This section describes material risks identified by the Kyowa Kirin Group as of December 31, 2020. 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 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, the Group is aiming to reinforce its global management structure to facilitate seamless cooperation between business divisions and affiliates on a global level. Establishing a robust production system and enhancing quality assurance systems will be key to creating a platform that ensures those objectives are fully realized. Consequently, the Group is tackling Risks Related to Product Quality and Risks Related to Stable Production and Supply as material risks, as described in key mitigation measures below.

Risks Related to R&D

Details of risks and expected main impacts
In R&D, the Group is aiming to create new medical value and accelerate drug discovery by combining its existing portfolio of technologies with the latest advances in disease science. The Group’s technology strategy is to build a drug discovery platform that uses next-generation antibody technology and other various modalities, while its disease area strategy is to combine insights into disease biology with its technologies to develop a steady stream of new drugs that address unmet medical needs. 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 expenses 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 actively working on strategic partnering activities (in-licensing, tie-ups, etc.) to drive open innovation drug discovery with industry, government agencies and academia, and to acquire platform technologies and pipeline assets. In 2020, the Group launched a collaboration 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 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, aiming to identify novel drug discovery targets for the Group’s proprietary next-generation antibody technologies and explore new disease applications.

Risks Related to Healthcare Cost-Control Policies

Details of risks and expected main impacts
Japan and other countries are tightening control of healthcare costs. In addition to reducing prices of original drugs, governments are encouraging wider use of generic drugs as part of efforts to reform healthcare systems. These trends may have a negative impact on the Group’s business performance and financial position. In addition, while innovative new drugs are still likely to be valued in this environment, 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 monitors healthcare policy trends in each country while also forecasting post-launch pricing for development compounds and their anticipated impact on revenue. The Group also works to prepare strategic drug approval packages that highlight the practicality and novelty of the drug.

Risks Related to Parent and Group Company Management

Details of risks and expected main impacts
In January 2020, the Company received a report from its Group Investigation Committee, which was led by a third party, into the voluntary recall of an antiemetic agent (Mitomycin-C) in 2019. Based on the report’s recommendations, the Company formulated measures to prevent any recurrence of issues that prompted the recall. The Company also formulated a specific improvement plan with three key objectives – create a strong production and quality assurance system, improve risk management, and reform corporate culture, as management’s top priority – while also strengthening the Group’s governance to prevent any recurrence. 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
To enhance risk management, the Group is working to improve its ability to respond to new and materializing risks through a number of initiatives, such as running workshops for all executives and management-level employees to strengthen enterprise risk management capabilities, and identifying material issues (materiality) that the Group needs to address over the medium and long term. The Group also aims to improve crisis management capabilities by conducting crisis training drills in Japan and overseas. 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 Compliance 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 or an internal audit by a national authority find a serious GMP issue, the regulatory authority may issue instructions for production 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 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 GxP Audit & Regulatory Compliance Department as an 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, anomalies, complaints, corrective and preventative actions, modifications, audits, etc.) are all managed electronically.

Risks Related to Stable Production and Supply

Details of risks and expected main impacts
In FY2020, the Group’s overseas revenue ratio reached 48%, spurred by strong growth in sales of global strategic products. With the overseas revenue ratio expected to rise further, stable supplies of the Group’s products could be affected by a failure to more accurately predict demand in each region or an inability to increase supply capacity further at proprietary plants or through cooperation with contract manufacturers and other suppliers, which may erode trust in Kyowa Kirin as a pharmaceutical company, depress revenues or lead to delays in new drug applications.

 

Key mitigation measures
The Group is introducing 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 enable quick adjustments to supply-demand from the perspective of profitability, in line with business plans. 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 Division.

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 and technology partnerships or joint ventures, and 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, depress revenues or lead to delays in new drug applications.

 

Key mitigation measures
The Group requires suppliers to ensure thorough compliance in accordance with compliance clauses in business contracts. Furthermore, the attitudes and actions required of the suppliers that make up the Group’s supply chains are stipulated in the Supplier Code of Conduct and are understood by suppliers. In addition to conducting questionnaire surveys on the items described in the Supplier Code of Conduct and feeding the results back to suppliers, the Group is working on activities designed to ascertain the actual status of compliance activities and improve the status of those activities. Based on responses from the questionnaire surveys and remedial activities by suppliers, the Group objectively evaluates supplier risk in conjunction with risk information from external supplier databases.

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, such as introducing technology countermeasures in response to cybersecurity threats that are becoming more diverse and sophisticated each year, and developing playbooks that include information such as the recommended initial response flow in the event of an incident and procedural manuals. The Group is also working to mitigate risks at suppliers, including verifying security measures. In 2020, the Group conducted an emergency response drill simulating the leak of personal information governed by the General Data Protection Regulation (GDPR), an EU data protection law, and another drill simulating a global cybersecurity incident. The aim of the training is to improve the Group’s ability to rapidly respond to and minimize damage from information security incidents.
     To enhance information security in home working environments, the Group sends notifications to remind employees about security and shares information about actual information security incidents as part of workplace housekeeping. It also uses remote networking tools to have multiple people check work processes in each team.

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 standards regarding pharmaceutical promotion. Failure to comply with these laws, regulations and voluntary standards could result in sanctions that delay or halt the development of new drugs, or restrict or halt 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 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 standards. To strengthen compliance, each Regional CSR Committee, which convenes on a quarterly basis, and the Group CSR Committee, which meets annually, promote continuous improvement by discussing progress made with measures to address important issues and reporting to the Board of Directors the status of compliance. The Group has also put in place a whistle-blowing hotline to prevent or detect and correct at an early stage any acts that would be in violation of the Group Code of Conduct or that could significantly impair the Group’s brand value.
     To ensure every employee upholds the highest ethical standards in line with the Group’s values and Code of Conduct, the Group collected data from an employee questionnaire survey and from director resolutions in 2020 to ascertain which areas of the Group’s corporate culture needed to change, and implemented measures to modify behavior.

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 adversely affect the continuation of its business activities.

 

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. Kyowa Kirin has established a Talent Review Council to ascertain the Group’s current supply-demand gap in personnel and discuss what each division needs to do to provide more opportunities to maximize the capabilities of each employee, based on the future vision for the Group’s organization. In addition, Kyowa Kirin runs a training program to cultivate the next generation of business leaders from a pool of potential personnel. The Group assesses and screens the employees, identifies preferred candidates early on and assigns them to challenging assignments, including overseas roles.

Risks Related to the Environment

Details of risks and expected main impacts
The Group recognizes that climate change is an issue that affects its business activities. Climate change-related abnormal weather patterns that cause spikes in materials prices and frequent flood damage may impact stable supplies of the Group’s products. 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
The Group is currently formulating a roadmap to reduce its greenhouse gas emissions over the medium and long term. 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 100% hydropower electricity supply service that generates zero CO2 emissions. Going forward, the Group will explore the use of renewable energy at other business sites, targeting 100% renewable energy usage by 2040. Looking further ahead to 2050, the Group will seek to convert plant facilities from fossil fuel use to hydrogen and other new energy sources and work to reduce greenhouse gas emissions in its supply chain, aiming to achieve net-zero greenhouse gas emissions across its entire value chain. In addition, the Group has declared its support for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The Group is expanding information disclosure in line with the recommendations, focusing on climate change-related risks and opportunities and the expected impacts on business activities.
* Electricity payment plan provided by Tokyo Electric Power Company Energy Partner Inc.

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 centers 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. In 2020, the Group conducted a BCP drill simulating a very large typhoon traversing Japan. Lessons
learned during the drill are being used to continually enhance the BCP.

Risks Related to Pandemics

Details of risks and expected main impacts
Novel coronavirus (COVID-19) infection disease has spread worldwide since early 2020, leading to a global pandemic. Depending on the scale of the current and future pandemics, the Group’s head office, plants, research centers and other business sites could be forced 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 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
In January 2020, the Group activated its Crisis Response Teams to ensure business continuity in response to the COVID-19 outbreak. Focusing on reducing the risk of infection, 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, every effort is being taken to ensure the safety of employees that need to attend work, including those in the Production Division, such as temperature checks, face masks, social distancing, divided indoor spaces and air purification. 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 and promotional activities are being moved to digital channels. The Group is positioning home working as one of its work practice reforms and is switching to digital tools and systems, which is helping to lift productivity.