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Nichi-Iko Aims To Regroup As It Enters Turnaround Process

As Japanese Firm Registers Huge Financial Impairments And Fails To Meet Forecasts

Executive Summary

Japan’s Nichi-Iko has formally entered a business turnaround alternative dispute resolution process that will see the company outline a business rehabilitation plan involving management restructuring and a fresh profit structure, following financial underperformance in the wake of recent quality issues.

Japan’s Nichi-Iko has capped off a financial year of turmoil for the company by formally entering a business turnaround alternative dispute resolution process.

The process – which allows Japanese companies facing financial difficulties to reassess and restructure – will see Nichi-Iko outline a business rehabilitation plan, following financial underperformance in the wake of recent quality issues.

Meanwhile, as part of the move, Nichi-Iko has also reached a deal with Japan Industrial Solutions III Investment Limited Partnership to “dramatically improve our financial position through recapitalization with the aim of establishing a solid profit structure, drastically improving our financial position, and achieving sustained growth.”

Business Turnaround ADR Process Follows A Difficult Year

Following a year that has seen the company face financial headwinds linked to quality and supply issues at its Namerikawa plant in the Toyama prefecture (Also see "Nichi-Iko Warns Over Delays From Toyama Plant" - Generics Bulletin, 29 Apr, 2021.), Nichi-Iko has disclosed full-year financial results even lower than it had forecasted in November 2021 (see sidebar).

Sales of ¥179.1bn ($1.4bn) came in lower than the expected ¥185bn in the firm’s financial year ended March 2022, while an enormous operating loss of ¥110.0bn – much larger than the forecasted loss of ¥17.1bn – came after the firm recorded significant impairments. And even at a “core” operating profit level, the firm registered a ¥16.8bn loss.

Impairments linked to delays in US approvals of biosimilars and orphan drugs – “which we are currently developing, and [for which] we have decided to re-evaluate our overall future development plan” – came to ¥14.8bn for Nichi-Iko and ¥6.61bn for its US Sagent subsidiary.

Also, “as a result of implementing impairment tests based on international financial reporting standards and based on an examination of the likelihood of future recoverability of fixed assets including the goodwill of our group,” the firm said it had “concluded that it loses expected revenue, and so has recorded a ¥34.2bn impairment loss for Nichi-Iko group and a ¥27.9bn impairment loss for Sagent group.”

A further inventory assets appraisal loss of ¥2.62bn was also recorded linked to “raw materials and work in progress that are highly likely to be disposed of” at the Toyama plant.

“Although production and shipments have gradually recommenced at the plant, shipments have not yet recommenced for certain products scheduled for manufacturing,” the firm commented.

Meanwhile, Nichi-Iko’s failure to meet its sales forecast was attributed to “factors such as it taking longer than expected to recommence production and shipments due to the implementation of rigorous production and quality control in response to quality issues at Toyama,” as well as “voluntary product recalls and a plant production suspension following a production capacity review of SterRx LLC. of Sagent group.”

The company has also “suspended sales of products that our consolidated subsidiary Elmed Co., Ltd. was subcontracting manufacturing of to Kobayashi Kako Co., Ltd. due to its suspension of production and shipment.”

Draft Rehabilitation Plan In The Works

“Given these difficult business and financial circumstances,” Nichi-Iko explained, “we have decided to use the specified certified dispute resolution procedure under the Act on Strengthening Industrial Competitiveness with the consent of financial institutions as related parties, and to aim to establish a solid profit structure and drastically improve our financial position to re-establish growth going forward.”

“The application was accepted, and a temporary suspension notice was sent out in the joint names of us and the Japan Association of Turnaround Professionals to all financial institutions.”

“We have swiftly secured a sufficient credit line from our main bank, Sumitomo Mitsui Banking Corporation, to secure financing,” the firm explained, “and continue to receive full understanding and support for our business.”

Emphasizing that the Business Turnaround ADR “is a procedure involving financial institutions, and so does not affect our business partners (customers, suppliers, etc.) currently transacting with us,” Nichi-Iko added that “our subsidiaries are not subject to the Business Turnaround ADR application, so there is no impact on business partners, including transacting financial institutions of our subsidiaries.”

Setting out the next steps for the company, Nichi-Iko said “we plan to explain the outline of a draft business rehabilitation plan and ask for approval (additional confirmation) for the above temporary suspension notice at the first bondholder meeting, which is scheduled for 26 May 2022.”

“Going forward, while advancing discussion with all financial institutions during the Business Turnaround ADR, we will ask the Japan Association of Turnaround Professionals for investigation, guidance and advice from a neutral standpoint, and formulate a draft business rehabilitation plan,” the company specified. “We will attempt to have the draft plan approved by all financial institutions according to the schedule set at the first bondholder meeting.”

Nichi-Iko indicated that “during the Business Turnaround ADR, we intend to discuss business improvement measures, ongoing support in terms of financing from financial institutions, the plan implementation schedule, and other matters of the content of the draft business plan with all financial institutions.”

Recapitalization Plan Will ‘Dramatically Improve Financial Position’

In addition to its own improvement measures, Nichi-Iko said it had “executed a basic agreement on investment with Japan Industrial Solutions III Investment Limited Partnership” that would “dramatically improve our financial position through recapitalization with the aim of establishing a solid profit structure, drastically improving our financial position, and achieving sustained growth.”

According to the basic agreement, “JIS intends to invest up to around ¥20bn in the company and agreed that the parties will consult with each other in good faith, aiming to execute a final investment agreement,” Nichi-Iko elaborated. “Meanwhile, we have not agreed any provisions to prevent us from making a proposal for, negotiating or discussing a transaction with respect to the investment, etc. with a third party other than JIS.”

As part of Nichi-Iko’s business overhaul, a number of changes have also been made to the company’s management structure. Takahiro Yoshikawa – a board member responsible for quality and the supply chain – has resigned, alongside board members Kenji Akane, Shigeo Takagi, Hideki Sakai and Toshinori Kongoji, at the end of their terms of office.

Additionally, “given that an optimal company-wide system based on strong leadership and accountability is necessary in order to achieve radical restructuring, a corporate reconstruction division has been established, with the board member, newly appointed senior executive vice president Osamu Mihara, as the division head.”

Reforms of the firm’s management structure would help “restore the company’s business performance” and “put board members in charge of divisions and strengthen collaboration between divisions in order to enable the agile responses by the company,” Nichi-Iko said.

“We sincerely apologize for any inconvenience to our shareholders and related parties such as financial institutions, and for any anxiety caused to our business partners,” the firm concluded after announcing the Business Turnaround ADR process. “Our executives and employees will strive as one to unfalteringly carry out the business turnaround, and we humbly ask for your continued support and cooperation.”

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