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 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 FY03/21, Nihon Chouzai reported sales of JPY279.0bn (+3.9% YoY), operating profit of JPY8.1bn (+6.8% YoY), recurring profit of JPY8.4bn (+13.6% YoY), and net income attributable to owners of the parent of JPY3.5bn (-47.2% YoY). Sales were up by 5.7% YoY in the Dispensing Pharmacy business and 6.1% YoY in the Pharmaceutical Manufacturing and Sales business, but dipped by 34.0% YoY in the Medical Professional Staffing and Placement business. Sales were hit by the ongoing pandemic-driven decrease in prescriptions (due to restrained hospital visits), but rose thanks to the effect of store openings and higher price per prescription with the increase in long-term prescriptions. Operating profit was boosted by a better-than-expected recovery in patient traffic to pharmacies in 2H, improved profitability due to strong sales of products newly added to the NHI drug price list in June and December 2020, and various cost-cutting measures.
The company revised its FY03/22 forecast on October 29, 2021. The revised forecast calls for sales of JPY294.6bn (+5.6% YoY), operating profit of JPY7.0bn (+13.6%YoY), recurring profit of JPY7.0bn (-16.8% YoY), net income attributable to owners of the parent of JPY4.0bn (-13.0% 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” (see FY03/22 company forecast for details). In the Pharmaceutical Manufacturing and Sales business, it will 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. That said, Pharmaceutical Manufacturing and Sales earnings are expected to fall short of initial company estimates (announced April 30, 2021) due to product recalls and manufacturing delays caused by quality control issues at sub-subsidiary Choseido Pharmaceutical Co., Ltd (unlisted).
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
FY03/11
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Est.
Sales
112,129
130,041
139,466
165,347
181,844
219,239
223,468
241,274
245,687
268,520
278,951
294,600
YoY
14.1%
16.0%
7.2%
18.6%
10.0%
20.6%
1.9%
8.0%
1.8%
9.3%
3.9%
5.6%
Gross profit
19,183
22,038
21,494
25,623
31,929
39,068
39,258
43,837
41,975
46,372
49,374
YoY
17.8%
14.9%
-2.5%
19.2%
24.6%
22.4%
0.5%
11.7%
-4.2%
10.5%
6.5%
Gross profit margin
17.1%
16.9%
15.4%
15.5%
17.6%
17.8%
17.6%
18.2%
17.1%
17.3%
17.7%
Operating profit
4,784
5,464
3,245
4,744
6,647
10,489
8,519
10,587
6,733
7,593
8,106
7,000
YoY
34.8%
14.2%
-40.6%
46.2%
40.1%
57.8%
-18.8%
24.3%
-36.4%
12.8%
6.8%
-13.6%
Operating profit margin
4.3%
4.2%
2.3%
2.9%
3.7%
4.8%
3.8%
4.4%
2.7%
2.8%
2.9%
2.4%
Recurring profit
4,359
4,941
2,855
4,188
6,003
9,878
7,976
10,138
6,077
7,405
8,409
7,000
YoY
40.7%
13.4%
-42.2%
46.7%
43.3%
64.6%
-19.3%
27.1%
-40.1%
21.9%
13.6%
-16.8%
Recurring profit margin
3.9%
3.8%
2.0%
2.5%
3.3%
4.5%
3.6%
4.2%
2.5%
2.8%
3.0%
2.4%
Net income
1,821
2,085
184
1,901
2,778
6,329
4,638
6,104
3,790
6,697
3,538
4,000
YoY
29.7%
14.5%
-91.2%
933.2%
46.1%
127.8%
-26.7%
31.6%
-37.9%
76.7%
-47.2%
13.1%
Net margin
1.6%
1.6%
0.1%
1.1%
1.5%
2.9%
2.1%
2.5%
1.5%
2.5%
1.3%
1.4%
Per-share data (split-adjusted; JPY)
Shares issued (year-end; '000)
32,048
32,048
32,048
32,048
32,048
32,048
32,048
32,048
32,048
32,048
32,048
EPS (JPY)
63.8
72.7
6.4
65.6
97.2
216.4
145.0
190.8
121.7
223.3
118.0
133.4
EPS (fully diluted; JPY)
-
-
-
-
-
-
-
-
-
-
-
Dividend per share (JPY)
15.0
17.5
17.5
17.5
17.5
22.5
25.0
25.0
25.0
25.0
25.0
25.0
Book value per share (JPY)
447
512
509
545
629
1,015
1,139
1,298
1,370
1,570
1,663
Balance sheet (JPYmn)
Cash and cash equivalents
7,276
12,622
14,583
15,429
13,952
32,385
21,200
28,464
29,749
32,254
32,893
Total current assets
28,920
36,543
43,037
53,373
60,096
84,838
82,327
83,121
80,132
87,414
89,246
Tangible fixed assets
25,465
30,796
32,459
42,123
48,819
51,997
68,513
75,662
69,806
66,082
64,785
Investments and other assets
8,368
9,429
10,219
10,694
10,848
10,650
10,733
9,837
11,833
12,628
13,277
Intangible assets
9,948
9,845
9,423
11,103
10,376
10,122
16,773
17,952
16,906
19,425
18,952
Total assets
72,702
86,615
95,140
117,295
130,141
157,609
178,347
186,573
178,677
185,551
186,262
Short-term debt
13,503
8,398
14,096
18,902
11,590
13,363
13,801
15,620
16,404
9,588
28,105
Total current liabilities
38,399
36,757
44,702
55,666
53,474
68,985
66,305
70,310
69,100
70,107
87,720
Long-term debt
20,388
33,879
34,184
43,133
54,832
51,958
71,680
69,069
62,906
63,442
44,226
Total fixed liabilities
21,522
35,141
35,735
45,779
59,031
56,151
75,595
74,756
68,504
68,370
48,673
Total liabilities
59,922
71,899
80,437
101,446
112,505
125,136
141,900
145,066
137,604
138,478
136,394
Shareholders' equity
12,780
14,716
14,702
15,849
17,635
32,473
36,447
41,504
41,069
47,072
49,868
Total net assets
12,780
14,716
14,702
15,849
17,635
32,473
36,447
41,506
41,073
47,072
49,868
Total interest-bearing debt
33,891
42,277
48,280
62,035
66,422
65,321
85,481
84,689
79,310
73,030
72,331
Cash flow statement (JPYmn)
Cash flows from operating activities
6,724
7,127
2,885
6,243
5,831
19,327
-940
23,141
13,572
13,192
11,213
Cash flows from investing activities
-8,269
-9,694
-6,422
-14,510
-8,437
-7,823
-28,444
-13,843
-1,770
-2,731
-7,767
Cash flows from financing activities
1,110
7,920
5,496
8,782
1,422
7,031
18,205
-2,034
-10,516
-7,955
-2,806
Financial ratios
ROA (RP-based)
6.3%
6.2%
3.1%
3.9%
4.9%
6.9%
4.7%
5.6%
3.3%
4.1%
4.5%
ROE
15.1%
15.2%
1.3%
12.4%
16.6%
25.3%
13.5%
15.7%
9.2%
15.2%
7.3%
Equity ratio
17.6%
17.0%
15.5%
13.5%
13.6%
20.6%
20.4%
22.2%
23.0%
25.4%
26.8%
Total asset turnover
163.2%
163.2%
153.5%
155.7%
147.0%
152.4%
133.0%
132.2%
134.5%
147.4%
150.0%
Net margin
1.6%
1.6%
0.1%
1.1%
1.5%
2.9%
2.1%
2.5%
1.5%
2.5%
1.3%
Source: Shared Research based on company data.
By segment
By segment
FY03/11
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.
Est.
Sales
112,129
130,041
139,466
165,347
181,844
219,239
223,468
241,274
245,687
268,520
278,951
293,400
YoY
14.1%
16.0%
7.2%
18.6%
10.0%
20.6%
1.9%
8.0%
1.8%
9.3%
3.9%
5.2%
Dispensing Pharmacy
106,714
123,549
131,052
145,957
157,999
190,874
189,327
205,192
208,622
231,001
244,072
256,700
YoY
13.8%
15.8%
6.1%
11.4%
8.3%
20.8%
-0.8%
8.4%
1.7%
10.7%
5.7%
5.2%
% of total
91.3%
91.6%
89.6%
83.8%
82.2%
82.1%
80.0%
80.4%
79.5%
80.5%
81.9%
81.9%
Pharmaceutical Manufacturing and Sales
7,579
8,133
11,196
23,192
27,550
32,598
36,821
38,066
40,659
43,072
45,699
49,800
YoY
53.0%
7.3%
37.7%
107.1%
18.8%
18.3%
13.0%
3.4%
6.8%
5.9%
6.1%
9.0%
% of total
6.5%
6.0%
7.7%
13.3%
14.3%
14.0%
15.6%
14.9%
15.5%
15.0%
15.3%
15.9%
Medical Professional Staffing and Placement
2,558
3,236
3,991
5,046
6,554
8,934
10,500
11,970
13,083
12,721
8,393
6,900
YoY
7.3%
26.5%
23.3%
26.4%
29.9%
36.3%
17.5%
14.0%
9.3%
-2.8%
-34.0%
-17.8%
% of total
2.2%
2.4%
2.7%
2.9%
3.4%
3.8%
4.4%
4.7%
5.0%
4.4%
2.8%
2.2%
Other
-4,722
-4,877
-6,773
-8,849
-10,259
-13,166
-13,180
-13,955
-16,679
-18,275
-19,213
Operating profit
4,784
5,464
3,245
4,744
6,647
10,489
8,519
10,587
6,733
7,593
8,106
9,200
YoY
34.8%
14.2%
-40.6%
46.2%
40.1%
57.8%
-18.8%
24.3%
-36.4%
12.8%
6.8%
13.5%
Operating profit margin
4.3%
4.2%
2.3%
2.9%
3.7%
4.8%
3.8%
4.4%
2.7%
2.8%
2.9%
3.1%
Dispensing Pharmacy
7,831
9,448
6,784
7,672
7,698
10,707
9,560
12,411
8,707
9,785
10,585
12,700
YoY
25.7%
20.6%
-28.2%
13.1%
0.3%
39.1%
-10.7%
29.8%
-29.8%
12.4%
8.2%
20.0%
Operating profit margin
7.3%
7.6%
5.2%
5.3%
4.9%
5.6%
5.0%
6.0%
4.2%
4.2%
4.3%
4.9%
% of total
96.8%
101.6%
90.9%
85.8%
70.9%
71.5%
73.6%
80.3%
72.1%
75.6%
77.6%
80.4%
Pharmaceutical Manufacturing and Sales
-1
-586
233
500
1,888
2,668
1,719
1,194
1,885
1,301
2,350
2,700
YoY
-
-
-
114.6%
277.6%
41.3%
-35.6%
-30.5%
57.9%
-31.0%
80.6%
14.9%
Operating profit margin
0.0%
-7.2%
2.1%
2.2%
6.9%
8.2%
4.7%
3.1%
4.6%
3.0%
5.1%
5.4%
% of total
0.0%
-6.3%
3.1%
5.6%
17.4%
17.8%
13.2%
7.7%
15.6%
10.1%
17.2%
17.1%
Medical Professional Staffing and Placement
262
437
450
770
1,266
1,599
1,710
1,842
1,478
1,851
712
400
YoY
-22.5%
66.6%
3.0%
71.1%
64.4%
26.3%
6.9%
7.7%
-19.8%
25.2%
-61.5%
-43.8%
Operating profit margin
10.3%
13.5%
11.3%
15.3%
19.3%
17.9%
16.3%
15.4%
11.3%
14.6%
8.5%
5.8%
% of total
3.2%
4.7%
6.0%
8.6%
11.7%
10.7%
13.2%
11.9%
12.2%
14.3%
5.2%
2.5%
Eliminations
-182
189
-15
52
11
0
36
28
-87
20
-34
Company-wide expenses
-3,126
-4,025
-4,206
-4,251
-4,217
-4,485
-4,506
-4,889
-5,250
-5,365
-5,507
Source: Shared Research based on company data
Recent updates
Fire at contract logistics center of consolidated subsidiary
2021-12-03
On November 29, 2021, Nihon Chouzai Co., Ltd. announced there was a fire at a contract logistics center of its consolidated subsidiary.
On November 29, 2021, there was a fire at a logistics center of Hitachi Transport System West Japan Co., Ltd., to which the company's consolidated subsidiary Nihon Generic Co., Ltd. outsources warehousing operations for its products.
Nihon Generic is using part of the logistics center as its West Japan Logistics Center. The company disclosed the following regarding the fire.
Date and time of occurrence: Around 8:50am on Monday, November 29, 2021
Location of fire: 2-chome Hokkoryokuchi, Konohana-ku, Osaka, Osaka Prefecture
Damages: No fatalities or injuries; currently investigating damages to products in storage under contract
Products damaged by the fire at the contract logistics center are expected to be covered by insurance. As of the time of this announcement, Nihon Chouzai said that it was investigating the impact of the fire on its earnings performance and that it would promptly disclose any matters that require public disclosure.
Absorption merger of consolidated subsidiaries (simplified, short-form merger)
2021-11-16
On November 15, 2021, Nihon Chouzai announced an absorption-type merger (simple and short-form merger) of a consolidated subsidiaries.
At a meeting held on the same day, the company's board of directors decided to merge its wholly owned subsidiaries Yajima Medical Brain Y.K. and Duon Y.K. into the company, effective January 1, 2022. The merger will be an absorption-type merger, with Yajima Medical Brain Y.K. and Duon Y.K. as the merged companies and Nihon Chouzai as the survivor company.
Purpose of the Merger
The dispensing pharmacy subsidiaries acquired by the company conducts the same operations and provides the same level of medical services as directly operated stores. The company has decided to merge its subsidiaries by absorption in order to strengthen its management functions and further improve the efficiency of its Dispensing Pharmacy business through the centralization of management.
Summary of the merger
Board of directors meeting to approve the merger: November 15, 2021
Execution of merger agreement: November 15, 2021
Scheduled date of the merger (effective date): January 1, 2022 (planned)
As the absorbed companies are consolidated subsidiaries of Nihon Chouzai, the impact of this merger on the company's consolidated performance is expected to be minimal.
Revised consolidated earnings forecasts for FY03/22
2021-10-29
Nihon Chouzai Co., Ltd. revised consolidated earnings forecasts for FY03/22.
The company revised full-year FY03/22 consolidated earnings forecasts as follows. Previous forecasts are company estimates made on April 30, 2021.
Net income: JPY4.0bn (previous forecast: JPY5.1bn)
EPS: JPY133.39 (previous forecast: JPY170.07)
The Tokushima prefectural government took administrative disciplinary action against Nihon Chouzai's subsidiary Choseido Pharmaceutical Co., Ltd. as was reported in the October 11, 2021 press release. Nihon Chouzai revised FY03/22 earnings forecasts to reflect the financial impact of this matter.
The company noted earnings are holding firm in the Dispensing Pharmacy and the Medical Professional Staffing and Placement businesses as sales and operating profit are running ahead of initial forecasts despite lingering effects from the pandemic. On the other hand, Pharmaceutical Manufacturing and Sales segment earnings look likely to fall short of initial company forecasts because of product recalls and manufacturing delays caused by the quality control issues at Choseido Pharmaceutical. Consequently, the company expects FY03/22 consolidated sales to exceed initial company forecasts while profits across the board come in below the original estimates.
Announcement of change in subsidiary (conversion of consolidated subsidiary into sub-subsidiary)
2021-10-21
Nihon Chouzai Co., Ltd. announced that it passed a resolution at its Board of Directors' meeting held on October 21, 2021 to transfer all shares in consolidated subsidiary Choseido Pharmaceutical Co., Ltd. to consolidated subsidiary Nihon Generic Co., Ltd. As a result of this share transfer, Choseido Pharmaceutical will become a wholly owned subsidiary of Nihon Generic while remaining in the Nihon Chouzai Group as a consolidated sub-subsidiary. The agreement concerning this transfer was concluded on October 22, 2021, and the stock transfer is scheduled for execution on November 30, 2021.
Purpose behind conversion of Choseido Pharmaceutical into a sub-subsidiary
The company decided to convert Choseido Pharmaceutical into a wholly owned subsidiary of Nihon Generic in an effort to integrate its Pharmaceutical Manufacturing and Sales Business and facilitate more efficient improvement in both its management of generic drug manufacturing and its quality control systems. This decision was made in response to the administrative action taken against Choseido Pharmaceutical, which has been outlined in the company's October 11, 2021 press release titled "Notice of Administrative Disciplinary Action against a Subsidiary of the Company (Choseido Pharmaceutical Co., Ltd.)." This transfer will enhance the effectiveness of the business improvement plan that the company will formulate moving forward. The entire Nihon Chouzai Group will cooperate on a unified front while implementing the business improvement plan and ensuring legal compliance.
All transfers of consolidated subsidiaries resulting from this share transfer will occur within the company's scope of consolidation. Accordingly, no changes in this scope will arise as a result of this transfer.
Choseido Pharmaceutical became a consolidated subsidiary of the company in April 2013 and has since been manufacturing and selling generic drugs as part of the Nihon Chouzai Group. Nihon Generic has also been producing and marketing generic drugs since its establishment in 2005.
Number of shares to be transferred, transfer price, and share ownership pre- and post-transfer
Share ownership before transfer: 1,650,000 shares (100.0% of voting rights)
Number of shares to be transferred: 1,650,000 shares (100.0% of voting rights)
Transfer price: JPY5.8bn
Future Outlook
The company has stated that impact from this share transfer on its performance in FY03/22 will be minor and maintains that it will promptly disclose any future relevant developments, should they arise.
Announcement regarding administrative disciplinary action against a subsidiary
2021-10-11
Nihon Chouzai Co., Ltd. has announced that a subsidiary was subjected to administrative disciplinary action.
On October 11, 2021, Choseido Pharmaceutical Co., Ltd., a Nihon Chouzai subsidiary, was subjected to administrative disciplinary action by the prefectural government of Tokushima in accordance with Japan’s Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices. This disciplinary action was conducted because Choseido Pharmaceutical manufactured pharmaceutical products for Nihon Chouzai using unauthorized methods and did not conduct necessary measures when results generated by drug stability monitoring procedures deviated from prescribed standards.
The company treats this incident very seriously and will support Choseido Pharmaceutical as it formulates a business improvement plan. Meanwhile, Nihon Chouzai will implement groupwide measures targeting recurrence prevention.
The company is currently investigating the impact this incident will have on its financial results in FY03/22 and will promptly disclose all relevant information as it becomes available.
Details of administrative disciplinary action
Suspension of manufacturing and sales operations (31 days)
Main Plant: Suspension of manufacturing operations (31 days)
Main Plant 2: Suspension of manufacturing operations (29 days)
Kawauchi Plant: Suspension of manufacturing operations (18 days)
Order requiring improvements in manufacturing and sales operations
Trends and outlook
Quarterly trends and results
Cumulative
FY03/20
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
% of Est.
1H Est.
Sales
64,316
130,297
199,040
268,520
68,306
135,999
208,337
278,951
71,851
146,202
102.8%
142,200
YoY
8.4%
9.8%
8.5%
9.3%
6.2%
4.4%
4.7%
3.9%
5.2%
7.5%
4.6%
Gross profit
11,147
22,439
34,351
46,372
10,962
23,272
36,679
49,374
12,471
25,194
YoY
14.2%
15.5%
12.0%
10.5%
-1.7%
3.7%
6.8%
6.5%
13.8%
8.3%
Gross profit margin
17.3%
17.2%
17.3%
17.3%
16.0%
17.1%
17.6%
17.7%
17.4%
17.2%
SG&A expenses
9,377
18,373
28,719
38,779
10,533
20,498
30,911
41,267
11,534
22,778
YoY
1.3%
2.8%
9.3%
10.0%
12.3%
11.6%
7.6%
6.4%
9.5%
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%
Operating profit
1,770
4,066
5,632
7,593
429
2,774
5,767
8,106
936
2,416
80.5%
3,000
YoY
253.3%
162.8%
28.4%
12.8%
-75.8%
-31.8%
2.4%
6.8%
118.2%
-12.9%
8.1%
Operating profit margin
2.8%
3.1%
2.8%
2.8%
0.6%
2.0%
2.8%
2.9%
1.3%
1.7%
2.1%
Recurring profit
1,710
4,001
5,449
7,405
337
2,665
5,773
8,409
993
2,528
84.3%
3,000
YoY
329.6%
216.3%
41.3%
21.9%
-80.3%
-33.4%
5.9%
13.6%
194.7%
-5.1%
12.6%
Recurring profit margin
2.7%
3.1%
2.7%
2.8%
0.5%
2.0%
2.8%
3.0%
1.4%
1.7%
2.1%
Net income
833
2,094
3,059
6,697
356
1,555
3,410
3,538
427
1,340
95.7%
1,400
YoY
1,982.5%
181.5%
29.1%
76.7%
-57.3%
-25.7%
11.5%
-47.2%
19.9%
-13.8%
-10.0%
Net income margin
1.3%
1.6%
1.5%
2.5%
0.5%
1.1%
1.6%
1.3%
0.6%
0.9%
1.0%
Quarterly
FY03/20
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
% 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
49.6%
294,600
YoY
8.4%
11.1%
6.2%
11.6%
6.2%
2.6%
5.2%
1.6%
5.2%
9.8%
5.6%
Gross profit
11,147
11,292
11,912
12,021
10,962
12,310
13,407
12,695
12,471
12,723
YoY
14.2%
16.8%
5.9%
6.4%
-1.7%
9.0%
12.6%
5.6%
13.8%
3.4%
Gross profit margin
17.3%
17.1%
17.3%
17.3%
16.0%
18.2%
18.5%
18.0%
17.4%
17.1%
SG&A expenses
9,377
8,996
10,346
10,060
10,533
9,965
10,413
10,356
11,534
11,244
YoY
1.3%
4.3%
23.1%
12.3%
12.3%
10.8%
0.6%
2.9%
9.5%
12.8%
SG&A ratio
14.6%
13.6%
15.1%
14.5%
15.4%
14.7%
14.4%
14.7%
16.1%
15.1%
Operating profit
1,770
2,296
1,566
1,961
429
2,345
2,993
2,339
936
1,480
34.5%
7,000
YoY
253.3%
119.5%
-44.8%
-16.5%
-75.8%
2.1%
91.1%
19.3%
118.2%
-36.9%
-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%
2.4%
Recurring profit
1,710
2,291
1,448
1,956
337
2,328
3,108
2,636
993
1,535
36.1%
7,000
YoY
329.6%
164.2%
-44.1%
-12.0%
-80.3%
1.6%
114.6%
34.8%
194.7%
-34.1%
-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%
2.4%
Net income
833
1,261
965
3,638
356
1,199
1,855
128
427
913
33.5%
4,000
YoY
1,982.5%
79.1%
-40.6%
156.0%
-57.3%
-4.9%
92.2%
-96.5%
19.9%
-23.9%
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%
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
FY03/22
(JPYmn)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
% of Est.
FY Est.
Sales
64,316
130,297
199,040
268,520
68,306
135,999
208,337
278,951
71,851
146,202
49.6%
294,600
YoY
8.4%
9.8%
8.5%
9.3%
6.2%
4.4%
4.7%
3.9%
5.2%
7.5%
5.6%
Dispensing Pharmacy
54,814
111,763
170,695
231,001
58,200
118,236
181,125
244,072
62,912
128,749
YoY
8.7%
10.6%
9.6%
10.7%
6.2%
5.8%
6.1%
5.7%
8.1%
8.9%
% of total
85.2%
85.8%
85.8%
86.0%
85.2%
86.9%
86.9%
87.5%
87.6%
88.1%
Pharmaceutical Manufacturing and Sales
10,881
21,040
32,564
43,072
12,073
22,812
35,235
45,699
12,158
23,669
YoY
11.6%
8.3%
6.2%
5.9%
11.0%
8.4%
8.2%
6.1%
0.7%
3.8%
% of total
16.9%
16.1%
16.4%
16.0%
17.7%
16.8%
16.9%
16.4%
16.9%
16.2%
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
YoY
11.8%
6.7%
0.3%
-2.8%
-18.2%
-25.8%
-31.8%
-34.0%
-35.4%
-27.4%
% of total
5.6%
5.2%
4.9%
4.7%
4.3%
3.7%
3.2%
3.0%
2.6%
2.5%
Operating profit
1,770
4,066
5,632
7,593
429
2,774
5,767
8,106
936
2,416
34.5%
7,000
YoY
253.3%
162.8%
28.4%
12.8%
-75.8%
-31.8%
2.4%
6.8%
118.2%
-12.9%
-13.6%
Operating profit margin
2.8%
3.1%
2.8%
2.8%
0.6%
2.0%
2.8%
2.9%
1.3%
1.7%
2.4%
Dispensing Pharmacy
1,843
4,408
6,581
9,785
464
3,624
6,991
10,585
1,888
5,041
YoY
31.3%
37.9%
9.0%
12.4%
-74.8%
-17.8%
6.2%
8.2%
306.9%
39.1%
Operating profit margin
3.4%
3.9%
3.9%
4.2%
0.8%
3.1%
3.9%
4.3%
3.0%
3.9%
% of total
56.0%
66.3%
68.9%
75.6%
25.7%
66.1%
71.0%
77.6%
72.1%
88.8%
Pharmaceutical Manufacturing and Sales
798
1,155
1,534
1,301
833
1,163
2,205
2,350
451
195
YoY
1,252.5%
235.8%
29.5%
-31.0%
4.4%
0.7%
43.7%
80.6%
-45.9%
-83.2%
Operating profit margin
7.3%
5.5%
4.7%
3.0%
6.9%
5.1%
6.3%
5.1%
3.7%
0.8%
% of total
24.2%
17.4%
16.1%
10.1%
46.1%
21.2%
22.4%
17.2%
17.2%
3.4%
Medical Professional Staffing and Placement
651
1,082
1,442
1,851
509
696
653
712
278
440
YoY
62.3%
71.7%
36.6%
25.2%
-21.8%
-35.7%
-54.7%
-61.5%
-45.4%
-36.8%
Operating profit margin
18.1%
16.0%
14.8%
14.6%
17.3%
13.9%
9.8%
8.5%
14.6%
12.1%
% of total
19.8%
16.3%
15.1%
14.3%
28.2%
12.7%
6.6%
5.2%
10.6%
7.8%
Other
Company-wide, eliminations
-1,523
-2,579
-3,927
-5,345
-1,377
-2,709
-4,082
-5,542
-1,681
-3,260
By segment (quarterly)
FY03/20
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
% of Est.
1H Est.
Sales
64,316
65,981
68,743
69,480
68,306
67,693
72,338
70,614
71,851
74,351
102.8%
142,200
YoY
8.4%
11.1%
6.2%
11.6%
6.2%
2.6%
5.2%
1.6%
5.2%
9.8%
4.6%
Dispensing Pharmacy
54,814
56,949
58,932
60,306
58,200
60,036
62,889
62,947
62,912
65,837
103.9%
123,900
YoY
8.7%
12.5%
7.8%
14.0%
6.2%
5.4%
6.7%
4.4%
8.1%
9.7%
4.8%
% of total
85.2%
86.3%
85.7%
86.8%
85.2%
88.7%
86.9%
89.1%
87.6%
88.5%
87.1%
Pharmaceutical Manufacturing and Sales
10,881
10,159
11,524
10,508
12,073
10,739
12,423
10,464
12,158
11,511
96.2%
24,600
YoY
11.6%
5.0%
2.6%
5.1%
11.0%
5.7%
7.8%
-0.4%
0.7%
7.2%
7.8%
% of total
16.9%
15.4%
16.8%
15.1%
17.7%
15.9%
17.2%
14.8%
16.9%
15.5%
17.3%
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
107.3%
3,400
YoY
11.8%
1.4%
-11.7%
-11.6%
-18.2%
-34.5%
-45.3%
-41.4%
-35.4%
-16.1%
-32.3%
% of total
5.6%
4.8%
4.3%
4.3%
4.3%
3.1%
2.2%
2.5%
2.6%
2.3%
2.4%
Operating profit
1,770
2,296
1,566
1,961
429
2,345
2,993
2,339
936
1,480
80.5%
3,000
YoY
253.3%
119.5%
-44.8%
-16.5%
-75.8%
2.1%
91.1%
19.3%
118.2%
-36.9%
8.1%
Operating profit margin
2.8%
3.5%
2.3%
2.8%
0.6%
3.5%
4.1%
3.3%
1.3%
2.0%
2.1%
Dispensing Pharmacy
1,843
2,565
2,173
3,204
464
3,160
3,367
3,594
1,888
3,153
105.0%
4,800
YoY
31.3%
43.1%
-23.4%
19.9%
-74.8%
23.2%
54.9%
12.2%
306.9%
-0.2%
32.5%
Operating profit margin
3.4%
4.5%
3.7%
5.3%
0.8%
5.3%
5.4%
5.7%
3.0%
4.8%
3.9%
% of total
56.0%
38.6%
22.7%
24.8%
25.7%
57.6%
34.2%
26.3%
72.1%
55.5%
78.7%
Pharmaceutical Manufacturing and Sales
798
357
379
-233
833
330
1,042
145
451
-256
17.7%
1,100
YoY
-
25.3%
-54.9%
-
4.4%
-7.6%
174.9%
-
-45.9%
-
-5.4%
Operating profit margin
7.3%
3.5%
3.3%
-2.2%
6.9%
3.1%
8.4%
1.4%
3.7%
-2.2%
4.5%
% of total
24.2%
5.4%
4.0%
-1.8%
46.1%
6.0%
10.6%
1.1%
17.2%
-4.5%
18.0%
Medical Professional Staffing and Placement
651
431
360
409
509
187
-43
59
278
162
220.0%
200
YoY
62.3%
88.2%
-15.5%
-3.1%
-21.8%
-56.6%
-
-85.6%
-45.4%
-13.4%
-71.3%
Operating profit margin
18.1%
13.6%
12.2%
13.7%
17.3%
9.0%
-2.7%
3.4%
14.6%
9.3%
5.9%
% of total
19.8%
6.5%
3.8%
3.2%
28.2%
3.4%
-0.4%
0.4%
10.6%
2.9%
3.3%
Other
-
Company-wide, eliminations
-1,523
-1,056
-1,348
-1,418
-1,377
-1,332
-1,373
-1,460
-1,681
-1,579
-3,100
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
Sales (JPYmn)
54,814
111,763
170,695
231,001
58,200
118,236
181,125
244,072
62,912
YoY
8.7%
10.6%
9.6%
10.7%
6.2%
5.8%
6.1%
5.7%
8.1%
Sales per store
91
184
275
370
88
179
274
369
93
YoY
7.1%
7.6%
4.6%
5.1%
-3.3%
-2.7%
-0.4%
-0.3%
5.7%
No. of prescriptions ('000)
3,576
7,219
10,980
14,704
3,278
6,858
10,579
14,223
3,755
YoY
2.7%
4.2%
3.5%
3.6%
-8.3%
-5.0%
-3.7%
-3.3%
14.6%
Price per prescription
15,110
15,239
15,199
15,479
17,473
16,965
16,833
16,869
16,474
YoY
6.2%
6.1%
5.3%
7.1%
15.6%
11.3%
10.7%
9.0%
-5.7%
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
Openings
7
20
53
65
9
19
25
29
11
20
Nihon Chouzai's own pharmacies
5
16
26
35
4
14
19
22
7
Pharmacies through M&A
2
4
27
30
5
5
6
7
4
[By store type]
Hospital-front
3
13
31
38
4
9
12
13
8
Hybrid
4
18
22
27
5
10
13
16
3
Closures
5
7
10
13
1
4
5
9
2
5
Store count (quarter-end)
600
611
641
650
658
665
670
670
679
685
FY03/20
FY03/21
FY03/22
Quarterly
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Openings
7
13
33
12
9
10
6
4
11
9
Nihon Chouzai's own pharmacies
5
11
10
9
4
10
5
3
7
Pharmacies through M&A
2
2
23
3
5
-
1
1
4
[By store type]
Hospital-front
3
10
18
7
4
5
3
1
8
Hybrid
4
14
4
5
5
5
3
3
3
Closures
5
2
3
3
1
3
1
4
2
3
Store count (quarter-end)
600
611
641
650
658
665
670
670
679
685
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
Sales (JPYmn)
10,881
10,159
11,524
10,508
12,073
10,739
12,423
10,464
12,158
11,511
No. of new NHI listings
8
-
14
-
16
-
5
-
12
-
Note: Of the 12 products newly listed in the National Health Insurance (NHI) drug price list in Q1 FY03/22, two were scheduled to be launched in July 2021 and three in August–September 2021. Source: Shared Research based on company data
Q2 FY03/22 (out October 29, 2021)
Overview
Sales: JPY146.2bn (+7.5% YoY, 102.8% of 1H company forecast)
Operating profit: JPY2.4bn (-12.9% YoY, 80.5%)
Recurring profit: JPY2.5bn (-5.1% YoY, 84.3%)
Net income attributable to owners of the parent: JPY1.3bn (-13.8% YoY 95.7%)
The company revised its full-year FY03/22 forecasts (see later section).
Key results
Sales were JPY146.2bn, up 7.5% YoY. Factors
contributing to sales growth included the higher prescription volume and the contribution of
new pharmacies in the Dispensing Pharmacy business (sales up 8.9% YoY), as well as
robust sales of products newly listed in the NHI drug price list in 2019, 2020, and in June 2021 in the Pharmaceutical Manufacturing and Sales business (+3.8%
YoY). Sales in the Medical Professional Staffing and Placement business were
down 27.4% YoY, due largely to the pandemic-driven decline in temporary staffing
demand.
Operating profit declined 12.9% YoY. The OPM declined 0.3pp YoY from 2.0% to 1.7%.
Progress against the company's full-year FY03/22 forecast (revised on October 29, 2021) was as follows.
Sales reached 49.6% of the forecast (48.8% in 1H FY03/21 versus full-year results), operating profit 34.5% (34.2%), recurring profit 36.1% (31.7%), and net income attributable to owners of the parent 33.5% (44.0%).
Dispensing Pharmacy business
Sales: JPY128.7bn (+8.9% YoY, 103.9% of 1H forecast, revised full-year forecast not disclosed [48.4% in 1H FY03/21 versus full-year results])
Sales increased 8.9% YoY to JPY128.7bn while operating profit was up 39.1% to JPY5.0bn. Both sales and profit were up YoY, despite lingering effects of COVID-19, reflecting
the higher prescription volume and ｄるdrug fee income as well as contributions from pharmacies opened in
FY03/21.
The number of pharmacies at end-Q2 FY03/22 was 685 (including one merchandise store; up 20 from 665 at end-Q2 FY03/21) as a result of 20 openings and five closures during 1H.
Generic drugs represented 88.2% of the company’s total pharmaceutical usage in volume terms as of end-September 2021. The share of pharmacies providing at-home medical care services (pharmacies that have carried out 12 or more at-home visits annually) came to 92.0%.
Pharmaceutical Manufacturing and Sales business
Sales: JPY23.7bn (+3.8% YoY, 96.2% of 1H forecast, revised full-year forecast not disclosed [49.9% in 1H FY03/21 versus full-year results])
Sales increased 3.8% YoY to JPY23.7bn while operating profit declined 83.2% YoY to JPY195mn. Sales were up YoY, despite pricing erosion of existing drugs due to the NHI price revision, reflecting rising sales of drugs newly included in the NHI drug price list in 2019, 2020, and in June 2021. Operating profit was down YoY, despite cost-cutting measures, marketing policies focused on profitability, and continued expansion of inhouse drugs (including newly NHI listed items), because of product recalls and manufacturing delays caused by quality control issues at Choseido Pharmaceutical.
The company launched 12 newly listed products in 1H FY03/22, bringing the total number of product offerings to 673 at end-September 2021 (including two OTC drugs).
Medical Professional Staffing and Placement business
Sales: JPY3.6bn (-27.4% YoY, 107.3% of 1H forecast, revised full-year forecast not disclosed [59.9% in 1H FY03/21 versus full-year results])
Sales declined 27.4% YoY to JPY3.6bn while operating profit receded 36.8% to JPY440mn. The fall in sales is mainly attributable to the reduced demand for temporary pharmacist staffing amid the pandemic. Operating profit was down YoY as well, despite continued demand for physician placements to help carry out the COVID-19 vaccination effort, due to reduced temporary pharmacist staffing demand.
FY03/22 company forecast (announced October 29, 2021)
FY03/21
FY03/22
YoY
(JPYmn)
1H Act.
2H Act.
FY Act.
1H Act.
2H Est.
FY Est.
1H Act.
2H Est.
FY Est.
Sales
135,999
142,952
278,951
146,202
148,398
294,600
7.5%
3.8%
5.6%
Cost of sales
112,726
116,851
229,577
121,007
Gross profit
23,272
26,102
49,374
25,194
8.3%
Gross profit margin
17.1%
18.3%
17.7%
17.2%
SG&A expenses
20,498
20,769
41,267
22,778
11.1%
SG&A ratio
15.1%
14.5%
14.8%
15.6%
Operating profit
2,774
5,332
8,106
2,416
4,584
7,000
-12.9%
-14.0%
-13.6%
Operating profit margin
2.0%
3.7%
2.9%
1.7%
3.1%
2.4%
Recurring profit
2,665
5,744
8,409
2,528
4,472
7,000
-5.1%
-22.1%
-16.8%
Recurring profit margin
2.0%
4.0%
3.0%
1.7%
3.0%
2.4%
Net income
1,555
1,983
3,538
1,340
2,660
4,000
-13.8%
34.1%
13.1%
Net margin
1.1%
1.4%
1.3%
0.9%
1.8%
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
FY03/21
FY03/22
YoY
(JPYmn)
1H Act.
2H Act.
FY Act.
1H Act.
2H Est.
FY Est.
1H Act.
2H Est.
FY Est.
Dispensing Pharmacy
Sales
118,236
125,836
244,072
128,749
8.9%
Cost of sales
100,875
105,143
206,018
Gross profit
17,361
20,693
38,054
Gross profit margin
14.7%
16.4%
15.6%
SG&A expenses
13,736
13,732
27,468
SG&A ratio
11.6%
10.9%
11.3%
Operating profit
3,624
6,961
10,585
5,041
39.1%
Operating profit margin
3.1%
5.5%
4.3%
3.9%
Pharmaceutical Manufacturing and Sales
Sales
22,812
22,887
45,699
23,669
3.8%
Cost of sales
19,394
19,410
38,804
Gross profit
3,417
3,477
6,894
Gross profit margin
15.0%
15.2%
15.1%
SG&A expenses
2,254
2,290
4,544
SG&A ratio
9.9%
10.0%
9.9%
Operating profit
1,163
1,187
2,350
195
-83.2%
Operating profit margin
5.1%
5.2%
5.1%
0.8%
Medical Professional Staffing and Placement
Sales
5,025
3,368
8,393
3,648
-27.4%
Cost of sales
2,446
1,470
3,916
Gross profit
2,578
1,899
4,477
Gross profit margin
51.3%
56.4%
53.3%
SG&A expenses
1,881
1,883
3,764
SG&A ratio
37.4%
55.9%
44.8%
Operating profit
696
16
712
440
-36.8%
Operating profit margin
13.9%
0.5%
8.5%
12.1%
Note: The company did not provide a segment breakdown of FY03/22 forecasts in its October 29, 2021 announcement. Source: Shared Research based on company data
The company revised FY03/22 earnings forecasts (announced April 30, 2021) on October 29, 2021.
Sales: JPY294.6bn (previous forecast: JPY293.4bn)
Operating profit: JPY7.0bn (JPY9.2bn)
Recurring profit: JPY7.0bn (JPY9.1bn)
Net income: JPY4.0bn (JPY5.1bn)
EPS: JPY133.39 (JPY170.07)
Reasons cited for earnings forecast revision
The prefectural government of Tokushima issued an administrative disciplinary action against the company's subsidiary Choseido Pharmaceutical as noted in the October 11, 2021 press release. In response, Nihon Chouzai revised its FY03/22 consolidated forecasts after assessing the impact to earnings.
The company noted that earnings are holding firm in the Dispensing Pharmacy and Medical Professional Staffing and Placement businesses as sales and operating profit are running ahead of initial company guidance despite some lingering adverse effects from the pandemic. That said, Pharmaceutical Manufacturing and Sales earnings are expected to fall short of original forecasts as quality control problems at Choseido Pharmaceutical led to product recalls and delayed manufacturing. The net effect is that the company expects FY03/22 consolidated sales to exceed initial company estimates while profits fall short across the board.
The following information is based on our post-Q1 results company contact and we plan to update the report after further follow-up.
Summary
For FY03/22, the company forecasts sales of JPY293.4bn (+5.2% YoY), operating profit of JPY9.2bn (+13.5%YoY), recurring profit of JPY9.1bn (+8.2% YoY), net income attributable to owners of the parent of JPY5.1bn (+44.1% YoY). Nihon Chouzai is expecting sales to reach an all-time high.
The company expects the business environment to remain much the same across FY03/22 as it was in 2H FY03/21, when the number of prescriptions swung upward YoY on an all-store basis and declines in customer footfall slowed despite some ongoing impact from the COVID-19 pandemic.
The company apparently hired more than 500 new pharmacists as of April 2021. For some time now, Nihon Chouzai has been looking to grow pharmacist numbers principally by hiring new graduates, who then receive education and training in-house before being deployed across the pharmacy network. The company expects labor costs to decrease over the longer term as a consequence of focusing on new graduates in place of mid-career hires and temporary staff.
Dispensing Pharmacy business
Sales: JPY256.7bn (+5.2% YoY)
Operating profit: JPY12.7bn (+20.0% YoY)
OPM: 4.9% (4.3% in FY03/21)
For FY03/22, the company assumes a price per prescription of JPY16,000 (-5.2% YoY) and looks for prescriptions to number 15,700,000 over the full year (+10.4% YoY). It also assumes 40 new pharmacy openings (organic growth), with potential for more to be added via M&A.
The company commented that the number of prescriptions (customer traffic) fell short of target because of another state of emergency being declared, but it expects progress in line with its forecast from Q2 onward.
Pharmaceutical Manufacturing and Sales business
Sales: JPY49.8bn (+9.0% YoY)
Operating profit: JPY2.7bn (+14.9% YoY)
OPM: 5.4% (5.1% in FY03/21)
In addition, from April 2021, the Ministry of Health, Labour and Welfare (MHLW) switched from making biennial revisions to NHI drug prices to making annual revisions. As such, the company recognizes that the dispensing pharmacy and pharmaceutical industries are facing a tougher business environment.
But while it expects some impact from NHI drug price revisions (in the form of downward pressure on prices), the company plans to increase sales volume of in-house manufactured products (chiefly newly NHI listed items).
On August 3, 2021, the company reported that having conducted its own inspection of the manufacturing process of Choseido Pharmaceutical, it had to suspend manufacturing and shipment of 44 pharmaceutical products made there. The company said it would proceed with shipment adjustment until it had a stable supply structure in place, and suspend sales of these products once inventories ran out. As of August 3, it did not have the means to supply alternatives for all products. Shared Research understands that this may have an unforeseen negative impact on sales and profit of the Pharmaceutical Manufacturing and Sales business in Q2 and beyond.
Medical Professional Staffing and Placement business
Sales: JPY6.9bn (-17.8% YoY)
Operating profit: JPY400mn (-43.8% YoY)
OPM: 5.8% (8.5% in FY03/21)
In the Medical Professional Staffing and Placement business, the company sees both sales and profit decreasing YoY, as although it plans to strengthen the doctor placement business and expand into new business fields, it assumes that temporary staffing demand will remain weak. The forecast is unchanged at end-Q1. The company assumes that the growth rate of doctor placements will slow as the COVID-19 vaccination program progresses.
Reference: Company forecasts by quarter
FY03/22
(JPYmn)
Q1 Est.
Q2 Est.
Q3 Est.
Q4 Est.
Sales
70,400
71,700
76,400
74,700
Cost of sales
57,500
58,600
61,800
60,800
Gross profit
12,800
13,100
14,500
13,900
Gross profit margin
18.2%
18.3%
19.0%
18.6%
SG&A expenses
11,900
10,900
11,500
10,800
SG&A ratio
16.9%
15.2%
15.1%
14.5%
Operating profit
900
2,100
3,000
3,000
Operating profit margin
1.3%
2.9%
3.9%
4.0%
Recurring profit
800
2,100
3,000
3,000
Recurring profit margin
1.1%
2.9%
3.9%
4.0%
Dispensing Pharmacy
Sales
60,900
63,000
66,600
66,000
Gross profit
9,600
10,100
11,100
11,000
Gross profit margin
15.8%
16.0%
16.7%
16.7%
Operating profit
1,800
3,000
3,700
4,100
Operating profit margin
3.0%
4.8%
5.6%
6.2%
Pharmaceutical Manufacturing and Sales
Sales
12,600
12,000
13,400
11,600
Gross profit
1,900
1,800
2,300
1,800
Gross profit margin
15.1%
15.0%
17.2%
15.5%
Operating profit
500
600
1,000
500
Operating profit margin
4.0%
5.0%
7.5%
4.3%
Medical Professional Staffing and Placement
Sales
1,800
1,600
1,700
1,800
Gross profit
1,100
1,000
1,000
1,000
Gross profit margin
61.1%
62.5%
58.8%
55.6%
Operating profit
200
0
0
100
Operating profit margin
11.1%
0.0%
0.0%
5.6%
Note: figures are rounded down to the nearest 100 million yen. Source: Shared Research based on company data
Key undertakings from FY03/22
Response to revision of Pharmaceuticals and Medical Devices Act (enabling pharmacies to be certified as “regional cooperation pharmacies,” or “specialized medical institution cooperation pharmacies”)
In the dispensing pharmacy industry, certification of pharmacies with specialized functions will start in August 2021, as per the revised Pharmaceuticals and Medical Devices Act (Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices) promulgated in 2019. Under this system, the dispensing pharmacies will be classified as either “regional cooperation pharmacies” (those capable of collaborating with medical institutions to manage patients’ medication information, including for inpatients and patients receiving at-home care), or “specialized medical institutions cooperation pharmacies” (which have the ability to handle advanced pharmaceutical management and a high level of expertise in oncology and other areas). Dispensing pharmacies will be able to obtain certification as either one of these from the prefectural governor.
The company says the revised Act will increasingly require the kind of pharmacies that are capable of meeting patients’ needs. In the Dispensing Pharmacy business, it will work to develop highly user-friendly pharmacies and cultivate pharmacists with advanced expertise to provide the kind of pharmacies the Japanese government envisions. It also looks to deliver quality medical care services to patients through its certified specialized medical institutions cooperation pharmacies and regional cooperation pharmacies, via the undertakings described below.
Regional cooperation pharmacies: Expand at-home medical care (provided by 94.1% of pharmacies as at end-FY03/21), hire more family pharmacists (on staff at 82% of pharmacies), establish more certified Nutrition Care Stations* (14 pharmacies certified as such as of April 2021), expand Health Support Pharmacies (91) and Health Check-up Stations.
Specialized Medical Institution Cooperation Pharmacies: Cultivate expert pharmacists certified in outpatient cancer treatment and provide oncology expertise training for other pharmacies
Joint undertakings: Install the advanced drug information (DI) web platform FINDAT at pharmacies (more detail below), and strengthen the function of providing drug information in local communities
*Certified Nutrition Care Stations: Nutrition Care Stations are community-based hubs providing nutrition care, with certification from the Japan Dietetic Association. They provide nutritional diet guidance in cooperation with medical institutions as well as day-to-day nutritional consultations for patients who find it difficult to travel to and forth to hospitals. In addition, they offer cooking classes, menu-planning advice, and specific health guidance for local governments, health insurance unions, private companies, and medical institutions.
About FINDAT
FINDAT is an online drug information platform for healthcare professionals, neutrally evaluating drug information comprehensively collected from various data sources, domestic and overseas guidelines, and secondary information databases. “FINDAT” is a coined word that combines “FIND” and “ATLAS.”
The types of information provided include:
Lists of recommended pharmaceuticals to aid medical institutions and communities in establishing formularies (the most effective and economical drug-use policy for patients).
Materials providing comprehensive comparison of the efficacy, safety, and economics of different drugs with the same indications
Materials to aid medical institutions in identifying newly approved pharmaceuticals with particularly significant clinical impact and evaluating them on scientific grounds, with a view to potentially using them
Collection and evaluation of pharmaceutical safety information disseminated by overseas regulatory authorities (e.g., FDA, EMA, and MHRA)
Efficacy and safety evaluation for existing pharmaceuticals that have had clinically significant indications added
Using FINDAT can help reduce the burden of drug information (DI) work, including peer review of original papers and information gathering on new drugs. This can aid in shifting from product service to interpersonal service, enhancing team medical care, and establishing formularies (the most effective, safe, and economical drug-use policy for patients).
Nihon Chouzai released this service on June 1, 2020. According to the company, as of May 25, 2020, FINDAT was Japan’s first drug information web platform.
In addition to introducing the FINDAT platform at its own dispensing pharmacies, Nihon Chouzai plans to roll the service out to medical institutions (hospitals), educational institutions, and eventually, non-group dispensing pharmacies. To support this expansion of the service, the company will also train and hire specialist personnel including system engineers and data scientists.
Digital transformation (DX) initiatives
The company will take the lead on measures to enhance user friendliness and pharmacy functions with online medication guidance and online insurance coverage confirmation. It intends to conduct group business administration by making full use of its ICT capabilities, including for the development of next-generation dispensing systems.
Over the next three years, the company will invest a total of JPY4.5bn in the development of next-generation dispensing systems. According to Nihon Chouzai, it is the only company in the dispensing pharmacy industry developing and operating proprietary dispensing systems for use by pharmacies.
To date, Nihon Chouzai has developed/introduced a number of dispensing systems (platforms), as follows.
Voice input system (2005): Assists with input of medication history
Vein biometric authentication system (2011): Guarantees the authenticity of pharmacists’ work, also optimizing working hours
At-home medical care communication system (2012): Used as a tool to streamline the work of pharmacists who conduct at-home medical care
Electronic medication notebook Okusuri Techo Plus (2014): Links with the dispensing system to enable centralized management of medication history, with roughly 750,000 members as of March 2021
Health consultation system (2017): Centrally records information such as health consultations at pharmacies and health consultations conducted by registered dieticians at Health Check Stations
Nihon Chouzai Online Store (2019): Online store offering approximately 2,000 different healthcare products, including pharmaceuticals, medical equipment, cosmetics, health foods, and hygiene products
Remote medication guidance (2019): Conducted in Aichi Prefecture, Fukuoka City, and Chiba City. In addition, starting in September 2020 the company has been able to offer online medication guidance for prescriptions given online (under the revised Pharmaceuticals and Medical Devices Act)
Automation of dispensing work (2019): The company is promoting automation of picking work in pharmacies (legal revisions allowed non-pharmacists to perform picking work under the supervision of pharmacists)
Strategies for growing Medical Professional Staffing and Placement Business
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, primarily through Workers Doctors Inc.* (unlisted), to further expand its physicians placement business.
* Workers Doctors Inc. provides industrial physician services mainly in the Tokyo metropolitan area. In November 2020, the company's consolidated subsidiary Medical Resources Co., Ltd. (unlisted) acquired all shares in Workers Doctors, making it a wholly owned subsidiary (a second-tier subsidiary of the company).
With Workers Doctors now a subsidiary, Nihon Chouzai’s future vision is as follows.
Strengthen physician placement business, with eye to building new growth engine alongside pharmacist business
Utilize nationwide network of Medical Resources Co., Ltd. to support nationwide rollout of Workers Doctors’ network from one city and four prefectures at present
Realize group synergies and achieve revitalization of occupational doctor and existing registered doctor services
Develop online medical checks and promote DX
Pursue comprehensive health care company strategy, providing support for corporate health management so that workers can maintain good physical, mental and social health
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 Chozai
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 Chozai
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 Chozai
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
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)
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)
・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 Chozai
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
Advanced pharmaceutical
management
Training of pharmacists specializing in disease types
Hybrid pharmacies
Family
pharmacist/pharmacy functions
(local area)
Support for community residents'
health
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%
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
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%
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
[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 Chozai
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
Executive summary
Business overview
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 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 FY03/21, Nihon Chouzai reported sales of JPY279.0bn (+3.9% YoY), operating profit of JPY8.1bn (+6.8% YoY), recurring profit of JPY8.4bn (+13.6% YoY), and net income attributable to owners of the parent of JPY3.5bn (-47.2% YoY). Sales were up by 5.7% YoY in the Dispensing Pharmacy business and 6.1% YoY in the Pharmaceutical Manufacturing and Sales business, but dipped by 34.0% YoY in the Medical Professional Staffing and Placement business. Sales were hit by the ongoing pandemic-driven decrease in prescriptions (due to restrained hospital visits), but rose thanks to the effect of store openings and higher price per prescription with the increase in long-term prescriptions. Operating profit was boosted by a better-than-expected recovery in patient traffic to pharmacies in 2H, improved profitability due to strong sales of products newly added to the NHI drug price list in June and December 2020, and various cost-cutting measures.
The company revised its FY03/22 forecast on October 29, 2021. The revised forecast calls for sales of JPY294.6bn (+5.6% YoY), operating profit of JPY7.0bn (+13.6%YoY), recurring profit of JPY7.0bn (-16.8% YoY), net income attributable to owners of the parent of JPY4.0bn (-13.0% 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” (see FY03/22 company forecast for details). In the Pharmaceutical Manufacturing and Sales business, it will 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. That said, Pharmaceutical Manufacturing and Sales earnings are expected to fall short of initial company estimates (announced April 30, 2021) due to product recalls and manufacturing delays caused by quality control issues at sub-subsidiary Choseido Pharmaceutical Co., Ltd (unlisted).
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
Recent updates
Fire at contract logistics center of consolidated subsidiary
On November 29, 2021, Nihon Chouzai Co., Ltd. announced there was a fire at a contract logistics center of its consolidated subsidiary.
On November 29, 2021, there was a fire at a logistics center of Hitachi Transport System West Japan Co., Ltd., to which the company's consolidated subsidiary Nihon Generic Co., Ltd. outsources warehousing operations for its products.
Nihon Generic is using part of the logistics center as its West Japan Logistics Center. The company disclosed the following regarding the fire.
Products damaged by the fire at the contract logistics center are expected to be covered by insurance. As of the time of this announcement, Nihon Chouzai said that it was investigating the impact of the fire on its earnings performance and that it would promptly disclose any matters that require public disclosure.
Absorption merger of consolidated subsidiaries (simplified, short-form merger)
On November 15, 2021, Nihon Chouzai announced an absorption-type merger (simple and short-form merger) of a consolidated subsidiaries.
At a meeting held on the same day, the company's board of directors decided to merge its wholly owned subsidiaries Yajima Medical Brain Y.K. and Duon Y.K. into the company, effective January 1, 2022. The merger will be an absorption-type merger, with Yajima Medical Brain Y.K. and Duon Y.K. as the merged companies and Nihon Chouzai as the survivor company.
Purpose of the Merger
The dispensing pharmacy subsidiaries acquired by the company conducts the same operations and provides the same level of medical services as directly operated stores. The company has decided to merge its subsidiaries by absorption in order to strengthen its management functions and further improve the efficiency of its Dispensing Pharmacy business through the centralization of management.
Summary of the merger
As the absorbed companies are consolidated subsidiaries of Nihon Chouzai, the impact of this merger on the company's consolidated performance is expected to be minimal.
Revised consolidated earnings forecasts for FY03/22
Nihon Chouzai Co., Ltd. revised consolidated earnings forecasts for FY03/22.
The company revised full-year FY03/22 consolidated earnings forecasts as follows. Previous forecasts are company estimates made on April 30, 2021.
The Tokushima prefectural government took administrative disciplinary action against Nihon Chouzai's subsidiary Choseido Pharmaceutical Co., Ltd. as was reported in the October 11, 2021 press release. Nihon Chouzai revised FY03/22 earnings forecasts to reflect the financial impact of this matter.
The company noted earnings are holding firm in the Dispensing Pharmacy and the Medical Professional Staffing and Placement businesses as sales and operating profit are running ahead of initial forecasts despite lingering effects from the pandemic. On the other hand, Pharmaceutical Manufacturing and Sales segment earnings look likely to fall short of initial company forecasts because of product recalls and manufacturing delays caused by the quality control issues at Choseido Pharmaceutical. Consequently, the company expects FY03/22 consolidated sales to exceed initial company forecasts while profits across the board come in below the original estimates.
Announcement of change in subsidiary (conversion of consolidated subsidiary into sub-subsidiary)
Nihon Chouzai Co., Ltd. announced that it passed a resolution at its Board of Directors' meeting held on October 21, 2021 to transfer all shares in consolidated subsidiary Choseido Pharmaceutical Co., Ltd. to consolidated subsidiary Nihon Generic Co., Ltd. As a result of this share transfer, Choseido Pharmaceutical will become a wholly owned subsidiary of Nihon Generic while remaining in the Nihon Chouzai Group as a consolidated sub-subsidiary. The agreement concerning this transfer was concluded on October 22, 2021, and the stock transfer is scheduled for execution on November 30, 2021.
Purpose behind conversion of Choseido Pharmaceutical into a sub-subsidiary
The company decided to convert Choseido Pharmaceutical into a wholly owned subsidiary of Nihon Generic in an effort to integrate its Pharmaceutical Manufacturing and Sales Business and facilitate more efficient improvement in both its management of generic drug manufacturing and its quality control systems. This decision was made in response to the administrative action taken against Choseido Pharmaceutical, which has been outlined in the company's October 11, 2021 press release titled "Notice of Administrative Disciplinary Action against a Subsidiary of the Company (Choseido Pharmaceutical Co., Ltd.)." This transfer will enhance the effectiveness of the business improvement plan that the company will formulate moving forward. The entire Nihon Chouzai Group will cooperate on a unified front while implementing the business improvement plan and ensuring legal compliance.
All transfers of consolidated subsidiaries resulting from this share transfer will occur within the company's scope of consolidation. Accordingly, no changes in this scope will arise as a result of this transfer.
Choseido Pharmaceutical became a consolidated subsidiary of the company in April 2013 and has since been manufacturing and selling generic drugs as part of the Nihon Chouzai Group. Nihon Generic has also been producing and marketing generic drugs since its establishment in 2005.
Number of shares to be transferred, transfer price, and share ownership pre- and post-transfer
Future Outlook
The company has stated that impact from this share transfer on its performance in FY03/22 will be minor and maintains that it will promptly disclose any future relevant developments, should they arise.
Announcement regarding administrative disciplinary action against a subsidiary
Nihon Chouzai Co., Ltd. has announced that a subsidiary was subjected to administrative disciplinary action.
On October 11, 2021, Choseido Pharmaceutical Co., Ltd., a Nihon Chouzai subsidiary, was subjected to administrative disciplinary action by the prefectural government of Tokushima in accordance with Japan’s Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices. This disciplinary action was conducted because Choseido Pharmaceutical manufactured pharmaceutical products for Nihon Chouzai using unauthorized methods and did not conduct necessary measures when results generated by drug stability monitoring procedures deviated from prescribed standards.
The company treats this incident very seriously and will support Choseido Pharmaceutical as it formulates a business improvement plan. Meanwhile, Nihon Chouzai will implement groupwide measures targeting recurrence prevention.
The company is currently investigating the impact this incident will have on its financial results in FY03/22 and will promptly disclose all relevant information as it becomes available.
Details of administrative disciplinary action
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Source: Shared Research based on company data
Q2 FY03/22 (out October 29, 2021)
Overview
Sales were JPY146.2bn, up 7.5% YoY. Factors contributing to sales growth included the higher prescription volume and the contribution of new pharmacies in the Dispensing Pharmacy business (sales up 8.9% YoY), as well as robust sales of products newly listed in the NHI drug price list in 2019, 2020, and in June 2021 in the Pharmaceutical Manufacturing and Sales business (+3.8% YoY). Sales in the Medical Professional Staffing and Placement business were down 27.4% YoY, due largely to the pandemic-driven decline in temporary staffing demand.
Operating profit declined 12.9% YoY. The OPM declined 0.3pp YoY from 2.0% to 1.7%.
Progress against the company's full-year FY03/22 forecast (revised on October 29, 2021) was as follows.
Sales reached 49.6% of the forecast (48.8% in 1H FY03/21 versus full-year results), operating profit 34.5% (34.2%), recurring profit 36.1% (31.7%), and net income attributable to owners of the parent 33.5% (44.0%).
Dispensing Pharmacy business
Sales increased 8.9% YoY to JPY128.7bn while operating profit was up 39.1% to JPY5.0bn. Both sales and profit were up YoY, despite lingering effects of COVID-19, reflecting the higher prescription volume and ｄるdrug fee income as well as contributions from pharmacies opened in FY03/21.
The number of pharmacies at end-Q2 FY03/22 was 685 (including one merchandise store; up 20 from 665 at end-Q2 FY03/21) as a result of 20 openings and five closures during 1H.
Generic drugs represented 88.2% of the company’s total pharmaceutical usage in volume terms as of end-September 2021. The share of pharmacies providing at-home medical care services (pharmacies that have carried out 12 or more at-home visits annually) came to 92.0%.
Pharmaceutical Manufacturing and Sales business
Sales increased 3.8% YoY to JPY23.7bn while operating profit declined 83.2% YoY to JPY195mn. Sales were up YoY, despite pricing erosion of existing drugs due to the NHI price revision, reflecting rising sales of drugs newly included in the NHI drug price list in 2019, 2020, and in June 2021. Operating profit was down YoY, despite cost-cutting measures, marketing policies focused on profitability, and continued expansion of inhouse drugs (including newly NHI listed items), because of product recalls and manufacturing delays caused by quality control issues at Choseido Pharmaceutical.
The company launched 12 newly listed products in 1H FY03/22, bringing the total number of product offerings to 673 at end-September 2021 (including two OTC drugs).
Medical Professional Staffing and Placement business
Sales declined 27.4% YoY to JPY3.6bn while operating profit receded 36.8% to JPY440mn. The fall in sales is mainly attributable to the reduced demand for temporary pharmacist staffing amid the pandemic. Operating profit was down YoY as well, despite continued demand for physician placements to help carry out the COVID-19 vaccination effort, due to reduced temporary pharmacist staffing demand.
FY03/22 company forecast (announced October 29, 2021)
Source: Shared Research based on company data
Source: Shared Research based on company data
The company revised FY03/22 earnings forecasts (announced April 30, 2021) on October 29, 2021.
Reasons cited for earnings forecast revision
The prefectural government of Tokushima issued an administrative disciplinary action against the company's subsidiary Choseido Pharmaceutical as noted in the October 11, 2021 press release. In response, Nihon Chouzai revised its FY03/22 consolidated forecasts after assessing the impact to earnings.
The company noted that earnings are holding firm in the Dispensing Pharmacy and Medical Professional Staffing and Placement businesses as sales and operating profit are running ahead of initial company guidance despite some lingering adverse effects from the pandemic. That said, Pharmaceutical Manufacturing and Sales earnings are expected to fall short of original forecasts as quality control problems at Choseido Pharmaceutical led to product recalls and delayed manufacturing. The net effect is that the company expects FY03/22 consolidated sales to exceed initial company estimates while profits fall short across the board.
The following information is based on our post-Q1 results company contact and we plan to update the report after further follow-up.
Summary
For FY03/22, the company forecasts sales of JPY293.4bn (+5.2% YoY), operating profit of JPY9.2bn (+13.5%YoY), recurring profit of JPY9.1bn (+8.2% YoY), net income attributable to owners of the parent of JPY5.1bn (+44.1% YoY). Nihon Chouzai is expecting sales to reach an all-time high.
The company expects the business environment to remain much the same across FY03/22 as it was in 2H FY03/21, when the number of prescriptions swung upward YoY on an all-store basis and declines in customer footfall slowed despite some ongoing impact from the COVID-19 pandemic.
The company apparently hired more than 500 new pharmacists as of April 2021. For some time now, Nihon Chouzai has been looking to grow pharmacist numbers principally by hiring new graduates, who then receive education and training in-house before being deployed across the pharmacy network. The company expects labor costs to decrease over the longer term as a consequence of focusing on new graduates in place of mid-career hires and temporary staff.
Dispensing Pharmacy business
For FY03/22, the company assumes a price per prescription of JPY16,000 (-5.2% YoY) and looks for prescriptions to number 15,700,000 over the full year (+10.4% YoY). It also assumes 40 new pharmacy openings (organic growth), with potential for more to be added via M&A.
The company commented that the number of prescriptions (customer traffic) fell short of target because of another state of emergency being declared, but it expects progress in line with its forecast from Q2 onward.
Pharmaceutical Manufacturing and Sales business
In addition, from April 2021, the Ministry of Health, Labour and Welfare (MHLW) switched from making biennial revisions to NHI drug prices to making annual revisions. As such, the company recognizes that the dispensing pharmacy and pharmaceutical industries are facing a tougher business environment.
But while it expects some impact from NHI drug price revisions (in the form of downward pressure on prices), the company plans to increase sales volume of in-house manufactured products (chiefly newly NHI listed items).
On August 3, 2021, the company reported that having conducted its own inspection of the manufacturing process of Choseido Pharmaceutical, it had to suspend manufacturing and shipment of 44 pharmaceutical products made there. The company said it would proceed with shipment adjustment until it had a stable supply structure in place, and suspend sales of these products once inventories ran out. As of August 3, it did not have the means to supply alternatives for all products. Shared Research understands that this may have an unforeseen negative impact on sales and profit of the Pharmaceutical Manufacturing and Sales business in Q2 and beyond.
Medical Professional Staffing and Placement business
In the Medical Professional Staffing and Placement business, the company sees both sales and profit decreasing YoY, as although it plans to strengthen the doctor placement business and expand into new business fields, it assumes that temporary staffing demand will remain weak. The forecast is unchanged at end-Q1. The company assumes that the growth rate of doctor placements will slow as the COVID-19 vaccination program progresses.
Source: Shared Research based on company data
Key undertakings from FY03/22
Response to revision of Pharmaceuticals and Medical Devices Act (enabling pharmacies to be certified as “regional cooperation pharmacies,” or “specialized medical institution cooperation pharmacies”)
In the dispensing pharmacy industry, certification of pharmacies with specialized functions will start in August 2021, as per the revised Pharmaceuticals and Medical Devices Act (Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices) promulgated in 2019. Under this system, the dispensing pharmacies will be classified as either “regional cooperation pharmacies” (those capable of collaborating with medical institutions to manage patients’ medication information, including for inpatients and patients receiving at-home care), or “specialized medical institutions cooperation pharmacies” (which have the ability to handle advanced pharmaceutical management and a high level of expertise in oncology and other areas). Dispensing pharmacies will be able to obtain certification as either one of these from the prefectural governor.
The company says the revised Act will increasingly require the kind of pharmacies that are capable of meeting patients’ needs. In the Dispensing Pharmacy business, it will work to develop highly user-friendly pharmacies and cultivate pharmacists with advanced expertise to provide the kind of pharmacies the Japanese government envisions. It also looks to deliver quality medical care services to patients through its certified specialized medical institutions cooperation pharmacies and regional cooperation pharmacies, via the undertakings described below.
Regional cooperation pharmacies: Expand at-home medical care (provided by 94.1% of pharmacies as at end-FY03/21), hire more family pharmacists (on staff at 82% of pharmacies), establish more certified Nutrition Care Stations* (14 pharmacies certified as such as of April 2021), expand Health Support Pharmacies (91) and Health Check-up Stations.
Specialized Medical Institution Cooperation Pharmacies: Cultivate expert pharmacists certified in outpatient cancer treatment and provide oncology expertise training for other pharmacies
Joint undertakings: Install the advanced drug information (DI) web platform FINDAT at pharmacies (more detail below), and strengthen the function of providing drug information in local communities
About FINDAT
FINDAT is an online drug information platform for healthcare professionals, neutrally evaluating drug information comprehensively collected from various data sources, domestic and overseas guidelines, and secondary information databases. “FINDAT” is a coined word that combines “FIND” and “ATLAS.”
The types of information provided include:
Lists of recommended pharmaceuticals to aid medical institutions and communities in establishing formularies (the most effective and economical drug-use policy for patients).
Materials providing comprehensive comparison of the efficacy, safety, and economics of different drugs with the same indications
Materials to aid medical institutions in identifying newly approved pharmaceuticals with particularly significant clinical impact and evaluating them on scientific grounds, with a view to potentially using them
Collection and evaluation of pharmaceutical safety information disseminated by overseas regulatory authorities (e.g., FDA, EMA, and MHRA)
Efficacy and safety evaluation for existing pharmaceuticals that have had clinically significant indications added
Using FINDAT can help reduce the burden of drug information (DI) work, including peer review of original papers and information gathering on new drugs. This can aid in shifting from product service to interpersonal service, enhancing team medical care, and establishing formularies (the most effective, safe, and economical drug-use policy for patients).
Nihon Chouzai released this service on June 1, 2020. According to the company, as of May 25, 2020, FINDAT was Japan’s first drug information web platform.
In addition to introducing the FINDAT platform at its own dispensing pharmacies, Nihon Chouzai plans to roll the service out to medical institutions (hospitals), educational institutions, and eventually, non-group dispensing pharmacies. To support this expansion of the service, the company will also train and hire specialist personnel including system engineers and data scientists.
Digital transformation (DX) initiatives
The company will take the lead on measures to enhance user friendliness and pharmacy functions with online medication guidance and online insurance coverage confirmation. It intends to conduct group business administration by making full use of its ICT capabilities, including for the development of next-generation dispensing systems.
Over the next three years, the company will invest a total of JPY4.5bn in the development of next-generation dispensing systems. According to Nihon Chouzai, it is the only company in the dispensing pharmacy industry developing and operating proprietary dispensing systems for use by pharmacies.
To date, Nihon Chouzai has developed/introduced a number of dispensing systems (platforms), as follows.
Voice input system (2005): Assists with input of medication history
Vein biometric authentication system (2011): Guarantees the authenticity of pharmacists’ work, also optimizing working hours
At-home medical care communication system (2012): Used as a tool to streamline the work of pharmacists who conduct at-home medical care
Electronic medication notebook Okusuri Techo Plus (2014): Links with the dispensing system to enable centralized management of medication history, with roughly 750,000 members as of March 2021
Health consultation system (2017): Centrally records information such as health consultations at pharmacies and health consultations conducted by registered dieticians at Health Check Stations
Nihon Chouzai Online Store (2019): Online store offering approximately 2,000 different healthcare products, including pharmaceuticals, medical equipment, cosmetics, health foods, and hygiene products
Remote medication guidance (2019): Conducted in Aichi Prefecture, Fukuoka City, and Chiba City. In addition, starting in September 2020 the company has been able to offer online medication guidance for prescriptions given online (under the revised Pharmaceuticals and Medical Devices Act)
Automation of dispensing work (2019): The company is promoting automation of picking work in pharmacies (legal revisions allowed non-pharmacists to perform picking work under the supervision of pharmacists)
Strategies for growing Medical Professional Staffing and Placement Business
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, primarily through Workers Doctors Inc.* (unlisted), to further expand its physicians placement business.
With Workers Doctors now a subsidiary, Nihon Chouzai’s future vision is as follows.
Strengthen physician placement business, with eye to building new growth engine alongside pharmacist business
Utilize nationwide network of Medical Resources Co., Ltd. to support nationwide rollout of Workers Doctors’ network from one city and four prefectures at present
Realize group synergies and achieve revitalization of occupational doctor and existing registered doctor services
Develop online medical checks and promote DX
Pursue comprehensive health care company strategy, providing support for corporate health management so that workers can maintain good physical, mental and social health
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.
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.
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.
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.
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.
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.
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.
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.
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
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%).
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).
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.
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.
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).
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.
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.
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
Source: Shared Research based on company data
Source: Shared Research based on company data
Source: Shared Research based on company data
[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.
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.
- Tablets
- Tablets
- Tablets, capsules, medicine
- Tablets, capsules, medicine
- Tablets, capsules, medicine
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.
Source: Shared Research based on 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.
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