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. Please note that this does not constitute a comprehensive listing of all risks facing the Chugai Group and that there are other risks, which may affect investment decisions.

Please refer to “Chugai Group’s Risk Management” for detail.

1. Potential Risks in Management Strategy (Strategic Risk)

(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. The Group is focused specifically on developing drug discovery technology for mid-size molecules to address unmet medical needs for which solutions have so far not been found using small molecules and therapeutic antibodies. Chugai is also actively progressing with the use of digital technology to boost efficiency in the research process.

However, in the constantly advancing fields of science, drug discovery technology, and digital technology, Delays or failures in in-house drug discovery and technology development, the emergence of solutions with strong competitive advantage, and similar eventualities carry the risk of decline in the value of in-house technology and products, revision of development plans, and other negative outcomes. The Chugai Group applies a range of intellectual property (IP) rights in its business activities, which it understands to either be its own proprietary rights or rights that it is licensed to use under relevant laws. Nevertheless, there remains the possibility, based on a different understanding, that the Group might suffer an infringement of its IP rights by a third party or itself infringe on those of a third party. Major disputes involving IP rights associated with the Group’s business activities could have a material impact on its strategy execution through outcomes such as reduction in projected profits, suspension of production and sale, loss of access to use of technologies, and payment of usage fees.

To respond to these risks, Chugai works through selection and concentration of management resources to increase the superiority of its proprietary technology, securing appropriate access to cutting-edge science and technology. At the same time, we seek to increase diversification by enhancing external collaborations. For the development of mid-size molecule drugs, we are taking measures for stronger collaboration between the relevant internal organizations (drug discovery, development, and pharmaceutical technology and production) and to address IP rights issues with an enhanced IP strategy.

Based on the risk appetite of the Group, Chugai takes risks to aggressively pursue opportunities to create innovation. In parallel, we seek to reinforce factors that encourage innovation in such areas as workplace environment, organizational culture, and human resource development and to reduce risks that hinder innovation.

(2) Healthcare System and Pharmaceutical Regulation

In order to address unmet medical needs, the Chugai Group is focused on the successive creation of innovative new drugs that can achieve the status of first-in-class (an original drug of that is highly novel and useful, and will significantly change the therapeutic system) and best-in-class (a drug that offers clear advantages over other existing drugs in the same category such as those with the same molecular target).

Meanwhile, 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. The great fiscal mobilization associated with the COVID-19 pandemic is expected to further accelerate efforts by each country to curb healthcare costs. In Japan specifically, in addition to the National Health Insurance (NHI) drug price revision that takes place every two years, a revision in interim years has been introduced from 2021. If the policy of drug price reduction and promotion of generics is expanded, the result will be a still greater reduction in revenues than so far experienced, which would risk impairing investment in research and development.

Moreover, we believe that this policy will lead to the continued advance of value-based healthcare (VBHC), adding further momentum to the trend to pursue only solutions that offer true value for patients. While working to strengthen the overseas intelligence function to grasp the contents and environmental trends of system and regulatory reforms not only in Japan but also around the world in a timely and appropriate manner, Chugai will continue to pursue innovation to provide new value and strengthen our profit structure.continue efforts to deliver new value through innovation and to strengthen its earnings structure.

(3) Markets and Customers

As well as the increasing market penetration of competing products, generics, and biosimilars, recent years have seen the development of new therapeutic modalities including regenerative medicine, cellular and genomic therapies, and therapeutic nucleic acids. Accompanying this, there have been increased calls for integrated value delivery from prevention, diagnosis, and treatment through to post-treatment. Meanwhile, 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. Moreover, the COVID-19 pandemic has impacted pharmaceutical companies’ systems for information provision, so that the nature of customer contact points is changing significantly.

These conditions carry the potential risk of decline in market position and product competitiveness and could result in pressure to carry out a fundamental revision of such systems due to the rapid change in customer contact points.

In order to address these risks, the Chugai Group works to successively create new drugs and to diversify its product range. The Group is simultaneously engaged in efforts to advance personalized healthcare (PHC), which realizes optimal diagnosis for the individual patient through gene panel testing. We are also strengthen a new system for value delivery to customers via a new customer engagement model with an approach that brings together physical, remote, and digital elements to match customer needs.

(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. A major advantage of the alliance is that we can establish a stable revenue base through our unique business model.

On the other hand, changes in Chugai’s strategic alliance with Roche for any reason could have a material impact on business 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 revenues and other negative outcomes. By pursuing innovation for the successive creation of new drugs, the Chugai Group will continue to strive to contribute to the value creation of the entire Roche Group.

ii. Personnel and organization

In 2020, Chugai introduced a new personnel system designed to assign the right people to the right positions, establish an advanced system of talent management, and foster an organizational culture that encourages a bold spirit of challenge. In addition, we will focus on acquiring, developing, and fulfilling highly specialized talent, such as data scientists and other digital talent, medical doctors, that are key to the execution of our strategy. Certain risks are nevertheless envisioned. Delay in securing human resources due to competition, etc., and time required for internal development, or a drastic change in the business environment causing a change in the nature of the required work operations could result in mismatch, shortage, surplus, or other human resource issues, while innovation could be hindered by failure to create the envisaged organizational culture.

To address these risks, we have established clearly defined requirements for the human resources that are key to strategy execution and are actively disclosing them outside the company. In addition we are working thus to strengthen measures to establish and develop them within the company. With stronger investment in organizations and human resources, we will put in place an organizational structure and strategic recruitment plans that take careful account of trends in the business environment.

iii. Digital platforms

Despite accelerated digital investment to achieve significant increases in productivity in all value chains, there is the possibility that digital technology will fail to advance and that digital transformation (DX) will stagnate and technical issues arise due to insufficient in-house digital capability, a lack of understanding of digital compliance, and other factors. We will undertake timely revision of our DX strategy and work to strengthen capabilities. At the same time, we will make active use of specialist external human resources.

iv. Earnings structure

With rapid technological advances in the manufacturing industry and fierce competition from pharmaceutical companies in Japan and overseas, the earnings structure could be impacted by increased investment and costs required for R&D expenditures. We will therefore seek to minimize operating costs by applying digital technology to improve processes and raise productivity, and will emphasize careful scrutiny of investment projects.

2. Risks in the Execution of Business Operations (Operational Risks)

(1) Quality and Side Effects

For stable delivery to patients of high-value products and services, we believe that prime importance attaches to product efficacy and safety, and the quality to guarantee these. The Chugai Group evaluates and confirms the validity of business processes during the product lifecycle and carries out corresponding improvement, and ensures the reliability of data through introduction and operation of a global IT system. For consistent quality assurance, we also emphasize enhanced collaboration with internal and external partners and hold regular meetings for considering and discussing quality together. However, if for some reason concerns were raised over product quality, a material impact on business performance could result through termination of sales, product recall, loss of public trust, and other consequences.

Pharmaceutical products and medical devices are approved by regulatory authorities in each country after strict review. Following approval, the Chugai Group continues with comprehensive activities to monitor drug safety, and uses its post-marketing surveillance and safety information database tools (PMS and SAFETY DB tools) to carry out swift provision of information matched to patient characteristics. We also operate an app to support patient adherence to medication that promotes smooth communication between patients and healthcare professionals, and helps alleviate the anxiety of patients undergoing treatment. Furthermore, we have established a safety consulting and networking system for healthcare professionals consisting mainly of our Safety Experts, who are professional safety staff. Through these and other initiatives, we are working to strengthen activities for the provision of safety information and thereby promote the proper use of pharmaceuticals. 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. In cases where side effects occur, particularly newly discovered serious side effects, in addition to revising the precautions listed in the package insert, the Group may have to terminate sales, recall products, or take other measures with a material impact on business performance.

(2) IT Security and Information Control

Chugai makes full use of a wide range of IT systems in its business activities. If negligence or willful misconduct by employees or service providers, or external factors such as cyberattacks, were to cause a system malfunction, the suspension of external service delivery, interference with the content of information provided, or other issues, this could result in suspension or delay of business activities, revision of plans, and costs for urgent response and related measures. In the event of the 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 address these risks, the Chugai Group has established related rules and conducts regular education and drills for employees. We additionally work to strengthen system robustness and availability, take measures to reinforce cyberattack and virus detection functions, and upgrade monitoring systems and systems for response to information security incidents. We have moreover put in place a security management system to evaluate and enhance these countermeasures Group-wide, which operates to constantly reduce risk.

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

In the event of severe damage to Chugai Group business sites or sales locations, or to the buildings, facilities, or other property of business partners being caused by a natural disaster such as an earthquake, typhoon, or flood, or an accident such as a fire, or in the event of business activities being restricted due to a pandemic caused by a novel influenza virus or other pathogen, this could result in the suspension of drug supplies, facility repair costs and other expenditures, delay in the market penetration of new products, associated reduction of revenues, and other outcomes with a material impact on business performance.

The Group has prepared for these risks and works to reduce them 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.

(4) Human Rights

Delays in addressing workplace harassment or human rights issues including occupational health and safety could weaken the Chugai 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 continuous 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.

(5) Supply Chains

Raw material suppliers, contract manufacturers, or other business partners could be affected by damage to facilities or by restriction of business activities due to natural disasters, accidents, pandemics, etc. Delays in addressing compliance infringements or environmental issues in the supply chain could also cause problems in procuring raw materials and maintaining production. This might result in loss of public trust, decline in revenues and market share, and consequent material impact on business performance.

The Chugai 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 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.

(6) Global Environmental Issues

The Chugai Group complies with environment-related 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 (GHG) emissions. As part of this commitment, in addition to reducing energy consumption, we are aiming to achieve 100 percent use of sustainable electricity that does not emit GHG by 2025, in addition, 60-75 percent reduction in scope 1 (direct emissions of GHG that are controlled or owned by an organization) and scope 2 (indirect emissions of GHG associated with the use of electricity, heat, and steam which are supplied by others) by 2030. However, if there is a delay in responding to climate change in terms of technologies and facilities, this may result in the revision of capital investment plans and additional costs.

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. Additionally, based on the framework set out in the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), we carried out a qualitative evaluation and scenario analysis taking into account the risks and opportunities that climate change presents for Chugai, which did not identify any major climate-related risk requiring large-scale business conversion or investment in the long term. Chugai will conduct continuous analysis and evaluation going forward and seek proactive solutions to environmental issues.

(7) Impact of COVID-19

The Chugai Group responded to the COVID-19 pandemic with initiatives to introduce highly flexible workstyles such as teleworking and to establish new workstyles that maintain and improve productivity. In view of its social responsibility for ensuring a stable supply of drugs to patients, Chugai’s basic policy is to maintain the ability to continue the required drug supply even under the declaration of a state of emergency.

Going forward, we will continue working to maintain a stable supply of drugs, while at the same time taking measures to prevent infection among employees and related business personnel. If business activities are restricted in the future by further spread of the infection or similar reasons, the resulting suspensions or delays in the supply chain could have a material impact on product supply. 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).

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