(1) Technology and Innovation

Under its strategic alliance with Roche, the Chugai Group works to enhance its strengths in science and technology for the creation of innovative drugs. In carrying out our TOP I 2030 growth strategy, we promote a concentration of management resources on RED (Research and Early Development) functions. In particular, we are focused on developing middle-molecule technologies that are expected to fulfill unmet medical needs (demand for therapeutic drugs to treat conditions for which no effective treatment has been discovered) that could not be solved with low-molecular-weight antibody drugs and on proactively working to improve the efficiency of research and development processes by utilizing generative AI and other forms of digital technology.

However, pharmaceutical research and development work is constantly beset by uncertainties (delays or failures in developing proprietary drugs and technologies). This is expected to delay the creation of value and the implementation of strategies that we aim to achieve. In the fast-evolving areas of science, pharmaceutical development, and digital technologies, there is the risk that the emergence of disruptive new technologies and solutions or highly competitive innovative products could cause in-house technologies and projects to be devalued and development plans to be revised. While the Chugai Group utilizes various intellectual property rights in our operating activities under the understanding that they are owned by or lawfully licensed to the Chugai Group, these intellectual property rights could become infringed by third parties or we could end up infringing the intellectual property rights of a third party outside the scope of our awareness. In some cases, this could result in a devaluation of our technologies or products or a dispute or have a serious impact on our ability to execute a strategy, such as where technology based on another company’s patent can no longer be used or becomes subject to the payment of royalties.

To address such risks, we will enhance the competitive advantages of our technologies by selecting and concentrating management resources without neglecting to pursue cutting-edge science and technology and will work to increase diversity by pursuing a multi-modality strategy, investing in the Chugai Venture Fund (CVF), and otherwise strengthening partnerships with external parties. In developing medium-molecule drugs, we seek to strengthen collaborations among relevant internal organizational units (drug discovery, development, and production), further fortify our intellectual property strategy, such as by strengthening tie-ups with licensees with respect to intellectual property rights, and proactively deal with matters concerning intellectual property.

The Chugai Group will take risks in aggressively pursuing the creation of innovation in accordance with our risk-appetite profile and work to reduce the risks that hinder the creation of innovation by reinforcing mechanisms for encouraging innovation in terms of our workplace environment, organizational culture, and personnel training.

(2) Systems, Regulations, and Policies

i. Healthcare System and Pharmaceutical Regulation

Policies for reducing drug costs are being strengthened against the backdrop of fiscal pressures due in part to population aging and soaring healthcare costs both domestically and overseas. In addition, each country will likely further accelerate efforts to contain healthcare costs in response to the substantial financial outlays associated with the outbreak of COVID-19. In Japan, due to the increase in defense expenses associated with the recent reinforcement of security policy, there is a concern on the impact of social security finance such as medical care. While pharmaceutical innovations will be evaluated under the 2024 reformation of the drug-pricing system in Japan, there is a risk that, as mid-year revisions introduced in fiscal year 2021 to go alongside drug-pricing revisions that already take place once every two years are carried out, there is a risk that the expansion of such policies to reduce drug prices and promote biosimilars could lead to greater reductions in earnings than have been experienced to date and impede investments in research and development. Moreover, while the contents of the healthcare system and pharmaceutical regulatory reforms as well as environmental trends are being monitored in a timely and appropriate manner and actions with respect to development and pharmaceutical plans are being taken in overseas countries, there is concern that amendments to and the development of plans could be delayed due to delays in the ascertainment of regulatory trends.

At the same time, value-based healthcare will continue to evolve thanks to these policies and the tendency for only solutions that are truly valuable to patients to be selected will likely grow stronger with time. The Chugai Group will try to continue to focus on demonstrating exceptional value to patients, develop next-generation products and address intellectual property issues on an ongoing basis, and strengthen the management of its product portfolio. We will also work on fortifying our intelligence functions not just in Japan but overseas as well.

ii. Environmental regulations

Environmental-conservation activities are a vital element of infrastructure supporting all of our business activities. We believe that they not only reduce environmental risks from a long-term standpoint but also help to lower future costs and build a framework of facilities and equipment conducive to innovation, such that they are a significant factor behind improvements in corporate value. On the other hand, further tightening of environmental regulations applicable to companies could cause capital investment plans to undergo reviews and delays to ensure compliance as well as compel additional spending and other forms of increased investments in the environment. Along with keeping ourselves abreast of regulatory trends in a timely manner and ascertaining and accurately incorporating the latest in technological trends, we aim to serve as a global role model spearheading efforts to solve environmental issues by upholding the challenging Medium-Term Environmental Goals for 2030 based on a global environmental consensus and engaging in innovative local environmental conservation activities and the active disclosure of evidence-based information through collaborations with Roche and outside partners.

(3) Markets and Customers

i. Change in Markets and Customers

In addition to the intensification of competition due to the accelerated pace at which competing products and biosimilars have penetrated the market in recent years, the value of treatments has been changing with the development of new therapeutic modalities, including regenerative medicine, cell/gene therapy, and oligonucleotide therapeutics, and with the need to provide consistent value for everything from prevention to diagnostics, treatment, and prognostics. Moreover, the COVID-19 pandemic has impacted pharmaceutical companies’ systems for pharmaceutical information provision, so that the nature of customer contact points is changing significantly.

Given these circumstances, there is a risk that our position in the market and product competitiveness will suffer and cause our earnings to deteriorate. Alternatively, rapid changes in the system of client contact points could force us to carry out a fundamental review of the system under which information on drugs is provided.

In order to address these risks, the Chugai Group will endeavor to continuously engage in the development of new drugs and diversify our lineup of products, allocate sales resources in an appropriate manner, and reinforce the way client engagement is undertaken. To this end, we also aim to improve efficiency through the promotion of digital transformation and build a flexible organizational system capable of rapidly accommodating environmental changes.

ii. Business restrictions due to rising geopolitical risk

In recent years, our business activities have been affected by heightened geopolitical risks, as can be seen in the strengthening by different countries of economic security legislation that has the effect of tightening restrictions on human rights, high-tech resources, data, and strategic goods due to rising tensions among countries - examples of which include the Ukrainian conflict and the Taiwanese situation - and in the impact of international conflicts on logistics.

Such rapid changes in international conditions and the occurrence of armed confrontations could give risk to such risks as business restrictions or withdrawals in affected regions (through the loss of production, R&D, and sales sites; reduced profits; and the loss of future opportunities) as well as supply chain holdups and delays in the supply of goods in affected regions.

To address such geopolitical and economic security risks, the Chugai Group obtains information on trends in legislation and policies in different countries and other types of external information in a timely manner and works to reinforce internal systems for analyzing the impact on business. Along with working to visualize the entire supply chain, we have also reorganized our safety-management system in preparation for contingencies and fortified our business continuity plan (BCP) and back-up supply system (dual-site operations).

(4) Business Foundation

i. 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 outlicensed many products and projects from and to Roche. Our distinctive business model has helped us to establish a stable earnings base and achieve dramatic growth. Any change to the agreement of strategic tie-ups concluded to date could have a material impact on performance. There is the additional risk that underperformance by Roche’s global drug discovery network could lead to a decline in the stable revenue source provided by products in-licensed from Roche and cause delay in the global market penetration of Chugai products outlicensed to Roche, resulting in a decline in revenue and other negative outcomes.

The Chugai Group will pursue innovation and continuously develop innovative drugs, strengthen support for the formulation and execution of our global development and marketing plan through our tie-up with Roche, and work on executing a licensing strategy that will help maximize the value of the Roche Group as a whole and execute an optimal deployment strategy based on Roche’s strategy.

ii. Personnel and organization

We adopted a new personnel system in 2020 and have been working to thoroughly assign persons to the right positions, enhance talent management, and cultivate an organizational culture that promotes the acceptance of challenges and growth. We are also focused on discovering, developing, and acquiring highly specialized personnel needed for the execution of strategies, including individuals working in the fields of science and digital transformation.

At the same time, it is expected that there is a risk of mismatches, shortages, or surpluses of personnel due to delays in acquisition attributable to competition for a limited pool of human resources, the time needed for internal training, and changes in required duties and the quality of work to be performed as a result of changes in the environment as well as a risk that the creation of innovation could be hampered by the non-cultivation of the expected organizational culture.

In order to deal with such risks, we are working to systematically acquire personnel as well as strengthen measures to retain and train personnel internally by clearly defining and updating requirements for human resources needed to execute strategies and proactively disclosing these requirements both within the company and externally. We will continue to strengthen investments in our organization and personnel, implement an organizational structure and strategic hiring plan reflecting a proper understanding of environmental trends, and work on carrying out a personnel strategy and organizational climate reforms designed to promote the creation of innovation.

iii. Earnings structure

Technological progress in the pharmaceutical industry has been remarkable. As we face fierce competition with pharmaceutical companies both in Japan and overseas, higher-than-expected increases in R&D investments and operational costs could affect our profit structure. For this reason, we will work on optimizing operational costs by making process improvements based on the use of digital transformation and improving productivity and will seek to allocate resources in an appropriate manner by identifying investment projects that are ideal.

iv. Digital platforms

While we accelerate digital investments in order to dramatically improve productivity across all value chains, there is a risk that strategic implementation will be delayed due to a lack of progress in the area of digital technology and a risk that digital transformation will be delayed or impeded due to a lack of digital capabilities in the company and understanding of digital compliance. In addition, the risk that competitiveness will be diminished due to delays in the use of generative AI is also possibly in play. We are working to enhance our ability to detect and ascertain technological trends, fortify capabilities through the strengthening of specialized sections and the proactive use of outside experts, promote the company-wide use of generative AI, and reinforce our system for assessing compliance risks.

(1) Quality and Side Effects

In delivering high-value products and services to patients in a stable manner, the effectiveness and safety of products are of course important as is the quality that guarantees their utility. In addition to the quality of our products and information, the Chugai Group ensures the reliability of our business through the quality of our operational processes and the human resources that are in charge of these processes. Moreover, given that collaboration with outside partner companies is important for providing high-quality products and information, various initiatives are being taken, such as by regularly establishing opportunities to discuss quality and culture matters with our partner companies. However, where product quality concerns arise for whatever reason, performance could become severely affected due to a suspension of sales, product recall, lawsuit or damages, or loss of public trust. For this reason, we will work to strengthen and thoroughly engage in quality-assurance activities encompassing risk assessments of and collaborations with partner companies.

Pharmaceuticals and medical equipment undergo strict reviews by the regulatory authorities in each country before they are approved. The Chugai Group will strengthen and thoroughly engage in safety monitoring activities for pharmaceuticals even after they are approved as well as work on strengthening activities for the provision of safety-related information to ensure proper usage, such as by promptly providing information according to patient characteristics through a database tool for investigations, adverse reactions, and clinical trials; operating a treatment-support app; and building a safety consultation network system for people working in the medical field. However, it is difficult to fully prevent side effects and other health hazards even if all possible safety measures are taken. In the event that side effects - in particular new serious ones - are elicited, they may be noted in the precautions for use and performance could become seriously affected to the extent that sales might be suspended, or a product recall might be issued.

(2) IT Security and Information Control

Where a system failure, suspension of a service provided to outside parties, or tampering of provided information occurs due to a negligent or intentional act in the use of an IT system in the course of operations by an employee or company to which operations have been outsourced or to a cyber-attack or other external factor, we may see business activities suspended or delayed or plans for business activities undergo a review as well as the incurrence of costs for an unexpected response or countermeasure. In the event of the external leakage of trade secrets relating to research and development or other activities, or of personal information or other confidential material, Chugai could experience loss of competitive advantage, loss of public trust, liability for damages, or other outcomes with a material impact on business performance.

To prepare for such risks, the Chugai Group has formulated internal rules related to information management and cyber-security, educated and trained employees, strengthened the robustness and availability of systems, established a system of monitoring (security operations center - SOC) and a system for providing incident responses (computer security incident response team - CSIRT) to address cyber-attacks and malware infections, and formulated early response measures to deal with incidents (formulated a cyber-BCP). In particular, we have endeavored to strengthen the management of confidential information from the standpoint of our IT system and have been promoting the introduction of functions for controlling access to each operations file, preventing inadvertent or intentional information leaks, and preventing leaked information from spreading. When it comes to the management of personal information, we are promoting the establishment of a global privacy governance system to deal with increasingly active cross-border transfers of data. Along with promoting compliance with the law according to global standards, we provide compliance-informed support for the use of data. Furthermore, we are working to reduce risks on a continuous basis by establishing a security governance system to assess and strengthen the status of these measures across our entire corporate group.

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

It is possible that significant damage caused to a business office or sales branch of the Chugai Group or a building or facility of a business connection due to an earthquake, a typhoon, flooding, or any other such natural disaster or a fire or any other such accident could affect performance, such as by way of the suspension of the supply of pharmaceutical goods, the posting of expenses incurred for repairs made to facilities, restrictions on business activities, delays in the process by which new products permeate through the market, and a resulting decline in earnings.

In preparing for such risks, the Chugai Group has worked to reduce risks by establishing a system to ensure the safety of employees and a stable supply of pharmaceutical products, such as by formulating a business continuity plan (BCP), carrying out training for such a plan, securing safety stock, having earthquake-resistance measures put in place, and taking out a non-life-insurance policy.

(4) Human Rights

The occurrence of violations of human rights in corporate activities can potentially lead to reputational damage to the company, boycotts, lawsuits, the payment of damages, and an exodus of human resources and could have a material impact on performance. There is also an increased risk that workplace harassment could induce a decline in an employee’s physical and mental health and a diminishment of human capital.

The Chugai Group regards human rights as one of the risks that could have a material impact on management. In accordance with the UN Guiding Principles on Business and Human Rights, we are working to establish a group-wide governance system to respect human rights and strengthen aspects of due diligence, such as by enabling the visualization of the entire supply chain and assessing human rights risks at our business connections and implementing measures to address these risks.

(5) Supply Chains

Where a natural disaster, international conflict, accident, or pandemic causes a supplier of raw materials, an external manufacturing contractor, or other supplier to sustain damage or have their business activities become restricted in some way or where there has been a delay in addressing a compliance violation or environmental issue in the supply chain, we may experience difficulties securing raw materials or continuing production activities. The resulting loss of public trust and decrease in sales and market share could have a material impact on performance.

In preparing for such supply chain-related risks, the Chugai Group has established a system for ensuring the stable supply of pharmaceutical goods, such as by enabling the visualization of our entire supply chain, formulating a business continuity plan (BCP), securing safety stock, and having alternative suppliers ready to step in if needed.

We have also been working to engage in the integrated management of risks by introducing a comprehensive risk assessment system targeting not just suppliers but also a wide range of third parties (business connections). Our policy is to build a system of collaboration and information sharing and seek to resolve issues in collaboration with our business connections when it comes to issues that cannot be resolved by the Chugai Group alone, such as compliance and environmental issues faced by our business connections.

(6) Global Environmental Issues

The risk of climate change is regarded as one of the most serious issues as concerns global environmental protection. We are promoting medium-term environmental goals across a time frame ending in 2030 for three issues identified as being material: climate-change measures, the use of recycling-oriented resources, and the protection of biodiversity.

We are working towards not just compliance with environment-related laws and regulations, but also the stipulation and attainment of even higher voluntary standards. However, if unexpected pollution caused by a hazardous substance or incidental harm is elicited, the assumption of the costs of implementing countermeasures or liability to compensate for damages could have a material impact on performance. In addition, more stringent environmental regulations in the future may increase expenditures for response measures and limit Group business activities including research, development, and manufacturing.

To disclose environmental information with a high level of transparency and reliability, the Group receives third-party assurance of its environmental performance data annually. We have also conducted qualitative assessments and scenario analyses incorporating the risks and opportunities that climate change imparts to us in accordance with the framework provided by the Declaration of the Task Force on Climate-Related Financial Disclosures (TCFD) and no material climate-related risks for which large-scale business transformations or investments are needed in the long run have been identified. Moreover, SBT certification by the Science Based Targets initiative (SBTi) was obtained in 2021 for our targets for reducing greenhouse gases. Chugai will conduct continuous analysis and evaluation going forward and seek proactive solutions to environmental issues.

(7) Impact of Pandemic

Where a new infectious disease gains enough traction nationally and internationally to restrict business activities in the future, the resulting supply chain disruptions and delays could have a material impact on the supply of products. Moreover, there might be delays in the progress of research and clinical studies, and in the market penetration of new products and other items due to restrictions on the activities of our medical representatives (MRs).

In order to fulfill the Chugai Group’s social responsibility to supply pharmaceutical products on a stable basis to patients in the face of such risks, we will formulate a BCP in which the maintenance of a system for providing needed pharmaceutical products even in the middle of a pandemic is a basic policy position as well as utilize new ways of working to make highly flexible working styles, such as teleworking, and the maintenance of and improvements to productivity possible.