The following are the major potential risks to which Takara Bio Group may be exposed to in its business and other activities. In addition, from the standpoint of the positive disclosure of information significant to investor decisions, conditions that may not become risks, are also described below. Upon identifying the possibility of such risks, the Group will make the utmost effort to avoid them and will take countermeasures against them. There is, however, no guarantee that we can avoid all risks. Please note that the following descriptions do not cover all of the risk factors concerning the Group. Unless specifically noted otherwise, all the statements in this section are as of the end of fiscal 2018, ended March 31, 2018, and any other statements with respect to future events are based on the Group’s assumptions as of June 28, 2018, the submission date of the annual securities report. In addition, the explanations of terminology are for investors to use as a reference to understand the information provided in this section. As such, they are based on our judgment and understanding.

1. R&D

A diverse range of industries are biotechnology-related, including the medical field (cell and gene therapy); the research support field, in which direct targets for the Takara Bio’s business include research institutions and universities that are seeking to promote basic research and to develop new drugs; the environment and energy field; the bioinformatics field; and the food field (agriculture and functional foods).

 Under these circumstances, the Group conducts extensive R&D, which it considers important in maintaining its competitive edge. In fact, the Group’s R&D expenses for fiscal 2018 were ¥4,653 million, or 14.4% of net sales, which is extremely high. At the same time, there is no guarantee that R&D will proceed as planned, and, as clinical development in the Group’s Gene Therapy business requires a particularly long period before commercialization, there is no guarantee that R&D will yield adequate results in a timely manner. Therefore, a delay in R&D could affect the Group’s business strategy and performance. In addition, there is no guarantee that the R&D currently under way will produce the anticipated results. As a result, the Group could fail to meet its revenue projections.

2. Dependence on manufacturing

Calculated on a sales price base for fiscal 2018, Takara Biotechnology (Dalian), a Chinese subsidiary, accounted for nearly all of the research reagent production, a core Takara Bio Group product that generated 68.7% of the Group’s net sales. The consolidation of production bases enables the Group to manufacture highly cost-competitive products, and the diversification of manufacturing sites is considered to be inexpedient, given the Group’s production scale. As a result, changes in earnings trends at the subsidiary or an interruption to its business activities for any reason could adversely affect the Group’s business strategy and performance.

3. Long-term prepaid expenses

Due to the nature of the Group’s business activities, execution of license agreements relating to patents owned by others is a key strategy. In such license agreements, the Group may make an initial payment and certain milestone payments. These expenditures are booked to assets as long-term prepaid expenses at the time of the expenditure and are processed regularly as expenses in each fiscal year, based on the terms of the agreements, and other factors. In addition, the Group makes an assessment for the licensed technologies in each settlement period, taking into account use of the technology within the Group and obsolescence due to advances in biotechnology. When the asset component of a technology is in doubt, the Group treats the relevant long-term prepaid expense as a one-off expense. Consequently, long-term prepaid expenses may increase in the future depending on the conclusion of license agreements and the occurrence of subsequent milestone payments. A high level of expense may also arise depending on the status of use of technologies within the Group and advances in biotechnology. This could affect the Group’s performance.

4. Competition

The Group holds a unique position in the industry with a firm, stable revenue base, a solid presence in the Asian market, and an extensive, proprietary technological lineup. Nevertheless, the Group is in competition with a number of other companies in the same industry, not only in Japan, but also overseas.

 In the Bioindustry business, manufacturing and sales of reagents and scientific instruments do not require the licensing and approvals needed for medical instruments; 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.

 In the Gene Therapy business, advances in technology have resulted in the development of therapies that excel in safety and performance, and acquisitions for manufacturing and sales approval are expanding overseas. Thus, a potentially enormous market has opened up, which has prompted many enterprises to conduct R&D for gene therapies, including large pharmaceutical companies and venture businesses in the U.S. and Europe.

 In the AgriBio business, the functional food industry is booming and many businesses, not just food manufacturers but many pharmaceutical companies as well, are entering this rapidly growing market, and competition has intensified.

 Under such circumstances, Takara Bio is developing technologies and products on a proprietary basis and in cooperation with universities and other outside organizations, and seeks exclusivity and differentiation by turning these into intellectual property wherever possible. However, such a development strategy may not necessarily be successful, and if competitors commercialize similar products and fields of technology first, the product development and performance of the Group could be affected.

5. Parent company of Takara Bio

As of March 31, 2018, Takara Holdings Inc. (listed on the First Section, Tokyo Stock Exchange) is the parent company of Takara Bio, owning 60.92% of the voting rights in the Company. The relationship between Takara Bio and Takara Holdings is as follows.

(1) Position of Takara Bio in the Takara Holdings Group (Takara Holdings and its associated companies)

The extraordinary general meeting of shareholders of Takara Shuzo Co., Ltd. (now Takara Holdings), held on February 15, 2002, approved the proposal to spin off the operations of the company’s alcoholic beverage and food business, and the biomedical business with the aim of making the most of the special characteristics of each respective business as well as creating a business environment for increasing growth potential and competitiveness in both. On this basis, Takara Shuzo and Takara Bio were established on April 1, 2002, through a corporate split, with each company becoming a fully owned subsidiary of Takara Holdings. Since then, Takara Holdings decreased the ownership of voting shares in Takara Bio to 60.92% as of March 31, 2017, 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 65 affiliated companies (63 subsidiaries and 2 associated companies). Within the Group, Takara Bio is positioned as a subsidiary specializing in the biotechnology business, and it promotes the biotechnology business along with its 11 affiliated companies (subsidiaries).

(2) The food business of the Takara Holdings Group

Takara Healthcare Inc., which specializes in marketing and sales of functional foods of Takara Holdings Group companies, was founded on September 7, 2006, as a 100%-owned subsidiary of Takara Holdings. Following the establishment of Takara Healthcare, Takara Bio appointed Takara Healthcare as its sales agent for our functional foods. The Group’s functional foods were sold to customers through Takara Healthcare, but the type of transactions changed to the outsourcing and contracting of manufacturing and R&D in April 2016.

(3) Management of Group companies by Takara Holdings

Takara Holdings has established and operates the Takara Holdings Group Company Management Rules from the standpoint of consolidated business management. However, its objective is to maintain the independence and autonomy of Takara Holdings Group companies while seeking to maximize the corporate value of the entire Takara Holdings Group. The rules are also applicable to Takara Bio, and Takara Bio reports on the decisions made at the meetings of its Board of Directors to Takara Holdings. However, Takara Bio is not required to gain prior approval from Takara Holdings for the resolutions of its Board of Directors, and runs its operations independently.
However, a change in the Group management strategy of Takara Holdings, although not currently envisaged, could affect the business and performance of Takara Bio.

(4) Transactions with the Takara Holdings Group

1) Real estate lease transactions related to sales sites

Takara Bio was established as a spin-off company of Takara Shuzo (now Takara Holdings) on April 1, 2002. As a result, the majority of Takara Shuzo’s former real estate, including plants, sales offices and company housing, was newly transferred to both Takara Shuzo and Takara Bio. Whereas the alcoholic beverage and food business, and the biomedical business had previously been developed on one site, real estate lease transactions have occurred with Takara Shuzo and Takara Bio since these transfers.

 Terms of agreement and method of determining terms of agreement are decided by consultation based on appraisal by real estate appraiser.

2) Transactions related to use of trademark rights

Takara Holdings owns and controls some trademarks used by Takara Bio. Takara Bio has concluded trademark licensing agreements with Takara Holdings with regard to these trademarks and makes a fixed monthly payment per trademark, country and category based on the number of licenses. As of March 31, 2018, Takara Bio had licenses for the use of 85 registered and 1 pending trademarks in Japan and overseas. In the event that Takara Bio is unable to obtain licenses for the use of trademarks from Takara Holdings for any reason, it might affect our business strategies and performance.

3) Transactions related to outsourcing of computer-related services

Takara Bio has concluded agreements with Takara Holdings on the contracting of computer-related services and the lease of equipment. In the event of difficulties in the renewal of these transactions for any reason, it might affect our business strategies and performance.

4) Other

Takara Bio has concluded a manufacturing and R&D outsourcing agreement related to functional foods and a licensing agreement for application and use of intellectual property with Takara Healthcare Inc. In addition, there are also purchases of packaging materials and other goods on an order basis as well as human resource placement agreement transactions with Takara Holdings Group companies (excludes Takara Bio Group companies). In the event of difficulties in the renewal of these transactions for any reason, it might affect our business strategies and performance.

6. Financing

The demand for funds, including R&D expenditure, capital expenditure, loans and investment, working funds, etc., is expected to rise due to the initiation of new businesses and expansion in business size. Thus, fundraising through a paid-in capital increase or other measures may possibly occur in the future. However, if financing does not proceed as planned, it could affect the Group’s business strategies and performance.

7. Allocation of funding

In light of the dramatic changes concerning the Takara Bio Group’s business environment with regards to the biotechnology industry, the Group’s business may be significantly impacted by new technology innovation and new market players. There is therefore no guarantee that the expected results of capital and R&D investment—the intended target of funding received through public stock offerings—will be realized, and the Group’s business strategies and performance may be affected.

8. Key operational agreements

An outline of the agreements considered crucial to the Takara Bio Group’s operations is described in our Securities reports*. If these agreements end due to the expiry of the agreement term, cancellation, or some other reason or if revisions to the agreements are disadvantageous to the Group, it could affect the business strategy and performance of the Group.
*Please see page 26-27 of our Annual Reports 2018

9. Securing human resources

The Group is based on R&D, and technological innovation is steadily advancing in the biotechnology industry. Therefore, to maintain its competitive edge, the Group considers it essential to secure outstanding human resources with specialist knowledge and skills for R&D. Nevertheless, the Group cannot rule out the possibility that it may not be able to secure human resources as planned or that its personnel may leave Takara Bio. In this event, the Group’s business strategy and performance could be affected.

10. Intellectual property rights

In the biotechnology industry, in which the success of business depends highly on the success of R&D, the Group regards securing intellectual property rights, including patents, as a critical factor, and the Group protects technologies developed in-house with patent rights to prevent competitors from imitating them. The Group will continue to place the highest priority on applications for patents based on R&D activities. However, not all of the applications may be successfully registered, and when a registered patent is made invalid for any reason, or expires, the Group’s business strategies and performance may be affected. In addition, the Group is aware that in the biotechnology industry, an area in which competition over R&D is continually growing, its patented technologies may be made obsolete at any time when a competitor develops superior technologies. When a competitor achieves such R&D, it could affect the Group’s business strategy and performance. 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 its business strategy and performance.

11. Product liability risks

All of the products that the Group handles are exposed to risks of compensation for product liability. 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 drug, medical device, regenerative medical products, food, or research reagent, any reagent and cell or gene therapy product used in a clinical trial, or any cell therapy product prepared under a doctor’s guidance, then the Group may be subject to product liability claims, and this could 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 damage to human bodies, and any such recall may require time and entail huge expense.

12. Legal regulations

(1) Bioindustry business and Gene Therapy business

R&D in the Bioindustry business is regulated by relevant legislation, such as the Law Concerning the Prevention of Radiation Hazards due to Radioisotopes, etc., and the Law Concerning the Conservation and Sustainable Use of Biological Diversity through Regulations on the Use of Living Modified Organisms (hereinafter “Cartagena Law”); and the Group is committed to observing these laws and regulations. In addition, in the production, sale, and trade of research reagents, Takara Bio is required to follow relevant legislation, such as the Poisonous and Deleterious Substances Control Law and the Quarantine Law. However, reagents are not pharmaceutical products or regenerative medical products as defined by the Law on Securing Quality, Efficacy and Safety of products including Pharmaceuticals, Medical Devices (hereinafter “Pharmaceuticals and Medical Devices Law”), and therefore are not regulated by that law. Nevertheless, if these regulations are tightened or new regulations are introduced following expansion of the supporting research industry, it could affect the Group’s business strategies and performance. Moreover, the relevant laws and regulations such as the Pharmaceuticals and Medical Devices Act, the Act on the Safety of Regenerative Medicine, and the Cartagena Law regulate commercialization of the cell and gene therapies that Takara Bio is aiming to accomplish, and the Group intends to comply with such laws and regulations. The relevant laws and regulations are targeted at securing the quality, effectiveness, and safety of pharmaceutical products, regenerative medical products, quasi-pharmaceutical products, specific processed cells, cosmetics, and medical devices, and the trading of these products requires approval or permission from the relevant authorities. If the Group is unable to obtain permission to continue conducting research projects as part of its Gene Therapy business, the Group’s business strategies and performance could be affected.

(2) AgriBio business

In its functional food business, the Group maintains business facilities; manages tools, containers, and packages; and controls production processes and sales activities in accordance with the provisions of the Food Sanitation Law. The Group observes the Food Sanitation Law and takes extra care to manage food hygiene. Food hygiene matters are an unavoidable issue for a company that handles food, and the Group is committed to strengthening its system for the management of food hygiene in the future. However, if any problem should arise related to this issue, the business strategies and performance of the Group could be affected. Beginning in October 2006, Takara Bio has been marketing and selling all its functional foods through Takara Healthcare, a 100%-owned subsidiary of Takara Holdings. In selling functional foods and materials in bulk, Takara Bio and Takara Healthcare are making every efforts to comply with the sales methods based on the Specified Commercial Transaction Law, the Food Labeling Act, the Act on Standardization and Proper Quality Labeling of Agricultural and Forestry Products, the Pharmaceuticals and Medical Devices Law, the Health Promotion Law, and the Act against Unjustifiable Premiums and Misleading Representation. The Group must also handle labeling and advertising in compliance with all the relevant laws. However, due to the nature of functional foods in general, the Group cannot completely rule out the possibility of violating a provision on mandatory labeling requirements. If any violation occurs, trust in the Group could deteriorate, which may adversely affect the Group’s business strategies and performance.

13. Risks of lawsuits, etc.

As of June 29, 2018, the submission date of the annual securities report, there are no major ongoing lawsuits with third parties relating to the Takara Bio’s business. However, the Group carries out wide-ranging R&D activities and business expansion. Therefore, there is no guarantee that lawsuits will not arise in the future. The Group is striving to enhance its internal control and strengthen its compliance system when it carries out its business
operations. However, in spite of all these efforts, there still remains a possibility of lawsuits being brought against the Group. The very fact that a lawsuit is brought against the Group and the results of such a lawsuit may seriously affect the Group’s business strategies and performance. Moreover, in order to prevent the Group from being sued concerning intellectual property rights, the Group has been conducting patent investigations through patent offices, etc., and the Group is not aware that any of its products are in conflict with the patent rights of others. However, it is difficult for an R&D-based company such as Takara Bio Group to completely avoid the occurrence of such issues involving the infringement of intellectual property rights. When such problems with the infringement of intellectual property rights do arise, the Group could be subject to demands for compensation for damages, sales injunctions, and payment of royalties. As a result, the expansion of the relevant business and the Group’s business strategy and performance could be affected. In addition, 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 lawsuits. In such cases, the resolution of the problem could take a long time and may incur huge expenses, and the Group’s business strategy and performance could be affected depending on the circumstances.

14. About the impairment of fixed assets

The Takara Bio group processes a variety of fixed assets that serve the purposes of our businesses, and intangible assets such as goodwill obtained through corporate acquisitions and technology assets. However, in the event that projected future cash flow from owned assets declines due to the idling of production facilities and decline in utilization rates accompanying rapid changes in the business environment or due to acquired businesses operating below initial plans, impairment losses may result from to the application of fixed asset impairment accounting, and may have an effect on the business results of the Group.

15. Exchange rate fluctuation

The translation into yen of costs, income, and trade receivables and payables associated with business undertaken by the Group denominated in foreign currencies is exposed to currency exchange rate fluctuation risk. The Group takes such measures as conducting forward foreign-exchange contracts to minimize the negative impact of exchange rate fluctuation, but such risks cannot be completely avoided. Additionally, sales, expenses, assets, and other such line items on the foreign currency financial statements of overseas consolidated subsidiaries are converted into yen for the purpose of creating consolidated financial statements. Consequently, exchange rate fluctuations may affect the Group’s business performance.

16. Overseas business expansion

The Group conducts business operations that include 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, or the occurrence of natural disasters such as earthquakes may affect the Group’s business strategies and performance.

17. Natural disasters

The Group’s business activities may be impeded by natural disasters such as storms, earthquakes, lightning strikes, and floods, by fires or other accidents, or by worldwide pandemics of infectious diseases. To minimize damage suffered in such cases, we conduct inspections and training, and create communication systems and business continuity plans. Nevertheless, damage caused to people or things as a result of such incidents may affect the Group’s business strategies and performance.