Management PoliciesBusiness Risks
The following is a list of main risks that management recognizes as having the potential to significantly affect the financial conditions, management performance, and cash flows of the Sawai Group’s consolidated companies, among other matters related to the Group’s business and accounting conditions. Any forward-looking statements stated below are based on the Group’s judgment as of the date of filing of the Annual Securities Report (June 25, 2024).
1. Regulatory risk arising from the Pharmaceutical and Medical Devices Law and other regulations
The companies under the umbrella of the Sawai Group are regulated by the Pharmaceutical and Medical Devices Law and other relevant laws and regulations and are required to obtain permits, registration and licenses, as well as submit notifications in each prefecture where we do business. Although the Group has a sufficient legal compliance system in place, in the event of a violation of laws or regulations pertaining to the licensing of our pharmaceutical manufacturing and sales business, there is a possibility that the regulatory authorities may suspend our business operations, cancel our permits or take other actions affecting the financial condition and business performance of the Group.
2. Changes in Japan’s National Health Insurance (NHI) drug price scheme and healthcare system
In order to sell prescription drugs, which constitute the Group’s main products and merchandise, they must be listed under national drug price standards in Japan. With regard to drug prices, market price surveys are conducted, with many NHI drug prices reduced in line with drug price revisions as well as in consideration of policies based on actual market price. In addition, there are ongoing discussions on drug price and medical insurance system reforms aimed at optimizing rising medical expenses. Sawai pays close attention to these trends and reflects them in our management policies and strategies, however, there is a possibility that NHI drug price reduction rates or changes to the system may affect the financial condition and business performance of the Group.
3. Lawsuits pertaining to intellectual property
The Sawai Group conducts thorough investigations into intellectual property rights, including patents, designs and trademarks related to substances, applications, manufacturing methods, crystal formations, usage methods, dosages and formulations. We also make every effort to develop products in careful observance of the Unfair Competition Prevention Act. However, many generic drugs marketed by the Group have multiple active patents related to manufacturing methods, crystal formations, usage methods, dosages or formulations even after the expiration of the original drug substance and usage patents, thus there is a possibility of litigation based on these patents. Such circumstances have the potential to affect the financial condition and business performance of the Group.
4. Effects of competition and other factors
Products sold by the Sawai Group in Japan become unprofitable due to frequent drug price reductions, and in order to avoid being forced to halt sales, we make an effort to sell at prices that ensure appropriate profit. However, when many manufacturers enter the generic drug market, intense competition easily causes prices to drop. Furthermore, original drug manufacturers make efforts to respond to declines in market share after patents expire through the introduction of authorized generics among other measures, and because of this trend, it is possible that the Group cannot achieve its revenue targets. Additionally, although our strength lies in our R&D capability of launching several generic drugs every year ahead of other companies, the risk from competition is increasing due to the improvement of competitors’ R&D capabilities which has the potential to affect the financial condition and business performance of the Group.
5. Product recalls and suspension of sales
The efficacy and safety of active ingredients used in the generic drugs sold by the Sawai Group have been confirmed over a set period of time based on the usage history of the original drug. In addition, drugs undergo reexaminations and reevaluations so that the risk of developing unknown and serious side effects is, in principle, extremely small. However, in the event of unexpected new side effects, contamination of the product with impurities or the establishment of new or stricter inspection standards, we may be forced to recall and/or discontinue product sales, and depending on the severity of the circumstances, may be held liable for damages caused by the product, all of which have the potential to affect the financial condition and business performance of the Group.
6. Temporary suspension and delays in production due to natural disasters
With regard to natural disasters such as earthquakes, storms and floods, as well as other serious health risks including COVID-19 and other pandemics, the Sawai Group formulates and maintains Business Continuity Plan (BCP), crisis management protocols and other measures in order to continue engaging in business with respect for human life as our first priority. With production bases located in Fukuoka Prefecture, Hyogo Prefecture, Chiba Prefecture, Ibaraki Prefecture, and Fukui Prefecture, the Group aims to reduce the risk of suspended operations through a decentralized factory network and standardized manufacturing equipment. However, if factory operations are halted due to natural disasters, technical or regulatory issues, or other problems, there is a possibility that the supply of products manufactured at the impacted production bases will be suspended, which may affect our business results. Furthermore, in terms of important raw materials, Sawai attempts to manage and respond to supply chain risks including multi-source purchasing, but as some materials are supplied by specific business partners, if purchases are suspended due to natural disasters or other factors and it is difficult to source replacements, this may affect the financial condition and business performance of the Group.
7. Global business development
In anticipation of slowing growth in the Japanese market due to an increase in the share of generic drugs, the Sawai Group has been considering overseas expansion, capital tie-ups, corporate acquisitions and other means of targeting sustainable growth. Although we strive to thoroughly examine business profitability as well as related laws and political and economic conditions, in some cases, unexpected changes in circumstance or investment outcomes beyond our initial expectations may affect the financial condition and business performance of the Group.
8. Information management
The Sawai Group retains possession of personal information from within and outside the Company, trade secrets and a substantial amount of other important information. In addition to establishing internal regulations, implementing IT security measures and saving data at multiple locations, including external data centers, the Group has established a Group Information Security Committee to conduct education and awareness activities, among other efforts, to ensure thorough information management. However, in the event of information leaks, falsification, loss or other incidents caused by system failure, accident or unauthorized access from the outside, there is a possibility that this may affect the financial condition and business performance of the Group.
9. Business in the U.S.
The Sawai Group was developing business in the U.S. generic drug market through its subsidiary, Upsher-Smith Laboratories, LLC (hereinafter, “USL”). If expected results were not achieved due to changes in USL’s business environment or business activities or for other reasons, there was a possibility that asset impairment or other accounting treatments would affect the financial condition and business performance of the Group. However, the Board of Directors resolved at its meeting held on January 16, 2024 to transfer equity interests held by Sawai in USL to Bora Pharmaceutical Holdings, Inc. (hereinafter, “Bora”), and the transfer was completed on April 2, 2024, significantly reducing the risks associated with this U.S. business. The Group is obliged to indemnify Bora within certain limits for losses incurred during a certain period after the transfer in relation to an antitrust lawsuit arising from the U.S. business; based on the assumed risks and other factors, an estimated amount has been recorded. In the event of future losses in excess of the estimated amount as a result of court or other decisions, the financial condition and business performance of the Group may be affected.
10. Other
In addition to the above, there are various risks involving financial market and exchange rate fluctuations, risks related to corporate governance including compliance, risks related to climate change and other environmental problems, medium- to long-term labor shortages due to low birthrates and an aging population, and geopolitical risks. Thus, the risks described herein are not inclusive of all risks facing the Sawai Group. The Group Risk Management Committee meets twice a year to discuss necessary risk responses and countermeasures, including discussions aimed at narrowing down particularly important risks in terms of frequency of occurrence and the degree of impact on business. Related topics are considered in greater detail separately by the Group Compliance Committee, the Group Sustainability Committee, etc. In addition, we are working to reduce the risk of executives and employees violating laws and regulations or violating social norms by implementing regular educational initiatives and awareness-raising activities that utilize tools such as e-learning.