Risk Information

【1】Ramifications of Revision of the NHI Drug Price Standards and Reform of the Health Insurance Regime
 The prescription pharmaceuticals that constitute the Toho Holdings Group’s primary line of products are listed in the National Health Insurance Drug Price Standards. The NHI Drug Price Standards are known as the “Methodology for Calculating the Amounts of Expenses Required for Medical Treatments as Prescribed by the Health Insurance Law” as announced by the Minister of Health, Labour and Welfare. The standards provide for the scope of use of pharmaceuticals available under the coverage of health insurance and the prices chargeable for pharmaceuticals administered by medical institutions. This means that the NHI Drug Price Standards act as ceilings for the sale prices of ethical pharmaceuticals.
 The Ministry of Health, Labour and Welfare carries out a survey on the prevailing prices of prescription pharmaceuticals in the marketplace (“drug price survey” hereinafter) and revises the NHI Drug Price Standards once every two years to reflect its findings. The Standards were revised in April of 2004, 2006, 2008, and 2010 when the NHI prices were cut, respectively, by 4.2%, 6.7%, 5.2%, and 6.5%.
 The Toho Holdings Group’s performance is likely to be affected by the conservative purchasing of pharmaceuticals by medical institutions prior to the revision of the NHI Drug Price Standards and by the consequences of a downward revision that has cut the prices.
 Furthermore, since the institutional reforms to be implemented by the government with a view to achieving sound public finances for medical insurance have a direct impact on the earnings structures of medical institutions and dispensing pharmacies, the Group’s major customers, an increasing number of them have funneled their efforts into strengthening their management bases, as witnessed in moves such as cooperative purchasing adopted by public hospitals and expansion of the scale of businesses, including the consolidation of dispensing pharmacy chains. Since medical institutions and dispensing pharmacies are able to enhance their purchasing capacity through the efforts described above, there have been indications of a movement to further reinforce their policy of reflecting the benefits of scale in the purchase prices.
 Furthermore, since the government decided to promote its policy of the use of generics from April 2008, the use of generics will expand, particularly in the dispensing pharmacy market.
 As explained above, revisions in the NHI Drug Price Standards and other health insurance framework arrangements may affect the Toho Holdings Group’s results for its operations, depending on how the details are worked out.

【2】Business Practices Unique to Industry
 The industry is known for its peculiar business practice whereby prices are not yet determined when a pharmaceutical vendor delivers a shipment to medical institutions or dispensing pharmacies based on the mutual understanding that both parties will negotiate the price at a later date. This practice has been fostered by the life or death nature of the market for pharmaceutical products that allows no excuse for any delay in a shipment. Provisional payments are customarily made in reference to the NHI Drug Price Standards, before the sale/purchase price is determined. Conversely, prolonged price negotiations may adversely affect the Group’s operating results.
 The pharmaceutical distribution business involves the payment of sales rebates and sales promotion incentives to pharmaceutical wholesalers by pharmaceutical manufacturers.
 Sales rebates are calculated by mainly setting up progressive rebate rates according to the purchase value and pharmaceutical wholesalers are consequently able to virtually reduce their purchase prices by acquiring sales rebates.
 Consequently, if part of a pharmaceutical manufacturer’s business policies or price system is changed, this may have a materially adverse impact on the Group’s performance according to the contents of the change.

【1】Ramifications of Revision of the NHI Drug Price Standards and Reform of the Health Insurance Regime
 As for dispensing pharmacy operations, revenues from the sales of prescription pharmaceuticals based on the NHI Drug Price Standards above and revenues such as dispensary fees and pharmaceutical administration fees based on medical fee points for dispensing as stipulated in the National Health Insurance Law are the main revenues. Accordingly, if the Group is unable to reduce the purchase prices of dispensary pharmaceuticals after the revision of the NHI Drug Price Standards, or if the medical fee points system is changed through a revision of the dispensary fees and subsequently the medical fee points for dispensing are reduced, these situations may affect the Group’s performance.
 Furthermore, the framework reforms being implemented by the government to secure the soundness of health insurance finances may result in a decrease in the number of patients and a decrease in the number of prescriptions issued by medical institutions, according to previous trends. In this case, the Group’s operating results may be affected.
 Furthermore, as the government decided to promote its policy on the use of generics from April 2008, it is highly likely that the use of inexpensive generics will expand in the future. In this case, the Group’s operating results may be affected.
 As mentioned above, revisions to the health insurance system, including a revision of the NHI Drug Price Standards, may materially affect the operating results of the Group.

【2】Business Practices Unique to the Industry
(1) System to separate dispensing and prescribing functions
 The dispensing pharmacy business is engaged mainly in prescription of pharmaceuticals according to prescriptions issued by medical institutions. Accordingly, if there are any changes in the circumstances surrounding the industry, including future progress in the system of separation of dispensing and prescribing functions, or if a situation arises such as the abolition of the issuance of prescriptions (a return to in-hospital prescriptions) or the transfer and discontinuation of the business by medical institutions of issuing prescriptions, then the number of prescriptions received may fluctuate. In this case, the Group’s operating results may be affected according to these fluctuations.

(2) Dispensing operations
 If any error occurs in dispensing operations due to the characteristics of prescription pharmaceuticals, this may damage the human body. Therefore, the Toho Group is actively involved in activities to improve the skills and knowledge of pharmacists, and at the same time is promoting a systemic upgrading of management systems. In addition, the Group has insured all stores for pharmacist’s liability insurance.
 However, if a dispensing error occurs due to human error, the pharmacy concerned may not only face a claim for substantial damages, but existing customers and the society may also lose confidence in it. In this case, the Group’s performance may be affected according to severity of the error.

(3) Consumption taxes
 Although prescription pharmaceuticals that a dispensing pharmacy sells to patients are non-taxable goods based on the Consumption Tax Law, those that a dispensing pharmacy purchases from a pharmaceutical wholesaler are taxable (e.g. consumption taxes) based on this same law. Against this background, the dispensing pharmacy is liable, as the final user, for consumption taxes at its own expense. At the time of the introduction of the consumption taxes and the revision of the tax rate, the amount of consumption taxes based on the former tax rate and those due to increased tax rates were taken into consideration in the revision of the NHI Drug Price Standards. However, there is no guarantee of the same treatment in future. Therefore, if the NHI Drug Price Standards are not revised according to the change in the tax rate when a revision of the consumption tax occurs in future, it may affect the Group’s operating results.

(4) Securing pharmacists
 At dispensing pharmacies, the work of dispensing medicine by persons other than pharmacists is prohibited. Consequently, if a resident pharmacist system and the services provided by such a pharmacist for patients cannot be secured at a pharmacy based on full cover of the business hours, then the above regulations may affect the Group’s maintenance of pharmacies and the opening of new pharmacies as well as the performance of its dispensing pharmacy business.

Control of personal information
 The Toho Group is handling a substantial amount of personal data concerning health personnel in pharmaceutical wholesale operations and patients in dispensing pharmacy operations. With respect to the personal data on health professionals and patients, if there is any irregularity in handling them, the Group may face more severe claims for compensation compared with cases involving general personal data, due to its value as an asset and high degree of confidentiality. In addition, pharmacists working in dispensing pharmacy operations are legally obligated to maintain confidentiality. Consequently, the Group is involved in activities to promote a full understanding of the issue of the protection of personal information among all employees concerned and is upgrading its control system.
 However, if any leakage of personal data occurs due to human error, the Group may not only face a claim for a large amount of damages, but may also lose the confidence of existing customers and the society. In this case, the Group’s performance may be affected according to the level of the adverse effects.