Message from Outside Directors

In this year’s roundtable discussion, under the theme of “How the Board of Directors Supports Future Value Creation,” each outside director focused on how the Board of Directors is involved in the formulation of the company’s long-term vision, new medium-term management strategy, and materiality, and how the Board will work to realize these goals in the future, and how each of them will contribute to the company.

Back row, from left: Mr. Ko Sekiguchi, Mr. Yoshihisa Aoki, Mr. Tatsuaki Kitachi Front row, from left: Mr. Yukio Matsutani, Ms. Mayo Mita

Outside Director Matsutani　As stated in the Otsuka group’s corporate philosophy, “Otsukapeople creating new products for better health worldwide,” the group is engaged in a very broad range of businesses to protect people’s health, which comes in many different aspects. If we are sick, we need medicine, but when we are healthy, we also need food, supplements, and sleep. The Otsuka group applies its pharmaceutical expertise to the field of food in pursuit of safety and efficacy, which is helping it demonstrate synergistic effects of each of these businesses. For the Otsuka group, I believe that cultivating multiple businesses and pursuing a conglomerate premium approach is the way forward.
Outside Director Sekiguchi　While synergies have been achieved among quite a few companies in the Otsuka group, there are still some companies where synergies have not yet been demonstrated. Although Otsuka has achieved great results to date, some of these results have not been from logical action, but through a kind of serendipity. In order to further enhance the corporate value of the group going forward, it needs to be able to reproduce its successes. From my outside perspective, there seems to be a capital efficiency issue in areas where synergies have not been realized. In this regard, if the group can achieve portfolio management that allows it to concentrate resources in areas offering further corporate value boosts, I believe that the market will value Otsuka even more highly.
Outside Director Aoki　Coming from a trading company background, I understand how difficult it is to manage and understand a company like the Otsuka group, which is engaged in a diverse range of businesses. However, in my experience, this is also a business format that is highly resistant to change. In the case of the Otsuka group, as it aims to become a conglomerate for well-being, the Nutraceutical Business has been growing steadily. This is a business focused on health by science so to speak, for living a happy and healthy life, and I believe this is an initiative only Otsuka is capable of carrying out. I believe there is room for the group to extend itself further to develop new products, such as food products, from the perspective of health maintenance and prevention, utilizing the results of its various research efforts. I would like for everyone to come to see Otsuka as a company with a very promising future.
Outside Director Mita　From an analyst’s perspective and from a global perspective, Otsuka group is a very unique organization. It has a diverse portfolio focused on pharmaceuticals and including nutraceuticals and food products, as well as chemicals and warehousing. It is only natural that returns will vary by industry, but I think we all agree that the group must take advantage of its diverse portfolio to grow each of its businesses. Otsuka has a number of group companies whose names are well-known, such as Pharmavite, but what is surprising is that they are not known as Otsuka group companies.
There needs to be a stronger branding push for Otsuka as a whole so that subsidiaries are better-known as part of the group. Otsuka has many loyal users and many trusted brands, meaning that showing these brands as a source of corporate value and the comprehensive strength of the group is a good idea. Subsidiaries acting alone may find themselves limited in terms of financial resources and expertise, whereas I believe that if subsidiaries can work together to make more comprehensive efforts, they can generate a very positive feedback loop.
Outside Director Kitachi　The Otsuka group has long been an organization of great social significance, providing products in areas such as psychiatry, neurology, and oncology, areas where people would face great difficulty without treatment methods. There is a concept that humans, even when healthy, live in a “presymptomatic” state. This term refers to the fact that between a healthy state and death, there is a spectrum of states, and that there is no clear boundary between being healthy and being sick. I believe that Otsuka addresses all of these pre-symptomatic stages. In the U.S., where the insurance system is different from Japan’s, adjustments are made in the earlier presymptomatic stages, such as supplementation of missing nutrients and exercise. Claude Lévi-Strauss, the great authority on structuralism,¹ once said that Japan is the norm for social health in the East and the norm for mental health in the West.² I believe that we can supplant “Japan” with “Otsuka” for its contributions.

1. The idea, based on linguistic theory in the 1960s, that different societies, ethnic groups, and countries have different characteristics
2. From L’autre face de la lune: Écrits sur le Japon [The Other Side of the Moon: Perspectives on Japanese Culture] by Lévi-Strauss

Outside Director Kitachi　Innovation is not something that suddenly falls from the sky; it requires a heightened sensitivity to the world around us and the soil and nourishment to properly nurture the seeds of innovation when they are planted. Here, the soil refers to corporate culture. It has been said that 70% of NASA’s R&D expenditures were spent on failures. Innovation cannot be created in the absence of effort. It is necessary to have the soil that allows us to accumulate a variety of experiences and cultivate questions on a regular basis. I have long felt that Otsuka is very good at nurturing that soil, and I hope that it will carry on that culture. Another important factor is its ample operating cash flow from diverse businesses to continue R&D and nurture the seeds of innovation.
Outside Director Mita　Nurturing innovation takes soil as well as human resources to discover and cultivate this innovation. No matter how good a product is, it must be properly assessed and understood not only in Japan but also globally. Though Otsuka’s Pharmaceutical Business is active worldwide, its Nutraceutical Business has not yet reached the point where it has the kind of presence globally as it does in Japan.
During the period of the 4th Medium-Term Management Plan (MTMP), the number of products will further increase, and the group’s companies will grow in size. I believe that Otsuka has entered an important period in which it will build a global market and maximize its value. Each subsidiary has its own financial resources, but the strength of the holding structure is that Otsuka is able to invest funds in companies with future potential, such as Recor Medical, which is working on uRDN solutions. Regarding human resources, it is also important to utilize partnerships. In terms of branding and marketing, I feel that there is still a lot of room to leverage Otsuka’s network to pitch its products, rather than simply saying that they are good and expecting people to know that.
Outside Director Aoki　The year 2024 marks the beginning of the 4th MTMP, and looking to the world ahead of us, we face times of drastic changes. Amid this context, we must discuss what kind of company Otsuka wants to become, set targets, and drive toward this vision we have set. The Otsuka group has adopted the Mandala Chart,³ a method also used by U.S. Major League Baseball player Shohei Ohtani to analyze what needs to be done from a target-based perspective. At Otsuka, each employee uses the Mandala Chart to set goals for the next five to ten years, and then considers how to manage the company to achieve those goals. This is where the need to develop human resources and concentrate resources becomes apparent, and there may well be a need for business restructuring. In that sense, I look forward to Otsuka’s medium- to long-term visions, its 5th MTMP, and beyond.

3. A 9 x 9 table of cells for organizing thoughts and setting specific action goals to achieve objectives. By expanding objectives from the center, users can deepen their thinking processes

Outside Director Sekiguchi　I believe that the way to expand Otsuka’s value creation will be to leverage synergies. If Otsuka can generate synergies at each level of the value chain, such as sales, production, and R&D through greater collaboration with each company than before, then it may be able to generate never-before-seen synergies also in areas like science and technology, markets and regions, DX and AI. At meetings of the Board of Directors, presentations are the best possible presentations for each individual company, but this may not be aligned with the best vector for the entire holdings structure. Since Otsuka has a solid foundation of philosophy, culture, and history of success that is unique to the company, I think it would be a good idea to create a place and organization to discuss and examine how to align (or deliberately misalign) these vectors. To take this one step further, Otsuka can also seek companies outside the group to find synergies and maximize value by considering alliances and acquisitions. Going forward, Otsuka will enter the stage of deciding how it can organize and reproduce this approach.
Outside Director Matsutani　Human resources will be a key issue in advancing the 4th MTMP. Since a company is simply a group of people working together, the issue is how to cultivate human resources in an organized manner. At each stage of the value chain, there are human resources with expertise, and those who have risen from the field become managers. A management team that is too stable and homogeneous may miss opportunities for new ideas and growth, and I believe it is important to have a diverse group of human resources in the management team, including non-Japanese employees, who know the front lines well.
Outside Director Mita　The Otsuka Group has a diverse range of human resources, but I would like to see more active personnel exchanges between subsidiaries. If, over the course of two or three years, employees were to be transferred to subsidiaries, including those outside Japan, then mutual understanding of businesses would deepen, they would gain positive experiences, and the exchange of people would help to solidify the cohesiveness of the group.
Outside Director Kitachi　Until now, value in corporate management has been focused on indirect financing, the long-term viability of companies, plus the employees, shareholders, and other stakeholders who have a strong stake somewhere in the financial statements. However, going forward, diversity and long-term value-building that helps to provide peace of mind for shareholders will have a positive impact on the cost of capital. For this reason, concepts such as purpose-driven management and ESG are now mainstream, and the emphasis is on a range of stakeholders: investors, employees, and society at large. Amid this, if we consider how to organize employees, personnel exchanges are no doubt one answer. Furthermore, I believe that a new definition of organizing will be created within Otsuka through the dynamism of subsidiary spin-offs and acquisitions through mergers and acquisitions.
Outside Director Matsutani　From an objective point of view, personnel exchanges among the companies are still sluggish, and I believe that they must be revitalized going forward.

Outside Director Kitachi　I feel that information is actively shared in venues that go beyond solely Board of Directors meetings. In addition to information from the company, each outside director presents a variety of information. For example, we receive materials from management meetings, and Outside Director Aoki provides us with monthly materials on global economic conditions compiled by a research institute.
Outside Director Mita　In the Board of Directors meetings themselves, I believe that there is a great deal of free speech. In particular, President Higuchi, who chairs the meetings, often asks for opinions, and I think it is characteristic of Otsuka’s board meetings that there is significant time for free discussion.
Outside Director Sekiguchi　More than half of the statements made at the Board are by outside directors.
Outside Director Kitachi　Japan’s Companies Act states that the board of directors is a body that makes decisions on resolutions and reports, but it also discusses matters such as the cost of capital and financial efficiency. In this respect, my sense of Otsuka’s Board of Directors meetings is that they are different from that of a routine board meeting elsewhere.
Outside Director Aoki　President Higuchi, the Board’s chairperson, is a highly capable coordinator of these meetings. After taking the time for detailed presentations of each issue, he allows the outside directors to say what they think about it, and then asks the inside directors what they think. I feel the president wants a large number of opinions expressed.
Outside Director Mita　Meetings are filled with questions being asked, and I feel that the Board’s operation is very sound. Even with regard to resolutions, if there is an atmosphere of doubt, the president himself decides not to make a resolution on the spot, but rather to take a little more time.
Outside Director Sekiguchi　There are places around the world where no decision is made if everyone is in agreement, and I believe that President Higuchi’s approach is similar to this, in that he always discusses and listens to many opinions, and then decides based on respect for those opinions.

Outside Director Aoki 　The 4th MTMP sets forth Otsuka’s corporate philosophy and its desired direction. This plan is a measure to get the group through the profit adjustment phase that it will face during the period, and it will lead the group to think about what lies ahead. If it can achieve its goals, I believe that Otsuka can become a company essential to people all around the world, a company that is needed in this world, and I am very much looking forward to seeing the kind of company Otsuka develops into.
Outside Director Mita　Again, I believe that strengthening branding will be very meaningful in the future. When employees are proud to work in the Otsuka corporate group, that earns a certain level of trust from society. Taking responsibility for the company and making efforts to earn society’s trust will also help foster compliance. I would like to support the creation of a system in which employees are committed to the development of the Group with responsibility and pride.
Outside Director Sekiguchi　Although the 3rd MTMP exceeded its initial targets, Otsuka is still faced with the looming challenge of patent expiration for pharmaceuticals. Against this backdrop, I consider 2023 to be a year in which Otsuka made significant progress as a company. However, with an eye on further rapid changes in the environment, I believe it is necessary to actively cultivate global human resources and take other measures from a holistic group perspective.
In addition, the Otsuka Group has many products, such as POCARI SWEAT, which can uncover latent needs that only Otsuka can address. I would like to see Otsuka continue to take on the challenge of developing products that create needs and markets.
Outside Director Kitachi　On the occasion of Otsuka’s 100th anniversary, Chairman Ichiro Otsuka expressed that Otsuka has been aiming to be a company which is appreciated by people. Later, in 2023, the company was praised as “indispensable” because it also provides essential drugs (IV solutions). Although the pharmaceutical industry continues to be undervalued in the stock market, Otsuka needs to continue its growth as a company which is appreciated by people and as “indispensable” and increase its corporate value while considering how to reward investors. To do so, it will be necessary to look at the numerical values that can be quantified in terms of Otsuka’s purpose and financial and non-financial data when working backwards from its Mandala Chart.
Where care is required is how Otsuka handles data to be collected. The wider the area to be covered, the more difficult it will be to analyze data using AI and other methods. For example, oncology drugs are highly individualized, making it difficult to establish metadata. Also, there are significant conflicts of interest regarding drugs in the psychiatric and neurological fields, showing that there are many data that are difficult to convert into business opportunities. It will be necessary to conduct business while being fully aware of the risks involved.
Outside Director Matsutani　Outside directors serve as representatives for minority shareholders. Based on this fundamental premise, the question of how to reward each stakeholder is an important role for us as outside directors. Materiality has been made more specific and clearer, and I believe that the method of formulating materiality based on the SDGs has been quite unique to and characteristic of Otsuka. In addition to paying dividends to shareholders, Otsuka is committed to ESG and SDGs as a company and has indicated the extent to which it can respond as an organization in the form of this materiality, which it diligently and steadily acts upon. While this action may not lead directly to profits, I believe that profits can only spring forth if Otsuka maintains this spirit of action for materiality. As long as Otsuka does not lose this spirit, I believe that it can successfully achieve what is possible only for Otsuka, and because we are Otsuka, which are values that go beyond the mere accumulation of money. From FY2024, an external evaluation (by FTSE) of Otsuka’s contribution to the creation of sustainable corporate value has been added to the nonfinancial indicators of the restricted stock-based compensation program. I look forward to continuing to fulfill my role as an outside director to enhance the value of the Otsuka group.