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
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 dispensing pharmacy operator with pharmacies located in the Tokyo metropolitan region and throughout Japan.
Year-end
March
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,770 32,674,165 shares ¥57.8 billion 20.7% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥24.00 1.4% ¥129.72 13.6x ¥652.42 2.7x
* Stock price as of the close on June 20, 2017. 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 (¥)
March 2014 100,966 2,105 2,208 777 25.11 18.00
March 2015 114,363 4,243 4,262 2,155 63.33 20.00
March 2016 124,957 6,743 6,688 3,709 107.78 24.00
March 2017 131,502 6,865 7,065 4,353 128.35 24.00
March 2018 Est. 145,000 7,500 7,500 4,400 129.72 24.00
* Estimates are those of the Company. From fiscal year March 2016, the definition for net income has been changed to net income attributable to parent company shareholders (In the rest of this report, net income shall be defined likewise).
* 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 calculated on the assumption that these stock splits were conducted at the beginning of the previous consolidated fiscal year.
* Fiscal year March 2016 earnings have been retroactively revised to reflect accounting method changes made in fiscal year March 2017.
 
This Bridge Report provides a review of Qol Co., Ltd.'s earnings results for fiscal year March 2017 and earnings estimates for fiscal year March 2018, in addition to overview of its business strategies.
 
Key Points
 
 
Company Overview
 
Qol is the third largest company in the dispensing pharmacy industry with nationwide operations and 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 in its new store opening strategy. In recent years, the Company has pursued partnerships with companies outside of the pharmacy industry to open stores in areas with well established foot traffic of potential customers including capital ties with LAWSON Inc. to create "hybrid facilities that combine dispensing pharmacies with convenience stores" in cities, a partnership with BIC CAMERA Inc. for pharmacies to be opened near train stations , and a collaborative agreement with West Japan Railway Company Group to open "Station Qol Pharmacies" within train stations. In addition, the CSO, dispatched nursing care, and clinical trial support services are provided as part of the BPO consignment business.
 
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 the marketing division manager at a pharmaceutical product wholesale company, opening the first store in Kabutocho, Tokyo.
April 2006Listed its shares on the "Hercules" section (Currently the JASDAQ Market) of the Osaka Securities Exchange
December 2008Formed collaborative agreement with LAWSON,
June 2010First hybrid dispensing pharmacy and convenience store was opened (Shiroyama Trust Tower, Minato Ward, Tokyo)
December 2011Listed 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 Co., Ltd. turned into a subsidiary
December 2012  Listed 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 related businesses through a corporate split (Newly established split)
July 2014Collaborative agreement formed with cocokara Fine OEC Inc.
June 2016Change of directors with Masaru Nakamura becoming Chairman and CEO, and Takashi Nakamura becoming President and COO
October 2016The intermediate holding company Qol SD Holdings Co., Ltd. was absorbed through merger
 
Business Description
Qol's reported business segments are divided into the segments of the pharmacy business, which accounted for 91.7% of fiscal year March 2017 sales, and the BPO consignment business, in which the CSO and clinical trial support services are provided. Also, pharmacies operated jointly with convenience stores (CVS, operated in conjunction with LAWSON) with a portion of sales derived from the sale of products is included in the pharmacy business. At the same time, the BPO consignment business segment is comprised of the CSO and pharmacist dispatch and placement services conducted by APO PLUS STATION Co., Ltd., clinical trial support service performed by QOL RD Co., Ltd. (QOL RD Co., Ltd. was merged and absorbed for APO PLUS STATION Co., Ltd. in April 2017.), 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 generally sought to get their prescription drugs 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 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 get prescription drugs issued by multiple medical institutions.

While Qol operates pharmacies providing personal advice, the number of pharmacies conducting similar services 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 2.17 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), near the station 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, the Pharmaceutical 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. The 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. But 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. At the same time, 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 contracted MR" (Dispatched MR) to match their need to convert some fixed costs to variable costs.
 
 
Fiscal Year March 2017 Earnings Results
 
 
Sales, Operating Income Rose 5.2%, 1.8% Year-On-Year, Profits Rise to Record High for 3rd Consecutive Year despite Medical Fee Revisions
Sales rose by 5.2% year-on-year to ¥131.5 billion. The negative influence of revisions in drug pricing and medical fees and declines in new store openings were absorbed by M&A activities, which allowed sales of the pharmacy business to rise by 5.2% year-on-year. MR dispatching services conducted by APO PLUS STATION Co., Ltd. trended strongly and helped to drive BPO consignment business sales higher by 13.0% year-on-year. Despite this strength, delays in large M&A activities (Planned to take place in August but slipped into October) caused sales to fall shy of initial estimates.

Operating income rose by 1.8% year-on-year to ¥6.8 billion. Higher sales and improvements in gross income margins allowed higher sales, general and administrative expenses arising from increases in staff numbers to be absorbed. Gross income margin improved on the back of improved gross income margins (36.0% to 36.2%) in the BPO consignment business arising from efforts implemented from the previous term to control costs, implementation of a selective and focused business strategy, and efforts to improve gross income margins of the pharmacy business by controlling the cost of pharmaceutical product procurement and strengthened inventory controls, which allowed the negative influence of revisions of drug pricing and medical fees to be absorbed.

An increase in insurance cash surrender value (¥58 to ¥219 million) allowed non-operating income to improve. At the same time, extraordinary income improved on the back of the booking of profit from sale of investment securities (¥370 million) and a decline in impairment accounting loss (¥497 to ¥152 million). Consequently, net income rose by 17.4% year-on-year to ¥4.3 billion. The number of employees at the term end rose by 19.7% year-on-year to 4,361 (Excluding 1,340 temporary staff), due in part to 23.7% year-on-year increase in pharmacists to 1,914. Capital investments declined by 7.4% year-on-year to ¥1.7 billion, depreciation rose by 7.4% year-on-year to ¥1.5 billion and goodwill amortization rose by 24.0% year-on-year to ¥1.9 billion.
 
 
Pharmacy Business
Sales rose by 4.6% year-on-year to ¥120.5 billion, but operating income declined by 8.2% year-on-year to ¥6.1 billion. Despite the negative influence of revisions in drug pricing and medical fees and an 8.2% year-on-year decline in average price of a prescription due in part to a drop in hepatitis C treatment drugs, the number of prescriptions received rose by 14.5% year-on-year and allowed pharmacy sales to rise by 5.1% year-on-year to ¥109.9billion. This increase in prescriptions filled was due in part to 21.2% year-on-year increase M&A, including the 86 stores of KYOEIDO and 125 total stores from acquisition of 10 pharmacy operators, and 3.4% year-on-year increase at existing stores. At the same time, Qol was unable to offset the negative influence of the revisions in drug pricing and medical fees, and declines in prescription drug sales and technical fee pricing.

The number of stores of the overall Qol Group rose to 696 at the end of the current term, compared with 563 at the end of the previous term. By brand of store, Qol opened 11 new self operated stores (Compared with 9 in the previous term), 4 LAWSON (1 in the previous term), 2 JR Western Japan (1 in the previous term), 1 Odakyu (First store opened) and acquired 125 through M&A (34 in the previous term) for a total of 143 new stores (Compared with 45 in the previous term). At the same time, the Qol Group closed 5 self operated stores (2 in the previous term), 2 LAWSON (6 in the previous term), and 3 retail (12 in the previous term) for a total of 10 closures (Compared with 20 in the previous term).
 
 
※ Medical Fee Revision Influence: Technical Fee Pricing Recover to Previous Year's Levels in March
While the influence of the revisions to medical fees implemented in fiscal year March 2017 was large, basic dispensing fees, standards for dispensing premium and generic drug (GE) dispensing system premiums all improved in each quarter of the term. The switch rate to generic drugs (GE) exceeded 71% and about 78% of stores accepted generic drug (GE) dispensing system premiums.
 
 
 
BPO Consignment Business
Sales and operating income rose by 13.0% and 49.8% year-on-year to ¥10.9 and ¥1.4 billion respectively. Increases in CMR (Dispatched MR), efforts to control costs implemented from the previous term and strict strategy of selection and focus allowed sales and profitability of APO PLUS STATION Co., Ltd. to improve.
 
 
(3) Financial Conditions and Cash Flow (CF)
Aggressive M&A activities allowed total consolidated assets to rise by ¥11.4billion from the end of the previous term to ¥81.2 billion at the end of the current term. The acquisition of KYOEIDO's 86 stores and a total of 125 stores through M&A of 10 companies contributed to increases in goodwill amortization and tangible assets including property and structures of ¥11.1 and ¥1.4 billion respectively. At the same time, both interest bearing liabilities and net assets rose. Stock buyback contributed to a 3.5% point decline in capital adequacy ratio to 26.2%, and return on equity improved to 1.2% points to 20.7%.
 
 
The margin of net inflow of operating cash flow contracted due in part to an increase in corporate tax payments from ¥1.9 to ¥3.5 billion, but a net inflow of ¥5.8 billion was still realized. At the same time, the net outflow of investing cash flow expanded due to the acquisition of shares of subsidiaries accompanying changes in the scope of consolidation (¥1.6 to ¥12.8 billion). Increase of long-term debt caused interest bearing liabilities to rise and the net inflow of financing cash flow to expand.
 
 
 
Fiscal Year March 2018 Earnings Estimates
 
 
Sales, Operating Income Expected to Rise 10.3%, 9.2% Year-On-Year
Qol's estimates for fiscal year March 2018 call for sales to rise by 10.3% year-on-year to ¥145.0 billion. Sales of the pharmacy business are expected to rise by 11.4% year-on-year to ¥134.3 billion on the back of growth in store numbers, and sales of the BPO consignment business are expected to grow by 2.6% year-on-year to ¥11.1 billion due to a gradual rise in the capacity utilization rates of the expanded medical representative work force. With regard to profit (Before consolidated adjustments are considered), Qol estimates call for operating income of the pharmacy business to rise by 11.5% year-on-year to ¥6.8 billion due to the assumption of similar levels of operating margins, and that of the BPO consignment business to rise by 13.5% year-on-year to ¥1.7 billion on the back of improved profitability (Operating margin rise from 13.7% to 15.2%) arising from higher capacity utilization of MRs. Capital investments, depreciation and goodwill amortization are expected to rise by 11.4%, 0.8% and 24.1% year-on-year to ¥1.9, ¥1.5 and ¥2.4 billion respectively.

APO PLUS STATION Co., Ltd., which dispatches medical representatives, boasts of the largest number of clients within the contract sales organization industry, but dispatches a lesser number of MRs per company than its competitors. However, there is a risk of large declines in capacity utilization rates of MRs posed by the expansion of its MR work force numbers needed to pursue large-scale dispatch projects, which entail dispatch of large numbers of MRs to each client, and in cancelation of these large projects could lead to the idling of large numbers of MRs. In addition to the risk of lower utilization rates every two years because the MR dispatch contracts are for two years presented, pricing discount requests from clients of large projects are yet another risk. And while there are inquiries for large supplies of about 200 MRs from specific clients, APO PLUS STATION Co., Ltd. is expected to pursue a strategy of achieving stable earnings growth by dispatching smaller numbers of staff to a wider range of clients.
 
 
 
Future Business Strategy
 
Pharmacy Business
Promote "Pharmacies that Support Health"
Qol will continue to promote its strategy of becoming the pharmacy of choice by operating "pharmacies that support health". "Pharmacies that support health" are "pharmacies that provide various functions to gain sustained usage by patient customers and measures to actively promote the health of their customers" (Pharmaceuticals and Medical Devices Act, Article 1, Paragraph 2, Item 5). Pharmacies that meet these criteria submit notifications to be recognized by the governing body. Qol "pharmacies that support health" provide educational activities regarding the self-medication taxation system, over-the-counter drugs, generic drugs, supplements and other medical treatments as part of its provision of advice to maintain the health of its customers.
 
Strengthen Primary Care Pharmacist Advice, Dispensing Pharmacy, Advanced Pharmacy Management Function
"Cancer" is the number one cause of death in Japan and the rate of cancer-related deaths is rising every year. Therefore, the number of pharmaceutical companies shifting the focus of their new drug development efforts to the realm of "oncology" is growing. At the same time, the number of pharmacies with specialized knowledge in this realm is still low. Qol is implementing efforts to strengthen its self-medication training and over-the-counter pharmaceutical product knowledge, registered sales agent skills, compliance training and other educational curriculum. At the same time, the Company has created its own pharmacist certification system including the Qol certified oncology pharmacist, Qol certified dementia pharmacist, Qol certified diabetes pharmacist, and Qol certified home care pharmacist categories of certifications in specialized fields. Qol boasts of over 3,000 Qol certified pharmacists of which over 130 are Qol certified oncology pharmacists.
 
New Pharmacy Opening Plans
Qol's new pharmacy opening plans call for 90 pharmacies to be opened in fiscal year March 2018. Amongst these, 20 are expected to be newly opened, 60 acquired through M&A, and 10 new format stores (Town center, near train stations, within train stations) are also expected to be opened. As part of the efforts to strengthen the primary care pharmacies and advanced pharmacy management functions, specialized knowledge will be pursued, and the convenience and regional specialization in development of new formats will be raised. As of end fiscal year Mach 2017, new format stores operated with BIC CAMERA stood at 4, 34 with LAWSON, 6 with West Japan Railway, and 1 with Odakyu Electric Railway. While traditional convenience stores are confronted by difficult conditions due to increases in the cost of part-time workers, the hybrid convenience and pharmacy stores are steadily ramping up profitably.
 
Strengthening Inventory Management
The distribution center responsible for managing nationwide inventories operated in cooperation with Yamato Holdings Co., Ltd. began full-scale operations. The task of managing overall inventories is growing in difficulty because of the increase in generic drugs and expansion of the store network, but the distribution center operations allowed gains in efficiency and reductions in dead stock to be achieved during fiscal year March 2017. In fiscal year March 2018, further gains in inventory management optimization are expected to be achieved through implementation of information technology.
 
BPO Consignment Business
Business Expansion
Within the MR dispatch (CSO business) division, registered dietitian dispatch service was started in fiscal year March 2017 in addition to the traditional dispatch of pharmacists, health care professionals, and nurses. Within the CRA (Clinical research associate) division, dispatch of staff to registered sales and health care applications was conducted as part of the clinical trial support service. The clinical trial support service benefitted from favorable trends in specified health use related applications. However, APO PLUS STATION Co., Ltd. took over this service after its merger and absorption in April 2017. CRA (Clinical research associate) dispatch is a service that leverages the human resources of Qol RD Co., Ltd.
 
Overseas Business Expansion
As a new growth realm, Qol is cultivating its overseas business. As part of this overseas business, APO PLUS STATION (THAILAND) Co., Ltd. was established during fiscal year March 2017 and began consigned application services for Food and Drug Administration (FDA) approval of pharmaceutical, over the counter and other products. This is also part of a broader ranging strategy in Thailand that considers the potential deployment of the CSO service and pharmacy operations in Thailand in the future that will leverage information gained through the FDA approval consignment service.
 
 
 
Conclusions
 
At the beginning of the earnings announcement meeting, Chairman Masaru Nakamura apologized for the prescription replacement issue that occurred at a pharmacy in Akita Prefecture and explained how efforts to prevent a reoccurrence of this issue, including implementation of strict compliance procedures, are being implemented. Currently, related staff are making the rounds of nationwide pharmacies to implement compliance training, and efforts to reform and strengthen the internal audit function are also being implemented. President Takashi Nakamura also apologized for this incident and pledged to implement measures to prevent a reoccurrence.

The performance of all of the dispensing pharmacy companies were largely influenced by the drug price and medical fee revisions implemented in fiscal year 2016. For example, the industry's largest company, AIN Holdings Inc., recorded sales and operating income growth of 5.6% and 0.4% year-on-year respectively, Nihon Chouzai Co., Ltd. saw a 1.9% increase in sales and an 18.8% decline in operating income, Sogo Medical Co., Ltd. recorded 1.2% year-on-year increase in sales and a 2.6% year-on-year gain in operating income on the back of strong demand for medical equipment rental services (Pharmacy business sales and operating income decline by 0.5% and 5.1% respectively), and Medical System Network Co., Ltd. booked 1.3% year-on-year increase in sales and a 44.1% year-on-year decline in operating income. Compared with these performances, Qol was able to record increases in sales and operating income of 5.2% and 1.8% year-on-year respectively despite delays in some of the large M&A activities undertaken. In addition to the successes of strict control of profits and selection and focus of business strategies of the BPO business, reductions in inventory losses through strengthened inventory management and control of pharmaceutical product procurement costs allowed gross income margin to improve slightly. While the breadth of its business is expanding on the back of aggressive M&A activities, Qol is also implementing measures to improve earnings generating capabilities along with its pursuit of growth in business scale.
Qol's share price valuations of 13.1 times earnings estimates and dividend yield of 1.40% may be considered cheap relative to its competitors like AIN Holdings, Nihon Chouzai, Shogo Medical and Medical System Network, which trade at price to earnings valuations of 28.8, 10.2, 18.3 and 14.8, and dividend yields of 0.6%, 1.37%, 1.11% and 1.99% respectively. Therefore, Qol may provide positive surprises with its two-pronged strategy of "further expanding earnings" and "restoring credibility" during fiscal year March 2018.
 
 
Reference: Corporate Governance
 
 
◎ Corporate Governance Report
Last update: June 23, 2016
 
<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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