TOWA PHARMACEUTICAL CO., LTD.

Due to the annual drug price revisions (including mid-year revisions since fiscal 2021), drug prices have been reduced for many products, and if the strengthening of medical cost containment policies continues, this could have a material impact on the Group's financial position and operating results. In addition, if a violation of pharmaceutical regulations occurs, such as due to stricter mutagenic substance regulations, there is also a risk of administrative sanctions or product recalls/discontinuation of sales. As countermeasures, the Company is working to improve profitability by expanding the share of supplementary products and to establish a company-wide compliance promotion structure.

There is a risk that the approval application and launch of generic pharmaceuticals may be delayed due to extensions of the patent period for original drugs (up to 5 years) or the resetting of the re-examination period for new drugs (in principle, 8 years). Furthermore, even after launch, if patents relating to the crystalline form, formulation, or use of the active pharmaceutical ingredient remain in effect, there is a risk of being subject to patent litigation, which could affect the financial position and operating results. The Company is promoting formulation development that avoids other companies' patents by strengthening cooperation between the technology and development departments.

The introduction of authorized generics and increased sales promotion activities by competitors may cause deviations from planned revenue. On the other hand, while supply concerns or discontinuation of sales by other companies present opportunities to gain market share, they can also pose a risk to stable supply due to a sudden surge in demand for the Company's products. Since fiscal 2025, a dedicated organization has been newly established to monitor demand volume and inventory levels on a daily basis, strengthening the stable supply system.

If operations are suspended at production sites in Osaka Prefecture, Okayama Prefecture, Yamagata Prefecture, Shiga Prefecture, Okinawa Prefecture, Hyogo Prefecture, Shizuoka Prefecture, Chiba Prefecture, Spain, and elsewhere due to natural disasters or technical or regulatory issues, this could disrupt the stable supply of products. In particular, since the business plan is formulated on the assumption of full-capacity operation of the Yamagata Plant's No. 3 Solid Dosage Form Building, production stagnation or delays pose a risk of lost market opportunities and damage to brand value. The Company has built a system for early recovery through the establishment of backup arrangements between domestic and overseas plants, the addition of distribution centers, and strengthened cooperation with regulatory authorities.

There is a risk that long-term procurement of raw materials may become difficult due to soaring raw material prices, fluctuations in supply-demand balance, tightening of domestic and overseas regulations, or suspension of supply by raw material manufacturers. It is extremely difficult to pass on cost increases caused by yen depreciation to sales prices under the drug pricing system, raising concerns about the impact on business performance. As countermeasures, the Company is diversifying suppliers, in-house producing active pharmaceutical ingredients through group company Daichi Kasei Co., Ltd., and hedging foreign exchange risk through long-term derivative transactions.

The Company conducts long-term derivative transactions to avoid the risk of cost increases due to yen depreciation; however, since these are measured at fair value at the time of financial statement preparation, valuation losses may arise if the yen appreciates compared to the end of the previous fiscal year or if the long-term interest rate differential between Japan and the U.S. widens. Because it is extremely difficult to pass on foreign exchange cost increases to sales prices under the drug pricing system, exchange rate and interest rate movements may directly affect business performance. The Company avoids speculative trading by conducting derivative transactions within the estimated range of future foreign-currency-denominated import transaction volumes.

In M&A and business alliances aimed at business expansion or entry into new business areas, there is a possibility that the anticipated synergy effects may not be achieved due to changes in the business environment or intensifying competition. As a result, if it becomes necessary to record impairment losses on goodwill or related assets, this poses a risk of affecting business performance and financial position. Even after implementation, the Company continuously monitors the progress of integration and collaboration as well as investment profitability, and reviews and improves business plans as necessary.

Against the backdrop of a declining working-age population due to the falling birthrate and aging population, if it becomes difficult to secure and develop the human resources necessary for business activities, sustainable business growth and maintenance of competitiveness may become difficult, potentially affecting operating results and financial position. In particular, demand for specialized personnel is increasing along with the expansion of production sites and new business development. As countermeasures, in addition to introducing an in-house qualification system and establishing a human resources training center, the Company is promoting automation and labor savings through the smart factory conversion of all plants.

As the Group holds a large amount of confidential information, including sensitive personal information, if an information leak occurs due to a cyberattack or internal misconduct, this could lead not only to legal damages but also to a loss of social trust in the Group as a whole. The importance of information management is further increasing due to the development of laws and regulations related to personal information protection and growing awareness of rights. The Company is strengthening security in cooperation with group company T Square Solutions Co., Ltd. and conducting ongoing internal training.

If a violation of the Pharmaceuticals and Medical Devices Act or related laws and regulations occurs, the Company may receive administrative sanctions from the relevant regulatory authorities, which could have a material impact on business activities. As mutagenic substance regulations are being strengthened internationally, if issues are discovered where products fail to meet standards, there is a risk of product recall, disposal, or discontinuation of sales, raising concerns about the impact on financial position and operating results. The Company continues to gather information on the healthcare system and related laws and regulations, while formulating a company-wide compliance promotion plan and establishing the necessary systems.