The Company applies the regulations in Note (31) listed in Form 2 of the “Cabinet Office Order on Disclosure of Corporate Affairs” following amendment in accordance with the “Cabinet Office Order Partially Amending the Cabinet Office Order on Disclosure of Corporate Affairs” (Cabinet Office Order No. 3 of January 31, 2019).
The business performances of the Olympus Group may be materially influenced by various risks (uncertainties) which may occur in the future. Based on the “Policy of Risk Management and Crisis Response” and related rules, the Olympus Group develops global risk management systems, undertaking risk management from the perspective of both “offense” through active and sound risk taking leading to sustainable growth and value creation for the Company and “defense” to prevent illegalities and accidents.
The Olympus Group’s risk management systems clarify the Executive Officer in charge of risks that could affect the achievement of the Company’s business targets as well as the corporate strategy (establishing risk assurance) and each Executive Officer executes the necessary measures (organizational structure, process preparation, focus measures, etc.) to keep within the permitted scope of their designated area of risk.
In addition, the Olympus Group operates risk management processes with a PDCA cycle of risk assessment (identification, analysis and evaluation of risk and setting countermeasures), implementation of risk countermeasures, monitoring and reporting, and improvement. Risk assessment is linked to the process for formulating the fiscal year plan, with risk evaluated using common company-wide evaluation standards, and company-wide risk tracked and uniformly managed. In addition, the status of response to the Group’s key risks are periodically monitored and reported to the Group Executive Committee and the Board of Directors.
We will achieve the “basic management policy” through these risk management initiatives.
Set out below are our principal business risk factors, aside from managerial decisions made by the Olympus Group, which may affect Olympus Group’s business performances.
The future outlooks described below are based on the forecasts of the Olympus Group made as of the end of the fiscal year ended March 31, 2021.
Risks Associated with Changes in Policy of Medical Administration and Strengthening of Reprocessing Regulations
In the medical field, healthcare system reforms are being continuously implemented in Japan and overseas with the aim of curbing medical care costs and improving the quality of life (QOL) of patients by improving the safety and efficacy of healthcare services. As a result, legal and regulatory requirements for medical device applications and registrations in each country, including the US Food and Drug Administration (FDA) and European Medical Device Regulations (EU-MDR), are increasing every year. In addition, the requirements concerning reprocessing (i.e., cleaning, disinfection, and sterilization) are becoming more complex.
The Olympus Group’s earnings may be adversely affected if: (i) amendments to healthcare laws and regulations or related administrative policies, or other unexpected environmental changes occur; and (ii)-a Olympus Group fails to launch new products or services in a timely manner or (ii)-b Olympus Group otherwise needs to take certain actions corresponding to such amendments or changes.
In March 2018, FDA has issued warning letters to duodenal endoscopy manufacturers including Olympus Group, due to incompliance with the mandatory post-marketing surveillance studies relating to the cleaning and disinfection of such products. Subsequently, we completed the post-marketing surveillance studies while cooperating with the FDA and in February 2020, we submitted the final report for the post-marketing surveillance studies. We are currently implementing the post-marketing surveillance studies concerning successor devices that we started selling in the U.S. in 2020, further regulatory actions may be taken by the FDA depending on the future progress.
Through product lifecycle management and infection prevention strategies, the Olympus Group is working on the development and selection of safe products, product development that is in compliance with laws and regulations, and the sharing of materials to be submitted to each country. In addition, through such efforts as training human resources and strengthening our capabilities to respond within the Olympus Group, such as sections dealing with quality and laws and regulations, the Company, while continuing periodic audits and verification procedures, is improving the processes for corrective action and preventative action in order to quickly respond to change in market requirements. Furthermore, for matters related to regulations, the Company, while conducting periodic monitoring and providing status updates to the management, is periodically training employees engaged in applicable operations to ensure best practices are shared by all while ensuring a thorough understanding of applicable laws and regulations.
Risks Associated with Macroeconomic Environment
We believe there is a solid need for healthcare as societies progressively age, particularly in developed countries. In addition, the need for healthcare is also rising in emerging countries due to economic growth. On the other hand, there are efforts underway, chiefly in developed countries, to reform healthcare systems in response to rising healthcare expenditures, aiming to optimize healthcare costs and provide effective, high quality healthcare services, and these changes may adversely affect the Olympus Group’s earnings.
In addition, the Olympus Group’s earnings may be adversely affected by change to the economic environment caused by the materialization of geopolitical risks.
The Olympus Group provides products and services in the endoscopic solutions business, therapeutic solutions business, scientific solutions business, etc. to customers worldwide. However, the earnings from these businesses are largely affected by the global economy and economic trends in each country.
Earnings in the medical field may be adversely affected if the national budgets of countries are curtailed or if there is a change in policy, etc.
Earnings in the life science field of the Scientific Solutions Business may be adversely affected if the national budgets of countries are curtailed as the proportion of sales to national and public research institutions is high. However, in the industrial field, there is a high proportion of sales to the automotive industry, aviation industry and oil-related industries and earnings may be adversely affected by capital investment trends.
In addition, apart from the impact on selling activities due to restrictions on visits to customers such as medical institutions or postponement/cancellation of business negotiations because of the worldwide spread of COVID-19, the Company has been affected by factors such as the decrease in the volume of products sold due to the decrease in the number of procedures. Please see “(Risks Associated with COVID-19 Infections)” for details.
Countermeasures and opportunities
The Olympus Group is not limited to conducting business operations in specific regions, but instead is working towards providing diverse products and services in various business fields and regions worldwide. In addition, since it is important to increase the number of physicians able to operate endoscopes in emerging countries, the Company is supporting the training of endoscopists.
Opportunities may emerge for increased earnings, etc. in the life science field of the Scientific Solutions Business and the medical field, if there is an increase in related national budgets due to policy, etc., or in the industrial field of the Scientific Solutions Business, if there is an increase in demand for capital investment due to change in the business environment for client companies.
Risks Associated with Market Competition
In the business fields where the Olympus Group relates to, there are risks that: (i) severe competitions with our competitors may cause decline in the unit price of our products or in our market shares; and that (ii) the alternative technologies or products may emerge. In such a competitive environment, it is necessary to launch products that are competitive in terms of technology, quality, etc. into markets in a timely manner, but earnings may be adversely affected depending on the results.
Countermeasures and opportunities
The Company monitors the competitive environment, including the emergence of alternative technologies and products in the market, and works towards expediting the selection and development of new technologies that should be adopted in cooperation with marketing, intellectual property and relevant departments. In addition, the Company actively considers not only inhouse development, but also the incorporation of external technologies through alliances, etc. The Company is working towards the development of new high-value added products and technologies that meet the market needs.
In cases where it becomes possible to launch competitive products into the market in a timely manner by catching up with the changes in market environment, and with the trends of alternative technologies and products being launched into the market, there could be opportunities for increased earnings, etc. mainly through high unit price and expansion of the Company’s share.
Risks Associated with Selling Activities
The Olympus Group and many of its distributors and suppliers engage in business with government-affiliated companies, medical institutions, and officials. In addition, there are wide-range of laws and regulations that cover fraud and misconduct in the healthcare industry; if the interpretation of such laws and regulations or their application guidelines change in the future, that may restrict the Olympus Group’s sales or marketing activities.
The Olympus Group makes its employees adhere thoroughly to the compliance of laws and regulations in their performance of duties as outlined in the Global Code of Conduct and provides training to employees on the importance of preventing corruption and compliance with each country’s competition-related laws. In addition, the Olympus Group conducts compliance trainings to local dealers in China.
Risks Associated with Production/Development Activities
For products and parts that depend on certain suppliers, if the procurement is restrained by such suppliers, the Olympus Group’s ability to produce and supply products may be adversely affected. In addition, if the Olympus Group is unable to appropriately respond to sudden changes in market conditions, its earnings and supply chain may be adversely affected.
The Olympus Group and its manufacturing contractors manufacture products in accordance with strict quality standards. However, if any product deficiency, malfunction, etc. occurs, not only substantial costs including those of a recall would be incurred but also the Olympus Group’s reputation from the market would be undermined, which may adversely affect the Olympus Group’s earnings.
If a rapid technological innovation causes unexpected change in market environment, and the Olympus Group fails to develop new products which properly meets customers’ needs in a timely manner, the Olympus Group’s earnings may be adversely affected. In addition, if Olympus Group suffers cost increase due to the extension of development period and impairment loss of capitalized R&D assets, the Olympus Group’s earnings may be adversely affected.
Countermeasures and opportunities
The Company aims to reduce supply issues through measures such as grasping customer trends and strengthening relations with customers and considering backup plans. In addition, the Company aims to curtail quality issues by implementing quality improvement activities such as separating the product development process into business reviews, technology reviews, etc.
In the medical field, in addition to technology development within the Company, the Company promotes the expansion of the product portfolio and acquisition of new technologies through M&A, etc. There have been heightened expectations in recent years for single-use endoscopes and diagnosis using AI as the requirement has increased with the heightened awareness of infection control, etc., and the Company is also actively working in product development.
In cases where competitive products can be continually launched into the market, it will possible to translate this into capturing opportunities for growth.
In addition, when undertaking production and development activities, we strategically consider whether to use internal or external resources after ascertainment of our proprietary core technologies. We will aim to further pursue cost cutting and increase the profit ratio through utilization of the best resource in light of such consideration.
Risks Associated with Foreign Currencies Exchange Rate Fluctuations
The Olympus Group provides products and services in various markets all over the world, and the overseas sales ratio on a consolidated basis accounts for approximately 83% in the fiscal year ended March 31, 2021. The Group’s performance may be adversely affected by a strong yen, while it may be positively affected by a weak yen. We hedge foreign currency-denominated receivables and payables where possible, however in the event that sudden exchange fluctuations occur or if receivables and payables being hedged differ significantly from expectations, the Olympus Group’s business performance may be adversely affected.
The Olympus Group mainly uses forward exchange contracts to reduce the risk of foreign exchange fluctuations. Furthermore, we are working to reduce foreign currency-denominated receivables and payables through improving the efficiency of the Group’s funds by introducing global cash pooling..
Risks Associated with Business Collaborations, Corporate Acquisitions and Sale of Business
The Olympus Group has built long-term strategic partnerships with leading enterprises in connection with technologies, product development, sales and marketing. If these strategic partners have financial or any other business-related issues, or the Olympus Group and such partners fail to maintain their partnerships due to reasons such as change of strategies, the Olympus Group’s business activities may be adversely affected.
The Olympus Group may acquire a business enterprise in order to expand its business. If the Olympus Group fails to integrate the acquired business appropriately in line with its corporate strategy or to utilize the existing business or the acquired business in an efficient manner, the Olympus Group’s business execution may be adversely affected, or its business performances and financial position may be adversely affected due to impairment of goodwill, loss on sale of business, liquidation loss, or other related expenses.
The Olympus Group holds investment securities for business purposes which include facilitating business alliances. As such, our business performance and financial position may be adversely affected under some situations involving considerable volatility with respect to stock prices and valuations of such investments brought about by developments that include market fluctuations and changes in the financial position of entities targeted for investment.
In addition, as part of the strategic review of the business portfolio, the Company may sell affiliated companies or businesses positioned as non-core, however, if changes in the laws and regulations of each country, economic conditions, and business conditions of counterparties make it difficult to implement the sale, or if there is a loss on sale or valuation loss occurs, it may have a management or financial impact on the Olympus Group.
The Olympus Group has been attempting to transfer of all the equity interests in Olympus (Shenzhen) Industrial Ltd., a consolidated subsidiary in Shenzhen, China and owned by Olympus (China) Co., Ltd., another consolidated subsidiary. Depending on the result of the attempt, the Olympus Group’s business performance and financial position may be adversely affected.
Countermeasures and opportunities
When considering M&A and investment, it is necessary to reduce the risk of serious problems being discovered after the conclusion of a contract. Accordingly, before making a decision on whether to proceed with an investment, the Company deliberates the appropriateness of the investment evaluation in accordance with approval processes established by the Company, while undertaking various types of due diligence and also using outside lawyers and financial advisors. In addition, the Company is working towards improving the entire investment process through periodically revising the internal guidelines for adhering to compliance, the valuation model and the matters of due diligence, and monitoring the relevant business after the completion of the transaction.
The Company may improve long-term growth and corporate value, expanding the product portfolio and obtaining new technology through business collaborations and corporate acquisitions with appropriate countermeasures.
Risks Associated with Overall Investment
The Olympus Group is investing in various areas related to its business, and the Olympus Group’s business performance and financial position may be adversely affected if there is an unforeseen change in circumstances, such as a sudden change in the external environment from when the decision was made in relation to such investment.
The Company determines whether to invest or not, deliberating the appropriateness of the investment evaluation before investing.
Risks Associated with Information Security
The Company is working towards reducing information security risk such by preparing against cyberattacks that could disrupt business continuity, preventing the leakage of confidential information and the personal information of stakeholders as well as violation of laws and regulations to provide continuous supply of the Company’s products and services. Nevertheless, were an unauthorized event such as the following to occur, the Olympus Group may suffer in addition to the damage to its corporate value, reduction in business competitiveness, loss of social credibility, indemnity obligations to affected stakeholders, which may in turn cause adverse effect to its business performance and financial position.
- An incident that makes it impossible for a customer to continue its business as a result of a patient data leak in a customer’s environment through use or maintenance of the Company’s products caused by a sophisticated cyberattack, or makes it impossible for a medical institution to carry out tests and treatments as a result of a business interruption or a delay in the provision of maintenance services of the Company.
- An incident where technological information or customer information is leaked or lost while stored in the Company due to inadequate information security measures or internal misconduct.
- An incident where the Company is issued with a fine or other penalty from a government agency or where a law suit is filed against the Company by a stakeholder as a result of a violation of personal information protection laws of a particular country worldwide (Act on the Protection of Personal Information in Japan, General Data Protection Regulation (GDPR) in the EU, California Consumer Privacy Act (CCPA) in California, U.S., etc.)
Under the leadership of the Chief Information Security Officer, the Group has built a system that can respond appropriately to risks related to information security, and is working to reduce information security risks. Meanwhile, we are taking the following measures.
- Introduction of a product security management system to reduce cyber risk in the customer environment through improvements in the product security level and to reduce security risk in business activities and points of contact with customers, responding to vulnerability and preparing an incident response structure based on risk analysis and evaluation.
- Introduction of a security management system to reduce the risk of the external outflow of information, including confidential information and personal information, taking measures such as the collection of access logs and quick detection of any abnormalities through analysis.
- Establishing a dedicated department for personal information protection, working together with each regional headquarter in Japan, the Americas, Europe, China and Asia･Oceania to prepare a structure to respond to overseas personal information protection laws, formulating countermeasure guidelines and monitoring their implementation.
Risks Associated with Internal Control System
No matter how effective the internal control system is, there is a potential risk that it may not properly operate for reasons such as any actions made by willful misconduct or gross negligence of our employees or other persons. If the Olympus Group fails to properly respond to such a situation, the Olympus Group may breach the laws and regulations in the future, which may result in payment of fines under administrative action, penalties under criminal proceedings, or indemnity civil lawsuits. Moreover, in such case, we may suffer an adverse impact on our business from a loss of our social trust, which in turn may cause an adverse impact on our operating results.
There is a potential risk that the said system may not properly work due to reasons such as unexpected changes in the business and social environment which invalidates the system, or mishandlings by internal organizations or functions. If the Olympus Group fails to properly respond to such situations, the Olympus Group’s business performance and financial position may be adversely affected.
The Olympus Group has developed and is maintaining and continuously improving a system to ensure appropriate and reliable financial reporting. In addition, The Olympus Group has developed, and is operating and continuously improving a system to ensure valid and efficient work processes.
Risks Associated with Laws and Regulations
The Olympus Group globally operates its businesses, including the medical business, which is a regulated business. We are subject to various laws, including the healthcare-related laws, antimonopoly laws both in Japan and other jurisdictions, as well as the anti-bribery provisions of the U.S. Foreign Corrupt Practices Act of 1977 (FCPA), the U.K. Anti-Bribery Act and other anti-bribery laws in other jurisdictions. We are also subject to various laws targeting fraud and misconduct in the healthcare industry, including the Act against Unjustifiable Premiums and Misleading Representations in Japan, and the Anti-Kickback Statute and the False Claims Act in the United States.
Violations of these laws may be punishable by criminal or civil fines, imprisonment and/or exclusion from participation in certain national healthcare programs. Furthermore, since many of our customers rely on reimbursement from public health insurance and other government programs to subsidize their medical expenditures, if our participation in such programs is restricted as a result of a violation of these laws, that could adversely affect the demand for our products and the number of surgical procedures performed with our devices.
The plea agreement, which we executed on December 3, 2018 with the U.S. Department of Justice, requires our subsidiary, Olympus Medical Systems, Corp. (OMSC), to “undertake steps to enhance its regulatory compliance processes and procedures, and to regularly make certain certifications that OMSC is meeting the expectations of the settlement.” Depending on OMSC’s performance of the said obligation, it may be subject to additional measures by the U.S. Department of Justice.
The Olympus Group strives to fully comply with these laws, however, if the Group violates any of them, regardless such violation is intentionally or not, it may affect the Olympus Group’s business, financial position, results of operations, cash flows, and share price.
The Olympus Group makes its employees adhere thoroughly to the compliance of laws and regulations in their performance of duties as outlined in the Global Code of Conduct. Departments performing control functions, such as Legal Affairs, Compliance and Internal Audit, monitor the business activities from the perspective of whether such activities are complying with the laws, regulations and internal guidelines that are applicable to the Group. In addition, necessary and appropriate training and education is provided to employees. The Olympus Group is constructing a structure to collect information and monitor regulations related to the Company’s business in all markets where business is being developed. In addition, if there are amendments or changes to applicable laws or regulations, the Olympus Group ensures there is a thorough knowledge of such changes by employees while swiftly developing and supplying products corresponding to such amendments or changes.
Risks Associated with Litigation
The Olympus Group may be subject to lawsuits, disputes and other legal proceedings in connection with its domestic and international businesses. If a material lawsuit such as indemnity claim or injunction is filed by a third party, the Olympus Group’s business performance and financial position may be adversely affected.
The Olympus Group uses various intellectual property rights in the course of its R&D and production activities, and although it believes that the Olympus Group lawfully owns or are licensed to use such rights, if any third party asserts that the Olympus Group has unknowingly infringed any of these intellectual property rights and files litigation, the Olympus Group’s earnings may be adversely affected.
Olympus (Shenzhen) Industrial Ltd., a consolidated subsidiary in Shenzhen, China and owned by Olympus (China) Co., Ltd., another consolidated subsidiary, had been sued by Shenzhen Anping Tai Investment and Development Co., Ltd. (“Anpingtai”) on December 23, 2016, and its judgement was handled down on July 30, 2018. We objected to this judgement and filed an appeal on August 17, 2018. On July 1, 2020, the Guangdong Higher People’s Court vacated the first judgement and remanded the case back to the first instance court for reconsideration because the basic facts of the case, such as the validity of the memorandum based on which Anpingtai made its claims, are unclear but the Olympus Group’s business performance and financial position may be adversely affected depending on future developments.
The Company has established a structure and process that enables timely consultation with external experts such as lawyers if a lawsuit or other legal proceeding arises and is strengthening the skills and expert knowledge in applicable departments in each regional headquarter in Japan, the Americas, Europe, China and Asia･Oceania. In addition, Olympus maintains insurance to prepare for certain types of unexpected losses due to lawsuits in order to minimize financial risk.
Risks Associated with Financing
The Olympus Group finances itself by, amongst others, loans from financial institutions as well as issuance of bonds. Changes in the financial markets may have an adverse impact on our financing capacities.
Furthermore, if the financing cost rises due to the deterioration of the Group’s business performance, etc., the financing of the Group may be adversely affected, while if the financing cost decreases due to the improvement of the business performance, etc., it may be positively affected.
The Olympus Group is reducing funding costs through the diversification of funding methods such as the issuance of commercial paper and public bonds. The Olympus Group basically adopts a fixed interest rate policy for long-term interest-bearing debt to limit the impact of rising interest rates. In addition, we are working to improve the efficiency of the Group’s funds and strengthen financial management by introducing global cash pooling.
Risks Associated with Business Structure Reform
The Olympus Group announced its business transformation plan “Transform Olympus” in January 2019 and announced its corporate strategy in November 2019. The Group is also promoting company-wide efficiency improvement programs expecting large-scale efficiency improvements in the areas of products (cost of sales and R&D), commercials (sales and marketing, maintenance service), and corporate (indirect expenses for corporate functions) to be a truly global medtech company achieving sustainable growth and profitability.
If these programs do not progress as scheduled, the Olympus Group’s business performance and financial position may be adversely affected.
The Company sets gate processes and milestones for each measure and monitors the progress of each measure of the business transformation plan “Transform Olympus” on a monthly basis by assigning an officer in charge (Chief Transformation Officer) as well as project leaders for each project. If there is a significant delay, the project leader reports it to the Chief Transformation Officer, and a company-wide process is in place to resolve the issue.
Through its domestic and overseas subsidiaries and affiliates, the Company operates its businesses globally. These businesses may be subject to investigations by domestic and overseas authorities; or the Company may have consultations with or report to authorities pursuant to laws and regulations (such as responding to the examinations under the antimonopoly acts or those related to pharmaceutical and medical device related laws, or voluntary disclosure to the U.S. Department of Justice under the FCPA). Our earnings may be adversely affected depending on the results of such investigations and consultations.
In addition, our tax burden may be increased due to changes in applicable tax laws or changes in their interpretations and application guidelines in each jurisdiction. The valuation allowance for deferred tax assets may need to be increased as a result of recoverability reassessment due to changes in business conditions or the implementation of organizational restructuring. If such situations occur, it may adversely affect the Olympus Group’s business performance and financial position.
Moreover, occurrence of natural disaster, disease, war, civil war, riot, terrorist attack or cyberattack may adversely affect the Olympus Group’s earnings.
The Olympus Group makes its employees adhere thoroughly to the compliance of laws and regulations in their performance of duties as outlined in the Global Code of Conduct.
In regard to changes in applicable tax laws in each jurisdiction, or changes in their interpretations and application guidelines, the Group is monitoring the amendments to laws and changes in regulations and making changes as appropriate to rules for transactions within the Group. In regard to deferred tax assets, the Group is monitoring the profitability of each group company and controlling the financial results so that the respective companies can appropriately secure profitability while also paying close attention in cases of business combinations for changes in profitability following such restructuring in order to minimize risks.
In addition, as part of risk management, the Olympus Group applies uniform process and standard to identify and evaluate risk factors that may prevent it from achieving the strategy and fiscal year targets, and formulates efficient and effective measures based on the degree of importance of each risk factor, while monitoring the implementation status of measures throughout the year.
When there is a serious crisis, a Crisis Response Team is established in accordance with crisis response rules that are applicable to the Group as a whole, striving to manage the crisis to minimize the negative impact on corporate value. Moreover, the Group strengthens the response to business interruption risk through the formulation and periodic revision of a business continuity plan (BCP) and education and training to increase the effectiveness of the BCP.
Risks Associated with COVID-19 Infections
While economic activities are gradually reopening after shutdowns due to the global spread of COVID-19, the global economy continued to face extremely challenging conditions overall including a second (or more) wave of infection.
Apart from the impact on selling activities due to restrictions on visits to customers such as medical institutions or postponement/cancellation of business negotiations, the Olympus Group’s business activities have been affected by factors such as the decrease in the volume of products sold due to the decrease in the number of procedures. If medical institutions will be compelled to prioritize the responsive measures to COVID-19, the number of medical treatments related to our business may decrease, in which case, the Olympus Group’s sales activities may be further adversely affected. In addition, if the procurement of specific products and parts is restricted, the production and supply capacity of the Olympus Group may be affected, which may cause adverse effect to the earnings and financial position.
The Olympus Group strives for thorough infection prevention measures and has set measures such as maintaining physical distance and wearing masks in the workplace, ventilation of facilities and self-restraint on business trips and events. In addition, a global task force will be established if necessary, to ensure certain business continuity.
Amid the ongoing global spread of COVID-19, the Olympus Group has continued to implement training, demonstration and seminars online, and strives to provide solutions responding to the new environment.
May 14, 2021 Updated