Business and Operational Risks

The main risks relating to the financial position and operating results of the Group that management considers could have a potential significant impact on investor decisions are described below. The Group’s business faces various risks, not all of which may necessarily be included below.
Forward-looking statements were determined by the Group as of 31 March, 2018.

1. Research and Development of Pharmaceutical Products

(1) 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 in research and development. Moreover, the likelihood of success is extremely low compared to other industries. Thus, research and development activities are accompanied by uncertainty, and there is a possibility that this uncertainty may have a significant impact on the Group’s financial position and operating results.

(2) 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, and other entities including major international corporations. Technological innovation is also advancing rapidly. The Group’s financial position and operating results may be significantly impacted as a result of such competition.

(3) Side effects

Pharmaceutical products may produce unexpected side effects. Should unexpected side effects lead to trial cessation, product recall, discontinuance of manufacturing and sales, or filing of lawsuits regarding adverse drug reactions, there may be a significant impact on the Group’s financial position and operating results.

(4) Pharmaceutical laws and other regulations

The pharmaceutical industry, is subject to a variety of regulations due to pharmaceutical laws and pharmaceutical administrative guidance in individual countries, and other laws and regulations applicable to the business activities of research, development, manufacturing and sales.

Taking a drug from the discovery stage to the manufacturing and marketing approval stage requires a great deal of development costs and a long period of time. If sufficient data on quality, efficacy and safety is not obtained, and its medical utility as a drug cannot be demonstrated, approval from regulatory authorities may not be granted as planned, and the market launch may become difficult. 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 applicable regulations, there may be a significant impact on the Group’s financial position and operating results.

2. Business Activities of the Group

(1) 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 expects that it will need to continue building a wide range of partnerships to strengthen its business foundation and realize efficient management, starting with the construction of a sales structure for products that it plans to sell in-house in the future. Should these current partnerships change, or should the Group fail to create partnerships as expected, there may be a significant impact on the Group’s financial position and operating results.

(2) 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, the Group continually strives to secure and develop 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 Group’s financial position and operating results.

(3) Intellectual property rights

The Group uses a variety of intellectual property rights in research and development activities, which are either proprietary or in-licensed by the Group. However, it is possible that the Group may not be able to continue to use the intellectual property rights it needs to operate its businesses. Also, it is possible that a third party will in the future launch a dispute based on intellectual property right infringement. Such events could have a significant impact on the Group’s financial position and operating results.

(4) Financing

A large amount of research and development spending is necessary in the pharmaceutical industry, and that amount tends to increase as research and development progresses. When the Group requires funds, if it is not possible to carry out flexible funding due to deterioration in the market environment, there may be a significant impact on the Group’s financial position and operating results, such as the Group being forced to reconsider its research and development plans.

(5) Foreign exchange fluctuations

The Group has expanded its business activities globally and has foreign currency-denominated licensing transactions with foreign companies and overseas research and development activities. Foreign exchange risk cannot be completely removed even by hedging, and if the risk manifests itself as a sudden exchange rate fluctuation, it may have a significant impact on the Group’s financial position and operating results.

(6) Contractual payment obligations

In its development 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 the commencement of sales. Also, there may be an obligation to pay joint development costs, and to invest in marketing activities after sales start. However, if the cost is high compared to the Group’s capital resources, the Group may experience a significant financial burden, which could have a significant impact on its financial position and operating results.

(7) Technology licensing

Technology licensing of products developed by the Company or its subsidiaries
The Group can profit through licensing out products to other companies at an intermediate stage of development and receiving an upfront payment and sales-associated revenue. However, if technology is not licensed out at the planned time due to delays in development or for some other reason, or if it becomes difficult to license out a development product as planned, it could have a significant impact on the Group’s financial position and operating results.

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

The Group seeks to manage its resources efficiently and strives to maximize corporate value. It is the Group’s policy to continue responding flexibly to business expansion opportunities, including M&A. However, if by these measures the expected benefit is not obtained and an impairment loss relating to goodwill or intangible assets is recorded, there may be a significant impact on the Group’s financial position and operating results.

(9) Significant contracts

Important agreements are stated under "Part 1: Company Information, Section 2. Business Review, subsection 5. Significant Contracts in Business Operation" of the Securities Report for the fiscal year ended 31 March 2018. If significant contracts are terminated, it is possible this will have a significant impact on the Group’s financial position and operating results.

(10) Litigation

The Group was not litigated against during the fiscal year ended 31 March 2018, but the Group could be subject in the future to litigation or other legal procedures, or investigation by authorities. If the Group has to pay a large settlement, is ordered to pay a large fine or is subject to a disadvantageous determination, this could have a significant impact on the Group’s financial position and operating results.

(11) Establishment of internal controls

The Group complies with the standards for evaluation and audit of the internal control system related to financial reporting in accordance with the Financial Instruments and Exchange Act, as well as the standards for implementation. It has established an effective internal control system for financial reporting and strives to operate the system appropriately. However, if the internal controls fail to function effectively or an unexpected problem occurs with internal controls such that the Group incurs significant losses, this could have a significant impact on the Group’s financial position and operating results.

(12) Fund management-related risk

a) Legal regulations

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

b) Risk from investing in unlisted companies

The fund operated by the Group invests in unlisted companies. The revenue and financial bases of unlisted companies are unstable, their management resources are constrained and the shares of unlisted companies are significantly less liquid than those of listed companies. Therefore, when recovering the investment, capital gains may not be made as expected, or capital loss as may be incurred and the schedule and conditions of an IPO or sale may significantly differ from expectations. In such cases it is possible this will have a significant impact on the Group’s financial position and operating results.

c) Other

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

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

3. Stock Acquisition Rights

The Group has adopted a stock option plan as an incentive plan to secure high quality human resources. Under the plan, stock acquisition rights are also granted to the Group’s directors, executive officers, and employees, as well as to subsidiary directors and employees by resolution of the General Meeting of Shareholders and resolution of the Board of Directors in accordance with the provisions of Article 236, Article 238 and Article 239 of the Companies Act. The number of shares for the purpose of these stock acquisition rights (hereinafter “residual shares”) totaled 566,000 shares as of May 31, 2018, which is less than 3% of the total number of the Group’s issued shares and residual shares. If these stock acquisition rights are exercised, per-share value of shares of the Company will be diluted.