Among the matters related to business status, accounting status, and other items described in the securities report, the major risks that management recognizes as having the potential to have a significant impact on the company’s consolidated financial condition, business results, and cash flow status are as follows.
The future projections included in the descriptions below are based on the company’s judgment as of the date of submission of the securities report.
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(1)Risks related to intellectual property rights
The Group strictly manages intellectual property (IP) rights, including patent rights, and conducts its business activities under their protection. It also pays close attention to any infringement of its IP rights, and in the event of third-party infringement of its IP rights, it may initiate litigation to protect its rights. However, depending on the results of such litigation, this can affect the Group’s business performance, financial position, and other factors. Moreover, if a legal dispute arises regarding the validity of IP rights held by the Group, and its patents are determined to be invalid, its competitive advantage could decline.
On the other hand, if the Group’s business activities infringe third-party IP rights, the outcome of a legal dispute could lead to the payment of damages or the suspension of the business activity concerned. These risks are likely to affect the Group’s business performance, financial position, and other factors.
In order to minimize these risks and strengthen the advantages of its own businesses to continuously increase its business value, the Group takes measures such as protecting and using pharmaceuticals and functional foods produced in-house in a multifaceted and strategic way through IP rights, including patent rights; regularly conducting third-party rights investigations regarding its products; and evaluating drug candidates and candidate partner companies through appropriate implementation of IP due diligence activities in drug in-licensing and out-licensing activities. -
(2)Risks related to litigation
In connection with its business activities, the Group has the possibility of being the target of litigation, such as lawsuits, due to pharmaceutical adverse effects, product liability, environmental issues, labor issues, fair trade violations, and other reasons. In the event of litigation, it often takes a considerable amount of time to resolve, and predicting the outcome is subject to uncertainty. Depending on the results of the litigation, this can affect the Group’s business performance, financial position, and other factors.
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(3)Risks related to research and development
The Group works to expand its development pipeline through three research and development approaches: in-house drug discovery, in-licensing of products from other companies, and product life-cycle management (PLCM) aimed at increasing product value by expanding the range of indications of existing products, with a focus on rare diseases.
The research and development of new drug candidates requires a huge amount of funds and a long period of time. If the expected efficacy of a candidate drug cannot be confirmed during that time, the research and development can be aborted while in process. In addition, even if favorable results are obtained in clinical trials, approval may still not be granted due to changes in approval review standards and other reasons.
In particular, the development of multiple in-house nucleic acid drugs is progressing in the area of DMD therapeutics.
With regard to these products under development, if there are delays in research and development, if the expected efficacy and safety are not achieved, if competing products are launched, or if progress in sales plans is delayed, this can affect the Group’s business performance, financial position, and other factors.
To address these risks, the Group promotes global development aimed at early launch of in-house products, while also promoting global in-licensing activities with a flexible and agile scouting system in order to continually create innovative products. -
(4)Risks related adverse effects
The sales of pharmaceuticals are only authorized after undergoing rigorous screening by competent authorities around the world. However, if unexpected adverse effects occur, it may lead to sales suspension and a product recall, and damage the public trust, which can affect the Group’s business performance, financial position, and other factors.
The Group strives to minimize pharmaceutical risks and promote the appropriate use of pharmaceuticals by collecting, evaluating, and reviewing safety management information (such as information on adverse effects) from both Japan and overseas and taking necessary safety measures, such as revising precautions for use, in a timely manner. The Group has also established a committee to respond swiftly when serious safety issues occur, as well as internal rules regarding response procedures in the event of a product recall. It has put in place a system in which related divisions work in collaboration to respond in the event that a risk materializes. Moreover, it strives to minimize safety risks by conducting annual training on safety management information for directors and all employees to ensure thorough safety management. -
(5)Risks related to healthcare cost-cutting measures and other administrative trends
The pharmaceutical business is subject to various regulations under the pharmaceutical administrations of each country. In Japan, as part of the measures to control medical expenses, policies such as lowering prescription drug prices and promoting generic drugs have been implemented, and further discussions are continuing on healthcare system reform. Similarly, overseas, there are various regulations on the prices of prescription drugs, and government pressure to lower prices is likely to continue. Depending on how the healthcare system reform evolves, such as tightening of regulations related to the development, manufacturing, and sales of pharmaceuticals, including promotion of measures to control medical expenses, this can affect the Group’s business performance, financial position, and other factors.
The Group continues to closely monitor administrative trends, including those overseas, as well as healthcare system reform in Japan, to evaluate their impact on its businesses and consider countermeasures according to the situation. -
(6)Risks related to the supply chain
If the Group’s plants, raw material suppliers, external manufacturing contractors, and other suppliers are forced to close or suspend operations due to quality or technical issues, disasters such as fires and earthquakes, the spread of infectious diseases, or other reasons that cause delays or interruptions in the supply of products, this can affect the Group’s business performance, financial position, and other factors. Moreover, if a sudden, unexpected change in demand occurs and causes a disruption to the stable supply of products, this can also affect the Group’s business performance, financial position, and other factors.
The Group has identified “maintaining a safe and high-quality supply of products” as a material issue in the supply chain, and works to strengthen the stable supply system of products through risk management.
Specifically, the Group uses the ISO 31000 risk management framework for supply chain risk management (SCRM) to identify, evaluate, and analyze potential risks of disruption to stable supply in the supply chain specific to each product. It then prioritizes the risks, takes measures against them, and monitors them, thereby establishing a sustainable and stable supply system.
In identifying risks, the Group conducts a questionnaire survey focused on stable supply targeting suppliers involved in all APIs and formulations, in addition to a questionnaire survey based on the Nippon Shinyaku Sustainable Procurement Policy, in order to understand the actual situation regarding efforts to ensure stable supply and business continuity plans (BCPs) implemented by suppliers. It then implements measures to reduce risks using a risk-based approach that takes into account the results of these surveys, quality information, and trading history. In SCRM, it reviews the risk assessment standards every year and strives to always take appropriate risk assessment and mitigation measures.
The Group also works to reduce pharmaceutical supply risks by using AI to detect environmental changes and threats that affect stable supply and to review predictive models that derive highly accurate demand forecasts. -
(7)Risks related to financial market and exchange trends
Fluctuations in stock prices, interest rates, and foreign exchange rates, and other financial market trends may lead to a decline in the market value of the Group’s assets and pension funds, as well as exchange risks in transactions in foreign currency such as royalties received and expense payments. These fluctuations can affect the Group’s business performance, financial position, and other factors.
The Group regularly reviews cross-shareholdings from the perspective of their purpose and economic rationale and gradually reduces them to minimize the impact of share price fluctuations. Moreover, in order to avoid the risk of foreign exchange fluctuations related to foreign currency debts, it endeavors to reduce such risk through the use of foreign exchange forward contracts and other such means as necessary. -
(8)Risks related to IT security and information management
The Group uses many information devices and system tools in its various business operations and also holds confidential information, including personal information and research and development information. In the event of a security incident, such as a computer virus infection, a computer system shutdown due to a cyberattack or other such cause, or the leakage of confidential information, it may lead to damage compensation and damage the public trust, which can affect the Group’s business performance, financial position, and other factors.
To prepare for the occurrence of these risks, the Group has established a policy and basic rules that indicate its approach to information security. The Information Security Management System (ISMS) Committee, established based on the basic rules, reviews various rules in response to changes in the social environment and advances in information technology in order to protect the Group’s information assets from various risks.
Moreover, based on the assumption that threats lurk in all internal and external networks and devices, the Group has created a cyberattack response system and monitors its networks and computers 24 hours a day, every day. It has also established a Computer Security Incident Response Team (CSIRT) to respond quickly and appropriately in the event of a security incident, thereby creating a system for emergencies.
As countermeasures against information security risk related to human factors, the Group provides ongoing training to ensure that employees are aware of the importance of information security, and regularly conducts drills against targeted e-mail attacks.
The Group will continue to collect information on changes in the external security environment and strive to reduce risks by continually strengthening its security measures against cyberattacks and system failures as well as its Business Continuity Plan (BCP) measures. -
(9)Risks related to environmental conservation
The Group uses various chemical substances for research and development and product manufacturing. In the event that a serious environmental problem occurs, it may lead to the suspension of operations and administrative penalties, and damage the public trust, which can affect the Group’s business performance, financial position, and other factors. Moreover, if environmental conservation-related costs increase due to the future tightening of environmental laws and regulations, additional obligations to reduce environmental impact, and other reasons, this can also affect the Group’s business performance, financial position, and other factors.
In order to prevent the occurrence and spread of health hazards and environmental pollution caused by chemical substances, the Group thoroughly implements appropriate management of chemical substances and compliance with environmental laws and regulations through voluntary management regulations, and promotes environmental conservation through its 7th Nippon Shinyaku Environmental Targets Plan established in FY2023. To address risks related to climate change, it promotes initiatives in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and works to reduce greenhouse gas emissions toward the 1.5°C target certified by the Science Based Targets initiative (SBTi) in FY2023. -
(10)Risks related to major disasters
In the event of large-scale earthquakes, natural disasters due to climate change, and accidents such as fires, it may lead to the closure of the Group’s Head Office, business offices, research laboratories, and other facilities, stagnation or delay in production activities due to plant shutdown, and disruption to the supply chain, which can affect the Group’s business performance, financial position, and other factors.
At the Odawara Central Factory, which is the Group’s pharmaceutical production base, a business continuity plan (BCP) has been formulated based on a scenario that assumes an earthquake of magnitude 6+. It has also prepared manuals for countermeasures in the event of wind and flood damage or the eruption of Mt. Fuji. In terms of tangible factors, the Group promotes measures to prevent flooding in plant buildings and works to improve its emergency power supply facilities. It also works to establish a system that will enable a stable supply of pharmaceuticals even in the event of an emergency, such as by securing safety stock and creating an information-sharing system with suppliers.
For departments other than plants, the Group has created BCP-related action manuals in anticipation of cases where workplaces are closed due to a disaster, and has made preparations to ensure the safety of employees in the event of a disaster by conducting evacuation drills and safety confirmation drills using our system, replenishing necessary supplies, and conducting regular inspections. -
(11)Risks related to product quality
The Group manufactures and sells pharmaceuticals in accordance with domestic and overseas laws and regulations, including the Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices, and manufactures and sells functional foods in accordance with various laws and regulations, including the Food Sanitation Act. However, if a problem with product quality occurs, resulting in a health hazard, it may lead to the incurrence of costs related to product recalls and compensation liability and out-of-stock situations due to shipping stoppage, and damage the public trust, which can affect the Group’s business performance, financial position, and other factors.
Based on its management policy of “Supply Unique and High-Quality Products,” the Group strengthens its management system for pharmaceuticals in compliance with Good Manufacturing Practice (GMP) standards. The Group’s consistent quality assurance efforts, from the procurement and storage of raw materials to the manufacturing and distribution of pharmaceuticals, enable it to comply with strict inspections by regulatory authorities both in Japan and overseas.
For functional foods, the Group works to strengthen its internal systems to ensure stable quality by continually improving its quality control systems through audits of domestic and overseas raw material suppliers and manufacturing contractors, responding accurately and promptly to customer requests, and conducting regular in-house training on risk management and related laws and regulations. -
(12)Risks related to compliance
In conducting its pharmaceutical and functional food businesses, the Group is subject to various legal regulations and voluntary standards that it must comply with. In the event that a serious violation, including violation of these laws and regulations or voluntary standards, or personal misconduct by a director or employee, occurs, the Group can be subject to punishment or sanctions based on laws and regulations, or disciplinary action by regulatory authorities. This may damage the public trust, which can affect the Group’s business performance, financial position, and other factors.
The Group has established the Code of Conduct for Nippon Shinyaku Group as a common ethical standard for all employees working within the Group, and all employees strive to comply with and practice it on a daily basis. In addition, under the Nippon Shinyaku Group Compliance Operating Rules, it has appointed the Director in charge of compliance as the Compliance Officer and has established a dedicated department to oversee compliance promotion activities. This dedicated department plans and drafts the Group’s compliance promotion activities.
Moreover, in order to instill, maintain, and raise compliance awareness among all employees, the President sends out a message to all employees twice a year requesting them to further emphasize compliance, and the Group conducts monthly compliance training, twice-yearly e-learning programs, and an annual employee compliance awareness survey.
In order to contribute to compliance activities, the Group has also established and operates the Internal Compliance Reporting System (Hotline) both inside and outside the company, working to prevent, detect early and correct any violations of compliance in a broad sense, including violations of the Code of Conduct. -
(13)Risks related to the securing and development of human resources
The Group believes that “human resources” are the driving force behind sustainable growth and that it is essential to “develop each employee.” However, if it is unable to secure and develop diverse human resources over the medium to long term, this can hinder the creation of innovation and the Group’s sustainable growth.
The Group has identified “developing diverse human resources and realizing employee well-being” as a material issue, and works to foster autonomous human resources and global leaders and to promote diverse work styles tailored to each individual.
Specifically, the Group develops various systems and environments, including the implementation of human resource development programs such as “NS Academy,” which supports employees’ self-directed career formation, and “HONKI Juku,” which nurtures managers for the next generation, the adoption of a second job system, and the introduction of flextime and telecommuting systems aimed at improving productivity and realizing flexible work styles.
The Group also strengthens mid-career recruitment to promote the acquisition of highly specialized and global human resources.
The Group will increase employee engagement and secure human resources by becoming a more attractive corporate group through the development of systems and environments that allow each employee to experience self-fulfillment and growth, regardless of gender, nationality, or age.
There are many other risks; the above is not an exhaustive list of risks to which the company is exposed.