Business Risks

With respect to the matters stated in the securities report concerning the status of operations and financial accounting, etc., management is aware of the following principal risks that may materially affect the financial status, business results, and cash flows of the consolidated companies.

Biotechnology-related industries cover a wide range of product fields such as the fields of regenerative medicine/gene and cell therapy, etc. as well as research support fields for the purpose of basic research and biologics development whose direct target customers are universities, public research institutions, companies, and commercial labs, plus an array of other fields covering the environment, energy, food, and information.

Under these circumstances, the Group conducts extensive R&D, which it considers important in maintaining its competitive edge. However, there is no guarantee that R&D will make progress as planned. Clinical development, especially in the field of gene therapy, requires long periods of time, and any delays in R&D may affect the Group’s business strategy and performance.

In addition, the business environment surrounding the biotechnology industry has been changing dramatically. Since the business environment of the Group may be significantly affected by new technological innovations, new entrants and other matters, there is no guarantee that the R&D currently underway will produce the anticipated results. As a result, the Group could fail to meet its revenue projections.

The Group conducts business operations such as R&D, manufacturing, and sales in regions that include North America, Europe, and Asia (mainly China). Significant changes concerning the economic, political, or social climate in these countries and regions, the occurrence of problems concerning international taxation, such as transfer price taxation systems, may affect the Group’s business strategies and performance.

In addition, most of the reagents that form the product mainstay of the Group are manufactured by the China-based subsidiary Takara Biotechnology (Dalian) Co., Ltd. Changes in the earnings trends of this subsidiary, a suspension of business activities for any reason, or other factors may affect the Group’s business strategies and performance. In light of this risk, while giving consideration to balancing efficiency gains and risk reduction, the Group will establish a global, multi-polar manufacturing and R&D system.

The Group holds a unique position in the industry with a stable revenue base, a solid presence in the Asian market, and an extensive line-up of proprietary technologies.

However, the manufacture, sale and provision of reagents, instruments and contract services for research do not require the licensing and approvals needed for pharmaceuticals and medical instruments, and in the absence of barriers such as patents, entry into the field is relatively easy. Accordingly, a large number of competitors exist in the market, both in Japan and overseas.

In the field of gene therapy, advances in technology have resulted in the development of therapies that excel in safety and performance, and acquisitions for manufacturing and sales approval have begun overseas. In this burgeoning market, many enterprises are conducting R&D for gene therapy, including biotechnology ventures and pharmaceutical companies in the U.S. and Europe.

Under such circumstances, the Group is developing technologies and products on a proprietary basis or in cooperation with universities and other outside organizations and enterprises. If competitors commercialize similar products and advance in the fields of technology first, the product development and performance of the Group may be affected. In light of this risk, the Group protects its technology and product developments through intellectual property rights in order to achieve exclusivity or differentiation, and will strive to maintain price competitiveness by promoting cost reductions and strengthening its manufacturing systems. 

While the Group’s business is based on R&D, new technological innovation and the emergence of new market players are having a significant influence on the biotechnology industry. Therefore, to maintain its competitive edge, the Group considers it essential to secure outstanding human resources with specialist knowledge and skills. Nevertheless, in the event that the Group is not able to secure human resources as planned or its personnel leave the Group, its business strategy and performance could be affected. In light of these risks, the Group is making efforts to promote diversity and a healthy work-life balance while also creating safe and comfortable worksites and working environments.

Based on contracts with customers, the Group recognizes upfront payments as revenue at the time when licensing rights are granted to customers, and recognizes milestone payments as revenue at the time the conditions prescribed by the agreement are satisfied, which are when performance obligations are determined to be satisfied. However, owing to the complexity of contracts, etc., there is a risk of error in the timing of revenue recognition, which may affect the Group’s business performance. In light of this risk, the Group is working to enhance its internal controls and is conducting checks through its internal auditing department and finance department.

The Group recognizes sales of CDMO as revenue when control over deliverables is transferred to the customer, such as acceptance, receipt or shipment according to the contract, which is when performance obligations are determined to be satisfied. However, owing to the complexity of contracts, etc., there is a risk of error in the timing of revenue recognition, which may affect the Group’s business performance. In light of this risk, the Group is working to enhance its internal controls and is conducting checks through its internal auditing department and finance department.

The Group may raise funds to cover rising financing demand for R&D expenditure, capital expenditure, working funds, etc., to accommodate the Group’s new business launches and expanding business scale. However, if financing does not proceed as planned, it may affect the Group’s business strategies and performance. In light of this risk, the Group works to maintain and strengthen its sound financial position and obtains its rating as well as conducts timely reviews of its financial planning based on the latest information.

Expenses, revenue, and trade receivables and payables arising from foreign currency transactions undertaken by the Group are exposed to currency exchange rate fluctuation risk. In light of this risk, the Group enters into exchange contracts, carrying out other hedging transactions in order to reduce the risk of exchange rate fluctuations.

Furthermore, items such as the revenue, expenses and assets of overseas consolidated subsidiaries are calculated in yen for the preparation of the consolidated financial statements, but fluctuations in the exchange rate at the end of the fiscal year may affect the Group’s management performance.

The Group possesses a variety of property, plant and equipment that serve the purposes of its businesses, and intangible assets such as goodwill associated with corporate acquisitions and technology assets. In the event that production equipment is left idle by a sudden change in the business environment, or owing to a decline in utilization rates, the failure of an acquired business to meet initial projections, or other factors, an impairment loss arises, it may affect the business performance of the Group. In light of this risk, the Group follows up on acquired businesses in order to realize post-acquisition synergies and regularly monitors the macroeconomic environment.

If any important contracts for the business development of the Group ends owing to the expiry of the contract term or cancellation or for some other reason or if revisions to the agreements are disadvantageous to the Group, it may affect the business strategy and performance of the Group.

In the biotechnology-related industry, where the success or failure of R&D is directly linked to the success or failure of business development, the Group protects its technologies with patents in order to exclude competitors. The Group will continue to place the highest priority on applications for patents and acquisition of rights when proceeding with R&D activities. However, not all applications may be successfully registered, and if a registered patent right becomes invalid or expires, for example, the Group’s business strategies and performance may be affected.

Moreover, the Group intends to acquire promising patent rights held by others, or acquire licenses for the patent rights, to enable future expansion of its business. However, these strategies may incur large expenses. In addition, there is a possibility that the Group may not be able to acquire licenses for necessary patent rights held by others, and this could affect the Group’s business strategy and performance.

All of the products and merchandise that the Group handles pose an inherent product liability risk. The Company has bought product liability insurance in preparation for this. If any defect is found in a product during its manufacture or sale, or during the clinical trial process, or if a health impairment is caused by any pharmaceutical product, medical devices, in vitro diagnostics, regenerative medicine products, or research reagents, investigational products used in clinical trials, or specific cell-processed product, when the Company assumes large-scale product liability whose amount of compensation is over the coverage of the insurance, then the Group may be subject to product liability claims, and this may affect the promotion of the Group’s business strategies and performance.

In addition, it is usual practice to conduct a voluntary recall when any problem arises with these products in view of the possible physical effects and damages, and any such recall may require significant time and entail expense.

In advancing research and development, the Group is subject to related laws and regulations such as the Act on the Prevention of Radiation Hazards due to Radioisotopes, etc., and the Act on the Conservation and Sustainable Use of Biological Diversity through Regulations on the Use of Living Modified Organisms (“Cartagena Act”), and the Group is committed to observing these laws and regulations. In addition, in the production, sale, and trade of reagents, etc., the Group is required to follow relevant legislation, such as the Poisonous and Deleterious Substances Control Act and the Quarantine Act. However, since reagents are neither pharmaceutical products nor regenerative medicine products as defined by the Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices (hereinafter “Pharmaceuticals and Medical Devices Act”), said laws and regulations are not applicable. However, if these regulations are tightened or new regulations are introduced following expansion, etc., of the supporting research industry, it may affect the Group’s business strategies and performance.

Moreover, in vitro diagnostics being developed and sold, and gene therapy products being developed by the Company are subject to related laws and regulations, including the Pharmaceuticals and Medical Devices Act, and approvals or permits from the relevant authorities are required for commercial activities. Failure to obtain such approvals or permits for individual projects being researched or under development by the Group may affect the Group’s business strategies.

The Group is not a party to any serious litigation or claim with third parties related to the Group’s business. However, litigation may be brought against individual Group companies, and the Group’s business strategies and performance may be affected by the litigation itself as well as by its outcome. In light of this risk, the Group is endeavoring to enhance internal controls and compliance in the pursuit of its business activities in Japan and overseas.

In addition, the Group conducts examinations relating to intellectual property rights at its discretion in its business development. The Group is aware of no fact of a product, etc. of the Group infringing another person’s intellectual property right. However, it is difficult for R&D companies such as the Group to entirely avoid patent right infringement problems, in particular. If a pertinent infringement issue arises, the Group may be subject to claims to damages, injunctions, or royalty payments, which may affect the Group’s business strategies and performance. 

Furthermore, if the Group’s business partners or licensors are involved in disputes, the Group may no longer be able to sell the relevant products or may itself become involved in litigation. Resolving such a case can be time consuming and costly, which may affect the Group’s business strategies and performance.  

The Group’s business activities may be impeded owing to physical and human damages caused by natural disasters such as storms, earthquakes, lightning strikes, floods and droughts, by fires or other accidents, or by worldwide pandemics of infectious disease. In light of such risks, the Group conducts inspections and training, and creates communication systems and business continuity plans (BCP) to minimize damage suffered in such cases.

In order to comprehensively resolve environmental issues such as climate change, resources and energy, it is necessary to take corporate action such as the reduction of greenhouse gases (GHGs) and the promotion of energy-saving activities. The Group has established the “Takara Bio Group Sustainability Management Promotion Policy” and is engaged in resolving issues. Meanwhile, if regulations on greenhouse gas emissions such as a carbon tax and emissions trading systems are introduced in regions where the Group conducts business in future, these may affect the Group’s business strategies and performance.

The Group endeavors to stringently manage confidential information and personal information it possesses. However, if a problem arises owing to a leak of such information, this may affect performance such as reducing competitiveness or social credibility. Furthermore, the Company takes a variety of defensive measures against cyberattacks and has bought cyber insurance, but in the event a problem arises in research and development, manufacturing or information systems, this may affect the Group’s performance.

As of March 31, 2023, Takara Holdings is the parent company of the Company, owing 60.93% of the voting rights in the Company. The relationship between the Company and Takara Holdings is as follows.

The extraordinary general meeting of shareholders of Takara Shuzo Co., Ltd. (hereafter referred to as “Takara Shuzo,” now Takara Holdings), held on February 15, 2002, approved the establishment of Takara Shuzo and the Company on April 1, 2002 through a corporate split, with each company becoming a wholly owned subsidiary of Takara Holdings. (Since then, Takara Holdings decreased the ownership of voting shares in Takara Bio to 60.93% through a third-party allotment of new shares by private and public offering.)

The Takara Holdings Group consists of Takara Holdings, which is a pure holding company, and its 63 group companies (61 subsidiaries and two affiliates). Within the Group, the Company is positioned as an operating subsidiary specializing in biotechnology, and conducts biotechnology business along with the Company’s eight group companies (subsidiaries).

Takara Holdings has established and operates the Takara Holdings Group Company Management Rules from the standpoint of consolidated business management. Its objective is to maintain the independence and autonomy of the Takara Holdings Group companies while seeking to maximize the corporate value of the entire Takara Holding Group. The Company is also subject to these regulations and reports to Takara Holdings on matters resolved by its Board of Directors.

However, since prior approval for its Board of Director’s resolutions is not required, the Company is left to operate as an independent business.

1) Real estate lease transactions related to sales sites

Real estate lease transactions exist with Takara Shuzo in Takara Holdings Group. The sales sites leased by the Company among the relevant lease transactions are as follows, and in the event of difficulties in the renewal of these transactions, Group revenue could be temporarily affected and relocation expenses incurred until the Company is able to secure an alternative site.

2) Transactions related to use of trademark rights

The Group has concluded trademark licensing agreements with Takara Holdings with regard to the trademarks it uses, which are owned and controlled by Takara Holdings, and makes trademark usage payments per trademark. As of March 31, 2023, the Group has licenses for the use of 64 registered trademarks and a pending trademark in Japan and overseas. 

In the event that the Group is unable to obtain licenses for the use of trademarks from Takara Holdings, it might affect the Group’s business strategies and performance. 

3) Transactions related to outsourcing of computer-related services

The Company has concluded agreements with Takara Holdings on the outsourcing of computer-related services and the lease of equipment.

In the event of difficulties in the renewal of these transactions, it might affect the Group’s business strategies and performance.

4) Other

The Group purchases packaging materials from Takara Holdings Group companies (excluding Takara Bio Group companies).
In the event of difficulties in the renewal of these transactions, it might affect the Group’s business strategies and performance.