Management Risks

■ Management Risks

The products handled by the Group are mainly ethical drugs, with a focus on generics. Generics are drugs that are marketed after the efficacy and safety of the original drug have been confirmed over a certain period of time, and which have the same active ingredients and the same indication/efficacy and dosage/administration as the original drug. For this, in addition to the risks associated with the manufacture and sale of pharmaceuticals, the Group faces risks specific to generic drug manufacturers.

Recognizing the possibility of these risks occurring, we believe that responding to them quickly and appropriately is essential for the continued existence and development of the Group. The Group’s basic policy is to prevent risks before they occur and minimize the loss of profit to stakeholders and the impact on corporate management when a risk materializes. Under this policy, the Risk Management Committee is responsible for identifying important risks and managing the progress of measures to address them.

Please note that forward-looking statements in this document are based on the judgments of the Group as of the end of the consolidated fiscal year (March 31, 2025) under review.

1. Medical system and pharmaceutical regulations, etc.

To be marketed in Japan, ethical drugs, the main products of the Group, must be included in the NHI price list stipulated by the Minister of Health, Labour and Welfare. The actual market prices of ethical drugs included in the NHI price list are surveyed every two years so that their official prices defined in the list accurately reflect their actual market prices. Based on the survey results, the prices of many drugs have been lowered. Moreover, as part of the drastic reform of the drug price system, drug price revision has been an annual process since 2021. There is also the risk of the Group’s financial status and business performance being affected by implementation of any government measure for medical cost containment, such as reviewing the medical insurance system, significantly changing the drug price system, or reinforcing the medical cost containment policy.

In addition, the Group’s business is regulated by the Act on Pharmaceuticals and Medical Devices and related laws and regulations. As various permits, approvals, and licenses are required, any violation of the above regulations may result in administrative sanctions by the competent authorities, which may affect the business activities of the Group. In addition, against the background of the global trend toward tighter regulations on mutagens, there is the risk of any detected problem with a product, including its failure to meet applicable standards, leading to its recall, disposal, or discontinued marketing.

To address these risks, the Group strives to gather information on medical systems and related laws and regulations, and implements measures in accordance with laws and regulations, as well as the expectations of society and the government. We are working to sell our products at appropriate prices commensurate with their value and expand the market share of products recently added to the NHI price list, thereby improving profitability. At the same time, we are formulating a group-wide compliance promotion plan and establishing a system to implement it.

2. Patents and reexaminations

The generics business, which is the core business of the Group, is, by its nature, significantly affected by the patent rights of original drug manufacturers. The active ingredients of an original drug are usually protected by patent rights, which are valid for 20 years from the application filing date (with a possible extension of up to five years). Since generics are approved for manufacture and sale after the expiration of the patent term, any extension of this term will affect the launch of new products by the Group.

In addition, there is a reexamination system for the original drug to reconfirm its efficacy and safety after a certain period of time, and the reexamination period is, in principle, eight years from the date of approval for manufacture and sale of the original drug. After this period has elapsed, we apply for the manufacture and sale of generics. However, if the reexamination period is reset due to the addition of new indications for the original drug or for any other reason, it will affect the launch of the Group’s new products, as they may differ from the original drug in terms of indications, efficacy, dosage and administration.

Furthermore, some of the generics marketed by the Group may still be subject to patents related to the crystal form, formulation, use, etc. of the APIs even after they are released. With regard to such patent rights, accurately understanding and avoiding them can provide us with opportunities to gain a competitive advantage. However, there is also a risk of patent litigation being filed by the patent holders, which could affect the financial condition and business performance of the Group.

To address the above risks, the Group strives to collect information on patents and reexamination periods and strengthen cooperation between relevant departments, such as the technology department and development department. Through these efforts, we will hopefully obtain approval for partial changes, such as adding indications, promptly after the expiration of the patent term of the original drug, or apply for approval for partial changes after the expiration of the reexamination period, thereby resolving inconsistencies in indications. At the same time, we are developing formulations that avoid patents held by other companies.

3. Risks arising from competitive circumstances

The competitive market for generics, a large portion of which comprises switches from brand-name drugs, is greatly influenced by the number of companies promoting them. Moreover, in recent years, many companies have been implementing various initiatives such as introducing authorized generics. Depending on how this trend plays out, our sales results may deviate from the Group’s planned revenue. In addition, since the supply situation of competitors may affect demand for the Group’s products, supply instability, sales suspension, or any other uncertainty related to our competitors may present an opportunity for us to gain market share but may also pose a risk to the stable supply of our products.

To respond to such risks, the Group is working to improve its production capacity through capital investment and establish backup systems for its manufacturing plants. Furthermore, starting from the fiscal year ending March 2026, we have been working to strengthen our functions by establishing a new specialized organization to ensure stable supply from the aspects of both production and sales by monitoring daily demand and inventory levels. We are also striving to ensure trust through transparent information disclosure.

4. Production stagnation and delays

The Group has production sites in Japan (Osaka, Okayama, Yamagata, Shiga, Okinawa, Hyogo, Shizuoka, and Chiba Prefectures) and Spain (the autonomous community of Catalonia). They face the risk of their operations being suspended due to natural disasters or technical or regulatory issues, thereby affecting our stable supply of products. In addition, the Group has formulated a business plan based on the assumption that we will meet domestic demand by operating the 3rd solid formulation building at the Yamagata Plant at full capacity. Therefore, any stagnation or delay in production could significantly damage our market opportunities and affect the business plan.

To mitigate these risks, the Group is working to develop a backup system among its plants in Japan and abroad, establish an increasing number of distribution hubs, and promote multiple sourcing of APIs. Also, in order to respond to increasing demand in the domestic market, we have been making additional investments in facilities at the Yamagata Plant since 2021. At the same time, we have been working to strengthen our organizational functions and promote appropriate personnel allocation and development so that these facilities can operate smoothly and contribute to the profits of the company.

5. Procurement of APIs and materials

The Group procures APIs and materials from sources both in Japan and overseas, and the recent surge in raw material prices may affect product costs. There is also a risk that the procurement of raw materials may become difficult in the long run due to fluctuations in the supply and demand balance of raw materials, domestic and overseas regulations, or suspension of supply by raw material manufacturers. Even if costs rise due to the weak yen, it is extremely difficult to pass on such increases to sales prices under Japan’s drug pricing system, and such procurement risks and exchange rate risks may affect the Group’s business performance.

To mitigate such risks, as a measure to strengthen supply chain management, we are actively promoting diversification of suppliers for APIs and raw materials. We are also promoting in-house production of APIs for important products at Daichi Kasei Co., Ltd., a member of the Group. In addition, in order to avoid the risk of cost increases due to the yen’s depreciation and to ensure a stable supply over the long term, we engage in long-term derivative transactions. At the end of each fiscal year, these are evaluated at market value. So, if the yen appreciates compared to the end of the previous fiscal year or the difference in long-term interest rates between Japan and the U.S. widens, a valuation loss will occur. Therefore, there is a risk of a valuation loss occurring depending on trends in exchange rates and interest rates in Japan and the U.S. Or, in the opposite situation, there is a possibility that a valuation gain will occur. Incidentally, we estimate the volume of future import transactions denominated in foreign currencies and conduct long-term derivative transactions within that range. By doing so, we take care to ensure that derivative transactions are not speculative.

6. Securing and developing human resources

The Group recognizes that securing and developing the right human resources for our business activities is an important management issue. Failing to sufficiently secure and develop the right human resources will make it difficult for us to achieve the sustainable growth of our business and maintain competitiveness, which may adversely affect our business performance and financial position.

To address such a risk, we are working to build an organization in which diverse human resources can maximize their abilities by actively recruiting and training people with diverse backgrounds and creating a workplace environment that supports flexible working styles. Through measures such as the introduction of an in-house qualification system and establishment of a human resource training center, we are developing human resources that will play key roles in increasing revenues from growth businesses and strengthening the competitiveness of our core businesses. On the other hand, in response to the issue of the declining working-age population due to the advancing aging of society with the declining birthrate, we are proactively promoting automation and labor-saving initiatives with the goal of turning all of our plants into smart factories.

7. IT security and information management risks

The Group has a large amount of confidential information obtained through its business activities, including sensitive personal information. There is a considerable risk of this kind of confidential information being leaked due to cyberattacks or internal irregularities. The formulation of laws and regulations aimed at protecting personal information and heightened public awareness of rights to personal information have contributed to the increasing importance of information management. There is the risk of leakage of important confidential information causing us to suffer not only legal damage but also loss of social trust of our group companies as a whole.

To address these risks, the Group constantly provides its employees with training to raise their awareness of information security, and works with T Square Solutions Co., Ltd., a company in the Group, to strengthen IT security.