0%

-2.5%

Food Service-1,733-2,057

-13

-89

-129

45

34

-

-

-

-

-24.4%

OPM

-0.7%

-3.1%

-2.8%

1.1%

1.1%

-76

-109

-163

-97

-101

YoY

-

-

-

-

-

OPM

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

Other

Segment profit adjustments

-

-674

YoY

YoY

Est.
103,500–105,500

1,428

Operating profit

OPM

Leasing and Facility-related

FY03/21Three other businesses

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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Medical System Network / 4350
LAST UPDATE: 2020.06.29

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

Recent updates
Highlights
On June 29, 2020, Shared Research updated the report following interviews with Medical System Network Co., Ltd.

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.
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

Tatsushi Muraoka

Chairman

Fumitaka Nakamura* President

Current position
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

On May 8, 2020, the company announced earnings results for full-year FY03/20; see the results section for details.

On the same day, the company issued a Notice of Differences between Results Forecasts and Actual Results and announced thebooking of extraordinary (impairment) losses.

On March 25 2020, the company announced revisions to its full-year forecast for FY03/20 consolidated results.

Revised company forecast for FY03/20 consolidated results
Sales:

JPY105.0bn (previously JPY103.0bn)

Operating profit:

JPY1.5bn (JPY2.5bn)

Recurring profit:

JPY1.5bn (JPY2.4bn)

Net loss*:

JPY250mn (versus profit of JPY650mn)

Loss per share:
JPY8.23 (versus EPS of JPY21.39)* Net loss attributable to owners of the parent

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Medical System Network / 4350
LAST UPDATE: 2020.06.29

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

Reasons for forecast revision
The company’s revised forecast sees full-year consolidated sales finishing JPY2.0bn ahead of its initial estimate but is projecting
shortfalls in earnings at all levels. Compared with its initial projections, the company has cut its full-year operating profit estimate
by JPY970mn, recurring profit estimate by JPY900mn, and net income estimate by JPY900mn. The upward revision to thecompany’s projection for sales reflects solid growth in network member counts at its Pharmaceuticals Network business and, at its
Dispensing Pharmacy business, increases in the number of high-value prescriptions filled and an accompanying increase in the
average value of prescriptions filled. The higher sales notwithstanding, earnings are expected to fall short of initial projections as aresult of a smaller-than-expected number of prescriptions. The measures being taken to prevent the spread of the novel
coronavirus have led to a smaller number of people than usual going in for medical checkups. The lower-than-usual attack rate ofseasonal influenza also affected results. According to the company, since the start of Q4 (January-March 2020) the number ofprescriptions filled has been running 10.3% below plan, translating into roughly JPY600mn less in gross profit. Further
aggravating the shortfall in earnings are the larger-than-expected cuts in NHI drug reimbursement prices for generic drugs
initiated in October 2019.

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

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Medical System Network / 4350
LAST UPDATE: 2020.06.29

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

Trends and outlook
Quarterly trends and results
Cumulative(JPYmn)FY03/19
Q2

Q1

Q3

Q4

Q1

FY03/20Q2Q3Q4FY03/20% of FYFY Est.

Sales

23,85647,56072,754

98,232

25,59952,21678,943

105,241

YoY

2.2%

2.2%

3.2%

4.5%

7.3%

9.8%

8.5%

7.1%

Gross profit

9,079

17,887

27,52737,271

9,839

19,81930,22540,214

0.1%

-1.2%

0.0%

1.8%

8.4%

10.8%

9.8%

7.9%

GPM

38.1%

37.6%

37.8%

37.9%

38.4%

38.0%

38.3%

38.2%
38,5998,867

17,41026,48735,842

9,504

19,022

28,997

YoY

4.6%

3.4%

5.0%

7.2%

7.2%

9.3%

9.5%

7.7%

SG&A ratio

37.2%

36.6%

36.4%

36.5%

37.1%

36.4%

36.7%

36.7%

Operating profit

105,000
6.9%

YoY
SG&A expenses

100.2%

212

476

1,040

1,428

334

796

1,228

1,615

YoY

-64.2%-62.5%-54.5%-54.9%

57.5%

67.2%

18.1%

13.1%

OPM

0.9%

1.0%

1.4%

1.5%

1.3%

1.5%

1.6%

1.5%

192

438

1,010

1,501

323

784

1,208

1,560

YoY

-67.5%-65.6%-56.7%-53.8%

68.2%

79.0%

19.6%

3.9%

RPM

0.8%

0.9%

1.4%

1.5%

1.3%

1.5%

1.5%

1.5%

Net income

101

119

372

462

97

218

326

-895

-65.1%-67.2%-60.6%-54.8%

-4.0%

83.2%

-12.4%

-

-

0.4%

0.3%

0.5%

0.5%

0.4%

0.4%

0.4%

-

-

Q3

Q4

Q1

25,19425,47825,59926,617

Recurring profit

YoY
Net margin
Quarterly(JPYmn)FY03/19
Q2

Q1

Sales

23,856

23,704

FY03/20Q2Q3

Q426,727

26,298

2.2%

2.3%

4.9%

8.7%

7.3%

12.3%

6.1%

3.2%

8,808

9,640

9,744

9,839

9,980

10,406

9,989

YoY

0.1%

-2.6%

2.5%

7.2%

8.4%

13.3%

7.9%

2.5%

GPM

38.1%

37.2%

38.3%

38.2%

38.4%

37.5%

38.9%

38.0%
9,602

8,867

8,543

9,077

9,355

9,504

9,518

9,975

YoY

4.6%

2.2%

8.2%

13.8%

7.2%

11.4%

9.9%

2.6%

SG&A ratio

37.2%

36.0%

36.0%

36.7%

37.1%

35.8%

37.3%

36.5%

212

264

564

388

334

462

432

387

YoY

-64.2%-61.1%-44.5%-55.7%

57.5%

75.0%

-23.4%

-0.3%

OPM

0.9%

1.1%

2.2%

1.5%

1.3%

1.7%

1.6%

1.5%

192

246

572

491

323

461

424

352

YoY

-67.5%-63.9%-46.1%-46.4%

68.2%

87.4%

-25.9%-28.3%

RPM

0.8%

1.0%

2.3%

1.9%

1.3%

1.7%

1.6%

1.3%

Net income

101

18

253

90

97

121

108

-1,221-65.1%-75.7%-56.5%

15.4%

-4.0%

572.2%-57.3%

-

0.4%

0.1%

1.0%

0.4%

0.4%

0.5%

0.4%

-

YoY
Net margin

104.0%

1,500
1.4%

9,079

Recurring profit

7.1%

-0.1%

YoY

Operating profit

1,530
1.5%

Gross profit

SG&A expenses

105.6%--250

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

Q2

Q3(JPYmn)

Q4

Q1

4,000

Q2

Q3

Q4

105,241
100,000

93,9773,500

98,232
26,29880,00023,44760,00024,00840,00025,478

3,163

3,000
875
2,500

23,17025,194

26,727

2,000
1,017

23,704

26,617

1,500

388
1,000

20,00023,352

23,85625,599FY03/18

FY03/19

FY03/20

0

1,428

679

500

1,615
387
432

564

462

592

264
212

334

FY03/18

FY03/19

FY03/200

Source: Shared Research based on company data

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LAST UPDATE: 2020.06.29

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Quarterly results
FY03/19

By segment (cumulative)(JPYmn）

FY03/19

Q1

Q2

Q3

23,85647,56072,754

YoY

2.2%

2.2%

3.2%

4.5%

YoY

Pharmaceuticals Network

955

1,818

2,897

3,951

Community Pharmacy Network

Sales

YoY
% of total
Dispensing Pharmacy

9.1%

5.2%

8.3%

Q2 retro

Q3 retro

Q4 retro

Q1

Q2

Q3

Q4

% of FYFY Est.

23,85647,56072,75452,21625,59952,21678,943

105,241100.2%

105,000

2.2%

2.2%

3.2%

9.8%

7.3%

9.8%

8.5%

7.1%

22,56444,717

68,40849,29024,22449,29074,636

99,617

8.6%

YoY

3.9%

3.7%

4.0%

4.0%

% of total

22,222

44,03567,29190,706

3.2%

2.7%

3.2%

4.1%

% of total

90.3%

89.8%

91.8%

91.7%

600

1,508

2,382

3,320

YoY

15.2%

38.9%

52.6%

63.5%

% of total

2.4%

3.1%

3.3%

3.4%

788

1,586

2,382

3,161

-31.8%-31.0%-27.4%-23.0%

3.2%

3.2%

3.3%

3.2%

33

91

166

261

Food Service
YoY% of total
Other

FY03/20

Q1 retro

YoY
Leasing and Facility-related

FY03/20

Q4
98,232 Sales

Leasing and Facility-related

-

-

-

10.2%

7.4%

10.2%

9.1%

7.9%

94.1%

94.7%

94.4%

93.6%

94.1%

93.6%

93.8%

94.0%

3,425

600

1,508

2,382

1,829

760

1,829

2,659

YoY

15.2%

38.9%

52.6%

21.3%

26.7%

21.3%

11.6%

% of total

2.5%

3.1%

3.3%

3.5%

3.0%

3.5%

3.3%

3.2%

788

1,586

2,382

1,434

730

1,434

2,128

2,797

-31.8%-31.0%-27.4%

-9.6%

-7.4%

-9.6%

-10.7%-11.5%

3.3%

3.2%

3.3%

2.7%

2.8%

2.7%

2.7%

2.6%

33

91

166

79

38

79

122

165

Food Service
YoY% of total
Other

3.2%

YoY

0.0%

71.7%

133.8%

183.7%

YoY

0.0%

71.7%

133.8%-13.2%

15.2%-13.2%-26.5%-36.8%% of total

0.1%

0.2%

0.2%

0.3%

% of total

0.1%

0.2%

0.2%

0.2%

0.1%

0.2%

0.2%

0.2%

Segment sales adjustments-743-1,479-523-674

Segment sales adjustments

-130

320

320

-417

-154

-417

-603

-764

212

476

1,040

1,428 Operating profit

212

476

1,040

796

334

796

1,228

1,615

-64.2%-62.5%-54.5%-54.9%

YoY-64.2%-62.5%-54.5%

67.2%

57.5%

67.2%

18.1%

13.1%

554

1,060

1,697

2,331

Community Pharmacy Network

642

1,227

2,332

1,736

825

1,736

2,764

3,743

Operating profit
YoY
Pharmaceuticals Network
YoY

17.6%

13.5%

17.5%

19.6%

YoY

-

-

-

41.5%

28.5%

41.5%

18.5%

13.0%

OPM

58.0%

58.3%

58.6%

59.0%

OPM

2.8%

2.7%

3.4%

3.5%

3.4%

3.5%

3.7%

3.8%

Dispensing Pharmacy

130

202

712

1,068

YoY

-78.0%-83.4%-67.8%-65.1%

OPM

0.6%

0.5%

1.1%

1.2%

-32

10

-51

-84

45

Leasing and Facility-related

10

-51

68

-8

68

67

YoY

-

-

-

-

YoY

-

-

-

580.0%-

580.0%

-

OPM

-

0.7%

-

-

OPM

-

0.7%

-

-

-

-

-

Food Service

1

18

28

34

Food Service

1

18

28

-34

-12

-34

-38

-43

YoY

-80.0%-47.1%-42.9%-24.4%

YoY-80.0%-47.1%-42.9%

-

-

-

-

-

OPM

0.1%

1.1%

1.2%

1.1%

OPM

0.1%

1.1%

1.2%

-

- -

Other

Leasing and Facility-related

-36

-57

-82

-101

-29

-57

-82

-39

-21

-39

-56

-71

-

-

-

-

YoY

-

-

-

-

-

-

-

-

-

-

-

-

OPM

-

-

-

-

-

-

-

-405

-721

-1,186-1,733

-369

-721

-721

-934

-447

-934

-1,508(JPYmn）
Sales
YoY
Pharmaceuticals Network

Segment profit adjustments

FY03/19

FY03/19

Q1

Q2

Q3

23,856

23,70425,194

2.2%

2.3%

4.9%

8.7%

Q4
YoY
Community Pharmacy Network

25,478 Sales

955

863

1,079

1,054

YoY

9.1%

1.2%

13.9%

9.3%

YoY

% of total

4.4%

3.5%

4.5%

4.1%

% of total
Leasing and Facility-related

Leasing and Facility-related

600

908

874

938

YoY

15.2%

60.7%

84.0%

99.6%

YoY

% of total

2.8%

3.7%

3.6%

3.7%

% of total

Food Service
YoY

788

798

796

779

-31.8%-30.1%-18.9%-5.5%

Q3 retro

Q4 retro

Q1

Q2

Q3

Q4

23,70425,194

26,61725,59926,617

26,727

26,298

2.3%

4.9%

12.3%

7.3%

12.3%

6.1%

3.2%

22,564

22,153

23,691

25,06624,22425,06625,34624,981

-

-

-

13.1%

7.4%

13.1%

7.0%

4.6%

94.1%

95.3%

94.0%

93.3%

96.6%

93.3%

94.2%

94.4%

874

1,069

760

1,069

830

766

-

-

-

17.7%

26.7%

17.7%

-5.0%

-18.3%

2.5%

3.9%

3.5%

4.0%

3.0%

4.0%

3.1%

2.9%

788

798

796

704

730

704

694

669

-

-

-

-11.8%-7.4%-11.8%-12.8%-14.1%

3.3%

3.4%

3.2%

33

58

75

41

38

41

43

43

-

-

-

-29.3%

15.2%-29.3%-42.7%-54.7%

YoY

3.7%
33

58

75

95

YoY

0.0%

190.0%

316.7%

352.4%% of total

0.2%

0.2%

0.3%

0.4%

% of total

0.1%

0.2%

0.3%

0.2%

0.2%

0.2%

0.2%

0.2%

Segment sales adjustments

2,320

-736

956

-151

Segment sales adjustments

-130

450

-

-263

520

-263

-186

-161

212

264

564

388 Operating profit

212

264

564

462

334

462

432

387

-64.2%-61.1%-44.5%-55.7%-64.2%-61.1%-44.5%

75.0%

57.5%

75.0%

-23.4%

-0.3%

554

506

637

634

642

585

1,105

911

825

911

1,028

979

YoY

17.6%

9.3%

24.9%

25.5%

YoY

-

-

-

80.0%

28.5%

80.0%

61.4%

-

OPM

58.0%

58.6%

59.0%

60.2%

OPM

2.8%

2.6%

4.7%

3.6%

3.4%

3.6%

4.1% -

Operating profit
YoY
Pharmaceuticals Network

3.3%

Q2 retro

2.2%% of total
Other

3.3%

Food Service

3.0%

Dispensing Pharmacy

130

72

510

356

YoY

-78.0%-88.6%-48.5%-58.1%

OPM

0.6%% of total-2,05723,856

908

Other
YoY

YoY
Community Pharmacy Network

2.6%

2.9%

2.6%

2.6%

2.5%

0.3%

2.2%

1.5%

-32

42

-61

-33

-32

42

-61

76

-8

76

-1

-22

YoY

-

-

-

-

YoY

-

-

-

-

-

-

-

-

OPM

-

4.6%

-

-

OPM

-

-

-

7.1%

-

7.1%

-

-

Food Service

1

17

10

6

Food Service

1

17

10

-22

-12

-22

-4

-5

YoY

-80.0%-41.4%-33.3%-250.0%

OPM

0.1%

2.1%

1.3%

0.8%

-36

-21

-25

-19

YoY

-

-

-

-

OPM

-

-

-

-

-405

-316

-465

-547

Leasing and Facility-related

Other

Segment profit adjustments

Leasing and Facility-related

YoY

-

-

-

-

-

OPM

0.1%

2.1%

1.3%

-

-

-29

-28

-25

-18

-21

-18

-17

-15

YoY

-

-

-

-

-

-

-

-

OPM

-

-

-

-

-

-

-

-

-369

-352

-

-487

-447

-487

-574

-549

Other

Segment profit adjustments

7.1%

FY03/20

Q1 retro

600

1,530

-

OPM
By segment (quarterly)

105.6%-

YoY
Segment profit adjustments

Other

-32

6.9%

-

-

- -

-

-

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

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LAST UPDATE: 2020.06.29

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

44

55
46

51

800
41

700

43

48
44

42

44

600

264
336

500

326

251

270

244

82

21

46

45

252

54

51

50

53

242

283
270

306

212

281

43

43
293

341

42

370

274

282

247

256

269

400
300
200

356

351

Q1

Q2

399

384

382

368

Q3

Q4

Q1

Q2

434

417

Q3

Q4

527

458

447

Q1

Q2

481

493

468

Q4

Q1

Q2

529

494

611

546

526

Q1

Q2

637
553

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)(JPY)

Number of prescriptions

3,000

Price per prescription (right axis)

11,00010,77010,701
10,3782,500

10,264

9,901

9,949

9,909

9,869

9,918 9,957

9,862

9,780

2,000
9,590

10,072
9,958
9,750

9,702

9,754 9,797

9,896

9,828

10,50010,000

9,825

9,642

9,573

9,491 9,486

9,430

9,500

9,220

1,500

9,000
1,000
1,416 1,405

1,573

1,666

1,675

1,666

1,781

1,787

1,885
1,829
1,898
1,803

2,031

2,027

1,904

1,997

1,921

1,999

2,170

2,079

2,092

2,257

2,287

2,267

2,354
2,264

2,195

2,072

8,500

500

8,000

7,500

0
Q1

Q2

Q3

FY03/14

Q4

Q1

Q2

Q3

FY03/15

Q4

Q1

Q2

Q3

FY03/16

Q4

Q1

Q2

Q3

FY03/17

Q4

Q1

Q2

Q3

Q4

Q1

FY03/18Q2Q3

FY03/19

Q4

Q1

Q2

Q3

Q4

FY03/20

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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Distribution of network members (as of March 31, 2020)

Source: Shared Research based on company data

Number of dispensing pharmacies by region
RegionDirectly operated
pharmacies

Affiliates

Total network
members

Hokkaido

125

150

275

Tohoku

22

305

327

Kanto and Koshinetsu

88

1,430

1,518

Tokai and Hokuriku

46

989

1035

Kinki

56

767

823

Chugoku and Shikoku

21

468

489

Kyushu and Okinawa

58

720

778

Total

416

4,829

5,245

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

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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.

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 network members 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 fromend-FY03/19). This consisted 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 pricenegotiations 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 was

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reflected 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:▷

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

JPY3.4bn (+3.2% YoY)

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)

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

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Full-year FY03/21 company forecasts
Recent performance and FY03/21 company forecasts
FY03/18(JPYmn)Sales

1H Act.
46,522

FY03/192H Act.

FY Act.

47,455

93,977

1H Act.
47,560FY03/20

2H Act.

FY Act.

50,672

98,232

1H Act.
52,2162H Act.
53,025

FY03/21FY Act.

FY Est.

105,241 103,500–105,500

YoY

7.2%

4.4%

5.8%

2.2%

6.8%

4.5%

9.8%

4.6%

7.1%

Cost of sales

28,413

28,95757,37029,67331,28860,961

32,39732,63065,027Gross profit

18,10918,49836,607

17,887

19,38437,271

19,81920,39540,214

GPM

38.9%

39.0%

39.0%

37.6%

38.3%

37.9%

38.0%

38.5%

38.2%

SG&A expenses

16,837

16,60733,444

17,41018,43235,842

19,022

19,57738,599

SG&A ratio

36.2%

35.0%

35.6%

36.6%

36.4%

36.5%

36.4%

36.9%

36.7%

Operating profit

1,271

1,892

3,163

476

952

1,428

796

819

1,615

1,150–2,150

YoY

131.5%

21.0%

49.7%

-62.5%-49.7%-54.9%

67.2%-14.0%

13.1%

-

OPM

2.7%

4.0%

3.4%

1.0%

1.9%

1.5%

1.5%

1.5%

1.5%

-

1,272

1,978

3,250

438

1,063

1,501

784

776

1,560

1,100–2,100

YoY

134.7%

26.2%

54.1%

-65.6%-46.3%-53.8%

79.0%-27.0%

3.9%

-

RPM

2.7%

4.2%

3.5%

0.9%

2.1%

1.5%

1.5%

1.5%

1.5%

-

Net income

363

659

1,022

119

343

462

218

-1,113-895-

450.0%

30.5%

79.0%

-67.2%-48.0%-54.8%

83.2%-424.5%-293.7%

-

0.8%

1.4%

1.1%

0.3%

0.7%

0.5%

0.4%

-2.1%

-0.9%

-

Recurring profit

YoY
Net margin-

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

▷

The company issued its full-year FY03/21 forecast in range form, citing uncertainty over the extent of effects from COVID-19. It
is projecting full-year consolidated sales of JPY103.5–105.0bn (-1.7% to +0.2% YoY), operating profit of JPY1.2–2.2bn (-28.8%
to +33.1% YoY), and recurring profit of JPY1.1–2.1bn (-29.5% to +34.6% YoY), with no forecast for net income (losses)
attributable to owners of the parent.

▷

It targets an earnings recovery driven by growth in the number of network members at the Pharmaceuticals Network business,
contributions to the Dispensing Pharmacy business from stores acquired via M&A, diminished investment in dispensing
pharmacy IT systems, and increased occupancy at serviced elderly housing facilities run by the Leasing and Facility-related
segment. The company has chosen to issue forecasts in range form as the spread of COVID-19 has caused a downturn in thenumber of prescriptions filled (one of the main factors that affect profitability of the Dispensing Pharmacy division), and it
remains difficult to predict when the disease outbreak will be contained as of the beginning of FY03/21.

▷

Assuming no impact of COVID-19, the company estimates sales growth of JPY695mn in the Pharmaceuticals Network business,
JPY812mn in the Dispensing Pharmacy business from existing stores and stores acquired via M&A and newly opened in
FY03/20 (plan to compensate for the impact of the NHI drug price revisions by increasing the number of prescriptions filled byexisting pharmacies and M&A). Expected negative impacts on sales (including the Other segment) total JPY611mn for an
estimate of JPY106.1bn (+0.9% YoY) in FY03/21. After factoring in the JPY600mn–2.6bn impact of COVID-19, the company’s
FY03/21 sales forecast is expressed in a range of JPY103.5bn–105.5bn.

▷

The company’s operating profit estimate is JPY2.8bn (+70.3% YoY), with brisk performance of the Pharmaceuticals Network
business, recovery in the number of prescriptions filled in the Dispensing Pharmacy business, and a selective focus on genericdrugs offsetting the negative effects of the NHI drug price revisions and increased labor costs. Factoring in the JPY600mn–
1.6bn impact of COVID-19, the FY03/21 operating profit forecast is expressed in a rage of JPY1.2bn–2.2bn.

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Earnings forecasts Sales

Operating profit(JPYmn)FY03/20

105,241

Pharmaceuticals Network

695

Comp. store: Drug price

Drug pricerevision impact-3,567

Comp. store: Technical fees

296

Comp. store: Prescription volume

2,769

M&A and openings (prev. year)

1,314

Other

-611

SUM

106,137-600〜-2,600

COVID-19
FY03/21103,500〜105,500

Source: Shared Research based on company data

Company recognizes the harsh environment
The company expects the pharmaceuticals industry to expand in the longer term as healthcare spending continues to risealongside Japan’s aging population. At the same time, however, owing to implementation of such measures as NHI drug priceand dispensing fee revisions aimed at reducing healthcare spending, as well as to the initiation of MHLW’s “Guidelines for the
Improvement of Commercial Transaction Practices of Ethical Drugs,” dispensing pharmacies and the drug distribution industry as
a whole are under pressure to streamline their management. Shared Research believes that the current environment could workin the favor of the Community Pharmacy Network segment, in particular the Pharmaceuticals Network business. There remains aneed for dispensing pharmacies to streamline their operations and pursue efficiency gains, and for regional pharmacies that do
not belong to large chains, it would be more convenient to join a network such as the company’s. Wholesalers also benefit fromlower delivery costs, stable terms of payment, and reduced workload for price negotiations. Medical System Network has laid out
a policy of continuing management streamlining support for small and mid-tier pharmacies that underpin regional healthcare by
expanding its pharmaceuticals network.
The company is instructing directly operated dispensing pharmacies (mainly Nanohana Pharmacies) to increase the number ofprescriptions they handle in order to contribute to earnings. That said, Shared Research believes that store-level efforts by thecompany (e.g., expanding its pharmaceuticals network) are not enough to ensure that prescription numbers grow; it is necessary
also to change prescription holders’ perception of the family pharmacy concept.
In the medium term, the company plans to make a greater contribution to regional healthcare and strengthen family pharmacy
functions to make qualitative improvements to their services. It will also work to spread the use of generic drugs, an initiative
promoted by the Japanese government, by expanding the lineup of generic drugs it manufactures and markets, especially via
consolidated subsidiary Feldsenf Pharma, and by continually working on improving the distribution of generic drugs.

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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 (FY03/19–22) 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 group 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 member pharmacies. In
the Dispensing Pharmacy business, the company aims to strengthen the family pharmacy function of its directly managed
Nanohana Pharmacies. In the manufacture and market pharmaceuticals business, the company seeks to increase the productlineup of generic drugs sold as well as the number of member pharmacies that sell its products. With the spread of COVID-19
affecting its earnings from the start of year in FY03/21, the company plans to review numerical target of its fifth medium-term plan
to reflect the change in business environment.

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Feldsenf Pharma’s generic drugs supply chain

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 managed 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. The
target of 5,000 network members amounts to nearly 10% of domestic dispensing pharmacies; thus, Shared Research believes
achieving this number will further strengthen the company’s influence in the industry.
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 terms of earnings forecasts, the company revised its FY03/20 forecasts to reflect the impact of COVID-19 and associatedsignificant change in the operating environment. The company issued its full-year FY03/21 forecast in range form and isconsidering a revision of numerical targets for FY03/22, the final year of its fifth medium-term plan, to reflect the impact of
COVID-19.
(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

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

Operating profit

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-group 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). The new Community Pharmacy Network segment comprises the Pharmaceuticals Network, Dispensing Pharmacy, andmanufacture and market pharmaceuticals businesses. The company does not disclose a sales and profit breakdown by business.
The company maintains its medical and long-term-care related businesses in the Leasing and Facility-related, Food Service, andOther segments, at the core of which is the home-visit nursing care business. Each business segment continues to be operated bycore subsidiaries.
Affiliated companies (as of March 2, 2020)
Segment
Dispensing Pharmacy

Company

Location

Ratio ofvoting rights

Nanohana Hokkaido Co., Ltd.

Sapporo, Hokkaido

100.0%

Nanohana Tohoku Co., Ltd.

Hachinohe, Aomori

100.0%

Nanohana East Japan 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%

Hokkaido Institute for Pharmacy Benefit Co., Ltd.

Sapporo, Hokkaido

100.0%

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%

Feldsenf Pharma Co., Ltd.

Sapporo, Hokkaido

80.0%

Source: Shared Research based on company data
Notes: *Not consolidated

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

Affiliated companies (as of March 2, 2020)
100 ％Hokkaido Institute for Pharmacy
Benefit Co., Ltd.

Analysis of pharmaceuticals-related data;
book publishing

Nanohana Hokkaido Co., Ltd.

Dispensing pharmacy(Hokkaido area)

Nanohana Tohoku Co., Ltd.

Dispensing pharmacy(Tohoku area)

Nanohana Higashi Nihon Co., Ltd.

Dispensing pharmacy(East Japan area)

Nanohana Chubu Co., Ltd.

Dispensing pharmacy(Chubu area)

Nanohana Nishi Nihon Co., Ltd.

Dispensing pharmacy(West Japan area)

Total Medical Service Co., Ltd.

Dispensing pharmacy(Kyushu area)

Nagatomi Dispensing Pharmacy
Co., Ltd
ヘルシートラスト㈱

Dispensing pharmacy(Kyushu area)

Feldsenf Pharma Co., Ltd.

Manufacture and sales ofpharmaceuticals (JV with Daito)

Paltecno Co., Ltd.

Insurance; construction

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

Visit-care services

Agrimas Corp. (*)

Nursing care and prevention services;
distribution of related programs

100 ％
100 ％
100 ％
100 ％

Medical System Network Co., Ltd.
Pharmaceuticals Network
Leasing and facility-related

100 ％

100 ％
100 ％
80 ％

100 ％

80 ％
100 ％

100 ％

Sakura Foods
Co., Ltd.

Meal catering* Not consolidated

Source: Shared Research based on company data

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 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 affiliates 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

Details of the company business are given in accordance with the former segment classifications of Pharmaceuticals Network,
Dispensing Pharmacy, and Other (manufacture and market pharmaceuticals).

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

Network affiliates(JPYbn)Pharmaceuticals transactions (right axis)

6,000

400
336.8
350

5,000

300
4,000

233.7

250

169.2

3,000

4,829
137.4

2,000

112.4

1,000
11.8
0

181

12.1

17.6

47
157

128
153

FY09/04

29.3
274
161

FY09/06

39.8
335
164

47.4

53.7

373
172

393
204

FY09/08

FY09/10

70.4

526
214

123.7

631
223

842
321

269

FY03/12

FY03/14

855
345

100

2,110

97.7
764

150

3,370

94.8
41.5

1,047
353

200

1,393
50
377

FY03/16399
FY03/18

420

416

0

FY03/20

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 group pharmacies are provided cash
funding more than a month earlier than the payment from insurance programs. This service offers dispensing pharmacies stablelow-cost financing, as unlike financing from a bank, no collateral is required. There are also no restrictions on how the funds canbe utilized. Social insurance and NHI claims can be securitized separately. Dispensing fee receivables are converted 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-group pharmacies (affiliates). Directly
operated pharmacies and affiliates make up the company’s pharmaceuticals network, but the affiliates are not included in thescope 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 March 2020, the number of
directly operated pharmacies and affiliates stood at over 5,245, and surpassing the fifth medium-term plan goal of 5,000 during
FY03/20, two years ahead of schedule.

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 2020. 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 ranks within the top 10, it has far fewer outlets than
the top-ranking pharmacy chains.
Number of dispensing pharmacies
FY end1

Ain Holdings

2

Qol

Sales (JPYmn)

No. ofpharmacies

April

275,596

1,186

March

165,411813

3

Toho Holdings

March

96,124778

4Sogo Medical Holdings

March

-

719

5

Nihon Chouzai

March231,001

650

6

SuzukenMarch

96,439613

7Kraft*-

185,700

580

8

Medical System NetworkMarch

90,706416

9

Aisei Pharmacy

March61,518373

10 Pharmarise Holdings

May

43,202

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. are unlisted, and companies that are primarily drugstore chainswere excluded.
Note: Based on earnings announcement data disclosed as of June 2019.

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Note: Number of pharmacies for Kraft (Sakura Pharmacy) only includes directly operated pharmacies.

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▷

Enhanced distribution for the entire region▷

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

Product sharing, interaction and collaboration among employees, and knowledge sharing

Efforts to streamline Nanohana Pharmacy operations
Several measures have been taken to streamline operations of the directly operated pharmacy chain, Nanohana Pharmacy.

▷

Reduce time required to input medication history and register drugs to be reviewed: Tablet computers are provided to each
pharmacist thus making work more flexible and enabling utilization of free time between dispensing work. Average 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 thetime spent on ordering drugs from a daily average of 30 minutes to less than 10 minutes.

▷

Reduce patient waiting time: Improvement of waiting time measurement system helped identify causes of long waiting time.
A successful case showed that waiting time was cut by about five minutes three months after the identified problem wassolved.

▷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.

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
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.

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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, located in Hidaka, Hokkaido, with five clinics, including internal
medicine and otolaryngology, and two Nanohana Pharmacies. The company notes the latter is a medical mall with roots in thelocal community, and has been attracting attention as a model case for supporting regional medical care in cities experiencing
depopulation and aging.

Planning and development of long-term care facilities
The company plans and develops serviced elderly housing facilities that collaborate with medical institutions, long-term carecenters, and dispensing pharmacies to ensure an environment where residents can live safely with peace of mind. Wisteria N17,
located in Sapporo, Hokkaido, is the company’s first serviced elderly housing facility. Standard services include daily safety checks
and 24-hour on-call emergency service while fee-based services such as meal catering and long-term 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. The
company commented that Wisteria Minami Ichijo would be the last elderly housing planning and development project for awhile, and that it would concentrate on increasing the occupancy rate of existing facilities for now.
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. The company plans to focus on building acommunity where medical care and long-term care are offered as one, with dispensing pharmacies, hospitals, and long-term careand 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. The manufacture and market pharmaceuticals business, conducted by subsidiary Feldsenf Pharma Co., Ltd., was consolidated
into the newly established Community Pharmacy Network segment.
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
59,61359,13858,67858,32657,78457,07159,00055,79756,00054,78053,64253,30453,00152,53951,952
51,23350,60049,95649,33253,00050,00048,252
46,76347,00045,171
44,08544,00042,41241,00040,31038,0001996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
(FY)

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

Developments surrounding dispensing pharmacies

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

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Prescription volume(mn prescriptions)
850

844

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

241

200

77

150

48

252
78

49

268
82

50

277

280

79

74

52

53

100
50

288
72

55

301
71

58

311
71

60

153

161

116

146

180

136

172

125

FY2004

FY2006

FY2008FY2010FY2012FY2014FY2016FY20180

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

A Nippon Pharmacy Association (NPhA) survey of member pharmacies showed that the percentage of pharmacies planning toembark 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%

60.6

62.1

50%

66.7

70.0

63.5
40%
30%

42.5

20%
10%

33.0

31.1

25.9

22.5

13.2

12.0

14.9

Feb. 2011

Jan. 2012

Jan. 2013

0%Planning to implement

Jan. 2014

Jan. 2015

Under consideration

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

Dentistry

45.0
40.0
35.0
31.4
30.0

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

36.6

35.3

2.6

2.5

14.9

14.0

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

13.0

13.3

13.4

13.8

12.7

13.6

12.4

4.0

4.3

4.4

4.9

4.9

5.2

5.4

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
5,870

6,000
5,000
4,000

5,167
4,593

6,560

6,643

4,859

4,877

1,644

1,702

7,038

7,199

5,244

5,371

1,737

1,768

7,495

7,713

7,475

6,082

5,440

4,747

4,349

4,438

5,978

5,578

5,741

5,483

1,849

1,912

1,931

3,000
2,000
1,000

1,454

1,591

1,828

0
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

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

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

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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:▷Elimination of negative primary margins, presentation of appropriate prices▷

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

Rapid settlement of transaction prices and promotion of individual drug unit price transactions▷

In principle, all drugs should have individual drug unit prices (no bundling contracts)▷

At a minimum, the percentage of individual drug unit price contracts must exceed previous year levels▷

Adjustment of excessive price discounts that do not reflect pharmaceuticals value and distribution costs▷

Ensured efficiency and safety of distribution▷

Avoidance of costly practices such as frequent and emergency deliveries that can impede stable supply

MHLW will establish a consultation office to support guideline compliance and plans to proactively disclose cases as 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 (%)
FY2002

FY2004

FY2006

FY2008FY2010FY2012FY2014FY2016FY2018FY2020Core medical fees (actual)

Year of revision

-1.30

±0.00

-1.36

+0.38

+1.55

+1.379

+0.10

+0.49

+0.55

+0.55

Dispensing fee

-1.30

＋0.00

-0.60

+0.17

+0.52

+0.46

+0.04

+0.17

+0.19

+0.16

-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

Drug prices (actual)
NHI basis
Consumption tax addition
Total (nominal)

Source: Shared Research based on company data

The key point regarding dispensing fees raised around the time of the FY2018 revision is a reassessment of the role 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 the

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proper assessment of large pharmacies operating near medical institutions. On generic drug utilization, MHLW is continuing
efforts to improve utilization rates, and the FY2020 medical fee revision includes components that will further stimulate genericdrug use.
Generic drug ratio
85.0%

Sep. 2019
78.7%

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

Apr. 2013
46.5%

45.0%

FY2014FY2015FY2017FY2018

Aug

Apr

Jun

Feb

Oct

Dec

Apr

Jun

Aug

Feb.

Oct.

Dec.

Aug.

Apr.

Jun.

Oct.

FY2016

Feb.

Dec.

Aug.

Apr.

Jun.

Feb.

Oct.

Dec.

Apr.

Jun.

Aug.

Feb.

Oct.

Dec.

Aug.

Apr.

Jun.

Oct.

FY2013

Feb.

Dec.

Aug.

Apr.

Jun.

40.0%

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

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Key points of medical fee revisionPre-revision
Basic dispensing fee

PointsBasic dispensing fee 1[Pharmacies other than those listed below]

42

Basic dispensing fee 2
1) Prescriptions exceed 4,000 per month and concentration rate
exceeds 70%2) Prescriptions exceed 2,000 per month and concentration rate
exceeds 85%3) Prescriptions from one medical institution exceeds 4,000 per month

Post-revision

Points[Pharmacies other than those listed below]

42

Basic dispensing fee 1
Basic dispensing fee 2

261) Prescriptions exceed 1,800–2,000 per month and concentration rate
exceeds 95%
2) Prescriptions total 2,000–4,000 per month and concentration rate
exceeds 85%3) Prescriptions from one medical institution exceeds 4,000 per month→ For pharmacies sharing a building with multiple medical institutions,→ For pharmacies sharing a building with multiple medical institutions,

total number of prescriptions of all medical institutions is used
4) Prescriptions from one medical institution exceeds 4,000 per month

total number of prescriptions of all medical institutions is used
4) Prescriptions from one medical institution exceeds 4,000 per month

Basic dispensing fee 3a)Basic dispensing fee 3a)[Pharmacy in a group with 40,000–400,000 prescriptions per monththat meets the following criteria]
1) Concentration rate exceeds 85%

26212) Has real estate rental transaction with specific medical institution

1) Prescriptions total 35,000–40,000 per month and concentration rate
exceeds 95%
2) Prescriptions total 40,000–400,000 per month and concentration
rate exceeds 85%
3) Has real estate rental agreement with specific medical institution

21(Excludes basic dispensing fee 1 pharmacies)
Basic dispensing fee 3b)[Pharmacy in a group whose prescriptions exceed 40,000 per monththat meets one of the following criteria]
1) Concentration rate exceeds 85%

Basic dispensing fee 3b)

162) Has real estate rental transaction with specific medical institution* If generic drug volume dispensing ratio is 20% or lower
Community support
system incentives

Special basic dispensing fee

11-2

Basic dispensing fee 1

1. Pharmacy with specific relationship with a hospital (such as realestate rental transaction) and the concentration rate for the hospital
exceeds 70%
2. Pharmacy does not meet criteria for basic dispensing fee 1, 2, 3a) or
3b) (pharmacy that has not submitted notifications)* If generic drug volume dispensing ratio is 40% or lower* When prescriptions are received from multiple medical institutions at
the same time, points for prescriptions other than the first
Basic dispensing fee 1

Must meet all three criteria below

Must meet criteria 1–3, or criterion 4 or 5

1) Is a licensed narcotics retailer

1) Is a licensed narcotics retailer

9

-2
-20%

2) Has provided in-home pharmaceutical management and guidanceservice 12 or more times3) Has submitted notifications for family pharmacist guidance fees orcomprehensive management fees4) Has submitted dosing information in writing 12 or more times2) Has track record of providing in-home services in the past year
3) Has submitted notifications for family pharmacist guidance fees orcomprehensive management fees

Other than basic dispensing fee 1(effective criteria: 1) – 8) per full-time pharmacist in the past year)
Has structure for, and substantial track record in, contributing tocommunity care1) Night-time and holiday service premium (400 times)

162) Has real estate rental transaction with specific medical institution

Special basic dispensing fee
1. Pharmacy with specific relationship with a hospital (such as realestate rental transaction) and the concentration rate for the hospital
exceeds 95%
2. Pharmacy does not meet criteria for Basic dispensing fee 1, 2, 3a) or
3b) (pharmacy that has not submitted notifications)
Subtractions[Pharmacy in a group whose prescriptions exceed 40,000 per monththat meets one of the following criteria]
1) Concentration rate exceeds 85%5) Certified pharmacist has attended community care conference of
medical professionals at least once
Other than basic dispensing fee 1(effective criteria: 1) – 8) per full-time pharmacist in the past year)
Meets eight out of nine criteria below
351) Night-time and holiday service premium (400 times)

2) Premium for narcotics guidance and management (10 times)

2) Premium for narcotics guidance and management (10 times)

3) Premium for prevention of drug duplication/drug interactions (40times)
4) Family pharmacist guidance fee (40 times)

3) Premium for prevention of drug duplication/drug interactions (40times)
4) Family pharmacist guidance fee (40 times)

5) Outpatient medication support fee (12 times)

5) Outpatient medication support fee (12 times)

6) Medication adjustment support fee (once)

386) Medication adjustment support fee (once)
7) In-home medication management for single-building medical
examination patients (12 times)* Includes service provided by in-home service partner pharmacy orequivalent service provided8) Fee for providing medication information (60 times)

7) In-home medication management fee (12 times)

8) Fee for providing medication information (60 times)* Includes equivalent service provided

Generic drug dispensing
premiums

Dispensing fee

Premium 1: Generic drug volume share exceeds 75%

189) Certified pharmacist has attended community care conferences of
medical professionals five or more times
Premium 1: Generic drug volume share exceeds 75%

15Premium 2: Generic drug volume share exceeds 80%

22

Premium 2: Generic drug volume share exceeds 80%

22

Premium 3: Generic drug volume share exceeds 85%

26

Premium 3: Generic drug volume share exceeds 85%

28

Oral medications
One to seven days

5 per day28

8–14 days

4 per day55

15–21 days

67

64

22–30 days

78

77

Pharmaceutical management fee
Drug history management
and instruction fee

1) In principle, when patient brings back prescription within six months

411) In principle, when patient brings back prescription within six months

432) When service is provided to patients other than 1)

532) When service is provided to patients other than 1)57413) When visitation service is provided to intensive care homes for theelderly43534) When online pharmaceutical guidance service is provided

433) When visitation service is provided to intensive care homes for theelderly
Patients with no drug history notebook, other than Basic dispensing fee
1
Pharmacies not considered to have a substantial track record of using
drug history notebooks
Medication adjustment
support fee
Online in-home
pharmaceutical guidancefee

13

Pharmacies not considered to have a substantial track record of using
drug history notebooks
When six or more oral medications from multiple medical institutions
are centrally managed and a written proposal to prevent drug
duplication is sent to prescribing physicians
Fee paid when pharmacy submits notification for pharmaceuticalmanagement and guidance fee 4 and provides online pharmaceuticalguidance

13
100

57

Source: Shared Research based on company data

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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 endFY2016FY2017FY2018FY20192796

Pharmarise Holdings

May

2.6%

2.0%

3.5%

2.3%

FY2020
-

3034

Qol

March

5.8%

5.1%

6.4%

4.7%

4.7%

3341

Nihon Chouzai

March

5.6%

5.0%

6.0%

4.2%

4.2%

4350

Medical System Network *

March

4.2%

2.8%

3.5%

3.6%

3.8%

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%

9627

Ain Holdings

April

9.1%

8.6%

9.5%

7.5%

-

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

Main industry peers
Latest full-year earnings
TickerCompany

Sales

OPM

ROE

Description(JPYmn)2796

Pharmarise Holdings

51,7281.2%

0.4%

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. [Consolidated sales] Dispensing Pharmacy
79, Sales 17, Storage and Management of Medical Documents 1, Medical Mall 1

3034

Qol

165,411

4.7%

10.3%

Major pharmacy chain. Started as monzen pharmacy. Opened stores with Lawson and Bic
Camera. Also developing MR and pharmacist dispatch business. [Consolidated sales] Insurance
pharmacy 93, BPO 7

3341

Nihon Chouzai

222,147

2.8%

15.2%

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.
[Consolidated sales] Dispensing Pharmacy 80, Pharmaceutical Manufacturing and Sales 15,
Medical Professional Staffing and Placement 5

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.
[Consolidated sales] Pharmaceuticals Network 4, Dispensing Pharmacy 90, Leasing and Facilityrelated 2, Food Service 4, Other 07649

Sugi Holdings

541,964

5.5%

11.9%

Developed drugstore/dispensing pharmacy, Sugi Pharmacy, in its stronghold Tokai area. The
holding company also has discount stores. [Consolidated sales] Pharmacy 79, Drugstore 21

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. [Consolidated sales]
Medical Practice Support 26, Dispensing Pharmacy 73, Other 1

9627

Ain Holdings

5.8%

9.0%

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. [Consolidated sales] Dispensing Pharmacy 89, Drug and Cosmetic
Store 9, Other 2-

275,596

Source: Shared Research based on company data
Note: Sogo Medical (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)FY03/18

FY03/19

Pharmarise Holdings (2796)

FY03/20

FY05/17

FY05/18

Qol (3034)

FY05/19

FY03/18

FY03/19

FY03/20

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Sales

93,977

98,232

105,241

52,94954,562

51,728145,516

144,783

165,411Gross profit

36,60737,271

40,214

7,218

7,950

7,342

19,64817,86321,094

SG&A expenses

33,44435,842

38,599

6,775

6,771

6,702

10,557

10,812

13,361

Operating profit

3,163

1,428

1,615

442

1,179

640

9,091

7,050

7,733

Recurring profit

3,250

1,501

1,560

324

1,092

590

9,333

7,208

8,024

Net income

1,022

462

-895

7

-28

23

4,986

3,970

4,067

ROE

9.8%

4.3%

4.3%

0.1%

-0.5%

0.4%

13.9%

10.5%

10.3%

ROA (RP-based)

5.7%

2.3%

2.3%

1.3%

4.5%

2.4%

10.7%

7.9%

8.1%

OPM

3.4%

1.5%

1.5%

0.8%

2.2%

1.2%

6.2%

4.9%

4.7%

Total assets

62,75968,93566,46424,54024,26524,21787,315

94,236

102,872

Net assets

10,584

10,761

9,418

5,900

5,624

5,619

35,93539,01741,001Equity ratio

16.9%

100.0%

100.0%

21.7%

21.8%

21.9%

41.2%

41.1%

39.4%

Operating CF

6,699

2,840

4,232

2,103

1,330

895

11,116

5,773

4,468

Investing CF-6,848-5,921-2,383

-871

-527

-501

-3,775-8,287-8,670Financing CF

8,050

4,338

-1,687

-816

-894

354

-1,685

2,906

-225

Cash and deposits

10,136

11,520

0

3,734

3,643

4,393

19,800193

15,766

Interest-bearing debt

33,79238,89737,55810,35910,550

11,13822,56028,87332,650Net debt

23,65627,37737,558

6,625

6,907

6,745

2,760

28,68016,884

Nihon Chouzai (3341)

Sugi Holdings (7649)

Sogo Medical Holdings (9277)

FY03/18

FY03/19

FY03/20

FY02/18

FY02/19

FY02/20

FY03/18

FY03/19

FY03/20

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Sales

241,274

245,687

222,147

457,047

488,464

541,964-

144,630-

Gross profit

43,837

41,97546,372

131,565

142,300

162,182-

22,715-

SG&A expenses

33,25035,242

38,779106,804

116,483

132,420-

17,303-Operating profit

10,587

6,733

7,593

24,76025,817

29,762

-

5,411

-

Recurring profit

10,138

6,077

7,405

25,90027,23731,473

-

5,607

-

Net income

6,104

3,792

6,697

16,411

17,94020,782

-

3,246

-

ROE

15.7%

9.2%

15.2%

10.1%

10.9%

11.9%

-

8.7%

-

ROA (RP-based)

5.6%

3.3%

4.1%

10.2%

10.5%

10.9%

-

6.1%

-

OPM

4.4%

2.7%

2.8%

5.4%

5.3%

5.5%

-

3.7%

-

Total assets

186,573

178,677

185,551

253,989

265,481313,757-

93,560-Net assets

41,506

41,07347,072

162,046

166,563

182,750-

38,669-Equity ratio

22.2%

23.0%

25.4%

63.8%

62.7%

58.2%

-

41.0%

-

Operating CF

23,141

13,572

13,192

27,56422,89445,353

-

3,852

-

Investing CF-13,843-1,770-2,731-17,911-22,362-18,422--6,624-

Financing CF-2,034-10,516-7,955-3,401-13,897-4,895--945-

Cash and deposits

28,46429,74932,25447,67634,311

56,347-

10,733-

Interest-bearing debt

84,68982,391

63,624000-22,373-Net debt

56,22552,642

31,370-47,676-34,311-56,347-

11,640-Ain Holdings (9627)
FY04/17

FY04/18

Cons.

Cons.

FY04/19
Cons.

Sales

248,110

268,386

275,596

Gross profit

42,09347,99345,363

SG&A expenses

27,52928,37129,295

Operating profit

14,563

19,623

16,067

Recurring profit

15,081

20,130

16,637

Net income

7,949

10,567

9,029

ROE

14.0%

13.5%

9.0%

ROA (RP-based)

10.2%

11.8%

8.9%

OPM

5.9%

7.3%

5.8%

Total assets

156,323

183,435

189,021

Net assets

60,17896,733103,922Equity ratio

38.4%

52.7%

54.9%

Operating CF

18,40921,657

14,788Investing CF-11,183-5,282-19,985

Financing CF

116

17,623-10,681

Cash and deposits

29,234

63,23347,495Interest-bearing debt

25,852

18,861

11,957

Net debt-3,382-44,372-35,538

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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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-group pharmacies access to the company’s proprietarysystem, 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 through acquisition 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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in outlet numbers over the past three years, industry leader Ain Holdings acquired more than 100 pharmacies while Medical
System Network acquired just three pharmacies in FY03/19. From the perspective of regional expansion, about 30% of thecompany’s pharmacies are located in Hokkaido while less than 10% are located in Tokyo and Osaka, despite their highpopulation 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
JPY65.0bn. In order to advance acquisitions and increase pharmacy outlets in regions other than its home ground Hokkaido,
the company will need to be able 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
Income statement

FY09/11

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.

FY03/20
Cons.

Sales

46,50825,411

54,827

66,18275,54887,71588,865

93,977

98,232

105,241

YoY

13.1%

-

-

20.7%

14.2%

16.1%

1.3%

5.8%

4.5%

7.1%

Cost of sales

30,292

16,45135,41543,44547,072

54,91354,70057,36960,96165,027Gross profit

16,217

8,960

19,412

22,73728,47632,801

34,16436,60737,271

40,214

YoY

15.2%

-

-

17.1%

25.2%

15.2%

4.2%

7.2%

1.8%

7.9%

GPM

34.9%

35.3%

35.4%

34.4%

37.7%

37.4%

38.4%

39.0%

37.9%

38.2%

SG&A expenses

13,954

7,603

17,365

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

38,599

SG&A ratio
Operating profit

30.0%
2,262

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

YoY

48.0%

-

-

2.2%

26.3%

43.2%

-44.1%

49.7%-54.9%

13.1%

OPM

4.9%

5.3%

3.7%

3.2%

3.5%

4.3%

2.4%

3.4%

1.5%

1.5%

Non-operating income

100

81

150

250

457

275

378

405

288

Non-operating expenses

223

124

284

321

380

279

291

333

343

Recurring profit

2,140

1,315

1,912

2,020

2,540

3,860

2,109

3,250

1,501

1,560

YoY

61.0%

-

-

5.6%

25.8%

52.0%

-45.4%

54.1%-53.8%

3.9%

RPM

4.6%

5.2%

3.5%

3.1%

3.4%

4.4%

2.4%

3.5%

1.5%

1.5%

Extraordinary gains

111

25

59

155

169

88

57

19

49

48

Extraordinary losses

302

41

65

404

415

470

260

976

128

1,586

349

Income taxes

801

702

1,018

1,073

1,315

1,599

1,262

1,271

962

918

Implied tax rate

41.1%

54.1%

53.4%

60.6%

57.3%

46.0%

66.2%

55.4%

67.7%

4172.7%

146

78

133

29

92

158

72

0

-2

0

Net income

1,001

518

756

668

885

1,720

571

1,022

462

-895

YoY

111.5%---11.6%

32.4%

94.4%

-66.8%

79.0%-54.8%-293.7%

2.2%

2.0%

1.4%

1.0%

1.2%

2.0%

0.6%

1.1%

0.5%

-0.9%

Net income attrib. to non-controlling interests

Net margin

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

Changed fiscal year-end in FY03/12; started third medium-term plan from March 2013
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 amid a severe business environment such as
NHI medical fee revisions and price negotiations with wholesalers.
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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SG&A expenses
SG&A expenses

FY09/11

FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18(JPYmn)

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Salaries and allowances

5,217

2,806

6,364

7,489

9,266

10,406

12,08812,481

13,467

Provision for employee bonuses

554

582

685

724

939

1,062

1,133

1,418

1,333

Retirement benefit expenses

147

88

172

195

264

329

361

466

457

Provision for directors' bonuses

57

32

64

68

76

55

47

35

33

33

52

38

33

Provision for directors' stock benefits
Taxes and dues
Depreciation
Amortization of goodwill

FY03/19

1,589

853

1,913

2,350

3,870

4,479

4,374

4,420

4,692

449

270

658

802

945

1,029

1,052

1,491

1,624

338

177

487

669

849

917

1,009

1,056

1,147

Other

4,380

2,142

5,509

6,612

7,537

8,486

9,630

9,559

15,827

Total SG&A expenses

13,954

7,603

17,365

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

Source: Shared Research based on company data

Extraordinary losses in excess of JPY400mn were booked in each of the three years between FY03/14–FY03/16; 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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Balance sheet
Balance sheet(JPYmn)FY09/11

FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

ASSETSCash and deposits

1,329

2,072

2,092

3,106

2,499

2,081

2,252

10,201

11,703

11,722

Notes and accounts receivable

2,238

2,597

1,514

2,802

2,484

2,614

2,223

2,332

2,420

2,313

Inventories

1,776

1,796

2,219

2,732

3,846

3,431

4,053

3,520

4,297

4,452

Other

634

629

614

664

709

927

958

868

1,528

940

Allowance for doubtful accounts

-2

-3

-6

-6

-7

-7

-10

-11

-12

-12

7,787

8,902

8,271

10,941

11,023

10,783

11,09818,736

21,055

20,578

Total tangible fixed assets

9,163

9,976

11,472

15,976

17,24920,253

21,24624,12925,721

25,126

Total intangible fixed assets

4,983

5,040

8,263

12,39913,554

13,481

13,833

15,045

16,235

14,615

54

179

157

524

583

812

726

483
5,686

Total current assets

Investment securities

39

Long-term loans
Other

2,607

2,728

2,771

3,645

3,631

3,838

4,008

4,066

5,217

-44

-43

-42

-26

-29

-33

-32

-31

-21

-26

Investment and other assets

2,602

2,685

2,783

3,798

3,759

4,329

4,559

4,847

5,922

6,143

Total fixed assets

16,747

17,701

22,51832,17334,56438,06339,63944,02347,87945,885

Total assets

24,53426,60330,78943,11445,587

48,84750,73762,75968,93566,464

Allowance for doubtful accounts

LIABILITIES
Notes and accounts payable

5,026

5,158

5,616

7,798

8,598

9,525

9,144

9,416

10,19810,021

Short-term debt

2,478

3,856

5,119

12,922

9,214

6,910

3,863

7,463

9,158

8,905

590

582

459

578

599

1,065

413

1,135

695

454

2,706

3,097

3,181

3,582

3,215

3,561

3,500

3,755

3,793

3,916

10,801

12,693

14,37524,88021,626

21,061

16,92021,76923,84423,296

7,365

7,029

8,758

10,94815,391

14,85920,18626,32929,73928,653

1

1

1

1

1

1

1

Income taxes payable
Other
TotalTotal current liabilities
Long-term debt
Deferred tax assets

1,104

1,200

1,419

1,933

2,434

2,660

2,985

4,075

4,590

5,096

Total fixed liabilities

Other

8,470

8,230

10,17812,882

17,826

17,52023,17230,40434,32933,749Total liabilities

19,271

20,92324,55337,76239,452

38,58140,092

52,174

58,17357,045

Capital stock

1,091

1,091

1,091

1,091

1,091

1,932

1,932

2,097

2,128

2,128

Capital surplus

924

924

901

901

901

1,742

1,742

1,160

1,185

1,183

NET ASSSETS

Retained earnings

2,924

3,281

3,836

4,300

4,980

6,467

6,735

7,459

7,616

6,414

Treasury stock

0

0

-45

-1,181-1,147

-328

-302

-275

-233

-206

Valuation differences on securities

-7

-5

3

2

11

15

49

143

83

-37
56,945

Foreign currency translation adjustments
Other

-58

-52

-40

-31

-28

-17

23

52,31658,239Non-controlling interests

382

436

493

273

338

469

514

2

0

0

Total net assets

5,263

5,680

6,236

5,352

6,136

10,265

10,644

10,584

10,761

9,418
66,464

Total liabilities and net assets

24,53426,60330,78943,11445,58848,84650,73662,75968,935Working capital-1,011-765-1,883-2,265-2,268-3,480-2,868-3,564-3,481-3,256

Total interest-bearing debt

9,843

10,885

13,87723,87024,605

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

8,514

8,813

11,785

20,76322,12019,70821,814

23,591

27,19425,836

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, the company booked an
impairment charge of JPY1.5bn in FY03/20 to reflect the impact of the spread of COVID-19.

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Liabilities: External financing
Liabilities rose during this period as the number of group pharmacies increased in line with a rising network member count. The
increase in current assets, which is working capital, was especially pronounced in FY03/14, when in addition to the increase incurrent 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-termborrowings 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.

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
FY09/11

FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19(JPYmn)Cash flow statement

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

FY03/20Cons.

Cash flows from operating activities (1)

3,353

1,566

3,790

3,706

3,838

6,409

3,084

6,699

2,840

4,232

Pre-tax profit

1,948

1,298

1,907

1,770

2,294

3,479

1,906

2,293

1,422

22

Depreciation

633

354

841

1,077

1,209

1,362

1,594

1,491

1,624

1,811

Goodwill amortization

337

177

487

669

849

917

1,009

1,056

1,147

1,217

Change in accounts receivable

669

-325

1,739

382

935

191

812

496

500

285

Change in inventories

-181

8

-74

-173

-689

455

-472

759

-620

-140

Change in accounts payable

354

102

-558

365

-295

683

-765

-569

69

-328

Cash flows from investing activities (2)-2,747-1,248-5,425-7,559-3,958-5,040-3,909-6,848-5,921-2,383Purchase of tangible fixed assets-2,488-805-1,625-4,180-2,360-3,674-2,170-4,050-3,094-1,351

Purchase of intangible fixed assets

-5

-1

-13

-44

-93

-273

-192

-190

-82

-107

Purchase, sale, and redemption of investment securities

10

2

1

129

-267

-19

-39

-16

102

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

36

18

-245

-56

-106

-106

-38

-95

-3

-102

Free cash flow (1+2)

606

318

-1,635-3,853

-120

1,369

-825

-149

-3,081

1,849

Cash flows from financing activities-1,069

425

1,654

4,864

-483

-1,792

998

8,050

4,338

-1,687

Change in short-term borrowings

175

1,293

685

7,255

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

2,598

1,471

-505

Change in long-term borrowings

-728

-489

1,846

-250

4,816

-896

5,292

7,292

3,701

-376

-297

-304

-305

Acquisition of treasury stock
Dividends paid

0

0

-129

-1,155

-117

-162

-276

-221

-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 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 group 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 of receivable
collections and the debt repayment period varies. Further, fiscal years with negative cash flow for inventory assets are common.
We think this is due to the nature of Medical System Network’s business of handling prescription drugs, which calls for the
maintenance of sufficient inventories to avert shortage versus prescriptions.

Cash flows from investing activities
Cash flow from investing activities has been consistently negative for the 10 years through FY03/17 owing to a businessexpansion strategy that leverages alliances and M&A. The cash flow deficit from investing activities has been especiallypronounced since the third medium-term plan was initiated in FY03/13. Prior to that, it was typically in the JPY1.0bn–3.0bn range,
but then expanded to the JPY4.0bn–7.0bn range. In FY03/14, the company posted its largest cash flow deficit in 10 years, but 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, 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, because the company prioritized improving
profitability of existing stores.

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Historical performance
Q3 FY03/20 earnings results (out February 6, 2020)
Overview
Cumulative Q3 FY03/20 (April–December 2019) earnings results▷

Sales:

JPY78.9bn (+8.5% YoY)▷

Operating profit:

JPY1.2bn (+18.1% YoY)▷

Recurring profit:

JPY1.2bn (+19.6% YoY)▷

Net income*:

JPY326mn (-12.4% YoY)*Net income attributable to owners of the parent▷

No changes were made to the full-year FY03/20 earnings forecast.

▷Business environment: NHI drug price and dispensing fee revisions were enacted in April 2018. Dispensing pharmacies had tostreamline 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: The company streamlined and consolidated the former Pharmaceuticals Network and Dispensing
Pharmacy businesses into the Community Pharmacy Network business and began disclosure under the new segmentationfrom FY03/20. In cumulative Q3, sales in the Community Pharmacy Network business increased by 9.1% YoY, reflecting an
increase in the number of network members and the steady sales at existing dispensing pharmacies. The segment operating
profit margin was 3.7%, an improvement of 0.3pp YoY. These increases drove overall sales and profit growth for the period.

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.

Cumulative Q3 FY03/20 (April–December 2019) segment earnings results▷

Segment sales: JPY74.6bn (+9.1% YoY; includes internal sales or transfers between segments; same hereafter)▷

Segment profit: JPY2.8bn (+18.5% YoY)▷

Pharmaceuticals Network division: The number of new network members increased driven by the strong need for improved
distribution efficiency. At end-December 2019, the number of network members was 4,922 (+1,132 from end-FY03/19),
consisting of 421 directly operated pharmacies and 4,501 affiliates. The company aimed to have 5,000 network members by
end-FY03/20, but it already reached that target in January 2020. According to the company, referrals from existing network
members account for nearly half of all new network members. Of the 58,000 or so dispensing pharmacies in Japan, only about
10% are under the umbrella of major pharmacy chains. As such, Shared Research believes that independent dispensing
pharmacies will continue joining its network for the time being. By end-Q3 FY03/20, network pharmacies’ pharmaceuticals
order value had already exceeded the full-year FY03/19 value of JPY233.7bn, at JPY246.6bn.

▷

Dispensing Pharmacy division: In addition to the contribution from stores acquired via M&A, comparable store sales remained
steady. As at end-December 2019, there were 421 dispensing pharmacies, one care plan center, and seven drug stores.
Affected both by the October 2019 consumption tax hike and NHI drug price and dispensing fee revisions, monthly
dispensing fees were up only 2.2% YoY in October, a significant fall from the 10.0% YoY increase in September. Subsequently,
monthly dispensing fees picked up and increased 2.8% YoY in November and 5.7% YoY in December, but the recovery in Q3

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was only modest. On a comparable store basis, the number of prescriptions was 0.4% higher YoY in cumulative Q3, below thecompany’s target of a 2.4% YoY increase. While initiatives such as automatic ordering systems helped streamline operations in
the Dispensing Pharmacy division, Shared Research believes that growth in prescription numbers nonetheless struggled owing
to external factors including a relatively low number of influenza diagnoses and bundling of multiple prescriptions.

▷

Manufacture and market pharmaceuticals division: This business, operated by consolidated subsidiary Feldsenf Pharma, aims toprovide a stable supply of good-quality, low-priced generic drugs. The company sold 23 ingredients and 51 products as ofend-December 2019.

Leasing and Facility-related
Cumulative Q3 FY03/20 (April–December 2019) segment earnings results▷

Segment sales:▷

Segment profit: JPY67mn (loss of JPY51mn in cumulative Q3 FY03/19)▷

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

JPY2.7bn (+11.6% YoY)

housing facilities contributed to earnings growth. Of the five facilities in the Wisteria serviced elderly housing series, three haveoccupancy ratios in excess of 90%, contributing to profit. As of end-December 2019, the number of occupied units at the tworemaining facilities was 63 out of 82 units total at Wisteria Senri-Chuo, and 67 out of 116 units total at Wisteria Minami Ichijo.
The company continued to carry out aggressive sales activities aimed at boosting occupancy. At 76.8%, the end-Q3
occupancy ratio at Wisteria Senri-Chuo was close to 80%, and according to the company this facility was just about breaking
even. Wisteria Minami Ichijo seemed to be receiving many inquiries from potential residents, due in part to its favorable
location.

Food Service
Cumulative Q3 FY03/20 (April–December 2019) segment earnings results▷

Segment sales:

JPY2.1bn (-10.7% YoY)▷

Segment loss:

JPY38mn (profit of 28mn in cumulative Q3 FY03/19)▷

Business reforms: Despite withdrawals from unprofitable facilities and pricing adjustments made to contracts, segment
earnings were hurt by higher labor costs as the company employed temporary resources in response to staff shortage.

Other
The main business is home-visit nursing care. The company is working out how best to incorporate community healthcare in thisbusiness; it believes that synergies can be realized between the home-visit nursing care business and the Community Pharmacy
Network segment’s Dispensing Pharmacy business.

Cumulative Q3 FY03/20 (April–December 2019) segment earnings results▷

Segment sales:

JPY122mn (-26.5% YoY)▷

Segment loss:

JPY56mn (loss of JPY82mn in cumulative Q3 FY03/19)

1H FY03/20 earnings results (out November 7, 2019)
Overview
1H FY03/20 (April–September 2019) earnings results▷

Sales:

JPY52.2bn (+9.8% YoY)▷

Operating profit:

JPY796mn (+67.2% YoY)

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Recurring profit:

JPY784mn (+79.0% YoY)▷

Net income*:

JPY218mn (+83.2% YoY)*Net income attributable to owners of the parent▷

No changes were made to the full-year FY03/20 earnings forecast.

▷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 “Guidelines for the Improvementof Commercial Transaction Practices of Ethical Drugs” (so-called distribution improvement guidelines) whose purpose was toensure stable supply of ethical drugs. According to the company, the distribution industry as a whole are facing labor
shortages and other issues, and there is also a growing understanding of the distribution improvement guidelines within thepharmaceutical industry. In light of these trends, the company has been gradually earning acceptance for the streamlining ofdrug distribution it has been promoting with wholesalers and others.

▷

Company response: 1H FY03/20 sales increased by 9.8% YoY, reflecting increases in the number of network members anddispensing fees at directly operated dispensing pharmacies. 1H FY03/20 operating profit was up 67.2% YoY, and theoperating profit margin (OPM) was 1.5%, an improvement of 0.5pp YoY. This was driven by an OPM improvement in themainstay Community Pharmacy Network business from 2.7% in 1H FY03/19 to 3.5% in 1H FY03/20. (From FY03/20, thecompany consolidated the Pharmaceuticals Network business, the Dispensing Pharmacy business, and the manufacture andmarket pharmaceuticals business (formerly in the Other business) to form the Community Pharmacy Network business andbegan disclosure under the new segmentation from FY03/20.)

Segment performance
Community Pharmacy Network▷

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

▷

1H FY03/20 (April–September 2019) segment earnings results▷

Segment sales:

JPY49.3bn (+10.2% YoY; includes internal sales or transfers between segments; same hereafter)▷

Segment profit:

JPY1.7bn (+41.5% YoY)▷

Pharmaceuticals Network division: The number of new network members continued to increase, driven by greater need for
improved distribution efficiency accompanying NHI drug price and dispensing fee revisions. At end-September 2019, thenumber of network members was 4,560 (up 770 from end-FY03/19). This consisted of 419 directly operated pharmacies and4,141 affiliates. The number of network members has continued to increase since the start of Q3, and the company says itrose above 4,800 by November 1, 2019, so Shared Research believes there is a strong likelihood the company will achieve its
FY03/20 target of 5,000 members. In 1H FY03/20, the division contributed a JPY330mn increase in sales and a JPY270mn
increase in operating profit, so Shared Research believes the business is maintaining its high profitability.

▷

Dispensing Pharmacy division: In addition to the contribution from stores acquired via M&A, sales at existing pharmacies
remained steady. Across all pharmacies, there were a total of roughly 4.5mn prescriptions handled (+6.3% YoY). At existing
pharmacies only, the number of prescriptions was up a relatively stable 1.1% YoY, so newly acquired pharmacies contributed
the bulk of the overall increase. In addition, since the price per prescription rose on higher drug prices, total dispensing fees
across all pharmacies were up 11.1% YoY. At end-September 2019, there were 419 dispensing pharmacies, one care plan
center, and seven drug stores.

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Manufacture and market pharmaceuticals division: This business aims to provide a stable supply of good-quality, low-priced
generic drugs. The company sold 20 ingredients and 45 products as of end-September 2019.

Leasing and Facility-related
1H FY03/20 (April–September 2019) segment earnings results▷

Segment sales:

JPY1.8bn (+21.3% YoY)▷

Segment profit:

JPY68mn (+580.0% YoY)▷

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. Number of occupied units as of end-September 2019 was 62 out of 82
units total at Wisteria Senri-Chuo, and 59 out of 116 units total at Wisteria Minami Ichijo. The company continued to carryout aggressive sales activities. For the time being, the company plans to focus on improving occupancy rates at thesefacilities.

Food Service
1H FY03/20 (April–September 2019) segment earnings results▷

Segment sales:

JPY1.4bn (-9.6% YoY)▷

Segment loss:

JPY34mn (vs. profit of 18mn in 1H FY03/19)▷

Business reforms: Despite withdrawal from certain unprofitable facilities, segment profit fell from higher labor costs as thecompany employed temporary resources in response to staff shortage.

Other
The main business is home-visit nursing care.

1H FY03/20 (April–September 2019) segment earnings results▷

Segment sales:▷

Segment loss: JPY39mn (vs. a loss of JPY57mn in 1H FY03/19)

JPY79mn (+16.2% YoY)

Q1 FY03/20 earnings results (out August 6, 2019)
Overview
Q1 FY03/20 (April–June 2019) earnings results▷

Sales:

JPY25.6bn (+7.3% YoY)▷

Operating profit:

JPY334mn (+57.5% YoY)▷

Recurring profit:

JPY323mn (+68.2% YoY)▷

Net income*:

JPY97mn (-4.0% YoY)*Net income attributable to owners of the parent▷

Business environment: Due to the implementation of NHI drug price and dispensing fee revisions in April 2018 as well as the
MHLW “Guidelines for the Improvement of Commercial Transaction Practices of Ethical Drugs,” whose purpose was toensure stable supply of ethical drugs, dispensing pharmacy operators had to streamline their management structures evenfurther.

▷Company response: The company consolidated the Pharmaceuticals Network business, the Dispensing Pharmacy business,and the manufacture and market pharmaceuticals business (formerly in the Other business) to form the Community

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Pharmacy Network business and began disclosure under the new segmentation from FY03/20. Sales in the Community
Pharmacy Network business increased by 7.3% YoY, reflecting an increase in the number of network members and steadysales at existing dispensing pharmacies. The operating profit margin was 1.3% in Q1 FY03/20, an improvement of 0.4pp YoY.
This was driven by the OPM improvement in the mainstay Community Pharmacy Network business from 2.8% in Q1 FY03/19
to 3.4% Q1 FY03/20.

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 operated by Feldsenf Pharma) previously included in the Other
business.
Q1 FY03/20 (April–June 2019) segment earnings results:▷

Segment sales: JPY24.2bn (+7.4 YoY; includes inter-segment sales and transfers; same hereafter)▷

Segment profit: JPY825mn (+28.5% YoY)▷

Pharmaceuticals Network business: The number of new affiliates increased driven by strong demand for improved drug
distribution efficiency. The pace of growth in affiliate numbers appears to slightly exceed the company's prior assumptions.
As of end June 2019, the number of network members was 4,118 (+328 from the end FY03/19), comprising 421 directly
operated pharmacies and 3,697 affiliates.

▷

Dispensing Pharmacy business: In addition to the contribution from stores acquired via M&A, sales at existing pharmacies
were steady. As of end June 2019, there were 421 dispensing pharmacies, one care plan center, and eight drug stores. In Q1
FY03/20, although both sales and profit grew and were in line with company forecasts, the company commented that there
remained some issues with the details of the earnings results. The company's plan was to increase the number ofprescriptions (at existing pharmacies), but the actual outcome was a YoY decline of 0.6%. Sales and profit, however, were inline with plan because of an unexpected 6.7% YoY increase in the drug price, which the company originally expected to beflat YoY, included in the average per prescription price (drug price + technical fees). The company thinks the higher drug
prices are attributed to increased drug use accompanying Japan’s aging population. In regard to its dispensing pharmacy
operation, the company plans to continue to provide guidance on store improvement with a focus on increasing the numberof prescriptions and acquiring additional premiums.

▷

Manufacture and market pharmaceuticals business: This business aims to provide a stable supply of quality, low-priced
generic drugs. The company sold 18 ingredients and 39 products as of end June 2019.

Leasing and Facility-related
Q1 FY03/20 (April–June 2019) segment earnings results:▷

Segment sales: JPY760mn (+26.7% YoY)▷

Segment loss: JPY8mn (loss of JPY32mn in Q1 FY03/19)▷

Reason for increase in sales: Steady inflow of leasing revenue and a rise in occupancy at the company’s serviced elderly
housing facilities contributed to sales growth.

▷

Reason for the segment loss: The segment remained in loss due to depreciation expenses related to Wisteria Minami Ichijo,
the serviced elderly housing facility opened in November 2018. According to the company, while there remains room for
improvement in the occupancy rate, the number of occupants is steadily increasing.

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Food Service
Q1 FY03/20 (April–June 2019) segment earnings results:▷

Segment sales: JPY730mn (-7.4% YoY)▷

Segment loss: JPY12mn (vs. 1mn segment profit in Q1 FY03/19)▷

Business reforms: Despite withdrawal from unprofitable facilities, segment profit fell due to higher labor costs as thecompany employed temporary resources in response to staff shortage.

Other
The main business is home-visit nursing care.
Q1 FY03/20 (April–June 2019) segment earnings results▷

Segment sales:▷

Segment loss: JPY21mn (loss of JPY29mn in Q1 FY03/19)

JPY38mn (+15.2% YoY)

Full-year FY03/19 earnings results (out May 8, 2019)
Overview
Full-year FY03/19 (April 2018 to March 2019) earnings results▷

Sales:

JPY98.2bn (+4.5% YoY)▷

Operating profit:

JPY1.4bn (-54.8% YoY)▷

Recurring profit:

JPY1.5bn (-53.8% YoY)▷

Net income*:

JPY462mn (-54.7% YoY)*Net income r attributable to owners of the parent▷

Business environment: NHI drug price and dispensing fee revisions were implemented in April 2018. Dispensing pharmacies
had to streamline their management structures following the implementation of the MHLW “Guidelines for the Improvementof Commercial Transaction Practices of Ethical Drugs” whose purpose was to ensure stable supply of drugs.

▷

Company response: The Pharmaceuticals Network business increased the number of network members (affiliates), mainly
among small and mid-tier pharmacies. The company also made changes in the Dispensing Pharmacy business, such as
acquiring new pharmacies and closing others, to improve the business makeup of the segment amid an increasingly severe
earnings environment.

Segment performance
Pharmaceuticals Network
FY03/19 (April 2018–March 2019) segment earnings results▷

Segment sales: JPY4.0bn (+8.6% YoY; includes internal sales or transfers between segments; same hereafter)▷

Segment profit: JPY2.3bn (+19.6% YoY)▷

Number of new affiliates: Following the start of distribution improvement guidelines in April 2018, the company surpassed its
year-end objective of 3,200 new affiliates for a total of 3,790 as the number of affiliates joining the network was steady amidst
growing needs for distribution efficiency. The company is also engaging in initiatives aimed at responding to these needs.

▷

Number of affiliates (as of March 31, 2019): The number of affiliates totaled 3,790 (+1,281 compared to end-FY03/18),
breaking down to 3,729 dispensing pharmacies and 61 hospitals and clinics. This exceeds the pace of growth envisioned by

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the company. The company attributes the growth to the implementation of distribution improvement guidelines andrevisions to NHI drug prices and dispensing fees.

Dispensing Pharmacy
FY03/19 (April 2018–March 2019) segment earnings results▷

Segment sales: JPY90.7bn (+4.1% YoY)▷

Segment profit: JPY1.1mn (-65.1% YoY)▷

Dispensing fees: Dispensing fees at existing pharmacies declined 3.8% YoY; prescription volumes were up 0.2% YoY, but
prescription values were down 3.9% YoY due to revisions to NHI drug prices and dispensing fees▷

Responses to dispensing fee revisions: Though progress is being made in expanding the number of pharmacies that qualify
for higher insurance points, a remaining concern is that even after meeting targets for basic dispensing fees and the genericdrug dispensing and community support system premiums, 66% of pharmacies still do not qualify for the community
support system premium.

▷

Store improvements: In response to dispensing fee revisions, the company encouraged its pharmacies to exercise theirfunctions as local pharmacies that support the health of local residents in a variety of ways and as family
pharmacies/pharmacists that engage in at-home medical care initiatives.

▷

Review of stores: In addition to opening five dispensing pharmacies during the period, the company acquired two
companies (25 pharmacies) through a share acquisition and obtained five other pharmacies through a business transfer. On
the other hand, the company closed 11 dispensing pharmacies and three drug stores, and disposed of six pharmacies
though a business transfer.

▷

Nagatomi Pharmacy Corp., which became a consolidated subsidiary in January 2019 after the company acquired its shares,
operates 23 dispensing pharmacies in Oita Prefecture. This has strengthened the company’s positioning in the Kyushu area.

▷

Number of stores (as of March 31, 2019): 420 dispensing pharmacies, one care plan center, and five drug stores

Leasing and Facility-related
FY03/19 (April 2018–March 2019) segment earnings results▷

Segment sales: JPY3.3bn (+63.5% YoY)▷

Segment loss: JPY84mn (loss of JPY182mn in FY03/18)▷

Reason for sales growth: Steady inflow of leasing revenue and growth in design and construction supervision of medical
facilities▷

Reason for increase profit improvement: Operating loss continued due to upfront spending on serviced elderly housing
facility Wisteria Minami Ichijo, opened in November 2018. However, at end-FY03/19, the occupancy rate improved as 56 of
the 82 units of Wisteria Senri-Chuo and 47 of the 115 units of Wisteria Minami Ichijo were occupied

Food Service
FY03/19 (April 2018–March 2019) segment earnings results▷

Segment sales: JPY3.2bn (-23.0% YoY)▷

Segment profit: JPY34mn (-22.7% YoY)▷

Business reforms: Profit fell due to increased labor costs at some of the facilities, despite progress in withdrawing from
unprofitable facilities

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Other
FY03/19 (April 2018–March 2019) segment earnings results▷

Segment sales: JPY261mn (+181.2% YoY)▷

Segment loss: JPY136mn (loss of JPY97mn in FY03/18)▷

Manufacture and market pharmaceuticals: Conducted by Feldsenf Pharma Co., Ltd., which sells 34 items based on 17
components as of March 31, 2019 and aims to provide a stable supply of high-quality, low-cost generic drugs

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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)

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)

Dec
Feb

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

Oct

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

Jan

2007

Mar
Sep

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

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

Formed business alliance with Yakuju Corporation

May

2016

Pharmaholdings acquired 100% of Home-Visit Nursing Care Station Himawari Co. shares and entered home-visit
nursing care business2017

Formed business alliance with Career Brain

Oct
Jan

Formed business alliance with Zoo Corporation

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
Jan

Feldsenf Pharma Co., Ltd. started sales of generic drugs
2019

Acquired all shares in Nagatomi Pharmacy Corporation and made it a wholly owned subsidiary

Source: Shared Research based on company data (as of March 2019)

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News and topics

Corporate governance and top management

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 (current) of Feldsenf Pharma Co., Ltd.

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

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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.

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

S&S G.K.

2,769,100

9.03%

Yasuyuki Okinaka

2,506,000

8.17%

KBL EPB S.A. 107704

2,443,800

7.97%

Jiro Akino

2,216,500

7.23%Japan Trustee Services Bank, Ltd. (Trust Account)

1,478,400

4.82%

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

1,402,900

4.57%

800,000

2.61%

EP-Sogo Co., Ltd.
Inao Tajiri

667,200

2.17%

Medical System Network Employees Stochkholding Association

589,300

1.92%

Japan Trustee Services Bank, Ltd. (Trust Account 5)
SUM

421,100

1.37%

15,294,300

49.86%

Source: Shared Research based on company data (as of March 31, 2019)

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

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

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