Business risks

Of the matters relating to operating results and financial position of the Group, the following matters are considered to have possible significant impact on investor decisions. In addition, even for matters that are not applicable risk factors for the business, matters considered important for investment decisions are given as proactive disclosure of information to investors. In addition, the Group, having recognized these risk categories, conducts business activities while striving to avoid these risks and to respond if exposure occurs, but there is no guarantee that these efforts will be fruitful. Also, the Group faces various business risks, not all of which may necessarily be included below.
Forward-looking statements were determined by the Group at the end of the current fiscal year.

(1) Nature of business

Research and development of pharmaceutical products

a. Uncertainty of research and development

The Group's business is focused on pharmaceutical development. Generally, the research and development period for pharmaceutical products, from basic research through to approval, takes a long time and requires a considerable scale of investment. Moreover, the likelihood of success is extremely low compared to other industries. So, potential in research and development activities is accompanied by uncertainty, and these risks will also be associated with current and future development products of the Group. There is a possibility that this risk may have a big impact on our financial position and operating results. It should be noted that our pipeline expansion is not only in-house product development as we also leverage in-licensing techniques. If drug candidate compounds deemed necessary by the Group in the future are not acquired as expected, there may be a significant impact on the financial position and operating results of the Group.

b. Competition in the pharmaceutical industry

Competition in the pharmaceutical industry is fierce due to the large number of domestic and overseas companies and research institutions, including international megapharmas. Innovation is also advancing rapidly. Competitors may have a significant impact on the Group's financial position and operating results as a result of competition in business activities such as research, development, manufacturing and sales.

c. Side effects

Pharmaceutical products may express unexpected side effects from clinical trials through to post-marketing. Should unexpected side effects lead to product recall, discontinuance of manufacturing and sales, or filing of lawsuits, there may be a significant impact on the financial position and operating results of the Group.

d. Pharmaceutical laws and other regulations

The pharmaceutical industry in which the Group operates is subject to a variety of regulations due to pharmaceutical laws and pharmaceutical administrative guidance in individual countries and other applicable laws and regulations for the business activities of research, development, manufacturing and sales. Taking a drug from the discovery stage to manufacturing and marketing approval requires a great deal of development costs and a long period of time. If sufficient quality, efficacy and safety data is not obtained, and pharmaceutical utility cannot be demonstrated, approval may not be granted and the drug may become difficult to market. If this happens with products licensed to other companies, the licensing conditions may change from those established at the outset, or licensing itself may become difficult.
In such an event, or in the event that there is a large change in regulations such as national pharmaceutical laws, there may be a significant impact on the financial position and operating results of the Group.

e. Product liability

It is possible that the Group will bear product liability in its research, development, manufacturing and sales activities of its pharmaceutical business. If health damage is caused by a Group product, or improper matters occur in research, development, manufacturing, or sales, this may have a significant impact on the financial position and operating results of the Group.

Business activities of the Group

a. Partnerships

The Group aims to build broad partnerships at each stage of research and development, and thereby incorporate state-of-the-art technology while avoiding an increase in fixed costs. The Group is building a strategic and flexible research and development system from these partnerships and our own R&D personnel. Similarly, to avoid fixed costs, we are building a variety of partnerships in other business activities, starting with the construction of a sales structure for products that we plan to sell in-house in the future. Should these partnerships change, there may be a significant impact on the financial position and operating results of the Group.
The Group will consider a wide range of partnerships to strengthen our business foundation and realize efficient management. However it may not be possible to create partnerships as expected.

b. Securing and training human resources

The business activities of the Group are strongly dependent on the current management team, and the heads and members of each department who promote the business. For that reason, we continually strive to ensure development of excellent human resources, but if human resources cannot be secured or trained as planned, it is possible this will have a significant impact on the financial position and operating results of the Group.

c. Intellectual property rights

The Group uses a variety of intellectual property rights in research and development activities, which are proprietary rights or licensed rights of the Group. However, it is possible that pending patents may fail to reach registration. Also, it is difficult to completely avoid the possibility that a third party will produce intellectual property rights that supersede the rights or license held by the Group, or that a third party will in future launch a dispute based on intellectual property right infringement. As a result, is possible this will have a significant impact on the financial position and operating results of the Group.

d. Financing

A large amount of research and development spending is necessary in the pharmaceutical industry, and that amount tends to increase as the research and development progresses. If the Group requires funds, we will consider financing through issuing new shares. In that case, as the number of shares outstanding will increase, it is possible that the price per share will be diluted. Also, if it has not been possible to carry out flexible funding due to deterioration of supply and demand in the market, and the Group is forced to reconsider the research and development system and planning, there may be a significant impact on the financial position and operating results of the Group.

e. Foreign exchange fluctuations

The Group has expanded its business activities globally and has currency-denominated transactions in licensing foreign companies, product supply from overseas, and overseas research and development activities. We consider hedging the foreign exchange risk in these cases but sometimes the risk manifests itself as a sudden exchange rate fluctuation, and this may have a significant impact on the financial position and operating results of the Group.

f. Contractual payment obligations

In its pipeline-related contracts with business partners, the Group may have an obligation to make payments to a partner at a development stage prior to sales and after sales start. Also, there may be an obligation to pay joint development costs, and to make a certain amount of investment into marketing activity.
These considerations are recognized as being in the nature of product development in the biotechnology industry, but it is undeniable that the cost may be high compared to the Group's capital resources. If for some reason the Group cannot meet its payment obligation, the Group may be subject to cancellation of the contract in question and claims for damages. As a result, it is possible this will have a significant impact on the financial position and operating results of the Group.

g. Domestic sales system and technology licensing

The Group, based on its mid-term management plan, has two revenue platforms: a) domestic market product sales and; b) licensing of in-house product technology.

(a) Domestic market product sales

Once the Group has constructed a domestic sales network, we will consider conducting our own sales or joint sales with other companies. However, if the sales structure cannot be constructed as expected, it is possible this will have a significant impact on the financial position and operating results of the Group.

(b) Licensing of in-house product technology

In addition to selling products developed in-house, the Group can profit through licensing out products at an intermediate stage of development and receive a lump sum and sales-associated revenue. However, if product development is delayed or for some other reason does not proceed as expected, and the amount received during the financial year differs from the forecast, it is possible this will have a significant impact on the financial position and operating results of the Group. Also, the Group expects to license out technology for product development; if it is difficult to do so, it is possible this will have a significant impact on the financial position and operating results of the Group.

h. Business expansion through M&A etcetera (acquisition, merger, transfer or acquisition of business, and investment)

The Group considers the efficient operation of its management resources and strives to seek to maximize corporate value. In this process, with a view to M&A, it is the Group's policy to continue responding flexibly to business expansion. However, if by these measures the expected effect is not obtained and goodwill impairment loss is recorded, there may be a significant impact on the financial position and operating results of the Group, and due to an increase in the number of shares outstanding, the price per share might be diluted.

i. Important agreements

Important agreements are stated on the securities report. If agreements important to Group management are in the future terminated by reaching full term, being canceled, or by some other reason, it is possible this will have a significant impact on the financial position and operating results of the Group.

j. Fund management-related risk

(a) Legal regulations

The Group conducts fund management and is subjected to a variety of laws and regulations (Companies Act, Antitrust Act, tax law, Financial Instruments and Exchange Act, laws related to the Limited Partnership Act for Investment, financial accounting-related laws etc). Hence if activities are limited or there is an increase of cost related to these regulations, it is possible this will have a significant impact on the financial position and operating results of the Group.

(b) Risk from investing in unlisted companies

The fund operated by the Group invests in unlisted companies. As the revenue and financial bases of unlisted companies are unstable and their management resources are constrained, in returning investment, if capital gains are not made as expected, or capital loss is generated, or IPO or sale significantly differs from expectations, it is possible this will have a significant impact on the financial position and operating results of the Group. In addition, shares of unlisted companies are significantly less liquid compared to listed companies.

(c) Other

There are risks, listed below, related to the fund managed by the Group and it is possible these will have a significant impact on the financial position and operating results of the Group.

  • (i) As an unlimited liability partner or general partner, the possibility of bearing loss that exceeds the amount invested.
  • (ii) As an unlimited liability partner or general partner, the possibility of being subjected to litigation due to duty of care violation.
  • (iii) The possibility that sufficient funds cannot be collected from investors through fundraising, and that this will interfere with investment activities.

(2) Changes in performance

From the financial year 2000 the Group converted to a pharmaceutical development business. The Group proactively invested management resources into research and development activities, so research and development expenses increased and ordinary loss grew. However, the success of subsequent development led to a stage in recovering the invested research and development expenses. Therefore, prior financial management indicators and period performance comparison are insufficient to predict the future performance of the Group.

(3) Forecasts

The Group announces its earnings forecast each consolidated financial year. However, due to unpredictable factors such as changes and uncertainty in business or economic environment, there is a possibility that it will be difficult to achieve forecasts and targets within the time limit, and to maintain targets.

(4) Delisting criteria

The Mothers Index of the Tokyo Stock Exchange where the Group is listed has established strict delisting criteria. The possibility cannot be denied that the shares of the Group may correspond to delisting criteria due to factors like deterioration of operating results, reduced number of shareholders, trends in the stock market and other reasons.

(5) Litigation

The Group has not been litigated in the last financial year but it is difficult to completely avoid the possibility of being subjected to litigation for some reason in the future. As a result, it is possible this will have a significant impact on the financial position and operating results of the Group.

(6) Stock Acquisition Rights

The Group has adopted a stock option plan. It was resolved at an Annual General Meeting to grant Stock Acquisition Rights to the Group's board of directors, executive officers, employees and advisors under a stock acquisition scheme that is in accordance with the provisions of the former Commercial Code, Articles 280-20 and the former Commercial Code, Articles 280-21. And it was resolved at an Annual General Meeting to grant Stock Acquisition Rights to the Group's board of directors, executive officers, and employees, as well as to subsidiary directors, auditors, and employees, under a stock acquisition scheme that is in accordance with the provisions of the Companies Act Article 236, Article 238 and Article 239.
The number of shares for the purpose of these stock acquisition rights (hereinafter "latent shares") totaled 288,600 shares at the end of the current financial year, and less than 5% of the total number of the Group's shares outstanding and latent shares. If these shares are exercised, the price per share may be diluted. In order to secure skilled personnel, the Group will continue to consider similar incentive schemes in the future. In addition, the Group will consider assigning Stock Acquisition Rights to third parties as one method of fund raising as needed. Therefore, if these shares are exercised in the future, the price per share may be diluted.