Risk Factors
Upon identification of the possibility of such risks, the Group will make its best efforts to avoid such an occurrence or take countermeasures against such an occurrence.
Please note that the following descriptions do notcover all of the risk factors concerning investment decisions. Descriptions related to the possible occurrence of events in the future are based on the Group’s judgments as of June 26, 2009, the date on which it filed its financial report.
Risks Concerning the Alcoholic Beverages and Seasonings Business and its Business Environment
(1) Risks concerning dependence on particular markets and products
More than 90% of sales of the Group's alcoholic beverages and seasonings segment are generated within Japan, and its market is highly vulnerable to changes in the tastes of consumers. The Group therefore strives to develop both original products that meet the ever-changing tastes of consumers and unique products that differentiate the Group from competitors. However, changes in consumer trends have been accelerating recently. For this reason, if the Group fails to offer attractive products that satisfy the tastes of consumers and reflect market trends, business growth and profitability will suffer and may adversely affect the business performance and financial position.
Furthermore, in Japan both a low birthrate and a rapidly aging population are said to have already pushed the population into a declining trend. If this population decrease results in a decline in liquor demand, the Group's business may be adversely affected.
(2) Risks concerning market competition
The recent deregulation in alcoholic beverages retail licensing has drastically changed the liquor distribution structure and prompted competing companies to reduce prices and pursue new product strategies, which has intensified competition in the marketplace. In such a competitive business environment, the Group is striving to address the challenges by developing and cultivating high-value-added products, strengthening its brand power, carrying out sales activities that reflect the changes in distribution channels and cutting costs.
However, if competition increases to a level that cannot be countered by these measures and strategies, the Group's performance and financial position may be adversely affected.
(3) Risks concerning dependence on particular plants for manufacturing
Most of the Group's alcoholic beverage products are manufactured at the Fushimi Plant (Fushimi Ward, Kyoto City) and the Matsudo Plant (Matsudo City, Chiba Prefecture), both operated by Takara Shuzo. Furthermore, the Group is expanding the production lines at these two plants. Therefore, in the event of a major earthquake or any other occurrence that prevents operations in either of these areas, it may threaten to seriously affect the manufacture and supply of products, which may adversely affect the Group's business performance and financial position. In addition, ethyl alcohol, a major raw material used by the Group, is classified by the Fire Service Law as a hazardous material, Class 4 (inflammable liquid, possessing a serious risk of starting and spreading a fire, which, once started, is hard to extinguish).
(4) Risks concerning fluctuations of raw material prices
The Group's procurement of raw materials could be indirectly affected by the climatic and economic conditions of supplier countries and regions. Ethanol for shochu and other products come mainly from South America and Asia, and rice for sake and other products is procured in Japan; therefore, the prices of these raw materials are influenced by weather conditions in these areas and the market for the raw material. Recently, the purchase price of ethanol has been increasing, and any hike in the procurement cost of raw materials will cause an increase in our production cost. If this increase cannot be added to the sales price due to, for example, market conditions, this in turn may adversely affect the Group's business performance and financial position.
(5) Risks concerning Japan's legal regulations
The alcoholic beverages business of the Group is subject to regulations specified under the Liquor Tax Law that governs licenses for the manufacturing and/or selling of alcoholic beverages and liquor taxes in Japan. In accordance with the Liquor Tax Law, the Group has obtained, in addition to the license as a seller, the license for manufacturing each type of product and for operating each manufacturing plant from the relevant taxation offices. In future business operations, the Group will continue to be regulated by the Liquor Tax Law, and consequently any change to the liquor tax rates may affect selling prices and sales trends.
(6) Risks concerning social attitudes toward drinking
It has been said that drinking alcoholic beverages in moderation generally relieves weariness, increases appetite, eases stress and works as a social lubricant. On the other hand, many problems in habitual drinking have been pointed out, such as intoxication, organ damage due to chronic drinking, alcoholism, under-age drinking and damage to the fetus owing to drinking by pregnant women, characteristics of which are not seen in any other beverages or foods.
Realizing these problems, the Group, as an organization producing and selling alcoholic beverages, is carrying out various activities to spread the idea of “controlled, moderate drinking” from the viewpoint of meeting its social responsibilities by helping to maintain and improve people's health. If these alcohol-attributable problems become more serious within society, the Group's production and sales activities may be further regulated or otherwise affected, and the future growth, business performance and financial position of the Group's alcoholic beverages business may deteriorate.
Risks Concerning the Biomedical Business and its Business Environment
In the biomedical business, the Group has been conducting a wide range of R&D activities in fields covering a broad range of biotechnology-related industries. The Group considers that these R&D activities are extremely important in order to keep the Group’s competitive edge. The Group therefore aggressively invests in research and development. However, there is no guarantee that the R&D activities will advance as planned, and because clinical development in the field of gene medicine takes a very long time, it is also not guaranteed that any R&D activities will bear fruit in a timely manner. A delay in R&D activities may adversely affect the business plans, business performance and financial position of the Group’s biomedical business. Furthermore, there is no guarantee that the R&D activities currently in progress will produce their expected results. Such a failure could hinder the Group from meeting its planned revenuemaking expectations.
(2) Risks concerning market competition
Currently, the revenue base of the Group’s biomedical business is generated by genetic engineering research, whose major product is research reagents related to the polymerase chain reaction (PCR) method*. However, the PCR license granted to the Group is not an exclusive license, with many other companies similarly granted a PCR license, thereby intensifying competition. Moreover, unlike medical equipment, since neither permission nor approval is required for the manufacture and sale of scientific instruments, entry into the market is relatively easy; therefore, there are many competing companies in the market.
In gene medicine, various genetic gene transfer methods and effective vectors have been developed recently, and the applications of gene therapy are expanding from congenital diseases, infectious diseases and various types of cancer to non-fatal chronic illnesses. Moreover, today, cell therapy is used to improve the quality of life (QOL) of patients and not just as a cure for a disease. Thus, a potentially enormous market has opened up, which has resulted in many enterprises investing in gene medicine research and development, centering on Western startup businesses.
In AgriBio, the health food industry is booming and many businesses, not just food manufacturers but many pharmaceutical companies as well, are entering the rapidly growing market. Legal regulations impose restrictions only on the descriptions of efficacies and effects as well as also prohibiting the use of experimental data in sales promotions to differentiate product offerings. As a result, this market is easy for companies to enter, which is consequently intensifying competition.
Under these market conditions, the Group strives to start new business projects and commercialize projects in their R&D phase as quickly as possible. However, if a competitor successfully commercializes a similar product or technology before the Group does, or if a competitor commercializes a superior technology, the business plans, business performance and financial position of the Group may be adversely affected.
Currently, the Group’s biomedical business depends mostly on Takara Biotechnology (Dalian), a Chinese subsidiary of the Takara Group, for manufacturing products related to the genetic engineering research sector. Therefore, in the event of a deterioration in security, a major earthquake or any other occurrence that prevents operations in the region where this subsidiary is located, the whole Group could lose most of its capacity to manufacture the products concerned, which may adversely affect the Group’s business performance and financial position.
(4) Risks concerning legal regulations specific to the biomedical business
R&D activities in genetic engineering research are regulated by relevant legislations, such as the Law Concerning Prevention from 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, and the Group intends to observe these laws and regulations. In sales of research reagents, the Group is also required to follow the Poisonous and Deleterious Substance Control Law. Research reagents are not drugs as defined by the Pharmaceutical Affairs Law, and consequently are not regulated by that law. However, if these regulations are tightened or new regulations are enforced following the expansion of gene-related industries, the Group’s business may be adversely affected.
The relevant laws and regulations such as the Pharmaceutical Affairs Law regulate the commercialization of gene and cell therapies, and the Group intends to comply with such laws and regulations. These laws and regulations are concerned with securing the quality, effectiveness and safety of drugs, quasi drugs, cosmetics and medical instruments, and the trading of these products requires obtaining approval or permission from the relevant authorities. At present, it is uncertain whether or not the Group will be granted any necessary permission or approval based on the Pharmaceutical Affairs Law for each project for which it is carrying out R&D activities. In addition, new therapies such as activated immunotherapy may require approval or may become regulated by the Pharmaceutical Affairs Law or Medical Practitioners Law in the future. In the event that these laws are tightened or a new regulation is introduced, the Group’s business strategy may be adversely affected. To start the gene diagnosis business, the Group has to register as a sanitary inspection institute under the Law for Clinical Laboratory Technicians and Health Laboratory Technicians and observe the related laws and regulations.
(5) Risks concerning intellectual property rights
In the biomedical segment, where the success of business depends solely on the success of R&D activities, the Group regards securing intellectual property rights,
including patents, as being a critical management responsibility, and it protects technologies developed inhouse with patents to prevent competitors from imitating them. The Group will continue placing the highest priority on applying for patents in its R&D activities. All applications are not always registered, however, and when a registered patent is made invalid for any reason, or expires, the Group’s business strategies or operational results may suffer a serious impact.
In addition, the Group is always mindful that, in bio-related industries with continuous cutthroat competition in research and development, its technology that is guarded with a patent right may be superseded at any time by a competitor. The Group is also willing to acquire or buy licenses for promising patent rights held by third parties, but this strategy may be prohibitively expensive or alternatively there is a possibility that the Group may not be able to acquire licenses for necessary patent rights.
Risks Shared by the Whole Group
The Group owns marketable securities. If their market values fall drastically, the difference between the acquisition cost and market price is booked as a loss for the fiscal year. Such a loss may adversely affect the Group’s business performance and financial position.
(2) Risks concerning impairment of fixed assets
The Group owns fixed assets. If the Group determines that an impairment loss should be recognized on any fixed assets or asset group specified by the accounting standard for impairment of fixed assets, the book value of the asset or asset group in question is lowered to the recoverable price, and the difference is booked as a loss for the fiscal year. Such a loss may adversely affect the Group’s business performance and financial position.
(3) Risks concerning retirement benefit liabilities
The Group calculates the cost of its employees’ retirement benefits and pension liabilities based on such preconditions as the discount rate used in actuarial calculations and the expected rate of return on pension assets. If the actual results are different from the preconditions or the preconditions have changed, the effects are accumulated and regularly recognized in the future, and generally affect expenses recognized and liabilities booked in future periods. If the yield on the investment in pension assets management worsens, it may adversely affect the Group’s performance and financial position.
(4) Risks concerning overseas operations
The Group’s operations include the manufacture and sale of products in North America, Europe and China as well as other regions of Asia. If any of these countries or regions experiences a drastic change in the condition of their economies, politics and/or societies, or suffers damage from a natural disaster, such as a major earthquake, the demand for the Group’s products could deteriorate and/or production facilities might have to suspend production. Such an occurrence could seriously affect the Group’s business plans and performance.
(5) Risks concerning fluctuations in exchange rates
Local currency-denominated items, including sales, expenses, and asset and liability accounts, are translated into Japanese yen for the purpose of the preparation of the consolidated financial statements. These items may be affected by the exchange rate at translation. The Group enters into forward exchange contracts and exchange rate hedging to minimize the adverse effects caused by short-term fluctuations in exchange rates between the U.S. dollar and yen. In the medium-to-long term, however, the Group may fail to accurately carry out procurement and sales activities as planned due to fluctuations in exchange rates. Therefore, fluctuations in exchange rates may adversely affect the business performance and financial position of the Group.
(6) Risks concerning product liability
All of the products developed and manufactured by the Group are exposed to the risk of product liability compensation. If any defect is found during the manufacturing, selling or clinical testing process, or any health impairment is caused by an alcoholic beverage, food, drug or medical instrument in particular, the Group may be subject to a product liability claim. Despite possessing product liability insurance, it is uncertain whether or not the insurance will cover the full amount of the final compensation. A defect that results in large-scale recalls or product liability compensation not only causes a huge financial cost but also affects the Group’s reputation, business performance and financial position.
(7) Risks concerning legal regulations
The Group is developing businesses in various countries and regions subject to local governmental regulations, such as those granting permission to begin business operations or undertake investment, export restrictions because of national security or other reasons, and trade conditions, including tariff duties. The Group is also subject to legislation governing trade, monopoly, patents, consumers, taxation, foreign currency exchanges, transportation, and environmental and recycling issues. If the Group is unable to observe any of the legislative regulations, its activities may be restricted and an increase in costs may occur.
Also, as a corporation involved in the manufacture and sale of food products, the Group maintains business facilities, manages equipment, containers and packages, as well as 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 control food hygiene. Food safety matters, including food hygiene and such problems as intentional interference, are an unavoidable issue. Therefore, if any problem should arise related to this issue, the business performance of the Group may be adversely affected.
Moreover, in sales of health foods, the Group makes its best efforts to observe the provisions of the Pharmaceutical Affairs Law in regard to expressing and advertising efficacies and effects and providing directions for proper usage. Due to the general nature of health foods, however, the Group cannot completely rule out the possibility of it violating any provision on mandatory information. If any violation occurs within the Group, trust in the Group may deteriorate and the business performance of the Group may be adversely affected.
As the Group is also selling certain products over the Internet, the Group is subject to mandatory information regulations based on the Specified Commercial Transactions Law.
(8) Risks concerning information control
The Group retains personal information about numerous individuals through, among other activities, sales promotion campaigns and mail-order sales. The Group takes every precaution to prevent the leakage of such information by establishing an information control system, appointing personnel in charge of information security, conducting ongoing staff training and taking other related measures. However, the risk remains that some unexpected incidents could lead to the loss, leakage or falsification of personal and/or other internal information. In such cases, the Group could lose its credibility among the general public, which may adversely affect the Group’s business.
(9) Risks concerning lawsuits
The Group strives to observe all the laws and regulations relevant to its business operations by enhancing its compliance measures. However, as the Group conducts its business both within and outside Japan, there remains a risk of a third party filing a suit over such issues as the Product Liability Law, intellectual property rights or a claim for compensation for an invention irrespective of whether or not the Group or its employees have violated any law. If a court case were to be brought against the Group, or if the court decision were to go against the Group, the Group’s business performance and financial position may be adversely affected.