Management Risk

■ Management Risk

Our group mainly handles prescription products, and among them, generics are our leading products. A generic drug has the same active ingredients, indications, dosage, and administration as a branded drug that has been on the market after its efficacy and safety has been confirmed for a certain period of time. Thus, our group faces specific risks as a generic business in addition to risks as a holder of marketing authorization for drugs.

After recognizing these risks, our group makes every effort to avoid their occurrence and set up a system for unexpected events. Our group has been striving to enhance and accumulate corporate strength to endure the impact of such risks.

Events related to the future in the text were determined by our group at the end of the previous fiscal year (March 31, 2023).

1. Control in accordance with the Pharmaceutical and Medical Device Act, etc.

Our group has been manufacturing and marketing prescription products in accordance with the Pharmaceutical and Medical Device Act and related laws and regulations, which stipulate acquisition of various approvals, permissions, and licenses. The main contents are as follows:

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If there is a violation of the above regulations, administrative action may be imposed by the competent authorities, etc., which may affect our group's business activities.
To address these risks related to the above regulations, our group strives to collect information on related laws and regulations, and takes measures in accordance with laws and regulations. In addition, our group has established a company-wide compliance promotion plan and system.

2. Patent and re-examination periods

The active ingredients of branded drugs are usually protected by patent rights, and the period is 20 years from the date of application (the period may be extended for up to 5 years). Since generics are approved for marketing after the expiration of the patent period, the extension of the patent period is expected to affect our group’s launch of new products (new generics).
There is a re-examination system to reconfirm the efficacy and safety, etc. of a branded drug after a certain period of time, and the re-examination period is 8 years from the date of marketing approval of the branded drug in principle. Marketing approval for generic drugs will be applied for after this period; if the re-examination period is set again (e.g., for additional efficacy of the branded drug), the indications, dosage, and administration may be different from that of the branded drug, and our group’s new product launch will be affected.
To address these risks, our group strives to collect patent and re-examination period information and cooperates with related divisions. As a result, our group strives to resolve efficacy discrepancies by promptly obtaining approval for a partial change, such as an additional indication, after the expiration of the patent period for a branded drug, or by filing a partial change application after the expiration of the re-examination period.

3. Re-evaluation based on the Pharmaceutical and Medical Device Act

Re-evaluation of drugs is a system in which the quality, efficacy, and safety of approved drugs are reviewed from the current academic standards. If the drug efficacy re-evaluation shows no usefulness, the product is recalled and disposed of; if it shows that the quality is not equivalent to that of a branded drug, subsequent marketing may be discontinued.
These situations may affect our group’s financial status and business performance.
To address these risks, our group gathers information on scientific and technological advances to properly evaluate drugs.

4. Adverse drug reactions

Generics are released after branded drugs have been used for many years. Their safety information has been confirmed, and they have been re-examined. Therefore, the risk of serious adverse reactions is minimal. However, if they occur, it may affect our group’s financial condition and business performance.
To mitigate these risks, our group collects, evaluates, and examines information on drugs, including information on adverse drug reactions, in accordance with the regulations of each country, and determines and implements necessary measures based on the results of such evaluations.

5. Drug price system and medical cost containment policy

To sell ethical drugs, the products have to be listed in the NHI price list specified by the Minister of Health, Labour and Welfare. The actual market prices of ethical drugs listed in the NHI price list are surveyed every 2 years, in principle, to reflect the actual market price of each product in its drug price as the official price thereof. Currently, the prices of most products are lowered. Moreover, owing to the drastic reform of the drug price system, drug prices will be revised every year, beginning in 2021. Our group’s financial condition and business performance could be affected if the medical insurance system is reviewed, the drug price system is significantly changed, or the medical cost containment policy is reinforced.
Our group responds to such risks by selling products at appropriate prices commensurate with the products’ value, effecting cost reduction by reducing procurement costs of raw materials, and improving production efficiency.

6. Patent litigation

Since our generic drugs sometimes use API that still has patent rights for their crystal form, formulations, use of the drug, etc., a patent suit may be filed by patent holders. Such cases may affect our group’s financial status and business performance.
Our group responds to such risks by collecting patent information and strengthening cooperation between related divisions, such as engineering and development. As a result, we are developing formulations that avoid patents owned by other companies.

7. Mark-to-market of derivative

Our group imports semi-finished products and raw materials from overseas manufacturers in foreign currencies. If the costs increase due to a weak yen, it is extremely difficult to shift the increase onto the sales price under the drug price system in Japan.
To avoid the risk of cost increase due to a weak yen and to provide a stable supply our products, we conduct long-term derivative transactions. The market value is evaluated at the time of settlement of accounts, but evaluation loss may occur if the yen is stronger than it was in the previous fiscal year, or the long-term interest rate difference between Japan and the US increases. Therefore, evaluation loss may occur depending on the exchange rate and the interest rate trend in Japan and the US. There may be an evaluation gain in the opposite case.
We estimate the volume of future import transactions denominated in foreign currencies and enter into long-term derivative transactions within this range. In this way, we take care to ensure that derivative transactions are not speculative.

8. Risks in the competitive environment

The competitive market for generic drugs is composed mainly of a switch from brand-name drugs and is greatly affected by the number of sales promotion companies. In recent years, companies have been planning strategies, such as introducing authorized generic products. Our actual sales revenue may differ from planned revenues, depending on their trends. In addition, competitors’ supply status impacts demand for our products, which could risk a stable supply.
Our group responds to such risks by increasing production capacity through capital investment, improving the backup system for manufacturing sites, and ensuring a stable supply of products from the production and sales aspects by monitoring the volume of demand and inventory daily. We are also making efforts to ensure reliability through transparent disclosure of information.

9. Stagnation and delay of production owing to disasters and other causes

Our group has production sites in Japan (Osaka, Okayama, Yamagata, Shiga, Hyogo, and Shizuoka Prefectures) and Spain (Province of Catalonia), and any of these production sites could be forced to cease business operations owing to the occurrence of natural disasters or technical/regulatory issues to affect the stable supply of products. Besides, if natural disasters and other causes force us to halt purchasing raw materials from some specific supplier(s) and these halted raw materials are challenging to substitute, our business performance could be affected. To mitigate these risks, our group strives to organize a mutual backup system among our domestic plants and promote multiple sourcing of APIs. Moreover, our group possesses its own API manufacturing plant to secure a stable supply of APIs.

10. Global risks

We completed all required procedures related to acquiring Pensa Investments, S.L. (Location of the Headquarters, Catalonia, Spain; Current trade name, Towa HD) as of January 31, 2020. We expect that the acquisition of Towa HD will contribute to building a global structure and providing our value-added products to the market in Europe and the United States. However, our group’s financial status and business performance could be affected if the acquisition of Towa HD fails to produce the expected effects owing to changes in business environments and business operations of Towa HD, effects of local systems and regulations, likely delay in the progress of the integration process between Towa HD and us, or events unrevealed during due diligence. To address these risks, our group strives to strengthen a global management structure through the integration process between Towa HD and us.

11. Risks of corporate acquisition

Protosera Inc. became our subsidiary on March 24, 2021. We also completed the acquisition of Sunsho Pharmaceutical Co., Ltd. by obtaining all stocks on March 7, 2022. True to the philosophy, “Towa Group contributes to people’s health by creating superior products and services,” we established five basic policies in the 5th Mid-term Business Plan 2021-2023 PROACTIVE II: (1) Enhancing generics business as a core; (2) Expanding and growing business in overseas market; (3) Entering new health related businesses; (4) Creating technology innovations and product values; and (5) Marketing job satisfaction and fostering talented human resources. With the generic drug business as our core business, we are working on further increasing the lineup of products and services for health maintenance and promotion to deploy various businesses that contribute to the health industry. The acquisition of both companies is in line with these policies, and various synergies are being created. However, if we fail to achieve the expected effects of the acquisition of these companies due to changes in the management environment and business, delayed progress in integration, and events not identified by due diligence, the financial status and management performance of our group may be affected.
To respond to such risks, we are in the process of creating a business plan by integrating our company and its subsidiaries, producing synergistic effects, and reinforcing the management organization by dispatching directors.

12. Others

At present (as of the date of submission of the securities report), now that the status of COVID-19 in the Act on the Prevention of Infectious Diseases and Medical Care for Patients with Infectious Diseases has been changed from a Class II Infectious Disease to a Class V Infectious Disease, we predict that the impact of that disease on our group will further lessen. However, if the COVID-19 situation worsens again with another wave of infections, there will be the risk that the worsening situation will affect the sales and production of our group. There will also be the risk that the impact of any changes in the war between Russia and Ukraine on the global economy will cause a sharp rise in the prices of energy and raw materials, thereby affecting the business of our group.