CEO Message

Supporting a Healthier, Longer-Lived Society through Pharmaceutical Business Based on Natural Ingredients and Recycling

Longer-Term Challenges and the Kind of Society We Want to Help Build

With a full quarter of its population aged 65 and over, Japan is a “super-aged” society. It is estimated that by the late 2030s one out of every three Japanese will be in this age group, and Japan leads the world*1 in average longevity at 84.3 years. But there remains an important disparity, a difference of nearly 10 years between average lifespan and average healthy lifespan.
Those 65 and over play important roles in today’s society, a big difference from the elderly of years ago. So it’s important for them to extend the period in which they can live fully and with gusto. I believe that achieving and maintaining this kind of healthy longevity will naturally address many of today’s social issues, such as labor shortages and the growing burden of healthcare and senior care, and a healthy life for every individual will drive the nation’s economic growth.

So for me, the products and services we offer are means to truly extend healthy longevity, and this isn’t just a slogan. I have strong confidence in Kampo medicines, which as multicomponent formulations derived from a broad range of crude drugs show real value in treating elderly people, who often live with multiple conditions manifesting in complex ways.

Another social challenge that will fall to the coming generations is the environmental crisis. Kampo medicines come from plants that grow best in pristine natural environments. The Tsumura Group is in the business of formulating these naturally available crude drugs into pharmaceuticals, so we have to be highly alert to changes and crises in the natural environment.

To minimize the environmental impact of our businesses, we have been farming medicinal plants in sustainable ways and recycling crude drug residues into resources. In recent years, we have also been considering incremental increases in the ratio of renewables in our total energy supply, as well as shifting to more eco-friendly product packaging. We work to make our businesses sustainable so we can conserve biodiversity while recycling resources.

• *1Source: World Health Organization, World Health Statistics 2023

• *2Average period of unrestricted daily living
  Source: Graph prepared by the Company based on Ministry of Health, Labour and Welfare, “White Paper on Social Security and Work Styles 2022,” Chart 2-1-1

Charting a Path for Growth Using Our Core Competence

There is a saying that “one lamp can light up a corner, but a thousand can illuminate an entire nation.” I cherish this idea as an image for the sustainable development of the Tsumura Group and society together. To build a better society, it’s important that each company lights one little corner with its strength. Our Group must conduct business based on the unique core competence it has built over the decades, the technology and expertise to produce highquality pharmaceuticals from natural substances. With this as our competitive strength, we provide patients with Kampo medicines of guaranteed safety, efficacy and consistency.

The crude drugs our products derive from contain many components that science has yet to fully understand. We at Tsumura have been studying and pursuing the hidden potentials of natural crude drugs for over 130 years. As a result, we are confident in our experience in this field. By expanding this core competence with advancing digital technology, which allows for scientific interpretations of the “patterns”*3 used in traditional Chinese medical diagnosis and can automate Kampo medical interviews, we work to make Kampo treatments available to everyone, leaving no patient behind. I feel that we have an enormous role and responsibility to patients who struggle to draw positive results from Western treatments. This is why we have to be a corporation in constant evolution.

In applying our core competence to foods and other fields, high-quality manufacturing will be possible there as well. We will create a new growth pillar beside the prescription Kampo formulation business, building multi-pillar operations rather than diversification.

• *3 Evidence of the condition of the person (individual differences in physical constitution, physical strength, resistance, and presentation of symptoms)

Long-Term Management Vision Built on Five Bold Policies

Using Backcasting in Management

We built Tsumura’s long-term management vision, targeting fiscal 2031, on five basic policies that the Board of Directors began discussing in late 2020. These include contributing to health and social sustainability, raising overseas sales to over 50% of total sales, having the healthcare business account for over 50% of total sales, doubling labor productivity, and cultivating global management personnel and in-house entrepreneurs. These policies are now the foundation of management backcasting from our vision for 2031.

Assessing the business environment going forward, we expect the largest impact to come from the decreasing working-age population, making it increasingly difficult to secure human resources. Our sense of crisis about this led to the inclusion of doubling productivity in our basic policies.

Pursuing change that will allow us to achieve our desired results with less labor, we are steadily investing in automation, making greater use of digital and robotic technologies. Our immediate challenge is building a foundation for entry into the traditional Chinese medicinal product business in China. We’ve been putting a great deal of time into discussing this in board meetings, resulting in what I believe are solid decisions. Based on the basic principle of “pay for purpose,” we revised our system of director remuneration in fiscal 2022.

Specifically, we introduced long-term incentives to strengthen the link between corporate value and director pay. For indicators, we incorporated relative TSR (TOPIX growth rate comparisons) to assess corporate value and reduction of greenhouse emissions and cultivation of wild-growing medicinal plants to assess sustainability. In regards to business value, our indicator is whether overseas sales account for more than 50% of total sales. This is designed to motivate directors to build corporate value and embody and accelerate our reform ideas.

Basic Capital Policy Principles and Revamped Shareholder Return Policy

In the process of drawing up our long-term management vision, we began looking at return on invested capital (ROIC) as a new management control index. Realizing this vision will require good balance sheet management, and we feel strongly about accelerating Tsumura’s evolution to a higher level of management.

We officially introduced ROIC as an index in fiscal 2022, and have been using it to help optimize our inventories and receivables turnover rate. We’ve asked Ryohei Yanagi, who came on as an outside director in June 2023, to join our meetings on capital policies, which has accelerated discussion of policies that best suit our businesses based on sound financial principles.

In November 2023, we announced new basic principles on capital policy and revised our shareholder return policies, projecting a significant dividend increase for fiscal 2024. We will make returns to our shareholders based on the revised policies, with longer-term profit levels and cash flow as well as good balance sheet management in mind as we build corporate value by actively investing for growth.

Steady Execution of Strategies with a Focus on Our Long-Term Management Vision

Enhance Systems to Maintain Reliable Supplies

Taking lessons from the Great East Japan Earthquake, the Tsumura Group has been revising and enhancing its business continuity plan by making its plants more earthquake-safe and reviewing optimal inventory levels. Still, we felt the effects of the sudden surge in demand for Kampo medicines with the seventh pandemic wave in the summer of 2022 and short supplies of prescription drugs at other pharmaceutical firms. The result was significant inconvenience to patients and healthcare professionals due to shipment limitations.

Reflecting on this, we have taken on a new mission to substantially reinforce our supply system while raising the precision of our demand projections.

Some investors may think it’s inefficient in normal times to maintain spare production capacity and ample inventories with emergencies in mind. However, lessons from past emergencies show us that it’s increasingly necessary to maintain relatively high inventory levels in Japan. We plan to invest in crude drug warehouses and other facilities, and are incrementally moving forward with investments ahead of schedule. Many producers are involved in growing the plants we rely on for drug ingredients, and it takes tremendous time and work to process plant roots and fruits into crude drugs. To broaden and deepen understanding on this matter, we’ve been communicating the state of the Kampo drug business with those in healthcare services, academia and related government authorities. We’ve been conducting educational outreach for over a decade for prescription drug sales agencies and healthcare organizations, responsible for intermediary distribution, to improve understanding of the production processes and value of Kampo medicines.

The National Health Insurance system exempted 1,943 kinds of prescription drugs from the 2024 price revisions due to fast-rising costs for raw materials and challenges to the reliable supply of prescription drugs, and 66 money-losing products of the Tsumura Group were made eligible for price reevaluation. We will continue reinforcing and enhancing our system for reliable supply of high-quality, safe prescription Kampo formulations in high demand for therapeutic purposes.

Follow Through on Our Philosophy to Thrive in Uncertain Times

Fiscal 2024 is the final year of our first medium-term management plan, and by the end of the year, we project that we will achieve all our numeric targets. But we’re looking beyond that, focused on realizing our long-term management vision. For the moment, our entry into the traditional Chinese medicinal product business in China and our initiative to double productivity are running a little behind, so we have designated these as our top priorities for fiscal 2024.

Using backcasting management, the Tsumura Group will move forward with our Corporate Purpose leading the way. Our Purpose is different from the generally accepted translation, “reason for existence,” in that while it is not currently front and center for our patients and customers, it is a Business Commitment guiding our long-term future. In other words, it is the core mission of our businesses. The Purpose is creating good opportunities for Tsumura employees to see their responsibilities from a new and different level, imagining what they can do to help drive positive change for patients and society. This mirrors what our founder envisioned with the Company’s first product, Chujoto, 130 years ago, and I feel it has smoothly permeated the organization now.

The 2022 inclusion of sustainability in the TSUMURA GROUP DNA Pyramid also carries significant meaning. In the short term, measures to address climate change may appear to be a trade-off against our more traditional corporate functions. However, we are exploring points where these values can meet in balance, and we will work to grow as a socially positive business.

To survive and thrive in times of VUCA*4, when it’s hard to see what the future holds, a corporation must have a compass to stay on course and avoid running aground. For our Group, the DNA Pyramid is that compass. As I pursue my commitment as CEO, I remain strongly focused on sustainably enhancing our corporate value.

• *4 Volatility, Uncertainty, Complexity and Ambiguity: conditions in which predicting the future of society and business are hard because of extremely high variability