3D Investment Partners Issues Open Letter to Shareholders of Toho Holdings

TOKYO--( BUSINESS WIRE )-- 3D Investment Partners Pte. Ltd., the investment manager of the 3D OPPORTUNITY MASTER FUND, today released an open letter addressed to the shareholders of Toho Holdings Co., Ltd. (TOKYO:8129).

The full text of the letter is below:

* * *

May 14, 2025

Dear Fellow Toho Holdings Shareholders,

3D Investment Partners Pte. Ltd., the investment manager of the 3D OPPORTUNITY MASTER FUND (collectively referred to as “3D” or “we,” meaning either or both of 3D Investment Partners Pte. Ltd. and 3D OPPORTUNITY MASTER FUND), is an independent investment management firm based in Singapore that specializes in Japan-focused value investing.

Since 2020, we have been investing in Toho Holdings Co., Ltd. (“Toho HD” or the “Company”), and we are currently one of the Company’s largest shareholders, holding approximately 22%¹ of the voting rights. Over the past two years, we have engaged in constructive dialogue with Toho HD with the primary objective of enhancing corporate value.

We have proposed initiatives in three key areas:

• Improving the profitability of core businesses through the reduction in and reallocation of human resources
• Unlocking investment capital by monetizing surplus assets with low ROIC, such as excess cash and deposits, cross-shareholdings, and real estate
• Achieving compounded corporate value growth by maintaining strict capital discipline and continuing to reinvest in opportunities that exceed the hurdle rate

The details of these proposals are mentioned in “The Corporate Value Enhancement Plan”, which was publicly issued on March 25, 2025 ². Each of these proposals is rational, and aimed at enhancing Toho HD’s medium- to long-term corporate value.

However, Toho HD has not sufficiently considered these proposals. We believe that Toho HD’s insufficient action, which is incompatible with enhancing corporate value, is caused by the lack of the structural governance framework.

Due to this lack of a proper governance framework, Toho HD has already missed several opportunities to enhance its corporate value. For example, as highlighted in the initiatives we proposed, the Company has failed to address critical issues in the allocation of its management resources. Additionally, a series of unstructured acquisitions has resulted in an extremely complex group structure, which has led to persistent low profitability and low productivity. As of the fiscal year ended March 2024, Toho HD had 57 subsidiaries and 11 affiliated companies. However, the Company has neglected to establish an appropriate group governance structure and has failed to fully integrate the acquired entities. This inefficient corporate structure continues to be a significant impediment to the Company’s value creation.

We firmly believe that addressing Toho HD’s structural governance failures—which have led to these serious consequences—is a top priority matter for sustainable enhancement of corporate value. Because of this, through this letter, we explain to Toho HD’s shareholders the realities of Toho HD and the awareness of issues we have for Toho HD. We would like fellow shareholders to refer to this letter for conversation with Toho HD and exercising of voting rights.

Severe Governance Failures Revealed by the Nihon University Incident

Toho HD has a history of governance issues, as evidenced by the fact that its subsidiaries have been involved in pharmaceutical bid-rigging³ on three separate occasions, resulting in administrative sanctions by the Japan Fair Trade Commission or criminal penalties. Despite this troubling track record, Toho HD has failed to implement any fundamental corrective measures.

Against this backdrop, reports surfaced indicating that Toho HD was involved in illicit transactions related to Nihon University-affiliated hospitals (hereinafter, the “Nihon University Incident”).⁴ In order to assess the credibility of these reports, we reviewed court records from civil litigation related to the incident. (A portion of the findings we reviewed is included as Annex 1 to this letter.)

The court records depict a troubling record. According to those records, Toho HD was complicit⁵ in the misappropriation of funds in the Nihon University Incident by paying “consulting fees” relating to revenue generated from Nihon University to a shell company with no substantive operations.

Toho HD was unique among pharmaceutical wholesalers in its participation in this extraordinary and illegal scheme.⁶ Furthermore, the contract underlying the transaction was not executed by a subsidiary but by Toho HD’s then-President and Representative Director.⁷

Additionally, an email exchange between then-CEO Norio Hamada and Executive Director Umada contains language⁸ that strongly suggests that similar inappropriate transactions with shell companies may have been commonplace within Toho HD.

Our review of the court documents causes us to be concerned that Toho HD not only repeatedly engaged in bid-rigging for pharmaceuticals with other major pharmaceutical wholesalers, but also engaged in the scandal on its own, and that the existence of transactions similar to the scandal was strongly suspected. It suffers from a deeply serious and structural compliance weakness and that this weakness is caused by its inadequate governance structure.

In spite of this, Toho HD has consistently denied voluntary disclosure and external research related to the Nihon University Incident; Also Toho HD only answered “as a result of internal research, there is no similar dealing” without reasonable explanations. In addition to this, Toho HD told us to refrain from further pursuing the matter in the meeting between Toho HD’s executive officer (Shikkoyakuin) and us held on October 2024. We suspect Toho HD has the purpose of concealing their compliance issue. Because of this, we believe Toho HD has extremely serious and structural insufficiency of compliance.

Compliance Issues and the Risk of Corporate Value Erosion

The pharmaceutical wholesale industry in Japan is highly concentrated, with four major players—Medipal Holdings Corporation, Alfresa Holdings Corporation, Suzuken Co., Ltd., and Toho HD—dominating the market. In this environment, pharmaceutical manufacturers have historically maintained business relationships with all four companies. However, there is a recent shift in policy among these manufacturers toward narrowing their list of distributors and prioritizing partners with lower compliance risk.

Given this shift, the emergence of the Nihon University Incident, on top of previous bid-rigging scandals, has likely positioned Toho HD as having the highest compliance risk among the major wholesalers. We are concerned this makes Toho HD a less attractive trading partner compared to its competitors.

Toho HD’s compliance lapses already seem to be having a negative effect on its business, with Janssen Pharmaceutical K.K. (a Johnson & Johnson company) reportedly terminating its business relationship with Toho HD due to “compliance issues.”⁹ If other manufacturers were to follow suit, Toho HD’s revenue base could decline and its corporate value could be irreparably damaged.

Refusal to Establish a Third-Party Committee Reflects Deliberate Neglect of Governance Failures

We have urged Toho HD to conduct an independent investigation into the Nihon University Incident and voluntarily disclose information related to the incident so that investors and customers can better understand the extent of the Company’s compliance failures and the remedial actions taken by the Company. During a meeting held in October 2024 between 3D and Toho HD’s executive officers (Shikkoyakuin), the executive officers cautioned 3D to “refrain from further pursuing the matter,” which we believe indicates an intent to conceal the extent of the issue.

We are not satisfied with this response. Accordingly, on March 25, 2025, we formally requested¹⁰ that Toho HD establish an independent third-party committee to address and dispel concerns regarding the Company’s serious governance failures outlined above.

This request was based on our belief that the series of scandals has already significantly damaged the trust of the Company’s stakeholders, including its customers. To restore that trust, it is essential to uncover the facts and identify the root causes through a transparent and independent investigation, and to implement effective measures to prevent recurrence.

In a written response dated April 11, 2025, Toho HD rejected our request,¹¹ stating that the matter had already been “addressed through an internal investigation.” However, the Company has not provided any information regarding the scope or methodology of the internal investigation, or the responsible parties. This “an internal investigation.” with complete lack of transparency makes it impossible for shareholders and customers to have confidence that the compliance problems have been rectified.

Toho HD has emphasized the establishment of a “Special Committee on Governance Enhancement,” which it announced on August 6, 2024, as part of its efforts to strengthen governance, including compliance and risk management. However, based on interviews we conducted with Toho HD’s outside directors, we understand that the role of this committee was limited to recommending remedial measures to management.¹² The committee was not granted any investigative authority and had no authority to enforce its recommendations or hold management, or other responsible parties, accountable.¹³ As a result, the Special Committee on Governance Enhancement has become ineffective and just a formality.

A Request to Our Fellow Shareholders

Toho HD has missed the opportunities to enhance corporate value many times and tries to reject implementation of the plan we proposed which objectively and reasonably contributes to enhance their corporate value. Although, in addition to many cases of collusion, it was uncovered that Toho HD is related to the Nihon University Incident, which is a unique and serious scandal for Toho HD, they have not investigated or disclosed details of this scandal. Further, Toho HD took actions which are suspected as their concealing their compliance issue. Toho HD’s insufficiency of compliance has become more and more serious. At the same time, pharmaceutical manufacturers are beginning to scrutinize their distribution partners more carefully, increasingly excluding companies with high compliance risks. In this context, Toho HD’s disregard for governance deprives opportunity to improve corporate value, and further poses a direct and serious threat to the corporate value.

We therefore respectfully ask that you, our fellow shareholders, carefully consider the contents of this letter when engaging with Toho HD and in exercising your voting rights at the upcoming Annual General Meeting.

Sincerely,

3D Investment Partners Pte. Ltd.

Annex 1: Excerpts from Civil Litigation Court Records Related to the Nihon University Incident
https://www.3dipartners.com/engagement/toho-pr-exhibit1-202505.pdf

Annex 2: Letter Dated August 13, 2024 – “Regarding Transactions Related to Nihon University-Affiliated Hospitals”
https://www.3dipartners.com/engagement/toho-pr-exhibit2-202505.pdf

Annex 3: Letter Addressed to the Board of Directors Dated March 25, 2025
https://www.3dipartners.com/engagement/toho-pr-exhibit3-202505.pdf

About 3D Investment Partners Pte. Ltd.

3D Investment Partners Pte. Ltd. is an independent Singapore-based Japan focused value investing fund manager founded in 2015. 3D Investment Partners Pte. Ltd. focuses on partnering with managements who share its investment philosophy of medium- to long-term value creation through compound capital growth and a common objective of achieving long-term returns.

Disclaimer

This press release, including annexes is provided for informational purposes only and does not constitute an offer to purchase or sell any security or investment product, nor does it constitute professional or investment advice. This press release should not be relied on by any person for any purpose and is not, and should not be construed as investment, financial, legal, tax or other advice.

3D Investment Partners Pte. Ltd. and its affiliates and their related persons (“3DIP”) believe that the current market price of Toho HD does not reflect its intrinsic value. 3DIP acquired beneficially and/or economic interests based on its own idea that Toho HD securities have been undervalued and provides attractive investment opportunity and may in the future beneficially own and/or have an economic interest in, Toho HD securities. 3DIP intends to review its investments in Toho HD on a continuing basis and, depending upon various factors including, without limitation, Toho HD's financial position and strategic direction, the outcome of any discussions with Toho HD, overall market conditions, other investment opportunities available to 3DIP, and the availability of Toho HD securities at prices that would make the purchase or sale of Toho HD securities desirable, 3DIP may, from time to time (in the open market or in private transactions), buy, sell, cover, hedge, or otherwise change the form or substance of any of its investments (including the investment in Toho HD securities) to any degree in any manner permitted by any applicable law, and expressly disclaims any obligation to notify others of any such changes.

3DIP provides no representation or warranty, either expressed or implied, in relation to the accuracy, completeness, or reliability of the information contained herein (including content or quotes from news coverage or other third-party public sources (“Third-Party Materials”)), nor is it intended to be a complete statement or summary of the securities, markets, or developments referred to herein. 3DIP expressly disclaims any responsibility or liability for any loss howsoever arising from any use of, or reliance on, this press release or its contents as a whole or in part by any person, or otherwise howsoever arising in connection with this press release. 3DIP hereby expressly disclaims any obligation to update or provide additional information regarding the contents of this press release or to correct any inaccuracies in the information contained in this press release.

3DIP disclaims any intention or agreement to be treated as a joint holder (kyodo hoyu sha) under the Financial Instruments and Exchange Act of Japan, a closely related party (missetsu kankei sha) under the Foreign Exchange and Foreign Trade Act with other shareholders, or receiving any power or permission to represent other shareholders in relation to the exercise of their voting rights, and has no intention to solicit, encourage, induce or require any person to cause other shareholders to represent such voting rights.

3DIP does not have the intention to make a proposal, directly or through other shareholders of Toho HD, to transfer or abolish the business or assets of Toho HD and/or Toho HD group companies at the general shareholders meeting of Toho HD. 3DIP does not have the intention and purpose to engage in any conduct which constricts the continuing and stable implementation of business of Toho HD and/or Toho HD group companies.

This press release may include Third-Party Materials. Permission to quote from Third-Party Materials in this press release may neither have been sought nor obtained. The content of the Third-Party Materials has not been independently verified by 3DIP and does not necessarily represent the views of 3DIP. The authors and/or publishers of the Third-Party Materials are independent of, and may have different views to 3DIP. The quoting Third-Party Materials in this press release does not imply that 3DIP endorses or concurs with any part of the content of the Third-Party Materials or that any of the authors or publishers of the Third-Party Materials endorses or concurs with any views which have been expressed by 3DIP on the relevant subject matter. The Third-Party Materials may not be representative of all relevant news coverage or views expressed by other third parties on the stated issues.

In respect of information that has been prepared by 3DIP (and not otherwise attributed to any other party) and which appears in the English language version of this press release, in the event of any inconsistency between the English language version and the Japanese language version of this press release, the meaning of the Japanese language version shall prevail unless otherwise expressly indicated.

¹ Calculated as: (Number of shares held by us + Number of potential shares from convertible bonds with stock acquisition rights held by us) ÷ (Total number of issued shares – Treasury shares + Number of potential shares from convertible bonds with stock acquisition rights held by us).

² Available at: https://www.3dipartners.com/wp-content/uploads/toho-presentation-on-corporate-value-enhancement-plan-jp-202503.pdf .

³ According to media reports, the following three incidents illustrate a repeated pattern of misconduct: (1) Miyagi Prefecture Price Cartel Case (2003-2008): Ten pharmaceutical wholesalers, including Suzuken Co., Ltd. and Toho Pharmaceutical Co., Ltd., were subject to surcharge payment orders for forming a price cartel in pharmaceutical sales within Miyagi Prefecture in 2003. (2) JCHO Bid-Rigging Case (2016-2022): Three companies—Alfresa Corporation, Suzuken Co., Ltd., and Toho Pharmaceutical Co., Ltd.—received surcharge payment orders for colluding to pre-determine successful bidders in open competitive tenders for pharmaceuticals ordered by the Japan Community Health care Organization (JCHO). (It is also reported that Mediceo Corporation was involved in the bid-rigging but avoided penalties under the leniency program.) (3) Kyushu National Hospital Organization (NHO) Bid-Rigging Case (2016-2023): Five companies, including Kyushu Toho Pharmaceutical Co., Ltd., were issued surcharge payment orders for colluding to designate winning bidders in open tenders for pharmaceuticals ordered by the NHO headquarters.

⁴ “Major Pharmaceutical Wholesaler Toho HD Exposed for Distorted Transactions in ‘Nihon University Incident’ Evidence Materials—Facing Risk of Contract Terminations by Manufacturers” (DIAMOND Online, July 4, 2024; Iyaku Keizai ONLINE, July 1, 2024)

⁵ According to the statement provided by [A], an agreement was first made for Toho Pharmaceutical to transfer half of the discount amount on prescription drugs supplied to Nihon University-affiliated hospitals into a bank account under the name of [Company B]. Subsequently, a “consulting agreement” was created to make the transfer appear legitimate. Furthermore, the “scope of entrusted services” described in the consulting agreement closely resembles the stated business purpose of [Company B] as registered, and lacks specificity. This strongly suggests that your company had no genuine intention, from the outset, to receive consulting services amounting to a total of 66 million yen. (Excerpt from page 4 of our letter dated August 13, 2024, titled “Regarding Transactions Related to Nihon University-Affiliated Hospitals” [Note: Certain corporate names and personal names have been anonymized].)

⁶ Statement of [V]

• "Later, around May 2017, Alfresa responded that it would agree to an additional 2% discount based on the official drug price, on the condition that the account for Nihon University Itabashi Hospital, which was then handled by Mediceo, be transferred to Alfresa."
• [...]
• "As expected, later on, around June 2017, I and [Ｗ] approached [Ｘ] and [Ｙ] from Alfresa to ask whether it would be possible for Alfresa to pay 1% of the additional discount amount to another company under the guise of consultant fees or similar. However, they refused our request." (Excerpt from page 12 of our letter dated August 2024, titled "Regarding Transactions Related to Nihon University-Affiliated Hospitals." [Note: Employee names have been anonymized.])

⁷ Consulting Services Agreement

• "[Company Ｂ] (hereinafter referred to as "Party KOU") and Toho Holdings Co., Ltd. (Hereinafter referred to as "Party OTU") agree to the provision of consulting services by Party KOU to Party OTU, and hereby enter into this agreement as follows."
• [...]
• "Party KOU: [Company B], Representative Director: [J]"
• Party OTU: Toho Holdings Co., Ltd. President and Representative Director: Katsuya Kato" (Excerpt from pages 12 and 13 of our August 2024 letter. [Note: Certain corporate names and personal names have been anonymized.])

⁸ “The email from then-CEO Norio Hamada to Executive Director Umada [received at 10:41:04, August 9, 2016]

(2) Regarding medical supplies, [A]’s procurement estimate indicated that it would be possible to reduce costs by 10% without changing product items. Procurement would be done through [Company H], a tunnel company of [Association G] and then delivered. -> Alliance between Our company and Inomedex has a maximum discount capacity of 4%.” (Excerpt from page 12 of our August 2024 letter. [Note: Certain corporate names and personal names have been anonymized.])

⁹ “Janssen Terminates Business with Toho Group—‘Compliance Issues’ Likely Behind Decision; Continues Contract with Saywell After April” (Iyaku Keizai ONLINE, February 20, 2025)

¹⁰ “We believe it is essential that a comprehensive investigation be conducted from a position that is fully independent of your company’s management. Therefore, we respectfully request that your company establish a third-party committee in accordance with the Guidelines for Third-Party Committees in Corporate Misconduct Cases published by the Japan Federation of Bar Associations, in order to […] carry out such an investigation.” (Excerpt from page 5 of our letter dated March 25, 2025)

¹¹ “With regard to the matters you have pointed out, we have cooperated with inspections by the Japan Fair Trade Commission and investigations by relevant authorities. Additionally, we have conducted appropriate internal investigations and confirmed that no similar incidents have occurred. For each case, we have already identified the root causes and implemented recurrence prevention measures accordingly. Furthermore, from the perspective of building a stronger governance framework across the entire organization, we have already undertaken initiatives to enhance governance, including the establishment of the Special Committee on Governance Enhancement. As a result, our current governance structure has significantly evolved compared to the time these incidents occurred, making direct comparisons inappropriate. Therefore, we do not believe it is necessary to establish a new third-party committee to re-investigate these matters.” (Excerpt from pages 2 and 3 of Toho HD’s response dated April 11, 2025, titled “Response to Your Request”)

¹² “(Takai [Note: Chairperson of the Special Committee on Governance Enhancement]) […] For example, what our committee does is make recommendations such as, ‘Please implement these types of measures.’”
“(Takai) Naturally, our role is to consider and propose various frameworks that would ensure sustainability. Whether or not to adopt them is a decision for the Board of Directors to make.” (Excerpt from pages 9 and 10 of the Interview Transcript with Attorney Takai, dated February 25, 2025)

¹³ “(An officer of our company) […] Are you also investigating the cause of the recent consulting contract with Nihon University?”
“(Takai) First of all, we are not an investigative body.” (Excerpt from page 3 of the Interview Transcript with Attorney Takai, dated February 25, 2025)

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