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Olba Healthcare Holdings

Olba Healthcare Holdings 2689

オルバヘルスケアホールディングス
Olba Healthcare Holdings, Inc.
Recent Updates
2022-05-02
Revisions to earnings and dividend forecasts and acquisition of treasury stock
2022-05-02
Q3 FY06/22 flash update
2022-02-28
1H FY06/22 report update
Get in touch
1-1-3 Shimoishii, Kita-ku, Okayama 700-0907, Japan
https://www.olba.co.jp/
086-236-1112
Summary
OLBA HEALTHCARE HD sells medical devices and consumables to hospitals and clinics as its core business. It sources its products from roughly 1,000 domestic and overseas manufacturers and distributors, and supplies these to about 2,000 medical institutions, which are its customers.
Health Care Equipment & SuppliesHealth Care Providers & Services
Key dates
2019-09-17
Coverage initiation
Full Report
2022-05-02
Q3 FY06/22 flash update
2022-05-02
1H FY06/22 flash update
2022-02-01
Q1 FY 06/22 flash update
2021-10-29
Full-year FY06/21 flash update
2021-08-10
Download

Executive summary

Business overview

Olba Healthcare Holdings, Inc. (previously Kawanishi Holdings, Inc.) sells medical devices and consumables to hospitals as its core business. About 80% of its sales are derived from controlled medical devices and specially controlled medical devices, two categories of equipment for which registration as a medical devices vendor is required. The company sources some 400,000 products from roughly 1,000 domestic and overseas manufacturers and distributors and supplies these to about 2,000 hospitals and clinics. It has no bias towards any particular supplier or distributor, with the top 10 suppliers accounting for about 40% of its purchases in value terms, and the top 100 accounting for about 80%.The top 10 customers for Medical Devices and Consumables account for roughly 40% of its external sales, and the top 100 about 75%.

The company's business is close to regional communities, and its regional strengths lie in the Chugoku-Shikoku (66% of total sales), Tohoku (20%), and Kinki (12%) regions. According to the company, it has the leading market share in Chugoku (about 20%) and Shikoku (about 15%), and is third in Tohoku (about 7%). In other regions, even the leading company has a market share of less than 20% in many cases, and in Tokyo and surrounding regions (Saitama, Chiba, and Kanagawa), the market leader has a share of roughly 7%, and in Kinki the figure is about 12%. Also, close coordination with hospitals and doctors, a solid grasp of operation schedules and procedures, proposing the right equipment and supplies for surgery and treatment, and delivery in bulk require highly knowledgeable personnel. However, the company currently generates only 2% of its sales in Kanto, a large market.

The company’s segments are: Medical Devices and Consumables (82% of total sales in FY06/21), SPD (Supply, Processing, and Distribution; 16%), and Nursing Care Products (2%). The core Medical Devices and Consumables segment supplies consumables required for surgery, such as automatic staplers, surgical sutures, syringes, stents, and catheters (86% of segment sales), and equipment such as computed tomography (CT) scanners, Magnetic Resonance Imaging (MRI) scanners, ultrasonic diagnostic equipment, and surgical monitors (14% of segment sales). The SPD segment provides supply, processing, and distribution services, which include support to enhance operational efficiency at hospitals; inter-hospital transportation of pharmaceuticals, medical devices, and consumables; appropriate management of hospital inventories; and verification of hospital procurement prices. Product sales generate some 90% of segment sales, with management service fees contributing the remaining 10%. This segment is closely linked with the Medical Devices and Consumables segment. The Nursing Care Products segment mainly leases nursing beds. In FY06/21, the Medical Devices and Consumables, SPD, and Nursing Care Products segments reported OPM of 1.4%, 0.7%, and 6.3%, respectively. 

The Japanese market for medical devices is generally expected to grow at a CAGR of 2–3%, driven by advances in medical technology and growth in the number of patients as Japan’s population ages. The company targets annual sales growth of at least 3–4%, mainly by increasing its share in regional markets. The market for nursing beds is also projected to grow as rises in the late-elderly population and expansion of in-home care push up demand. The company looks for annual sales growth of 5% or more in its nursing bed leasing business.

Earnings trends

In FY06/21, the company reported sales of JPY113.0bn (+4.7% YoY), operating profit of JPY1.5bn (+66.2% YoY), recurring profit of JPY1.5bn (+70.3% YoY), and net income attributable to owners of the parent of JPY989mn (+203.1% YoY). Although the number of surgical procedures decreased due to the impact of the COVID-19 pandemic, sales expanded on increased demand for infection prevention-related products and testing-related products, as well an increase in orders for COVID-19-response supplies. Profit benefitted from the positive effects from increased sales and the fact that the company booked a provision of allowance for doubtful accounts of JPY257mn as SG&A expenses in FY06/20, but no such expense in FY06/21. 

In April 2022, the company revised its full-year FY06/22 earnings forecast. The revised forecast calls for sales of JPY107.5bn, operating profit of JPY2.0bn (+28.9% YoY), recurring profit of JPY2.0bn (+31.6% YoY), and net income attributable to owners of the parent of JPY1.5bn (+47.6% YoY). The revised forecasts constitute upward revisions of JPY2.5bn for sales, JPY402mn for operating profit, JPY414mn for recurring profit, and JPY407mn for net income attributable to owners of the parent, due mainly to the number of surgical procedures and demand for medical equipment exceeding company expectations. 

The company began applying the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from the beginning of FY06/22. The company's FY06/22 forecasts reflect expected earnings after the application of this standard, and do not include the expected YoY change for sales. YoY changes for operating profit, recurring profit, and net income attributable to owners of the parent are shown as the application of the new standard is not expected to impact earnings at these profit levels. If the new accounting standard was applied to the results in FY06/21, the company's forecast for sales growth would be 5.2% YoY.

Strengths and weaknesses

The company’s strengths are 1) its relationships of trust with customers, developed through a focus on regional areas, 2) its training system for human resources that underpins stable growth, and 3) the unique background and extensive personal network of President Yohei Maeshima that contributes to new business opportunities (including in the field of medical-engineering collaboration). Shared Research believes the company’s weaknesses are 1) difficulties in selling products and services at prices that reflect value added, 2) the lack of a business foundation that targets clinics, and 3) a sales presence that is limited to specific regions (in other words, its low market share in the Kanto region). (For details, see the “Strengths and Weaknesses” section.)

Key financial data

Income statementFY06/12FY06/13FY06/14FY06/15FY06/16FY06/17FY06/18FY06/19FY06/20FY06/21FY06/22
(JPYmn)Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Est.
Sales74,74596,22397,13894,515101,461105,779107,664107,428107,897112,976107,500
YoY20.3%28.7%1.0%-2.7%7.3%4.3%1.8%-0.2%0.4%4.7%-
Gross profit7,89610,07610,1219,75810,13610,89911,02311,13711,06811,599
YoY19.5%27.6%0.4%-3.6%3.9%7.5%1.1%1.0%-0.6%4.8%
Gross profit margin10.6%10.5%10.4%10.3%10.0%10.3%10.2%10.4%10.3%10.3%
SG&A expenses7,1298,5208,6809,0909,5929,8559,7939,83610,14110,059
YoY18.6%19.5%1.9%4.7%5.5%2.7%-0.6%0.4%3.1%-0.8%
SG&A ratio9.5%8.9%8.9%9.6%9.5%9.3%9.1%9.2%9.4%8.9%
Operating profit7671,5561,4416685431,0441,2311,3019271,5412,000
YoY29.3%102.9%-7.4%-53.6%-18.7%92.2%17.9%5.7%-28.8%66.2%29.8%
Operating profit margin1.0%1.6%1.5%0.7%0.5%1.0%1.1%1.2%0.9%1.4%1.9%
Recurring profit7501,5351,5196635571,1131,2361,3109061,5422,030
YoY30.5%104.7%-1.0%-56.4%-16.0%99.8%11.1%6.0%-30.9%70.3%31.6%
Recurring profit margin1.0%1.6%1.6%0.7%0.5%1.1%1.1%1.2%0.8%1.4%1.9%
Net income3469438174053066911,0547763269891,460
YoY10.8%172.6%-13.4%-50.4%-24.6%125.9%52.6%-26.4%-57.9%203.1%47.6%
Net margin0.5%1.0%0.8%0.4%0.3%0.7%1.0%0.7%0.3%0.9%1.4%
Per-share data (JPY)
Shares outstanding (ex. treasury shares; year-end; mn)5.65.65.65.65.65.65.65.66.16.1
EPS61.7168.1145.572.254.5123.1187.9138.256.8162.7240.0
EPS (fully diluted)----------
Dividend per share10.020.025.030.030.030.040.040.045.050.060.0
Book value per share4075787008408199431,1211,1921,1971,337
Balance sheet (JPYmn)
Cash and cash equivalent5,7526,9164,3242,3522,1432,2201,4161,1201,9262,159
Total current assets23,79027,03224,33525,19425,45526,21627,63627,73126,72529,105
Tangible fixed assets2,8782,8993,1333,4213,7463,6683,7533,8094,5824,654
Investments and other assets1,0021,1701,0001,7641,6021,6781,9861,8031,8712,105
Intangible assets628561491360247213242429504699
Total assets28,29931,66328,95930,73831,05031,77533,61733,77233,68336,562
Short-term debt3,4193,8361,1262,2351,8167601,7941,5392,282689
Current liabilities23,25426,49323,20024,25224,34524,44025,22725,06523,79726,119
Long-term debt1,7678748355059276005131,0901,6301,271
Fixed liabilities2,7601,9241,8331,7762,1111,9091,9741,9362,6052,312
Total liabilities26,01428,41825,03326,02726,45626,34927,20127,00126,40228,431
Shareholders' equity2,2853,2453,9264,7114,5945,2906,2916,6867,2828,132
Total net assets2,2853,2453,9264,7114,5945,4266,4176,7717,2828,132
Total interest-bearing debt5,1864,7101,9622,7402,7431,3602,3072,6293,9131,960
Cash flow statement(JPYmn)
Cash flows from operating activities1,9322,061926-2,114710872-3141378633,126
Cash flows from investing activities-605-449-401-388-705-100-269-362-496-630
Cash flows from financing activities1,207-545-2,886627-209-741-228-63440-2,263
Financial ratios
ROA (RP-based)3.1%5.1%5.0%2.2%1.8%3.5%3.8%3.9%2.7%4.4%
ROE16.0%34.1%22.8%9.4%6.6%14.0%18.2%12.0%4.7%12.8%
Equity ratio8.1%10.3%13.6%15.3%14.8%16.6%18.7%19.8%21.6%22.2%
Source: Shared Research based on company data
Note: The company is applying the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22. The company's FY06/22 forecasts reflect expected earnings after the application of this standard, and do not include the expected YoY change for sales. YoY change figures for operating profit, recurring profit, and net income attributable to owners of the parent are shown as the application of the new standard is not expected to impact earnings at these profit levels.

Recent updates

Revisions to earnings and dividend forecasts and acquisition of treasury stock

2022-05-02

On April 28, 2022, Olba Healthcare Holdings, Inc. announced revisions to its earnings forecast and dividend forecast for FY06/22.

Revised earnings forecast for FY06/22
  • Sales: JPY107.5bn (previous forecast: JPY105.0bn)
  • Operating profit: JPY2.0bn (JPY1.6bn)
  • Recurring profit: JPY2.0bn (JPY1.6bn)
  • Net income attributable to owners of the parent: JPY1.5bn (JPY1.1bn)
  • EPS: JPY240.0 (JPY173.0)
Reasons behind the revision

In the Medical Devices and Consumables business, consumables sales increased steadily as the number of surgical procedures turned upward from around fall 2021 owing to progress in implementation of COVID-19 countermeasures. With demand for medical equipment also exceeding the company's previous forecast gross profit beat the company's previous projections. The company expects the rising trend in consumables sales to continue through FY06/22. 

SG&A expenses were below expectations as the company was able to rein in branch relocation expenses in the Medical Devices and Consumables business. Also, having reexamined the recognition of deferred tax assets, the company now expects a reduction in corporate taxes at the end of the fiscal year. As a consequence, all profit levels are seen beating the company's previous expectations.  

Revision to FY06/22 dividend forecast

Based on the upward revision to its full-year FY06/22 earnings forecast, the company also revised its forecast for annual dividend per share to JPY60.0 (from the previous forecast of JPY50.0).

On the same day, the company made an announcement concerning the acquisition of treasury stock through the Off-Auction Own Share Repurchase Trading System (ToSTNeT-3).

Acquisition details

Type of shares to be acquired: Common shares of the company

Total number of shares to be acquired: Up to 80,000 shares (1.3% of total number of issued shares excluding treasury stock)

Total cost of acquisition: Up to JPY136mn

Announcement of acquisition results: The acquisition results will be announced after the completion of trading at 08:45 JST on May 2, 2022

Trends and outlook

Quarterly trends and results

CumulativeFY06/21FY06/22FY06/22
(JPYmn)Q1Q1-Q2Q1-Q3Q1Q1-Q2Q1-Q3% of Est.FY Est.
Sales23,26049,86177,60825,01353,03081,75776.1%107,500
YoY---7.5%6.4%5.3%3.0%
Gross profit2,6255,6398,8742,8145,9119,332
YoY-8.5%0.7%4.2%7.2%4.8%5.2%
Gross profit margin11.3%11.3%11.4%11.3%11.1%11.4%
SG&A expenses2,5165,0187,5172,5655,1247,653
YoY0.9%-4.7%-2.6%1.9%2.1%1.8%
SG&A ratio10.8%10.1%9.7%10.3%9.7%9.4%
Operating profit1086211,3572497871,67883.9%2,000
YoY-71.0%85.2%69.7%130.7%26.7%23.7%29.8%
Operating profit margin0.5%1.2%1.7%1.0%1.5%2.1%1.9%
Recurring profit1056151,3612578031,70283.8%2,030
YoY-72.0%86.6%74.0%145.7%30.5%25.0%31.6%
Recurring profit margin0.5%1.2%1.8%1.0%1.5%2.1%1.9%
Net income553898841755331,13477.6%1,460
YoY-77.6%129.7%92.3%221.1%36.9%28.3%47.6%
Net margin0.2%0.8%1.1%0.7%1.0%1.4%1.4%
QuarterlyFY06/21FY06/22
(JPYmn)Q1Q2Q3Q1Q2Q3
Sales23,26026,60127,74725,01328,01728,726
YoY---7.5%5.3%3.5%
Gross profit2,6253,0153,2352,8143,0973,420
YoY-8.5%10.3%10.8%7.2%2.7%5.7%
Gross profit margin11.3%11.3%11.7%11.3%11.1%11.9%
SG&A expenses2,5162,5022,4992,5652,5602,529
YoY0.9%-9.7%1.8%1.9%2.3%1.2%
SG&A ratio10.8%9.4%9.0%10.3%9.1%8.8%
Operating profit108513736249537892
YoY-71.0%-58.5%130.7%4.8%21.2%
Operating profit margin0.5%1.9%2.7%1.0%1.9%3.1%
Recurring profit105510746257545899
YoY-72.0%-64.8%145.7%6.8%20.6%
Recurring profit margin0.5%1.9%2.7%1.0%1.9%3.1%
Net income55335495175358601
YoY-77.6%-70.5%221.1%6.9%21.5%
Net margin0.2%1.3%1.8%0.7%1.3%2.1%
Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
At the start of FY06/22, the company adopted several new accounting standards, including the Accounting Standard for Revenue Recognition (ASBJ Statement No. 29). The figures shown above for FY06/21 have been retroactively calculated based on these new accounting standards and are shown for reference purposes only. The change in the revenue recognition standard effects both sales and the cost of sales, but does not affect earnings at the gross profit level and below. For this reason, the table above does not show YoY comparisons for FY06/21 sales but does show YoY comparisons for FY06/21 operating profit, recurring profit, and net income.
By segmentFY06/21FY06/22
Cumulative(JPYmn) Q1Q1-Q2Q1-Q3Q1Q1-Q2Q1-Q3
Sales23,26049,86177,60825,01353,03081,757
YoY---7.5%6.4%5.3%
Medical Devices and Consumables21,96347,15673,52523,62150,19477,497
YoY---7.5%6.4%5.4%
Supply Processing and Distribution1,0282,1703,3081,1532,3243,493
YoY---12.2%7.1%5.6%
Nursing Care Products5611,1661,7385821,1861,771
YoY---3.8%1.7%1.9%
Adjustments-291-631-963-342-674-1,004
Operating profit1086211,3572497871,678
YoY-71.0%85.2%69.7%130.7%26.7%23.7%
Operating profit margin0.5%1.2%1.7%1.0%1.5%2.1%
Medical Devices and Consumables975671,2442317201,532
YoY-75.4%-5.2%19.6%139.1%27.0%23.1%
Profit margin0.4%1.2%1.7%1.0%1.4%2.0%
Supply Processing and Distribution38741202861118
YoY114.1%83.0%73.6%-27.1%-17.2%-2.1%
Profit margin3.7%3.4%3.6%2.4%2.6%3.4%
Nursing Care Products29691103985132
YoY29.3%28.4%26.3%36.3%22.3%19.8%
Profit margin5.1%6.0%6.3%6.7%7.2%7.4%
Adjustments-55-90-118-48-80-103
By segmentFY06/21FY06/22
Quarterly(JPYmn) Q1Q2Q3Q1Q2Q3
Sales23,26026,60127,74725,01328,01728,726
YoY---7.5%5.3%3.5%
Medical Devices and Consumables21,96325,19326,37023,62126,57327,303
YoY---7.5%5.5%3.5%
Supply Processing and Distribution1,0281,1431,1371,1531,1711,169
YoY---12.2%2.5%2.8%
Nursing Care Products561606572582604585
YoY---3.8%-0.3%2.3%
Adjustments-291-340-332-342-331-330
Operating profit108513736249537892
YoY-71.0%-58.5%130.7%4.8%21.2%
Operating profit margin0.5%1.9%2.7%1.0%1.9%3.1%
Medical Devices and Consumables97471677231489812
YoY-75.4%128.1%53.2%139.1%4.0%19.8%
Profit margin0.4%1.9%2.6%1.0%1.8%3.0%
Supply Processing and Distribution383646283457
YoY114.1%58.9%60.5%-27.1%-6.8%22.0%
Profit margin3.7%3.2%4.1%2.4%2.9%4.8%
Nursing Care Products294141394647
YoY29.3%27.8%22.8%36.3%12.3%15.5%
Profit margin5.1%6.7%7.1%6.7%7.6%8.0%
Adjustments-55-35-28-48-31-23
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Cumulative Q3 FY06/22 results (out April 28, 2022)

Summary

In cumulative Q3 FY06/22, the company reported sales of JPY81.8bn (+5.3% YoY), operating profit of JPY1.7bn (+23.7% YoY), recurring profit of JPY1.7bn (+25.0% YoY), and net income attributable to owners of the parent of JPY1.1bn (+28.3% YoY). 

At the start of FY06/22, the company adopted several new accounting standards, including the Accounting Standard for Revenue Recognition (ASBJ Statement No. 29). The YoY changes in consolidated sales and earnings shown here reflect comparisons with year-ago figures that have been retroactively calculated using these new accounting standards. The retroactive adjustments put both consolidated sales and the cost of sales in cumulative Q3 FY06/21 JPY8.3bn below where they were prior to the change in accounting standards but had no impact on earnings at the operating profit and below.

Please note, in the case of the company’s Medical Devices and Consumables business, the figures shown for sales by individual product areas in both cumulative Q3 FY06/22 and Y06/21 reflect sales as calculated under the old revenue recognition standard used by the company. As a result, the total for sales by product line will not add up to the sales reported for the Medical Devices and Consumables business as a whole. 

Medical Devices and Consumables

In cumulative Q3 FY06/22, the Medical Devices and Consumables business reported sales of JPY77.5bn (+5.4% YoY) and operating profit of JPY1.5bn (+23.1% YoY). 

Earlier in the COVID-19 pandemic, hospitals had little knowledge about coronavirus infections and therefore prioritized measures against COVID-19 over performing non-essential surgeries. From around autumn 2021, however, the number of surgical procedures has rebounded amid increased division of roles and cooperation between hospitals, a rising vaccination rate, and progress in hospital measures to stem coronavirus infections. This led to a 3.5% YoY rise in sales of consumables under the company's Medical Devices and Consumables business.

Breakdown of consumable sales is as follows.

Cumulative Q3 sales of surgery-related consumables were up 2.3% YoY. Sales of ophthalmology-related products were down 19.8% YoY, due in large part to a lack of orders from several clients during the period. Sales of PPE-related products (masks, gloves, and other personal protection equipment) and other infection control-related products had been sharply higher amid the ongoing battle against COVID-19, but fell 3.0% YoY as the surge in prices stalled. Sales of mainstay surgical products, though, rose 10.4% YoY in a continuation of the growth trend since Q1. Sales of testing-related products rose 10.2% YoY, while in the focus area of internal medicine (which includes diabetes treatment) there was a 13.7% YoY increase in related product sales. 

Sales of orthopedic surgery-related consumables were up 2.2% YoY. Among mainstay products in this area, sales of artificial joint-related products have suffered an ongoing drag from the pandemic, but were down only 0.2% YoY due to a rebound in joint replacement surgery numbers and increase in robot-assisted surgeries. Sales of spinal surgery-related products (which tend to be used in quite acute-care settings) rose 7.4% YoY, and sales of products used in arthroscopic surgeries and surgical procedures to treat external injuries and sports-related injuries were 4.7% higher YoY. While sales of the latter could decline as demand tends to be correlated with people's movement and this is likely to be limited by a renewed rise in COVID-19 infections, demand for orthopedic surgery-related consumable maintained an upward trajectory.                          

Sales of circulatory system-related consumables finished up 9.6% YoY, continuing the uptrend that began in Q3 FY06/21. Growth was driven by strong sales in catheter ablation-related products (+21.1% YoY), where the company has expanded its customer base, and there was a 10.0% YoY rise in sales of medical implant devices (such as cardiac pacemakers) used to treat arrhythmia. 

Sales of medical equipment were up 20.3% YoY. The sharp jump was driven by a combination of new hospital construction/relocations and strong sales of low-ticket items such as air purifiers and equipment for creating negative pressure rooms, much of which was funded by the additional funds allocated by the government in the wake of the pandemic.

SPD

In cumulative Q3 FY06/22, the SPD business reported sales of JPY3.5bn (+5.6% YoY) and operating profit of JPY118mn (-2.1% YoY).

Sales increased YoY as although sales activities to win new contracts could not make much progress due to the impact of the pandemic, demand for products to combat viral infection remained high at existing clients. Operating profit finished the quarter down YoY as costs went up, especially personnel-related costs, which rose in response to changes in the company's pay scale.

Nursing Care Products

In cumulative Q3 FY06/22, the Nursing Care Products business reported sales of JPY1.8bn (+1.9% YoY) and operating profit of JPY132mn (+19.8% YoY).

Sales in the Nursing Care Products business increased YoY as the COVID-19 pandemic fueled a 6.5% YoY rise in sales from the mainstay nursing care product rental business amid heightened interest in at-home medical and nursing care. The YoY rise in operating profit reflected ongoing margin improvement at the rental business.

Company forecast for FY06/22

FY06/20FY06/21FY06/22
(JPYmn)1H Act.2H Act.FY Act.1H Act.2H Act.FY Act.1H Act.2H Est.FY Est.
Sales55,54852,349107,89755,28257,694112,97653,03054,470107,500
YoY2.1%-1.3%0.4%-0.5%10.2%4.7%---
Cost of sales49,94746,88296,82949,64351,734101,37747,119
Gross profit5,6015,46711,0685,6395,96011,5995,911
YoY1.7%-2.9%-0.6%0.7%9.0%4.8%-
Gross profit margin10.1%10.4%10.3%10.2%10.3%10.3%11.1%
SG&A expenses5,2664,87510,1415,0185,04010,0595,124
YoY6.9%-0.7%3.1%-4.7%3.4%-0.8%2.1%
SG&A ratio9.5%9.3%9.4%9.1%8.7%8.9%9.7%
Operating profit3355929276219201,5417871,2132,000
YoY-42.1%-18.0%-28.8%85.2%55.4%66.2%26.7%31.9%29.8%
Operating profit margin0.6%1.1%0.9%1.1%1.6%1.4%1.5%2.2%1.9%
Recurring profit3305769066159271,5428031,2272,030
YoY-43.5%-20.7%-30.9%86.6%61.0%70.3%30.5%32.4%31.6%
Recurring profit margin0.6%1.1%0.8%1.1%1.6%1.4%1.5%2.3%1.9%
Net income1691573263896009895339271,460
YoY-54.4%-61.1%-57.9%129.7%282.4%203.1%36.9%54.5%47.6%
Net margin0.3%0.3%0.3%0.7%1.0%0.9%1.0%1.7%1.4%
Source: Shared Research based on company data
Note: The company is applying the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22. The company's FY06/22 forecast reflect expected earnings after the application of this standard, and do not include the expected YoY change for sales. YoY change figures for operating profit, recurring profit, and net income attributable to owners of the parent are shown as the application of the new standard is not expected to impact earnings at these profit levels.

In April 2022, the company revised its full-year FY06/22 earnings forecast. The revised forecast calls for sales of JPY107.5bn, operating profit of JPY2.0bn (+28.9% YoY), recurring profit of JPY2.0bn (+31.6% YoY), and net income attributable to owners of the parent of JPY1.5bn (+47.6% YoY). The company also revised its forecast for annual dividend per share to JPY60.0 (from the previous forecast of JPY50.0). 

The company began applying the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from the beginning of FY06/22. The company's FY06/22 forecasts reflect expected earnings after the application of this standard, and do not include the expected YoY change for sales. YoY changes for operating profit, recurring profit, and net income attributable to owners of the parent are shown as the application of the new standard is not expected to impact earnings at these profit levels. If the new accounting standard was applied to the results in FY06/21, the company's forecast for sales growth would be 5.2% YoY.

The new forecasts constitute upward revisions of JPY2.5bn for sales, JPY402mn for operating profit, JPY414mn for recurring profit, and JPY407mn for net income attributable to owners of the parent. 

In the Medical Devices and Consumables business, consumables sales increased steadily as the number of surgical procedures turned upward from around fall 2021 owing to progress in implementation of COVID-19 countermeasures. With demand for medical equipment also exceeding the company's previous forecast gross profit beat the company's previous projections. The company expects the rising trend in consumables sales to continue through FY06/22. 

SG&A expenses were below expectations as the company was able to rein in branch relocation expenses in the Medical Devices and Consumables business. Also, having reexamined the recognition of deferred tax assets, the company now expects a reduction in corporate taxes at the end of the fiscal year. As a consequence, all profit levels are seen beating the company's previous expectations.  

The following explanation is based on the previous forecast. 

Company forecast by segment (based on previous forecast)
By segmentFY06/20FY06/21FY06/22
(JPYmn)Act.Act.Est.
Sales107,897112,976105,049
YoY0.4%4.7%-
Medical Devices and Consumables94,18797,81198,954
YoY-0.9%3.8%-
Supply Processing and Distribution17,94419,2884,782
YoY8.4%7.5%-
Nursing Care Products2,1842,3162,350
YoY4.1%6.0%1.5%
Adjustments-6,419-6,438-1,037
Operating profit9271,5411,597
YoY-28.8%66.2%3.7%
Operating profit margin0.9%1.4%1.5%
Medical Devices and Consumables1,2541,4121,516
YoY-8.3%12.7%7.4%
Operating profit margin1.3%1.4%1.5%
Supply Processing and Distribution86134149
YoY11.7%54.8%11.5%
Operating profit margin0.5%0.7%3.1%
Nursing Care Products119145151
YoY28.7%21.7%3.9%
Operating profit margin5.5%6.3%6.4%
Adjustments-136-150-219
Source: Shared Research based on company data
Note: The company started applying the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22. FY06/22 company forecast reflects expected earnings after the application of this standard, and do not include the expected YoY change for sales. YoY changes for operating profit are shown as the application of the new standard is not expected to impact operating profit.

In January 2022, the company revised its 1H FY06/22 earnings forecast. It revised up forecasts for sales by JPY1.3bn, operating profit by JPY786mn, recurring profit by JPY802mn, and net income attributable to owners of the parent by JPY532mn from the previous forecasts. 

In the Medical Devices and Consumables business, consumables sales exceeded the company's expectations as the number of surgical procedures turned upward from around fall 2021 owing to progress in the implementation of COVID-19 countermeasures in medical institutions. Demand for medical equipment also exceeded the company's expectations, and sales of equipment initially scheduled for Q3 (January–March 2022) were moved up to 1H. As a result, the company expects 1H sales and gross profit to exceed its previous projections.

SG&A expenses fell below expectations as the company was able to rein in branch relocation expenses in the Medical Devices and Consumables business and as the scheduled opening of a new location in the Nursing Care Products business was pushed back to Q3.

The company has made no change to its full-year FY06/22 earnings forecast. This is due to uncertainties surrounding the impact of the COVID-19 pandemic on the market as of January 2022 and the falloff of contributions from the earlier-than-expected equipment sales in 1H.

For FY06/22, the company forecasts sales of JPY105.0bn, operating profit of JPY1.6bn (+3.7% YoY), recurring profit of JPY1.6bn (+4.7% YoY), and net income attributable to owners of the parent of JPY1.1bn (+6.3% YoY). 

The company adopted the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22. This will reduce sales and cost of sales by JPY11.5bn each, but will have no impact on profit from the gross profit line down. Under the previous accounting standard, the company's sales forecast would be JPY116.6bn (+3.2% YoY). Adoption of the standard will affect sales and cost of sales in the Medical Devices and Consumables and SPD segments. 

The company expects an ongoing impact from COVID-19 in FY06/22, but looks for the impact to lessen versus FY06/21. It also assumes that the number of operations will recover gradually. 

Segment forecasts follow.

Medical Devices and Consumables 

The company forecasts sales (including inter-segment sales) of JPY99.0bn (JPY97.8bn in FY06/21 under previous accounting standard) and operating profit of JPY1.5bn (+7.4% YoY).

The company looks for growth in consumables sales as the impact of COVID-19 eases and the number of operations recovers. However, in FY06/21 customers used COVID-19 subsidies to purchase ventilators and extracorporeal membrane oxygenation (ECMO) systems. Because the deadline for applications for subsidies for these items came in March 2021, the company expects equipment sales to decline in FY03/22. It expects profit to increase on higher sales.

The Japanese government launched a comprehensive emergency support program in the spring of 2020 using funds in the supplementary budget to reinforce the Japanese medical system to cope with the COVID-19. This included a project to provide medical institutions with equipment for COVID-19 patients. This subsidized the purchase of hospital beds and medical equipment and materials for medical institutions with COVID-19 inpatients. Subsidies covered consumables, ventilators and ancillary equipment, PPE, simple negative pressure equipment, makeshift beds, extracorporeal membrane oxygenation (ECMO) systems and ancillary equipment, and simple hospital rooms. The deadline to apply for subsidies under the program was March 2021. The government has maintained this subsidy program in FY2021, with an application deadline of December 2021.

The company outlined the following as key initiatives for the Medical Devices and Consumables business in FY06/22.

  • Increase market share in current operating markets while cultivating customers in neighboring prefectures to expand the sales base.
  • Identify fields expected to grow along with advances in medical technology, upgrade relevant expertise, and optimize use of medical device rentals and leases to support customers and contribute to development of medical care. Medical institutions used to procure and own equipment, but are working to lower their equipment costs through rentals and leasing. As of August 2021, the company was focusing on promoting ventilator rentals.
  • Strengthen back-office operations through the use of integrated logistics systems and reform workflow through the use of IT to boost productivity. As part of its moves to reform workflows, the company used RPA to reduce the time spent on routine tasks such as printing, data output, and emailing by 75 hours per month in FY06/21. In FY06/22, it aims to use RPA to cut time spent on routine tasks by 160 hours per month.
  • Meet challenges in the medical field through medical-engineering collaboration and thus improve customer satisfaction and create new business opportunities. In FY06/21, medical-engineering collaboration enabled the creation and sale of products to deal with the pandemic, such as a portable negative pressure clean dome to prevent the spread of the coronavirus, and TM clean shelter, to prevent droplet infection during the collection of PCR test samples. The company plans to continue such collaboration in FY06/22.
  • Leverage Kawanishi BarcMed to develop the automated check-out business on a nationwide basis, and expand the subscription-based business for the group as a whole by collaborating with Nippon Telegraph and Telephone East Corporation (NTT East) to develop IT environments for medical institutions.  In collaboration with NTT East, the company provides a Wi-Fi rental service, Medi-Fi, for patients and medical institution staff; a cloud camera that can store images from inside a hospital securely in the cloud, Medi-Sight; and cloud-based PC rental service, Medi Lock PC.
SPD business

The company forecasts sales (including inter-segment sales) of JPY4.8bn (JPY19.3bn in FY06/21 under previous accounting standard) and operating profit of JPY149mn (+7.4% YoY).

The company expects sales to decline YoY due to the newly adopted accounting standard, despite an increase in the number of facilities under contract. It looks for profit to increase on growth in number of facilities and higher profit as such facilities get underway.

The company expects the new accounting standard to reduce sales in the SPD segment by roughly JPY14.5bn in FY06/22. Some JPY5.0bn of this is from the reclassification of sales (transferred to external sales from Medical Devices and Consumables) so will not affect consolidated sales. In Medical Devices and Consumables, revenue previously classified as inter-segment sales will be booked as external sales.

The key initiatives in the SPD business in FY06/22 are as follows.

  • Develop new customers in the Chugoku and Shikoku regions while gradually expanding the area for systems sales that support the efficient management of medical equipment at small and medium-sized medical institutions. Direct contract count at end-June 2021 was 65 and franchise contract count was 13.
  • Make proposals to support hospital administration such as reducing procurement prices and checking for medical insurance billing omissions as auxiliary services to the SPD function.
  • Improve productivity and customer satisfaction by continuously reviewing the service delivery process to increase value added and maximize operational efficiency.
Nursing Care Products

The company forecasts sales (including inter-segment sales) of JPY2.4bn (+1.5% YoY) and operating profit of JPY151mn (+3.9% YoY).

The key initiatives in the Nursing Care Products business in FY06/22 are as follows.

  • Increase market share in existing areas by subdividing sales areas and improving customer follow-up systems. Use IT to expand remote-based sales.
  • Develop new customers and expand sales of related products by strengthening cooperation with medical institutions and establishing a system to smoothly supply nursing care products from hospitals to homes.
  • Develop new customers and diversify the revenue base by strengthening the in-house construction and long-term care housing reform businesses.

Initial forecasts and results

Results vs. Initial Est.FY06/12FY06/13FY06/14FY06/15FY06/16FY06/17FY06/18FY06/19FY06/20FY06/21
(JPYmn)Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.
Revenue (Initial Est.)65,03588,47092,821101,091103,020105,069106,377110,881110,520114,114
Revenue (Results)74,74596,22397,13894,515101,461105,779107,664107,428107,897112,976
Results vs. Initial Est.14.9%8.8%4.7%-6.5%-1.5%0.7%1.2%-3.1%-2.4%-1.0%
Operating profit (Initial Est.)6391,0771,0221,5377008161,1001,3241,2541,440
Operating profit (Results)7671,5561,4416685431,0441,2311,3019271,541
Results vs. Initial Est.20.0%44.5%41.0%-56.5%-22.4%28.0%11.9%-1.7%-26.1%7.0%
Recurring profit (Initial Est.)6061,0169801,5216888081,1091,3361,2651,441
Recurring profit (Results)7501,5351,5196635571,1131,2361,3109061,542
Results vs. Initial Est.23.7%51.0%55.0%-56.4%-19.1%37.7%11.4%-2.0%-28.4%7.0%
Net income (Initial Est.)294559516889369492714861837931
Net income (Results)3469438174053066911,054776326989
Results vs. Initial Est.17.7%68.7%58.2%-54.4%-17.2%40.4%47.6%-9.9%-61.0%6.3%
Source: Shared Research based on company data

Medium-term management plan

The company revised its medium-term management plan in August 2021 in light of restraints on sales activities and the market trend toward the curtailing surgical procedures to ensure enough hospital beds were available amid the COVID-19 pandemic contributing to the delayed achievement of prior targets. 

The revised medium-term management plan, covering FY06/22 through FY06/24, targets FY06/24 sales of JPY110.0bn (average annual growth of 2.3% compared with the FY06/22 forecast) and operating profit of JPY1.9bn (9.1%). The company is applying the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22. The targets in the medium-term plan reflect the application of this standard. 

While factoring in uncertainties tied to the COVID-19 pandemic, the revised medium-term plan assumes that the number of surgical procedures will recover as vaccinations increase. The company has positioned the improvement of productivity through digital transformation (DX), including expanding the subscription-based business and the increased utilization of telecommuting, as a priority strategy within its plan. The company expects the Medical Devices and Consumables segment to drive earnings growth.

The previous medium-term plan targeted FY06/23 sales of JPY120.0bn (CAGR of 3.6% from FY06/20) and operating profit of JPY1.9bn (27.0%). The company revised its plan due to delays as the number of hospital operations were curtailed and it refrained from sales activities.

Medium-term management plan (announced in August 2021)
FY06/21FY06/22FY06/23CAGR versus
(JPYmn)Act.Est.MTPFY06/22
Sales114,114105,049110,0002.3%
YoY5.8%--
Operating profit1,4401,5971,9009.1%
YoY55.3%10.9%-
Operating profit margin1.3%1.5%1.7%
Source: Shared Research based on company data
Note: The company applied the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22, so did not provide YoY growth rates because its FY06/22 forecast reflects sales under the new standard. There is no impact on operating profit from the new standard, so growth rates are included.  
Medium-term strategy

The Ministry of Health, Labor and Welfare (MHLW) has advocated for a new healthcare delivery system that fits within the community medical care concept by 2025, when the baby boomer generation will be over 75. Although COVID-19 will likely slow this process, the company still thinks consolidation of acute care hospitals is inevitable. Meanwhile, healthcare technology is advancing as seen in robotic surgery and personalized healthcare (treatments tailored to the patient’s constitution and disease characteristics) based on genetic analysis of cancer genomes, for example.

The company’s forte is in the acute care orthopedics and cardiovascular (cardiology and cardiovascular surgery) fields. It aims to increase its market share in these areas by using digital tools and optimizing staffing levels. It also plans to contribute to the development of healthcare by being the first to provide technical and academic information in advanced fields. In addition, it aims to look into developing business with clinics, where its sales efforts have been insufficient so far, by providing support for online medical services.

The company set out the eight following longer term strategies.

Re-engineer business processes in its high market share orthopedic business to create a win-win situation for customers, suppliers, and the company

Streamline and boost the efficiency of internal operations through Robotic Process Automation (RPA) and quality control (QC) activities

Strengthen purchasing power across the entire Medical Devices and Consumables business

Maximize value provided to customers by digital transformation of sales activities using ICT (rebuilding business model via digitalization)

Build a structure that can continuously respond to healthcare issues by developing new businesses to diversify revenue streams

Expand medical-engineering collaboration to include manufacturers to develop products that solve healthcare challenges

Strengthen initiatives for employees such as work-style reform and health management through focusing on the social aspect of ESG in particular

Enhance institutional strength by instilling the Employee Charter, which serves as the group’s corporate philosophy, across the organization

In line with its long-term strategy, the medium-term plan calls for enhancing the ability to negotiate for purchase across the Medical Devices and Consumables business, streamlining and boosting efficiency of administrative workflows, leveraging its high market share in orthopedics to re-engineer business processes, and rolling out ESG initiatives. It also plans to focus on new businesses and the digital transformation of sales activities.

Bolster buying power across the Medical Devices and Consumables business

The company group's procurement volumes of medical devices and consumables are comparable to that of a major company, but procurement is divided among three separate companies—Kawanishi Co., Ltd, Sansei Medical Materials Co., Ltd, and Nikko Medical Materials Co., Ltd. The company aims for the three business companies to collaborate in negotiations with manufacturers to gain commercial rights over wide areas. 

The company also plans to negotiate incentive terms with major medical equipment manufacturers and rejig basic agreements. It aims to receive manufacturer sales incentives of JPY480mn in FY06/24, up by JPY120mn from FY06/20.

Streamline internal administrative operations

Administrative departments can leverage digital technology to promote operational streamlining and enhancement of efficiency. From May 2022, the company plans to introduce a new integrated logistics system LiFlo that strengthens inventory management by adopting package management and streamlining movement within the warehouse at each location in turn. LiFlo also provides quality control such as expiration date management and sample product management. It will be possible to record usage sales on handy terminals and boost efficiency of lending operations.

The company also plans to continue focusing on using RPA to streamline workflows. In FY06/21, the company used RPA to reduce the time spent on routine tasks such as printing, data output, and emailing by 75 hours per month. In FY06/22, it plans to use RPA to reduce time spent on routine tasks by 160 hours per month.

ESG initiatives

The company looks to promote health management such as being certified by METI as an “Excellent Corporation for Health Management 2021.” In consideration of COVID-19, the company plans to increasingly utilize web lectures and improved e-learning for human resource development of employees in 2020.

New businesses

The company plans to continue its efforts to diversify revenue streams. It will have a particular focus on the clinics business, ICT healthcare solutions, subscription business, and medical-engineering collaboration.

Clinics business

The company formed joint venture Kawanishi BarcMed (equity-method affiliate) with EPARK in July 2019. EPARK has a proven track record in reservation systems for restaurants, hospitals, pharmacies, and mobile phone shops. The joint venture will develop a reservation system and contactless automatic checkout and change machines, aimed primarily at clinics in the Chugoku region to establish a foothold in the clinics market. The selling points of contactless services include prevention of infection spread, easing the outpatient workload at busy times, reducing waiting times, and addressing the labor shortage. In the longer term, the company looks to leverage online medical care support to expand business into clinics, a market it has yet to crack due to lack of sales activities. As of August 2021, it had sold 25 units.

ICT healthcare solutions

In February 2021, the company entered a business alliance with NTT East. Under the agreement, the company provides a Wi-Fi rental service, Medi-Fi, for patients and medical institution staff; a cloud camera that can store images from inside a hospital securely in the cloud, Medi-Sight; and cloud-based PC rental service, Medi Lock PC. As it provides Wi-Fi for inpatients, Medi-Fi is eligible for subsidies and the company plans to expand service offerings going forward.

Subscription business 

The company also looks to build up the subscription business. Products that have been launched on a monthly subscription basis include rental ventilators. Medical institutions used to procure and own equipment, but rentals and leasing lower their equipment costs and increase convenience, and the company plans to tap into such demand. The company will also focus on growing sales of its amenity support system, which handles the sale of amenity sets for inpatients.

Medical-engineering collaboration

The company has focused on medical-engineering collaboration, in which medical and engineering disciplines team up to develop new medical devices. Traditionally, products have been developed based on needs from medical settings as communicated to manufacturers and engineering universities, then produced by manufacturers or contractors. However, products developed simply based on needs "as is" were often not cost-effective. By involving as a distributor with access to both medical settings and device manufacturers, the company aims to develop new products that are also marketable from a price perspective as well.

The company is the sole distributor in Japan for the medical training simulation robot mikoto (training robot for procedures such as nasotracheal intubation and oropharyngeal intubation) developed by MICOTO Technology Inc., and has also helped commercialize Gagless Mouthpiece (reduces the gag reflex and aspiration during endoscopic procedures) jointly developed by the Tottori University Hospital and Inaba Rubber Co., Ltd.

In FY06/21, the company provided small and medium-sized businesses with proposals for specifications and advice on the development of personal protection equipment (PPE) while also cooperating to develop sales channels. In light of the medical needs of Fukushima Medical University, it has collaborated in developing a portable negative pressure clean dome, for which subsidiary Sansei Medical Materials is the sole distributor in Japan. Product differentiation is not easy among medical devices and consumables but strengthening ties with upstream manufacturers through medical-engineering collaboration can lead to product differentiation that can lift sales values and cultivate new sales channels. Strengthening medical-engineering collaboration is again a theme included in the new medium-term management plan.

Maximize value provided to customers through DX of sales activities 

To date, the company has prepared and uses an in-house electronic catalog for its employees that lists 450,000 of the total 800,000 medical devices and consumables, covering most products normally distributed. Various searches can be used on the electronic catalog thanks to enhancements such as application of in-house tagging, creating a system that can quickly and reliably find information sought by customers. The company is considering making the electronic catalog available to some medical institutions. The company established a DX promotion office in July 2021, and plans to step up its initiatives in the area.

Business

Business description

The company sells medical devices and consumables to hospitals and clinics as its core business. It sources its products from roughly 1,000 domestic and overseas manufacturers and distributors, and supplies these to about 2,000 medical institutions, which are its customers. It has no bias towards any particular supplier or distributor, with the top 10 suppliers accounting for about 40% of its purchases in value terms, and the top 100 accounting for about 80%. The top 10 customers for Medical Devices and Consumables account for roughly 40% of its external sales, and the top 100 about 75%.

In FY06/21, the company reported sales of JPY113.0bn, with the Medical Devices and Consumables segment (core business) contributing 82%, the SPD segment (contracted distribution and procurement for hospitals) 16%, and the Nursing Care Products segment (leasing of nursing beds and other products) 2%.

Sales grew at a CAGR of 2.2% in the five years from FY06/16 to FY06/21, and 1.6% in the three years from FY06/18. Although sales fluctuate due to changes in equipment sales caused by hospital reconstruction and other factors, the company has achieved stable growth driven by advances in medical technology and growth in the elderly population.

Sales by segment
Source: Shared Research based on company data
Note: From FY06/17, figures for its Life Science business are included in the Medical Devices and Consumables segment.

In FY06/21, GPM came to 10.3%. Its CoGS mostly consist of procurement expenses for devices and consumables (procurement-related transportation costs are also included in CoGS, but amount to only about 0.2% of sales, according to the company). Since FY06/11, GPM has reached a high of 10.6% in FY06/11 and a low of 10.0% in FY06/16. The difference was only 0.6pp, suggesting the company’s operations are relatively immune to major swings in GPM.

The Japanese Ministry of Health, Labour and Welfare (MHLW) estimates GPM in the medical devices sales industry came to 9.4% in FY2019, and also averaged 9.5% in the five preceding years. In other words, the company’s GPM is trending above the industry average. This is mainly because 1) the company has earned deep trust through sales activities centered on customers such as hospitals and doctors (proposing necessary devices and consumables inferred from limited data on surgery schedules, medical cases, surgery procedures, surgeons, and other categories), 2) it supplies some 400,000 products and has established mechanisms to ensure precise deliveries of necessary products in adequate quantities and at the right time (removing the need for hospitals to hold high-value and excess inventory), and 3) it can leverage its large scale of operations (Shared Research estimates the company is ranked fifth in the medical devices sales industry) to gain advantages in procurement.

Sales, CoGS, and GPM
Source: Shared Research based on company data
GPM
Source: Shared Research based on company and MHLW data
Note: FY06/17 shows GPM in the medical devices wholesale industry in 2017.

In FY06/21, the SG&A-to-sales ratio was 8.8%. Employee salaries, allowances, and bonuses were the major cost items, totaling JPY5.7bn and accounting for 5.0% of sales (1,261 employees at end-FY06/21).

Since FY06/11, the SG&A-to-sales ratio has hit a low of 8.8% in FY06/21 and a high of 9.7% in FY06/11. The company’s SG&A expenses mainly consist of fixed-costs, and therefore, the SG&A-to-sales ratio tends to drop in years of sharp sales growth.

Although the company’s GPM does not fluctuate much, its SG&A-to-sales ratio is affected by changes in sales. As a result, OPM improves sharply in years of strong sales expansion. Since FY06/11, OPM has peaked at 1.6% in FY06/13 and bottomed at 0.5% in FY06/16.

SG&A expenses
SG&A expensesFY06/12FY06/13FY06/14FY06/15FY06/16FY06/17FY06/18FY06/19FY06/20FY06/21
(JPYmn)Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.
SG&A expenses7,1298,5208,6809,0909,5929,8559,7939,83610,14110,059
YoY18.6%19.5%1.9%4.7%5.5%2.7%-0.6%0.4%3.1%-0.8%
% of total sales9.5%8.9%8.9%9.6%9.5%9.3%9.1%9.2%9.4%8.8%
Salaries, allowances, and bonuses3,7224,4504,5994,8085,2085,3835,3735,4455,3865,671
YoY18.4%19.5%3.4%4.5%8.3%3.4%-0.2%1.3%-1.1%5.3%
% of total sales5.0%4.6%4.7%5.1%5.1%5.1%5.0%5.1%5.0%5.0%
Provision for directors' compensation and retirement benefits448483482509530523512390396451
YoY12.2%7.8%-0.2%5.7%4.1%-1.2%-2.2%-23.8%1.7%13.7%
% of total sales0.6%0.5%0.5%0.5%0.5%0.5%0.5%0.4%0.4%0.4%
Retirement benefit expenses176213194216212256260185219224
YoY23.2%20.9%-8.9%11.2%-1.6%20.5%1.4%-28.6%18.0%2.2%
% of total sales0.2%0.2%0.2%0.2%0.2%0.2%0.2%0.2%0.2%0.2%
Other2,7833,3743,4053,5573,6433,6933,6493,8164,1403,714
YoY19.6%21.2%0.9%4.5%2.4%1.4%-1.2%4.6%8.5%-10.3%
% of total sales3.7%3.5%3.5%3.8%3.6%3.5%3.4%3.6%3.8%3.3%
Source: Shared Research based on company data
Sales trends by region

The medical devices sales industry has a strong regional characteristic, mainly because companies require approval from prefectural governors to sell advanced medical devices and need to develop relationships of trust with customers (hospitals). The company has a strong presence in the Chugoku/Shikoku (66% of sales), Tohoku (20%), and Kinki (12%) areas. The company says it has the leading market share in Chugoku (about 20%) and Shikoku (about 15%), and is third in Tohoku (about 7%). In other regions, even the leading company has a market share of less than 20% in many cases, and in Tokyo and surrounding regions (Saitama, Chiba, and Kanagawa), the market leader has a share of roughly 7%, and in Kinki the figure is about 12%.

The company’s predecessor, Kawanishi Co., Ltd., established its business foundations over many years in the Chugoku/Shikoku areas, which today account for 66% of sales. The company’s subsidiary, Sansei Medical Materials Co., Ltd. (added to the group in January 2012), operates mainly out of the Tohoku area, which currently makes up 20% of sales. Meanwhile, the Kinki area generates 12% of sales thanks to contributions from Nikko Medical Materials Co., Ltd. (based in Kinki, turned into a subsidiary in June 2005), Inoue Medical Equipment Ltd. (based in Kobe City, acquired in 2004, and absorbed in 2011), and the supply of products and services from the new company, Kawanishi, Co., Ltd. (sales department spun off from the preceding Kawanishi Co., Ltd. in 2004), to neighboring Hyogo Prefecture.

On the other hand, the major Kanto market, with its large population, only accounts for 2% of the company’s sales.

The company says it is extremely difficult to cultivate new customers of hospitals in prefectures where it has no sales track record and gives two main reasons for this: First, hospitals have multiple decision-makers who determine orders for medical devices and consumables (such as doctors, directors, nurses, and persons in charge of SPD areas) and the company needs to establish personal relations with each of them to win orders (it must demonstrate its ability to make informed and optimally timed proposals about devices and consumables that precisely match individual hospital needs). Second, while the company can set up delivery centers near new customers to ensure prompt deliveries, it still needs approval from prefectural governors to sell advanced medical equipment (which in turn requires the appointment of resident managers and leads to upfront fixed costs). In other words, the regional characteristics of the medical devices sales industry are the main cause behind the variation in the company's market shares by region.

Sales by region
RegionsFY06/14FY06/15FY06/16FY06/17FY06/18FY06/19FY06/20FY06/21
(JPYbn)Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.
Sales97.194.5101.5105.8107.7107.4107.9113.0
YoY1.0%-2.7%7.3%4.3%1.8%-0.2%0.4%4.7%
Chugoku42.341.343.443.944.444.346.649.9
YoY--2.4%5.1%1.2%1.1%-0.2%5.2%7.1%
% of total43.5%43.7%42.8%41.5%41.2%41.2%43.2%44.2%
Shikoku21.518.721.522.624.224.023.925.1
YoY--13.0%15.0%5.1%7.1%-0.8%-0.4%5.0%
% of total22.1%19.8%21.2%21.4%22.5%22.3%22.2%22.2%
Kinki11.011.613.014.014.614.714.313.3
YoY-5.5%12.1%7.7%4.3%0.7%-2.7%-7.0%
% of total11.3%12.3%12.8%13.2%13.6%13.7%13.3%11.8%
Kanto1.22.43.42.52.02.12.32.1
YoY-100.0%41.7%-26.5%-20.0%5.0%9.5%-8.7%
% of total1.2%2.5%3.4%2.4%1.9%2.0%2.1%1.9%
Tohoku21.220.420.122.622.622.320.822.7
YoY--3.8%-1.5%12.4%0.0%-1.3%-6.7%9.1%
% of total21.8%21.6%19.8%21.4%21.0%20.8%19.3%20.1%
Source: Shared Research based on company data

By segment

By segmentFY06/14FY06/15FY06/16FY06/17FY06/18FY06/19FY06/20FY06/21
(JPYmn)Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.
Sales97,13894,515101,461105,779107,664107,428107,897112,976
YoY1.0%-2.7%7.3%4.3%1.8%-0.2%0.4%4.7%
Medical Devices and Consumables84,78881,63587,03594,28695,62995,04294,18797,811
YoY0.1%-3.7%6.6%8.3%1.4%-0.6%-0.9%3.8%
Supply Processing and Distribution10,94212,79914,83115,44316,34916,55717,94419,288
YoY13.9%17.0%15.9%4.1%5.9%1.3%8.4%7.5%
Nursing Care Products1,2271,4141,6721,9192,0352,0972,1842,316
YoY21.0%15.3%18.2%14.8%6.0%3.1%4.1%6.0%
Life Science4,0033,5753,628-----
YoY-8.2%-10.7%1.5%-----
Adjustments-3,823-4,908-5,706-5,869-6,349-6,268-6,419-6,438
Operating profit1,4416685431,0441,2311,3019271,541
YoY-7.4%-53.6%-18.7%92.2%17.9%5.7%-28.8%66.2%
Operating profit margin1.5%0.7%0.5%1.0%1.1%1.2%0.9%1.4%
Medical Devices and Consumables1,4116905911,0631,2651,3671,2541,412
YoY-14.2%-51.1%-14.3%79.9%19.0%8.0%-8.3%12.7%
Profit margin1.7%0.8%0.7%1.1%1.3%1.4%1.3%1.4%
Supply Processing and Distribution946588103607786134
YoY105.7%-30.5%34.2%17.9%-42.2%29.2%11.7%54.8%
Profit margin0.9%0.5%0.6%0.7%0.4%0.5%0.5%0.7%
Nursing Care Products41576312911593119145
YoY91.7%38.1%11.0%103.2%-11.0%-19.0%28.7%21.7%
Profit margin3.4%4.0%3.8%6.7%5.6%4.4%5.5%6.3%
Life Science11-10-18-----
YoY--------
Profit margin0.3%-0.3%-0.5%-----
Adjustments-117-134-181-230-181-144-136-150
Source: Shared Research based on company data
Notes: From FY06/17, the company included figures for its Life Science business in the Medical Devices and Consumables segment. The Life Science business was operated by consolidated subsidiary Takatsuka Life Science Co., Ltd., which mainly sells reagents, test drugs, physical and chemical appliances, and analysis devices. Takatsuka Life Science Co., Ltd. was absorbed by Kawanishi, Inc. in January 2017, and figures for the Life Science business have been subsequently included in the Medical Devices and Consumables segment. 

Medical Devices and Consumables

The Medical Devices and Consumables segment is the company’s core business, accounting for 82% of sales in FY06/21. It procures medical devices and consumables from domestic and overseas manufacturers and distributors and sells these to medical institutions. By product, consumables make up 89% of segment sales, with the remaining 11% going to equipment. The company handles some 400,000 products.

It has roughly 1,000 supplier and deals with about 2,000 medical institutions. It has no bias towards any particular supplier or distributor, with the top 10 suppliers accounting for about 40% of its purchases in value terms (on a consolidated basis), and the top 100 accounting for about 80%. The top 10 customers for Medical Devices and Consumables account for roughly 40% of external sales, and the top 100 about 75%.

Main product lineup
Automatic stapler (surgery)
PPE (surgery)
Artificial joints (orthopedics)
Osteosynthesis plates (orthopedics)
Stents (cardiovascular)
Catheters (cardiovascular)
Vascular grafts (cardiovascular)
Artificial heart valves (cardiovascular)
Intraocular lenses (ophthalmology)
Continuous glucose monitor(growth field)
Insulin pumps (growth field)
Patient monitoring systems (equipment)
Infusion pumps 
(equipment)
ECMO (equipment)
Ventilator (equipment)
Source: Data obtained from several companies

Consumables sold by the company include automatic staplers for surgery (surgical devices used to automatically close tissue using consistent staple lines after ailing body parts have been removed in a gastrointestinal surgery), surgical sutures, surgical drapes, syringes, gauze, scalpels, patient return electrodes for electrical scalpels, surgical drains, artificial joints, orthopedic plates and screws to join fractures, spinal prosthetics, pacemakers, vascular and other indwelling stents (reticular tubes), vascular catheters (tubes inserted from blood vessels in the neck or groin to enable passage to the heart or brain via blood vessels), vascular grafts, artificial heart valves, intraocular lenses, and devices used to inject insulin. In other words, the company supplies a vast and diverse range of products to medical care departments.

Equipment supplied by the company include Computed Tomography (CT) scanners, Magnetic Resonance Imaging (MRI) scanners, ultrasonic diagnostic equipment, patient monitoring devices (such as surgical monitors), infusion pumps, extracorporeal membrane oxygenation (ECMO) systems, and mechanical ventilators.

Consumables, the driving force behind stable growth

Consumables are the main product category contributing to stable growth of the company. Sales of consumables have grown at a CAGR of about 2.4% in the last five years and 0.5% in the last three years. In FY06/21, the number of operations fell due to COVID-19, slowing growth in sales of consumables. Medical institutions postponed operations to make beds available for COVID-19 patients.

Sales of consumables and equipment
FY06/12FY06/13FY06/14FY06/15FY06/16FY06/17FY06/18FY06/19FY06/20FY06/21
(JPYmn)Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.
Medical Devices and Consumables sales63,28584,66684,78881,63587,03594,28695,62995,04294,18797,811
YoY20.2%33.8%0.1%-3.7%6.6%8.3%1.4%-0.6%-0.9%3.8%
Consumables52,40065,60066,80070,10074,30079,60082,29883,27683,45983,602
YoY-25.2%1.8%4.9%6.0%7.1%3.4%1.2%0.2%0.2%
Equipment10,88819,05318,00011,50012,70014,70013,45411,72610,78114,364
YoY-75.0%-5.5%-36.1%10.4%15.7%-8.5%-12.8%-8.1%33.2%
Source: Shared Research based on company data

The company is enjoying stable growth driven not only by fundamental factors, such as an increasing need for medical care due to growth in Japan’s elderly population and a rise in treatment costs per patient, but also by innovation in the medical devices field, such as advances in medical technology that allow doctors to save more lives, the growing adoption of less invasive medical treatments (e.g., the shift from thoracotomy procedures to surgical procedures that rely on catheters and stents), and the development of medical equipment that enhances the quality of patients’ lives (e.g., the shift from using syringes to inject insulin necessary to control blood sugar to using portable insulin pumps).

Portable insulin pump
Source: Diabetes Network
Fluctuations in equipment sales reflecting capital investment trends at hospitals

The company’s equipment sales fluctuate more than its consumable sales mainly because it supplies high-value equipment in bulk when new hospitals are constructed or when existing hospitals undergo reconstruction to upgrade earthquake resistance. As a result, equipment sales surge whenever a new hospital is established in its operating regions. That said, its equipment sales are not entirely dependent on new construction or reconstruction of hospitals. The company also enjoys steady demand from periodic equipment replacement and the installation of new equipment. In this respect, it benefits from the fact that hospital operators are encouraged to introduce new equipment to attract doctors.

Number of hospital openings nationwide
(Institutions) 2010201120122013201420152016201720182019
Number of hospitals opened7581968910912096897460
YoY1.4%8.0%18.5%-7.3%22.5%10.1%-20.0%-7.3%-16.9%-18.9%

The Great East Japan Earthquake, which occurred in March 2011, reaffirmed the importance of seismic reinforcement of hospitals. Government subsidies are also encouraging such reinforcement work. The company’s equipment sales expanded in FY06/13 and FY06/14, and its operating profit reached a record high in FY06/13.

According to the company, none of the customers in the Medical Devices and Consumables account for more than 10% of total sales, suggesting the company has a diversified customer base.

Profitability in the Medical Devices and Consumables segment

This segment also records sales to the SPD segment (which make up roughly 7% of segment sales) as inter-segment sales through FY06/21. In FY06/21, OPM (operating profit divided by segment sales, including inter-segment sales) came to 1.4%. Since FY06/11, OPM has reached a high of 1.9% in FY06/13 and a low of 0.7% in FY06/16.

Sales classifications: Until FY06/21, when the Medical Devices and Consumables segment procured a product which was sold to a medical institution through the SPD segment, it was recognized as external sales for the SPD segment and inter-segment sales for Medical Devices and Consumables. The company adopted the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22, so after looking into sales classifications, it decided not to book the sales under the SPD segment, but as external sales for the Medical Devices and Consumables segment. For FY06/22, this is expected to reduce sales for the SPD segment by roughly JPY5.0bn. The new treatment will result in a decline of an equivalent amount of roughly JPY5.0bn in inter-segment adjustments, so will have no impact on consolidated sales.

Sales and gross profit increase in years when the company records bulk orders of equipment (but GPM does not change much). When sales increase in any given year, SG&A expenses tend to grow, the SG&A-to-sales ratio (particularly, personnel costs) tends to decline, and OPM tends to rise. By contrast, in years when bulk orders for equipment (which are transient in nature) dissipate, the reverse occurs.

Sales and OPM in the Medical Consumables and Equipment segment
Source: Shared Research based on company data
Note: Internal sales are included in the calculation of OPM.

SPD

The SPD segment, which handles hospital distribution, generated 16% of sales (including inter-segment sales) in FY06/21. It offers both on-premise (warehouses on hospital premises) and off-premise (warehouses located on nearby off-site locations) SPD services, including 1) support to enhance operational efficiency at medical institutions, 2) inter-hospital transportation of goods and appropriate inventory management, 3) verification of hospital procurement prices, 4) streamlining of operating room support, and 5) management of medical fees. As of end-June 2021, the company managed 65 SPD projects for medical institutions (63 at end-June 2020) through its subsidiary HOSNET・Japan, Inc. Although earnings contributions from the business are small, the company also franchises out the SPD-related systems it has developed to third parties (13 projects).

SPD stands for supply, processing, and distribution. This refers to contracted inventory management, quality control, and distribution management in hospitals for medical equipment, pharmaceuticals, reagents, and daily necessities used by hospitals. These services allow nurses and other medical practitioners to dedicate more time to patient care and treatment assistance. SPD is a commonly used term in the Japanese medical industry, but it is not used much overseas, according to the company.

Sales in the SPD segment are broadly divided into product and management fees. Product fees mainly reflect procurement fees related to alternative procurement for medical devices, materials, pharmaceuticals, reagents, and other products required by hospitals, which account for over 90% of segment sales. Management fees are service fees that include personnel and other costs (estimated at roughly 6–7% of sales). The company enters pharmaceutical and medical device procurement contracts through which hospitals specify vendors, as well as contracts through which the company selects suppliers. Both contract types are expected to contribute to sound hospital management (through cost reductions, prevention of product shortages, and elimination of excess inventories).

When the company is required to buy products from only vendors specified by hospitals, it must make purchases from a narrow range of vendors. This limits the value added it can offer, resulting in an extremely low gross margin (low management fees). When it is able to select suppliers independently, the company can have multiple vendors compete for an order, thereby increasing value added. It can also source products from its main business company, Kawanishi Co., Ltd., thus generating group synergies (leveraging of procurement capabilities within the group). In fact, JPY6.3bn, or 33% of the JPY19.3bn in sales generated by the segment in FY06/21, was procured from the Medical Devices and Consumables segment (booked as inter-segment sales in the Medical Devices and Consumables segment).

Since FY06/11, profit in the SPD segment has bottomed at JPY36mn in FY06/11 and peaked at JPY134mn in FY06/17. Although the segment has not posted a loss in the last 10 years, its profit contributions have been limited.

According to the company, low-priced, low-quality SPDs were prevalent at times due to stiff price competition. Recently, medical institutions are rating the company’s SPD business more highly as it provides high-quality services. From FY06/21, it aims to boost earnings by reviewing its service charges and increasing the number of contracted institutions.

Sales and OPM in the SPD segment
Source: Shared Research based on company data

Nursing Care Products

The Nursing Care Products segment made up 1.9% of sales in FY06/21. It mainly leases and sells nursing care and welfare equipment (such as nursing beds, wheelchairs, and handrails), and remodels homes to support caregiving through a subsidiary, Life Care Co., Ltd. Segment sales have expanded at a relatively high CAGR of 6.7% over the last five years and 4.4% over the last three years. OPM was 6.3% in FY06/21, the highest among the company’s segments.

The business supplies products to about 13,000 care recipients and it leases just over 7,000 nursing beds (the core product). Demand for nursing rental beds is expanding amid an uptrend in the number of people needing long-term care caused by the rise in the elderly population. Over the last three years, the cancellation rate for rental beds has ranged from 4% to 12%. According to the company, the main cancellation reasons are care recipients’ deaths and hospital readmission, and switchovers to competitors are very rare.

Rental beds can be leased under nursing care insurance plans, in which case users only bear 10–30% of the cost (actual percentage determined based on users’ income), with the remainder covered by the insurance. This reduces the financial burden on care recipients.

The company procures its rental beds from welfare equipment rental wholesalers, and subleases them to care recipients. It generates a gross profit margin of 45–50% on this business. Personnel costs (sales and delivery representatives) represent the largest cost item in SG&A expenses. Care managers, who set up care plans and serve as counsellors to the users of rental nursing beds, often advise users and their families on which equipment (and, by extension, supplier) is suitable for them. Accordingly, the company’s sales representatives also target care managers as part of their sales activities.

Long-term care support specialists are defined as “people who provide consultation to a person requiring long-term care or support, and communicate and coordinate with municipalities or service providers to ensure the person requiring long-term care or support can utilize appropriate services according to his or her mental and physical conditions. They possess the professional knowledge and skills necessary to help people requiring long-term care or support conduct independent daily lives, and have obtained Long-Term Care Support Specialist Certificates.” They must pass a Long-Term Care Support Specialist Examination administered by individual prefectures, complete Long-Term Care Support Specialist Training, and register in the Long-Term Care Support Specialist Registry.

The market for rental nursing care equipment is projected to expand on growing needs for in-home care due to increases in the elderly and late-elderly population. Under these conditions, the company appears to be targeting annual sales growth of just over 5%.

However, low barriers to entry and susceptibility to regulatory changes are two areas of concern for the business. From April 2018, care manages who provide advice regarding care equipment for care recipients have been required to propose several products across multiple function and price categories. Also, the cost percentage to be shouldered by care recipients with incomes equivalent to the current working generation has been raised from 20% to 30%. In addition, the government has imposed price restrictions on rental services for long-term care equipment covered by public aid from October 2018, and care managers are now required to not only explain product features and pricing to care recipients but also share nationwide average prices for applicable products.

Sales and OPM in the Nursing Care Products segment