With respect to Kyowa Hakko Kirin group's business performance and financial position, the major risks that may significantly affect investors' assessments include, but are not limited to, those described below. The group recognizes that these risk events may occur, and the group uses a risk management system to prevent the occurrence of those risk events that can be controlled by the group. At the same time, the group will do its utmost to respond in the event of the occurrence of a risk event.

*Items in this section dealing with future events reflect the assessment of the group as of December 31, 2016.

Risks associated with R&D investment

In ethical drug operations, the development of new drugs requires long periods of time and substantial R&D expenditures. In the long-term development of new drugs, there may be cases where the expected efficacy or stability is not confirmed. This may result in the abandonment of the continuous R&D. In addition, in non-pharmaceutical operations, the group invests R&D resources in the development of new products and new technologies to differentiate the group from its competitors. However, as with R&D for pharmaceuticals business, there is no guarantee that these investments will produce results. Moreover, as above, in cases where expected R&D results are not realized, the group's future growth and profitability may decline and our business performance and financial position may also be adversely affected.

Risks related to intellectual property assets

The group strictly manages its intellectual property assets and closely monitors infringement by third parties. Nevertheless, in cases where the group's intellectual property rights are infringed upon, sales of the group's products or licensing revenue could decline earlier than forecast and the group's business performance and financial position could be adversely affected. Furthermore, while the group pays particular attention not to violate the intellectual property rights of others, in cases where the group is subject to litigation based on allegations of infringement of intellectual property rights, the group may be required to cease such activities, and pay compensation and/or settlement, and our business activities, business performance and financial position may be adversely affected.

Risk of side effects

Pharmaceutical products undergo strict safety audits at the development stage and following checks by the relevant national authorities are approved, however following launch, on occasion previously unknown side effects based on the accumulated results of users may become apparent. In such cases where an unexpected side effect is discovered following launch, the group's business performance and financial position, etc., could be adversely affected.

Risk related to pharmaceutical regulations

The pharmaceuticals business, the group's core business, operates under the pharmaceutical regulatory authorities of the countries in which we operate. In Japan, the group's business performance and financial position could be affected by factors including future trends in the reform of Japan's system of medical treatment aimed at promoting the use of generic drugs, in addition to price reductions under the domestic public pharmaceutical price system. Overseas, pressure to suppress medical cost is becoming higher, and in cases where a price reduction cannot be compensated for by an increase in volumes, the group's business performance and financial position could be adversely affected.

Legal regulation risk

In the course of carrying out its operations in Japan and overseas, the group must strictly comply with legal regulations. The group emphasizes compliance to try to ensure that it does not violate the laws to which it is subject, and the group is working to bolster internal control functions through such means as administrative oversight. However, there is no guarantee that the group will be able to completely eliminate the possibility of committing a violation of these legal regulations. If, because we are unable to observe these legal regulations, new product development is delayed or stopped, or manufacturing or sales activities are restricted, the group's credibility could be damaged. In such cases, the group's business performance and financial position could be negatively impacted.

Furthermore, in the future, if laws and regulations that must be observed in Japan and overseas change, the group's business performance and financial position could be adversely affected.

Risk of fluctuations to foreign exchange rate

The group conducts foreign currency denominated transactions such as receiving income from overseas sales, licensing-out of technologies overseas, and acquiring raw materials overseas. Therefore any sudden change in exchange rates could adversely affect the group's financial position and business performance. Fluctuations to the exchange rate could also affect our ability to be price competitive on products sold in markets shared with overseas competitors. In addition, the gains and losses, and assets and liabilities of overseas consolidated subsidiaries denominated in local currencies are translated into yen for the preparation of the consolidated financial report. The exchange rate at the time of translation could have an effect on values following currency translation.

Disaster-related and accident-related risks

Earthquakes, fires, pandemics such as influenza, terrorism, large-scale electrical blackouts and other events could result in suspension of business activities at our group headquarters, plants, research facilities or offices. The group handles substances that are subject to various legal regulations and guidelines, and as a result of natural disasters, etc., these substances could enter the external environment and cause damage to the surrounding area. Although the group maintains a disaster prevention system and has prepared a business continuity plan, should an event or accident as described above occur it might result in significant damage and negatively impact the group's position of trust in society. Additionally, the group's business performance and financial position could be adversely affected.

Litigation-related risk

A lawsuit filed against the group concerning our business activities (e.g., side effects of pharmaceutical products, product liability, labor-related problems), could have a negative impact on the group's operating results, financial condition, etc.

IT security and information management risk

As the group utilizes a variety of information systems, system malfunctions, computer viruses, etc. may impede our business. We hold many pieces of information including personal information, and in the case of divulgence thereof outside the company, the group’s business performance and financial position could be adversely affected.

Environmental risks

The group ensures thorough compliance with environment-related laws and regulations regarding air, water quality, noise, oscillations, offensive odors, soil contamination, ground subsidence, waste, etc. Due to environmental preservation issues such as environmental pollution arising or revisions etc. of pertinent laws and regulations, however, if the costs required for responsibility for compensation to surrounding areas, and improvement of the environment are entailed, or the necessity for new capital investments etc. arises, the group’s business performance and financial position could be adversely affected.

Other risks

In addition to the above, there are other risks that could adversely affect the group's business performance and financial position and they include changes to the price of raw materials and fuel prices, changes to share prices and interest rates, impairment of fixed assets, and suspension of supply of products and raw materials.