Risk Management

≪ Risk Summary ≫

In the infectious disease area, revenue is easily influenced by trends, and market predictability is lower than in other disease areas. Even successful drug development sometimes does not lead to recovery of investment. In addition, novel antibiotic drugs are mainly used for the purpose of reducing the incidence of resistant bacteria and are only used when treatment options are limited, which makes market prediction difficult for antibiotic drugs. On the other hand, given the recent rising public concerns about infectious diseases, SHIONOGI sees these as an opportunity and has set “Protect people worldwide from the threat of infectious diseases” as one of its material issues. SHIONOGI works to establish an optimal revenue model by combining initiatives for “infectious diseases that require a long period of time for treatment,” “vaccines,” and “acute infectious diseases,” thereby making its overall disease business sustainable. SHIONOGI has so far launched many products overseas mainly through partnerships with partner companies, in which it has received a part of product sales as royalties. While maintaining good relationships with these partners, particularly in the HIV business, SHIONOGI should also enhance its overseas business development so that it can take the initiative in development, regulatory affairs, marketing and sales, and other business activities for SHIONOGI products in Europe, the U.S., and Asia, as well as activities to improve access to medical services in lower-middle income countries. However, if the initial development plan or sales strategy is delayed or fails, or if the expected discovery of treatment drugs or vaccines or sales revenue cannot be realized, it may significantly affect our performance.

≪ Major responses and initiatives ≫

・ Sales and promotion of proper use of COVID-19 and influenza drugs

・ Expansion of sales of cefiderocol, an antimicrobial resistance (AMR) drug

・ Development of COVID-19 and influenza preventive vaccines

・ Research and development on long-acting treatment and preventive drugs to improve the QOL of people living with HIV

・ Research and development on new treatment of infectious diseases with high unmet needs (tuberculosis, malaria, non-tuberculous mycobacterial diseases, etc.)

・ Creation of products and services that realize total care for diseases, including pre-symptomatic care, prevention, testing, diagnosis, and convalescence, in addition to treatment

・ Implementation of global development and application for approval for products launched overseas, and improvement of overseas production, distribution, and sales systems

・ Negotiations with governments and regulatory authorities of various countries on stockpiling and expansion of the subscription type reimbursement model

≪ Risk Summary ≫

Aiming to realize a society in which everyone can live life to the fullest and on their own terms, SHIONOGI engages in research and development on drugs and other healthcare solutions that will help solve problems of people. Research and development of pharmaceuticals require a long period of time and a large amount of investment. There is also a possibility that the expected effects cannot be obtained in clinical trials, resulting in failure to obtain approval. In this environment with high uncertainty, in order to raise the success rate of drug discovery and build attractive pipelines that satisfy medical needs, in addition to the research and development technologies SHIONOGI has cultivated for infectious diseases and small molecule drugs, it is crucial to acquire new modalities, utilize external networks, obtain growth drivers from outside through active investment, and develop human resources capable of handling these operations. We are also working to shift from a conventional business model relying heavily on revenue from pharmaceutical patents and start providing vaccines and new healthcare services, as we see this as an opportunity to solve diverse problems of patients and society that cannot be solved by pharmaceuticals alone. We believe that by balancing the prescription drug business and other businesses, fluctuations in revenue due to patent expiration can be mitigated.

≪ Major responses and initiatives ≫

・ Venturing into new modalities and technologies

・ Promotion of co-creation with external parties

・ Active investment in growth drivers, such as in-licensing

・ Human resource development to secure cutting-edge research and development capabilities

・ Maintaining a high original pipeline ratio

・ Development of innovative treatment options beyond conventional treatment drugs, such as digital apps

・ Development of services necessary to create an environment in which all people can play active roles

≪ Risk Summary ≫

In order for SHIONOGI to transform its business model and achieve the growth targeted by the STS2030 Revision, each and every employee should constitute the “source of competitiveness” that leads the transformation, and SHIONOGI should be a group composed of such diverse human resources with strengths. To this end, we see human capital management toward achieving the Vision for 2030 as a business opportunity and have set it as a key theme in our strategy. By recruiting external human resources and promoting ability-based appointment, we will transform our personnel portfolio and realize a fusion of human resources with diverse values, thereby aiming to achieve our 2030 Vision. SHIONOGI has established “SHIONOGI Way: Be the best you can be to take on new challenges by constantly improving and expanding your capabilities” as its vision for human resources, and it implements various measures to help employees to acquire both the abilities that all employees should have and the abilities that are required for individual roles. We will also enhance mid-career recruiting to acquire expertise that SHIONOGI lacks. In addition, by developing various systems and programs, we have been establishing an environment in which diverse people are able to enhance their engagement and play active roles. However, if any obstructive factor, such as failure to implement measures or acquire human resources, delays SHIONOGI’s reform, it may have a significant impact on our performance.

≪ Major responses and initiatives≫

・ Enhancing mid-career recruitment

・ Revision of personnel system

・ Workstyle reform to enable various characteristics to play active roles

・ Holding events to encourage and praise those who take on challenges

≪ Risk Summary ≫

Seeing recent technological innovations and the dynamic changes in the environment surrounding them as an opportunity, SHIONOGI declares in the STS2030 Revision its commitment to digital transformation through various activities as a big theme to accelerate decision making and realize new value creation based on data. As conventional business models are required to be transformed, it is essential to improve productivity using AI and IT. If the efforts to achieve this become stalled, it may have a significant impact not only on the performance of SHIONOGI but also on the improvement of its corporate value.

≪ Major  responses and initiatives ≫

・ Building global IT infrastructure

・ Business model/operation reform through practicing AI drug discovery, market inventory prediction using AI, etc.

・ Developing a medical device program (SaMD) for diagnosis and treatment of diseases, and disease detection algorithms

・ Establishing a data utilization base that will improve work efficiency and realize new value creation

・ Implementing measures to develop digital core human resources

≪ Risk Summary ≫

SHIONOGI manufactures products and outsources manufacturing under strict quality control in compliance with Good Manufacturing Practice (GMP) and the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH) guidelines and other pharmaceutical-related laws and regulations. It has also been inspected by competent agencies, such as the Ministry of Health, Labour and Welfare in Japan, the Food and Drug Administration (FDA) in the United States, and the European Medicines Agency (EMA), to obtain approval for production and sales. However, if a quality problem occurs, such as a quality defect or a non-conforming lot, possible risks are as follows.

- Decline in product reputation

- Quality defect due to a discrepancy between approval documents and actual manufacturing conditions, shipment suspension, product recall, or suspension of business due to administrative action

-  A product recall due to lack of data integrity or a significant indication in an inspection by a competent agency

-  Decline in credibility of the company

≪ Major responses and initiatives≫

・ Establishment and promotion of the SHIONOGI Group Quality Policy

・ Holding educational events, etc. to increase employees’ understanding of the importance of quality

・ Promoting activities to foster a quality culture

・ Management and supervision activities through audits of manufacturing facilities, etc.

・ Strengthening the Bad News Fast/First system through collaborative meetings with relevant internal departments

≪ Risk Summary ≫

If any problem occurs in the supply chain due to a natural disaster, such as a large earthquake, storm, or flood, the outbreak of a pandemic, a geopolitical influence, such as the economic conflict between the U.S. and China or a Taiwan emergency, or a sustainability-related factor, such as relating to human rights or the environment, the possible risks are as follows.

- Suspension of plant operation

- Difficulty in procuring raw materials and products

- Disruption of wholesale distribution network and stagnation of information

- Significant impact on stable supply of pharmaceuticals

≪ Major responses and initiatives ≫

・ Inventory management based on standards for inventory levels to be held

・ Establishment of a system for the manufacture of active ingredients contained in some products in Japan

・ Diversifying raw material procurement sources to ensure stable supply of products (selecting second vendors for raw materials with high geopolitical risk)

・ Establishing and periodically reviewing BCP items to be supplied on a priority basis

・ Conducting due diligence and audits on suppliers and requesting improvements

・ Consideration for business partners in accordance with the “multi-stakeholder policy.”

・ Smooth cooperation with wholesalers, and discussion and planning of disaster countermeasures with them

・ Ensuring transparency of wholesale and market inventory

・ Review of the crisis management system and crisis management regulations

≪ Risk Summary ≫

SHIONOGI holds a large amount of confidential information, including personal information, and uses various IT systems, including those of outsourced contractors. If its IT security is threatened by a willful or negligent act of an employee or contractor, or a cyberattack by a malicious third party, the possible risks are as follows.

- Difficulty in continuing business due to suspension of an important system

- Leakage of confidential information, including personal information

- Incurring of legal damages, such as claims for compensation for damage, and costs related to post-incident measures

- Decline in business performance and reputation

≪ Major responses and initiatives ≫

・Appointment of a CIO responsible for overall control of information management and who establishes policies to ensure information protection and information security, a CDO responsible for overall control of the use and management of data and documents, and a Global Head of IT responsible for operation of SHIONOGI’s information technology, and the establishment of rules and regulations for information management based on laws, regulations, and guidelines

・ Establishment and promotion of the SHIONOGI Group Global Privacy Policy with regard to personal information

・ Conducting education to ensure that all employees of the Group are aware of the importance of information management and personal information and the need to comply with laws and regulations regarding the protection of personal information

・ Promoting a project to establish an IT-BCP system to be prepared for a cyberattack, a large-scale disaster, or any other crisis

・ Improving IT infrastructure, strengthening information security infrastructure, and improving the infrastructure’s operations

・ Taking measures to prevent cyberattacks based on an actual attack on a location in Taiwan, including a fundamental review of the Group-wide network structure based on a global security assessment conducted for the entire Group, including overseas locations

≪ Risk Summary ≫

Pharmaceuticals are approved and sold after rigorous review by competent authorities around the world. After launch, efforts are made to gather safety information and take necessary measures for ensuring safety and proper use of pharmaceuticals. However, if an unforeseen ADR occurs or reporting of ADR is omitted or delayed, the following risks are expected.

- Suspension of sales or product recall

- Lawsuits filed for compensation for health damage

- Impact on business performance and reputation

≪ Major responses and initiatives ≫

・ Establishing and strengthening systems to properly gather, analyze, evaluate, and report information on ADR

・ Conducting education for all employees that leads to minimizing the spread and harm of ADR

・ Coverage by insurance for indemnity of medical damage from ADR

≪ Risk Summary ≫

SHIONOGI recognizes that compliance not only refers to the observance of laws, rules, and regulations but also includes compliance with social norms and ethical behavior as a company and a member of society. Under this awareness, violations of laws and regulations, deviations from social norms, and unethical behavior/actions in the course of business activities are considered as material risks. If any of such risk emerges, the possible impacts are as follows.

- Decline in reputation

- Loss of trust from stakeholders

- Worsened business results and financial condition

≪ Major responses and initiatives ≫

・ Adding a compliance section to the SHIONOGI Group Code of Conduct and establishing and promoting the SHIONOGI Group Compliance Policy

・ Enhancing compliance awareness of all Group employees through Global Compliance & Quality Week

・ Operation of the compliance promotion system according to the structure of organizations

・ Meetings of the Compliance Committee chaired by the Representative Director, President and CEO (four times a year)

・ Reporting to the Board of Directors on the status of the Compliance Committee activities (twice a year)

・ Placing compliance as a top priority in business activities, and communicating the President’s messages about compliance (six times in FY2023)

・Conducting compliance awareness surveys among all employees, and providing feedback on analysis results for each organization

・ Creation of a checklist of five items for employees to stop and reassess their actions when they are unsure of what to do, and disseminating the checklist to all employees globally

≪ Risk Summary ≫

In the course of business activities, such as pharmaceutical research, development, manufacturing, etc., events that affect the environment and/or ecosystems and the safety of workers may occur. If damage caused by such events emerges, the possible risks are as follows.

- Suspension of operation of facilities or equipment, or incurring of countermeasures or recovery costs

- Lawsuits filed for compensation, or payment of compensation costs

- Decline in business performance and reputation

≪ Main response ≫

・ Establishment of the EHS Policy and the EHS Code of Conduct to enhance governance

・ Establishment of a Group-wide environment, health and safety (EHS) management system

・ Review of Medium-Term Action Plan regarding environmental materiality and EHS

・ Strengthening the operation of ISO14001 and ISO45001 and the EHS management system in accordance with these standards at each business site

・ Ensuring compliance with relevant laws and regulations, and formulating stricter voluntary management standards and targets

・ Establishment of Global SOP for setting Occupational Exposure Limits (OELs) for worker exposure to APIs

・ Setting handling standards for worker exposure

≪ Risk Summary ≫

The purpose of collaboration with business partners is to enable mutual provision of management resources and internal information and to strengthen business by utilizing the strengths of both parties. However, it is associated with the risks below.

- Use of SHIONOGI’s technologies and know-how by partners for purposes other than the purpose of the business alliance

- Lawsuits due to unintended, unauthorized use of technologies of other companies or infringement of intellectual property by SHIONOGI

- Leakage of confidential information by SHIONOGI

- Decline in the brand image, reputation, or trust from investors due to leakage of confidential information by other companies

≪ Major responses and initiatives ≫

・ Enhancing communication with partners to eliminate misunderstanding and maintain or improve relationships of trust

・ Entering into a non-disclosure agreement incorporating potential risks

・ Entering into a contract that clarifies matters related to handling of intellectual property rights and compensation for damage

・ Avoiding litigation risks by conducting periodic inspection of intellectual property rights to identify problems and infringement risks

・Establishment of an information management system by properly encrypting data, strengthening access control, preventing unauthorized access from outside using a firewall, and developing a security monitoring system

・ Minimizing information to be shared with partners and formulating rules for information sharing

・ Establishment of a system to monitor the status of use of shared information and access logs

・ Regular audits and evaluation of the information management system of partner companies

・Conducting due diligence from multiple perspectives on the reliability, financial condition, legal issues, etc. of partner companies

・Conducting regular audits and evaluation of partnerships for the purpose of early detection of problems and points requiring improvement

・ Establishing a new group specializing in alliance management and accumulating know-how

≪ Risk Summary ≫

SHIONOGI’s products generate profits under the protection of intellectual property rights (e.g., patents). However, due to factors such as an increase in Group companies and changes and expansion of business areas, there is a risk that various intellectual properties may not be sufficiently protected or that third parties’ intellectual property rights may be infringed. If the intellectual property rights SHIONOGI owns are infringed by a third party, or SHIONOGI’s products infringe the intellectual property rights of a third party, the possible risks are as follows.

- Deterioration of business results and financial condition due to loss of expected revenue

- Disputes or lawsuits for the protection of intellectual property rights

- Payment of damages

- Injunction against manufacture and sale of the product

- Decline in the corporate brand or reputation

≪ Major responses and initiatives ≫

・ Proper acquisition of intellectual property rights and establishment of a management system, and continuous surveillance on infringement of rights by third parties

・ Conducting infringement prevention surveys in business activities

・ Putting in place a system to prevent infringement by carrying out IP due diligence in in-licensing and out-licensing activities, etc.

・ Conducting education for employees through e-Learning, etc. on a regular basis

≪ Risk Summary ≫

The Pharmaceuticals Business is subject to a range of regulations due to various government policies in each country and region. In addition to tighter health insurance finances, large financial outlays due to the COVID-19 pandemic and the U.S. Inflation Reduction Act (IRA) may further increase the pressure to curb drug cost increases, especially in developed countries. At the same time, important elections are scheduled in the U.S. and other countries around the world in FY2024, and we need to pay close attention to the impact of the results of these elections on policy. In Japan, the health insurance system is undergoing reforms, with healthcare expenses expected to increase due to the further aging of the population. Beginning in FY2021, National Health Insurance (NHI) price revisions have been conducted every year. These government policy trends may affect SHIONOGI’s performance. In addition, changes in regulations in Japan and overseas related to the development and manufacture of pharmaceuticals may result in additional costs or the need for new measures. Furthermore, there are concerns about the impacts of the lifting of various regulations and support measures introduced to deal with COVID-19 at the end of FY2023. If they become real, the following risks are expected.

- Decline in the predictability of the prescription drug business

- Determination of drug prices deviating from the created innovation value

- Delay in research and development, or supply instability of drugs, vaccines, etc.

≪ Major responses and initiatives ≫

・ Creating innovative pharmaceuticals and healthcare services and providing them at prices acceptable to society

・ Building evidence that demonstrates the value of its innovations

・ Promoting efforts to appeal to the value of innovations through the activities of industry associations

・ Obtaining the latest information on the NHI drug price system and various regulations on the research and development, manufacture, and sale of pharmaceuticals, etc., and promptly responding to them