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Business risks

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, 2021).

  1. 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:

    Approval/license Competent authorities, etc. Details of approval/license Expiration date
    Approval for marketing drugs Prefectural governor Article 12 of the Pharmaceutical and Medical Device Act Updated every 5 years for a main office
    Approval for manufacturing drugs Prefectural governor Article 13 of the Pharmaceutical and Medical Device Act Updated every 5 years for a business office
    License for manufacturing and compounding psychotropic drugs Minister of Health, Labour and Welfare Article 50 of the Narcotics and Psychotropics Control Act Updated every 5 years for a business office
    Approval for drugs wholesaler Prefectural governor Article 24 of the Pharmaceutical and Medical Device Act Updated every 6 years for a business office
    License for importing narcotics Minister of Health, Labour and Welfare Article 3 of the Narcotics and Psychotropics Control Act Maximum of 3 years for a business office
    License for compounding narcotics Minister of Health, Labour and Welfare Article 3 of the Narcotics and Psychotropics Control Act Maximum of 3 years for a business office
    License for central narcotics wholesaler Director of Regional Bureau of Health and Welfare Article 3 of the Narcotics and Psychotropics Control Act Maximum of 3 years for a business office
    License for narcotics wholesaler Prefectural governor Article 3 of the Narcotics and Psychotropics Control Act Maximum of 3 years for a business office
  2. 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 efficacy may be different from that of the branded drug, and our group’s new product launch will be affected.

  3. 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 is discontinued.
    These situations may affect our group’s financial status and business performance.

  4. 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.

  5. 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.

  6. 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 a manufacturer of new drugs. Such cases may affect our group’s financial status and business performance.

  7. 7.Mark-to-market of derivative

    Our group imports semi-finished products such as vasodilators 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 in terms of qualitative analysis, 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.

  8. 8. 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.

  9. 9. 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.

  10. 10. COVID-19

    At present (as of the date of submission of the securities report), the effects of the COVID-19 pandemic are minor within our group. However, should the effects prolong or worsen in the future, closure or shutdown of a particular business facility of our group owing to a cluster of COVID-19 cases identified therein, effects of patients’ reluctance to visit hospitals and clinics on sales, and effects of the spread of COVID-19 outside Japan on supply chains for raw materials and APIs might spill over into production.
    To address COVID-19, our group implements countermeasures for the following: workstyle (e.g., encouragement of working at home and staggered working hours and encouragement of holding virtual in-house and external meetings), preventing the spread of COVID-19 (e.g., review of meeting room capacity, installation of acrylic resin panels, and checking for individuals with fever using thermography cameras), and decreasing opportunities of exposure to COVID-19 (e.g., cancelation/postponement of business trips and events in principle). Our group will continue to implement appropriate countermeasures to ensure business continuity.