BRIDGE REPORT
Qol Co., Ltd. (3034)
Masaru Nakamura Chairman and CEO
Masaru Nakamura
Chairman and CEO
Takashi Nakamura President and CEO
Takashi Nakamura
President and CEO
 
Corporate Profile
Company
Qol Co., Ltd.
Security Code
3034
Exchange
Tokyo Stock Exchange, First Section
Chairman
and CEO
Masaru Nakamura
President
and CEO
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
¥2,257 38,362,599 shares ¥86,584 million 17.4% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥28.00 1.2% ¥127.43 17.7x ¥936.74 2.4x
* Stock price as of the close on June 20, 2018. Number of shares outstanding as of most recent quarter end does not include treasury shares. ROE and BPS are the values from the previous term.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Income Ordinary Income Net Income EPS(¥) DPS (¥)
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 145,516 9,091 9,333 4,986 141.19 28.00
March 2019 Est. 152,000 8,000 8,000 4,500 127.43 28.00
* 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).
* 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 2018 and earnings estimates for fiscal year March 2019.
 
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 (Contract Sales Organization: dispatching medical representatives) 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.
 
Business Description
Qol's reported business segments are divided into the segments of the Pharmacy business, which accounted for 92.8% (after consolidation adjustments) of fiscal year March 2018 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, and publishing related services provided by Medical Qol Co., Ltd. Also, Qol dispatches medical representatives as a response to the need of pharmaceutical companies in reducing 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. 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 Qol Card, which can be used at Qol pharmacies across the country, prescription transmission applications and other information technologies. Such efforts have been successful 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
The Pharmaceutical Product Sourcing Organization established in March 2014 for conducting competitive bidding on pharmaceutical product purchases is currently composed of 18 different drug store and pharmacy companies nationwide. Although Qol was only able to get limited discounts on its purchases because it had negotiated with wholesalers over the prices of all drugs by itself; however, participation in the organization has allowed Qol to conduct negotiations and conclude agreements at an appropriate and fair price.
 
 
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., one of the group companies of the Qol Group, has provided services that reflect this "switch from manufacturer MRs (in-house MRs) to contracted MRs (CMRs for short, or Dispatched MRs)" (the need for a shift from fixed costs to variable costs).
 
 
Fiscal Year March 2018 Earnings Results
 
 
Sales and operating income grew 10.7% and 32.4% year-on-year, respectively, as forecasted based on the second upward revision.
Sales stood at 145,516 million yen, up by 10.7% year-on-year. While sales in the BPO Consignment Business, in which the Contract Sales Organization (CSO) market reached a plateau, shrank 4.3% year-on-year, the Pharmacy Business showed a year-on-year sales increase of 12.0%. In the Pharmacy Business, the existing pharmacies showed a healthy growth because the Company propelled adoption of the drug pricing and medical fees revised in 2016, as well as because the large-scale M&A activities in the previous year brought full results.

Operating income grew by 32.4% year-on-year to 9,091 million yen. The new inventory management system that started to be in operation at all of the Company's pharmacies improved the accuracy of management of orders put in and inventories regarding pharmaceuticals, raising the gross income margin by 0.7 points to 13.5% (the gross income margin of the Pharmacy Business increased by 1.2 points). The ratio of selling, general and administrative (SG&A) expenses decreased 0.3 points on the back of the results of the continuous efforts of control of costs. In addition, the contingency reserve (142 million yen), which was reserved in the previous term as an amount corresponding to the interest of bonds payable following the conversion of all of the convertible bonds (CBs), were reversed, which brought improvement in ordinary income and loss.
The number of regular employees at the end of the term stood at 4,532 (which was 4,361 at the end of the previous term), including 1,993 pharmacists (1,914 at the end of the previous term), and the number of temporary staff was 2,027 (which was 1,928 at the end of the previous term). Capital investments grew by 2.9% year-on-year to 1,778 million yen (1,728 million yen in fiscal year March 2017), and depreciation rose 2.5% year-on-year to 1,624 million yen (1,584 million yen in fiscal year March 2017).
 
 
 
Pharmacy Business
Sales and operating income were 135,084 million yen (up 12.0% year-on-year) and 8,652 million yen (up 40.4% year-on-year), respectively. The Company proactively dealt with the revisions to drug pricing and medical fees implemented in 2016 by promoting the concept of Primary Care Pharmacist and Pharmacy Advice, and facilitating use of generics, which increased technical sales by 15.4% and pharmaceuticals sales by 12.0% year-on-year. With regard to each pharmacy store, the existing pharmacies showed a healthy growth, in addition to the contributions made through M&A activities, particularly the large-scale ones conducted in the previous term (the sales increase of 11,273 million yen is attributable to M&A activities, out of which sales of 9,527 million yen were yielded through the M&A activities performed in the previous term). The growth in the number of pharmacy stores resulted in a rise in the number of prescriptions received by 12.1% year-on-year, in conjunction with a 0.6% year-on-year increase of an average price of a prescription.

The number of pharmacies of the overall Qol Group at the end of the term stood at 718 (compared with 696 at the end of the previous term). Qol opened a total of 35 new pharmacies (the number was 143 at the end of the previous term), including 17 self-operated stores (compared with 11 in the previous term), 14 pharmacies acquired through M&A (125 in the previous term), 3 pharmacies operated in cooperation with LAWSON (4 in the previous term), and 1 other pharmacy (3 in the previous term). In anticipation of revisions to drug pricing and medical fees, the industry as a whole did not proactively move ahead with M&A activities. Meanwhile, Qol Group closed 13 pharmacy stores (compared with 10 in the previous term), including 3 kiosks.
 
 
 
 
 
BPO Consignment Business
Sales and operating income stood at 10,431 million yen (down by 4.3% year-on-year) and 1,341 million yen (down 10.5% year-on-year), respectively. While the pharmacist dispatch and placement service, in which the number of pharmacists dispatched increased, exceeded the forecast and underpinned this segment as its second pillar, the CSO Business exhibited a sluggish growth this year. At the same time, the growth of the number of orders placed in the Contract Research Organization (CRO) Business slowed down. Concerning the CSO Business, although the Company has retained the largest number of partner companies in the industry, the entire industry is reaching a plateau. With regard to the CRO Business, Qol is forging ahead with establishment of a structure that will strengthen its sales capabilities.
 
 
 
Total assets at the end of the term were 87,315 million yen, up 6,024 million yen from the end of the previous term. The conversion of all of the CBs (with the face value being 10 billion yen) increased cash and equivalents, and net assets. In addition, account receivables and payables grew due to a cut-off error caused because the end of this term was a holiday. Capital adequacy ratio was 41.2% (which stood at 26.2% at the end of the previous term).
 
 
Operating cash flow grew by 91.2% year-on-year to 11,116 million yen due to a profit increase and the aforementioned term-end factors. The decline in expenses related to M&A activities improved investing cash flow, and free cash flow of 7,341 million yen was secured. Financing cash flow fell into the red due to the payment of loans.
 
 
Fiscal Year March 2019 Earnings Estimates
 
 
Sales will grow 4.5% and operating income will shrink by 12.0% year-on-year.
The Company predicts that operating income is to be 8.0 billion yen, down 12.0% year-on-year, due to a decreasing profit in the Pharmacy Business attributed to the influence of revisions to drug pricing and medical fees. In the Pharmacy Business, Qol plans to open 100 pharmacies, including newly established pharmacy stores and new types of pharmacies, mainly through M&A activities. In addition, aiming to achieve a generics utilization rate of 80%, which is the government's target, the Company will lay stress on facilitating use of generic drugs. With regard to profit, while impact of drug pricing and medical fees revisions on earnings is inevitable, Qol will put forth efforts to further streamline operation of its pharmacies by taking advantage of its new inventory management system. Meanwhile, sales and profit are expected to be on the rise in the BPO Consignment Business, following revitalization of the CSO Business and prosperity of the pharmacist dispatch and placement service.
 
 
 
(2) Future Business Strategy
Qol will not only realize a vision of pharmacies for patients and expand the Pharmacy Business, which is its core business, by securing larger market share, but it will also grow the BPO Consignment Business on a stable basis through pursuit of group synergy. Furthermore, it will shift to a holding company in October 2018.
 
Pharmacy Business
There are 3 key points, which are "establishment of pharmacies of choice," "expansion of the business scale," and "development of human capital." Regarding "establishment of pharmacies of choice," the Company will propel enhancement of the advanced pharmacy management function and organization of pharmacies that support health, as well as promote the concept of Primary Care Pharmacist Advice. The number of pharmacies which have met the criteria on pharmacies that support health at the end of the previous term reached 43 in the Qol Group as a whole, with 753 pharmacists completing training for pharmacists to work at pharmacies that support health. This means that Qol Group has accounted for about 5% of a national total of 817 pharmacies (composed of 515 chain pharmacies and 302 other pharmacies) that have fulfilled the criteria on pharmacies that support health.
Furthermore, as it is necessary to lure more patient customers into Qol's pharmacies in order to facilitate self-medication, the Company has been engaged in establishment of more convenient and comfortable pharmacy stores, in parallel with not only adoption of the self-medication system but also "development of human capital." The Company has installed free Wi-Fi and settlement terminals for versatile payment methods in all the Qol pharmacy stores, excluding some pharmacies, and besides, it has realized continuous management using Qol Card and other Information and Communication Technology using prescription transmission applications. Qol will forge ahead with introduction of digital signage and enrich contents.

The Company will continue M&A and creation of partnership with companies outside the pharmacy industry with the aim of "expansion of the business scale." Although the room for opening pharmacies is limited, Qol will open pharmacies based on a careful selection. In fiscal year March 2019, Qol plans to open a total of 100 pharmacies, including 20 newly established pharmacies, 70 pharmacies acquired through M&A, and 10 pharmacies in a new form (in coordination with companies in different industries). It has been demonstrated that pharmacies opened through partnership built with companies in different industries, including LAWSON, LIFE, BIC CAMERA, Odakyu Railway, and West Japan Railway, are superior in terms of capabilities to attract customers (the rate of new patient customers), growth abilities (the number of prescriptions received), and appeal (the number of medical institutions). Qol will open pharmacy stores within hospitals, which have garnered great attention, on the premise of an environment that allows pharmacists to learn about highly advanced medical care from doctors with extensive expertise, like the pharmacy currently operated in Chiba University. The Company plans to make the most of the knowledge which pharmacists have acquired in such pharmacies in expanding business.

Concerning "development of human capital," the Company will endeavor to further enrich its educational systems and strengthen compliance, aiming to nurture pharmacists who are capable of offering quality medical treatment.
 
 
BPO Consignment Business
In the BPO Consignment Business, Qol has engaged in the CSO Business that has the largest number of partner companies in the industry, the pharmacist dispatch and placement service in which the Company dispatches multifarious kinds of experts, the CRO Business in the pharmaceuticals and food fields, and the publishing-related business that has strength in medical treatment. The Company is able to secure high-quality human capital in the CSO Business through coordination with the highly advanced education of Qol pharmacies, and expected to realize synergy, such as capture of demand from medical institutions and pharmaceutical companies which are client companies of Qol pharmacies, in the CRO Business and publishing-related business.
 
CSO Business
While the number of MRs is shrinking in Japan, the ratio of Contracted MRs (CMRs) is on the rise, and the market share of APO PLUS STATION is showing a tendency for growth in conjunction with the increasing number of client companies. The CMR ratio is rising following the decline in the number of MRs also in Europe and the U.S., with the ratio being at 10 - 20% level today. This indicates that the CMR ratio of Japan, which remains at 5.6%, is expected to grow further.
In the wake of these changes in the environment surrounding MRs, it is predicted that there will be growing needs for Contracted MRs with aptitude for health care providers and abundant medical knowledge. Therefore, in anticipation of the era of a 15% CMR ratio like Europe and the U.S., APO PLUS STATION plans to expand business by offering superior human capital to a multitude of channels.
Specifically, while ensuring quality by nurturing both general and professional MRs through educational programs in coordination with the Qol education and training division, the Company will grow business by taking advantage of its strengths, which are the largest number of partner companies in the industry and the fact that, after completion of projects, it has received requests for continuous dispatch of staff from over 70% of the companies accepting its temporarily loaned staff.
 
 
Pharmacist Dispatch and Placement Service
In fiscal year March 2018, sales and profit in the pharmacist dispatch and placement service (the MJ Business Division of APO PLUS STATION) grew for three consecutive years, both hitting record highs. One of the strengths in this business is staff with multi-disciplinary expertise, including pharmacists, registered drug sellers, registered dietitians, clerical staff for pharmaceuticals dispensing, and occupational health nurses. The Company would like to double sales in fiscal year March 2021 compared with those of fiscal year March 2016. Thus, it will enhance cooperation with Health & Beauty (H&B) Business Division of APO PLUS STATION in order to pursue synergy. H&B Business Division makes proposal of health-supporting products backed up by an evidence that they have been sold exclusively by medical institutions.
 
Overseas Business
The Company will expand business in Thailand, with a focus on APO PLUS STATION (THAILAND) Co., Ltd. Although Qol currently serves as an agency for application of Over-the-Counter (OTC) ethical pharmaceuticals to the Food and Drug Administration (FDA), it will lay stress also on cultivation of sales/marketing support services in Thailand for assisting Japanese and overseas companies to break into the market in the country.
 
[Shift to a holding company]
Qol will shift to a holding company in October 2018. The aims of the shift include (1) enhancement of the function of propelling the Group business strategy, (2) speeding-up of the decision-making process by clarifying authority and responsibility, (3) strengthening of its corporate governance framework (strengthening of the compliance management structure), and (4) maximization of group synergy. The Company strives to thrive further with creation of new businesses and expansion of overseas businesses in mind, as well as accelerate opening of pharmacies mainly through M&A. Furthermore, Qol as a holding company will strengthen governance of the whole Group by providing managerial guidance to each operating company in accordance with the Group business strategy in order to increase transparency of management.

At the beginning, Qol planned to become a holding company around April 1, 2018; however, the Company noticed that it would take a longer period of time than initially expected to deal with the revisions to drug pricing and medical fees implemented in April 2018 and go through proper procedures necessary for operating business. Therefore, in January 2018, Qol announced its plan to postpone the shift.
 
 
Qol and other associated companies that are engaged in the Pharmacy Business, and APO PLUS STATION engaging in the BPO Business are affiliated with Qol Holdings, Co., Ltd., the holding company. The Company will develop new businesses within a category of medical care.
 
 
Conclusions
 
It is predicted that sales will grow and profit will drop in the Pharmacy Business in fiscal year March 2019. While Qol is expected to maintain the sales increase trend by opening pharmacies, profit will be affected significantly by drug pricing and medical fees revisions. The Company plans to take time to absorb the influence of the revisions by intensifying its efforts to deal with the generics dispensing system premiums, which has been one of the Company's shortcomings, and developing community-based pharmacy stores.
Anticipating the advent of a harsh business environment ahead of any other company, Qol has taken numerous approaches, including cultivation of new businesses, distribution reforms, and adoption of a new inventory management system. We would like to keep an eye on how much profit will be boosted in fiscal year March 2019 through these approaches.
 
 
Reference: Corporate Governance
 
 
◎ Corporate Governance Report
Last update: June 29, 2017
 
Basic Concept
Our company has believed that we will be able to fulfill the expectations of all stakeholders, including shareholders, patients, and employees, by continuously improving our corporate value through corporate activities in compliance with our corporate philosophy, slogan, Qol vision, and Qol Group Charter of Corporate Behavior. For that, as a basis for ensuring soundness, transparency, and efficiency in management, we have considered continuous enhancement of our corporate governance framework to be one of the high-profile managerial issues and strengthened the managerial supervisory function by appointing outside directors and auditors who have met the requirements for independent directors. Furthermore, our company has proactively held dialogue with shareholders and investors. We strive to satisfy the expectations of stakeholders, including shareholders and investors, not only by disclosing information on business conditions, such as progress with business plans, quantitative financial information, and non-financial information, including corporate governance and CSR, in a timely and appropriate manner but also by properly arranging environment in order to allow shareholders to exercise rights.
 
<Reasons for Non-Compliance with the Principles of the Corporate Governance Code (Excerpts)>
The Company states that it complies with all basic principles of the Corporate Governance Code of which a reason is required for non-compliance.
 
<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>
(Principle 3-1) Enrichment of information disclosure
(1) Our company has set a corporate philosophy, slogan, Qol vision, and Qol Group Charter of Corporate Behavior, and disclosed them on our website (http://www.qol-net.co.jp/). In addition, we have proactively disclosed and announced our business strategies and plans through announcements of financial results, financial briefings, shareholder meetings, explanatory meetings for individual investors, and overseas IR activities.
(2) Our company has believed that we will be able to fulfill the expectations of all stakeholders, including shareholders, patients, and employees, by continuously improving our corporate value through corporate activities in compliance with our corporate philosophy, slogan, Qol vision, and Qol Group Charter of Corporate Behavior. For that, as a basis for ensuring soundness, transparency, and efficiency in management, we have considered continuous enhancement of our corporate governance framework to be one of the high-profile managerial issues and strengthened the managerial supervisory function by appointing outside directors and auditors who have met the requirements for independent officers. Furthermore, our company has proactively held dialogue with shareholders and investors. We strive to satisfy the expectations of stakeholders, including shareholders and investors, not only by disclosing information on business conditions, such as progress with business plans, quantitative financial information, and non-financial information, including corporate governance and CSR, in a timely and appropriate manner but also by properly arranging environment in order to allow shareholders to exercise rights.
 
(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.
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