Medical System Network / 4350
COVERAGE INITIATED ON:

2018.05.08

LAST UPDATE:

2019.09.20

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.

Research Coverage Report by Shared Research Inc.

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Medical System Network / 4350
LAST UPDATE: 2019.09.20

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

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

Executive summary ----------------------------------------------------------------------------------------------------------------------------------- 3
Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 5
Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 7
Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------7
Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 8
Quarterly trends and results -----------------------------------------------------------------------------------------------------------------------------------8
Business ------------------------------------------------------------------------------------------------------------------------------------------------ 17
Business model --------------------------------------------------------------------------------------------------------------------------------------------------- 17
Overview of business segments ---------------------------------------------------------------------------------------------------------------------------- 17
Market and value chain ---------------------------------------------------------------------------------------------------------------------------------------- 25
Industry peers (dispensing pharmacy chains) --------------------------------------------------------------------------------------------------------- 32
Strengths and weaknesses------------------------------------------------------------------------------------------------------------------------------------ 34
Historical performance and financial statements------------------------------------------------------------------------------------------ 36
Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 36
Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 38
Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 40
Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 42
Other information ---------------------------------------------------------------------------------------------------------------------------------- 51
History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 51
News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 52
Corporate governance and top management --------------------------------------------------------------------------------------------------------- 58
Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 59
Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 60
Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 60
Profile---------------------------------------------------------------------------------------------------------------------------------------------------------------- 60

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Medical System Network / 4350
LAST UPDATE: 2019.09.20

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-FY03/19, there were 3,790 network
members (+1,281 from end-FY03/18) comprising 420 directly operated pharmacies and 3,370 affiliates (of which 61 were
hospitals and clinics). The company has reorganized its business segments in FY03/20, moving the Pharmaceuticals Network
and Dispensing Pharmacy businesses, as well as the manufacture and market pharmaceuticals business previously included in
the Other business, under the Community Pharmacy Network segment. The Leasing and Facility-related business and the
Food Service business are unchanged. In the Other business, since the manufacture and market pharmaceuticals business istransferred 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 FY03/19, prior to the segment change, Pharmaceuticals Network accounted for 3.9% of sales, Dispensing Pharmacy (which

operated the Nanohana Pharmacy chain) 89.5%, Leasing and Facility-related 3.3%, Food Service 3.1%, and Other 0.3%.
Operating profit share was 72.6% (unadjusted) for Pharmaceuticals Network, 33.3% for Dispensing Pharmacy, and 2.2% forFood Service. The other two segments were loss-making in FY03/19. Margins were high in the Pharmaceuticals Network
business despite its relatively low share of sales, largely due to contributions from inter-segment transactions with the
Dispensing Pharmacy business.

Trends and outlook◤ FY03/19 sales increased 4.5% YoY to JPY98.2bn while operating profit declined 54.9% YoY to JPY1.4bn, recurring profit was

down 53.8% YoY to JPY1.5bn, and net income attributable to owners of the parent fell 54.7% YoY to JPY462mn. Of the two
mainstay segments, sales and profit of the Pharmaceuticals Network business were solid, but segment profit fell a sharp 65.1%
YoY in the Dispensing Pharmacy business due to the effect of the April 2018 NHI drug reimbursement price and dispensing
fee revision, leading to lower operating profit.
◤ The company forecasts full-year FY03/20 sales of JPY103.0bn (+4.9% YoY), operating profit of JPY2.5bn (+75.0% YoY),

recurring profit of JPY2.4bn (+59.9% YoY), and net income attributable to owners of the parent of JPY650mn (+40.4% YoY).
With the aim of raising operating profit, the company plans to expand its Pharmaceuticals Network business targeting small
and mid-tier pharmacies and to increase the number of prescriptions filled and improve business efficiency in the Dispensing
Pharmacy business by harnessing family pharmacy functions (both businesses are under the Community Pharmacy Network
segment).
◤ 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%.

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Medical System Network / 4350
LAST UPDATE: 2019.09.20

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

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: 2019.09.20

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

Key financial data
Income statement

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.

FY03/19

Cons. Cons. Est.

FY03/20

Sales

46,50825,411

54,827

66,18275,54887,71588,865

93,977

98,232103,000

YoY

13.1%

-

-

20.7%

14.2%

16.1%

1.3%

5.8%

4.5%

4.9%

Gross profit

16,217

8,960

19,412

22,73728,47632,801

34,16436,60737,271

YoY

15.2%

-

-

17.1%

25.2%

15.2%

4.2%

7.2%

1.8%

GPM

34.9%

35.3%

35.4%

34.4%

37.7%

37.4%

38.4%

39.0%

37.9%

2,262

1,357

2,047

2,091

2,641

3,783

2,113

3,163

1,428

2,500

48.0%

-

-

2.2%

26.3%

43.2%

-44.1%

49.7%-54.9%

75.1%

Operating profit
YoY
OPM
Recurring profit

4.9%

5.3%

3.7%

3.2%

3.5%

4.3%

2.4%

3.4%

1.5%

2.4%

2,140

1,315

1,912

2,020

2,540

3,860

2,109

3,250

1,501

2,400

YoY

61.0%

-

-

5.6%

25.8%

52.0%

-45.4%

54.1%-53.8%

59.9%

RPM

4.6%

5.2%

3.5%

3.1%

3.4%

4.4%

2.4%

3.5%

1.5%

2.3%

Net income

1,001

518

756

668

885

1,720

571

1,022

462

650

111.5%---11.6%

32.4%

94.4%

-66.8%

79.0%-54.8%

40.7%

2.2%

2.0%

1.4%

1.0%

1.2%

2.0%

0.6%

1.1%

0.5%

0.6%

6,492

6,492

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

9.6

5.0

29.1

27.7

37.1

60.1

19.3

34.5

15.3

-

-

-

-

-

-

-

34.3

15.0

YoY
Net margin
Per share data (JPY)
Shares issued (year-end; '000)
EPS
EPS (fully diluted)
Dividend per share

6.3

3.8

8.0

8.0

8.0

9.5

10.0

10.0

10.0

Book value per share

47.0

50.5

222.9

214.7

243.3

334.9

345.3

351.4

354.8

21.4
10.0

Balance sheet (JPYmn)
Cash and cash equivalents
Total current assets

1,329

2,072

2,092

3,106

2,499

2,081

2,252

10,201

11,703

7,787

8,902

8,271

10,941

11,023

10,783

11,09818,736

21,05525,721

Tangible fixed assets

9,163

9,976

11,472

15,976

17,24920,253

21,24624,129Investments and other assets

2,602

2,685

2,783

3,798

3,759

4,329

4,559

4,847

5,922

Intangible fixed assets

4,983

5,040

8,263

12,39913,554

13,481

13,833

15,045

16,235

Total assets

24,53426,60330,78943,11445,587

48,84750,73762,75968,935

Accounts payable

5,026

5,158

5,616

7,798

8,598

9,525

9,144

9,416

10,198

Short-term debt

2,478

3,856

5,119

12,922

9,214

6,910

3,863

7,463

9,158

10,801

12,693

14,37524,88021,626

21,061

16,92021,76923,844

Total current liabilities
Long-term debt

7,365

7,029

8,758

10,94815,391

14,85920,18626,32929,739Total fixed liabilities

8,470

8,230

10,17812,882

17,826

17,52023,17230,40434,329Total liabilities

19,271

20,92324,55337,76239,452

38,58140,092

52,174

58,173

Net assets

5,263

5,680

6,236

5,352

6,136

10,265

10,644

10,584

10,761

Total interest-bearing debt

9,843

10,885

13,87723,87024,605

21,76924,04933,79238,897

Cash flow statement (JPYmn)
Cash flows from operating activities

3,353

1,566

3,790

3,706

3,838

6,409

3,084

6,699

2,840

Cash flows from investing activities-2,747-1,248-5,425-7,559-3,958-5,040-3,909-6,848-5,921

Cash flows from financing activities-1,069

425

1,654

4,864

-483

-1,792

998

8,050

4,338

Financial ratios
ROA (RP-based)

9.1%

5.1%

6.7%

5.5%

5.7%

8.2%

4.2%

5.7%

2.3%

ROE

22.6%

10.2%

13.7%

12.2%

16.2%

21.9%

5.7%

9.8%

4.3%

Equity ratio

19.9%

19.7%

18.8%

11.9%

12.7%

20.3%

20.1%

16.9%

15.6%

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: 2019.09.20

Segment sales and profit

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

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

Act.

Act.

Act.

Act.

Act.

75,54887,71588,865

93,977

98,232

YoY

14.2%

16.1%

1.3%

5.8%

4.5%

Pharmaceuticals Network

2,814

3,235

3,237

3,639

3,951

YoY

-1.0%

15.0%

0.1%

12.4%

8.6%

YoY

% of total

3.6%

3.6%

3.5%

3.8%

3.9%

% 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%

89.5%

% of total

Leasing and Facility-related

1,517

2,430

2,046

2,031

3,320

-

-

15.1%

60.2%

-15.8%

-0.7%

63.5%

-

-

(JPYmn）
Sales

YoY% of total
Food Service
YoY% of total
Other
YoY

Segment sales and profit(JPYmn）
Sales
YoY
Community Pharmacy Network

Three other businesses

FY03/19

FY03/20

Act.

Est.

98,232103,000

4.5%

4.9%

92,284

97,461

-

5.6%

93.3%

94.1%

6,622

6,113

-

-7.7%

6.7%

5.9%

1.9%

2.7%

2.2%

2.1%

3.3%

-

-

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%

3.1%

-

-

182

143

163

92

261

-

-

-55.3%-21.4%

14.0%-43.6%

183.7%-% of total

0.2%

0.2%

0.2%

0.1%

0.3%

-

-

Segment sales adjustments-2,641-2,926-2,900-3,063-3,167-674-574

Operating profit

Segment sales adjustments

2,641

3,783

2,113

3,163

1,428

Operating profit

1,428

2,500

YoY

26.3%

43.2%

-44.1%

49.7%-54.9%

YoY-54.9%

75.1%

Pharmaceuticals Network

1,549

1,776

1,718

1,949

2,331

5.0%

14.7%

-3.3%

13.4%

19.6%

Dispensing Pharmacy

2,377

3,412

2,314

3,060

1,068

YoY

29.2%

43.5%

-32.2%

32.2%-65.1%

YoY
OPM

YoY

YoY

3,313

4,783

-

44.4%

-150

-240

-

-

OPM

OPM
Leasing and Facility-related

Community Pharmacy Network

Three other businesses
YoY
OPM

25

129

-143

-182

-84

-

-

-

416.0%

-

-

-

-

-

-13

-89

-129

45

34

-

-

-

-

-

-

-24.4%

-

-

-76

-109

-163

-97

-136

-

-

-

-

-

-

-

-1,221-1,335-1,482-1,610-1,784-1,733-2,042

OPM
Food Service
YoY
OPM
Other
YoY
OPM
Segment profit adjustments

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: 2019.09.20

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

Recent updates
Highlights
On September 20, 2019, Shared Research updated the report following interviews with Medical System Network Co., Ltd.

On August 6, 2019, the company announced earnings results for Q1 FY03/20; see the results section for details.

On June 24, 2019, Shared Research updated the report following interviews with the company.

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

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Medical System Network / 4350
LAST UPDATE: 2019.09.20

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

Trends and outlook
Quarterly trends and results
FY03/18

Cumulative(JPYmn)FY03/19

FY03/20

FY03/20

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

% of FYFY Est.

Sales

23,352

46,52270,53093,97723,85647,56072,754

98,232

25,59924.9%103,000

YoY

8.6%

7.2%

6.5%

5.8%

2.2%

2.2%

3.2%

4.5%

7.3%

Gross profit

9,069

18,10927,51536,607

9,079

17,887

27,52737,271

9,839

YoY

11.0%

10.0%

8.6%

7.2%

0.1%

-1.2%

0.0%

1.8%

8.4%

GPM

38.8%

38.9%

39.0%

39.0%

38.1%

37.6%

37.8%

37.9%

38.4%
9,504

SG&A expenses

8,476

16,83725,22633,444

8,867

17,41026,48735,842

YoY

6.5%

5.8%

4.8%

4.3%

4.6%

3.4%

5.0%

7.2%

7.2%

SG&A ratio

36.3%

36.2%

35.8%

35.6%

37.2%

36.6%

36.4%

36.5%

37.1%

Operating profit

592

1,271

2,288

3,163

212

476

1,040

1,428

334

YoY

179.2%

131.5%

80.7%

49.7%

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

57.5%

OPM

2.5%

2.7%

3.2%

3.4%

0.9%

1.0%

1.4%

1.5%

1.3%

590

1,272

2,334

3,250

192

438

1,010

1,501

323

Recurring profit

4.9%

13.4%

2,500
75.1%
2.4%

13.5%

2,400

YoY

196.5%

134.7%

84.4%

54.1%

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

68.2%

RPM

2.5%

2.7%

3.3%

3.5%

0.8%

0.9%

1.4%

1.5%

1.3%

Net income

289

363

944

1,022

101

119

372

462

97

YoY

-

450.0%

185.2%

79.0%-65.1%-67.2%-60.6%-54.8%

-4.0%

40.7%

1.2%

0.8%

1.3%

1.1%

0.4%

0.3%

0.5%

0.5%

0.4%

0.6%

Net margin
Quarterly

FY03/18(JPYmn)Sales

FY03/19

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

23,352

23,17024,00823,44723,856

23,70425,19425,47825,599

YoY

8.6%

5.8%

5.2%

3.5%

2.2%

2.3%

4.9%

8.7%

7.3%

9,069

9,040

9,406

9,092

9,079

8,808

9,640

9,744

9,839

YoY

11.0%

9.1%

6.0%

2.9%

0.1%

-2.6%

2.5%

7.2%

8.4%

GPM

38.8%

39.0%

39.2%

38.8%

38.1%

37.2%

38.3%

38.2%

38.4%
9,504

8,476

8,361

8,389

8,218

8,867

8,543

9,077

9,355

YoY

6.5%

5.2%

2.8%

2.9%

4.6%

2.2%

8.2%

13.8%

7.2%

SG&A ratio

36.3%

36.1%

34.9%

35.0%

37.2%

36.0%

36.0%

36.7%

37.1%

Operating profit

592

679

1,017

875

212

264

564

388

334

YoY

179.2%

101.5%

41.8%

3.3%

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

57.5%

OPM

2.5%

2.9%

4.2%

3.7%

0.9%

1.1%

2.2%

1.5%

1.3%

590

682

1,062

916

192

246

572

491

323

YoY

196.5%

98.8%

46.7%

8.7%

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

68.2%
1.3%

Recurring profit

RPM

2.5%

2.9%

4.4%

3.9%

0.8%

1.0%

2.3%

1.9%

Net income

289

74

581

78

101

18

253

90

97

YoY

-

-1.3%

119.2%-67.5%-65.1%-75.7%-56.5%

15.4%

-4.0%

1.2%

0.3%

2.4%

0.3%

0.4%

0.1%

1.0%

0.4%

0.4%

Net margin

2.3%
14.9%

650

FY03/20Gross profit

SG&A expenses

59.9%

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)(JPYmn)120,000
100,000

4,000

23,44760,00024,00840,00098,232

93,97780,000103,000

3,500

3,163

3,000

25,4782,500
25,194

2,000

875

2,500

1,017

1,428

1,500
23,704

23,1701,000

20,00025,59923,85623,3520
FY03/18

FY03/19Q1Q2Q3

FY03/20
Q4

500

388
679

564

592

264
212

334

FY03/18

FY03/19

FY03/20

0

Q1

Q2

Q3

Q4

Source: Shared Research based on company data

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Medical System Network / 4350
LAST UPDATE: 2019.09.20

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

Quarterly results
FY03/18

By segment (cumulative)(JPYmn）
Sales

FY03/19

FY03/19

Q1

Q2

Q3

Q4

Q1

Q2

Q3

23,352

46,52270,53093,97723,85647,56072,754Q4
98,232 Sales

YoY

8.6%

7.2%

6.5%

5.8%

2.2%

2.2%

3.2%

4.5%

YoY

Pharmaceuticals Network

875

1,728

2,675

3,639

955

1,818

2,897

3,951

Pharmaceuticals Network

YoY

2.8%

6.9%

10.9%

12.4%

9.1%

5.2%

8.3%

8.6%

YoY

% of total

3.6%

3.6%

3.7%

3.8%

3.9%

3.7%

3.9%

3.9%

% of total

Dispensing Pharmacy

21,52542,86365,21587,172

22,222

44,03567,29190,706

YoY

9.2%

7.5%

7.2%

6.8%

3.2%

2.7%

3.2%

4.1%

% of total

89.3%

89.3%

89.6%

89.8%

90.3%

89.8%

89.6%

89.5%

521

1,086

1,561

2,031

600

1,508

2,382

3,320

4.0%

9.8%

3.0%

-0.7%

15.2%

38.9%

52.6%

63.5%

Leasing and Facility-related
YoY% of total

2.2%

2.3%

2.1%

2.1%

2.4%

3.1%

3.2%

3.3%

1,156

2,298

3,279

4,103

788

1,586

2,382

3,161

YoY

0.1%

-0.7%

-6.0%

-12.1%-31.8%-31.0%-27.4%-23.0%% of total

4.8%

4.8%

4.5%

4.2%

3.2%

3.2%

3.2%

3.1%

33

53

71

92

33

91

166

261

-8.3%

-31.2%-37.7%-43.6%

0.0%

71.7%

133.8%

183.7%

Food Service

Other
YoY

Leasing and Facility-related

FY03/20Q1Q123,85625,5992.2%

7.3%

22,56424,224

-

7.4%

94.1%

94.1%

600

760

YoY

15.2%

26.7%

% of total

2.5%

3.0%

Food Service
YoY% of total
Other
YoY

788

730

-31.8%

-7.4%

3.3%

2.8%

33

38

0.0%

15.2%

% of total

0.1%

0.1%

0.1%

0.1%

0.1%

0.2%

0.2%

0.3%

% of total

0.1%

0.1%

Segment sales adjustments-759-1,478-2,274-3,063-743-1,479-2,365-3,167

Segment sales adjustments

-130

-154

592

1,271

2,288

3,163

212

476

1,040

1,428 Operating profit

179.2%

131.5%

80.7%

49.7%

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

YoY
Pharmaceuticals Network

Operating profit
YoY
Pharmaceuticals Network

212

334

-64.2%

57.5%

471

934

1,444

1,949

554

1,060

1,697

2,331

642

825

YoY

7.3%

11.5%

12.8%

13.4%

17.6%

13.5%

17.5%

19.6%

YoY

-

28.5%

OPM

2.8%

3.4%

-32

-8

OPM

53.8%

54.1%

54.0%

53.6%

58.0%

58.3%

58.6%

59.0%

Dispensing Pharmacy

591

1,220

2,210

3,060

130

202

712

1,068

YoY

118.9%

72.8%

50.4%

32.2%

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

OPM

2.7%

2.8%

3.4%

3.5%

0.6%

0.5%

1.1%

1.2%

-40

-73

-109

-182

-32

10

-51

-84

YoY

-

-

-

-

-

-

-

-

YoY

-

-

OPM

-7.7%

-6.7%

-7.0%

-9.0%

-5.3%

0.7%

-2.1%

-2.5%

OPM

-5.3%

-1.1%

Food Service

1-12

Leasing and Facility-related

Food Service

Leasing and Facility-related

5

34

49

45

1

18

28

34

YoY

-110.6%-133.3%-135.3%-134.9%-80.0%-47.1%-42.9%-24.4%

YoY

-

-

OPM

0.4%

1.5%

1.5%

1.1%

0.1%

1.1%

1.2%

1.1%

OPM

0.1%

-1.6%

-29

-21

Other

-35

-58

-75

-97

-36

-73

-105

-136

YoY

-

-

-

-

-

-

-

-

YoY

-

-

OPM

-106.1%-109.4%-105.6%-105.4%-109.1%-80.2%-63.3%-52.1%

OPM-87.9%-55.3%-400-785-1,231-1,610-405-741-1,240-1,784

Segment profit adjustments

FY03/18

By segment (quarterly)(JPYmn）

Other

Segment profit adjustments

FY03/19

Q1

Q2

Q3

Q4

Q1

Q2

Q3

23,352

23,17024,00823,44723,856

23,70425,194

YoY

8.6%

5.8%

5.2%

3.5%

2.2%

2.3%

4.9%

8.7%

YoY

Pharmaceuticals Network

875

853

947

964

955

863

1,079

1,054

Pharmaceuticals Network

YoY

2.8%

11.4%

19.3%

16.7%

9.1%

1.2%

13.9%

9.3%

YoY

% of total

3.6%

3.6%

3.8%

4.0%

4.4%

3.5%

4.1%

4.0%

% of total

Dispensing Pharmacy

21,525

21,33822,352

21,95722,222

21,81323,25623,415

Dispensing Pharmacy

YoY

9.2%

5.9%

6.6%

5.4%

3.2%

2.2%

4.0%

6.6%

YoY

% of total

89.3%

89.3%

90.1%

90.6%

103.2%

89.3%

89.2%

89.1%

% of total

Leasing and Facility-related

521

565

475

470

600

908

874

938

Leasing and Facility-related

4.0%

15.8%

-9.9%

-11.3%

15.2%

60.7%

84.0%

99.6%

Sales

YoY
% of total

Q4
25,478 Sales

2.2%

2.4%

1.9%

1.9%

2.8%

3.7%

3.4%

3.6%

1,156

1,142

981

824

788

798

796

779

YoY

0.1%

-1.6%

-16.3%-30.2%-31.8%-30.1%-18.9%-5.5%% of total

4.8%

4.8%

4.0%

3.4%

3.7%

3.3%

3.1%

3.0%

33

20

18

21

33

58

75

95

-8.3%

-51.2%-51.4%-57.1%

0.0%

190.0%

316.7%

352.4%

Food Service

Other
YoY

YoY
% of total
Food Service
YoY% of total
Other
YoY

-369

-447

FY03/19

FY03/20Q1Q123,85625,5992.2%

7.3%

22,56424,224

-

7.4%

94.1%

107.3%

600

760

-

26.7%

2.5%

3.4%

788

730

-

-7.4%

3.3%

3.2%

33

38

-

15.2%

% of total

0.1%

0.1%

0.1%

0.1%

0.2%

0.2%

0.3%

0.4%

% of total

0.1%

0.2%

Segment sales adjustments

-759

-719

-796

-789

2,320

-736

-886

-802

Segment sales adjustments

-130

3,013

592

679

1,017

875

212

264

564

179.2%

101.5%

41.8%

3.3%

-64.2%-61.1%-44.5%

Operating profit
YoY
Pharmaceuticals Network

388 Operating profit-55.7%

471

463

510

505

554

506

637

634

YoY

7.3%

16.0%

15.4%

15.3%

17.6%

9.3%

24.9%

25.5%

YoY
Pharmaceuticals Network

212

334

-64.2%

57.5%

642

825

YoY

-

28.5%

2.8%

3.4%

-32

-8

OPM

53.8%

54.3%

53.9%

52.4%

58.0%

58.6%

59.0%

60.2%

OPM

Dispensing Pharmacy

591

629

990

850

130

72

510

356

Dispensing Pharmacy

YoY

118.9%

44.3%

29.8%

0.6%

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

YoY

OPM

2.7%

2.9%

4.4%

3.9%

0.6%

0.3%

2.2%

1.5%

-40

-33

-36

-73

-32

42

-61

-33

YoY

-

-

-

-

-

-

-

-

YoY

-

-

OPM

-7.7%

-5.8%

-7.6%

-15.5%

-5.3%

4.6%

-7.0%

-3.5%

OPM

-5.3%

-1.1%

Food Service

1-12

Leasing and Facility-related

Food Service

OPM
Leasing and Facility-related

5

29

15

-4

1

17

10

6

YoY

-110.6%-152.7%-140.5%--80.0%-41.4%-33.3%-250.0%

YoY

-

-

OPM

0.4%

2.5%

1.5%

-0.5%

0.1%

2.1%

1.3%

0.8%

OPM

0.1%

-1.6%

-29

-21

Other

-35

-23

-17

-22

-36

-37

-32

-31

YoY

-

-

-

-

-

-

-

-

YoY

-

-

OPM

-106.1%-115.0%-94.4%-104.8%-109.1%-63.8%-42.7%-32.6%

OPM-87.9%-55.3%

-400

-385

-446

-379

-405

-336

-499

-544

-369

-447

Segment profit adjustments

Other

Segment profit adjustments

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: 2019.09.20

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

700

41

43

48
44

42

45

44

600
500

46

51

800

264
336

326

251

270

244

21

46

51

53

293
283

306

270

212

43

43

50

341

242

252

54

82

42

44

55

281

274

370

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*Integrated into the Community Pharmacy Network segment from FY03/20

Prescription volume and price per prescription (drug price + technical fees; Dispensing Pharmacy segment; all stores)(JPY)('000)

Number of prescriptions

3,000

10,3872,500

Price per prescription (right axis)

11,000

10,485

10,500

10,224
10,072

2,000

9,745

9,818 9,832

9,590

9,573

9,676

9,757

9,809

9,750

9,806 9,770 9,766 9,797

9,857 9,891 9,875

10,0009,642
9,353 9,399

9,407

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 1,829 1,803

1,885 1,898 1,904 1,921

2,027 1,997 2,031 1,999 2,079 2,072

2,170 2,092

2,257 2,287 2,267
8,500

500

8,000

0

7,500
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

FY03/18

Q4

Q1

Q2

Q3

FY03/19Q4Q1
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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Medical System Network / 4350
LAST UPDATE: 2019.09.20

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

Distribution of network members (as of June 30, 2019)

Source: Shared Research based on company data

Number of dispensing pharmacies by region
Area

Directly operated
dispensing pharmacies

Network affiliates

Total
254

Hokkaido

123

131

Tohoku

23

214

237

Kanto and Koshinetsu

83

1,066

1,149

Tokai and Hokuriku

47

809

856

Kinki

62

588

650

Chugoku and Shikoku

23

315

338

Kyushu and Okinawa

60

574

634

421

3,697

4,118

Total

Source: Shared Research based on company data (June 30, 2019)

11/61

R

Medical System Network / 4350
LAST UPDATE: 2019.09.20

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

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 refers to 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 distributor compliance to improve ethical drug distribution,” whose purpose was to ensure stable supplyof ethical drugs, dispensing pharmacy operators had to streamline their management structures even further.

▷ Company response: The company consolidated the Pharmaceuticals Network business, the Dispensing Pharmacy business, andthe manufacture and market pharmaceuticals business (formerly in the Other business) to form the Community 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 steady sales 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 weresteady. 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 remainedsome issues with the details of the earnings results. The company's plan was to increase the number of prescriptions (at existing
pharmacies), but the actual outcome was a YoY decline of 0.6%. Sales and profit, however, were in line with plan because of an
unexpected 6.7% YoY increase in the drug price, which the company originally expected to be flat 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 toprovide guidance on store improvement with a focus on increasing the number of prescriptions and acquiring additional
premiums.

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Medical System Network / 4350
LAST UPDATE: 2019.09.20

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp▷ Manufacture and market pharmaceuticals business: This business aims to provide a stable supply of quality, low-priced genericdrugs. 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, theserviced 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.

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 the company
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:

JPY38mn (+15.2% YoY)

▷ Segment loss:

JPY21mn (loss of JPY29mn in Q1 FY03/19)

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

13/61

R

Medical System Network / 4350
LAST UPDATE: 2019.09.20

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

Full-year FY03/20 company forecasts
On May 8, 2018, Medical System Network announced its fifth medium-term plan starting FY03/19. Forecasts for full-year FY03/20
are sales of JPY103.0bn (+4.9% YoY), operating profit of JPY2.5bn (+75.0% YoY), recurring profit of JPY2.4bn (+59.9% YoY), andnet income attributable to owners of the parent of JPY650mn (+40.4% YoY). As of end Q1 FY03/20, the company’s full-year
forecasts remain unchanged.
The key focus points for Q2 through Q4 FY03/20 are as follows. In the mainstay Community Pharmacy Network segment, network
members are steadily increasing. The company intends to keep a close eye on the number of prescriptions filled, which fell in Q1,
in the Dispensing Pharmacy business. In the other three segments, occupancy trends in serviced elderly housing facilities andindustry reforms in the Food Service business deserve attention.

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
distributor compliance to improve ethical drug distribution,” dispensing pharmacies are under pressure to streamline their
management.
Company estimate on FY03/20 consolidated operating profit
FY03/19 Act.

1,428

Pharmaceuticals network＋586

Drug price at existing pharmacies

－298
+432

Technical fees at existing pharmacies
No. of prescriptions at existing pharmacies+265

M&A of pharmacies

+320

Other

－233

FY03/20 Est.

2,500

(JPYmn)Source: Shared Research based on company data

Medical System Network has laid out a policy of strengthening management support for small and mid-tier pharmacies that
underpin regional healthcare by expanding its pharmaceuticals network. For directly operated dispensing pharmacies, thecompany plans to make a greater contribution to regional healthcare and strengthen family pharmacy functions to makequalitative improvements to their services. Regarding the NHI drug price revision scheduled for October 2019, the company
plans to enter negotiations on price revisions with wholesalers, but it should be noted that depending on the outcome of thesenegotiations, there may be an impact on earnings in the Dispensing Pharmacy business. It will also work to spread the use ofgeneric drugs, an initiative promoted by the Japanese government, through manufacture and marketing of generic drugs led byconsolidated subsidiary Feldsenf Pharma and continue to work on improving the distribution of ethical drugs.

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Medical System Network / 4350
LAST UPDATE: 2019.09.20

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

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 themto 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 (medicalcare, nursing care, and disease prevention) that are considered essential to regional comprehensive care systems.

▷ 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.
The company also reorganized its business segments effective FY03/20. It combined the former Pharmaceuticals Network andDispensing Pharmacy businesses to create a new segment, and to this new segment it added the manufacture and market
pharmaceuticals business, which is mainly operated by Feldsenf Pharma.

15/61

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Medical System Network / 4350
LAST UPDATE: 2019.09.20

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

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. 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. (See News and topics section.)

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 has been on the rise since the April 2018 NHI drug pricerevision. In response, the company announced that it plans to clear the 5,000-member target in FY03/20, two years earlier thaninitially planned.
Numerical targets for the fifth medium-term plan
(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. Approximately
90% of the company’s sales came from the Dispensing Pharmacy business (operation of dispensing pharmacies) in FY03/19,
before business segments were reorganized in FY03/20. The dispensing pharmacy support service (formerly, Pharmaceuticals
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 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 company maintains its medical and nursing-care related businesses in the Leasing and Facility-related, Food Service,
and Other segments, at the core of which is the home-visit nursing care business. Each business segment continues to be
operated by core subsidiaries.
Affiliated companies (as of March 31, 2019)
Segment
Pharmaceuticals Network
Dispensing Pharmacy

Company

Location

Ratio ofvoting rights

H&M Co., Ltd. *Minato-ku, Tokyo

50.0%

A-System Co., Ltd.

Hachinohe, Aomori

100.0%

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%
100.0%

Nanohana Central Co., Ltd.

Nagoya, Aichi

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**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.

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Affiliated companies (as of April 1, 2019)

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).

Former Pharmaceuticals Network
The core Pharmaceuticals Network business offers comprehensive support for operating pharmacies, ranging from the sourcingof drugs to pharmacist training and financing. Services are provided by the parent and subsidiaries H&M Co., Ltd., and A-System

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Co., Ltd. It can be broken down into four major functions: Pharmaceuticals supply chain management, slow moving inventory
clearance, pharmacist training, and financing.
Network members and pharmaceuticals transactions
Directly operated dispensing pharmacies

Network affiliates(JPYbn)Pharmaceuticals transactions (right axis)

4,000

233.7

250

3,500
169.1

200

3,000
2,500

137.4
112.4

2,000
94.8

1,500
1,000
500
0

11.8

12.1

17.6

181

47
157

128
153

29.3
274
161

39.8

47.4

53.7

335

373

393

526

164

172

204

214

223

100

2,110
1,393

41.5
631

3,370

97.7

70.4

150

123.7

764
269

842

855

321

345

1,047

353

50

377

399

420
0

FY09/04 FY09/05 FY09/06 FY09/07 FY09/08 FY09/09 FY09/10 FY09/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19
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.

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

Former Dispensing Pharmacy
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

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subsidiaries. Another subsidiary, Hokkaido Institute for Pharmacy Benefit Co., Ltd., publishes specialized books for pharmacists
and other healthcare professionals and analyzes pharmaceuticals-related data.
The Dispensing Pharmacy business operates the group’s directly operated pharmacies. The company provides support services
through its pharmaceuticals network to both its directly-operated pharmacies and non-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 May 2019, the number of
directly operated pharmacies and affiliates stood at over 4,000, and the number is on track to reaching the 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 pharmacies do not dramatically differ from those of other dispensing
pharmacies, although one distinguishing characteristic is that they tend to be located in residential areas where homes andmedical 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. Although most of its competitors do not disclose abreakdown of stores by format, one of the major dispensing pharmacy chains Nihon Chouzai (TSE1: 3341) stated that it aimed toreduce the number of monzen pharmacies (pharmacies operating near large hospitals) to 50% by 2030 in its FY03/19 briefing
material. The weighting of Medical System Network's monzen pharmacies already stands at about 30%.
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 14 outlets while opening five new stores and acquiring 30 through M&A.

Market position of directly operated Nanohana Pharmacy
The number of Nanohana brand pharmacies increased from 399 in March 2018 to 420 by end-March 2019. The following tablecompares sales and pharmacy numbers for other major pharmacy chains as of their fiscal year-ends. Unlisted companies andcompanies 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.

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Number of dispensing pharmacies

1

FY endSales (JPYmn)

No. ofpharmacies

April

245,003

1,132

Ain Holdings

2

Toho Holdings

March93,222

773

3

Qol

March

134,148766

4

Sogo Medical

March106,282

698

5

SuzukenMarch

94,657615

6Nihon ChouzaiMarch

208,622598

7

Kraft*-

185,700

580

8

Medical System NetworkMarch

90,706420

9Aisei Pharmacy

March61,518363

10 Pharmarise Holdings

May

43,202

255

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

Initiatives in line with the Guidelines for distributor compliance to improve ethical drug distribution
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 time required
for this task was reduced from 60 minutes to 30 minutes a day.

▷ Reduce time spent on ordering drugs: Adoption of in-house developed automated drug ordering system (scheduled to be
introduced at all pharmacies by end-September 2019) reduced the time spent on ordering drugs from a daily average of 30
minutes to less than 10 minutes.

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

▷ Optimization of staffing: Setting standard working hours for pharmacists and staff (appropriate number of staff) for each
pharmacy and installing management tools enabled the company to gauge appropriate staffing for any given week or any given
day of the week.

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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.
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 nursing care facilities
The company plans and develops serviced elderly housing facilities that collaborate with medical institutions, nursing 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 nursing care services are also available.
Wisteria N17 is also networked with local medical institutions such as the general hospital, specialty clinics, dental clinics, anddispensing pharmacies. The company’s fourth facility, Wisteria Senri-Chuo (Toyonaka, Osaka Prefecture), was launched in 2016,
and the fifth facility, Wisteria Minami Ichijo (Sapporo, Hokkaido), was opened in November 2018.
According to the company, investment for expansion of serviced elderly housing facilities came to an end in FY03/19, and it is
now taking measures to boost occupancy rates at the Wisteria series facilities. The company plans to focus on building acommunity where medical and nursing care are offered as one, with dispensing pharmacies, hospitals, and nursing care andchildcare facilities surrounding the serviced elderly housing facilities.

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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 professionals, and pharmacists 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
59,13858,67858,32657,78457,07159,00055,79756,00054,78053,64253,30453,00152,53951,952
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
(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

839

800

750

700
650
650

600
FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
Source: Shared Research based on MHLW’s Trends in Prescription Medicine Costs

That said, the number of pharmacists has not kept pace with the increase in pharmacies, and securing sufficient staffing is apressing issue, particularly for small and mid-tier pharmacies.
Pharmacist numbers

Pharmacies('000)

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

146

153

161

116

136

172

125

2004

2006

2008

2010

2012

2014

2016

0
(FY)

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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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

35.3
2.5

14.0

36.6
2.6

14.9

37.8

38.4

2.7

2.7

15.2

15.0

39.3

40.0

2.7

2.8

15.8

16.0

13.4

13.6

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 regional comprehensive 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 nursing careexpenditures. 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 tend to squeeze smaller pharmacies (such as those near large hospitals).
Dispensary charges
Technical fee(JPYbn)Drug fee

Dispensing medical fee

9,000
7,875
8,000
6,560

7,000
5,870

6,000
5,000

4,593

4,747

5,167

6,643

7,038

7,199

7,495

7,713

6,082

5,440

4,000
3,000
2,000
1,000
0
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017

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

MHLW initiates “Guidelines for distributor compliance to improve ethical drug distribution”
The “Guidelines for distributor compliance to improve ethical drug distribution” (so-called distribution improvement guidelines)
were adopted starting April 2018. Issued by MHLW, the guidelines targeting industry members reflect the ministry’s initiative to

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shift the role of spearheading improvement in prescription drug distribution from the distributors to the government. Items ofnote on the relationship between drug wholesalers and medical institutions/dispensing pharmacies include the avoidance ofexcessive discounts. According to these guidelines, offering prices involving excessive discounts that do not reflect the actual
value of pharmaceuticals, such as using a benchmark without considering transaction terms, is incompatible with the current NHI
drug price system (where individual drug 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.

FY2018 medical fee revision
Medical fees were revised from April 2018. Net medical fees in FY03/19 will be reduced by 1.19%, comprised of a 0.55% increasein core medical fees and 1.74% reduction in NHI drug prices (official price of medicines).
Net medical fee revision -1.19% = core medical fee +0.55% + drug reimbursement price -1.74%
The increase in the core medical fee includes +0.63% for medical fees, +0.69% for dental fees, and +0.19% for dispensing fees. In
contrast, the reduction in the NHI drug prices includes -1.65% for pharmaceuticals prices and -0.09% 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.
2018 medical fee revision (%)
Year of revision

FY2002

FY2004

FY2006

FY2008FY2010FY2012FY2014FY2016FY2018Core medical fees (actual)

-1.30

±0.00

-1.36

+0.38

+1.55

+1.379

+0.10

+0.49

+0.55

Dispensing fee

-1.30

＋0.00

-0.60

+0.17

+0.52

+0.46

+0.04

+0.17

+0.19

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

-1.40

-1.05

-1.80

-1.20

-1.36

-1.375

-1.36

-1.33

-1.74

-6.30

-4.20

-6.70

-5.20

-5.75

-6.00

-5.64

-5.57

-7.48

-

-

-

-

-

-

+1.36

-

-

-2.70

-1.05

-3.16

-0.82

+0.19

+0.004

+0.10

-0.84

-1.19

Source: Shared Research based on company data

The key point of this dispensing fee revision is a reassessment of the role of dispensing pharmacies with an emphasis on
patient-centered service. Specifically, it promotes evaluation of family pharmacies and pharmacists, patient-centric businesses
and at-home medical care; and promotes the use of generic drugs. It also encourages the proper assessment of large pharmacies

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operating near medical institutions. An additional drug price revision is scheduled to take place accompanying a hike in the
consumption tax in October 2019.
On generic drug utilization, MHLW targets a generic drug ratio of over 80% by 2020. The generic drug ratio continues to rise in
response to this, and the medical fee revision includes components that will further stimulate generic drug use.
Generic drug ratio(%)

Mar. 2018
73.0%

75.0
70.0
65.0
60.0
55.0

Apr. 2013
46.5%

50.0
45.0
40.0
Apr. Jun. Aug. Oct. Dec. Feb. Apr. Jun. Aug. Oct. Dec. Feb. Apr. Jun. Aug. Oct. Dec. Feb. Apr. Jun. Aug. Oct. Dec. Feb. Apr. Jun. Aug. Oct. Dec. Feb.
FY2013

FY2014FY2015FY2016FY2017

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

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Key points of medical fee revision
Issue

Description

Item

Assess the role of family pharmacists and pharmacies
1) Assess family pharmacists- Revise eligibility criteria for family pharmacist- Family pharmacist guidance fee
guidance fee and family pharmacist- Family pharmacist comprehensive
comprehensive management fee
management fee→ Check on patient's demand based on
his/her condition- Revise service period criteria
2) Assess pharmacies contributing to community care
- Community support system premium (newly- Community support systemestablished)premium

PrePost- Comments
revision revision
pointspoints
70
270

73
280

Working hours: 32hrs/week → 32hrs/week (including cases where"over 24hrs/week and 4 days/week" [per Child Care and Family
Care Leave Act] applies); period of service at the pharmacy: 6months → 12 months

ー35

On the condition that the pharmacy has a track record that meets
criteria for contributions to comprehensive community medical caresystem32

ーEstablish new assessment on pharmacies' contribution to community
support
1. When service is given to patient who brings back prescription
within six months in principle
2. When service is given to patient other than the case "1"
3. When service is given to "intensive-care nursing home patient" →When service is given to "patient at his/her intensive-care nursing
home"→ Assess pharmacies contributing tocommunity care in regional comprehensive caresystem→ Develop system for medical safety- Can be applied to Basic fee 2 or 3 if criteria aremet- Eliminate standard dispensing premium- Standard dispensing premium

Enhance assessment of pharmacy interpersonal services- Revise assessment for internal medicine- Medication history management
dispensing fee
and guidance fee- Enhance pharmaceutical management fee
related to interpersonal service→ Establish medication adjustment support fee- Medication adjustment support fee

Ensure quality of home medical care1) Assess in detail home-visit pharmaceutical management guidance fee- Revise patient home-visit medication
management and guidance fee→ Assess based on number of patients with
- Home-visit medication
management and guidance feesame residence

2) Promote high-quality home-visit medication management and guidance service- Promote home service by family pharmacists→ Revise sterile preparation premium- Sterile preparation premium→ Establish assessment of services for infants

Promote generic drugs; optimize pricing- Establish generic drug dispensing premium 3- Establish reduced basic dispensing fee forpharmacies with exceptionally low generic drug
ratio
Optimize large "monzen" pharmacies- Reduce concentration rate for basic dispensing
fee 2 when prescriptions exceed 2,000- Subdivide prescriptions for basic dispensing fee 3- Infant premium

38

41

50
38

53
41

ー

125

Applies once a month to case where number of internal medicationsprescribed to patient is six or more (excluding specifically designateddrugs) and is reduced by two or more in response to written
recommendation by pharmacist

650

650

300

320

ー

290

For patients with separate residence → If number of patients atsame building is 1
For patients with same residence → If number of patients at samebuilding is 2–9
Other

65 (130) 67 (135) Sterile preparation for central parenteral nutrition infusion
75 (140) 77 (145) Sterile preparation for antineoplastic agent
65 (130) 67 (135) Sterile preparation for narcotics(Points in parenthesis for children under six years)ー100
When pharmaceutical management and guidance is provided topatient or family members if patient is under six years old andtreated at home, having difficulty going to the hospital- Generic drug dispensing premium 1- Generic drug dispensing premium 2- Generic drug dispensing premium 3

18
22
ー

18
22
26

Tighten eligibility criteria for generic drug dispensing premiums,
raising generic drug ratios from 65% to 75% or more for premium
1; 75% to 80% for premium 2; and 85% or more for premium 3- Basic dispensing feeー-2Applies to pharmacy with generic drug ratio at 20% and under.
Exceptional cases are excluded, but applies to pharmacy notreporting generic drug ratio- Basic dispensing fee 2

25

25

Applies to pharmacy accepting prescriptions exceeding 2,000 per
month; required ratio of prescriptions from specific medical
institutions lowered from 90% to over 85% for specific dispensing
pharmacies- Basic dispensing fee 3

20

20

When prescriptions from pharmacies in the same group exceed
40,000 but are less than 400,000
When same-group pharmacies' prescriptions exceed 400,000

15- Total prescriptions of all medical institutions isused for pharmacy sharing a building with multiple
medical institutions

Note: *A good outcome would include all of the following
1 Nighttime and holiday service 400 times
2 Premium for prevention of drug duplication/drug interactions 40 times
3 Medication adjustment support fee once
4 At-home medication management for single-building medical examination patients 12 times
5 Fee for providing medication information 60 times
6 Premium for narcotics guidance and management 10 times
7 Family pharmacist instruction fee, etc., 40 times
8 Outpatient medication support fee 12 times

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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.
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%

-

3034

Qol

March

5.8%

5.1%

6.4%

4.7%

3341

Nihon Chouzai

March

5.6%

5.0%

6.0%

4.2%

4350

Medical System Network

March

4.2%

2.8%

3.5%

1.2%

4775

Sogo Medical *

March

5.0%

6.3%

6.5%

5.0%

7649

Sugi Holdings **February

5.6%

5.3%

5.4%

5.3%

9627

Ain Holdings

April

9.1%

8.6%

9.5%

-

Source: Shared Research based on each company’s data and websites (as of end-March 2019)
Note: * Sogo Medical: FY2016 earnings are total profit margins as segment information is regional, transitioned to a holding company (9277) in October 2018.
** 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

54,562

2.2%

-0.5%

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

144,783

4.9%

10.5%

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

245,687

2.7%

9.2%

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

488,464

5.3%

10.9%

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

9277

Sogo Medical

144,630

3.7%

8.7%

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

268,386

7.3%

13.5%

Top-ranked dispensing pharmacy chain. Originated in Hokkaido, expanded into metropolitan
areas, with nationwide coverage of mainly monzen pharmacies. Concluded capital and businesstie-up with Seven & i Holdings. [Consolidated sales] Dispensing Pharmacy 89, Drug and Cosmetic
Store 9, Other 2

Source: Shared Research based on company data
Note: *Sogo Medical (4775) became Sogo Medical HD (9277) in October 2018.

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)FY03/17

FY03/18

Pharmarise Holdings (2796)

FY03/19

FY05/16

FY05/17

Qol (3034)

FY05/18

FY03/17

FY03/18

FY03/19

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Sales

88,865

93,977

98,23248,511

52,94954,562

131,502145,516

144,783

Gross profit

34,16436,60737,271

6,929

7,218

7,950

16,876

19,64817,863

SG&A expenses

32,05033,44435,842

6,116

6,775

6,771

10,01010,557

10,812

Operating profit

2,113

3,163

1,428

813

442

1,179

6,865

9,091

7,050

Recurring profit

2,109

3,250

1,501

659

324

1,092

7,065

9,333

7,208

Net income

571

1,022

462

382

7

-28

4,353

4,986

3,970

ROE

5.7%

9.8%

4.3%

7.0%

0.1%

-0.5%

20.4%

13.9%

10.5%

ROA (RP-based)

4.2%

5.7%

2.3%

2.6%

1.3%

4.5%

8.7%

10.7%

7.9%

OPM

2.4%

3.4%

1.5%

1.7%

0.8%

2.2%

5.2%

6.2%

4.9%

Total assets

50,73662,75968,93525,667

24,54024,26581,29087,315

94,236

Net assets

10,644

10,584

10,761

6,237

5,900

5,624

21,63235,93539,017

Equity ratio

20.1%

16.9%

100.0%

21.1%

21.7%

21.8%

26.2%

41.2%

41.1%

Operating CF

3,084

6,699

2,840

-272

2,103

1,330

5,813

11,116

5,773

Investing CF-3,909-6,848-5,921

-773

-871

-527

-15,392-3,775-8,287

Financing CF
Cash and deposits

998

8,050

4,338

492

-816

-894

7,435

-1,685

2,906

2,235

10,136

11,520

3,319

3,734

3,643

14,14419,80020,193

Interest-bearing debt

21,72533,79238,897

10,852

10,35910,55033,60722,56028,873Net debt

19,49023,65627,377

7,533

6,625

6,907

19,463

2,760

8,680

Nihon Chouzai (3341)

Sugi Holdings (7649)

Sogo Medical Holdings (9277)

FY03/17

FY03/18

FY03/19

FY02/17

FY02/18

FY02/19

FY03/17

FY03/18

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

FY03/19
Cons.

Sales

223,468

241,274

245,687

430,795

457,047

488,464--

144,630

Gross profit

39,25843,837

41,975120,008

131,565

142,300--

22,715

SG&A expenses

30,73833,25035,242

97,176

106,804

116,483--

17,303Operating profit

8,519

10,587

6,733

22,832

24,76025,817

-

-

5,411

Recurring profit

7,976

10,138

6,077

23,87525,90027,237

-

-

5,607

Net income

4,638

6,104

3,792

14,947

16,411

17,940

-

-

3,246

ROE

13.5%

15.7%

9.2%

10.0%

10.1%

10.9%

-

-

8.7%

ROA (RP-based)

4.7%

5.6%

3.3%

10.4%

10.2%

10.5%

-

-

6.1%

OPM

3.8%

4.4%

2.7%

5.3%

5.4%

5.3%

-

-

3.7%

Total assets

178,347

186,573

178,677

230,664

253,989

265,481--

93,560Net assets

36,44741,506

41,073

148,782

162,046

166,563--

38,669Equity ratio

20.4%

22.2%

23.0%

64.5%

63.8%

62.7%

-

-

41.0%

Operating CF-940

23,141

13,572

16,912

27,56422,894

-

-

3,852

Investing CF-28,444-13,843-1,770-18,439-17,911-22,362---6,624

Financing CF

18,205-2,034-10,516-3,506-3,401-13,897

-

-

-945

Cash and deposits

21,20028,46429,74941,42547,67634,311--

10,733

Interest-bearing debt

84,08984,68982,391

0

0

0

-

-

22,373Net debt

62,88956,22552,642-41,425-47,676-34,311--

11,640Ain Holdings (9627)
FY04/16

FY04/17

Cons.

Cons.

FY04/18
Cons.

Sales

234,843

248,110

268,386

Gross profit

38,53542,09347,993

SG&A expenses

23,91627,52928,371
19,623Operating profit

14,61914,563

Recurring profit

15,15815,081

20,130Net income

7,917

7,949

10,567

ROE

14.9%

14.0%

13.5%

ROA (RP-based)

10.8%

10.2%

11.8%

OPM

6.2%

5.9%

7.3%

Total assets

139,888

156,323

183,435

Net assets

53,32460,17896,733Equity ratio

38.1%

38.4%

52.7%

Operating CF

21,352

18,40921,657

Investing CF-20,877-11,183-5,282Financing CF

2,028

116

17,623

Cash and deposits

21,892

29,234

63,233

Interest-bearing debt

20,54425,852

18,861

Net debt-1,348-3,382-44,372

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

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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 segment OPM ofabout 3.0% 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, nursing
care products, and toiletries. Many of the other major chains have adopted the strategy to boost pharmacy profit margins by
integrating drugstore operations with added floor space for food products and cosmetics. The company is looking to expand
its product offerings to include various nursing care products like adult diapers as part of a family pharmacy service, but it willtake 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 137 pharmacies while Medical System
Network acquired just 30 pharmacies in FY03/19. From the perspective of regional expansion, about 30% of the company’s
pharmacies are located in Hokkaido while less than 10% are located in Tokyo and Osaka, despite their high population density.
In total assets, an important indicator of the buyer’s financial strength in an M&A deal, comparable companies range in the
JPY100.0bn mark and over, while Medical System Network significantly falls behind at around JPY50.0bn. In order to advanceacquisitions and increase pharmacy outlets in regions other than its home ground Hokkaido, the company will need to beable to demonstrate its financial strength to the sell-side companies’ management as well as M&A intermediaries.

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Historical performance and financial statements
Income statement
Income statement

FY09/10

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.

FY03/19
Cons.

Sales

41,132

46,50825,411

54,827

66,18275,54887,71588,865

93,977

98,232

YoY

11.8%

13.1%

-

-

20.7%

14.2%

16.1%

1.3%

5.8%

4.5%

Cost of sales

27,06130,292

16,45135,41543,44547,072

54,91354,70057,36960,961Gross profit

14,071

16,217

8,960

19,412

22,73728,47632,801

34,16436,60737,271

YoY

10.4%

15.2%

-

-

17.1%

25.2%

15.2%

4.2%

7.2%

1.8%

GPM

34.2%

34.9%

35.3%

35.4%

34.4%

37.7%

37.4%

38.4%

39.0%

37.9%

SG&A expenses

12,542

13,954

7,603

17,365

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

SG&A ratio
Operating profit

30.5%
1,528

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

YoY

6.1%

48.0%

-

-

2.2%

26.3%

43.2%

-44.1%

49.7%-54.9%

OPM

3.7%

4.9%

5.3%

3.7%

3.2%

3.5%

4.3%

2.4%

3.4%

1.5%

Non-operating income

51

100

81

150

250

457

275

378

405

Non-operating expenses

250

223

124

284

321

380

279

291

333

349

Recurring profit

1,329

2,140

1,315

1,912

2,020

2,540

3,860

2,109

3,250

1,501

YoY

5.0%

61.0%

-

-

5.6%

25.8%

52.0%

-45.4%

54.1%-53.8%

RPM

1.5%

3.2%

4.6%

5.2%

3.5%

3.1%

3.4%

4.4%

2.4%

3.5%

Extraordinary gains

1

111

25

59

155

169

88

57

19

49

Extraordinary losses

35

302

41

65

404

415

470

260

976

128

Income taxes

716

801

702

1,018

1,073

1,315

1,599

1,262

1,271

962

Implied tax rate

55.3%

41.1%

54.1%

53.4%

60.6%

57.3%

46.0%

66.2%

55.4%

67.7%

Net income attrib. to non-controlling interests

105

146

78

133

29

92

158

72

0

-2

Net income

473

1,001

518

756

668

885

1,720

571

1,022

462

YoY

9.7%

111.5%---11.6%

32.4%

94.4%

-66.8%

79.0%-54.8%Net margin

1.2%

2.2%

2.0%

1.4%

1.0%

1.2%

2.0%

0.6%

1.1%

0.5%

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. The plan breaks down into four key initiatives. We
believe the company has also applied these concepts to its business strategy from FY03/16 and beyond.

▷ Expand Pharmaceuticals Network business, which has substantial growth potential, to 46 prefectures nationwide and become
the dominant leader in total value of drug orders▷ Pursue acquisition of family pharmacies that are useful, necessary, trusted, and loved by local residents▷ Develop medical/nursing care zones from the standpoint of “community planning” in anticipation of a super-aging society▷ Balance sustainable growth and financial stability

Sales have risen steadily over the past 10 years with the exception of the period when the fiscal year-end was changed. We
attribute this to the company’s growth strategy that promotes expansion of network members and new openings of directly
operated pharmacies through measures such as M&A. Of the targets laid out in the third medium-term plan, the company
surpassed the FY03/15 sales target of JPY75.0bn.

Improved profit margins
One target of the third medium-term plan that proved elusive, however, was lifting RPM above 5.0%; the RPM finished at 3.4% in
FY03/15 (the final year of the plan). This shortfall was in large a result of government efforts to curb pharmaceutical costs by
cutting dispensing fees, which resulted in a harsher-than-expected business environment for the company’s mainstay Dispensing
Pharmacy business. A breakdown of SG&A expenses further reveals reductions of personnel-related expenses, the largest cost
factor, were below plan as cost-savings from measures such as integration of back-office functions and optimization of pharmacy

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staffing came up short of projections. Labor costs, which account for a large percentage of SG&A expenses, and high fixed costs
such as rents also impeded efforts to cut costs.
SG&A expenses
SG&A expenses(JPYmn)FY09/09

FY09/10

FY09/11

FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Provision for doubtful accounts
Salaries and allowances

4,144

4,734

5,217

2,806

6,364

7,489

9,266

10,406

12,08812,481

Provision for employee bonuses

495

668

554

582

685

724

939

1,062

1,133

1,418

Retirement benefit expenses

107

111

147

88

172

195

264

329

361

466

Provision for directors' bonuses

44

55

57

32

64

68

76

55

47

35

33

52

38

Provision for directors' stock benefits
Taxes and dues

1,361

1,484

1,589

853

1,913

2,350

3,870

4,479

4,374

4,420

Rents

1,009

1,081

1,225

653

1,512

1,736

2,089

2,222

2,304

2,480

Shipping and storage charges
R&D expenses
Other

3,464

3,696

4,380

2,142

5,509

6,612

7,537

8,486

9,630

12,106

Total SG&A expenses

11,305

12,542

13,954

7,603

17,365

20,64625,83529,01832,05033,444

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.

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Balance sheet
Balance sheet(JPYmn)FY09/10

FY09/11

FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

ASSETSCash and deposits

1,792

1,329

2,072

2,092

3,106

2,499

2,081

2,252

10,201

11,703

Notes and accounts receivable

2,803

2,238

2,597

1,514

2,802

2,484

2,614

2,223

2,332

2,420

Inventories

1,551

1,776

1,796

2,219

2,732

3,846

3,431

4,053

3,520

4,297

Other

578

634

629

614

664

709

927

958

868

1,528

Allowance for doubtful accounts

-3

-2

-3

-6

-6

-7

-7

-10

-11

-12

8,071

7,787

8,902

8,271

10,941

11,023

10,783

11,09818,736

21,055

Total current assets
Total tangible fixed assets

6,753

9,163

9,976

11,472

15,976

17,24920,253

21,24624,12925,721

Total intangible fixed assets

5,210

4,983

5,040

8,263

12,39913,554

13,481

13,833

15,045

16,235

54

39

54

179

157

524

583

812

726

2,471

2,607

2,728

2,771

3,645

3,631

3,838

4,008

4,066

5,217

-77

-44

-43

-42

-26

-29

-33

-32

-31

-21

Investment and other assets

2,448

2,602

2,685

2,783

3,798

3,759

4,329

4,559

4,847

5,922

Total fixed assets

14,411

16,747

17,701

22,51832,17334,56438,06339,63944,02347,879Total assets

22,482

24,53426,60330,78943,11445,587

48,84750,73762,75968,935Investment securities
Long-term loans
Other
Allowance for doubtful accounts

LIABILITIES
Notes and accounts payable

4,596

5,026

5,158

5,616

7,798

8,598

9,525

9,144

9,416

10,198

Short-term debt

2,099

2,478

3,856

5,119

12,922

9,214

6,910

3,863

7,463

9,158

371

590

582

459

578

599

1,065

413

1,135

695

2,344

2,706

3,097

3,181

3,582

3,215

3,561

3,500

3,755

3,793

9,410

10,801

12,693

14,37524,88021,626

21,061

16,92021,76923,844

7,857

7,365

7,029

8,758

10,94815,391

14,85920,18626,32929,739

0

1

1

1

1

1

1

1

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

918

1,104

1,200

1,419

1,933

2,434

2,660

2,985

4,075

4,590

Total fixed liabilities

Other

8,775

8,470

8,230

10,17812,882

17,826

17,52023,17230,40434,329Total liabilities

18,184

19,271

20,92324,55337,76239,452

38,58140,092

52,174

58,173

Capital stock

1,091

1,091

1,091

1,091

1,091

1,091

1,932

1,932

2,097

2,128

Capital surplus

924

924

924

901

901

901

1,742

1,742

1,160

1,185

2,040

2,924

3,281

3,836

4,300

4,980

6,467

6,735

7,459

7,616

Net assets

Retained earnings
Treasury stock

0

0

0

-45

-1,181-1,147

-328

-302

-275

-233

Valuation differences on securities

-7

-7

-5

3

2

11

15

49

143

83
58,239Foreign currency translation adjustments
Other

-68

-58

-52

-40

-31

-28

-17

23

52,316

Non-controlling interests

310

382

436

493

273

338

469

514

2

0

Total net assets

4,298

5,263

5,680

6,236

5,352

6,136

10,265

10,644

10584

10761

Total liabilities and net assets

68,93522,482

24,53426,60330,78943,11445,58848,84650,73662,759Working capital-241-1,011-765-1,883-2,265-2,268-3,480-2,868-3,564-3,481

Total interest-bearing debt

9,956

9,843

10,885

13,87723,87024,605

21,76924,04933,79238,897

Net debt

8,163

8,514

8,813

11,785

20,76322,12019,70821,814

23,591

27,194

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.

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-term debt

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increased by about JPY7.0bn to JPY102.7bn in FY03/14, while long-term debt increased by about JPY4.5bn to JPY14.2bn in
FY03/15 and has continued to gradually rise.

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.

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Cash flow statement
Cash flow statement

FY09/10

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.

FY03/19Cons.

Cash flows from operating activities (1)

2,273

3,353

1,566

3,790

3,706

3,838

6,409

3,084

6,699

2,840

Pre-tax profit

1,295

1,948

1,298

1,907

1,770

2,294

3,479

1,906

2,293

1,422

Depreciation

603

633

354

841

1,077

1,209

1,362

1,594

1,491

1,624

Goodwill amortization

303

337

177

487

669

849

917

1,009

1,056

1,147

Change in accounts receivable

-195

669

-325

1,739

382

935

191

812

496

500

Change in inventories

128

-181

8

-74

-173

-689

455

-472

759

-620

Change in accounts payable

373

354

102

-558

365

-295

683

-765

-569

69

Cash flows from investing activities (2)-2,784-2,747-1,248-5,425-7,559-3,958-5,040-3,909-6,848-5,921

Purchase of tangible fixed assets-1,125-2,488-805-1,625-4,180-2,360-3,674-2,170-4,050-3,094Purchase of intangible fixed assets

-3

-5

-1

-13

-44

-93

-273

-192

-190

-82

Purchase, sale, and redemption of investment securities

0

10

2

1

129

-267

-19

-39

-16

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

27

36

18

-245

-56

-106

-106

-38

-95

-3

-511

606

318

-1,635-3,853

-120

1,369

-825

-149

-3,081

Free cash flow (1+2)
Cash flows from financing activities

774-1,069

425

1,654

4,864

-483

-1,792

998

8,050

4,338

Change in short-term borrowings

-695

175

1,293

685

7,255

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

2,598

1,471

Change in long-term borrowings

4,816

7,292

3,701

-297

-304

1,276

-728

-489

1,846

-250

Acquisition of treasury stock

82

0

0

-129

-1,155

Dividends paid

-83

-117

-162

-276

-221

-190

-896

5,292

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.
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 JPY2.2bn in JPY03/17,
accounting for the bulk of the deficit in both years.
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. As the company
continues to invests in business expansions, free cash flow has been negative since the start of the third medium-term plan, withthe exception of FY03/16 when free cash flow turned positive due to temporary factors that sharply lifted profits.

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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 for business expansion.
Short-term borrowing:
FY03/12 (acquisition of land, etc., for new pharmacies)
FY03/14 (acquisition of land for serviced elderly housing facilities and new pharmacies)
FY03/18 (funding for M&A and in preparation for future M&A and capital expenditures)
Long-term borrowing:
FY03/13 (acquisition of consolidated subsidiary, etc.)
FY03/15 (acquisition of land for new pharmacies)
FY03/17 (acquisition of land for pharmacies, funding for M&A activities such as share/business acquisitions)
FY03/18 (funding for M&A and in preparation for future M&A and capital expenditures)
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.

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Historical performance
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 refers to net income 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 distributor compliance toimprove ethical drug distribution” whose purpose was to ensure stable supply of drugs.

▷ Company response: The Pharmaceuticals Network business increased the number of network members (affiliates), mainly amongsmall 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 the company.
The company attributes the growth to the implementation of distribution improvement guidelines and revisions 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 forhigher insurance points, a remaining concern is that even after meeting targets for basic dispensing fees and the generic drug
dispensing and community support system premiums, 66% of pharmacies still do not qualify for the community support system
premium.

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Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp▷ Store improvements: In response to dispensing fee revisions, the company encouraged its pharmacies to exercise their functions
as local pharmacies that support the health of local residents in a variety of ways and as family pharmacies/pharmacists thatengage 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

Measures implemented in response to dispensing fee revisions
Basic dispensing fee
FY03/18

FY03/18 Act.

(points)
Basic dispensing fee

FY03/19

Basic fee 1

41

Basic fee 1

41

Basic fee 2

25

Basic fee 2

25

Basic fee 3

20

Basic fee 3-b

15

307

77.1%

-

45.0%

204

25 points

9

2.3%

-

1.7%

9

2.1%

15 points

-

-

-

53.3%

208

49.4%

20 points

82

20.6%

-

-

-

-

Total number of pharmacies

398

FY03/19 Act.

FY03/19 Est.

No. of pharmacies
-

-

-

19.7%

120

239

60.1%

-

25.3%

114

27.1%

22

18 points

105

26.4%

-

28.8%

89

21.1%

0 point

54

13.6%

-

26.2%

98

23.3%

18

Total number of pharmacies

398

85% or higher

26

65% or higher

18

80% or higher
75% or higher-

FY03/18 Act.

Community support system premiumStandard dispensing premium

FY03/19 (new)32 Community
support system
premium421

22 points

22

Standard
dispensing
premium

48.5%

26 points

75% or higher

FY03/18-

FY03/18 Act.
Generic drug dispensing premium

FY03/19

FY03/19 Act.

41 points

Generic drug dispensing premium
FY03/18

FY03/19 Est.

No. of pharmacies421

FY03/19 Est.

No. of pharmacies

28.5%

FY03/19 Act.

Eliminated32 points

217

54.5%

-

-

-

-

0 point

181

45.5%

-

-

-

-

Total number of pharmacies

398

-

-

-

-

35

Community support system premium

Newly established

35 points

-

-

-

33.4%

143

34.0%

0 point

-

-

-

66.6%

278

66.0%

Total number of pharmacies

-

-

-

421

Source: Shared Research based on company data
Note: Includes pharmacies that were closed as of March 31, 2019, but excludes those that were temporarily closed.

Store breakdown by fees/premiums in FY03/19
Basic dispensing fees

Generic drug dispensing premiums

Community support system premiums

0 points
23.3%

15 points
49.4%

41 points
48.5%

35 points
34.0%

26 points
28.5%
18 points
21.1%

0 points
66.0%
22 points
27.1%

25 points
2.1%

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Estimated

Estimated

Estimated

0 points
26.2%

41 points
45.0%

26 points
19.7%

15 points
53.3%

35 points
33.4%

0 points
66.6%

22 points
25.3%
18 points
28.8%

25 points
1.7%

FY03/18 results (pre-revision):
FY03/19 forecast (post-revision):

Weighted average points perprescription

Weighted average points perprescription

Weighted average points perprescription
36.0 pts
28.3 pts

FY03/18 results (pre-revision):17.2 pts

FY03/18 results (pre-revision):18.8 pts

FY03/19 forecast (post-revision):

15.2 pts

FY03/19 forecast (post-revision):

13.8 pts

FY03/19 results (post-revision): 16.6 pts FY03/19 results (post-revision): 14.3 pts

FY03/19 results (post-revision): 29.1pts
Source: Shared Research based on company data

Earnings comparison between drug wholesalers (drug wholesaling business) and dispensing pharmacy operators

TickerCompany

Sales

YoY

(JPYmn)OP

YoY(JPYmn)2784

Alfresa Holdings

2,311,312

1.5%

40,268

14.1%

3151

Vital KSK Holdings

531,400

-1.0%

2,639

27.3%

7459

Medipal Holdings

2,100,976-0.8%

22,460

15.6%

8129

Toho Holdings

1,127,836

1.3%

16,084

-6.2%

9987

Suzuken

1,993,213

0.7%

22,857

58.8%

OP

YoY

TickerCompany

Sales

YoY

(JPYmn)(JPYmn)3034

Qol134,122

-0.7%

6,349

-26.6%

3341

Nihon Chouzai

208,610

1.7%

8,707

-29.8%

4350

Medical System Network

90,703

4.1%

1,068

-65.1%

7649

Sugi Holdings **488,464

6.9%

25,817

4.3%

9277

Sogo Medical *106,282

-3.3%

5,311

-25.6%

Source: Shared Research based on company data (companies with March fiscal year ends [FY03/19 results])*Sogo Medical (4775) transitioned to Sogo Medical Holdings (9277) in October 2018**Sugi Holdings has February fiscal year end; whole company has only one segment***Toho Holdings engages in both wholesaling and dispensing pharmacy businessLeasing 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 unitsof Wisteria Senri-Chuo and 47 of the 115 units of Wisteria Minami Ichijo were occupied

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Wisteria series facilities
Property

OpenedOccupancy

Wisteria N17

December 2007

90.6%

Wisteria Kiyota

May 2013

98.7%

Wisteria Otaru Inaho

December 2015

92.6%

Wisteria Senri-Chuo

May 2016

68.3%

Wisteria Minami Ichijo

November 2018

40.9%

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

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

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

Q3 FY03/19 earnings results (out February 6, 2019)
Overview
Cumulative Q3 FY03/19 (April-December 2018) earnings results▷ Sales:

JPY72.8bn (+3.2% YoY)

▷ Operating profit:

JPY1.0bn (-54.5% YoY)

▷ Recurring profit:

JPY1.0bn (-56.7% YoY)

▷ Net income*:

JPY372mn (-60.6% YoY)*Net income refers to net income attributable to owners of the parent.

Regarding the business environment in FY03/19, its profits continued to face harsh circumstances primarily in the Dispensing
Pharmacy business, due to NHI drug price and dispensing fee revisions implemented in April 2018. However, the number of
network members in the Pharmaceuticals Network business continued to expand at a brisk pace, with harsh negotiations
continued between drug wholesalers and dispensing pharmacies over terms of business. The number of members as of end-Q3
FY03/19 reached 3,430, surpassing the full-year target of 3,200 and up 921 over end-FY03/18. Medical System Network
continues to expand Pharmaceuticals Network business membership amid the harsh business climate for dispensing pharmacies
while also providing guidance and promoting improvement at dispensing pharmacies to align with the revised dispensing feeschedule. The company is also making progress in reshuffling its dispensing pharmacies through acquisition of new stores,
including M&A, and closure of others.

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Segment performance
Pharmaceuticals Network
Cumulative Q3 FY03/19 segment earnings results▷ Segment sales: JPY2.9bn (+8.3% YoY; includes internal sales or transfers between segments; same hereafter)▷ Segment profits: JPY1.7bn (+17.5% YoY)

MHLW applied guidelines promoting improvement of drug distribution by drug manufacturers, drug wholesalers, and medical
institutions/dispensing pharmacies (issued on January 23, 2018 "Guidelines for compliance by distributors for the improvementof ethical drug distribution") from April 2018. The start of the government-led initiative to resolve issues with drug distribution
has increased the need for improving drug distribution efficiency undertaken by Medical System Network and this has led to abrisk expansion in the number of its new members from Q3 FY03/19. The company has already reached its full-year target of
3,200 members. The number of network members as of December 31, 2018 stood at 3,369 dispensing pharmacies and total
3,430 including hospitals and clinics (up 921 over end-FY03/18). The company noted this rising trend has continued in Q4
FY03/19.

Dispensing Pharmacy
Cumulative Q3 FY03/19 segment earnings results▷ Segment sales: JPY67.3bn (+3.2% YoY)
▷ Segment profit: JPY712mn (-67.8% YoY)

In response to the April 2018 dispensing fee revisions, the company encouraged group dispensing 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 in-home medical treatment initiatives. On improvements at existing pharmacies, it will take time to meet some of
the requirements for community support premiums (e.g., number of years pharmacist has been employed), but overall progress
is in line with initial plans as shown in the following table. As regards to reassessing pharmacies, in addition to opening fivepharmacies in cumulative Q3, the company acquired one company (two pharmacies) through a share acquisition and obtained
five other pharmacies through business transfers. On the other hand, the company closed five dispensing pharmacies and one
drug store. In January 2019, Medical System Network acquired Nagatomi Pharmacy Corp., which operates 23 dispensing
pharmacies in Oita Prefecture and has excellent operational knowhow for regional pharmacies and a solid financial position, tofacilitate expansion in the Kyushu area and the continued growth of its group dispensing pharmacy structure.
Number of locations (as of December 31 2018): 406 dispensing pharmacies, one care plan center, and seven drug stores

Leasing and Facility-related
Cumulative Q3 FY03/19 segment earnings results▷ Segment sales: JPY2.4bn (+52.6% YoY)
▷ Segment loss: JPY51mn (loss of JPY109mn in cumulative Q3 FY03/18)

The company posted operating losses for Q3, despite a sharp expansion in sales supported by firm leasing revenues and growthin business overseeing design and construction of medical facilities in cumulative Q3 FY03/19 (Apr–Dec 2018), due to upfront
expenses on a serviced elderly housing facility Wisteria Minami Ichijo, which opened in November 2018. The occupancy rate
improved as 53 of the 82 units (64.6% as of end-Q3 from 54.9% as of end-Q2) of Wisteria Senri Chuo and 38 of the 115 units(versus 21 contracted units as of November 2, 2018) of Wisteria Minami Ichijo were occupied.

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Wisteria series facilities
Property

OpenedOccupancy

Wisteria N17

Dec. 2007

92.0%

Wisteria Kiyota

May 2013

96.0%

Wisteria Otaru Inaho

Dec. 2015

93.8%

Wisteria Senri-Chuo

May 2016

64.6%

Wisteria Minami Ichijo

Nov. 2018

33.0%

Source: Shared Research based on company data (as of December 31, 2018)

Food Service
Cumulative Q3 FY03/19 segment earnings results▷ Segment sales: JPY2.4bn (-27.4% YoY)
▷ Segment profits: JPY28mn (-42.9% YoY)

Profits fell as a staffing shortage boosted labor costs at some facilities, despite progress in restructuring efforts through withdrawal
from unprofitable facilities.

Other
Cumulative Q3 FY03/19 segment earnings results▷ Segment sales: JPY166mn (+133.8% YoY)
▷ Segment loss: JPY105mn (JPY75mn segment loss in cumulative Q3 FY03/18)

Manufacture and market pharmaceuticals business is conducted by Feldsenf Pharma Co., Ltd. The company aims to sell 16
generic active pharmaceutical ingredients (APIs) and 32 products and provide a stable supply of high-quality, low-cost genericdrugs. It posted a modest operating loss in Q3.

1H FY03/19 earnings results
Overview: 1H results achieve targets
In 1H FY03/19, the company posted JPY47.6bn (+2.2% YoY) in sales owing to steady performances in the mainstay
Pharmaceuticals Network business and contributions from new pharmacies and pharmacies acquired through M&A in the
Dispensing Pharmacy business. However, unsuccessful price negotiations with drug wholesalers as a result of the NHI drug priceand dispensing fee revisions implemented in April 2018 weighed heavily on earnings. As a result, operating profit came in at
JPY476mn (-62.5% YoY), recurring profit JPY438mn (-65.6% YoY), and net income attributable to owners of the parent JPY119mn(-67.2% YoY). Sales and profits reached initial forecasts for 1H FY03/19 (target sales of JPY46.5bn, operating profit of JPY450mn,
and recurring profit of JPY400mn).

Segment performance
Pharmaceuticals Network
Sales were JPY1.8bn (+5.2% YoY) and operating profit JPY1.1bn (+13.5% YoY). The number of member pharmacies and affiliates
increased at a steady pace in 1H FY03/19. As of September 30, 2018, the total—including pharmacies, hospitals, and clinics—was
2,976 (+467 from end-FY03/18). Verses the year-end target of 3,200, the number of network members came to 2,976 in
September 2018 and to 3,207 in October, surpassing the target. The company noted an ongoing trend in dispensing pharmacies
to join the network as a means of supporting their businesses in response to the April 2018 NHI drug price revisions and theensuing uncertainty over price negotiations with drug wholesalers as a result of the revisions. The network system was affectedby the earthquake that struck Hokkaido in early September 2018, but the overall impact was minimized as service was restored
the following day supported by the company's backup system.

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Dispensing Pharmacy
Sales were JPY44.0bn (+2.7% YoY) and operating profit JPY202mn (-83.4% YoY). In 1H, Medical System Network opened two
new dispensing pharmacies, added five through acquisition, and closed one dispensing pharmacy and one drug store. As a result,the company had 405 dispensing pharmacies, one care plan center, and seven drugstores as of September 30, 2018. While new
pharmacy openings and additions through acquisitions contributed to sales, operating profit dropped due to the impact of NHI
drug price and dispensing fee revisions.
Although the company is advising pharmacies on how to respond to the dispensing fee revisions, the eligibility criteria for thegeneric drug dispensing premiums were raised substantially, thereby leading to an increase in the number of pharmacies that do
not qualify. Prescription volumes at existing pharmacies had been projected to increase 2.4% YoY in 1H, but in fact declined by
0.3% YoY. This is attributable to the YoY decline in the number of operating days at existing pharmacies in Hokkaido due to the
Hokkaido earthquake and subsequent blackouts that occurred throughout the region.

Leasing and Facility-related
In this segment, the company posted sales of JPY1.5bn (+38.9% YoY) and an operating profit of JPY10mn (operating loss of
JPY73mn in 1H FY03/18). Reasons for the increased sales include steady inflow of leasing revenue and increased businessoverseeing design and construction of medical facilities. The company was able to bring operating profit into the black due tohigher sales, despite upfront spending on serviced elderly housing facility Wisteria Minami Ichijo, opened in November 2018.
Another facility, Wisteria Senri-Chuo, that opened in May 2016 saw 45 of the 82 units occupied (occupancy rate of 54.9%) as of
September 30, 2018. Occupancy rates for the other three Wisteria facilities in operation exceeded 90%.
Wisteria series facilities

Property

OpenedOccupancy

Wisteria N17

Dec. 2007

93.8%

Wisteria Kiyota

May 2013

96.0%

Wisteria Otaru Inaho

Dec. 2015

92.6%

Wisteria Senri-Chuo

May 2016

54.9%

Wisteria Minami Ichijo

Nov. 2018

Contracted units as of Nov. 2: 21
Applications: 14

Source: Shared Research based on company data

Food Service
Sales were JPY1.6bn (-31.0% YoY) and operating profit JPY18mn (-47.1% YoY). Sales fell owing to withdrawal from unprofitablefacilities. Increased labor costs at some of the facilities caused operating profit to drop.

Other
Sales were JPY91mn (+71.7% YoY), but the company reported an operating loss of JPY73mn (operating loss of JPY58mn in 1H
FY03/18). Consolidated subsidiary Feldsenf Pharma Co., Ltd. (manufactures and sells pharmaceuticals) began sales of genericdrugs in June 2018.

Financial condition
Total assets as of end-1H FY03/19 were JPY61.7bn (-JPY1.1bn versus end-FY03/18). Current assets fell by JPY1.2bn versus
end-FY03/18 due to a decline in cash and deposits, but fixed assets increased by JPY132mn versus end-FY03/18 on an increase indeferred tax assets among other factors.

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Liabilities fell JPY1.2bn versus end-FY03/18 to JPY51.0bn due to a JPY468mn drop in current liabilities and a JPY716mn drop in
fixed liabilities. The decline in liabilities was largely attributable to a drop in accounts payable, income taxes payable, andlong-term borrowing.
Net assets were up JPY108mn versus end-FY03/18 to JYP10.7bn on increases in shareholders’ equity and accumulated othercomprehensive income.

Cash flow
Cash and cash equivalents totaled JPY8.5bn at end-1H FY03/19, a JPY1.7bn decrease from end-FY03/18.

Cash flow from operating activities
Cash outflow from operating activities was JPY48mn (cash inflow of JPY3.4bn in FY03/18), mainly due to an increase in inventory
assets and income tax paid.

Cash flow from investing activities
Cash outflow from investing activities was JPY1.5bn (cash outflow of JPY2.8bn in FY03/18), mainly due to expenditure for theacquisition of tangible fixed assets and the acquisition of businesses.

Cash flow from financing activities
Cash outflow from financing activities was JPY274mn (cash inflow of JPY4.8bn in FY03/18), mainly due to repayments oflong-term borrowing and lease obligations.

Q1 FY03/19 earnings results
Overview: Profit down due to impact of NHI drug price and dispensing fee revisions
In Q1 FY03/19, the company posted JPY23.9bn (+2.2% YoY) in sales owing to steady performances in the mainstay
Pharmaceuticals Network business and the Dispensing Pharmacy business. However, the NHI drug price and dispensing fee
revisions implemented in April 2018 weighed heavily on earnings. As a result, operating profit came in at JPY212mn (-64.2% YoY),
recurring profit JPY192mn (-67.5% YoY), and net income attributable to owners of the parent JPY101mn (-65.1% YoY). The
impact of NHI drug price and dispensing fee revisions on profit was largely within initial expectations. In the mainstay
Pharmaceuticals Network business, the number of network members is steadily increasing, and in the mainstay Dispensing
Pharmacy business, directly operated pharmacies are making progress with measures implemented in response to the NHI drug
price and dispensing fee revisions.

Segment performance
Pharmaceuticals Network
Sales were JPY955mn (+9.1% YoY) and operating profit JPY554mn (+17.6% YoY). The number of member pharmacies andaffiliates increased at a steady pace in Q1 FY03/19. As of June 30, 2018, the total—including pharmacies, hospitals, andclinics—was 2,723 (up 214 from end-FY03/18). The increase in order placement fees from a rise in the number of network
members drove operating profit growth. The company said the number of member pharmacies and affiliates increased steadily
despite Q1 coinciding with the purchase price negotiation period with pharmaceutical wholesalers who have been affected by
the NHI drug price revision (around September in case of 2018). The number of network members already came to 2,723 at
end-Q1 FY03/19 versus the full-year target of 3,200, reaching 30% of the forecast full-year net increase in Q1 alone. Although the
NHI drug price and dispensing fee revisions implemented in April 2018 had negative impacts on dispensing fees, they worked toencourage pharmacies to join the company’s pharmaceuticals network as the pharmacies looked to benefit from the company’s
strength in price negotiation.

Dispensing Pharmacy
Sales were JPY22.2bn (+3.2% YoY) and operating profit JPY130mn (-78.0% YoY). In Q1, Medical System Network opened two
new pharmacies, added five through acquisition, and closed one drug store. The company had 406 dispensing pharmacies, one

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care plan center, and seven drugstores as of June 30, 2018. While new pharmacy openings and additions contributed to sales,
operating profit dropped due to the impact of NHI drug price and dispensing fee revisions.
In Dispensing Pharmacy, Medical System Network is pushing forward initiatives to obtain additional points under the revised
dispensing fee structure. The company plans to implement measures to increase the number of prescriptions and further
promote transition to pharmacies that contribute to community medical care.
Following the dispensing fee revision enacted in April 2018, the company is expediting store reforms to obtain additions points
in the areas of basic dispensing fees, generic drug dispensing premium, and community support system premium. Versus
full-year target for each category, progress in some areas have already come close to meeting the full-year target as of Q1
FY03/19. According to the company, store reform is progressing steadily overall.

Leasing and Facility-related
In this segment, the company posted sales of JPY600mn (+15.2% YoY) and an operating loss of JPY32mn (loss of JPY40mn in Q1
FY03/18). The inflow of leasing revenue was mostly steady, but the company continued to record an operating loss due toupfront spending on serviced elderly housing facility Wisteria Minami Ichijo, slated for opening in November 2018. Anotherfacility, Wisteria Senri-Chuo, that opened in May 2016 saw 40 of the 82 units occupied as of June 30, 2018. As of July 31, 2018,
the company received 79 applications for residency at Wisteria Minami Ichijo slated for opening in November 2018 (total 104
units).

Food Service
Sales were JPY788mn (-31.8% YoY) and operating profit JPY1mn (-80.0% YoY), owing to withdrawal from unprofitable projects.
While the company sustained profitability, increased labor costs at some of the facilities caused operating profit to drop.

Other
Sales were flat YoY at JPY33mn, but the company reported a JPY36mn operating loss (JPY35mn operating loss in Q1 FY03/18).
Consolidated subsidiary Feldsenf Pharma (manufactures and sells pharmaceuticals) began sales of generic drugs in June 2018.

Financial condition
Total assets as of end-Q1 FY03/19 was JPY62.0bn (-JPY796mn versus end-FY03/18). Current assets fell by JPY1.2bn versus
end-FY03/18 due to a decline in cash and deposits, but fixed assets increased by JPY418mn versus end-FY03/18 on an increase ingoodwill among other factors.
Liabilities fell JPY836mn versus end-FY03/18 to JPY51.3bn due to a JPY1.0bn drop in fixed liabilities despite a JPY196mn increase incurrent liabilities. The decline in liabilities was largely attributable to a JPY962mn drop in long-term borrowing versus a JPY731mn
increase in short-term borrowing (including long-term borrowing to be repaid within one year).
Net assets were up JPY39mn versus end-FY03/18 to JYP10.6bn. Retained earnings fell due to dividend payments, but capital andcapital reserves increased thanks to exercise of stock acquisition rights and so did valuation differences on available-for-salesecurities.

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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
February 2019
On February 15, 2019, the company announced an absorption-type merger with A-System Co., Ltd., a consolidated subsidiary,
and revisions to the trade names of two other subsidiaries: Apotec and Kyoei Pharmacy.
The company says the goal of the merger (scheduled tentatively for April 1, 2019) is to consolidate corporate resources, improve
operational efficiency, and accelerate decision-making. A-System is already collaborating with Medical System Network on thedevelopment and maintenance of pharmaceutical systems.
Apotec and Kyoei Pharmacy operate dispensing pharmacies in Tohoku and West Japan, respectively. Trade names of the two
subsidiaries were changed to align with Medical System Network's Nanohana Pharmacy chain so as to improve name recognitionand strengthen the business base. Apotec was renamed to Nanohana Tohoku and Kyoei Pharmacy to Nanohana West Japan(scheduled to be effective from April 1, 2019).

January 2019
On January 8, 2019, the company announced the latest opening and closure of its dispensing pharmacies.
The company announced that it acquired all shares in Nagatomi Pharmacy Corporation (headquarters: Oita, Oita Prefecture),
which operates 23 dispensing pharmacies, as of January 8, 2019 and that it sold two dispensing pharmacies as of January 1, 2019.
These transactions brought the group’s total store count to 438, breaking down to 427 dispensing pharmacies, one care plan
center (Hokkaido), seven drugstores (three in Ibaraki, four in Osaka), and three visiting nurse stations (two in Tokyo, one in
Miyagi).

December 2018
On December 13, 2018, the company announced the launch of new generic drugs by Feldsenf Pharma Co., Ltd.
The following four APIs and eight products will be included in the NHI drug price list on December 14 and will be successively
marketed by consolidated subsidiary Feldsenf Pharma Co., Ltd.
Newly listed drugs for December 2018
Brand name

Therapeutic category

Originator/alternatives

Clarithromycin tablet 200mg (Feldsenf)

Macrolide antibiotic formulation

Clarith tablet 200mg
Klaricid tablet 200mg

Paroxetine tablet 5mg / 10mg / 20mg (Feldsenf)

Selective serotonin reuptake inhibitor

Paxil tablet 5mg / 10mg / 20mg

Mirtazapine tablet 15mg / 30mg (Feldsenf)

Noradrenergic and serotonergic antidepressantRosuvastatin tablet 2.5mg / 5mg (Feldsenf)

HMG-CoA reductase inhibitor

Reflex tablet 15mg / 30mg
Remeron tablet 15mg / 30mg
Crestor tablet 2.5mg / 5mg

Source: Shared Research based on company data

Note: Rosuvastatin tablet 2.5mg/5mg (Feldsenf) is scheduled for commercialization in or after January 2019.
On December 6, 2018, the company announced the acquisition of shares in Nagatomi Pharmacy Corp.
At a Board of Directors meeting held on December 6, 2018, the company resolved to acquire all shares of Nagatomi Pharmacy
Corp. (HQ: Oita, Oita Prefecture; Representative Director and President: Shigeru Nagatomi) and make it a consolidated
subsidiary.
Nagatomi Pharmacy operates 23 dispensing pharmacies in Oita, and of which, three are certified as health support pharmacies*.
It is known for its community-based operation of pharmacies as it engages in community activities such as health-related events(e.g., on exercise and diet) and rolls out health-awareness and promotion initiatives focused on regional communities. Medical
System Network aims to further improve the quality of family pharmacies it operates by welcoming Nagatomi Pharmacy to thegroup. Further, by including Nagatomi’s pharmacies to the company’s network of pharmacies it has already built in Kyushu, an

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area of focus for the company in its effort to become the dominant pharmacy operator, it aims to further expand the number ofpharmacies under its operation. By doing so, the company thinks it can establish an efficient management structure and boost
profitability.
*Health support pharmacies: As pharmacies that satisfy certain requirements set by the Minister of Health, Labour and Welfare, health support
pharmacies provide consultations on nursing care, diet, and nutrition as well as on over-the-counter drugs and health food, in addition to fulfilling
functions of family pharmacists and pharmacies.

Details of the share acquisition
Number of shares to be acquired

600 common shares (number of voting rights: 600)

Acquisition priceApproximately JPY3,494mn (including advisory fees and other expenses of roughly
JPY303mn)

Schedule

Date resolved by the Board of Directors: December 6, 2018
Date share transfer agreement was concluded: December 6, 2018
Date of share transfer: January 8, 2019 (tentative)

Overview of Nagatomi Pharmacy Corp.
Business

Dispensing pharmacy operation

Capital

JPY30mn

Date established

October 1, 1982

Operating results and financial position (FY09/18)

Net assets:

JPY2.8bn

Total assets:
Sales:

JPY3.7bn
JPY3.8bn (-1.8% YoY)

Operating profit:
Recurring profit:

JPY172mn (-10.4% YoY)
JPY151mn (-31.4% YoY)

Net income:

JPY109mn (-25.9% YoY)

On December 3, 2018, the company announced the latest opening and closure of its dispensing pharmacies.
The company announced that it opened one new dispensing pharmacy on December 3, 2018 and that it closed two on
November 30 of the same year. These changes bring the group’s store count to 417, breaking down to 406 dispensing
pharmacies, one care plan center (Hokkaido), seven drugstores (three in Ibaraki, four in Osaka), and three visiting nurse stations(two in Tokyo, one in Miyagi).

New dispensing pharmacy (opened on December 3, 2018)
Store name: Nanohana Pharmacy Sapporo Nijuyonken Store
Location: Nishi-ku, Sapporo
Operating company: Nanohana Hokkaido Co., Ltd

Closures (effective November 30, 2018)
Store name: Nanohana Pharmacy Shizuoka Naka-Cho Store
Location: Aoi-ku, Shizuoka
Operating company: Nanohana Central Co., Ltd
Store name: Nanohana Pharmacy Nagoya Fushiya Store
Location: Nakagawa-ku, Nagoya
Operating company: Nanohana Central Co., Ltd

November 2018
On November 1, 2018, the company announced the latest opening and closure of its dispensing pharmacies.
The company opened one dispensing pharmacy (Chuo-ku, Sapporo) on November 1, 2018, and closed two dispensing
pharmacies (one in Kushiro, Hokkaido, and another in Mito, Ibaraki Prefecture) on October 31, 2018. As a result, the company

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operates a total of 418 stores: 407 dispensing pharmacies, one care plan center (Hokkaido), seven drugstores (three in Ibaraki,
four in Osaka), and three visiting nurse stations (one in Miyagi, two in Tokyo).

October 2018
On October 19, 2018, the company announced plans for opening of its new Wisteria Minami Ichijo facility.
The company announced that it plans to open the Wisteria Minami Ichijo for business on November 1, 2018, and would also be
holding a ceremony to celebrate the completion of the new facility on October 23. With 12 stories above ground and one story
below ground, the new complex includes space for medical tenants, a dispensing pharmacy, a child daycare facility, food service
tenants, an event hall, and a serviced elderly housing facility. The new complex embodies the company's guiding principle ofhelping to better the quality of life for local residents by building high-quality medical infrastructure.
The serviced elderly housing facility, located on the upper-level floors (5–12), will be the fourth in the company's Wisteria seriesof such facilities in Hokkaido (also one of the largest of its kind in Hokkaido). With services ranging from basic support services all
the way to primary nursing care, the assisted living units are designed for seniors age 60 and above, though several units on the
top floor will be available for leasing by the general public.
Building name:

Wisteria Minami Ichijo

Address:

291 Banchi-81, Minami Ichijo Nishi 14 Chome, Chuo-ku, Sapporo, Hokkaido

Lot size:

3,105.77sqm

Total floor space:

14,072.99sqm

Uses:

Parking lot, event hall, food service tenants, medical tenants, child daycare, serviced elderly housing
facility, rental apartments for general public

Description:

One below-ground floor, 12 above-ground floors, 31 parking spaces below ground and 24 above groundOn October 1, 2018, the company announced the number of pharmaceuticals network members and its policy initiatives.
The company announced that the number of pharmaceuticals network members has reached 3,207 as of October 1, 2018.
Since the launch of the pharmaceuticals network service in September 1999, the Pharmaceuticals Network business expanded toinclude over 3,000 members in 20 years. Based on its fifth medium-term management plan (FY03/19–FY03/22) announced in
May 2018, the company aims to strengthen its contributions to improving drug distribution efficiency and promoting community
medical care through the pharmaceuticals network and grow as a provider of infrastructure that supports drug distribution in
Japan.
1.

Pharmaceuticals Network businessAs pharmaceutical drugs are products that affect human lives, drug distribution demands safety and emergency response
capabilities at all times. However, the cost of maintaining such a system has burdened dispensing pharmacies and drug
wholesalers. The company launched the pharmaceuticals network service to connect member pharmacies with drug
wholesalers, and to bring about significant cost reduction to both parties through improving operational efficiency andstreamlining drug distribution. Features of the company’s Pharmaceuticals Network business are as follows:(1) Common terms of payment (two months after closing)
At the time of signing the membership agreement, new member pharmacies are asked to agree to make payments forpurchased drugs two months after closing to minimize the time between their receiving reimbursement of medical
treatment fees (insurance claims) and making payments to drug wholesalers. This improves capital efficiency andreduces credit management costs for drug wholesalers.
(2) Improve efficiency of drug distribution

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As part of terms and conditions of membership in the pharmaceuticals network, members are required to cooperate on
efforts to improve drug distribution efficiency. In specific, network members are requested to maintain the share of
online orders (electronic ordering system [EOS]) that does not rely on telephone or FAX at or over 90%, reduce thenumber of emergency deliveries, and to reduce returns to drug wholesalers by utilizing deadstock exchange (slowmoving inventory clearance service). For network members who agree to such terms and conditions, the company
provides services comprising price negotiations with drug wholesalers, introduction of optimal and economicalordering and inventory management systems, and labor-efficient settlement of bills. In turn, network members canutilize the time freed up thanks to reduced operational burden to build close relationships with patients, improve theirfamily pharmacy functions, and conduct pharmacist training to enhance expertise. Further, by holding seminars formember pharmacies, the company can address the needs for pharmacist training and sharing of telework know-hows.
Overall, the company comprehensively supports management of the network member pharmacies.
2.

Initiatives in the Pharmaceuticals Network business

The company’s basic policy for the Pharmaceuticals Network business as set forth in the fifth medium-term management plan is
as follows: Through expansion of the Pharmaceuticals Network business, support small and medium-tier pharmacies that help
sustain community-based medical care and collaborate with network members to improve efficiency of drug distribution. Basedon the policy, the company intends to accelerate the following initiatives:(1) Further improve drug distribution
To further improve drug distribution, the company identified five new parameters in addition to the existing three.
These eight parameters are EOS ordering, product returns, emergency delivery, number of deliveries, number of orders,time of ordering, time of delivery, and delivery method. The company’s group pharmacies have already demonstrated
excellent results, achieving EOS ordering rate of greater than 95%, product return rates in between 0.2–0.3%, andalmost no emergency delivery of common drugs. With an aim of realizing once-a-day fixed-time ordering and delivery
in the most efficient method, the company improved its distribution system and began test operations. Further, Okura
Information System’s (the company’s business partner) ordering and inventory management system, Kusuri Van, wasupgraded to incorporate the eight parameters. The company intends to actively promote introduction of Kusuri Van to
improve drug distribution.
(2) Collaborate with community medical care
As family pharmacies that support the health of community members in a variety of ways, the company’s grouppharmacies strive to promote home medical care and improve their family pharmacy functions. Further, members of thepharmaceuticals network manage their pharmacies in close connection with their community. Previously, each grouppharmacy and member pharmacy individually worked to promote community medical care, but recently, social
gatherings and study groups at seminars held for network members have begun to appear, and network members insome regions have started to voluntarily exchange inventory. The company will promote collaboration of grouppharmacies and network members so that they can draw on each other’s strengths to complement what they lack aspartners in community medical care, and work toward strengthening their contributions to community medical care asa pharmaceuticals network.
Number of pharmaceuticals network members by region
Area

Directly operated
dispensing pharmacies

Network affiliates

Total

Hokkaido

123

121

244

Tohoku

23

178

201

Kanto and Koshinetsu

86

755

841

Tokai and Hokuriku

54

577

631

Kinki

63

471

534

Chugoku and Shikoku

22

194

216

Kyushu and Okinawa

37

503

540

408

2,799

3,207

Total

Source: Shared Research based on company date

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On the same day, the company announced opening of a dispensing pharmacy.
The company opened a dispensing pharmacy and acquired all shares in Aries Yakkyoku (headquartered in Sapporo, Hokkaido)that operates two dispensing pharmacies. Further, the company closed a “monzen” dispensing pharmacy (an independent
pharmacy located near a hospital) on July 31, 2018. As a result, the company operates a total of 419 stores: 408 dispensing
pharmacies, one care plan center (Hokkaido), seven drugstores (three in Ibaraki, four in Osaka), and three visiting nurse stations(two in Tokyo, one in Miyagi).

September 2018
On September 28, 2018, the company announced an investment in Polaris Co., Ltd.
The company announced that it had invested in Polaris Co., Ltd. (HQ: Takarazuka, Hyogo Prefecture; Representative Director:
Tsuyoshi Mori) on September 28, 2018.
1. Investment Purpose
The company is making progress in its initiatives toward enhancing the function of family pharmacies in preventative andpre-symptomatic illness care. This includes touting a principle of enabling family pharmacies to serve as "'beacons of light intowns' while providing a variety of health services to the regional community" in the Dispensing Pharmacy business; conducting
pharmacy store-front introductions of health fairs and nutrition consultation events led by pharmacists and nutritionists; andoffering patient courses for dementia prevention, including "Cognicise" (cognitive exercises for dementia prevention), also heldat pharmacies. Meanwhile, Polaris touts the concept of "firmly relying on oneself,” operating 70 day-service business facilities
around Japan specializing in independent living support, facilitating the "self-reliant lifestyle" of users with a focus on walking andphysical therapy to allow them to continue living healthy lives in the comfort of their own homes.
The business agreement with Polaris was conducted in accordance with the company’s previous announcement, "Notice ofBusiness Alliance with Polaris Co., Ltd.,” made on January 19,2018. With this investment, the company aims to strengthen
relations between the two companies and achieve faster results through their business alliance.
2. Business Alliance Details (determined January 19, 2018, refer to News and topics section)(1) Drug administration guidance and pharmaceutical intervention for users of Polaris' independent day service centers,
provided by pharmacies and pharmacists participating in Polaris group(2) Joint initiatives involving the gathering and publication of evidence regarding the efficacy of (1), above(3) Joint initiatives involving the development of model pharmacy storefronts that offer home medical care, day services andat-home dispensary of medication in an integrated manner(4) Full-scale operational support provided by Polaris should Medical System Network decide to enter the independent day
service business market(5) Mutual referrals for users of both Polaris' day service centers and the Polaris group’s pharmacy users(6) Ancillary business operations related to (1) through (5)3. Investment Details
The company invested JPY50mn, accepting a third-party allocation of new shares from Polaris.
4. Investment Summary (as of August 31, 2018)(1) Company Name: Polaris Co., Ltd.
(2) Address:

3-2-30 Isoshi, Takarazuka, Hyogo Prefecture(3) Representative:

Tsuyoshi Mori, Representative Director(4) Business lineup:

Day service center business, in-home care service business, R&D business, franchise business and other(5) Common Stock:

JPY105mn(6) Date Founded:

July 2002(7) Business relations between Medical System Network Co., Ltd., and Polaris Co., Ltd.:

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There are no investment, personal or trade relationships (including both individuals and affiliated companies) between Medical
System Network and Polaris that require disclosure. No related parties exist between Medical System Network and Polaris, itsaffiliates or affiliated companies.
5. Investment Date
Payment Date:

September 28, 2018

6. Impact on Earnings
The impact of this matter on FY03/19 consolidated earnings is expected to be minimal.

August 2018
On August 15, 2018, the company announced that consolidated subsidiary Feldsenf Pharma Co., Ltd. obtained approval to
manufacture and sell generic drugs.
The company announced that consolidated subsidiary Feldsenf Pharma obtained approval to manufacture and sell the following
five generic active pharmaceutical ingredients (APIs) and 12 products on August 15. Among the generic drugs below, Feldsenf’s
product is one of the first generic formulations of mirtazapine to be approved.
Brand name

Therapeutic category

Originator/alternatives

Amlodipine tablet
2.5mg / 5mg / 10mg (Feldsenf)

Drug for high blood pressure and angina pectoris Amlodine tablet 2.5mg / 5mg / 10mg
Prolonged-release calcium channel blocker
Norvasc tablet 2.5mg / 5mg / 10mg

Clarithromycin tablet 200mg (Feldsenf)
Clarithromycin tablet 50mg pediatric(Feldsenf)

Macrolife antibiotic formulation

Clarith tablet 200
Klaricid tablet 200mg
Clarith tablet 50 pediatric
Klaricid tablet 50mg pediatricParoxetine tablet
5mg /10mg / 20mg (Feldsenf)

Selective serotonin reuptake inhibitor

Paxil tablet 5mg / 10mg / 20mg

Mirtazapine tablet 15mg /30mg(Feldsenf)

Noradrenergic and serotonergic antidepressantReflex tablet 15mg / 30mg
Remeron tablet 15mg / 30mg

Rosuvastatin tablet 2.5mg / 5mg(Feldsenf)

HMG-CoA reductase inhibitor

Crestor tablet 2.5mg / 5mg

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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
especially crucial to internal control, and thus aims to enhance corporate governance by ensuring thorough compliance, building
a risk management system, and establishing a system for reporting financial and other important matters.

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Board of directors
A board of directors with 14 members (including three outside directors) was established as the decision-making body. Regularboard meetings are held monthly and extraordinary meetings are also conducted as needed. The company adopted an executive
officer system in June 2017, and developed a system to enhance and clearly separate management decision-making,management oversight, and business execution functions.

Board of auditors
The board of auditors is comprised of three members (two full-time corporate auditors and one part-time) and meets once
monthly in addition to extraordinary meetings as needed. Two of the three members are outside auditors.

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

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

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

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

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Major shareholders
Top shareholders

Shares held Shareholding ratio

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

20

2

22

2,594

468

3,062
1,503

Pharmaceuticals Network
Dispensing Pharmacy

Total

Pharmacists

1,243

260

Leasing and Facility-related

119

25

144

Food Service

203

374

577

Other

28

9

37

Corporate (administration)

112

7

119

3,076

885

3,961

Total

Source: Shared Research based on company data (as of March 31, 2019)
Note: The sum of temporary employees does not equal to the total due to differences in rounding methods (based on eight-hour work days).

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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RACCOON HOLDINGS, Inc.

ONO SOKKI Co., Ltd.

AnGes Inc.

Harmonic Drive Systems Inc.

Anicom Holdings, Inc.

HOUSEDO Co., Ltd.

Raysum Co., Ltd.

Anritsu Corporation

IDOM Inc.

RESORTTRUST, INC.

Apaman Co., Ltd.

IGNIS LTD.

ROUND ONE Corporation

ARATA CORPORATION

i-mobile Co.,Ltd.

RVH Inc.

Arealink Co.,Ltd.

Inabata & Co., Ltd.

RYOHIN KEIKAKU CO., LTD.

Artspark Holdings Inc.

Infocom Corporation

SanBio Company Limited

AS ONE CORPORATION

Infomart Corporation

SANIX INCORPORATEDAteam Inc.

Intelligent Wave, Inc.

Sanrio Company, Ltd.

Aucfan Co., Ltd.

ipet Insurance CO., Ltd.

AVANT CORPORATION

istyle Inc.

SBS Holdings, Inc.

Axell Corporation

Itochu Enex Co., Ltd.

Seikagaku Corporation

SATO HOLDINGS CORPORATION

Azbil Corporation

JSB Co., Ltd.

Seria Co.,Ltd.

AZIA CO., LTD.

JTEC Corporation

SHIFT Inc.

AZoom, Co., Ltd.

J Trust Co., Ltd

SHIP HEALTHCARE HOLDINGS, INC.

BEENOS Inc.

Japan Best Rescue System Co., Ltd.

SIGMAXYZ Inc.

Bell-Park Co., Ltd.

JINS HOLDINGS Inc.

SMS Co., Ltd.

Benefit One Inc.

JP-HOLDINGS, INC.

Snow Peak, Inc.

B-lot Co.,Ltd.

KAMEDA SEIKA CO., LTD.

Solasia Pharma K.K.

Broadleaf Co., Ltd.

Kenedix, Inc.

SOURCENEXT Corporation

Canon Marketing Japan Inc.

KFC Holdings Japan, Ltd.

Star Mica Holdings Co., Ltd.

Career Design Center Co., Ltd.

KI-Star Real Estate Co., Ltd.

Strike Co., Ltd.

Kondotec Inc.

SymBio Pharmaceuticals Limited

Carna Biosciences, Inc.
CARTA HOLDINGS, INC

Kumiai Chemical Industry Co., Ltd.

Synchro Food Co., Ltd.

CERES INC.

Lasertec Corporation

TAIYO HOLDINGS CO., LTD.

Chiyoda Co., Ltd.

LUCKLAND CO., LTD.

Takashimaya Company, Limited

Chugoku Marine Paints, Ltd.

MATSUI SECURITIES CO., LTD.

Take and Give Needs Co., Ltd.

cocokara fine Inc.

Medical System Network Co., Ltd.

Takihyo Co., Ltd.

COMSYS Holdings Corporation

MEDINET Co., Ltd.

TEAR Corporation

CRE, Inc.

MedPeer,Inc.

Tenpo Innovation Inc.

CREEK & RIVER Co., Ltd.

Mercuria Investment Co., Ltd.

3-D Matrix, Ltd.

Daiichi Kigenso Kagaku Kogyo Co., Ltd.

Micronics Japan Co., Ltd.

TKC Corporation

Daiseki Co., Ltd.

Milbon Co., Ltd.

TKP Corporation

DIC Corporation

MIRAIT Holdings Corporation

TOKAI Holdings Corporation

Digital Arts Inc.

Monex Goup Inc.

TOYOBO CO., LTD.

Digital Garage Inc.

MORINAGA MILK INDUSTRY CO., LTD.

Toyo Ink SC Holdings Co., Ltd

Dream Incubator Inc.

NAGASE & CO., LTD

Toyo Tanso Co., Ltd.

Earth Corporation

NAIGAI TRANS LINE LTD.

Tri-Stage Inc.

Elecom Co., Ltd.

NanoCarrier Co., Ltd.

VISION INC.

en-Japan Inc.

Net One Systems Co.,Ltd.

VISIONARY HOLDINGS CO., LTD.

euglena Co., Ltd.

Nichi-Iko Pharmaceutical Co., Ltd.

WirelessGate, Inc.

Evolable Asia Corp.

Nihon Denkei Co., Ltd.

YELLOW HAT LTD.

FaithNetwork Co., Ltd.

Nippon Koei Co., Ltd.

YOSHINOYA HOLDINGS CO., LTD.

Ferrotec Holdings Corporation

NIPPON PARKING DEVELOPMENT Co., Ltd.

YUMESHIN HOLDINGS CO., LTD.

FIELDS CORPORATIONNIPRO CORPORATION

Yume no Machi Souzou Iinkai Co., Ltd.

Financial Products Group Co., Ltd.

Nisshinbo Holdings Inc.

Yushiro Chemical Industry Co., Ltd.

FreeBit Co., Ltd.

NS TOOL CO., LTD.

ZAPPALLAS, INC.

FRONTEO, Inc.

OHIZUMI MFG. CO., LTD.

Fujita Kanko Inc.

Oisix ra daichi Inc.

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