Business Risks

The main business and other risks of the MEDIPAL Group are as follows. Statements regarding the future in the text are the judgments of the MEDIPAL Group as of March 31, 2020.

About medical insurance system reform

The Prescription Pharmaceutical Wholesale Business, one of the MEDIPAL Group's core businesses, is intrinsically linked to Japan’s social security system and medical policies. Japan is moving forward with healthcare reform in response to social developments such as growing social security costs due to demographic changes.Going forward, the occurrence of any major unforeseeable systematic change or events that impact the business structure of the MEDIPAL Group may affect the performance and financial condition of the Group.

About the NHI drug price system

Prescription pharmaceuticals, products handled by the MEDIPAL Group, are listed in the National Health Insurance (NHI) drug price standards, which stipulate the range of drugs that can be used in insured medical treatment and the billing prices of the drugs used. Therefore, the drug price standards act as a ceiling on selling prices. As part of measures to control medical expenses, the prices set by the drug price standards are based on surveys of prevailing market prices and are generally revised every two years.Currently, NHI drug price revisions are carried out once every two years, in principle. The next “off-cycle” price revision is scheduled for April 2021. A drop in selling prices to medical institutions may affect the performance and financial condition of the Prescription Pharmaceutical Wholesale Business.

About risks related to specific legal regulations, etc.

The MEDIPAL Group handles various types of prescription pharmaceuticals and related products. Therefore, the Group conducts sales activities after receiving the necessary authorizations, registrations, designations and licenses from the local governments where business sites are located, or after notifying the authorized supervisory agency, pursuant to the Law for Ensuring the Quality, Efficacy and Safety of Drugs and Medical Devices and other laws. For this reason, the business results of the Prescription Pharmaceutical Wholesale Business may be affected by the status of approvals and licenses issued by the relevant authorities. In addition, if companies from different industries were to enter the business domain of the MEDIPAL Group due to deregulation in the future, it may become difficult for the Group to maintain and expand its business model and existing strengths. This may affect the performance and financial condition of the MEDIPAL Group.

About trade practices with medical institutions

Prescription pharmaceuticals, the main products handled by the MEDIPAL Group, are products that lives depend on, and late deliveries are unacceptable. As such, it is an industry-specific trading practice to deliver products to medical institutions while the price is still pending, and then carry out negotiations after delivery. To improve such trading practices, the Guidelines for the Improvement of Commercial Transaction Practices of Prescription Pharmaceuticals for Manufacturers, Wholesalers, and Medical Institutions/Pharmacies were enacted in April 2018. However, if negotiations prove difficult, the sales price will be reasonably estimated by taking past results into consideration. Therefore, a difference between the determined selling price and the estimated price may affect the performance and financial condition of the Prescription Pharmaceutical Wholesale Business. In fiscal 2019, sales of prescription pharmaceuticals totaled ¥1.9 trillion, and the ratio of transactions with a determined selling price (amount basis) was 99.7%. Transaction prices were largely determined by the end of the period. (The ratio of transactions with a determined selling price for the last three years is as follows: 99.3% in fiscal 2016, 99.9% in fiscal 2017, and 96.6% in fiscal 2018.)

About trade practices with pharmaceutical companies

The use of rebates and allowances results in significant price reductions when trading with pharmaceutical companies that supply prescription pharmaceuticals, which are the Group's main products. While we work to maintain favorable trading relationships with pharmaceutical companies, a drastic change in their sales strategies or trade practices may affect the performance and financial condition of the Prescription Pharmaceutical Wholesale Business.

About changes to the competitive environment

In the Cosmetics, Daily Necessities, and OTC Pharmaceutical Wholesale Business, one of the MEDIPAL Group’s core businesses, competition is intensifying across industry types and business categories, and the size of the industry is continuing to expand due to M&As. For this reason, the Cosmetics, Daily Necessities, and OTC Pharmaceutical Wholesale Business is working to identify customer needs and build an organization capable of responding flexibly to environmental changes. However, an increase in competition, or a significant change in customers’ policies or terms and conditions due to business reorganization may affect the performance and financial condition of the Group.

About system interruptions

The MEDIPAL Group is actively promoting the use of IT in order to increase the efficiency and sophistication of its supply chains and to fulfill its role as social infrastructure that supports the reliable distribution of “pharmaceuticals, health, and beauty.” The business operations of the MEDIPAL Group are heavily reliant on computer network systems. In addition to duplicating the server network of core systems and taking measures such as seismic base isolation, disaster preparedness and power outage countermeasures for the buildings where servers are housed, we have also established a comprehensive data backup system. We have also implemented countermeasures for viruses and unauthorized access, and introduced data encryption for mobile PCs. However, in the event of system failure, sales and logistics functions may be significantly disrupted, and the Group’s performance and financial condition may be affected.

About risk of information leaks

In the protection of information assets held by the MEDIPAL Group, including customer information and confidential information, the Group works to maintain a management system that prevents information from leaking to parties outside the Group, and provides information security training twice annually to all employees based on its Information Security Policy. However, in the event that an information leak occurs due to unforeseen circumstances, it may affect the Group’s business performance and financial condition due to a decline in sales caused by a decrease in public trust or an increase in costs related to countermeasures.

About disasters and traffic accidents

The MEDIPAL Group handles the distribution of prescription pharmaceuticals, daily necessities, and other products indispensable to living a healthy life. We are implementing a variety of measures to ensure that we reliably deliver the required products at the required time in just the required amount.
1. About disaster risk
The MEDIPAL Group has established crisis management systems and a Business Continuity Plan (BCP) in preparation for natural disasters such as earthquakes and typhoons, an outbreak of a new strain of influenza, or other such events, and to ensure the Group is able to carry out supply activities in the event of an emergency. However, if the Group’s business operations are suspended due to a large-scale natural disaster, the Group’s business performance and financial condition may be affected due to decreased sales resulting from lost sales opportunities or an increase in recovery costs or other expenses.
2. About traffic accidents
The MEDIPAL Group uses many vehicles (8,700 Group-wide) in its sales and delivery activities. In addition to using vehicles with low environmental impact, we are also introducing vehicles equipped with drive recorders and automatic braking systems in order to prevent traffic accidents. In addition, we proactively conduct awareness-raising activities to promote traffic accident prevention, such as the establishment of a safe driving month and holding classes taught by police officers. However, in the event a serious traffic accident occurs, social credibility may decline, and this may affect the performance and financial condition of the Group.

About securing a labor force

In order to reliably distribute the pharmaceuticals, daily necessities, and other products of the MEDIPAL Group, it is essential to secure high-quality human resources and assign them appropriately. In recent years, securing a labor force in the distribution field has become difficult due to the declining population resulting from the decreasing birthrate and aging population. In addition to promoting labor saving measures at distribution centers, we are implementing work style reforms and making efforts to improve the working environment. However, if the demand for labor tightens further and we are unable to secure adequate human resources, it may affect the performance and financial condition of the Group.In addition, a significant increase in employee-related costs due to revised laws and systems or price fluctuations may affect the performance and financial condition of the Group.

About investing

The MEDIPAL Group has formulated “2022 MEDIPAL Medium-Term Vision” for fiscal 2019 to fiscal 2021. We plan to proactively invest ¥100 billion over the three-year period of the vision to ensure the continuous growth of the Group.
1. About investment in logistics infrastructure
The MEDIPAL Group is proactively investing in logistics and systems as well as introducing cutting-edge technology in order to carry out its social mission of safe, secure distribution. These activities are also essential for the Group to maintain its competitiveness. However, any increase in investment costs or the inability to earn the expected return on investments may affect the performance and financial condition of the Group.In fiscal 2020, capital expenditures totaled ¥29.3 billion.
2. About investment in business development
In order to expand its business foundation and diversify earnings, the MEDIPAL Group invests in the development of new drugs by pharmaceutical companies in order to receive returns on investment after these drugs go to market (project finance), and sell and distribute them to medical institutions preferentially (marketing). We aim to reliably supply medical treatments to patients with rare diseases by making effective use of the MEDIPAL Group’s management resources, such as its logistics capabilities and sales network. However, the development of new drugs takes time and may be suspended, and does not always proceed smoothly. As a result, we may incur losses and or not achieve the earnings we expected, and this may affect the performance and financial condition of the Group.
3. About capital alliances and business partnerships
In line with the basic policy of our medium-term vision, “The MEDIPAL Group will expand its earnings foundation and achieve sustainable growth by building new frameworks that benefit customers and society,” we are proactively reaching beyond the boundaries of our industry into fields such as the digital realm and logistics, in addition to investing in startup companies, with a focus on venture companies in the life sciences field. Regarding capital alliances and business partnerships such as these, prior to investment we consider profitability and return on investment from various perspectives. However, in the event of an unexpected environmental change or significant divergence from the assumed business plan, the Group may incur an impairment loss, which may impact the performance and financial condition of the Group.

About legal and regulatory infractions

The MEDIPAL Group has set “ensure thorough legal compliance” as one of its business policies, and continually carries out employee education and awareness activities. In addition, we work to detect problems within the Group at an early stage, and have established whistleblowing hotlines both inside and outside the Company. Nonetheless, if a legal violation occurs, not only will this necessitate the payment of monetary penalties through administrative measures, fines related to criminal proceedings, and damages through civil proceedings, the MEDIPAL Group may face the negative impact of the loss of trust from society, and this may affect the performance and financial condition of the Group.

About COVID-19 pandemic countermeasures

The MEDIPAL Group reliably supplies products that lives depend on. As such, we anticipate various circumstance related to the COVID-19 pandemic, and work to maintain a reliable supply system (establishment of backup system through mutual cooperation of nationwide distribution centers, maintenance of inventory, use of thermal cameras to check temperatures of persons entering buildings and acceleration of planned maintenance of equipment) and to prevent the further spread of the virus (prevention of spread of infection among employees, thorough cleaning and disinfection of vehicles and equipment and prevention of spread of infection at medical institutions). Nonetheless, if the virus spreads among employees, or if logistics functions need to be suspended, we will face difficulties in reliably supplying pharmaceuticals and other products, and this could affect the performance and financial condition of the Group.

Various risks other than these exist, and the risks described here are not all of the risks of the MEDIPAL Group.