Business risks related to business conditions, financial status in this report that may potentially have significant influence on investor decisions include the following. Particularly important risks are those related to regulatory approval and quality issues for medical devices.
The Board of Directors is responsible for establishing basic policies concerning risk management in overall Group business operations, and ascertaining the improvement and promotion status of the Group-wide risk management framework. The Risk Management Divisions and Risk-Related Committees have been assigned to each risk type. The Risk Management Divisions provide training and support to operating units and subsidiaries with regard to their assigned risk types, and report the system improvement and promotion status to the Risk Management Supervisory Division. The RiskRelated Committees report to the Board of Directors and the Management Council on matters including assessments of management system appropriateness, validity, and effectiveness for related risk types. The Risk Management Committee reported significant risks that it identified to the Board of Directors as well as promoting the development of a sophisticated company-wide risk management framework. The Risk Management Committee identifies significant risks by using a risk map that evaluates each risk scenario based on its impact on management and frequency of occurrence.
The forward-looking statements in the text are based on the judgment of the Nihon Kohden Group as of the end of this fiscal year, June 27, 2024.
- Regulatory approval for medical devices
The production and sales of medical devices is subject to laws and regulations in each country and region, including the Pharmaceuticals and Medical Devices Act in Japan and regulations of the U.S. Food and Drug Administration (FDA) in the U.S. Recently, we have been required to respond to the following regulations: the Medical Device Regulation (MDR) effective in May 2021 and the In Vitro Diagnostic Medical Device Regulation (IVDR) effective in May 2022 in Europe, as well as the FDA Cybersecurity Guidance published in October 2018 and the Draft Guidance for AI-enabled medical devices published in April 2023 in the U.S. If these laws and regulations are revised or abolished or new laws and regulations are established in the future, the Company may change its review system for receiving regulatory approval and need to conduct additional testing. If there are any consequences such as a delay in the launch of new products, it could have an impact on the operating results and financial conditions of the Nihon Kohden Group. However, risks that could have a significant impact are reduced because the Nihon Kohden Group's products are high-mix and low-volume, and new products are introduced in each product cycle.
- Quality issues
Since medical devices are required to have an extremely high level of quality, the Company has established and operates a quality management system based on standards such as those of the International Organization for Standardization (ISO). The Company has set Group-wide targets based on its group policy and continually strives to ensure quality and enhance customer satisfaction in all processes, from development to production, sales, and after-sales services. The Company also focuses on managing the risk of its products leading to medical accidents. In addition to the rules for normal operation, the Company has stipulated the rules and reporting line in case of an accident. In order to prevent an accident and communicate quickly when an accident takes place, the Company has established a system to collect a broad range of information from clinical practice quickly and accurately as well as a framework for disseminating information. However, in the event of a quality issue, the Company may take measures such as suspending sales or conducting a voluntary recall for the product. In addition, if a lawsuit were to be filed against the Company seeking liability for damages due to a medical accident, or if the incident were to be widely publicized, it could have an impact on the operating results and financial condition of the Nihon Kohden Group, regardless of whether the facts are true or false.
In FY2023, two recalls occurred in Japan and overseas, and the Company took measures to improve software quality. The provision for product warranties at the end of FY2023 was ¥1,648 million. The provision for product warranties includes costs related to free-of-charge repairs during the warranty period and costs related to future voluntary recalls.
- Trends in domestic and overseas markets
The Nihon Kohden Group aims at sustainable growth in Japan and strong growth internationally by strengthening its business structure in the U.S. and emerging countries including China. In Japan, the Government is working on healthcare system reform with the aim of reducing the increase of medical costs and improving the quality of medical care. As a result of the widespread installation of AEDs, the Nihon Kohden Group's customer base has expanded beyond medical institutions to private companies that are vulnerable to economic trends. Domestic sales are around 60% of its consolidated sales, which are affected by healthcare system reform and economic trends. The Nihon Kohden Group also supplies products to countries around the world via its overseas subsidiaries and distributors. As public hospitals account for a high percentage of the healthcare system in emerging countries and a large part of their healthcare infrastructure is procured by tender, the Nihon Kohden Group is affected by the timing of elections and budget execution. In a mid- to long-term perspective, the Company may need to handle assembling production in emerging countries where there is a move to prefer domestically produced products. If economic recessions in various countries resulting in demand declines, political and social unrest, and changes in laws and regulations could have an impact on operating results and financial conditions of the Nihon Kohden Group.
- Laws and regulations
In order to practice fair and legitimate business activities with high ethics, the Nihon Kohden Group has introduced a Global Compliance Program and is fully committed to a program of sound ethics and rigorous legal compliance. Under the Global Compliance Program, the Company has established the Nihon Kohden Charter of Conduct and the Nihon Kohden Code of Ethics and Conduct, which sets forth the basic policies and rules for compliance, and the Compliance Promotion Regulations, which set forth the basic matters for the structure and operational methods to ensure thorough compliance. The Compliance Committee is responsible for responding to laws and regulations, conducting education and training, operating the Internal Reporting Hotline and monitoring compliance status. In addition, the Company is strengthening its supervision of the development and operation of risk management systems for overseas subsidiaries.
The Nihon Kohden Group's business activities are subject to a wide range of laws and regulations both in Japan and in each country and region overseas: laws and regulations related to the production and sales of medical devices such as the Pharmaceutical and Medical Device Act, the Companies Act, the Financial Instruments and Exchange Act, tax laws, labor laws, the Antimonopoly Act, trade-related laws, and environment-related laws in Japan. Despite its efforts to ensure compliance, in the event of any violation of applicable laws and regulations, the Company may receive penalties, disciplinary actions, or other sanctions. The Company may also incur damage to its social credibility and corporate image. These items could have an impact on operating results and financial conditions of the Nihon Kohden Group.
- Important litigation
There are currently no lawsuits that could have a significant impact on the operating results or financial condition of the Nihon Kohden Group. However, the Nihon Kohden Group's domestic and overseas business activities may be subject to future significant litigation or other legal action related to product liability, quality issues, intellectual property rights, labor issues, violations of laws and regulations, or some other claim or dispute, which could have an impact on the operating results and financial condition of the Nihon Kohden Group.
- Information security
The Nihon Kohden Group utilizes various IT systems in its overall business and strives to manage information by implementing security and backup measures, and preventing the leakage of confidential and personal information. The Company also takes various security measures for its products and services that use communication networks. To enhance the security of its products and services and strengthen its response to security incidents, the Company has established PSIRT (Product Security Incident Response Team) in April 2022. The Company has also established and implemented the Product Security Policy in May 2023. However, in the event of IT system outages, interruptions in providing services, and information leaks due to natural disasters, cyber-attacks, infection by new types of computer viruses, and communication network failures, the Company may incur damage to its social credibility and corporate image, which could have an impact on the operating results and financial condition of the Nihon Kohden Group.
- Climate change, natural disasters, and infectious diseases
The Nihon Kohden Group operates its business activities throughout Japan and around the world. In the event of natural disasters and shortages of water or other resources associated with climate change, terrorism, war, or the spread of infectious diseases in each region, the procurement of parts, the supply of products, and sales and service activities may be disrupted, which could have an impact on the operating results and financial condition of the Nihon Kohden Group.
The Company procures raw materials and parts used for its products not only in Japan but also around the world. In the event of a supply issue at a supplier, the Company takes measures, including the consideration of alternative parts, to ensure that the production of its products is not affected. In addition, the Company has formulated a Business Continuity Plan (BCP) and conducts periodic company-wide education and training to ensure the continued supply of products and services in the event of a large-scale disaster.
Although uncertainty has continued due to the Ukraine crisis, the impact of Ukraine crisis on consolidated results will be minor, as sales in Russia and Ukraine are less than 10% of sales in Europe and less than 1% of overall sales.
As addressing climate change is one of the most critical social issues facing global society and one of the most significant management issues for the Company. Nihon Kohden expressed its support for the Task Force on Climate-related Financial Disclosures (TCFD) in May 2022 and disclosed information on climate change on the four pillars of Governance, Strategy, Risk Management, and Metrics and Targets in July 2022. The Company continues to address climate change with integrity to realize a carbon-free society as stated in our material issues and disclose information in line with the TCFD recommendations.
