This section describes material risks identified by the Kyowa Kirin Group as of December 31, 2021. The Group defines risks as factors that could have an uncertain impact on business targets, including both threats and opportunities.

 

However, the Group may face other unforeseen risks caused by changes in internal and external conditions. In addition, the domestic and overseas pharmaceutical industry faces a number of other risks to its business activities. These include, but are not limited to, risks related to intellectual property rights, risks related to product side-effects, risks related to legal disputes, risks related to competition and patent expiry, risks related to fluctuations in fuel costs, risks related to fluctuations in exchange rates and financial markets, and country risk, which could all have a negative impact on the Group’s business performance and financial position.

Risks Related to Maximizing the Value of Global Strategic Products

Details of risks and expected main impacts

The Kyowa Kirin Group is working to maximize the value of three drugs that have been positioned as global strategic products – Crysvita, a treatment for X-linked hypophosphatemia, Poteligeo, an anticancer agent, and Nourianz (product name in Japan: Nouriast), an antiparkinsonian agent. However, delays to sales area expansion caused by setbacks in market launch preparations, slow progress with market penetration due to difficulties in identifying potential patients, sharply lower-than-expected sales due to a shortfall in projected product prices in new markets, and impediments to stable supplies caused by quality issues, manufacturing problems and other issues, may prevent the Group from attaining its business targets.

 

Key mitigation measures

To maximize the value of global strategic products, the Group is implementing initiatives to spur market uptake and expanding its business reach, centered on the US and Europe. In addition to a global management framework that facilitates seamless cooperation between functions (divisions) and regions (affiliates) on a global level, the Group has appointed personnel to take responsibility for each global strategic product. This person leads a cross-function/region team that works together to draft and execute strategies to maximize the value of each product. Regarding issues with quality and manufacturing, key mitigation measures are outlined in the Risks Related to Product Quality and Risks Related to Production and Stable Supply sections below.

Risks Related to R&D

Details of risks and expected main impacts

In its R&D, the Group pursues the ongoing creation of groundbreaking pharmaceutical products and has established the following strategies centered on technology, disease, and open innovation.


(1) In addition to its ongoing quest to drive advances in antibody technologies, the Group will build a platform for creating breakthrough drugs by making full use of diverse modalities.
(2) The Group will continue to provide ”Only-one value” drugs to address diseases that currently have no effective treatment while drawing on achievements cultivated to date in disease science (in the areas of nephrology, oncology, immunology and allergies, and the central nervous system).
(3) The Group will continue to incorporate external innovation through advanced open innovation activities, fusing collaborative research activities with academia, startups, and other partners (information gathering in the San Diego area, etc.) with early access to information by means of venture capital fund investments.


However, in the process of developing new drugs over long periods of time, there may be cases where R&D has to be abandoned, for example if expected efficacy is not confirmed or for safety and other reasons, which may prevent the Group from expanding its drug pipeline and undermining growth potential and profitability.

 

Key mitigation measures

The Group is actively stepping up investment in R&D (aiming for an R&D expense ratio of 18–20%) to identify the next global drug candidates and take other steps to reinforce its pipeline of new drugs to support future growth. In addition, to complement proprietary research, the Group is also focusing on open innovation activities involving partners from across industry, government, and academia, including active strategic partnering (in-licensing, tie-ups, etc.) to acquire platform technologies and pipeline assets. For instance, since 2020, the Group has been collaborating with Axcelead Drug Discovery Partners Inc., a drug discovery solutions provider formed by the spinout of Takeda Pharmaceutical Company Limited’s drug discovery platform business. The aim of the tie-up is to combine Axcelead’s long-established, extensive technologies and expertise in small-molecule drug discovery with the Group’s own innovative drug discovery technologies, thereby building a small-molecule drug discovery platform and using this technology to broaden the R&D pipeline with groundbreaking new compounds. The Group is also extending its R&D alliance with InveniAI LLC, a US company providing AI and machine learning applications, identifying, assessing, and optimizing novel drug discovery targets that complement the Group’s proprietary next-generation antibody technologies.

Risks Related to Healthcare Cost-Control Policies

Details of risks and expected main impacts

The trend toward tighter control of healthcare costs is increasing in Japan and elsewhere. Efforts to reform healthcare systems in various countries involve reducing prices of branded drugs and encouraging wider use of generic drugs. These trends may have a negative impact on the Group’s business performance and financial position. In this context, while being innovative is important to the successful reception of a new drug, delays to the development of practical, groundbreaking new drugs may undermine the Group’s growth potential and profitability.

 

Key mitigation measures

The Kyowa Kirin Group closely monitors healthcare policy trends in each country while also forecasting post-launch pricing for development compounds and evaluating their impact on revenue. To deliver life-changing drugs that meet the needs of patients, the Group is also exploring the formulation of strategic data packages that highlight the scientific basis for the value of such drugs.

Risks Related to Parent and Group Company Management

Details of risks and expected main impacts

For the Group’s business as a Global Specialty Pharmaceutical Company to grow, robust risk management for Kyowa Kirin and its Group companies is management’s top priority. Since 2020, the Group has been working to enhance governance, and launched an improvement plan with three key objectives: creating a strong production and quality assurance platform, improving risk management, and reforming the corporate culture. In the event that these measures are not fully effective, trust in the Company as a pharmaceutical manufacturer may be eroded if production, sales and other business activities are restricted or halted due to emerging risks.

 

Key mitigation measures

Improving risk management aims to achieve Group-wide risk management that can anticipate the future and take preventative measures. To this end, the Group holds workshops for all executives and managers at the head office as well as workshops with overseas regional head offices, stages ongoing crisis and business continuity plan (BCP) drills across regions in Japan and overseas, and deliberates on material issues (materiality) that are both risks the Group needs to address over the medium and long term as well as opportunities. Through these actions, the Group is working to heighten its ability to respond to new and potential risks. Please refer to Risks Related to Product Quality for details about how Kyowa Kirin is building a robust quality assurance system and Risks Related to Human Resources for details about corporate culture reforms.

Risks Related to Product Quality

Details of risks and expected main impacts

Pharmaceutical manufacturing requires facilities (hard assets) and procedures and people (soft assets) that are compatible with good manufacturing practice (GMP). Should a GMP inspection by a national authority or an internal audit find a serious GMP issue, the regulatory authority may issue instructions for production or shipments to be suspended. In addition, if for any reason there are any concerns about the safety or quality of the product with regard to raw materials or manufacturing processes used to make the product, these may give rise to a suspension of shipments or product recall.

 

Key mitigation measures

The Group’s quality assurance functions are centered on the Global QA Head, who reports directly to the President and guides quality assurance activities in each region. Specifically, the Global Quality Assurance Committee, regular and ad hoc Global Product Council and other quality assurance bodies discuss critical quality-related issues reported by key regional subsidiaries, evaluate quality performance at newly selected manufacturing sites, regularly assess product quality, review the activities of global taskforces established to address specific issues, and monitor issues identified in audits and progress with related response measures. The Group has also established a global, independent specialist audit unit to reinforce product quality audits within the Group and at contractors. In addition, the Group is introducing an electronic Quality Management System (eQMS) to appropriately manage and utilize large volumes of quality assurance information on a global level and to drive continuous improvements in processes and reliability. With eQMS, key quality management processes (education and training, document management, deviation, complaints, corrective and preventative actions, modifications, change control, audits, etc.) are all managed electronically.

Risks Related to Stable Production and Supply

Details of risks and expected main impacts
In cases where detailed, accurate demand forecasts in various regions are impossible; where it is impossible to maintain supply capacity with the Group’s proprietary plants or through cooperation with contract manufacturers and other suppliers; where market supply and demand fluctuates significantly due to the supply difficulties of other companies; or in other cases, stable supplies of the Group’s products could be impeded, and resulting factors such as delays in drug launch schedules or adjustments of product shipments could erode trust in Kyowa Kirin as a pharmaceutical company or depress revenues, among other things.

 

Key mitigation measures
The Group is implementing sales and operations planning (S&OP) to optimize the entire supply chain. S&OP is being used to increase the accuracy of demand forecasting by rapidly identifying changes in product sales and needs, and to achieve a supply-demand balance and enable quick adjustments in line with business plans. The Group has visualized demand for global strategic products using a supply-demand planning system. In addition, to respond to spikes in demand and tight supply-demand conditions, the Group is expanding its network of contractors, investing in Group plants, rolling out digital technology to enhance manufacturing operational efficiency, and increasing headcount and upgrading training systems in the production and quality assurance divisions.

Risks Related to the Management of Suppliers and Contractors

Details of risks and expected main impacts
The Group enters into alliances with other companies, in the form of joint development projects, joint marketing, technology partnerships and establishing joint ventures, and it also outsources operations related to the supply of raw materials for pharmaceutical products, production, logistics and marketing to other domestic and overseas suppliers. However, if the alliances and outsourcing contracts fail to deliver the expected results or are dissolved due to issues related to human rights, legal compliance, the environment, information security, or if there are quality issues with contracted deliverables, the Group could face difficulty securing stable supplies of its products or issues in logistics and sales, which may erode trust in Kyowa Kirin as a pharmaceutical company, lower revenues, or lead to delays in new drug applications.

 

Key mitigation measures
The Group is seeking to conduct open, fair CSR-based procurement in line with the Kyowa Kirin Group Procurement Policy, which states its commitment to pursue CSR procurement together with suppliers to ensure stable supplies of high-quality products. In addition, the Supplier Code of Conduct sums up the seven areas where the Group calls for understanding and cooperation from suppliers: relationships with society, relationships with employees, compliance with rules, respect for human rights, environmental preservation, information management, and risk management. Contracts with suppliers carry a CSR clause, which includes compliance with the Code of Conduct, and the Group carries out CSR questionnaires to confirm compliance with the Code, publishing the results. The Group also obtains risk and credit background data from external organizations and conducts supplier assessments based on objective information. The Group will continue to obtain similar information in the course of transactions as needed, and confirm with a supplier when there is any cause for concern. In addition, the Group promptly shares the risk information it obtained with relevant divisions and works together to mitigate risk, including requesting corrective action from suppliers or considering changing suppliers, as needed.

Risks Related to Information Security

Details of risks and expected main impacts
As the Group utilizes a variety of information systems, confidential information may be leaked outside the Company or systems may be rendered inoperable in the event of unauthorized system access or following a cyberattack. In addition, cyberattacks on servers at suppliers could have a negative impact on the Group, such as unauthorized access to the Group’s confidential information or personal data, interruption to the Group’s business activities, or brand damage. As explained in key mitigation measures for Risks Related to Pandemics, the move to home working is improving productivity, but the number of employees using home communication environments or working alone is rising, which increases the risk of surveillance, cyberattacks and email errors that may lead to information leaks.

 

Key mitigation measures
The Group is taking steps to upgrade information security, including technical measures to guard against cybersecurity threats that are becoming more diverse and more sophisticated each year, as well as developing playbooks that include information such as the recommended initial response flow and procedural steps in the event of a cyber incident. The Group is also working to mitigate risks at suppliers, including verifying security countermeasures. In addition, to be better prepared to mount a rapid response and minimize damage in the event of an incident, the Group is conducting crisis drills in each region to deal with ransomware and other cyberattacks. The Group is also educating employees in information security, conducting ongoing drills on handling targeted email attacks, and raising awareness by disseminating information and precautions on preventing computer viruses updated to reflect the latest cyberattack methods, both in writing and on a dedicated cybersecurity website.

Risks Related to Compliance

Details of risks and expected main impacts
The Group is required to comply with a range of laws and regulations governing pharmaceutical R&D, manufacturing, sales, imports and exports. In addition, pharmaceutical companies must strictly adhere to regulations in each country and voluntary industrywide codes regarding pharmaceutical promotion. Failure to comply with these laws, regulations and voluntary codes could result in sanctions that delay or suspend the development of new drugs, or restrict or suspend production, sales and other business activities, which may erode trust in Kyowa Kirin as a pharmaceutical company.

 

Key mitigation measures
In the Kyowa Kirin Group, compliance is not restricted to legal compliance. The Kyowa Kirin Group Code of Conduct stipulates general actions that every executive and employee must take to quickly identify and correctly gauge the needs of society and to act ethically. In addition, the Group is establishing systems and conducting continuous training to ensure compliance with laws and regulations and voluntary codes. To strengthen compliance, each Regional CSR Committee, which convene on a quarterly basis, and the Group CSR Committee, which meets annually, promote continuous improvement by discussing compliance status and progress made with measures to address important issues. In addition, the Group has set up a whistleblowing hotline to prevent or quickly detect and rectify actions that violate the Code of Conduct or that significantly damage the brand value of the Kyowa Kirin Group. Furthermore, the Group conducts an annual employee compliance awareness survey to identify potential risks, while working to mitigate risks in the early stages by confirming the facts of survey responses and responding accordingly. Survey results are also reported to the CSR Committee and Board of Directors. The Group also launched a Group compliance enhancement project in 2021. Based on the various Kyowa Kirin Group Policies that supplement the Code of Conduct, the project seeks to assess the status of efforts such as the formulation of relevant policies and procedures, education and training, and monitoring. Based on the assessment results, the Group creates a roadmap for improvement and implements measures accordingly, further raising its compliance level.

Risks Related to Human Resources

Details of risks and expected main impacts
The Group is working to embed its global management system to encourage individuals from diverse backgrounds to demonstrate their abilities and engage in business activities in Japan and overseas. However, if the Group is unable to develop and hire the personnel who will be responsible for its global management system, this may hinder the continuation of its business activities or its sustainable growth.

 

Key mitigation measures
The Group believes people are the source of innovation. In line with that thinking, the Group develops and implements human resources training plans designed to maximize the potential of its diverse workforce to cultivate personnel who are motivated to drive change and create new value. The Group also formulated a new Diversity, Equity, and Inclusion (DE&I) Statement, shared worldwide, and is moving forward with efforts to realize the strengths of teams that shine with diverse personalities. The Group is reinforcing the global human resources management framework to ensure adequate staffing, creating succession planning for each global key position and nominating next-generation candidates regardless of race, nationality, gender, or age. Going forward, the Group will strategically develop human resources to expand the pool of potential nominees, after clarifying the requirements for leadership positions and designing separate training programs for each position to be filled. In Japan, the Group will identify shortfalls in current staffing with a view to the ideal future business scale and organizational structure. The Group will also provide every employee with opportunities to draw out their maximum potential. The Group set up talent review meetings in all divisions to deliberate on staff rotation and recruitment, and is formulating and implementing appropriate plans. In addition, to cultivate managers who can lead the next generation, the Group is selecting candidates and pursuing training measures that combine assessments, attendance at nominee training, early selection, and tough assignments such as overseas postings. With regard to these various personnel initiatives, as part of its improvement plan, the Group established a Human Resources Development Committee. With the participation of executives other than those in charge of human resources, this committee thoroughly discusses ways of making initiatives even more effective. In addition, to foster the corporate culture it aspires to, the Group has established Key Behavior “Overcome Barriers” (KABEGOE in Japanese). The Group is implementing activities, such as dialogues with the President and other executives and group work, to empower all employees to overcome the barriers that divide them—all the difficulties and new challenges they face. Through employee awareness and corporate culture surveys, the Group monitors the extent to which initiatives to transform the corporate culture are gaining acceptance and taking root.

Risks Related to Pandemics

Details of risks and expected main impacts
The emergence or re-emergence regionally of new cases of COVID-19 or other infectious diseases or global pandemics could force the Group’s head office, plants, research laboratories and other business sites to close or cease business activities due to onsite infection clusters, or raw material suppliers could halt supplies and logistics may be affected. Disruption at medical facilities and other issues could prevent the Group from ensuring stable supplies of products or collecting product safety data, or delay in the provision of product information to medical professionals and progress with clinical studies. In addition, any impact on government authorities in each country could slow down new drug approvals and price negotiations, delaying the launch of new products. Under those conditions, the Group’s business performance and financial position may be adversely affected.

 

Key mitigation measures

Reducing the risk of infection is the first priority in dealing with the global COVID-19 pandemic. To this end, the Group implemented remote working as the main mode of work, including working from home, and actively introduced web meeting tools for internal and external communication to enable employees to continue their duties. At the same time, the Group is taking every effort to ensure the safety of employees that need to attend work, including those in the production, R&D, and sales divisions, such as temperature checks, face masks, social distancing, divided indoor spaces and ventilation. The Group has also made careful preparations to prevent the spread of infection in the event that an employee becomes infected and for other scenarios. Home working is also the main mode of work at the Group’s overseas businesses, but online training is being conducted to prepare for the restart of normal business activities. In terms of sales activities as well, the Group is working to create optimal customer contact points that combine in-person and digital approaches. Considering efforts to make effective use of working from home as a critical element of working style reforms, the Group set a global policy for a hybrid working model to encourage both innovation and employee well-being. The Group will boost productivity by expanding the scope of the new working styles and stepping up the pace of digitizing tasks and achieving operational excellence, while carefully tracking new case levels in each region.

Risks Related to Natural Disasters

Details of risks and expected main impacts
Natural disasters such as earthquakes and typhoons in regions worldwide could lead to the closure of the Group’s head office, plants, research laboratories and other business sites or halt business activities, potentially impacting drug discovery or clinical development, stable supplies of products, collection of product safety data, and the provision of product information, which may have a negative impact on the Group’s business performance and financial position.

 

Key mitigation measures
The Group has developed a coordinated disaster prevention plan with its business sites to ensure the safety of employees and their families in the event of a disaster. Based on the plan, the Group regularly conducts employee safety confirmation drills and safety equipment upgrades/checks. The Group has also developed a Business Continuity Plan (BCP) to continue supplies of pharmaceutical products, safety monitoring activities and the provision of product information when normal business activities are disrupted. The Group conducts BCP drills simulating a range of scenarios, including super typhoons, a massive earthquake directly under Tokyo, and plant fires. The Group is working to identify issues through such drills and continuously improve BCP. In 2021, the Group established global, all-hazard BCP guidelines and is working to enhance the business continuity framework in each region.

Risks Related to Climate Change

Details of risks and expected main impacts
Flood damage stemming from abnormal weather patterns brought about by climate change may affect all of the Group’s business activities, including stable supplies of its products and research activities. In addition, in the future, Kyowa Kirin may face additional costs from the introduction of a carbon tax or to respond to tighter environmental regulations, or fail to attain its greenhouse gas reduction targets, which may undermine the Group’s brand value.

 

Key mitigation measures
In addition to the impact on business activities, the Group considers the response to climate change (prevention of global warming) to be critical to bringing about a sustainable society. The Group drafted a roadmap for reducing greenhouse gas emissions over the medium to long term, and is moving forward with an array of initiatives across the Group. In the medium term, the Group aims to cut emissions of greenhouse gases by focusing on energy-saving measures and expanding the use of renewable energy. In 2020, the Group selected Aqua Premium* to provide 75% of power at its Takasaki Plant. Aqua Premium is a 100% hydropower electricity supply service that generates zero CO2 emissions. In 2021, the Group’s head office switched 100% of its electric power to renewable energy. The Group has also expressed support for the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. It is identifying the risks and opportunities that climate change poses to its businesses and its impacts, and is make disclosure based on the four thematic areas recommended by the TCFD: governance, strategy, risk management, and metrics and targets.
* Electricity payment plan provided by Tokyo Electric Power Company Energy Partner Inc.