Japanese generics business

Review of the first year as president
Simultaneously addressing inappropriate testing and strengthening production capacity

I would like to express my deepest apologies to all related parties for the substantial problems caused by the inappropriate stability monitoring dissolution testing of Teprenone Capsules 50mg “Sawai” at Sawai Pharmaceutical’s Kyushu Factory that was discovered in April 2023.

This incident came to light just as I took up the position of president, and since then, I have addressed it through such steps as conducting an in-house investigation, disclosing the results of the investigation outside the Company, providing explanations to business partners and other parties, and holding dialogues with employees. We are now making steady progress in implementing recurrence prevention measuress in order to regain trust as soon as possible.

At town hall meetings held as part of recurrence prevention measures, I communicated my honest opinion to employees in the various departments and answered numerous questions. Since moving from Senior Vice President of the Manufacturing Division to President, I have uncovered issues related to conditions at several divisions, including the Reliability Assurance Division, Research & Development Division, and Marketing Division, by gathering information, and I am working to resolve those problems while incorporating ideas from the workplace into management.

At the same time, we worked to enhance production capacity to eliminate the generic drug supply shortage through two initiatives. The first was the launch of Trust Pharmatech, which was planned since I was Senior Vice President of the Manufacturing Division and involved the transfer of Kobayashi Kako production facilities and 400 employees. The second was the construction of a new solid dosage form facility at Daini Kyushu Factory. Because both projects progressed as planned, we increased our production capacity by 5.0 billion tablets. However, as of May 13, 2024, there continued to be limited shipments of 249 items, and thus we still have a responsibility to meet the expectations placed on Sawai Pharmaceutical to dramatically improve the situation and provide a stable supply.

Bright signs as pricing policy and interdepartmental collaboration boost business results

In fiscal 2023, our Japan generic drug business revenue rose 8.0% year on year due to growth in sales of products launched since fiscal 2022. In addition, core operating profit increased 11.7% year on year despite the impact of higher energy and sales costs.

Revenue / Core operating profit

The improved business results are due to increased revenue, the revised distribution pricing policy, and implementation of a pricing policy that reflects increased costs into the wholesale acquisition cost, particularly for low-priced items.

As for the pricing policy, the Marketing Division has spearheaded earnest negotiations to win the understanding of business partners. On the other hand, even after the inappropriate testing was discovered, the Manufacturing Division not only conducted normal production but also worked hard on future-oriented activities, including collaborating on the launch of Trust Pharmatech and addressing construction of the new solid dosage form facility at the Daini Kyushu Factory. Furthermore, with the 2024 drug pricing reforms, there were special increases in the price of unprofitable drugs^* based on requests by companies for recalculation in response to the sudden rise in raw material prices and stable supply problems. Our head office tenaciously negotiated with government authorities regarding the recalculated prices and the Manufacturing Division compiled and provided the data necessary for those negotiations. In this way, the Marketing Division, Manufacturing Division, and head office departments were able to work together, just like a well performing orchestra, and I think this facilitated the fiscal 2023 business results.

However, one issue that we face is the increase in raw material prices, which is likely to continue for a while. There are limits to the extent that cost increases can be covered by cost cuts through increased productivity, which means we will have to continue to implement pricing policies. Furthermore, we will work to ensure earnings by increasing production capacity and launching better products at the right time.

• *These are prescription drugs for which the Ministry of Health, Labour and Welfare determines it is appropriate to raise or maintain the current NHI drug price because its price is clearly low despite its importance for healthcare.

Generic drug industry environment

Social issues

Quantitative targets and outline of the drug pricing system reform in April 2024

Steadily implementing recurrence prevention measures and focusing on talent and system development to restore trust

It is important to reform our corporate culture to ensure that recurrence prevention measures take root and avoid such incidents as inappropriate testing from occurring again. One such recurrence prevention measure is the Corporate Culture Reform Project, a project directly under the supervision of the President. Project-related information, including its progress, is also available on the Sawai Pharmaceutical website at all times. Furthermore, I explain to all business partners and other stakeholders I meet the progress we have made in implementing recurrence prevention measures.

At town hall meetings, a venue for direct dialogue with employees, I have explained to MRs, who communicate with medical institutions, our progress with production workplace improvements and recurrence prevention measures. MRs use this information to answer questions from medical institutions.

It is necessary to properly develop talent and systems to prevent recurrences. As for system development, the R&D Division is moving forward with optimizing high-mix, low-volume production and further improving quality, starting with high-priority products.

In my opinion, one of the reasons for the inappropriate testing was that work and knowledge depended on particular individuals. Therefore, we are moving forward with digital transformation both to prevent incidents such as the inappropriate testing from occurring by ensuring work does not become dependent on a particular individual, and to improve production and quality efficiency. For example, in the new facility of the Daini Kyushu Factory, we introduced a system that automatically enters data from analysis equipment and makes necessary calculations, eliminating human involvement as much as possible. We will gradually introduce this system into other factories. At the Kanto factory, where it has already been introduced, this system has eliminated mistakes and improved test efficiency, leading to stable operations. A similar DX is underway in the Quality Assurance Department, and we plan to quickly introduce a quality control system that makes it possible to visualize progress with such operations as deviation management and CAPA in fiscal 2024.

We will only restore trust when our efforts have won the praise of outside stakeholders. As we are now still on the path to restoring trust, we must make our efforts to continue to firmly implement recurrence prevention measures and communicate those results to parties outside the Company. In an emergency, what you do in normal times will come into play. After returning to normal times, it is important to continue to maintain our determination to prevent such an incident from ever occurring again.

Taking the lead to establish a trusted corporate foundation and generate business growth

At the start of the Medium-Term Business Plan START 2024 in 2021, the generic drug business was in a precarious position because of annual drug price revisions. Looking back at that time, we made progress with enhancing the production system as planned, and we were able to boost earnings to a certain extent. Furthermore, we saw positive signs for the future in the final year for various reasons, including having introduced pricing policies to achieve a long-term stable supply and having our opinions reflected in price recalculations for unprofitable items.

In the new Medium-Term Business Plan Beyond 2027, which was announced in June 2024, we position the period of the plan as a time to concentrate management resources to ensure quality and expansion of production capacity, and to establish a system for growth in the current Medium-Term Business Plan and great strides in the next. We will make the next round of investments to improve productivity at Trust Pharmatech and respond to further increases in demand at the Daini Kyushu Factory with an eye toward increased production capacity of 3.5 billion tablets, compared to the initially planned 3.0 billion tablets, resulting in overall production capacity of 22.0 billion tablets. It is necessary, however, to enhance production capacity even more in order to increase our share of the Japan generic drug market from the current approximate 17% to our target of 25% or more by fiscal 2030. In addition to our own production, we will likely examine flexibly partnering and collaborating with other generic drug companies.

Expanding in-house production capacity toward FY2030

Note: For the current number of items, it is assumed that the machines are kept running in two shifts per day on weekdays for the current number of items. Contract manufacturing is not included.

Another important topic is the steady development and launch of new products. A medium- and long-term strategy that includes a patent strategy for R&D is critical, as the usage ratio of generic drugs has reached more than 80% and development of new products is becoming more difficult. When it comes to decisions regarding what to develop and launch, rather than having individuals make them, I believe that it is important that we make them systematically by sharing and organizing our development portfolio within the organization.

To achieve that, the most important measure is securing and developing talent, and in the new Medium-Term Business Plan, we have positioned “creating talent that supports sustainable growth” as a key theme. We are focusing on securing talent by strengthening recruiting, as well as making efforts to retain employees, including introducing a mentor system and reviewing personnel allocations at factories. To raise the level of young employees, it is important to improve compensation. We must also be thorough about providing education, particularly GMP and compliance education.

The period of the new Medium-Term Business Plan is an important one for putting us on the path to achieve our long-term vision, the Sawai Group Vision 2030. With myself leading the way, we will raise the morale of employees and move forward to both establish a trusted corporate foundation and generate business growth.

• *Revised June 2024

Senior Managing Executive Officer
Representative Director and President of Sawai Pharmaceutical Co., Ltd.