Bringing smiles
smiles toto everyone
everyone
Bringing

28-8,Honkomagome
Honkomagome2-chome,2-chome,Bunkyo-ku,
Bunkyo-ku,Tokyo
Tokyo
28-8,
113-8650,JapanJapan
113-8650,
Tel:81-3-5977-5001
81-3-5977-5001
Tel:
Fax:81-3-5977-5131
81-3-5977-5131
Fax:
http://www.kaken.co.jp
http://www.kaken.co.jp

Annual Report
Report 2007
2007
AnnualYearEnded
EndedMarch
March31,
31,2007
2007
Year
PrintedininJapan
Japan
PrintedCorporate Data

Corporate Philosophy

Business Philosophy: Three Joys

(As of March 31, 2007)

Bringing smiles to everyone

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

KAKEN

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

Global Business Development
Executive Director & General Manager
Masao Ishida
Creating joy as
Tel: 81-3-5977-5046
a company.
Fax: 81-3-5977-5133
E-mail: masao-ishida@kaken.co.jp We recognize our social

To continue realizing our corporate philosophy of “bringing smiles to everyone,” it is essential that Kaken
not only responds to changes in the times but also innovates and remakes itself.
Looking to create new drugs that are competitive on the global market, we will build Kaken into a

responsibility as a pharmaceuticalcompany with a high ethicalstandard and society’s trust.

company that makes our employees proud by providing much-needed, high-quality pharmaceuticals. Kaken
strives to advance to the 21st century as a company that maintains a strong presence and fulfills its
obligations to society as a pharmaceutical company.

ProfileContents

The origin of Kaken Pharmaceutical Co., Ltd. can be traced back to the

President’s Message

02

Institute of Physical and Chemical Research (Riken), established inSpecial Feature

04

Review of Operations

06

Commitment and Excellence

10

Fulfilling Our Social Responsibilities

12

1917. The Company started pharmaceutical business with full-scale
development of penicillin and streptomycin based on Riken’s own
technologies in 1948, and since then broadened the scope of its businessand drug development activities through merger and alliance. Kaken’s
prestige has soared accordingly.
While the Company has established strength in developing and

Board of Directors andCorporate Auditors

14

selling pharmaceuticals for orthopedics, it is now expanding its

Financial Section

15

involvement in other medical fields, such as hyperlipidemia and diabetes.

Corporate Data

35

The Company contributes to improving people’s health by cultivating its
own original technologies, engaging in joint development initiatives,
introducing new technologies and acquiring marketing rights.
As a fruit of its technology and product introduction, theCompany has been since June 2001 marketing Fiblast Spray consistingof Trafermin, a recombinant form of human basic fibroblast growth

Forward-Looking Statements

factor (bFGF) for the first time in the world, licensed from a US

This annual report contains forward-looking statements pertaining to the

bio-pharmaceutical company, Scios, in the area of regenerative medicine

Company’s business and prospects. These statements are based on current(wound healing medicine).

expectations due to unforeseen risks and uncertainties.

analysis of existing information and trends. Actual results may differ from

Company Information

Main Branches
Sapporo Branch
Sendai BranchTokyo-1 BranchTokyo-2 Branch
Nagoya Branch
Osaka-1 Branch
Osaka-2 Branch Financial Highlights
Consolidated
Hiroshima Branch
Fukuoka BranchFoundedCreating joy for
March 1917

patients.

Incorporated
We strive to create and offer
March
effective 1948
drugs that satisfy theneeds of patients and medical
professionals.

Paid-in Capital¥23,348 million

CommonStockCreating
joy for
Authorized: 360,000,000 shares
our employees.
Issued: 113,298,512 shares (As of Jul. 31, 2007)
Numberof Shareholders:
Our objective
is to become a 17,083
company with vitality andpresence whose employees enjoy
Employees (Non-Consolidated)
and take pride in their work.

Administration: 136
Sales & Marketing: 988
Production & Technology: 245
Research & Development: 271
Regulatory Affairs: 40

Thousands of
U.S. dollars (Note)

Millions of yen

2007

2006

2007

¥ 76,415¥ 75,540$ 647,585

8,113

8,359

68,754

4,602

3,886

39,00060,43354,637512,144

100,900

98,739855,085

For the years ended March 31,

Plant
Net Shizuoka
sales Factory

Operating income
Net Research
income Laboratories
Shizuoka Research Laboratories
Kyoto Research Laboratories
At March 31,
Production Technology Laboratories
Total net assets
Total
assets Office:Overseas
Kaken New York Office
Per share
data: Avenue, 24th Floor, New York, NY10167
245 Park
1-212-372-8910
Net Tel:income(Basic)Fax: 1-212-372-8970
Cash dividends (Non-Consolidated)
E-mail: ny@kaken.co.jp

Yen

U.S. dollars (Note)¥ 42.42¥ 40.23$ 0.359

17.00

15.00

0.144

%

Ratios:

ROE

8.00

7.76

—

Capital adequacy ratio

59.89

55.33

—

Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥118 = $1 effective on March 30, 2007.

35

Business Philosophy: Three Joys

KAKEN

Creating joy forpatients.

conducts business by

We strive to create and offer
effective drugs that satisfy theneeds of patients and medical
professionals.

Creating joy as
a company.

Creating joy forour employees.

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

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

Consolidated Financial Highlights

Thousands of
U.S. dollars (Note)

Millions of yen

2007

2006

2007

¥ 76,415¥ 75,540$ 647,585

Operating income

8,113

8,359

68,754

Net income

4,602

3,886

39,000Total net assets

60,43354,637512,144

Total assets

100,900

98,739855,085

For the years ended March 31,

Net sales

At March 31,

Yen

Per share data:

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

U.S. dollars (Note)¥ 42.42¥ 40.23$ 0.359

17.00

15.00

0.144

%

Ratios:

ROE

8.00

7.76

—

Capital adequacy ratio

59.89

55.33

—

Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥118 = $1 effective on March 30, 2007.

President’s Message

Overview of Results for the Fiscal Year Ended
March 31, 2007
Kaken faced an increasingly challenging business climate infiscal year 2006. In April 2006, Japanese government initiatives
reduced drug prices by an average of 6.7% industrywide,heightened efforts to encourage the use of generic drugs andintroduced other measures to limit medical costs.
Under these circumstances, the Group rapidly expanded
its R&D pipeline and strove to promote sales activities closely
tied to local communities by providing high-value-added
information that meets the needs of medical professionals in
the field.
As a result of these efforts, consolidated net sales rose
1.2% from fiscal year 2005, to ¥76,415 million. Operating
income decreased 2.9%, to ¥8,113 million, as higher R&D
expenses pushed up selling, general and administrative
expenses. However, net income climbed 18.4%, to ¥4,602
million, owing to cost reductions achieved in the preceding
term by liquidating affiliated companies accounted for underthe equity method, as well as to lower interest costs following
the repayment of long-term debt.
The Group’s equity ratio amounted to 59.9% as all
In fiscal year 2006, ended March 31, 2007, Kaken faced an

bonds with stock acquisition rights issued in 2002 wereincreasingly challenging business climate as the Japaneseconverted to stock.

government implemented further measures to curtail
medical expenses.
Under these circumstances, we endeavored to respond

Addressing Future Challenges for Continued
Growthflexibly to any changes and work steadily as a medium-sized

Ongoing government initiatives to curb healthcare spending

pharmaceutical company to accelerate marketing activities

are exacerbating competition within the pharmaceuticaland drug discovery to meet the needs of medical professionals

industry. Under these circumstances, we aim to maximize

in the field. We also actively pursued the generic drug

corporate value by steadily raising awareness and imple-

business as one pillar of our operations.

menting operational reforms, as well as maintaining ourUpholding its corporate philosophy of “bringing

status as a trusted company in the eyes of the public

smiles to everyone,” Kaken aims to be characterized by anthrough a strong commitment to compliance. Our five key

independent spirit and a strong global presence.

reforms are outlined below.

Kaken’s commitment to “bringing smiles to everyone”

entails providing superior pharmaceuticals that improve

Focus investments on research and development

patients’ quality of life. We embrace strong principles and a

Targeting specific research areas, we are working to expand

compliance orientation, utilize management resources

our product range by accelerating research and development.

efficiently and maximize corporate value to earn the trust of

At the same time, we will continue to actively pursue strategic

all our stakeholders.

alliances with domestic and overseas companies and researchinstitutions, and introduce new research themes.

System certification by the city of Kyoto in recognition of

To expedite research and development, we will out-

their environmental management systems. We recognize

source basic research procedures and make use of contract

environmental protection as a social responsibility, and toresearch organizations (CROs). In addition, we will consider

this end we are aggressively promoting activities at all levels

increasing expenditures on specific R&D themes to fortifyof our organization. For example, we have established an

our R&D framework.

Environment Committee and set up Environment Task

In the fiscal period under review, we applied for production
and marketing approval for the pulmonary hypertension

Forces at each worksite. These activities are summarized in
our Social and Environmental Report on the Kaken website.

treatment TRK-100STP, a sustained-release formulation for
Procylin tablets.

Basic Policy and Approach concerning Returnto Shareholders

Strengthen our sales force

Kaken considers long-term, comprehensive profit increases

Our sales staff works closely with local communities tofor its shareholders an important management goal. Operating

provide high-value-added information to meet the needs ofin the pharmaceutical industry entails large risks, requiring

medical professionals in the field. We will focus on the

us to have a higher level of equity capital than companies indevelopment of Fiblast Spray, a wound healing agent, as weother industries. We employ a flexible dividend policy thatstrive to become a leader in this field. In addition, we will

sets cash dividends based on performance while maintaining

expand our market share to ensure our strong position in thea balance between returns to shareholders and strengthening

field of orthopedics. We are also actively pursuing the genericequity capital.

drug business as one pillar of our operations.

Dividends per share of common stock applicable to thefiscal year under review consisted of an ¥8.50 interim dividend

Establish an internal control system and carefully
manage risk

and an ¥8.50 year-end dividend, resulting in total dividends

We will reinforce our internal control system and carefully

for the preceding fiscal year, making fiscal year 2006 our fifth

manage risk as we strive to enhance operating efficiency andconsecutive year of dividend increases. As a result, thecompliance to ensure that we reach our management goals.

consolidated dividend payout ratio increased to 40.1%.

for the year of ¥17 per share. This amount is ¥2 higher than

We have commenced efforts to assure reliable financial reporting

Kaken also acquires treasury stock on a flexible basis. In

in line with the Standard for Assessment and Audit of Internal

the year under review, we acquired treasury stock three times

Controls over Financial Reporting (J-SOX).

at a total cost of ¥5,705 million, as per resolutions of theBoard of Directors.

Optimize and streamline operations
On the production side, we will make further reassessments

June, 2007of procedures, products and standards as we strive to lower
manufacturing costs. In the field of agrochemicals, we are
expanding consigned production to Chinese companies, andwe are committed to obtaining FDA certification.
Shiro Inui

Promote environmental protection

President

Kaken’s Shizuoka production and R&D facilities haveobtained ISO 14001 certification, and our Kyoto researchlaboratories have been awarded the Kyoto EnvironmentalF E A T U R E
S P E C I A L

Developing
New
Products
Kaken’s Innovative Product for Regeneration
Fiblast Spray—the world’s first regenerative medicine—is the commercialized product of ahuman recombinant protein basic Fibroblast Growth Factor (bFGF). A member of the FGF
family, bFGF exists endogenously in almost all tissues. bFGF, which binds to the extracellularmatrix, is released from the matrix once cells or tissues are damaged, such as by trauma or
ischemia, after which bFGF acts on a variety of cells and tissues to promote repair. As the
drug’s actions are broad-ranging, it is characterized by its powerful ability to stimulate growthof numerous cell types while stimulating the formation of new blood vessels.
After obtaining exclusive licensing rights in Asia in 1988 from Scios Inc. of the UnitedStates, Kaken made continued R&D efforts toward approval of the drug for the treatment of
bedsores and other skin ulcers (burns and leg ulcers), releasing the product onto the world
market for the first time as Fiblast Spray in June 2001. After more than six years on themarket as a wound healing agent, the drug has a solid reputation in numerous hospitals andclinics in Japan.
To further apply and expand the technology cultivated in the development of Fiblast
Spray, Kaken has completed Phase II clinical trials on intractable skin ulcers with diabetes,
confirming the drug’s effectiveness at treating diabetic skin ulcers.
bFGF has also been found to promote the proliferation and regeneration of periodontal
and bone tissues, in addition to skin tissue. For periodontal tissue, bFGF has been proven its
effectiveness in the regeneration of alveolar bone destroyed by periodontitis in early Phase IINew Drug Development Pipeline
Product

Development Stage Category

TRK-100STP

NDA

KCB-1 (Fiblast Spray)

Orally active PGI2
analogLaunch Indication

Remarks

2007

Pulmonary arterial
hypertension

Sustained release tablet

Preparing for Phase III bFGF

2009

Diabetic ulcers

New indication

KCB-1D

Phase II-finished

bFGF

2010

Periodontitis

New indication

KCB-1B

Phase II

bFGF

2012

Bone fractures

New indication

KP-102LN

Phase IIGH secretagogue

2012

Short stature

SPK-843

Phase II

Polyene antibiotic

2012

Systemic mycosis

Introduced from Aparts B.V. (preparing
to recommence)

KN-48

Phase II

Lidocaine patch

2010

Postherpetic neuralgia

Introduced from Teikoku Seiyaku Co., Ltd.
Additional study ongoing

KP-496NS

Preclinical

LT/TX dual inhibitor

Allergic rhinitis

In-house

KP-496DPI

Development
stopped

LT/TX dual inhibitor

AsthmaKP-103Pre-clinical

Triazole antifundal

Onychomycosis(topical)Licensed to Dow Pharmaceutical
Sciences Inc.

clinical trial conducted with patients suffering from this disease. In recently completed latePhase II clinical trials with a much larger number of patients, we succeeded in reconfirming its
strong effectiveness in alveolar bone regeneration and also in identifying the optimal dose forPhase III. We will conduct Phase III clinical trials as scheduled and apply for launch in 2010.
We are conducting basic research with the prospect of expansion into areas of dentistry beyond
periodontitis, including implant applications.
For bone tissue, bFGF has demonstrated the ability to promote the healing of fractures byenhancing bone metabolism through both the direct proliferative effect on osteoblasts and theindirect accelerative effect on osteoclasts. We are currently conducting Phase II clinical trials forbone fractures, aiming to apply for launch in 2012.
In addition to the areas in which we are conducting clinical trials, we are also currently
collaborating with universities and other research organizations in Japan in broad-ranging areas
to expand the possibilities of bFGF-based regenerative medicines.
In March 2005, we obtained worldwide rights to develop, manufacture and market bFGF.
That same year in December, we concluded a license agreement with a Chinese pharmaceuticalcompany for the development and marketing of Fiblast Spray. In June 2007, we concluded alicense agreement with Sunstar Inc. involving the development and marketing in Europe andNorth America in the dental area.
Using the expertise accumulated in our research and development of bFGF, we continue
to collaborate with our overseas partners to expand our global activities.

Review of Operations

n Pharmaceuticals and Medical Devices
Artz (Sodium hyaluronic acid)

Artz (Sodium hyaluronic acid)

Artz is an anti-osteoarthritic with highly purified sodium
hyaluronic acid as the active ingredient. Hyaluronic acid isextracted from rooster combs and has viscoelastic, waterretentive and lubricating properties.
In 1987, Artz was released for the first time, indicatedfor osteoarthritis of the knee as a form of hyaluronic acidinjectable into the joint, obtaining additional approval forthe treatment of shoulder periarthritis in 1989.

Procylin(oral prostaglandin I2 derivative)

In 1992, Artz Dispo—a packaging of the drug with adisposable syringe—was released with the aim of making
injection procedures simpler and faster, as well as reducing
the danger of infections.
In 2005, the drug was approved for the treatment ofknee joint pain accompanying chronic rheumatoid arthritis.

Adofeed(pain- and inflammationrelieving plaster)

Procylin (oral prostaglandin I2 analog)
Procylin is a prostaglandin I2-analog, beraprost sodium, as
its active ingredient, which dilates blood vessels and inhibits
platelet aggregation, serving as a treatment for chronic artery
occlusive disease. This drug was created by Toray Industries,
Inc. and commercialized through joint clinical developmentwith Kaken. It is the only oral prostaglandin I2 analog
formulation in the world.

Mentax(anti-Trichophyton agent)

Procylin is a superior circulation enhancer with its
ability to inhibit platelet aggregation and increase peripheral
blood flow. The drug was launched in 1992 for its effectivenessin treating ulcers, pain and chills resulting from such condi-

Mentax (anti-Trichophyton agent)tions as arteriosclerosis obliterans (ASO) and thromboangitis

Mentax is a topical treatment for superficial mycosis withobliterans (TAO). In 1999 Procylin received additional

butenafin hydrochloride—created by Kaken—as its main

approval for primary pulmonary hypertension.

ingredient. Mentax is marketed worldwide, including in the
United States through Mylan Pharmaceuticals. In December

Adofeed (pain- and inflammation-relieving plaster)

2001, Mentax was approved as an over-the-counter (OTC)

Adofeed is an antiphlogistic analgetic plaster containing

drug in the United States and is now marketed under the trade

Flurbiprofen as its active ingredient, which is a non-steroidalname Lotrimin Ultra through Schering-Plough Corporation.

anti-inflammatory drug that acts as a powerful prostaglandin

In 2003, Mentax was approved for manufacture andbiosynthesis inhibitor. Absorbed directly through the skin,sale as an OTC drug in Japan, and is currently being marketed

Adofeed has proven effective in reducing pain and inflammation

as an OTC drug by Takeda Pharmaceutical Company

associated with osteoarthritis, shoulder periarthritis, tennis

Limited and Sato Pharmaceutical Co., Ltd.

elbow, muscle pain and other inflammatory diseases.

In 2004, we launched a new spray formulation of Mentax.

product becomes a hydrated gel and remains in place forapproximately seven days, acting as an effective anti-adhesive
Lipidil (anti-hyperlipidemic)

by creating a physical barrier between damaged tissue and thesurrounding normal tissue.

Fiblast Spray (wound healing agent)
Consisting of Trafermin, a recombinant form of humanbFGF (basic fibroblast growth factor), Fiblast Spray is awound healing promoter having effects of angiogenesis andSeprafilm(synthetic-absorbent
anti-adhesive)

granulation formation. Scios Inc. paved the way for thedevelopment of recombinant bFGF by mapping the complete
DNA sequence of the human bFGF gene. Kaken then took
over development of the drug, releasing Fiblast Spray as theworld’s first human bFGF agent in 2001.
The Company is currently engaged in clinical studies ofFiblast Spray to expand application of the drug to treat
diabetic skin ulcers.
Fiblast Spray(wound healing agent)

Ebrantil (treatment for dysuria and hypertension)
Ebrantil is a sustained-release formulation of the 1-selective
blocker, Urapidil.
In Japan, the drug was first marketed in 1989 as a

Lipidil (anti-hyperlipidemia)

treatment drug for hypertension, based on its peripheral

This new micronized formulation of the active ingredientvasodilating effect. In 1995 the treatment was approved for

Fenofibrate in the drug Lipantil—released in 1999—is a fibrate

difficulty in urination caused by benign prostatic hyperplasia,

type of lipid-lowering agent with increased absorbability.

and in 1999 it was approved as the world’s first 1-blocker

Fenofibrate is a fibrate compound developed by Fournier

for the treatment of dysuria caused by neurogenic bladder.

Pharma (now Solvay S.A.) in France. The drug improves
overall lipid metabolism by activating peroxisome proliferator-

Cytotec (NSAID-induced ulcer preventive)

activated receptor a (PPARa) in liver cells and lowering

This drug is excellent at treating gastric and duodenal ulcers

triglycerides and cholesterol while increasing HDL-cholesterol

brought on by the administration of NSAIDs. The activeby adjusting the expression of a variety of proteins involved

ingredient, prostaglandin E1-analog Misoprostol, developedin lipid metabolism.

by G.D. Searle (now Pfizer, Inc.), both inhibits the secretion

Lipidil is sold in over 90 countries and has accumulated
extensive clinical experience.

of gastric juices and exerts a mucosal protective effect (siteprotection).
In the Guidelines for the Examination of GastricSeprafilm (synthetic-absorbent anti-adhesive)

Ulcers and Guidelines for the Treatment of Rheumatoid

Seprafilm is a sheet-type, synthetic-absorbent anti-adhesive

Arthritis in Japan, Cytotec is recommended as a drug

developed by Genzyme Corp. in the United States, consistingbacked by clinical evidence for the prevention and treatmentof sodium hyaluronic acid and CMC. Within 24 to 48 hours

of NSAID-induced ulcers.

after applying Seprafilm to tissues damaged by surgery, theGeneric Drugs
In Japan, government authorities are currently urging the useof generics as part of a movement to reduce medical costs.
We are also seeing an increase in frequency of generic drug
use in actual medical practice.
As the generic drug market grows, Kaken is making
aggressive forays into generics to seize this business opportunity.
In addition to pharmaceuticals, medical devices, agrochemicals and animal health products, and real estate, we
intend to build generics into the fifth pillar of our operations
with a medium-term goal of ¥10 billion in sales. We willcontinue to expand our product line to achieve this objective.

n Agrochemicals

producing millions of tons of healthy chicken meat. Kaken

Polyoxins (fungicides)

produces salinomycin under GMP and supplies worldwide

Two different technical grade active ingredients (TGAIs),

technical grade material and formulated products directly

Polyoxin AL and Polyoxin Z, are produced by fermentationand through distributiors.

using a microorganism isolated from a soil of Mt. Aso inJapan. Formulations of WP, SG and WG are registered in

Colistin sulfate (polypeptide antibiotic)

various countries and used widely to control fungal diseases on

Colistin sulfate is used as a veterinary medicine or feed

fruit trees, vegetable, flowers, turf and ornamentals. As natural

additive to control diseases caused by gram-negative bacteria

source fungicides, they are known to be highly safe forin poultry, swine, cattle and other animals. This antibiotic

humans, animals, plants and the environment.

has been used worldwide for a long period of time becauseof its excellent safety and efficacy. Kaken produces the EP5

Pentoxazone (rice herbicide)

grade material under GMP, and its Drug Master File (DMF)

Pentoxazone is known as a Protox inhibitor and used tois available if required.

control annual broad leaves, barnyard grass and monocholia
in paddy fields with a long-lasting effect. GR, SC, TB andEW formulations of pentoxazone alone or in combination
with sulfonylurea and other herbicidal compounds are available
and can be applied before, during and after transplantationof rice seedlings due to their high crop safety.

n Animal Health Products
Salinomycin (ionophore anti-coccidial for chicken)
Salinomycin was discovered and developed by Kaken andregistered first in Japan in 1978. Through successful marketingand licensing, salinomycin is now the best-selling anti-coccidial
feed additive in the world and is instrumental in economicallyCommitment and Excellence

R&D Divisionand compares them alongside other drugs. The Safety Research

Kaken has extensive technical expertise in its main drug

Laboratory verifies the safety of candidate compounds on

discovery research in the areas of inflammation, immunity andanimals to predict adverse effects on the human body. The

allergies, as well as fungal infection disease. We invest

Pharmacokinetics Laboratory assesses the pharmacokinetics ofsubstantial financial and human resources into such researchdeveloped compounds in vivo. The Drug Formulation Laboratory

activities with the aim of developing new drugs that are bothinvestigates the physical and chemical properties of the drug

effective and safe. To create new drugs that can compete incompound and creates a production plan to ensure maximum

the world market, we maintain an active program of drug

safety and effectiveness in the resulting drug’s action on the

discovery research, spearheaded by outstanding researchtarget disease.

professionals and techniques refined over many years ofexperience in pharmaceutical development.
At present, we have a total of around 260 researchers.

scientists received the 23rd Young Investigator Award fromthe American Society for Bone and Mineral Research (ASB-

During the year under review, research and developmentMR)—the most prestigious organization in the field—inexpenses amounted to ¥6.5 billion. To expedite our R&D

recognition of our research in osteoporosis. In 2003, Kaken’s

activities, we are actively pursuing strategic alliances with

scientists received the Prize for the Most Outstanding Pharmacy

companies and research institutes both in Japan and overseas,

Thesis from Academy of Pharmaceutical Science and Tech-as well as outsourcing some of our operations.

nology, Japan in the field of oral solid formulation design,

Kaken is fully committed to R&D activities that generate

underscoring our high level of basic technology. We areinnovative proprietary products, which will enable theleveraging such research technologies to accelerate andCompany to build a unique position as a pharmaceuticalexpand our R&D efforts.

manufacturer. To enable efficient R&D activities, we adopt a

To expedite discovery research in genomic drug discovery

multifaceted approach that includes pinpointing specificand other areas, we will continue focusing on our specialist

research programs, in-house development, joint development,

areas and actively pursue alliances with research institutions

licensing and outsourcing.

in Japan and overseas. We will also introduce and license		new technologies on a global basis, seeking out new tech-

Our Drug Discovery Research Laboratories arelocated in Kyoto, the ancient capital of Japan, and our

nologies and their seeds on a worldwide scale. As a part ofDevelopment Research Laboratories are in Shizuoka. We

our efforts to continue carrying out top-classdivide duties and employ cutting-edge research equipment

research, we have set up a Scientific Advisory Board comprised

and techniques to aid drug discovery and investigation,of respected researchers in Japan who periodically discuss andwhich require long and arduous research and unrivalled

advise on Kaken’s drug discovery programs.

expertise. At our laboratory in Kyoto, we carry out discovery

In our R&D division, clinical trials are studies in which

research, synthetic studies and pharmacological studies, while

drug candidates that have passed the non-clinical trials areat our Shizuoka laboratory we conduct studies on drug

actually administered to humans. The Clinical Development

safety, metabolism and formulation.

Department verifies the efficacy of candidate compounds

We advance R&D efforts through cooperation and

10

As a result of our research activities, in 2001 Kaken’s

coming out of discovery research or from elsewhere andcoordination among six research sections. The Chemistryplans and performs clinical trials on those compounds. The

Laboratory handles synthesis of the compounds that are theAdministration Department of Clinical Development oversees

seeds of new drugs. The Drug Discovery Research Laboratory

clinical trial quality and reliability and manages safety infor-

seeks out and evaluates pharmacological activities of candidate

mation for investigational drugs. These departmentscompounds. The Pharmacology Laboratory verifies the utility

coordinate with the research laboratories to ensure speedy

of candidate compounds created through discovery researchcompletion of clinical trials.

Practice (cGMP) regulations in the United States, which

Regulatory Affairs Division
Kaken’s Regulatory Affairs Division consists of threewere formulated the Food and Drug Administration (FDA).
We have also set up Production Technology Laboratories

departments—the Quality Assurance Department, thewithin the facilities, aiming to enhance product quality andPharmacovigilance Department and the Regulatory Affairs

research pharmaceutically useful innovations.

Department.
The Regulatory Affairs Division shoulders Kaken’sMarketing and Sales Division

responsibility as a pharmaceutical manufacturer and marketer,

Kaken’s medical representatives (MRs) provide professionals

making the final judgments on quality, effectiveness andon the medical front line with up-to-date information on thesafety in providing Kaken’s drugs to medical professionals

Company’s drugs and medical devices. Our MRs also talkin the field.

with healthcare professionals to gather medical information

The Quality Assurance Department assesses whether
each drug is produced according to those judgments every
time and whether the quality test results comply withrelated to the safety and effectiveness of our drugs and provide
feedback to the relevant departments.
We have established nine branches and 66 sub-branches

standards. The Pharmacovigilance Department then evaluates

so that our 700 MRs can work closely with local communities,

the safety information collected so far from medical institutions

particularly in our specialist fields of orthopedics andpertaining to the drug in question, after which thedermatology.

Regulatory Affairs Division judgments are comprehensively
carried out.
The Quality Assurance Department therefore works tomaintain quality by regularly inspecting internal and external

Distribution Division
We outsource all distribution functions to distributors
specialized in handling pharmaceuticals.

plants and collecting and examining information on quality.
Meanwhile, the Pharmacovigilance Department reports theassessed safety information to the required entities and distributes
information to medical institutions on the appropriate use ofpharmaceuticals to enhance their effectiveness, such as byincorporating this information in the drug documentation.
The Regulatory Affairs Department supervises andassists with general aspects of production and marketing.
Separate from these matters, the department is also involvedin drug R&D affairs. It compiles basic and clinical data
produced in the R&D Division, obtaining drug approvals aswell as registration in the drug price standards after approval.

Production Division
Our production facilities in Shizuoka Prefecture were among
the first in the industry to incorporate factory automation
systems. They comply with Japanese GMP, which stipulates
requirements for drug manufacturing and quality control. In
addition to satisfying these requirements, the quality of
products for export clears current Good Manufacturing

11

Fulfilling our Social Responsibilities

Between the “company with corporate auditors” andCorporate GovernanceKaken recognizes that corporate governance is one of the“company with committees” formats for Kaken’s manage-

most important issues facing management with regard toment, we have chosen our existing format of “company with

continually enhancing corporate value. Through the imple-

corporate auditors.” While we fully recognize that reinforc-

mentation of appropriate systems, we have steadily raised theing the control and auditing functions is an importanttransparency of management, clarifying the separation ofelement of corporate governance, we believe our Board ofmanagement’s supervisory and business execution functions.

Directors, corporate auditor system and operating officer

In addition, we are fulfilling our obligation to provide stake-system—under the current management format for now—

holders with appropriate information.

are critical to the functional operation of the Company.

We have introduced an operating officer system to
expedite decision-making and clarify supervisory andbusiness execution functions.

Corporate Governance System
General Meeting of Stockholders

Board of Corporate Auditors
Corporate Auditors

Board of Directors

Accounting Auditor

PresidentInternal Auditing Oﬃce

Managing Directors Meeting
Directors

Operating Oﬃcers, Companywide Departments, Group Companies

12Our Initiatives
Kaken is aware that compliance is pivotal to earning thetrust of society. To this end, we have established activity

5. We shall respect the human rights and individuality of
employees, pay attention to health and safety issues andwork hard to foster a fair and honest workplace culture.

principles and guidelines and adhere to high ethical

6. We shall manage Company information appropriately andstandards in all of our business activities. The Compa-

disclose information in a timely and appropriate manner.

ny’s businesses are directly concerned with people’s

7. We shall take seriously the impact of our activities on thehealth and lives. In carrying out these important activi-

global environment and contribute to society as a goodties, each executive and employee maintains a strong

corporate citizen, including through environmental

daily commitment to these activity principles and guide-

protection efforts.

lines.
Moreover, we maintain and operate a basic policy
on internal control systems, pursuant to the Company

8. We shall not tolerate terrorism and other anti-social
behavior.

Law, based on a resolution of the Board of Directors on

Environmental Protection Activities

May 12, 2006.

Seeking to help protect the global environment and maintainand enhance the health and well-being of people, in 1983

Compliance

Kaken launched its environmental protection program

Kaken recognizes compliance-based management as the mostthrough the establishment of environment task forces at eachfundamental element in gaining society’s trust and achieving

worksite.

healthy development. We further believe that this will enable

In 2000, we established an Environment Committee to

the Company to raise its corporate value for the benefit ofoversee the implementation of policies across the Company.

our shareholders, investors, business partners and the local

The Committee has established regulations to help realize acommunity.

prosperous society, mindful that all Company activities
should contribute to the protection and improvement of the

Kaken’s Activity Principles

global environment and the safety of people. In 2004, theEvery executive and employee of Kaken and its subsidiar-Committee formulated basic principles and basic policies

ies is strongly committed to compliance in operations

related to environmental issues.

with respect to observing Japanese and foreign laws andIn 2001, our Shizuoka production and R&D facilities

regulations, respecting different cultures and customs andobtained ISO14001 certification, the international standard

adopting high ethical standards.

for environment management. In 2005, our Kyoto research

1. We recognize the preciousness of life and shall contribute

facilities were awarded Kyoto Environmental System (KES)to the welfare of society by channeling all our efforts into

certification by Kyoto City in recognition of their environ-enhancing people’s health and patients’ quality of life.

mental management system. These both demonstrate Kak-

2. We recognize the importance of maintaining appropriate

en’s strong commitment to strengthening activities aimed atrelations with all our stakeholders, including shareholders, investors, employees, business partners and local
communities.
3. We shall compete in a fair and free manner, conducting

protecting the environment.
Our Shizuoka and Kyoto facilities continue to promotewaste reduction, control of chemical substances, and energysaving activities. All of our worksites, including the Company’s

our business activities in a just and proper way.

headquarters and branches, will continue to reinforce and4. We shall handle all the Company’s assets, including

augment such initiatives by actively engaging in activities toinformation, in a legitimate and proper manner to facili-

protect the environment.

tate the smooth running of its operations.

13

Board of Directors and Corporate Auditors(Standing, from left) Susumu Kojima, Masao Ishida, Takao Endo
(Seated, from left) Tetsuo Onuma, Shuji Komoto, Shiro Inui, Takeshi Hirahara, Motoyuki Yajima

President and Representative Director

Executive Director

AuditorShiro Inui

Masao Ishida

Takeji Saito(Global Business Development)(Standing)Takeshi Hirahara

Executive Director

Auditor(Administration)

Takao Endo

Fumio Hoshii(General Affairs)(Standing)Shuji Komoto

Executive Director

Auditor

(Accounting, Purchasing and

Susumu Kojima

Sumio Yoshizawa

Agrochemicals)(Research and Development)

Executive Managing Director

Executive Managing Director

AuditorExecutive Managing Director
Motoyuki Yajima, Ph.D.
(Research and Development)
Executive Managing Director
Tetsuo Onuma(Marketing and Sales)

14

Keizo NemotoFinancial Section
Consolidated Five-year Summary

16Managements Discussion and Analysis

16

Consolidated Balance Sheets

18

Consolidated Statements of Income

20

Consolidated Statements of
Changes in Net Assets

21

Consolidated Statements of Cash Flows23

Notes to the Consolidated Financial Statements

24

Report of Independent Auditors

34

15

Consolidated Five-Year Summary
Thousands of
U.S. dollars(Note)

Millions of yen

2007

2006

2005

2004

2007

2003

For the years ended March 31:

Net sales
Operating income
Net income¥76,415 ¥75,540 ¥74,922 ¥72,706 ¥74,002
8,113
8,359
7,897
7,525
7,946
4,602
3,886
3,417
3,017
2,597

$647,585
68,75439,00060,433
100,900

512,144855,085

At March 31:

Total net assets
Total assets

54,637 45,490 43,132 40,771
98,739 108,547 105,612 108,515

Per share data:

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

42.42
17.00

¥40.23
15.00

Ratios:ROE
Capital adequacy ratio

U.S. dollars(Note)

Yen¥36.5412.00¥31.8710.00¥27.11
8.25

7.19
40.84

6.51
37.57

$0.359
0.144

(%)

8.00
59.89

7.76
55.33

7.71
41.91

Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥118 = $1 effective on March 31, 2007.

Management Discussion and Analysis
Business Climate
Competition between pharmaceutical companies increased as
drug prices fell by an average of 6.7% across the industry in
April 2006, efforts mounted to encourage use of genericdrugs and other government-induced measures to limit
medical costs took hold.
Under these circumstances, the Group rapidly expanded
its pipeline with R&D as its focus area and worked hard topromote sales activities closely tied to local communities by
providing high-value-added information that meets theneeds of medical professionals in the field.

Performance
Consolidated net sales for the year under review amounted to¥76,415 million, up 1.2% from the preceding fiscal year.
Operating income decreased 2.9%, to ¥8,113 million, as higher
R&D expenses pushed up selling, general and administrative
expenses. However, net income climbed 18.4%, to ¥4,602
million, owing to reduced cost burden through liquidation in16

the previous fiscal year of affiliated companies accounted forusing the equity method, as well as lower interest costs from the
lump-sum repayment of long-term debt.

Segment Information
Starting in the fiscal year under review, the “Other” segment
has been renamed as the “Real Estate” segment in light of theactual content of that segment’s business.

Pharmaceuticals
Our pharmaceuticals segment consists of two core categories:
pharmaceuticals (including medical devices), and agrochemicals and animal health products.
In pharmaceuticals, sales of Artz—an anti-osteoarthritic
and one of our mainstay products—grew despite a regulatory
price cut of more than 8%, as sales unit volume advanced
14.0%.
Sales of the anti-hyperlipidemic Lipidil and the synthetic-absorbent anti-adhesive medical device Seprafilm also

steadily expanded. Sales of generic drugs increased on theback of three new product launches. Sales of Procylin, atreatment for chronic artery occlusive disease, fell, as did salesof the pain- and inflammation-relieving plaster Adofeed andrelated products. Sales of our wound-healing agent Fiblast
Spray remained nearly constant, as price cuts dulled theimpact of higher unit sales volume.
In the agrochemicals category, the Company faceddifficult business conditions brought on by restrictions on
the use of agricultural chemicals. In this environment, salesof Polyoxin fungicides, used to control fungal diseases on
fruit trees, vegetables and lawns, remained largely unchanged, while sales of the feed additive Salinomycin and therice herbicide Pentoxazone increased.
As a result, net sales edged up 1.1% year-on-year, to¥74,056 million, and operating income slipped 4.2%, to¥6,826 million. Net sales overseas reached ¥3,580 million.

Real Estate
Rental income from Bunkyo Green Court represents thebulk of revenues from our real estate business. During theperiod under review, this income remained at virtually thesame level as in the previous year.
Consequently, sales in the real estate segment rose
1.5%, to ¥2,359 million, and operating income increased
4.4%, to ¥1,287 million.

Financial Position
Total assets at fiscal year-end stood at ¥100,900 million, up
2.2% from a year earlier. This rise is mainly the result of anincrease in trade notes and accounts receivable because thefiscal year-end fell on a non-business day. Total liabilities
amounted to ¥40,467 million, down 8.2%, primarily as aresult of the conversion of bonds. Net assets totaled ¥60,433
million, a 10.6% increase, mainly owing to the conversion ofbonds and increased net income.
On April 14, 2006, the right to exercise the call option
provision of the yen-denominated convertible bonds withstock acquisition rights issued in 2002 became available. The
Board of Directors resolved to exercise this right to redeem
the full value of the bonds before maturity.
As a result, the Group’s equity ratio amounted to59.9% as all bonds with stock acquisition rights were converted to common stock. Net assets per share totaled¥565.92.

Cash Flows
Cash and cash equivalents at the end of fiscal year 2006
stood at ¥11,914 million, up ¥2,232 million from a year
earlier.
Net cash provided by operating activities amounted
to ¥11,933 million, up ¥5,587 million from the previous

year. Contributing factors included an increase in net
income before tax and a decrease in income taxes paid.
Net cash used in investing activities totaled ¥2,222
million, up ¥198 million. The principal use of cash was
the acquisition of property, plant and equipment.
Net cash used in financing activities was ¥7,478
million, down ¥4,433 million. This was the result of cash
dividends paid and the acquisition of treasury stock.

Risk Factors
The factors outlined in the list below may materially affectinvestors’ decisions relating to the Company’s business activities. It should be noted that not all risks are included in thelist.
(1) Risks related to new drug development
Substantial investment and development periods extending over more than 10 years are required before a new
drug is released onto the market. While undertaking
development with due regard to verifying the efficacy andsafety of a particular drug, development could be halted
midway.
(2) Risks related to occurrence of side effects
Clinical trials undertaken in the development stage
involve the trial administration of drugs to a restricted
number of patients. Consequently, once a drug islaunched into the market we conduct post-marketingsurveillance to supplement clinical trials. In the event a
new side effect is discovered at this stage, sales of the drug
could be halted.
(3) Risks related to policies to curtail medical expenses
As government initiatives to curtail medical expenses,
such medical system reforms as the establishment of a
medical care system for elderly patients and annual drug
cost revisions are under consideration. Such changes in
the market environment could affect the Company’s
performance.
(4) Risks due to competition
Sales competition with other pharmaceutical companies
may result in a drop in prices. In addition, the emergenceof generic products upon the expiration of a patent causes
a decline in sales of the original product, which could
affect the Company’s performance.
(5) Risks related to delay or cessation of production
Production may be delayed or halted as a result of various
factors, such as problems with manufacturing facilities ordelays in the procurement of raw materials. These factors
could affect the Company’s performance.
(6) Risks related to legal action
We are exposed to the possibility of legal action in thecourse of our business activities. Such actions could affect
the Company’s performance.

17

Consolidated Balance Sheets
As of March 31, 2007 and 2006

Thousands of
U.S. dollars(Note 4)

Millions of yen

ASSETS
Current Assets:
Cash on hand and at bank (Note 5)

2007

2006

2007

¥ 10,915¥ 9,681$ 92,500

999

149

8,466

Notes and accounts receivable–trade34,62932,369293,466

Accounts receivable–other

1,005

1,283

8,517

35,63533,652301,992

(8)

(6)

(68)

35,62733,646

301,924

Inventories (Note 7)

9,126

9,657

77,339Deferred tax assets (Note 15)

1,133

992

9,602

799

1,127

6,771

58,60055,256496,610

Buildings and structures

34,98934,778296,517

Machinery and equipment

18,21917,944

154,398

53,20852,722450,915(31,822)(30,900)(269,678)

21,385

21,822

181,229

3,437

3,331

29,127

415

282

3,517

25,23725,435

213,873

10,391

11,27088,059

795

1,074

6,737

Deferred tax assets (Note 15)

3,413

3,467

28,924

Other assets

2,461

2,234

20,856

17,061

18,047

144,585¥100,900¥98,739$855,085

Marketable securities (Note 6)
Receivables:

Less: Allowance for doubtful receivables

Other current assets
Total current assets
Property, Plant and Equipment (Notes 8 and 9):

Less: Accumulated depreciation
Land
Construction in progress
Total property, plant and equipment
Investments and Other Assets:
Investment securities (Notes 6 and 9)
Intangible assets and long-term prepaid expenses

Total investments and other assets
TOTAL ASSETS
The accompanying notes are an integral part of the Consolidated Financial Statements.

18

Millions of yen

LIABILITIES AND NET ASSETS
Current Liabilities:
Short-term bank loans (Note 9)
Current portion of long-term debt (Note 9)
Payables:Notes and accounts payable–trade
Notes and accounts payable–construction
Accounts payable–otherThousands of
U.S. dollars(Note 4)

2007

2006

2007

¥ 5,380
1,006¥ 5,380—$ 45,593
8,525

Accrued expenses
Accrued bonuses (Note 3)
Accrued sales rebates
Accrued income taxes (Note 15)
Other current liabilities
Total current liabilities

15,147
1,178
3,248
19,573
648
1,183
566
2,562
557
31,47812,301929
2,601
15,833
532
1,149
807
118
432
24,254

128,364
9,983
27,525
165,873
5,492
10,025
4,797
21,712
4,720
266,763

Non-Current Liabilities:
Long-term debt (Note 9)
Accrued pension and severance costs (Note 12)
Accrued retirement benefits to directors
Deferred tax liabilities (Note 15)
Other long-term liabilities
Total non-current liabilities

3,000
4,958
354
220
455
8,989

13,192
5,737
297
239
381
19,84825,42442,017
3,000
1,864
3,856
76,17823,34820,737

197,864

22,22618,305

19,462
15,428

188,356
155,127(5,771)(3,784)(48,907)

58,11051,843

492,458

2,321
1
2,323
60,433¥100,900

2,793
0
2,793
54,637¥98,739

19,6698
19,686512,144$855,085

Net assets:
Shareholders’ Equity:
Common stock - no par value
Authorized: 360,000,000 shares
Issued: 113,282,639 shares as of March 31, 2007 and 105,992,690
shares as of March 31, 2006
Capital surplus
Retained earnings
Treasury stock, at cost: 6,495,694 shares in 2007 and 5,543,567 sharesin 2006
Total shareholders’ equity
Valuation and translation adjustments:
Net unrealized gain on valuation of other securities, net of taxes (Note 2 (c))
Deferred gain on hedges
Total valuation and translation adjustments
Total net assets
TOTAL LIABILITIES AND NET ASSETS
The accompanying notes are an integral part of the Consolidated Financial Statements.

19

Consolidated Statements of Income
For the years ended March 31, 2007 and 2006

Millions of yen

2007

2006

2007

Net sales
Cost of sales
Gross profit¥76,415
39,222
37,193¥75,540
38,50837,032$647,585
332,390
315,195

Selling, general and administrative expenses (Note 14)
Operating income

29,0798,113

28,673
8,359

246,432
68,754

133
(121)
(524)
(188)
—
342
—
—
—
(5)
33
(329)

115
(410)
(524)
(40)
(268)
—
1,612
(401)
(1,112)(9)
8(1,031)

1,127(1,025)(4,441)(1,593)
—
2,898
—
—
—
(42)
280
(2,788)

7,783

7,327

65,958

2,964
216
3,181

1,129
2,312
3,441

25,1191,831
26,958

4,602

3,886

39,000—¥ 4,602—¥ 3,886—$ 39,000

Other income (expenses):
Interest and dividend income
Interest expenses
Amortization of net obligation at transition
Loss on sales/disposal of property, plant and equipment, net
Loss on impairment of fixed assets (Note 8)
Gain on establishment of retirement benefit trust
Gain on sales of investment securities, net
Equity in losses of affiliates
Loss on liquidation of affiliates
Revaluation loss of golf membership
Other, net

Income before income taxes and minority interests
Income taxes (Note 15):
Current
DeferredIncome before minority interests
Minority interests
Net income

U.S. dollars(Note 4)Per share data:
Net income (Note 17):
Basic
Diluted¥42.42¥40.83¥40.23¥33.24$0.359$0.346

Cash dividends (Note 2 (m))¥17.00¥15.00$0.144

The accompanying notes are an integral part of the Consolidated Financial Statements.

20

Thousands of
U.S. dollars(Note 4)Yen

Consolidated Statements of Changes in Net Assets
For the years ended March 31, 2007 and 2006

Millions of yen
Shareholders’ equity
Number ofcommon stock
BALANCE–MARCH 31, 2005

94,922,782

Commonstock

Capitalsurplus¥17,127

Total
Treasuryshareholders’
stock at costequityRetainedearnings¥15,873¥12,859(¥1,715)¥44,146

Net income

3,886

3,886

Cash dividends(1,278)(1,278)

(39)

(39)

Director’s bonuses
Shares issued on conversion of convertible bonds

11,069,908

3,609

3,587

Treasury stock acquired, net

7,197

0

(2,069)(2,069)(¥3,784)¥51,843

Net changes of items other than shareholders’ equity
BALANCE–MARCH 31, 2006

105,992,690¥20,737¥19,462¥15,428

Net income

4,602

4,602

Cash dividends(1,682)(1,682)(43)

Director’s bonuses
Shares issued on conversion of convertible bonds

7,289,949

2,611

(43)

2,596

5,208

Treasury stock acquired
168

Treasury stock sold

(5,799)(5,799)

3,812

3,980

(¥5,771)¥58,110

Net changes of items other than shareholders’ equity
BALANCE–MARCH 31, 2007

113,282,639¥23,348¥22,226¥18,305

Millions of yen
Valuation and translation adjustments
Net unrealized
Total valuation
Deferred gain
gain on otherand translation
on hedges
securities
adjustments
BALANCE–MARCH 31, 2005

¥1,344—¥1,344

Total net
assets¥45,490

Net income

3,886Cash dividends(1,278)

Director’s bonuses(39)

Shares issued on conversion of convertible bonds

7,197

Treasury stock acquired, net(2,069)Net changes of items other than shareholders’ equity
BALANCE–MARCH 31, 2006

1,448
¥2,793

—

1,448

1,448

¥2,793¥54,637

Net income

4,602

Cash dividends(1,682)(43)

Director’s bonuses
Shares issued on conversion of convertible bonds

5,208

Treasury stock acquired(5,799)3,980

Treasury stock soldNet changes of items other than shareholders’ equity
BALANCE–MARCH 31, 2007

(471)

1

(470)

(470)

¥2,321¥1¥2,323¥60,433

21

Thousands of U.S. dollars (Note 4)
Shareholders’ equity
Number ofcommon stock
BALANCE–MARCH 31, 2006

105,992,690

Commonstock

CapitalsurplusRetainedearnings$175,737$164,932$130,746

Total
Treasuryshareholders’
stock at costequity($32,068)$439,347

Net income

39,00039,000Cash dividends(14,254)(14,254)

(364)

(364)

Director’s bonuses
Shares issued on conversion of convertible bonds

7,289,949

22,12722,00044,136

Treasury stock acquired
1,424

Treasury stock sold(49,144)(49,144)

32,30533,729($48,907)$492,458

Net changes of items other than shareholders’ equity
BALANCE–MARCH 31, 2007

113,282,639$197,864$188,356$155,127

Thousands of U.S. dollars (Note 4)
Valuation and translation adjustments
Net unrealized
Total valuation
Deferred gain
gain on otherand translation
on hedges
securities
adjustments
BALANCE–MARCH 31, 2006

$23,669—$23,669$463,025

Net income

39,000Cash dividends(14,254)(364)

Director’s bonuses
Shares issued on conversion of convertible bonds

44,136

Treasury stock acquired(49,144)
33,729Treasury stock soldNet changes of items other than shareholders’ equity
BALANCE–MARCH 31, 2007

(3,992)8(3,983)(3,983)$19,669$8$19,686$512,144

The accompanying notes are an integral part of the Consolidated Financial Statements.

22

Total net
assetsConsolidated Statements of Cash Flows
For the years ended March 31, 2007 and 2006

Millions of yen

Cash flows from operating activities:
Income before income taxes and minority interests
Adjustments for:
Depreciation
Loss on impairment of fixed assets
Amortization of long-term prepaid expenses
Accrual for pension and severance costs, less payments
Interest and dividend income
Interest expense
Equity in losses of affiliates
Loss on liquidation of affiliates
Revaluation loss of golf membership
Gain on sale of investment securities, net
Gain on establishment of retirement benefits trust
Loss on disposals of property, plant and equipment
Gain on sale of property, plant and equipment
Decrease (Increase) in notes and accounts receivable–trade
Decrease in inventories
Increase (Decrease) in notes and accounts payable–trade
Paid bonuses to directors
Other, net
Subtotalinterest and dividends received
Interest paid
Income taxes paid, net
Net cash provided by operating activities
Cash flows from investing activities:
Acquisition of property, plant and equipment
Proceeds from sales of property, plant and equipment
Acquisition of investment securities
Proceeds from sales of investment securities
Payment of long-term prepaid expenses
Other, net
Net cash used in investing activities
Cash flows from financing activities:
Repayments of long-term debt
Acquisition of treasury stock
Cash dividends paid
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year (Note 5)

Thousands of
U.S. dollars(Note 4)

2007

2006

2007

¥ 7,783¥ 7,327$ 65,958

1,977
—
619
(215)
(133)
121
—
—
5
—
(342)
188
—
(2,260)
530
2,845
(43)
1,091
12,166
133
(121)
(245)
11,933

1,940
268
818
(613)
(115)
410
401
1,112
9
(1,612)
—
178
(147)
1,195
592
(663)
(39)
(770)
10,295115(410)(3,653)
6,346

16,754—
5,246(1,822)(1,127)
1,025
—
—
42
—
(2,898)1,593—(19,153)
4,492
24,110(364)
9,246
103,102
1,127(1,025)(2,076)
101,127(1,524)
1
(356)
—
(153)
(189)
(2,222)(1,532)697(3,669)
2,600
(42)
(76)
(2,023)(12,915)8(3,017)—(1,297)(1,602)(18,831)—(8,560)(5,796)(2,073)(1,682)(1,278)(7,478) (11,912)
2,232(7,590)9,681
17,271¥11,914 ¥ 9,681—(49,119)(14,254)(63,373)
18,91582,042$100,966

The accompanying notes are an integral part of the Consolidated Financial Statements.

23

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 basically an English version of those which were prepared from accounts
and records maintained by the Group and in accordance with accounting principles and practices generally accepted in Japan,
which are different in certain respects from the application and disclosure requirements of International Financial ReportingStandards, and filed with the Director of Kanto Finance Bureau.
Certain items presented in the consolidated financial statements have been reclassified for the convenience of readers outside Japan.
Effective the year ended March 31, 2007, the Company has adopted a new accounting standard for the presentation of net
assets in the balance sheet (ASBJ Statement No.5) and the related implementation guidance issued by Accounting Standards
Board of Japan (ASBJ) on December 9, 2005. In addition, effective the year ended March 31, 2007, the Company is required toprepare consolidated statements of changes in net assets. In this connection, the consolidated balance sheet as of March 31,
2006 and the consolidated statement of shareholders’ equity for the year ended March 31, 2006, which had been prepared toprovide additional information to the Japanese disclosure requirements, have been restated to conform to the presentation anddisclosure of the consolidated financial statements for the year ended March 31, 2007.
The consolidated financial statements are not intended to present the consolidated financial position, results of operations
and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions otherthan Japan.
As permitted by the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. As aresult, the totals shown in the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily
agree with the sum of the individual amounts.
Some supplementary information included in the statutory Japanese language consolidated financial statements, but notrequired for fair presentation, is not presented in the accompanying consolidated financial statements.

2. Summary of Significant Accounting Policies:(a) Principles of Consolidation
The Company had three subsidiaries as of March 31, 2007 and 2006. The consolidated financial statements include the accounts of the Company and all of its subsidiaries. The consolidated subsidiaries as of March 31, 2007 are as follows:
KAKEN REALTY & SERVICE CO., LTD.
KAKEN PHARMA CO., LTD.
FUJIKA CORPORATION
There was no affiliate which was accounted for by the equity method.
All significant intercompany transactions, account balances and unrealized profits or losses among the Group have been
eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents in the consolidated statements of cash flows are composed of cash on hand, bank deposits which areable to be withdrawn within three months and short-term investments with original maturity of three months or less and areconsidered to have minimal risk from market fluctuations.
(c) Marketable and Investment Securities
Securities are classified into one of the following four categories; (1) Trading, (2) Held-to-maturity debt, (3) Shares in subsidiaries and affiliated, and (4) Other. Trading securities are recorded at market value with unrealized gains and losses recognized in
the current year’s earnings. Debt securities that are expected to be held to maturity are carried at amortized cost. Shares insubsidiaries and affiliates are carried at cost. Other securities are expected to be sold in future and those, whose fair values arereadily determinable, are carried at fair value and the related unrealized gains or losses, net of taxes, are included as a componentof “Valuation and translation adjustments” under net assets. Other securities without market quotations are stated at cost,
determined by the moving average method.
(d) Inventories
Inventories are stated at cost, being determined by the gross average method.
24

(e) Property, Plant and Equipment
Depreciation is computed on the declining-balance method at rates based on the estimated useful lives of assets, except forbuildings, structures, machinery and equipment for the Komagome office that are computed on the straight-line method.
Furthermore, depreciation of buildings, except for ancillary facilities to buildings, acquired on and 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 and equipment.
(f) Accounting for Impairment of Fixed Assets
In accordance with the accounting standard for impairment of fixed assets, the Group review their fixed assets for impairment
by grouping the assets in income generating units whenever there is any indication of a significant decline in the fair value
against its book value based on an independent appraisal, and when the existence of any impairment for the group of the assets
is identified, an impairment loss will be recognized and such amount is directly deducted from the related assets.
(g) Pension and Retirement Benefits
Employees who terminate employment are entitled, under most circumstances, to lump-sum payments or pension payments as
described below, determined by reference to current basic rate of pay, length of service and conditions under which the termination occurs. The minimum payment is an amount based on voluntary retirement. In addition to the minimum payment basedon voluntary retirement, employees receive additional benefits for retirement due to age limit, death or other defined reasons.
The Company has a non-contributory defined benefit funded pension plan (entrusted) which covers 30% of the benefits payable
under the existing retirement plan to employees.
The accrued pension and severance costs represent the amount actuarially calculated projected benefit obligation less (1) the
fair value of the plan assets, (2) unrecognized actuarial loss or gain, (3) the unrecognized transition amount arising from adopting the new standard and (4) unrecognized prior service cost. If the fair value of the plan assets exceeds the projected benefit
obligations, prepaid pension and severance costs are recorded on the balance sheet. The transition amount is amortized on astraight-line basis over 15 years. Unrecognized actuarial loss or gain is amortized on a straight-line basis over 10 years from thenext year in which they arise. Unrecognized prior service cost is amortized on a straight-line basis over 10 years from the year inwhich they arise. For the Company, prepaid pension and severance costs were recognized for a portion of the plan covered by
the non-contributory pension plan assets and the accrued pension and severance costs were recognized for a portion of the plan
not covered by the plan assets.
Accrued retirement benefits to directors and statutory auditors is provided in an amount equivalent to the liability therelevant company would have been required to pay upon retirement at the balance sheet date, as prescribed by its internal rules.
(h) Income Taxes
Income taxes are determined using the asset and liability approach, where deferred tax assets and liabilities are recognized for
temporary differences between the tax basis of assets and liabilities and their reported amount in the financial statements.
(i) Consumption Taxes
Consumption taxes withheld and consumption taxes paid are excluded from revenues and expenses in the accompanying consolidated statements of income. The net balance of consumption taxes withheld and consumption taxes paid is included incurrent liabilities of the consolidated balance sheet as of the end of the fiscal year.
(j) Derivative Financial Instruments
Derivative instruments, which include foreign currency forward exchange contracts and interest rate swap agreements, are used
as a part of the Company’s risk management of foreign currency and interest rate risk exposures of its financial assets and liabilities.
Foreign currency exchange forward contracts:
The Company enters into foreign currency exchange forward contracts to limit exposure, affected by changes in foreign currency
exchange rates, on accounts receivable and payable and cash flows generated from anticipated transactions denominated inforeign currencies. For foreign currency exchange forward contracts which are designated and are effective as hedges of suchcurrency exchange rate risk on existing assets and liabilities, the Company adopted the accounting method whereby foreign
currency denominated assets and liabilities are measured at the contract rate of the respective foreign currency exchange forward
contracts. With respect to such contracts for anticipated transactions, the contracts are marked-to-market and the unrealized
gains/losses are deferred in the balance sheet to be released to income when the exchange gains/losses on the hedged items ortransactions are recognized.

25

Interest rate swap agreements:
The Company enters into interest rate swap agreements, in order to lower funding costs and limit the Company’s exposure in
respect of the underlying financial instruments, resulting from adverse fluctuation in interest rates. The related interest differentials paid or received under the interest rate swap agreements are recognized in interest expenses over the terms over the terms of
the agreements.
Derivative financial instruments have not been implemented by consolidated subsidiaries.
(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 stockholders’ approval.
(l) Shareholders’ Equity
The new Corporate Law of Japan (“the Law”), which superseded most of the provisions of the Commercial Code took into
effect on May 1, 2006. The Law provided that an amount equal to 10% of the amount to be disbursed as distributions of capitalsurplus (other than the capital reserve) and retained earnings (other than the legal reserve) be transferred to the capital reserveand the legal reserve, respectively, until the sum of the capital reserve and legal reserve equals 25% of the stated capital. Such
distributions can be made at any time by resolution of the shareholders or by the Board of Directors if certain conditions are
met. The above mentioned legal reserve is included in retained earnings in the accompanying consolidated balance sheets.
(m) Net Income and Dividends per Share
Net income per share of common stock is based upon the weighted average number of shares 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.
Fully-diluted net income per share is computed, based on the assumption that the convertible bonds were fully converted
into common stock on the date of issue or at the beginning of the respective years subsequent to the issue, with appropriate
adjustments of related interest expense (net of taxes).

3. Change in Accounting Policies:(Accounting for Directors’ bonus)
Effective April 1, 2006, the Group adopted the new accounting standard for directors’ bonus (ASBJ Statement No.4) issued by
ASBJ on November 29, 2005. In accordance with the new standard, the Group accounted for the directors’ bonuses as an
expense of the fiscal year in which such bonuses are accrued, while in the prior years directors’ bonuses had been accounted for
as a deduction from the amount of retained earnings as an appropriation of retained earnings to be approved by the shareholders’ meeting. The effect of this change was to decrease operating income and income before income taxes by ¥54 million ($458
thousand) for the year ended March 31, 2007.

4. United States Dollar Amounts:

The Group maintains its accounting records in yen. The dollar amounts included in the consolidated financial statements andnotes thereto represent the arithmetical results of translating yen to dollars on the basis of ¥118=U.S.$1. The inclusion of suchdollar amounts is solely for convenience and is not intended to imply that yen amounts have been or could be converted, realized or settled in dollars at ¥118=U.S.$1 or any other rate.

5. Cash and Cash Equivalents:

Cash on hand and at banks and marketable securities are reconciled to cash and cash equivalents of consolidated statements ofcash flows as follows:

Millions of yen

Cash on hand and at banks
Marketable securities
Marketable securities due in more than three months
Cash and cash equivalents

26

2007

2006

¥10,915
999
11,914—¥11,914¥9,681
149
9,831
(149)
¥9,681

Thousands of
U.S. dollars(Note 4)2007

$ 92,500
8,466
100,966—$100,966

6. Marketable Securities and Investment Securities:

The costs and aggregate market values of marketable and investment securities are as follows:
Millions of yen
Cost

March 31
Other securities:
Market value available
Equity securities
Other securities

Market value

Unrealized gain
(loss)

Cost

Market value

2007

Unrealized gain
(loss)

2006

Market value not available
Total¥5,605—
5,605
372¥5,977¥9,519—9,519
372¥9,891¥3,914—
3,914—¥3,914¥5,668
13
5,681
379
¥6,061¥10,376
14
10,391379¥10,770

Held-to-maturity securities:¥1,499¥1,499—¥ 649¥

¥4,7081
4,709—¥4,709649—

Thousands of U.S. dollars (Note 4)
Cost

March 31
Other securities:
Market value available
Equity securities
Other securities

Market value

Unrealized gain
(loss)

2007

Market value not available
Total$47,500—
47,5003,153$50,653$80,669—
80,6693,153$83,822$33,169—
33,169—$33,169

Held-to-maturity securities:$12,703$12,703—

Other securities sold during the fiscal years ended March 31, 2007 and 2006 were as follows:

Millions of yen

2007

Proceeds from sales
Gross realized gains
Gross realized losses

¥—
—
—

2006

¥2,600
1,612—

Thousands of
U.S. dollars(Note 4)

2007

$—
—
—

7. Inventories:

Inventories as of March 31, 2007 and 2006 are comprised of the following:

Millions of yen

March 31
Finished products
Work in process
Raw materials
Supplies
Raw materials in transit
Total

Thousands of
U.S. dollars(Note 4)

2007

2006

2007

¥4,150
1,309
2,831
735
100
¥9,126¥4,114
1,434
3,202
732
173
¥9,657$35,169
11,09323,992
6,229
847$77,33927

8. Impairment of Fixed Assets:

The Group recorded losses on impairment of fixed assets amounting to ¥268 million for the year ended March 31, 2006 , but
no loss on impairment was recognized for the year ended March 31, 2007.

9. Short-term Bank Loans and Long-term Debts:

Short-term bank loans outstanding as of March 31, 2007 and 2006 represented the notes issued by the Group to banks. Customarily, these notes are renewed at maturity subject to renegotiation of interest rates and other factors. The weighted-averageinterest rates applicable to short-term bank loans as of March 31, 2007 and 2006 are 1.37% and 0.90%, respectively. Outstanding balance of short-term bank loans as of March 31, 2007 and 2006 were ¥5,380 million ($45,593 thousand) and ¥5,380
million, respectively.
Long-term debt as of March 31, 2007 and 2006 consisted of the following:Thousands of
U.S. dollars(Note 4)

Millions of yen

March 31
Loans from banks and other financial institutions due on September 30,
2008 (interest rate 1.77%)
0.0% unsecured convertible bond due in September, 2007 (a)0.0% unsecured convertible bond due in September, 2007 (b)Less: current portion
Total

2007

2006

2007

¥3,000¥ 3,000$25,424¥1,006 ¥ 1,797— ¥ 8,395(1,006)—¥3,000 ¥13,192$ 8,525(8,525)$25,424a) 0.0% Unsecured convertible bond
Holders of this bond are entitled to convert these bonds into common stock at a price of ¥630 during the period from August 9,
2000 to September 14, 2007b) 0.0% Unsecured convertible bond
The 0.0% unsecured convertible bond due September 2007 (b), issued on July 25, 2002, was fully converted in the period from
April 18, 2006 to June 16, 2006. As a result, capital and capital surplus were increased by ¥2,214 million ($18,763 thousand)and ¥2,202 million ($18,661 thousand), respectively.
Aggregate annual maturities of convertible bonds in the next five fiscal years are as follows:

Millions of yen

Within one year
Over one year less than five years
More than five years and thereafter
Total¥1,006——¥1,006

Thousands of U.S.
dollars (Note 4)$8,525——$8,525Aggregate annual maturities of long-term bank loans are as follows:

Millions of yen

Within one year
Over one year less than two years
Over two years less than five years
More than five years and thereafter
Total

¥ —
3,000
—
—
¥3,000Thousands of U.S.
dollars (Note 4)$—25,424——$25,424

As is customary in Japan, short-term and long-term bank loans are made under general agreements which provide that security
and guarantees for future and present indebtedness will be given upon request of the bank, and that the bank shall have theright, as the obligations become due or in the event of their default, to offset cash deposits against such obligations due to thebank. The Group has not received any such requests to date.
28

At March 31, 2007 and 2006, assets pledged as collateral for certain short-term and long-term debts, including current
portion of long-term debts, were as follows:
Thousands of
U.S. dollars(Note 4)

Millions of yen

March 31
Assets pledged:
Buildings and structures
Machinery and equipment
Land
Investment securities
Total
Liabilities secured:
Short-term bank loans
Total

2007

2006

2007

¥2,289
2,364
103
2,232
¥6,990¥2,333
2,267
103
2,517
¥7,221$19,398
20,034873
18,91559,237¥1,400¥1,400¥1,400¥1,400$11,864$11,864

10. Accounting for leases:

Leases that transfer substantially all the risks and rewards of ownership of the assets are accounted for as capital leases, however,leases that do not transfer ownership of the assets at the end of the lease term are accounted for as operating leases, in accordancewith accounting principles and practices generally accepted in Japan.
Assumed data “as if capitalized” as to acquisition cost, accumulated depreciation, net book value and depreciation expenseof the leased assets, which excluded the portion of interest thereon, were summarized as follows:
Thousands of
U.S. dollars(Note 4)

Millions of yen

March 31
Acquisition cost
Accumulated depreciation
Net book value
Depreciation

2007

2006

¥15
14
0
¥ 1

¥15
12
¥ 2
¥ 1

2007

$127
119
0
$ 8

Depreciation is computed on the straight-line method over the lease term of the leased assets with no residual value.
Periodic lease expenses on finance lease contracts without ownership-transfer for the years ended March 31, 2007 and 2006
were summarized as follows:
Thousands of
U.S. dollars(Note 4)

Millions of yen

2007

2006

¥2

Periodic lease expense

¥2

2007

$17

The amount of outstanding future lease payments due at March 31, 2007 and 2006, which excluded the portion of interest
thereon, was summarized as follows:
Thousands of
U.S. dollars(Note 4)

Millions of yen

2007

Within one year
Over one year
Total

2006

¥1
—
¥1

¥2
1
¥3

2007

$8
—
$8
29

11. Derivative Financial Instruments:

Derivative financial instruments are utilized by the Company principally to reduce interest rate and foreign exchange rate risks.
The Company has established a control environment which includes policies and procedures for risk assessments and for theapproval, reporting and monitoring of transactions involving derivative financial instruments. The Company does not hold or
issue derivative financial instruments for speculative purposes.
The Company is exposed to certain market risks arising from its forward exchange contracts and interest rate swap agreements. The Company is also exposed to the risk of credit loss in the event of non-performance by the counterparties to thecurrency and interest rate derivatives; however, the Company does not anticipate non-performance by any of these counterparties all of whom are financial institutions with high bond ratings.

12. Pension and Retirement Benefits:

The benefit obligation and plan assets, funded status and composition of amounts recorded in the consolidated balance sheets asof March 31, 2007 and 2006 are as follows:

Millions of yen

March 31
Projected benefit obligations
Plan assets
Funded status
Unrecognized transition amount
Unrecognized actuarial loss
Unrecognized prior service cost
Amounts recognized in the balance sheet consists ofPrepaid pension costAccrued pension and severance costs

2007

2006

Thousands of
U.S. dollars(Note 4)2007

¥(21,720) ¥(22,026)
11,98810,658(9,732) (11,367)
4,199
4,724
1,830
1,978
(132)
(154)
(3,834)(4,819)$(184,068)
101,593(82,475)
35,585
15,508(1,119)(32,492)

1,124
918¥ (4,958) ¥ (5,737)

9,525$ (42,017)

The components of net pension and severance costs for the years ended March 31, 2007 and 2006 were as follows:

Millions of yen

Service cost
Interest cost
Expected return on plan assets
Amortization of transition amountAmortization of actuarial loss
Amortization of prior service cost
Net pension expense

Thousands of
U.S. dollars(Note 4)

2007

2006

2007

¥ 699
502
(261)
524
353
(22)
¥1,797¥ 726
517
(235)
524
376
(22)
¥1,887$ 5,924
4,254(2,212)
4,441
2,992
(186)
$15,229

Assumptions used in calculation of the above information for the year ended March 31, 2007 were as follows:
Discount rate
2.3%
Expected rate of return on plan assets
2.5%
Method of attributing the projected benefits to periods of services
Years of service

13. Shareholders’ Equity:

At the general shareholders’ meeting held on June 28, 2007, it was approved to pay dividends of ¥8.50 per share to the shareholders as of March 31, 2007, aggregating ¥907 million ($7,686 thousand). Such dividends have not been incorporated in theaccompanying consolidated financial statements for the year ended March 31, 2007.

30

14. Research and Development Costs:

Research and development costs included in selling, general and administrative expenses for the years ended March 31, 2007
and 2006 amounted to ¥6,533 million ($55,364 thousand) and ¥6,045 million, respectively.

15. Income Taxes:

The Group is subject to several taxes based on income, which in the aggregate resulted in statutory tax rates of approximately
40.69% for the years ended March 31, 2007 and 2006. Reconciliation of the differences between the statutory tax rate and theeffective tax rate for the years ended March 31, 2007 and 2006 is as follows:
2007

2006

40.69%

40.69%

5.72

6.84(0.24)
1.10(5.54)(0.86)
40.87%(0.08)
1.14(1.82)
0.19
46.96%

Millions of yen

Thousands of
U.S. dollars(Note 4)

Statutory tax rate
Increase (decrease) in taxes resulting from:
Expenses not deductible for income tax purpose (ex. Entertainment
expenses)
Income not included for income tax purpose (ex. Dividend income)Inhabitant per capita taxes
Tax credit for research expenses
Other
Effective tax rateSignificant components of deferred tax assets as of March 31, 2007 and 2006 are as follows:

2007

2006

2007

Deferred tax assets:
Reserve for bonuses
Reserve for sales rebates
Loss of supplies
Devaluation of financial instruments
Amortization of R&D
Amortization of long-term prepaid expenses
Pension and severance costs
Retirement benefits to directors
Allowance for bad debt
Unrealized gain of property, plant and equipment
Other
Total
Valuation allowance
Deferred tax assets¥ 459
230
122
50
241
325
1,734
144
—
2,568
358
6,234
(11)
6,223

¥ 467
328
135
84
182
522
1,959
121
76
2,568
94
6,542
(82)
6,460

$ 3,890
1,949
1,034
424
2,042
2,754
14,695
1,220—
21,763
3,034
52,831(93)
52,737

Deferred tax liabilities:
Deferred gain on sales of property, plant and equipment
Unrealized gain on other securities
Other
Deferred tax liabilities
Deferred tax assets, net(301)(1,592)(2)(1,896)¥4,326(322)(1,916)(1)(2,240)¥4,219(2,551)(13,492)(17)(16,068)$36,661

16. Related Party Transactions:

There is nothing to be noted according to the disclosure requirements in Japan for the year ended March 31, 2007.

31

17. Per Share Information:

Per share information for the years ended March 31, 2007 and 2006 is as follows:
U.S. dollars(Note 4)Yen

Net assets per share
Net income per share
Diluted net income per share

2007

2006

¥565.92
42.42
40.83

¥543.49
40.23
33.24

2007

$4.7960.359
0.346

Calculation for net income per share and diluted net income per share is as follows:

Millions of yen

For the years ended March 31, 2007 and 2006
Net income
Net income relating to common stock
Adjustment to net income(Share data)
Average number of share (thousand)
Additional number of share (thousand)Thousands of
U.S. dollars(Note 4)

2007

2006

2007

¥4,602
4,602—¥3,886
3,842—$39,000
39,000—108,486
4,241

95,53420,087——

18. Segment Information:

Information about operations in industry segments of the Group for the years ended March 31, 2007 and 2006 is as follows:
Millions of yen

Year ended March 31, 2007

I. Sales and operating income
Outside customers
Inter-segment
Total
Operating expenses
Operating income
II. Assets, depreciation andcapital expenditure
AssetsDepreciation
Capital expenditure

32

Pharmaceutical

Real estate

Total

EliminationorCorporate

Consolidated¥74,056—
74,056
67,229¥ 6,826¥ 2,359
303
2,662
1,375
¥ 1,287¥76,415303
76,71868,605¥ 8,113

¥

—
(303)
(303)
(303)
¥
—

¥ 76,415—
76,41568,301¥ 8,113¥64,966¥ 1,869¥ 2,186¥16,789¥ 727¥
51¥81,756¥ 2,596¥ 2,238¥19,144¥—¥—¥100,900¥ 2,596¥ 2,238

Millions of yen

Year ended March 31, 2006

I. Sales and operating income
Outside customers
Inter-segment
Total
Operating expenses
Operating income
II. Assets, depreciation andcapital expenditure
AssetsDepreciation
Loss on impairment
Capital expenditure

Pharmaceutical

EliminationorCorporate

Other*

Total¥73,215—
73,21566,089¥ 7,126¥ 2,325
303
2,628
1,394
¥ 1,233¥75,540
303
75,84367,484¥ 8,359

¥

—
(303)
(303)
(303)
—

¥75,540—
75,54067,181¥ 8,359¥63,205¥ 1,983¥268¥ 1,914¥17,588
¥
775
—
¥
52

¥80,794¥ 2,759¥268¥ 1,966¥17,944
¥
—
¥
—
¥
—

¥98,739¥ 2,759¥268¥ 1,966¥Consolidated* Other business fields consist of mainly real estate.

Year ended March 31, 2007

I. Sales and operating income
Outside customers
Inter-segment
Total
Operating expenses
Operating income
II. Assets, depreciation andcapital expenditure
AssetsDepreciation
Capital expenditure

Pharmaceutical

Real estate

Total

Thousands of U.S. dollars
EliminationorCorporate
Consolidated$627,593—
627,593569,737$ 57,847$ 19,992
2,568
22,55911,653$ 10,907$647,585
2,568
650,153
581,398$ 68,754$

—(2,568)(2,568)(2,568)$
—$647,585—
647,585
578,822$ 68,754$550,559$ 15,839$ 18,525$142,280$ 6,161$432$692,847$ 22,000$ 18,966$162,237$—$—$855,085$ 22,000$ 18,966

19. Subsequent Event:

There was no significant subsequent event to be noted herein as of June 28, 2007.

33

Report of Independent Auditors
To the Board of Directors
KAKEN PHARMACEUTICAL CO., LTD.

We have audited the accompanying consolidated balance sheets of KAKEN PHARMACEUTICAL CO., LTD. and its consolidated subsidiaries (collectively, the “Group”) as of March 31, 2007 and 2006 and the related consolidated statements ofincome, changes in net assets and cash flows for the years ended , all expressed in Japanese yen.
These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards, procedures and practices generally accepted and applied inJapan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement
presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of the Group as of March 31, 2007 and 2006 and the consolidated results of their operations and their cash
flows for the years ended in conformity with accounting principles and practices generally accepted in Japan (See Note 1).
The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader have been translated on thebasis set forth in Note 4 to the accompanying consolidated financial statements.

Hijiribashi Audit Corporation
Tokyo, Japan
June 28, 200734

Corporate Data

Corporate Philosophy

Business Philosophy: Three Joys

(As of March 31, 2007)

Bringing smiles to everyone

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

KAKEN

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

Global Business Development
Executive Director & General Manager
Masao Ishida
Creating joy as
Tel: 81-3-5977-5046
a company.
Fax: 81-3-5977-5133
E-mail: masao-ishida@kaken.co.jp We recognize our social

To continue realizing our corporate philosophy of “bringing smiles to everyone,” it is essential that Kaken
not only responds to changes in the times but also innovates and remakes itself.
Looking to create new drugs that are competitive on the global market, we will build Kaken into a

responsibility as a pharmaceuticalcompany with a high ethicalstandard and society’s trust.

company that makes our employees proud by providing much-needed, high-quality pharmaceuticals. Kaken
strives to advance to the 21st century as a company that maintains a strong presence and fulfills its
obligations to society as a pharmaceutical company.

ProfileContents

The origin of Kaken Pharmaceutical Co., Ltd. can be traced back to the

President’s Message

02

Institute of Physical and Chemical Research (Riken), established inSpecial Feature

04

Review of Operations

06

Commitment and Excellence

10

Fulfilling Our Social Responsibilities

12

1917. The Company started pharmaceutical business with full-scale
development of penicillin and streptomycin based on Riken’s own
technologies in 1948, and since then broadened the scope of its businessand drug development activities through merger and alliance. Kaken’s
prestige has soared accordingly.
While the Company has established strength in developing and

Board of Directors andCorporate Auditors

14

selling pharmaceuticals for orthopedics, it is now expanding its

Financial Section

15

involvement in other medical fields, such as hyperlipidemia and diabetes.

Corporate Data

35

The Company contributes to improving people’s health by cultivating its
own original technologies, engaging in joint development initiatives,
introducing new technologies and acquiring marketing rights.
As a fruit of its technology and product introduction, theCompany has been since June 2001 marketing Fiblast Spray consistingof Trafermin, a recombinant form of human basic fibroblast growth

Forward-Looking Statements

factor (bFGF) for the first time in the world, licensed from a US

This annual report contains forward-looking statements pertaining to the

bio-pharmaceutical company, Scios, in the area of regenerative medicine

Company’s business and prospects. These statements are based on current(wound healing medicine).

expectations due to unforeseen risks and uncertainties.

analysis of existing information and trends. Actual results may differ from

Company Information

Main Branches
Sapporo Branch
Sendai BranchTokyo-1 BranchTokyo-2 Branch
Nagoya Branch
Osaka-1 Branch
Osaka-2 Branch Financial Highlights
Consolidated
Hiroshima Branch
Fukuoka BranchFoundedCreating joy for
March 1917

patients.

Incorporated
We strive to create and offer
March
effective 1948
drugs that satisfy theneeds of patients and medical
professionals.

Paid-in Capital¥23,348 million

CommonStockCreating
joy for
Authorized: 360,000,000 shares
our employees.
Issued: 113,298,512 shares (As of Jul. 31, 2007)
Numberof Shareholders:
Our objective
is to become a 17,083
company with vitality andpresence whose employees enjoy
Employees (Non-Consolidated)
and take pride in their work.

Administration: 136
Sales & Marketing: 988
Production & Technology: 245
Research & Development: 271
Regulatory Affairs: 40

Thousands of
U.S. dollars (Note)

Millions of yen

2007

2006

2007

¥ 76,415¥ 75,540$ 647,585

8,113

8,359

68,754

4,602

3,886

39,00060,43354,637512,144

100,900

98,739855,085

For the years ended March 31,

Plant
Net Shizuoka
sales Factory

Operating income
Net Research
income Laboratories
Shizuoka Research Laboratories
Kyoto Research Laboratories
At March 31,
Production Technology Laboratories
Total net assets
Total
assets Office:Overseas
Kaken New York Office
Per share
data: Avenue, 24th Floor, New York, NY10167
245 Park
1-212-372-8910
Net Tel:income(Basic)Fax: 1-212-372-8970
Cash dividends (Non-Consolidated)
E-mail: ny@kaken.co.jp

Yen

U.S. dollars (Note)¥ 42.42¥ 40.23$ 0.359

17.00

15.00

0.144

%

Ratios:

ROE

8.00

7.76

—

Capital adequacy ratio

59.89

55.33

—

Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥118 = $1 effective on March 30, 2007.

35

Bringing smiles
smiles toto everyone
everyone
Bringing

28-8,Honkomagome
Honkomagome2-chome,2-chome,Bunkyo-ku,
Bunkyo-ku,Tokyo
Tokyo
28-8,
113-8650,JapanJapan
113-8650,
Tel:81-3-5977-5001
81-3-5977-5001
Tel:
Fax:81-3-5977-5131
81-3-5977-5131
Fax:
http://www.kaken.co.jp
http://www.kaken.co.jp

Annual Report
Report 2007
2007
AnnualYearEnded
EndedMarch
March31,
31,2007
2007
Year
PrintedininJapan
Japan
Printed