Business Risks

Overview of Risk

Development of pharmaceuticals and medical devices requires substantial investments in research and development, and the drug development process, including the step of obtaining approval based on strict regulatory review, is a long-term endeavor. Delay or suspension of development due to, for instance, inability to confirm the expected efficacy and safety in clinical trials, could shorten the period of patent exclusivity, allow competing products to reach the market first, or cause us to abandon efforts to market developed products. As a result, the group would be unable to obtain revenue commensurate with research and development expenses, which could have an adverse effect on medium-to-long-term business plans. Moreover, a decline in profit margins or recording of impairment losses on assets due to a failure to achieve the expected operating rate of facilities in which the group invested could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

In addition to its core therapeutic areas-the psychiatry and neurology area, and the oncology/oncology supportive care area-the group focuses on research and development that addresses unmet medical needs in the cardiovascular and nephrology area, and is enhancing its pipeline, with the aim of raising the probability of success for development projects in key areas. The group monitors clinical trials, and if problems are recognized, implements countermeasures in cooperation with the relevant departments. The group also reduces risk by conducting impact analyses that consider the possibility that projects do not proceed according to the development plan, and by expanding its pipeline through in-licensing.

Decisions on major development plans for pharmaceutical compounds are made at the Board of Directors meetings of each operating company.
Furthermore, advisory committees such as the Global Strategy Meeting set development-related budget priorities, review research and development directions, and manage the development portfolio optimally.

Overview of Risk

The group’s pharmaceuticals, medical devices and other products may cause unexpected serious side effects that would affect the safety profile of the product. In that case, the group may be required to respond with measures such as revising the package insert, suspending sales, or recalling the product, which could have an effect on revenue and development plans.

Countermeasures

In addition to the portfolio management measures described above, the group has a global organizational structure for safety management, has established global operational procedures, and ensures the collection of safety information through measures including employee training. In all countries/regions where the group's products are sold, safety information collected by group companies, alliance partners or others is managed in a global database of all group companies. Safety information is evaluated internally by physicians and reported appropriately to authorities in accordance with the regulations of each country/region, and a system has been established for implementing safety measures.

Overview of Risk

To provide high-quality products, the group thoroughly implements manufacturing and quality control compliant with regulations in each country and works continuously to strengthen its quality assurance system. Regular checks and evaluations of quality assurance systems are also implemented for contract manufacturers and raw material suppliers to ensure product quality equivalent to that of the Otsuka group.

Countermeasures

To provide high-quality products, the group thoroughly implements manufacturing and quality control compliant with regulations in each country and works continuously to strengthen its quality assurance system. Regular checks and evaluations of quality assurance systems are also implemented for contract manufacturers and raw material suppliers to ensure product quality equivalent to that of the Otsuka group.

Overview of Risk

In our Nutraceutical Business, we are working to continuously maintain a high-profit structure, with operating profit margins of 10% or more, by creating new concepts in anticipation of changes in the business environment, taking on the challenge of expanding into new categories and regions, and accelerating global rollout. However, there is the risk that products developed to capture customers' unmet needs may be unsuited to the market, as well as risks in new regions relating to legal regulations, economic conditions, political instability, and uncertainty in the business environment. If such risks were to realize, they could have a significant adverse effect on revenue and business plans.

Countermeasures

In sustaining and enhancing brand value in its various markets, the group reduces risks by looking at market environments in terms of both macro- and micro-trends and by optimizing strategies for the long term according to the unique characteristics of each product and region. In addition, relevant departments engage in effective global expansion by, for instance, collecting and analyzing information and developing strategies for the creation of new global brands and categories, and coming up with measures to bolster existing global brands.

Overview of Risk

In domestic and international markets, the food industry has faced various problems in recent years, such as contamination with harmful substances. The occurrence of an incident that exceeds the group’s quality control capacity could have a significant adverse effect on the group’s operating results, financial condition and social trust.

Countermeasures

To secure food safety for customers, the group takes every possible measure for the quality control and safety assurance of not only products the group manufactures in-house but also products made by contract manufacturers, both in Japan and in other countries. Specifically, the group conforms to all legal and regulatory requirements, as well as governmental and industry standards, including Japan’s Pharmaceutical and Medical Devices Act and Food Sanitation Act, and group companies work to acquire ISO 9001 (for quality), and ISO 22000 and FSSC 22000 (both for food safety) certifications. Leveraging its global network, the group works toward continuous quality improvement by establishing guidelines, setting indicators for monitoring quality activities, and conducting internal audits. In global operations, systems and regulations differ in each country/region. Therefore, the group encourages each of its factories to acquire certification under international standards, and conducts internal audits of factories on a regular basis. Through these initiatives, the group is reducing risk related to food safety.

Overview of Risk

If the corporate culture and corporate philosophy are not sufficiently understood, and if the group is unable to secure personnel who can operate its businesses in accordance with the group's strategies, the group's competitiveness and operating results could be adversely affected in the long term. Furthermore, if the group is unable to secure sufficient talent to carry out critical and high-level strategies such as overseas expansion, M&As and alliances, as well as digital transformation (DX), the group's competitiveness and profitability may not grow as expected, while incidents of misconduct may occur and appropriate responses may not be implemented, which could have a significant adverse effect on the group's operating results and financial condition. Also, in the event that communication between employees at each main operating company and at related departments is insufficient due to the impact of the spread of COVID-19, this could affect business operations.

Countermeasures

In order to discover and develop the next generation of management talent early on, the group has established the Otsuka Global Academy to secure personnel capable of business management based on the group's strategies. The group also believes that diverse human resources, without regard to attributes such as nationality, race, ethnicity, age, gender, disability or sexual orientation, are necessary to generate the innovative products and ideas that will drive long-term business growth. Accordingly, promotion of diversity is included in the Otsuka Group Global Code of Business Ethics, and by providing systems and mechanisms to support diverse human resources, the group is securing talent to support sustainable growth. Even amid the impact of the spread of COVID-19, we have established systems to facilitate smooth communication between employees under a telecommuting system, and we are promoting flexible work styles, in order to maintain and improve productivity.

Overview of Risk

The Otsuka group's 2050 Environmental Vision goal of net zero is aimed at achieving net zero environmental impact across all of the group's business activities by 2050. To that end, the whole group is cooperating on initiatives focused on three material issues related to environment: carbon neutrality, circular economy, and water neutrality. In particular, climate change brought about by global warming is manifesting as a global environmental issue with major impacts including on biological resources and water resources. As such, it is recognized as a serious risk affecting the group's global business development. Failure to appropriately execute the transition to decarbonization, or to miss achieving goals by a significant margin, could force the group to address increased costs due to tightened regulations including carbon pricing. The surfacing of environmental issues or decline in social reputation could have a major impact on the group's operating results or sustainable growth.

Countermeasures

The Otsuka group, guided by its corporate philosophy, seeks to address social issues through its businesses and achieve both sustainable corporate growth and a healthy, sustainable society. To play our part in tackling environmental issues, the Otsuka Holdings Environmental Committee has established the Otsuka Group Environmental Policy and Environmental Activity Guidelines, while the Otsuka Group Global Environmental Council pursues initiatives that help resolve the environmental challenges currently facing societies around the world. In addition, the Company and its main operating companies have begun working to acquire integrated ISO 14001certification (the international standard for environmental management) as part of their efforts for greater effectiveness and efficiency in their activities, and are expanding the scope of the certification.

Regarding carbon neutrality, we have set a 2028 target of reducing CO2 emissions by 50% compared to 2017 levels. We aim to help realize a sustainable society by working in unison as a group to pursue this target, which is aligned with our 2050 Environmental Vision, “Net Zero,” as we seek to reduce total environmental impact across all business activities.

In October 2021, the Otsuka group expressed its endorsement of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Based on the TCFD framework, we conducted scenario analysis and began disclosing information in our Integrated Report 2022. We will continue expanding our disclosures, going forward. We have set clear targets based on the material issues of the Otsuka group, which were determined to be: society (health, people, quality in all we do), environment (carbon neutrality, circular economy, and water neutrality), and governance. All group operating companies work to resolve these issues through their business activities, and we have also established the Otsuka Group Sustainability Promotion Committee as a forum for sharing activities throughout the group. The committee is chaired by an Otsuka Holdings director.

Overview of Risk

In the supply chain, encompassing the group's own operations as well as contract manufacturers, suppliers of raw materials, logistics companies, and sales companies, the occurrence of inappropriate conduct related to human rights, labor, the environment, anti-corruption, or sustainability in general could force a review of the group's business execution framework, harm the group's brand value or credibility, and have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

The Otsuka Group Global Code of Business Ethics requires all people involved in the Otsuka group’s business activities to act with high ethical standards. For the procurement of raw materials and supplies, the group has established the group-wide Otsuka Group Procurement Policy, which requires suppliers to be selected using due diligence and review in accordance with defined processes. The Otsuka Group Procurement Policy mandates fair and transparent supplier selection based on comprehensive assessments including quality, cost, delivery terms, and promotion of environment preservation, as well as observance of applicable laws, regulations and rules and good behavior at all times with the highest level of ethics, consistent with social norms. Moreover, selection of suppliers follows a process of due diligence and deliberation, and subsequent monitoring.

Overview of Risk

Failure to fully realize the benefits from governance under the holding company structure, such as appropriate allocation of resources, planning and review of group strategies, monitoring and supervision of group companies, and group company administration via the main operating companies in business execution in and outside Japan, could have a significant adverse effect on the group's operating results and financial condition. Moreover, inability to procure funding as planned or a rise in funding costs due to changes in global economic conditions could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

In the Otsuka group, strategic decisions and allocation of resources appropriate for the group as a whole are made based on reports of business operations from group companies and analysis of those reports. The group's core businesses are the Pharmaceutical Business and the Nutraceutical Business. In particular, the group allocates resources primarily to products and pipeline in the psychiatry and neurology area, products and pipeline, especially led by Japan, and new technologies in the Pharmaceutical Business, and new businesses and pioneering high-growth markets in the Nutraceutical Business. Furthermore, to respond appropriately to changes in domestic and international market environments, the group examines the possible existence of various risks, and promptly reports the findings to management. Specifically, the group focuses on proposing solutions based on new concepts that address yet-to-emerge needs and social issues, and creating original products based on its unique and diverse businesses. In addition, the group's distinctive and diverse products enable it to disperse its overall business risk and respond to changes in the market environment related to changes in personal consumption trends.

The Company also enacted the Otsuka Group Global Code of Business Ethics and related global policies, and is using these as the basis of standardized training throughout global operations, which in turn will lead to the creation of a system for the collective control of group companies. Based on matters prescribed in the Regulations of the Board of Directors and the Affiliated Company Management Regulations, information from domestic and overseas group companies is collected and exchanged regularly, and by requiring the approval of the Company for important matters, a group cooperation framework has been established. In addition, the Company periodically conducts internal audits of domestic and overseas group companies, and has built a monitoring framework and established a group-wide internal reporting system.
The Company maintains good relationships with financial institutions and is proactively diversifying its funding sources, and raises funds through bond issues and other methods as necessary. The Company also maintains line of credit commitments with multiple financial institutions as a precaution against the event that it is unable to raise sufficient funds using these methods due to market disruption. In addition, it makes timely revisions to funding plans based on the most current information.

Overview of Risk

Failure to properly cultivate and manage the Otsuka group's corporate brand may adversely affect the group's image. The spread through social media of inappropriate expressions in the group's advertisements or other media, or the spread of criticism or misinformation about the group's business activities or image could lower the group's brand value or credibility, depending on various factors, which could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

To properly cultivate and manage the group's corporate brand, the Company established rules for use of the corporate brand at each group company, and promotes initiatives for management of the corporate brand and maintenance and improvement of its value. The group's corporate symbol is managed primarily by the CI^* Management Committee in accordance with unified group rules.

Moreover, prevention of inappropriate expressions in advertising and social media has been incorporated into in-house training, and a system has been established to collect information from group companies on matters that could affect the group's corporate brand. The Company has prepared appropriate media responses in the event that problems affecting the group's reputation occur, and has clarified procedures and responsibilities for communication with the media in the Otsuka Group PR Guidelines. In addition, training on appropriate communication with the public in the event that risks do materialize is conducted for the senior management of group companies.
^* CI: Corporate Identity

Overview of Risk

Business alliances and acquisitions conducive to the group's key growth strategies may not produce the expected group synergy due to various changes, for instance in the operating environment after the alliance or acquisition is made, resulting in dissolution of the alliance or financial losses. In that event, the dissolution of the alliance or the recording of impairment losses on goodwill or intangible assets due to inability to realize the anticipated benefits from the acquisition or alliance, could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

In order to make appropriate business alliances and acquisitions and pursue subsequent sustainable growth, the group conducts detailed due diligence and valuation of the target companies or assets, holds extensive discussion by the Board of Director s, and monitors business operations after the alliance commences or acquisition is completed. The group also engages outside experts when necessary, and works to develop in-house talent with the ability to effectively execute alliances and acquisitions.

Overview of Risk

If the group's digitalization policy and support measures are not carried out effectively, delays in DX at the group's operating companies may prevent the group from securing a competitive advantage or expanding its market share. This could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

By harnessing its collective capabilities, the group is striving to introduce advanced technology with a sense of urgency, primarily in group companies and business divisions. As specific measures, the group is conducting proof-of-concept demonstrations and practical application in a variety of contexts, from the research and production fields, to smartphone apps for patients. ln addition, measures are being taken to raise the base level of lT knowledge and skills group-wide by holding seminars for employees on the latest technologies, such as Al, machine learning and loT, to improve their lT literacy, and by sharing successful case studies throughout the group.

Overview of Risk

A large-scale disaster or pandemic could have a significant adverse effect on the group's operating results and financial condition. Adverse effects could include interrupted operation of the group's factories, research laboratories, business sites, or other facilities, loss of human resources, delays in the development of new products due to suspended clinical trials in the Pharmaceutical Business, decline in product sales due to inability to appropriately provide treatments to patients, and decline in sales of products in the Nutraceutical Business and other segments due to reduced consumption.

Countermeasures

The group formulates business continuity plans (BCP) to continue its business activities to the extent possible and maintain stable supplies of products even in the event of a major earthquake or other disaster. Specifically, in preparation for natural disasters, the group has established a system for confirming the safety of employees and their families, ensures channels of communication between group companies, maintains stockpiles of emergency supplies, and conducts regular drills. From the standpoint of business continuity management (BCM), group companies are cooperating to create a framework for business continuity across the group, securing proper raw materials and product inventories, and working to strengthen measures such as alternate production capability and logistical systems. As part of these efforts, group companies jointly conduct drills annually. For COVID-19, the Risk Management Committee has led the way in formulating the response policy that has been shared with group companies. In addition to practicing basic infection prevention measures, such as daily temperature checks, hand washing, and mask wearing, the group is taking every reasonable measure, including implementing a work-from­ home system, introducing and enhancing systems for web conferencing, restricting in-person visits to production sites, and using thermographic cameras to conduct body temperature screenings.
To respond appropriately to changes in domestic and international trends caused by natural disasters and pandemics as may pertain to our core operating companies and other business sites, group companies study the likelihood of the actualization of various risks, promptly report to management, and implement countermeasures.

Overview of Risk

The increasing risk of stagnation in the global economy due to the spread of COVID-19, or increased geopolitical risk, also poses an increasing threat to the group's supply chains. A delayed response in analyzing the impact on the group or in the planning and execution of strategies could affect business continuity and have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

The group strives to practice procurement that is fair, equitable and transparent, and to build good relationships with suppliers. In particular, for key raw materials, the group clarifies possible risks in advance. Countermeasures are implemented, including diversifying procurement sources by purchasing from multiple companies, securing alternative raw materials, maintaining appropriate inventory levels, and operating from multiple production sites, among others. By means of these risk countermeasures, the group is building a framework to ensure business continuity across the group as a whole.

Overview of Risk

The prices of key raw materials used in the group's products fluctuate due to factors including weather, natural disasters, market prices, economic conditions, fuel costs, and exchange rates. If prices rise significantly due to these or other causes, it could increase the manufacturing costs of the affected products or make raw materials unprocurable, which could have a major adverse effect on the group's operating results and financial condition.

Countermeasures

To mitigate risks associated with raw material price hikes, the group implements various countermeasures as a general principle, including purchasing from multiple suppliers, gathering information on market conditions for raw materials including upstream raw materials, securing alternative raw materials, maintaining appropriate inventory levels, and improving productivity to reduce costs. In addition, after implementing such countermeasures, the group can also address raw material price increases by passing on those increases to sales prices.

Overview of Risk

Expected earnings may not eventuate if the intellectual property rights that are held by the group or licensed to the group by other companies are infringed by a third party. Also, the group may be required to conduct product recalls, terminate manufacturing or sales, and/or pay substantial amounts of compensation if a product manufactured or sold by the group is determined to have infringed a third party’s intellectual property rights.

Countermeasures

The group has systems in place to properly manage intellectual property rights, including patents. Through continuous monitoring, the group remains alert to the risk of infringement of its intellectual property rights by third parties. The group also conducts investigations and gathers information using outside experts, databases and investigative organizations to remain alert to the risk of infringement of the intellectual property rights of third parties. In addition, should an intellectual property dispute arise, the group takes steps to minimize the impact on its businesses in cooperation with the relevant parties inside and outside the group.

Overview of Risk

Regarding the group’s business operations, there is a possibility that a suit may be brought relating to product liability, labor issues, patent infringement, breach of contract, environmental pollution, or other issues. Any judgment, decision or settlement unfavorable to the group could result in a significant adverse effect on the group’s operating results, financial condition, business strategies and social trust.

Countermeasures

The group has established an internal reporting system to monitor signs of possible litigation. The Company’s Legal Affairs Department also exchanges information with group companies and responds appropriately. Furthermore, the Company consults with outside counsels as necessary to reduce litigation risk.

Overview of Risk

Regarding the management of information, the group’s business activities could be affected by interruption due to system stoppage and information falsification, misuse, and leakage that could occur due to system malfunctions, accidents, cyberattacks, or acts of negligence by an employee or a third party such as an outsourced contractor. This could have a significant adverse effect on the group's operating results, financial condition, and social trust.

Countermeasures

The group has established the Otsuka Group Global Information Security Policy as its basic policy on information management and security. In addition to promoting a shared awareness of the importance of information management and security at all group companies, the group reinforces awareness of that importance through training for executives and employees. Also, in the form of countermeasures against various cyberattacks and related threats, the group is strengthening its security infrastructure and establishing processes for identification, defense, detection, response, and recovery across the group as a whole. In addition, by visualizing and improving management status via security risk assessments of group companies in and outside Japan, we strive to continuously strengthen security. Meanwhile, an internal Computer Security Incident Response Team (CSIRT) has been established to enable responses to information security incidents, etc.

Furthermore, we have organized the Otsuka Group Information Security Committee for the purpose of examining and sharing the latest information on specific measures related to information management and security. We also provide cyber human resource development training to improve the skills of security staff at group companies, promoting improvement of the overall security level across the group.

Overview of Risk

Outside of Japan, the group conducts business operations mainly in the U.S., Europe and Asia, including research and development, manufacturing and sales activities. In the course of these global business activities, the occurrence of risks including changes or tightening of legal regulations in each country, changes in economic conditions, political instability, and uncertainty in the business environment, could lead to stagnation in business activities or delays or cancellation of business expansion. This could have a significant adverse effect on the group's operating results and financial condition.

Also, in the event of sudden contingencies relating to geopolitical factors, it is anticipated there could be impacts related to securing the safety of employees, their family members and others, as well as to employment. These situations too could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

The Otsuka group works to mitigate risks in global expansion by assessing local business environments and business conditions and geopolitical risk impacts, and, as needed, reviewing management strategies from a long-term perspective, while ensuring related departments collaborate appropriately in responding to these issues.

In addition, by taking measures including formulating crisis management manuals, conducting emergency response drills through exercises, and regularly gathering and sharing risk information, the group as a whole works to improve its crisis management system.