Bringing

SmilesEveryoneto

Annual Report 2013
Year Ended March 31, 2013

Profile
The origins of Kaken Pharmaceutical Co., Ltd., can be traced back to the Institute ofPhysical and Chemical Research (RIKEN), which was established in 1917.
In 1948, the Company started its pharmaceutical business by developing a new way
to manufacture penicillin utilizing Riken’s own technologies. It has since broadened thescope of its business activities to include the manufacturing and sales of drugs such as
streptomycin, an antituberculosis drug, and various antifungal agents.
The Company is particularly strong in the field of orthopedics, dermatology, andinternal medicine. In the field of orthopedics, Kaken boasts the accomplishment of
introducing medical treatment for osteoarthritis that involves the intraarticular
injection of sodium hyaluronate.
Since 2001, the Company has been marketing Fiblast Spray, a wound-healing agent that
employs a recombinant human basic Fibroblast Growth Factor (bFGF). This was the first drugin the world to employ bFGF. Kaken continues to advance research efforts in this field.
The Company is also focused on the fields of inflammation, immunologic diseases, and allergies, as well asthat of fungal infection. In 2012, Kaken applied for manufacturing approval for efinaconazole, an original drug
developed by Kaken, as Japan’s first topical antifungal agent for onychomycosis.

Bringing

SmilesEveryone

to

Corporate Philosophy
Kaken helps improve the quality of life for patients by serving as many people as possible
to return smiles of happiness to their faces, through supplying superior pharmaceuticals.

Business Philosophy

KAKEN

Three Joys
Creating joy
for patients

Creating joy
as a company

Creating joy
for our employees

We strive to create and offer
effective drugs that satisfy
the needs of patients andmedical professionals.

We recognize our social
responsibility as a pharmaceuticalcompany with a high ethicalstandard and society’s trust.

Our objective is to become
a company with vitality andpresence whose employees enjoy
and take pride in their work.

Forward-looking Statements
This annual report contains forward-looking statements pertaining to the Company’s business and prospects. These statements are based on the current
analysis of existing information and trends. Actual results may differ from expectations due to unforeseen risks and uncertainties.

Consolidated Financial Highlights
Net Sales

Operating Income

Net Income

MILLIONS OF YENMILLIONS OF YENMILLIONS OF YEN

82,93085,02286,42887,997

15,18087,054

8,991

14,611

14,17911,784

8,213

8,282

2011

2012

6,734

10,629
5,579

2009

2010

2011

2012

2013

2009

2010

2011

2012

2009

2013

2010

ROE

Net Income per ShareTotal Net Assets%

YEN

MILLIONS OF YENCash Dividends per Share

Capital Adequacy Ratio

YEN%

66,578103.30
87.87
13.69

13.53

13.98

11.59

92.46

59.98

59,57560,375

62.65

61.30

62,071

59.05
61.13

55.61

26.00

2010

56,679

68.79

9.78

2009

2013

2011

2012

2013

2009

30.00

2010

40.00

36.00

2011

2012

44.00

2013

2009

2010

2011

2012

2013

Contents
President’s Message����������������������������������������������������������������������������� 2

2

4

Special Feature: Developing New Products�������������������������������������� 4
Overview of Major Products��������������������������������������������������������������� 6
Commitment and Excellence������������������������������������������������������������10
Fulfilling Our Social Responsibilities�����������������������������������������������13

6

Board of Directors and Audit & Supervisory Board Members�����16
Financial Section���������������������������������������������������������������������������������17
Corporate Data������������������������������������������������������������������������������������45
ANNUAL REPORT 20131

President’s Message

Tetsuo Onuma
President and Representative Director

Dear Stakeholders:
In the fiscal year under review, ended March 31, 2013, sales volumes for Artz, Seprafilm, and other mainstay products were up, as
were sales of generic drugs. However, drug prices were reducedby slightly less than 6%, resulting in a small year-on-year decline
in sales. Nevertheless, we were able to achieve higher net income.
We increased dividend payments for the 11th consecutive year
and repurchased 2 million shares of treasury stock. In this way,
we would like to express our appreciation for your support over
the years.
In the fiscal year ending March 31, 2014, we are targeting higher
sales and income, as announced previously. In addition, we plan toissue total dividend payments of ¥48.00 per share, making for the
12th consecutive year of increased dividend payments. We will
also repurchase another 1.2 million shares of treasury stock, as we
pursue higher levels of shareholder returns.
Further, I anticipate that the fiscal year ending March 31, 2014,
will be a year in which we give form to several initiatives that have

Overview of Results for the Fiscal Year Ended
March 31, 2013
The impacts of drug price revisions in the fiscal year under review,
ended March 31, 2013, resulted in a 1.1% year-on-year decrease in
net sales, to ¥87,054 million. Consequently, operating income wasdown 3.7%, to ¥14,611 million. However, net income increased
8.6%, to ¥8,991 million, due to the benefits of tax revisions.

2

KAKEN PHARMACEUTICAL CO., LTD.

yet to come to fruition. One such example is KP-103, Kaken’s
original topical antifungal agent for onychomycosis for which we
submitted an application to receive marketing and manufacturing
approval for in October 2012. At the same time, we will accelerate
the licensing activities that we have traditionally conducted withthe aim of supplementing our development pipeline.
Looking ahead, the operating environment is expected to remain highly opaque due to such factors as drug price revisions
impacting long-term listed products. However, we believe it is still
possible for Kaken to improve performance in the fiscal year ending March 31, 2014. This improved performance is expected to be
driven by contributions from the sales of existing products thatare still experiencing sales growth and the generic drugs we sellin response to the contemporary needs.
Going forward, we will strive unceasingly to ensure Kaken
Pharmaceutical continues to be a company that is appealing
to investors. In closing, I would like to ask for your continued
support as we undertake this endeavor.

Addressing Future Challenges for Continued Growth
The Kaken Group is addressing future challenges with the aim of
maximizing corporate value and maintaining the trust of society.

• Strategically investing in R&D
In our R&D efforts, we selectively focus our investment of
resources and constantly strive to raise efficiency in order toexpand the product pipeline. At the same, we conduct joint
research and pursue strategic alliances with companies andresearch institutions in Japan and around the world, with theaim of quickly introducing new research projects.
To expedite R&D efforts, we will outsource basic research
procedures, utilize contract research organizations (CROs), andconduct overseas clinical trials while also participating in joint
international clinical trials.
Through these efforts, we will work to develop new drugs to
support the health of people around the world.

• Strengthening our sales force
We conduct sales activities in which our medical representatives(MRs) work closely with local communities to supply medical
practitioners with high-value-added medical informationaccording to their needs. We primarily provide information
by utilizing product-related websites and the mass media.
Additionally, we are expanding our market share in the fieldof orthopedics to further solidify our position in that field.
We are also developing our generic drug business as a dominantpillar of our operations.

• Optimizing operations and promoting efficiency
We are actively working to improve the cost of sales ratio
through more-efficient investment and optimizing the placement of employees, while revising products and standards.
Also, we are increasingly outsourcing the production of
agrochemicals to overseas companies.
Additionally, we outsource all of our distribution center
functions.

• Promoting environmental preservation
Kaken recognizes that promoting environmental preservation isa social responsibility. Therefore, it is conducting Companywide
environmental preservation activities under the guidance of theEnvironmental Committee.
Both Kaken’s Shizuoka Factory and Shizuoka Research Laboratories have obtained ISO 14001 certification. Also, the Kyoto
Research Laboratories have received the Kyoto Environmental
Management System Standard (KES) Step 2 certification, acertification awarded by the city of Kyoto in recognition of
implementing appropriate environmental management systems.
Further information regarding Kaken’s environmental preservation activities can be found in its Social and Environmental
Report (Japanese only), which is available on Kaken’s website.

Basic Policy and Approach Concerning Returns
to Shareholders
Kaken believes that providing consistent shareholder returns is
an important task for management.
The pharmaceutical industry is relatively high risk, and therefore
companies operating in this industry must maintain a higher levelof equity capital than companies in other industries. However, we
aim to provide shareholder returns while maintaining a balancewith the need to secure sufficient equity capital. Accordingly, we
have established a flexible policy of dividend payments that are
based on operating results and also take this balance into consideration. Retained earnings are used to maximize corporate value
through strategic investments in R&D and business infrastructure.
In principle, the Company makes dividend payments twice ayear, with the interim dividend being decided at the general meeting of shareholders and the year-end dividend being decided by
the Board of Directors.
In accordance with the aforementioned policy, we have decided
to increase both the interim and year-end dividend by ¥2.00 per
share, to ¥22.00, for total dividend payments of ¥44.00 per sharein the year under review, making this our 11th straight year ofincreased dividend payments.
Further, the Company acquired 2,000,000 shares of treasury
stock in accordance with a decision made by the Board of Directors.
In the fiscal year ending March 31, 2014, we intend to pay
interim and year-end dividends of ¥24.00 per share each, fortotal dividend payments of ¥48.00 per share.

Target Management Indicators and Long-Term Business
Strategy
Targeting future growth, the Kaken Group has set the mediumterm numeric target of consolidated operating income of ¥20.0
billion. In the future, we will endeavor to optimize the value ofeach division and establish a base that ensures our survival as abusiness that maintains a strong presence in the 21st century.
June 2013

Tetsuo Onuma
President and Representative Director

ANNUAL REPORT 20133

Special Feature

Developing

New Products

to Satisfy Unmet Medical Needs

Kaken’s Specialty—Topical Antifungal Agent—
The drug candidate KP-103 (efinaconazole), which was discovered through the outstanding antifungal
research at Kaken, has the potential to be the world’s first triazole compound for a topical medication foronychomycosis. This drug has high antifungal activity and is effective against a wide spectrum of fungi.
Also, compared to other existing antifungal agents, its activity decreased only slightly even in the presenceof keratin, the main component of nails. This means that the drug has superior nail penetrating properties,
thereby suggesting that it will maintain its therapeutic effect in nails thickened by fungal infection or on
the underside of such nails. KP-103 has also shown antifungal activity in various animal models of infections
and, in particular, greater effectiveness than other treatment options in a guinea pig model for onychomycosis. While oral medications are currently taken as a standard therapy for patients suffering from persistent
onychomycosis, KP-103 shows promise as a new treatment option by its featured topical approach.
In 2006, Kaken concluded a licensing agreement with Dow Pharmaceutical Sciences, Inc. (DPS), of theUnited States, for the development and marketing of KP-103 products in Europe and the Americas. Afterthe acquisition of DPS in 2009 by Valeant Pharmaceuticals International, Inc., of Canada, Valeant hascontinued the joint development activities with Kaken. In two multinational pivotal studies (Phase III)in patients with mild to moderate onychomycosis of the toenails, this topical investigational drug
(US development code: IDP-108) was found to be statistically superior to a placebo for all primary andsecondary endpoints. The efficacy of this drug is competitive when compared to that of existing oral
medications, and it has thus demonstrated its efficacy as a topical agent with fewer side effects.
In 2012, Kaken applied for marketing authorization for KP-103 in Japan, and the application is currently
under investigation. We expect that the drug will receive approval in 2014, making it Japan’s first topical
medication for onychomycosis, and we are currently responding to investigations and preparing to market
the drug accordingly. Valeant also submitted a marketing authorization application for this drug in the
United States and Canada during 2012.
We will continue our efforts with overseas partners to acquire approval of this drug as a treatment foronychomycosis in the global market.

4

KAKEN PHARMACEUTICAL CO., LTD.

New Drug Development Pipeline
PRODUCT CODE

INDICATIONSTAGE

REMARKS

KP-103 (IDP-108)

Onychomycosis

Filed

Topical formulation
In the overseas markets, Valeant Pharmaceuticals International, Inc.
filed a new drug application for approval in the U.S. and Canada.

KCB-1D

Periodontitis

PIII

bFGF

KCB-1B

Bone fractures

PII FinishedbFGF
Next stage of clinical trials under consideration

TRK-100STP

Lumbar spinal
canal stenosis

PII

Developed jointly with Toray Industries, Inc.;
Additional indication for BERASUS

SI-657

Enthesopathy

Preparing for PIII

Developed jointly with Seikagaku Corporation;
Additional indication for ARTZ

Kaken’s Innovative Product for Tissue Regeneration:
Fiblast Spray

Action Mechanism of Fiblast Spray
Epithelialization Stimulation
Reduction of wound area

Fibroblasts Proliferation
Stimulation of granulation

Fiblast Spray is the world’s first product that commercializes
formation
recombinant human basic Fibroblast Growth Factor (bFGF).
GRANULATION
bFGF exists in almost all tissue in the human body. It is released
TISSUE
from the extracellular matrix once tissue is damaged by trauma
and ischemia, etc., after which bFGF acts on various cells and tissues
to stimulate tissue regeneration. While bFGF has a wide range ofAngiogenesis
functions, it is best known for its powerful abilities to stimulate
1. Activation of matrix degrading enzymes
2. Migration of vascular endothelial cells
both cellular proliferation and neovascularization.
3. Proliferation of vascular endothelial cells
4. Formation of vascular vessel lumen
In 1988, Kaken obtained exclusive licensing rights for recombinanthuman bFGF (trafermin) in Asia from Scios Inc., of the United States.
Following this, Kaken made continued R&D efforts, and as a result obtained marketing approval in Japan for
Fiblast Spray for the treatment of pressure ulcers and other skin ulcers (burn ulcers and leg ulcers) in 2001.
Further, as the Japanese regulatory authority completed reexamination of the product in 2010, Fiblast Sprayhas reestablished its presence as a highly reliable drug in the medical market in Japan, and is now used withconfidence at a number of hospitals throughout the country.
In addition to its effectiveness in regard to regenerating skin tissue, trafermin has also demonstrated theabilities to promote the proliferation and regeneration of both periodontal and bone tissues. In the field ofdentistry, trafermin is known for its ability to promote the regeneration of periodontal ligaments, cementum, and alveolar bone. After the completion of the phase III clinical trial that is currently underway, we
intend to file a new drug application of trafermin for the treatment of periodontitis.
In March 2005, Kaken acquired the worldwide rights to develop, manufacture, and market trafermin for all
therapeutic purposes. In June 2007, Kaken entered a licensing agreement with Sunstar Inc., regarding thedevelopment and marketing of trafermin for dental applications in Europe and North America. Further, inNovember 2009, Kaken entered a licensing agreement with Olympus Corporation regarding the development
and marketing of trafermin for wound healing in Europe and North America. Regarding the development andmarketing of Fiblast Spray, Kaken entered licensing agreements with a Chinese pharmaceutical company inDecember 2005 and with a South Korean company in December 2006, respectively.
Going forward, in collaboration with our overseas business partners, Kaken will continue to further establish the presence of trafermin in the global medical market by fully utilizing the wealth of knowledge wehave accumulated regarding trafermin and its uses through our R&D efforts.

EPIDERMISDERMIS/SUBCUTANEOUS
TISSUEMUSCLEBONE

ANNUAL REPORT 20135

Overview of Major Products
Distribution of Net Sales (Non-Consolidated)%
5.7% 2.4
Renting Real Estate

Agrochemicals

In the fiscal year under review, drug price revisions adversely impacted
sales. As a result, non-consolidated net sales decreased 1.2% year on year,
Non-Consolidated
Net Sales¥85,270 million(–1.2% yoy)to ¥85,270 million.

91.9%

Pharmaceuticals andMedical Devices

Pharmaceuticals and Medical Devices
In pharmaceuticals, sales of genericdrugs were up, and Artz, an antiosteoarthritis product that is one of
the Company’s mainstay products,
maintained sales of essentially thesame level as seen in the previous
fiscal year. However, Procylin, a drug
to treat chronic artery occlusive disease, and Adofeed, a pain- andinflammation-relieving plaster, experienced a decline in sales as theimpacts of drug price revisions could not be completely absorbed.
In medical devices, sales were up for Seprafilm, an anti-adhesive
absorbent barrier. Due to these factors, in the fiscal year under review,
net sales for pharmaceuticals and medical devices decreased 1.6% year
on year, to ¥78,395 million.

Net Sales (Non-Consolidated)

Agrochemicals

Net Sales (Non-Consolidated)

Agrochemical sales rose, driving
an overall increase in sales in thiscategory, and net sales rose 4.6%,
to ¥4,843 million, accordingly.

MILLIONS OF YENMILLIONS OF YEN

73,25576,40778,276

79,661

78,395

2009

2010

2011

2012

2013

YEARS ENDED MARCH 31

5,740
4,711

2009

2010

4,319

2011

4,630

4,843

2012

2013

YEARS ENDED MARCH 31

Renting Real Estate

Net Sales (Non-Consolidated)

In the real estate segment, themajority of revenues are generated
through rent fees related to the
Bunkyo Green Court commercial
facility. Net sales for the real estatesegment increased 0.2% year on year,to ¥2,031 million.

MILLIONS OF YEN

2,074

2,053

2,045

2,026

2,031

2009

2010

2011

2012

2013

YEARS ENDED MARCH 31

6

KAKEN PHARMACEUTICAL CO., LTD.

Pharmaceuticals and Medical Devices
Artz

MentaxFUNCTION: Anti-osteoarthritis product

FUNCTION: Anti-trichophyton productArtz is an anti-osteoarthritis drug. Its
active pharmaceutical ingredient ispurified sodium hyaluronate extracted
from rooster combs, and it has viscoelastic, water-retentive,
and lubricating properties.
In 1987, Artz was introduced into the market as the world’s
first sodium hyaluronate drug indicated to treat osteoarthritis
by intraarticular injection. In 1989, an indication was added forthe treatment of shoulder periarthritis.
In 1992, Artz began being marketed in disposable pre-filled
syringes under the trade name Artz Dispo. This was done withthe aim of making injection procedures simpler and faster, as
well as reducing the danger of infection.
In 2005, the drug was approved for an indication to treat knee
joint pain accompanied by chronic rheumatoid arthritis.

Mentax is a topical productused to treat superficial
mycosis containing butenafinehydrochloride, a compound developed by Kaken, as an active
pharmaceutical ingredient. In addition to being available inJapan, Mentax is offered in the United States, sold by Mylan
Pharmaceuticals, and is also marketed in a number of othercountries worldwide. In December 2001, Mentax received
approval as an over-the-counter (OTC) drug in the UnitedStates. It has subsequently been sold in the United States by
Merck Consumer Care under the trade name Lotrimin Ultra.
In Japan, Mentax received approval to be manufactured, andit was subsequently launched as an OTC drug in 2003. Salesof Mentax as an OTC drug in Japan are conducted by Takeda
Pharmaceutical Company Limited and Sato Pharmaceutical Co.,
Ltd. In 2004, a new spray formulation of Mentax was introduced
into the market.

Procylin
FUNCTION: Oral-use prostaglandin I2 analog product
Procylin is a drug used to treat chronicartery occlusive disease containing
a prostaglandin I2 analog, beraprost
sodium, as an active pharmaceuticalingredient. The drug has the effects ofboth vascular vessel dilatation and platelet aggregation inhibition. It is the only oral-use prostaglandin I2
analog product in the world. It was developed by Toray Industries, Inc. and commercialized by co-development with Kaken.
Procylin improves blood circulation by platelet aggregationand peripheral blood flow increase. It has an improvement effecton ulcers, pain, and chills resulting from conditions associatedwith arteriosclerosis obliterans (ASO) and thromboangitis obliterans (TAO). The drug was launched in 1992. In 1999, Procylin
was approved for an additional indication to treat primary
pulmonary hypertension.

Lipidil
FUNCTION: Anti-hyperlipidemia product
Lipidil is a fibrate-type antihyperlipidemic
drug with fenofibrate, which was developed by Groupe Fournier SA of France,
as its active pharmaceutical ingredient.
The drug lowers triglycerides and total cholesterol, while
increasing HDL cholesterol, thus improving overall lipid
metabolism by activating peroxisome proliferator activatedreceptor (PPAR ) in the liver cells to adjust the expression ofvarious lipid metabolism related proteins.
Lipidil is currently marketed in over 90 countries and muchclinical experience has been accumulated to date.
In 2011, Lipidil was released in tablet form. The change from
capsule to tablet has made Lipidil even easier for patients to take.

Fiblast Spray

AdofeedFUNCTION: Wound-healing product

FUNCTION: Pain- and inflammation-relieving plaster

Fiblast Spray is a wound-healing drug
containing trafermin, a recombinanthuman basic fibroblast growth factor(bFGF) that has effects on the
promotion of angiogenesis and granulation formation,as an active pharmaceutical ingredient. The entire DNA
sequence of the human bFGF gene was mapped by Scios
Inc., thus making it possible to manufacture recombinanthuman bFGF. Kaken obtained a license to develop thisAdofeed is an antiphlogistic analgetic plaster. Its active pharmaceutical ingredient is flurbiprofen, a nonsteroidal anti-inflammatory agent thatfunctions as a powerful prostaglandin biosynthesis inhibitor. Adofeed is absorbed directly
through the skin and is effective in treating
pain and inflammation caused by such condition as osteoarthritis, shoulder periarthritis, tennis elbow, and muscle pain.
In 2008, we launched plasters that were double the size of the
Adofeed plasters previously offered. This allows patients tochoose the size most appropriate for their needs.

product, and subsequently launched Fiblast Spray, theworld’s first recombinant human bFGF product, in Japan
in 2001.
ANNUAL REPORT 20137

Ebrantil

Generic Drugs

FUNCTION: 1 blocker to treat dysuria and hypertension

In Japan, people are being
encouraged by the government to use generic drugs aspart of a movement to reduce
public healthcare costs. As aresult, there has also been an increasing trend in the medical
field toward using generic drugs.
Kaken sees the future expansion of the generic drug market
as a significant business opportunity, and therefore is aggressively increasing its presence in this market in order to takefull advantage of this opportunity.
Consequently, we aim to grow our generic drug operations
into a fifth pillar of our business, alongside pharmaceuticals,
medical devices, agrochemicals and animal health products,
and real estate, and have set a medium-term goal of achieving
net sales of ¥10.0 billion in this field. Accordingly, we willcontinue to expand our generic product lineup.

Ebrantil is a sustained-release formulation of urapidil, which isa selective 1 blocker. This product was initially placed on themarket in Japan in 1989 for the treatment of hypertension basedon its peripheral vasodilating effect. In 1995, it was approved forthe treatment of dysuria due to it having benign prostate hypertrophy as an additional indication. In 1999, it was approved forthe treatment of dysuria caused by neurogenic bladder, making
it the first 1 blocker in the world for this indication.

Berasus
FUNCTION: Oral-use sustained-release formulation of
prostaglandin I2 analog
Berasus, which was approved formarketing in October 2007 andsubsequently launched in Decemberof the same year, is a drug used to treat
pulmonary arterial hypertension (PAH). This product is asustained-release formulation of beraprost sodium, the active
pharmaceutical ingredient of Procylin, which was launched in
1992. This product can maintain more-consistent blood levels
in comparison with Procylin, which made it possible to reduce
the number of administrations and increase the daily dose.
As there are currently very few effective drugs available for thetreatment of PAH, Berasus is ranked as an important drug forthis disorder.
Currently, clinical trials are in progress to add an indication totreat lumbar spinal canal stenosis.

ClexaneFUNCTION: Anticoagulant
Clexane is an anticoagulant containing enoxaparin sodium, a low
molecular weight heparin developed by Sanofi of France, as anactive pharmaceutical ingredient.
Clexane exhibits an anticoagulant effect by forming a complex
with antithrombin III that inhibits Xa and IIa activation factors.
Clexane is the first product of low molecular weight heparindeveloped in Japan with an indication to suppress an onset ofvenous thromboembolism (VTE). Clexane is recommended to be
used to suppress the sideration of VTE for the treatment ofpatients who undergo podiatric or abdominal surgery underdomestic and international medical guidelines.
The product is currently used in approximately 130 countries
worldwide.

8

KAKEN PHARMACEUTICAL CO., LTD.

Seprafilm
FUNCTION: Anti-adhesive absorbent barrier
Developed by Genzyme Corporation(current Sanofi) of the United States,
Seprafilm is a sheet-type anti-adhesive
absorbent barrier. Made from sodium hyaluronate and carboxymethyl cellulose, Seprafilm transforms intoa hydrated gel within 24 to 48 hours after being applied to tissue
that has been damaged by surgery. It then remains in place forapproximately seven days, preventing adhesion by forming aphysical barrier between damaged tissue and the healthy tissue
surrounding it.
There are currently three sizes of Seprafilm available, thus
allowing practitioners to select the size that meets the need.

Agrochemicals
Polyoxins ( fungicides)

Pentoxazone (rice herbicide)

Polyoxins are natural fungicides originating from micro­organisms first discovered by Dr. Saburo Suzuki and his teamat the RIKEN Institute in 1963. They are produced by culturing an
actinomycete, Streptomyces cacaoi var. asoensis isolated from soilof the Aso region in Kumamoto Prefecture, Japan. Polyoxins are
not a single compound, but are a complex consisting of a seriesof compounds resembling each other in their chemical structure.
Currently, 14 different polyoxin analogues, polyoxins A throughN, have been discovered. Among them, the major active ingredient of Polyoxin AL, a polyoxin complex used for fruit trees andvegetables, is a polyoxin complex consisting of polyoxin B andother related compounds. Meanwhile the main active ingredientof Polyoxin Z, used for lawns, is polyoxin D.
Polyoxins have been sold as horticultural fungicides for over
40 years and even now, they are still widely used. Polyoxin AL iseffective against a wide range of fungi-related diseases such as
mildew, gray mold, and other mold fungi diseases that affectvegetables, flowers, and other plants.

Synthesized at the Sagami Chemical Research Center anddeveloped by Kaken, Pentoxazone is an oxazolidinedione-type
rice herbicide. In 1997, it was registered as an agrochemical in
Japan. Since then, it has been used as a herbicide for paddy ricein its initial formulation and in several mixed formulations basedon this initial formulation. Pentoxazone is effective mainly on
annual weeds in rice paddies, such as barnyard grass, Lindernia,
and Monocholia, and is also widely effective on other weeds
including Eleocharis kuroguwai, a perennial weed that is difficult
to eradicate. Pentoxazone shows high, stable, and residual efficacy particularly on Lindernia and Monocholia, both of which
are resistant to sulfonylurea herbicides.
The safety of Pentoxazone is high for rice paddies and therefore it can be used in a variety of ways. Its initial formulation canbe used on rice paddies before or after the rice is transplanted
and its one-shot herbicide formulation can be used at the sametime as rice planting. There are also formulations approved forflooding and direct seeding in rice paddies. As a harmful effect,
mild browning of the leaf sheathes of the rice plants is observed
five to ten days after the application of the herbicide, but it is
only a temporary effect and the plants quickly recover without
adverse effects on their subsequent growth.
Having extremely low water solubility and high soil absorbability, Pentoxazone hardly flows out to groundwater andrivers. Furthermore, it has low toxicity to humans, animals,
and other living beings. For these reasons, it is an environmentally safe herbicide.

Animal Health Products
Salinomycin (anti-coccidial for chickens)

Colistin sulfate (polypeptide antibiotic)

Salinomycin sodium is a polyether antibiotic originally discovered in a culture of Streptomyces albus, a strain of Actinomycetes
in 1968. Later, it was developed as a feed additive by Kaken.
Salinomycin sodium is currently the most widely used anticoccidial worldwide, having effectiveness against Clostridium
and other gram-positive bacteria. Produced in accordance with
Good Manufacturing Practices (GMP), Salinomycin sodium
is not only used in Japan but also exported, thus supporting
poultry farmers worldwide.

Colistin sulfate is a polypeptide antibiotic that was originallydiscovered in a culture of Bacillus colistinus taken from the soil in
Fukushima Prefecture, Japan. Colistin sulfate is effective against
gram-negative bacteria such as E. coli and salmonella, which areserious pathogens for livestock. Accordingly, there is a great
demand domestically and internationally for this product.
Therefore, Kaken also exports this product worldwide.

ANNUAL REPORT 20139

Commitment and Excellence

R&D Division
As a pharmaceutical manufacturer, Kaken is dedicated to conducting R&D activities while always maintaining the goal of developing proprietary medicines. Kaken focuses its drug discovery
efforts on areas in which it is particularly strong including inflammation, allergies, and pain relief, and also maintains its focus on
the area of fungal infection in which it specializes, devoting agreat deal of financial and human resources to these research
themes. It utilizes the technologies it has developed through its
experience over the years and superior research staff in the pursuit of new drugs that are both effective and safe. In this manner,
Kaken is continuing to implement active drug discovery programs.
The R&D Division is presently staffed by approximately 300
employees. Kaken estimates that research and development expenses will be around ¥7.7 billion during the current fiscal year.
The R&D Division also works to more actively evaluate products
as potential candidates to be introduced into Kaken’s pipelineof clinical development. At the same time, the division employsa multifaceted approach toward R&D activities, which entails
engaging in joint research and development, in- and out-licensingof developed products, and outsourcing of its operations to suchorganizations. This serves to accelerate its R&D initiatives.
Kaken’s Central Research Laboratories consists of two different
facilities, one located in Kyoto, the old capital of Japan, and theother located in Shizuoka. At both facilities, drug discovery projects, which require long, arduous research as well as unique, specialized knowledge, are conducted. In order to ensure that theseprojects progress efficiently, researchers make full use of state-ofthe-art equipment and technologies, and encourage effective
communication and the clear division of responsibilities. The
Research Laboratories are divided into five different sections. The
Chemistry Research Department specializes in the synthesis of
10

KAKEN PHARMACEUTICAL CO., LTD.

chemical compounds, the “seeds,” from which new drugs are
created. The Drug Discovery Research Department seeks out
novel drug targets, screens chemical compounds, and evaluates
selected candidates from screening. The Pharmacology Research
Department evaluates the usefulness of candidate compounds
developed through drug discovery research and compares thesecompounds to other drugs. The Pharmacokinetics and Safety
Research Department assesses how candidate compounds behave
within the body and evaluates the safety of candidate compounds
for use on humans through non-clinical studies. The Drug Formulation Research Department identifies the physicochemical properties of compounds and develops formulations of thesecompounds that guarantee their stability and maximize theireffectiveness when used on patients. These five sections advanceKaken’s R&D efforts through collaborative, coordinated efforts.
Kaken’s R&D activities have earned us a number of awards.
In 2009, Kaken’s scientists were awarded the Asahi Kasei
Encouraging Award from the Academy of Pharmaceutical Scienceand Technology, Japan (APSTJ) for utilizing novel technology inthe development of Itraconazole products. Additionally, in 2011,
a paper written on the Formulation Design of Latanoprost Eye Drops
received an award as an excellent paper from the APSTJ. Later, in2012, another scientist was awarded the Best Presentation Awardfor the 27th annual meeting of APSTJ for its research regarding“In Vitro—In Vivo Correlation of Percutaneous Drug Absorption.”
These recognitions have further reinforced the high reputationof Kaken’s fundamental technology. By leveraging such superior
research technologies, the Company aims to continue to accelerate and expand its R&D efforts.
Only candidate drugs that have cleared a number of non-clinicalstudies regarding safety and pharmacokinetics, as well as effectiveness of the drugs, are allowed to proceed onto clinical trials

in which the drugs are administered to humans. After testing
candidate compounds that have been developed through drug
discovery research or introduced from outside partners, the Clinical Development Department plans and conducts efficient clinical
trials for these compounds both in Japan and overseas to verify
their efficacy and safety on human subjects. In addition to developing its original drugs, Kaken also engages in joint developmentwith other companies or organizations. Recently, a successful
global clinical trial was jointly conducted between Kaken and aforeign company, which has entered into a licensing agreement
regarding the development and marketing of a compound createdoriginally by Kaken. The Administration of Clinical Development
Department is responsible for all areas of statistical analysis. It also
manages case data from clinical trials and information related tothe safety of the drugs under investigation, and works to maintaina certain degree of quality with regard to this data. Meanwhile,
the R&D Quality Assurance Department assures the quality andreliability of the data related to clinical trials that are conductedby the Clinical Development Department. The R&D Quality Assurance Department also assures quality and reliability of the plansand data related to the non-clinical studies that are designed andconducted by research laboratories. These departments cooperatewith Kaken’s research laboratories in order to conduct clinical
trials as quickly as possible.
Further, while focusing on its areas of expertise, Kaken willcontinue to collaborate with both domestic and overseas research
institutions in order to accelerate the progression of its drug
discovery research efforts. Also, the Company will introduce andlicense new drugs and continue to seek out the “seeds” of newtechnologies and drugs around the world. Moreover, by periodically discussing Kaken’s drug discovery strategies with and receiving advice from respected experts in Japan, the Company willcontinue to ensure that its drug discovery programs are in-linewith present day needs.

Regulatory Affairs Division
Kaken’s Regulatory Affairs Division consists of three departments:
the Quality Assurance Department, the Pharmacovigilance
Department, and the Regulatory Affairs Department.
The Regulatory Affairs Division is an embodiment of Kaken’s
sense of responsibility as a pharmaceutical manufacturer. Thisdivision makes the final judgments regarding the quality, effectiveness, and safety of the drugs that the Company supplies to the
medical field.
The Quality Assurance Department assesses whether or noteach batch of drug is produced in the predetermined mannerand evaluates whether or not quality tests are compliant with allapplicable standards. The Pharmacovigilance Department thenreviews the safety related information pertaining to these drugs
that has been collected from medical institutions using the drugs.
Following this, the Regulatory Affairs Division makes comprehensive judgments based on the findings of these two departments.
The Quality Assurance Department conducts regular inspections and audits of both internal and external production plants,
thus gathering and assessing quality related information at theseplants in order to ensure the quality of their operations. The
Pharma­covigilance Department reports the safety related
information it has gathered and reviewed to both the regulatory
and internal organizations that require it. The department also
distributes this information to medical institutions by reflecting
the gathered information in the package inserts in the form of
information on the proper use of drugs in order to promote theireffective use.
The Regulatory Affairs Department supervises and assists all
aspects of the Company’s manufacturing and sales activities, andis also responsible for maintaining marketing licenses for its pharmaceuticals. In addition to this, the department also participatesin the R&D process. It compiles the R&D Division’s data regarding
production quality as well as data from both non-clinical andclinical trials. After compiling this data, the department is thentasked with gaining approval for use of our drugs and for listingthem in the National Health Insurance Drug Price List after
approval is obtained. The department is also responsible for
producing product literature for approved drugs.

ANNUAL REPORT 201311

Production Division

Agrochemical & Animal Health Products Division

Kaken’s flagship production facility is the Shizuoka Factory.
Here we manufacture the raw materials used to make pharma­
ceuticals and agrochemicals. The facility also produces a wide
variety of pharmaceuticals in various different forms. Operationscommenced after World War II, and initially it primarily manufactured antibiotics and enzymes through fermentation. Over theyears, it has continued to refine these technologies, and now
one of its main characteristics is its use of sophisticated fermentation technologies.
In manufacturing pharmaceuticals, we practice strict adherence
to Japanese GMP (“Ministerial Ordinance on Standards for Manufacturing Control and Quality Control for Drugs and Quasi-drugs,”
Ordinance of Ministry of Health, Labour and Welfare, No. 179,
2004). Further, for products marketed overseas, we take steps toensure they are in compliance with applicable standards in the
United States and other countries in which they are sold. In suchways, we have developed a stringent quality control system underwhich we strive to manufacture products of the highest quality.

The Agrochemical & Animal Health Products Division is
responsible for conducting global research, development, andsales activities related to agrochemicals, feed additives, anddrugs for animals.
Our agrochemical operations are primarily focused on two
products—Polyoxins, which is a group of fungicides, and Pentoxazone, a rice herbicide—and we are actively expanding sales ofthese products both in Japan and overseas. Polyoxins are fungicides
produced by culturing microorganisms in a culturing medium
consisting of natural materials. For a number of years, theseproducts have been consistently evaluated highly by agriculture
producers around the world due to their safety for both humans
and animals, low environmental impact, and effectiveness foruse against disease damage on vegetables, fruit trees, lawns,
and flowers. These products were also recently proven to haveacaricidal properties, thus further expanding their range of use.
Pentoxazone is a rice herbicide effective against the vast arrayof annual weeds found in rice paddies and has demonstrated
effectiveness against herbicide-resistant varieties of weedsthat have emerged recently. These factors make Pentoxazone
indispensable for rice farmers.
Our animal health products operations offer anti-coccidials forchickens, including Salinomycin, which is a feed additive, as well asColistin sulfate, which helps prevent infectious diseases in livestock. We also supply a drug for bovine, known as Uroston, thus
contributing to the production of healthy livestock and safe food.
Going forward, the Agrochemical & Animal Health Products
Division will continue contributing to the safety and reliabilityof food production by developing and selling products thatare safe for both humans and animals, while also having a low
environmental impact.

Marketing & Sales Division
At Kaken, we employ medical
representatives (MRs), who
are responsible for providing
medical practitioners in thefield with the latest information
regarding the Company’s drugs
and medical devices. These MRs
also gather information regarding the safety and effectivenessof Kaken’s products by actively
engaging in communication
with such medical practitioners.
They then provide feedback to internal departments basedon their findings.
Our approximately 700 MRs located throughout Japan work inclose contact with local communities, particularly in the fields oforthopedics and dermatology, two areas in which we specialize.
In the fiscal year ended March 31, 2013, we strengthened oursales structures by switching to a sales system based on a nationwide network consisting of 8 branches and 69 sub-branches.

12

KAKEN PHARMACEUTICAL CO., LTD.

Distribution Division
All distribution functions are outsourced to distributors thatspecialize in the distribution of pharmaceuticals.

Fulfilling Our Social Responsibilities
Corporate GovernanceKaken’s Activity Principles and Guidelines

Kaken’s management philosophy is centered on the three joysof “creating joy for patients,” “creating joy as a company,” and“creating joy for employees.” “Creating joy as a company,” oneof the three joys, is based on the principle that “Kaken aims to be
a company realizing its social responsibility as a pharmaceuticalcompany conducting its business with both a high ethical standard and society’s trust.” Accordingly, the tasks of “enhancing
corporate governance” and “ensuring the transparency of management,” as well as “providing our stakeholders with proper
explanations of the Company’s activities,” are placed among
our top management priorities.

Each executive and employee of Kaken and its subsidiaries
is strongly committed to compliance with all relevant Japaneseand foreign laws and regulations, respecting different
cultures and customs, and adopting high ethical standards
in business operations.
1. We recognize the preciousness of life and shall contributeto the welfare of society by channeling all our efforts into
the enhancement of people’s health and patients’ qualityof life.
2. We recognize the importance of maintaining appropriate
relations with all medical practitioners as well as ourshareholders, investors, employees, business partners,
and local communities.
3. We shall compete in a fair and free manner, conducting ourbusiness activities in an appropriate way.
4. We shall handle all the Company’s assets, including information, in a legitimate and proper manner to facilitate the smoothrunning of our business operations.
5. We shall respect the human rights and individuality of employees, pay attention to health and safety issues, and endeavor
to foster a fair and honest workplace culture.
6. We shall manage Company information appropriately anddisclose information in a timely and appropriate manner.
7. We shall take seriously the impact of our activities on
the global environment and contribute to society as agood corporate citizen, including through environmental
protection efforts.
8. We shall not tolerate terrorism and other anti-social behavior.

Initiatives to Enhance Corporate Governance
The Company recognizes the fact that compliance is essential inearning the trust of society. For this reason, we have established
Kaken’s Activity Principles and Guidelines, and consequently
strive to practice high ethical standards in our management.
Moreover, we realize that our business activities have a direct
impact on people’s lives and health. All of our employees arethus fully aware of these principles and guidelines, and exercise
them in their daily work as they participate in this importantbusiness pursuit.

Compliance
We believe that compliance-based management is the mostfundamental key element in earning the trust of society andpromoting the healthy development of the Company. Moreover,compliance is important in raising corporate value, which ourshareholders, investors, business partners, and the local community will in turn benefit from.

Corporate Governance System
General Meeting of Shareholders
APPOINT/DISMISSAPPOINT/DISMISS
AUDITBoard of Directors

Audit & Supervisory Board
Audit & Supervisory Board Members
COORDINATE/REPORTAPPOINT/DISMISSSUPERVISE

COORDINATE
INSTRUCTInternal Audit Department
REPORT

Risk Management andvarious other committees

REPORT

DELIBERATE

AUDIT

Accounting
AuditorSUPERVISE

President
REPORTPROMOTE

AUDIT

Chairman

REPORT

Managing Directors’ Meeting

APPOINT/DISMISSREPORT

INSTRUCT, SUPERVISE

Company-wide organizations,Group companies

ANNUAL REPORT 201313

Environmental Protection Activities
In recent years, there has been a growing concern for various
environmental issues, such as preserving biodiversity. These issues
force corporations to reevaluate their interests in a number ofwide-ranging and complex areas, thus increasing the role that
corporations must play in addressing these issues. Of these issues,
we believe that addressing the need to preserve and restore thenatural environment is of particular importance for corporations.
Therefore, we will continue to exercise our corporate philosophy
by promoting environmental preservation and working to be agood corporate citizen with the aim of creating a society that isfull of healthy, smiling faces.
In 1983, Kaken launched its environmental campaign by
establishing Environmental Measures Committees at each of its
operational sites. These committees were assigned the task ofcomprehensively addressing various CSR-related issues, such as
the need to preserve the natural environment, improve people’s
health and living environments, and reduce pollution.
Further, in 2004, we developed the Kaken Basic Environmental
Philosophy and the Basic Environmental Policies. Later, theEnvironmental Measures Committees were transformed into
the Environmental Measures Task Forces in order to enhance theirability to respond to such changes as the April 2009 revision of
the Act on the Rational Use of Energy. These task forces work incooperation with the Environmental Committee to develop environmental preservation measures with a particular focus on thosethat relate directly to society. Additionally, we have taken several
steps to reinforce our environmental management activities,
including acquiring ISO 14001 certification for our Shizuoka
Factory in August 2001 and the Kyoto Environmental Management System Standard (KES) Step 2 certification for our Kyoto
Research Laboratories in April 2005.
Looking ahead, we will continue to actively engage in environmental management and social contribution activities at theCompany’s headquarters and all of its factory, research laboratories, and sales and other branches, while developing a more complete and aggressive approach toward environmental issues.

At the same time, we will work to reduce the environmental
impact of Kaken’s operations.

Recent Environmental Protection Activities
Environmental Monitoring of Business Activities
Kaken believes that consideration for the natural environmentis one of its responsibilities toward society. For this reason, allemployees are made aware of the environmental circumstances
regarding all of its business operations, spanning from researchand development to production and back-office operations. This
includes input data related to usage of chemical substances andenergy, both of which impact the environment, as well as output
data on the emissions into water and the atmosphere and waste
production. Based on an understanding of this information,
reductions in environmental impact are being pursued.
Water Pollution Prevention
Kaken is emphasizing initiatives that contribute to environment
preservation. For example, the Shizuoka Factory separates wastewater from production activities into organic wastewater andother wastewater. Organic wastewater then undergoes treatmentusing active sludge, after which it is mixed with other wastewater
until the organic wastewater is diluted to below the maximum
level defined in wastewater standards. It is then dispelled intorivers. To further its efforts to prevent water pollution, the factory
concluded an agreement with Fujieda City, Shizuoka Prefecture,
regarding pollution prevention in 1976. The factory has also established internal standards based on which it periodically measures
its environmental impacts, and practices strict compliance withenvironmental laws and regulations. In a similar manner, the Kyoto
Research Laboratories treat organic wastewater using active
sludge, and then mix it with wastewater from other systems before dispelling into public sewers. When dispelling such wastewater, the Kyoto Research Laboratories adheres to its own internal
standards, which are stricter than the standards of Kyoto City, andit also periodically measures emissions and reports the findings.

Kaken’s River Beautification Activities
Seto River, Shizuoka Prefecture

14

KAKEN PHARMACEUTICAL CO., LTD.

Shinomiya River, Kyoto Prefecture

Air Pollution Prevention
In order to prevent air pollution, the Shizuoka Factory installeda city-gas fired boiler to replace its previous boiler, which usedfuel oil A. As a result, the factory has continued to boast zero
emissions of sulfur oxide (SOx) since 2007. The factory also evaluates emissions of smoke dust twice a year, and emission volumes
are currently significantly lower than the figures promised inits pollution prevention agreement with Fujieda City (smoke
dust concentration of less than 0.2g/m3N). Going forward, theShizuoka Factory will continue to strengthen its management
systems to better prevent air pollution.
Chemical Substance Management
Both the Shizuoka Factory and the Kyoto Research Laboratories
are managing chemical substances on a voluntary basis. In orderto reduce exposure to potential risks from using harmful chemical
substances, the Company considers possible revisions to its processes for manufacturing and analyzing pharmaceuticals, and is
working to reduce the amount of solvents used and switch to lessharmful substances. In addition, regulations have been establishedfor handling harmful chemical substances and these substances
are stringently managed. In these ways, the Company is working
to prevent accidents and environmental pollution at all stages ofhandling these chemicals, from purchasing to use and disposal.
The Company also manages chemical substances in an integrated
manner together with reagents, and safety data sheets (SDSs)
regarding the usage of such substances are kept up-to-date toensure readiness for emergencies.
Waste Reduction and Recycling
As the Company’s operations involve using raw materials to create
products, the production of waste cannot be avoided. However,the development of a recycling-based society requires that the
production of waste for final disposal be reduced to the greatest
extent possible. To this end, the Shizuoka Factory acts in accordance with the Basic Law for Establishing the Recycling-based
Society, and is actively practicing the 4Rs (refuse, reduce, reuse,
and recycle). In the fiscal year ended March 31, 2013, the total
amount of waste produced by the Shizuoka Factory was 5,565 tons.
Of this, 93% was sludge produced during treatment of wastewaterand residual materials from fermentation processes (animal andplant remnants). All waste produced in this year was used forcomposting. Going forward, the Company will continue to advance
activities promoting the reduction and recycling of waste.

Social Responsibility as a Pharmaceutical Company
Product Quality Assurance
Kaken believes that it is absolutely essential to possess a quality
assurance system in which both its headquarters (responsible
for sales and manufacturing of pharmaceuticals) and its factory(responsible for manufacturing of pharmaceuticals) fulfill theirindividual responsibilities while also maintaining close coordination. At Kaken’s factory, the effectiveness and appropriateness ofeach manufacturing process and facility is evaluated to ensurethat manufacturing practices and quality are suitably managed.
Located in the Company’s headquarters, the Quality Assurance
Department evaluates and confirms these activities, which isbelieved will result in the creation of a more stringent quality
assurance system. However, this type of coordination is not limited to divisions related to quality. Rather, these activities havebeen expanded to the R&D Division, Production Division, andMarketing & Sales Division to guarantee the utmost quality
throughout all stages of a product’s lifecycle.

Safety Assurance for Pharmaceuticals After Launch
New pharmaceuticals receive marketing approval only after undergoing stringent evaluations. However, these evaluations are
based on the results of clinical trials, which have a limited scopein regard to such considerations as patient age and gender andthe range of drugs taken simultaneously. After drugs are launched,
they are used by a wider range of patients, and this can result inthe occurrence of unexpected side effects. For this reason, it isnecessary to continue to evaluate the efficacy and safety of drugs
even after they are launched, and respond to any issues that may
be discovered. To this end, the Company has established thePharmacovigilance Department, which continues to collect,evaluate, and analyze data regarding the efficacy and safety ofthe pharmaceuticals Kaken sells after they are launched. It thenaddresses issues and provides information regarding proper usage
methods to medical practitioners.

Information Provision by MRs
Kaken deals in a wide range of pharmaceuticals. Kaken’s medical
representatives (MRs) are responsible for handling all of thesepharmaceuticals. For this reason, they are constantly taking on
new challenges in a wide range of fields, and play an expansiverole in the development of Kaken’s pharmaceutical operations.
MRs maintain an up-to-date, in-depth understanding with regard
to products so that they are always able to adapt to changes incircumstances in the medical field. They also work to provide
appropriate response to the ever more complex, diverse needsof medical institutions and medical practitioners. In addition,
MRs collect feedback from practitioners in the medical fieldso that it may be utilized in efforts to improve existing products
and developing new drugs. Through these and other activities
coinciding with the corporate philosophy, MRs are providing
medical professionals with accurate information regarding
Kaken’s products.

ANNUAL REPORT 201315

Board of Directors and Audit & Supervisory Board Members(Standing, from left)

Noboru Shibata, Hirokazu Konishi, Susumu Kojima, Yoshihiro Ieda, Kazuki Sekitani(Seated, from left)

Shiro Inui, Tetsuo Onuma
Chairman and Representative Director

Audit & Supervisory Board Member

Shiro Inui

Kazuo Shiba(Standing)President and Representative Director

Tetsuo Onuma

Audit & Supervisory Board Member

Managing Director(Standing)Susumu Kojima(Research and Development)

Managing Director

Hirokazu Konishi(Marketing and Sales)

Managing Director

Yoshihiro Ieda
(Administration, Corporate Planning & Coordination)

Managing Director

Noboru Shibata(Accounting, Purchasing and Agrochemicals)

Outside Director

Kazuki Sekitani

16

KAKEN PHARMACEUTICAL CO., LTD.

Masanori Aoyama
Audit & Supervisory Board Member

Sumio Yoshizawa
Audit & Supervisory Board Member

Toshio Sakurai

Financial Section
Consolidated Five-Year Summary�����������������������������������������������������18
Management Discussion and Analysis��������������������������������������������18
Consolidated Balance Sheets������������������������������������������������������������20
Consolidated Statements of Income������������������������������������������������22
Consolidated Statements of Comprehensive Income�������������������23
Consolidated Statements of Changes in Net Assets���������������������23
Consolidated Statements of Cash Flows�����������������������������������������25
Notes to the Consolidated Financial Statements��������������������������26
Report of Independent Auditors������������������������������������������������������44

ANNUAL REPORT 201317

Consolidated Five-Year Summary
THOUSANDS OF
U.S. DOLLARS (NOTE)MILLIONS OF YEN

2013

2012

2011

2010

2009

2013

FOR THE YEARS ENDED MARCH 31

Net sales¥ 87,054¥ 87,997¥86,428¥85,022¥82,930$  936,065

Operating income

14,611

15,18014,17911,784

10,629157,108

Net income

8,991

8,282

8,213

6,734

5,579

96,677

Total net assets

66,57862,07160,37559,57556,679715,892

Total assets

108,911105,108

98,49395,096

94,504

1,171,086

AT MARCH 31

PER SHARE DATA

Net income (Basic)

YEN

U.S. DOLLARS (NOTE)¥103.30¥92.46¥87.87¥68.79¥55.61$1.111

44.00

40.00

36.00

30.00

26.00

0.473

ROE

13.98

13.53

13.69

11.59

9.78

Capital adequacy ratio

61.13

59.05

61.30

62.65

59.98

Cash dividends (Non-Consolidated)
RATIOS%

Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥93 = $1.00, effective on March 31, 2013.

Management Discussion and Analysis
Operating Performance
In the fiscal year under review, ended March 31, 2013, consolidated
net sales were down 1.1% year on year, to ¥87,054 million, due
to the impacts of drug price revisions. As a result, operating
income decreased 3.7%, to ¥14,611 million. Nevertheless, net
income increased 8.6%, to ¥8,991 million, thanks to the benefitsof tax revisions.

Segment Information
Pharmaceuticals
Kaken’s pharmaceuticals segment consists of two core categories:
pharmaceuticals and medical devices as well as agrochemicals.
In pharmaceuticals, sales increased for generic drugs, and salesof Artz, an anti-osteoarthritis product, remained at essentially thesame level as seen in the previous fiscal year. However, Procylin, adrug to treat chronic artery occlusive disease, and Adofeed, apain- and inflammation-relieving plaster, were unable to completely absorb the impacts of drug price revisions. As a result,sales were down overall.
In medical devices, sales increased for Seprafilm, an anti-adhesive
absorbent barrier.
In agrochemicals, sales grew overall.
As a result of the above, net sales decreased 1.1% year on year,to ¥84,618 million, and segment income* was down 3.3%, to¥13,240 million.
Net sales overseas were ¥3,722 million.

Real Estate
In the real estate segment, the majority of revenues are generated
through rent fees related to the Bunkyo Green Court commercial
facility. Net sales for the real estate segment increased 0.1% year
on year, to ¥2,435 million, while segment income* decreased 7.5%
year on year, to ¥1,370 million.
* Segment income is based on operating income.

18

KAKEN PHARMACEUTICAL CO., LTD.

Financial Position
Total assets were ¥108,911 million as of March 31, 2013, up¥3,803 million from the previous fiscal year-end, primarily due
to an increase in investment securities. Total liabilities were¥42,333 million, down ¥703 million, which was largely attributable
to a decrease in income taxes payable. Net assets totaled¥66,578 million, an increase of ¥4,507 million, following higher
retained earnings.

Cash Flows
Cash and cash equivalents as of March 31, 2013, totaled ¥16,920
million, a decrease of ¥930 million compared with the previous
fiscal year-end. Principal factors related to cash flows during theyear under review are as follows.
Net cash provided by operating activities totaled ¥11,729 million,
an increase of ¥1,444 million compared with the previous fiscal
year-end, due to factors including a decrease in notes and accounts
receivable–trade.
Net cash used in investing activities totaled ¥6,792 million, an
increase of ¥4,228 million compared with the previous fiscal yearend, due to factors including an increase in purchase of property,
plant and equipment.
Net cash used in financing activities totaled ¥5,867 million,a decrease of ¥1,037 million compared with the previous fiscal
year-end, due to factors including a decline in the acquisitionof treasury stock.

trials. In the event a new side effect is discovered at this stage,
sales of the drug could be halted.
(3) Risks related to policies to curtail medical expenses
As government initiatives to curtail healthcare expenses continue, various medical system reforms are being implemented.
These reforms may cause changes in the market environment,
which could subsequently affect the Company’s performance.
(4) Risks due to competition
Sales competition with other pharmaceutical companies may
result in a drop in the sales price of products. In addition, salesof generic products by other companies may cause declines insales of the original product. Such factors could subsequently
affect the Company’s performance.
(5) Risks related to delay or cessation of product supply
The supply of products may be delayed or halted as a result ofvarious factors, such as problems with the Company’s manufacturing facilities or the facilities of its suppliers, or delays in
the procurement of raw materials. These factors could affect
the Company’s performance.
(6) Risks related to legal action
The Company is exposed to the possibility of legal action in
the course of its business activities. Such actions could affect
the Company’s performance.

Business Risks
The risk factors outlined below in relation to the Company’s business activities may materially affect the decision making of investors. The forward-looking statements that are made reflect theGroup’s judgment and forecasts based on information available tous as of the end of the year under review. Further, the risks facedby the Company are not limited to those listed below.
(1) Risks related to new drug development
Substantial investment amounts and development periods ofmore than 10 years are required before a new drug is launched.
The Company develops new drugs while taking such factors as
the efficacy and safety of a particular drug into full consideration. However, it is possible that the development process
could be halted before its completion.
(2) Risks related to the occurrence of side effects
Clinical trials undertaken in the development stage involve thetrial administration of drugs to a limited number of patients.
Consequently, once a drug is launched onto the market we
conduct post-marketing surveillance to supplement clinical

ANNUAL REPORT 201319

Consolidated Balance Sheets
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
As of March 31, 2013 and 2012
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YENASSETS

2013

2012

2013

¥  9,710¥  9,543$  104,409

7,210

8,308

77,527

31,17432,032335,204

CURRENT ASSETS:

Cash and deposits (Notes 3 and 9)
Marketable securities (Notes 3, 4 and 9)
Receivables:		 Notes and accounts receivable–trade (Note 9)
		Accounts receivable–other
Allowance for doubtful accounts

1,016

1,070

10,92532,191

33,103

346,140

(3)

(3)

(32)

32,18833,100346,108

Inventories (Note 5)

11,531

10,926

123,989

Deferred tax assets (Note 14)

1,117

1,110

12,011

225

225

2,419

61,98363,214

666,484

Buildings and structures

39,84637,855428,452

Machinery, equipment and vehicles

21,90020,198235,484

61,74658,054

663,935(40,635)(38,884)(436,935)

Other
			Total current assets

PROPERTY, PLANT AND EQUIPMENT (Notes 6, 7 and 8):

Accumulated depreciation

21,111

19,169227,000

Land

6,646

5,455

71,462

Construction in progress

1,380

3,743

14,83929,13828,368313,312

10,272

6,422

110,452

732

966

7,871

Long-term prepaid expenses

1,396

148

15,011

Deferred tax assets (Note 14)

4,448

4,899

47,828939

1,087

10,097

			 Total property, plant and equipment

INVESTMENTS AND OTHER ASSETS:

Investment securities (Notes 4 and 9)
Intangible assets

Other assets
			 Total investments and other assets
TOTAL ASSETS

See accompanying notes to Consolidated Financial Statements.

20

KAKEN PHARMACEUTICAL CO., LTD.

17,78913,525191,280¥108,911¥105,108$1,171,086

THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

LIABILITIES AND NET ASSETS

2013

2012

2013

¥  8,390¥  8,390$  90,215
175,989

CURRENT LIABILITIES:

Short-term bank loans (Notes 6 and 9)
Payables:		 Notes and accounts payable–trade (Note 9)

16,367

16,331

		Notes payable–facilities

202

154

2,172

		Accounts payable–other

4,642

5,010

49,914

21,212

21,496228,086

Accrued expenses
Provision for bonuses
Provision for sales rebates
Income taxes payable (Note 14)
Other

716

726

7,699

1,213

1,168

13,043

529

537

5,688

2,616

3,420

28,129

554

614

5,957

35,23236,354

378,839

Provision for retirement benefits (Note 10)

6,112

5,753

65,720

Provision for directors' retirement benefits

5

390

54

142

150

1,527

			Total current liabilities

NON-CURRENT LIABILITIES:Deferred tax liabilities (Note 14)
Other

840

388

9,032

7,100

6,682

76,34423,85323,853

256,484

Capital surplus

11,587

11,587

124,591

Retained earnings

43,997

38,672

473,086	Treasury stock, at cost: 15,537,710 shares in 2013 and13,498,376 shares in 2012

(14,796)(12,592)(159,097)

			Total shareholders’ equity

64,642

61,520695,075

			Total non-current liabilities

NET ASSETS:

Shareholders’ Equity (Notes 2(l) and 12):
Common stock		 Authorized: 360,000,000 shares		Issued: 101,879,461 shares as of March 31, 2013 and101,879,461 shares as of March 31, 2012

Accumulated other comprehensive income:Net unrealized holding gain on securities (Note 2 (c))

1,936

550

20,817

			 Total accumulated other comprehensive income

1,936

550

20,817

			Total net assets
TOTAL LIABILITIES AND NET ASSETS

66,57862,071

715,892¥108,911¥105,108$1,171,086

See accompanying notes to Consolidated Financial Statements.

ANNUAL REPORT 201321

Consolidated Statements of Income
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2013 and 2012
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2013

2012

2013

NET SALES¥87,054¥87,997$936,065

COST OF SALES

44,96844,932

483,527

		Gross profit

42,08543,065452,527

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 13)

27,47427,884295,419

OPERATING INCOME

14,611

15,180157,108

Interest and dividend income

152

146

1,634

Interest expenses

(68)

(70)

(731)

Amortization of net retirement benefit obligation at transition

(524)

(524)

(5,634)

Loss on retirement of noncurrent assets(1,097)OTHER INCOME (EXPENSES):

(102)

(101)

Loss on revaluation of investment securities

—

(128)

—

Loss on revaluation of golf club membership

(4)

(5)

(43)

Gain on sales of investment securities

31

—

333

Other, net

82

70

882

(433)

(613)

(4,656)

14,17814,566

152,452

Current

5,517

6,071

59,323

Deferred

(331)

212

(3,559)

5,186

6,283

55,763

8,991

8,282

96,677¥ 8,991¥ 8,282$ 96,677

INCOME BEFORE INCOME TAXES AND MINORITY INTERESTSINCOME TAXES (Note 14):

INCOME BEFORE MINORITY INTERESTSNET INCOMEYEN

PER SHARE DATA:

U.S. DOLLARS (NOTE 1)

2013

2012

2013

¥103.30¥92.46$1.111———¥ 44.00¥40.00$0.473

Net income (Note 16):
		Basic
		Diluted
Cash dividends applicable to the year (Note 12)
See accompanying notes to Consolidated Financial Statements.

22

KAKEN PHARMACEUTICAL CO., LTD.

Consolidated Statements of Comprehensive Income
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2013 and 2012
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2013

2012

2013

¥ 8,991¥8,282$ 96,677

		 Net unrealized holding gain on securities

1,385

321

14,892

			 Total other comprehensive income

1,385

321

14,892Comprehensive income

10,377

8,603

111,581¥10,377¥8,603$111,581

Income before minority interests
Other comprehensive income (Note 17):

Total comprehensive income attributable to:		 Owners of the parent
See accompanying notes to Consolidated Financial Statements.

Consolidated Statements of Changes in Net Assets
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2013 and 2012
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2013

2012

2013

¥ 23,853¥ 23,853$ 256,484

23,85323,853

256,484

11,587

11,587

124,591

			 Sale of treasury stock

0

—

0

		 Total changes during the year

0

—

0

11,587

11,587

124,591

38,67233,806415,828

			Cash dividends(3,667)(3,416)(39,430)

			Net income

8,991

8,282

96,677

		 Total changes during the year

5,324

4,866

57,247

		 Balance at end of the year

43,997

38,672

473,086(12,592)(9,100)(135,398)(2,204)(3,491)(23,699)

1—

11

		 Total changes during the year

(2,203)(3,491)(23,688)

		 Balance at end of the year

(14,796)(12,592)(159,097)

61,52060,145661,505

			Cash dividends(3,667)(3,416)(39,430)

			Net income

8,991

8,282

96,677

			 Purchase of treasury stock(2,204)(3,491)(23,699)

1—

11

SHAREHOLDERS’ EQUITYCOMMON STOCK		 Balance at beginning of the year
		 Balance at end of the year
CAPITAL SURPLUS

		 Balance at beginning of the year
		 Changes during the year:

		 Balance at end of the year
RETAINED EARNINGS

		 Balance at beginning of the year
		 Changes during the year:

TREASURY STOCK		 Balance at beginning of the year
		 Changes during the year:
			 Purchase of treasury stock			 Sale of treasury stock

TOTAL SHAREHOLDERS’ EQUITY

		 Balance at beginning of the year
		 Changes during the year:

			 Sale of treasury stock		 TOTAL CHANGES DURING THE YEAR		 BALANCE AT END OF THE YEAR

3,121

1,374

33,559¥ 64,642¥ 61,520$ 695,075

ANNUAL REPORT 201323

THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2013

2012

2013

ACCUMULATED OTHER COMPREHENSIVE INCOME

Net unrealized holding gain on securities
		 Balance at beginning of the year¥   550¥   229$  5,914

		 Net changes in items other than shareholders’ equity

1,385

321

14,892

		 Total changes during the year

1,385

321

14,892¥ 1,936¥   550$ 20,817

550

229

5,914

1,385

321

14,892

		 Balance at end of the year
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME

		 Balance at beginning of the year
		 Net changes in items other than shareholders’ equity
		 Total changes during the year

1,385

321

14,892¥ 1,936¥   550$ 20,817

62,07160,375

667,430

			Cash dividends(3,667)(3,416)(39,430)

			Net income

8,991

8,282

96,677

			 Purchase of treasury stock(2,204)(3,491)(23,699)

1—

11
14,892

		 Balance at end of the year
TOTAL NET ASSETS		 Balance at beginning of the year
		 Changes during the year:

			 Sale of treasury stock			 Net changes in items other than shareholders’ equity

1,385

321

		 Total changes during the year

4,507

1,695

48,462¥66,578¥62,071$715,892

		 Balance at end of the year
See accompanying notes to Consolidated Financial Statements.

24

KAKEN PHARMACEUTICAL CO., LTD.

Consolidated Statements of Cash Flows
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2013 and 2012
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2013

2012

2013

¥14,178¥14,566$152,452
28,032

CASH FLOWS FROM OPERATING ACTIVITIES:

Income before income taxes
Adjustments for:		Depreciation

2,607

2,424

		 Amortization of long-term prepaid expenses

72

84

774

		 Increase (decrease) in provision for retirement benefits

512

615

5,505

		 Interest and dividend income

(152)

(146)

(1,634)

		Interest expenses

68

70

731

		 Loss on revaluation of golf club memberships

4

5

43

		 Loss (gain) on sales of investment securities

(31)

—

(333)

		 Loss (gain) on revaluation of investment securities

—

128

—

102

101

1,097

		 Decrease (Increase) in notes and accounts receivable–trade858(4,913)9,226

		 Decrease (increase) in inventories

(605)

(625)

(6,505)

		 Increase (decrease) in notes and accounts payable-trade

35

4,038

376

		Other, net

311

134

3,344

			Subtotal

		 Loss on retirement of noncurrent assets

17,961

16,485

193,129

		 Interest and dividends received

152

146

1,634

		Interest paid

(65)

(70)

(699)

		 Income taxes paid, net(6,318)(6,275)(67,935)

			 Net cash provided by operating activities

11,72910,285

126,118

Purchase of property, plant and equipment(3,845)(1,873)(41,344)

Purchase of investment securities(1,813)(3)(19,495)

148

—

1,591

(1,260)(35)(13,548)

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sales of investment securities
Payment of long-term prepaid expenses
Other, net

(22)

(651)

(237)

(6,792)(2,563)(73,032)

		 Net change in treasury stock(2,202)(3,491)(23,677)

		 Cash dividends paid

(3,664)(3,413)(39,398)

			 Net cash provided by (used in) financing activities(5,867)(6,904)(63,086)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(930)

816

(10,000)

			 Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

17,851

17,035

191,946

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 3)¥16,920¥17,851$181,935

See accompanying notes to Consolidated Financial Statements.

ANNUAL REPORT 201325

Notes to the Consolidated Financial Statements
1. Basis of Presenting Consolidated Financial Statements:
The accompanying consolidated financial statements of KAKEN PHARMACEUTICAL CO., LTD.
(the “Company”) and its consolidated subsidiaries (collectively the “Group”) are prepared on the basisof the accounting principles generally accepted in Japan, which are different in certain respects as
to the application and disclosure requirements of International Financial Reporting Standards, andare compiled from the consolidated financial statements prepared by the Company as required by
the Financial Instruments and Exchange Act of Japan.
In preparing these consolidated financial statements, certain reclassifications and rearrangements
have been made to the consolidated financial statements issued domestically in order to present
them in a form which is more familiar to readers outside Japan.
As permitted by the Japanese Financial Instruments and Exchange Act, amounts of less than
one million yen have been omitted. As a result, the totals shown in the accompanying consolidated
financial statements (both in yen and U.S. dollars) do not necessarily agree with the sum of theindividual amounts.
The U.S. dollar amounts in the accompanying consolidated financial statements have been translated from yen amounts solely for convenience and, as a matter of arithmetic computation only, at¥93 = U.S.$1.00, the approximate rate of exchange prevailing on March 31, 2013. This translation
should not be construed as a representation that yen amounts have been, could have been, or couldin the future be, converted into U.S. dollars at the above or any other rate.

2. Summary of Significant Accounting Policies:(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries.
For the years ended March 31, 2013 and 2012, the Company had two consolidated subsidiaries as follows:
KAKEN REALTY & SERVICE CO., LTD.
KAKEN PHARMA CO., LTD.
Effective March 31, 2012, FUJIKA CORPORATION, one of the Company’s subsidiaries, was excluded
from the scope of consolidation as a result of dissolution through a merger with KAKEN REALTY &SERVICE CO., LTD. The profit and loss from April 1, 2011 to March 30, 2012 of the company was
included in the consolidated statements of income for the year ended March 31, 2012.
For the years ended March 31, 2013 and 2012, there was no affiliate accounted for using the equity
method.
All significant intercompany transactions, account balances and unrealized profits or losses among
the Group have been eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents in the consolidated statements of cash flows are composed of cash on
hand, bank deposits which are able to be withdrawn within three months, and short-term investmentswith original maturity of three months or less and are considered to have minimal risk from market
fluctuations.

26

KAKEN PHARMACEUTICAL CO., LTD.

(c) Marketable and Investment Securities
Securities are classified into one of the following four categories: (1) Trading, (2) Held-to-maturity debt
securities, and (3) Available-for-sale securities. Trading securities are recorded at market value withunrealized gains or losses recognized in the current year’s earnings. Held-to-maturity debt securities
are carried at amortized cost. Available-for-sale securities are expected to be sold in future and those
whose fair values are readily determinable are carried at fair value and the related unrealized gains
or losses, net of taxes, are included as a component of “Accumulated other comprehensive income”
under net assets. Available-for-sale securities without market quotations are stated at cost determinedby the moving average method.
(d) Inventories
Inventories are stated at the lower of cost determined by the gross average method, or net selling
value, which is defined as the selling price less additional estimated manufacturing costs and estimated direct selling expenses.
(e) Property, Plant and Equipment
Depreciation is computed using the declining-balance method at rates based on the estimated useful
lives of assets, except for buildings, structures, machinery and equipment for the Komagome office,which are computed using the straight-line method.
Furthermore, depreciation of buildings, except for ancillary facilities to buildings, acquired on orafter April 1, 1998, is computed using the straight-line method. The range of useful lives is from 3 years
to 60 years for buildings and structures, and from 2 years to 8 years for machinery and equipment.
(Changes in accounting policy which is difficult to distinguish between a change in an accounting
policy and a change in an accounting estimate)
Effective from the year ended March 31, 2013, the Company and its consolidated subsidiaries havechanged their depreciation method for tangible fixed assets acquired on or after April 1, 2012, to themethod in compliance with the revised Corporation Tax Act. There was no significant financial impact
from this change. The impact on segment information is disclosed in Note 18. “Segment Information.”(f) Intangible Assets
Software for own use is amortized over the estimated useful life (five years) using the straight-line
method.
(g) Provision for Retirement Benefits
The Company has a retirement benefit program of lump-sum retirement benefit plan, while the rest isallocated to a defined benefit corporate pension plan. Effective April 1, 2012, the Company changed
the pension payments from 10-years guaranteed lifetime annuity to 15-years guaranteed 20-years
terminable annuity. In the meanwhile, the Company has set up a retirement benefit trust. Extra retirement payments may be paid to employees retiring under certain circumstance. Consolidated subsidiaries of the Company have no arrangement for corporate pension plans.
Provision for retirement benefits represents the amount actuarially calculated projected benefit
obligation less (1) the fair value of the plan assets, (2) unrecognized actuarial loss or gain, (3) the unrecognized transition amount arising from adopting the new standard, and (4) unrecognized priorservice cost. If the fair value of the plan assets exceeds the projected benefit obligations, prepaid
pension and severance costs are recorded on the balance sheet. The transition amount is amortizedon a straight-line basis over 15 years. Unrecognized actuarial loss or gain is amortized on a straightline basis over 10 years from the next year in which they arise. Unrecognized prior service cost is

ANNUAL REPORT 201327

amortized on a straight-line basis over 10 years from the year in which they arise. For the Company,
prepaid pension and severance costs were recognized for a portion of the plan covered by the noncontributory pension plan assets, and the accrued pension and severance costs were recognized fora portion of the plan not covered by the plan assets.
As of March 31, 2013, provision for directors’ retirement benefits is provided in an amount equivalent
to the liability the relevant company would have been required to pay upon retirement of directors
and statutory auditors of consolidated subsidiaries at the balance sheet date, as prescribed by its
internal rules.
(Additional information)
Previously, provision for directors’ retirement benefits was provided in an amount equivalent to theliability the Company would have been required to pay upon retirement of directors and statutory
auditors of the Company at the balance sheet date, as prescribed by its internal rules. However, inconnection with the abolition of the Directors’ Retirement Benefits Program, it was resolved to discontinue the accrual and make payments for the retirement benefits to directors and statutory auditors of the Company at the general meeting of shareholders on June 28, 2012.
Thus, all amounts accounted for as provision for directors’ retirement benefits were reversed and theamount to be paid out, ¥402 million ($4,323 thousand), is recorded under other long-term liabilities asof March 31, 2013.
(h) Income Taxes
Income taxes are determined using the asset and liability approach, where deferred tax assets andliabilities are recognized for temporary differences between the tax basis of assets and liabilities andtheir reported amount in the consolidated financial statements.
(i) Consumption Taxes
Consumption taxes withheld and consumption taxes paid are excluded from revenues and expenses
in the accompanying consolidated statements of income. The net balance of consumption taxes withheld and consumption taxes paid is included in current liabilities of the consolidated balance sheet
as of the end of the fiscal year.
(j) Derivative Financial Instruments
Derivative instruments, which include forward foreign exchange contracts, are used as a part of theCompany’s risk management of foreign currency risk exposure of its financial assets and liabilities.
Forward foreign exchange contracts:
The Company enters into forward foreign exchange contracts to limit exposure, affected by changes
in foreign currency exchange rates, on accounts receivable and payable and cash flows generated
from anticipated transactions denominated in foreign currencies. For forward foreign exchange contracts which are designated and are effective as hedges of such foreign currency risk on existing assets and liabilities, the Company adopted the accounting method whereby foreign currency
denominated assets and liabilities are measured at the contract rate of the respective forward foreignexchange contracts. With respect to such contracts for anticipated transactions, the contracts aremarked-to-market and the unrealized gains/losses are deferred in the balance sheet to be released toincome when the exchange gains/losses on the hedged items or transactions are recognized.

28

KAKEN PHARMACEUTICAL CO., LTD.

(k) Appropriations of Retained Earnings
Appropriations of retained earnings at each year-end are reflected in the consolidated financial statements for the following year upon shareholders’ approval.
(l) Shareholders’ Equity
Japanese companies are subject to the Companies Act of Japan (the “Act”). The Act provides that an
amount equal to 10% of the amount to be disbursed as distributions of capital surplus (other than thecapital reserve) and retained earnings (other than the legal reserve) be transferred to the capital reserve and the legal reserve, respectively, until the sum of the capital reserve and legal reserve equals
25% of the stated capital. Such distributions can be made at any time by resolution of the shareholders’or by the Board of Directors if certain conditions are met. The above mentioned legal reserve is included
in retained earnings in the accompanying consolidated balance sheets.
(m) Net Income and Dividends per Share
Net income per share of common stock is based upon the weighted average number of shares ofcommon stock outstanding during each financial year appropriately adjusted for subsequent free
distribution of shares (stock splits), if applicable.
Cash dividends per share shown for each year in the accompanying consolidated statements ofincome represent dividends approved or declared as applicable to the respective years.
(n) Additional Information
Accounting Standards Issued But Not Yet Adopted
The “Accounting Standard for Retirement Benefits” (Accounting Standards Board of Japan (“ASBJ”)
Statement No. 26, issued on May 17, 2012) and the “Guidance on Accounting Standard for Retirement
Benefits” (ASBJ Guidance No. 25, issued on May 17, 2012)
1) Overview
This accounting standard and its implementation guidance have been revised from the viewpoint of
improvements to financial reporting and international convergence, mainly focusing on (a) unrecognized actuarial loss and unrecognized prior service cost should be accounted for, (b) projected benefit obligations and service cost should be determined, and (c) enhancement of disclosures.
2) Effective dates
The Company will adopt this accounting standard and its implementation guidance effective fromthe year ending March 31, 2014. However, the amendments relating to the calculation of projected
benefit obligations and service costs will be adopted effective April 1, 2014.
3) Financial impact
The financial impact from the adoption of this accounting standard and its implementation guidanceis being evaluated but has not been determined yet.

ANNUAL REPORT 201329

3. Cash and Cash Equivalents:
Cash and deposits and marketable securities are reconciled to cash and cash equivalents on the
consolidated statements of cash flows as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

For the years ended March 31
Cash and deposits

2013

2012

2013

¥ 9,710¥ 9,543$104,409

Marketable securities

7,210

8,308

77,527

Time deposits due in more than three months

—

—

—

Marketable securities due in more than three months

—

—

—

¥16,920¥17,851$181,935

Cash and cash equivalents

4. Marketable and Investment Securities:
The carrying amounts and fair values of held-to-maturity debt securities are as follows:
MILLIONS OF YEN
Carrying amountMarch 31
Fair values exceeding carrying amount
Fair values not exceeding carrying
amountTotal

Fair value

Unrealized gain (loss)

Carrying amount

¥—

¥   —

2013
¥   —

Fair value

Unrealized gain (loss)

2012

¥   —

¥   —

¥—

2,999

2,999

—

2,999

2,999

—

¥2,999¥2,999¥—¥2,999¥2,999¥—Acquisition cost

Unrealized gain (loss)

THOUSANDS OF U.S. DOLLARS (NOTE 1)
Carrying amountMarch 31

Fair value

Unrealized gain (loss)

2013

Fair values exceeding carrying amount$    —$    —$—

Fair values not exceeding carrying
amount32,24732,247—$32,247$32,247$—

Total

The aggregate fair values (carrying amounts) and acquisition costs of available-for-sale securities are
as follows:
MILLIONS OF YEN
Fair value

Acquisition cost

March 31

Unrealized gain (loss)

Fair value

2013

2012

Carrying amounts exceedingacquisition cost
Equity securities¥10,129¥ 7,114¥3,014¥ 5,366¥ 4,210¥1,156

Others

—

—

—

—

—

—

Subtotal

10,129

7,114

3,014

5,366

4,210

1,156

(301)

Carrying amounts not exceedingacquisition cost
80

87

(6)

993

1,295

OthersEquity securities

4,210

4,210

—

5,308

5,308

—

Subtotal

4,291

4,297

(6)

6,302

6,603

(301)

¥14,421¥11,412¥3,008¥11,668¥10,813¥  855

		Total30

KAKEN PHARMACEUTICAL CO., LTD.

THOUSANDS OF U.S. DOLLARS (NOTE 1)
Fair value

Acquisition cost

March 31

Unrealized gain (loss)

2013

Carrying amounts exceedingacquisition cost$108,914$ 76,495

OthersEquity securities——$32,409—

Subtotal

108,91476,49532,409

860

935

(65)

45,26945,269—Carrying amounts not exceedingacquisition cost
Equity securities
OthersSubtotal
		Total46,14046,204(65)$155,065$122,710$32,344

For the year ended March 31, 2012, the Company recorded a revaluation loss of ¥128 million foravailable-for-sale securities whose fair values were readily determinable. Securities whose fair value asof March 31, 2012, declined by 50% or more become subject to impairment, whereby all the difference
between the fair value and carrying amount is recorded as a revaluation loss. In cases where the fairvalue declined 30% or more but less than 50%, the difference between the fair value and carrying
amount is recorded as a revaluation loss based on certain rules.
Available-for-sale securities sold for the year ended March 31, 2013, were as follows:
MILLIONS OF YEN

For the year ended March 31
Equity securities

THOUSANDS OF U.S. DOLLARS (NOTE 1)

Sales proceeds

Aggregate gain

Aggregate loss

Sales proceeds

Aggregate gain

Aggregate loss

¥148

¥31

¥—

$1,591$333$—

There were no available-for-sale securities sold for the year ended March 31, 2012.

5. Inventories:
Inventories as of March 31, 2013 and 2012, are comprised of the following:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YENMarch 31

2013

2012

2013

¥ 6,018¥ 5,953$ 64,710

Work in process

1,438

1,573

15,462

Raw materials and supplies

4,075

3,398

43,817¥11,531¥10,926$123,989

Merchandise and finished products

Total

6. Short-term Bank Loans:
Short-term bank loans outstanding as of March 31, 2013 and 2012, amounting to ¥8,390 million($90,215 thousand), represent the notes issued by the Group to banks. Customarily, these notes
are renewed at maturity subject to renegotiation of interest rates and other factors. The weightedaverage interest rates applicable to short-term bank loans as of March 31, 2013 and 2012, are 0.72%
and 0.78%, respectively.
As is customary in Japan, short-term and long-term bank loans are made under general agreements
which provide that security and guarantees for future and present indebtedness will be given uponrequest of the bank, and that the bank shall have the right, as the obligations become due or in theevent of their default, to offset cash deposits against such obligations due to the bank. The Group has
not received any such requests to date.

ANNUAL REPORT 201331

At March 31, 2013 and 2012, assets pledged as collateral for certain short-term bank loans are
as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YENMarch 31

2013

2012

2013

Buildings and structures¥2,730¥2,653$29,355

Machinery and equipment

32,022

Assets pledged:
2,978

2,061

Land

103

103

1,108

		Total¥5,812¥4,819$62,495¥1,400¥1,400$15,054¥1,400¥1,400$15,054

Liabilities secured:
Short-term bank loans
		Total

7. Accounting for Leases:
Operating leases
Future minimum lease receivables under non-cancellable operating leases subsequent to March 31, 2013
and 2012, are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YENMarch 31

2013

2012

2013

Due within 1 year¥  239¥   86$ 2,570

Due after 1 year

2,567

1,303

27,602¥2,806¥1,389$30,172

Total

8. Investment Properties:
The Company and certain consolidated subsidiaries own rental office buildings (including land) inTokyo and other areas. Rental income from these properties for the years ended March 31, 2013 and2012, are ¥1,370 million ($14,731 thousand) and ¥1,481 million (Major revenue from rental properties
and rent expense are reported as net sales and cost of sales, respectively).
Carrying amount, change during the years ended March 31, 2013 and 2012, and fair values of theseproperties are stated as follows:
MILLIONS OF YEN
Carrying amount
Balance at April 1, 2012

Change during the year ended March 31, 2013¥15,307¥427

Balance at March 31, 2013

Fair value at March 31, 2013¥15,734¥40,550

Balance at March 31, 2012

Fair value at March 31, 2012¥15,307¥39,944

Balance at March 31, 2013

Fair value at March 31, 2013

$169,183$436,022

MILLIONS OF YEN
Carrying amount
Balance at April 1, 2011

Change during the year ended March 31, 2012¥15,107¥199
THOUSANDS OF U.S. DOLLARS (NOTE 1)
Carrying amount

Balance at April 1, 2012

Change during the year ended March 31, 2013

$164,591$4,591

Notes: 1. The carrying amount represents the acquisition costs less accumulated depreciation.
2.	Fair value at March 31, 2013 and 2012 is calculated, with adjustments using indexes, by the Company based primarily on the “Real estate appraisal
standards of Japan.”

32

KAKEN PHARMACEUTICAL CO., LTD.

9. Financial Instruments:
1. Outline of financial instruments(1) Policy for financial instruments
The Group is managing its cash surplus in the form of low-risk financial instruments with high liquidity, while raising short-term working capital through loans from financial institutions including banks.
Derivatives are used, not for speculative purposes, but to manage exposure to financial risks as
described later.
(2) Nature and extent of risks arising from financial instruments
Receivables such as notes and accounts receivable–trade are exposed to customers’ credit risk. Trade
receivables denominated in foreign currencies are exposed to foreign exchange fluctuation risk. Marketable and investment securities are mainly held-to-maturity securities and shares held to maintainbusiness collaborations with clients and trade partners, which are exposed to the risk of market pricefluctuations.
Payment terms of payables, such as notes and accounts payable–trade, are mostly less than one
year. Payables in foreign currencies incurred from the import transactions of raw materials are exposed to foreign exchange fluctuation risk. Loans are used for short-term working capital.
Derivative transactions mainly include forward foreign exchange contracts for the purpose ofhedging foreign exchange fluctuation risk exposed to trade receivables and payables denominatedin foreign currencies. Hedging instruments and hedged items, hedging policy, assessment method forhedge effectiveness, and other matters related to hedge accounting are as follows:a. Hedging instruments and hedged items
Hedging instrument:
Forward foreign exchange contract
Hedged items:	Foreign currency denominated receivables and payables, and forecast
foreign currency denominated transactions
b. Hedging policy
Hedging instruments are used within the limits of anticipated foreign currency denominated transactions, and the Company makes it a policy not to use derivatives for speculative purposes.
c. Assessment method for hedge effectivenessSince material terms related to hedged items and hedging instruments are substantially identical,
and such hedging transactions are deemed to be highly effective so that the market fluctuations
may be completely offset continuously after the inception of the related hedge, assessment of hedging effectiveness is omitted.
Assessment of effectiveness is omitted also for the forward foreign exchange contracts, underwhich the hedged items are translated using the forward contract rates.

ANNUAL REPORT 201333

(3) Risk management for financial instruments
a. Credit risk management (customers’ default risk)
For the purpose of managing trade receivables within the Group, each concerned department, according to the credit management rules, is managing payment terms and balances of each major customer
by regularly monitoring their status, in an effort to achieve early identification and mitigation ofdefault risk of customers arising from their deteriorating financial condition and other factors.
Held-to-maturity securities held by the Company are, under the short-term investment rules,
restricted to those with superior ratings only, involving minimal credit risk.
The Company enters into derivative transactions with high credit rating financial institutions to
mitigate the counterparty risk.
b. Market risk management (foreign exchange and interest rate fluctuation risks)
The Company uses forward foreign exchange contracts as appropriate to hedge foreign exchange
fluctuation risk associated with trade receivables and payables denominated in foreign currencies.
With respect to marketable and investment securities, the Company is periodically monitoring fairvalues and financial positions of the related issuers (business connections).
Derivative transactions are conducted under the authority of the general manager at each concerned
department, under the forward foreign exchange contracts management rules, and actual performance of derivative transactions is reported to the concerned departments including the Accounting
Department, as each transaction takes place. Then at the end of each month, the outstanding balanceof forward exchange contracts is reported to directors in charge, as well as to other concerned departments. The consolidated subsidiaries are not engaged in derivative transactions.
c. Liquidity risk management on fund-raising
The Company manages its liquidity risk by the Accounting Department preparing and updating the
cash flow management plan as appropriate based on the report from each concerned department.
(4) Supplementary explanation concerning fair values of financial instruments
Fair values of financial instruments comprise values determined based on market prices and values
determined reasonably when there is no market price. Since variable factors are incorporated in computing the relevant fair values, such fair values may vary depending on different assumptions.
(5) Concentration of credit risks
As of March 31, 2013 and 2012, 66% of all trade receivables are with specific major accounts.

34

KAKEN PHARMACEUTICAL CO., LTD.

2. Fair values of financial instruments
Carrying amount, fair value, and difference of the financial instruments as of March 31, 2013 and 2012,
are as follows:
Financial instruments whose fair values are not readily determinable are excluded from thefollowing table:
MILLIONS OF YEN
Carrying amount

Fair value(1) Cash and deposits¥ 9,710¥ 9,710—(2) Notes and accounts receivable – trade31,174
31,171—March 31

Allowance for doubtful accounts (*1)

Difference

2013

(2)
31,171(3) Marketable and investment securities
a. Held-to-maturity securities

2,999

2,999

—

b. Available-for-sale securities

14,421

14,421—

		 Total assets¥58,303¥58,303—(1) Notes and accounts payable – trade¥16,367¥16,367

—

8,390

8,390

—

¥24,757¥24,757—(2) Short-term bank loans
		 Total liabilities

MILLIONS OF YEN
Carrying amountMarch 31

Fair value

Difference

2012(1) Cash and deposits¥ 9,543(2) Notes and accounts receivable – trade32,032

Allowance for doubtful accounts (*1)(3)
32,029¥ 9,543—

32,029—(3) Marketable and investment securities
a. Held-to-maturity securities

2,999

2,999

—

b. Available-for-sale securities

11,668

11,668—

		 Total assets¥56,242¥56,242—(1) Notes and accounts payable – trade¥16,331¥16,331

—

8,390

8,390

—

¥24,721¥24,721—(2) Short-term bank loans
		 Total liabilities

ANNUAL REPORT 201335

THOUSANDS OF U.S. DOLLARS (NOTE 1)
Carrying amount

Fair value

March 31

Difference

2013(1) Cash and deposits$104,409(2) Notes and accounts receivable – trade335,204

Allowance for doubtful accounts (*1)$104,409—

335,172—(22)
335,172(3) Marketable and investment securities
a. Held-to-maturity securities

32,24732,247—b. Available-for-sale securities

155,065

155,065—

		 Total assets$626,914$626,914—(1) Notes and accounts payable – trade$175,989$175,989—

90,21590,215—$266,204$266,204—(2) Short-term bank loans
		 Total liabilities(*1) Allowance for doubtful accounts in respect of notes and accounts receivable – trade.
Notes:
1. Calculation method of fair values of financial instruments and securities
Assets:(1) Cash and deposits and (2) Notes and accounts receivable – trade
These assets are recorded using carrying amounts because fair values approximate carrying amounts because of
their short-term maturities.
(3) Marketable and investment securities
Fair values of equity securities are based on the prices quoted on stock exchanges while those of debt securities are
based on the prices quoted on stock exchanges, or those quoted by correspondent financial institutions. For thenotes on marketable securities by purpose of holding, please see Note 4. “Marketable and Investment Securities.”
Liabilities:(1) Notes and accounts payable – trade and (2) Short-term bank loans
These payables are recorded using carrying amounts because fair values approximate carrying amounts because of
their short-term maturities.
2. Financial instruments whose fair values are not readily determinable
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN
Carrying amountMarch 31
Unlisted equity securities

2013

2012

2013

¥62

¥62

$667

These items are not included in “(3) Marketable and investment securities” because there is no market price and it
is very difficult to identify fair values.

36

KAKEN PHARMACEUTICAL CO., LTD.

3. Redemption schedule of monetary assets and securities with contractual maturities subsequent to March 31, 2013
and 2012, are as follows:
MILLIONS OF YEN
Within one year

March 312013

Cash and deposits¥ 9,710Notes and accounts receivable - trade31,174Marketable and investment securities:
Held-to-maturity securities
Available-for-sale securities with contractual maturities
		Total

2,999
900¥44,784MILLIONS OF YEN
Within one year

March 312012

Cash and deposits¥ 9,543

Notes and accounts receivable - trade32,032Marketable and investment securities:
Held-to-maturity securities
Available-for-sale securities with contractual maturities
		Total

2,999
900¥45,476
THOUSANDS OF U.S.
DOLLARS (NOTE 1)
Within one year

March 312013

Cash and deposits$104,409

Notes and accounts receivable - trade335,204

Marketable and investment securities:
Held-to-maturity securities
Available-for-sale securities with contractual maturities
		Total32,247
9,677$481,548

4. R edemption schedules for long-term debt and other interest-bearing obligations subsequent to March 31, 2013
and 2012 are omitted since the Company only had short-term bank loans maturing within one year as of March 31,
2013 and 2012.

10. Retirement Benefits:
The following table sets forth the funded and accrued status of the plan, and the amounts recognizedin the Company’s consolidated balance sheets as of March 31, 2013 and 2012.
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YENMarch 31
Projected benefit obligations

2013

2012

2013

¥(21,805)¥(20,322)$(234,462)

Plan assets

11,133

10,266

119,710

Funded status(10,671)(10,056)(114,742)

Unrecognized transition amount

1,049

1,574

11,280

Unrecognized actuarial loss

3,780

3,155

40,645

Unrecognized prior service cost

(271)

(326)

(2,914)(6,112)(5,652)(65,720)

Amounts recognized in the balance sheet consists ofPrepaid pension cost (other assets)
Provision for retirement benefits

—

101

—

¥ (6,112)¥ (5,753)$ (65,720)

Notes: 1. Retirement benefit trust assets of ¥549 million ($5,903 thousand) and of ¥524 million are included in plan assets as of March 31, 2013 and 2012.
2. The consolidated subsidiaries use a simplified method of accounting to calculate projected benefit obligations.
3.	As a result of the change from a lifetime annuity to a terminal annuity, prior service cost decreased by ¥304 million for the year ended March 31, 2012.
ANNUAL REPORT 201337

The components of net pension and severance costs for the years ended March 31, 2013 and 2012,
are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

For the years ended March 31

2013

2012

2013

Service cost¥  603¥  640$ 6,484

Interest cost

466

484

5,011

Expected return on plan assets

(97)

(96)

(1,043)

Amortization of transition amount

524

524

5,634

Amortization of actuarial loss

628

751

6,753

Amortization of prior service cost

(55)

(49)

(591)

¥2,070¥2,254$22,258

Net pension expense

Assumptions used in calculation of the above information for the years ended March 31, 2013 and2012, are as follows:
Discount rate: 1.3% in 2013 and 2.3% in 2012
Expected rate of return on plan assets: 1.0%
Method of attributing the projected benefits to periods of service: Straight-line method

11. Discount of Export Bills:
Amount of export bills discounted at March 31, 2013 and 2012, are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YENMarch 31
Export bills

2013

2012

2013

¥—

¥187

$—

12. Shareholders’ Equity:a) Type and number of shares outstanding and treasury stock
Type of shares outstanding

Type of treasury stock

For the year ended March 31

Common stock

Common stock

Number of shares as of April 1, 2012

101,879,461

13,498,376—

2,040,622

Increase in the number of shares during the accounting period ended March 31, 2013
Decrease in the number of shares during the accounting period ended March 31, 2013
Number of shares as of March 31, 2013—

(1,288)101,879,461

15,537,710

Note: Increase in treasury stock (2,040,622 shares) is due to purchase of shares in the market (2,000,000 shares) based on the resolution of the Board of
Directors’ meeting and purchase of shares less than one unit (40,622 shares). Decrease in treasury stock (1,288 shares) is due to sale of shares lessthan one unit in compliance with requests by odd-lot shareholders.

38

KAKEN PHARMACEUTICAL CO., LTD.

b) Matters related to dividendsi) Dividend payment
Approvals by the ordinary general meeting of shareholders held on June 28, 2012, were as follows:
Dividends on common stock
Total amount of dividends¥1,767 million ($19,000 thousand)
Dividends per share¥20.00 ($0.215)
Record date
March 31, 2012
Effective dateJune 29, 2012
Approvals by the Board of Directors’ meeting held on November 5, 2012, were as follows:
Dividends on common stock
Total amount of dividends¥1,900 million ($20,430 thousand)
Dividends per share¥22.00 ($0.237)
Record date
September 30, 2012
Effective date
December 4, 2012ii) Dividends whose record date is attributed to the accounting period ended March 31, 2013, but
become effective after the said accounting period.
The Company obtained the following approval at the general meeting of shareholders held on
June 27, 2013:
Dividends on common stock
Total amount of dividends¥1,899 million ($20,419 thousand)
Dividends per share¥22.00 ($0.237)
Record date
March 31, 2013
Effective dateJune 28, 2013

13. Research and Development Costs:
Research and development costs included in selling, general and administrative expenses for theyears ended March 31, 2013 and 2012, amounted to ¥6,302 million ($67,763 thousand) and¥6,592 million, respectively.

14. Income Taxes:
The Group is subject to several taxes based on income, which in the aggregate resulted in statutory
tax rates of approximately 38.01% and 40.69% for the years ended March 31, 2013 and 2012, respectively. A reconciliation of the differences between the statutory tax rate and the effective tax rate forthe years ended March 31, 2013 and 2012, are as follows:
March 31

2013

2012

Statutory tax rate

38.01%

40.69%

Increase (decrease) in taxes resulting from:
Expenses not deductible for income tax purpose (ex. Entertainment expenses)

1.52

2.31

Income not included for income tax purpose (ex. Dividend income)(0.18)(0.18)

Inhabitant per capita taxes

0.61

0.59

Tax credit for research expenses(3.10)(3.56)—

2.64

Reduction of deferred tax assets due to income tax rates change
Other
Effective tax rate

(0.28)

0.65

36.58%

43.14%

ANNUAL REPORT 201339

Significant components of deferred tax assets as of March 31, 2013 and 2012, are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YENMarch 31

2013

2012

2013

Deferred tax assets:
Provision for bonuses¥   429¥  413$   4,613

Provision for sales rebates

201

204

2,161

Loss of supplies

123

130

1,323

Revaluation of financial instruments

39

84

419

Amortization of R&D

371

185

3,989

Amortization of long-term prepaid expenses

92

133

989

Pension and severance costs

2,369

2,220

25,473

Unrealized gain of property, plant and equipment

2,568

2,568

27,613

Other

567

545

6,097

		Total

6,762

6,485

72,710

Valuation allowance

(66)

(112)

(710)

		 Deferred tax assets

6,696

6,373

72,000

(199)

(208)

(2,140)(1,072)(304)(11,527)

Deferred tax liabilities:
Deferred gain on sales of property, plant and equipment
Net unrealized holding gain on securities

(0)

0

(0)

		 Deferred tax liabilities

Other(1,271)(512)(13,667)

		 Deferred tax assets, net¥ 5,424¥5,860$ 58,323

Following the promulgation of the Act for Partial Revision of the Income Tax Act, etc. for the Purpose of Creating Taxation System Responding to Changes in Economic and Social Structures and the
Act on Special Measures for Securing Financial Resources Necessary to Implement Measures for
Reconstruction following the Great East Japan Earthquake on December 2, 2011, statutory tax rates
used to calculate deferred tax assets and deferred tax liabilities (limited to those settled after April 1,
2012) will be changed from 40.69% to 38.01% for temporary differences expected to be settled orrealized for the period from April 1, 2012, to March 31, 2015, and 35.64% for those after April 1, 2015.

15. Related Party Transactions:
There is nothing to be noted according to the disclosure requirements in Japan for the years ended
March 31, 2013 and 2012.

16. Per Share Information:
Per share information for the years ended March 31, 2013 and 2012, are as follows:
YEN

For the years ended March 31

2013

2012

2013

Net assets per share¥771.10¥702.31$8.291

Net income per share

103.30

92.46

1.111

Note: Diluted net income per share is not presented due to the absence of dilutive shares.

40

U.S. DOLLARS (NOTE 1)

KAKEN PHARMACEUTICAL CO., LTD.

Calculation for net income per share for the years ended March 31, 2013 and 2012, are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

For the years ended March 31
Net income
Net income attributable to common stock
Adjustment to net income

2013

2012

2013

¥ 8,991¥ 8,282$96,677

8,991

8,282

96,677———87,042

89,577—(Share data)
Average number of share (thousand)

17. Comprehensive Income:
Recycling and income tax effects for each component of other comprehensive income for the years
ended March 31, 2013 and 2012, are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

For the years ended March 31

2013

2012

2013

¥2,185¥ 339$23,495

Net unrealized holding gain on securities
Amount increased for the year
Recycling

(31)

128

(333)

Before income tax effect

2,153

468

23,151

Income tax effect

(767)

(147)

(8,247)Net unrealized holding gain on securities¥1,385¥ 321$14,892

Total other comprehensive income¥1,385¥ 321$14,892

18. Segment Information:(a) Overview of reportable segments
The Group’s reportable segments are those for which separate financial information is available andregular evaluation by the Board of Directors is being performed in order to decide how resources areallocated among the Group.
The Group produces and sells medical products and agrochemicals, rents real estates, and maintains
buildings, operating business by category of industry. Each business operates on its own initiative, andcreates comprehensive business strategies to conduct business activities. The Group consists of segments by category of industry based on the operation of business; therefore, consists of two reportable segments: “Pharmaceutical” and “Real estate.”“Pharmaceutical” mainly produces and sells medical products, medical devices, and agrochemicals.
“Real estate” mainly rents Bunkyo Green Court.
(b) Method of calculating net sales, income, assets, and other items by reportable segment
Accounting policies of the reportable segments are consistent to those described in Note 2. “Summary of Significant Accounting Policies.” Income by the reportable segment is based on operating
income. Intersegment transactions are based on prevailing market prices.
Corporate assets are not allocated to each reportable segment. However, related expenses areallocated to each reportable segment using reasonable criteria.
As stated in Note 2. “Summary of Significant Accounting Policies, (e) Property, Plant and Equipment,(Changes in accounting policy which is difficult to distinguish between a change in an accounting
policy and a change in an accounting estimate),” effective from the year ended March 31, 2013, theCompany and its consolidated subsidiaries have changed the depreciation method for tangible fixed
assets acquired on or after April 1, 2012, to the method in compliance with the revised Corporation

ANNUAL REPORT 201341

Tax Act. Accordingly, the depreciation method for segment assets was also changed. There was no
significant financial impact on segment information.
(c) Information about reportable segments
MILLIONS OF YEN
Reportable segment
Pharmaceutical

Real estate

Total

For the year ended March 31

Adjustments

Consolidated¥ 87,054

2013

Net sales:
Outside sales¥84,618¥ 2,435¥87,054¥    —

—

313

313

(313)

—

		Total¥84,618¥ 2,749¥87,367¥  (313)¥ 87,054

Segment income¥13,240¥ 1,370¥14,611—¥ 14,611

Segment assets¥68,094¥17,203¥85,297¥23,613¥108,911

Depreciation and amortization¥ 2,054¥   625¥ 2,680—¥  2,680

	Increase in property, plant andequipment and intangible assets

3,440

1,075

4,516

—

4,516

Adjustments

Consolidated¥ 87,997

Intersegment sales or transfers

Other items:

MILLIONS OF YEN
Reportable segment
Pharmaceutical

Real estate

Total

For the year ended March 31

2012

Net sales:
Outside sales¥85,564¥ 2,432¥87,997¥    —

—

312

312

(312)

—

		Total¥85,564¥ 2,744¥88,309¥  (312)¥ 87,997

Segment income¥13,698¥ 1,481¥15,180—¥ 15,180

Segment assets¥63,872¥16,753¥80,625¥24,482¥105,108

Depreciation and amortization¥ 1,883¥   625¥ 2,508—¥  2,508

	Increase in property, plant andequipment and intangible assets

2,554

759

3,314

—

3,314

Adjustments

Consolidated$  936,065

Intersegment sales or transfers

Other items:

THOUSANDS OF U.S. DOLLARS (NOTE 1)
Reportable segment
Pharmaceutical

Real estate

For the year ended March 31

Total

2013

Net sales:
Outside sales$909,871$ 26,183$936,065$     —

—

3,366

3,366

(3,366)—

		Total$909,871$ 29,559$939,430$  (3,366)$  936,065

Segment income$142,366$ 14,731$157,108—$  157,108

Segment assets$732,194$184,978$917,172$253,903$1,171,086

Depreciation and amortization$ 22,086$  6,720$ 28,817—$   28,817

	Increase in property, plant andequipment and intangible assets

36,98911,55948,559—48,559Intersegment sales or transfers

Other items:

42

KAKEN PHARMACEUTICAL CO., LTD.

(d) Information about products and services
Information about products and services has not been disclosed since the classification by products
and services is the same as the reportable segments.
(e) Information by geographical area
(1) Sales
Information about sales has not been disclosed since sales in Japan constituted more than 90%
of sales on the consolidated statements of income.
(2) Property, plant and equipment
Information about property, plant and equipment has not been disclosed since there is only
property, plant and equipment located in Japan.
(f) Information about major customers
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN
SalesName of the related segment

For the years ended March 31

2013

2012

2013

Alfresa Corporation¥14,338¥15,042$154,172

Pharmaceutical

SUZUKEN CO., LTD.

13,763

13,786

147,989

Pharmaceutical

MEDICEO CORPORATION

12,936

13,052139,097

Pharmaceutical

Toho Pharmaceutical Co., Ltd.

8,912

9,097

95,828

Pharmaceutical

19. Subsequent Event:
Following acquisition of treasury stock under Article 156 of the Act, as applied pursuant to Article 165(3) of the Act, has been resolved by the Board of Directors’ meeting held on May 13, 2013.
1. Reason for acquisition:
To execute flexible capital policy corresponding to changes in management environment.
2. Class of stocks to be acquired:
Common stock
3. Number of stock to be acquired:
Up to 1,200,000 shares
4. Total amount of stocks to be acquired:
Up to ¥2,300 million ($24,731 thousand)
5. Schedule of acquisition:
From May 14, 2013, to December 27, 2013
Total number and total amount of stock acquired based on the above resolution on or before May 31,
2013, were 300,000 shares and ¥507 million ($5,452 thousand), respectively.

ANNUAL REPORT 201343

Report of Independent Auditors
To the Board of Directors
KAKEN PHARMACEUTICAL CO., LTD.
We have audited the accompanying consolidated financial statements of KAKEN PHARMACEUTICAL CO., LTD. (the“Company”) and subsidiaries, which comprise the consolidated balance sheet as of March 31, 2013, and the related consolidated statements of income, comprehensive income, changes in net assets, and cash flows for the year then ended, anda summary of significant accounting policies and other explanatory information, all expressed in Japanese yen.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements inaccordance with accounting principles generally accepted in Japan, and for designing and operating such internal control
as management determines is necessary to enable the preparation and fair presentation of the consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted
our audit in accordance with auditing standards generally accepted in Japan. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidated financial statements are free frommaterial misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks ofmaterial misstatement of the consolidated financial statements, whether due to fraud or error. The purpose of an audit of
the consolidated financial statements is not to express an opinion on the effectiveness of the entity’s internal control, but inmaking these risk assessments the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
OpinionIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries at March 31, 2013, and the consolidated results of their operations
and their cash flows for the year then ended in conformity with accounting principles generally accepted in Japan.
Emphasis of Matter
As described in Note 19, at a meeting of the Board of Directors of the Company held on May 13, 2013, the Company
approved a purchase of shares of treasury stock. Our opinion is not qualified in respect of this matter.
Convenience Translation
The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader have been translated on
the basis set forth in Note 1 to the accompanying consolidated financial statements.

Tokyo, Japan
June 27, 201344

Kaken Pharmaceutical Co., Ltd.

Corporate Data
As of March 31, 2013

Directory
Registered Head Office

Company Information
Founded28-8, Honkomagome 2-chome, Bunkyo-ku,
Tokyo 113-8650, Japan
Tel: 81-3-5977-5001
Fax: 81-3-5977-5131
http://www.kaken.co.jp

March 1917

Incorporated
March 1948

Paid-in Capital
Licensing & Business Development¥23,853 million

Tel: 81-3-5977-5046
Fax: 81-3-5977-5133
E-mail: licensing_bd@kaken.co.jp

Common Stock

Main Branches
Sapporo Branch
Sendai BranchTokyo BranchTokyo Branch II
Nagoya Branch
Osaka Branch
Hiroshima Branch
Fukuoka Branch

Plant

Authorized: 360,000,000 shares
Issued: 101,879,461 shares (As of August 31, 2013)
Number of Shareholders: 11,991 (As of March 31, 2013)

Others

16.3%+1.6

Overseas
Investors

Individuals

24.4%

–3.1

17.4%

+0.8

Domestic
Corporations

11.1%
+0.6

Shizuoka Factory

Financial
Institutions

30.8%

+0.1

Research Laboratories
Central Research Laboratories (Kyoto)
Central Research Laboratories (Shizuoka)
Production Technology Laboratories

Major Shareholders
NO. OF SHARES(THOUSANDS)SHARE OFTOTAL (%)

The Master Trust Bank of Japan, Ltd. (Trust Ac.)

5,863

5.8

Toray Industries, Inc.

4,589

4.5

Japan Trustee Services Bank, Ltd. (Trust Ac.)

3,864

3.8

Mizuho Bank, Ltd.

3,686

3.6

The Norinchukin Bank

3,686

3.6

Nippon Life Insurance Company

1,700

1.7

Kaken Pharmaceutical Employee Stock
Ownership Association

1,687

1.7

KYORIN Pharmaceutical Co., Ltd.

1,294

1.3

Mellon Bank, N.A. As Agent for its Client
Mellon Omnibus US Pension

1,262

1.2

The Kyoei Fire and Marine Insurance
Company, Limited

1,248

1.2

SHAREHOLDERS

Employees (Non-Consolidated)
Administration: 104
Sales & Marketing: 1,015
Production & Technology: 212
Research & Development: 280
Regulatory Affairs: 38
ANNUAL REPORT 201345

Bringing

Smilesto Everyone

28-8, Honkomagome 2-chome, Bunkyo-ku,
Tokyo 113-8650, Japan
Tel: 81-3-5977-5001
Fax: 81-3-5977-5131
http://www.kaken.co.jp

Printed in Japan