TSUMURA & CO.

Amid rising healthcare costs associated with the super-aging society, the government continues to strengthen policies to reduce drug prices, and the "review of benefits and burdens" is explicitly stated in the roadmap of the Council on Economic and Fiscal Policy. If further drug pricing system reforms are implemented, they could directly impact the earnings of Prescription Kampo Formulations (129 Formulations), the Company Group's core business. The Company Group is working to reduce cost ratios and improve distribution efficiency, while also engaging in advocacy activities toward relevant government ministries in cooperation with industry associations.

The Company Group procures approximately 90% of the raw crude drugs used in Kampo formulations from China, and securing the necessary quantities may become difficult due to adverse weather, natural disasters, changes in political and economic conditions, or changes in import/export regulations. There is also a risk of soaring crude drug prices and impairment losses on crude drugs under cultivation. As countermeasures, the Company Group secures sufficient inventory, expands procurement sources both domestically and internationally, continues to expand company-managed cultivation fields, and has established a Kampo extract powder manufacturing facility in China.

There is no guarantee that product defects or safety issues, such as residual pesticides or chemical substances in raw crude drugs, can be completely avoided, and if unexpected side effect problems or health hazards occur, this could lead to decreased sales volume, substantial damage claims, or large-scale recalls. The Company Group upholds "Tsumura Quality Culture" as a value linked to its management philosophy, and has established a consistent quality control system from crude drug procurement through shipment, based on the "Regulations on the Tsumura Quality Management System" and the "Regulations on the Crude Drug GACP Policy."

The Company Group conducts production, sales, and R&D activities in China and is pursuing business expansion in collaboration with the Ping An Insurance Group of China, but business activities could be affected by unexpected changes in laws and regulations, changes in political and economic conditions, natural disasters, or soaring crude drug prices. The Company Group has diversified its manufacturing bases between Shanghai Tsumura Pharmaceutical Co., Ltd. and Tianjin Tsumura Pharmaceutical Co., Ltd. to spread risk, but there are limits to its ability to respond to environmental changes beyond expectations.

The Company Group is advancing R&D activities aiming to obtain approval for and launch Daikenchuto as a prescription pharmaceutical product in the United States, but there is a possibility of schedule delays or cost increases significantly exceeding projected expenses. Additionally, if changes in the international situation or heightened geopolitical risks disrupt the procurement of raw materials or research materials, this could affect R&D activities overall. There is no guarantee that all R&D activities will succeed, and discontinuation, delays, or cost increases will directly affect the Company Group's ability to secure earnings.

Since approximately 90% of the main raw material, crude drugs, is imported from China, procurement costs could rise when the yen depreciates, potentially adversely affecting business performance. While risk mitigation measures such as forward exchange contracts are implemented, there is a possibility that hedging may not be sufficient in the event of large fluctuations in exchange rates. In addition, exchange rate fluctuations may affect consolidated business performance and financial condition through the yen conversion of local currency-denominated financial statements of overseas consolidated subsidiaries.

If information systems malfunction due to large-scale earthquakes, fires, power outages, etc., or if confidential information is leaked due to malicious cyber attacks by third parties or employee negligence, business operations could be impeded, affecting business performance, financial condition, and social credibility. The Company Group implements security measures such as BCP development, network and terminal monitoring, and training for handling suspicious emails, but there is no guarantee that events exceeding anticipated scale can be completely avoided.

There is a high degree of dependence on sophisticated professional judgment across the entire value chain, from crude drug procurement to R&D, quality assurance, and sales, and a shortage of highly specialized personnel, delays in talent development, or outflow of personnel due to declining engagement could directly affect business competitiveness and continuity. The Company Group monitors indicators such as turnover rate, ratio of female managers, and rate of paternity leave uptake, and is implementing measures such as talent development centered on the Tsumura Academy and promotion of DE&I; however, if the response to the declining working-age population and diversifying labor environments is insufficient, this could also affect social credibility.

The Company Group conducts M&A activities aimed at business expansion and strengthening competitiveness, and even after conducting due diligence, undisclosed liabilities or unexpected legal or tax issues may come to light. If the post-acquisition integration process (PMI) does not proceed smoothly in terms of integrating organizational culture and HR systems, there is a risk of outflow of key personnel or compliance issues arising. Furthermore, if the profitability of an acquired company falls significantly short of the initial plan, it may become necessary to recognize impairment losses on recorded goodwill and intangible fixed assets, potentially affecting business performance and financial condition.

If domestic and international pharmaceutical companies newly enter the prescription Kampo market, or if competitors establish new clinical evidence, the Company Group's market advantage could decline, affecting business performance and financial condition. In addition, the self-care and wellness domain, which the Company Group positions as a growth opportunity, could also be affected by changes in the competitive environment, including from other industries, and by market trends. The Company Group strives to maintain competitive advantage through information provision via MRs, diverse information provision utilizing the internet, and the accumulation of evidence.