Research Coverage Report by Shared Research Inc.

4350

Medical System Network
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Coverage initiated on: 2018-05-02
Last update: 2023-09-12

INDEX
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.
Key financial data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.
Trends and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.
Quarterly trends and results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15..
Business model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15..
Market and value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25..
Industry peers (dispensing pharmacy chains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32..
Strengths and weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33..
Historical performance and financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35...
Income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35..
Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36..
Cash flow statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37..
Historical performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38..
News and topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46..
Other information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47..
Company profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50..

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2

Executive summary
Business overview
Medical System Network's primary business is the operation of dispensing pharmacies and the provision of pharmacy support
services. In addition to operating the Nanohana Pharmacy chain, the company provides various services to medical
institutions, including directly operated pharmacies and affiliated pharmacies that have registered for membership, ranging
from pharmaceutical procurement to pharmacist training. The core service is a pharmaceutical supply chain management
service that provides unified operations such as price determination for appropriate transactions with drug wholesalers, drug
ordering, and payment settlement to all medical institutions that are members of the network. As of the end of March 2023,
the number of network members was 8,912 (+1,511 from the end of the previous fiscal year), including 428 directly operated
pharmacies and 8,484 affiliated pharmacies.
The company has four business segments: Community Pharmacy Network (accounting for 95.3% of total sales in FY03/23),
Leasing and Facility-related (2.4%), Meal Catering (2.1%), and Other (0.3%). Almost all segment profit (before adjustment) is
generated by the Community Pharmacy Network segment, a new segment disclosed from FY03/20 that integrated former
businesses and consists of four business divisions. In addition to the Community Pharmacy business, which operates
dispensing pharmacies, there are three businesses that support the operation of dispensing pharmacies: the Pharmaceutical
Network business, the Manufacture and Market Pharmaceuticals business, and the Digital Shift businesses added from
FY3/21. The company discloses the operating status of each business within this segment, but does not provide a sales andprofit breakdown by business. The Leasing and Facility-related segment develops locations for pharmacies, rents out
buildings, and operates serviced housing facilities for the elderly. The Meal Catering segment is a contracted food service
business providing meals to hospitals and welfare facilities, and the Other segment is a home-visit nursing service that
supports at-home care.
The Community Pharmacy business within the Community Pharmacy Network segment mainly operates the Nanohana
Pharmacy chain, which is directly managed by the group. The majority of dispensing pharmacies in Japan are medium-sized
regional pharmacy chains or small family-run pharmacies. The dispensing pharmacies operated by Medical System Network
are generally located near large medical institutions or in medical malls or complexes that integrate multiple clinics andhospitals. According to the Ministry of Health, Labour and Welfare, there were 61,791 dispensing pharmacies in Japan in
FY2021. Dispensing pharmacies directly operated by Medical System Network accounted for 0.7% of this market. Each of
the major dispensing pharmacy chains, including Medical System Network, has a maximum share of around 2% in terms ofpharmacy numbers, but companies are looking to grow their shares not only via new pharmacy openings but also throughacquisition of smaller operators. Since FY03/21, Medical System Network's pharmaceutical network members (including
both directly operated pharmacies and affiliates) have collectively accounted for over 10% of the domestic market.
The Pharmaceutical Network business within the Community Pharmacy Network segment provides operational support tothe company's directly operated dispensing pharmacies and general affiliates. By acting as an intermediary in pharmaceuticaltransactions between pharmacies, hospitals, and drug wholesalers, Medical System Network contributes to efficiency gains in
the drug distribution process and provides comprehensive management support services to dispensing pharmacies. In the
Manufacture and Market Pharmaceuticals business, consolidated subsidiary Feldsenf Pharma Co., Ltd. manufactures andmarkets generic pharmaceuticals. In the Digital Shift Business, consolidated subsidiary PharmaShift Co., Ltd. aims to build a
new pharmaceutical platform by supporting pharmacies' digital transformation, and is conducting family pharmacy support
services using tools such as LINE.

Trends and outlook
In FY03/23, the company reported sales of JPY109.6bn (+2.7% YoY), EBITDA of JPY6.1bn (-8.7% YoY), operating profit of
JPY3.2bn (-17.9% YoY), recurring profit of JPY3.4bn (-22.2% YoY), and net income attributable to owners of the parent of
JPY1.6bn (-32.7% YoY). Sales in the mainstay Community Pharmacy Network segment stood at JPY104.4bn (+2.9% YoY).
Within this segment, the Community Pharmacy business saw a decline in prescription unit price; still, an increase in thenumber of pharmacies through new store openings and acquisitions lifted overall segment sales. The Pharmaceutical
Network business also steadily added new network affiliates. Operating profit fell 17.9% YoY, mainly due to the impact of the
NHI drug price and dispensing fee revisions and higher labor expenses accompanying the company's efforts to step up
interpersonal services.
The company's FY03/24 earnings forecast calls for sales of JPY112.5bn (+2.7% YoY), EBITDA of JPY5.6bn (-8.5% YoY),
operating profit of JPY2.6bn (-17.8% YoY), recurring profit of JPY2.6bn (-24.0% YoY), and net income attributable to owners ofMedical System Network 4350
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3the parent of JPY1.0bn (-37.9% YoY). The company expects sales to grow 2.7% YoY, driven by an increase in the number of
network affiliates and the number of prescriptions filled. However, the company expects operating profit to decline 17.8%
YoY due to the end of transitional measures for community support system premiums and higher procurement prices
following the NHI drug price revisions.
Within the Community Pharmacy Network segment, the company will seek to further strengthen interpersonal services in
the Community Pharmacy business by fostering a medical mindset and facilitating high-quality pharmacotherapy, while also
gaining prescriptions primarily through use of the official LINE account Tsunagaru Pharmacy. In the Pharmaceutical Network
business, it will work to win new network members, provide comprehensive management support to dispensing pharmacies,
and further improve the efficiency of pharmaceutical distribution. In the Leasing and Facility-related segment, the company
aims to expedite achieving occupancy rates of 90% at all five serviced elderly housing facilities.
When reporting FY03/22 results, Medical System Network also released its sixth medium-term plan spanning FY03/23
through FY03/26. While under the fifth medium-term plan the company sought to expand both market share and the scaleof operations, under the new plan it aims to transition to a new stage in which the company's networks form a foundation
platform that functions as a new pharmacy infrastructure with group pharmacies at the core but also including affiliates.
Medical System Network plans to utilize this platform to pursue growth in various businesses.

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

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4

Key financial data
Income statement

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

FY03/21

FY03/22

FY03/23(JPYmn)

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

FY03/24
Est.

Sales

66,18275,54887,71588,865

93,977

98,232

105,241

104,257

106,685

109,551

112,500
2.7%

YoY

20.7%

14.2%

16.1%

1.3%

5.8%

4.5%

7.1%

-0.9%

2.3%

2.7%

Gross profit

22,73728,47632,801

34,16436,60737,271

40,21442,412

44,42945,921

YoY

17.1%

25.2%

15.2%

4.2%

7.2%

1.8%

7.9%

5.5%

4.8%

3.4%

Gross profit margin

34.4%

37.7%

37.4%

38.4%

39.0%

37.9%

38.2%

40.7%

41.6%

41.9%

Operating profit

2,091

2,641

3,783

2,113

3,163

1,428

1,615

3,429

3,852

3,163

2,600

YoY

2.2%

26.3%

43.2%

-44.1%

49.7%-54.9%

13.1%

112.3%

12.3%-17.9%-17.8%

Operating profit margin

3.2%

3.5%

4.3%

2.4%

3.4%

1.5%

1.5%

3.3%

3.6%

2.9%

2.3%

Recurring profit

2,020

2,540

3,860

2,109

3,250

1,501

1,560

3,479

4,313

3,355

2,550

YoY

5.6%

25.8%

52.0%

-45.4%

54.1%-53.8%

3.9%

123.0%

24.0%-22.2%-24.0%

Recurring profit margin

3.1%

3.4%

4.4%

2.4%

3.5%

1.5%

1.5%

3.3%

4.0%

3.1%

2.3%

Net income

668

885

1,720

571

1,022

462

-895

2,198

2,394

1,610

1,000

-11.6%

32.4%

94.4%

-66.8%

79.0%-54.8%--

8.9%-32.7%-37.9%

1.0%

1.2%

2.0%

0.6%

1.1%

0.5%

-

2.1%

2.2%

1.5%

0.9%

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

-

27.7

37.1

60.1

19.3

34.5

15.3

-29.5

72.5

79.4

53.4

33.1

YoY
Net marginPer-share data
Shares issued at year-end(000 shares)
EPS
EPS (fully diluted)

-

-

-

-

34.3

15.0

-

-

-

-

-

Dividend per share

8.0

8.0

9.5

10.0

10.0

10.0

10.0

10.0

12.0

12.0

10.0

Book value per share

214.7

243.3

334.9

345.3

351.4

354.8

310.4

370.2

439.7

478.9

-

Balance sheet (JPYmn)
Cash and cash equivalents

3,106

2,499

2,081

2,252

10,201

11,703

11,722

10,118

8,201

8,141

Total current assets

10,941

11,023

10,783

11,09818,736

21,055

20,57819,31318,701

20,265

Tangible fixed assets

15,976

17,24920,253

21,24624,12925,721

25,126

24,634

24,62427,060Investments and other assets

3,798

3,759

4,329

4,559

4,847

5,922

6,143

6,926

6,848

7,090

Intangible assets

12,39913,554

13,481

13,833

15,045

16,235

14,615

13,572

12,767

11,807

Total assets

43,11445,587

48,84750,73762,75968,93566,46464,44862,941

66,223

Accounts payable

7,798

8,598

9,525

9,144

9,416

10,19810,021

9,258

9,680

9,937

Short-term debt

12,922

9,214

6,910

3,863

7,463

9,158

8,905

10,210

5,935

6,377

Total current liabilities

24,88021,626

21,061

16,92021,76923,84423,29625,41820,435

21,349Long-term debt

10,94815,391

14,85920,18626,32929,73928,653

22,34823,631

24,139Total fixed liabilities

12,882

17,826

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

29,21930,385

Total liabilities

37,76239,452

38,58140,092

52,174

58,17357,04553,26049,65451,735

Total net assets

5,352

6,136

10,265

10,644

10,584

10,761

9,418

11,187

13,286

14,488

Total interest-bearing debt

23,87024,605

21,76924,04933,79238,89737,55832,55829,56630,516

Cash flow statement (JPYmn)
Cash flows from operating activities

3,706

3,838

6,409

3,084

6,699

2,840

4,232

5,205

Cash flows from investing activities-7,559-3,958-5,040-3,909-6,848-5,921-2,383-1,485-2,511-2,114

Cash flows from financing activities

4,864

-483

-1,792

998

8,050

4,338

-1,687-5,312-3,4154,010-2,918

4,973

Financial ratios
ROA (RP-based)

5.5%

5.7%

8.2%

4.2%

5.7%

2.3%

2.3%

5.3%

6.8%

5.2%

ROE

12.2%

16.2%

21.9%

5.7%

9.8%

4.3%

-8.9%

21.3%

19.6%

11.6%

Equity ratio

11.9%

12.7%

20.3%

20.1%

16.9%

15.6%

14.2%

17.3%

21.1%

21.8%

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

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5

Trends and outlook
Quarterly trends and results
Cumulative

FY03/22(JPYmn)FY03/23

FY03/24

FY03/24

Q1

Q1–Q2

Q1–Q3

Q1–Q4

Q1

Q1–Q2

Q1–Q3

Q1–Q4

Q1

Sales

25,914

52,16979,868106,685

26,29953,34081,878109,551

27,656

YoY

3.0%

2.2%

2.2%

2.3%

1.5%

2.2%

2.5%

2.7%

5.2%

Gross profit

10,73821,86133,44344,42911,062

22,31534,28745,921

11,433

YoY

10.7%

6.6%

5.6%

4.8%

3.0%

2.1%

2.5%

3.4%

3.4%

Gross profit margin

41.4%

41.9%

41.9%

41.6%

42.1%

41.8%

41.9%

41.9%

41.3%

SG&A expenses

10,981

10,071

19,99930,37940,576

10,713

21,21531,94242,758

YoY

3.1%

4.4%

5.1%

4.1%

6.4%

6.1%

5.1%

5.4%

2.5%

SG&A ratio

38.9%

38.3%

38.0%

38.0%

40.7%

39.8%

39.0%

39.0%

39.7%

Operating profit

667

1,862

3,063

3,852

348

1,099

2,344

3,163

451

-

37.4%

10.5%

12.3%

-47.8%-41.0%-23.5%-17.9%

29.6%

YoY
Operating profit margin

2.6%

3.6%

3.8%

3.6%

1.3%

2.1%

2.9%

2.9%

1.6%

Recurring profit

935

2,235

3,485

4,313

392

1,242

2,499

3,355

410

YoY

% of Est.

1H Est.

50.6%

54,670

56.4%

800

750

-

60.0%

25.8%

24.0%

-58.1%-44.4%-28.3%-22.2%

4.6%-39.6%

4.3%

4.4%

4.0%

1.5%

2.3%

3.1%

3.1%

1.5%

1.4%

Net income

583

1,431

2,144

2,394

91

502

1,195

1,610

148

-

147.6%

6.5%

8.9%-84.4%-64.9%-44.3%-32.7%

2.2%

2.7%

2.7%

2.2%

0.3%

0.9%

1.5%

1.5%

Net margin

FY03/22(JPYmn)
Sales

Q4

Q1

Q2

Q3

Q4

Q1

26,29927,041

28,53827,67327,656

3.0%

1.4%

2.1%

2.8%

1.5%

3.0%

3.0%

3.2%

5.2%

10,738

11,123

11,582

10,986

11,062

11,253

11,972

11,634

11,433

10.7%

3.0%

Gross profit margin

41.4%

42.4%

41.8%

41.0%

42.1%

41.6%

42.0%

42.0%

41.3%

SG&A expenses

10,071

9,928

10,38010,197

10,713

10,502

10,727

10,816

10,981

3.4%

5.9%

3.1%

5.8%

6.5%

1.1%

6.4%

5.8%

3.3%

6.1%

2.5%

SG&A ratio

38.9%

37.8%

37.5%

38.0%

40.7%

38.8%

37.6%

39.1%

39.7%

Operating profit

667

1,195

1,201

789

348

751

1,245

819

451

-

-15.6%-15.3%

20.3%-47.8%-37.2%

3.7%

3.8%

29.6%

3.0%

1.6%

Operating profit margin

2.6%

2.8%

4.4%

Recurring profit

935

1,300

1,250

828

392

850

1,257

856

410

-

-10.9%

-9.0%

16.8%

-58.1%-34.6%

0.6%

3.4%

4.6%

Recurring profit margin

3.6%

5.0%

4.5%

3.1%

1.5%

3.1%

4.4%

3.1%

1.5%

Net income

583

848

713

250

91

411

693

415

148

-

8.9%

-50.3%

35.1%-84.4%-51.5%

-2.8%

66.0%

62.6%

2.2%

3.2%

2.6%

0.9%

0.3%

1.5%

2.4%

1.5%

0.5%

YoY
Net margin

4.6%

4.3%

2.9%

1.3%

1,000

3.4%

YoY

YoY

2.3%
14.8%

0.9%

26,817

YoY-24.0%-37.9%

Q3

1.2%

2,550

0.5%

27,699

3.0%

2.3%
16.1%

-50.2%

Q2

2.2%

2,600
-17.8%

0.5%

26,255

3.8%

17.3%

62.6%

Q1

YoY

250

112,500

FY03/24

25,914YoY
Gross profit

FY03/2359.2%

FY Est.
2.7%

1.5%
54.7%

3.6%

YoY

24.6%

-27.2%

Recurring profit margin

Quarterly% of Est.

2.5%

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

Quarterly results
By segment (cumulative)

FY03/22(JPYmn)Sales
YoY
Community Pharmacy Network

FY03/23

FY03/24

Q1

Q1–Q2

Q1–Q3

Q1–Q4

Q1

Q1–Q2

Q1–Q3

Q1–Q4

Q1

25,914

52,16979,868106,685

26,29953,34081,878109,551

27,656

3.0%

2.2%

2.2%

2.3%

1.5%

2.2%

2.5%

2.7%

5.2%

24,65749,66375,986

101,457

25,04550,792

78,078104,399

26,356

YoY

3.1%

2.3%

2.2%

2.3%

1.6%

2.3%

2.8%

2.9%

5.2%

% of total

94.6%

94.6%

94.5%

94.5%

94.5%

94.5%

94.7%

94.5%

94.7%

Leasing and Facility-related

739

1,536

2,461

3,326

794

1,673

2,448

3,494

800

YoY

2.2%

6.8%

12.2%

13.1%

7.4%

8.9%

-0.5%

5.1%

0.8%

% of total

2.8%

2.9%

3.1%

3.1%

3.0%

3.1%

3.0%

3.2%

2.9%

Meal Catering

586

1,166

1,752

2,322

573

1,135

1,701

2,289

590

YoY

-4.2%

-6.6%

-6.5%

-6.1%

-2.2%

-2.7%

-2.9%

-1.4%

3.0%

% of total

2.1%

2.2%

2.2%

2.2%

2.2%

2.2%

2.1%

2.1%

2.1%

Other

74

152

232

305

77

151

228

304

78

YoY

45.1%

38.2%

35.7%

33.2%

4.1%

-0.7%

-1.7%

-0.3%

1.3%

% of total

0.3%

Segment sales adjustments
Operating profit
YoY
Community Pharmacy Network

0.3%

0.3%

0.3%

0.3%

-143

-350

-563

-727

-190

-412

-579

-937

-168

667

1,862

0.3%

3,063

0.3%

3,852

348

1,099

0.3%

2,344

0.3%

3,163

451

-

37.4%

10.5%

12.3%

-47.8%-41.0%-23.5%-17.9%

29.6%

1,202

2,885

4,663

6,117

1,014

2,384

4,299

5,887

1,077

177.0%

21.8%

7.7%

7.3%

-15.6%-17.4%

-7.8%

-3.8%

6.2%

Operating profit margin

4.9%

5.8%

6.1%

6.0%

4.0%

4.7%

5.5%

5.6%

4.1%

Leasing and Facility-related

-2

32

53

39

-43

-65

-97

-92

YoY

-

100.0%

55.9%

21.9%

-

-

-

-

-

Operating profit margin

-

2.1%

2.2%

1.2%

-

-

-

-

2.8%

-1

1

7

1

-11

-33

-55

-65

-14
-

YoY

Meal Catering

22

YoY

-

-

-

-

-

-

-

-

Operating profit margin

-

0.1%

0.4%

0.0%

-

-

-

-

-

Other

-7

-12

-10

-12

-2

-10

-14

-22

-8

YoY

-

-

-

-

-

-

-

-

-

Operating profit margin

-

-

-

-

-

-

-

-

Segment profit adjustments-523-1,043-1,650-2,293-608-1,175-1,787-2,542

FY03/22
Sales
YoY
Community Pharmacy Network

FY03/23-626
FY03/24

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

25,91426,255

27,69926,817

26,29927,041

28,53827,67327,656

3.0%

1.4%

2.1%

2.8%

1.5%

3.0%

3.0%

3.2%

5.2%

24,65725,00626,32325,471

25,04525,74727,28626,321

26,356

YoY

3.1%

1.6%

1.9%

2.5%

1.6%

3.0%

3.7%

3.3%

5.2%

% of total

93.5%

94.5%

94.3%

94.4%

96.8%

94.4%

95.1%

93.9%

96.3%

Leasing and Facility-related
YoY

739

797

925

865

794

879

775

1,046

800

2.2%

11.5%

22.4%

16.0%

7.4%

10.3%

-16.2%

20.9%

0.8%

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% of total

2.8%

3.0%

3.3%

3.2%

3.1%

3.2%

2.7%

3.7%

Meal Catering

586

580

586

570

573

562

566

588

590

-4.2%

-8.8%

-6.4%

-5.0%

-2.2%

-3.1%

-3.4%

3.2%

3.0%

2.1%

2.2%

2.0%

2.1%

2.2%

YoY
% of total

2.2%

2.2%

2.1%

2.1%

2.9%

Other

74

78

80

73

77

74

77

76

78

YoY

45.1%

32.2%

31.1%

25.9%

4.1%

-5.1%

-3.8%

4.1%

1.3%

% of total

0.3%

0.3%

0.3%

0.3%

0.3%

0.3%

0.3%

0.3%

0.3%
274

Segment sales adjustments

-463

-207

-213

-164

413

-222

-167

-358

Operating profit

667

1,195

1,201

789

348

751

1,245

819

451

-

-15.6%-15.3%

20.3%-47.8%-37.2%

3.7%

3.8%

29.6%

YoY
Community Pharmacy Network

1,202

1,683

1,778

1,454

1,014

1,370

1,915

1,588

1,077

177.0%-13.0%

-9.3%

5.8%

-15.6%-18.6%

7.7%

9.2%

6.2%

Operating profit margin

4.9%

6.7%

6.8%

5.7%

4.0%

5.3%

7.0%

6.0%

4.1%

Leasing and Facility-related

-2

34

21

-14

-43

-22

-32

5

22

YoY

-

240.0%

16.7%

-

-

-

-

-

-

Operating profit margin

-

4.3%

2.3%

-

-

-

-

-

2.8%

YoY

Meal Catering

1

2

6

-6

-11

-22

-22

-10

-14

YoY

-

-66.7%-45.5%

-

-

-

-

-

-

Operating profit margin

-

0.3%

1.0%

-

-

-

-

-

-

-7

-5

2

-2

-2

-8

-4

-8

-8

Other

-

-

Operating profit margin

-

-

2.5%

-

-

-

-

-

-

Segment profit adjustments

YoY

-523

-

-520

-607

-643

-

-608

-

-567

-

-612

-

-755

-

-626

-

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

(Reference) Former Pharmaceuticals Network segment sales

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

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Quarterly trends in prescription volume and price per prescription (drug price + technicalfees; Community Pharmacy business [former Dispensing Pharmacy business]; all stores)

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

Number of network members by region
Area

Directly operated pharmacies
122

Hokkaido

Affiliates
220

Total
342

Tohoku

24

627

651

Kanto and Koshinetsu

102

2,723

2,825

Tokai and Hokuriku

44

1,522

1,566

Kinki

53

1,447

1,500

Chugoku and Shikoku

21

909

930

Kyushu and Okinawa
Total

64
430

1,294
8,742

1,358
9,172

Source: Shared Research based on company data (as of June 30, 2023)

Q1 FY03/24 results (out August 8, 2023)
Overview
Q1 FY03/24 (April–June 2023) earnings results
Sales: JPY27.7bn (+5.2% YoY)
Operating profit: JPY451mn (+29.6% YoY)
Recurring profit: JPY410mn (+4.6% YoY)
Net income attributable to owners of the parent: JPY148mn (+62.6% YoY)
Q1 sales and operating profit
Sales rose 5.2% YoY. Sales in the mainstay Community Pharmacy Network segment amounted to JPY26.4bn (+5.2% YoY),
accounting for 95.3% of the total sales (before segment adjustments). Although the prescription unit price fell in theCommunity Pharmacy business owing to the impact of off-year NHI drug price revisions and the end of the transitional
measures for community support system premiums, the number of prescriptions filled exceeded the company's expectations,as patients felt more at ease with seeking medical consultations following the downgrading of COVID-19 to a Class 5
infectious disease. Further, in the Pharmaceutical Network business, the number of new network affiliates grew steadily.
Gross profit came in at JPY11.4bn (+3.4% YoY), with a GPM of 41.3% (-0.8pp YoY). This was primarily due to a lower profit
margin in the Community Pharmacy business due to the impact of the drug price revisions and a drop in technical fees perprescription. However, by containing SG&A expenses to JPY10.9bn (+2.5% YoY), the company achieved operating profit
growth of 29.6% YoY. EBITDA was 13.3% higher YoY at JPY1.2bn.

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Segment results
Q1 FY03/24 results by segment were as follows.

Community Pharmacy Network
Segment sales: JPY26.4bn (+5.2% YoY; including intra-group sales and transfers between segments, same applies
below)
Segment profit: JPY1.1bn (+6.2% YoY)
Starting from Q1, the costs of the business development division, which were previously allocated to the Leasing andFacility-related segment, have been transferred to the Community Pharmacy Network segment due to the decision to
focus on pharmacy development. The amount transferred was JPY46mn.
This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy
business, and the manufacture and market pharmaceuticals business (operated by Feldsenf Pharma) previously
included in Other. A digital shift business that utilizes instant messaging app LINE was added to the segment from
FY03/21. The company does not disclose sales and operating profit by business (subsegment) within the Community
Pharmacy Network segment.
Community Pharmacy
Dispensing fee revenue in Q1 amounted to JPY23.5bn (+4.8% YoY) on an all-store basis. On a comparable store basis,
dispensing fee revenue grew 3.3% YoY. Although the prescription unit price fell due to the impact of off-year NHI drug pricerevisions and the end of the transitional measures for community support system premiums, the number of prescriptions
filled increased, as patients felt more at ease with seeking medical consultations following the downgrading of COVID-19 to a
Class 5 infectious disease. During Q1, the company opened two community pharmacies, including one inside a medical
mall. As of end-June 2023, the company had 430 community pharmacies, one care plan center, and nine cosmetics/drugstores.
Pharmaceuticals Network
As of end-June 2023, pharmaceutical network members totaled 9,172 (+260 from end-FY03/23), comprising 430 directly
operated pharmacies and 8,742 affiliates. Network membership expanded due to the company's efforts to improve
distribution and growing interest in its management support services. However, in view of the progress of drug pricenegotiations and other factors, some pharmacies postponed joining the network, resulting in the number of new affiliates in
Q1 slightly falling below the company's plan. Nevertheless, the group's pharmaceutical order value increased to JPY149.4bn(+20.9% YoY), driven by an uptick in the number of prescriptions at both directly operated pharmacies and affiliates.
Network fee income rose in line with order growth.
Manufacture and Market Pharmaceuticals
In this business, the company group aims to provide a stable supply of high-quality, low-priced generic drugs. As of end-June
2023, the company offered 96 products (46 ingredients) and supplied these to 3,642 pharmacies (+727 YoY), includinggroup pharmacies, network affiliates, and other customers. Feldsenf Pharm, which operates this business, reported Q1 salesof JPY0.7bn (+4.8% YoY).
Digital Shift
Aiming to create a "new pharmaceutical platform" for the digital age, the company established PharmaShift Co., Ltd. on
October 1, 2020 and launched the "Tsunagaru Pharmacy" service via its official LINE account in March 2021. By endFY03/24, the company aims to have 1mn registered users and to introduce the service to 5,300 stores. As of end-June
2023, the number of registered users stood at 744,000 and the number of stores using the service was 3,797 (+406 storesfrom end-FY03/23).

Leasing and Facility-related
Segment sales: JPY800mn (+0.8% YoY)
Segment profit: JPY22mn (versus loss of JPY43mn in Q1 FY03/23)
Operating conditions of serviced elderly housing facilities
Segment sales grew 0.8% YoY, driven by a steady increase in management fee income from managed properties. The
segment returned to profitability as a result of the transfer of the costs of the business development division to theMedical System Network 4350
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Community Pharmacy Network segment (see above) and the absence of one-time advertising expenses for the Wisteria
serviced residence for the elderly booked in the previous fiscal year.
As of end-June 2023, the company reported stable occupancy rates at three of its five properties (the total occupancy rate at
the five serviced residences for the elderly stood at 80.6%), while for the remaining two, at Wisteria Senri-Chuo it reported
an occupancy rate of 68.3% (with 56 out of 82 units occupied), and at Wisteria Minami Ichijo it reported an occupancy rate of
67.2% (with 78 out of 116 units occupied).

Meal Catering
Segment sales: JPY590bn (+3.0% YoY)
Segment loss: JPY14mn (versus loss of JPY11mn in Q1 FY03/23)
Lower sales and operating loss
While sales grew owing to a revision of the contract unit price, the gross profit margin declined due to rising purchaseprices. The segment loss widened as a result.

Other (mostly home-visit nursing care)
Segment sales: JPY78mn (+1.3% YoY)
Segment loss: JPY8mn (versus a loss of JPY2mn in Q1 FY03/23)

Company forecast for FY03/24
Recent performance and FY03/24 company forecast
FY03/22

FY03/23

FY03/24(JPYmn)1H Act.

2H Act.

FY Act.

1H Act.

2H Act.

FY Act.

1H Est.

2H Est.

FY Est.

Sales

52,16954,516

106,685

53,34056,211

109,551

54,67057,830112,500

2.5%

2.9%

2.7%

2.2%

2.5%

2.3%

2.2%

3.1%

2.7%

Cost of sales

YoY

30,307

31,94962,25631,02432,60663,630Gross profit

21,861

22,56844,42922,31523,60645,921Gross profit margin

41.9%

41.4%

41.6%

41.8%

42.0%

41.9%

SG&A expenses

19,99920,577

40,576

21,215

21,54342,758

SG&A ratio

38.3%

37.7%

38.0%

39.8%

38.3%

39.0%

Operating profit

1,862

1,990

3,852

1,099

2,064

3,163

800

1,800

2,600

YoY

37.4%

-4.1%

12.3%

-41.0%

3.7%-17.9%-27.2%-12.8%-17.8%

Operating profit margin

3.6%

3.7%

3.6%

2.1%

3.7%

2.9%

1.5%

3.1%

2.3%

Recurring profit

2,235

2,078

4,313

1,242

2,113

3,355

750

1,800

2,550

YoY

1.7%

-24.0%

60.0%

-0.2%

24.0%

-44.4%-22.2%-39.6%-14.8%

Recurring profit margin

4.3%

3.8%

4.0%

2.3%

3.8%

3.1%

1.4%

3.1%

Net income

1,431

963

2,394

502

1,108

1,610

250

750

1,000

147.6%-40.6%

8.9%-64.9%

15.1%-32.7%-50.2%-32.3%-37.9%

2.7%

1.8%

2.2%

0.9%

2.0%

1.5%

0.5%

1.3%

0.9%

YoY
Net margin

2.3%

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

The company's earnings forecast for FY03/24, as announced on May 9, 2023, is shown below. On the same day as thisannouncement, the company also decided to apply for a market reclassification, from the Prime to the Standard market of
the Tokyo Stock Exchange, in light of its current compliance status with the listing maintenance standards of the Prime
Market. There were no changes to the forecast at the time of the Q1 results announcement on August 8, 2023.
Sales: JPY112.5bn (+2.7% YoY)
EBITDA: JPY5.6bn (-8.5% YoY)
Operating profit: JPY2.6bn (-17.8% YoY)
Recurring profit: JPY2.6bn (-24.0% YoY)
Net income attributable to owners of the parent: JPY1.0bn (-37.9% YoY)EPS: JPY33.14 (versus JPY53.38 in the previous year)
Forecast by key segment (announced on May 9, 2023)
Community Pharmacy Network business: sales of JPY106.8bn (+2.3% YoY), segment profit of JPY5.0bn (-15.5% YoY; from
FY03/24, expenses associated with development sales—previously booked under Leasing and Facility-related segment—is being booked under the Community Pharmacy business. The impact of this change is estimated at JPY124mn)
Other three businesses (total for Leasing and Facility-related, Meal Catering, and home-visit nursing care): sales of
JPY6.5bn (+7.0% YoY), segment profit of JPY220mn (loss of JPY180mn in FY03/23)

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Adjustments: -JPY842mn for sales, -JPY2.6bn for segment profit
Forecast on new pharmacy openings and network member count
In FY03/24, the company looks to expand the total number of network members to 10,400 (+1,488 YoY). Also included in
its forecast is the opening of 15 directly operated pharmacies, primarily in medical malls. The company has been
implementing measures at its directly operated pharmacies to improve distribution by limiting weekday deliveries to once aday, stopping deliveries on Saturdays, and reducing the number of emergency deliveries. In FY03/24, it intends to roll out
these measures to the affiliates as well. In terms of services for network members, the company plans to expand and enhancehome services, expand users of the online community, and provide education and training services.
In Q1 FY03/24, the number of new network affiliates was affected by issues surrounding drug price negotiations. The
company anticipates that the Ministry of Health, Labour and Welfare will provide clarification on these matters in 2H, andthat the trend in the number of new network affiliates will return to normal thereafter. The company also noted that the causeof the rapid recovery in the number of prescriptions since the beginning of FY03/24 is somewhat unclear, and it is currently
evaluating whether this trend will sustain.
Background to earnings forecasts
The dispensing pharmacy industry is heavily impacted by revisions to NHI drug prices and dispensing fees, which can have asignificant effect on revenue. In addition to the biennial NHI price revision, a mid-term revision has been put in place sinceApril 2021, which effectively means that drug prices are subject to revision every year. The company believes there is acontinuing strong need among pharmacy operators to improve operational efficiency and stabilize management so that they
can focus even more on interpersonal services.
With regard to the mainstay Community Pharmacy Network segment, in the Community Pharmacy business, the company
will strengthen interpersonal services and work to gain prescriptions through the use of its official LINE account, "Tsunagaru
Pharmacy." In the Pharmaceutical Network business, it will consider the aforementioned harsh environment as anopportunity for business expansion and work towards acquiring new network members, providing comprehensive
management support to pharmacies, and further improving the efficiency of pharmaceutical distribution.
In the other three businesses, the company's primary focus is on the Leasing and Facility-related business. To achieve earlyoccupancy rates of 90% at all five serviced residences for the elderly, the company plans to reassess the residents' needs,
cultivate new sales routes, and improve the quality of consultation services to prevent residents from relocating or moving
out.

Medium-term plan (out May 6, 2022)
The sixth medium-term plan
When reporting FY03/22 results, Medical System Network also released its sixth medium-term plan kicking off in FY03/23.
While under the fifth medium-term plan the company sought to expand both market share and the scale of operations,
under the new plan it aims to transition to a new stage in which the company's networks form a foundation platform thatfunctions as a new pharmacy infrastructure with group pharmacies at the core but also including affiliates. Medical System
Network plans to utilize this platform to pursue growth in various businesses. Quantitative targets for the final year of theplan calls for sales of JPY140.0bn (CAGR of 7.0% over the span of the sixth medium-term plan), operating profit of JPY6.5bn(14.0%), 12,000 network members in the Pharmaceuticals Network business, and 550 community pharmacies (directly
operated pharmacies).

Review of the fifth medium-term plan
Medical System Network announced its fifth medium-term plan (FY03/19–FY03/22) at the time of its earnings
announcement for FY03/18. Starting from the fifth medium-term plan, the company changed the plan's term from three
years to four years, which would be in line with the cycle of medical treatment fee revisions.
Core strategies of the fifth medium-term plan
The core strategies of the fifth medium-term plan were as follows. The first four were in response to the NHI drug price anddispensing fee revisions implemented in April 2018. The third strategy was linked to the company’s full-scale entry into thegeneric drug business (manufacture and sales), and the company expected earnings contribution from its consolidated
subsidiary Feldsenf Pharma, which has a central role in managing the business. Regarding the fifth strategy, given that the

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construction of a new serviced elderly housing facility was near completion as of end FY03/18, the company aimed to focus
on boosting occupancy rates for these units. Also, having made continued investments into these new facilities, the company
saw the period covered by the fifth medium-term plan as a time to focus on stepping up its financial base.
Drive collective efforts of all network members to expand the pharmaceuticals network and provide management support
to small and mid-tier pharmacies that help sustain community-based medical care; also improve drug distribution
efficiency through collective efforts.
Position directly operated pharmacies as medical institutions and raise their caliber; promote their family pharmacy
functions, allowing them to take initiative in resolving issues surrounding community medical care.
Assist government-driven efforts to increase generic drug utilization and help develop efficient drug distribution systems
by expanding manufacture and sales of quality generic drugs.
Strengthen collaboration among group businesses and take a unified approach in providing community care functions(medical care, long-term care, and disease prevention) that are considered essential to the community-based integrated
care system.
Improve cash flows, take further steps to achieve efficient management structure, and fortify financial base.
We understand that in the mid- to long-term, Feldsenf Pharma, a generic drugs subsidiary (manufacture and sales)
established by the company, will take on a significant role in Medical System Network’s generic drug business cited in thethird strategy. In the final year of the fifth medium-term plan, the company planned on sourcing around 50% of its
consolidated operating profit from the Supply Chain Management (SCM) business, which is the combination of the genericdrugs business centering on Feldsenf Pharma, and the Pharmaceuticals Network business.
Although the business environment surrounding Medical System Network changed during the fifth medium-term plan
because of the spread of COVID-19, the company did not change its basic policy outlined above, even from FY03/20 whenthe effects of the pandemic were felt strongly. It did, however, revise the sales and profit targets for the plan's final year
(FY03/22) to reflect the pandemic's impact.
Final year of the fifth medium-term plan (FY03/22)
The company was unable to fulfill the quantitative targets of its fifth medium-term plan due to the spread of COVID-19.
Consolidated sales in FY03/22 (plan's final year) stood at JPY106.7bn versus the JPY120.0bn target, consolidated operating
profit was JPY3.9bn versus the JPY5.0bn target, and consolidated EBITDA came to JPY6.7bn versus the JPY7.5bn target. The
equity ratio was 21.1% versus the target of at least 30%.
Meanwhile, network members in the Pharmaceuticals Network business continued a steady increase, surpassing the 6,000
mark in FY03/21, well above the plan's target of 5,000. By number of pharmacies, the company captured over 10% of thedomestic dispensing pharmacy market. The network member count continued to expand in the final year of FY03/22,
reaching a total of 7,401. In addition to business growth in the Pharmaceuticals Network business, profitability improvements
at directly managed pharmacies in the Community Pharmacy business contributed to earnings, and the recurring profit
margin in the final year reached 4.0%, largely in line with the 4.1% target.

Positioning of the sixth medium-term plan and basic policy
Up until the fifth medium-term plan, the company mainly sought to expand market share and scale of operations under its
pharmaceuticals network. As a result of focusing on scale expansion, sales grew 1.9x over the past decade from JPY54.8bn in
FY03/13 to JPY106.7bn in FY03/22, with recurring profit increasing 2.3x from JPY1.9bn to JPY4.3bn over the same period.
Medical System Network primarily operates in two areas: pharmaceuticals network (the Pharmaceuticals Network businessunder the current Community Pharmacy Network segment) and dispensing pharmacies (Community Pharmacy business).
Now that its pharmaceuticals network has expanded to account for 10% of the domestic dispensing pharmacy market by
number of pharmacies, the company thinks these two businesses have strengthened their correlation, and are evolving into a"platform" for community pharmacies. It maintains that the sixth medium-term plan positions this platform as a foundation
based on which the company will seek to expand into new growth areas and further bolster overall scale. In this way, thecompany plans to transition into a new growth stage and build a new growth model.
The company says the platform, comprising network members with directly operated pharmacies at its core, will function as
an infrastructure for community pharmacies. Put differently, the platform can be described as a base formed by the

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Community Pharmacy business (directly operated pharmacies) overlaid with the Pharmaceuticals Network business, which
involves all network members. One of the growth strategies under the sixth medium-term plan seeks to establish multiple
layers of new growth businesses over this platform to achieve multifaceted operations. While improving the pharmacy
infrastructure, the company will step up efforts to provide quality healthcare, goods, and services, and streamline
pharmaceuticals distribution to ensure sustainability of local healthcare and the distribution market.
Another growth strategy under the sixth medium-term plan calls for continued expansion of the platform's base. The
company's directly operated pharmacies managed under the Nanohaha Pharmacy brand underwent eliminations, newopenings, and acquisitions, and reached a total of 425 locations as of end-FY03/22. Over the four years of the sixth mediumterm plan, Medical System Network plans to increase this number to 550 through acquisitions and new openings. At thesame time, it will continue to expand network membership, roughly doubling the current member count to 12,000(including directly operated pharmacies) over the same period. If the company manages to achieve this number, it would
capture about 20% of the domestic dispensing pharmacy market (by number of pharmacies). Because boosting network
membership leads to an increase in pharmaceuticals transactions, Shared Research understands that an upscaled network will
grant the company an even greater presence in pharmaceuticals distribution.

Numerical targets for the sixth medium-term plan
(JPYmn)Fifth medium-term plan results

Sixth medium-term plan targets

FY03/22

FY03/26

106,685

140,000

Consolidated operating profit

3,852

6,500

Operating profit margin

3.6%

4.6%

Consolidated EBITDA

6,708

10,000No. of network members

7,401

12,000Consolidated revenue

No. of community pharmacies
Equity ratio

425

550

21.1%

30.0%

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.

Business strategies and measures by business category
Medical System Network places its community pharmacies—in other words, the directly operated pharmacy business—at thecore of the aforementioned platform. In the first two years of the sixth medium-term plan, the company will seek to establish
how individual dispensing pharmacies should play a role in the community-based integrated care systems. The plan is toelevate their functions from a simple "monzen" pharmacy (conveniently located near hospitals) to a family pharmacy, and to
a community pharmacy, enhancing the quality of their services by shifting the focal point from objects to people. For
example, enhanced services cover centralized and continuous management of medication information, home healthcare
support, 24-hour support, and collaboration with various internal and external specialists in the areas of medical care, longterm care, food, and daily care.
The objective for the latter two years of the medium-term plan is to equip the company's pharmacies with the means tofunction as the central body or a hub supporting local healthcare and community at large. The company will seek to achieve
optimization for the area rather than within the boundaries of its own operations. For instance, it will work to shareknowledge, human resources, and pharmaceuticals across the community, maximize and jointly use local resources, andexpand the network of hub pharmacies. The company's goal is to have the platform provide values and functions needed in
the community while also maintaining profitability as a business.
Community Pharmacy
The sixth medium-term plan's principal theme for this business is "be ‘the town's beacon of light’ supporting local
communities and bolster area coverage." Priority measures comprise improving quality and efficiency of store operations to
prepare for enhanced interpersonal work (the initiative includes pharmacist training), providing medical care that supports
community-based integrated care systems, and strengthening store development capabilities. The company is laying the
groundwork to open 25 new pharmacies per year, and says that costs will temporarily precede earnings when it begins
spending upfront on these store openings.
Pharmaceuticals Network
The plan's principal theme for this business is "target of 12,000 network members × (distribution improvement + service
expansion)." Priority measures include boosting network member count to 12,000 by FY03/26 (the final year of plan),
capturing 20% industry share, improving distribution and establishing supply chain management, and contributing tocommunity-based medical care by building an area network.

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Manufacture and Market Pharmaceuticals
The plan's principal theme for this business is "stable supply of safe and secure pharmaceuticals to the company's network."
Group company Feldsenf Pharma is the main driver of this business. Priority measures include creating a system to ensure
quality and safety, building a system to ensure stable supply, and expanding the product lineup and sales channels. The
company targets sales of JPY10.0bn in this business in the plan's final year.
Digital Shift
The plan's principal theme for this business is "establishment of pharmacy business infrastructure and expansion to multiple
business lines." Priority measures include expanding market share (raising the number of pharmacies using the LINE appbased Tsunagaru Pharmacy service to 20,000 by the plan's final year), upgrading services with highly value-added functions(such as the ability to network with medical institutions and long-term care facilities), and launching new businesses.
Nursing care, long-term care, and nutrition
The plan's principal theme for this business is "deepen cooperation between medical and long-term care." Separate priority
measures have been set for nursing care, long-term care, and nutrition. In nursing care, the plan calls for expansion ofcollaborative opportunities with dispensing pharmacies and development of service locations. In long-term care, thecompany will roll out home-visit services at its Wisteria series serviced elderly housing facilities. In nutrition, it will pursue
expansion in scale and earnings.

Earnings structure to achieve targets; financial outlook
Historically speaking, the company's earnings growth was propelled by expansion of the Pharmaceuticals Network businessand profitability improvement in the Community Pharmacy business. However, with the sixth medium-term plan, Medical
System Network made a major turn toward proactively opening more pharmacies to further develop the platform structure.
Since this means that the company will be making front-loaded spending in the Community Pharmacy business, it expects
profit from this business to decline over the span of the medium-term plan. Accordingly it has positioned the three pharmacy
support businesses (Pharmaceuticals Network, Manufacture and Market Pharmaceuticals, and Digital Shift) to take on the roleof absorbing the earnings drop in the Community Pharmacy business.
In the final year of the plan (FY03/26), the company targets sales of JPY140.0bn, an increase by roughly JPY35.0bn from
FY03/22, which it plans to generate in the Community Pharmacy business (+JPY20.0bn) and the pharmacy support
businesses (+JPY15.0bn). Meanwhile, the target for operating profit in the final year is JPY6.5bn, up roughly JPY2.7bn from
FY03/22. Since the company anticipates operating profit in the Community Pharmacy business to fall due to the burden of
upfront opening costs, the three pharmacy support businesses are expected to underpin profit growth, lifting the operating
profit margin by 1.0pp as well, by the final year.
In terms of cumulative cash flows over the four years of the medium-term plan, the company expects JPY20.0bn in net cash
inflow from operating activities and JPY18.0bn in net cash outflow from investing activities (business development andacquisitions focusing on investment efficiency). The free cash flow of JPY2.0bn will be used mainly to reduce debt (JPY2.0bn
in net cash outflow from financing activities). By reducing interest-bearing debts that account for about 60% of total liabilities
in FY03/22, the company will seek to achieve equity ratio of 30% by the final year of plan.

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Business
Business model
Medical System Network provides dispensing pharmacy support services to its own pharmacies and to affiliates. Based on the
FY03/19 results reported under the former segment classifications, approximately 90% of the company’s sales came fromthe operation of dispensing pharmacies (Community Pharmacy business*). The dispensing pharmacy support services(Pharmaceuticals Network business**) are highly profitable.
*The former Dispensing Pharmacy segment; currently the Community Pharmacy business under the Community Pharmacy
Network segment**The former Pharmaceuticals Network segment; currently the Pharmaceuticals Network business under the Community
Pharmacy Network segment
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), on the condition that they join the company's network.
Shared Research understands that the then Dispensing Pharmacy business generated about 30% of operating profit(unadjusted for internal transactions) in FY03/19 while the then Pharmaceuticals Network business accounted for about 70%,
suggesting high OPM for the latter considering the segment’s small share of sales.
Dispensing pharmacies in Japan are regulated by the nation’s universal healthcare insurance system governed by the Ministryof Health, Labour and Welfare (MHLW). The system requires the separation of prescription and dispensary practices, where
patients receive prescriptions from physicians at medical institutions and have them filled at dispensing pharmacies by apharmacist. Under the universal healthcare insurance system, the cost of medication is split between patients and theirinsurance plans. When a pharmacy dispenses drugs, it collects the patient co-payment (30% of total cost for most company
employees) in cash and obtains dispensing fee receivables for the insurance plan portion (70%), for which a reimbursement
claim is later submitted. The prices for drugs and medical services are set and periodically revised by MHLW, which is thegoverning authority.

Overview of business segments
Medical System Network comprised five business segments until FY03/19, which were consolidated into four businesssegments in FY03/20. Previously, the mainstay segments were Pharmaceuticals Network and Dispensing Pharmacy, butthese two segments were consolidated into the Community Pharmacy Network segment along with the Manufacture andMarket Pharmaceuticals business (mainly operated by Feldsenf Pharma) previously included in the former Other businesssegment. Then in FY03/21 the company added the Family Pharmacy Support Service (operated by PharmaShift Co., Ltd.,established on October 1, 2020). As of end-FY03/23, the Community Pharmacy Network segment comprises the fourbusinesses outlined below. The company does not disclose a sales and profit breakdown by business.
As peripheral business in healthcare and care-related businesses, the company maintains its three segments (Leasing andFacility-related, Meal Catering, and Other businesses) even after the FY03/23 segment reshuffle. Following the transfer outof the Manufacture and Market Pharmaceuticals business, the main business in the Other business segment is home-visit
nursing care. Each business segment continues to be operated by respective core subsidiaries.

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Status of affiliated companies
Segment

Company

Community Pharmacy Network

Location

Hokkaido Institute for Pharmacy Benefit
Sapporo, Hokkaido
Co., Ltd.
Nanohana Hokkaido Co., Ltd.
Sapporo, Hokkaido
Nanohana Tohoku Co., Ltd.
Hachinohe, Aomori

Ratio of voting rights
100.0%
100.0%
100.0%

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

Minato-ku, Tokyo
Nagoya, Aichi

100.0%
100.0%

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

Toyonaka, Osaka
Kasuya, Fukuoka

100.0%
100.0%

Digital Shift

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

Oita, Oita
Sapporo, Hokkaido
Minato-ku, Tokyo

100.0%
80.0%
51.0%

Leasing and Facility-related
Meal Catering

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

Sapporo, Hokkaido
Kasuya, Fukuoka

100.0%
100.0%

Other

Agrimas Corp. *Ota-ku, Tokyo

77.7%

Source: Shared Research based on data from the company website.
*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.
***As of September 30, 2022

Community Pharmacy Network
The Community Pharmacy Network business is a new segment created in FY03/20 from consolidating the former
Pharmaceuticals Network and Dispensing Pharmacy segments and part of the Other segment (only the Manufacture andMarket Pharmaceuticals business). The new Family Pharmacy Support Service business operated by PharmaShift Co., Ltd. wasalso added from FY03/21. As of FY03/23, the Community Pharmacy Network business comprises four businesses:
Community Pharmacy, Pharmaceutical Network, Manufacture and Market Pharmaceuticals, and Digital Shift.
The company cited following two reasons for the reorganization:
To accommodate expansion of the company’s business scope to the entire supply chain accompanied by the rise inpharmaceuticals network members and full-scale development of the Manufacture and Market Pharmaceuticals
business
To transition to a structure that can provide value to the entire supply chain while taking into account possible conflictsof interest between business segments due to the aforementioned changes

Community Pharmacy business (former Dispensing Pharmacy
segment)
Business overview
One of the company's core businesses is the Community Pharmacy business (operation of dispensing pharmacies), whichcorresponds to the former Dispensing Pharmacy business. While the company does not disclose sales and profits for thisbusiness, FY03/19 results for the former Dispensing Pharmacy business were sales (to external customers) of JPY90.7bn(92.3% of total sales) and segment profit of JPY1.1bn (33.2%, pre-adjustment basis). Since the company has continued topromote renewal of directly operated pharmacies since then, Shared Research believes that this business accounts for the
majority of the company's total sales, and that its operating profit, combined with that from the below-mentioned
Pharmaceutical Network business, accounts for the bulk of the company's profits.
The company's directly operated dispensing pharmacies are found in most areas nationwide, although the home base of
Hokkaido has the highest concentration followed by the Kanto and Koshinetsu area (for recent regional patterns see thefigure Number of network member by region in the Trends and Outlook section). The group’s dispensing pharmacies had
been operating under the umbrella of a holding company Pharmaholdings Co., Ltd., which was the company’s subsidiary
until October 2017, when it was absorbed by the company. At present, the group’s dispensing pharmacies are operated
through seven regional consolidated subsidiaries. In terms of operational support, directly operated stores also receive
services provided by the below-mentioned Pharmaceutical Network business, as do general affiliates. Another subsidiary,
Hokkaido Institute for Pharmacy Benefit Co., Ltd., publishes specialized books for pharmacists and other healthcare
professionals and analyzes pharmaceuticals-related data.

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Dispensing fees at Community Pharmacy business (companywide basis)(JPYmn)FY03/19

FY03/20

FY03/21

FY03/22

FY03/23

Dispensing fees

82,834

89,91988,32091,05693,029Rate of change

2.5%

8.6%

-1.8%

3.1%

2.2%

Source: Shared Research based on company materials

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

Market position of directly operated Nanohana Pharmacy
The company's directly operated pharmacies, mostly of the Nanohana brand, totaled 428 at end-March 2023. The following
table compares sales and pharmacy numbers for other major pharmacy chains as of their fiscal year-ends. Unlisted companies
and companies mainly operating dispensaries within drugstores are excluded. The figure for Medical System Network
represents sales of the Community Pharmacy Network segment including the network business. The company has far fewer
own-brand outlets than the top-ranking pharmacy chains, but in terms of all network members including affiliates in thecompany's pharmaceuticals network, the total exceeds the counts of major chains. Medical System Network also ranks among
the top five by sales.

Number of dispensing pharmacies
FY endSales (JPYmn)

No. of pharmacies

April

283,111

1,099

2 Kraft-

176,200

917

3 Qol

March

155,370892

4 Toho Holdings

March

92,346767

5 Sogo Medical Holdings

March

-

740

6 Nihon Chouzai

March280,164718

7 Suzuken

March87,742577

8 Medical System NetworkMarch

104,366

428

9 Aisei Pharmacy

March73,700398

May42,038350

1 Ain Holdings

10 Pharmarise Holdings

Source: Shared Research based on data from each company’s websites and materials
Note: Sales figures are aggregate of dispensing pharmacy segment, Aisei Pharmacy Co., Ltd. and Kraft Inc. (Sakura Pharmacy) are unlisted, Sogo Medical Holdings wasdelisted in April 2020, and companies that are primarily drugstore chains were excluded.
Note: Based on earnings announcement data disclosed as of May 2023.

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

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

Pharmaceutical Network business (former Pharmaceuticals
Network segment)
Business overview
This business provides services that support multiple tasks essential to the operation of dispensing pharmacies, such as
pharmaceutical price negotiations, distribution including purchasing, and profit management. These services are firstdeveloped for, and provided to, directly operated dispensing pharmacies, but are also provided to general pharmacies for afee. General dispensing pharmacies must join the company's network to receive this service.
While the company does not disclose sales and profits for this business, FY03/19 results for the former Pharmaceuticals
Network segment were sales of JPY4.0bn (1.6% of total sales), of which sales to external customers were JPY1.6bn and intersegment sales or transfers were JPY2.4bn, and segment profit of JPY2.3bn (72.5%, pre-adjustment basis). The company has
since expanded its range of support services and revised membership fees, but Shared Research believes that this business
continues to make a significant contribution to segment profit.
General dispensing pharmacies can receive support services by joining the network operated by the company andbecoming general network affiliates. The company's network thus consists of directly operated pharmacies and general
network affiliates. As shown below, both directly operated pharmacies and general network affiliates continue to increase in
number. Growth in the number of general network affiliates has been especially strong, which Shared Research attributes toincreasingly tough measures taken by the government each year to curb increases in the nation's medical expenditure. The
Ministry of Health, Labour and Welfare now regularly revises drug prices and dispensing fees, and requirements for earning
higher dispensing fees, which are an important source of income for dispensing pharmacies, are becoming ever more
stringent. This translates to an increasingly tough operating environment for independent dispensing pharmacies notaffiliated with any of the major chains.
As of the end of FY03/23, the number of pharmaceutical network member stores (the total of directly operated stores andgeneral network affiliates) was 8,912, for average annual growth of 25% over the past 10 years. According to the Ministry of
Health, Labor and Welfare, there were 61,791 dispensing pharmacies in Japan in FY2021, and the share of the company's
network member stores exceeded 14%, making it the No. 1 group in Japan. As the number of member stores in thecompany's network has expanded, the group's pharmaceutical order value similarly has grown to JPY526.2bn (+17.1% YoY) in
FY03/23, among the largest in Japan and a significant scale even for a pharmaceutical wholesaler.

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Network members and pharmaceuticals transactions

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

Four functions
The core Pharmaceuticals Network business offers comprehensive support for operating dispensing pharmacies, not only
distribution support contributing to the sourcing of drugs, but also pharmacist training and financing. It can be broken down
into four major functions: Pharmaceuticals supply chain management, slow moving inventory clearance, pharmacist training,
and financing.
(1) Pharmaceuticals supply chain management
Medical System Network determines appropriate transaction prices with drug wholesalers on behalf of its network members.
Typically, dispensing pharmacies have to negotiate prices separately with each wholesaler. In contrast, after receiving
authorization from its member affiliates, the company determines unit prices per product with wholesalers around thecountry on their behalf. 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 three months, which reduces interest expenses.
The company’s collection service helps them minimize the cost of recovering outstanding payments for pharmaceuticalproducts. 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 tonegotiate better prices with wholesalers. Price negotiation is crucial to dispensing pharmacies since the difference between
the actual drug sourcing cost and official price of prescription drugs represents their profit stream, but it is also a source ofheavy operational burden.
In negotiating terms with wholesalers, Medical System Network adopts the law of one price. Instead of using order volume asbargaining power (making lower price a condition for large orders), it negotiates with all wholesalers based on a common
price per each pharmaceutical product. Further, the company does not get involved in the transactions and relationships
between the pharmacies and their regular suppliers* (wholesalers). Members can choose which wholesaler to buy from on
the basis of service and other conditions, not price. This system lowers the hurdle for dispensing pharmacies thinking of
joining the network, but wants to keep existing trading accounts with their regular suppliers, and appeals to wholesalers as
well, because they can maintain relationships with existing customers. It is thus a win-win for both retailers and wholesalers.
The company also benefits, because it can attract new network members by allowing them to maintain their existingaccounts.
Medical System Network is also focusing on handling generics, whose use is being strongly promoted by MHLW. The
company gathers and analyzes detailed information such as interview forms** mainly about drugs added to the NHI list thatit receives from pharmaceutical companies. The company then negotiates with wholesalers about stable supply of the
product, price, and other conditions, and provides information on the product to network members if it concludes that it canbe dispensed safely by the pharmacists. The company also provides a substantial support system to its affiliates to increase
their handling of generics, including an inventory management system with the same features as the generic drug
recommendation system used by its directly operated pharmacies.

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Since FY03/21, the company's network members—directly operated dispensing pharmacies (the Nanohana Pharmacy chain
under the Community Pharmacy business) and affiliates (non-group pharmacies) in its pharmaceuticals network, combined—
have accounted for over 10% of the domestic dispensing pharmacy market. Shared Research understands that the company's
presence in terms of strength in drug price negotiations is growing.
*Regular supplier/trading account: A relationship between retailer and wholesaler whereby the retailer has a trading
account with the wholesaler. For a retailer, a regular supplier is a wholesaler with which it has a history of doing
business.
**Interview form: Pharmaceutical Interview Form (IF), whose purpose is to supplement information that is not fully
covered in package inserts of prescription drugs. These forms are supplied by pharmaceutical companies and provide
all-round product information. Japan Society of Hospital Pharmacists (JSHP) sets IF drafting guidelines and instructs
pharmaceutical companies to distribute the forms. Historically produced by pharmacists interviewing companies, thecurrent format was established in 1988.

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

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

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Manufacture and Market Pharmaceuticals business (formerly partof the Other business)
Business overview
The Manufacture and Market Pharmaceuticals business was transferred from the Other business to the Community
Pharmaceutical Network business in FY03/20. It is operated by consolidated subsidiary Feldsenf Pharma Co., Ltd.
Feldsenf Pharma was established in September 2016 to manufacture and market ethical drugs. It does not have
manufacturing capabilities or facilities but aims to develop an efficient pharmaceutical distribution system frommanufacturing through the filling of prescriptions at the pharmacy by building a collaborative relationship withpharmaceutical manufacturers with capability to provide a stable supply of high-quality, lower-priced generic drugs. In 2018,
it formed a business alliance with Daito Pharmaceutical Co., Ltd. (TSE Prime: 4577), which manufactures and supplies ethicaldrugs to Feldsenf Pharma.
Feldsenf Pharma started marketing generic drugs from 2018. It mainly supplies directly-operated pharmacies and network
affiliates of Medical System Network; in FY03/22, it supplied drugs to 1,698 affiliates. Feldsenf Pharma also has eyes set on
expanding its lineup of in-house brand generic drugs in the future to become a supplier first to the company's dispensing
pharmacies, then to its affiliates, and then to non-affiliated dispensing pharmacies and medical institutions nationwide.

Feldsenf Pharma’s generic drugs supply chain

Source: Shared Research based on company data

Business scale, profit trends
In FY03/19, Feldsenf Pharma started out with 17 active pharmaceutical ingredients (API) across 34 items, and expanded to
45 API across 93 products as of FY03/23. Medical System Network aims to further expand Feldsenf Pharma's product lineup
of in-house drugs and sales tie-up products. In addition to first expanding supply of Feldensf Pharma products to its directly
operated dispensing pharmacies, the company also has stepped up sales to affiliates members of its network. Sales grew to
JPY2.6bn in FY03/23, and the business switched to profits at the operating level in FY03/22, according to the company.

Feldsenf Pharma sales(JPYbn)FY03/19

FY03/20

FY03/21

FY03/22

0.4

1.1

1.8

2.6

23 ingredients, 51 items

34 ingredients, 68 items

41 ingredients, 82 items

45 ingredients, 93 items

Sales
Number of items handled

17 ingredients, 34 items

FY03/23

Source: Shared Research based on company data

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

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

Utilization of official LINE accounts
The plan is to integrate various functions based on the LINE communication app to facilitate communication between
patients and pharmacies using the official LINE account. Specifically, Medical System Network looks to incorporate functions
such as prescription transmittal, electronic medication records, surveys of pharmacy visits, and follow-ups during medication.
In collaboration with OPT, it aims to develop products using the LINE official account based on a common platform fordispensing pharmacies so that it can provide the products not only to directly-operated and network member pharmacies, but
to all pharmacies nationwide.
The Family Pharmacy Support Service utilizing the official LINE account launched from March 15, 2021. In FY03/23, thenumber of registered friends (users) roughly doubled YoY to 649,000. The number of directly operated and affiliatedpharmacies using the service continues to increase. For dispensing pharmacies, the service offers functions such as
centralized management of medication (which could lead to additional medical fee points), medication follow-ups, andonline medication guidance, all available on the LINE app. The service apparently is being used more and more for sending
prescriptions and providing online medication guidance. Dispensing pharmacies pay a fee for using the service, and thenumber of pharmacies ordering the service has expanded to 3,787, with the number of pharmacies actually introducing theservice rising to 3,391.
According to the company, the number of prescriptions sent to pharmacies that have adopted the service more than doubled
that of those that have not. Safe management of personal information is a high priority, so proactive measures being taken
include no need to fill out personal information on the LINE Talk screen, making service available on external website apps,
and utilizing highly secure domestic servers. The company is encouraging its network members to adopt the service, andplans to establish the system as a standard service of its network at an early stage.
LINE is a messaging application developed and operated by LINE Corporation (unlisted). The LINE messaging
application has achieved substantial market penetration in Asian countries such as Japan, Thailand, and Taiwan.

Leasing and Facility-related
Planning and development of medical buildings and medical plazas
In addition to private practice clinics, the company engages in the planning and development of facilities that house multiple
medical clinics (medical buildings and medical plazas). The real estate business is mainly operated by subsidiary Nihon
Leben, which was a subsidiary, but was absorbed in October 2017.
This business supports development of clinics that goes beyond just real estate brokerage. The focus is on providing a broad
range of support to physicians looking to start a practice, beginning with the stage of formulating a basic business plan for theclinic, and spanning the creation of a management philosophy and strategy, investigating the medical area, selecting realestate property, overseeing design and construction, financing, and processing the business start-up application.
The company develops medical malls* where multiple medical institutions are located in one area, which benefit bothpatients and physicians. Grouping various medical institutions in the same premises provides patients with opportunities toreceive one-stop treatment from multiple specialists. It is also more efficient for physicians, as they can lower costs by sharing
facilities and benefit from synergies in patient traffic and advertising.

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*Medical mall: Where several specialized clinics and dispensing pharmacies are located in the same building or area. It
is called a medical building when they are in the same building and a medical plaza when they are located in the samearea.
Medical malls have different formats. For the building format where tenants are only clinics and dispensing pharmacies,
the building is often constructed based on the assumption that clinics will move in, so the floor space and specifications
are designed accordingly. Another type is a medical area located within a shopping mall or a commercial facility
attached to a train station; since station users and local residents frequent these commercial facilities, they can see their
physicians after shopping or on their way home. A third format is a congregation of multiple detached clinics in thesame area, often established along suburban main roads where land is easy to acquire.

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

Planning and development of long-term care facilities
The company plans and develops serviced elderly housing facilities that collaborate with medical institutions, long-term carecenters, and dispensing pharmacies to ensure an environment where residents can live safely with peace of mind. Wisteria
N17, located in Sapporo, Hokkaido, is the company’s first serviced elderly housing facility. Standard services include daily
safety checks and 24-hour on-call emergency service while fee-based services such as meal catering and long-term careservices are also available. Wisteria N17 is also networked with local medical institutions such as the general hospital,
specialty clinics, dental clinics, and dispensing pharmacies. The company’s fourth facility, Wisteria Senri-Chuo (Toyonaka,
Osaka Prefecture), was launched in 2016, and the fifth facility, Wisteria Minami Ichijo (Sapporo, Hokkaido), was opened in
November 2018.
According to the company, investment for expansion of serviced elderly housing facilities came to an end in FY03/19, and it
is now taking measures to boost occupancy rates at the Wisteria series facilities, especially for the Wisteria Senri-Chuo and
Wisteria Minami Ichijo. The company plans to focus on building a community where medical care and long-term care areoffered as one, with local dispensing pharmacies, hospitals, and long-term care and childcare facilities surrounding theserviced elderly housing facilities.
The business of serviced housing for the elderly has a large effect on earnings, and occupancy rates have a particularly
significant impact. In FY03/23, the number of new residents entering the facilities slowed due to effects from the pandemic,
and utility costs increased due to rising energy costs. Thus, although segment sales grew 5.1% YoY to JPY3.5bn, the segment
loss was JPY92mn (profit of JPY39mn in FY03/22).

Meal Catering
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, Kumamoto, Miyazaki, andKagoshima prefectures).
In FY03/23, the number of meals supplied decreased owing to effects from the pandemic, and procurement prices
increased. Sales were JPY2.3bn (-1.4% YoY) and the segment loss was JPY65mn (profit of JPY1mn in FY03/22).

Other
The major business in this segment is home-visit nursing care carried out by subsidiary Home-Visit Nursing Station HimawariCo., Ltd., which is slated for an absorption-type merger from July 1, 2021. In addition, the Manufacture and Market
Pharmaceuticals business, conducted by subsidiary Feldsenf Pharma Co., Ltd., was consolidated into the newly established
Community Pharmacy Network segment from FY03/20.

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The home-visit nursing care business dispatches specialized nurses to patients’ homes to check on their conditions, andprovides appropriate nursing care and advice. It collaborates with physicians, healthcare and long-term care professionals,
and pharmacists working in the company’s Nanohana Pharmacy chain.

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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-ofhospital dispensing ratio exceeded 50% nationwide for the first time in 2003. According to JPA estimates, the average ratiorose to 70% in FY2016 and reached 76.1% in February 2023.
The number of dispensing pharmacies steadily increased as separation of prescribing/dispensing advanced and pharmacies
that previously marketed OTC drugs became dispensing pharmacies. There was also a pronounced increase in independent
pharmacies operating near large hospitals—so-called “monzen” (Japanese meaning “in front of the gate”) pharmacies.
Another factor driving growth has been the expansion of drugstores into the dispensary business. Prescription volumes
issued by medical institutions have also been rising.

Number of dispensing pharmacies

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

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Developments surrounding dispensing pharmacies

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

Prescription volume

Source: Shared Research based on MHLW’s Trends in Prescription Medicine Costs
Note: Shared Research understands that the volume in FY2020 reflects an increase in long-term prescriptions due to the COVID-19 pandemic.

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

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Pharmacist numbers

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

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

Survey results on home-based medication management service

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

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Reasons cited for not providing home-based medication management service

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

The motivation behind MHLW’s push to expand these roles for pharmacies is a response to steadily rising medical costs inJapan. In order to practice appropriate healthcare spending as the Japanese population ages, the MHLW is encouraging
pharmacies to reduce unnecessary drug use and take on a more patient-centered approach rather than focusing primarily on
pharmaceuticals.

(Reference) Drug expenditures

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

MHLW wants dispensing pharmacies to be able to expand their role from just filling prescriptions to providing
comprehensive care to patients living in the community as family pharmacies and regional pharmacies. With the functions
required of insurance pharmacies expanding in this way, actual responsibility for the associated work lies with the pharmacists

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working at these pharmacies. This has only served to exacerbate the shortage of the pharmacists needed to perform theseimportant functions.

Role of dispensing pharmacies in community-based integrated
care system: transforming to family, regional pharmacies
Environment facing smaller pharmacies: dispensing fee revisions
The dispensing fee revision implemented in April 2014 reduced the basic dispensing fee for pharmacies that receive morethan 90% of their prescriptions from specific medical institutions. The government enacted the changes after reassessing
medical care finances amid chronic fiscal deficits, a health insurance program on the verge of collapse, and continually
expanding long-term care expenditures. Since then, dispensing fees have been further lowered in stages. In addition, facedwith concerns of rising medical costs, the government opted to expand the functions of dispensing pharmacies rather thanincrease physician numbers. Thus, it has promoted home medical care services such as prescription delivery and offeredpreferential treatment to dispensing pharmacies that can provide a 24-hour on-call service.
However, this trend often works against smaller pharmacies (such as those near large hospitals) that do not belong to major
chains, in the sense of increased costs and a shortage of human resources. At a time of virtually flat dispensing fee
expenditures, survival for community pharmacies hinges on strengthening family pharmacy functions and services that
directly generate revenues such as technical fees.

Dispensary charges

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

MHLW initiates “Guidelines for the Improvement of Commercial Transaction Practices of
Ethical Drugs”
The “Guidelines for the Improvement of Commercial Transaction Practices of Ethical Drugs” (so-called distribution
improvement guidelines) were adopted starting April 2018. Issued by MHLW, the guidelines targeting industry members
reflect the ministry’s initiative to shift the role of spearheading improvement in prescription drug distribution from the
distributors to the government. Items of note on the relationship between drug wholesalers and medical
institutions/dispensing pharmacies include the avoidance of excessive discounts. According to these guidelines, offering
prices involving excessive discounts that do not reflect the actual value of pharmaceuticals, such as using a benchmark
without considering transaction terms, is incompatible with the current NHI drug price system (where individual drug pricereflects the value). The guidelines urge wholesalers and medical institutions/dispensing pharmacies also to consider
distribution costs and stable provision/sourcing of pharmaceuticals, and to take a comprehensive perspective on each pricenegotiation, seeing it as an extension of the price negotiations between drug manufacturers and wholesalers.

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Key points from the “distribution improvement guidelines”
Items of note between manufacturers and wholesalers:Elimination of negative primary margins, presentation of appropriate prices
Items of note between wholesalers and medical institutions/dispensing pharmacies:
Rapid settlement of transaction prices and promotion of individual drug unit price transactions
In principle, all drugs should have individual drug unit prices (no bundling contracts)
At a minimum, the percentage of individual drug unit price contracts must exceed previous year levels
Adjustment of excessive price discounts that do not reflect pharmaceuticals value and distribution costs
Ensured efficiency and safety of distribution
Avoidance of costly practices such as frequent and emergency deliveries that can impede stable supply
MHLW will establish a consultation office to support guideline compliance and plans to proactively disclose cases as theycome up. In addition to confirming compliance, it will also check to see if the guidelines’ intent and substance are reflected
in medical fees.

FY2022 medical fee revision
The FY2022 medical fee revision called for a 0.43% increase in medical fee (0.23% increase in core medical fee) and 1.35%
reduction in NHI drug prices (official price of medicines).
Net medical fee revision -0.94% = medical fee +0.43% + drug reimbursement price -1.35% +medical materials price-0.02%The increase in the core medical fee includes +0.26% for medical fees, +0.29% for dental fees, and +0.08% for dispensing
fees. In contrast, the reduction in the NHI drug prices includes -1.35% for pharmaceuticals prices and -0.02% for medical
material prices. The result of the revisions is a shift from a merchandise-based approach to a patient-centered one, evidenced
by the expansion of guidance fees for pharmacists who interact with patients, and the recognition of pharmacies that
contribute to community-based medical care such as through provision of medication information to hospitals.

FY2023 medical fee revisions
The Ministry of Health, Labor and Welfare released information concerning temporary revisions to the medical fee
reimbursement system starting from April 1, 2023. Under these temporary revisions, the following three special measuresapply. Shared Research understands that the duration of these measures is limited to six or twelve months from April 2023,
and that the measures ultimately will lead to higher costs for dispensing pharmacies.
(1) Grace period pertaining to in-principle obligatory introduction of online eligibility verification
A grace period applies when medical institutions and pharmacies covered by insurance are unable to comply with thisrequirement due to unavoidable circumstances such as system maintenance, network shortcomings, renovation work, andplans to cease/suspend trading. In principle, the grace period extends to the end of September 2023.
(2) Special measures awarding bonus points for introduction and increased uptake of online eligibility verification
Medical care providers already can earn points for performing online eligibility verification at the time of initial consultationand dispensing, but under this new measure awarding bonus points for improving medical information and systeminfrastructure, the above points have been revised, and points also are awarded at the time of follow-up consultations. The
government also has reviewed the calculation method for these bonus points, adding one to two points. This measure is inplace from April to December 2023.
(3) Special measures for medical fees to ensure more stable supply of pharmaceuticals
In light of the unstable supply of medicines and from the perspective of prescribing appropriate drugs to patients andpromoting cooperation among local pharmacies, one to three additional bonus points are being temporarily awarded for

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This measure is in place from April to December 2023.

Medical fee revision (%)
Year of revision

2002Core medical fees (actual)-1.30

Dispensing fee-1.30

Drug prices (actual)-1.40

NHI basis-6.30

Consumption tax addition
Total (nominal)

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

±0.00

-1.36

+0.38

+1.55

+1.379

+0.10

+0.49

+0.55

+0.55

+0.43

-0.60

+0.17

+0.52

+0.46

+0.04

+0.17

+0.19

+0.16

+0.08

-1.05

-1.80

-1.20

-1.36

-1.375

-1.36

-1.33

-1.74

-1.01

-1.35

-4.20

-6.70

-5.20

-5.75

-6.00

-5.64

-5.57

-7.48

-4.38

-1.44

-

-

-

-

-

-

+1.36

-

-

-

-

-2.70

-1.05

-3.16

-0.82

+0.19

+0.004

+0.10

-0.84

-1.19

-0.46

-0.94

＋0.00

Source: Shared Research based on company data

The key point regarding dispensing fees raised around the time of the FY2018 revision is a reassessment of the role ofdispensing pharmacies with an emphasis on patient-centered service. Specifically, it promotes evaluation of family
pharmacies and pharmacists, patient-centric businesses and at-home medical care; and promotes the use of generic drugs. It
also encourages the proper assessment of large pharmacies operating near medical institutions. On generic drug utilization,
MHLW is continuing efforts to improve utilization rates, and the FY2020 medical fee revision includes components that willfurther stimulate generic drug use.

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

Generic drug ratio

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

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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
the operating profit margin of the business segments that operated dispensing pharmacies, Ain Holdings (TSE Prime: 9627)
had the highest OPM in 2021. Profit margins declined across the board in FY2017 owing to the diminished impact of major
drugs for hepatitis C. The whole industry was affected by the NHI medical fee revision in FY2019, with almost all companies
recording lower profit margin than in the previous fiscal year. The uptrend in the profit margin of Medical System Network’s
dispensing pharmacy business since FY2019 mainly reflects a change in segmentation.

Comparison of profit margins of industry peers’ pharmacy operation segments
TickerFY endFY2016FY2017FY2018FY2019FY2020

FY2021

FY20222796 Pharmarise Holdings

May

2.6%

2.0%

3.5%

2.3%

3.4%

3.4%

4.2%

-

3034 Qol Holdings

March

5.8%

5.1%

6.4%

4.7%

4.7%

6.5%

7.7%

7.4%

3341 Nihon Chouzai

March

5.6%

5.0%

6.0%

4.2%

4.2%

4.3%

4.3%

5.2%

4350 Medical System Network

March

4.2%

2.8%

3.5%

3.6%

3.8%

5.7%

6.0%

5.6%

March

5.0%

6.3%

6.5%

5.0%

-

-

-

-

7649 Sugi Holdings

February

5.6%

5.3%

5.4%

5.3%

5.5%

5.6%

5.1%

4.7%

9627 Ain Holdings

April

9.1%

8.6%

9.5%

7.5%

7.9%

8.0%

8.9%

-

-

Company

Sogo Medical Holdings

FY2023

Source: Shared Research based on each company’s data and websites (as of end-May 2023)
Notes:* Values for Medical System Network are profit margins of the Community Pharmacy Network business from 2019.
** Sogo Medical Holdings: FY2016 earnings are total profit margins as segment information is regional, transitioned to a holding company (9277) in October 2018 anddelisted on April 17, 2020.
*** Sugi Holdings: Total company profit margins since there is only one segment.

Main industry peers
Latest FY results
TickerCompany

Sales

Operating profit margin

ROE(JPYmn)(%)(%)

Business description

Middle-tier pharmacy chain. Leverages partnerships with regional drug wholesalers to acquire
7.2% local dispensing chains. Has a reputation for community care support. Established joint
ventures with Higuchi and FamilyMart to develop pharmacies.

2796 Pharmarise Holdings

51,6082.9%3034 Qol

170,036

5.6% 12.2%

3341 Nihon Chouzai

313,318

2.4%

Second-ranked dispensing pharmacy chain. Nationwide expansion centered on monzen
9.2% pharmacies in Kanto-Koshinetsu area. Established generic drug manufacturing subsidiary, also
developing in-house drugs. Referral & placement of medical staff such as pharmacists.

4350 Medical System Network

98,232

1.5%

4.3%

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

7649 Sugi Holdings

667,647

4.7%

8.8%

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

9627 Ain Holdings

316,247

4.8%

Top-ranked dispensing pharmacy chain. Originated in Hokkaido, expanded into metropolitan
6.0% areas, with nationwide coverage of mainly monzen pharmacies. Concluded capital andbusiness tie-up with Seven & i Holdings.

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

Source: Shared Research based on company data

Medical System Network (specifically, its Community Pharmacy Network business) ranks among the top ten dispensing
pharmacy chains by sales. They all have negative cash flow from investment activities, which Shared Research attributes totheir strategies of achieving growth by absorbing smaller local dispensing pharmacies (these smaller pharmacies account for
90% of the market). Shared Research believes that Medical System Network has options for unifying dispensing pharmacies'
management styles into a single group: either to integrate pharmacies into the Nanohana Pharmacy group through capital
investment (similar to major chains), or allow the smaller pharmacies to continue operating independently and bring theminto the company group as affiliates (i.e., network users). By joining the company's network, independently managed
dispensing pharmacies can enjoy the same management services as major chains without losing their management rights.

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

Qol Holdings (3034)

FY03/21

FY03/22

FY03/23

FY05/20

FY05/21

FY05/22

FY03/21

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Sales

104,257

106,685

109,551

51,03052,32451,608161,832

FY03/22
166,199

FY03/23
170,036

Gross profit

42,412

44,42945,921

7,437

8,067

8,117

21,102

23,16323,504

SG&A expenses

38,982

40,57642,758

6,403

6,821

6,596

13,737

13,30814,009Operating profit

3,429

3,852

3,163

1,034

1,246

1,520

7,364

9,855

9,495

Recurring profit

3,479

4,313

3,355

1,023

1,288

1,517

7,403

10,094

10,098Net income

2,198

2,394

1,610

577

426

447

3,365

5,489

5,656

ROE

21.3%

21.1%

21.8%

10.5%

7.3%

7.2%

8.2%

12.9%

12.2%

ROA (RP-based)

5.4%

6.9%

5.1%

4.1%

5.2%

6.3%

7.3%

10.3%

10.2%

Operating profit margin
Total assets

3.3%

3.6%

2.9%

2.0%

2.4%

2.9%

4.6%

5.9%

5.6%

64,44862,941

66,22325,206

24,72423,746

100,571

95,984

101,905
48,856

Net assets

11,187

13,286

14,488

5,946

6,331

6,699

41,83443,881Equity ratio

100.0%

102.4%

97.3%

22.6%

24.3%

26.9%

40.9%

45.7%

47.9%

Operating CF

5,205

4,010

4,973

1,572

1,945

713

12,912

10,112

11,662-734

Investing CF-1,485-2,511-2,114-1,076-292-3,065-3,087

Financing CF-5,312-3,415-2,918-766-728-1,034-6,114-10,006-2,569Cash and deposits

10,118

8,201

8,141

4,464

4,604

3,991

19,49816,516

18,596

Interest-bearing debt

32,55829,56630,516

10,375

10,251

9,575

29,721

23,28222,750Net debt

22,44021,36522,375

5,911

5,647

5,584

10,223

6,766

4,154

Nihon Chouzai (3341)

Sugi Holdings (7649)-7,013Ain Holdings (9627)

FY03/21

FY03/22

FY03/23

FY02/21

FY02/22

FY02/23

FY04/20

FY04/21

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Sales

278,951

299,392

313,318

602,850

625,477

667,647

292,615

297,305

316,247

Gross profit

49,37452,42253,643

181,631

191,490

202,524

46,861

46,15549,971

SG&A expenses

41,26745,83346,057

147,590

159,353

170,865

30,79335,222

34,832

Operating profit

8,106

6,589

7,586

34,041

32,13731,65816,068

10,932

15,139Recurring profit

8,409

6,767

7,682

35,33333,08232,391

16,822

12,64916,041

Net income

3,538

3,705

4,458

21,12019,38919,007

9,179

6,697

7,092

ROE

7.3%

7.2%

9.2%

11.0%

9.4%

8.8%

8.5%

5.9%

6.0%

ROA (RP-based)

4.5%

3.7%

4.2%

10.7%

9.7%

9.4%

8.8%

6.4%

Operating profit margin

FY04/22

7.7%

2.9%

2.2%

2.4%

5.6%

5.1%

4.7%

5.5%

3.7%

4.8%

Total assets

186,262

178,753

185,297

345,933

334,758

351,895

193,451

203,662

212,461

Net assets

49,86852,87656,483200,629

213,890

216,538

111,003

115,837

119,010Equity ratio

26.8%

29.6%

30.5%

58.0%

63.9%

61.5%

57.3%

56.8%

56.0%

Operating CF

11,213

19,411

7,532

34,027

7,174

38,27917,747

14,92826,156

Investing CF-7,767-9,313-10,018-29,254-23,892-23,256-11,474-9,493-13,943

Financing CF-2,806-17,448713-5,274-5,295-14,209-7,8373,643-7,753

Cash and deposits

32,89325,543

23,77055,84533,831

34,62245,93155,00959,470Interest-bearing debt

44,36542,80645,736

0

0

0

6,074

12,004

8,467

Net debt

11,472

17,263

21,966-55,845-33,831-34,622-39,857-43,005-51,003

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

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

Weaknesses
Potential conflict of interest between businesses pursuing M&A-driven pharmacy chain expansion and those offering
support services for small pharmacies:
The Pharmaceuticals Network business provides non-directly operated pharmacies (i.e., affiliates) access to the company’s
proprietary system, thus allowing them to maintain management independence, but this has the potential negative effect ofimpeding growth of the Dispensing Pharmacy business. While the company’s peers are expanding through acquisition ofsmaller pharmacies, the availability of membership to the Pharmaceuticals Network system is a possible lifeline to smaller
pharmacies that could encourage them to delay M&A action.
Low profit margins for dispensing pharmacies without drugstore function:
The Dispensing Pharmacy business OPM of about 3.0% (based on disclosed data through FY03/19) is 2–5pp below that ofother major chains. This is mainly because most of the company’s dispensing operations are limited to prescription drugs andare not accompanied by drugstore functions handling items such as OTC drugs, long-term care products, and toiletries. Manyof the other major chains have adopted the strategy to boost pharmacy profit margins by integrating drugstore operations
with added floor space for food products and cosmetics. The company is looking to expand its product offerings to include
various long-term care products like adult diapers as part of a family pharmacy service, but it will take time to transition to thisbusiness format.
Relatively small assets a disadvantage in acquisitions:
The company is at a disadvantage versus the major players in terms of asset scale when it comes to acquisitions targeting
pharmacy chain expansion. Looking at the M&A-based increases in outlet numbers over the past three years, industry leader
Ain Holdings acquired more than 100 pharmacies while Medical System Network was virtually flat YoY in FY03/23. Fromthe perspective of regional expansion, about 30% of the company’s pharmacies are located in Hokkaido while less than 10%
are located in Tokyo and Osaka, despite their high population density. In total assets, an important indicator of the buyer’s
financial strength in an M&A deal, comparable companies range in the JPY100.0bn mark and over, while Medical System
Network significantly falls behind at around JPY64.0bn. In order to advance acquisitions and increase pharmacy outlets inregions other than its home ground Hokkaido, the company will need to be able to demonstrate its financial strength to thesell-side companies’ management as well as M&A intermediaries.

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Historical performance and financial
statements
Income statement
Income statement

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

FY03/21

FY03/22

FY03/23(JPYmn)

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Sales

66,18275,54887,71588,865

93,977

98,232

105,241

104,257

106,685

109,551

YoY

20.7%

14.2%

16.1%

1.3%

5.8%

4.5%

7.1%

-0.9%

2.3%

2.7%

Cost of sales

43,44547,072

54,91354,70057,36960,96165,027

61,84562,25663,630Gross profit

22,73728,47632,801

34,16436,60737,271

40,21442,412

44,42945,921

YoY

17.1%

25.2%

15.2%

4.2%

7.2%

1.8%

7.9%

5.5%

4.8%

3.4%

Gross profit margin

34.4%

37.7%

37.4%

38.4%

39.0%

37.9%

38.2%

40.7%

41.6%

41.9%

SG&A expenses

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

38,59938,982

40,57642,758

SG&A ratio

31.2%

34.2%

33.1%

36.1%

35.6%

36.5%

36.7%

37.4%

38.0%

39.0%

Operating profit

2,091

2,641

3,783

2,113

3,163

1,428

1,615

3,429

3,852

3,163

YoY

2.2%

26.3%

43.2%

-44.1%

49.7%-54.9%

13.1%

112.3%

12.3%-17.9%

3.5%

4.3%

2.4%

3.4%

1.5%

1.5%

3.3%

3.6%

2.9%

457

275

378

405

288

361

758

550

Operating profit margin

3.2%

Non-operating income

250

Non-operating expenses

321

349

380

279

291

333

343

312

296

358

Recurring profit

2,020

2,540

3,860

2,109

3,250

1,501

1,560

3,479

4,313

3,355

YoY

5.6%

25.8%

52.0%

-45.4%

54.1%-53.8%

3.9%

123.0%

24.0%-22.2%

Recurring profit margin

3.1%

3.4%

4.4%

2.4%

3.5%

1.5%

1.5%

3.3%

4.0%

3.1%

Extraordinary gains

155

169

88

57

19

49

48

914

146

7

Extraordinary losses

404

415

470

260

976

128

1,586

426

447

343

Income taxes

1,073

1,315

1,599

1,262

1,271

962

918

1,769

1,624

1,389

Implied tax rate

60.6%

57.3%

46.0%

66.2%

55.4%

67.7%

4,172.7%

44.6%

40.5%

46.0%

Net income attributable to noncontrolling interests

29

92

158

72

0

-2

0

0

0

0

Net income

668

885

1,720

571

1,022

462

-895

2,198

2,394

1,610

-11.6%

32.4%

94.4%

-66.8%

79.0%-54.8%-293.7%-345.6%8.9%-32.7%

1.0%

1.2%

2.0%

0.6%

1.1%

0.5%

-0.9%

2.1%

2.2%

1.5%

YoY
Net margin

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

The third medium-term plan (FY03/13–FY03/15) began the following year. We believe the company has also applied plantargets to its business strategy from FY03/16 and beyond (the fourth medium-term plan), i.e., to increase the number of
network member pharmacies and grow its own dispensing pharmacies. The five key initiatives of the fifth medium-term plan,
which started in FY03/19, are as follows. We note that OPM has remained in the 1% range in FY03/19 and FY03/20 amid asevere business environment such as NHI medical fee revisions and price negotiations with wholesalers but recovered to the
3% level in FY03/21 owing to growth of the Pharmaceuticals Network business and improved profitability of the Dispensing
Pharmacy business (currently, Community Pharmacy business). In FY03/22, the operating profit margin improved thanks to aboost in the number of network members and further profitability improvement in the Community Pharmacy business (namechanged from Dispensing Pharmacy business). In FY03/23, however, the operating profit margin was below 3% due toincreases in personnel, utilities, and other costs.

SG&A expenses
SG&A expenses

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

FY03/21(JPYmn)

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Salaries and allowances

7,489

9,266

10,406

12,08812,481

13,467

14,195

14,43515,301

Provision for employee bonuses

724

939

1,062

1,133

1,418

1,333

1,393

1,486

1,526

Retirement benefit expenses

195

264

329

361

466

457

596

566

576

Provision for directors' bonuses

68

76

55

47

35

33

41

42

33

52

38

33

35

29

32

Taxes and dues

2,350

3,870

4,479

4,374

4,420

4,692

5,691

5,818

6,068

Depreciation

802

945

1,029

1,052

1,491

1,624

1,811

1,859

1,727

Provision for directors' stock benefits

Amortization of goodwill

FY03/22

39

669

849

917

1,009

1,056

1,147

1,217

1,136

1,128

Other

6,612

7,537

8,486

9,630

9,559

15,827

16,64816,606

14,179Total

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

38,59938,982

40,576

Source: Shared Research based on company data

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

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35

Balance sheet
Balance sheet

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

FY03/21

FY03/22

FY03/23

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cash and deposits

3,106

2,499

2,081

2,252

10,201

11,703

11,722

10,118

8,201

8,141

Notes and accounts receivable

2,802

2,484

2,614

2,223

2,332

2,420

2,313

2,646

2,891

3,437

Inventories

2,732

3,846

3,431

4,053

3,520

4,297

4,452

4,408

4,780

5,179

664

709

927

958

868

1,528

940

994

1,435

-6

-7

-7

-10

-11

-12

-12

-12

-3

-11

Total current assets

10,941

11,023

10,783

11,09818,736

21,055

20,57819,31318,701

20,265

Total tangible fixed assets

15,976

17,24920,253

21,24624,12925,721

25,126

24,634

24,62427,060Total intangible assets

12,39913,554

13,481

13,833

15,045

16,235

14,615

13,572

12,767

11,807

Investment securities

179

157

524

583

812

726

483

397

155

159

3,645

3,631

3,838

4,008

4,066

5,217

5,686

6,549

6,712

6,950

(JPYmn)AssetsOther
Allowance for doubtful accounts

2,017Long-term loans receivable
Other

-26

-29

-33

-32

-31

-21

-26

-20

-19

Investment and other assets

Allowance for doubtful accounts

3,798

3,759

4,329

4,559

4,847

5,922

6,143

6,926

6,848

7,090

Total fixed assets

32,17334,56438,06339,63944,02347,87945,88545,134

44,23945,958-19

Total assets

43,11445,587

48,84750,73762,75968,93566,46464,44862,941

66,223

Notes and accounts payable

7,798

8,598

9,525

9,144

9,416

10,19810,021

9,258

9,680

9,937

Short-term debt

12,922

9,214

6,910

3,863

7,463

9,158

8,905

10,210

5,935

6,377

578

599

1,065

413

1,135

695

454

1,556

617

600

Other

3,582

3,215

3,561

3,500

3,755

3,793

3,916

4,394

4,203

4,435

Total current liabilities

24,88021,626

21,061

16,92021,76923,84423,29625,41820,435

21,349Long-term debt

10,94815,391

14,85920,18626,32929,73928,653

22,34823,631

24,139Liabilities

Income taxes payable

Deferred tax liabilities

1

1

1

1

Other

1,933

2,434

2,660

2,985

4,075

4,590

5,096

5,493

5,588

6,246

Total fixed liabilities

12,882

17,826

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

29,21930,385

Total liabilities

37,76239,452

38,58140,092

52,174

58,17357,04553,26049,65451,735

Capital stock

1,091

1,091

1,932

1,932

2,097

2,128

2,128

2,128

2,128

2,128

Capital surplus

901

901

1,742

1,742

1,160

1,185

1,183

1,182

1,182

1,182

Net assets

Retained earnings

4,300

4,980

6,467

6,735

7,459

7,616

6,414

8,305

10,393

11,606

Treasury stock-1,181-1,147

-328

-302

-275

-233

-206

-344

-326

-326

2

11

15

49

143

83

-37

-24

-7

-2

-31

-28

-17

23

52,31658,23956,945

53,15449,54751,596

Valuation differences on securities
Other

273

338

469

514

2

0

0

23

17

37

Total net assets

Non-controlling interests

5,352

6,136

10,265

10,644

10,584

10,761

9,418

11,187

13,286

14,488

Total liabilities and net assets

43,11445,58848,84650,73662,75968,93566,46464,44862,941

66,223

Working capital-2,265-2,268-3,480-2,868-3,564-3,481-3,256-2,204-2,009-1,321

Total interest-bearing debt

23,87024,605

21,76924,04933,79238,89737,55832,55829,56630,516

Net debt

20,76322,12019,70821,814

23,591

27,19425,83622,44021,36522,375

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

Assets: Assets expanded from 2012–13 on business growth
The company’s business transformed in 2012–13, due in part to the formulation of its third medium-term plan. The
company’s consolidated subsidiary Pharmaholdings Co., Ltd., which operates dispensing pharmacies, entered a businessalliance in December 2012 with Hanshin Dispensing Pharmacy Co., Ltd. (later became a subsidiary of Hanshin Dispensing
Holding Co., Ltd. [merged into I&H Co., Ltd. in November 2019]). In July 2013, the two companies established a joint
venture, H&M Co., Ltd. The main purpose of the joint venture was joint sourcing and distribution of pharmaceuticals,
purchase of medical devices, and clearance of dead stock. H&M’s chief goal is not to win pricing concessions from drug
wholesalers as a result of buying power due to large-volume procurement, but to collaborate with drug wholesalers to set
economically rational prices. This is the core objective of the company’s Pharmaceuticals Network business.
Assets have continued to increase under the fourth medium-term plan and beyond. The company has sought to increase thenumber of dispensing pharmacies by M&A, but has carefully monitored the performance of pharmacies and booked
impairment charges or disposed of those whose earnings have not improved. Under the fifth medium-term plan, assets haveshrunk reflecting the impact of the COVID-19 pandemic since FY03/20. In FY03/22, the company continued to reduce
assets through absorption of Home-visit Nursing Care Station Himawari Co., Ltd. among other means. In FY03/23, tangible
fixed assets increased due to store development centered on medical malls.

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

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36borrowings have been over JPY30.0bn since FY03/18. Profits increased in FY03/21 and FY03/22, and although interestbearing debt declined YoY in both years, it was more or less flat in FY03/23.

Net assets: Capital stock increase in FY03/16
The company increased capital and retired treasury stock in FY03/16, lifting the equity ratio in line with one of the third
medium-term plan targets of achieving a ratio of 20% or higher. At the same time, management shored up the balance sheet
through reducing short-term borrowing by JPY6.2bn YoY. Improving its financial position remains a key initiative of its fifth
medium-term plan, and of its sixth medium-term plan unveiled together with the announcement of FY03/22 results. In
FY03/23, net assets increased due to an increase in retained earnings.

Cash flow statement
Cash flow statement

FY03/14

FY03/15

FY03/16

FY03/17

FY03/18

FY03/19

FY03/20

FY03/21

FY03/22

FY03/23(JPYmn)

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cons.

Cash flows from operating activities (1)

3,706

3,838

6,409

3,084

6,699

2,840

4,232

5,205

4,010

4,973

Pre-tax profit

1,770

2,294

3,479

1,906

2,293

1,422

22

3,967

4,012

3,019

Depreciation

1,077

1,209

1,362

1,594

1,491

1,624

1,811

1,859

1,727

1,825

Amortization of goodwill

669

849

917

1,009

1,056

1,147

1,217

1,136

1,128

1,132

Change in trade receivables

382

935

191

812

496

500

285

-239

-214

-505

Change in inventories

-173

-689

455

-472

759

-620

-140

72

-406

-377

Change in trade payables

365

-295

683

-765

-569

69

-328

-864

400

211

Cash flows from investing activities (2)-7,559-3,958-5,040-3,909-6,848-5,921-2,383-1,485-2,511-2,114Purchase of tangible fixed assets-4,180-2,360-3,674-2,170-4,050-3,094-1,351-1,375-1,934-1,373Purchase of intangible assets

-44

-93

-273

-192

-190

-82

-107

-154

-194

-234

Purchase, sale, and redemption of
investment securities

129

-267

-19

-39

-16

102

18

379

Change in shares resulting in change
in scope of consolidation-1,626-304-1,725-2,576-2,898

-583

-8

-209

-56

-106

-106

-38

-95

-3

-102

-233

7

Free cash flow (1+2)-3,853

-120

1,369

-825

-149

-3,081

1,849

3,720

1,499

2,859

Cash flows from financing activities

4,864

-483

-1,792

998

8,050

4,338

-1,687-5,312-3,415-2,918

7,255-4,334-2,314

-250

4,816

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

Change in short-term borrowings
Change in long-term borrowings
Acquisition of treasury stock
Dividends paid

-1,155
-221

-190

-54

-3,241

2,598

1,471

-505

0

-2,901

-896

5,292

7,292

3,701

-376

-4,63433-2,269

1,005

0

-229

-297

-297

-304

-305

-304

-304

-395

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

Cash flows from operating activities
Cash flow from operating activities since FY03/12, when the accounting period was changed, has trended around JPY3.7bn–
3.8bn, approximately half of which is derived from pre-tax profit, except for FY03/16–FY03/17 when profits fluctuatedsharply. FY03/16–FY03/17 earnings were impacted by a number of temporary factors and a changing business environment
owing to NHI drug price and dispensing fee revisions. The company notes temporary factors that boosted FY03/16 profits
such as JPY242mn in gains from the sale of real estate, JPY100mn in subsidies for opening a serviced elderly housing facility,
and a JPY90mn tax benefit from acquisition of subsidiary shares. The decline in FY03/17 profits was exacerbated by factors
such as drug price and dispensing fee revisions, a winding down of major hepatitis C drug sales, and the absence oftemporary factors that boosted FY03/16 profits. Operating cash flow in FY03/19 declined by half YoY owing to the April
2018 NHI price revision, but increased YoY in FY03/20 and FY03/21 as earnings recovered. In FY03/22, operating cash
flow fell YoY again due to an increase in inventories and income taxes paid accompanying earnings recovery. In FY03/23,
operating cash flow increased due to a decline in corporate tax payments.
Depreciation and goodwill have been steadily increasing (except during the abbreviated accounting period) on businessexpansion owed to an upswing in the number of directly operated pharmacies, and this has had a positive impact on cash
flow. Accounts receivable and accounts payable tend to fluctuate from year-end to year-end, showing no set pattern as thetiming of receivable collections and the debt repayment period varies. Further, fiscal years with negative cash flow for
inventory assets are common. We think this is due to the nature of Medical System Network’s business of handlingprescription drugs, which calls for the maintenance of sufficient inventories to avert shortage versus prescriptions.

Cash flows from investing activities
Cash flow from investing activities has been consistently negative for the 10 years through FY03/17 owing to a businessexpansion strategy that leverages alliances and M&A. The cash flow deficit from investing activities has been especiallypronounced since the third medium-term plan was initiated in FY03/13. Prior to that, it was typically in the JPY1.0bn–3.0bn
range, but then expanded to the JPY4.0bn–7.0bn range. In FY03/14, the company posted its largest cash flow deficit in 10
years, but this was mostly due to acquisition of tangible fixed assets: JPY4.2bn for serviced elderly housing facilities andMedical System Network 4350
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land/buildings for new pharmacies and JPY4.2bn for shares acquired through M&A and from business transfers. Even inother fiscal years, the acquisition of land and buildings had a major impact on cash flow from investing activities—JPY3.7bn in
FY03/16 and JPY3.1bn in JPY03/19, accounting for the bulk of the deficit in both years. The company commented that
Wisteria Minami Ichijo would be the last elderly housing planning and development project for a while.
The company has aimed to make its network system an industry standard by expanding the number of affiliates and to
improve profitability of the directly operated pharmacy business. Accordingly, in the third to fifth medium-term plans, itfocused on profitability improvements in these mainstay businesses. Since the company's businesses call for front-loaded
spending by nature, free cash flow has been negative up to FY03/19, with the exception of FY03/16 when free cash flow
turned positive due to temporary factors that sharply lifted profits. From FY03/20 onward, free cash flow has remained
positive owing to selective engagement in M&A and pretax profits.

Cash flows from financing activities
Financing will be indispensable as the company looks to continue expanding its business. In addition to using internal funds,
the company raises funds through short- and long-term borrowing. We list the relatively large-scale financings of the past 10
years below. Most were short- and long-term borrowings, of which a large majority was for business expansion, such aspurchase of real estate for new pharmacies and M&A.
In FY03/14, there was a JPY1.2bn cash flow deficit due to a share buyback accompanying the restructuring of an affiliatedcompany. In FY03/16, cash flow saw a JPY2.8bn surplus as the company increased capital and sold treasury shares to improve
its financial standing. Total borrowing also increased JPY5.2bn in FY03/19, but JPY3.9bn was invested in M&A, including theacquisition of Nagatomi Pharmacy. There were few M&A deals in FY03/20 and FY03/21 because the company prioritized
improving profitability of existing stores. Under better financial standing, the company reduced its interest-bearing debts,
particularly short-term borrowings, in FY03/22. In FY03/22, interest-bearing debt was roughly flat YoY.

Historical performance
Full-year FY03/23 results (out May 9, 2023)
Overview
Full-year FY03/23 (April 2022–March 2023) earnings results
Sales: JPY109.6bn (+2.7% YoY)
Operating profit: JPY3.2bn (-17.9% YoY)
Recurring profit: JPY3.4bn (-22.2% YoY)
Net income attributable to owners of the parent: JPY1.6bn (-32.7% YoY)
Operating results and business conditions
Sales rose 2.7% YoY, thanks in part to higher sales in the mainstay Community Pharmacy Network segment, owing to two
factors. First, in the segment's Community Pharmacy business, the prescription unit price fell due to the impact of the NHI
drug price and dispensing fee revisions, but the opening of new stores and acquisition of stores contributed to earnings.
Secondly, in the Pharmaceutical Network business, the company was successful in securing a record number of new network
members, as its ongoing efforts to improve pharmaceutical distribution also gained the backing of pharmaceuticalwholesalers.
Gross profit was JPY45.9bn (+3.4% YoY) and GPM was 41.9% (+0.3pp YoY). The main reason for the increase in gross profit
was an annual increase in membership fees in the Pharmaceutical Network business, as well as a rise in technical fees andthe drug-price margin (difference between a product’s NHI reimbursement price and its actual market price) in theCommunity Pharmacy business. However, SG&A expenses increased to JPY42.8bn (+5.4% YoY), and operating profit fell
17.9% YoY. The main factors behind the increase in SG&A expenses were the impact of NHI drug price and dispensing fee
revisions in the Community Pharmacy business, increased labor expenses accompanying efforts to strengthen interpersonal
services, and an increase in utility costs in the Leasing and Facility-related business. EBITDA was JPY6.1bn (-8.7% YoY).

Segment results
Full-year FY03/23 results by segment were as follows.
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Community Pharmacy Network
Segment sales: JPY104.3bn (+2.9% YoY; including intra-group sales and transfers between segments, same applies
below)
Segment profit: JPY5.9bn (-3.8% YoY)
This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy
business, and the manufacture and market pharmaceuticals business (mainly Feldsenf Pharma) previously included in
Other. A digital shift business that utilizes instant messaging app LINE was added to the segment from FY03/21.
Community Pharmacy
The prescription unit price fell due to the impact of the NHI drug price and dispensing fee revisions, but the prescription
count rose on the back of the contribution of stores newly opened and acquired. During FY03/23, the company opened
eight community pharmacies, including six inside medical malls. As of end-March 2023, the company had 428 community
pharmacies, one care plan center, and nine cosmetics/drug stores. Dispensing fees for FY03/23 were JPY93.0bn (+2.2%
YoY) on a companywide basis and JPY88.6bn (+0.2% YoY) on an existing store basis.
Pharmaceuticals Network
The company had success in gaining a record number of new network members as its ongoing efforts to improvepharmaceutical distribution also gained the backing of pharmaceutical wholesalers. As of end-March 2023, pharmaceutical
network members totaled 8,912 (an increase of 1,511 from March 31, 2022), comprising 428 directly operated pharmacies
and 8,484 affiliates. Pharmaceutical orders handled by the company's network totaled JPY526.2bn (+17.1% YoY).
Manufacture and Market Pharmaceuticals
In this business, the company group aims to provide a stable supply of good-quality, low-priced generic drugs. The company
offered 93 products (45 ingredients) as of end-March 2023, and supplied these to 2,161 general network affiliates (anincrease of 463 from March 31, 2022) and 1,148 other customers. Feldsenf Pharma's sales were JPY2.6bn (1.4x YoY).
Digital Shift
The company established subsidiary PharmaShift Co., Ltd. on October 1, 2020, to create a “new pharmaceutical platform” forthe digital age. In March 2021, the subsidiary launched the “Tsunagaru Pharmacy” service utilizing its official LINE account.
As of end-March 2023, the number of pharmacies using the service was 3,391 (an increase of 2,480 from March 31, 2022)
while 3,787 had placed orders for the service use (an increase of 2,144 from March 31, 2022).

Leasing and Facility-related
Segment sales: JPY3.5bn (+5.1% YoY)
Segment loss: JPY92mn (versus profit of JPY39mn in FY03/22)
Operating conditions of serviced elderly housing facilities
Segment sales grew 5.1% YoY, supported by firm inflow of income from property lease and management. However, thesegment posted an operating loss, due to factors such as higher labor expenses resulting from an increase in the number of
employees to strengthen sales, and an increase in utility expenses due to the energy cost hike. As of end-March 2023, thecompany reported stable occupancy rates at three of its five properties (the overall occupancy rate at the five serviced
residences for the elderly stood at 80.4%), while for the remaining two, at Wisteria Senri-Chuo it reported an occupancy rateof 72.0% (with 59 out of 82 units occupied), and at Wisteria Minami Ichijo it reported an occupancy rate of 68.1% (with 79
out of 116 units occupied). The company was aiming for an occupancy rate of 90% or higher for all five properties, but at theend of FY03/23 it was only 80.4%.

Meal Catering
Segment sales: JPY2.3bn (-1.4% YoY)
Segment loss: JPY65mn (versus profit of JPY1mn in FY03/22)
Lower sales and operating loss
In FY03/23, sales decreased along with the decline in the number of meals supplied due to the COVID-19 pandemic, and aloss followed lower gross profit margin due to higher purchase prices.

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Other (mostly home-visit nursing care)
Segment sales: JPY304mn (-0.3% YoY)
Segment loss: JPY22mn (versus a loss of JPY12mn in FY03/22)

Cumulative Q3 FY03/23 results (out February 3, 2023)
Overview
Q3 FY03/23 (April–December 2022) earnings results
Sales: JPY81.9bn (+2.5% YoY)
Operating profit: JPY2.3bn (-23.5% YoY)
Recurring profit: JPY2.5bn (-28.3% YoY)
Net income attributable to owners of the parent: JPY1.2bn (-44.3% YoY)
Trends and outlook
Sales increased 2.5% YoY, driven by the growth in sales of the Community Pharmacy Network business. This was primarily
due to earnings contributions from newly acquired stores and store openings, offsetting the impact of the NHI drug priceand dispensing fee revisions on prescription unit prices in the Community Pharmacy segment. Additionally, thePharmaceutical Network segment saw steady growth in the number of new network affiliates.
Gross profit was JPY34.3bn (+2.5% YoY), and the gross profit margin remained flat at 41.9%. Despite the impact of NHI drug
price and dispensing fee revisions on the Community Pharmacy business, the company achieved improvements inprocurement costs through changes to its drug procurement routes. However, due to an increase in investments in humanresources related to strengthening interpersonal services and sales activities, SG&A expenses rose to JPY31.9bn (+5.1% YoY),
causing operating profit to fall by 23.5% YoY. EBITDA for the period was JPY4.5bn (-12.5%).

Segment results
Cumulative Q3 FY03/23 results by segment were as follows.

Community Pharmacy Network
Segment sales: JPY78.1n (+2.8% YoY; including intra-group sales and transfers between segments, same applies
below)
Segment profit: JPY4.3bn (-7.8% YoY)
This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy
business, and the manufacture and market pharmaceuticals business (mainly Feldsenf Pharma) previously included in
Other. A digital shift business that utilizes instant messaging app LINE was added to the segment from FY03/21.
Community Pharmacy
Although the NHI drug price and dispensing fee revisions led to a decline in prescription unit price, the company saw anincrease in prescription demand due to the contribution of newly opened and acquired stores. The dispensing fee on a perstore basis increased by JPY1.2bn YoY to JPY69.5bn (+1.7% YoY). The company opened six new community pharmacies during
the cumulative Q3 period, including five inside medical malls. As of December 31, 2022, the company had a total of 429
community pharmacies, one care plan center, and nine cosmetics/drug stores.
Pharmaceuticals Network
Amid increasing demand for business efficiency at dispensing pharmacies, as pharmacists concentrate further oninterpersonal work due to the impact of dispensing fee revisions, the number of new network members continued to growsteadily. As of the end of December 2022, the total number of pharmaceutical network members was 8,555 (an increase of
1,154 from the end of March 2022), including 429 directly operated pharmacies and 8,126 affiliate pharmacies. The volumeof pharmaceuticals orders placed through the network during the period was JPY391.4bn (+16.6% YoY).
Manufacture and Market Pharmaceuticals
In this business, the company group aims to provide a stable supply of good-quality, low-priced generic drugs. The company
offered 90 products (44 ingredients) as of December 31, 2022, and supplied these to 2,042 general network affiliates (anMedical System Network 4350
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increase of 344 from March 31, 2022). Feldsenf Pharma’s sales in cumulative Q3 were JPY2.0bn (+43.8% YoY).
Digital Shift
In order to create a "new pharmaceutical platform" for the digital age, the company established PharmaShift Co., Ltd. on
October 1, 2020, and in March 2021, it launched the "Tsunagaru Pharmacy" service utilizing its official LINE account. The
company prioritized the expansion of the service introduction to more pharmacies, and as of the end of December 2022,
the number of pharmacies using the service had increased to 3,071 (an increase of 2,160 from the end of March 2022),
while 3,381 had placed orders for the service use (an increase of 1,738 from the end of March 2022).

Leasing and Facility-related
Segment sales: JPY2.5bn (-0.5% YoY)
Segment loss: JPY97mn (versus profit of JPY53mn in 1H FY03/22)
Operating conditions of serviced elderly housing facilities
Despite generally strong property leasing revenue, sales for the cumulative Q3 period decreased by 0.5% YoY, mainly due toa drop in construction projects. This was because the timing of recording sales for construction projects was concentrated in
Q4. The segment posted an operating loss due to higher labor expenses resulting from an increase in the number of
employees to strengthen sales, as well as increased advertising expenses related to aggressive sales promotion activities for
the Wisteria serviced residences for the elderly and support services for physicians opening their own practices.
As of the end of December 2022, the company reported stable occupancy rates at three of its five properties, with theoverall occupancy rate for the five serviced residences for the elderly at 81.8%. For the remaining two properties, Wisteria
Senri-Chuo had an occupancy rate of 72.0% (with 59 out of 82 units occupied) and Wisteria Minami Ichijo had an occupancy
rate of 71.6% (with 83 out of 116 units occupied).

Meal Catering
Segment sales: JPY1.7bn (-2.9% YoY)
Segment loss: JPY55mn (versus profit of JPY7mn in 1H FY03/22)
Lower sales and operating loss
In Q3 FY03/23, sales decreased along with the decline in the number of meals supplied due to the COVID-19 pandemic,
and a loss followed lower gross profit margin due to higher purchase prices.

Other (mostly home-visit nursing care)
Segment sales: JPY228mn (-1.7% YoY)
Segment loss: JPY14mn (versus a loss of JPY10mn in Q3 FY03/22)

1H FY03/23 results (out November 7, 2022)
Overview
1H FY03/23 (April–September 2022) earnings results
Sales: JPY53.3bn (+2.2% YoY)
Operating profit: JPY1.1bn (-41.0% YoY)
Recurring profit: JPY1.2bn (-44.4% YoY)
Net income attributable to owners of the parent: JPY502mn (-64.9% YoY)
Operating results and business conditions
Sales and operating profit in 1H FY03/23 were largely in line with the company's forecast, announced on May 6, 2022 at thetime of the full-year FY03/22 results announcement. Against the 1H forecast, sales achieved 99.8% of the target, operating
profit 98.1%, recurring profit 98.6%, and net income 85.1%.
Sales rose 2.2% YoY on the back of higher sales in the mainstay Community Pharmacy Network segment. In the
Pharmaceuticals Network business, the number of new network members remained strong. In the Community Pharmacy
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business, the prescription unit price fell due to the impact of NHI drug price and dispensing fee revisions in April 2022, but
the opening of new stores and acquisition of stores contributed to earnings.
In terms of profit, gross profit and GPM were mostly flat YoY, with gross profit rising 2.1% YoY to JPY22.3bn and GPM
declining 0.1pp YoY to 41.8%. However, operating profit fell 41.0% YoY and OPM declined 1.5pp YoY to 2.1% due to SG&A
expenses increasing 6.1% YoY to JPY21.2bn on a rise in personnel expenses. In the Community Pharmacy Network segment,
profit declined in the Community Pharmacy business due to the impact of NHI drug price and dispensing fee revisions andincreased labor expenses accompanying efforts to strengthen interpersonal services. Profit also declined in the Leasing andFacility-related segment on account of expenses rising amid efforts to strengthen sales. However, these declines in profit
were offset by increased profit in other businesses under the Community Pharmacy Network segment, and operating profit
was largely in line with the company's forecast as a result.

Segment results
1H FY03/23 results by segment were as follows.

Community Pharmacy Network
Segment sales: JPY50.8bn (+2.3% YoY; including intra-group sales and transfers between segments, same applies
below)
Segment profit: JPY2.4bn (-17.4% YoY)
This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy
business, and the Manufacture and Market Pharmaceuticals business (Feldsenf Pharma; Medical System Network owns
an 80% stake) previously included in Other. A Digital Shift business (PharmaShift Co., Ltd.; 51% stake) that utilizes
instant messaging app LINE was added to the segment from FY03/21.
Community Pharmacy
In the Community Pharmacy business, the prescription unit price fell (-JPY193 YoY to JPY10,061 on a total store basis) due tothe impact of NHI drug price and dispensing fee revisions, but the prescription count rose 3.4% YoY to 4.5mn on a total
store basis and 1.2% YoY to 4.3mn on a comparable store basis on the back of the contribution of stores newly opened andacquired. During 1H FY03/23, the company opened four community pharmacies, including three inside medical malls,
bringing the number of stores to 427 community pharmacies, one care plan center, and nine cosmetics/drug stores as of
September 30, 2022.
Sales grew JPY711mn YoY (including internal transactions; the same applies below) due to the prescription count rising. On
the other hand, operating profit declined JPY773mn YoY as a result of the prescription unit price falling and labor expenses
rising.
Pharmaceuticals Network
The number of new network members continued to grow steadily amid rising demand for business efficiency at pharmacies
as pharmacists further concentrated on interpersonal work due to the impact of dispensing fee revisions. As of September
30, 2022, pharmaceutical network members totaled 8,173 (an increase of 772 from March 31, 2022), comprising 427
directly operated pharmacies and 7,746 affiliates.
Sales rose JPY325mn YoY in this business from the number of network members increasing. Operating profit also increased
JPY275mn YoY.
Manufacture and Market Pharmaceuticals
In this business, the company group aims to provide a stable supply of good-quality, low-priced generic drugs. The company
offered 85 products (42 ingredients) as of September 30, 2022, and supplied these to 1,886 general network affiliates (anincrease of 188 from March 31, 2022).
Sales grew JPY465mn YoY to JPY1.29bn on an increase in the number of network affiliates, and operating profit increased
JPY40mn.
Digital Shift
The company established subsidiary PharmaShift Co., Ltd. on October 1, 2020, to create a “new pharmaceutical platform” forthe digital age. In March 2021 the subsidiary launched the “Tsunagaru Pharmacy” service utilizing its official LINE account.

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As of end-September 2022, the number of pharmacies using the service was 2,332 (an increase of 1,421 from March 31,2022) while 2,866 had placed orders for the service use (an increase of 1,223 from March 31, 2022), and the number ofregistered users was 440,000 (up 152% from FY03/22).
Sales grew JPY465mn YoY due to the number of pharmacies using the official LINE account-based "Tsunagaru Pharmacy"
service increasing following the service's full-scale launch. Operating profit also increased JPY40mn.

Leasing and Facility-related
Segment sales: JPY1.7bn (+8.9% YoY)
Segment loss: JPY65mn (versus profit of JPY32mn in 1H FY03/22)
Operating conditions of serviced elderly housing facilities
Segment sales rose 7.4% YoY, as property leasing revenue was generally strong and orders for construction projects
increased. However, the segment posted an operating loss due to an increase in advertising and other expenses
accompanying aggressive sales promotion activities for the Wisteria serviced residences for the elderly and support services
for physicians opening their own practices. As of end-September 2022, the company reported stable occupancy rates atthree of its five properties (the overall occupancy rate at the five serviced residences for the elderly stood at 80.6%), while
for the remaining two, it reported occupancy rates of just 69.5% at Wisteria Senri-Chuo (with 57 out of 82 units occupied),and 69.0% at Wisteria Minami Ichijo (with 80 out of 116 units occupied).

Meal Catering
Segment sales: JPY1.1bn (-2.7% YoY)
Segment loss: JPY33mn (versus profit of JPY1mn in 1H FY03/22)
Lower sales and operating loss
In 1H FY03/23, sales decreased along with the decline in the number of meals supplied due to the COVID-19 pandemic,
and a loss followed lower gross profit margin due to higher purchase prices.

Other (mostly home-visit nursing care)
Segment sales: JPY151mn (-0.7% YoY)
Segment loss: JPY10mn (versus a loss of JPY12mn in 1H FY03/22)

Q1 FY03/23 results (out August 5, 2022)
Overview
Q1 FY03/23 (April–June 2022) earnings results
Sales: JPY26.3bn (+1.5% YoY)
Operating profit: JPY348mn (-47.8% YoY)
Recurring profit: JPY392mn (-58.1% YoY)
Net income attributable to owners of the parent: JPY91mn (-84.4% YoY)
Operating results and business conditions
Sales rose 1.5% YoY. In the mainstay Community Pharmacy Network segment, sales were 1.6% higher YoY. Contributing
factors included an increase in network members at the Pharmaceutical Network business. In the Community Pharmacy
business, the prescription unit price fell due to the impact of the NHI drug price and dispensing fee revisions, but the
opening of new stores and acquisition of stores, as well as increased dispensing fees (all-store basis), contributed to earnings.
Operating profit fell 47.8% YoY. This was due in part to a decline in profit at the Community Pharmacy business (part of theCommunity Pharmacy Network segment) as a result of NHI drug price and dispensing fee revisions and increased labor
expenses accompanying efforts to strengthen interpersonal services at directly managed pharmacies. Higher company-wide
expenses for the development of operational systems (related to personnel, inventory management, security enhancement,etc.) also weighed on profit. The company had projected that generating profit in Q1 would be challenging because thequarter came immediately after NHI drug price and dispensing fee revisions and it accordingly anticipated smaller profit

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margins. However, operating profit exceeded its initial projection due to steady growth in network affiliates and an increasein prescription count.
In Q1, sales reached 49.2% of the company's 1H forecast (23.9% of full-year forecast), while operating profit came to 31.1%(9.9%), recurring profit 31.1% (10.6%), and net income 15.4% (5.2%). NHI drug price and dispensing fee revisions in April
2022 had an impact on progress rates, particularly in terms of profit.

Segment results
Community Pharmacy Network
Segment sales: JPY25.0bn (+1.6% YoY; including intra-group sales and transfers between segments, same applies
below)
Segment profit: JPY1.0bn (+15.6% YoY)
This is a new segment that integrates the former Pharmaceuticals Network business, the Dispensing Pharmacy
business, and the manufacture and market pharmaceuticals business (mainly Feldsenf Pharma) previously included in
Other. A digital shift business that utilizes instant messaging app LINE was added to the segment from FY03/21.
Community Pharmacy
The prescription unit price fell by 1.3% YoY due to NHI drug price and dispensing fee revisions, but the stores newly opened
and acquired since Q2 FY03/22 contributed to earnings. As a result, the prescription count rose to 2.2mn (+2.1% YoY) anddispensing fees reached JPY22.4mn (+0.7% YoY) on a company-wide basis. The company faced challenges in terms of profit
in Q1 because it was required to sell drugs procured before the NHI price revisions implemented in April 2022 at postrevision selling prices. During Q1 FY03/23, the company opened three community pharmacies, including two inside
medical malls. As of June 30, 2022, the company had 426 community pharmacies, one care plan center, and eightcosmetics/drug stores.
Pharmaceuticals Network
The company observed a growing need for improvement in operational efficiency at pharmacies as pharmacists concentrated
more intensely on interpersonal operations due primarily to impact stemming from dispensing fee revisions. Accordingly,
the company reported a net increase of 411 network affiliates (525 new additions and 114 departures) in Q1. As of June 30,
2022, pharmaceutical network members totaled 7,812 (an increase of 411 from March 31, 2022), comprising 426 directly
operated pharmacies and 7,386 affiliates. Shared Research assumes that the increase in network affiliates contributed tosegment profit growth.
Manufacture and Market Pharmaceuticals
Sales of Feldsenf Pharma Co., Ltd., the core subsidiary in this business, amounted to JPY630mn (+61.5% YoY). In the
Manufacture and Market Pharmaceuticals business, the company group aims to provide a stable supply of good-quality, lowpriced generic drugs. The company offered 82 products (41 ingredients) as of June 30, 2022, and supplied these to 1,732
general network affiliates (an increase of 34 from March 31, 2022).
Digital Shift
The company established subsidiary PharmaShift Co., Ltd. on October 1, 2020, to create a “new pharmaceutical platform” forthe digital age. In March 2021 the subsidiary launched the “Tsunagaru Pharmacy” service utilizing its official LINE account.
As of end-June 2022, the number of pharmacies using the service was 1,549 (an increase of 638 from March 31, 2022) while
2,194 had placed orders for the service use (an increase of 551 from March 31, 2022). The company believes that early
growth of the Tsunagaru Pharmacy service will lead to an increase in prescription count. Accordingly, despite the temporary
advance outlays it will incur in association, the company has begun offering a free trial of this service to its network affiliates.

Leasing and Facility-related
Segment sales: JPY794mn (+7.4% YoY)
Segment loss: JPY43mn (versus a loss of JPY2mn in Q1 FY03/22)
Operating conditions of serviced elderly housing facilities
Segment sales rose 7.4% YoY, as property leasing revenue was generally strong and orders for construction projects
increased. On the profit front, the operating loss widened due to increased advertising expenses accompanying aggressive
sales promotion activities for the Wisteria serviced residences for the elderly and support services for physicians opening
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their own practices. As of end-June 2022, the company reported stable occupancy rates at three of its five properties (theoverall occupancy rate at the five serviced residences for the elderly stood at 81.8%), while for the remaining two, at Wisteria
Senri-Chuo it reported an occupancy rate of 76.8% (with 63 out of 82 units occupied), and at Wisteria Minami Ichijo itreported an occupancy rate of 69.0% (with 80 out of 116 units occupied).

Meal Catering
Segment sales: JPY573mn (-2.2% YoY)
Segment loss: JPY11mn (versus a loss of JPY1mn in Q1 FY03/22)
In Q1 FY03/22, sales decreased and losses worsened, as the number of meals supplied declined due to the company
withdrawing from loss-making facilities.

Other (mostly home-visit nursing care)
Segment sales: JPY77mn (+4.1% YoY)
Segment loss: JPY2mn (versus a loss of JPY7mn in Q1 FY03/22)

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News and topics
Transition to company with Audit & Supervisory Committee
2023-03-17

Medical System Network Co., Ltd. announced the transition to a company with an Audit & Supervisory Committee.
At its Board of Directors meeting held on March 17, 2022, the company resolved to transition to a company with an Audit &Supervisory Committee, subject to approval at its 25th general meeting of shareholders scheduled for June 2023.
The purpose of the transition is to further improve corporate governance by strengthening the supervisory function of theBoard of Directors through the inclusion of Audit & Supervisory Committee members, and to expedite the Board's decisionmaking process for business execution by delegating decisions to the directors.
The transition will take place following the approval of the necessary amendments to the Articles of Incorporation at the 25th
general meeting of shareholders scheduled for June 2023.

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Other information
History
Data
Sep 1999
Mar 2002
Dec
Feb 2005
Oct

Description
Established Medical System Network ( capital stock :JPY 10mn ) in Chuo-Ward, Sapporo, to streamline hospital operation andpharmaceuticals distribution
Registered shares on Osaka Stock Exchange NASDAQ Japan market ( now JASDAQ )Acquired 100% of Pharmaholdings and Nihon Leben shares, making them wholly owned subsidiaries
Established joint venture MM net with Mitsui & Co. ( capital JPY 200mn, Medical System Network held 51% equity stake, but dissolved
alliance and absorbed MM net in 2013 )Pharmaholdings acquired 100% of Sunmedic Co., Ltd. (now Nanohana East Japan Co., Ltd.) shares, making it a wholly owned
subsidiary

Jan 2007

Pharmaholdings acquired 100% of Hankyu Kyoei Pharmacy ( now Kyoei Pharmacy ) shares, making it a wholly owned subsidiary
Acquired 100% of CR Medical ( now Nanohana central Co., Ltd. ), making it a wholly owned subsidiaryMar
Sep 2008

Acquired 100% of Hokkaido Hiclips ( now SMO-MDS ) shares, making it a wholly owned subsidiary
Listed shares on the Second Section of the Tokyo Stock Exchange

Jun 2010

Listed shares on the First Section of the Tokyo Stock Exchange

May 2013

Formed Business alliance with Hansin Dispensing Pharmacy( Switched to alliance with parent Hansin Pharmacy Holdings when the holding company was established in December 2012 )Formed business alliance with FamilyMart

Jul
Nov

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

Jan 2015

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

Mar
Apr

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

May
Jun

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

May 2016

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

Oct
Jan 2017

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

May
Jun

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

Jan 2018

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

Feb

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

Jun
Jan 2019

Feldsenf Pharma Co., Ltd. started sales of generic drugs
Acquired all shares in Nagatomi Pharmacy Corporation and made it a wholly owned subsidiaryApr
Feb 2020

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

Oct

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

Nov 2012

Source: Shared Research based on company data (as of March 2023)

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

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

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

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

Company with Audit & Supervisory Board

Controlling shareholder

None

Directors and Audit & Supervisory Board members
Number of directors under Articles of Incorporation

15

Number of directors

12

Directors' term of office under Articles of Incorporation

2 years

Chairperson of the Board of Directors

President

Number of outside directors

3

Number of independent outside directors

3

Number of members of Audit & Supervisory Board per Articles of Incorporation

4

Number of members of Audit & Supervisory Board

4

Number of outside members of Audit & Supervisory Board

3

Number of independent outside members of Audit & Supervisory Board

3

Other
Participation in electronic voting platform

In place

Providing convocation notice in English
Implementation of measures regarding director incentives

In place
Performance-linked remuneration, Other

Disclosure of directors' compensation

None

Policy to determine amount and calculation method of remuneration

In place

Corporate takeover defenses

None

Source: Shared Research based on company materials

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
Jun 1991

Representative director of Medical Yamagata Pharmaceutical Co., Ltd.
Director of Akiyama Aiseikan Co., Ltd. (now Suzuken Co., Ltd)

Sep 1999
Apr 2000

Established Medical System Network and became representative director and president (current)
President (current) of Social Welfare Corporation Nomad-Fukushikai

Dec 2004

Representative director of Nihon Leben Co., Ltd.

Feb 2005
Apr 2013

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

Jul 2013
Jun 2015

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

Jan 2016

President of Social Welfare Corporation Hokushikai

Sep 2016
Jun 2020

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

Source: Shared Research based on company data (as of March 2023)

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

Shares held( )Shareholding ratio

S&S G.K.

2,769,100

9.05%

The Master Trust Bank of Japan, Ltd. (trust account)

2,699,600

8.82%

Yasuyuki Okinaka

2,506,000

8.19%

Jiro Akino

2,220,400

7.26%

CACEIS BANK /QUINTET LUXEMBOURG SUB AC/UCITS CUSTOMERS ACCOUNT

2,059,700

6.73%

950,000

3.10%

Custody Bank of Japan, Ltd.(880,400

2.87%

Medical System Network Employees Stochkholding Association

787,600

2.57%

Inao Tajiri

757,500

2.47%

Tsuyoshi Nakamura

481,800

1.57%

16,112,100

52.63%EPS Holdings Co., Ltd.

信託口)

SUM

Source: Shared Research based on company data (as of March 31, 2023)

Employees
Segment
Community Pharmacy Network
Pharmacists

No. of employees

No. of temporary employees

Total

3,145

512

3,657

1,488

287

1,775

Leasing and Facility-related

148

14

162

Meal Catering

168

250

418

Other

38

12

Corporate (administration)

134

10

144

3,633

798

4,017

Total

50

Source: Shared Research based on company data (as of March 31, 2023)
Note: The sum of temporary employees does not equal to the total due to differences in rounding methods (based on eight– hour work days).

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Profile
Company Name

Head Office

Medical System Network Co., Ltd.

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

Phone

Listed On（011）612-1069

Tokyo Stock Exchange, Prime Market

EstablishedExchange Listing

1999-09-16

2002-03-18

IR Contact

Fiscal Year-End

Corporate management Department

Mar

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