AFC-HD AMS Life Science Co.,Ltd

While the health food market is expected to expand due to growing consumer health awareness, competition among businesses is intensifying due to an increase in new entrants. If the Group fails to adequately respond to changes in consumer preferences, it may be unable to offer attractive products, leading to a decline in future sales and adversely affecting business results and financial condition. The Group strives to continuously provide products through its own market needs collection and analysis, but there is no guarantee that it can fully predict market changes.

Against the backdrop of strong demand from emerging countries such as China and the diversion of food materials for energy use, there is a possibility of difficulties in procuring raw materials and rising procurement costs. As demand for safe health foods rapidly expands, if securing raw materials becomes difficult, it could disrupt the production system and adversely affect business results and financial condition. The Group is addressing this through diversification of procurement sources, but it is difficult to completely eliminate this risk.

There is a possibility of unexpected foreign matter contamination or defective products occurring during the manufacturing or procurement process, or labeling violations arising from the interpretation or application of laws and regulations. If such issues occur, they could damage the Group's corporate image and result in product recall costs, adversely affecting business results and financial condition. The Group strives to ensure quality and safety by introducing management methods compatible with pharmaceutical GMP standards and establishing a traceability system, but building such systems may involve substantial costs.

The health food business is subject to a wide range of legal regulations, including the Pharmaceuticals and Medical Devices Act, the Food Sanitation Act, the Act against Unjustifiable Premiums and Misleading Representations, the Health Promotion Act, and the Basic Act on Food Safety. Unexpected changes in laws and regulations, or changes in the interpretation or application of existing laws, requiring new countermeasures, could disrupt business operations and adversely affect business results and financial condition. The Group reports, consults, and requests guidance from supervisory authorities, and strives to respond promptly to improve based on such guidance.

The sales prices of prescription pharmaceuticals manufactured and sold by the subsidiary Honso Co., Ltd. are set based on the drug price standards under the medical insurance system, which tend to be revised downward in stages at each revision. If the reduction is significant, it could lead to a decline in sales and adversely affect business results and financial condition. Since drug price revisions depend on national policy decisions, this is a risk that the Group cannot autonomously control.

The pharmacological mechanisms of Kampo (traditional Chinese herbal) medicines are not fully elucidated, and while reviews of their efficacy and safety are ongoing, several cases of adverse drug reactions have been reported to date. If large-scale damage claims arise due to adverse drug reactions, or if product recalls or discontinuation of sales become unavoidable, this could adversely affect business results and financial condition. The insufficient scientific elucidation of the mechanisms of action of Kampo medicines increases the difficulty of risk management.

The rapid development and practical application of new manufacturing equipment, as well as new technologies and services in the internet domain within the mail-order sales business, may result in unexpected capital expenditures or costs associated with changing systems. If the business environment changes due to the spread of new technologies or services that the Group cannot anticipate, there is a risk that it may not be able to respond promptly, which could adversely affect business results and financial condition. The Group addresses this through technical exchanges with machinery manufacturers and information exchange with partner companies and subsidiaries, but this does not guarantee a complete response.

The Group handles corporate and individual customer information in its OEM business and personal information in its mail-order sales business, and it is difficult to completely prevent leakage or disclosure resulting from unauthorized access using advanced external technology. If personal information leakage or disclosure were to occur, it could lead to a decline in social trust and adversely affect business results and financial condition. The Group has implemented measures such as entry restrictions, access log management, and data access authority restrictions, but recognizes that no absolute countermeasure exists.

In the health food market, securing personnel with doctoral or graduate-level education in medicine, pharmacy, agriculture, or chemistry, as well as individuals well-versed in biotechnology, is extremely important for ensuring product quality and safety. However, such personnel are relatively scarce, making timely recruitment difficult. If the Group is unable to secure personnel in line with its business plans, this could significantly affect the Group's business expansion. The Group strives to broaden its recruitment activities and secure personnel with proven track records.

The Group implements M&A as a means of business expansion, conducting prior due diligence on target companies' financial conditions and contractual relationships to proceed carefully. However, if unexpected risks materialize after acquisition or business development does not proceed as planned, investment recovery may become difficult, adversely affecting business results and financial condition. Additionally, costs associated with M&A may temporarily adversely affect business results and financial condition. The Group addresses this through prior due diligence, but it is difficult to completely eliminate post-acquisition risks.