Annual Report 2003
Year Ended March 31, 2003

Bringing smiles to everyone

KAKEN

The origin of Kaken Pharmaceutical Co., Ltd. can be traced back to the Institute of Physical andChemical Research (Riken), established in 1917. The Company started pharmaceutical businesswith full-scale development of penicillin and streptomycin based on Riken’s own technologies
in 1948, and since then broadened the scope of its business and drug development activities
through merger and alliance. Kaken’s prestige has soared accordingly.
While the Company has established strength in developing and selling pharmaceuticals fororthopedics, it is now expanding its involvement in other medical fields, such as hyperlipidemia and diabetes. 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, the Company has been since June 2001
marketing Fiblast Spray consisting of Trafermin, a recombinant form of human basic fibroblast
growth factor (bFGF) for the first time in the world, licensed from a US bio-pharmaceuticalcompany, Scios, in the area of regenerative medicine (wound healing medicine).

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

Business Philosophy: Three Joys

KAKEN

conducts business by

Creating joy forpatients.
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.

CONTENTS
Consolidated Financial Highlights .......................... 1
President’s Message ................................................. 2
Special Report .......................................................... 4
Review of Operations .............................................. 7
Commitment and Excellence ................................. 11
Organizations ......................................................... 15
Consolidated Financial Review ............................. 16
Consolidated Financial Statements ........................ 18
Corporate Data, Board of Directors
and Corporate Auditors ..................................... 33

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

Consolidated Financial Highlights

Consolidated Financial Highlights
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries.

Thousands of
U.S. dollars (Note)

Millions of yen

2003

2002

2003

¥ 74,003
7,947
2,598

¥ 73,272
7,725
1,765

$616,692
66,22521,65040,771
108,516

39,018114,125

339,759904,300

For the years ended March 31,

Net sales ............................................................................................................
Operating income .............................................................................................
Net income ........................................................................................................
At March 31,

Total shareholders’ equity ................................................................................
Total assets ........................................................................................................

Yen

U.S. dollars (Note)

Per share data:

Net income (Basic) ...........................................................................................
Cash dividends ..................................................................................................

¥¥

27.11.
8.25.

18.74.
7.50.

$

0.226.
0.069.

ROE (%) .............................................................................................................
6.51.
4.70.
Capital adequacy ratio (%) ...............................................................................
37.57.
34.19.
.Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥120 = $1 effective on March 31, 2003.

73,27274,003

100,590106,240

121,803

114,125

108,516

30,59334,854

36,11239,01840,771(¥ millions)70,306

Shareholders' Equity(¥ millions)

71,801

Total Assets(¥ millions)
66,870Net Sales

99

00

01

02

03

99

00

01

02

03

99

00

01

02

03

Kaken Pharmaceutical Co., Ltd. 01

P r e s i d e n t ’s M e s s a g e

President’s Message

Business Climate and Performance
In fiscal 2002, ended March 31, 2003, Kaken Pharmaceutical re-enable us to prevail in the 21st century as an “independent company with a strong presence.”

ported consolidated net sales of ¥74,003 million, up 1.0% fromfiscal 2001. Operating income rose 2.9%, to ¥7,947 million, andTo this end, we are committed to the four core management
initiatives: pursuing world-class drug discovery research, strength-

net income jumped 47.2%, to ¥2,598 million. Our ability to secure an earnings increase greater than the revenue gain stemmed

ening our domestic sales base, maintaining high quality and productivity, and strengthening our financial foundation. This en-

mainly from a significant decrease in revaluation loss on investment securities, which were substantial in the previous fiscal

tails clarifying our areas of specialization in R&D, sales, andproduction, and striving to reach our targets by reinforcing ouryear.
Early in the year under review, health authorities decided oncapabilities in each area. Specifically, we are targeting consolidated net sales of ¥77,000 million, operating income of ¥10,000

a general outline of reforms to the Japanese healthcare system.
Such reforms promise to have a major impact on Japan’s phar-million, and ROE of 8% by the final year of the plan.
The four core management initiatives are outlined in moremaceutical industry. Decisions made included reducing National
Health Insurance (NHI) price standards for the industry, lower-

detail below.

ing medical fees charged by medical institutions, and subjecting
patients to an increase in health insurance co-payments.
In April 2002, the NHI price was cut by an average of 6.3%
across the industry. In October 2002, the Health Insurance Law
was amended, and medical care system for the elderly was reviewed. As a result, the elderly now have to bear 10% of their
medical costs, which has led to a decline in the number of patients seeking medical care from medical institutions. Furthermore, in April 2003 the share of medical costs borne by individuals covered by health insurance was raised to 30%. All of thesemeasures have served to make Japanese people more consciousof medical costs and intensified the competitive environment
within the pharmaceutical industry.
NHI price of pharmaceuticals made by Kaken declined anaverage 7.3%, which was higher than the industry average andthus placed the Company in a difficult situation. The slight 1.0%
increase in net sales was attributable mainly to higher sales mainlyof new products, such as Fiblast Spray and Lipantil. By contrast,
we were unable to generate higher sales of existing products,
such as Artz and Procylin, due to price reductions and otherfactors.
For the year under review, the Company declared annual(1) Pursuing advanced drug discovery research
We are broadening and strengthening our R&D activities to expedite the development of new drugs that meet the needs of
medical professionals in the field. Our aim is to discover new
drugs in-house in the Company’s key areas of inflammation andimmunology, infectious diseases (systemic mycosis), and endocrine and metabolic diseases. We will reinforce our R&D activities through collaborative initiatives with other organizations andthrough the introduction of leading-edge technologies.
(2) Strengthening domestic sales
We will establish a firm sales base focusing on orthopedics andinternal medicine, primarily lipidemia and diabetes. We will also
strengthen our expertise in other remarkable fields, notably in
Fiblast Spray, a new product that stands at the vanguard of regenerative medicine. In the field of internal medicine, we will
expand the market potential for Lipantil, a drug used to treat
hyperlipidemia.
(3) Maintaining high quality and productivity
We are committed to further improving quality and reducing
production costs, while expanding consignment production andother initiatives in the future.

cash dividends of ¥8.25 per share, up ¥0.75 from the previous
year. We plan to use retained earnings to upgrade R&D invest-(4) Strengthening our financial foundation
In addition to expanding revenues, we aim to increase operat-ments and reinforce our financial foundation.

ing income by implementing various rationalization and efficiency measures, such as reducing labor costs, reviewing non-Five-Year Management Plan
We are currently implementing a five-year management plan thatprofitable segments, reassessing our agrochemical and animal
health businesses, and outsourcing production and distribution.

began in April 2001 and will conclude in March 2006. Under theplan, we intend to establish a firm business foundation that willIn the process, we plan to fortify our financial foundation and toinvest in further innovation and progress.

02 Kaken Pharmaceutical Co., Ltd.

P r e s i d e n t ’s M e s s a g e

Corporate GovernanceIn the previous fiscal year, we introduced an corporate officer
system in order to expedite decision-making and clarify supervisory and business execution functions. We will continue strengthening the business execution authority of our executive officers
while reducing the number of directors.
Following an amendment to the Commercial Code in calendar 2002, we are now permitted to choose between an auditorstyle or committee-style management format. While we fully recognize that reinforcing the control and auditing functions is an
important element of corporate governance, we have chosen
our existing format—Board of Directors, corporate auditor system, and executive officer system—which we believe is criticalto the functional operation of our company.

Future Plans
We believe that the pharmaceutical industry will continue to be
confronted by harsh competition, symbolized by such factors asincreased product development risk, the entry of foreign-owned
pharmaceutical companies into the market, and measures to curb

broaden the authority of executive officers and give them more
flexibility in the execution of their duties. These initiatives re-

medical expenditures. The review of the medical system for theelderly and the increase in patients’ co-payment for health insur-

flect our commitment to being an “independent company with astrong presence.”

ance are underscoring huge changes in our business environment. In response, we will raise the ratio of drugs in the fields of

For the fiscal year to March 2004, we plan to declare anannual cash dividend of ¥9.00 per share, with an emphasis on

orthopedics and internal medicine, primarily for lipidemia anddiabetes, where we hold a high market share. Using the exper-

flexibility depending on our business performance. By providing more and more patients with superior drugs, we intend totise we have gained in developing and selling these drugs, wewill raise the number of drugs handled by our company, includ-

help reduce total medical expenditures by shortening the lengthof hospital stays. In these ways, we will continue our contribu-

ing those developed by other firms.
Amendments made to the Pharmaceutical Law have led to ation to enhancing patients’ quality of life.

relaxation of regulations in some areas. For example, two years
from now it will be possible to consign all production to phar-

June 27, 2003

maceuticals manufacturers. By contrast, drugs sold on the market are now subject to even tighter safeguards with respect tothe quality and safety. We prefer to view these changes as windows of new business opportunities, and we will respond by
maximizing corporate value and pursuing reforms to our administration and corporate consciousness.
We will conduct proactive marketing and sales activities,
shorten R&D lead times, and continue seeking to improve our

Shiro Inui
President

income structure. Maximizing corporate value is an importantbusiness challenge, and to this end we are carrying out comprehensive reforms to our administration and corporate consciousness. While reducing the number of executives, we will also

Kaken Pharmaceutical Co., Ltd. 03

Special Report

Special Report

Successful New Products
Fiblast Spray: At the vanguard of regenerative medicine
A protein called bFGF (Trafermin) is a cell growth factor existing in minute quantities in the human body. Using
this protein’s function, Kaken developed Fiblast Spray, the world’s first regenerative drug. Fiblast Spray has beenshown to stimulate the growth of numerous tissue cells, heal damaged tissue, and boost the formation of new
blood vessels. Its effectiveness stems from its power to form new blood vessels, which is garnering widespreadrecognition. This is due to empirical evidence of Fiblast Spray’s ability to promote the efficient supply of oxygenand nutrients, its effect in the treatment of skin ulcers, and the fact that new skin forms in two to three weeks
when applied to bed sores or tissue damaged by burns or ulcers.
The effectiveness of Fiblast Spray was hailed soon after its market launch in June 2001. Today, it is used by all
university hospitals, as well as many other hospitals and medical clinics. As a state-of-the-art drug used in regenerative medicine, Fiblast Spray is steadily penetrating the market, and since November 2002 it has held theleading market share among skin ulcer therapeutic agents.

What’s bFGF?
Extra Cellular Matrix(heparan sulfate)bFGF is stored ubiquitously in extra
cellular matrix (ECM) of tissues andreleased when the tissues undergo somedamage like trauma and ischemia, and it
works as a potent regeneration agent.

DamageVariety of Cells with FGFR
Epithelial Cell, Vascular Endothelial Cell,
Vascular Smooth Muscle Cell, Osteoblast,Chondrocyte, Neuronal Cells etc.

bFGF
FGF receptor (FGFR-1 to 4)

Neovascularization“Establishment of Lifeline”

Proliferation

Tissue Regeneration
Dermal Ulcers, Bone Fractures, Periodontitis,
Myocardial Infarction etc.

04 Kaken Pharmaceutical Co., Ltd.

Special Report

Expanding applications for Fiblast Spraydentists it has the potential to reach a patient base consisting of

Fiblast Spray is well recognized as a skin ulcer application that

more than 80% of Japanese adults (Phase II of clinical trials now
in progress).

produces new blood vessels containing benign granulations andas a wound-healing agent. We are conducting research and development in anticipation of expanding its application to bone
fractures and osteoporosis, periodontitis, diabetic ulcers, and postoperative ulcers.
Clinical trials are being held for its application as a gel for

Expanding applications of Fiblast Spray to other areas ofregenerative medicine has vast hidden potential. This includes
vascularization of blood vessels in the areas of peripheral circulation and severe angina, treatment of osteoarthritis, propagation of stem cells, and nerve regeneration.

treating bone fractures and osteoporosis, where there is an estimated market worth ¥10.0 billion for the treat-

Market Expansion

ment of two million patients annually (Phase II of clinical trials now

On the basis of our success in Japan, we have concluded a sales
agreement with Hanmi Pharmaceutical Co., Ltd., a South Korean

in progress).
We are also developing ap-

pharmaceutical manufacturer. The market for wound healing
agents in South Korea is worth ¥5 billion annually, and we ex-plications in the field of periodontics. Here, Fiblast Spraypect to gain a 40% share of that market. We have plans forfurther expansion and are investigating launching Fiblast Sprayhas enormous market possibilities; if adopted by ordinary

onto the Taiwanese and Chinese markets.

Increased Production of Mentax, a Kaken Original
Mentax, a topical antifungal agent, received approval for over-the-counter (OTC) sales in the United States in
December 2001. Sales of Mentax have surged as a result. In Japan too, we obtained approval to manufacture Mentax
as an alternative OTC remedy for athlete’s foot, and began shipments and sales in January 2003 via other companies.
The active ingredient of Mentax is butenafine hydrochloride, which inhibits the reproduction of trichophyton, afungus that causes athlete’s foot.

Strengthening Antifungal R&D: Collaboration with Elitra on Genomics Based Drug Discovery
In February 2003, Kaken concluded a joint research and development agreement with the Elitra Pharmaceuticals,Inc., of the United States, covering R&D on genomic drug discovery for a new wide-spectrum systemic mycosis
therapeutic agent. Elitra Pharmaceuticals will conduct screening based on its proprietary vital fungal gene information, while Kaken will undertake pre-clinical trials.
Kaken has obtained exclusive sales rights to sell antifungal agents developed through the joint R&D alliance inJapan and the rest of Asia, as well as Europe.

Kaken Pharmaceutical Co., Ltd. 05

Special Report

New Drug Development Pipeline
In new drug development, during the year we applied for approval to manufacture the diagnostic drug KP-102Dand the antifungal Mentax Spray (new agent form).
Clinical trials are continuing for KCB-1B, a bFGF-related drug that promotes the healing of bone fractures;
KCB-1D, used in the treatment of periodontitis; KP-102LN, used to treat pituitary dwarfism; KN-48, for thetreatment of postherpetic neuralgia; and SPK-843, a drug used in the treatment of systemic mycosis. We alsobegan clinical trials for TRK-100STP, a new form of Procylin with added effects for use in treating chronic artery
occlusive disease. Meanwhile, in the area of drug discovery, we are compiling data with a view to commencing
clinical trials in the autumn of 2003 of KP-496, a drug for treating bronchial asthma. Research is also continuing into drugs for treating inflammatory diseases, osteoporosis, and systemic mycosis.
In addition, we have entered into an agreement with Elitra Pharmaceuticals for the collaboration on a drugfor treating systemic mycosis using new genomic information.
N.K. Curex Co., an affiliate of Kaken, is developing SNK-860, for treating diabetic neuropathy. In the year
under review, we decided to formulate a new development strategy following trials in the United States conducted by Sankyo Co., Ltd.
In other highlights, we are currently in Phase II of clinical trials of KP-102LN, which is used to treat pituitary
dwarfism in persons with stunted growth. In the year ending March 2010, we plan to launch on the market a newform of this drug that promotes the release of endgenous growth hormones.

Product

Development Stage

Category

Launch Indication

Remarks

KP-102D (GHRP-2)

NDA

GH secretagogue

2004

Hypothalamo-pituitary function
Diagnostic

Developed in-house

Mentax Spray

NDA

Butenafine

2004

Antifungal

New formulation, jointly developed with Hisamitsu
Pharmaceutical Co., Inc.

KCB-1B
KCB-1D

Phase II
Phase II

bFGF
bFGF

2009
2009

Intractable bone fractures
Periodontitis

New indication
New indication

KP-102LN (GHRP-2)

Phases II

GH secretagogue

2009

Short stature

Developed in-house

TRK-100STP (Procylin)

Phase II

Orally active prostacyclin

2008

ASO

New indication: Jointly developed with
Toray Industries, Inc.

KN-48

Phase I

Lidocaine patch

2010

Postherpetic neuralgia

Developed in-house

SPK-843
KP-496

Phase I
Phase I

Polyene antibiotic
LT/TX dual inhibitor

2009
2010

Systemic mycosis
AsthmaDeveloped in-house
Developed in-house

SNK-860

Under consideration
for redevelopment

ARI

2005

Diabetic neuropathy

Jointly developed with N.K. Curex Co., Ltd. and
Sanwa Kagaku Kenkyusho Co., Ltd.

06 Kaken Pharmaceutical Co., Ltd.

Review of Operations

Review of Operations

Pharmaceuticals
Kaken is steadily expanding its fields of medical involvement and increasing sales of a broad spectrum of mainstay products—from Artz , an anti-osteoarthritic, to Procylin , used for treating chronic artery occlusive
disease, Adofeed , a pain-relieving plaster, and Lipantil, an anti-hyperlipidemic. We are also actively promoting Fiblast Spray , our new wound-healing agent that has garnered much attention in the field of regenerative medicine, as well as Seprafilm , a post-operative anti-adhesive.
With respect to Cytotec , an NSAIDs-induced gastric ulcer preventive, Kaken has obtained exclusive sales
rights for Japan from Pharmacia Corporation and now handles all sales of this product.
We recently commenced co-promotion of Zyloric tablets, used for treating hyperuricaemia, and we are
expanding sales channels for Lipantil , a lipid lowering agent which is also effective in reducing uric acidlevels.

Agrochemicals and Animal Health Products
Kaken decided to withdraw from drug discovery R&D related to agrochemicals and animal health products beginning in April 2003. Production activities
will continue at new bases established in Asia.Withdrawal from drug discovery
and research activities in these segments will facilitate our effort to strengthen
R&D on pharmaceuticals for medical treatment.

Kaken Pharmaceutical Co., Ltd. 07

Review of Operations

Pharmaceuticals

Artz (anti-osteoarthritic) Artz is made of ultra-pure sodium hyaluronic acid extracted from rooster combs. Hyaluronic acid is a naturally occurring,biocompatible polymer found throughout the body, particularly in synovial fluid.
A viscoelastic supplement, Artz replaces the diseased synovial fluid found inosteoarthritic knees and restores the physical properties and elastoviscosity ofthis diseased synovial fluid. It is injected directly into the knee joint by the physician.

Procylin (Prostacyclin analog) Procylin is an orally active and chemically stable prostacyclin analog (Beraprost) that directly acts on the PGI2 receptor to inhibit platelet aggregation. It is already in wide clinical use for treating
chronic artery occlusive disease. In September 1999, Procylin was approved forthe additional indication of pulmonary hypertension, which cannot be cured
with most remedies currently in use.

Adofeed (pain-relieving plaster) Adofeed is a pain-relieving plaster containing Flurbiprofen as its active ingredient, which is absorbed throughthe skin. Applied to the affected area twice a day, Adofeed has proven effectivein treating osteoarthritis, tennis elbow, muscle pain, and other inflammatory diseases.

Mentax (topical antifungal) Mentax is a topical antifungal with
Butenafine as its main ingredient. An original Kaken product, Mentax is soldworldwide, including in the U.S. through Bertek/Mylan and in Canada through Schering-Plough. In
December 2001, Mentax was approved as OTC Drug in the U.S., which is sold under the trade name of
Lotrimin Ultra through Schering- Plough.

Lipantil (anti-hyperlipidemic) A fibrate type of lipid lowering agent, Lipantil containing
Fenofibrate lowers both triglyceride and cholesterol. Originally developed by Fournier in France, Lipantil
was sublicensed to Kaken in 1996 from a Japanese licensee, Grelan Pharm. Kaken launched Lipantil on
the Japanese market in May 1999.

08 Kaken Pharmaceutical Co., Ltd.

Review of Operations

Seprafilm (post-operative anti-adhesive) Seprafilm is a sheettype, bioabsorbable, anti-adhesive, biomaterial consisting of hyaluronic acid and
CMC. This unique product, licensed from Genzyme Corp., was already in use in
the gynecological field in Japan. In June 1999, it received additional approval foruse in preventing post-operative abdominal adhesions.

Fiblast Spray (wound healing agent) Consisting of Trafermin, ahuman recombinant form of bFGF, this is a new type of drug for treating bed
sores and other skin ulcers. Fiblast Spray strongly stimulates the growth of endothelial cells and fibroblasts. It also accelerates wound healing by producing highly
vascularized granulation tissues. Introduced by Scios Inc., Fiblast Spray was firstdeveloped by Kaken, which commenced sales in June 2001.

Ebrantil ( α1-blocker) Ebrantil is a specific α1-adrenergic receptor antagonist (Urapidil) for
neurogenic dysuria. Clinical studies have shown that twice-daily administration of Ebrantil capsules significantly improves difficulty in urination caused by central or peripheral neural disorders without causing significant hypertension. It was approved for this indication in November 1999. Ebrantil already has
been in use for hypertension and dysuria caused by BPH (Benign Prostatic Hyperplasia).

Cytotec (ulcer preventive) An ulcer preventive whose active ingredient is Misoprostol, Cytotec
is effective for NSAIDs - induced gastric ulcer. It was developed by Searle (now Pharmacia Corporation),and has been sold by Kaken since 1995.

Norinyl T28 (Low-dose oral contraceptive) Norinyl T28 is a Sunday-start-type, lowdose oral contraceptive pill containing a combination of two hormones: norethisterone and ethinylestradiol.
Incidence of metrorrhagia, which is often observed by users of this type product, is low. Norinyl T28 wasdeveloped by Monsanto Company and Daiichi Pharmaceutical Co., Ltd. and received approval in June
1999. In September 1999, Kaken launched this product into the Japanese market. Kaken is currently
marketing Norinyl T28 in collaboration with Morinaga Milk Industry Co., Ltd.

Kaken Pharmaceutical Co., Ltd. 09

Review of Operations

Eyecare 0.1 (Eye drop for corneal disorders) Hyaluronic acid, a naturally occurring,biocompatible polymer, was first discovered in the eye and has proved to promote to healing cornea
epithelium wounds. It is also a major component of Kaken’s Artz for the treatment of osteoarthritis.
Eyecare 0.1 eye drop solution, containing ultrapure hyaluronic acid (0.1%), was approved in March 2000,
for the treatment of corneal disorders, including dry eyes. It was launched into the Japanese market in
July 2000 and co-marketed with Teika Pharmaceutical Co., Ltd. under the same brand name.

Mirol (Anti-glaucoma) Consisting of Levobunolol (0.5%), Mirol is a βblocker for treating glaucoma and ocular hypertension. Mirol is used once daily
as eye drops without heavy viscosity. This product was launched in February
2001. Originally developed by Allergan Inc. in the U.S., Mirol was sublicensed to
Kaken from a Japanese licensee, Kyorin Pharmaceutical Co., Ltd.

Agrochemicals and Animal Health Products
Ag r o che m i c a l s

Polyoxin (Fungicide) Polyoxin is a fungicide produced by a certain type of bacterium isolated
from the soil in the Aso region of Japan. It is particularly effective for treating damage caused by alternalia
in apple, pear and other fruit trees, as well as flowering trees and tobacco plants. It is also effective
against botrytis rot and powdery mildew. With low toxicity, it does not damage crops and is highly safe
for use.

Pentoxazon (Herbicide) Pentoxazon is a new type of paddy herbicide. It is effective against
first-year weeds and has long-lasting effects. It is highly safe for use in rice paddies and can be used
before, during or after transplantation.

Ani m a l H ea l t h P rodu c t s
Salinomycin (Anti-coccidiosis in fowls) Salinomycin was developed originally by Kaken.
It is sold in Japan, Europe, North America, Asia and other regions. It is the most widely used agent in theworld to prevent and treat coccidiosis, a contagious disease that begins when protozoans become parasitic in the intestinal tracts of fowls. When transmitted, coccidiosis causes stunted growth and even death.
The disease can be known to cause major economic damage in modern, large-scale chicken farms.

Colistin (Antibiotic) Colistin is used to prevent diseases caused by Gram-negative bacteria, suchas colon bacillus and salmonella. Colistin is highly safe and is one of the few drugs used against Gramnegative bacteria. It has found widespread use. It is sold in Japan, European and Asian countries.

10 Kaken Pharmaceutical Co., Ltd.

Commitment and Excellence

Commitment and Excellence

Research and Development

Discovery Research
We are committed to strengthening and broadening our R&D
activities. To this end, we are reinforcing in-house drug discovery research and adopting a multifaceted approach to cultivating new R&D themes. At the same time, we will actively pursue
joint research and introduce new technologies, both in Japanand overseas, in order to pinpoint and capitalize on lucrative
opportunities.
Drug Discovery Research Laboratories are located in Kyoto,
the ancient capital of Japan. There, our dedicated researchers
constantly study the latest scientific information and technologies.
Our main in-house drug discovery research themes are inflammation and immunology, endocrine and metabolic diseases,

fective R&D and minimize unforeseeable risks pertaining R&D

and infectious diseases, especially systemic mycosis. In endo-

investments.

crine and metabolic diseases, in particular, drugs for treating

Our laboratories are exploring a number of innovative tech-osteoporosis, diabetes, and obesity appear very promising fornologies in collaboration with leading academic scientists and

Kaken in light of Japan’s aging society.

pharmaceutical companies. As a result, our expertise has ex-

Computer-aided drug design (CADD) is an important part ofour rational approach to drug discovery. Our medicinal chem-

panded to the fields of asthma, endocrinology, systemic mycosis, cardiology, and oral care.

ists continue to explore chemical candidates synthesized in vari-

Our researchers are highly motivated and dedicated to ex-

ous projects in order to design a superior peptidemimetic focus-

cellence at every phase of drug discovery research. Moreover,ing laboratory.

we have a refined education program that is producing many

To establish a strong presence in genomic approach andtalented young researchers.

other leading-edge technologies, we are actively involved in joint

Since 2001, we have conducted joint R&D on drugs for treat-

research programs with other laboratories and academic institu-

ing diabetes and obesity with IDD Inc. of the United States. In

tions. We enter licensing agreements with these entities as ap-

addition, in February 2003 we concluded an agreement with

propriate. These collaborations are designed to ensure more ef-

Elitra Pharmaceuticals covering R&D on genomic drug discovery for treating systemic mycosis. Our aim is to develop a new
drug for the effective treatment of mycosis on the basis of Elitra’s
unique “vital gene information” related to fungi.

Kyoto Research Laboratories

Kaken Pharmaceutical Co., Ltd. 11

Commitment and Excellence

Research and Development

Development Research
Kaken’s Development Research Laboratories are located in
Shizuoka Prefecture. There, we undertake a wide range of research activities in a stimulating environment. Our objective here
is to develop candidate compounds identified during discovery
research into commercially acceptable new drugs. Our drug development research covers pharmacokinetics research, drug formulation, safety evaluation, and quality assurance.
The Company’s drug development activities are highly acclaimed. We have received the Okochi Memorial Prize five times
in the past. This is the most respected prize in Japan for companies and researchers who have contributed to innovative drug

Shizuoka Research Laboratories

production.
Our Pharmacokinetics Research Group uses the latest equip-

drug delivery systems (DDSs) and pinpoints technologies toment and technologies to study the absorption, distribution,

develop optimal dosage forms. Our Safety Evaluation Group

metabolism, and excretion of drugs in order to determine theirstrictly evaluates the safety of candidate compounds. Our Qual-

effectiveness and safety in the body. Our Drug Formulation Group

ity Assurance Group works to ensure that information generated

studies general pharmaceutical designs and formulations using

in all Kaken laboratories is of the highest quality and reliability.
To expedite research and development, we will pursue joint
initiatives on a global basis in the areas of joint development,
introduction of new technologies, and technology transfer. We
will also actively outsource the functions of basic research andclinical trials.
In 2003, Kaken’s scientists were awarded for the Most
Outstanding Thesis of an innovation development from theAcademy of Pharrmaceutical Science and Technology, Japan(APSTJ). “Research on Rapidly-disintegrating Tablets Using theSurface-modifying Method.”

12 Kaken Pharmaceutical Co., Ltd.

Commitment and Excellence

Medical Representative System

Head OfficeKaken’s medical representatives (MRs) provide doctors with up-

were 66 sub-branch offices nationwide. We are also increasing

dated information on the Company’s products and respondthe number of MRs, with plans to have 700 of them in place bypromptly to requests from medical professionals. Our MRs also

March 2005.

gather medical information related to the safety and effective-

The measures outlined above have mainly been directed atness of our drugs and provide feedback from customers to thehospitals due to the success of past MR activities in the area of

relevant departments.

orthopedics. With respect to internal medicine, there are numer-

Our MRs also play a key role in our R&D and production

ous small medical clinics, the majority of which are serviced by

activities through their communication with doctors and patients.

drug wholesalers. In the future, we must strengthen sales activi-

Being on the front line, they obtain valuable information fromties aimed at such medical clinics by upgrading our lineup of

doctors’ offices and other medical institutions. In addition, theydrugs for internal medicine. These include the hyperlipidemic

help us develop user-friendly package designs and product de-agent Lipantil and a drug for treating diabetic neuropathy that is

scriptions by incorporating the suggestions of medical profes-

currently consideration for redevelopment.

sionals.

By raising the numbers of sub-branch offices and MRs, we

We are currently reviewing and strengthening our marketing

hope to further reinforce our stronghold in the market for ortho-and sales system in order to expand sales of our pharmaceutical

pedics treatments. We also aim to expand market share in the

products. The number of sub-branch offices are being increased

areas of surgical medicine and internal medicine with drugs forso that medical representatives (MRs) can work closely with lo-

treating diabetes and lipid metabolism.

cal communities and provide up-to-date information on our products that meet the needs of medical professionals. During theterm under review, we upgraded offices in major regions aroundthe country to sub-branch status, and by fiscal year-end there

Kaken Pharmaceutical Co., Ltd. 13

Commitment and Excellence

Production and Quality Control

Our production facilities in Shizuoka Prefecture are on the eastbank of the Ohi River, near Mt. Fuji. These facilities are among
the first in the industry to incorporate factory automation systems. They comply with Good Manufacturing Practices (GMP)of Japan, which stipulate requirements for drug manufacturing
Shizuoka Factoryand quality control.
While adhering to these requirements, we also maintain evenstricter in-house regulations for our production facilities. The

Our production facilities are equipped with the latest tech-quality of products for export is governed by GMP regulations

nologies for protecting the environment. In order to boost qual-

in the United States, which were formulated by the U.S. Food

ity and productivity, we are currently reviewing work proce-and Drug Administration (FDA).

dures and reevaluating products and standards. Our overriding
objective here is to reduce the ratio of cost of sales to net sales.
At the same time, we are using our specialist manufacturingrelated expertise to invest in production and packaging lines sothat we can accept orders for consignment production in the
future.
We are increasing consignment production of agrochemicals
and animal health products overseas. We are also working to cut
costs by outsourcing distribution.

Environmental Protection Activities
As a pharmaceutical manufacturer involved in life sciences, we

incineration, and land reclamation, while reducing power con-are committed to fulfilling our social responsibilities and con-sumption and otherwise saving energy. They also work to monitor

tributing to people’s well-being. Another important management

and control the volumes of chemical used, minimize discharge

priority is to protect the global environment and help realize aof harmful substances into the atmosphere, and improve theprosperous society.

quality of effluent. In addition, staff at our Shizuoka facilities

We pursue proactive environmental protection activities at
our Shizuoka production and R&D facilities. Having obtained
ISO14001 certification, these facilities work to minimize waste,

14 Kaken Pharmaceutical Co., Ltd.

strive to develop products and production technologies that haveminimal impact on the environment.

Organizations

Organizations

General Meetingof Stockholders

Managing
Directors
Meeting

Board of Directors

President

Corporate Auditors

Board ofCorporate Auditors

Corporate Planning & Coordination Department
Legal Affairs Department
Legal Affairs
Intellectual Property
General Affairs Department
Human Resources Department
Education & Training
Accounting & Finance Department
Purchasing Department
Subsidiaries Coordination Department
Construction & Maintenance Department
Information System Department
Regulatory Affairs Department
Global Business Development Department
International Business & Administration - NY OfficeLicensing & Business Development
Agrochemicals & Animal Health Products,
Planning & Coordination Department
Agrochemicals & Animal Health Products Department
R&D Division
R&D Strategy Department
FGF Product Team
KP-102 Product Team
Central Research Laboratories
Research Planning & Coordination Department
Drug Discovery Research Laboratory
Chemistry Laboratory
Pharmacology Laboratory
Pharmacokinetics Laboratory
Drug Formulation Laboratory
Safety Research Laboratory
Administration Department of Clinical Development
Clinical Development Department
Post Marketing Surveillance Department
R&D Quality Assurance Department
R&D Administration Center
Marketing & Sales DivisionMarketing Planning & Coordination Department
Marketing & Sales Department
Sales Promotion & Information Service Department
Promotion & Information
Drug Information Service
Domestic Nine (9) Marketing & Sales Branches
Tokyo Administrative Office Center
Osaka Administrative Office CenterTokyo Sales Promotion & Information Service Center
Osaka Sales Promotion & Information Service Center
Production Planning & Coordination Department
Shizuoka Factory
Quality Assurance Control Department
Production Technology Laboratories

Kaken Pharmaceutical Co., Ltd. 15

Consolidated Financial Review
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries.

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

Millions of yen

2003

2002

¥ 74,003
7,947
2,598

40,771
108,516

2001

2000

1999

2003

¥ 73,272
7,725
1,765

¥ 70,306 ¥ 71,801 ¥ 66,870
6,805
5,925
5,487
1,999
1,989
647

$616,692
66,22521,65039,018114,125

36,112
121,803339,759904,300

For the years ended March 31,

Net sales ......................................................
Operating income .......................................
Net income ..................................................
At March 31,

Total shareholders’ equity ..........................
Total assets ..................................................

34,854106,240

30,593
100,590

Yen

U.S. dollars (Note)

Per share data:

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

¥ 27.11.
8.25.

¥ 18.74.
7.50.

ROE (%) .......................................................
Capital adequacy ratio (%) .........................
.

6.51.
37.57.

4.70.
34.19.

¥ 21.78. ¥ 21.68.
7.50.
7.50.
5.63.
29.65.

6.08.
32.81.

¥7.06.
7.50.

$

0.226
0.069

2.11.
30.41.

Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥120 = $1 effective on March 31, 2003.

(¥ millions)

Sales of Pharmaceuticals (Non-Consolidated)
Artz

Sales

Share

Change¥17,881

27.7%- 4.5%

Procylin

9,396

14.5

- 12.8Adofeed

7,163

11.1

- 14.2

Fiblast Spray

2,880

4.5

+52.5

Lipantil

2,693

4.2

+ 9.6

Seprafilm

2,677

4.1

+27.8

Mentax

2,287

3.5

- 1.0

Cytotec

2,209

3.4

+64.0

Others17,403

26.9

+ 8.1

¥64,589

100.0

+ 0.8

Total

Note: The sales figures above relate to Japanese medical institutions only.

16 Kaken Pharmaceutical Co., Ltd.

Revenues and Earnings

With around 20% of its workforce scheduled to retire over the

In fiscal 2002, ended March 31, 2003, consolidated net sales in-next several years, Kaken is committed to improving business effi-creased 1.0%, due mainly to stagnating sales of existing products

ciency and streamlining operations.

stemming from reductions in NHI prices.
During the year, we focused on promoting sales of mainstay

Consolidated Cash Flows

products—such as Artz, Procylin, and Adofeed—as well as new of-Cash and cash equivalents at the end of fiscal 2002 stood at ¥13,247

ferings destined to become part of our next-generation lineup in the

million, down ¥3,163 million from a year earlier. This resulted mainly

future. Although we were unable to increase sales of existing main-from redemption of convertible bond amounting to ¥ 18,491 mil-stay products, such new items as Fiblast Spray and Lipantil steadilylion.

penetrated the market, with sales growing accordingly. In addition,

Net cash provided by operating activities totaled ¥8,197 million,

the Company took over unified sales of Cytotec, which also contrib-

up from ¥3,142 million increase in the previous year. This improve-uted to higher revenues.

ment resulted mainly from ¥1,463 million in income before income

Although unit sales of Artz increased, this was not sufficient tooffset a decline in value terms stemming from reductions in phar-taxes and minority interests, as well as a decrease in notes andaccounts receivable-trade.

maceutical prices, causing year-on-year sales to fall slightly. Sales of

Net cash used in investing activities amounted to ¥4,254 million,

Procylin and Adofeed also declined due to lower pharmaceuticalup from ¥2,004 million in fiscal 2001. This was mainly due to acqui-prices, as well as intensifying competition and depressed demandsition of investment securities.

from the elderly, who now have to bear 10% of their medical costs.

Net cash used in financing activities was ¥7,106 million, down

In the year under review, more and more medical professionals

from ¥8,669 million compared to the year before. This was the net

adopted Seprafilm hyaluronic acid film, greatly boosting sales. The

result of a number of factors, including ¥9,723 million in proceeds

Company’s promotion of Seprafilm in gastrointestinal surgery, whichfrom issuance of yen-denominated convertible bonds in the Swissis now covered by health insurance, added to the appeal of thismarket and redemption of convertible bonds totaling ¥18,491 mil-product. We also enjoyed an increase in royalty income related tolion.

Fiblast Spray and Mentax.
In the agrochemicals and animal food additives segment, sales

Performance Indicatorsof the herbicide Pentoxazon increased, but sales of Polyoxin, a fun-In the year under review, the ratio of operating income to net sales

gicide, declined due to tighter controls on methods of using agricul-

was 10.8%, representing the fifth year of successive increases. Net

tural chemicals in the wake of amendments to the Agricultural Chemi-

income per share totaled ¥27.11, up 44.7% from the previous year.

cals Regulation Law, as well as problems related to unregistered

Return on equity (ROE) rose 1.8 points, to 6.5%.

agricultural chemicals.

The ratio of shareholders' equity to total assets at fiscal year-end

Sales of agrochemicals and animal food additives Eustin andwas 37.6%, up 3.4 points from a year earlier, owing to the redemp-

Colistin increased in terms of export volume, but severe price-cut-tion of convertible bonds, an increase in retained earnings, andting in overseas markets caused sales in value terms to decline.

other factors. Shareholders’ equity per share rose ¥19.01, to ¥431.91.

As a result, sales of pharmaceuticals, including medical devices,
agrochemicals and animal food additives in the year under review

Outlook

totaled ¥70,930, a year-on-year increase of 0.9%.

In the fiscal year ending March 31, 2004, the Company expects net

In other areas, revenue from renting our real estate holdings

sales to remain largely unchanged, or perhaps increase slightly, fromremained largely unchanged. Consequently, other businesses grew

the year under review. Revenues will be constrained by a continua-

2.3%, to ¥3,073 million.

tion of the current harsh business climate and the lack of new drugs

Operating income rose 2.9%, to ¥7,947 million, owing largely toincreased sales of new products. Although we reported a ¥1,283

scheduled for release. We also project a modest increase in earnings.

million loss in equity of NK Curex Co., an affiliate, net income jumped

The Company plans to declare annual cash dividends of ¥9.00

47.2%, to ¥2,598 million, owing primarily to the absence of large

per share, up ¥0.75 from fiscal 2002. We are also targeting ROE ofrevaluation loss on investment securities, which the Company in-

8.0% or higher by the year to March 2006.

curred in the previous fiscal year.

During the next fiscal year, we plan to buy back a maximum of
2 million shares in treasury stock amounting to ¥1,000 million, equivalent to 2.1% of total shares outstanding.

Kaken Pharmaceutical Co., Ltd. 17

Consolidated Financial Statements
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries.

Consolidated
Balance Sheets
As of March 31, 2003 and 2002
Thousands of
U.S. dollars (Note 3)

Millions of yen

2003

2002

2003

¥ 13,264150¥ 14,439
2,191$110,533
1,250

34,390584

39,436561

286,583
4,867

Less: Allowance for doubtful accounts .....................................

34,974(24)

39,997(11)291,450(200)

Inventories (Note 6) ........................................................................
Deferred tax assets (Note 13) .........................................................
Other current assets .........................................................................

34,950
10,2071,143
1,129

39,986
9,796
830
882

291,250
85,0589,525
9,409

Total current assets ....................................................................

60,843

68,124

507,025

Property, Plant and Equipment:
Buildings and structures ..................................................................
Machinery and equipment ..............................................................

34,734
17,54435,054
17,136

289,450
146,200

Less: Accumulated depreciation .....................................................

52,278(28,067)

52,190(26,982)435,650(233,892)

Land ...............................................................................................
Construction in progress .................................................................

24,211
3,638
43

25,2083,844—

201,758
30,317358

27,892

29,052

232,433

3,981
2,459
3,578
7,277
185
2,301

3,869
773
4,318
6,027
151
1,811

33,175
20,49229,81760,642
1,541
19,175

19,781

16,949164,842¥108,516¥114,125$904,300

ASSETS
Current Assets:
Cash on hand and at bank (Note 4) ...............................................
Marketable securities (Notes 4 and 5) ............................................
Receivables:
Notes and accounts receivable-trade ........................................
Accounts receivable-other .........................................................

Investments and Other Assets:
Investment securities (Note 5) ........................................................
Investments in unconsolidated affiliates (Note 5) .........................
Intangible assets and long-term prepaid expenses .......................
Deferred tax assets (Note 13) .........................................................
Deferred charges .............................................................................
Other assets .....................................................................................

TOTAL ASSETS .....................................................................

The accompanying notes are an integral part of the Consolidated Financial Statements.
18 Kaken Pharmaceutical Co., Ltd.

Thousands of
U.S. dollars (Note 3)

Millions of yen

2002

2003

6,204
19,167$ 51,458
13,90012,711551
2,445

14,482643
3,261

105,925
4,592
20,375

Accrued expenses ............................................................................
Accrued bonuses .............................................................................
Accrued sales rebates ......................................................................
Accrued income taxes (Note 13) ....................................................
Other current liabilities ...................................................................

15,707
416
1,708
616
2,761
581

18,386
557
1,773
472
1,506
560

130,892
3,467
14,233
5,133
23,008
4,842

Total current liabilities ..........................................................

29,632

48,625

246,933

Non-Current Liabilities:
Long-term debt (Note 7) .................................................................
Accrued pension and severance costs (Note 10) ...........................
Accrued retirement benefits to directors ........................................
Deferred tax liabilities (Note 13) ....................................................
Other long-term liabilities ...............................................................

30,487
6,512
493
290
330

19,169
6,162
500
319
331

254,058
54,267
4,108
2,417
2,750

Total non-current liabilities ..................................................

38,112

26,481

317,600

Minority Interests in Consolidated Subsidiaries ...................................

1

1

8

17,00015,735
8,406

17,00015,735
6,557

141,667
131,125
70,050

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities:
Short-term bank loans (Note 7) ......................................................
Current portion of long-term debt (Note 7) ...................................
Payables:Notes and accounts payable-trade ............................................
Notes and accounts payable-construction ................................
Accounts payable-other .............................................................

2003
¥

6,175
1,668

¥

Commitments and contingencies (Note 14)
Shareholders’ Equity:
Common stock - no par value
Authorized: 360,000,000 shares
Issued : 94,518,374 shares
as of March 31, 2002 and 2003 ..............................................
Capital surplus .................................................................................
Retained earnings ............................................................................

41,14139,292342,842Less:
Net unrealized loss on valuation of other securities,
net of taxes (Note 2) ..............................................................
Treasury stock, at cost ...............................................................

(262)
(108)

(258)
(16)

(2,183)(900)

Total shareholders’ equity ....................................................

40,77139,018339,759

TOTAL LIABILITIES ANDSHAREHOLDERS’ EQUITY ..................................................

¥108,516¥114,125$904,300

Kaken Pharmaceutical Co., Ltd. 19

Consolidated
Statements of Income
For the years ended March 31, 2003 and 2002
Thousands of
U.S. dollars (Note 3)

Millions of yen

Net sales ...............................................................................................
Cost of sales ..........................................................................................

2003¥74,003
38,0392002¥73,272
37,5002003$616,692
316,992

Gross profit ......................................................................................

35,96435,772299,700

Selling, general and administrative expenses (Note 12) .....................

28,01728,047

233,475

Operating income .................................................................................

7,947

7,725

66,225

79
(608)
(525)

102
(813)
(525)

658
(5,067)(4,375)

696
(8)
(276)
(1,283)
(84)
(284)

279
(304)
(1,882)
(0)
(6)
(385)

5,800
(67)
(2,300)(10,692)(700)(2,365)(2,293)(3,534)(19,108)

5,654

4,191

47,117

4,656(1,600)
3,056

3,471
(1,045)2,426

38,800(13,333)
25,467

Income before minority interests .........................................................

2,598

1,765

21,650Minority interests ...................................................................................

0

0

0

Net income ............................................................................................

¥ 2,598¥ 1,765$ 21,650

Other Income (Expenses):
Interest and dividend income .........................................................
Interest expense ..............................................................................
Amortization of net obligation at transition ...................................
Gain (Loss) on sales/disposal of property, plantand equipment, net .....................................................................
Loss on sales of investment securities, net ....................................
Revaluation loss of investment securities .......................................
Equity in losses of affiliates .............................................................
Revaluation loss of golf membership .............................................
Others, net .......................................................................................

Income before income taxes and minority interests ...........................
Income taxes (Note 13):
Current .............................................................................................
Deferred ...........................................................................................

Yen

U.S. dollars (Note 3)

Per share data:
Net income:Basic ............................................................................................

¥027.11.

¥018.74

.

$

0.226

Diluted ........................................................................................

¥020.50.

¥016.17

.

$

0.171

Cash dividends ................................................................................

¥008.25.

¥007.50

.

$

0.069

The accompanying notes are an integral part of the Consolidated Financial Statements.
20 Kaken Pharmaceutical Co., Ltd.

.

.

.

Consolidated
Statements of Shareholders’ Equity
For the years ended March 31, 2003 and 2002
Millions of yen
Number ofcommonstock

Commonstock

CapitalsurplusRetainedearnings

Balance at March 31, 2001 ................. 91,799,041
Net income ....................................
Cash dividends .............................
Directors’ bonuses ........................
Shares issued on conversionof convertible bonds ................
2,719,333
Net unrealized loss on valuationof other securities, net of taxes ...
Treasury stock acquired, net ........

¥15,923¥14,661¥5,537
1,765
(699)
(46)

1,077

1,074

Balance at March 31, 2002 .................
Net income ....................................
Cash dividends .............................
Directors’ bonuses ........................
Net unrealized loss on valuationof other securities, net of taxes ......
Treasury stock acquired, net ........

¥17,000

94,518,374

Unrealized
loss on othersecurities

Treasurystock
at cost

¥

¥

—

(9)

(7)
¥6,557
2,598
(709)
(40)

¥ (258)¥ (16)(4)

Balance at March 31, 2003 ................. 94,518,374¥17,000¥15,735¥36,112
1,765
(699)
(46)
2,151

(258)
¥15,735

Total
shareholders’equity¥8,406(258)(7)¥39,018
2,598
(709)
(40)

(92)

(4)
(92)

¥(108)¥40,771

Unrealized
loss on othersecurities

Treasurystock
at costTotal
shareholders’equity$(2,150)$(133)$325,150
21,650(5,908)(333)¥ (262)Thousands of U.S. dollars (Note 3)

Balance at March 31, 2002 .................
Net income ....................................
Cash dividends .............................
Directors’ bonuses ........................
Net unrealized loss on valuationof other securities, net of taxes ......
Treasury stock acquired, net ........

Number ofcommonstock

Commonstock

CapitalsurplusRetainedearnings

94,518,374$141,667$131,125$54,641
21,650(5,908)(333)

Balance at March 31, 2003 ................. 94,518,374

(33)
(767)
$141,667$131,125$70,050$(2,183)

(33)
(767)

$(900) $339,759

Kaken Pharmaceutical Co., Ltd. 21

Consolidated
Statements of Cash Flows
For the years ended March 31, 2003 and 2002
Thousands of
U.S. dollars (Note 3)

Millions of yen

2003

2002

2003

¥ 5,654¥ 4,191$ 47,117

2,100
1,020
243
1,283
84
350
(79)
608
8
276
93
(789)

2,073
1,491
215
0
6
382
(102)
813
304
1,882
77
(356)

17,5008,500
2,025
10,692
700
2,917
(658)
5,067
67
2,300
775
(6,575)

5,046
(411)

(2,052)487

42,050(3,425)(1,771)(40)(1,549)

371
(46)
(527)

(14,758)(333)(12,911)

Interest and dividends received ...........................................................
Interest paid ...........................................................................................
Income taxes paid .................................................................................

12,12678(606)(3,401)

9,209
107
(808)
(5,366)

101,050650(5,050)(28,341)

Net cash provided by operating activities ................................

8,197

3,142

68,309II. Cash flows from investing activities
Acquisition of investment securities .....................................................
Proceeds from sales of investment securities ......................................
Acquisition of property, plant and equipment ....................................
Proceeds from sales of property, plant and equipment .....................
Payment of long-term prepaid expenses .............................................
Other, net ...............................................................................................

(3,382)22(1,419)
1,248
(200)
(523)

(10)
67
(995)
362
(1,488)60(28,183)
183(11,825)
10,400(1,667)(4,358)Net cash used in investing activities .........................................

(4,254)(2,004)(35,450)

III. Cash flows from financing activities
Proceeds from long-term debt ..............................................................
Repayment of long-term debt ...............................................................
Proceeds from issuance of convertible bonds .....................................
Redemption of convertible bonds ........................................................
Decrease in short-term bank loan ........................................................
Cash dividends paid ..............................................................................
Other, net ...............................................................................................

3,000
(508)
9,723
(18,491)
(29)
(709)
(92)

—
(1,499)—(6,256)
(206)
(699)
(9)

25,000(4,233)81,025(154,092)(242)(5,908)(767)(7,106)(3,163)
16,410¥13,247(8,669)(7,531)
23,941¥16,410(59,217)(26,358)
136,750$110,392¥—¥ 1,077

$

—

¥

—
—

1,074
¥ 2,151$——

I. Cash flows from operating activities
Income before income taxes and minority interests ...........................
Adjustments for:
Depreciation ....................................................................................
Amortization of long-term prepaid expenses ................................
Amortization of deferred charges ...................................................
Equity in losses of affiliates.............................................................
Revaluation loss of golf membership .............................................
Accrual for pension and severance costs, less payments .............
Interest and dividend income .........................................................
Interest expense ..............................................................................
Loss on sale of investment securities .............................................
Revaluation loss of investment securities .......................................
Loss on disposals of property, plant and equipment ....................
Gain on sale of property, plant and equipment ............................
Decrease (Increase) in notes andaccounts receivable-trade ............................................................
Decrease (Increase) in inventories .................................................
Increase (Decrease) in notes andaccounts payable-trade ................................................................
Paid bonuses to directors ................................................................
Other, net .........................................................................................

Net cash used in financing activities ........................................
Net decrease in cash and cash equivalents ................................................
Cash and cash equivalents at beginning of year .........................................
Cash and cash equivalents at end of year (Note 5) ....................................
Major non-cash transactions:
Increase in common stock due to conversion of convertible bonds .............
Increase in additional paid-in capital due to conversion of
convertible bonds ..............................................................................
Decrease in convertible bonds due to conversion ..............................
The accompanying notes are an integral part of the Consolidated Financial Statements.
22 Kaken Pharmaceutical Co., Ltd.

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 andrecords 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 Accounting Standards, and filed with
the Director of Kanto Finance Bureau. The consolidated statementsof shareholders’ equity have been prepared to provide additional
information.
Certain items presented in the consolidated financial statements
have been reclassified for the convenience of readers outside Japan.
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 other than Japan.

2. Summary of Significant Accounting Policies:(a) Principles of Consolidation
The Company had five subsidiaries as of March 31, 2003 and2002. The consolidated financial statements include the accountsof the Company and all of its subsidiaries. The consolidated subsidiaries as of March 31, 2003 and 2002 are as follows:
KAKEN REALTY & SERVICE CO., LTD.
KAKEN PHARMA CO., LTD.
KAKEN LOGISTICS CO., LTD.
EIKO FILTER CO., LTD.
FUJIKA CORPORATIONThe Company had an affiliate as of March 31, 2003 and 2002. Investment in N·K Curex Co., Ltd. is accounted for by the equity method.
All significant intercompany transactions, account balances andunrealized profits among the Group have been eliminated in consolidation.
The difference between the cost of an investment in a subsidiary and the amount of underlying equity in net assets of the subsidiary is allocated to identifiable assets based on fair value at thedate of acquisition. The unassigned residual value of the excess ofthe cost over the underlying net equity is recognized as goodwill,
and amortized over a period of five years on a straight-line basis.
(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 are considered to have minimal risk from market fluctuations.
(c) Marketable and Investment Securities
Securities are classified as one of four categories; (1) Trading, (2)Held-to-maturity debt, (3) Securities of subsidiaries and affiliated,and (4) Other. Trading securities are recorded at market value
with unrealized gains and losses recognized in the current years

earnings. Debt securities that are expected to be held-to-maturity
are carried at amortized cost. Securities of subsidiaries and affiliates are carried at cost. Other securities are expected to be sold in
the long term and those, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a separate component in shareholders’ equity, net oftaxes. Other securities without market quotations are stated atcost, determined by the moving average method.
Effective from the year ended March 31, 2002, other securities,
which are expected to be sold in the long-term and those, whose
fair values are readily determinable, are carried at fair value withunrealized gains or losses included as a separate component inshareholders’ equity, net of taxes. Previously, such securities werecarried at cost under a transition treatment of the new accounting
standard for financial instruments which was effective in the year
ended March 31, 2001. As a result of this adoption, investment
securities decreased by ¥445 million, and the related deferred tax
assets (non-current) increased by ¥187 million. Net unrealized
loss on valuation of other securities are reported as a separate
component of shareholders’ equity, net of taxes.
(d) Inventories
Inventories are stated at cost, this being determined by the average method.
(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.
Consolidated subsidiaries principally adopted the straight-line
method. Furthermore, depreciation of buildings, except for ancillary facilities to buildings, acquired 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 from 2 years to 17 years forequipment.

Kaken Pharmaceutical Co., Ltd. 23

(f) Pension and Retirement Benefits
Employees who terminate employment are entitled, under mostcircumstances, to lump-sum payments or pension payments as
described below, determined by reference to current basic rate ofpay, 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 based on 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 underthe existing retirement plan to employees.
The accrued pension and severance costs represents theamount actuarially calculated projected benefit obligations less (1)the fair value of the plan assets (2) unrecognized actuarial loss orgain and (3) the unrecognized transition amount arising fromadopting the new standard. If the fair value of the plan assets
exceeds the projected benefit obligations, prepaid pension andseverance costs are recorded. The transition amount (unfunded
and unrecognized benefit obligation) of ¥7,902 million at April 1,
2000 is amortized on a straight-line basis over 15 years (for subsidiaries mainly 10 years). Unrecognized actuarial loss or gain isamortized on a straight-line basis over 10 years from the next year
in which they arise. For the Company, prepaid pension and severance costs were recognized for a portion of the plan coveredby the non-contributory pension plan assets and the accrued pension and severance costs were recognized for a portion of theplan not covered by the plan assets.
Accrued retirement benefits to directors and statutory auditors
is provided in an amount equivalent to the liability the relevant
company would have been required to pay upon retirement at
the balance sheet date, as prescribed by its internal rules.
(g) 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 andliabilities and their reported amount in the financial statements.
(h) Consumption Taxes
Consumption taxes have been excluded from amounts shown on
the accompanying consolidated statements of income.
(i) Research and Development Expenses
Previously significant research and development expenses for
new products and new technologies had been capitalized andamortized over five years on the straight-line basis.
However, on April 1, 1999, a new accounting standard for
Research and Development expenses (the “R&D expenses”) was
adopted. Under the new standard, R&D expenses are charged toincome as incurred, while the capitalized amounts at March 31,
1999 are amortized over the remaining period.

24 Kaken Pharmaceutical Co., Ltd.

(j) Derivative Financial Instruments
Derivative instruments, which include foreign currency exchange
forward contracts and interest rate swap agreements, are used as apart of the Company’s risk management of foreign currency andinterest 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 in foreign
currencies. For foreign currency exchange forward contracts which
are designated and are effective as hedges of such currency 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 therespective foreign currency exchange forward contracts. With respect to such contracts for anticipated transactions, the contracts aremarked-to-market and the unrealized gains / losses are deferred in
the balance sheet to be released to income when the exchange
gains/losses on the hedged items or transactions are recognized.
Interest rate swap agreements:
The Company enters into interest rate swap agreements, in order tolower funding costs and limit the Company’s exposure in respect of
the underlying financial instruments, resulting from adverse fluctuations in interest rates. The related interest differentials paid or received under the interest rate swap agreements are recognized ininterest expenses over the terms of the agreements.
Derivative financial instruments have not been implemented byconsolidated subsidiaries.
(k) Bond Issue Costs
Bond issue costs are capitalized and amortized over three years
on the straight-line basis.
(l) Appropriation of Retained Earnings
The Commercial Code of Japan provides that appropriations ofretained earnings, including bonuses to directors and statutory
auditors, require approval by the shareholders at the annual ordinary general meeting of shareholders. Appropriations of retained
earnings are, therefore, not reflected in the consolidated financial
statements for the period to which they relate, but are recorded in
the subsequent accounting period after shareholders’ approvalhas been obtained.
(m) Shareholders’ Equity
Under the Commercial Code of Japan, at least 50 per cent of theissue price of new shares is required to be designated as statedcapital. The portion which is designated as stated capital is determined by resolution of the Board of Directors. Proceeds in excessof the amounts designated as stated capital have been credited tocapital surplus.

The Commercial Code of Japan permits the Company to use
retained earnings distributable to shareholders to acquire its own
stock for retirement, following approval by the shareholders.
(n) Net Income and Dividends per Shares
Net income per share of common stock is based upon theweighted average number of shares of common stock outstanding
during each financial year appropriately adjusted for subsequent
free distribution of shares (stock splits), if applicable.
Effective from the year ended March 31, 2003, the Company
adopted “Accounting Standard for Earnings per Share” (Accounting Standard No.2) and “Implementation Guidance on AccountingStandards for Earnings per Share” (Accounting Implementation
Guidance No.4). The effect of the adoption of these accounting
standard and guidance on net income and net assets per share
was immaterial for the current fiscal year.
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 theassumption that the convertible bonds were fully converted into
common stock on the date of issue or at the beginning of therespective years subsequent to the issue, with appropriate adjustments of related interest expense (net of tax).

3. 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 ¥120=U.S.$1. The inclusion of such dol-lar 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 ¥120=U.S. $ 1 or any other rate.

4. Cash and Cash Equivalents:
Cash on hand and at banks and marketable securities are reconciled to cash and cash equivalents of consolidated statements of cash flows
as follows:
Thousands of
U.S. dollars (Note 3)

Millions of yen

Cash on hand and at banks .....................................................................................................
Marketable securities ................................................................................................................
Time deposits which fall due in more than three months .....................................................
Marketable securities due in more than three months ...........................................................
Cash and cash equivalents .......................................................................................................

2003

2002

2003

¥13,264150
13,414
(17)
(150)
(167)
¥13,247¥14,439
2,191
16,630
(70)
(150)
(220)
¥16,410$110,533
1,250
111,783(141)(1,250)(1,391)$110,392

5. Marketable Securities and Investment Securities:
Millions of yen
CostMarketvalue

Unrealized
gain (loss)

Cost

Thousands of U.S. dollars (Note 3)
Marketvalue

Unrealized
gain (loss)

Cost

Unrealized
gain (loss)

For the years ended March 31,
Other securities:
Market value available
Equity securities ....................... ¥3,744
Other securities ........................
208
3,952
Market value not available ............
2,929
Total .......................................... ¥6,881¥3,356
155
3,511
2,929
¥6,440¥(388)(53)(441)—¥(441)¥3,911
228
4,139
2,989
¥7,128¥3,499
195
3,694
2,989
¥6,683¥(412)(33)(445)—¥(445)$31,200
1,733
32,933
24,409$57,342$27,967(1,291)
29,25824,409$53,667$(3,233)(442)(3,675)—$(3,675)

Held-to-maturity debt securities:
Market value not available ............

¥ 150

¥

¥ 150

¥ 150

¥ —

$ 1,250$ 1,250

$

¥ 150

2002

Market
value

2003

—

2003

—

Kaken Pharmaceutical Co., Ltd. 25

Other securities sold during the fiscal years ended March 31, 2003
and 2002
Millions of yen

Proceeds from sales ..........................
Gross realized gains ..........................
Gross realized losses .........................

Thousands of
U.S.dollars (Note 3)

2003

2002

2003

¥22
—
8

¥67
—
304

$183
—
67

Write down of investments in securities
During the years ended March 31, 2003 and 2002, certain equities
with market quotations were written down by ¥270 million. The
Company writes down the book value of equities when the market value declines by more than 50%, or the market value declines
approximately by more than 30% but less than 50%, and theCompany’s management determines the decline to be other temporary.

6. Inventories:
Inventories as of March 31, 2003 and 2002 are comprised of the following:Thousands of
U.S. dollars (Note 3)

Millions of yen

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

2003

2002

2003

¥ 4,706
1,524
2,446
1,409
122

¥4,884
1,770
2,464
481
197

$39,217
12,70020,383
11,742
1,016¥10,207¥9,796$85,058

7. Short-term Bank Loans and Long-term Debts:
Short-term bank loans outstanding as of March 31, 2003 and 2002
are represented the notes issued by the Group to banks. Customarily, these notes are renewed at maturity subject to renegotiationof interest rates and other factors. The weighted-average interest

rates applicable to short-term bank loans as of March 31, 2003 and2002 are 0.88% and 0.89%, respectively. Outstanding balance ofshort-term bank loans as of March 31, 2003 and 2002 were ¥6,175
million and ¥6,204 million, respectively.

Long-term debts as of March 31, 2003 and 2002 consisted of the following:Thousands of
U.S. dollars (Note 3)

Millions of yen

March 31
Loans from banks and other financial institutions due 2003 to 2008 ....................................
1.0% unsecured convertible bond due 2003 (a) .....................................................................
0.0% unsecured convertible bond due 2007 (b) .....................................................................
0.0% unsecured convertible bond due 2007 (c) .....................................................................
Other long-term debt with interest bearing due 2003 to 2033 ...............................................
Less: current portion .................................................................................................................

26 Kaken Pharmaceutical Co., Ltd.

2003

2002

2003

¥ 5,162—
7,849
10,0009,144
32,155(1,668)¥30,487¥ 2,670
18,491
7,849
—
9,326
38,336(19,167)¥19,169$ 43,017—
65,40883,33376,200267,958(13,900)$254,058

a) 1.0% Unsecured convertible bond
Holders of this bond are entitled to convert these bonds into common
stock at a price of ¥1,610 during the period from April 1, 1994 to March
28, 2003.
b) 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, 2007.
c) 0.0% Unsecured convertible bond
Holders of this bond are entitled to convert these bonds into common
stock at a price of ¥732 during the period from August 8, 2002 to September 14, 2007.

Aggregate annual maturities of convertible bonds in the next
five fiscal year are as follows:
Thousands of
U.S. dollars(Note 3)

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 ........

¥——
17,849—¥17,849$——
148,741—$148,741

Aggregate annual maturities of long-term bank loans and otherinterest bearing debt are as follows:
Millions of yen

Within one year ...........
Over one year lessthan two years ...........
Over two years lessthan three years .........
Over three years lessthan four years ...........
Over four years lessthan five years ...........
More than five years
and thereafter ............

Thousands of
U.S. dollars (Note 3)Long-termbank loans

Other interest
bearing debt

Long-termbank loans

Other interest
bearing debt

¥1,480¥ 188$12,333$ 1,567

682

194

5,684

1,616

—

200

—

1,667

—

207

—

1,725

—

213

—

1,775

3,000
¥5,162

8,142¥9,14425,000$43,01767,850$76,200

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 the right,
as the obligations become due or in the event of their default, tooffset cash deposits against such obligations due to the bank. The
Group has not received any such requests to date.
At March 31, 2003, the Company had unused commitment
lines of credit amounting to ¥2,000 million ($16,667 thousand).
At March 31, 2003 and 2002, assets pledged as collateral for
certain short-term (¥1,410 million) and long-term debts (¥9,986
million), including current portion of long-term debts, were as
follows:
Millions of yen

March 31

Thousands of
U.S.dollars(Note 3)

2003

2002

2003

Assets pledged
Buildings and structures ............ ¥10,679
Machinery and equipment ........
2,005
Land ............................................
108
Investment securities .................
1,254¥14,046¥11,139
2,117
108
1,411
¥14,775$ 88,992
16,708900
10,450$117,050

Liabilities and secured
Short-term bank loans ............... ¥ 1,410
Long-term bank loans ...............
842
Other interest bearing debt .......
9,144¥11,396¥ 1,4101,328
9,326¥12,064$ 11,750
7,017
76,200$ 94,967

Kaken Pharmaceutical Co., Ltd. 27

8. 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 leaseterm are accounted for as operating leases, in accordance with accounting principles and practices generally accepted in Japan.
Assumed data “as if capitalized” as to acquisition cost, accumulated depreciation, net book value and depreciation expense of
the leased assets, which included the portion of interest thereon,
were summarized as follows:
Thousands of
U.S.dollars(Note 3)

Millions of yen

March 31

2003

2002

2003

Acquisition cost ..................................
Accumulated depreciation .................
Net book value ..................................

¥15
7
¥ 8

¥15
6
¥ 9

$125
58
$ 67

Depreciation .......................................

¥ 2

¥ 2

$ 17

Periodic lease expenses on finance lease contracts withoutownership-transfer for the year ended March 31, 2003 and 2002
were summarized as follows:
Thousands of
U.S.dollars(Note 3)

Millions of yen

Periodic lease expense ...................

2003

2002

2003

¥2

¥2

$17

The amount of outstanding future lease payments due atMarch 31, 2003 and 2002, which included the portion of interest
thereon, was summarized as follows:
Thousands of
U.S.dollars(Note 3)

Millions of yen

March 31
Within one year ..............................
Over one year .................................

2003

2002

2003

¥2
7
¥9

¥ 1
9
¥10

$17
58
$75

Depreciation is computed on the straight-line method over the lease termof the leased assets with no residual value.

9. 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 the approval,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 fromits exchange forward contracts and interest rate swap agreements.
The Company is also exposed to the risk of credit loss in theevent of non-performance by the counterparties to the currency
and interest rate derivatives; however, the Company does not
anticipate nonperformance by any of these counterparties all ofwhom are financial institutions with high bond ratings.

10. Pension and Retirement Benefits:
The benefit obligation and plan assets, funded status and composition of amounts recorded in the consolidated balance sheet asof March 31, 2003 and 2002 is as follows:
Millions of yen

March 31

Thousands of
U.S.dollars(Note 3)

2002

2003

Projected benefit obligations ........ ¥(24,175) ¥(22,561)
Plan assets .....................................
7,820
8,048
Funded status ................................ (16,355) (14,513)
Unrecognized transition
amount .......................................
6,313
6,844
Unrecognized actuarial loss .........
3,743
1,763
(6,299)(5,906)
Amounts recognized in thebalance sheet consists of —Prepaid pension cost ...............
213
256
Accrued pension andseverance costs ..................... ¥ (6,512) ¥ (6,162)$(201,458)
65,166(136,292)

28 Kaken Pharmaceutical Co., Ltd.

2003

The components of net pension and severance costs for theyear ended March 31, 2003 and 2002 were as follows:

52,60831,192(52,492)

1,775$ (54,267)

Millions of yen

Service cost ......................................
Interest cost .....................................
Expected return on plan assets ......
Amortization of transition amount .
Actuarial loss ...................................
Net pension expense ......................

Thousands of
U.S.dollars(Note 3)

2003

2002

2003

¥ 786
630
(121)
531
181
¥2,007

¥ 747
749
(199)
528
46
¥1,871$ 6,550
5,250(1,008)
4,425
1,508$16,725

Assumptions used in calculation of the above information as ofMarch 31, 2003 were as follows:
Discount rate .................................................... 2.3%
Expected rate of return on plan assets ........... 1.5%
Method of attributing the projected
benefits to periods of services ...................... years of service

11. Shareholders’ Equity:
The following appropriations of the Company’s retained earnings
in respect of the year ended March 31, 2003 which were approved by the shareholders at the general meeting held on June27, 2003, have not been incorporated in the accompanying consolidated financial statements.

Millions of yen

Retained earnings at the end of the year .....
Utilization of general reserve
Utilization of deferred gain on sales ofproperty, plant and equipment ...........

Thousands of
U.S.dollars(Note 3)

¥6,648$55,400

17
6,665

142
55,542

Appropriations:
Dividends (¥4.50 per share) ..................
Bonuses to directors ...............................
[of which to statutory auditors] ..............

(424)
(37)
[4]

(3,354)(308)[33]

Transfer to general reserve:
Deferred gain on sales ofproperty, plant and equipment ......
Others reserves .................................

(6)(1,000)(50)(8,333)Retained earnings carried forward to
the following year .....................................

¥5,198$43,317

12. Selling, General and Administrative Expenses:
Major elements of “Selling, general and administrative expenses” for two years in the period ended March 31, 2003 and 2002 are as follows:
Thousands of
U.S. dollars (Note 3)

Millions of yen

Salaries .......................................................................................................................................
Bonuses .....................................................................................................................................
Pension and severance costs ....................................................................................................
Provision for retirement benefits to directors ..........................................................................
Research and development expenses ......................................................................................
Sales promotion ........................................................................................................................
Advertisement ...........................................................................................................................
Rent and lease ...........................................................................................................................
Travel .........................................................................................................................................

2003

2002

2003

¥6,628
3,060
1,094
71
5,695
1,732
651
1,752
1,422

¥6,926
2,980
992
75
5,253
1,828
651
1,731
1,465

$55,233
25,5009,117
592
47,45814,433
5,425
14,60011,85013. Income Taxes:
The Group is subject to several taxes based on income, which in
the aggregate resulted in statutory tax rates of approximately
42.05 % for the two years in the period ended March 31, 2003.
Reconciliation of the differences between the statutory tax rate
and the effective tax rate for the years ended March 31, 2003 and2002 is as follows:

2003

2002

Statutory tax rate ..................................................... 42.05%
Increase (decrease) in taxes resulting from:
Expenses not deductible for income tax
purpose (ex. Entertainment expenses) .......... 9.73
Income not included for income tax
purpose (ex. Dividend income) ..................... (0.20)
Equity in losses of affiliates .............................. (3.49)
Inhabitant equalization taxes ............................ 1.40
Change of tax rate in defferd tax assets ........... 2.40
Other ................................................................. 2.17

42.05%

Effective tax rate ..................................................... 54.06%

57.88%

14.36(0.30)
0.00
1.86—(0.09)

Kaken Pharmaceutical Co., Ltd. 29

Due to the change in local tax law on March 31,2003, the effective
tax rate used in the calculation of deferred tax assets and liabilities
at March 31, 2003 is reduced to 40.69% as compared with 42.05%
for the prior fiscal year. This reduced effective tax rate applies
only to deferred tax items that will be settled on and after April 1,

2004. As a result, net of deferred tax assets and net of deferred tax
liabilities as of March 31, 2003 decreased by ¥141 million andincome taxes-deferred for the year ended March 31, 2003 increased by ¥135 million.

Significant components of deferred tax assets as of March 31, 2003 and 2002 are as follows:
Thousands of
U.S. dollars (Note 3)

Millions of yen

March 31

2003

2002

2003

Deferred tax assets:
Non-deductible portion of reserve for bonuses ...............................................................
Provision for reserve for sales rebates ..............................................................................
Enterprise taxes payable ....................................................................................................
Devaluation of financial instruments ................................................................................
Amortization of R&D .........................................................................................................
Amortization of long-term prepaid expenses ...................................................................
Pension and severance costs .............................................................................................
Provision for retirement benefits to directors ...................................................................
Non-deductible portion of allowance for bad debt .........................................................
Unrealized gain of property, plant and equipment .........................................................
Unrealized loss on other securities ...................................................................................
Other ...................................................................................................................................

¥ 600
259
257
1,887
72
843
1,567
206
77
2,568
181
112

¥ 475
198
133
1,069
56
997
1,015
210
87
2,568
187
62

$ 5,000
2,158
2,142
15,725600
7,025
13,0581,717
642
21,400
1,508
933

Total deferred tax assets ......................................................................................
Valuation allowance ...........................................................................................................
Deferred tax assets, net ........................................................................................

8,629
(28)
8,601

7,057
—
7,057

71,908(233)
71,675

Deferred tax liabilities:
Deferred gain on sales of property, plant and equipment ..............................................
Other ...................................................................................................................................
Total deferred tax liabilities .................................................................................

(470)
(1)
(471)

(519)
0
(519)

(3,917)(8)(3,925)

Deferred tax assets, net ........................................................................................

¥8,130¥6,538$67,750

14. Contingencies:
The Group had contingent liabilities arising from notes discounted at banks in the ordinary course of business in theamount of ¥ 2,088 million as of March 31, 2003.

30 Kaken Pharmaceutical Co., Ltd.

15. Segment Information:
Information about operations in industry segments of the Group for years ended March 31, 2003 and 2002 is as follows:
Millions of yen

2003

I. Sales and Operating Income
Sales to customers ................................................................................
Inter-segment/transfer ..........................................................................

Operating expenses .............................................................................
Operating income ................................................................................
II. Assets, Depreciation andCapital Expenditures
Assets .............................................................................................
Depreciation ..................................................................................
Capital Expenditures .....................................................................

Eliminations
or Corporate

Pharmaceutical

Other*

Total¥70,930—
70,930¥ 3,073304
3,377¥74,003304
74,30764,068¥ 6,862

2,292¥ 1,085

66,360¥ 7,947¥¥65,486¥ 2,547¥ 1,924¥19,985¥ 816¥
74¥85,471¥ 3,363¥ 1,998¥23,045¥—¥—¥108,516¥ 3,363¥ 1,998

Eliminations
or Corporate

Consolidated¥

Consolidated

—
(304)
(304)

¥ 74,003—
74,003(304)—¥

66,056
7,947

Millions of yen

2002

I. Sales and Operating Income
Sales to customers ................................................................................
Inter-segment/transfer ..........................................................................

Operating expenses .............................................................................
Operating income ................................................................................
II. Assets, Depreciation andCapital Expenditures
Assets .............................................................................................
Depreciation ..................................................................................
Capital Expenditures .....................................................................

Pharmaceutical

Other*

Total¥70,268—
70,268¥03,004
594
3,598¥73,272594
73,866

63,766¥06,5022,375¥01,223

66,141¥07,725¥¥68,728¥02,913¥03,649¥20,899¥00,866¥00,058¥89,627¥03,779¥03,707

¥

—
(594)
(594)

¥073,272—
73,272(594)—

65,547¥007,725¥24,498¥—¥—¥114,125¥003,779¥003,707

Thousands of U.S. dollars (Note 3)

2003

I. Sales and Operating Income
Sales to customers ................................................................................
Inter-segment/transfer ..........................................................................

Operating expenses .............................................................................
Operating income ................................................................................
II. Assets, Depreciation andCapital Expenditures
Assets .............................................................................................
Depreciation ..................................................................................
Capital Expenditures .....................................................................

Eliminations
or Corporate

Pharmaceutical

Other*

Total$591,083—
591,083$ 25,609
2,533
28,142$616,692
2,533
619,225

533,900$ 57,183$

19,1009,042

553,000$ 66,225$$545,717$ 21,225$ 16,033$166,542$ 6,800$
617$712,259$ 28,025$ 16,650$

Consolidated—(2,533)(2,533)$616,692—
616,692(2,533)—

550,467$ 66,225$192,041$—$—$904,300$ 28,025$ 16,650*Other business fields consist of mainly real estate.

Kaken Pharmaceutical Co., Ltd. 31

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, 2003 and 2002 and the related consolidated statements of income, shareholders’ equity 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 appliedin Japan. 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, 2003 and 2002 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 translatedon the basis set forth in Note 3 to the accompanying consolidated financial statements.

Tokyo, Japan
June 27, 2003

32 Kaken Pharmaceutical Co., Ltd.

Corporate Data

(As of March 31, 2003)

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

Employees (Non-Consolidated)
Administration: 144
Sales & Marketing: 981
Production & Technology: 275
Research & Development: 261

Global Business Development
FoundedMarch 1917

Incorporated
March 1948

Paid-in Capital

2-28-8, Hon-Komagome, Bunkyo-ku,
Tokyo 113-8650, Japan
Executive Officer & General Manager
Masao Ishida
Tel: 81-3-5977-5046
Fax: 81-3-5977-5133
E-mail: masao-ishida@kaken.co.jp

Plant
Shizuoka Factory

Research Laboratories
Shizuoka Research Laboratories
Kyoto Research Laboratories
Production Technology Laboratories

Overseas Office:Kaken New York Office
245 Park Avenue, 24th Floor, New York, NY10167
Tel: 1-212-372-8910
Fax: 1-212-372-8970
E-mail: ny@kaken.co.jp¥17,000 million (As of Sept. 30, 2003)

Branch Offices
Common Stock
Authorized: 360,000,000 shares
Issued: 94,518,374 shares (As of Sept. 30, 2003)
Number of Shareholders: 24,392

Sapporo Branch
Sendai BranchTokyo-1 BranchTokyo-2 Branch
Nagoya Branch
Osaka-1 Branch
Osaka-2 Branch
Hiroshima Branch
Fukuoka Branch

Board of Directors and Corporate Auditors
President and Representative Director
Shiro Inui
Executive Managing Director
Takeshi Hirahara(Administration)
Executive Managing Director
Yoshinori Kambayashi(Research and Development)
Executive Managing Director
Takeji Saito(Marketing and Sales)

Executive Managing Director
Shuji Komoto(Accounting & Purchasing)

AuditorOsamu Okamoto(Standing)

Executive Director
Yutaka Handa(Personnel)

Auditor
Satoshi Shoji(Standing)

Executive Director
Shinichi Takamatsu(Accounting)

Auditor
Sumio Yoshizawa

Executive Director
Masahiro Hori
(Agrochemicals and Animal Health Products)

AuditorKeizo Nemoto

Kaken Pharmaceutical Co., Ltd. 33

Bringing smiles to everyone

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

Printed in Japan