Annual Report 2016
Year Ended March 31, 2016

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 proprietary technologies. It has since broadened the scope of its business activities to include the manufacture and sales ofdrugs such as streptomycin, an antituberculosis drug, and various antifungal agents.
The Company is particularly strong in the fields of orthopedics, dermatology, andgeneral surgery. In the field of orthopedics, Kaken boasts the accomplishment of
introducing a medical treatment for osteoarthritis of the knee that involves theintraarticular injection of sodium hyaluronate.
In 2001, the Company launched Fiblast Spray, a wound-healing agent that
employs a recombinant human basic Fibroblast Growth Factor (bFGF). This was thefirst drug in the world to employ bFGF. Kaken continues to advance research efforts
to fully leverage the potential of bFGF going forward.
In its R&D efforts, the Company is focused on the fields of inflammation, allergies, and pain relief, as well as that of fungal
infection. In addition, in 2014, Kaken commenced sales of Clenafin, a drug that contains efinaconazole, a compound discoveredby Kaken’s scientists, and is Japan’s first topical treatment for onychomycosis.

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

KAKEN

Three Joys

Creating joy for

Creating joy as a

Creating joy forpatients

company

our employees

We strive to create and offer
effective drugs that satisfy theneeds 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 acompany with vitality and presence
whose employees enjoy and takepride in their work.

Contents
2

President’s Message

4 	Special Feature: Developing New Products
6

13 Fulfilling Our Social Responsibilities
16 Board of Directors and Audit & Supervisory Board Members

to Satisfy Unit Medical Needs

17 Financial Section

Overview of Major Products

47 Corporate Data

10 Commitment and Excellence
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.

History
1948
1952
1961
1962
1963
1982
1987
1988
1989
1992
1994
1996
1998
2000
2001

2002
2005
2006
2007
2008
2009
2010
2011
2012
2014
2015
2016

Riken reorganized into Kagaku-Kenkyusho
Kagaku-Kenkyusho renamed Kaken Chemicals
Kaken Chemicals listed on the Second Section of the Tokyo Stock Exchange
Kaken Chemicals listed on the First Section of the Tokyo Stock Exchange
Construction of Shizuoka Factory (Fujieda City, Shizuoka Prefecture) completed
Kaken Chemicals merged with Kakenyaku-Kako to form Kaken Pharmaceutical Co., Ltd.
Artz (anti-osteoarthritis product) launched
Kaken Pharma Co., Ltd., established
Adofeed (pain- and inflammation-relieving plaster) launched
Ebrantil (α1 blocker to treat dysuria and hypertension) launched
Procylin (oral-use prostaglandin I2 analog product) launched
Mentax (anti-trichophyton product) launchedArtz
40th Okochi Memorial Grand Production Prize received(Received for development of a topical antifungal agent, butenafine hydrochloride)
Sales approval received from the U.S. Food and Drug Administration for Mentax (anti-trichophyton product)
Bunkyo Green Court completed
Seprafilm (anti-adhesive absorbent barrier) launched
Shiga Factory closed, operations integrated with Shizuoka Factory
ISO 14001 obtained by Shizuoka Factory
Corporate philosophy and business philosophy established
Mirol (glaucoma and ocular hypertension treatment product) launched
Fiblast Spray (wound-healing product) launchedCompliance program established
GHRP Kaken (diagnostic agent for growth hormone deficiency) launchedWorldwide rights acquired to develop, manufacture, and sell bFGF
Out-licensing agreement concluded for antifungal compound KP-103 in North America and Europe
Out-licensing agreement concluded for Fiblast Spray (wound-healing product) in South Korea
Out-licensing agreement concluded for dental applications of bFGF in North America and Europe
Berasus LA Tablet 60μg (pulmonary arterial hypertension treatment product) launched
Adofeed PAP 80mg (pain- and inflammation-relieving plaster product) launched
ClenafinOut-licensing agreement concluded for wound-healing applications of bFGF in North America and Europe
Clexane (anticoagulant product) launched
Lipidil Tablet (anti-hyperlipidemia product) launched
Exclusive sales license agreement concluded for SI-6603 (lumbar disc herniation treatment) in Japan
Clenafin (topical onychomycosis treatment product) launched
Exclusive licensing and joint development agreement concluded for BBI-4000 (primary focal hyperhidrosis product)in Japan and certain other Asian countries
Kaken Realty & Service Co., Ltd., absorbed
Exclusive rights to develop and distribute NexoBrid (burn wound eschar-specific removal product) in Japan acquired
Out-licensing agreement concluded for Clenafin (topical onychomycosis treatment product) in South Korea
Products

Overseas activities

Company

Consolidated Financial Highlights(As of or for the years ended March 31)

Net Sales

Operating Income

MILLIONS OF YENMILLIONS OF YEN

109,730

87,99787,05488,946

2013

%

2015

MILLIONS OF YEN

25.3

ROE
%

22.0

2014

32.0

93,88935,1462012

Operating Income Ratio

Profit Attributable to Ownersof Parent

2016

17.3

16.8

15,18014,611

2012

2013

17.8

16.7
13.5

20,631

15,872

2014

21,14335,146

8,282

2015

2016

2012

14.0

8,991

2013

14.5
12,122
9,735

2014

2015

2016

ANNUAL REPORT 20161

President’s Message
Dear Stakeholders:
In the fiscal year under review, ended March 31, 2016, weposted record highs for net sales, operating income, andprofit attributable to owners of the parent, thanks largely toincreased sales of Clenafin as well as revenues received inrelation to Jublia (trade name for Clenafin in the UnitedStates and Canada) from Valeant Pharmaceuticals International, Inc. With a few exceptions, all major products saw
sales growth.
However, as the Japanese government continues to promote the usage of generic drugs, sales of long-term listed
products are declining. The impacts of this trend are expected
to heighten into the future. However, we nonetheless choseto increase dividend payments for the 14th consecutive year.
In the fiscal year ending March 31, 2017, additional reductions are expected with regard to the prices of Artz and otherlong-term listed products, and the overall impact of National
Health Insurance (NHI) drug price revisions on sales is
expected to be roughly 5%. Amidst these price reductions,enhancing our R&D pipeline will beof utmost importance in ensuringongoing growth, and we will therefore need to devote even more effort
than before to acquire new products
through development and in-licensing.
We are forecasting decreased sales
and income for the fiscal year ending
March 31, 2017. These decreases will be a result of the
impacts of NHI drug price revisions. Regardless, we plan toonce again raise dividend payments by issuing total dividend
payments of ¥150.00 per share. We will also acquire treasury
stock. Looking ahead, Kaken will continue to carry out flexible
capital measures based on timely decisions.
Going forward, we will strive unceasingly to ensure Kaken
continues to be a company that is appealing to investors. In
closing, I would like to ask for your continued support as weundertake this endeavor in the future.

Medium-Term Business Plan 2018
The Group is currently placed in a difficult position as thegovernment drive to promote the usage of generic drugs
has created an environment in which pharmaceuticalcompanies cannot expect to grow unless they are able tocontinue creating new drugs. Based on this recognition,
we formulated a new three-year medium-term businessplan that started in April 2016. This plan defines the establishment growth foundations from a forward-looking per-spective, as opposed to pursuing short-term
improvements in performance, as matter of top priorityand puts forth three priority measures. In consideration of
the projected impacts of future NHI drug price revisions,
we have set the medium-term numeric target of achieving consolidated net sales of ¥110.0 billion in the fiscal
year ending March 31, 2019.

1 Putting R&D pipeline enhancement as the foremost priority
and allocating management resources as much as possible

Priority
Measures

2 Work to maximize value of Clenafin and new products,
while for existing products, work toward strengthening
marketing bases and efficiency

Targetfor Fiscal YearEnding March 31,
2019

Consolidated net sales:

110.0

¥

billion

3 Work to foster personnel with strong creativity, fitting for an
era of change

Overview of Results for the Fiscal Year Ended
March 31, 2016
In the fiscal year under review, ended March 31, 2016, Clenafin,
a topical treatment for onychomycosis, contributed to consolidated performance (performance of the Company and its consolidated subsidiaries). As a result, consolidated net sales wereup 16.9% year on year, to ¥109,730 million, and operating
income increased 70.4%, to ¥35,146 million. Profit attributableto owners of parent rose 74.4%, to ¥21,143 million.
2

K AKEN PHARMACEUTICAL CO., LTD.

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

Investing strategically in R&D
In our R&D efforts, we will continue to selectively focus the
allocation of resources and constantly strive to raise efficiency

in order to expand our pipeline. At the same time, we will
engage in joint research and pursue strategic alliances withcompanies and research institutions in Japan and around theworld with the aim of quickly introducing new research projects.
To expedite R&D efforts, we will also outsource basic
research procedures, utilize contract research organizations(CROs) related to clinical trials, and conduct overseas clinical
trials while participating in joint global clinical trials.

Strengthening sales activities
We will continue to conduct sales activities in which our medical
representatives (MRs) work closely with local communities
to supply medical practitioners with high-value-added medical
information according to their needs. In providing medical
information, product-related websites and the mass media
will be utilized. At the same time, we will solidify our positionin the orthopedics field while expanding our presence in thedermatology field.

of Directors and the year-end dividend being decided at thegeneral meeting of shareholders.
In accordance with the aforementioned policy, we havedecided to increase the interim dividend by ¥7.00 per shareyear on year, to ¥34.00. In regard to the year-end dividend,
we have chosen to raise dividend payments to ¥78.00 per
share in reflection of the 1-for-2 reverse stock split that was
conducted with an effective date of October 1, 2015. This
amount contains a commemorative dividend of ¥10.00 per
share and represents an increase of ¥14.00 per share on a
post-share consolidation basis. This made for an increase of¥28.00 to total dividend payment per share in the fiscal year
under review on a post-share consolidation basis and our
14th straight year of higher dividend payments.
In the fiscal year ending March 31, 2017, we intend to pay
interim and year-end dividends of ¥75.00 per share each, fora total dividend payment of ¥150.00 per share.

Optimizing operations and promoting efficiency
In production operations, we will actively work to reduce thecost of sales ratio by conducting more-efficient investment,
optimizing the placement of employees, and revising productlines and standards. In addition, the production of agrochemicals will continue to be outsourced to overseas companies.

Promoting environmental preservation
Kaken recognizes that promoting environmental preservationis one of its social responsibilities. Therefore, we are conducting Companywide environmental preservation activities
under the guidance of the Environmental Committee.
As one such activity, Kaken’s Shizuoka Factory has obtained
ISO 14001 certification.
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, andtherefore companies operating in this industry must maintaina higher level of equity capital than companies in other industries. Accordingly, we have established a flexible policy of
issuing dividend payments based on operating results while
striking a balance between shareholder returns and the needto secure sufficient equity capital. Retained earnings, meanwhile, are used to maximize corporate value through strategic
investments in R&D and business infrastructure.
In principle, the Company makes dividend payments twicea year, with the interim dividend being decided by the Board

June 2016

Tetsuo Onuma
President and Representative Director
ANNUAL REPORT 20163

Special Feature

Developing

New Products

to Satisfy Unmet Medical Needs

Kaken’s Specialty—Topical Antifungal Agent—
Clenafin (efinaconazole), discovered by Kaken’s scientists, isthe world’s first triazole compound used in a topical medication for onychomycosis. This drug has potent antifungal activity
and is effective against a wide spectrum of fungi. Also, its
effectiveness decreased only slightly compared with otherexisting antifungal agents in the presence of keratin, a protective
protein and the main component of nails. Exhibiting superior
nail-penetrating properties, the drug has demonstrated that it
can maintain its therapeutic effect in nails thickened by fungal
infection or on the underside of such nails. Clenafin 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. For
these reasons, Clenafin is a promising new topical treatment
for persistent onychomycosis, which has been primarily
treated with oral medications in the past.
In 2006, Kaken concluded a licensing agreement with U.S.
company Dow Pharmaceutical Sciences, Inc. (DPS), granting
it the development and marketing rights for Clenafin in
Europe and the Americas. After Valeant acquired DPS in
2009, the company has continued to conduct joint clinicaldevelopment activities with Kaken. In two pivotal studies(phase III), including a multinational study, in patients withmild to moderate onychomycosis of the toenails, this topicalinvestigational drug was found to be clinically and statisticallysuperior to a vehicle for all primary and secondary endpoints.
The efficacy of this drug is also competitive when comparedwith that of existing oral medications, and it has demonstrated its efficacy as a topical agent with fewer side effects.

In 2014, Kaken was granted manufacturing and marketing
approval for Clenafin in Japan and subsequently launchedthat year, making the drug the first topical medication foronychomycosis in the country. In the nearly two years since
its release, Clenafin has gained an exceptional reputation
among dermatologists, with domestic sales of approximately¥20.0 billion in the fiscal year under review. In addition, Valeant acquired marketing approval for this drug in Canada in2013 and in the United States in 2014, marketing it under the
trade name Jublia in these countries. Furthermore, in May
2016, Kaken concluded a development and distribution
license agreement for this drug with Dong-A ST Co., Ltd., alocal company in South Korea.
We will continue to work with overseas partners to obtainapproval for this drug as a treatment for onychomycosis in
the global market.

Action Mechanism of Clenafin (Efinaconazole)
Application of Clenafin

Effective in the presenceof keratin
Efinaconazole

Cuticle

Nail
plate

Nail matrix
Nail
plate

Nail bed

Nail bed
Fungi

4

K AKEN PHARMACEUTICAL CO., LTD.

Keratin

Antifungal activity
by efinaconazole

New Drug Development Pipeline
PRODUCT CODE

INDICATIONSTAGE

REMARKS1

KCB-1D

Periodontitis

Filed

bFGF

2

KAG-308

Ulcerative colitis

Phase II

Developed jointly with Asahi Glass Co., Ltd.;
Oral-use prostaglandin analog

3

BBI-4000

Primary focal hyperhidrosis

Preparing forPhase II

Licensed from Brickell Biotech, Inc.;
Topical anticholinergic

4SI-657

Enthesopathy

Development
abandoned

Developed jointly with Seikagaku Corporation;
Additional indication for Artz

Kaken’s Innovative Product for Tissue Regeneration: Fiblast Spray
Fiblast Spray is the world’s first product to be marketed forregenerative medicine treatment containing recombinanthuman bFGF. Present in almost all tissue in the human body,bFGF is released from the extracellular matrix once tissue isdamaged and subsequently acts on various cells and tissues
to stimulate tissue regeneration. While having a wide variety
of functions, the most prominent features of bFGF are its
powerful ability to stimulate cellular proliferation and its
capacity to promote neovascularization.
In 1988, Kaken obtained exclusive licensing rights in Asia
for recombinant human bFGF (trafermin) from Scios Inc., of
the United States. Following this, Kaken has pushed forwardwith its own R&D efforts and obtained marketing approval inJune 2001 for Fiblast Spray for the treatment of pressure
ulcers and other skin ulcers, such as burn and leg ulcers.
Furthermore, after completing a reexamination in 2010,
Fiblast Spray has been re-acknowledged as a highly reliable
drug. In 2015, Fiblast Spray was endorsed as an external
medicinal product for primary topical therapy in the guidelines of the Japanese Society for Burn Injuries. The product isnow used with confidence at a number of hospitals throughout Japan.
Not only effective in regenerating skin tissue, trafermin has
also demonstrated the ability to promote the proliferation andregeneration of bone tissues. In the field of dentistry, trafermin is known for its ability to promote the regeneration of
periodontal ligaments, cementum, and alveolar bone. Thisability inspired Kaken to begin research and development

investigating the potential for trafermin to be used in regenerating periodontal tissue lost due to periodontitis. Based on
the results of two phase III clinical trials, it was confirmedthat the meaningful effect of trafermin on alveolar boneregeneration demonstrated superiority in comparison with aplacebo and an existing medical device. An application forthis indication was submitted to the Japanese authorities in
2015, and this application is currently under review.
Kaken is pressing ahead with the development of traferminand has concluded licensing agreements regarding its development and distribution with several companies in Japan andoverseas. Going forward, Kaken will continue to expand thepresence of trafermin in the global medical market. In thisundertaking, we will collaborate with our domestic and overseas business partners and fully utilize the wealth of knowledge we have accumulated regarding trafermin.

Action Mechanism of Fiblast Spray
Epithelialization Stimulation
Reduction of wound area

Fibroblasts Proliferation
Stimulation of granulation
formation
Epidermis

GRANULATIONTISSUE

Angiogenesis
1. Activation of matrix degrading enzymes
2. Migration of vascular endothelial cells
3. Proliferation of vascular endothelial cells
4. Formation of vascular vessel lumen

Dermis/Subcutaneous
tissueMuscleBone

ANNUAL REPORT 20165

Overview of Major Products

Pharmaceuticals and Medical Devices
Artz

Clenafin

Seprafilm

Anti-osteoarthritis product

Topical onychomycosis treatment

Anti-adhesive absorbent barrier

Artz 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 themarket as the world’s first sodium
hyaluronate drug indicated to treat
osteoarthritis of the knee by intraarticular injection. In 1989, an indication was added for the treatment ofshoulder periarthritis.
In 1992, Artz was marketed in disposable pre-filled syringes under the
trade name Artz Dispo. This was donewith the 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 rheumatoid arthritis.

Launched in Japan in September 2014,
Clenafin is the country’s first topicaltreatment for onychomycosis. This
drug contains efinaconazole, which
was discovered by Kaken, as its active
ingredient.
Clenafin does not bind well withkeratin, the main component of nails,
meaning that this drug has superior
nail-penetrating properties. Clenafin
has proven effective in treating onychomycosis through a once-daily application to the infected nails.
Clenafin comes packaged in a bottlewith a connected brush, making it
easy to apply the drug across the surface of nails.
In 2014, Clenafin was launched in the
United States and Canada by Valeantunder the trade name Jublia.

Developed by Genzyme Corporation,of the United States (which was later
acquired by Sanofi SA, of France),
Seprafilm is a sheet-type anti-adhesive
absorbent barrier. Made from sodium
hyaluronate and carboxymethyl cellulose, Seprafilm transforms into a
hydrated gel within 24 to 48 hours
after being applied to tissue that has
been damaged by surgery. It thenremains in place for approximately
seven days, preventing adhesion byforming a physical barrier between thedamaged tissue and the healthy tissue
surrounding it.
There are currently four sizes of
Seprafilm available, thus allowing practitioners to select the size that best
meets the needs at hand.

Sales: Artz

Sales: Clenafin

Sales: Seprafilm

MILLIONS OF YENMILLIONS OF YENMILLIONS OF YEN

31,83631,55032,07330,25919,86830,7609,967

10,363

10,726

10,791

11,262

Launched in
September 2014
6,857

2012/3 2013/3 2014/3 2015/3 2016/3
6

K AKEN PHARMACEUTICAL CO., LTD.

2012/3 2013/3 2014/3 2015/3 2016/3

2012/3 2013/3 2014/3 2015/3 2016/3

LipidilFiblast Spray

Generic Drugs

Anti-hyperlipidemia product

Wound-healing product

Lipidil is a fibrate-type antihyperlipidemic
drug with fenofibrate, which was developed by Groupe Fournier SA, of France(which was later transferred to Abbott
Laboratories, of the United States, after
acquisition by Solvay SA, of Belgium),as its active pharmaceutical ingredient.
This drug lowers triglycerides and totalcholesterol, while increasing HDL(“good”) cholesterol, thus improving
overall lipid metabolism. This is accomplished by activating peroxisome proliferator activated receptor (PPAR ) in
the liver cells to adjust the expression ofvarious lipid metabolism-related proteins.
Lipidil is currently marketed in over
90 countries, and a significant amountof clinical experience has been accumulated to date.
In 2011, Lipidil was released in tablet
form. The change from capsule totablet has made Lipidil even easier forpatients to take.

Fiblast Spray is a wound-healing drug
containing trafermin as an active pharmaceutical ingredient. Trafermin is arecombinant human bFGF that has
effects on the promotion of angiogenesis and granulation formation. The
entire DNA sequence of the humanbFGF gene was mapped by Scios Inc.
(which was later acquired by Johnson& Johnson, of the United States), thus
making it possible to manufacture
recombinant human bFGF. Kaken
obtained a license to develop this product and subsequently launched Fiblast
Spray, the world’s first recombinanthuman bFGF product, in Japan in 2001.

In Japan, the public is being encouraged by the government to use
generic drugs as part of a movement
to reduce public healthcare costs. As aresult, there has also been an increasing trend toward using generic drugs in
the medical field.
Kaken sees the future expansion of
the generic drug market as a significant business opportunity, and it istherefore aggressively increasing its
presence in this market in order totake full advantage of this opportunity.

Sales: Lipidil

Sales: Fiblast Spray

Sales: Generic Drugs

MILLIONS OF YENMILLIONS OF YENMILLIONS OF YEN

4,429
4,118

4,373

4,526

4,082

13,292
3,934

3,809

12,380

3,786
3,511

3,617

10,977

8,520

2012/3 2013/3 2014/3 2015/3 2016/3

2012/3 2013/3 2014/3 2015/3 2016/3

9,180

2012/3 2013/3 2014/3 2015/3 2016/3
ANNUAL REPORT 20167

Procylin

AdofeedMentaxOral-use prostaglandin I2 analog
product

Pain- and inflammation-relieving
plaster

Anti-trichophyton product

Procylin is a drug used to treat chronicartery occlusive disease and contains a
prostaglandin I2 analog beraprost
sodium as an active pharmaceuticalingredient. This drug has the effects ofboth vascular vessel dilatation and platelet aggregation inhibition. It is the firstoral-use prostaglandin I2 analog productin the world. It was developed by Toray
Industries, Inc., and commercialized
through co-development with Kaken.
Procylin improves blood circulation
by inhibiting platelet aggregation andperipheral blood flow increase.
Launched in 1992, the drug has an
improvement effect on ulcers, pain,
and chills resulting from conditions
associated with arteriosclerosis obliterans (ASO) and thromboangitis obliterans (TAO). In 1999, Procylin wasapproved for an additional indication totreat primary pulmonary hypertension.

Adofeed is an antiphlogistic analgetic
plaster. Its active pharmaceutical ingredient is flurbiprofen, a nonsteroidal
anti-inflammatory agent that functions
as a powerful prostaglandin biosynthesis inhibitor. Adofeed is absorbed
directly through the skin and is effective in treating pain and inflammation
caused by such conditions as osteoarthritis, shoulder periarthritis, tennis
elbow, and muscle pain.
In 2008, we launched plasters thatwere double the size of the Adofeed
plasters previously offered. This allows
patients to now choose the size mostappropriate for their needs.

Ebrantil

BerasusClexane1 blocker to treat dysuria
and hypertension

Oral-use sustained-release formulation of prostaglandin I2 analog

Anticoagulant

Ebrantil is a sustained-release formulation of urapidil, which is a selective 1
blocker. This product was initiallyplaced on the market in Japan in 1989
for the treatment of hypertension
based on its peripheral vasodilating
effect. In 1995, it was approved for thetreatment of dysuria due to having
benign prostate hypertrophy (BPH) asan additional indication. In 1999, it wasapproved for the treatment of dysuria
caused by neurogenic bladder, making
it the first 1 blocker in the world forthis indication.

8

Mentax is a topical product used totreat superficial mycosis. It contains
butenafine hydrochloride, a compounddeveloped by Kaken, as an active pharmaceutical ingredient. Mentax is provided in three forms, as a cream, aliquid (for external application), and aspray. Mentax is sold in the UnitedStates by Mylan Pharmaceuticals Inc.,and is also marketed in a number ofother countries worldwide. In December 2001, Mentax received approval as
an over-the-counter (OTC) drug in the
United States, and it is now sold in the
United States by Bayer AG of Germany(which acquired the consumer carebusiness of Merck Consumer Care,the company originally licensed to sell
Mentax in this market) under the tradename Lotrimin Ultra.

K AKEN PHARMACEUTICAL CO., LTD.

Berasus, a drug used to treat pulmonary arterial hypertension (PAH), wasapproved for marketing in October2007 and subsequently launched in
December of the same year. This product is a sustained-release formulationof beraprost sodium, the active pharmaceutical ingredient of Procylin, adrug launched in 1992. Berasus canmaintain more-consistent blood levels
in comparison with Procylin, which
made it possible to increase the daily
dose and thereby reduce the numberof daily administrations.
As there are currently very few effective drugs available for the treatment
of PAH, Berasus is viewed as animportant drug for this disorder.

Clexane is an anticoagulant containing
enoxaparin sodium, a low molecularweight heparin developed by Sanofi SA
of France, as an active pharmaceuticalingredient.
Clexane accelerates anticoagulant
effects by forming a complex with antithrombin III, which inhibits coagulation
factor Xa and factor IIa.
Clexane is the first commercialized
form of low molecular weight heparindeveloped in Japan with an indication
to suppress an onset of venous thromboembolism (VTE). Clexane is recommended to be used to suppress thesideration of VTE for the treatment ofpatients who undergo podiatric or
abdominal surgery under domestic andinternational medical guidelines.
Clexane is currently used in approximately 130 countries worldwide.

Agrochemicals
Polyoxins

Pentoxazone

Fungicides

Rice herbicide

Polyoxins are natural fungicides originating from microorganisms first discovered by Dr. Saburo Suzuki and his team at
RIKEN in 1963. They are produced by culturing the actinomycete
Streptomyces cacaoi var. asoensis isolated from the soil of thearea around Mt. Aso in Kumamoto Prefecture, Japan. Polyoxins
are not a single compound; they are a complex consisting of aseries of compounds resembling each other in their chemical
structure. Currently, 14 different polyoxin analogues—polyoxins
A through N—have been discovered.
Polyoxins have been sold as horticultural fungicides for over
50 years, and they are still widely used today. 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. Polyoxin D zinc salt was
categorized as a biochemical pesticide after it was recognized
as safe for humans, livestock, and the environment and as
being completely derived from natural sources through stringent inspections by the U.S. Environmental Protection Agency.
It is now widely used in the United States to prevent diseases
in lawns and flowers as well as in nuts, fruits, and vegetables.

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
field in its initial formulation and in several mixed formulations
based on this initial formulation.
Pentoxazone is effective mainly on annual weeds in ricepaddies, 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 resistantto sulfonylurea herbicides.
The safety of Pentoxazone is high for rice paddies, andtherefore it can be used in a variety of ways. Its initial formulation can be used on rice paddies before or after the rice istransplanted, and its one-shot herbicide formulation can beused at the same time as rice planting. There are also formulations approved for flooding and direct seeding in rice paddies.
Having extremely low water solubility and high soil absorbability, Pentoxazone hardly flows out to groundwater and rivers. Furthermore, it has low toxicity to humans, animals, andother living forms. For these reasons, it is an environmentallysafe herbicide.

Animal Health Products
Salinomycin

Colistin sulfate

Anti-coccidial antibiotics for chickens

Polypeptide antibiotic

Salinomycin sodium is a polyether antibiotic originally discovered by Kaken 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 mostwidely used anti-coccidial for chickens in the world, having
effectiveness against Clostridium and other gram-positivebacteria. Produced in accordance with Good Manufacturing
Practice (GMP) guidelines, Salinomycin sodium is not onlyused in Japan but also exported, thus supporting poultry
farmers worldwide.

Colistin sulfate is a polypeptide antibiotic that was discoveredin 1950 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 are serious pathogens for livestock. Accordingly, as
there is great international demand for this product, Kaken
exports this product worldwide.

ANNUAL REPORT 20169

Commitment and Excellence

R&D Division
As a pharmaceutical manufacturer, Kaken utilizes the technologies it has accumulated throughout its long history as
well as its superior research staff to advance R&D activities
to continually develop new drugs. Kaken focuses its drug
discovery efforts on areas where it has a strong presence,
including inflammation, allergies, and pain relief, and also
maintains its focus on the area of fungal infection in which it
specializes, devoting a great deal of financial and humanresources to these research themes.
The R&D Division is presently staffed by approximately 250
employees. Kaken estimates that research and development
expenses will be around ¥10.2 billion during the fiscal year
ending March 31, 2017. The R&D Division also works to more
actively evaluate products as potential candidates to be introduced into Kaken’s clinical development pipeline. At thesame time, the division employs a multifaceted approach
toward its R&D activities, which entails engaging in joint
research and development, in- and out-licensing of developed
products, and outsourcing of its operations. To boost theefficiency of its R&D initiatives, the R&D Division was reorganized in October 2014. Details of the new organizations are
as follows.
Kaken’s R&D activities are conducted at the Drug ResearchCenter located in Kyoto, the old capital of Japan, as well as at
one department of the Drug Research Center and the CMC
Center located in Shizuoka Prefecture. At these facilities,
Kaken conducts drug discovery projects, which require long,arduous research as well as unique, specialized knowledge.
In order to ensure that these projects progress efficiently,
researchers make full use of state-of-the-art equipment andtechnologies, and encourage effective communication and theclear division of responsibilities. At the Drug Research Centerin Kyoto, the Chemistry Department is responsible for thedesign and synthesis of chemical compounds, the “seeds”
from which new drugs are created. The Pharmacology Department of this center screens synthetized compounds, and it
evaluates the usefulness of developed compounds and compares these compounds to other available drugs.
10

K AKEN PHARMACEUTICAL CO., LTD.

Meanwhile, at the Drug Research Center in Shizuoka, thePharmacokinetics and Safety Department assesses how
candidate compounds behave within the human body andevaluates the safety of candidate compounds for use on
humans through non-clinical studies in animals. At the CMC
Center, the API Department develops processes related to
candidate compounds and manufactures these compounds.
The Formulation Department at this center identifies thephysicochemical properties of candidate compounds anddevelops formulations of these compounds that guarantee
their safety and maximize their effectiveness when used on
patients. This center’s Analysis Department is responsible fordeveloping specifications for drug substances, formulations,and raw materials; establishing testing methods; and conducting related stability tests. The Drug Research Center andthe CMC Center advance Kaken’s R&D efforts through collaborative, coordinated efforts.
Kaken’s R&D activities have earned a number of awards inrecognition of the Company’s superior fundamental technologies. The following are some of the awards that Kaken’s
scientists have received.
2009

Asahi Kasei Encouraging Award from the Academy ofPharmaceutical Science and Technology, Japan eceived for utilizing novel technology in the development ofR
Itraconazole products
2011

Prize for the Outstanding Pharmaceutical Science
Thesis from the Academy of Pharmaceutical Scienceand Technology, Japan
Received for work in the thesis titled “Formulation Design of Latanoprost Eye Drops to Improve the Stability at Room Temperature”
2012

Best Presentation Award at Annual Meeting of Academyof Pharmaceutical Science and Technology, Japan
Received for presentation titled “In Vitro-In Vivo Correlation of
Percutaneous Drug Absorption: Prediction of Percutaneous
Absorption Based on an In Vitro Skin Permeability Assay”

By leveraging such superior research technologies, theCompany aims to continue to accelerate and expand its R&D
efforts going forward.
Candidate drugs that have non-clinical studies are thentested to evaluate their safety and effectiveness on humansubjects. The Clinical Development Department conducts
clinical trials for candidate compounds that have been developed through drug discovery research or introduced fromoutside partners to evaluate their efficacy and safety in humansubjects. In addition to developing original drugs, Kaken
engages in joint clinical trials with other companies or organizations. Recently, a successful global clinical trial was jointly
conducted between Kaken and a foreign company, which hasentered into a licensing agreement with Kaken, leading to thelaunch of a new drug in Japan and some other countries. The
Clinical Development Department also handles all areas ofstatistical analysis. It manages case data from clinical trials
and works to maintain a certain degree of quality with regard
to this data. Meanwhile, the R&D Quality Assurance Department assures the quality and reliability of the data related toclinical trials that are conducted by the Clinical Development
Department. It also assures the quality and reliability of theplans and data related to the non-clinical studies that aredesigned and conducted by research laboratories. These clinicaldevelopment-related departments mutually cooperate withefforts to carry out clinical trials as quickly as possible.
In addition to in-house R&D ventures, Kaken engages inlicensing activities and joint research with outside companies
and organizations to expand its pipeline. The Research Planning and Collaboration Department seeks out themes forjoint research with academic institutions as well as othercompanies in the research stage while also searching forpartners with which to conduct joint research related to“seeds” developed in-house. Meanwhile, the Project Management and Licensing Department searches for promising
drugs for which to acquire licenses and then advances contract negotiations with the license holders. The department isalso responsible for negotiations related to out-licensing
activities. With regard to R&D themes in the clinical development phase, the department carries out project management. The Alliance Management Section handles the export
business as well as communications concerning allianceswith partners after the out-licensing of Kaken’s products.
Kaken will focus on its areas of expertise to accelerate theprogression of its drug discovery research efforts. Also, theCompany will collaborate with both domestic and overseas
research institutions and introduce and license new drugs
and continue to seek out the “seeds” of new technologies
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 medical 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 various medical fields.
The Quality Assurance Department assesses whether or
not each batch of drugs is produced in the predeterminedmanner and evaluates whether or not quality tests are compliant with all applicable standards. The Pharmacovigilance
Department then reviews the safety-related information pertaining to these drugs that has been collected from the medical
institutions where they are in use. Following this, the Regulatory Affairs Division makes comprehensive judgments basedon 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 atthese plants in order to ensure the quality of their operations.
The Pharmacovigilance Department reports the safety-related
information it has gathered and reviewed to organizations that
require it. The department also distributes this information to
medical institutions in the form of proper-usage information
contained in package inserts, thereby helping promote theeffective use of Kaken’s products. Furthermore, this department is responsible for collecting and evaluating safety-related
information from the R&D phase for pharmaceuticals.
The Regulatory Affairs Department supervises and assists
all aspects of the Company’s manufacturing and sales activities, and is also responsible for maintaining marketing
licenses for its pharmaceuticals. In addition to this, thedepartment also participates in the R&D process. It compiles
the R&D Division’s data regarding quality as well as datafrom both non-clinical and clinical trials. After compiling thisdata, the department is then tasked with gaining approval foruse of our drugs and for listing them in the NHI Drug Price
List after approval is obtained. The department is also responsible for producing product literature for approved drugs.

ANNUAL REPORT 201611

Production Division

Agrochemical & Animal Health Products Division

Kaken’s production base is the Shizuoka Factory. At this factory, we manufacture pharmaceuticals, agrochemicals, andfeed additives. In the fiscal year we completed the construction of a building that dedicated for the production of Clenafin, a topical treatment for onychomycosis. In manufacturing
this treatment as well as other existing pharmaceuticals, we
practice strict adherence to Japanese GMP (“Ministerial
Ordinance on Standards for Manufacturing Control and Quality Control for Drugs and Quasi-drugs,” revised Ordinance ofMinistry of Health, Labour and Welfare, No. 87, 2014). In thismanner, we strive to manufacture products of the highest
quality under stringent quality control and production control
systems. Furthermore, we have completed technical transfersof the sophisticated agrochemical and feed additive fermentation and purification technologies we have refined over thecourse of many years to overseas bases, thereby creating asystem that allows for increased production.

The Agrochemical & Animal Health Products Division is
responsible for conducting research and development
through sales activities related to agrochemicals, feed additives, and drugs for animals.
Our agrochemical operations are primarily focused on two
products—Polyoxins, which is a group of fungicides, andPentoxazone, a rice herbicide—and we are actively developing
these products and expanding their sales both in Japan andalso in overseas markets. Polyoxins are fungicides producedby culturing microorganisms in a culturing medium consistingof natural materials. These products are highly safe for bothhumans and animals and have a low environmental impact.
For a number of years, these products have consistently won
strong praise and support from agricultural producers aroundthe world due to their effectiveness in preventing diseasedamage to vegetables, fruit trees, lawns, and flowers. In
addition, Polyoxin AL has recently proven to have acaricidal
properties, thus further expanding its range of use. Pentoxazone is a rice herbicide that is effective against the vast arrayof annual weeds found in rice paddies and has also demonstrated effectiveness against herbicide-resistant varieties of
weeds. These factors make Pentoxazone indispensable forrice farmers.
The feed additives we offer include Salinomycin, an anti-coccidials
for chickens, and Colistin sulfate, which helps prevent infectious
diseases in livestock. We also supply a drug known as Uroston
that is used to treat urolithiasis in bovine. Through the provisionof feed additives and drugs for animals, Kaken is 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 the fieldwith the latest information related to the Company’s drugs
and medical devices. These MRs also collect information
regarding the safety and effectiveness of Kaken’s products byactively engaging in communication with such practitioners in
the medical field. They then provide feedback to internal
departments based on their findings.
Positioned throughout our nationwide network consistingof eight branches and 61 sub-branches, our approximately
750 MRs work in close contact with local communities, andare particularly capable with regard to the fields of orthopedics, dermatology, and general surgery.

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

12

K AKEN PHARMACEUTICAL CO., LTD.

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

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

Kaken practices compliance-based management, and each
executive and employee of Kaken and its subsidiaries isstrongly committed to practicing compliance with all relevantJapanese and foreign laws and regulations, respecting
different cultures and customs, and adopting high ethicalstandards 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, other investors, employees, business partners, and local communities.
3. We shall compete in a fair and free manner, conducting
our business activities in an appropriate way.
4. We shall handle all the Company’s assets, including information, in a legitimate and proper manner to facilitate thesmooth running of our business operations.
5. We shall respect the human rights and individuality of
employees, pay attention to health and safety issues, andendeavor 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 or other anti-social behavior.

Initiatives to Enhance Corporate Governance
The Company recognizes that compliance is essential inearning the trust of society. For this reason, we have established Kaken’s Activity Principles and Guidelines, based on
which we 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 ouremployees are thus fully aware of these principles and guidelines, and exercise them in their daily work as they participate
in this important business 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, fromwhich our shareholders, other investors, business partners,
and the local community will in turn benefit.

Corporate Governance System (As of June 29, 2016)
General Meeting of Shareholders
APPOINT/DISMISSAPPOINT/DISMISS

Audit & Supervisory Board
Audit & Supervisory Board Members

AUDIT

Board of Directors

COORDINATE/REPORTINSTRUCTInternal Audit Department

AUDIT

Risk Management andRepresentative

DELIBERATE

AuditorREPORT SUPERVISE

Director
REPORTPROMOTE

Accounting
AUDIT

President and

REPORT

Managing Directors’ Meeting

various other committees

APPOINT/DISMISSSUPERVISE

COORDINATE

COORDINATEREPORTAPPOINT/DISMISSREPORT

INSTRUCT, SUPERVISE

Companywide organizations,Group companies

ANNUAL REPORT 201613

Environmental Protection Activities
In recent years, there has been a growing concern for various
environmental issues, such as preserving biodiversity. Theseissues force people to reevaluate their interests in a numberof wide-ranging and complex areas, thus increasing the rolethat corporations must play in addressing these issues. Of
these issues, we believe that addressing the need to preserve and restore the natural environment is of particularimportance for corporations. Therefore, we will continue toexercise our corporate philosophy by promoting environmental
preservation and working to be a good corporate citizen withthe aim of creating a society that is full of healthy, smiling faces.
In 1983, Kaken established Environmental Measures Committees at each of its operational sites. These committees
were assigned the task of addressing the need to (1) preserve
the natural environment, (2) improve people’s health and living
environments, and (3) reduce pollution.
Further, in 2004, we developed the Kaken Basic Environmental Philosophy and the Basic Environmental Policies. In
April 2009, the Environmental Measures Committees weretransformed into Environmental Measures Task Forces. Thesetask forces work in cooperation with the Environmental Committee to advance Companywide environmental preservation
measures. Additionally, we have taken several steps to reinforce our environmental management activities, including
acquiring ISO 14001 certification for our Shizuoka Factory inAugust 2001.
Looking ahead, we will continue to actively engage in environmental management and social contribution activities at
the Company’s headquarters and its factory and all of its
research centers 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,
all employees are made aware of the environmental circumstances regarding Kaken’s business operations. This includes
promoting the understanding of input data related to the useof chemical substances that impact the environment andenergy consumption as well as output data on the emissions
into water and the atmosphere and waste production figures.
Based on an understanding of this information, reductions inenvironmental impact are being pursued.

14

K AKEN PHARMACEUTICAL CO., LTD.

Water Pollution Prevention
Kaken is emphasizing initiatives that contribute to environmental preservation. For example, the Shizuoka Factory separates wastewater from production activities into organic
wastewater and other wastewater. Organic wastewater thenundergoes treatment using active sludge, after which it ismixed with other wastewater until the organic wastewater isdiluted to below the maximum level defined in the wastewater standards. It is subsequently dispelled into rivers. 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 impact and is practicing
strict compliance with environmental laws and regulations.
In addition, as a monitor for whole effluent toxicity tests,
Kaken confirmed that wastewater from the Shizuoka Factory
did not have any impact on the surrounding aquatic organisms in the fiscal year ended March 31, 2014.
In a similar manner, the Drug Research Center in Kyoto
treats organic wastewater using active sludge and then mixes
it with wastewater from other systems before dispelling it
into public sewers. When dispelling such wastewater, theDrug Research Center adheres to its own internal standards,
which are stricter than the standards of Kyoto City, and periodically measures its emissions and reports the findings.
Air Pollution Prevention
In order to prevent air pollution, the Shizuoka Factory
installed a city gas fired boiler to replace its previous boiler,
which used fuel oil A. As a result, the factory has continued
to boast zero emissions of sulfur oxide (SOx) since 2007. In
the fiscal year ended March 31, 2014, the facility revised its
agreement with Fujieda City regarding smoke dust concentration emissions. At this time, the Shizuoka Factory voluntarily lowered the mutually agreed limit to below 0.05g/m3N.
Smoke dust emissions are measured twice a year, and emission levels are always significantly lower than this limit.
The kerosene-fired boiler of the Drug Research Center in
Kyoto was also replaced with a city gas fired boiler to prevent
air pollution in May 2007, and the facility has continued tooperate with zero emissions of SOx ever since. Moreover,the Drug Research Center measures soot and smoke emissions twice a year, and its emissions figures are always substantially below the level permitted by the Air Pollution
Control Act.
Going forward, both the Shizuoka Factory and the Kyoto
Drug Research Center will continue strengthening environ­mental management procedures to better prevent air pollution.

Chemical Substance Management
Both the Shizuoka Factory and the Drug Research Center in
Kyoto are managing chemical substances on a voluntarybasis. In order to reduce exposure to potential risks fromusing harmful chemical substances, the Company considers
possible revisions to its processes for manufacturing andanalyzing pharmaceuticals, and it is working to reduce theamount of solvents used and switch to less harmful substances. In addition, internal regulations have been established for handling harmful chemical substances, and theCompany is working to prevent accidents and environmental
pollution at all stages of handling these chemicals, from purchasing to use and then disposal. The Company also manages chemical substances in an integrated manner together
with reagents. Safety data sheets (SDSs) regarding theusage of such substances are kept up to date to ensure readiness for emergencies. The Shizuoka Factory takes steps tominimize the potential accident and health risks associatedwith chemicals by conducting risk assessments and working
environment assessments.
Waste Reduction and Recycling
The production of waste is part of the process of manufacturing pharmaceuticals that cannot be avoided. However, thedevelopment 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 inaccordance with the Basic Law for Establishing the Recyclingbased Society and is actively practicing the 4Rs (refuse,
reduce, reuse, and recycle). In the fiscal year ended March 31,
2016, the total amount of waste produced by the Shizuoka
Factory was 4,743 tons. Of this, 94% was sludge produced
during the treatment of wastewater and residual materials
from fermentation processes (animal and plant remnants). The
entire volume of this sludge and residual materials producedin the year under review was used for composting. Goingforward, 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 aquality assurance system in which both its headquarters(a medical supplier) and its factory (a manufacturer of pharmaceuticals) maintain close coordination. At Kaken’s factory,
the effectiveness and appropriateness of each manufacturing
process and facility is evaluated to ensure that manufacturing
practices and quality are suitably managed. The Quality
Assurance Department evaluates and confirms these activities, which is believed will result in the creation of a more
stringent quality assurance system. These activities havebeen expanded to the R&D Division and the Marketing &Sales Division to guarantee the utmost quality throughout allstages 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
scope in regard to such considerations as patient age andgender and the range of drugs taken simultaneously. Afterdrugs are launched, they are used by a wider range ofpatients, and this can result in the occurrence of unexpectedside effects. For this reason, it is necessary to continue toevaluate the efficacy and safety of drugs even after they havebeen launched. To this end, the Company has established thePharmacovigilance Department, which continues to collect,evaluate, and analyze data regarding the efficacy and safetyof the pharmaceuticals Kaken sells after they are launched. Itthen addresses any issues and provides information regarding proper usage methods to medical practitioners.

Information Provision by MRs
Kaken’s pharmaceuticals are used in various medical carefields. Kaken’s MRs are responsible for handling all of thesepharmaceuticals. For this reason, MRs are constantly taking
on new challenges in a wide range of disorder fields and play
an extensive role in the medical practice. MRs acquire expert
knowledge and develop an in-depth understanding of products
offered by Kaken so that they are always able to adapt tochanges in healthcare circumstances. They also work to provide an appropriate response to the ever more complex,
diverse needs of medical institutions and medical practitioners. In addition, MRs collect feedback from practitioners invarious medical fields so that the feedback may be utilized inefforts to improve existing products and develop new drugs.
Through these and other activities reflecting the corporate
philosophy, MRs are providing medical professionals withaccurate information regarding Kaken’s products.

ANNUAL REPORT 201615

Board of Directors and Audit & Supervisory Board Members(As of June 29, 2016)(Standing, from left)

Eiki Enomoto, Fumihiro Watanabe, Kazuki Sekitani, Hirokazu Konishi, Atsushi Takaoka, Hiroyuki Horiuchi, Yoshio Tanabe(Seated)Tetsuo Onuma

President and Representative Director

Outside Director

Tetsuo Onuma

Eiki Enomoto

Managing Director

Outside Director

Hirokazu Konishi

Yoshio Tanabe(Marketing and Sales)

Managing Director

Kazuki Sekitani(Research and Development)

Managing Director

Atsushi Takaoka(Accounting, Purchasing and Agrochemicals)

Director

Fumihiro Watanabe(Corporate Planning, Legal Affairs and Information System)

Director

Hiroyuki Horiuchi(General Manager of Marketing and Sales)

16

K AKEN PHARMACEUTICAL CO., LTD.

Audit & Supervisory Board Member

Masanori Aoyama(Standing)

Audit & Supervisory Board Member

Atsutada Iwamoto(Standing)

Audit & Supervisory Board Member

Toshio Sakurai
Audit & Supervisory Board Member

Kazuo Hara

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�����������24
Consolidated Statements of Cash Flows�����������������������������25
Notes to the Consolidated Financial Statements�����������������26
Report of Independent Auditors�������������������������������������������46

ANNUAL REPORT 201617

Consolidated Five-Year Summary

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

2016

2015

2014

2013

2012

2016
$  979,732

FOR THE YEARS ENDED MARCH 31¥109,730¥ 93,889¥ 88,946¥ 87,054¥ 87,997

Operating income

Net sales

35,146

20,631

15,872

14,611

15,180313,804

Profit attributable to owners of parent

21,14312,122

9,735

8,991

8,282

188,777

AT MARCH 31

Total net assets

89,875

77,10068,096

66,57862,071

802,455

Total assets

132,991

115,135

106,465

108,911105,108

1,187,420¥510.54¥290.90¥228.27¥206.61¥184.93$4.558

—

59.00

48.00

44.00

40.00

—

PER SHARE DATA

Net income (Basic)
Cash dividends (Non-Consolidated)

YEN

RATIOS

U.S. DOLLARS (NOTE)

%

ROE

25.3

16.7

14.5

14.0

13.5

Capital adequacy ratio

67.6

67.0

64.0

61.1

59.1

Notes: 1.	 U.S. dollar amounts are translated, for convenience only, at the rate of ¥112 = $1.00, effective on March 31, 2016.
2.	The Company conducted a 1-for-2 share consolidation on October 1, 2015. Net income per share has been calculated assuming thatthe share consolidation was conducted at the beginning of the fiscal year ended March 31, 2012.
3.	The Company conducted a 1-for-2 share consolidation on October 1, 2015. Dividends per share figures up to and including the fiscal
year ended March 31, 2015, are displayed at the values prior to the share consolidation and dividends per share for the fiscal year
ended March 31, 2016, are displayed as “–.” When calculated on a post-share consolidation basis, the interim dividend was ¥68 pershare and the total dividend payment per share was ¥146 (including a commemorative dividend of ¥10.00 per share) in the fiscal year
ended March 31, 2016.

Management Discussion and Analysis
Operating Performance
In the fiscal year under review, ended March 31, 2016,
Clenafin, a topical treatment for onychomycosis, contributed
to consolidated performance (performance of the Company
and its consolidated subsidiaries). As a result, consolidated
net sales were up 16.9% year on year, to ¥109,730 million,
and operating income increased 70.4%, to ¥35,146 million.
Profit attributable to owners of the parent rose 74.4%, to¥21,143 million.

18

K AKEN PHARMACEUTICAL CO., LTD.

Segment Information
Pharmaceuticals
Kaken’s pharmaceuticals segment consists of two core categories: pharmaceuticals and medical devices as well as
agrochemicals.
In pharmaceuticals, overall sales were up due to smoothsales growth for Clenafin, and higher sales of Artz, an antiosteoarthritis product. Increased revenues from overseas
Clenafin licensees also contributed to the rise in sales.
In medical devices, sales increased for Seprafilm, an antiadhesive absorbent barrier.
In agrochemicals, sales were relatively unchanged year on year.
As a result of the above, net sales in the pharmaceuticals
segment increased 17.4% year on year, to ¥107,391 million,
and segment income* was up 74.5%, to ¥33,633 million.
Net sales from overseas were ¥10,185 million.

Real EstateBusiness Risks

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
decreased 3.8% year on year, to ¥2,338 million, while segment income* increased 11.4% year on year, to ¥1,513 million.

The risk factors outlined below in relation to the Company’sbusiness activities may materially affect the decision making
of investors. The forward-looking statements that are madereflect the Group’s judgment and forecasts based on information available as of the end of the fiscal year under review.
Further, the risks faced by the Company are not limited tothose listed below.

* Segment income is based on operating income.

Financial Position
Total assets were ¥132,991 million as of March 31, 2016, up¥17,856 million from the previous fiscal year-end, primarily
due to an increase in cash and deposits. Total liabilities were¥43,116 million, up ¥5,081 million, largely as a result of gains
in income taxes payable. Net assets totaled ¥89,875 million,a rise of ¥12,775 million, following higher retained earnings.

(1) Risks related to new drug development
Substantial investment amounts and development periodsof more than 10 years are required before a new drug canbe 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.

Cash Flows
Cash and cash equivalents as of March 31, 2016, totaled¥41,744 million, an increase of ¥16,976 million comparedwith the previous fiscal year-end. Principal factors related to
cash flows during the year under review are as follows.
Net cash provided by operating activities was ¥27,067 million, an increase of ¥12,329 million year on year, due to factors including a rise in income before income taxes.
Net cash used in investing activities stood at ¥4,105 million,
compared with net cash provided by investing activities of¥473 million in the previous fiscal year, primarily as a result ofsales of property, plant and equipment, which occurred in theprevious fiscal year.
Net cash used in financing activities totaled ¥5,984 million,a decrease of ¥1,916 million year on year, largely due toreduced purchases of treasury stock.

(2) Risks related to the side effects
Clinical trials undertaken in the development stage involve
the trial administration of the drug to a limited number ofpatients. Accordingly, after a drug is launched onto the market, we conduct post-marketing surveillance to supplement
these clinical trials. In the event that new side effects are
identified at this stage, sales of the drug could be halted.
(3) Risks related to policies to curtail public healthcare
expenditure
As government initiatives to curtail healthcare expenditurecontinue, various medical system reforms are also being
implemented. These reforms may cause changes in themarket environment, which could subsequently affect theCompany’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 versions of Kaken products by other companies
may cause declines in sales of Kaken products. 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 aresult of various factors, such as problems with the Company’s manufacturing facilities, or the facilities of its suppliers, and delays in the procurement of raw materials.
These factors could affect the Company’s performance.
(6) Risks related to litigation
The Company is exposed to the possibility of litigation
arising in relation to its business activities. Such litigation
could affect the Company’s performance.
ANNUAL REPORT 201619

Consolidated Balance Sheets
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
As of March 31, 2016 and 2015
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

¥ 29,845¥ 10,553$  266,473

11,89914,214106,241

29,86828,204

266,679

851

879

7,598

30,72029,084274,286

Inventories (Note 5)

14,50813,483

129,536

Deferred tax assets (Note 14)

1,678

1,342

14,982ASSETS

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

Other

340

338

3,036

88,991

69,016

794,563

Buildings and structures

37,39338,550333,866

Machinery, equipment and vehicles

21,85822,967

195,161

59,252

61,518529,036

Accumulated depreciation(40,349)(42,292)(360,259)    Total current assets

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

18,902

19,225

168,768

Land

4,313

4,313

38,509Construction in progress

3,510

2,422

31,33926,72625,961

238,625

14,40015,357

128,571

Intangible assets

371

474

3,313

Net defined benefit asset (Note 10)

40

—

357

1,319

3,226

11,777    Total property, plant and equipment

INVESTMENTS AND OTHER ASSETS:
Investment securities (Notes 4 and 9)

Deferred tax assets (Note 14)
Other assets    Total investments and other assets
TOTAL ASSETS
See accompanying notes to Consolidated Financial Statements.

20

K AKEN PHARMACEUTICAL CO., LTD.

1,141

1,097

10,18817,273

20,156

154,223¥132,991¥115,135$1,187,420

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

2016

2015

¥  3,875¥  4,195   Notes and accounts payable–trade (Note 9)

12,256

12,295

109,429  Notes payable–facilities

1,132

1,377

10,107   Accounts payable–other

3,333

4,790

29,75916,722

18,462

149,304

741

542

6,616

LIABILITIES AND NET ASSETS

2016

CURRENT LIABILITIES:
Short-term bank loans (Notes 6 and 9)$

34,598

Payables:Accrued expenses
Provision for bonuses

1,437

1,361

12,830

Provision for sales returns

524

12

4,679

Provision for sales rebates

406

383

3,625

8,628

3,807

77,036

Income taxes payable (Note 14)
Other    Total current liabilities

1,523

1,604

13,59833,86130,369302,330

79,446

NON-CURRENT LIABILITIES:Net defined benefit liability (Note 10)

8,898

7,162

Deferred tax liabilities (Note 14)

—

121

—

Other

356

381

3,179

9,255

7,665

82,63423,85323,853212,973

Capital surplus

11,407

11,406

101,848

Retained earnings

68,60952,932

612,580

Treasury stock, at cost: 7,033,882 shares in 2016 and   14,025,880 shares in 2015

(16,301)(16,098)(145,545)    Total shareholders’ equity

87,56872,094

781,857

Net unrealized holding gain on securities (Note 2 (c))

4,423

5,478

39,491Remeasurements of defined benefit plans(2,117)(472)(18,902)    Total non-current liabilities

NET ASSETS:
Shareholders’ equity (Notes 2 (l) and 11):
Common stock   Authorized: 1
 93,000,000 shares as of March 31, 2016 and
360,000,000 shares as of March 31, 2015   Issued:	48,439,730 shares as of March 31, 2016 and96,879,461 shares as of March 31, 2015

Accumulated other comprehensive income:    Total accumulated other comprehensive income

2,306

5,005

20,589    Total net assets

89,875

77,100802,455¥132,991¥115,135$1,187,420

TOTAL LIABILITIES AND NET ASSETS
See accompanying notes to Consolidated Financial Statements.

ANNUAL REPORT 201621

Consolidated Statements of Income
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2016 and 2015
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

¥109,730¥93,889$979,732

COST OF SALES

48,09344,753

429,402  Gross profit

61,637

49,136550,330SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 12)26,49028,504

236,518

OPERATING INCOME

35,146

20,631

313,804

Interest and dividends income

232

219

2,071

Interest expenses

(27)

(28)

(241)

Foreign exchange losses

(32)

—

(286)

Amortization of net retirement benefit obligation at transition

—

(524)

—

Gain or loss on sales of non-current assets, net (Note 13)—(1,179)—Loss on retirement of non-current assets

(65)

(69)

(580)

Amortization of long-term prepaid expenses

—

(525)

—

Loss on sale of golf club membership

(5)

(8)

(45)

NET SALESOTHER INCOME (EXPENSES):

Other, net

43

96

384

145

(2,019)1,295

35,292

18,611

315,107

Current

11,332

6,611

101,179

Deferred

2,815

(123)

25,13414,148

6,488

126,321

21,14312,122

188,777¥ 21,143¥12,122$188,777

INCOME BEFORE INCOME TAXESINCOME TAXES (Note 14):NET INCOME
PROFIT ATTRIBUTABLE TO OWNERS OF PARENTYEN

PER SHARE DATA:

U.S. DOLLARS (NOTE 1)

2016

2015

2016

¥510.54¥290.90$4.558———¥112.00¥ 59.00$1.000Net income (Note 16):
Basic
DilutedCash dividends applicable to the year (Note 11)
See accompanying notes to Consolidated Financial Statements.

22

K AKEN PHARMACEUTICAL CO., LTD.

Consolidated Statements of Comprehensive Income
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2016 and 2015
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

NET INCOME

2016

2015

2016

¥21,143¥12,122$188,777

OTHER COMPREHENSIVE INCOME (Note 17):
Net unrealized holding gain on securities(1,054)

3,079(9,411)Remeasurements of defined benefit plans(1,644)

1,404(14,679)   Total other comprehensive income(2,699)4,484(24,098)

COMPREHENSIVE INCOME

18,444

16,607

164,679¥18,444¥16,607$164,679

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

ANNUAL REPORT 201623

Consolidated Statements of Changes in Net Assets
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2016 and 2015
MILLIONS OF YEN
ACCUMULATED OTHERCOMPREHENSIVE INCOME

SHAREHOLDERS’ EQUITY

Common stock Capital surplus

BALANCE—March 31, 2014

¥23,853¥11,587Cumulative effect of changes
in accounting policies  Restated balance

Treasury stockTotal¥49,789¥(17,656)¥67,574

299
23,853

11,587Net unrealized Remeasurementsof defined
holding gain on
benefit planssecurities

Retainedearnings

50,089¥ 2,398¥(1,876)

Total

TOTAL NETASSETS¥   521¥68,096299(17,656)

67,874299
2,398(1,876)521

68,395

Changes during the year:  Cash dividends(4,265)(4,265)(4,265)   Profit attributable toowners of parent

12,122

12,122

12,122(3,637)(3,637)(3,637)000—   Purchase of treasury stock   Sale of treasury stock0   Cancellation of treasury
stock

(181)

(5,013)

5,195

—
3,079

1,404

4,484

—

(181)

2,843

1,557

4,220

3,079

1,404

4,484

8,704

¥23,853¥11,406¥52,932¥(16,098)¥72,094¥ 5,478¥ (472)¥ 5,005¥77,100  Other, net
Total changes during the year
BALANCE—March 31, 2015
Cumulative effect of changes
in accounting policies  Restated balance—
23,853

11,40652,932(16,098)

72,094

4,484

—
5,478

(472)

5,005

77,100Changes during the year:  Cash dividends(5,467)(5,467)(5,467)   Profit attributable toowners of parent

21,143

21,143

21,143

(203)

(203)

(203)

0

1

   Purchase of treasury stock   Sale of treasury stock0  Other, net
Total changes during the year
BALANCE—March 31, 2016

1
(1,054)(1,644)(2,699)(2,699)—0

15,676(202)

15,474(1,054)(1,644)(2,699)12,775¥23,853¥11,407¥68,609¥(16,301)¥87,568¥ 4,423¥(2,117)¥ 2,306¥89,875

THOUSANDS OF U.S. DOLLARS (NOTE 1)
ACCUMULATED OTHERCOMPREHENSIVE INCOME

SHAREHOLDERS’ EQUITY

Common stock Capital surplus

BALANCE—March 31, 2015

$212,973$101,839

Treasury stock

Total$472,607$(143,732)$643,696Cumulative effect of changes
in accounting policies  Restated balance

Net unrealized Remeasurementsof defined
holding gain on
benefit planssecurities

Retainedearnings$48,911$ (4,214)

Total

TOTAL NETASSETS$ 44,688$688,393—
212,973

101,839472,607(143,732)

643,696—
48,911(4,214)

44,688688,393

Changes during the year:  Cash dividends(48,813)(48,813)(48,813)   Profit attributable toowners of parent

188,777

188,777

188,777(1,813)(1,813)(1,813)0

9   Purchase of treasury stock   Sale of treasury stock0  Other, net
Total changes during the year
BALANCE—March 31, 2016—

0$212,973$101,848

139,964

K AKEN PHARMACEUTICAL CO., LTD.

(1,804)(14,679)(24,098)(24,098)

138,161(9,411)(14,679)(24,098)

114,063$612,580 $(145,545) $781,857$39,491$(18,902)$ 20,589$802,455

See accompanying notes to Consolidated Financial Statements.

24

9(9,411)

Consolidated Statements of Cash Flows
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2016 and 2015
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

¥35,292¥18,611$315,107  Depreciation

2,242

2,400

20,018   Increase (decrease) in net defined benefit liability

(618)

348

(5,518)   Decrease (increase) in net defined benefit asset

(40)

—

(357)

   Interest and dividends income

(232)

(219)

(2,071)  Interest expenses

27

28

241

   Loss on retirement of non-current assets

65

67

580

CASH FLOWS FROM OPERATING ACTIVITIES:
Income before income taxes
Adjustments for:   Loss (gain) on sales of non-current assets

—

1,179

—

   Decrease (increase) in notes and accounts receivable–trade(1,664)(2,841)(14,857)   Decrease (increase) in inventories(9,152)(1,025)(260)   Increase (decrease) in notes and accounts payable–trade(38)(1,418)(339)  Other, net

(393)

3,093

(3,509)   Subtotal

33,61520,990300,134   Interest and dividends income received

232

219

2,071

  Interest paid

(27)

(28)

(241)

   Income taxes paid, net(6,752)(6,443)(60,286)    Net cash provided by (used in) operating activities

27,067

14,737

241,670(27,893)

CASH FLOWS FROM INVESTING ACTIVITIES:   Purchase of property, plant and equipment(3,124)(1,954)   Proceeds from sales of property, plant and equipment

—

1,941

—

   Purchase of intangible assets

(93)

(74)

(830)

   Purchase of investment securities

(753)

(3)

(6,723)  Other, net

(134)

565

(1,196)(4,105)473(36,652)(2,857)    Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:   Decrease in short-term loans payable

(320)

—

   Net change in treasury stock(201)(3,636)(1,795)(5,463)(4,263)(48,777)    Net cash provided by (used in) financing activities(5,984)(7,900)(53,429)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

16,976

7,310

151,571   Cash dividends paid

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

24,767

17,457221,134

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 3)¥41,744¥24,767$372,714

See accompanying notes to Consolidated Financial Statements.

ANNUAL REPORT 201625

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 basis of 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, and are compiled from the consolidated financial statements preparedby 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 orderto present them in a form which is more familiar to readers outside Japan. In addition, certain
reclassifications have been made in the 2015 financial statements to conform to the classifications used in 2016.
As permitted by the Financial Instruments and Exchange Act of Japan, 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 sumof the individual amounts.
The U.S. dollar amounts in the accompanying consolidated financial statements have beentranslated from yen amounts solely for convenience and, as a matter of arithmetic computation
only, at ¥112 = U.S.$1.00, the approximate rate of exchange prevailing on March 31, 2016. Thistranslation should not be construed as a representation that yen amounts have been, could
have been, or could in 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 subsidiary.
For the year ended March 31, 2016, the Company had one consolidated subsidiary as follows:
KAKEN PHARMA CO., LTD.
On March 31, 2016, KAKEN REALTY & SERVICE CO., LTD., a whollyowned subsidiary of theCompany, was dissolved due to an absorption-type merger into the Company.
The financial results of KAKEN REALTY & SERVICE CO., LTD. from April 1, 2015 to March 30,
2016 were included in the consolidated financial statements. See Note 18. “Business Combination” for details.
For the years ended March 31, 2016 and 2015, there was no affiliate accounted for using theequity 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 shortterm investments with original maturity of three months or less and are considered to haveminimal risk from market fluctuations.

26

K AKEN PHARMACEUTICAL CO., LTD.

(c) Marketable and Investment Securities
Securities are classified into one of the following three categories: (1) Trading, (2) Held-tomaturity debt securities, and (3) Available-for-sale securities. Trading securities are recorded atmarket value with unrealized gains or losses recognized in the current year’s earnings. Held-tomaturity 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 fairvalue 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 determined by 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 manufacturingcosts and estimated direct selling expenses.
(e) Property, Plant and Equipment
Depreciation is computed using the declining-balance method at rates based on the estimateduseful lives of assets, except for buildings, structures, machinery and equipment for the Komagome office, which are computed using the straight-line method. Furthermore, depreciation ofbuildings, except for ancillary facilities to buildings, acquired on or after 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, equipment and vehicles.
(f) Intangible Assets
Software for own use is amortized over the estimated useful life (five years) using the straightline method.
(g) Retirement and Pension Plan
The Company applies the benefit formula basis as the attribution method for estimated retirement benefits.
Unrecognized actuarial difference is amortized on a straight-line basis over 10 years from theyear following the year in which it arises. Unrecognized prior service cost is amortized on astraight-line basis over 10 years from the year in which it arises.
(h) Income Taxes
Income taxes–deferred are determined using the asset and liability approach, where deferred
tax assets and liabilities are recognized for temporary differences between the tax basis ofassets and liabilities and their reported amount in the consolidated financial statements.
(i) Consumption Taxes
Consumption taxes withheld and consumption taxes paid are excluded from revenues andexpenses in the accompanying consolidated statements of income. The net balance of consumption taxes withheld and consumption taxes paid is included in current liabilities of theconsolidated balance sheets as of the end of the fiscal year.
(j) Derivative Financial Instruments
Derivative instruments, which include forward foreign exchange contracts, are used as a partof the Company’s risk management of foreign currency risk exposure of its financial assets
and liabilities.

ANNUAL REPORT 201627

Forward foreign exchange contract:
The Company enters into forward foreign exchange contracts to limit risk exposure, affectedby 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 rateof the respective forward foreign exchange contract. With respect to such contracts for anticipated transactions, the contracts are marked-to-market and the unrealized gains/losses aredeferred in the balance sheet to be released to income when the exchange gains/losses on
the hedged items or transactions are recognized.
(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 provides that an
amount equal to 10% of the amount to be disbursed as distributions of capital surplus (otherthan the capital reserve) and retained earnings (other than the legal reserve) be transferred tothe capital reserve and the legal reserve, respectively, until the sum of the capital reserve andlegal reserve equals 25% of the stated capital. Such distributions can be made at any time byresolution 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 ofshares of common 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
of income represent dividends approved or declared as applicable to the respective years.
(n) Change in accounting policy
The Company adopted the “Revised Accounting Standard for Business Combinations” (ASBJ
Statement No. 21, September 13, 2013), the “Revised Accounting Standard for Consolidated
Financial Statements” (ASBJ Statement No. 22, September 13, 2013) and the “Revised
Accounting Standard for Business Divestitures” (ASBJ Statement No. 7, September 13, 2013),
from the fiscal year ended March 2016. As a result, the Company changed the presentation of
net income. Certain reclassifications have been made in the 2015 financial statements to conform to the classifications used in 2016.
(o) Accounting standards issued but not yet applied“Revised Implementation Guidance on Recoverability of Deferred Tax Assets” (ASBJ Guidance
No. 26, March 28, 2016)

28

K AKEN PHARMACEUTICAL CO., LTD.

(1) Overview
Following the framework in Auditing Committee Report No. 66 “Audit Treatment regarding the
Judgment of Recoverability of Deferred Tax Assets”, which prescribes an estimation of deferred
tax assets according to the classification of the entity by one of five types, the following treatments
were changed as necessary:
1. Treatment for an entity that does not meet any of the criteria in types 1 to 5;
2. Criteria for types 2 and 3;
3. Treatment for future deductible temporary differences which an entity classified as type 2
is unable to schedule;
4. Treatment for the period which an entity classified as type 3 is able to reasonably estimate
with respect to future taxable income before consideration of taxable or deductible temporary differences that exist at the end of the current fiscal year; and5. Treatment when an entity classified as type 4 also meets the criteria for types 2 or 3.
(2) Effective date
Effective from the beginning of the fiscal year ending March 31, 2017(3) Effects of application of the Guidance
The Company is currently evaluating the effects of application.

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 YENCash and deposits
Marketable securities
Subtotal

2016

2015

2016

¥29,845¥10,553$266,473

11,89914,214106,241¥41,744¥24,767$372,714———

Time deposits due in more than three months
Marketable securities due in more than three months
Cash and cash equivalents

—

—

—

¥41,744¥24,767$372,714

4. Marketable and Investment Securities:
The carrying amounts and fair values of held-to-maturity debt securities are as follows:
MILLIONS OF YEN
Carrying amount

Fair value

Unrealized gain (loss)

Carrying amount

Fair values exceeding carrying amount
Fair values not exceeding carrying
amountTotal¥       —Fair value

Unrealized gain (loss)

2015

2016
¥       —¥—

¥      —

¥      —¥—

10,99910,999

—

6,999

6,999

—

¥10,999¥10,999¥—¥6,999¥6,999¥—

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

Fair value

Unrealized gain (loss)

2016
Fair values exceeding carrying amount$Fair values not exceeding carrying
amount
Total

—

$

—

$—

98,20598,205—$98,205$98,205$—

ANNUAL REPORT 2016

29

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

Acquisition cost

Unrealized gain (loss)

Fair value

Acquisition cost

Unrealized gain (loss)

2015

2016
Carrying amounts exceedingacquisition cost
¥13,667¥7,233¥6,433¥15,295¥ 7,208

OthersEquity securities

—

—

—

—

—

¥8,086—

Subtotal

13,667

7,233

6,433

15,295

7,208

8,086

Carrying amounts not exceedingacquisition cost
Equity securities

671

728

(57)

—

—

—

Others

900

900

—

7,214

7,214

—

Subtotal
		Total

1,571

1,628

(57)

7,214

7,214

—

¥15,238¥8,861¥6,376¥22,510¥14,423¥8,086

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

Acquisition cost

Unrealized gain (loss)

2016
Carrying amounts exceedingacquisition cost
Equity securities$122,027$64,580

Others——$57,438—

Subtotal

122,027

64,58057,438(509)

Carrying amounts not exceedingacquisition cost
Equity securities

5,991

6,500

Others

8,036

8,036

—

Subtotal

14,027

14,536(509)$136,054$79,116$56,929

		TotalThere were no available-for-sale securities sold for the years ended March 31, 2016 and 2015.

5. Inventories:
Inventories as of March 31, 2016 and 2015, comprised the following:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

¥ 7,399¥ 7,323$ 66,063

Work in process

1,940

2,244

17,321

Raw materials and supplies

5,167

3,915

46,134¥14,508¥13,483$129,536

Merchandise and finished products

Total

6. Short-term Bank Loans:
Short-term bank loans outstanding as of March 31, 2016 and 2015, amounting to ¥3,875­million ($34,598 thousand) and ¥4,195 million, represent the notes issued by the Group tobanks. Customarily, these notes are renewed at maturity subject to renegotiation of interest
rates and other factors. The weighted-average interest rates applicable to short-term bankloans as of March 31, 2016 and 2015 were 0.60% and 0.66%, respectively.

30

K AKEN PHARMACEUTICAL CO., LTD.

As is customary in Japan, short-term and long-term bank loans are made under generalagreements which provide that security and guarantees for future and present indebtedness
will be given upon request of the bank, and that the bank shall have the right, as the obligations become due or in the event of their default, to offset cash deposits against such obligations due to the bank. The Group has not received any such requests to date.
At March 31, 2016 and 2015, assets pledged as collateral for certain short-term bank loans
are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

Buildings and structures¥3,465¥2,555$30,938

Machinery and vehicles

2,659

2,181

23,741Tools, furniture and fixtures

437

460

3,902

Land

106

103

946

		Total¥6,668¥5,300$59,536¥1,400¥1,400$12,500¥1,400¥1,400$12,500

Assets pledged:

Liabilities secured:
Short-term bank loans
		Total

7. Accounting for Leases:
Operating leases
Future minimum lease payments receivable under non-cancellable operating leases subsequent
to March 31, 2016 and 2015, are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

Due within 1 year¥  239¥  239$ 2,134

Due after 1 year

1,849

2,088

16,509¥2,088¥2,328$18,643

Total

8. Investment Properties:
The Group owns rental office buildings (including land) in Tokyo and other areas. Rental income
from these properties for the years ended March 31, 2016 and 2015 was ¥1,513 million($13,509 thousand) and ¥1,358 million (Revenue from rental properties and rent expense arereported as net sales and cost of sales, respectively).
Carrying amount, changes during the years ended March 31, 2016 and 2015, and fair value ofthese properties are stated as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

¥11,520¥15,158$102,857(321)(3,637)(2,866)

Balance at the end of the year

11,19911,52099,991

Fair value at the end of the year

¥40,045¥39,406$357,545

Carrying amount:
Balance at the beginning of the year
Changes during the year

Notes: 1.	 The carrying amount represents the acquisition costs less accumulated depreciation.
2.	The decrease for the fiscal year ended March 31, 2015 is mainly attributable to sale of Shin-Urayasu Building (Urayasu-City)(¥3,106 million).
3.	Fair value at March 31, 2016 and 2015 is calculated, with adjustments using indexes, by the Company based primarily on the“Real estate appraisal standards of Japan.”

ANNUAL REPORT 201631

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 highliquidity, 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 maintain business collaborations with clients and trade partners, which areexposed to the risk of market price fluctuations.
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 denominated in foreign currencies. Hedging instruments and hedged items, hedging policy, assessment
method for hedge 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 transactionsb. Hedging policy
Hedging instruments are used within the limits of anticipated foreign currency denominatedtransactions, and the Company makes it a policy not to use derivatives for speculative p­ urposes.
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 the­market 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,
under which the hedged items are translated using the forward contract rates.
(3) Risk management for financial instrumentsa. C redit 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 balancesof each major customer by regularly monitoring their status, in an effort to achieve early
identification and mitigation of default 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.

32

K AKEN PHARMACEUTICAL CO., LTD.

b. Market risk management (foreign exchange and interest rate fluctuation risks)
The Company uses forward foreign exchange contracts as appropriate to hedge foreignexchange fluctuation risk associated with trade receivables and payables denominated inforeign currencies.
With respect to marketable and investment securities, the Company is periodically monitoring fair values and financial positions of the related issuers (business connections).
Derivative transactions are conducted under the authority of the general manager at eachconcerned department, under the forward foreign exchange contracts management rules,
and the actual performance of derivative transactions is reported to the concerned departments including the Accounting Department, as each transaction takes place. Then at theend of each month, the outstanding balance of forward exchange contracts is reported tothe 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 andvalues 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, 2016, 66% of all trade receivables was with specific major accounts.
2. Fair values of financial instruments
Carrying amount, fair value, and difference of the financial instruments as of March 31, 2016
and 2015 are as below. Financial instruments whose fair values are not readily determinable
are excluded from the following table:
MILLIONS OF YEN
Carrying amount

Fair value

Difference

2016(1) Cash and deposits¥29,845¥29,845¥—(2) Notes and accounts receivable–trade

29,86829,868—a. Held-to-maturity securities

10,99910,999—b. Available-for-sale securities

15,23815,238—

		 Total assets¥85,951¥85,951¥—(1) Notes and accounts payable–trade¥12,256¥12,256

¥—

3,875

3,875

—

¥16,131¥16,131¥—(3) Marketable and investment securities(2) Short-term bank loans
		 Total liabilities

MILLIONS OF YEN

ANNUAL REPORT 201633

Carrying amount

Fair value

Difference

2015(1) Cash and deposits¥10,553¥10,553¥—(2) Notes and accounts receivable–trade28,20428,204——(3) Marketable and investment securities
a. Held-to-maturity securities

6,999

6,999

b. Available-for-sale securities

22,51022,510—		 Total assets¥68,268¥68,268¥—(1) Notes and accounts payable–trade¥12,295¥12,295

¥—

4,195

4,195

—

¥16,490¥16,490¥—(2) Short-term bank loans
		 Total liabilities

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

Fair value

Difference

2016(1) Cash and deposits$266,473$266,473$—(2) Notes and accounts receivable–trade266,679

266,679—(3) Marketable and investment securities
a. Held-to-maturity securities

98,20598,205—b. Available-for-sale securities

136,054

136,054—

		 Total assets$767,420$767,420$—(1) Notes and accounts payable–trade$109,429$109,429$—(2) Short-term bank loans
		 Total liabilities

34,59834,598—$144,027$144,027$—

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 due to 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 the notes on marketable securities by holding purpose,
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 due to 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 amountUnlisted equity securities

2016

2015

2016

¥61

¥61

$545

The above item is not included in “(3) Marketable and investment securities” because there is no market
price and it is very difficult to identify fair values.
3. Redemption schedules of monetary assets and securities with contractual maturities subsequent to34

K AKEN PHARMACEUTICAL CO., LTD.

March 31, 2016 and 2015, are as follows:
MILLIONS OF YEN
Within one year

2016
Cash and deposits¥29,845

Notes and accounts receivable–trade

29,868Marketable and investment securities:
Held-to-maturity securities
Available-for-sale securities with contractual maturities
		Total10,999900¥71,613MILLIONS OF YEN
Within one year

2015
Cash and deposits¥10,553

Notes and accounts receivable–trade28,204Marketable and investment securities:
Held-to-maturity securities
Available-for-sale securities with contractual maturities
		Total

6,999
900¥46,657
THOUSANDS OF U.S.
DOLLARS (NOTE 1)
Within one year

2016
Cash and deposits$266,473

Notes and accounts receivable–trade266,679

Marketable and investment securities:
Held-to-maturity securities
Available-for-sale securities with contractual maturities
		Total98,2058,036$639,402

4. Redemption schedules for long-term debt and other interest-bearing obligations subsequent to March
31, 2016 and 2015 are omitted since the Company only had short-term bank loans maturing within one
year as of March 31, 2016 and 2015.

10. Retirement Benefits:
The Company has defined benefit plans, i.e., a lump-sum retirement plan and defined benefit
pension plan. Retirement benefit trust is established for the lump-sum retirement plan. The
Company may pay a premium in addition to the retirement benefits. The simplified method isused for the calculation of retirement benefit obligation at consolidated subsidiaries.

ANNUAL REPORT 201635

Defined benefit plans(1) Changes in the retirement benefit obligation for the years ended March 31, 2016 and 2015
are as follows (excluding plans under the simplified method):
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

Retirement benefit obligation–Beginning balance
Cumulative effect of change in accounting policies

2016

2015

2016

¥20,707¥21,551$184,884

—

(464)

—

Restated balance

20,70721,087

184,884

Service cost

683

701

6,098

Interest cost

248

253

2,214

2,122

94

18,946

Actuarial differences
Retirement benefit paid
Retirement benefit obligation–Ending balance(1,842)(1,428)(16,446)¥21,918¥20,707$195,696(2) Changes in the plan assets for the years ended March 31, 2016 and 2015 are as follows(excluding plans under the simplified method):
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

Plan assets–Beginning balance

2016

2015

2016
$120,991¥13,551¥12,064

Expected return on plan assets

317

286

2,830

Actuarial differences

(574)

1,307

(5,125)

Employer’s contributions

607

649

5,420

Retirement benefit paid

(834)

(756)

(7,446)¥13,067¥13,551$116,670

Plan assets–Ending balance(3) Changes in the net defined benefit liability under the simplified method for the years ended
March 31, 2016 and 2015 are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

Net defined benefit liability–Beginning balance
Retirement benefit cost
Net defined benefit liability–Ending balance

2016

2015

2016

¥6

¥5

$54

0

0

0

¥6

¥6

$54

(4) Net balance of the retirement benefit obligation and plan assets, and net balances shownon the consolidated balance sheets are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

Retirement benefit obligation under funded plan

¥ 21,918¥ 20,707$ 195,696

Plan assets(13,067)(13,551)(116,670)

8,851

7,156

79,0276

6

54

Retirement benefit obligation under non-funded plan
Net balances shown on the consolidated balance sheets
Net defined benefit liability
Net defined benefit asset
Net balances shown on the consolidated balance sheets

8,857

7,162

79,080¥  8,898¥  7,162$  79,446

(40)

—

(357)

¥  8,857¥  7,162$  79,080

Notes: 1.	Retirement benefit obligation and plan assets under the Company’s funded plan include those for the lump-sum retirement plan.
		
2.	 A plan under simplified method is included.

36

K AKEN PHARMACEUTICAL CO., LTD.

(5) The components of retirement benefit cost are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

Service cost

¥ 683¥  701$ 6,098

Interest cost

248

253

2,214

Expected return on plan assets

(317)

(286)

(2,830)

Amortization of actuarial differences

375

510

3,348

Amortization of prior service cost

(33)

(33)

(295)

Amortization of transition amount

—

524

—

Retirement benefit cost under simplified method

0

0

0

Retirement benefit cost for defined benefit plans¥ 957¥1,669$ 8,545(6) The components of remeasurements of defined benefit plans in other comprehensive
income (before tax effect) for the years ended March 31, 2016 and 2015 are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

Prior service cost¥   (33)¥  (33)$   (295)

Actuarial differences(2,321)

1,723(20,723)

—

524

—

¥(2,354)¥2,214$(21,018)

Transition amount
Total(7) The components of remeasurements of defined benefit plans in accumulated other­comprehensive income (before tax effect) for the years ended March 31, 2016 and 2015 are
as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

Unrecognized prior service cost

¥ (171)¥(205)$ (1,527)

Unrecognized actuarial differences

3,227

906

28,813Total¥3,055¥ 701$27,277

2016

2015

Debt securities

35%

28%

Equity securities

45%

54%

General account

16%

15%

Other

4%

3%

Total

100%

100%

(8) Plan assets(a) Plan assets consist of the following:

Note: The plan assets include retirement benefit trust which accounted for 6% of the total plan assets as of March 31,
2016 and 2015.

(b) Long-term expected rate of return on plan assets is determined based on assumptions about:(i) allocation of plan assets and (ii) long-term expected rate of returns on such assets.

ANNUAL REPORT 201637

(9) Major assumptions used for actuarial calculation are as follows (weighted average):
2015

2016
Discount rate

0.3%

1.2%

Long-term expected rate of return

2.5%

2.5%

Note: The Discount rate has changed from 1.2% to 0.3% for the fiscal year ended March 31, 2016 since the market
interest rate has significantly dropped and it would have an impact on the retirement benefit obligation of theCompany.

11. Shareholders’ Equity:a) Class and number of shares outstanding and treasury stock
Class of shares outstanding

Class of treasury stock

Common stock

Common stock

96,879,461

14,025,880

Increase—

38,546

Decrease(48,439,731)(7,030,544)

48,439,730

7,033,882

Number of shares as of April 1, 2015

Number of shares as of March 31, 2016

Notes: 1.	Decrease in shares outstanding (48,439,731 shares) is due to share consolidation as stated below.
2.	Increase in treasury stock (38,546 shares) is due to purchase of shares of less than one unit.
3.	Decrease in treasury stock (7,030,544 shares) is due to share consolidation (7,030,368 shares) and purchase demand fromshareholders holding shares of less than one unit (176 shares).

Based on the resolution of the Company’s 95th ordinary general meeting of shareholders heldon June 26, 2015, effective October 1, 2015, the Company (i) changed the number of share unitof common stock from 1,000 shares to 100 shares, (ii) executed a two-to-one share­consolidation which resulted in decrease in outstanding shares to 48,439,730 shares and (iii)
reduced the total number of authorized shares from 360,000,000 shares to 193,000,000 shares.
b) Matters related to dividendsi) Dividend payment
Approvals by the ordinary general meeting of shareholders held on June 26, 2015, wereas follows:
Dividends on common stock
Total amount of dividends¥2,651 million ($23,670 thousand)
Dividends per share¥32.00 ($0.29)
Record date
March 31, 2015
Effective dateJune 29, 2015
Approvals by the Board of Directors’ meeting held on November 6, 2015, were as follows:
Dividends on common stock
Total amount of dividends¥2,815 million ($25,134 thousand)
Dividends per share¥34.00 ($0.30)
Record date
September 30, 2015
Effective dateNovember 30, 2015
Note: Dividends per share do not include the effects of the share consolidation on October 1, 2015, as therecord date was September 30, 2015.

38

K AKEN PHARMACEUTICAL CO., LTD.

ii) Dividends whose record date is attributed to the accounting period ended March 31, 2016,
but become effective after the said accounting period
The Company obtained the following approval at the ordinary general meeting of shareholders
held on June 29, 2016:
Dividends on common stock
Total amount of dividends¥3,229 million ($28,830 thousand)
Dividends per share¥78.00 ($0.70)
Record date
March 31, 2016
Effective dateJune 30, 2016
Note: Dividends per share include a commemorative dividend of ¥10.00 ($0.09).

12. Research and Development Costs:
Research and development costs included in selling, general and administrative expenses forthe years ended March 31, 2016 and 2015 amounted to ¥5,883 million ($52,527 thousand) and¥7,615 million, respectively.

13. Gain or Loss on Sales of Non-Current Assets, Net
Gain or loss on sales of non-current assets, net, is as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

7

$—

Gain on sales of non-current assets:
Land

¥—

¥

Other

—

0

—

—

7

—

Loss on sales of non-current assets:
Buildings and structures

—

(784)

—

Land

—

(402)

—

Other

—

(1)

—

—

(1,187)—¥—¥(1,179)$—

Gain or loss on sales of non-current assets, net

ANNUAL REPORT 201639

14. Income Taxes:
Significant components of deferred tax assets and liabilities as of March 31, 2016 and 2015 are
as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

¥   142¥   263$  1,268

113

106

1,009

2,638

—

23,554

Unrealized gain of property, plant and equipment

—

2,568

—

Amortization of research & development

151

348

1,348

Amortization of long-term prepaid expenses

367

453

3,277

Provision for bonuses

407

430

3,634

Provision for sales rebates

125

126

1,116

Net defined benefit liability

2,867

2,475

25,598Deferred tax assets:
Accounts receivable
Loss of supplies
Adjustment of gain on sales of land

Other

962

497

8,589

		Total

7,777

7,271

69,438Valuation allowance(2,682)(44)(23,946)

		 Deferred tax assets

5,094

7,226

45,482

Deferred tax liabilities:
Reserve for advanced depreciation of property, plant and equipment
Net unrealized holding gain on securities

(144)

(170)

(1,286)(1,952)(2,608)(17,429)		 Deferred tax liabilities(2,097)(2,778)(18,723)

		 Deferred tax assets, net¥ 2,997¥ 4,447$ 26,759

The Group is subject to several taxes based on income, which in the aggregate resulted instatutory tax rates of approximately 33.06% and 35.64% for the years ended March 31, 2016
and 2015. Reconciliation of the differences between the statutory tax rate and the effective tax
rate for the years ended March 31, 2016 and 2015, is as follows:
2016

2015

33.06%

35.64%

Expenses not deductible for income tax purpose (e.g. entertainment expenses)

0.40

0.80

Income not included for income tax purpose (e.g. dividend income)(0.04)(0.21)

Inhabitant per capita taxes

0.24

0.46

Tax credit for research expenses(1.41)(4.05)

Effects of merger

7.28

—

Adjustment to deferred tax asset due to change in statutory tax rate

0.70

2.18

Other

(0.14)

0.04

40.09%

34.86%

Statutory tax rate
Increase (decrease) in taxes resulting from:

Effective tax rate

40

K AKEN PHARMACEUTICAL CO., LTD.

In line with the Diet session that was enacted on March 29, 2016, the “Act for Partial Revision of the Income Tax Act, etc.” and the “Act for Partial Revision, etc of the Local Tax Act, etc.”,
the Company has changed the statutory tax rate to calculate deferred tax assets and deferred
tax liabilities for the year ended March 31, 2016, from 32.26% to 30.86% for the temporary
differences assumed to be reversed in the fiscal years beginning on April 1, 2016 and 2017, andto 30.62% for those assumed to be reversed in and after the fiscal year beginning on April 1,
2018.
As a result of this change, net deferred tax assets decreased ¥355 million ($3,170 ­thousand)whereas deferred income tax increased ¥254 million ($2,268 thousand), net unrealized holding
gain on securities increased ¥104 million ($929 thousand) and remeasurements of defined
benefit plans increased ¥4 million ($36 thousand), respectively.

15. Related Party Transactions:
There is nothing to be noted according to the disclosure requirements in Japan for the years
ended March 31, 2016 and 2015.

16. Per Share Information:
Per share information for the years ended March 31, 2016 and 2015, is as follows:
YEN

U.S. DOLLARS (NOTE 1)

2016

2015

2016

Net assets per share¥2,170.60¥1,861.12$19.38Net income per share

510.54290.904.56

Notes: 1.	On October 1, 2015, the Company implemented a two-to-one share consolidation.
Net assets per share and net income per share are calculated, based on the assumption that the share consolidation had been
carried out at the beginning of the fiscal year ended March 31, 2015.
		

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

The basis of calculation for net income per share for the years ended March 31, 2016 and2015 is as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

Net income¥21,143¥12,122$188,777

Net income attributable to common stock owners of parent

21,14312,122

188,777———

41,413

41,673—

Net income not attributable to common stock(Share data)
Average number of shares (thousand)

ANNUAL REPORT 201641

17. Comprehensive Income:
Recycling and income tax effects for each component of other comprehensive income for theyears ended March 31, 2016 and 2015, are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2016

2015

2016

¥(1,710)¥ 4,360$(15,268)———(1,710)4,360(15,268)

Net unrealized holding gain on securities:
Amount increased for the year
Recycling
Before income tax effect
Income tax effectNet unrealized holding gain on securities

656(1,280)5,857¥(1,054)¥ 3,079$ (9,411)¥(2,696)¥ 1,213$(24,071)

342

1,001

3,054

(2,354)

2,214(21,018)

Remeasurements of defined benefit plans:
Amount increased for the year
Recycling
Before income tax effect
Income tax effectRemeasurements of defined benefit plans
Total other comprehensive income

709

(810)

6,330

¥(1,644)¥ 1,404$(14,679)¥(2,699)¥ 4,484$(24,098)

18. Business Combination:
Transaction under common control
Absorption-type merger of a consolidated subsidiary
Based on the resolution at the Board of Directors’ meeting held on October 27, 2015, the Company merged its wholly-owned consolidated subsidiary, KAKEN REALTY & SERVICE CO., LTD.
(hereinafter, referred to as “the Merger”) on March 31, 2016.
The Merger is a simple / short-form merger applicable to a whollyowned consolidated­subsidiary.
(a) Overview of the transaction(1) Name and description of business
Surviving company
Company name:
KAKEN PHARMACEUTICAL CO., LTD.
Business description:	Production and sales of medical products, medical devices andagrochemicals, and rental of real estate.
Absorbed company
Company name:
KAKEN REALTY & SERVICE CO., LTD.
Business description: Rental of real estate, maintenance of building, etc.
(2) Date of business combination
March 31, 2016
(3) Legal form of business combination
An absorption-type merger whereby the Company becomes the surviving company(4) Company name after business combination
KAKEN PHARMACEUTICAL CO., LTD.

42

K AKEN PHARMACEUTICAL CO., LTD.

(5) Objective of business combination
KAKEN REALTY & SERVICE CO., LTD. was a whollyowned consolidated subsidiary of theCompany and mainly operated a real estate business. The Company also operates a real estatebusiness, rental office buildings. The Merger aims to improve business efficiency of the Group.
(b) Overview of the accounting treatment
The Merger is treated as a transaction under common control in accordance with the “Revised
Accounting Standard for Business Combinations” (ASBJ Statement No.21, September 13,2013) and the “Revised Guidance on Accounting Standard for Business Combinations andAccounting Standard for Business Divestitures” (ASBJ Guidance No.10, September 13, 2013).
Since this is a merger with a whollyowned subsidiary of the Company, there are no effects
on net sales, operating income and income before income taxes in the consolidated statement of income. However, as the Company had intercompany sales of fixed assets with thesubsidiary before the Merger, the related deferred tax assets were reduced and income taxes
were recorded accordingly. As a result, both net income attributable to owners of parent andconsolidated net assets decreased ¥2,568 million ($22,929 thousand).

19. Segment Information:(a) Overview of reportable segments
The Group’s reportable segments are those for which separate financial information is available and regular evaluation by the Board of Directors is being performed in order to decide
how resources are allocated within the Group.
The Group produces and sells medical products, medical devices and agrochemicals, rents
real estate, and maintains buildings, operating each business by category of industry. Eachbusiness operates on its own initiative, and creates comprehensive business strategies in
conducting its business activities. The Group consists of segments by category of industry
based on the operation of business; therefore, it consists of two reportable segments: “Pharmaceuticals” and “Real estate.”“Pharmaceuticals” mainly produces and sells medical products, medical devices, and agrochemicals.
“Real estate” mainly rents out Bunkyo Green Court.
On March 31, 2016, KAKEN REALTY & SERVICE CO., LTD., a whollyowned subsidiary, wasmerged into the Company. Accordingly, some assets held by the subsidiary and previously
categorized into “Real estate” have been reclassified into “Pharmaceuticals.”
Segment information for the year ended March 31, 2015 has been modified to conform tothe classifications used in 2016.
(b) Method of calculating net sales, income, assets, and other items by reportable segment
Accounting policies for the reportable segments are consistent with those described in Note
2. “Summary of Significant Accounting Policies.” Income by reportable segment is based on
operating income.
Corporate assets are not allocated to each reportable segment. However, related expenses
are allocated to each reportable segment using reasonable criteria.

ANNUAL REPORT 201643

(c) Information about reportable segments
MILLIONS OF YEN
Reportable segment
Pharmaceuticals

Real estate

Total

Adjustments

Consolidated

2016
Net sales:
Outside sales¥107,391¥ 2,338¥109,730———¥107,391¥ 2,338¥109,730

Intersegment sales or transfers
		Total¥—¥109,730

—

—

¥

—

¥109,730

Segment income¥ 33,633¥ 1,513¥ 35,146¥—¥ 35,146

Segment assets¥ 75,248¥11,057¥ 86,306¥46,685¥132,991

¥

¥

¥

¥

¥

Other items:
Depreciation and amortization
Increase in property, plant andequipment and intangible assets

1,975
3,115

346
20

2,321
3,135

—

2,321

—

3,135

Adjustments

Consolidated

MILLIONS OF YEN
Reportable segment
Pharmaceuticals

Real estate

Total

2015
Net sales:
Outside sales
Intersegment sales or transfers¥91,458¥ 2,431¥93,889¥—¥ 93,889

—

—

—

—

—

		Total¥91,458¥ 2,431¥93,889¥—¥ 93,889

Segment income¥19,272¥ 1,358¥20,631¥—¥ 20,631

Segment assets¥72,032¥11,385¥83,417¥31,717¥115,135¥ 2,445¥549¥ 2,995

¥

¥

20

2,936

Other items:
Depreciation and amortization
Increase in property, plant andequipment and intangible assets

2,916

—

2,995

—

2,936

Adjustments

Consolidated

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

Real estate

Total

2016
Net sales:
Outside sales
Intersegment sales or transfers
		Total$958,848$20,875$979,732———$958,848$20,875$979,732$—$  979,732

—

—

$

—

$  979,732

Segment income$300,295$13,509$313,804$—$  313,804

Segment assets$671,857$98,723$770,589$416,830$1,187,420$ 17,634$ 3,089$ 20,723$—$   20,723

27,813

179

27,991—

27,991Other items:
Depreciation and amortization
Increase in property, plant andequipment and intangible assets

44

K AKEN PHARMACEUTICAL CO., LTD.

(d) Information on products and services
Information on 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 all 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

2016

2015

2016

Alfresa Corporation¥18,276¥15,367$163,179

Pharmaceuticals

SUZUKEN CO., LTD.

16,95914,133

151,420

Pharmaceuticals

MEDICEO CORPORATION

16,444

13,546

146,821

Pharmaceuticals

20. Subsequent Events:
Acquisition of treasury stock
Following acquisition of treasury stock under Article 156 of the Companies Act (the “Act”), as
applied pursuant to Article 165 (3) of the Act, has been resolved by the Board of Directors’
meeting held on May 12, 2016.
(1) Reason for acquisition:
To execute flexible capital policy corresponding to changes in management environment.
(2) Class of stock to be acquired:
Common stock(3) Number of stock to be acquired:
Up to 600,000 shares(4) Total amount of stock to be acquired:
Up to ¥3,500 million ($31,250 thousand)(5) Schedule for acquisition:
From May 13, 2016 to December 29, 2016(6) Method of acquisition:
Purchase on the Tokyo Stock Exchange
Based on the aforementioned resolution, the Company acquired 43,900 shares of its common
stock in a total amount of ¥266 million ($2,375 thousand) at the end of May 2016.

ANNUAL REPORT 2016

45

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, 2016, and therelated consolidated statements of income, comprehensive income, changes in net assets, and cash flows for theyear then ended, and a summary of significant accounting policies and other explanatory information, all expressedin 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 and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material 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 of material 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 effectivenessof the entity’s internal control, but in making these risk assessments the auditor considers internal controls relevantto 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 ofaccounting 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, theconsolidated financial position of the Company and subsidiaries at March 31, 2016, 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 20, at a meeting of the Board of Directors of the Company held on May 12, 2016, the Company approved the acquisition 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 beentranslated on the basis set forth in Note 1 to the accompanying consolidated financial statements.

Tokyo, Japan
June 29, 2016
46

K AKEN PHARMACEUTICAL CO., LTD.

Corporate Data
As of March 31, 2016

Directory

Company Information

Registered Head Office

Incorporated

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

March 1948

Paid-in Capital¥23,853 million

Common Stock
Licensing & Business Development
Tel: 81-3-5977-5046
Fax: 81-3-5977-5133
E-mail: licensing_bd@kaken.co.jp

Main Branches
Sapporo Branch
Sendai BranchTokyo BranchTokyo Branch II
Nagoya Branch
Osaka Branch
Chugoku and Shikoku Branch
Fukuoka Branch

Plant

Authorized: 193,000,000 shares
Issued: 48,439,730 shares (As of August 31, 2016)
Number of Shareholders: 11,565 (As of March 31, 2016)
OthersIndividuals

+1.3

–0.6

16.4%

16.8%
Overseas
Investors

Financial
Institutions

+3.3

–4.5

27.1%

27.6%

Domestic
Corporations

12.1%
+0.5

Major Shareholders

Shizuoka Factory

Research Laboratories
Drug Research Center (Kyoto)
Drug Research Center (Shizuoka)
CMC Center

NO. OFSHARES(THOUSANDS)SHARE OFTOTAL (%)

Toray Industries, Inc.

2,294

4.7

The Norinchukin Bank

1,843

3.8

Mizuho Bank, Ltd.

1,474

3.0

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

1,375

2.8

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

1,185

2.4

KYORIN Pharmaceutical Co., Ltd.

852

1.8

Nippon Life Insurance Company

680

1.4

Kaken Pharmaceutical Employee Stock
Ownership Association

635

1.3

Kyoei Fire & Marine Insurance Co., Ltd.

624

1.3

MSCO CUSTOMER SECURITIES

561

1.2

SHAREHOLDERS

Employees (Non-Consolidated)
Administration: 70
Marketing & Sales: 944
Production: 129
Research & Development: 259
Regulatory Affairs: 42

ANNUAL REPORT 201647

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