KOA SHOJI HOLDINGS CO.,LTD.

Pharmaceutical active pharmaceutical ingredients (APIs) are procured primarily from overseas, creating a risk that purchase prices may rise due to market fluctuations or sharp foreign exchange rate movements. In addition, API procurement may be delayed or become impossible due to the business condition, supply capabilities, or local political situation of overseas suppliers. As countermeasures, the Group imports from more than 90 API manufacturers across more than 10 countries worldwide to diversify procurement sources, while also executing foreign exchange forward contracts as appropriate.

Consolidated net sales are highly dependent on therapeutic formulations for renal disease, and if demand falls significantly short of expectations due to technological innovation or the emergence of alternative formulations in this area, it could have a material impact on business results and financial condition. In addition, dependence on certain specific customers is relatively high, creating a risk that transaction volumes could decline due to customer corporate restructuring or changes in sales strategy. As a countermeasure, the Group monitors market trends and gathers information through participation in industry events and strengthened collaboration with business partners.

Since fiscal 2021, drug price revisions have shifted from a biennial to an annual cycle, and annual drug price revisions may cause selling price declines and reduced profit margins in the Pharmaceutical Manufacturing and Sales Business, as well as demand fluctuations and price declines in the API Sales Business. Combined with fundamental reform of the government's healthcare insurance system, this could exert continuous downward pressure on business results and financial condition. As a countermeasure, the Group has established marketing functions and continues to develop new products with expected profit margins, while maintaining a policy of sustaining transactions with multiple business partners across multiple products.

The Group holds multiple licenses, including a pharmaceutical manufacturing and marketing business license and a wholesale sales business license, under regulations such as the Pharmaceuticals and Medical Devices Act, GMP, and GQP. If unintended violations of laws and regulations lead to adverse dispositions such as license revocation or business suspension, this could seriously impede business continuity. To date, there have been no cases of administrative disposition such as license revocation or suspension. As a countermeasure, the Group thoroughly ensures legal compliance and has established a system whereby the responsible department checks license renewal deadlines.

In the manufacturing and importing of pharmaceutical APIs and formulations, the occurrence of foreign matter contamination, side effects, or an unfavorable evaluation in a re-examination under the Pharmaceuticals and Medical Devices Act could result in product recalls, discontinuation of sales, and damages, potentially leading to a decline in social credibility and competitiveness. In particular, continuous management of compliance with Japanese domestic standards is essential in overseas API manufacturing processes, and lot recalls after delivery are also anticipated. As countermeasures, the Group has established a rapid reporting system for defects, selects business partners based on quality priority, and is building a stable supply network.

At the Zao Plant of Koa Isei Co., Ltd., where production capacity has been significantly expanded, if there is a substantial deviation from the original business plan due to delays in the sales launch timing of newly developed products or a decrease in planned sales volumes, impairment of fixed assets may become necessary, which could affect business results and financial condition. In addition, the head office plant of Koa Isei Co., Ltd. includes equipment that has been in use for a long period, and unexpected equipment malfunctions due to aging could affect the manufacturing schedule. As countermeasures, the Group monitors the progress of approval acquisition in a timely manner and manages equipment based on a long-term maintenance plan.

If the Group or its partner manufacturers are unable to obtain approval for newly developed products as planned in the approval procedures, this could delay supply to the market and affect business results and financial condition. R&D activities often commence in advance of API import supply and manufacturing and sales, creating a risk that they may not necessarily lead to the expected earnings and could result in excessive upfront investment. As countermeasures, the Group has established marketing functions to promote development suited to market demand, and has established information-sharing and development-check systems.

In the supply of APIs and the manufacturing and sale of generic drugs, there is a possibility of legal disputes developing, with the Company as either plaintiff or defendant, over intellectual property rights such as patents related to substances, manufacturing methods, uses, and formulations. Depending on the outcome of judgments, this could affect business results and financial condition, and this risk is structurally inherent given the nature of the generic drug business. As a countermeasure, the Group is enhancing company-wide intellectual property management strategy through strengthened collaboration between the legal and IP departments, and is strengthening relationships with external experts.

Toshiyuki Shuto, Representative Director and President, is the founder of the Group and plays a critical role across overall management, from formulating management policy and strategy to sales strategy and business execution. If, for any reason, he becomes unable to carry out his duties, this could affect the business and business results in terms of personal connections and industry networks. As countermeasures, the Group is advancing the establishment of its governance structure and strengthening human resources, and, in accordance with the Corporate Governance Code, will consider and formulate a succession plan.

The Group's pharmaceutical formulation production sites are concentrated in Yamagata Prefecture, and since none of the Group's business sites can be immediately substituted, in the event of a disaster or accident, damage to manufacturing equipment, suspension of production lines, and compensation payments could affect the business, business results, and financial condition. While API warehouses and quality inspection sites operate under a two-site system in Kanagawa and Osaka, the geographic concentration risk of formulation manufacturing remains. As a countermeasure, the Group is reviewing its insurance coverage as appropriate while advancing the construction of an optimal network for stable supply.