Business Risks

Chugai’s corporate performance is subject to material impact from a range of possible future events. Below, we list what we consider the principal sources of risk to our business operations. We recognize the possibility of these risk events actually occurring, and have prepared policies to forestall such events and take appropriate measures when they do occur.

1. Potential Risks in Management Strategy

(1) New Product Research and Development

With the aim of becoming a top innovator for advanced and sustainable patient-centric healthcare, Chugai aggressively pursues research and development in Japan and overseas. Powered by our unique strength in science and technology, our development pipeline is well stocked, especially in the field of oncology. However, in recent years intensifying competition in R&D has made the creation of new drugs more challenging, and R&D expenses have increased significantly. Therefore, bringing all drug candidates smoothly through to the market from the development stage may not be possible, and we expect to have to abandon development in some cases. This could have a material impact on business performance, depending on the drug candidate.

(2) Changes in Product Environments

In recent years, there have been rapid technological advancements in the pharmaceutical industry, and Chugai faces fierce competition from pharmaceutical companies in Japan and overseas. Competing products, generics and biosimilars are penetrating the market, and therapeutic modalities including regenerative medicine, cellular and genomic therapies, therapeutic nucleic acids, and digital therapies are evolving beyond the scope of conventional drugs. Moreover, the emergence of a digital oligopoly brought on by the entry of IT platform providers into the healthcare industry is engendering new technologies and threats in life science and digital markets. The competitive environment in the healthcare industry is therefore changing rapidly. Changes in the environment surrounding the Group’s products that exceed the Group’s expectations, such as the emergence of new technologies and treatment modalities that significantly alter the treatment of diseases targeted by Chugai’s drugs and development candidates could have a material impact on business performance.

(3) Healthcare System Reform

Japan and other countries are strengthening measures to reduce drug prices as issues such as aging populations and surging healthcare costs put strains on their finances. Steadily growing pressure to curb healthcare costs is particularly apparent in Japan, where the government is holding meetings on social security reform to discuss the benefits and premiums of Japan’s universal healthcare insurance system. Value-based healthcare will continue to advance as the trend toward pursuing only solutions that offer true value for patients gains momentum. Healthcare system reforms and market trends in countries around the world may have a material impact on business performance, including reduced revenues due to drug price reductions, restricted access to drugs and increased expenses for demonstrating the value of drugs including healthcare economics.

(4) Strategic Alliance with Roche

Under its strategic alliance with Roche, Chugai is the only pharmaceutical partner of Roche in the Japanese market and has granted Roche first refusal rights with respect to Chugai’s products in global markets outside Japan, excluding South Korea and Taiwan. Consequently, Chugai has in-licensed and out-licensed many products and projects from and to Roche. Changes in Chugai’s strategic alliance with Roche for any reason could have a material impact on business performance.

2. Operational Risks

(1) Side Effects

Pharmaceutical products and medical devices are approved by regulatory authorities in each country after strict review. However, because of the characteristics of the products, it is difficult to completely prevent adverse outcomes such as side effects from their use even if all possible safety measures are taken. The Group monitors drug safety. However, in cases where side effects occur, particularly newly discovered serious side effects, in addition to publishing precautions, the Group may have to terminate sales and recall products, which could have a material impact on business performance.

(2) Intellectual Property Rights

Chugai recognizes that it applies intellectual property rights in pursuing its business activities, and takes care to distinguish its own proprietary intellectual property rights and licensing arrangements recognized under law. However, the possibility remains of unintentional infringement on third-party intellectual property rights. Major disputes involving intellectual property rights associated with our business could have outcomes that have a material impact on business performance, including the suspension of production and sale, or expenses for countermeasures.

(3) International Business Activities

Chugai actively conducts international operations including overseas marketing and research and development, and export and import of bulk drug products. These business activities expose Chugai to risks associated with legal and regulatory changes, political instability, economic uncertainty, local labormanagement relations, changes in and diverse interpretations of systems of taxation, changes in foreign currency markets, differences in commercial practices and other issues. Compliance and other problems arising from these issues could have a material impact on business performance.

(4) Information Technology Security and Information Control

Chugai makes full use of a wide range of information technology systems in its business activities. Consequently, its operations may be disrupted due to negligence or willful misconduct among employees or service providers, or by system malfunctions caused by cyberattacks or other external factors. In addition, the leakage of material and confidential information associated with private individuals or intellectual property may result in liability for damages, loss of trust, loss of competitive advantage or other outcomes that have a material impact on business performance.

To prepare for these risks, the Group takes measures including establishing and disseminating related rules, conducting security education for employees, and safeguarding against cyberattacks and system failures (prevention and monitoring as well as countermeasures and preparations for recovery), and strives to reduce risk by maintaining an annual process of evaluating and enhancing these countermeasures Group-wide.

(5) Impact from Large-Scale Disasters and Other Events

Factors such as disruption of business activities due to severe damage to Chugai’s business sites or sales locations, or to those of its business partners caused by natural disasters such as earthquakes or typhoons and accidents such as fires, or a significant drop in employee attendance caused by pandemics such as novel influenza outbreaks, and significant expenses for the repair of damaged buildings and facilities, could have a material impact on business performance. The Group has prepared for the risks associated with such disasters and works to reduce those risks with measures to protect employees and ensure an uninterrupted supply of pharmaceuticals. Measures include the use of property and casualty insurance, the implementation of business continuity plans (BCPs) and drills, the use of aseismic construction, and the maintenance of safety stock.

(6) Litigation

The Group may be subject to litigation or investigation by regulatory authorities because of pharmaceutical side effects, product liability, labor issues, fair trade or other issues associated with its business activities. This could result in the suspension of manufacturing and sale or in remedial expenses or other outcomes that could have a material impact on business performance.

(7) Human Rights

Delays in addressing workplace harassment or human rights issues including occupational health and safety could weaken the Group’s human resources in ways such as negatively affecting the physical and mental health of employees and increasing employee turnover, and damaging public trust in the Group, which could have a material impact on business performance. The Group addresses these human rights issues with training for executives and employees, as well as with harassment hotlines. It also conducts health and safety programs as part of its health and productivity management. In addition, the Group asks suppliers to respect human rights and works with them to resolve issues related to human rights.

(8) Supply Chains

Natural disasters such as large-scale earthquakes or typhoons and heavy rain due to climate change could damage suppliers, including raw material suppliers or contract manufacturers. Moreover, delays in addressing supply chain compliance or environmental issues could create problems in procuring raw materials or maintaining production, thereby reducing public trust in the Group or reducing market share, which could have a material impact on business performance. The Group has prepared for these supply chain risks. Measures for the uninterrupted supply of pharmaceuticals include the use of property and casualty insurance, the formulation of business continuity plans (BCPs), maintenance of safety stock and the establishment of systems for sharing information with suppliers. We also work with suppliers to resolve issues such as supply chain compliance and environmental issues that the Group cannot resolve on its own.

(9) Environmental Pollution and the Global Environment

The Group complies with relevant laws and regulations and has established a set of even higher voluntary standards that it is committed to achieving and will continue to strengthen and enhance. However, the Group may have to bear expenses for countermeasures or liability for damages should unexpected contamination by harmful substances or collateral damage occur, which could have a material impact on business performance. We consider climate change to be a key challenge in protecting the global environment, and are therefore committed to reducing greenhouse gas emissions. However, natural disasters or other events resulting from climate change caused by continued global warming could damage the Group’s logistics network and manufacturing facilities, resulting in outcomes such as the suspension or significant delay of product supply, which could have a material impact on business performance. In addition, more stringent environmental regulations in the future may limit Group business activities including research, development and manufacturing.

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