BRIDGE REPORT
Qol Co., Ltd. (3034)
Masaru Nakamura Chairman CEO
Masaru Nakamura
Chairman CEO
Takashi Nakamura President COO
Takashi Nakamura
President COO
 
Corporate Profile
Company
Qol Co., Ltd.
Security Code
3034
Exchange
Tokyo Stock Exchange, First Section
Industry
Retail Industry (Commerce)
Chairman CEO
Masaru Nakamura
President COO
Takashi 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
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,408 34,496,665 shares ¥48,571 billion 18.2% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥24.00 1.7% ¥107.28 13.1x ¥604.49 2.3x
*Stock price as of the close on November 11, 2016. Number of shares outstanding as of most recent quarter end does not include treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Income Ordinary Income Net Income EPS(¥) DPS (¥)
FY 3/13 76,783 2,812 2,829 1,349 52.76 20.00
FY 3/14 100,966 2,105 2,208 777 25.11 18.00
FY 3/15 114,363 4,243 4,262 2,155 63.33 20.00
FY 3/16 124,957 6,709 6,655 3,641 105.81 24.00
FY 3/17 Est. 138,000 6,800 6,800 3,700 107.28 24.00
* Estimates are those of the Company. From the current fiscal year, the definition for net income has been changed to net income attributable to parent company shareholders (Abbreviated as Parent Company Net Income).
* 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 celebrate the listing on the TSE Second Section.
* A commemorative dividend of ¥2 per share was paid in fiscal year March 2013 to celebrate the moving of Qol's listing to the TSE First Section.
 
This Bridge Report provides a review of Qol Co., Ltd.'s earnings results for first half of fiscal year March 2017.
 
Key Points
 
 
Company Overview
 
Qol is the third largest company in the dispensing pharmacy industry with nationwide operations with the bulk of its stores in the Tokyo and surrounding regions. Traditionally, dispensing pharmacies have been located adjacent or close to hospitals and been engaged in fierce competition to capture customers. However, Qol maintains close communications with medical institutions to ensure success while opening new stores. In recent years, the Company has pursued partnerships with companies outside of the pharmacy industry to open stores in areas not necessarily close to hospitals, but have well-established foot traffic of potential customers. Some of these partnerships include capital ties with LAWSON, Inc. to create "hybrid facilities that combine dispensing pharmacies with convenience stores" in suburban regions, a partnership with Bic Camera Inc. for pharmacies to be opened in subterranean sections of train stations, and a collaborative agreement with West Japan Railway Company Group to open "Station Qol Pharmacies" within trains stations. In addition, the CSO and clinical trial support services are provided as part of the BPO consignment business through the intermediary holding company Qol SD Holdings Co., Ltd., which acts as an intermediary holding company.
 
Corporate Philosophy:    We seek to improve the "Quality Of Life" of all people, anytime and anywhere.
 
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 2012Business alliance formed with West Japan Railway Company Daily Service Net
August 2012Formed capital alliance with LAWSON
October 2012APO PLUS STATION Co., Ltd. turned into a subsidiary
December 2012Listed shares on the First Section of the Tokyo Stock Exchange
April 2013Qol SD Holdings Co., Ltd. established as an intermediary holding company to oversee and manage the related businesses through a corporate split (Newly established split)
July 2014Formed business alliance with Cocokara fine Inc.
June 2016Change of directors with Masaru Nakamura becoming Chairman and CEO, and Takashi Nakamura becoming President and COO
 
Business Description
Qol's reported business segments are divided into the segments of the pharmacy business, which accounted for 92.3% of fiscal year March 2016 sales, the BPO consignment business (name changed from related business), in which the CSO and clinical trial support services are provided, along with pharmacies operated jointly with convenience stores (CVS, operated in conjunction with LAWSON) with a portion of sales derived from the sale of products.

At the same time, the BPO consignment business segment is comprised of 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. Also, Qol also dispatches medical representatives as a response to help pharmaceutical companies reduce costs (Medical Representative Reduction).
 
Pharmacy Business
QOL Pharmacies
Because of the strong tradition of "purchasing prescription medicines at pharmacies located close to hospitals," customers sought to get their prescriptions filled at pharmacies located close to hospitals and clinics. Therefore, dispensing pharmacies had sought to open stores in front of or close to major hospitals and clinics. Despite this trend, Qol will continue its strategy of maintaining close one-on-one relations with numerous medical institutions (Strong and credible relations with physicians at prescribing medical institutions) to maintain its reputation as a pharmacy with detailed person-to-person services, while also promoting the operation of pharmacies close to hospitals. At the same time, Qol will also promote a store development strategy that focuses upon the opening of pharmacies that satisfy the need to fill prescriptions issued by multiple medical institutions.

While Qol operates the bulk of its pharmacies close or adjacent to hospitals, the number of pharmacies located in other locations that are further away from hospitals is on the rise. While the focus of its new pharmacy openings is centered in the Tokyo and surrounding regions (Approximately 50% of all new pharmacy openings), efforts will be made to expand the number of pharmacies that do not depend upon close proximity to hospitals for business by leveraging the 1.92 million member Qol Card network, prescription transmission applications and other information technologies, and to achieve a stable rate of new customer business rate of about 8% per month.
 
Increase Collaboration with Other Industries as Part of Strengthened Non-Adjacent Pharmacy Strategy: "Cover Wide Range of the Market"
From 2010 onwards, Qol has focused upon developing diversified sales channels through cooperation with partners in differing industries. As part of this strategy, Qol has promoted a new pharmacy opening strategy in various locations including hybrid pharmacies jointly operated with LAWSON convenience stores (From April 2014, a shift has been made to opening hybrid stores that fuse the traditional dispensing pharmacies, convenience stores, and drug stores to form health care stores), station front pharmacies, pharmacies located within BIC CAMERA stores that boast of high customer foot traffic, and pharmacies within West Japan Railway Company railway stations. Because over 20% of patients make conscious decisions in their choice of dispensing pharmacies they frequent, Qol seeks to acquire orders for filling of prescribed medicines by broadening the types of pharmacies it operates and as part of its differentiation strategy to capture patients. In the future, home delivery services are also being considered for not only pharmaceutical products but also for nursing care products and prepared foods.
 
 
 
Distribution Reforms
In March 2014, Pharrmaceutical Product Sourcing Organization operated by 16 different drug store and pharmacy companies was established to make possible competitive bidding on pharmaceutical product purchases to reduce procurement costs by member pharmacy companies. This Pharmaceutical Product Sourcing Organization has divided pharmaceutical products into five categories and the three categories of additional new drug discovery, patented products and long term listed products within these five categories, and it announces to member companies the anticipated pricing in addition to conducting general bidding for these products. As for other 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. However, from fiscal year March 2015, this bidding system conducted by the organization and subsequent appropriate and fair pricing have contributed to improvements in profitability.
 
BPO Consignment Business
In order to survive, pharmaceutical companies have adopted a selection and concentration strategy for its businesses. Therefore, reduction in the scale of business has been promoted including specialization in original drugs and sale of long-selling product businesses. In addition, efforts to reduce sales, general and administrative expenses (Reductions in fixed costs, shift to variable costs) are being conducted, and reductions in labor force, including manufacturer medical representatives and development staff, are being undertaken. Simultaneously, the use of CSO (MR dispatch) and CRO (Pharmaceutical product development support) companies is increasing (Reflecting a shift from fixed to variable costs in the form of outsourcing). In response to these pharmaceutical company trends, APO PLUS STATION Co., Ltd. provides services that respond to this "switch from in-house MR to use of CSO" (Contract MR).
 
 
First Half of Fiscal Year March 2017 Earnings Results
 
 
Sales Rise 3.0%, Operating Income Decline 13.7% Year-On-Year
Sales rose by 3.0% year-on-year to ¥60.572 billion. An increase in the numbers of prescriptions filled offset the negative influence of drug price and dispensing fee revisions and allowed sales to increase by 1.7% year-on-year in the dispensing business. Also, strength in the CSO and dispatch services allowed sales of the BPO consignment business to rise by 19.2% year-on-year.

With regards to profits, operating income declined by 13.7% year-on-year to ¥2.366 billion due to weak growth in gross income arising from the negative influence of dispensing fees revisions, and increases in sales, general and administrative expenses arising from higher labor costs associated with an increase in the number of newly hired pharmacists (200 new graduates joined in April) and higher goodwill amortization. While an increase in insurance policy cancellation refunds (¥51 million → ¥154 million) and a decline in interest expenses allowed non-operating income to improve, the burden of increased taxes caused net income to decline by 18.9% year-on-year to ¥1.534 billion. Total labor expenses rose by ¥926 million, with ¥776 million booked as cost of sales and ¥149 million booked as sales, general and administrative expenses. At the same time, goodwill amortization and depreciation for equipment rose by ¥261 million. Goodwill amortization returns of ¥814 million allowed operating income before goodwill amortization of ¥3.180 billion to be achieved.

A decline of ¥2.1 billion caused by delay in M&A initially planned to be completed during August until October and a ¥0.9 billion decline in technical fee sales caused sales to fall ¥3.0 billion (4.8%) below initial sales estimate. APO PLUS STATION Co., Ltd., which conducts the BPO consignment business, reached a record high on a half year basis on the back of strict cost controls and selection and concentration strategy implemented in the previous term. In addition, the reduction of procurement costs of medicines at logistic centers (reductions in fixed inventory and waste), and use of inventory management systems allowed operating income to exceed initial estimates by 2.9%. At the same time, non-operating income also exceeded initial estimates.

The total number of employees at the end of the first half fiscal year stood at 3,984 (3,544 at the end of the previous first half), including 1,746 pharmacists (1,547 at the end of the previous first half) and 1,758 temporary employees (1,706 at the end of the previous first half).
 
 
Pharmacy Business
Sales rose 1.7% year-on-year to ¥55.079 billion while operating income declined 27.0% year-on-year to ¥1.980 billion. Aggressive M&A activities helped to offset revisions of drug prices and dispensing fees and contributed to increases in both the number of prescriptions filled and sales, but increases in labor costs caused operating income to decline. While dispensing sales at new stores fell 69.1% due to a decline in new store openings, a 3.6% year-on-year rise in the number of prescriptions filled absorbed a drop in prescription prices of 3.3% year-on-year and allowed sales to rise by 0.1% year-on-year. Despite a 5.4% year-on-year decline in prescription prices, M&A activities allowed prescriptions filled and sales to rise by 5.3% and 11.3% year-on-year respectively.

Of the approximately 50,000 pharmacist consent forms signed, 60% were subject to additional basic dispensing fees. In addition, the rate of personal pharmacist advice fees (70 points) and the number of prescriptions filled have doubled compared to the first quarter of the current term. Approximately 34% of store staffs are now registered as personal pharmacists.

The Qol Group as a whole consists a total of 587 directly operated stores (540 stores at the end of the previous first half), including 5 new stores opening (7 stores in previous first half), 2 stores newly acquired, and 22 stores (14 in the previous first half) added through acquisition of subsidiaries for a total of 29 new stores. The Company closed a total of 5 stores including 3 retail stores and 2 FC stores (14 stores including 12 retail stores in previous first half).
 
 
 
With regards to standard pharmacy premiums, Qol will aggressively pursue assisted home care responses by opening pharmacies that can provide services of over 45 hours per week and implement privacy measures to help boost the number of 32 point stores to 40% by the end of the current term. Stores with generic drug (GE) dispensing system adds of 22 points are expected to rise to 39.6% (18 point stores up to 38.9%) by the end of the current term. In addition high repeats customers, and the Qol card membership system will be leveraged in personal pharmacies to cultivate "personal pharmacist advice fees."
 
 
BPO Consignment Business
Net sales and operating income rose by 19.2% and 50.8% year-on-year to ¥5.492 and ¥0.791 billion respectively. APO PLUS STATION Co., Ltd. recorded double-digit growth in sales and profits and achieved record high profits on a half-year basis. While the MR dispatch services trended steadily, dispatch of registered sales staff increased 107.0% year-on-year.
 
 
 
Total assets at the end of the first half of the fiscal year rose by ¥1.755 billion from the end of the previous fiscal year to ¥71.603 billion. Due to the revision of dispensing fees and drug prices in April, account payables decreased but fixed assets increased due to an increase in store counts and M&A (Goodwill increased by ¥0.964 billion). Qol financed capital demand through increases in long-term loans. Capital adequacy ratio stood at 30.2% (29.7% in previous term), and net debt to equity ratio obtained by dividing interest bearing liabilities by equity was 0.37 times (0.34 times in previous term).
 
 
The decline in pretax profit and increase in tax expenses (¥1.031 → ¥1.917 billion) contributed to a decline in the net inflow of operating cash flow. At the same time, M &A-related expenses increased.
 
 
Fiscal Year March 2017 Earnings Estimates
 
 
First Half, Full Year Estimates Remain Unchanged, Sales, Operating Income Expected to Rise by 10.4%, 1.3% Year-On-Year
Qol's estimates call for sales to rise by 10.4% year-on-year to ¥138.0 billion as a result of 146 new stores scheduled to be opened, including 10 new Qol pharmacies, 8 new LAWSON hybrid pharmacies, and 128 new pharmacies acquired through M&A activities. The total number of pharmacies is expected to be 709 at the end of the term, including 40 LAWSON hybrid pharmacies (563 total and 32 LAWSON hybrid pharmacies at the end of the previous term). In addition to revisions of medical fees, basic dispensing fees, personal pharmacist advice fees, standard pharmacy premium and generic drug dispensing system premium are expected to gradually increase as the year end approaches.

With regards to profitability, systems investments, goodwill amortization, and overall sales, general and administrative expenses are expected to rise. However, the contribution from an anticipated 30.0% year-on-year rise in profits of APO PLUS STATION Co., Ltd. is expected to allow operating income to rise by 1.3% year-on-year to ¥6.8 billion (Operating income would rise by 9.5% year-on-year to ¥9.0565 billion after goodwill amortization is added back).

Capital investments and depreciation are expected to rise from ¥1.927 and ¥1.607 billion respectively in the previous fiscal year to ¥3.301 and ¥1.763 billion respectively in the coming term. Goodwill amortization is also expected to rise from ¥1.569 to ¥2.265 billion over the same period. Dividends of ¥12 per share are expected to be paid at the end of both the first half and second half resulting in a full year dividend of ¥24 per share.
 
 
 
First Half of Fiscal Year March 2017 Summary (President Takashi Nakamura COO)
 
Profits Stronger than Initial Estimates
"Despite a decline in profits due to the revision of medical fees in the first half of the current term, we surpassed our initial estimates due to efforts to reduce procurement costs and to the contribution from APO PLUS STATION Co., Ltd."
 
Pharmacy Business: Achievements in M&A, Logistics, and Surface Expansion
"Although technical fee sales stagnated due to the revision of dispensing fees, they have entered a recovery phase and exceeded initial estimates in October. In the first half of current term, 24 acquired through M&A (14 in the previous first half) and 5 independently developed stores were opened (7 new stores in previous first half). Because the separation rate of dispensing and prescribing functions exceeds 70%, it has become difficult to independently open a large number of new stores which can be expected to perform strongly, and we have therefore shifted our focus to open new stores through M&A, which has become a successful strategy. KYOEIDO Co., Ltd., an operator of pharmacies based in Niigata with sales of ¥13.0 billion and operating 86 stores in Niigata and Yamagata Prefecture, became a part of the Qol Group on October 2. With 81 stores in Niigata Prefecture, Niigata has become the second largest operating area after Tokyo. However, because this M&A was initially expected to be completed in August, the delay of KYOEIDO's consolidation in October caused our performance in the first half of the fiscal year to fall below initial estimates. Aside from KYOEIDO, M&A related activities of large dispensing pharmacies operating between 10 and 20 stores were also conducted in the first half of the current term.
"Although we will continue to aggressively conduct M&A activities, the contents and details of projects need to be closely scrutinized, and careful responses need to be developed considering the tough environment surrounding the dispensing pharmacies. Furthermore, close attention must be paid to inventory management efficiencies concerning M&A. Our full year plans call for 128 stores to be added through M&A related activities, and we have already added 122 as of October."
 
 
Support Center Opened in Tamachi, Tokyo
"With regards to the logistics function, a support center for the dispensing and logistics functions was established in Tamachi (Shinagawa, Tokyo) through corroborate with Yamato Transport. This support center occupies the first and second floors of Yamato Transport`s Yamato Tamachi Building, of which the first floor (117 ㎡) is used for dispensing, and the second floor (175 ㎡) as a distribution center. As for products other than medical drugs such as hygiene and OTC related products, Qol has not placed large orders for these products because of their low level of sales. However, it has become necessary to develop a system responding to various patient needs since health support pharmacies require OTC products. We estimate that reduction in distribution cost, discarded items, and fixed inventories to amount to approximately ¥0.5 billion."
 
 
Odakyu Train Line Yurigaoka Station Store Opened in September
"In September, a store inside a station was opened at the Odakyu Train Line Yurigaoka Station located in the Tokyo metropolitan area. This shop is located close to a bus stop for buses headed to Shinyurigaoka General Hospital, and the store showed a promising start with more than 400 prescriptions filled within the first month of operation. The Odakyu Train Line Yurigaoka Station store is small and has a limited selection of products, but is expected to see strong customer foot traffic as it operates inside a major train station and bases its operation upon know-how developed through operation of pharmacies within train stations of West Japan Railway Company. Convenience is an important requirement for dispensing pharmacies, and Qol will pursue the development of more stores like this in the future. Qol plans to open two stores affiliated with the JR West Group in the second half of the current term, bringing the total to six stores."

"Although hybrid dispensing pharmacies operated with LAWSON perform strongly and have exceeded expectations for sales, competition is fierce, and conditions remain difficult. Homecare at customer homes exceeds 50%, and Qol would like to raise this ratio a step further."
 
BPO Consignment Business: MJ Business As A Pillar with CSO Business
"So while the pharmacy business has been in a sustained growth phase until now, the impact of revisions of drug prices and dispensing fees in April is significant. In the future, Qol expects that the stable management of its pharmacy business to become difficult unless additional services and value addition can be created. Fortunately, our Company is also engaged in BPO consignment projects, conducted primarily by APO PLUS STATION Co., Ltd, and this business has steadily grown. This is a high-profit margin business, and Qol expects to focus further attention on this business."

"In the BPO consignment business, APO PLUS STATION Co., Ltd achieved record high profits in the first half of the current term and also started operations in Thailand. Efforts by APO PLUS STATION Co., Ltd, which operates the main business of contract sales organization, to conduct marketing to pharmaceutical companies by leveraging the pharmaceutical product procurement routes of the pharmacy business have been successful. However, the contribution of dispatch and headhunting services of registered pharmaceutical sales representatives during the first half (First half performance basically in line with estimates as nearly half of the full year estimates were achieved) was considerable. Within the Company, healthcare worker dispatch and headhunting services are included in the medical-job (MJ) business. The weight of the services performed by APO PLUS STATION Co., Ltd, which was originally a medical representative dispatching company (CSO business), is currently large, but the MJ business is expected to grow to become similar in scale in the future, allowing Qol to establish a position of leadership as a comprehensive medical human resources dispatching and headhunting company."
 
 
 
Conclusions
 
While competitors in the dispensing business are struggling, Qol was able to steadily grow the number of prescriptions filled and customers served due to its 50% concentration of stores in the Tokyo metropolitan area, hybrid pharmacies jointly operated with LAWSON, West Japan Railway Group in-station pharmacies, and information technology applications (Used by 10% of LAWSON and JR pharmacy customers) which have allowed new customer growth of just under 20% to be achieved. Furthermore, reductions in costs at logistics centers achieved by using inventory management systems and other methods have allowed Qol to achieve results in a short period. Sales of the CSO services in the BPO consignment business have grown on the back of efforts to leverage the sales channels of the pharmacy business, and strict cost controls and a selection and concentration strategy implemented in the previous term are contributing to improvements in profitability. In addition, the MJ business is developing into a new growth business. Moreover, while the revisions of drug prices and dispensing fees caused profits to decline year-on-year in the first half, Qol has been able to achieve concrete results in their efforts to grow both the dispensing and BPO consignment businesses.
 
 
Reference: Corporate Governance
 
 
◎ Corporate Governance Report
Qol has submitted a Corporate Governance Report on December 18, 2015 after the Corporate Governance Code came into effect, and has implemented all of the basic principles of the Corporate Governance Code.
 
<Disclosure Based on the Principles of the Corporate Governance Code>
(Principle 1-4) Cross-Shareholdings
(1) Qol takes a comprehensive approach to cross-shareholdings from a strategic standpoint of important business strategy issues and business partner relationships to continually increase its corporate value.
 
(2) With regards to strategic shareholdings, Qol respects the management policies and strategies of the companies in which it invests and implements its voting rights from the perspective of whether or not efforts are being conducted properly to increase the corporate value of investment companies from a medium to long-term view.
 
(Principle 1-7) Transactions between Related Parties
Transactions with parties related to our directors are conducted in compliance with laws and is recognized by our directors. In addition, transactions of our Company and its subsidiaries are monitored for relationships with our directors or their direct relatives on an annual basis, and important transactions are reported in our securities reports.
 
(Principle 5-1) Policy regarding Constructive Communications with Shareholders
Qol promotes constructive communications with shareholders, maintains high levels of transparency in its information disclosure, endeavors to build good relationships with shareholders and actively conducts investor relations activities. Specifically, Qol conducts presentations to analysts and institutional investors twice a year, road shows to overseas institutional investors, actively discloses earnings information and provides presentations on management strategies. In addition, presentations are provided to individual investors over 10 times per year to explain management strategies. Furthermore, store visits are also implemented.
 
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.
Copyright(C) 2017, Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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