With respect to the matters stated in the securities report concerning the status of operations and financial accounting, etc., management is aware of the following principal risks that may materially affect the financial status, business results, and cash flows of the consolidated companies.

 The contents are excerpts from the main part of “Business Risks” in the securities report submitted on July 29, 2021. Please refer the report for details.

 

Annual Securities Report (For the fiscal year ended March 31, 2021) [Japanese text only]

1. Markets and Operations

1) R&D activities

Biotechnology-related industries cover a wide range of product fields such as regenerative medicine including gene therapy, as well as research support fields for the purpose of basic research and drug discovery whose direct target markets are universities, public research institutions, companies, and commercial labs, plus an array of other fields covering the environment, energy, food, and information.

 Under these circumstances, the Group conducts extensive R&D, which it considers important in maintaining its competitive edge. However, there is no guarantee that R&D will yield adequate results in a timely manner. Clinical development, especially in the field of gene therapy, requires long periods of time, and any delays in R&D could affect the Group’s business strategy and performance. 

 In addition, the business environment surrounding the biotechnology industry has been changing dramatically. Since the business environment of the Group may be significantly affected by new technological innovations and new entrants, there is no guarantee that the R&D currently underway will produce the anticipated results. As a result, the Group could fail to meet its revenue projections. 

 

2) Overseas business

The Group conducts business operations such as 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 may affect the Group’s business strategies and performance.

 In addition, most of the research reagents that form the product mainstay of the Group are manufactured by the China-based subsidiary Takara Biotechnology (Dalian) Co., Ltd. Changes in the earnings trends of this subsidiary, a suspension of business activities for any reason, or other factors may affect the Group’s business strategies and performance. In light of this risk, while giving consideration to balancing efficiency gains and risk reduction, the Group will establish a global, multi-polar manufacturing and R&D system. 

 

3) Competition

The Group holds a unique position in the industry with a stable revenue base, a solid presence in the Asian market, and an extensive line-up of proprietary technologies.

 However, 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, both in Japan and overseas.

 In the field of gene therapy, advances in technology have resulted in the development of therapies that excel in safety and performance, and acquisitions for manufacturing and sales approval have begun overseas. In this burgeoning market, many enterprises are conducting R&D for gene therapy, including biotechnology ventures and big pharma in the U.S. and Europe.

 Under such circumstances, the Group is developing technologies and products on a proprietary basis and in cooperation with universities and other outside organizations. If competitors commercialize similar products and fields of technology first, the product development and performance of the Group could be affected. In light of this risk, the Group protects its technology and product developments through intellectual property rights in order to achieve exclusivity or differentiation, and will strive to maintain price competitiveness by promoting cost reductions and strengthening its manufacturing systems. 

 

4) Securing human resources

While the Group is based on R&D, new technological innovation and the emergence of new market players are having a significant influence on the biotechnology industry. Therefore, to maintain its competitive edge, the Group considers it essential to secure outstanding human resources with specialist knowledge and skills. Nevertheless, the Group cannot rule out that it may not be able to secure human resources as planned, or that its personnel may leave the Group. In this event, the Group’s business strategy and performance could be affected.

 In light of these risks, the Group is making efforts to promote diversity and a healthy work-life balance, while also creating safe and comfortable worksites and working environments. 

 

5) Sales related to initial payments and milestone payments

The Group recognizes initial payments and milestone payments generated under contracts with customers as revenues at the time when the conditions stipulated in individual contracts have been met. However, due to the complexity of contracts, etc., there is a risk of error in the timing of revenue recognition, which may affect the Group’s business performance. In light of this risk, the Group is working to enhance its internal controls and is conducting checks through its internal auditing department and finance department. 

 

6) Sales related to contract services

The Group recognizes sales of contract services as revenue as of when they meet the criteria established by the Group. However, due to the complexity of contracts, etc., there is a risk of error in the timing of revenue recognition, which may affect the Group’s business performance. In light of this risk, the Group is working to enhance its internal controls and is conducting checks thorough its internal auditing department and finance department.

2. Finance and Economy

1) Financing

The Group occasionally raises funds to cover rising financing demand for R&D expenditure, capital expenditure, working demand for R&D expenditure, capital expenditure, working funds, etc., to accommodate the Group’s new business launches and expanding business scale. However, if financing does not proceed as planned, it could affect the Group’s business strategies and performance. In light of this risk, the Group works to maintain and strengthen its sound financial position and conducts timely reviews of its financial planning based on the latest information.

 

2) Exchange rate fluctuation

The translation of costs, income, and trade receivables and payables associated with business undertaken by the Group in denominated foreign currencies is exposed to currency exchange rate fluctuation risk. In light of this risk, the Group enters into forward foreign exchange contracts and other hedging instruments in order to reduce the risk of exchange rate fluctuation.

 Additionally, the income, sales, expenses, assets, and other such line items of overseas consolidated subsidiaries are converted into yen for the purpose of creating consolidated financial statements. Consequently, exchange rate fluctuations at the time of account closing may affect the Group’s business performance. 

3. Finance

1) Impairment of fixed assets

The Group possesses 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. In the event that production equipment is left idle by a sudden change in the business environment, or due to a decline in utilization rates, or owing to the failure of an acquired business to meet initial projections, or owing to other factors, an impairment loss arises, which may affect the business performance of the Group. In light of this risk, the Group follows up on acquired businesses in order to realize post-acquisition synergies and regularly monitors the macroeconomic environment.

4. Regulatory and Legal Procedures; Natural Disasters

1) Key operational agreements

An outline of the agreements that are considered to be important for the business development is described in “2. Business Status 4 Important Contracts for Management, etc.” 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.

 

2) Intellectual property rights

In the biotechnology industry, in which the success of the business depends highly on the success of R&D, the Group protects the technologies it develops 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 applications may be successfully registered, and if a registered patent right becomes invalid or expires, for example, the Group’s business strategies and performance may be affected.

 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 the Group’s business strategy and performance. 

 

3) Product liability risks

All of the products that the Group handles pose an inherent product liability risk. If any defect is found in a product during its manufacture or sales, or during the clinical trial process; or if a health impairment is caused by any pharmaceutical product, medical devices, regenerative medicine products, or research reagents, investigational drugs used in clinical trials, or specific cell-processed product, 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 any such recall may require time and entail expense. 

 

4) Legal regulations

In advancing research and development, the Group is subject to related laws and regulations 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 reagents, etc., the Group is required to follow relevant legislations, such as the Poisonous and Deleterious Substances Control Law and the Quarantine Law. However, since reagents are neither pharmaceutical products nor regenerative medicine products as defined by the Law on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices (hereinafter “Pharmaceuticals and Medical Devices Law”), the statute and its regulations are not applicable. Nevertheless, if these regulations are tightened or new regulations are introduced following expansion, etc., of the supporting research industry, it could affect the Group’s business strategies and performance.

 Moreover, gene therapy drugs under development by the Group are subject to related laws and regulations including the Pharmaceutical and Medical Devices Law, the Act on Safety of Regenerative Medicine, and the Cartagena Law. The purpose of these related laws and regulations is to ensure the quality, effectiveness, and safety of pharmaceutical products, regenerative medicine products, quasi-pharmaceutical products, specific cell-processed products, cosmetics, and medical devices, to the effect that approvals or permits from the relevant authorities are required for commercial activities. Failure to obtain such permits for individual projects being researched or under development by the Group may affect the Group’s business strategies. 

 

5) Risks of lawsuits, etc.

The Group is not a party to any important litigation or claim with third parties related to the Group’s business. However, litigation may be brought against individual Group companies, and the Group’s business strategies and performance may be affected by the litigation itself as well as by its outcome. In light of this risk, the Group works to enhance internal controls and compliance in the pursuit of its business activities in Japan and overseas.

 In addition, the Group conducts patent searches through patent offices, etc., in order to prevent in its business development any litigation related to intellectual property rights. The Group is aware of no factual conflict between a product of the Group and a third-party patent. However, it is difficult for R&D companies such as the Group to entirely avoid intellectual property infringement problems. If a pertinent infringement issue arises, the Group may be subject to claims to damages, injunctions, or royalty payments, which may affect the Group’s business strategies and performance.

 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. Resolving such a case can be time consuming and costly, which may affect the Group’s business strategies and performance. 

 

6) 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 disease. To minimize damage suffered in such cases, we conduct inspections and training, and create communication systems and business continuity plans. 

 

7) Extended duration of the influence of the COVID-19 pandemic

The Group expects that the fiscal year ending March 2022 will be impacted by the spread of COVID-19. A continuation of the pandemic for an extended period, with business partners temporarily suspending operations and with delays in the collection of accounts receivable, may affect the Group’s business or other performance. In light of this risk, the Group is taking steps to secure sufficient cash on hand.

 In addition, Group employees in some locations may be unable to come to work or face other difficulties. In light of this risk, the Group is implementing remote work modes and other work set-ups that enable social distancing. 

5. Parent company of Takara Bio

As of March 31, 2021, Takara Holdings is the parent company of Takara Bio, owing 60.93% of the voting rights in the Group. 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 group companies)

The extraordinary general meeting of shareholders of Takara Shuzo Co. Ltd. (hereafter, “Takara Shuzo”, now Takara Holdings), held on February 15, 2002, approved the establishment of Takara Shuzo and Takara Bio 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 60.93% as of March 31, 2020, 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 its 62 group companies (60 subsidiaries and 2 affiliated 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 8 group companies (subsidiaries).

2) 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 to the entire Takara Holding Group. Takara Bio, too, is subject to these regulations and reports to Takara Holdings on matters resolved by its Board of Directors. However, since prior approval for its Board of Director’s resolutions is not required, Takara Bio is left to operate as an independent business. 

 A change in the Group management strategy of Takara Holdings could affect the business and performance of the Group.

3) Transactions with the Takara Holdings Group

(1) Real estate lease transactions related to sales sites

Real estate lease transactions exist between the Takara Bio and Takara Shuzo, a subsidiary of Takara Holdings. In the event of difficulties in the renewal of these transactions, Group revenue could be affected and relocation expenses incurred until we are able to secure an alternative site. 

(2) Transactions related to use of trademark rights

The Group has concluded trademark licensing agreements with Takara Holdings with regard to the trademarks it uses which are owned and controlled by Takara Holdings, and makes usage payments per trademark. As of March 31, 2021, Takara Bio had licenses for the use of 64 registered trademarks and a pending trademark in Japan and overseas.

 In the event that the Group is unable to obtain licenses for the use of trademarks from Takara Holdings, 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, it might affect the Group’s business strategies and performance.

(4) Other

The Group purchases packaging materials from Takara Holdings Group companies (excluding Takara Bio Group companies).

 In the event of difficulties in the renewal of these transactions, it might affect the Group’s strategies and performance.