BRIDGE REPORT
Qol Co., Ltd. (3034)
Masaru Nakamura, President
Masaru Nakamura, President
Corporate Profile
Company
Qol Co., Ltd.
Stock Code
3034
Exchange
Tokyo Stock Exchange, First Section
Industry
Retail Industry (Commerce)
President
Masaru Nakamura
Headquarter Address
Toranomon 4-3-1, Shiroyama Trust Tower 37F, Minato-ku, Tokyo
Business Description
Qol Group is a major pharmacy operator with its network of stores centered on the greater Tokyo area but also developed nationwide.
Year-end
March
Homepage
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,188 34,359,100 shares ¥40,818 billion 11.9% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥20.00 1.7% ¥73.45 16.2x ¥557.42 2.1x
*Stock price as of the close on May 26, 2015. Number of shares outstanding as of most recent quarter end and does not include treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Income Ordinary Income Net Income EPS(¥) Dividend (¥)
FY3/12 66,201 3,308 3,238 1,560 6,211.00 3,175.00
FY3/13 76,783 2,812 2,829 1,349 52.76 20.00
FY3/14 100,966 2,105 2,208 777 25.11 18.00
FY3/15 114,363 4,243 4,262 2,155 63.33 20.00
FY3/16Est. 125,800 5,010 5,000 2,500 73.45 20.00
* Estimates are those of the Company. 2-for-1 stock splits were conducted in September 2009 and October 2011, and a 100-for-1 stock split in April 2012.
* EPS and dividend figures have been adjusted to reflect the stock splits.
* A commemorative dividend of ¥10 per share was paid in fiscal year March 2012 to commemorate the listing on the TSE Second Section.
* A commemorative dividend of ¥2 per share was paid in fiscal year March 2013 to commemorate the moving of Qol's listing to the TSE First Section.
 
This Bridge Report provides a review of the fiscal year ended March 2015 earnings results for Qol Co., Ltd.
 
Key Points
 
 
Company Overview
 
Qol is the third largest company in the pharmacy industry with nationwide operations with the bulk of its stores in the Tokyo and surrounding regions. Traditionally, pharmacies have been located adjacent or close to large hospitals, and been engaged in fierce competition to get hold of customers. However, Qol maintains close communications with medical institutions in its new store opening strategy, and has established a successful pattern. In recent years, the Company has sought out partnerships with companies outside of the industry to open stores in areas where there is well established foot traffic of potential customers. Some of these partnerships include capital ties with LAWSON, Inc. to create "hybrid facilities that combine pharmacies with convenience stores" in suburban regions, a partnership with Bic Camera Inc. for pharmacies to be opened in near train stations , and a collaborative agreement with West Japan Railway Company Group to open "Station QOL Pharmacies" within trains stations. In addition, Qol also conducts CSO and clinical trial support service through its subsidiaries.

Corporate Philosophy:    We support quality of life for everyone. There for you. Anywhere, anytime.
 
(Corporate History)
October 1992Masaru Nakamura (Current President) founded Qol at the age of 50 after working as a marketing division manager at a pharmaceutical product wholesale company, opening the first store in Nihonbashi-Kabutocho, Tokyo.
April 2006Listed its shares on the "Hercules" section (Currently the JASDAQ Market) of the Osaka Securities Exchange
December 2008  Formed collaborative agreement with LAWSON
June 2010First hybrid pharmacy and convenience store was opened (Shiroyama Trust Tower, Minato Ward, Tokyo)
December 2011  Listed shares on the Second Section of the Tokyo Stock Exchange
August 2012Collaborative agreement formed with West Japan Railway Company Daily Service Net
August 2012Capital alliance formed with LAWSON
October 2012APO PLUS STATION turned into a subsidiary
December 2012  Listed shares on the First Section of the Tokyo Stock Exchange
April 2013Qol SD Holdings established as an intermediary holding company to oversee and manage the related businesses through a corporate split (Newly established split)
July 2014Collaborative agreement formed with Cocokara Fine OEC Inc.
 
(Business Overview, Pharmacy Business Characteristics)
Qol's reported business segments are divided into the two segments of pharmacy business and related business, with pharmacy business accounting for 90.3% of total sales in fiscal year ended March 2015. While operations of pharmacies are the main service in the pharmacy business segment, Qol also derives some of its sales from merchandise sold through its hybrid pharmacy stores formed with convenience stores (37 "LAWSON" hybrid pharmacy convenience stores operated). At the end of the term, Qol operated a total of 538 stores, including two franchised stores.
At the same time, the intermediary holding company Qol SD Holdings oversees and manages the related business segment which includes the CSO and pharmacist dispatch services conducted by APO PLUS STATION Co. Ltd., clinical trial support service performed by Qol RD Co., Ltd., and publishing-related services provided by Medical Qol Co., Ltd. The dispatch of MRs is a response designed to reduce pharmaceutical company costs (through reductions in the number of full-time MRs). At the same time, the dispatch of pharmacists is designed to help resolve the issue of chronic shortages of pharmacists resulting from the longer period of education newly required to become a pharmacist (6 years of university studies compared with the previous 4 years) and the decline in passage rates of the national examination to become a registered pharmacist.
 
Characteristic of the Pharmacy Business
QOL Pharmacies
Because of the strong stereotype of "purchasing prescription medicines at pharmacies located close to hospitals", customers generally sought to get their prescriptions at pharmacies located close to hospitals. Therefore, pharmacies had sought to open stores in front of or close to major hospitals. Despite this trend, Qol has established close one-on-one relationships with numerous medical institutions and medical doctors, who write prescriptions in the first place, and has effectively promoted a strategy of opening pharmacies that can capture demand from multiple medical institutions without necessarily being located adjacent to hospitals.
 
QOL phamacies boast of a new patient rate of 8% and double digit growth in sales on an existing store basis.

Based upon QOL's unique pharmacist certification system, pharmacists with high levels of knowledge in specialized realms of oncology, dementia, home care, diabetes and others have been cultivated. In addition, filling prescribed drug mistake prevention, fully automated pharmacies, speech privacy systems, ecology, natural disaster countermeasures, home care, video phone and other functions have been fortified.
 
Moreover, collaboration with companies outside of the pharmacy industry, QOL Cards, prescription mailing application, QOL pharmacy application and other information technologies are utilized as part of a strategy of reducing dependence upon major hospitals.
 
Collaboration with Partners Outside of the Industry - Coverage of the Wider Market -
Since 2010, collaborative partnerships with companies outside of the industry have allowed Qol to cultivate multiple channels, including hybrid pharmacy stores formed with LAWSON convenience stores (since April 2014, it has shifted to a combined health care store having a facet of pharmacy, a convenience store and drug store), stores within Bic Camera stores conveniently located in front of train stations with high customer foot traffic, and West Japan Railway Company Group for stores opened within train stations. Currently, over 20% of customers are said to choose pharmacies on their own, and through the above developments to differentiate themselves from competitors, Qol seeks to increase the point of contact with customers to acquire a greater number of prescription. Qol is considering delivery services of not only prescription drugs, but also nursing care products and food as well in the future.
 
 
Distribution Reforms
In March 2014, Qol, along with 16 other pharmacy chains and drugstores established a pharmaceutical product sourcing organization for wholesale companies of pharmaceutical products to run on a competitive bidding system. This pharmaceutical product sourcing organization has divided pharmaceutical products into five categories, and for the three categories of additional new drug discovery, patented products, and long-term listed products within these five categories, the organization announces to member companies the anticipated pricing in addition to conducting general bidding for these products. As for the remaining categories including off patent drugs and essential drugs (the minimum drugs required by national health insurance systems), negotiations for each product are conducted individually. Because Qol had conducted bulk purchases of pharmaceutical products until now, they have only been able to get limited discounts on their purchases. But from fiscal year ended March 2015, this bidding system conducted by the organization and subsequent appropriate and fair pricing have contributed to improvements in profitability.

The pharmaceutical product purchasing price negotiations conducted during the fourth quarter (January to March) have had a profound impact upon Qol's full year earnings. In particular, the impact was significant in fiscal years ended March 2013 and 2014, but the introduction of the competitive bidding system to determine purchasing pricing for pharmaceutical products brought a smooth landing in earnings during fiscal year ended March 2015.
 
 
In general, the price of prescription drug becomes income of the pharmacy when they fill a prescription, with 25% and 75% of the price being booked as technical and prescription drug sales respectively. While the technical fee is considered to carry 100% gross margin, the prescription drug sales includes the cost of the pharmaceutical product with the difference between the prescription drug sales and pharmaceutical product cost being booked as gross income (the larger the discount rate, more the earnings would be).
 
Prescription drug Sales = Average price of a prescription x Prescriptions Filled
Prescription drug Profit = Technical Fee + (Pharmaceutical Product price x Discount Rate)
 
 
The number of pharmacies operating throughout Japan is about 57,000, or about the same number of convenience stores. At the time when Qol was established in 1992, the rate of separation of dispensing and prescribing functions stood at only 14%, but has since risen to 70%. Increases in external body (outside of hospitals) processing prescriptions and the aging of society is contributing to growth in the prescription pharmacy market at sustained rates of between 3% to 8%, and the total market is currently estimated to amount to ¥7 trillion.

The industry leader Ain Pharmacies maintains no more than a 2.5% share of the market (Qol takes 1.5% of the market), and the top ten major pharmacy chains (total sales of ¥700.0 billion) accounting for only about 10% market share. There is no clearly established leader within the industry at this point in time.

Against the backdrop of the Government policies to restrain medical expenses, revisions of drug pricing and dispensing fees, and hikes in consumption tax (pharmacies may not pass on the consumption tax to patients) are negative factors impacting the management of small- to medium-sized pharmacies, which is also an driving factor for the highly active M&A. Therefore, the market is believed to be headed towards oligopoly (the market is expected to expand to ¥10 trillion as the ratio of separation of dispensing and prescribing functions increases to 100%, and the market share held by the major pharmacy chain operators is expected to rise to over 50%.).
 
 
Trigger of Change in the Pharmacy Market, and Industry Events and Impact
Due to the impending hike in the consumption tax to 10%, the separation of dispensing and prescribing functions at the hospitals is expected to progress further as hospitals not in favor of their inability to pass along the higher tax to patients and the negative impact upon dispensing profitability. Qol expects this and the four other factors mentioned below to act as "triggers for change in the pharmacy market," and the industry events and impacts are also described below.
 
Triggers for Change in the Pharmacy Market
・Consumption Tax HikeInability to pass along higher tax to patients; increase in rate of separation of dispensing and prescribing functions at the hospitals, thus increase in dispensing handling outside the hospitals
・Expansion in Generic
  Drugs
Medical expense reductions (declines in sales)
・Government's Financial
  Issues
Difficulty in claiming dispensing fees, drug pricing revisions (M&A to advance)
・Shortage of Pharmacists  New pharmacy opening restraint (Slowing growth, M&A to advance)
・Promotion of ITElectronic dispensing, electronic drug notebooks
 
 
Drug price revisions are expected to be implemented in 2016 and 2018, and the consumption tax is expected to hike from 8% to 10% in 2017. For pharmacies that are unable to pass along the higher consumption tax, the next three years are anticipated to be a difficult period. However, in the wake of the previous consumption tax hike in 2014, the rate of separation of dispensing and prescribing functions rose by 3 points in the course of one year from 67.0% to 70.0%. Consequently, 2017 is expected to provide an opportunity for Qol to expand its business.
 
Dispatching Business (MR, Pharmacists) Environment
According to the MR Certification Center's "MR White Paper", the number of medical representatives within Japan stood at 65,752 in 2013. Within this number, only 3,957, or 6% of the whole, were Contract MRs (CMRs) (5.0% in 2012), but in 2013, the number grew by 23.2% year-on-year.

Expanding demands for outsourcing by pharmaceutical companies, downward pressures on sales pricing due to expansion of the generic drug (off patent drugs) market and fortifying the unmet medical needs realm, which doesn't require a large number of MRs, are factors contributing to a shift from permanent hiring of MRs to greater use of dispatched MRs, i.e., a shift from fixed costs to variable costs. In addition, pharmaceutical companies specializing in generic drugs, for which the market is growing, are also increasing their usage of dispatched MRs. Expiration of patents for major drug would boost the need for MRs, but it does not occur every year. Changes in the number of major drug patent expiration creates fluctuations in demand for personnel. Furthermore, unlike new drugs, marketing function is more important than explanation of products for generic drugs. Because pharmaceutical companies can reduce their labor expenses by one third to one half by switching to CMRs, some estimate that over 20,000 permanently employed MRs will be replaced by CMRs in the future. This presents a significant business opportunity for Qol, and they will continue to proactively invest business resources to cultivate this area of business.

In addition to the above, prescription drugs are said to currently account for 53% to 54% of the pharmaceutical market, and pharmacies are now too significant an existence to ignore for pharmaceutical companies. Therefore, using the Qol Group's CSO and pharmacist dispatch services represents an opportunity for pharmaceutical companies not only to reduce their costs by shifting from fixed to variable costs but also as a means of fortifying their marketing relationships.

The demand for dispatched pharmacists is also strong. The extended period of education necessary to become a pharmacist (pharmacology study extended from four years to six), and declines in the passage rates of the national examination for certified pharmacists is contributing to a serious shortage of pharmacists. Furthermore, 153,000 of the 280,000 certified pharmacists work in the Tokyo and surrounding regions, presenting another issue of regional disparity.
 
Other Endeavors
Advanced Medical Technology Responses, Cultivation of Highly Skilled Pharmacists: Qol Certified Pharmacist System
Along with the progress of advanced medical technologies, increases in anticancer drug treatments on an outpatient basis is contributing to the need for more specialized knowledge by pharmacists working at pharmacies. Therefore, Qol has established a "Qol Certified Pharmacist System" to educate pharmacists on disease-specific treatments and to cultivate pharmacists with high degrees of specialized knowledge. The introduction of a Qol Certified Pharmacist System for cancer patients was introduced in 2013 and a similar system for dementia was introduced in 2014. By cultivating pharmacists with high levels of specialized knowledge, this educational system is also designed as a method of differentiating Qol from its competitors.
 
General symptoms:2,324 pharmacists certified
Cancers require advanced treatments:50 pharmacists certified
Cancers in General:218 pharmacists certified
Dementia:46 pharmacists certified
 
CSR Activities
Qol seeks to strike a balance between the expansion in earnings (pursuit of economic value) and pursuit of social value. As part of this effort, the Company participates in both Student City and Make-A-Wish® of Japan (a charitable organization), and implements classes on the prevention of drug abuse as specific measures in its proactive endeavors.
 
 
 
Growth Strategy
 
Qol has started developing new business services including CSO and pharmacist dispatch services, and clinical trials for pharmaceutical products and food for specified health use from three years ago. As a specific policy of President Nakamura, new businesses should have operating margins that exceed that of the pharmacy business (approximately 5% due to the Government control and biannual drug price revisions), and the current new businesses boast of margins well in excess of this target level. Currently, the new business holding the most promise for future growth is the dispatching services conducted by Apo Plus Station Co., Ltd. This business boasts of operating income margins of 15% to 20% in general. With profits propped up by the dispatching services and other related businesses, the pharmacy business is expected to contribute to top-line growth over the medium term.
For the foreseeable future, Qol aims sales and operating income of ¥300.0 and ¥24.0 billion, respectively. Of the sales income target of ¥300.0 billion, the pharmacy business is expected to contribute ¥240.0 billion and the related business ¥60.0 billion. Qol seeks to establish a pharmacy network of 1,000 stores in its pharmacy business through new openings, M&A and cross-industry collaborations. At the same time, dispatched services, with the CSO in its center, are expected to be the driver of growth in the related business segment. Operating income margin is expected to be 5% and 20% for the pharmacy and related business segments, respectively, and both segments are expected to contribute ¥12.0 billion each to the operating income target of ¥24.0 billion.
 
 
(1) Pharmacy Business
Collaboration with Companies in Other Industries
The new format pharmacies being formed with LAWSON (Town Locations), Bic Camera (Near Train Stations) and West Japan Railway Company Group (Train Station Locations) are further recognized as a new form of service and are expected to contribute to continued strong growth in prescriptions.
 
LAWSON
This segment is now promoting a scrap and build strategy of its existing LAWSON stores (37 at the end of the term) in town locations to be converted to convenience stores with a focus upon healthcare products (Three stores opened and closed during FY3/15). At the same time, prescriptions rose by double digits during fiscal year ended March 2015 (10% of all prescriptions filled were done through "Prescription Application"). Moreover, the addition of drugstore functions also contributed to the favorable sales of merchandise, and the average daily sales of ¥700,000 to ¥800,000 exceeded by a large margin that of about ¥530,000 for regular LAWSON stores (the convenience store industry-leader Seven Eleven's average daily sales is about ¥650,000 to ¥660,000). During fiscal year ended March 2015, sales rose by 22.3% year-on-year, with convenience store and pharmacy stores sales rising by 20.4% and 36.1% year-on-year, respectively. The number of customer receptions at pharmacies rose by 34.2% year-on-year.
 
 
Bic Camera
Bic Camera is a collaborative partner for the company's strategy of expanding stores near train station (four stores) and the strong foot traffic of several tens of thousands of customers per day in these locations is propping up strong double-digit growth in dispensing fees. Although it does require some time for brand recognition to settle in, once it's recognized, its effect is visible. In particular, a large increase in processed prescriptions and dispensing fees was recorded along with a store relocation to the Shinjuku East Exit subterranean area where there is strong foot traffic. Furthermore, the Nagoya store benefitted from large-quantity purchases by foreign visitors to Japan with sales of over the counter drugs (OTC) jumped 40.6% year-on-year.
 
 
West Japan Railway Company Group
With regards to pharmacies opened within train stations in collaboration with the West Japan Railway Group, Qol has been able to differentiate its stores from convenience stores operating within train stations. The increased brand recognition is contributing to increased demand for dispensing of pharmacy drugs from a wide range of customers, resulting in a double-digit increase in dispensing fees. An increase in the number of people with hay fever who took OTC drugs contributed to increases in OTC hay fever remedies. The first store was opened in Osaka and saw increases in both dispensing fees and processed prescriptions of 83.7% and 87.6% year-on-year, respectively, along with a 21.6% year-on-year rise in OTC drug sales.
 
 
Promotion of Information Technologies
The issuance of a "QOL Card", a card with which the prescription drug history of the card holder can be viewed when presented at the counter, (information is gathered at information centers in Tokyo and Osaka, and the card is solely for referencing) to customers contributed as an effective tool to retain customers (1.242 million members as of the end of April 2015). At the same time, the smartphone application "prescription mailing application" has become a very popular device as well. "Prescription mailing application" allows customers to take a picture of their prescriptions with their smartphone cameras, and then mail to a QOL pharmacy. After sending a picture of the prescription to a QOL pharmacy, the customer can pick up their prefilled prescription without having to wait. The application is expected to support the Company's approach to create closer relationships with customers and bring out synergistic effect with the QOL Card.

The "prescription mailing application" was launched along with the start of operations of four collaborative stores with Bic Camera (at Yurakucho, Shinjuku, Nagoya Station West Exit and Sapporo) in October 2013, and was expanded to the four LAWSON QOL pharmacies in November 2013, the Station QOL Pharmacy within JR Osaka Station. Thereafter, this application was also expanded to QOL hybrid pharmacies operated with convenience stores and other QOL pharmacies. In addition to the prescription mailing application function, the "QOL Pharmacy Application" that includes an electronic drug notebook, self-health management check system and various other functions was also launched in May 2015.
 
(2) Related Business Segment
Various efforts to secure new sources of earnings are being conducted in the related business undertaken by the intermediate holding company "Qol SD Holdings." Currently, special efforts are being focused upon the clinical trial support service conducted by Qol RD Co., Ltd., and CSO, pharmacist and nurse (MJ business) dispatch services conducted by APO PLUS STATION Co., Ltd.

While APO PLUS STATION incurred losses at the time of its acquisition in October 2012, promotion of internal reforms allowed it to turn profitable from fiscal year ended March 2014. During fiscal year ended March 2015, they recorded an operating income of ¥0.7 billion and is expected to see ¥1.5 billion in operating income in fiscal year ending March 2016. Based upon the current operating rates of the CMRs nearly up to the full capacity, they have been stepping up their hiring process with an aim to increase the number of CMRs to 1,000 by 2017. At the same time, with overseas businesses deployment in sight, the Company has established a global marketing management division. The offering of support for overseas business deployment of generic drug and other small- to medium-sized domestic pharmaceutical companies into Asia and other markets, and consignment of marketing function for foreign pharmaceutical companies newly entering the Japanese market are also being considered. In addition, new collaborative efforts with medical institutions with which Qol has already established relationships are also being considered.
 
 
Fiscal Year Ended March 2015 Earnings Results
 
 
Sales, Operating Income Rise 13.3%, 101.6% Year-On-Year
Sales rose by 13.3% year-on-year to ¥114.363 billion. Favorable existing store sales and successful M&A activities allowed sales of the pharmacy business to rise by 13.1% year-on-year. CSO and pharmacist dispatch services conducted by APO PLUS STATION acted as a driver of growth and allowed related business sales to rise by 15.2% year-on-year.

With regards to profits, the introduction of the bidding system for pharmaceutical product purchases, fortification of generic drug sales (number of stores receiving 22 additional points rose), closure of unprofitable stores, and reductions of expenses allowed operating income of the pharmacy business to rise by 45.5% year-on-year. High capacity utilization rates in CSO and pharmacist dispatch services contributed to a strong 8.4 fold increase in operating income of the related business segment.

Capital investments, depreciation and amortization of goodwill totaled ¥1.752, ¥1.611 and ¥1.497 billion (¥2.177, ¥1.574 and ¥1.172 billion in the previous term), respectively. The year-end dividend is expected to be raised by ¥2 per share to ¥12, combined with the interim period dividend, for a full year dividend payment of ¥20 per share.
 
 
Pharmacy Business
Pharmacy business sales and operating income rose by 13.1% and 45.5% year-on-year to ¥103.242 and ¥4.420 billion, respectively. The number of stores operated rose from 520 at the end of the previous term to 538, including two franchised stores. Based upon the new store opening strategy of focusing upon profitability, a total of 32 stores were opened including 16 newly opened and 16 acquired through M&A activities (compared with 104 newly opened stores and 66 stores acquired through M&A during the previous term), and a total of 14 stores (compared with 22 stores closed during the previous term) were closed including 9 shops, 3 LAWSON stores and 2 QOL Pharmacies. While the decline in new store openings contributed to a decline in new store sales, existing store sales rose by 13.0% year-on-year and sales arising from M&A related activities rose by 16.9% year-on-year. The number of prescriptions processed at existing and M&A stores grew by a large margin. At the same time, prescription pricing declined due to the drug price revisions.
 
 
 
 
Qol is proactively promoting a shift towards generic drugs, with the total number of stores receiving additional points at the end of March 2015 comprising 75.8% of all stores. The percentage of stores receiving 22 additional points has exceeded 40%.
 
Related Business
The contribution from APO PLUS STATION, which conducts CSO and pharmacist dispatch services, allowed sales to rise by 15.2% year-on-year to ¥11.121 billion, and operating income to rise by 8.4 times year-on-year to ¥772 million. The CMRs within the CSO operated at nearly full capacity utilization rate.
 
 
Total assets rose by ¥5.668 billion from the end of the previous term to ¥59.573 billion at the end of the term under review. Accounts receivables and payables rose on the back of an expansion in business, and intangible fixed assets rose in response to M&A activities. At the same time, the introduction of a bidding system for product purchases and subsequent declines in cost of goods sold allowed inventories to decline. As a response to the need for capital, interest-bearing liabilities including long term loans were increased. Net assets grew, and equity ratio rose by 0.5% points to 32.1%. ROIC rose from 3.9% in the previous term to 7.2%.
Qol had been confronted with the issues of responding to the large sum of goodwill and interest-bearing liabilities accompanying an expansion in its business. However, the introduction of a bidding system for product purchases has contributed to a stable earnings environment, which in turn has contributed positively to cash flow. Net debt to equity ratio ((interest-bearing liabilities minus cash and equivalents) / Capital) improved from 0.65 times in fiscal year ended March 2014 to 0.54 times in the term just ended (an improvement resulting from increase in cash and equivalents).
In addition, Qol had pursued a strategy of turning companies acquired through M&A into 100% owned subsidiaries, but it intends to reduce its ownership down the road in newly acquired companies to a majority stake (Between 30% to 40%, with a maximum of 50%) as a means of reducing the burden of goodwill amortization (based upon the profitability of companies acquired, capital participation may be raised over time.).
 
 
The increase in profits and decline in inventories contributed to greater efficiency in use of capital and allowed the net inflow of operating cash flow to grow from ¥2.350 billion in the previous term to ¥7.841 billion. At the same time, declines in outlays for M&A activities caused the margin of net outflow in investing cash flow to decline, and contributed to a turn to a net inflow of ¥2.775 billion in free cash flow after a net outflow of ¥6.032 billion in the previous term. Acquisition of treasury stock in March 2014 (¥1.413 billion) and a lack of stock and bond issuance caused the net inflow of financing cash flow to decline. Consequent to these changes, cash and equivalents rose from ¥4.957 billion at the end of the previous term to ¥8.011 billion at the end of the term just ended.
 
 
Note 1: ROE (Return on Equity) is calculated by multiplying by "net profit to sales margin (net profit/sales)," times "total assets turnover (sales/total assets)" times "leverage (total assets/equity capital, inverse of equity capital ratio.)"
Note 2: The data contained within the table above are calculated based upon data taken from the earnings announcements and official securities filings, and averages of total assets and capital are used as needed (an average of the balances of the previous and current terms). Equity ratio taken from official financial filings is calculated based on balance at the end of term. Therefore, its inverse and the leverage figure quoted above may differ.
The large increases in profits of the pharmacy business and related business segments contributed to a strong recovery in ROE from 5.17% in the previous term to 11.91% in the term under review. In fiscal year ending March 2016, net income is expected to improve a step further relative to sales.
 
 
Fiscal Year Ending March 2016 Earnings Estimates
 
 
Sales, Operating Income Expected to Rise by 10.0%, 18.1% Year-On-Year
Qol earnings estimates call for sales to rise by 10.0% year-on-year to ¥125.8 billion. The Qol Group expects to open 47 QOL Pharmacies and 8 hybrid stores with LAWSON (LAWSON QOL Pharmacy), for a net increase of 55 stores from the end of the term just ended to 593 stores. With regards to the stores opened with LAWSON, a scrap-and-build strategy will be continued with a number of existing stores being converted to healthcare convenience stores with a total of 40 expected to be operating by the end of this term. At the same time, the related business segment is expected to see a large increase in earnings based upon an expansion of the market for CSO and pharmacist dispatch services conducted by APO PLUS STATION. APO PLUS STATION continues conducting active new hiring as part of its strategy of growing the number of CMRs to 1,000 by 2017. Furthermore, Qol will provide support services for the overseas deployment of business by small- to medium-sized Japanese manufacturers and for sales of foreign manufacturers entering the Japanese market as part of its overseas business.

With regards to profits, stable earnings arising from the introduction of a bidding system for product purchases and proactive switch to generic drugs are expected to contribute to a 1.1% point improvement in cost of sales margin. While reinforcement of pharmacists and CMRs is expected to contribute to a large increase in sales, general and administrative expenses, these higher expenses are expected to be absorbed by an increase in gross income and operating income is expected to rise by 18.1% to ¥5.010 billion.

Capital investment, depreciation and amortization of good will are expected to be ¥1.627, ¥1.699, and ¥1.760 billion, respectively (compared with ¥1.752, ¥1.611, and ¥1.497 billion in the term just ended).

Dividend of ¥10 are expected to be paid at the end of both the first half and full year, for a full year dividend of ¥20 (dividend payout ratio of 27.2%).
 
 
On April 1, 2015, Qol opened a flagship pharmacy in Shikoku "QOL Pharmacy Shikoku Chuo Store" in the parking lot of the Hito Medical Center in Shikoku. The opening of this new store is a reflection of the strong relationship established with the Hito Medical Center. At this new pharmacy, by giving specialized instruction regarding administration of drugs by having clinical laboratory test results on the prescription, and keeping record of side-effects and providing feedbacks to the hospital with regards to cancer patients, Qol will contribute to improving the quality of life of patients.
 
 
Conclusions
 
The efforts in both the pharmacy business and related business segments during fiscal year ended March 2015 were successful in boosting profits to the record high levels. And while the Company will have to face drug pricing revisions for practically the three consecutive years from fiscal year ending March 2017, structures for both the pharmacy business and the related business segments have been well established so that they could grow earnings despite the impending period of headwind. In addition, the consumption tax hike is expected to provide an opportunity to expand its business owing to the further promotion of separation of dispensing and prescribing functions as evidenced in the experience with the hike in the consumption tax from 5% to 8% in 2014.

In addition, the working group for the Council for Regulatory Reform of the Ministry of Health, Labor and Welfare held on May 21 deliberated over potential reductions in the dispensing fees received by pharmacies located directly adjacent to large hospitals. At the same time, the working group also indicated its support for increases in fees received by "family pharmacies" that receive orders to fill prescriptions from multiple hospitals and can provide advice on compatibility of various drugs administered simultaneously. This is positive news for Qol which conducts extensive interaction with customers and has relationships with multiple large hospitals.
Disclaimer
This report is intended solely for the purpose of providing information, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However, we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
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