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, 2024).

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. Reevaluation based on the Pharmaceutical and Medical Device Act and tightened regulations

The drug reevaluation system is aimed at reevaluating the quality, efficacy, and safety of already approved drugs according to the current academic standards. Unless a pharmaceutical product is proven useful by efficacy reevaluation, that product will have to be recalled and disposed of. Also, unless a generic pharmaceutical product is proven equivalent to the original drug by quality reevaluation, its manufacturing and marketing may have to be discontinued. In addition, against the background of global trends toward tightened 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.
Any of 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 and establish a reliable drug analysis method.

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 be marketed in Japan, ethical drugs, the main products of our 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 are 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 our 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.
Our group responds to these risks by selling its products at appropriate prices commensurable with their value and working to expand the market share of products recently added to the NHI price list, thereby improving profitability. We also strive for cost reduction by cutting the cost of procuring 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. 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.

8. 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.

9. Production stagnation and delay due to disasters or other causes

Our group has production sites in Japan (Osaka, Okayama, Yamagata, Shiga, Okinawa, Hyogo, Shizuoka, and Chiba Prefectures) and Spain (Province 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. There is also the risk of natural disasters or other causes halting us from purchasing raw materials and, if it is difficult for us to find substitutes for them, affecting our business performance.
To mitigate these risks, our group strives to organize a system for mutual backup among our plants both in Japan and abroad, to establish an increasing number of distribution hubs, and to 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 INT) as of January 31, 2020. We expect that the acquisition of Towa INT 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 INT fails to produce the expected effects owing to changes in business environments and business operations of Towa INT, effects of local systems and regulations, likely delay in the progress of the integration process between Towa INT 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 INT 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 three basic policies in the 6th Medium-term Business Plan 2024-2026 PROACTIVE III: (1) Evolution of generics business in Japan toward a new milestone; (2) Establishing foundation for new markets / new businesses and realizing group synergies; (3) Strengthening sustainability management and building fundamentals for sustainable growth. 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. IT security and information management risks

Our 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 legal damage or loss of public trust.
To address these risks, our group constantly provides its employees with education to raise their awareness of information security, and works with T Square Solutions Co., Ltd., a company in our group, to strengthen IT security.

13. Others

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 to a Class V Infectious Disease, the impact of the disease on our group has become minor. Meanwhile, there is still a lasting risk of a pandemic of a new viral infectious disease breaking out and affecting our group’s sales and production. Our group also faces the risk of its management being affected by the global impact of possible changes in the Russo-Ukrainian War and resulting sharp rises in energy and raw material prices.