Below is an outline of the risks that may affect the operating results and financial conditions of the Group, and risks that may significantly impact the investment decisions of investors. Please note that this is not a comprehensive list. Furthermore, we have also sought to list additional matters that do not fall under mentioned risk factors but may be considered important for investment decisions of investors, and as such are proactively disclosed certain information here.
Forward-looking statements are provided to allow investors the opportunity to understand management’s beliefs and opinions with respect to the future as of March 31, 2023. Please note that this is not a comprehensive description of all risks that may occur in the future and undue reliance should not be placed on them.
1. Economic environment
The Group operates its businesses in more than 125 countries and regions around the world. Demand for the Group’s products and services is affected by the economic conditions of the countries and regions where they are sold. The Group’s businesses, customers, and business partners may be adversely affected by factors such as a slowdown in economic growth in the Group’s major markets, volatility in foreign exchange and credit markets, increased unemployment, a decline in capital investment, and various policy changes. The operational results and financial condition of the Group may be affected by a recession in the global market and any accompanying decrease in demand. In response to such risks, we aim to build a stronger earnings structure by proactively seeking to gather information on the economic environment, while at the same time seeking to reduce costs, improve operational efficiency, and further strengthen our global business infrastructure.
2. Market trends
The industry to which the Group belongs is closely related to medical systems in various countries. In Japan and other countries, medical system reforms are underway to reduce medical costs and improve the quality of medical care. These reforms and factors related to new medical treatments and technological developments may drive new innovations and demand for cost-effective products and solutions. The Group seeks to analyze and respond to trends in relevant business segments. In addition to internal R&D activities, we are working to satisfy customer needs through acquisitions and alliances that create synergies with our existing businesses. Failure to respond to future changes in the market environment may affect the Group’s operating results and financial condition.
The Group’s main customers in the Diagnostics & Life Sciences segment are universities, government agencies, and corporate research institutions. These customers’ R&D expenses may fluctuate depending on economic conditions and are dependent on the amount of national and government funding that they receive. While the Group seeks to analyze and respond to future changes in R&D spending, it is difficult to predict future levels of government expenditure on R&D that are dependent on unknown future budget priorities and changes in economic conditions. Economic conditions and government cutbacks may affect our customers’ R&D expenditures. Reductions or delays in government funding may cause our customers to postpone or forego purchases of the Group’s products. This may affect the Group’soperating results and financial condition.
The Group is seeking to proactively collect information on trends in the industry and changes in governmental budgets.
3. Customer trends/preferences
We expect customer demand for our products to constantly vary as their business and social environment changes and new technologies emerge. Diabetes patients, who use products and services that are part of the Group’s Diabetes Management segment, are anticipated to have greater need for high accuracy and low price blood glucose monitors that they use every day, as well as desiring continuous glucose monitors that monitor glucose levels for a longer period of time through a sensor. They also have a growing need for minimally invasive sensors, which result in less pain and bleeding. Medical institutions, the Group’s customers in the Healthcare Solutions segment, are increasingly demanding cloud-based electronic medical record systems from the perspective of security and cost. Moreover, in recent years, in addition to the accuracy and safety that have been required for conventional products, customers in the Group’s Diagnostics & Life Sciences segment have asked for streamlining and labor-saving in their operations flow by promoting the use of digitalized analysis and workflow management tools. Many customers are also asking for awareness with respect to the manner in which the Group is reducing its environmental impact. The Group is working continuously to respond to such customer needs. The Group's operational results and financial condition may be impacted in the following cases: (i) Demand for the Group’s products and services declines due to changes in customer needs, (ii) the Group is unable to provide products and services that meet the level and requirements of customers due to the Group’s failure to successfully alter products and services, or develop new products and services, and (iii), the Group is unable to properly identify changes in customer demand. Moving forward, we will further continue to strengthen our sales and marketing capabilities, focus on understanding customer trends and needs, and strive to provide improved products and services.
The Group develops, manufactures, and sells a wide range of healthcare products and services around the world. Our competitors are diverse, including large multinational firms and smaller, specialized growth companies. The Group faces competition in a number of areas, including technological capabilities, marketing resources, product lineup, diversity of business models, and financial infrastructure. The Group’s products also are exposed to competition in terms of features, quality, price, and service. Furthermore, in the medical technology industry in which the Group is involved, there is rapid technological change and development. New developments and improvements in our competitor’s products, processes, and technologies may surpass the competitiveness of the Group’s products. Moreover, in businesses in emerging countries, it is possible that the Group’s products may lose market share to companies that have achieved low-priced products through low-cost manufacturing. The Group constantly monitors the trends of its competitors and strives to collect information. At the same time, we strive to strengthen our competitiveness by developing innovative technologies and products that leverage the strengths of our products and services. However, if we cannot ensure sufficient competitiveness against our competitors, the Group’s sales may decline, which may affect the Group's operational results and financial condition.
5. Price fluctuation risk associated with policies to suppress medical care expenses
Some products sold by the Group are subject to periodic decreases in the reimbursement amounts we receive from payers due to the global trend towards adoption of policies seeking to lower medical expenses. In Japan, medical fees, medication prices, and official reimbursement amounts for specified medical products are revised approximately once every two years. As part of initiatives being undertaken with the goal of maintaining universal coverage of the National Health Insurance (“NHI”) program, medication prices have been revised annually since the fiscal year ended March 31, 2022. Moving forward, if annual revisions are extended to the prices of certain medical products, including our BGM systems, it could lead to more frequent price reductions. With respect to insurance coverage for COVID-19 testing products, based on the review of the position of COVID-19 under the Act on the Prevention of Infectious Diseases and Medical Care for Patients with Infectious Diseases, there is the possibility of a temporary reduction in prices for these products in light of government policies that may result in price changes other than when the regular medical fee revision (most recently April 1, 2022). In the United States, there is a pronounced movement toward price reduction in response to increased reimbursement pressure caused by reforms to the health insurance system. With respect to the Group’s main product, the BGM system, the reimbursement rate of the United States’ primary government payor, Medicare, has been significantly reduced in the past. The BGM sensor system is easily susceptible to fluctuations in reimbursement rates as a result of government policies aimed at reducing healthcare expenses. In order to limit the impact of fluctuating reimbursement rates, the Group is continuously working to expand sales channels for people who are not covered or not covered in full by insurance and pay out-of-pocket depending upon their country’s regulations. Even so, such risks of reimbursement rate fluctuations may affect the Group’s operational results and financial condition.
6. Overseas business growth
The Group supplies products to various regions of the world. As such, we may face risks such as uncertain geopolitical and economic trends, wars, conflicts and terrorism between nations and regions, differences in religion and culture, local labor-management relations, and societal disruption caused by the spread of epidemic outbreaks. Moreover, with respect to building and expanding business partner relationships, the Group may face obstacles related to overseas business practices. Other issues we may face include a variety of political, legal, and other barriers, such as tax systems, contract customs and practices, intellectual property protection systems, investment regulations, regulations on repatriation of earnings, nationalization of local industries, and changes in import/export regulations and foreign exchange regulations in countries around the world. The Group has affiliated companies throughout the world. In regard to company management, we strive for appropriate management as a group with a focus on strict adherence to applicable law and legal compliance. Nevertheless, if a problem were to occur at an affiliated company, it may affect the Group’s business. With regard to export products, the competitiveness of the Group’s products may be weakened by tariffs and other barriers, or by transportation costs. Since the Group operates in many countries with lower tax rates than Japan, the effective tax rate of the Group as a whole is lower than that of companies that operate in only Japan. However, if tax systems and tax rates in other countries were to change, we would no longer be able to benefit from the reduced tax burden, which may affect the Group’s operational results and financial condition. In response to non-tariff barriers due to policies aimed at encouraging domestic products in emerging countries, the Group will continue to actively utilize free trade agreements to the maximum extent possible, in addition to promoting measures such as local production. We will continue to comprehensively consider the various risks introduced above in order to establish optimal procurement, production, and distribution systems on a global scale; however, there is the possibility that such efforts may fail. In relation to the current situation in Russia and Ukraine, reduced sales in Russia will mainly affect the Diabetes Management, and Diagnostics & Life Science segments. At present, the impact on the Group’s sales as a whole is minor, but there is the possibility that the impact may increase depending on future trends.
7. Mid-term management plan
The mid-term management plan formulated by the Group is designed to continue to strengthen the three existing businesses that form the Group’s foundation, work on three growth areas that pursue synergies between our businesses, and expand into new customers and markets. The Group seeks to grow the three business domains and increase profitability by accelerating growth through an expanded share of core products achieved through developing new customers and launching new products, improving earnings through policies designed to continue to reduce costs, and implementing strategies through business partnerships and M&A.
If many assumptions set by the Group when formulating the midterm management plan do not materialize as expected, we may fail to achieve the goals stated in the plan. Furthermore, as a result of factors or other matters that have not been adequately recognized or analyzed by the Group, forecasts in the mid-term management plan may reduce the Group’s competitiveness.
There are also numerous inherent risk factors, such as the risk that the Group’s competitive situation with other companies will be tougher than expected and that we will not be able to expand our market share as a means of growth, the risk of failing to secure qualified employees in accordance with the Group’s personnel plan, the risk of failing to execute strategies such as the growth strategy, customer strategy, product strategy, and cost reduction strategy, the risk of failing to respond to new technological innovations or changes in customer preferences or that responding to these issues will require a massive expenditure, and the risk of other unexpected events occurring. Due to these inherent risks, the Group may be unable to achieve its goals or may encounter difficulty in implementing strategies. Furthermore, the planned strategies may no longer be of benefit to the Group.
The result of these risks may affect the Group’s operational results and financial condition.
8. Dependence upon BGM system business profits
The total segment profit (before elimination of internal transactions) for the fiscal year ended March 31, 2023, was 35,501 million yen, of which the Diabetes Management segment profit was 26,737 million yen.
For BGM, the Group aims to increase sales in China and other emerging markets where there is still growth and to expand its share in developed markets where demand is declining. Furthermore, we plan to expand sales and profits in the Diabetes Management segment through investment in CGM system products. However, moving forward, if the expansion of BGM sales in emerging markets and the expansion of BGM market share in developed markets and the deployment of CGM system products do not proceed as planned, the Group’s profits may decline.
The Group will seek to strengthen businesses in the Diagnostics & Life Sciences segment and the Healthcare Solutions segment, aiming for a well-balanced profit structure among the three domains. If new product development does not proceed as planned or if strengthening each business does not proceed as planned due to competition with other companies being fiercer than expected, the Group’s operational results and financial condition may be affected.
9. Foreign currency exchange rate risk
In the fiscal year ended March 31, 2023, 42.3% of the Group’s revenue was from Japan, 25.5% from Europe, 21.0% from North America and 11.2% from other regions. Since products and services which are transacted in foreign currencies account for more than half of the Group’s sales. The Group’s operational results could be affected as our prices and costs are impacted by fluctuations in foreign currency exchange rates. When preparing consolidated financial statements, the Group converts local currencies in each region into Japanese yen. Therefore, a fluctuation in exchange rates would also cause the rate used for conversion to fluctuate, which would then affect profit and loss, assets, and other matters, on a consolidated basis after conversion to yen. In addition to implementing structural measures such as transferring production to overseas factories and procuring raw materials from overseas, the Group conducts currency hedging transactions according to sales scale and region. However, unexpected exchange rate fluctuations may affect the operational results and financial condition of the Group.
The Group supplies products and services around the world. We strive to ensure a stable supply of products to global markets. We adjust the molds, equipment, lines, and other items, necessary for production and manufacturing to suit each production and manufacturing process and require maintenance as appropriate. The Company continuously works to innovate its production and manufacturing technology, as well as conduct periodic maintenance. However, if we invest in production facilities and other items relevant to new production or manufacturing technology, an increase in these investment costs may affect the operational results and financial condition of the Group.
If the use of existing molds, equipment, lines, and other items is hindered due to factors such as the aging of equipment, there is the risk that the supply of materials and products to the Group will be temporarily disrupted. This may affect the operational results and financial condition of the Group.
11. Recruiting personnel
The average age of employees at PHC Corporation, the core subsidiary of the Group for product development and manufacturing, is 47.6 years old (as of March 31, 2023). Moving forward, if recruiting employees or transitioning to an operational system with fewer employees does not proceed as expected, it may hinder the succession of manufacturing technology or cause labor shortages in the manufacturing and sales departments, and main departments of the head office. The Group’s business is supported by the experience and leadership of its management team and the contributions of other key officers and employees. If we were to lose them or we are unable to recruit new personnel, the Group’s business may be affected. Competition to recruit qualified human resources is fierce, and the Group needs to invest in recruiting, training, and retaining talented people. We will continue to actively promote the attractiveness of the Group in order to recruit well-qualified human resources. For each business function, we seek to maintain and improve the performance of the Group as a whole in each job category and to develop successors by retaining Group employees with special knowledge and experience through strategies such as the re-employment of retired employees. However, if we are unable to secure qualified human resources as planned or face obstacles to the succession of manufacturing technology or labor shortages, the Group’s operational results and financial condition may be affected.
The Group’s procurement of parts and consignments is based on an ordering system that enables us to acquire the necessary volume on time. Considering supply chain risks, the Group seeks to utilize multiple suppliers as much as possible. However, in some cases, in light of a unique specialty and necessary quality, a considerable amount of time is required to find replacement sources due to the importance of managing fluctuations. If the Group’s businesses are affected by difficulties in procurement caused by unexpected events (manufacturing impact of infectious diseases, force majeure incidents, civil rehabilitation, bankruptcy, among others), there may be a temporary increase in personnel hours and expenses required to arrange replacement sources, as well as an increase in expenses due to business partner impacts. It is also possible that the changed circumstances may result in increased costs for reacquiring licenses. Furthermore, due to fluctuations in market prices, the Group’s cost increases may be unavoidable in order for the Group to continue to operate its businesses.
13. Outsourcing of logistics operations
With the aim of streamlining logistics operations and optimizing distribution inventory, the Group outsources logistics operations to RR Donnelley and DHL for products sold by Ascensia Diabetes Care (the “ADC Group”) among the products in the Diabetes Management segment. Most of the Group’s products sold by the ADC Group are manufactured in Japan and then consolidated at RR Donnelley's three distribution centers in the United States, Mexico, and Poland. Afterwards, the products are packaged in accordance with the laws and regulations of each country, and shipped to sales destinations through DHL’s distribution facilities. If the provision of services from an outside contractor is interrupted or stopped, for example, by unexpected disasters and accidents, and other events that make it difficult to continue the work of the outside contractor, the Group’s reputation is damaged, legal compliance problems arise due to outside contractor malpractice, or the business operations of the Group are affected by a change in the basic contract with the outside contractor and the Group is unable to respond appropriately, the Group’s operational results and financial condition could be adversely affected.
The products supplied by the Group are required to be highly reliable. Therefore, the Group works to ensure product quality under a thorough quality control system in the design, development, and manufacturing stages. We also manufacture in-vitro diagnostic drugs, medical devices, and products under strict quality control based on the international ISO standards for quality management systems. In this way, the Group makes the utmost effort to ensure the safety of its products. However, in the unlikely event of a quality problem with a product, the cancellation or delay in the renewal of a license or permit required for the Group’s business may affect the Group’s operational results and financial condition.
Even if it is clear that the Group’s products are not directly involved in the occurrence of an accident, we may take preventive measures and actions if there is the possibility of future product liability risks. In such a case, the Group’s operational and financial results could be affected by decreased sales or increased expenditures.
There are also product liability risks relating to third party damages and litigation claims for compensatory damages due to accidental defects or side effects during product use. In order to prepare for such risks, the Group is covered by product liability insurance. However, in the very unlikely event that our product liability claims exceed our insurance coverage, the Group’s operational results and financial condition may be affected.
In the healthcare industry in which the Group operates, there is a long period of time between research and development and the launch of products due to legal regulations, permits, and approvals. Many products are commercialized after undergoing clinical trials and tests. For this reason, the Group has formulated medium- to long-term development strategies. Based on these strategies, we invest in R&D and facilities necessary for new technologies, products, and production process reforms. However, due to changes in the environment during a long period of R&D to bring a product into the market, the Group may change its policies or have to abandon a R&D project. In such cases, the Group’s operational results and financial condition may be affected.
Customer needs and values are diversifying, and many companies are trying to enter the healthcare market as a result of its market prospects. Therefore, it is possible that products developed by the Group may not achieve expected sales and growth. Furthermore, new technologies and products developed by our competitors may cause unexpected obsolescence of our commercial technologies and products, resulting in decreased demand for the Group’s technologies and products. Although the Group strives to understand customer needs, there is no guarantee that the Group will be able to continually provide products that appropriately meet customer needs. Moreover, there is no guarantee that the Group will always be able to fully meet customer price demands, quantities, and timelines. If the Group cannot offer products that meet customer needs due to diversification of customer needs, trends in new market entries, or the introduction of new competing technologies and products, the Group’s operational results and financial condition may be affected.
16. Retaining and training human resources involved in R&D
In the Group’s business, we need to retain and train talented researchers and engineers with expertise in R&D and new product development. At the same time, we must ensure qualified employees are retained and trained in development and production in each region. However, the Group’s business may be affected if it is unable to retain and train highly qualified employees. Furthermore, if such employees move to competitors the competitiveness of those competitors may improve, and the Group’s operational results and financial condition may be affected.
17. Technological innovation
Many corporations from other industries may seek to divert their own technology to the same industry as the Group due to market prospects in this area. As a result, unexpected technological innovation may take place. The Group’s business segment also is one where existing competitors are actively conducting R&D in an effort to maintain or secure technological advantage.
The Group engages in technological development to constantly improve its own technologies, among other areas, to meet the needs of its customers. In addition to our own R&D, we are keeping a close eye on trends in technological innovation, with a view to business partnerships and acquisitions with other companies that possess outstanding technologies. However, medical technology developments that make the Group’s products unnecessary or technological innovations that fundamentally overturn the technological superiority of the Group’s products could affect the Group’s operational results and financial condition.
18. Interest-bearing debt
The Group has entered into loan agreements with financial institutions. As of March 31, 2023, our ratio of borrowings to total assets is approximately 52%. The aforementioned agreements include financial covenants. If the Group violates these covenants, it may lose the financial benefits of the loan agreements, which may affect the Group’s financial position and cash flow.
The following measures are the primary means by which the Group minimizes risks of rising interest rates and the risk of losing the beneficial terms of loan agreements. due to conflicts with financial covenants in such agreements.
・Business management: In order to maintain business stability and achieve sustainable growth, the Group intends to manage its operations by setting specific numerical targets and growth rates, and monitoring them regularly, using revenue, operating profit, adjusted EBITDA, adjusted net income, as key management indicators.
・Fund management: In principle, the Group formulates investment plans based upon a loan repayment and operating cash flow schedule. We manage investment and financial cash flows consistent with operating cash flow balances and strive to improve leverage and increase cash on hand. In addition to necessary confirmation of fund balances within the Group, we constantly ascertain trends by regularly updating the cash flow outlook. As a general rule, the Group’s financing is handled collectively by the Group’s finance department.
・Negotiations with financial institutions: After sharing information on the economic environment and the progress of the Group’s businesses, we negotiate with financial institutions as needed to improve interest rates and reduce financial covenants. Also, when entering into an agreement, we stipulate a reduction of the interest rate spread according to the threshold of the gross leverage ratio.
However, the measures listed above may not be successful. Furthermore, as a result of allocating a considerable portion of the funds obtained through business activities to the repayment of debt, there may be a decrease in funds available for R&D and capital investment, as well as dividend payments.
19. Impairment of fixed assets and goodwill
Due to past carve-outs from Panasonic and subsequent M&As, intangible assets and goodwill recorded in the Group’s consolidated financial statements account for 52% of our total assets as of March 31, 2023. We prepare our consolidated financial statements in accordance with IFRS, and goodwill is treated as a non-amortizable asset. The Group conducts an impairment test every consolidated fiscal year. Impairment may occur if there is a significant decrease in future cash flows from the asset group, including goodwill, a significant change in the business environment, or other factors. Moreover, the Group’s operational results and financial condition may be significantly affected if the value of assets, including goodwill, is impaired due to the Group’s decreased business profitability.
20. Risks relating to our share price
The Group holds convertible loans of companies with which we have a business relationship. Since the fair market value of these loans is measured based on fundamental data such as share prices, these loans are exposed to the risk of share price fluctuations. Investment shares held by the Group are also similarly exposed to the risk of share price fluctuations. On April 1, 2023, the above-mentioned convertible loans were exchanged for share acquisition rights of the same issuing company. Since the fair market value of share acquisition rights is measured based on fundamental data, such as share prices, share acquisition rights are also exposed to the risk of share price fluctuations.
Fluctuations in the share prices of companies with which the Group has business relationships or in the prices of investment shares held by the Group could have a material impact on the Group’s financial condition.
21. Risks of corporate acquisition and business partnerships
The Group sometimes implements corporate acquisitions and business partnerships as a means of expanding and growing its business. Inability to find appropriate opportunities for corporate acquisitions and business partnerships, or inability to reach agreement with the target company on the terms of corporate acquisitions (including competitive acquisitions) could affect the expansion of the Group’s business.
When acquiring a corporation, the Group conducts a detailed preliminary survey of that corporation’s management situation, business activities, financial activities, compliance with laws and regulations, contractual relationships, and other factors, and makes decisions after carefully examining the risks. The Group’s operational results and financial condition could be affected by the following circumstances, among others: a problem that was not identified in the preliminary survey, the post-acquisition integration work required dedication of management resources and exceeded originally estimated timelines, changes in the business environment arose that were not anticipated at the time of the acquisition, and/or it became necessary to record an impairment of goodwill at the time of acquisition.
Similarly, with regard to business partnerships, the Group’s operational results and financial condition may be affected if we cannot realize the expected synergies and business performance, or the business partnership must be terminated due to changes in the business environment and other factors, and costs are incurred in the business partnership termination or withdrawal from the business. For example, with respect to the commercialization and development of CGM products in partnership with Senseonics Holdings, Inc., due to intensifying competition and delays in U.S. Food and Drug Administration (FDA) applications for approval of CGM products, the business may not grow as planned.
Also, integrating multiple new businesses into the Group’s businesses through corporate acquisitions and business partnerships is a complex process that requires a vast amount of management attention and resources. Failure to effectively execute corporate integration may adversely affect the performance of the Group’s existing businesses.
22. Risks related to internal controls
The Group has an established system to ensure internal controls to support appropriate and reliable financial reporting. We continually strive to improve these controls. However, even in situations where an effective system of internal controls has been established, the system may malfunction due to various factors, such as employee actions based on malicious intent or gross negligence. If the Group is unable to respond appropriately to such events, there is the possibility of problems such as future legal violations occurring, and the Group’s businesses being adversely affected by loss of the Group’s credibility. Furthermore, the Group’s operational results and financial condition may be affected by the payment of administrative sanctions and fines resulting from criminal litigation, and damages resulting from civil lawsuits.
Furthermore, the Group has an established system to ensure the effectiveness and efficiency of its operations and is making continuous improvements to that system. However, the system may stop functioning due to various factors, such as unanticipated changes in the business and social environment, as well as the inability of internal business units to effectively respond to such changes. If the Group is unable to effectively respond to such changes, the Group’s operational results and financial condition may be affected.
23. Risks related to information breaches
When conducting business, the Group handles a large amount of personal information, such as customer information, and confidential product development information. In order to properly protect and manage such information consistent with highest standards, we have established compliant policies and conduct regular employee training. We build and operate information systems with compliant security measures in place. However, in the event of cybersecurity attacks causing unauthorized external access to this information, defects in the internal management system, intentional or negligent acts by Group employees, or information breaches due to computer viruses or other causes, the Group’s credibility could be damaged, costs incurred, and damage claims may be filed against the Group. In such cases, the Group’s operational results and financial condition may be affected. Furthermore, when the laws and regulations concerning the protection of personal and confidential information are revised, the Group may have expenditures for system modifications necessary to comply with the revised laws and regulations. In such cases, the Group’s operational results and financial condition may be affected.
24. Risks related to information systems
The Group has established information systems across its businesses, including managing manufacturing and supply chains, product orders and deliveries, business administration, and other areas. These systems are indispensable to our business operations. As a result, improving the safety, reliability, and effectiveness of our systems are critical factors in developing our businesses. The Group depends on third parties for the design and operation of these systems. There is a possibility that these systems may not continuously operate effectively due to cybersecurity attacks, system security failures, or system failures due to natural disasters, accidents, defects in hardware or software, or other causes. Recently, there has been an overall increase in cybersecurity threats such as ransomware attacks. To prepare for such situations, the Group maintains duplicates of various important information systems in distant data centers. In the event of unforeseen circumstances, such as disasters, we can switch to these duplicate systems and continue business operations. However, the system’s failure to continuously operate effectively could cause delays in the Group’s management and business processes, expenditures necessary to resolve problems, and damage to the Group’s credibility and reputation. In such cases, the Group’s operational results and financial condition may be affected.
In the course of business operations, the Group is subject to the risk of being sued or becoming a party to other legal proceedings by users, business counterparties, competitors, Group employees, regulators, and others, including breach of contract, labor issues, intellectual property right violations and confidential information breaches, among others. In order to reduce such risks, the Group implements measures to increase its employees’ awareness of compliance. For example, we have established policies, such as a Group Code of Conduct and other policies to ensure compliance, and provide rank-based training for employees (new employee training, mid-career hire training, training for promoted employees), e-learning education, and regulatory and legal updates. Although many of the Group’s product categories are intended for use by medical professionals, self-monitoring systems for blood glucose are used directly by end users who are general consumers. For this reason, if there are any deficiencies in the blood glucose self-monitoring system, lawsuits may be filed by general consumers. If the Group becomes a party to litigation or other proceedings and loses the case or is forced to accept unfavorable settlements, the reputation and credibility of the Group could be damaged or affected. Regardless of whether or not the Group is found liable, it may take time and expense to respond to such litigation. As a result, the Group’s operational results and financial condition may be affected.
26. Laws, regulations, approvals, and licenses (regulatory and medical affairs)
The Group acquires the necessary approvals and licenses for conducting business under medical device regulations around the world; for example, the Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices (Pharmaceuticals and Medical Devices Act) in Japan. The Group is subject to various laws and regulations around the world, including product liability, data protection, intellectual property rights, promotional content regulations, competition laws, consumer protection, anti-corruption, and taxes. The Group seeks to comply with these laws and regulations; for example, we have an established internal management system, and we hold educational and awareness-raising activities for employees. However, the Group’s operational results and financial condition may be affected in the event of legal and regulatory violations, and expenditures to comply with legal and regulatory amendments or new legal or regulatory enactments or guidelines.
In particular, emerging countries may establish non-tariff barriers for the purpose of encouraging domestic products. In order to respond to such circumstances, the Group considers strategies such as local production. However, in certain circumstances local legislation is insufficient and interpretations of legal requirements are inconsistent. Accordingly, even if the Group attempts to coordinate with the local authorities, it may not be possible to conduct business as planned.
The Group will strive to respond promptly to the relevant laws, regulations, approvals, and licenses of each country. However, if we are subject to a form of administrative penalty (for example, revocation of approvals or licenses) due to the unlikely event of a legal violation, or if we are unable to respond to the enactment or revision of relevant laws and regulations in a timely manner, the Group’s operational results and financial condition may be affected.
27. Intellectual property
The Group owns, maintains, and manages many intellectual property rights in its three segments (Diabetes Management segment, Healthcare Solutions segment, and Diagnostics & Life Sciences segment). However, there is a possibility that intellectual property rights owned by the Group may not be recognized, sufficiently protected in certain regions and- countries, or may be infringed by a third party. Any loss of protection for the Group’s intellectual property rights may affect the Group’s operational results and financial condition.
When proceeding with R&D or developing new products, the Group conducts comprehensive investigations into the intellectual property rights of related third parties and strives not to infringe on the intellectual property rights of third parties. However, the industries in which the Group operates are wide-ranging. As a result, it is difficult to fully ascertain the status of ownership and registration of intellectual property rights of third parties. Consequently, the Group may unintentionally infringe third party intellectual property rights, or be the subject of claims of intellectual property right infringement by a third party newly established in the Group’s industry. Such claims may result in litigation or an injunction precluding the Group from asserting its intellectual property rights. Such circumstances may affect the Group’s operational results and financial condition.
28. Risks related to environmental issues
The Group has implemented various measures to comply with regulations applicable to business operations. To manage environmental risks, we have obtained the ISO 14001 certification with respect to our main manufacturing facilities, and we have sought to enhance Group compliance efforts. However, if the Group fails to comply with applicable regulations or causes environmental problems, the Group may be required to pay compensatory damages or suspend production, or may suffer a decline of our corporate reputation. Furthermore, the Group may incur costs to comply with new regulations. In such cases, the Group’s operational results and financial condition may be affected.
29. Societal disruption due to natural disasters, geopolitical threats, and outbreak and spread of societal disruption due to an epidemic.
Natural disasters such as earthquakes, storms, floods, tsunamis, heavy snowfalls, fires, and other events, accidents, geopolitical threats, such as terrorism and international conflicts, or societal disruption due to the outbreak and spread of serious diseases may impact the Group’s production plant. Depending upon the extent of the resulting damage, production activities at the relevant plant may be halted, product shipments may be suspended or delayed, or large losses and costs may be incurred due to repairs or replacement of production equipment. Furthermore, the Group’s operational results and financial position may be impacted if our suppliers or logistics partners were to experience societal disruption due to natural disasters, accidents, geopolitical threats, outbreaks or spread of epidemics, and other events. In addition, if one of the Group’s suppliers or distribution partners experienced shortages of power supply and power price increases, procurement interruptions or the inability to secure raw materials, or deliver or export products, the Group’s operational results and financial position may be impacted.
In the event of societal disruption caused by natural disasters, geopolitical threats, the outbreak and spread of serious disease, and other events, the Group may close its facilities or suspend operations in light of its responsibility for the safety of its employees. In such event, costs associated with such closures or suspensions and the deterioration in our labor productivity may hurt our profitability, and the Group’s operational results and financial condition may be affected.
The Group’s business is exposed to risks due to pandemics. A global epidemic of an unknown infectious disease may slow down the global economy. Measures taken by governments, corporations, and individuals to slow the spread may impact demand for the Group’s products and services, and the Group’s business, supply chain, and distribution systems.
If Group employees become infected with an infectious disease or lockdown measures are implemented in various regions, the ability of employees to perform their duties may be significantly impacted. The Group will follow recommendations of government authorities and take preventive measures to prioritize the safety of its employees. However, there is the possibility that such measures may not be effective and it may require the temporary shutdown of our manufacturing facilities.
31. Risk of reputational damage
The Group’s corporate brands, PHC, Ascensia, Epredia, LSI Medience, and Wemex, business and product brands Contour, Medicom, PHCbi, SHANDON, MICROM, MENZEL GLACER, Richard-Allan Scientific, SUPERFROST, PRINTMATE, STACIA, and PATHFAST, are important trademarks for the Group’s businesses. The occurrence or spread of reputational damage, such as unauthorized use of Group trademarks or complaints about Group products or services, could damage the Group's brand image with regard to safety, reliability and credibility, regardless of the accuracy of the content, and may affect the Group’s operational results and financial condition.
In addition, brand image and credibility may be damaged due to inappropriate acts or other incidents involving Group employees or third parties. We repeatedly provide compliance education to our employees to ensure that inappropriate behavior does not occur. However, reputational damages may harm the Group’s credibility, and may impact product sales, which in turn may affect the Group’s operational results and financial condition.
32. Relationship with fund shareholder (KKR PHC Investment L.P.)
The Company has received investment from KKR PHC Investment L.P., a private equity fund of the global investment firm Kohlberg Kravis Roberts & Co. L.P. As of March 31, 2023, KKR PHC Investment L.P. owns 38.30% of the Company’s shares and continues the relationship as an “other affiliated company.”
33. Relationship with main shareholder (Mitsui & Co., Ltd.)
The Company has received investment from Mitsui & Co., Ltd. As of March 31, 2023, Mitsui & Co., Ltd. owns 17.45% of the Company’s shares and continues the relationship as a main shareholder.
34. Relationship with main shareholder (Life Science Institute, Inc.)
The Company has received investment from Life Science Institute, Inc. As of March 31, 2023, Life Science Institute, Inc. owns 9.81% of the Company’s shares and continues the relationship as a main shareholder.
35. Relationship with main shareholder (Panasonic Holdings Corporation)
The Company has received investment from Panasonic Holdings Corporation. As of March 31, 2023, Panasonic Holdings Corporation owns 8.99% of the Company’s shares and continues the relationship as a main shareholder.