Nihon Chouzai Co., Ltd. is an integrated healthcare company whose core business is the operation of dispensing pharmacies. The company also manufactures and sells generic drugs and engages in the staffing and placement of medical professionals. In FY03/21, the company’s sales were JPY279.0bn, operating profit was JPY8.1bn, and the OPM was 2.9%. The company’s three business segments are the Dispensing Pharmacy business (FY03/21: sales of JPY244.1bn, 81.9% of total sales, 77.6% of operating profit, OPM of 4.3%), the Pharmaceutical Manufacturing and Sales business (FY03/21: sales of JPY45.7bn, 15.3% of total sales, 17.2% of operating profit, OPM of 5.1%), and the Medical Professional Staffing and Placement business (FY03/21: sales of JPY8.4bn, 2.8% of total sales, 5.2% of operating profit, OPM of 8.5%).

Dispensing Pharmacy business: As of end-March 2021, the company had 670 pharmacies in all prefectures in Japan, a 1% share of the market. This is the company’s original line of business, started in 1980. Segment sales are determined by the number of prescriptions dispensed by pharmacies multiplied by price per prescription. In FY03/21, the company dispensed 14.2mn prescriptions and average price per prescription was JPY16,869 (versus the FY2019 national average of JPY9,184). The prescription price consists of a drug fee and a technical fee (remuneration for a pharmacist’s dispensing work and giving medication guidance to patients). A pharmacy records the technical fee and the drug price margin (difference between the drug selling price and purchase price) as gross profit. Materials costs (cost of drugs purchased from wholesalers) account for about 70% of total costs in the segment, while personnel costs, chiefly for pharmacists (average of five staff per pharmacy), account for about 10%.

Pharmacy opening strategy and status: The company distinguishes between “hospital-front pharmacies” (located near or inside the premises of major hospitals), and “hybrid pharmacies” (located in high-traffic areas of cities and handle prescriptions from many different medical facilities). Hospital-front pharmacies record annual sales of around JPY500mn, above the FY03/21 company-wide average of JPY369mn, and represented 67% of all Nihon Chouzai pharmacies as of end-March 2021. The company says it plans to boost the number of hybrid pharmacies to 50% of the total, seeking a balanced approach to expanding its pharmacy network. Moreover, the company’s policy is to focus on the organic growth of its own pharmacies while taking advantage of promising M&A opportunities. Organic growth (i.e., pharmacies opened on its own as opposed to those added via M&A) currently accounts for roughly 70% of all store openings. This strategy sets the company apart from its peers that mainly focus on expanding their pharmacy networks through acquisitions.

Pharmaceutical Manufacturing and Sales business: This segment mainly engages in the manufacturing and sales of generic drugs (oral medications). As of end-FY03/21, the company handles 677 products: it manufactures 262 of these at five production facilities it operates and outsources manufacturing of other products to outside makers or purchases them. In FY03/21, sales to Nihon Chouzai’s own pharmacies accounted for 42.0% of total sales (internal sales) and sales to external customers for 58.0%. The company generally ships almost all its pharmaceuticals to wholesalers, and these wholesalers also supply Nihon Chouzai’s own pharmacies. In this way, the company is contributing to revenues of such wholesalers while growing its share of the wholesale market. Costs in this segment mainly consist of purchases of raw materials, manufacturing consignment (outsourcing) costs, and labor costs. Segment OPM was 5.1% in FY03/21, which is lower than the FY03/21 average of roughly 10% among the three main competitors in this field. The company is aiming to boost profitability through increased production following an aggressive series of capital investments it made through FY03/18.

Medical Professional Staffing and Placement business: This segment involves the temporary staffing and placement of medical professionals, primarily pharmacists. The focus going forward is on the placement of pharmacists, particularly family pharmacists who offer consultations on an ongoing basis to patients, and of physicians, for which there is strong demand in Japan.

Industry comparison: Nihon Chouzai has fewer pharmacies than industry leader Ain Holdings Inc. (TSE1: 9627), which boasts 1,065 pharmacies (2% share). The company ranks third in store count among companies specializing in dispensing pharmacy operations (as of end-March 2021, same hereafter). In terms of sales per pharmacy, however, at around JPY369mn the company surpasses Ain Holdings (JPY244mn). As discussed above, this is attributable in part to the high proportion of hospital-front pharmacies (63% versus 58% for Ain Holdings as of July 2020). As these pharmacies are located near or inside the premises of major hospitals, they tend to dispense relatively costly medications such as anticancer drugs. The growing number of pharmacies in the Dispensing Pharmacy business has spilled over into rising earnings in the Pharmaceutical Manufacturing and Sales segment. At the same time, the increase in drug manufacturing has the added benefit of enabling procurement cost reductions at pharmacies through the streamlining of manufacturing processes. The company points out the synergies between the two segments, with growth in one contributing to profitability in the other.

Earnings trends

In FY03/22, Nihon Chouzai reported sales of JPY299.4bn (+7.3% YoY), operating profit of JPY6.6bn (-18.7% YoY), recurring profit of JPY6.8bn (-19.5% YoY), and net income attributable to owners of the parent of JPY3.7bn (+4.7% YoY). Sales were up by 8.8% YoY in the Dispensing Pharmacy business, down 1.9% YoY in the Pharmaceutical Manufacturing and Sales business, and down 16.7% YoY in the Medical Professional Staffing and Placement business. An increase in prescription volume on a comparable-store basis and the contributions from new stores drove sales growth in the Dispensing Pharmacy business. Sales were down YoY in the Pharmaceutical Manufacturing and Sales business, because the drop in prices of existing products as a result of the April 2021 NHI drug price revision outweighed the positive effect of brisk sales of drugs newly listed from 2019 onward. The Medical Professional Staffing and Placement business recorded lower sales due to reduced demand for temporary staffing amid the pandemic.

The company's FY03/23 forecast calls for sales of JPY321.4bn (+7.4% YoY), operating profit of JPY8.5bn (+29.0% YoY), recurring profit of JPY8.4bn (+24.1% YoY), and net income attributable to owners of the parent of JPY4.4bn (+18.8% YoY). In the Dispensing Pharmacy business, the company will work to develop highly user-friendly pharmacies and cultivate pharmacists with advanced expertise to deliver high-quality medical care services through its certified “specialized medical institutions cooperation pharmacies” and “regional cooperation pharmacies”. In the Pharmaceutical Manufacturing and Sales business, it will make quality control and stable supply its top management priorities, focusing its efforts on stable supply of quality generic drugs. In addition to leveraging group synergies, the company will also invest in R&D to expand its catalog of in-house manufactured product offerings, including newly listed drugs, while aiming to improve overall profitability. In the Medical Professional Staffing and Placement business, the company will work to further fortify its placement business for pharmacists, physicians, and other medical professionals, as well as operate nationwide industrial physician services to further expand its physicians placement business.

Nihon Chouzai announced its long-term vision “On the Road to 2030” in April 2018. The plan targets FY03/30 sales of JPY1tn—more than 3x the level of sales (before intragroup eliminations) in FY03/20—as well as a 10% share of Japan’s dispensing pharmacy market (compared with less than 5% in FY03/20). It also targets a 15% share of the generic drug market sales (3% in FY03/20) in the Pharmaceutical Manufacturing and Sales business. Its qualitative strategy involves growing the Dispensing Pharmacy business by investing in personnel, enhancing pharmacy functions, and prioritizing sales potential when opening new pharmacies (i.e., opening large-scale pharmacies capable of providing advanced services). In response to public policy calling on pharmacies to serve to improve the health of the overall population, the company will take steps to increase its number of family pharmacies and promote the expansion of online medication guidance services. Building on a solid record of growth in the Dispensing Pharmacy business, the company aims to achieve sustainable growth as an integrated healthcare company by expanding its Pharmaceutical Manufacturing and Sales and Medical Professional Staffing and Placement businesses.

Strengths and weaknesses

Strengths:
1) Having established a chain of pharmacies near large general hospitals ahead of competition, the company’s per-pharmacy sales (JPY369mn) and prescription volume (21,600) are highest in the industry, reflecting its efficient pharmacy operations.
2) The company has relatively strong capacity to expand the pharmacy network internally. It opened (not acquired) 127 pharmacies in the five years to FY03/21, with organic growth accounting for 62.3% of its store openings—both figures are higher than competitors.
3) Even without a large MR force, the company can expand its share of the generic drug market (total wholesale volume) by selling in-house products to its own pharmacies.

Weaknesses:
1) Compared with drugstores, the company’s pharmacies have lower name recognition and are not as well positioned to attract general consumers.
2) Because it sells nearly all its generic drugs through wholesalers, the company has structurally higher distribution costs (lower profit margins) than competitors with their own distribution networks (Sawai Group Holdings, Towa Pharmaceutical).
3) If the company is to comply with recent MHLW policy calling for pharmacies to relocate from hospital-front to community locations, its relatively high ratio of hospital-front pharmacies will expose it to the impact of rising relocation costs.

Key financial data

Income statement		FY03/12	FY03/13	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.	Cons.	Est.
Sales		130,041	139,466	165,347	181,844	219,239	223,468	241,274	245,687	268,520	278,951	299,392	321,400
	YoY	16.0%	7.2%	18.6%	10.0%	20.6%	1.9%	8.0%	1.8%	9.3%	3.9%	7.3%	7.4%
Gross profit		22,038	21,494	25,623	31,929	39,068	39,258	43,837	41,975	46,372	49,374	52,422	-
	YoY	14.9%	-2.5%	19.2%	24.6%	22.4%	0.5%	11.7%	-4.2%	10.5%	6.5%	6.2%	-
	Gross profit margin	16.9%	15.4%	15.5%	17.6%	17.8%	17.6%	18.2%	17.1%	17.3%	17.7%	17.5%	-
Operating profit		5,464	3,245	4,744	6,647	10,489	8,519	10,587	6,733	7,593	8,106	6,589	8,500
	YoY	14.2%	-40.6%	46.2%	40.1%	57.8%	-18.8%	24.3%	-36.4%	12.8%	6.8%	-18.7%	29.0%
	Operating profit margin	4.2%	2.3%	2.9%	3.7%	4.8%	3.8%	4.4%	2.7%	2.8%	2.9%	2.2%	2.6%
Recurring profit		4,941	2,855	4,188	6,003	9,878	7,976	10,138	6,077	7,405	8,409	6,767	8,400
	YoY	13.4%	-42.2%	46.7%	43.3%	64.6%	-19.3%	27.1%	-40.1%	21.9%	13.6%	-19.5%	24.1%
	Recurring profit margin	3.8%	2.0%	2.5%	3.3%	4.5%	3.6%	4.2%	2.5%	2.8%	3.0%	2.3%	2.6%
Net income		2,085	184	1,901	2,778	6,329	4,638	6,104	3,790	6,697	3,538	3,705	4,400
	YoY	14.5%	-91.2%	933.2%	46.1%	127.8%	-26.7%	31.6%	-37.9%	76.7%	-47.2%	4.7%	18.8%
	Net margin	1.6%	0.1%	1.1%	1.5%	2.9%	2.1%	2.5%	1.5%	2.5%	1.3%	1.2%	1.4%
Per-share data (split-adjusted; JPY)
Shares issued at year-end ('000 shares)		32,048	32,048	32,048	32,048	32,048	32,048	32,048	32,048	32,048	32,048	32,048
EPS (JPY)		72.7	6.4	65.6	97.2	216.4	145.0	190.8	121.7	223.3	118.0	123.6	146.7
EPS (fully diluted; JPY)		-	-	-	-	-	-	-	-	-	-	-
Dividend per share (JPY)		17.5	17.5	17.5	17.5	22.5	25.0	25.0	25.0	25.0	25.0	25.0	25.0
Book value per share (JPY)		512	509	545	629	1,015	1,139	1,298	1,370	1,570	1,663	1,763
Balance sheet (JPYmn)
	Cash and cash equivalents	12,622	14,583	15,429	13,952	32,385	21,200	28,464	29,749	32,254	32,893	25,543
Total current assets		36,543	43,037	53,373	60,096	84,838	82,327	83,121	80,132	87,414	89,246	81,651
Tangible fixed assets		30,796	32,459	42,123	48,819	51,997	68,513	75,662	69,806	66,082	64,785	64,025
Investments and other assets		9,429	10,219	10,694	10,848	10,650	10,733	9,837	11,833	12,628	13,277	14,107
Intangible assets		9,845	9,423	11,103	10,376	10,122	16,773	17,952	16,906	19,425	18,952	18,969
Total assets		86,615	95,140	117,295	130,141	157,609	178,347	186,573	178,677	185,551	186,262	178,753
	Short-term debt	8,398	14,096	18,902	11,590	13,363	13,801	15,620	16,404	9,588	28,105	13,514
Total current liabilities		36,757	44,702	55,666	53,474	68,985	66,305	70,310	69,100	70,107	87,720	78,931
	Long-term debt	33,879	34,184	43,133	54,832	51,958	71,680	69,069	62,906	63,442	44,226	42,658
Total fixed liabilities		35,141	35,735	45,779	59,031	56,151	75,595	74,756	68,504	68,370	48,673	46,944
Total liabilities		71,899	80,437	101,446	112,505	125,136	141,900	145,066	137,604	138,478	136,394	125,876
	Shareholders' equity	14,716	14,702	15,849	17,635	32,473	36,447	41,504	41,069	47,072	49,868	52,876
Total net assets		14,716	14,702	15,849	17,635	32,473	36,447	41,506	41,073	47,072	49,868	52,876
Total interest-bearing debt		42,277	48,280	62,035	66,422	65,321	85,481	84,689	79,310	73,030	72,331	56,172
Cash flow statement (JPYmn)
Cash flows from operating activities		7,127	2,885	6,243	5,831	19,327	-940	23,141	13,572	13,192	11,213	19,411
Cash flows from investing activities		-9,694	-6,422	-14,510	-8,437	-7,823	-28,444	-13,843	-1,770	-2,731	-7,767	-9,313
Cash flows from financing activities		7,920	5,496	8,782	1,422	7,031	18,205	-2,034	-10,516	-7,955	-2,806	-17,448
Financial ratios
ROA (RP-based)		6.2%	3.1%	3.9%	4.9%	6.9%	4.7%	5.6%	3.3%	4.1%	4.5%	3.7%
ROE		15.2%	1.3%	12.4%	16.6%	25.3%	13.5%	15.7%	9.2%	15.2%	7.3%	7.2%
	Equity ratio	17.0%	15.5%	13.5%	13.6%	20.6%	20.4%	22.2%	23.0%	25.4%	26.8%	29.6%
	Total asset turnover	163.2%	153.5%	155.7%	147.0%	152.4%	133.0%	132.2%	134.5%	147.4%	150.0%	164.0%
	Net margin	1.6%	0.1%	1.1%	1.5%	2.9%	2.1%	2.5%	1.5%	2.5%	1.3%	1.2%

Source: Shared Research based on company data.

By segment

By segment			FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22
(JPYmn)			Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.
Total sales			130,041	139,466	165,347	181,844	219,239	223,468	241,274	245,687	268,520	278,951	299,392
	YoY		16.0%	7.2%	18.6%	10.0%	20.6%	1.9%	8.0%	1.8%	9.3%	3.9%	7.3%
	Dispensing Pharmacy		123,549	131,052	145,957	157,999	190,874	189,327	205,192	208,622	231,001	244,072	265,624
		YoY	15.8%	6.1%	11.4%	8.3%	20.8%	-0.8%	8.4%	1.7%	10.7%	5.7%	8.8%
		% of total sales	91.6%	89.6%	83.8%	82.2%	82.1%	80.0%	80.4%	79.5%	80.5%	81.9%	83.7%
	Pharmaceutical Manufacturing and Sales		8,133	11,196	23,192	27,550	32,598	36,821	38,066	40,659	43,072	45,699	44,836
		YoY	7.3%	37.7%	107.1%	18.8%	18.3%	13.0%	3.4%	6.8%	5.9%	6.1%	-1.9%
		% of total sales	6.0%	7.7%	13.3%	14.3%	14.0%	15.6%	14.9%	15.5%	15.0%	15.3%	14.1%
	Medical Professional Staffing and Placement		3,236	3,991	5,046	6,554	8,934	10,500	11,970	13,083	12,721	8,393	6,991
		YoY	26.5%	23.3%	26.4%	29.9%	36.3%	17.5%	14.0%	9.3%	-2.8%	-34.0%	-16.7%
		% of total sales	2.4%	2.7%	2.9%	3.4%	3.8%	4.4%	4.7%	5.0%	4.4%	2.8%	2.2%
	Other		-4,877	-6,773	-8,849	-10,259	-13,166	-13,180	-13,955	-16,679	-18,275	-19,213	-18,058
Operating profit			5,464	3,245	4,744	6,647	10,489	8,519	10,587	6,733	7,593	8,106	6,589
	YoY		14.2%	-40.6%	46.2%	40.1%	57.8%	-18.8%	24.3%	-36.4%	12.8%	6.8%	-18.7%
	Operating profit margin		4.2%	2.3%	2.9%	3.7%	4.8%	3.8%	4.4%	2.7%	2.8%	2.9%	2.2%
	Dispensing Pharmacy		9,448	6,784	7,672	7,698	10,707	9,560	12,411	8,707	9,785	10,585	13,009
		YoY	20.6%	-28.2%	13.1%	0.3%	39.1%	-10.7%	29.8%	-29.8%	12.4%	8.2%	22.9%
		Operating profit margin	7.6%	5.2%	5.3%	4.9%	5.6%	5.0%	6.0%	4.2%	4.2%	4.3%	4.9%
		% of total OP	101.6%	90.9%	85.8%	70.9%	71.5%	73.6%	80.3%	72.1%	75.6%	77.6%	96.1%
	Pharmaceutical Manufacturing and Sales		-586	233	500	1,888	2,668	1,719	1,194	1,885	1,301	2,350	-53
		YoY	-	-	114.6%	277.6%	41.3%	-35.6%	-30.5%	57.9%	-31.0%	80.6%	-
		Operating profit margin	-7.2%	2.1%	2.2%	6.9%	8.2%	4.7%	3.1%	4.6%	3.0%	5.1%	-0.1%
		% of total OP	-6.3%	3.1%	5.6%	17.4%	17.8%	13.2%	7.7%	15.6%	10.1%	17.2%	-0.4%
	Medical Professional Staffing and Placement		437	450	770	1,266	1,599	1,710	1,842	1,478	1,851	712	576
		YoY	66.6%	3.0%	71.1%	64.4%	26.3%	6.9%	7.7%	-19.8%	25.2%	-61.5%	-19.1%
		Operating profit margin	13.5%	11.3%	15.3%	19.3%	17.9%	16.3%	15.4%	11.3%	14.6%	8.5%	8.2%
		% of total OP	4.7%	6.0%	8.6%	11.7%	10.7%	13.2%	11.9%	12.2%	14.3%	5.2%	4.3%
	Eliminations		189	-15	52	11	0	36	28	-87	20	-34	-36
	Company-wide expenses		-4,025	-4,206	-4,251	-4,217	-4,485	-4,506	-4,889	-5,250	-5,365	-5,507	-6,943

Source: Shared Research based on company data

Trends and outlook

Quarterly trends and results

Cumulative		FY03/20				FY03/21				FY03/22
(JPYmn)		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Sales		64,316	130,297	199,040	268,520	68,306	135,999	208,337	278,951	71,851	146,202	223,439	299,392
	YoY	8.4%	9.8%	8.5%	9.3%	6.2%	4.4%	4.7%	3.9%	5.2%	7.5%	7.2%	7.3%
Gross profit		11,147	22,439	34,351	46,372	10,962	23,272	36,679	49,374	12,471	25,194	39,724	52,422
	YoY	14.2%	15.5%	12.0%	10.5%	-1.7%	3.7%	6.8%	6.5%	13.8%	8.3%	8.3%	6.2%
	Gross profit margin	17.3%	17.2%	17.3%	17.3%	16.0%	17.1%	17.6%	17.7%	17.4%	17.2%	17.8%	17.5%
SG&A expenses		9,377	18,373	28,719	38,779	10,533	20,498	30,911	41,267	11,534	22,778	33,897	45,833
	YoY	1.3%	2.8%	9.3%	10.0%	12.3%	11.6%	7.6%	6.4%	9.5%	11.1%	9.7%	11.1%
	SG&A ratio	14.6%	14.1%	14.4%	14.4%	15.4%	15.1%	14.8%	14.8%	16.1%	15.6%	15.2%	15.3%
Operating profit		1,770	4,066	5,632	7,593	429	2,774	5,767	8,106	936	2,416	5,827	6,589
	YoY	253.3%	162.8%	28.4%	12.8%	-75.8%	-31.8%	2.4%	6.8%	118.2%	-12.9%	1.0%	-18.7%
	Operating profit margin	2.8%	3.1%	2.8%	2.8%	0.6%	2.0%	2.8%	2.9%	1.3%	1.7%	2.6%	2.2%
Recurring profit		1,710	4,001	5,449	7,405	337	2,665	5,773	8,409	993	2,528	6,058	6,767
	YoY	329.6%	216.3%	41.3%	21.9%	-80.3%	-33.4%	5.9%	13.6%	194.7%	-5.1%	4.9%	-19.5%
	Recurring profit margin	2.7%	3.1%	2.7%	2.8%	0.5%	2.0%	2.8%	3.0%	1.4%	1.7%	2.7%	2.3%
Net income		833	2,094	3,059	6,697	356	1,555	3,410	3,538	427	1,340	1,096	3,705
	YoY	1,982.5%	181.5%	29.1%	76.7%	-57.3%	-25.7%	11.5%	-47.2%	19.9%	-13.8%	-67.9%	4.7%
	Net income margin	1.3%	1.6%	1.5%	2.5%	0.5%	1.1%	1.6%	1.3%	0.6%	0.9%	0.5%	1.2%
Quarterly		FY03/20				FY03/21				FY03/22				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	% of Est.	FY Est.
Sales		64,316	65,981	68,743	69,480	68,306	67,693	72,338	70,614	71,851	74,351	77,237	75,953	101.6%	294,600
	YoY	8.4%	11.1%	6.2%	11.6%	6.2%	2.6%	5.2%	1.6%	5.2%	9.8%	6.8%	7.6%		5.6%
Gross profit		11,147	11,292	11,912	12,021	10,962	12,310	13,407	12,695	12,471	12,723	14,530	12,698	101.2%	51,800
	YoY	14.2%	16.8%	5.9%	6.4%	-1.7%	9.0%	12.6%	5.6%	13.8%	3.4%	8.4%	0.0%		4.9%
	Gross profit margin	17.3%	17.1%	17.3%	17.3%	16.0%	18.2%	18.5%	18.0%	17.4%	17.1%	18.8%	16.7%		17.6%
SG&A expenses		9,377	8,996	10,346	10,060	10,533	9,965	10,413	10,356	11,534	11,244	11,119	11,936	102.3%	44,800
	YoY	1.3%	4.3%	23.1%	12.3%	12.3%	10.8%	0.6%	2.9%	9.5%	12.8%	6.8%	15.3%		8.6%
	SG&A ratio	14.6%	13.6%	15.1%	14.5%	15.4%	14.7%	14.4%	14.7%	16.1%	15.1%	14.4%	15.7%		15.2%
Operating profit		1,770	2,296	1,566	1,961	429	2,345	2,993	2,339	936	1,480	3,411	762	94.1%	7,000
	YoY	253.3%	119.5%	-44.8%	-16.5%	-75.8%	2.1%	91.1%	19.3%	118.2%	-36.9%	14.0%	-67.4%		-13.6%
	Operating profit margin	2.8%	3.5%	2.3%	2.8%	0.6%	3.5%	4.1%	3.3%	1.3%	2.0%	4.4%	1.0%		2.4%
Recurring profit		1,710	2,291	1,448	1,956	337	2,328	3,108	2,636	993	1,535	3,530	709	96.7%	7,000
	YoY	329.6%	164.2%	-44.1%	-12.0%	-80.3%	1.6%	114.6%	34.8%	194.7%	-34.1%	13.6%	-73.1%		-16.8%
	Recurring profit margin	2.7%	3.5%	2.1%	2.8%	0.5%	3.4%	4.3%	3.7%	1.4%	2.1%	4.6%	0.9%		2.4%
Net income		833	1,261	965	3,638	356	1,199	1,855	128	427	913	-244	2,609	92.6%	4,000
	YoY	1,982.5%	79.1%	-40.6%	156.0%	-57.3%	-4.9%	92.2%	-96.5%	19.9%	-23.9%	-	1,938.3%		13.1%
	Net income margin	1.3%	1.9%	1.4%	5.2%	0.5%	1.8%	2.6%	0.2%	0.6%	1.2%	-	3.4%		1.4%

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

Segment performance

By segment (cumulative)			FY03/20				FY03/21				FY03/22
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Sales			64,316	130,297	199,040	268,520	68,306	135,999	208,337	278,951	71,851	146,202	223,439	299,392
	YoY		8.4%	9.8%	8.5%	9.3%	6.2%	4.4%	4.7%	3.9%	5.2%	7.5%	7.2%	7.3%
	Dispensing Pharmacy		54,814	111,763	170,695	231,001	58,200	118,236	181,125	244,072	62,912	128,749	197,389	265,624
		YoY	8.7%	10.6%	9.6%	10.7%	6.2%	5.8%	6.1%	5.7%	8.1%	8.9%	9.0%	8.8%
		% of total	85.2%	85.8%	85.8%	86.0%	85.2%	86.9%	86.9%	87.5%	87.6%	88.1%	88.3%	88.7%
	Pharmaceutical Manufacturing and Sales		10,881	21,040	32,564	43,072	12,073	22,812	35,235	45,699	12,158	23,669	35,274	44,836
		YoY	11.6%	8.3%	6.2%	5.9%	11.0%	8.4%	8.2%	6.1%	0.7%	3.8%	0.1%	-1.9%
		% of total	16.9%	16.1%	16.4%	16.0%	17.7%	16.8%	16.9%	16.4%	16.9%	16.2%	15.8%	15.0%
	Medical Professional Staffing and Placement		3,597	6,775	9,737	12,721	2,943	5,025	6,644	8,393	1,901	3,648	5,207	6,991
		YoY	11.8%	6.7%	0.3%	-2.8%	-18.2%	-25.8%	-31.8%	-34.0%	-35.4%	-27.4%	-21.6%	-16.7%
		% of total	5.6%	5.2%	4.9%	4.7%	4.3%	3.7%	3.2%	3.0%	2.6%	2.5%	2.3%	2.3%
	Adjustments		-4,976	-9,281	-13,957	-18,275	-4,911	-10,073	-14,666	-19,213	-5,120	-9,864	-14,433	-18,058
Operating profit			1,770	4,066	5,632	7,593	429	2,774	5,767	8,106	936	2,416	5,827	6,589
	YoY		253.3%	162.8%	28.4%	12.8%	-75.8%	-31.8%	2.4%	6.8%	118.2%	-12.9%	1.0%	-18.7%
	Operating profit margin		2.8%	3.1%	2.8%	2.8%	0.6%	2.0%	2.8%	2.9%	1.3%	1.7%	2.6%	2.2%
	Dispensing Pharmacy		1,843	4,408	6,581	9,785	464	3,624	6,991	10,585	1,888	5,041	9,108	13,009
		YoY	31.3%	37.9%	9.0%	12.4%	-74.8%	-17.8%	6.2%	8.2%	306.9%	39.1%	30.3%	22.9%
		Operating profit margin	3.4%	3.9%	3.9%	4.2%	0.8%	3.1%	3.9%	4.3%	3.0%	3.9%	4.6%	4.9%
		% of total	56.0%	66.3%	68.9%	75.6%	25.7%	66.1%	71.0%	77.6%	72.1%	88.8%	84.1%	96.1%
	Pharmaceutical Manufacturing and Sales		798	1,155	1,534	1,301	833	1,163	2,205	2,350	451	195	1,294	-53
		YoY	1,252.5%	235.8%	29.5%	-31.0%	4.4%	0.7%	43.7%	80.6%	-45.9%	-83.2%	-41.3%	-
		Operating profit margin	7.3%	5.5%	4.7%	3.0%	6.9%	5.1%	6.3%	5.1%	3.7%	0.8%	3.7%	-0.1%
		% of total	24.2%	17.4%	16.1%	10.1%	46.1%	21.2%	22.4%	17.2%	17.2%	3.4%	12.0%	-0.4%
	Medical Professional Staffing and Placement		651	1,082	1,442	1,851	509	696	653	712	278	440	423	576
		YoY	62.3%	71.7%	36.6%	25.2%	-21.8%	-35.7%	-54.7%	-61.5%	-45.4%	-36.8%	-35.2%	-19.1%
		Operating profit margin	18.1%	16.0%	14.8%	14.6%	17.3%	13.9%	9.8%	8.5%	14.6%	12.1%	8.1%	8.2%
		% of total	19.8%	16.3%	15.1%	14.3%	28.2%	12.7%	6.6%	5.2%	10.6%	7.8%	3.9%	4.3%
	Adjustments		-1,523	-2,579	-3,927	-5,345	-1,377	-2,709	-4,082	-5,542	-1,681	-3,260	-5,000	-6,943
By segment (quarterly)			FY03/20				FY03/21				FY03/22
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales			64,316	65,981	68,743	69,480	68,306	67,693	72,338	70,614	71,851	74,351	77,237	75,953
	YoY		8.4%	11.1%	6.2%	11.6%	6.2%	2.6%	5.2%	1.6%	5.2%	9.8%	6.8%	7.6%
	Dispensing Pharmacy		54,814	56,949	58,932	60,306	58,200	60,036	62,889	62,947	62,912	65,837	68,640	68,235
		YoY	8.7%	12.5%	7.8%	14.0%	6.2%	5.4%	6.7%	4.4%	8.1%	9.7%	9.1%	8.4%
		% of total	85.2%	86.3%	85.7%	86.8%	85.2%	88.7%	86.9%	89.1%	87.6%	88.5%	88.9%	89.8%
	Pharmaceutical Manufacturing and Sales		10,881	10,159	11,524	10,508	12,073	10,739	12,423	10,464	12,158	11,511	11,605	9,562
		YoY	11.6%	5.0%	2.6%	5.1%	11.0%	5.7%	7.8%	-0.4%	0.7%	7.2%	-6.6%	-8.6%
		% of total	16.9%	15.4%	16.8%	15.1%	17.7%	15.9%	17.2%	14.8%	16.9%	15.5%	15.0%	12.6%
	Medical Professional Staffing and Placement		3,597	3,178	2,962	2,984	2,943	2,082	1,619	1,749	1,901	1,747	1,559	1,784
		YoY	11.8%	1.4%	-11.7%	-11.6%	-18.2%	-34.5%	-45.3%	-41.4%	-35.4%	-16.1%	-3.7%	2.0%
		% of total	5.6%	4.8%	4.3%	4.3%	4.3%	3.1%	2.2%	2.5%	2.6%	2.3%	2.0%	2.3%
	Adjustments		-4,976	-4,305	-4,676	-4,318	-4,911	-5,162	-4,593	-4,547	-5,120	-4,744	-4,569	-3,625
Operating profit			1,770	2,296	1,566	1,961	429	2,345	2,993	2,339	936	1,480	3,411	762
	YoY		253.3%	119.5%	-44.8%	-16.5%	-75.8%	2.1%	91.1%	19.3%	118.2%	-36.9%	14.0%	-67.4%
	Operating profit margin		2.8%	3.5%	2.3%	2.8%	0.6%	3.5%	4.1%	3.3%	1.3%	2.0%	4.4%	1.0%
	Dispensing Pharmacy		1,843	2,565	2,173	3,204	464	3,160	3,367	3,594	1,888	3,153	4,067	3,901
		YoY	31.3%	43.1%	-23.4%	19.9%	-74.8%	23.2%	54.9%	12.2%	306.9%	-0.2%	20.8%	8.5%
		Operating profit margin	3.4%	4.5%	3.7%	5.3%	0.8%	5.3%	5.4%	5.7%	3.0%	4.8%	5.9%	5.7%
		% of total	56.0%	38.6%	22.7%	24.8%	25.7%	57.6%	34.2%	26.3%	72.1%	55.5%	37.6%	28.8%
	Pharmaceutical Manufacturing and Sales		798	357	379	-233	833	330	1,042	145	451	-256	1,099	-1,347
		YoY	-	25.3%	-54.9%	-	4.4%	-7.6%	174.9%	-	-45.9%	-	5.5%	-
		Operating profit margin	7.3%	3.5%	3.3%	-2.2%	6.9%	3.1%	8.4%	1.4%	3.7%	-2.2%	9.5%	-14.1%
		% of total	24.2%	5.4%	4.0%	-1.8%	46.1%	6.0%	10.6%	1.1%	17.2%	-4.5%	10.2%	-10.0%
	Medical Professional Staffing and Placement		651	431	360	409	509	187	-43	59	278	162	-17	153
		YoY	62.3%	88.2%	-15.5%	-3.1%	-21.8%	-56.6%	-	-85.6%	-45.4%	-13.4%	-	159.3%
		Operating profit margin	18.1%	13.6%	12.2%	13.7%	17.3%	9.0%	-2.7%	3.4%	14.6%	9.3%	-1.1%	8.6%
		% of total	19.8%	6.5%	3.8%	3.2%	28.2%	3.4%	-0.4%	0.4%	10.6%	2.9%	-0.2%	1.1%
	Adjustments		-1,523	-1,056	-1,348	-1,418	-1,377	-1,332	-1,373	-1,460	-1,681	-1,579	-1,740	-1,943

Source: Shared Research based on company data

Dispensing Pharmacy business

		FY03/20				FY03/21				FY03/22
Cumulative		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3
Sales (JPYmn)		54,814	111,763	170,695	231,001	58,200	118,236	181,125	244,072	62,912	128,749	197,389
	YoY	8.7%	10.6%	9.6%	10.7%	6.2%	5.8%	6.1%	5.7%	8.1%	8.9%	9.0%
Sales per store (JPYmn)		91	184	275	370	88	179	274	369	93	190	290
	YoY	7.1%	7.6%	4.6%	5.1%	-3.3%	-2.7%	-0.4%	-0.3%	5.7%	6.1%	5.8%
No. of prescriptions ('000)		3,576	7,219	10,980	14,704	3,278	6,858	10,579	14,223	3,755	7,567	11,512
	YoY	2.7%	4.2%	3.5%	3.6%	-8.3%	-5.0%	-3.7%	-3.3%	14.6%	10.3%	8.8%
Price per prescription (JPY)		15,110	15,239	15,199	15,479	17,473	16,965	16,833	16,869	16,474	16,709	16,851
	YoY	6.2%	6.1%	5.3%	7.1%	15.6%	11.3%	10.7%	9.0%	-5.7%	-1.5%	0.1%
		FY03/20				FY03/21				FY03/22
	Cumulative	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3
Sales (JPYmn)		54,814	56,949	58,932	60,306	58,200	60,036	62,889	62,947	62,912	65,837	68,640
	YoY	8.7%	12.5%	7.8%	14.0%	6.2%	5.4%	6.7%	4.4%	8.1%	9.7%	9.1%
Sales per store (JPYmn)		91	93	91	95	88	91	95	95	93	97	100
	YoY	7.1%	8.1%	-1.1%	6.7%	-3.3%	-2.2%	4.4%	0.0%	5.7%	6.6%	5.3%
No. of prescriptions ('000)		3,576	3,643	3,761	3,724	3,278	3,580	3,721	3,644	3,755	3,812	3,945
	YoY	2.7%	5.8%	2.0%	4.1%	-8.3%	-1.7%	-1.1%	-2.1%	14.6%	6.5%	6.0%

Source: Shared Research based on company data

New pharmacy openings

		FY03/20				FY03/21				FY03/22
Cumulative		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3
Openings		7	20	53	65	9	19	25	29	11	20	30
	Nihon Chouzai's own pharmacies	5	16	26	35	4	14	19	22	7	15	25
	Pharmacies through M&A	2	4	27	30	5	5	6	7	4	5	5
	[By store type]
	Hospital-front	3	13	31	38	4	9	12	13	8	15	18
	Hybrid	4	18	22	27	5	10	13	16	3	5	12
Closures		5	7	10	13	1	4	5	9	2	5	10
Store count (quarter-end)		600	611	641	650	658	665	670	670	679	685	690

		FY03/20				FY03/21				FY03/22
Quarterly		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3
Openings		7	13	33	12	9	10	6	4	11	9	10
	Nihon Chouzai's own pharmacies	5	11	10	9	4	10	5	3	7	8	10
	Pharmacies through M&A	2	2	23	3	5	-	1	1	4	1	-
	[By store type]
	Hospital-front	3	10	18	7	4	5	3	1	8	7	3
	Hybrid	4	14	4	5	5	5	3	3	3	2	7
Closures		5	2	3	3	1	3	1	4	2	3	5
Store count (quarter-end)		600	611	641	650	658	665	670	670	679	685	690

Source: Shared Research based on company data

Pharmaceutical Manufacturing and Sales business: Sales and number of new NHI listings*

		FY03/20				FY03/21				FY03/22
	Quarterly (JPYmn)	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3
Sales (JPYmn)		10,881	10,159	11,524	10,508	12,073	10,739	12,423	10,464	12,158	11,511	11,605
	No. of new NHI listings	8	-	14	-	16	-	5	-	12	-	3

Source: Shared Research based on company data

Full-year FY03/22 results

Overview

Sales: JPY299.4bn (+7.3% YoY, 101.6% of full-year company forecast)
Operating profit: JPY6.6bn (-18.7% YoY, 94.1%)
Recurring profit: JPY6.8bn (-19.5% YoY, 96.7%)
Net income attributable to owners of the parent: JPY3.7bn (+4.7% YoY, 92.6%)

Key takeaways

Sales were JPY299.4bn, up 7.3% YoY. Factors contributing to sales growth included higher prescription volume at existing pharmacies and the contribution of new pharmacies in the Dispensing Pharmacy business (segment sales up 8.8% YoY). In the Pharmaceutical Manufacturing and Sales business (-1.9% YoY), segment sales declined, mainly because sales prices for existing products fell owing to the April 2021 NHI drug price revisions. Sales in the Medical Professional Staffing and Placement business were down (-16.7% YoY), due largely to a pandemic-driven decline in temporary staffing demand.

Operating profit fell 18.7% YoY and the OPM was down 0.7pp YoY from 2.9% to 2.2%.

In Q3 the company booked a JPY3.9bn extraordinary loss covering damage from a fire at a consolidated subsidiary's contract logistics center. However, all products damaged by the fire were covered by insurance, and the company recorded JPY3.9bn insurance claim income in Q4 as an extraordinary gain.

Dispensing Pharmacy business

Sales: JPY265.6bn (+8.8% YoY, 101.6% of full-year forecast)
Operating profit: JPY13.0bn (+22.9% YoY, 100.8%)
OPM: 4.9% (4.3% in FY03/21)

Sales increased 8.8% YoY to JPY265.6bn while operating profit was up 22.9% to JPY13.0bn. Both sales and profit were up YoY, despite lingering effects of COVID-19, reflecting the higher prescription volume and drug fee income as well as contributions from pharmacies opened in FY03/21.

The number of pharmacies at end-March 2022 was 697 (including one merchandise store; up 27 from 670 at end-FY03/21) as a result of 40 openings and 13 closures during the year.

Generic drugs represented 89.3% of the company’s total pharmaceutical usage in volume terms as of end-March 2022. The share of pharmacies providing at-home medical care services (pharmacies that have carried out 12 or more at-home visits annually) came to 93.1%.

Pharmaceutical Manufacturing and Sales business

Sales: JPY44.8bn (-1.9% YoY, 99.0% of full-year forecast)
Operating loss: JPY53mn (operating profit of JPY2.4bn in FY03/21; full-year company forecast: JPY400mn)
Operating loss ratio: 0.1% (OPM of 5.1% in FY03/21)

Sales declined 1.9% YoY to JPY44.8bn while the company recorded an operating loss of JPY53mn versus a JPY2.4bn profit in FY03/21. Although sales of drugs newly listed in 2019 and after have been brisk, sales were down YoY because of pricing erosion of existing drugs due to the April 2021 NHI price revision. Operating profit was down YoY, despite cost-cutting measures, marketing policies focused on profitability, and continued expansion of in-house drugs (including newly NHI listed items), because the company booked a one-time loss from the disposal of nonperforming assets associated with quality control issues at Choseido Pharmaceutical. The company is making steady progress with the disclosed business improvement plan for Choseido Pharmaceutical, and taking steps toward resuming sales of products that suffered shipment delays.

With the launch of new NHI-listed products, the company had 642 drugs on the market (including two OTC drugs) at the end of FY03/22.

Medical Professional Staffing and Placement business

Sales: JPY7.0bn (-16.7% YoY, 102.8% of full-year forecast)
Operating profit: JPY576mn (-19.1% YoY, 144.0%)
OPM: 8.2% (8.5% in FY03/21)

Sales declined 21.6% YoY to JPY7.0bn while operating profit fell 19.1% YoY to JPY576mn. The fall in sales was mainly attributable to the reduced demand for temporary pharmacist staffing amid the pandemic. Despite continued demand for physician placements, including to help carry out the COVID-19 vaccination effort, operating profit was down YoY due to reduced temporary pharmacist staffing and placement demand.

FY03/23 full-year company forecast

		FY03/22			FY03/23			YoY
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Est.	2H Est.	FY Est.	1H Est.	2H Est.	FY Est.
Sales		146,202	153,190	299,392	156,000	165,400	321,400	6.7%	8.0%	7.4%
Cost of sales		121,007	125,962	246,969
Gross profit		25,194	27,228	52,422
	Gross profit margin	17.2%	17.8%	17.5%
SG&A expenses		22,778	23,055	45,833
	SG&A ratio	15.6%	15.0%	15.3%
Operating profit		2,416	4,173	6,589	2,600	5,900	8,500	7.6%	41.4%	29.0%
	Operating profit margin	1.7%	2.7%	2.2%	1.7%	3.6%	2.6%
Recurring profit		2,528	4,239	6,767	2,500	5,900	8,400	-1.1%	39.2%	24.1%
	Recurring profit margin	1.7%	2.8%	2.3%	1.6%	3.6%	2.6%
Net income		1,340	2,365	3,705	1,000	3,400	4,400	-25.4%	43.8%	18.8%
	Net margin	0.9%	1.5%	1.2%	0.6%	2.1%	1.4%

Note: 2H sales estimate for FY03/22 is the difference between full-year and 1H estimates. Cost of sales, gross profit, and SG&A expenses estimates for 1H and 2H are the sum of the company's quarterly estimates. The company discloses figures rounded down to the nearest 100 million yen, so the sum of the breakdown figures does not equal the overall figure.
Source: Shared Research based on company data

Sales: JPY321.4bn (+7.4% YoY)
Operating profit: JPY8.5bn (+29.0% YoY)
Recurring profit: JPY8.4bn (+24.1% YoY)
Net income: JPY4.4bn (+1.4% YoY)
EPS: JPY146.73 (JPY123.56)

For FY03/22, the company forecasts sales of JPY321.4bn (+7.4% YoY), operating profit of JPY8.5bn (+29.0% YoY), recurring profit of JPY8.4bn (+24.1% YoY) , and net income attributable to owners of the parent of JPY4.4bn (+1.4% YoY).

In the mainstay Dispensing Pharmacy business, Nihon Chouzai has taken the lead in the industry to obtain certification of many of its pharmacies as "specialized medical institutions cooperation pharmacies" and "regional cooperation pharmacies" in pursuit of the government's vision for pharmacies. The company is focusing on developing convenient pharmacy premises and training pharmacists with highly specialized knowledge to deliver even better quality healthcare services to patients. It is also committed to digital transformation (DX) of healthcare and is expanding delivery of quality healthcare that is convenient for patients and adds value through greater use of online drug guidance and the electronic medication notebook.

In the Pharmaceutical Manufacturing and Sales business, the company is making quality control and stable supply its top management priorities, focusing its efforts on stable supply of quality generics. In addition leveraging group synergies, the company will also invest in R&D to expand its catalog of in-house manufactured product offerings, including newly listed drugs, while aiming to improve overall profitability.

In the Medical Professional Staffing and Placement business, the company will work to further fortify its placement business for pharmacists, physicians, and other medical professionals, as well as operate nationwide industrial physician services to further expand its physician placement business.

The FY03/23 company forecast factors in the full-year ongoing impact of COVID-19.

Long-term vision

In April 2018, the company announced a business plan setting out its medium- to long-term vision for growth leading up to FY03/30. The plan establishes a numerical target of over JPY1tn in sales in FY03/30. The qualitative goal is to grow the Dispensing Pharmacy business by implementing a strategy of opening pharmacies that both conform to public policy calling for pharmacies to bolster their functionality and are positioned to weather the current move toward pharmacy closures and consolidations amid mounting competition. Building on a solid record of growth in the Dispensing Pharmacy business, the company aims to achieve sustainable growth as an integrated healthcare company by expanding its Pharmaceutical Manufacturing and Sales and Medical Professional Staffing and Placement businesses.

Numerical targets

Nihon Chouzai envisions the company’s size and scale in FY03/30 as follows:

Group sales: Over JPY1tn (before intragroup eliminations, simple sum of business segments)

Share of dispensing pharmacy market sales: 10%

Share of generic drug market sales: 15%

Earnings portfolio (breakdown of operating profit): Dispensing Pharmacy business 50%; combined Pharmaceutical Manufacturing and Sales business and Medical Professional Staffing and Placement business 50%

Growth strategy

Dispensing Pharmacy business

Nihon Chouzai’s growth strategy involves continued investment in personnel, enhancement of pharmacy functions and quality of healthcare services, and expansion of the pharmacy network emphasizing prime location and strong per-pharmacy sales potential.

Invest in personnel: Expand the hiring of highly specialized pharmacists capable of dealing with increasingly sophisticated healthcare, and cultivate the workforce through distinctive in-house education and training

Enhance pharmacy functions and raise the quality of healthcare services: Elevate all pharmacies to the level of “regional cooperation pharmacies” (pharmacies acting under a government initiative beginning in August 2021 to collaborate with community-based medical institutions to provide integrated healthcare services, including at-home care) and “specialized medical institution cooperation pharmacies” (pharmacies capable of providing highly-specialized healthcare utilizing advanced pharmaceutical management)

Digital transformation initiatives: Internally develop systems built on the company’s dispensing platform, including its electronic medication notebook Okusuri Techo Plus, online medication guidance, and the Nihon Chouzai online store, as well as moving forward with the mechanization of prescription-filling tasks

Raise the proportion of hybrid pharmacies: target a 50/50 ratio of hospital-front and hybrid pharmacies

Pharmaceutical Manufacturing and Sales business

The growth strategy in this segment involves promoting the shift to in-house manufacturing of generic drugs, business expansion through contract manufacturing and out-licensing (sales of Nihon Chouzai licensed products by other companies), and containing fixed and variable costs to boost profitability.

Shift to in-house development and manufacturing of generic drugs: Increase the proportion of products manufactured internally (currently about 40%); target an OPM of 10%

Business expansion through contract manufacturing and out-licensing: Accept more contract manufacturing projects at Tsukuba Plant No. 2

Control of fixed and variable costs to boost profitability: Contain fixed costs by streamlining manufacturing processes and contain variable costs by reducing waste loss

Medical Professional Staffing and Placement business

The growth strategy in this segment involves expanding the placement business for pharmacists, physicians, nurses, and other healthcare professionals. In particular, the company will work to capture increasing demand for family pharmacists, positions that are difficult to fill by means of temporary staffing, by working to step up the placement business.

Business

Overview

Overview of the company

Nihon Chouzai is an integrated healthcare company whose core business is the operation of dispensing pharmacies. The company also manufactures and sells generic drugs and engages in the temporary staffing and placement of medical professionals. In FY03/21, the company recorded sales of JPY279.0bn (+3.9% YoY) and operating profit of JPY8.1bn (+6.8% YoY) with an OPM of 2.9% (2.8% in FY03/20). The company’s three business segments are as follows:

Dispensing Pharmacy business (FY03/21 sales of JPY244.1bn, 81.9% of total sales, 77.6% of operating profit, OPM of 4.3%): As of end-March, 2021, the company had 670 pharmacies in all 47 prefectures in Japan. This segment is the company’s original line of business, started in 1980.

Pharmaceutical Manufacturing and Sales business (FY03/21 sales of JPY45.7bn, 15.3% of total sales, 17.2% of operating profit, OPM of 5.1%): This segment mainly engages in the manufacturing and marketing of generic drugs.

Medical Professional Staffing and Placement business (FY03/21 sales of JPY8.4bn, 2.8% of total sales, 5.2% of operating profit, OPM of 8.5%): This segment involves the temporary staffing and placement of pharmacists, as well as the placement of physicians and other medical professionals, for medical institutions and dispensing pharmacies.

The Dispensing Pharmacy business is Nihon Chouzai’s core business. Its pharmacies generate annual sales of approximately JPY369mn per pharmacy, the highest level in the industry (annual per-pharmacy sales for Ain Holdings Inc. [TSE1: 9627] are JPY244mn and for Qol Holdings Co., Ltd. [TSE1: 3034] JPY184mn). “Hospital-front pharmacies” (located near or inside the premises of major hospitals) account for more than 67% of the company’s pharmacy network. Highly specialized pharmacists are allocated to each pharmacy to handle complex prescriptions. Due to their proximity to large hospitals, many of these pharmacies dispense costly medications such as anticancer drugs, which leads to relatively higher sales per pharmacy. Per-pharmacy sales of the company’s “hybrid pharmacies” (see below) are also higher than the national dispensing pharmacy average of around JPY128mn (Shared Research estimate based on Ministry of Health, Labour and Welfare [MHLW] data).

In populous suburban areas, the company is developing a network of what it calls “hybrid pharmacies” that fill prescriptions from multiple medical facilities across a wide geographical area (i.e., these pharmacies are not dependent on specific medical institutions). Aside from straightforward dispensing services, hybrid pharmacies also collaborate with local medical institutions to provide patients with convenient healthcare such as at-home care and pediatric care, as well as health promotion services for the community. By assigning highly specialized pharmacists to its hybrid pharmacies, the company aims to win the confidence of local medical institutions and make further inroads into the communities it serves. The company’s growth strategy looks to expand the pharmacy network in this way while maintaining a high level of sales per pharmacy.

Comparison with major competitors

Dispensing pharmacy		Dispensing sales (JPYmn)	Operating profit margin	No. of pharmacies	Sales per pharmacy (JPYmn)
Nihon Chouzai Co., Ltd. (Dispensing Pharmacy)	TSE1: 3341	244,072	4.3%	670	369
Ain Holdings Inc.	TSE1: 9627	263,095	7.3%	1,065	244
Qol Holdings Co., Ltd.	TSE1: 3034	148,778	5.4%	811	184
Medical System Network Co., Ltd.	TSE1: 4350	99,214	5.7%	416	238
Drugstore chain with dispensing pharmacy
Welcia Holdings Co., Ltd.	TSE1: 3141	174,169	-	1,638	128
Sugi Holdings Co., Ltd.	TSE1: 7649	117,597	-	1,267	93
Generic pharmaceutical manufacturing		Sales	Operating profit margin	No. of products (total)	No. of products manufactured in-house
Nihon Chouzai Co., Ltd. (Pharmaceutical Manufacturing and Sales)	TSE1: 3341	45,699	5.1%	677	262
Nichi-Iko Pharmaceutical Co., Ltd.	TSE1: 4541	188,218	0.1%	1,226
Sawai Pharmaceutical Co., Ltd. (Japan)	TSE1: 4555	153,584	17.1%	754
Towa Pharmaceutical Co., Ltd.	TSE1: 4553	118,685	16.4%	770

Source: Shared research based on company data

Dispensing Pharmacy business (FY03/21: 81.9% of sales, 77.6% of operating profit)

Business model

Types of dispensing pharmacies

A dispensing pharmacy is a pharmacy that dispenses medications based on physicians’ prescriptions. Dispensing pharmacies also offer medication guidance to patients and support various healthcare services such as at-home medical care.

The company mainly operates two types of dispensing pharmacies: “hospital-front pharmacies” and “hybrid pharmacies.”

Hospital-front pharmacies

Hospital-front pharmacies are located near or inside the premises of major hospitals, such as university hospitals and regional public hospitals. As of end-March 2021, such pharmacies accounted for 67% of the company’s pharmacy network. Most patients who visit hospital-front pharmacies are undergoing medical treatment at a single hospital, and most prescriptions handled by the pharmacy (95% in some cases) are issued by the hospital.

Hospital-front pharmacy is a format that has taken off in Japan since the latter half of the 1980s. Until then, major hospitals had their own medications on hand and filled prescriptions for patients. As hospitals began outsourcing pharmacy functions at the urging of the government, which sought the separation of drug prescribing and dispensing services*, many outside companies began to open pharmacies near hospital premises.

*The separation of drug prescribing and dispensing services means that doctors and pharmacies assume responsibility for their respective specialties, rather than the doctors performing everything from issuing prescriptions to dispensing drugs. The goal is to ensure patient safety and prevent overprescribing and overdoses. To encourage the separation of services, the former Ministry of Health and Welfare increased the prescription fee (which was included in the medical treatment fee and counted as income for doctors) from six points (JPY60) to 10 points (JPY100) in its February 1974 medical fee revision, and again to 50 points (JPY500) the following October. The new fee system encouraged doctors to issue prescriptions and utilize dispensing pharmacies outside hospitals.

Up until mid-2010s, dispensing pharmacies and medical facilities had to be located on separate properties according to the MHLW’s regulations on the independence of pharmacies and medical institutions. However, the MHLW relaxed regulations in October 2016 to allow pharmacy openings on the premises of medical institutions.

Compared to neighborhood pharmacies, hospital-front pharmacies tend to handle drugs for serious illnesses, such as cancer, which also carry a relatively high risk of side effects. Because such drugs are costly, the price per prescription at these pharmacies tends to be higher than the company-wide average (JPY15,479).

Hybrid pharmacies

Rather than being near or on hospital premises, hybrid pharmacies are located in high-traffic areas of cities (e.g., near train stations, within shopping districts). The assumption is that patients from a wide range of medical facilities will make use of such pharmacies to fill their prescriptions, and the prescriptions handled tend not to be weighted toward a single hospital. On the other hand, hybrid pharmacies must handle prescriptions from a customer base that varies according to location (for example, station-front pharmacies will serve commuters) or the demographics of the surrounding residential area (for example, areas with a high proportion of elderly people).

“Hybrid pharmacy” is Nihon Chouzai’s own term, referring to a combination of the company’s Mentaio-type pharmacies and its medical center-type pharmacies.

Mentaio-type pharmacies (literally, “serving a wide catchment area”): Unlike the one-on-one pharmacies built to service a single medical practitioner, which was the company’s prototypical dispensing pharmacy, Mentaio-type pharmacies accept prescriptions from multiple medical facilities in the surrounding community. The pharmacy sees its business field not as a single point (patients from a specific clinic) but as an area.

Medical center pharmacies: Pharmacies that fill prescriptions issued by multiple clinics gathered in a central “medical mall” location.

In building up its hybrid pharmacy network, the company is focusing on creating a healthcare system that can adequately respond to the healthcare and pharmaceutical needs of the community (see Pharmacy network strategy). Through the hybrid pharmacy, the company aims to make available the pharmaceutical supplies and pharmacists needed to fill sophisticated prescriptions just as well as hospital-front pharmacies, even in suburban areas.

Dispensing Pharmacy business sales

Sales in the Dispensing Pharmacy business derive from the number of prescriptions multiplied by price per prescription. The company dispensed 14.2mn prescriptions in FY03/21 (-3.3% YoY), with an average price per prescription of JPY16,869 (+9.0% YoY).

The company filled fewer prescriptions than its chief competitors, e.g., Ain Holdings at 20.9mn (FY04/21) and Welcia Holdings (TSE1: 3141) at 16.1mn (FY02/21). On the other hand, in terms of price per prescription (JPY16,869) and per-pharmacy sales (JPY369mn), the company outstrips all major dispensing pharmacy chains and major drug stores in Japan. For comparison, Ain Holdings’ price per prescription in FY04/21 was JPY12,552 and its per-pharmacy sales were JPY244mn; the figures for Welcia Holdings (FY02/21) were JPY10,816 and JPY128mn, respectively.

Major dispensing pharmacy chains: price per prescription and other key data

		No. of prescription	Price per prescription	No. of pharmacies		Sales per pharmacy	No. of prescription
		('000)	(JPY)	FY-end	% of total	(JPYmn)	('000/Pharmacy)
Nihon Chouzai Co., Ltd. (Dispensing Pharmacy)	TSE1: 3341	14,223	16,869	670	1.1%	369	21.6
Ain Holdings Inc.	TSE1: 9627	20,960	12,552	1,065	1.8%	244	19.5
Qol Holdings Co., Ltd.	TSE1: 3034	13,369	10,234	811	1.3%	184	16.5
Medical System Network Co., Ltd.	TSE1: 4350	8,289	10,655	416	0.7%	238	19.9
Welcia Holdings Co., Ltd.	TSE1: 3141	16,102	10,816	1,638	2.7%	128	10.5
Sugi Holdings Co., Ltd.	TSE1: 7649	10,101	11,642	1,267	2.1%	93	8.3
Average for Japan (FY2019)		838,690	9,184	60,171	100.0%	128	13.9

Note: Data is based on each company’s most recent full-year financial results (Ain Holdings: FY04/21, Welcia Holdings: FY02/21, Sugi Holdings: FY02/21, Others: FY03/21).
Note: Price per prescription and sales per pharmacy for Ain Holdings and Medical System Network are Shared Research estimates.
Note: Sales per pharmacy of Qol Holdings, Welcia Holdings, and Sugi Holdings are Shared Research estimates.
Note: Sales per pharmacy for the two drugstore chains (Welcia Holdings and Sugi Holdings) are calculated by dividing dispensing sales by the number of stores.
Note: National average per-pharmacy sales are calculated by dividing dispensing drug costs by the number of pharmacies.
Source: Shared Research based on respective company data and MHLW data.

Reasons for the company’s higher price per prescription

Nihon Chouzai’s higher average price per prescription (JPY16,869 versus JPY10,234–12,552 among its major competitors) is attributable to the high proportion of hospital-front pharmacies, which tend to dispense costly medications such as anticancer drugs, in its pharmacy network.

As of end-FY03/21, 67% of the company’s dispensing pharmacies were hospital-front pharmacies. The remaining just over 30% were hybrid pharmacies. The proportion of hospital-front pharmacies at the company was higher than at its leading competitors (57.6% for Ain Holdings and 52.5% for Qol Holdings). Most of the company’s hospital-front pharmacies are located near or inside university hospitals and large regional hospitals—it has a presence at 47.1% of the nation’s university hospitals. Shared Research thinks this sets the company apart from its competitors, which tend to serve many clinics and small and medium-sized hospitals, in terms of the scale of its pharmacies and its track record of dealing with advanced healthcare.

Breakdown of pharmacies by location

	Hospital-front	Other
Nihon Chouzai	67.0%	33.0%
Ain Holdings	57.6%	42.4%
Qol Holdings	52.7%	47.3%

Note: Figures for Nihon Chouzai are calculated from the proportion of hospital-front pharmacies posted on the company website as of end-March 2021.
Note: For Ain Holdings (figures as of July 2020) and Qol Holdings (figures as of end-March 2021), this report defines pharmacies other than those which charge Category 1 basic dispensing fees (discussed below) as hospital-front pharmacies.
Source: Shared Research based on company data.

Higher drug fees at hospital-front pharmacies

Typical hospital-front pharmacies mainly fill prescriptions issued by medical institutions ranging from university hospitals and other major hospitals to small and medium-sized hospitals and clinics. The average price of prescriptions filled by Japanese pharmacies is JPY9,184. Breaking down this figure by prescribing institution, the average price per prescription is JPY17,472 for hospitals (medical facilities with 20 or more beds) and JPY6,914 for clinics (0–19 beds).

The reason for the higher per-prescription prices for hospitals is that they tend to prescribe more costly medications. The prescription price comprises a technical fee (dispensing technical fee and pharmaceutical management fee) and a drug fee. The technical fee is in the JPY2,000 range for both hospitals and clinics. The drug fee, on the other hand, is JPY14,808 for hospitals and JPY4,613 for clinics, a difference of more than 3x. This is the main reason why the average prescription price differs depending on the location of pharmacies.

Difference in price per prescription by prescribing medical institution (FY03/19)

		Average		Hospitals								Clinics
(JPY)			% of total		% of total	University hospitals	% of total	Public hospitals	% of total	Hospitals with 200 or more beds	% of total		% of total
Dispensing fees (price per prescription)		9,184	100.0%	17,472	100.0%	31,675	100.0%	21,062	100.0%	22,029	100.0%	6,914	100.0%
	Technical fee (Dispensing technical fee and pharmaceutical management fee）	2,357	25.7%	2,613	15.0%	2,535	8.0%	2,604	12.4%	2,599	11.8%	2,294	33.2%
	Drug fee	6,810	74.2%	14,808	84.8%	29,027	91.6%	18,387	87.3%	19,356	87.9%	4,613	66.7%
	Specified treatment materials fee	17	0.2%	52	0.3%	113	0.4%	71	0.3%	73	0.3%	7	0.1%

Note: Hospitals indicate medical facilities with more than 20 beds and clinics are medical facilities with 0–19 beds.
Note: Technical fee = dispensing technical fee + pharmaceutical management fee.
Source: Shared Research based on MHLW data.

Breakdown of pharmacy sales by type

Nihon Chouzai reports that per-pharmacy sales at its hospital-front pharmacies are higher than its company-wide average of JPY369mn.

Calculating based on the proportion of pharmacies, Shared Research estimates that per-pharmacy sales for the company’s pharmacies other than hospital-front pharmacies (i.e., hybrid pharmacies) are about JPY150mn.

Using data from the MHLW, Shared Research calculates nationwide average per-pharmacy sales at JPY128mn. Shared Research notes that Nihon Chouzai also records sales above the national average at non-hospital-front pharmacies.

Highest prescription volume per pharmacy in the industry

Prescription volume (total number of prescriptions filled) is mainly determined by the number of patients visiting a pharmacy, which in turn is influenced in large part by the total number of pharmacies. Nihon Chouzai is a pioneer in the dispensing pharmacy field, having opened its first pharmacy in 1980. The company currently has fewer pharmacies than Ain Holdings, which entered the field in 1993, or major drugstore chains which operate in-store dispensaries. In terms of average annual per-pharmacy prescriptions, however, the company’s FY03/21 figure of 21,600 exceeds the FY04/21 figure of 19,500 for Ain Holdings and the FY02/21 figure of 10,500 for Welcia Holdings, even though these two companies have larger pharmacy networks.

Higher number of pharmacists per pharmacy

Shared Research understands that one factor that attracts customers to Nihon Chouzai pharmacies is their relatively high efficiency, attributed to the company’s strategy of placing a higher number of pharmacists per pharmacy (see below). Robust staffing has fed into the expansion of services such as medication guidance, health counseling, and at-home care (including home drug delivery), ultimately resulting in higher patient visits and prescription volumes.

Number of pharmacists per pharmacy

Nihon Chouzai	5.5	(persons)
Ain Holdings	5.1
Qol Holdings	2.8
Welcia Holdings	3.3

Note: Number of pharmacists per pharmacy = Number of pharmacists employed ÷ number of pharmacies.
Source: Shared Research based on respective company data. As of end-April 2020 for Nihon Chouzai, end-March 2020 for Qol Holdings, end-April 2021 for Ain Holdings, and end-February 2021 for Welcia Holdings.

Shared Research recognizes that the high number of pharmacists per pharmacy is part of the company’s pharmacy network expansion strategy, which sets out a target of average annual per-pharmacy sales of JPY350mn—setting the bar higher than that of other companies. To sustain and grow per-pharmacy sales, the company is expanding both staffing and the inventories at its hybrid pharmacies as well (see Pharmacy network strategy).

Approaches to attract customers

The company strives to set itself apart by operating pharmacies that specialize in healthcare, ranging from advanced medical care to community-based healthcare. Nihon Chouzai does not seek to attract customers through the sale of food or cosmetics, which distinguishes the company both from other chains whose pharmacies handle such products and from drugstores.

The company’s policy is to appeal to customers by focusing on the fundamental role of pharmacy. It aims to position its pharmacies as a type of medical facility, which patients will choose for their functionality. The company’s efforts include the following:

Promoting the use of generic drugs at all pharmacies and stressing the benefits for customers of lower drug fees. The company’s proportion of generic drug use (by volume) was 89.3% as of end-March 2021, higher than that of its competitors (79–82%).

Increasing the number of family pharmacists employed at each pharmacy and expanding services such as medication guidance and health consultation.

At suburban hybrid pharmacies as well, gaining the confidence of patients by increasing the types of drugs handled to be able to fill a variety of prescriptions.

Proportion of generic drug use

	End-Mar. 2015	End-Mar. 2016	End-Mar. 2017	End-Mar. 2018	End-Mar. 2019	End-Mar. 2020	End-Mar. 2021
Nihon Chouzai	73.9%	79.0%	81.6%	83.6%	87.0%	88.8%	89.3%
	FY04/15	FY04/16	FY04/17	FY04/18	FY04/19	FY04/20	FY04/21
Ain	65.3%	70.3%	74.3%	77.4%	80.1%	81.7%
	Mar. 2015	Mar. 2016	Mar. 2017	Mar. 2018	Mar. 2019	Apr. 2020	Apr. 2021
Qol	60.5%	64.4%	71.5%	74.8%	78.1%	81.0%
	FY2014	FY2015	FY2016	FY2017	FY2018	FY2019	FY2020
Japan (avg.)	56.4%	60.1%	66.8%	70.2%	75.9%	79.1%	82.1%

Source: Shared Research based on company data

At-home medical care initiatives

The company began providing at-home services to care facilities in 2009 and expanded into at-home services for individual residences in 2010. It established a specialized at-home services department in 2011. As of March 2021, all Nihon Chouzai pharmacies have a system in place to provide at-home medication guidance services. Examples of these at-home services include guidance for patients undergoing medical treatment about how to take medicine and what to do with unused drugs.

The company reports that 94.1% of its pharmacies provided at-home care at least once in FY03/20. Home-visiting services by pharmacists mainly consist of the following:

Packaging medications (grouping multiple drugs together for each medication time) and delivering them directly to patients’ homes.

Suggesting to physicians methods of taking medicine best suited to patients (e.g., the use of swallowing-aid jelly).

Checking how a patient is taking medicine and checking for side effects.

Checking missed medications and devising medication management methods.

Sorting out medicines patients missed taking and considering ways of reducing the burden of subsequent medical expenses.

Fee structure and number of visits

In principle, at-home medical care is used by patients who have difficulty going to a hospital or pharmacy. The pharmacist visiting service fee is the sum of the visiting fee and the drug fee based on the prescription. Pharmacist visiting fees are set uniformly, based on Japan’s Health Insurance Act and Health and Long-Term Care Insurance Act. Fees vary depending on the age of the patient (for example, elderly patients pay a 10% co-payment) and on household situations (such as whether or not multiple patients live in a single building). The fee structure and the rules for the number of visits are shown below.

Fee structure

No. of patient treated within a single building: 1
Long-term care insurance (1)	JPY517
Medical insurance (2)	JPY650
No. of patient treated within a single building: 2–9
Long-term care insurance (1)	JPY378
Medical insurance (2)	JPY320
No. of patient treated within a single building: 10 or more
Long-term care insurance (1)	JPY341
Medical insurance (2)	JPY290
Contingency (emergency) visits
Long-term care insurance	(Not covered)
Medical insurance (3)	JPY500
	JPY200

Long-term care insurance (1): At-home care management guidance fee (for long-term preventative care).
Medical insurance (2): At-home medication management guidance fee.
Medical insurance (3): Emergency medication management guidance fee for at-home patients (in case of sudden change in an illness under regular medication management guidance).
Medical insurance (4): Emergency medication management guidance fee for at-home patients 2 (in cases other than the above)
Source: Shared Research based on company data

Visit frequency guidelines

Basic
No. of visits	Regular, up to four times per month
Insurance type	Medical, long-term care
Patients with end stage malignant tumor, patients applying total parenteral nutrition
No. of visits	Regular: up to twice per week, eight times per month
Insurance type	Medical, long-term care
Contingency (emergency) visits
No. of visits	Emergency: Up to four times per month
Insurance type	Medical (long-term care is not covered)

Source: Shared Research based on company data

Sales/cost structure of the Dispensing Pharmacy business

Prescription price = drug fee + dispensing technical fee + pharmaceutical management fee

The prescription prices that make up this segment’s sales (number of prescriptions x price per prescription) can be broadly divided into drug fees, dispensing technical fees, and pharmaceutical management fees.

Drug fee: This is the selling price of the drug, which is the purchase price (cost) of the drug plus the pharmacy’s margin. On a national average (FY2019), the drug fee accounts for 74.2% of the prescription price.

Dispensing technical fee and pharmaceutical management fee: Vary depending on the location of the pharmacy and the tasks performed by the pharmacist. Together, these fees represent gross profit for the pharmacy. The fees (in points) are set out in a fee schedule issued by the Ministry of Health, Labour and Welfare (MHLW). As a general rule, the schedule is revised every two years. Dispensing technical fees account for 20.5% of the prescription price, while pharmaceutical management fees account for 5.2% on a national average.

The dispensing technical fee is further subdivided into three categories: the basic dispensing fee (7.4% of the national average prescription price), the dispensing fee (11.2%), and various premiums (1.9%).

Dispensing fee points (breakdown of national average prescription price; FY2019)

Breakdown of dispensing activities				Fee (JPY)	% of total	Points (x JPY10=price)
Prescription price = Dispensing technical fee + pharmaceutical management fee + drug fee (incl. tax) + specified treatment materials fee				9,184	100.0%
	Dispensing technical fee		Points for various pharmacy functions and services	1,881	20.5%
		Basic dispensing fee	Points for the use of various pharmacy facilities and equipment (determined on per-pharmacy basis)	676	7.4%	・5 levels: 9, 16, 21, 26, or 42 points
		Dispensing fee	Points for dispensing operation	1,031	11.2%	・Oral medications: 28, 55, 64, 77, or 86 points (prescriptions of 7 days or less = 28 points, over 31 days = 86 points)
			Depends on number of days of prescription
			(more points for longer prescription periods)
		Various premiums	Points for special dispensing services, such as grouping medications to be taken together (one-dose packaging) (premium added to dispensing fee)	174	1.9%	・Community support system premiums (38 points)
						・Generic drug dispensing premiums (15, 22, or 28 points)
						・One-dose package premiums (34 or 240 points), etc.
	Pharmaceutical management fee		Points awarded when pharmacist records or manages patient medication history or provides information	477	5.2%	・Medication history management and guidance fee (43 or 57 points)
	Pharmaceutical management fee			477	5.2%	・Family pharmacist guidance fee (76 points), etc.
	Drug fee		Price of drug as determined by NHI drug price schedule	6,810	74.2%	(1/10th of NHI drug price)
	Specified treatment materials fee		Price of designated medical materials such as insulin used in treating diabetes, infusion therapy used in at-home medical care, etc.	17	0.2%	(1/10th of materials costs ÷10)

Source: Shared Research based on company data and MHLW data.

Basic dispensing fee varies depending on characteristics of pharmacy

Of the three types of dispensing technical fee, the basic dispensing fee varies depending on the characteristics of the pharmacy. A higher fee can be charged by pharmacies with a lower proportion of prescriptions filled for a single medical facility (i.e., a lower concentration rate).

Hospital-front pharmacies: These pharmacies tend to be highly dependent on specific medical institutions. If a pharmacy fills over 400,000 prescriptions per month and a specific medical institution accounts for more than 85% of the total (concentration rate above 85%), it is allowed to charge a basic dispensing fee of 16 points (x JPY10=JPY160).

Other pharmacies (hybrid pharmacies): These pharmacies fill prescriptions from multiple medical facilities. If a pharmacy fills less than 1,800 prescriptions per month, or if its concentration rate is less than 70%, it is allowed to charge a basic dispensing fee of 42 points (x JPY10=JPY420), and the profit for the pharmacy is JPY420.

Differences in basic dispensing fees can make a difference of millions of yen in annual profit. For example, if a pharmacy fills 1,800 prescriptions per month and the basic dispensing fee per prescription is 42 points, its profit (annual basic dispensing fee) comes to JPY9.1mn (=42 points x JPY10 x 1,800 prescriptions per month x 12 months). However, even with the same number of prescriptions, a pharmacy with a basic dispensing fee of 26 points will earn just JPY5.6mn, a difference of JPY3.5mn.

Dispensing fees, various premiums, and pharmaceutical management fees reflect remuneration for pharmacist services

Dispensing fees, various premiums, and pharmaceutical management fees are remuneration for the services provided by a pharmacist. Of these, dispensing fees are charged for working with pharmaceutical materials, while various premiums and pharmaceutical management fees are charged for patient-centered services.

A dispensing fee is remuneration to the pharmacist for filling a prescription. For example, prescriptions with longer prescription periods involve a higher volume of medications and require more work to fill, so the dispensing fee is higher. In most cases, the length (number of days) of prescriptions is specified by the prescribing doctor or medical facility, so the dispensing fee is not determined independently by the pharmacy.

In terms of patient-centered services, various premiums are determined by the degree of services provided by the pharmacist. For example, a pharmacist might group medicines by the time of day when they need to be taken by the patient (i.e., one-dose packaging). There are also premiums determined in line with public policy which contribute to the gross profit of pharmacies, including community support system incentives, based on the degree to which the pharmacy contributes to community-based healthcare, and generic drug dispensing premiums, based on the volume of generic drugs used.

Pharmaceutical management fees can be charged for patient-centered services such as medication guidance by a family pharmacist.

Pharmacies derive profits from drug price margins

Drug fees are determined by the drug price standard (official price) issued by the MHLW. However, the actual purchase price of drugs for pharmacies is the prevailing market price, which fluctuates in line with pharmacy demand. How much a pharmacy profits from drug fees is determined by the drug price margin, the difference between the official price and the market price. If pharmacies can obtain discounts through high-volume purchases from wholesalers, their margins will increase.

Average domestic drug price margin: According to the MHLW, the average drug price margin for pharmacy transactions in September 2020 was 8.0%.

NHI drug price revisions: The MHLW revises the NHI drug prices every year to bring prices closer to the prevailing market prices, typically causing margins to shrink over time.

Profit margin in the Dispensing Pharmacy business

Nihon Chouzai reported that the gross profit margin for its Dispensing Pharmacy business in FY03/20 was 15.1%. However, the company records consumption tax on drug purchases in SG&A expenses, while its competitors include consumption tax in their cost of sales, so care is needed when making comparisons.

For FY03/20, the company estimated that the gross profit margin, taking into account the consumption tax recorded in SG&A expenses, was 9.1%.

Comparing gross profit margins adjusted for consumption tax, the company’s two main competitors had higher gross profit margins than Nihon Chouzai (see below).

Gross profit margin comparison

		Nihon Chouzai	Ain	Qol
Gross profit margin (dispensing)		15.6%	12.6%	13.0%
	Adjusted for consumption taxes	9.1%	12.6%	13.0%
	Versus Nihon Chouzai	-	+4.2pp	+3.7pp

Note: The company’s gross profit margin adjusted for consumption taxes uses the consumption tax amount recorded in parent SG&A expenses.
Source: Shared Research based on respective company data.

Shared Research understands that the difference in gross profit margin between Nihon Chouzai and its two competitors is mainly due to the high drug fee component of the company’s prescription price. The company’s average price per prescription was JPY15,497 in FY03/20, which was higher than its competitors. As described above, when the prescription price is high, the proportion accounted for by the drug fee also tends to be high, and the gross profit margin tends to be low. The drug fee represents the drug purchase price for the pharmacy, plus any margin. In Q3 FY03/21, the gross profit margin gap narrowed due to the company’s strong performance compared to its competitors.

Cost structure

Major costs for the Dispensing Pharmacy business consist of drug purchase costs and personnel expenses. Looking at the parent company’s cost of sales and SG&A expenses, drug purchase costs (materials costs) are about 70% and pharmacy-related labor costs (personnel expenses under cost of sales) are roughly 11% (see below).

In FY03/21, materials costs (mainly drug purchases) accounted for JPY156.9bn of parent cost of sales, mainly in the Dispensing Pharmacy business, while internal sales in the Pharmaceutical Manufacturing and Sales business were JPY19.2bn. Shared Research estimates that in-house products account for more than 10% of the drugs purchased by the company’s pharmacies.

Cost structure: Cost of sales and SG&A expenses (parent)

			FY03/19	FY03/20	FY03/21	FY03/19	FY03/20	FY03/21
			(JPYmn)	(JPYmn)	(JPYmn)	(% of sales)	(% of sales)	(% of sales)
Sales: Parent			203,623	223,775	233,619	100.0%	100.0%	100.0%
Cost of sales: Parent			174,323	190,190	196,971	85.6%	85.0%	84.3%
	Materials costs		139,885	153,151	156,910	68.7%	68.4%	67.2%
	Labor costs		21,913	23,822	25,572	10.8%	10.6%	10.9%
	Other costs		12,524	13,216	14,488	6.2%	5.9%	6.2%
		Rents	2,195	2,152	2,229	1.1%	1.0%	1.0%
		Depreciation	5,586	6,246	6,859	2.7%	2.8%	2.9%
SG&A expenses: Parent			25,849	28,981	31,320	12.7%	13.0%	13.4%
		Personnel	4,148	3,985	4,133	2.0%	1.8%	1.8%
		Consumption taxes	11,276	14,994	17,148	5.5%	6.7%	7.3%

Note: The increase in the proportion of consumption taxes reflects Japan’s October 2019 tax hike.
Source: Shared Research based on company data

Pharmacy network strategy

Basic strategy

The company is pursuing a two-pronged strategy as it expands its pharmacy network:

By 2030, achieve a 50/50 balance of hospital-front pharmacies and hybrid pharmacies.

Focus on the organic growth of the pharmacy network, while actively taking advantage of M&A opportunities for pharmacies with high growth potential.

Initiatives to expand the family pharmacy network

Opening pharmacies in line with MHLW policy.

Functions of family pharmacies based on MHLW policy

The company’s strategy for expanding its pharmacy network is based on the family pharmacist and pharmacy system laid out in the Vision of Pharmacies for Patients, a paper published in 2015 by the Ministry of Health, Labour, and Welfare (MHLW) (discussed below). The MHLW defines a family pharmacist as a professional who provides appropriate pharmaceutical management and guidance to patients, allowing them to consult at any time about medicines and treatments. Apart from the formal qualifications* required of family pharmacists, the system calls for pharmacies to fulfill the following basic functions:

Centralized management of medication information: The pharmacy continuously monitors and maintains medication information of individual patients and, based on this information, offers medication guidance, prevents overprescribing and duplicate medications, and works to ensure patient safety, such as preventing side effects.

24-hour response, at-home response: The MHLW envisions that family pharmacists will be available to respond to patients’ questions related to medical treatments not only during pharmacy hours of operation, and in some cases will prepare medications or make home visits as needed.

Collaboration with physicians and medical institutions: The family pharmacist makes inquiries with the prescribing physician about prescriptions and provides feedback to the physician about the patient’s condition after filling the prescription.

* To be eligible to work as a family pharmacist, a pharmacist must have three or more years of work experience as a pharmacist (a temporarily staffed pharmacist can only work up to three years at a pharmacy, so it is difficult for him/her to be certified); work more than 32 hours per week at the same pharmacy; have been employed at the pharmacy for 12 months or more; have received certified pharmacist training; and be involved in community healthcare-related activities.

In addition to the above, the MHLW system also calls on family pharmacies to reinforce the following two functions:

Healthcare support: Advising community residents about the safe and proper use of medicines, accepting a wide range of health consultations, and making referrals to appropriate medical facilities as needed.

Advanced pharmaceutical management: By maintaining collaborative relationships with specialized medical facilities and accurately understanding the rationale for physicians’ prescriptions, the pharmacist offers appropriate medication guidance and other pharmacy management services to the patient. This function is carried out by pharmacists with advanced knowledge, skills, and clinical experience, such as pharmacists specializing in oncology pharmacy. This function is needed in some family pharmacies, but not all.

Patients can choose a family pharmacist or pharmacy if they want; it is not compulsory. In addition, patients are not required to use only their designated family pharmacy.

Overview of industry restructuring envisioned by MHLW

MHLW’s Vision of Pharmacies for Patients calls for all pharmacies in Japan to function as family pharmacies by 2025. Longer term, the ministry expects pharmacies, primarily those adjacent to major hospitals, to relocate into local communities, when it comes time to rebuild their facilities, by 2035 at the latest. The goal is to build a system in which pharmacies become embedded in the communities in which patients live, and play a key role in supporting comprehensive community-based healthcare.

The MHLW pharmacy system assumes that the communities in which patients live represent the range of all necessary services that can be accessed within approximately 30 minutes. Specifically, these communities correspond to the roughly 10,000 junior high school districts in Japan.

Each pharmacy is expected to build up its capacity to function as a family pharmacy, or, in cases where this is not feasible, to collaborate with the local community to fulfill the functions of a family pharmacy.

Differing functions of Nihon Chouzai pharmacies

In light of the above discussion of family pharmacies, Nihon Chouzai has indicated the direction it intends to take in separating the functions of hospital-front and hybrid pharmacies, and reinforcing their respective functions.

Hospital-front pharmacies: As pharmacies linked to specialized medical institutions, strengthen advanced pharmaceutical management functions.

Hybrid pharmacies: As “regional cooperation pharmacies,” strengthen collaboration with community-based medical institutions as well as the capacity to engage in at-home healthcare and support community healthcare (see the table below).

Functions and healthcare services by pharmacy type

	Functions	Healthcare service structure
Hospital-front pharmacies	Family pharmacist/pharmacy functions (medium to wide area)	Handling of advanced treatments
Hospital-front pharmacies	Advanced pharmaceutical management	Training of pharmacists specializing in disease types
Hybrid pharmacies	Family pharmacist/pharmacy functions (local area)	Support for community residents' health
Hybrid pharmacies	Heath support functions	Initiatives for well-person and preventative care

Source: Shared Research based on company data

The company expects that its hybrid pharmacies will increasingly handle the kind of prescriptions from major hospitals that hospital-front pharmacies currently handle. In addition, the company has listed Accredited Pharmacist of Ambulatory Cancer Chemotherapy (APACC; oncology pharmacy) and Board Certified Pharmacist in Palliative Pharmacy (BCPPP; palliative pharmacy) certifications as requirements for the specialized pharmacists it puts in charge of advanced pharmaceutical management. One in four active pharmacists who are certified in APACC in Japan is a Nihon Chouzai pharmacist.

The company’s competitors are also developing their pharmacy networks in line with the MHLW policy. As of July 2020, family pharmacists were employed at 82% of Nihon Chouzai pharmacies and made up 31.3% of the company’s total pharmacists. For competitor Ain Holdings, the figures were 85.3% (April 2020) and 30.8% (October 2020), respectively.

Expansion of hybrid pharmacies

Given the expectation by the MHLW that pharmacies, particularly those located near major hospitals, will relocate into local communities, the company has indicated its plans to draw down the proportion of its hospital-front pharmacies. Specifically, it intends to lower the proportion of hospital-front hospitals from around 70% at present to 50%, while increasing the proportion of hybrid pharmacies from just over 30% to 50%.

Meanwhile, the company aims to attract more patients to the hybrid pharmacies located in their communities. By enabling these pharmacies to handle some of the drugs used in advanced medical treatments, they can serve patients with serious illnesses who would normally visit hospital-front pharmacies.

Looking at the company’s pharmacy openings by type, in FY03/17 it opened 36 hospital-front pharmacies and six hybrid pharmacies (14% of new openings). In FY03/18, the proportion of hybrid pharmacies increased to 44%, with 20 hospital-front pharmacies and 16 hybrid pharmacies opened. Since FY03/18, the proportion of hybrid pharmacies has been trending at around 50% of new openings.

New pharmacy openings by type

			FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
Openings			37	29	27	42	36	32	65	29
	Hospital-front		na	na	na	36	20	16	38	13
		% of total				86%	56%	50%	58%	45%
	Hybrid		na	na	na	6	16	16	27	16
		% of total				14%	44%	50%	42%	55%
Store count (quarter-end)			494	511	527	557	585	598	650	670
	Hospital-front									451
		% of total								67%
	Hybrid									219
		% of total								33%

Source: Shared Research based on company data

The proportion of hybrid pharmacies in the company's pharmacy network increased from 28% in FY03/16 to 33% as of end-March 2021. In the Tokyo metropolitan area (Tokyo and surrounding three prefectures), hybrid pharmacies accounted for 57% of all Nihon Chouzai pharmacies as of end-FY03/21.

Organic growth and M&A strategy

Organic growth

As a general rule, the company will open new pharmacies organically, while taking advantage of M&A opportunities as it assesses the growth potential of outside pharmacies.

The company focuses on opening its own pharmacies in front of busy stations, within commercial complexes, or as part of medical centers. In conjunction with opening a new pharmacy, the company may invite medical practitioners, clinics, and other medical institutions to set up practice nearby.

For example, in an area it is targeting to open a new pharmacy, the company analyzes the existing distribution of clinics (e.g., numerous ENT specialists but few pediatric clinics, etc.) and invite medical practitioners in underrepresented fields. If the invitation is accepted, this may lead to an increase in prescriptions filled at the company’s pharmacy.

The company will also continue to promote “medical malls,” locations with multiple medical facilities. Since the 1980s, the company has been planning and promoting such malls as a means of expanding its pharmacy network. The company continues to gather information on real estate properties that are amenable to multiple medical facilities setting up practice, and to provide such information to interested doctors or medical institutions. For medical practitioners, the advantages of “medical malls” are the low cost of attracting patients and greater ease of specialization.

Scale of newly opened pharmacies

Conforming to MHLW policy on family pharmacies requires that pharmacies become multifunctional. This is giving impetus to the progressive weeding out and consolidation of small-scale pharmacies unable to make the transition. The company explained that it will deal with industry restructuring by focusing on pharmacies with greater scale and range of functions. Specifically, as the number of pharmacies expands going forward, the target is to maintain annual per-pharmacy sales at around JPY350mn (company-wide average).

M&A policy

Across the industry, Shared Research perceives that drugstore chains and leading pharmacy chains often target smaller pharmacies unable to make the transition to family pharmacies, or where continued operation is not feasible, for acquisition.

In 2017, the Council on Economic and Fiscal Policy addressed the problem of the excessive number of pharmacies in Japan, noting that about half of all pharmacies were small in scale, operated by a single pharmacist.

The government mentioned the need for consolidation, pointing out that single-pharmacist pharmacies lacked adequate capacity to function as family pharmacies, including the centralized management of patient information.

Nihon Chouzai has been accelerating its acquisition of outside pharmacies since FY03/17. In FY03/16, five out of 27 new pharmacies (19%) were by acquisition, which rose to 21 out of 42 pharmacies (50%) in FY03/17. The number of acquired pharmacies was 13 (36%) in FY03/18, six (19%) in FY03/19, 30 (46%) in FY03/20, and seven (24%) in FY03/21.

M&A trends

			FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
Openings			37	29	27	42	36	32	65	29
	Nihon Chouzai's own pharmacies		33	28	22	21	23	26	35	22
		% of total	89%	97%	81%	50%	64%	81%	54%	76%
	Pharmacies through M&A		4	1	5	21	13	6	30	7
		% of total	11%	3%	19%	50%	36%	19%	46%	24%
Store count (quarter-end)			494	511	527	557	585	598	650	670
	Hospital-front									451
		% of total								67%
	Hybrid									219
		% of total								33%

Source: Shared Research based on company data

The company also emphasizes per-pharmacy sales in its M&A activities. According to company materials, company-wide sales per pharmacy in FY03/17 were JPY340mn, while sales at acquired pharmacies were JPY430mn. The company converts acquired pharmacies into directly managed pharmacies, ensuring service quality through the placement of highly specialized pharmacists and improving the efficiency of management, such as through ICT investment, obtaining discounts through high-volume purchasing, and the greater use of generic drugs.

[Reference] Industry pharmacy openings

Nihon Chouzai Co., Ltd.

		FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	Recent 5-yr total
Openings		37	29	27	42	36	32	65	29	204
	Nihon Chouzai's own pharmacies	33	28	22	21	23	26	35	22	127
	Pharmacies through M&A	4	1	5	21	13	6	30	7	77
Closures		9	12	11	12	8	19	13	9	61
YoY change in pharmacies		28	17	16	30	28	13	52	20	-
Store count (quarter-end)		494	511	527	557	585	598	650	670	-
Own pharmacy ratio		89.2%	96.6%	81.5%	50.0%	63.9%	81.3%	53.8%	75.9%	62.3%
Closure rate		1.9%	2.4%	2.2%	2.3%	1.4%	3.2%	2.2%	1.4%	2.1%

Note: The recent five-year total average for own pharmacy ratio and closure rate (=number of closures ÷ number of pharmacies at previous fiscal year end) is a simple five-year average.
Source: Shared Research based on company data

Ain Holdings, Inc.

		FY04/14	FY04/15	FY04/16	FY04/17	FY04/18	FY04/19	FY04/20	FY04/21	Recent 5-yr total
Openings		62	159	142	209	36	157	20	29	451
	Ain's own pharmacies	36	40	32	27	25	23	14	15	104
	Pharmacies through M&A	26	119	110	182	11	134	6	14	347
Closures		6	21	15	24	73	54	64	52	267
	Store transfer	1	1	1	2	32	30	42	34	140
YoY change in pharmacies		56	138	127	185	-37	103	-44	-23	-
Store count (quarter-end)		616	754	881	1,066	1,029	1,132	1,088	1,065	-
Own pharmacy ratio		58.1%	25.2%	22.5%	12.9%	69.4%	14.6%	70.0%	51.7%	23.1%
Closure rate		1.1%	3.4%	2.0%	2.7%	6.8%	5.2%	5.7%	4.8%	5.1%

Qol Holdings Co., Ltd.

		FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	Recent 5-yr total
Openings		104	32	45	143	35	67	60	34	350
	Qol's own pharmacies	38	16	11	18	21	17	21	28	105
	Pharmacies through M&A	66	16	34	125	14	50	39	6	234
Closures		22	14	20	10	13	19	21	28	91
YoY change in pharmacies		82	18	25	133	22	48	39	6	-
Store count (quarter-end)		520	538	563	696	718	766	805	811	-
Own pharmacy ratio		36.5%	50.0%	24.4%	12.6%	60.0%	25.4%	35.0%	82.4%	31.0%
Closure rate		5.0%	2.7%	3.7%	1.8%	1.9%	2.6%	2.7%	3.5%	2.5%

[Reference] Overview of the MHLW Vision of Pharmacies for Patients

Overview

Nihon Chouzai’s policy for expanding its pharmacy network, which guides its pharmacy opening strategy, is in accordance with the Vision of Pharmacies for Patients announced by the Ministry of Health, Labour and Welfare (MHLW) in 2015. The main points of the Vision are as follows.

The government aims to bring about a separation of drug prescribing and dispensing services. This means that doctors and pharmacies assume responsibility for their respective specialties, rather than the doctors performing everything from issuing prescriptions to dispensing drugs. The goal is to ensure patient safety and prevent overprescribing and overdoses.

The task of realizing the separation of services falls to so-called family pharmacists or pharmacies. The family pharmacist or pharmacy is not simply to dispense medicines, but should centrally manage patient medication information, and thus be in a position to respond to patients’ needs to consult about drug treatments at any time. The family pharmacist or pharmacy also plays a role in providing community-based healthcare services, including at-home care, in collaboration with doctors and medical institutions.

The national government monitors the progress of the separation of services by family pharmacists and pharmacies using multiple performance indicators, such as the overall number of certified family pharmacists and pharmacies, and the extent of at-home support carried out. The government is also promoting the adoption of ICT-based systems for centralized, continuous management of medication information to enable pharmacists and pharmacies to fulfill their roles more effectively.

Background

The Vision of Pharmacies for Patients was formulated in recognition of the limitations of the conventional division of drug prescribing and dispensing services. The paper argued that pharmacies were not adequately playing their part in the prescribing and dispensing balance and that the system was not patient-centered, noting the following situations:

Medical facilities in Japan are typically surrounded by numerous pharmacies, but these are not equipped to centrally monitor patients’ medication information.

Ensuring the separation of drug prescribing and dispensing services necessitates that patients go someplace other than the medical facility where they are being treated to fill prescriptions, which increases the burden on the patient. However, patients do not have a sense of receiving better services from these pharmacies or reaping the benefit of separate dispensing services commensurate with the increased burden.

In light of these issues, the MHLW declared that a family pharmacy system was needed to realize a patient-centered separation of prescribing and dispensing functions, and laid out its vision for the ideal system. The paper also presented a roadmap for transitioning toward a family pharmacy system in stages: the first stage goes up to 2025, when Japan’s postwar baby boomer generation will have turned 75 or older, and the next stage covers the following ten years, to 2035.

Formal requirements for family pharmacies

A family pharmacy is not simply a pharmacy that employs a family pharmacist, but an entity that can also manage specialized operations and is equipped with an appropriate physical structure:

Operations

Ensuring an appropriate work system, such as scheduling pharmacists in charge of providing medication guidance

Ensuring adequate pharmacist training and qualifications (patient communication skills, at-home support skills, etc.)

Building collaborative systems with medical facilities and other healthcare-related organizations

Ensuring a safety management system to prevent dispensing accidents and incidents

Physical structure

Securing a space where visitors can feel at ease consulting with their pharmacist

Maintaining sufficient stock of drugs and implementing quality control to respond to patients’ medication needs in a timely and appropriate manner

Family pharmacists’ work and qualifications

The work of family pharmacists ranges from dealing with pharmaceutical materials to providing patient-centered services: Patient-centered services include checking prescriptions; checking for overprescribing, duplicate medications, and medications to be taken simultaneously; making inquiries with prescribing doctors; giving thorough medication guidance; and continuously monitoring medication status and side effects in at-home care contexts, and using this information to provide feedback to doctors and suggest prescriptions. Other services include the management of unused medicines, as well as outside activities such as at-home medical care and other initiatives to contribute to comprehensive community-based healthcare.

Communication skills: To enable patients and community residents to feel comfortable consulting about medications and health issues, pharmacists must listen to patients’ concerns while being attentive to their psychological state, and endeavor to provide simple and easy-to-understand directions and explanations.

Patients who require a family pharmacist or pharmacy

The Vision of Pharmacies for Patients indicates the importance, in terms of maintaining and improving health, of enabling certain patients in particular to designate their own pharmacist or pharmacy:

Elderly patients

Patients with lifestyle diseases and other chronic conditions

Patients requiring advanced medication management due to a serious or rare disease

Patients such as pregnant women and young children who especially require centralized and continuous monitoring of medication information

People in risk groups for lifestyle-related diseases who require regular health management

Path to pharmacy reorganization

The Vision of MHLW indicates three aspects involved in reorganizing pharmacies to realize a more patient-centered separation of prescribing and dispensing services.

Shift from location to function: Rather than relying on the convenience of pharmacy locations (especially those located near or inside hospitals) to attract patients, pharmacies ought to strive to become patients’ first choice by demonstrating their pharmaceutical expertise and their ability to respond to the diverse needs of patients and community residents, such as providing 24-hour and at-home support.

Shift from working with pharmaceutical materials to patient-centered services: Pharmacies and pharmacists ought to shift from simple materials-centered tasks such as the preparation of medicines toward patient-centered services that involve a greater degree of involvement with patients and community residents, and hone their expertise and communication skills to that end.

Shift from dispersed to centralized operation: Pharmacies should gather medication information in a central location to offer patients peace of mind about their medical treatments, such as confirming what medications are to be taken together and managing unused medications. Pharmacists and pharmacies should not work in isolation from the community merely filling prescriptions, but rather aim to be a vital part of comprehensive community-based healthcare* in cooperation with other medical disciplines and institutions such as family doctors.

* Comprehensive community-based healthcare as defined by the MHLW includes medical care, long-term care, preventative medicine, housing, and social support to enable people as much as possible to continue living in areas where they are accustomed to living with as much independence as they can achieve, even when medical care or long-term care is required. The MHLW is striving to put this kind of comprehensive community-based healthcare system in place by 2025. The system assumes that the communities in which patients live represent the range of all necessary services that can be accessed within approximately 30 minutes (specifically, these correspond to the junior high school districts).

Pharmaceutical Manufacturing and Sales business (FY03/21: 15.3% of sales, 17.2% of operating profit)

Business overview

Nihon Chouzai’s Pharmaceutical Manufacturing and Sales business is mainly carried out by two subsidiaries, both unlisted: Nihon Generic Co., Ltd. and Choseido Pharmaceutical Co., Ltd. The segment manufactures, purchases, and sells generic oral medications. For convenience, this report refers to Nihon Chouzai as the segment business entity.

Background

The company’s Pharmaceutical Manufacturing and Sales business has its origin as a “fabless manufacturer,” i.e., a business operation that does not own its own manufacturing facilities. The company established Nihon Generic in January 2005. The subsidiary obtained approval as a pharmaceutical manufacturing and sales company in April that same year, and started nationwide marketing of generic drugs (made by other companies) via wholesalers in April 2006. It began marketing approved drugs of Nihon Chouzai in 2007.

Approved drugs are drugs for which the Ministry of Health, Labour and Welfare (MHLW) has given approval to Nihon Chouzai to manufacture and sell in-house. Until it acquired its own manufacturing facilities, the company outsourced manufacturing of internally developed drugs to contract manufacturers.

The company acquired a plant in Tsukuba, Ibaraki Prefecture in 2010, and started up in-house production. It made Choseido Pharmaceutical a subsidiary in 2013 and, in 2018, completed the construction of Tsukuba Plant No. 2, equipped with a state-of-the-art production management system and manufacturing facilities. Its manufacturing network now comprises five production facilities and two R&D centers.

[Reference] Overview of production facilities (as of FY03/20)

Plant	Description
Nihon Generic Tsukuba Plant	- Small to midsize production - Tablets
Nihon Generic Tsukuba Plant 2	- Midsize to large-scale production - Tablets
Choseido Pharmaceutical Main Plant	- Small to midsize production - Tablets, capsules, medicine
Choseido Pharmaceutical Main Plant 2	- Small to midsize production - Tablets, capsules, medicine
Choseido Pharmaceutical Kawauchi Plant	- Small to midsize production (dedicated to antibiotics) - Tablets, capsules, medicine

Source: Shared Research based on company data

Product lineup

As of end-FY03/21, the company sold 677 drugs. Of these, 473 were drugs approved for in-house manufacturing and sales, and 211 were procured (in-licensed) from outside companies.

As of end-FY03/21, of all drugs approved by MLHW for in-house manufacturing, it manufactured 262 (including contract manufacturing for outside companies) at its own production facilities.

With the startup of operations at Tsukuba Plant No. 2, Nihon Chouzai’s R&D and manufacturing network has grown to five production facilities and two R&D centers. The company already has the capability to develop a similar volume of drugs as major generic manufacturers like Nichi-Iko Pharmaceutical, Sawai Group Holdings (formerly Sawai Pharmaceutical), and Towa Pharmaceutical. It is striving to expand its product lineup every year, by manufacturing and marketing newly NHI listed generic drugs as the patents for brand-name products expire.

The company says it intends to prioritize the in-house manufacturing of drugs that are used most frequently at its own pharmacies.

Overview of Nihon Chouzai’s generic drug manufacturing and sales

			FY03/06	FY03/07	FY03/08	FY03/09	FY03/10	FY03/11	FY03/12	FY03/13
Number of products sold			99	170	223	235	244	283	340	373
	Developed in-house		-	-	9	34	55	80	101	129
		Outsourced	-	-	9	34	55		91	108
		Manufactured in-house	-	-	-	-	-		10	21
	In-licensed		99	170	214	201	189	203	239	244

			FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
Number of products sold			573	561	574	611	636	663	681	677
	Developed in-house		364	370	388	423	449	458	466	473
		Outsourced	176	174	187	198	206	214	221	211
		Manufactured in-house	170	177	201	225	243	244	245	262
	In-licensed		209	191	186	188	187	205	215	204

Note. Blank spaces (-) indicate undisclosed data. Figures for FY03/21 are as of end-Q3.
Source: Shared Research based on company data

Production capacity of generic drug manufacturers

	No. of products manufactured and marketed	No. of products manufactured in-house	Number of plants
Nihon Chouzai	677	262	5
Sawai Pharmaceutical	740	740	6
Towa Pharmaceutical	Approx. 770	Approx. 770	3
Nichi-Iko Pharmaceutical	1,218		8 in Japan, 3 overseas

Source: Shared Research based on respective company data.

Pharmaceutical Manufacturing and Sales business sales

Customers

Pharmaceutical wholesalers are the direct customers for the company’s drugs. Wholesalers then sell the drugs to Nihon Chouzai’s pharmacies (internal sales) and outside dispensing pharmacies and medical facilities (external sales). When the company began manufacturing drugs in-house in FY03/11, internal sales accounted for the majority of sales (56.9%). Having made Choseido Pharmaceutical, which handles contract manufacturing, a subsidiary in 2013, external sales now account for the majority.

The company believes that sales in the Pharmaceutical Manufacturing and Sales business will expand, driven by the growth of its Dispensing Pharmacy business and supported by the increased supply capacity of generic drugs with the startup of operations at the Tsukuba Plant No. 2.

Breakdown of Pharmaceutical Manufacturing and Sales business sales

		FY03/11	FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
Sales (JPYmn)		7,579	8,133	11,196	23,192	27,550	32,598	36,821	38,066	40,659	43,072	45,699
	YoY	53.0%	7.3%	37.7%	107.1%	18.8%	18.3%	13.0%	3.4%	6.8%	5.9%	6.1%
Sales to internal customers (JPYmn)		4,311	4,210	5,873	7,703	9,215	12,247	12,637	13,381	16,428	18,173	19,173
	YoY	64.7%	-2.4%	39.5%	31.2%	19.6%	32.9%	3.2%	5.9%	22.8%	10.6%	5.5%
	% of total	56.9%	51.8%	52.5%	33.2%	33.4%	37.6%	34.3%	35.2%	40.4%	42.2%	42.0%
	No. of dispensing pharmacies (year-end)	340	417	466	494	511	527	557	585	598	650	670
	Sales per pharmacy (JPYmn)	12.7	10.1	12.6	15.6	18.0	23.2	22.7	22.9	27.5	28.0	28.6
Sales to external customers (JPYmn)		3,268	3,923	5,323	15,489	18,335	20,351	24,184	24,685	24,231	24,899	26,526
	YoY	39.9%	20.0%	35.7%	191.0%	18.4%	11.0%	18.8%	2.1%	-1.8%	2.8%	6.5%
	% of total	43.1%	48.2%	47.5%	66.8%	66.6%	62.4%	65.7%	64.8%	59.6%	57.8%	58.0%
No. of products sold		283	340	373	573	561	574	611	636	663	681	677

Source: Shared Research based on company data

Distribution of generic drugs

For the drugs it manufactures and sells, the company works through wholesalers not only for outside pharmacies and medical facilities, but for its own pharmacies as well, and records these transactions as sales. This arrangement allows the company to reap the benefits of greater transaction volumes for its products in the generic drug market, increased recognition of its brand name, and volume discounts for purchases by the company’s pharmacies.

The advantage for pharmaceutical wholesalers is the assurance that they can sell a certain volume of generic drugs purchased from Nihon Chouzai to the company’s own pharmacies. If the company can further increase its share of the generic drug distribution market, this in turn will increase the benefit to wholesalers of handling the company’s products.

The company had already established business relationships with pharmaceutical wholesalers through its Dispensing Pharmacy business. The company’s pharmacies purchase not only its own generic drugs but those of other companies as well, both brand-name and generic drugs.

In FY03/20, materials costs (mainly drug purchases) accounted for JPY153.2bn of parent cost of sales, mainly in the Dispensing Pharmacy business, while internal sales in the Pharmaceutical Manufacturing and Sales business were JPY18.2bn. Shared Research estimates that in-house developed products account for more than 10% of the drugs purchased by the company’s pharmacies.

Nihon Chouzai began focusing on opening hospital-front pharmacies from the late 1980s. As a result, it reports that both its pharmacies and its generic drugs have gained wide recognition from doctors working at general hospitals. The company says this has a spill-over effect, e.g., if a major hospital starts handling the company’s generic drugs, this may lead community-based medical facilities and other companies’ pharmacies to also handle more Nihon Chouzai drugs. Although the company only employs a small number of medical representatives, it is well-known among medical facilities, which Shared Research sees as a factor encouraging wholesalers to sell Nihon Chouzai drugs to customers other than the company’s own pharmacies.

Earnings and cost structure of Pharmaceutical Manufacturing and Sales business

In FY03/21, gross profit margin in the segment was 15.1%, which is lower than that of the company’s main competitors Sawai Group Holdings (formerly Sawai Pharmaceutical) (36.6%) and Towa Pharmaceutical (42.3%). The company explains that this is primarily because the proportion of drugs it manufactures in-house is about 40%, which is comparatively low. This means that it purchases a higher volume of pharmaceuticals manufactured externally, including by contract manufacturing as well as the purchase and sale of in-licensed drugs.

The company is also a comparative latecomer to the generic drug market. When it first entered the market, as part of the process of expanding its product lineup, the company engaged in the production of generic drugs whose brand-name counterparts’ patents had long expired and whose market prices had thus fallen. Consequently, the company explains that a factor behind the low gross profit margin is a higher proportion of low-margin drugs than at competitors.

On the other hand, the company employs few medical representatives. This is reflected in an SG&A ratio of 9.9% in FY03/21, which is low compared to other generic drug manufacturers.

SG&A ratio comparison: Nichi-Iko Pharmaceutical (TSE1: 4541) 11.2%, Sawai Group Holdings (formerly Sawai Pharmaceutical; TSE1: 4555) 19.5%, Towa Pharmaceutical (TSE1: 4553) 29.4%.

Earnings structure of major generic drug manufacturers

		Nihon Chouzai (Pharmaceutical Manufacturing and Sales)	Sawai Pharmaceutical Co., Ltd. (Japan)	Towa Pharmaceutical	Nichi-Iko Pharmaceutical
		FY03/21	FY03/21	FY03/21	FY03/21
Sales		45,699	153,584	154,900	188,218
Cost of sales		38,804	97,401	89,448	166,973
	% of total	84.9%	63.4%	57.7%	88.7%
Gross profit		6,894	56,183	65,452	21,245
	% of total	15.1%	36.6%	42.3%	11.3%
SG&A expenses		4,543	29,899	45,527	21,138
	% of total	9.9%	19.5%	29.4%	11.2%
Operating profit		2,350	26,284	19,923	107
	% of total	5.1%	17.1%	12.9%	0.1%
Depreciation		3,647	11,866	9,674	13,217
	% of total	8.0%	7.7%	6.2%	7.0%

Note: Sawai Group Holdings (formerly Sawai Pharmaceutical) and Nichi-Iko Pharmaceutical have adopted IFRS.
Source: Shared Research based on respective company data.

The company states that it will be able to boost its profit margin by increasing the ratio of newly listed drugs manufactured in-house, on top of recording higher sales from the expanding sales volume of these drugs. For example, considering the pharmaceuticals newly listed in June 2020, 12 of the 16 drugs for which the company obtained MHLW approval are manufactured in-house, yielding a higher profit margin.

Slowdown in depreciation costs following a round of aggressive capital spending

Since starting up in-house manufacturing in 2010, the company expanded its production capacity through successive capital investments. In FY03/17 and FY03/18, the company made large-scale capital investments toward the completion of the Tsukuba Plant No. 2. Even before that, the company was investing to expand production capacity, leading to growing depreciation costs every year from FY03/15 to FY03/20 (see table below).

Capital expenditures in the Pharmaceutical Manufacturing and Sales business

(JPYmn)			FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
Capital expenditures			5,672	8,712	3,663	18,742	10,245	1,582	2,069	2,701
Depreciation			1,109	1,257	2,003	2,222	2,677	3,589	3,639	3,647

Source: Shared Research based on company data

After FY03/21, the company has no immediate plans for large-scale investments in production capacity expansion, and expects the rise in depreciation costs to slow down. Meanwhile, the company expects growth in the Dispensing Pharmacy business to drive expansion of the product lineup in the Pharmaceutical Manufacturing and Sales business, and anticipates growth in sales. For these reasons, the company projects improvement in both the gross profit margin and operating profit margin.

Medical Professional Staffing and Placement business (FY03/21: 2.8% of sales, 5.2% of operating profit)

Business overview

The Medical Professional Staffing and Placement business is the purview of subsidiary Medical Resources Co., Ltd. (unlisted, 100% ownership by Nihon Chouzai. For convenience, this report refers to the parent as the business entity). The segment matches pharmacists and pharmacies nationwide, including its own pharmacies, through both temporary staffing and permanent placements. It also engages in the placement of physicians and nurses.

Business history

Medical Resources was established following the 1999 revision of Japan’s Worker Dispatching Act* to specialize in providing pharmacists to dispensing pharmacies.

* The 1999 revision of the Worker Dispatching Act lifted the prohibition on providing temporary pharmacist staffing to pharmacies, which had been disallowed until then.

At its inception, the segment served as the staffing arm for Nihon Chouzai pharmacies, playing the role of facilitating flexible working styles that fit with the life events of pharmacists. In particular, it was a springboard for returning to work for pharmacists who had taken time off for childbirth and child rearing. As Nihon Chouzai and other companies expanded their nationwide pharmacy networks from the latter half of the 1990s, rising demand for pharmacists has driven growth in this segment.

Number of dispensing pharmacies nationwide: CAGR of 2.8% in 1991–1995, 3.6% in 1996–2000, and 3.6% in 2001–2005.

Placement business: The pharmacist placement business started in 2016, expanding to physician placements in 2017.

Registered pharmaceutical seller placements: The placement of registered pharmaceutical sellers, certified professionals who can sell over-the-counter (OTC) drugs such as cold remedies and painkillers, began in 2018. Such personnel are in demand from pharmacies and drugstores that do not employee pharmacists.

Growing demand for family pharmacists behind the launch of placement business

In FY03/17, the company moved beyond temporary pharmacist staffing into permanent placement, primarily to meet growing demand among pharmacies for family (regular) pharmacists.

To qualify as a family pharmacist, a pharmacist has to have three or more years of work experience at a pharmacy, be working more than 32 hours per week at the same pharmacy, and have been employed at the pharmacy for 12 months or more. A family pharmacist is also required to build an ongoing relationship of trust with patients at a community-based pharmacy he or she belongs to. However, the maximum number of years a temporarily staffed pharmacist can work at one pharmacy is three years, so both formally and practically it is difficult for the pharmacist to obtain certification.

Of the roughly 60,000 dispensing pharmacies nationwide, most are part of small and medium-sized chains or privately owned. Pharmacies with three or fewer resident pharmacists account for about 80% of the total (MHLW data). With the growing trend of pharmacists gravitating toward major companies, many smaller pharmacies are unable to recruit talented pharmacists on their own. The company believes that there is strong latent demand for the placement of permanent staff as family pharmacists. These circumstances prompted the company to expand its matching services from temporary staffing to the placement of new graduates and mid-career pharmacists.

Business model

Matching hiring companies and job seeking healthcare professionals

This segment leverages Nihon Chouzai’s in-house pharmacist training program to provide pharmacist human resources nationwide. It also operates recruiting websites and matches pharmacists, physicians, nurses, and registered pharmaceutical sellers registered on the sites with pharmacies and medical institutions seeking to hire new staff.

Pharmacist recruiting site Pharma Staff: Roughly 62,000 job offers. In terms of pharmacist recruitment, this site lists the largest number of job offers in Japan, surpassing that of the country’s largest comprehensive recruiting site MyNavi, which had about 58,000 pharmacist job offers.

Doctor recruiting site Doctor Vision: Approximately 12,000 job offers.

Registered pharmaceutical seller recruiting site Cheer Job Tohan: Approximately 13,000 job offers.

Pharmacist recruiting websites

Operator		Year established	Website	Approx. number of job postings
Medical Resources Co., Ltd. (Nihon Chouzai subsidiary)	Unlisted (TSE1: 3341)	1999 (1980)	Pharma Staff	62,000
Mynavi Corporation	Unlisted	1973	Mynavi Pharmacist	58,000
Axis Corporation (Aisei Pharmcy's subsidiary)	Unlisted (Unlisted)	2015 (1984)	Oshigoto Lab	30,000
M3, Inc.	TSE1: 2413	2000	P Career	17,000
AnyCareer Inc.	Unlisted	2018	Pharma Career	13,000

Source: Shared Research based on respective company data.

Matching method

Medical Resources staff, operating out of 13 business offices nationwide, match hiring needs and job-seeking personnel by visiting hiring companies to learn directly about job descriptions and providing guidance to registered site users. The company says that its emphasis on face-to-face interactions gives it a solid grasp of the needs of both hiring companies and job seekers, which helps ensure that there is only a small number of mismatches after the start of employment.

Sales and earnings structure of Medical Professional Staffing and Placement business

Temporary staffing business

In the temporary pharmacist staffing business, sales are recorded when a pharmacist registered with the company (contracted by the company) begins employment at a pharmacy. The company receives a dispatching fee from the pharmacy (the sum of the pharmacist’s annual income and the company’s margin) and, after subtracting its margin, pays the pharmacist’s salary. The company says its margin is about 30% of the annual salary paid.

Placement business

In the placement business, the company receives matching commissions from the companies with which it places personnel, and records these as sales. Unlike in the temporary staffing business, it does not pay pharmacists’ salaries in the placement business, so the entire amount of matching commission is recorded as gross profit. The commission is roughly 30% of the annual salary of the physicians, nurses, and pharmacists the company places.

Trends in segment performance

In FY03/20, sales in the Medical Professional Staffing and Placement business were down 2.8% YoY, but gross profit increased by 9.2% and operating profit increased by 25.2%. The placement business accounted for 59% of gross profit in the segment, exceeding the original temporary staffing business. This reflects a drop in demand for temporary pharmacist staffing amid the pandemic-driven contraction in workloads at pharmacies, together with an increase in placements of physicians.

Medical Professional Staffing and Placement business

(JPYmn)		FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
Sales		8,934	10,500	11,970	13,083	12,721	8,393
	YoY	36.3%	17.5%	14.0%	9.3%	-2.8%	-34.0%
Gross profit		-	-	4,604	4,950	5,404	4,477
	YoY	-	-	-	7.5%	9.2%	-17.2%
	Gross profit margin	-	-	38.5%	37.8%	42.5%	53.3%
Operating profit		1,599	1,710	1,842	1,478	1,851	712
	YoY	26.3%	6.9%	7.7%	-19.8%	25.2%	-61.5%
	Operating profit margin	17.9%	16.3%	15.4%	11.3%	14.6%	8.5%

Source: Shared Research based on company data

Sales from physician placements increased 3.74x over the four fiscal years from FY03/18 to FY03/21. The volume of hiring institutions and new placements also increased by 4.02x and 3.47x, respectively, over the same period.

Physician and pharmacist placements

Placement: physicians
(indexed to FY03/18=100)	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
Sales	-	24	100	183	336	374
No. of clients	-	-	100	189	321	402
No. of contracts	-	-	100	214	318	347
Sales per institution	-	-	100	97	105	93
Sales per contract	-	-	100	86	106	108

Placement: pharmacists
(indexed to FY03/18=100)	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
No. of clients	-	91	100	112	127	130
No. of contracts	70	90	100	113	123	134

Source: Shared Research based on company data

Market and value chain

Dispensing pharmacy market

According to the Ministry of Health, Labour and Welfare (MHLW) survey on drug dispensing trends, total drug dispensing costs in Japan in FY2019 were JPY7.7tn (+3.7% YoY). Japan has 60,171 pharmacies (Public Health Administration Statistics), more than the country’s number of convenience stores (about 50,000). A total of 838.7mn prescriptions were filled in FY2019, with an average dispensing cost per prescription of JPY9,184.

Small, privately owned pharmacies account for about 70% of the dispensing pharmacy market in Japan. These smaller pharmacies are facing difficult times: Intensifying competition is causing restructuring and the weeding out of market participants, with an increasing number of small- and mid-sized pharmacies going out of business, and other pharmacies responding to M&A overtures from major pharmacy chains or being absorbed into the networks of pharmaceutical wholesalers.

According to the MHLW’s March 2019 Survey on Family Pharmacists and Pharmacies, 38.9% of Japan’s pharmacies have a single full-time pharmacist, 29.4% have two pharmacists, and 13.7% have three pharmacists. Pharmacies with one to two pharmacists accounted for 68.3% of the total; pharmacies with one to three pharmacists accounted for 82.0% of the total.

The 2009 revision of the Pharmaceutical Affairs Act (now the Pharmaceuticals and Medical Devices Act; see Pharmaceutical regulations below) allowed convenience stores and supermarkets to handle many types of medicines, putting pressure on drugstores to differentiate themselves from other business formats. Many focused on reinforcing their dispensing operations. Dispensing pharmacies in Japan tend to have small footprints and require a lower startup investment than many other small retail businesses. However, the influx of new pharmacists is limited (about 8,000 people a year), making these human resources highly sought after. A driver of growth of dispensing pharmacies has been the government-led effort to separate drug prescribing and dispensing services.

Medical treatment fees, including technical fees for dispensing prescriptions, are revised every other year and, from FY2021, the official National Health Insurance (NHI) drug prices are due to be revised annually. To date, drug prices have been revised in a consistently downward direction. “Hospital-front pharmacies,” which are located near or inside hospital premises and concentrate on filling prescriptions for the hospital’s patients, account for roughly 70% of all pharmacies in Japan. In the past, such pharmacies were more or less independent, but are now being absorbed by major pharmaceutical chains at an increasing pace. Also, urged by the government’s policy of developing at-home and community-based healthcare structures, large drugstore and pharmacy chains are rushing to establish themselves as community healthcare hubs.

The Japanese government, under pressure to reign in soaring healthcare costs, is pushing for a reduction in hospital-front pharmacies and promoting the transition to “family pharmacies,” which are community-based pharmacies that fill prescriptions from patients being treated at a wide range of medical facilities.

The industry has been reshaped by a succession of revisions to the medical treatment fee schedule. In the FY2016 revision, dispensing fees reimbursed to large hospital-front pharmacies, which have high prescription volumes and a high concentration of prescriptions from a single medical institution (high concentration rates), were revised downward. Meanwhile, medical treatment fee points (representing reimbursement amounts) were raised for pharmacies that put in place 24-hour prescription filling systems and generic drug dispensing systems.

The FY2018 revision further raised the bar for generic drug premiums: Pharmacies had to have a generics usage rate of 85% or more to qualify for the maximum premium. The revision also discontinued the standard dispensing premium, establishing instead a new community support system premium based on pharmacies’ contribution to community-based healthcare. In addition, for major pharmacy groups with monthly prescriptions of over 400,000, the basic dispensing fee points were reduced for pharmacies with concentration rates of over 85%—a blow for pharmacy chains pursuing operational efficiency.

The FY2020 revision revised the requirements for the community support system premium and further raised the points awarded for this premium, continuing to reward pharmacies contributing to community-based healthcare. The generic drug premium was also revised, awarding more points to pharmacies with high generics usage rates.

Pharmaceutical regulations

Pharmaceutical sales in Japan are regulated by the Pharmaceuticals and Medical Devices Act. Under this law, medications are roughly divided into two types: prescription medications that require a doctor’s prescription or order, and general-purpose medications, drugs that can be purchased without a prescription. The latter are often referred to as over-the-counter or OTC drugs.

General-purpose medications can be purchased without a prescription and used at the purchaser’s discretion based on information provided in package inserts or by pharmacists and registered pharmaceutical sellers (discussed above). General-purpose medications are further divided into those requiring guidance, roughly equivalent to drugs used for medical treatment, and other general-purpose medications. The latter group is subdivided into Class 1 (high-risk), Class 2 (medium-risk), and Class 3 (low-risk) drugs according to the degree of the risk for side effects and other hazards.
Major revisions to the Pharmaceuticals and Medical Devices Law are summarized below.

Separation of drug prescribing and dispensing services

The MHLW has urged the separation of drug prescribing and dispensing services, wherein doctors and pharmacies assume responsibility for their respective specialties. The benefit to patients is that doctors can prescribe the most appropriate drugs without being limited to supplies on hand. Additionally, pharmacists double-check prescribed treatments, and, in the case of family pharmacies, patients can have multiple prescriptions filled at a single location, with the pharmacist checking that there are no duplicate prescriptions or harmful drug interactions.

There are two main frameworks for achieving the separation of drug prescribing and dispensing services: One-on-one pharmacies which service a single medical practitioner or facility, and pharmacies which accept prescriptions from multiple medical facilities from a wide geographical area, not limited to a particular medical facility. The family pharmacy system being promoted by the MHLW falls in the second group.

Regulations governing pharmacy operations and sales

MHLW regulations determine the number of pharmacists that must be placed in a pharmacy. The regulations stipulate that the maximum number of prescriptions one pharmacist can fill per day is 40*.

* Calculated by dividing the number of prescriptions filled in the previous fiscal year by the number of business days. Technically, the regulation does not mean a pharmacist may not handle more than 40 prescriptions a day, but that, for example, if the pharmacy’s daily average is 100 prescriptions, it must employ three pharmacists.

The regulations are premised on the idea that 40 prescriptions is the maximum number of prescriptions a pharmacist can fill while still giving adequate medication guidance to each patient. However, when the regulations were put into effect, they assumed the manual filling of prescriptions. Significant advances have since been made in computer processing and automated dispensing. Many Western countries have occupational categories such as technicians and dispensing assistants that support pharmacists. If a similar system is introduced in Japan, it could rapidly alleviate the currently tight supply of pharmacists.

Medical treatment fees

Medical treatment fees refer to the fees healthcare providers charge for medical services and pharmaceuticals that are covered by health insurance*. These are determined by the medical treatment fee schedule of the National Health Insurance (NHI), using a point system in which one point equals JPY10. The fees are the official price that all medical institutions and pharmacies must charge for their services. Patients are responsible for portion of the fee (a basic 30% co-payment), with the remainder being reimbursed by public health insurance. The point schedule does not apply to elective medical treatments or procedures not covered by public health insurance, whose expenses a patient bears in full.

*Healthcare in Japan is provided based on a public health insurance system, under a system of universal healthcare established in 1961. All residents of the country are required to join the system and pay monthly premiums. Through the High-Cost Medical Expense Benefit provision, even if patients face high monthly medical expenses, they are not required to pay more than a fixed amount. The NHI system has tended to inculcate a mentality of seeking medical services even for minor illnesses. This, together with the country’s rapidly aging population, is causing medical costs to swell year by year and putting significant stress on the national budget. Reducing medical costs is an urgent issue for the government.

The medical treatment fee schedule is subject to regular revision. The most recent revision was in FY2020, when overall fees were raised by 0.55% while NHI drug prices were reduced by 0.99%. Medical fees (for services provided by hospitals, clinics, etc.) were raised by 0.53%, dental fees were raised by 0.59 %, and dispensing fees were raised by 0.16% (there was also an 0.08% increase in the premium awarded for reforming the working styles of emergency department doctors). In terms of drug price revisions, the assessed prevailing market price was revised downward by 0.43%. The rationale given for the revision highlighted the following four points:

Alleviating the burden on medical staff and promoting working style reforms for doctors and other healthcare professionals

Realizing safe, secure, quality healthcare centered on the needs of patients and citizens

Differentiating and reinforcing healthcare functions and promoting collaborative and comprehensive community-based healthcare

Improving the stability and sustainability of healthcare delivery systems through increased efficiency and optimization

Shared Research believes that in certain respects the priority issues identified in connection with the revision will have a positive impact on Nihon Chouzai, namely, the revision’s emphasis on recognizing the functionality of family pharmacies, and its emphasis on the proper criteria needed to promote the structural shift from working with pharmaceutical materials to patient-centered services.

Healthcare providers prepare a medical treatment fee statement based on the healthcare services they provide, and seek reimbursement from public health insurance agencies. The schedule of medical treatment fee points is released by the MHLW (under Article 76 of the Health Insurance Act). For this reason, in Japan, most medical services other than elective healthcare are carried out at the officially stated price.

The MHLW’s medical treatment fee schedule is grouped into three categories: medical fees, dental fees, and dispensing fees. The following discussion of dispensing fees is based mainly on the FY2020 revision. One point indicates a fee of JPY10.

Dispensing fees

Dispensing fees include dispensing technical fees, pharmaceutical management fees, drug fees, and fees for specified treatment medical materials such as insulin. Dispensing technical fees are further divided into basic dispensing fees, specific dispensing fees, and various premiums.

Basic dispensing fees

Basic dispensing fees are shaped by the MHLW’s goal of de-emphasizing the role of hospital-front pharmacies, which are highly dependent on specific medical facilities (i.e., have high concentration rates), and encouraging community-based family pharmacies. Pharmacies with low concentration rates are allowed to charge Category 1 basic dispensing fees (42 points), while those with higher concentration rates are allowed to charge either Category 2 fees (26 points), Category 3a fees (21 points), Category 3b fees (16 points), or the special basic dispensing fee (9 points) depending on their concentration rates.

Pharmacies qualify to charge Category 2 fees if they meet one of the following criteria for the monthly number of prescriptions and the concentration rate (dependence on a single medical institution):
1) Prescriptions exceed 4,000 per month and concentration rate exceeds 70%, or
2) Prescriptions exceed 2,000 per month and concentration rate exceeds 85%, or
3) Prescriptions exceed 1,800 per month and concentration rate exceeds 95%
4) Prescriptions from one medical institution exceed 4,000 per month
Category 3a fees are for pharmacies that belong to a large pharmacy group and meet one of the following criteria:
1) Prescriptions total 35,001–40,000 per month for the group and concentration rate exceeds 95% for the pharmacy, or
2) Prescriptions total 40,001–400,000 per month for the group and concentration rate exceeds 85% for the pharmacy
Pharmacies (belonging to a group) charge Category 3b basic dispensing fees if the number of prescriptions for the group exceeds 400,000 per month and their concentration rate exceeds 85%.
Finally, pharmacies charge the special basic dispensing fee if they have real estate transactions with a medical institution (i.e., pharmacies located on hospital premises).

Basic dispensing fee categories

Basic dispensing fee	Number of prescriptions (monthly)	Concentration rate	Points	Price (JPY)	Pharmacy type
1	Pharmacy other than those listed below	-	42	420	Small, privately owned downtown pharmacy
2	2,001–4,000	Over 85%	26	260	Chain pharmacy located near large hospitals (hospital-front pharmacies)
	Over 4,000	Over 70%
	1,801–2,000	Over 95%
	Over 4,000 from specific medical institutions	-
3 a)	Pharmacy in a group with prescriptions 35,001–40,000	Over 95%	21	210
3 a)	Pharmacy in a group with prescriptions 40,001–400,000	Over 85%	21	210
3 b)	Pharmacy in a group with prescriptions over 400,000	Over 85%	16	160
Special	Pharmacy located on hospital premises	Over 70%	9	90	Located on hospital premises

Source: Shared Research based on company data

Examples of premiums

Community support system premium

The aim of the community support system premium is to reward pharmacies whose pharmacists function as family pharmacists, and which contribute to community-based healthcare. A pharmacy can charge this premium if its facilities meet MHLW requirements and achieve certain targets. In the FY2020 medical treatment fee schedule revision, the community support system premium was raised to 38 points, from 35 points in FY2018. For pharmacies eligible to charge Category 1 basic dispensing fees (described above), the mandatory requirements are as follows: at least one pharmacist has to be licensed as a narcotics distributor; the pharmacy has to have a record of at least 12 medication management home visits per year; and the pharmacy has to be submitting reimbursement claims for family pharmacist guidance fees. Other non-mandatory criteria are a record of charging medication information provision fees more than 12 times a year, and the participation of a board-certified pharmacist in a multidisciplinary conference in the community at least once a year.

Generic drug dispensing premium

To charge a generic drug dispensing premium, a pharmacy must maintain a generic drug dispensing ratio above a certain level and post a notice stating that it actively dispenses generic drugs in easy-to-see locations both inside and outside the pharmacy. It also needs to post a notice that it charges a generic drug premium in an easily visible place somewhere inside the pharmacy. The FY2020 medical service fee revision set a premium of 15 points for pharmacies whose generic drug dispensing ratio is between 75% and 80% (down from 18 points), 22 points (unchanged) if the ratio is between 80% and 85%, and 28 points for a ratio above 85% (up from 26 points). The MHLW is gradually raising the bar to achieve its policy goal of 80% overall generic drug use in Japan.

Pharmaceutical management fees

The medical treatment fee revisions have also changed the pharmaceutical management fee schedule, for the purpose of giving an incentive to family pharmacists. Pharmaceutical management fees include a fee for medication history management and guidance, a family pharmacist guidance fee, a family pharmacist comprehensive management fee, and two categories of fees for medication adjustment support. The second such fee was added in the latest revision, specifically relating to patients prescribed six or more types of medication. Carrying a 100 point reimbursement, the fee is for centrally monitoring medication data and suggesting ways of eliminating duplicate medications, if requested by the patient. In addition to changing the family pharmacist requirements, the revision raised the family pharmacist guidance fee to 76 points (from 73 points), and the family pharmacist comprehensive management fee to 291 points (from 281 points).

Drug fees (NHI drug prices)

NHI drug price revisions tend to result in lower prices for most drugs. Although the price charged to patients is the official price, there is no regulation of the purchase price that hospitals and pharmacies pay, or the wholesale price, which tends to decrease amid competition among wholesalers. The NHI periodically surveys the prevailing market price, and if it determines that the wholesale price of a drug is decreasing, it will revise the official price downward in its next revision. Because of such revisions, pharmacies are subject to inventory valuation losses and may experience a decline in profitability.

Strengths and weaknesses

Strengths

Having established a chain of pharmacies near large general hospitals ahead of competition, the company’s per-pharmacy sales (JPY369mn) and prescription volume (21,600) are highest in the industry, reflecting its efficient pharmacy operations.

The company’s pharmacy network (670 pharmacies as of end-March 2021) is smaller than that of its two main competitors, Ain Holdings (1,065 pharmacies as of end-April 2020) and Qol Holdings (811 as of end-March 2021). Nevertheless, its annual per-pharmacy sales (JPY369mn) and prescription volume (21,600) are higher than the competition (figures for Ain Holdings are JPY244mn and 19,500, respectively). Shared Research attributes this to the fact that Nihon Chouzai in the 1980s led the industry in developing a network of “hospital-front pharmacies” (pharmacies located near or inside hospital premises), which are well positioned to draw patients. Shared Research thinks that being the first to have done so has enabled the company to gain relatively high recognition among doctors at major hospitals and medical institutions. This positioning is behind the company’s leading per-pharmacy sales and prescription volume.

The company has relatively strong capacity to expand the pharmacy network internally. It opened (not acquired) 127 pharmacies in the five years to FY03/21, with organic growth accounting for 62.3% of its store openings—both figures are higher than competitors.

The company has opened 231 pharmacies since 2015, when the Ministry of Health, Labor and Welfare (MLHW) published the Vision of Pharmacies for Patients. While this is fewer than its competitors specializing in dispensing pharmacies, Ain Holding