Business Risks

Overview of Risk

Failure to fully realize the benefits from governance under the holding company structure, such as appropriate allocation of resources, planning and review of group strategies, monitoring and supervision of group companies, and group company administration via the main operating companies in business execution in and outside Japan, could have a significant adverse effect on the Otsuka group's operating results and financial condition. Moreover, inability to procure funding as planned or a rise in funding costs due to changes in global economic conditions could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

In the Otsuka group, strategic decisions and allocation of resources appropriate for the group as a whole are made based on reports of business operations from group companies and analysis of those reports. The group's core businesses are the Pharmaceutical Business and the Nutraceutical Business. In the Pharmaceutical Business, the group concentrates on priority areas such as psychiatry and neurology, oncology, cardiovascular and renal, and autoimmune areas, focusing on unmet medical needs that have not yet been satisfied. In the Nutraceutical Business, the group prioritizes the allocation of management resources, mainly operating functional drinks, foods, and supplements that support the maintenance and enhancement of daily health.

Furthermore, to adaptively interpret changes in domestic and international market environments and respond appropriately, the group examines the possible existence of various risks, and promptly reports the findings to management. Specifically, the group focuses on proposing solutions based on new concepts that address substantial needs and social issues, and creating original products and services based on its unique and diverse businesses. In addition, the group's distinctive and diverse products enable it to disperse its overall business risk and respond to changes in the market environment related to changes in personal consumption trends.

The group also enacted the “Otsuka Group Global Code of Business Ethics” and related global policies and is using these as the basis of standardized training throughout global operations, which in turn will lead to the creation of a system for the collective control of group companies. Based on matters prescribed in the Regulations of the Board of Directors and the Affiliated Company Management Regulations, information from domestic and overseas group companies is collected and exchanged regularly, and by requiring the approval of the Company for important matters, a group cooperation framework has been established. In addition, the Company periodically conducts internal audits of domestic and overseas group companies and has built a monitoring framework and established a group-wide internal reporting system.

The group maintains good relationships with financial institutions and is proactively diversifying its funding sources, and raises funds through bond issues and other methods as necessary. At the same time, in preparation for situations in which market instability and disruption make it difficult to secure sufficient funding through these means, the group is pursuing new funding methods while also consolidating funds within the group through cash pooling and intercompany financing. Based on the latest funding plans, the group has established a structure that enables it to secure funds with an adequate margin.

If the corporate culture and corporate philosophy are not sufficiently understood, and if the Otsuka group is unable to secure human capital that can operate its businesses in accordance with the group's strategies, competitiveness and operating results could be adversely affected in the long term. Furthermore, if the group is unable to secure sufficient human capital to carry out critical and high-level strategies such as overseas expansion, M&As and alliances, as well as digital transformation (DX), the group's competitiveness and profitability may not grow as expected, while incidents of misconduct may occur and appropriate responses may not be implemented, which could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

Under the leadership of executive management, the group has developed and implemented structured programs designed to systematically cultivate the competencies, leadership qualities, and business skills required of management personnel for Otsuka group employees in Japan and overseas. Through these initiatives, the group is continuously developing talent with capability to lead business operations aligned with its group and global strategies. At the same time, each operating company implements its own executive development programs to foster next-generation leaders in accordance with its respective business characteristics.
In addition, with the aim of enhancing employee engagement across the group by embedding corporate philosophy and fostering a corporate culture, the group has established a cross-functional task force. This task force is working to standardize survey systems and indicators, while also advancing discussions toward establishing a shared understanding of the positioning of employee engagement, the desired talent profile, and appropriate evaluation methods.
Furthermore, from the perspective of sustaining innovation and enhancing corporate competitiveness, the group is expanding initiatives to secure and retain research and development talent, as well as to develop digital talent. In the “Otsuka Group Global Code of Business Ethics”, the promotion of diversity is clearly stated, and the group is advancing the development of systems and frameworks that support the active participation of diverse talent.
In particular, the group is striving to create an environment that balances flexibility and productivity through the introduction of work arrangements that take life events such as childcare and caregiving into consideration, as well as through the adoption of hybrid work models that reflect diversified ways of working.
Moreover, in order to enhance the reliability and effectiveness of its internal reporting system, the group has established the “Otsuka Group Global Speak-Up Policy” and is promoting the establishment of a speak-up culture through education and awareness-raising activities.

Overview of Risk

In the global trend of respecting human rights, laws mandating responses to human rights risks are spreading across various countries. Human rights risks refer to the risk of human rights abuses for all individuals involved in business activities. If left unaddressed, these risks can lead to reputational risks, such as loss of trust from customers and society, operational risks such as business stagnation, termination of transactions with business partners, and disruption of supply chains, legal risks including lawsuits and administrative penalties, and financial risks such as divestments and decline in stock prices. These risks would significantly adversely affect the Otsuka group's performance and sustainability.

Countermeasures

Under the "Otsuka Group Global Code of Business Ethics", the Otsuka group complies with the United Nations "Guiding Principles on Business and Human Rights" and has established the "Otsuka Group Human Rights Policy" in 2020. The group has identified important human rights issues for each stakeholder as "Salient Human Rights Issues for Otsuka Group" and under the leadership of the Otsuka Group Human Rights Promotion Officer (Director of Otsuka Holdings), the Otsuka Group Human Rights Task Force promotes initiatives. In addition, major operating companies have established dedicated team structures to address human rights issues and are advancing initiatives tailored to the specific characteristics of their respective businesses. Across the entire group, we are committed to respecting human rights and are building a human rights framework in collaboration with independent external experts, with the aim of generating a positive impact on society.
Additionally, the group conducts human rights risk assessments in its supply chain, then we directly confirm and investigate these risks through dialogue with external stakeholders to ensure proper management as necessary. Internally, the group also provides employees with education on human rights and conducts regular monitoring.
Moreover, the group has established anonymous internal reporting systems at each group of companies, as well as a Speak Up Line for external stakeholders to anonymously report inappropriate incidents, including fraud and human rights issues, recognized in transactions and contractual relationships with group companies. All reports and consultations are appropriately investigated and addressed in coordination with group companies.

Overview of Risk

Regarding climate change due to global warming, the increasing frequency and severity of extreme weather events—such as severe heat, droughts, and floods—may lead to reduced yields and deterioration in the quality of agricultural products used as raw materials, potentially resulting in higher procurement costs. In addition, if the transition to decarbonization does not progress appropriately, business operating costs may increase due to factors such as the introduction or strengthening of carbon taxes and rising energy prices. This could also undermine international competitiveness and may have a significant impact on the group’s business performance and sustainable growth.

Countermeasures

Under the Otsuka Holdings Environmental Committee, the Otsuka group has established environmental policies and goals, including the "Otsuka Group’s Environmental Policy" and "Activity Guidelines," and is promoting initiatives based on these frameworks. In particular, with regard to potential financial risks such as rising procurement costs associated with climate change and increasing energy prices resulting from the introduction or strengthening of carbon taxes, the group identifies and assesses climate-related risks and opportunities in accordance with international disclosure requirements and regulations, including those under the ISSB, to which the TCFD framework has been transferred. In addition, the group assesses the financial impacts and the resilience of its business strategies through scenario analysis, and work to mitigate risks and enhance medium- to long-term corporate value by promoting energy conservation, the use of renewable energy, and reductions in greenhouse gas emissions.

Overview of Risk

In the supply chain, encompassing the Otsuka group's own operations as well as contract manufacturers, suppliers of raw materials, logistics companies, and sales companies, the occurrence of inappropriate conduct related to human rights, labor, the environment, anti-corruption, or sustainability in general could force a review of the group's business execution framework, harm the group's brand value or credibility, and have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

The “Otsuka Group Global Code of Business Ethics” requires all people involved in the Otsuka group’s business activities to act with high ethical standards. In procurement activities, the group has established the “Otsuka Group Procurement Policy,” which sets forth principles for fair, objective, and transparent supplier selection, as well as compliance with relevant laws and regulations. In addition, with the aim of ensuring quality, safety, and stable supply, and of building an ethical and sustainable supply chain, the group has formulated the “Otsuka Group Sustainable Procurement Guidelines” and the “Otsuka Group Business Partner Code of Ethics.” Based on these frameworks, it obtains agreements from business partners and conducts confirmation and monitoring of suppliers’ initiatives.

Overview of Risk

Failure to properly cultivate and manage the Otsuka group's corporate brand may adversely affect the group's image. If critical assessments or inaccurate information regarding the group’s business activities or image are disseminated, these and other factors may lead to a decline in the group’s brand value and reputation, which could have a significant impact on its business performance and financial condition.

Countermeasures

To properly cultivate and manage the group's corporate brand, the Company established rules for use of the corporate brand at each group company, and promotes initiatives for management of the corporate brand and maintenance and improvement of its value. The group's corporate symbol is managed primarily by the CI^* Management Committee in accordance with unified group rules.
It has also established a framework to collect information from each group company regarding events that may impact the corporate brand.
The Company has prepared appropriate media responses in the event that problems affecting the group's reputation occur, and has clarified in advance appropriate communication with the media and defined our responsibilities in the “Otsuka Group PR Guidelines”. In addition, training and exercises on appropriate communication with the public in the event that risks do materialize are conducted for the relevant departments of group companies.

Overview of Risk

Business alliances and acquisitions that support the group’s important growth strategies may fail to deliver the business effects initially anticipated if the business environment or other conditions change after implementation. As a result, the profits expected from such alliances and acquisitions may not be realized. In that event, the termination of the alliances or the recognition of impairment losses on goodwill and intangible assets due to inability to realize the anticipated benefits from the acquisition or alliance, could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

In order to appropriately execute business alliances and acquisitions and to achieve sustainable growth thereafter, our group conducts due diligence and valuation of the target companies and assets, and makes decisions after comprehensive deliberation by the Board of Directors. In addition, it continuously monitors business operations following the completion of such alliances and acquisitions. It also makes use of external experts as appropriate and strives to develop internal personnel with the capabilities required to execute such transactions.

Overview of Risk

If the group's digitalization policy and support measures are not carried out effectively, delays in DX at the group's operating companies may prevent the group from securing a competitive advantage or expanding its market share. This could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

By harnessing its collective capabilities, the group is striving to introduce advanced technology with a sense of urgency, primarily in group companies and business divisions. As specific measures, the group is conducting proof-of-concept demonstrations and practical application in a variety of contexts, from the research, production, and sales fields, to smartphone apps for patients. ln addition, measures are being taken to raise the base level of IT knowledge and skills group-wide by holding seminars for employees on the latest technologies, such as AI, machine learning and IoT, to improve their IT literacy, and by sharing successful case studies throughout the group.

Overview of Risk

Physical damage caused by a large-scale natural disaster, including earthquakes, tsunamis, typhoons, and floods, or a pandemic, such as infectious diseases, could have a significant adverse effect on the Otsuka group's operating results and financial condition. Adverse effects could include interrupted operation of the group's factories, research laboratories, business sites, or other facilities, loss of human resources, delays in the development of new products due to suspended clinical trials in the Pharmaceutical Business, decline in product sales due to inability to appropriately provide treatments to patients, and decline in sales of products in the Nutraceutical Business and other segments due to reduced consumption.
In addition, not only the group but also the entire supply chain is expected to suffer significant damage, which could disrupt the provision of the group's products and services.

Countermeasures

The Otsuka group has formulated a business continuity plan (BCP) in order to ensure the maximum possible continuation of business operations and the stable supply of products even in the event of disasters such as large-scale earthquakes. Specifically, in preparation for natural disasters, it has established systems to confirm the safety of employees and their families, secured means of communication among the locations of group companies, and maintained emergency stockpiles for disaster response, in addition to conducting regular drills and training exercises.
From the perspective of business continuity management (BCM), the group has established a group-wide framework under which group companies work collaboratively to ensure business continuity across operations such as production, order processing, and logistics. In this context, it strives to strengthen measures related to maintaining appropriate levels of raw material and product inventories, implementing multiple-sourcing procurement systems, establishing alternative production arrangements, and reinforcing logistics frameworks. As part of these efforts, the group conducts joint BCP exercises involving group companies each year, with a specific theme set annually.
In relation to infectious diseases, the Global Risk Oversight Committee takes the lead in formulating basic response policies to be implemented in the event of a pandemic, including the comprehensive enforcement of fundamental infection prevention measures, the use of remote work, restrictions on visitors to production sites, and temperature screening using thermographic cameras.
Regarding the impacts of natural disasters and pandemics, it appropriately monitors domestic and international trends related to each of our businesses, including our core businesses, examines the potential for the materialization of risks that could affect business continuity, and promptly reports the results to management and implements necessary countermeasures.

Overview of Risk

The prices of key raw materials used in the Otsuka group's products fluctuate due to factors including weather, natural disasters, market prices, economic conditions, fuel costs, and exchange rates. If relevant prices surge due to these factors and the situation does not improve, it could increase the manufacturing costs of the affected products or make raw materials unavailable, which could have a major adverse effect on the group's operating results and financial condition.

Countermeasures

To mitigate risks associated with key raw materials price hikes, the Otsuka group implements various countermeasures as a general principle, including procurement of raw materials from multiple suppliers, gathering information on market conditions for raw materials including upstream raw materials, securing alternative raw materials, maintaining appropriate inventory levels, and improving productivity to reduce costs. In addition, even after implementing such countermeasures, the group may pass on increase in raw material prices to selling prices.

Overview of Risk

Expected earnings may not eventuate if the intellectual property rights that are held by the Otsuka group or licensed to the group by other companies are infringed by a third party. Also, the group might be required to conduct product recalls, terminate manufacturing or sales, and/or pay substantial amounts of compensation if a product manufactured or sold by the group is determined to have infringed a third party’s intellectual property rights.

Countermeasures

The Otsuka group has systems in place to properly manage intellectual property rights, including patents. Through continuous monitoring, the group remains alert to the risk of infringement of its intellectual property rights by third parties. The group also conducts investigations and gathers information using outside experts, databases and investigative organizations to remain alert to the risk of infringement of the intellectual property rights of third parties. In addition, should an intellectual property dispute arise, the group takes steps to minimize the impact on its businesses in cooperation with the relevant parties inside and outside the group.

Overview of Risk

Regarding the Otsuka group’s business operations, there is a possibility that a suit may be brought relating to product liability, labor issues, infringement of intellectual property rights, breach of contract, environmental pollution, or other issues. Any judgment, decision or settlement unfavorable to the group could result in a significant adverse effect on the group’s operating results, financial condition, business strategies and social trust.

Countermeasures

The Otsuka group has established an internal reporting system to monitor signs of possible litigation. The Company’s Legal Affairs Department also exchanges information with group companies for responding and supporting appropriately. Furthermore, the Company consults with outside counsel as necessary to reduce litigation risk.

Overview of Risk

Within the group, system outages or incidents may arise from various factors, including cyberattacks from external sources, as well as errors or other actions by employees, contractors, or other third parties. Such events could disrupt business operations due to system downtime and may result in the alteration, misuse, or leakage of information. If any of these incidents were to occur, they could have a material adverse effect on the group’s operating results, financial condition, and reputation.

Countermeasures

Across the Otsuka group, it has established the Otsuka Group Global Information Security Policy, which defines our fundamental approach to information security and promotes a shared understanding of the importance of information security management across all group companies. In line with this policy, we provide ongoing education and training for directors and employees to ensure broad awareness of information security throughout the organization.
To address a broad range of threats, including cyberattacks, we strengthen security infrastructure and security-related processes across the group and conduct cross-group assessments based on recognized cybersecurity frameworks. These efforts enhance visibility into security management, including governance, across domestic and overseas group companies and support continuous improvement of our security posture.
CSIRTs (Computer Security Incident Response Teams) are in place at the Company and group-company levels, providing a structure for timely and appropriate responses to information security incidents. Incident reporting procedures for employees are continuously reviewed and improved within each group company. In conjunction with these efforts, escalation drills are conducted annually to ensure that incidents arising at group companies are appropriately shared through the major operating companies.
The group has also established the Group Information Security Committee to review specific security measures and facilitate the sharing of the latest information. In parallel, cybersecurity training programs are conducted to develop and enhance the capabilities of security personnel across group companies, supporting steady improvements in the overall security maturity of the group.
These information security initiatives are reported to the Board of Directors as appropriate, and continuous improvements are carried out under the Board’s oversight.

Overview of Risk

Outside of Japan, the Otsuka group conducts business operations mainly in the U.S., Europe and Asia, including research and development, manufacturing and sales activities. In the course of these global business activities, the occurrence of risks including changes or tightening of legal regulations in each country, changes in economic conditions, political instability, and uncertainty in the business environment, could lead to stagnation in business activities or delays or cancellation of business expansion. This could have a significant adverse effect on the group's operating results and financial condition.
Also, in the event of sudden contingencies relating to geopolitical factors, it is anticipated there could be impacts related to securing the safety of employees, their family members and others, as well as employment.

Countermeasures

The Otsuka group works to mitigate risks in global expansion by assessing local business environments and business conditions and geopolitical risk impacts, and, as needed, reviewing management strategies from a long-term perspective, while ensuring relevant departments collaborate appropriately in responding to these issues.
In addition, by taking measures including formulating crisis management manuals, conducting emergency response drills through exercises, and regularly gathering and sharing risk information, the group as a whole works to improve its crisis management system.

Overview of Risk

The Otsuka group conducts business operations across various regions around the world, and it may be significantly affected by rising geopolitical tensions. In recent years, geopolitical factors have increasingly had a substantial impact on corporate activities, including the strengthening of regulations on critical information and materials between countries and regions, changes to economic security-related legal frameworks and tariff policies in various jurisdictions, and restrictions on logistics resulting from international conflicts. These developments could adversely affect the group’s profitability and supply chain.
In addition, sudden changes in international situations and the occurrence of armed conflicts would pose risks such as business restrictions, supply chain disruptions, and delays in supply in the affected regions. Additionally, instability in the foreign exchange market and sudden fluctuations in exchange rates could have a significant adverse effect on the group's operating results and financial condition.

Countermeasures

The Otsuka group closely monitors the political, economic, and social conditions in each region, establishing systems to recognize and respond to risks earlier. We regularly analyze and visualize the impact on the group's business activities, review and continuously update our BCP in planning of emergencies, and promote the optimization of the entire supply chain. Additionally, through fair, impartial, and transparent procurement policies and building good relationships with suppliers, the group strives to achieve stable procurement and supply, and stabilize the supply chain.
The group is working to minimize the impact of risks in any one region by diversifying and decentralizing procurement sources and supply bases for critical raw materials especially. Furthermore, the group prepares response measures in advance for risk occurrences and establishes systems to review business structures and rebuild supply networks flexibly as needed. In response to tariff policies in various countries and regions, the group is working to optimize its production and supply structures while gathering the latest information and assessing the potential impact on the group.