Annual Report 2015
Year Ended March 31, 2015

Profile
The origins of Kaken Pharmaceutical Co., Ltd., can be traced back to the Instituteof Physical and Chemical Research (Riken), which was established in 1917.
In 1948, the Company started its pharmaceutical business by developing a new
way to manufacture penicillin utilizing Riken’s proprietary technologies. It has
since broadened the scope of its business activities to include the manufactureand sales of drugs such as streptomycin, an antituberculosis drug, and various
antifungal agents.
The Company is particularly strong in the fields of orthopedics, dermatology,
and general surgery. In the field of orthopedics, Kaken boasts the accomplishment of introducing a medical treatment for osteoarthritis of the knee thatinvolves the intraarticular injection of sodium hyaluronate.
In 2001, the Company launched Fiblast Spray, a wound-healing agent that
employs a recombinant human basic Fibroblast Growth Factor (bFGF). This was
the first drug in the world to employ bFGF. Kaken continues to advance research
efforts to fully leverage the potential of bFGF going forward.
In its R&D efforts, the Company is focused on the fields of inflammation, allergies, and pain relief, as well as that of fungal
infection. In addition, in 2014, Kaken commenced sales of Clenafin, a drug that contains efinaconazole, a compound discoveredby Kaken’s scientists, and is Japan’s first topical treatment for onychomycosis.

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

KAKEN

Three Joys

Creating joy for

Creating joy as a

Creating joy forpatients

company

our employees

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

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

Our objective is to become acompany with vitality and presence
whose employees enjoy and takepride in their work.

Contents
2

President’s Message

13 Fulfilling Our Social Responsibilities

4

Special Feature: Developing New Products

16 Board of Directors and Audit & Supervisory Board Members

6

Overview of Major Products

17 Financial Section

10 Commitment and Excellence

47 Corporate Data

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

History
1948
1952
1961
1962
1963
1982
1986
1987
1988

Riken reorganized into Kagaku-Kenkyusho
Kagaku-Kenkyusho renamed Kaken Chemicals
Kaken Chemicals listed on the Second Section of the Tokyo Stock Exchange
Kaken Chemicals listed on the First Section of the Tokyo Stock Exchange
Construction of Shizuoka Factory (Fujieda City, Shizuoka Prefecture) completed
Kaken Chemicals merged with Kakenyaku-Kako to form Kaken Pharmaceutical Co., Ltd.
Kaken Realty & Service Co., Ltd., established
Artz (anti-osteoarthritis product) launched
Kaken Pharma Co., Ltd., established
Adofeed (pain- and inflammation-relieving plaster) launched
Ebrantil (α1 blocker to treat dysuria and hypertension) launched
Artz
Procylin (oral-use prostaglandin I2 analog product) launched
Mentax (anti-trichophyton product) launched
40th Okochi Memorial Grand Production Prize received(Received for development of a topical antifungal agent, butenafine hydrochloride)
Sales approval received from the U.S. Food and Drug Administration for Mentax (anti-trichophyton product)
Bunkyo Green Court completed
Seprafilm (anti-adhesive absorbent barrier) launched
Shiga Factory closed, operations integrated with Shizuoka Factory
ISO14001 obtained by Shizuoka office
Corporate philosophy and business philosophy established
Mirol (glaucoma and ocular hypertension treatment product) launched
Fiblast Spray (wound-healing product) launchedCompliance program established
GHRP Kaken (diagnostic agent for growth hormone deficiency) launchedWorldwide rights acquired to develop, manufacture, and sell bFGF
Out-licensing agreement concluded for antifungal compound KP-103 in North America and Europe
Out-licensing agreement concluded for Fiblast Spray (wound-healing product) in South Korea
Out-licensing agreement concluded for dental applications of bFGF in North America and Europe
Berasus LA Tablet 60μg (pulmonary arterial hypertension treatment product) launched
Clenafin
Adofeed PAP 80mg (pain- and inflammation-relieving plaster product) launched
Out-licensing agreement concluded for wound-healing applications of bFGF in North America and Europe
Clexane (anticoagulant product) launched
Lipidil Tablet (anti-hyperlipidemia product) launched
Exclusive sales license agreement concluded for SI-6603 (lumbar disc herniation treatment) in Japan
Clenafin (topical onychomycosis treatment product) launched
Exclusive licensing and joint development agreement concluded for BBI-4000 (primary focal hyperhidrosis product)in Japan and certain other Asian countries
Trading unit for its common stock changed from 1,000 shares to 100 shares and 1-for-2 reverse stock split instituted on October 1

1989
1992
1994
1996
1998
2000
2001

2002
2005
2006
2007
2008
2009
2010
2011
2012
2014
2015

Products

Overseas activities

Company

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

Net Sales
Operating Income

YEN

MILLIONS OF YEN

86,42887,99787,054Net Income

Cash Dividends per Share(Non-consolidated)
88,946MILLIONS OF YEN

59.00

93,889

ROE

16.7

%

13.7

48.00
44.00

13.5

36.00

2011

15,1802012

14,611

2013

15,872

2014

14.5

12,122

9,735

40.00

14,179

14.0

8,213

8,282

2011

2012

8,991

20,631

2015

2011

2012

2013

2014

2015

2013

2014

2015

ANNUAL REPORT 20151

President’s Message
Dear Stakeholders:
In the fiscal year under review, ended March 31, 2015, an
adverse environment was created by the consumption tax rate
hike, the National Health Insurance (NHI) drug price revisions,and the continued drive to promote the use of generic drugs. As
a result, the sales performance of existing products was down
year on year, particularly with regard to long-term listed products.
Amidst this adversity, however, we launched Clenafin, Japan’s
first topical treatment for onychomycosis, in September 2014.
Sales of this new product made a contribution that more thancovered the lower sales of existing products. Also in 2014,
Valeant Pharmaceuticals International, Inc. (Valeant), of Canada,
which has been licensed by the Company to sell Clenafin,
released this drug in the United States and Canada under the
trade name Jublia. The strong performance of this drug in thesemarkets and the resulting licensing revenues from Valeantmade a contribution to the overall rise in sales and income.
As part of our efforts to acquire licenses for new productsthat will contribute to future earnings, we have received adevelopment license for BBI-4000, a primary focal hyperhidrosis treatment, from Brickell Biotech, Inc., of the United

Overview of Results for the Fiscal Year Ended
March 31, 2015
In the fiscal year under review, ended March 31, 2015, consolidated net sales increased 5.6% year on year, to ¥93,889
million. Consequently, operating income was up 30.0%, to¥20,631 million, and net income grew 24.5%, to ¥12,122
million, despite a loss on sales of noncurrent assets recorded
under extraordinary loss.

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

Investing strategically in R&D
In our R&D efforts, we will continue to selectively focus the
allocation of resources and constantly strive to raise efficiency in order to expand our pipeline. At the same time, wewill engage in joint research and pursue strategic allianceswith companies and research institutions in Japan andaround the world with the aim of quickly introducing new
research projects.
To expedite R&D efforts, we will also outsource basic
research procedures, utilize contract research organizations(CROs) related to clinical trials, and conduct overseas clinical
trials while also participating in joint global clinical trials.

2

K AKEN PHARMACEUTICAL CO., LTD.

States. Going forward, we willcontinue enhancing our R&D
pipeline through in-licensing andother activities.
As for shareholder returns, wewill maintain the policy of emphasizing shareholder returns that wehave practiced to date. Initially, we
had intended to issue total dividend payments of ¥54.00 per
share in the fiscal year ended March 31, 2015. However,full-year performance exceeded our initial forecasts, and wetherefore chose to raise the amount of total dividend payments to ¥59.00 per share. At this point in time, we plan toissue total dividend payments of ¥68.00 per share in thefiscal year ending March 31, 2016. In addition, we acquired
nearly 1.6 million shares of treasury stock in May 2015, after
having cancelled 5.0 million shares previously.
Going forward, we will strive unceasingly to ensure Kaken
continues to be a company that is appealing to investors. In
closing, I would like to ask for your continued support as weundertake this endeavor in the future.

Strengthening sales activities
We will continue to conduct sales activities in which our
medical representatives (MRs) work closely with local communities to supply medical practitioners with high-value-added
medical information according to their needs. In providing
medical information, product-related websites and the mass
media will be utilized. At the same time, we will solidify ourposition in the orthopedics field while expanding our presencein the dermatology field. We plan to advance the developmentof our generic drug business as a dominant pillar of our operations going forward.

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

Promoting environmental preservation
Kaken recognizes that promoting environmental preservationis one of its social responsibilities. Therefore, we are conducting Companywide environmental preservation activities
under the guidance of the Environmental Committee.
As one such activity, Kaken’s Shizuoka Factory has obtained
ISO 14001 certification.
Further information regarding Kaken’s environmental preservation activities can be found in its Social and Environmental
Report (Japanese only), which is available on Kaken’s website.

Basic Policy and Approach Concerning Returns
to Shareholders
Kaken believes that providing consistent shareholder returns
is an important task for management.
The pharmaceutical industry is relatively high risk, andtherefore companies operating in this industry must maintaina higher level of equity capital than companies in other industries. Accordingly, we have established a flexible policy of
issuing dividend payments based on operating results while
striking a balance between shareholder returns and the needto secure sufficient equity capital. Retained earnings, meanwhile, are used to maximize corporate value through strategic
investments in R&D and business infrastructure.
In principle, the Company makes dividend payments twicea year, with the interim dividend being decided by the Boardof Directors and the year-end dividend being decided at thegeneral meeting of shareholders.
In accordance with the aforementioned policy, we havedecided to increase the interim dividend by ¥3.00 per shareyear on year, to ¥27.00, and the year-end dividend by ¥8.00
per share, to ¥32.00. This made for a total dividend paymentof ¥59.00 per share in the fiscal year under review, and our
13th straight year of increased dividend payments.
Further, the Company acquired nearly 1.6 million shares oftreasury stock in accordance with a decision made by the
Board of Directors.
In the fiscal year ending March 31, 2016, we intend to pay
interim and year-end dividends of ¥34.00 per share each, fora total dividend payment of ¥68.00 per share.
In addition, we plan to conduct a 1-for-2 reverse stock split
on October 1, 2015. Accordingly, the dividend payment per
share will be doubled after this change.

Target Management Indicators and Long-TermBusiness Strategy
In the fiscal year under review, consolidated operating
income exceeded ¥20.0 billion, which had been our mediumterm numerical target. Despite achieving this goal, we willcontinue endeavoring to strengthen our foundations in orderto guarantee growth and ensure our survival as a businessthat maintains a strong presence in the 21st century.

June 2015

Change in Common Stock Trading Unit andReverse Stock Split
Effective October 1, 2015, the Company will change the trading unit for its common stock from 1,000 shares to 100
shares. At the same time, a 1-for-2 reverse stock split will beinstituted. These two measures will result in the investment
unit for the Company’s stock being reduced to one-fifth theprevious level.

Tetsuo Onuma
President and Representative Director

ANNUAL REPORT 20153

Special Feature

Developing

New Products

to Satisfy Unmet Medical Needs

Kaken’s Specialty—Topical Antifungal Agent—
Clenafin (efinaconazole) discovered by Kaken’s scientists is
the world’s first triazole compound for a topical medicationfor onychomycosis. This drug has potent antifungal activity
and is effective against a wide spectrum of fungi. Also, its
effectiveness decreased only slightly compared to otherexisting antifungal agents in the presence of keratin, themain component of nails. This means that the drug has superior nail penetrating properties, thereby demonstrating that it
can maintain its therapeutic effect in nails thickened by fungal
infection or on the underside of such nails. Clenafin has also
shown antifungal activity in various animal models of infections and, in particular, greater effectiveness than other treatment options in a guinea pig model for onychomycosis. For
these reasons, Clenafin is a promising new topical treatment
for persistent onychomycosis, which has been primarily
treated through oral medications in the past.
In 2006, Kaken concluded a licensing agreement with U.S.
company Dow Pharmaceutical Sciences, Inc. (DPS), granting
it the development and marketing rights for Clenafin in
Europe and the Americas. After Valeant acquired DPS in
2009, it has continued to conduct joint clinical development
activities with Kaken. In two multinational pivotal studies(phase III) in patients with mild to moderate onychomycosisof the toenails, this topical investigational drug was found to
be clinically and statistically superior to a vehicle for all

primary and secondary endpoints. The efficacy of this drug isalso competitive when compared to that of existing oral
medications, and it has demonstrated its efficacy as a topicalagent with fewer side effects.
In 2014, Kaken was granted manufacturing and marketing
approval for Clenafin in Japan, and it was subsequently
launched that year, making it the first topical medication foronychomycosis in the country. In the nearly one year since its
release, Clenafin has an exceptional reputation among dermatologists. In addition, Valeant acquired marketing approval
for this drug in Canada in 2013 and in the United States in
2014, and this drug is being marketed under the trade nameJublia in these countries.
We will continue to work with overseas partners to getapproval for this drug’s use as a treatment for onychomycosisin the global market.

Action Mechanism of Clenafin (efinaconazole)
Application of Clenafin

Effective in the presenceof keratin
Efinaconazole

CUTICLE

Keratin

Nail
plate

NAIL MATRIX
NAIL
PLATE

Nail bed

NAIL BED
Fungi

4

K AKEN PHARMACEUTICAL CO., LTD.

Antifungal activity
by efinaconazole

New Drug Development Pipeline
PRODUCT CODE

INDICATIONSTAGE

REMARKS1

KCB-1D

Periodontitis

Preparing for NDA

bFGF

2

KAG-308

Ulcerative colitis

Preparing for PII

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

3

BBI-4000

Primary focal hyperhidrosis

Pre-clinicalLicenced from Brickell Biotech, Inc.;
Topical anticholinergic

4SI-657

Enthesopathy

PIII

Developed jointly with Seikagaku Corporation;
Additional indication for Artz

Kaken’s Innovative Product for Tissue Regeneration: Fiblast Spray
Fiblast Spray is the world’s first marketed product for regenerative medicine treatment containing recombinant humanbFGF. Present in almost all tissue in the human body, bFGF isreleased from the extracellular matrix once tissue is damaged, and then acts on various cells and tissues to stimulate
tissue regeneration. While bFGF has a wide variety of functions, its most prominent features are its powerful ability tostimulate cellular proliferation and its capacity to promote
neovascularization.
In 1988, Kaken obtained exclusive licensing rights forrecombinant human bFGF (trafermin) in Asia from Scios Inc.,of the United States. Following this, Kaken has pushed forward with its own R&D efforts, and subsequently obtained
marketing approval for Fiblast Spray for the treatment ofpressure ulcers and other skin ulcers (burn ulcers and leg
ulcers) in June 2001. Further, after completing reexaminationin 2010, Fiblast Spray has been re-acknowledged as a highly
reliable drug. It is now used with confidence at a number ofhospitals throughout Japan.
Not only effective for regenerating skin tissue, trafermin
has also demonstrated the ability to promote the proliferation
and regeneration of both periodontal and bone tissues. In thefield of dentistry, trafermin is known for its ability to promote
the regeneration of periodontal ligaments, cementum, andalveolar bone. We have completed phase III clinical trials forthis drug, and are currently in the process of preparing to file
a new drug application for trafermin to be used in the treatment of periodontitis.
In March 2005, Kaken acquired the worldwide rights todevelop, manufacture, and market trafermin for all therapeutic

purposes. In June 2007, Kaken entered a licensing agreementwith Sunstar Inc. regarding the development and marketing oftrafermin for dental applications in Europe and North America.
Further, in November 2009, Kaken entered a licensing agreement with Olympus Corporation in relation to the development and marketing of trafermin for wound healing in Europe
and North America. Kaken also entered licensing agreements
regarding the development and marketing of Fiblast Spraywith a Chinese pharmaceutical company in December 2005
and with a South Korean company in December 2006.
Going forward, Kaken will continue to expand the presenceof trafermin in the global medical market. In this undertaking,we will collaborate with our overseas business partners andfully utilize the wealth of knowledge we have accumulated
regarding trafermin.

Action Mechanism of Fiblast Spray
Epithelialization Stimulation
Reduction of wound area

Fibroblasts Proliferation
Stimulation of granulation
formation
EPIDERMISGRANULATIONTISSUE

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

DERMIS/SUBCUTANEOUS
TISSUEMUSCLEBONE

ANNUAL REPORT 20155

Overview of Major Products

Pharmaceuticals and Medical Devices
Artz

Clenafin

Seprafilm

Anti-osteoarthritis product

Topical onychomycosis treatment

Anti-adhesive absorbent barrier

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

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

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

Sales: Artz

Sales: Clenafin

Sales: Seprafilm

MILLIONS OF YENMILLIONS OF YENMILLIONS OF YEN

30,84031,83631,55032,073

6,857

30,259

9,580

9,967

10,363

10,726

10,791

Launched in
September 20142011/3 2012/3 2013/3 2014/3 2015/3
6

K AKEN PHARMACEUTICAL CO., LTD.

2011/3 2012/3 2013/3 2014/3 2015/3

2011/3 2012/3 2013/3 2014/3 2015/3

LipidilFiblast Spray

Generic Drugs

Anti-hyperlipidemia product

Wound-healing product

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

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

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

Sales: Lipidil

Sales: Fiblast Spray

Sales: Generic Drugs

MILLIONS OF YENMILLIONS OF YENMILLIONS OF YEN

4,194

4,429
4,118

4,373

4,082

3,946

3,934

3,809

12,380

3,786
3,511

10,977

7,852

2011/3 2012/3 2013/3 2014/3 2015/3

2011/3 2012/3 2013/3 2014/3 2015/3

8,520

9,180

2011/3 2012/3 2013/3 2014/3 2015/3
ANNUAL REPORT 20157

Procylin

AdofeedMentaxOral-use prostaglandin I2 analog
product

Pain- and inflammation-relieving
plaster

Anti-trichophyton product

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

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

Ebrantil

BerasusClexane1 blocker to treat dysuria
and hypertension

Oral-use sustained-release formulation of prostaglandin I2 analog

Anticoagulant

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

8

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

K AKEN PHARMACEUTICAL CO., LTD.

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

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

Agrochemicals
Polyoxins

Pentoxazone

Fungicides

Rice herbicide

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

Synthesized at the Sagami Chemical Research Center anddeveloped by Kaken, Pentoxazone is an oxazolidinedione-type
rice herbicide. In 1997, it was registered as an agrochemical in
Japan. Since then, it has been used as a herbicide for paddy
rice in its initial formulation and in several mixed formulations
based on this initial formulation.
Pentoxazone is effective mainly on annual weeds in ricepaddies, such as barnyard grass, Lindernia, and Monocholia,
and is also widely effective on other weeds including Eleocharis
kuroguwai, a perennial weed that is difficult to eradicate. Pentoxazone shows high, stable, and residual efficacy particularly
on Lindernia and Monocholia, both of which are resistant tosulfonylurea herbicides.
The safety of Pentoxazone is high for rice paddies, andtherefore it can be used in a variety of ways. Its initial formulation can be used on rice paddies before or after the rice istransplanted, and its one-shot herbicide formulation can beused at the same time as rice planting. There are also formulations approved for flooding and direct seeding in rice paddies.
Having extremely low water solubility and high soil absorbability, Pentoxazone hardly flows out to groundwater and rivers.
Furthermore, it has low toxicity to humans, animals, and otherlife forms. For these reasons, it is an environmentally safe
herbicide.

Animal Health Products
Salinomycin

Colistin sulfate

Anti-coccidial for chickens

Polypeptide antibiotic

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

Colistin sulfate is a polypeptide antibiotic that was discoveredin 1950 in a culture of Bacillus colistinus taken from the soil in
Fukushima Prefecture, Japan. Colistin sulfate is effective
against gram-negative bacteria such as E. coli and salmonella,
which are serious pathogens for livestock. Accordingly, there
is a great international demand for this product. Therefore,
Kaken also exports this product worldwide.

ANNUAL REPORT 20159Commitment and Excellence

R&D Division
As a pharmaceutical manufacturer, Kaken utilizes the technologies it has accumulated throughout its long history as
well as its superior research staff to advance R&D activities
to continually develop new drugs. Kaken focuses its drug
discovery efforts on areas where it has a strong presence,
including inflammation, allergies, and pain relief, and also
maintains its focus on the area of fungal infection in which it
specializes, devoting a great deal of financial and humanresources to these research themes.
The R&D Division is presently staffed by approximately 300
employees. Kaken estimates that research and development
expenses will be around ¥11.3 billion during the fiscal year
ending March 31, 2016. The R&D Division also works to more
actively evaluate products as potential candidates to be introduced into Kaken’s clinical development pipeline. At thesame time, the division employs a multifaceted approach
toward its R&D activities, which entails engaging in joint
research and development, in- and out-licensing of developed
products, and outsourcing of its operations. To boost theefficiency of its R&D initiatives, the R&D Division was reorganized in October 2014. Details of the new organizations are
as follows.
Kaken’s R&D activities are conducted at the Drug ResearchCenter located in Kyoto, the old capital of Japan, as well as at
one department of the Drug Research Center and the CMC
Center located in Shizuoka Prefecture. At these facilities,
Kaken conducts drug discovery projects, which require long,arduous research as well as unique, specialized knowledge. In
order to ensure that these projects progress efficiently,
researchers make full use of state-of-the-art equipment andtechnologies, and encourage effective communication and theclear division of responsibilities. At the Drug Research Centerin Kyoto, the Chemistry Department is responsible for thedesign and synthesis of chemical compounds, the “seeds”
from which new drugs are created. The Pharmacology Department of this center screens synthetized compounds, andevaluates the usefulness of developed compounds and compares these compounds to other available drugs.
10

K AKEN PHARMACEUTICAL CO., LTD.

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

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

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

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

By leveraging such superior research technologies, theCompany aims to continue to accelerate and expand its R&D
efforts going forward.
Candidate drugs that have non-clinical studies are thentested to evaluate their safety and effectiveness on humansubjects. The Clinical Development Department conducts
clinical trials for candidate compounds that have been developed through drug discovery research or introduced fromoutside partners to evaluate their efficacy and safety inhuman subjects. In addition to developing original drugs,
Kaken also engages in joint clinical trials with other companies or organizations. Recently, a successful global clinical
trial was jointly conducted between Kaken and a foreigncompany, which has entered into a licensing agreement with
Kaken, leading to the launch of a new drug in Japan andsome foreign countries. The Clinical Development Department also handles all areas of statistical analysis. It manages
case data from clinical trials and information related to thesafety of the drugs under investigation, and works to maintain a certain degree of quality with regard to this data.
Meanwhile, the R&D Quality Assurance Department
assures the quality and reliability of the data related to clinical trials that are conducted by the Clinical Development
Department. It also assures quality and reliability of theplans and data related to the non-clinical studies that aredesigned and conducted by research laboratories. These
departments mutually cooperate with efforts to conductclinical trials as quickly as possible.
In addition to in-house R&D ventures, Kaken also engages
in licensing activities and joint research with outside companies and organizations to expand its pipeline. The Research
Planning and Collaboration Department seeks out themes forjoint research with academic institutions as well as othercompanies while also searching for partners with which to
conduct joint research related to “seeds” developed in-house.
Meanwhile, the Project Management and Licensing Department searches for promising drugs for which to acquire
licenses, and then advances contract negotiations with thelicense holders. This department is also responsible for negotiations related to out-licensing activities. The department also
conducts project management with regard to R&D themes in
the clinical development phase. The Alliance Management
Section handles the export business as well as communications concerning alliances with partners after the out-licensingof Kaken’s products.
Kaken will focus on its areas of expertise to accelerate theprogression of its drug discovery research efforts. Also, theCompany will collaborate with both domestic and overseas
research institutions and introduce and license new drugs andcontinue to seek out the “seeds” of new technologies anddrugs around the world. Moreover, by periodically discussing
Kaken’s drug discovery strategies with and receiving advice
from respected experts in Japan, the Company will continue

to ensure that its drug discovery programs are in-line withpresent day medical needs.

Regulatory Affairs Division
Kaken’s Regulatory Affairs Division consists of three departments: the Quality Assurance Department, the Pharmacovigilance Department, and the Regulatory Affairs Department.
The Regulatory Affairs Division is an embodiment of Kaken’s
sense of responsibility as a pharmaceutical manufacturer. Thisdivision makes the final judgments regarding the quality,
effectiveness, and safety of the drugs that the Company supplies to various medical fields.
The Quality Assurance Department assesses whether or
not each batch of drugs is produced in the predeterminedmanner and evaluates whether or not quality tests are compliant with all applicable standards. The Pharmacovigilance
Department then reviews the safety-related information pertaining to these drugs that has been collected from the medical
institutions where they are in use. Following this, the Regulatory Affairs Division makes comprehensive judgments basedon the findings of these two departments.
The Quality Assurance Department conducts regular inspections and audits of both internal and external production plants,
thus gathering and assessing quality-related information atthese plants in order to ensure the quality of their operations.
The Pharmacovigilance Department reports the safety-related
information it has gathered and reviewed to organizations that
require it. The department also distributes this information to
medical institutions in the form of proper-usage information
contained in package inserts, thereby helping promote theeffective use of Kaken’s products. Furthermore, this department is responsible for collecting and evaluating safety-related
information from the R&D phase for pharmaceuticals.
The Regulatory Affairs Department supervises and assists
all aspects of the Company’s manufacturing and sales activities, and is also responsible for maintaining marketing
licenses for its pharmaceuticals. In addition to this, thedepartment also participates in the R&D process. It compiles
the R&D Division’s data regarding quality as well as datafrom both non-clinical and clinical trials. After compiling thisdata, the department is then tasked with gaining approval foruse of our drugs and for listing them in the NHI Drug Price
List after approval is obtained. The department is also responsible for producing product literature for approved drugs.

ANNUAL REPORT 201511

Production Division

Agrochemical & Animal Health Products Division

Kaken’s production facility is the Shizuoka Factory. At thislocation, we manufacture pharmaceuticals, agrochemicals,
and feed additives. In manufacturing pharmaceuticals, we
practice strict adherence to Japanese GMP (“Ministerial Ordinance on Standards for Manufacturing Control and Quality
Control for Drugs and Quasi-drugs,” revised Ordinance ofMinistry of Health, Labour and Welfare, No. 87, 2014). Furthermore, for products marketed overseas, we take steps toensure they are in compliance with applicable standards in
the United States and other countries in which they are marketed. In such ways, we have developed a stringent quality
control system under which we strive to manufacture products of the highest quality. This facility got its start around 60
years ago, and was initially a facility for manufacturing antibiotics and enzymes through fermentation. Over the years, it
has continued to refine these technologies, and now one ofits main characteristics is its use of sophisticated fermentation
technologies, with another being its practice of Japanese GMP
management procedures that are suited to pharmaceuticals.

The Agrochemical & Animal Health Products Division is
responsible for conducting research and development
through sales activities related to agrochemicals, feed additives, and drugs for animals.
Our agrochemical operations are primarily focused on two
products—Polyoxins, which is a group of fungicides, andPentoxazone, a rice herbicide—and we are actively developing these products and expanding their sales both in Japanand also in overseas markets. Polyoxins are fungicides produced by culturing microorganisms in a culturing medium
consisting of natural materials. These products are highly safefor both humans and animals and have a low environmental
impact. For a number of years, these products have consistently won strong praise and support from agriculture producers around the world due to their effectiveness in preventing
disease damage to vegetables, fruit trees, lawns, and flowers.
In addition, Polyoxin AL has recently proven to have acaricidal
properties, thus further expanding its range of use. Pentoxazone is a rice herbicide that is effective against the vast arrayof annual weeds found in rice paddies and has also demonstrated effectiveness against herbicide-resistant varieties of
weeds. These factors make Pentoxazone indispensable forrice farmers.
The feed additives we offer include Salinomycin, an anticoccidials for chickens, and Colistin sulfate, which helps prevent infectious diseases in livestock. We also supply a drug
known as Uroston that is used to treat urolithiasis in bovine.
Through the provision of feed additives and drugs for animals,
Kaken is contributing to the production of healthy livestockand safe food.
Going forward, the Agrochemical & Animal Health Products
Division will continue contributing to the safety and reliabilityof food production by developing and selling products thatare safe for both humans and animals while also having a low
environmental impact.

Marketing & Sales Division
At Kaken, we employ MRs,
who are responsible for providing medical practitioners
in the field with the latest
information related to theCompany’s drugs and medical
devices. These MRs alsocollect information regarding
the safety and effectivenessof Kaken’s products byactively engaging in communication with such practitioners
in the medical field. They then provide feedback to internal
departments based on their findings.
Positioned throughout our nationwide network consistingof 8 branches and 62 sub-branches, our approximately 750
MRs work in close contact with local communities, and areparticularly capable with regard to the fields of orthopedics,
dermatology, and general surgery.

12

K AKEN PHARMACEUTICAL CO., LTD.

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

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

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

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

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

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

Corporate Governance System (As of June 26, 2015)
General Meeting of Shareholders
APPOINT/DISMISSAPPOINT/DISMISS
AUDITBoard of Directors

Audit & Supervisory Board

APPOINT/DISMISSREPORT

Audit & Supervisory Board Members
COORDINATE/REPORTAPPOINT/DISMISSSUPERVISE

COORDINATE
INSTRUCTInternal Audit Department
REPORT

Risk Management andRepresentative

DELIBERATE

AUDIT

various other committees

President and

REPORT

Managing Directors’ Meeting

Accounting
AuditorREPORT

SUPERVISE

Director
REPORTPROMOTE

AUDITINSTRUCT, SUPERVISE

Companywide organizations,Group companies

ANNUAL REPORT 201513

Environmental Protection Activities
In recent years, there has been a growing concern for various
environmental issues, such as preserving biodiversity. Theseissues force people to reevaluate their interests in a numberof wide-ranging and complex areas, thus increasing the rolethat corporations must play in addressing these issues. Of
these issues, we believe that addressing the need to preserve and restore the natural environment is of particularimportance for corporations. Therefore, we will continue toexercise our corporate philosophy by promoting environmental
preservation and working to be a good corporate citizen withthe aim of creating a society that is full of healthy, smiling faces.
In 1983, Kaken established Environmental Measures Committees at each of its operational sites. These committees
were assigned the task of addressing the need to (1) preserve
the natural environment, (2) improve people’s health and living
environments, and (3) reduce pollution.
Further, in 2004, we developed the Kaken Basic Environmental Philosophy and the Basic Environmental Policies. In
April 2009, the Environmental Measures Committees weretransformed into Environmental Measures Task Forces. Thesetask forces work in cooperation with the Environmental Committee to advance Companywide environmental preservation
measures. Additionally, we have taken several steps to reinforce our environmental management activities, including
acquiring ISO 14001 certification for our Shizuoka Factory inAugust 2001.
Looking ahead, we will continue to actively engage in environmental management and social contribution activities at
the Company’s headquarters and its factory and all of its
research centers and sales and other branches, while developing a more complete and aggressive approach toward
environmental issues. At the same time, we will work to
reduce the environmental impact of Kaken’s operations.

Recent Environmental Protection Activities
Environmental Monitoring of Business Activities
Kaken believes that consideration for the natural environmentis one of its responsibilities toward society. For this reason,
all employees are made aware of the environmental circumstances regarding Kaken’s business operations. This includes
promoting the understanding of input data related to the useof chemical substances that impact the environment andenergy consumption as well as output data on the emissions
into water and the atmosphere and waste production figures.
Based on an understanding of this information, reductions inenvironmental impact are being pursued.

14

K AKEN PHARMACEUTICAL CO., LTD.

Water Pollution Prevention
Kaken is emphasizing initiatives that contribute to environment preservation. For example, the Shizuoka Factory separates wastewater from production activities into organic
wastewater and other wastewater. Organic wastewater thenundergoes treatment using active sludge, after which it ismixed with other wastewater until the organic wastewater isdiluted to below the maximum level defined in the wastewater standards. It is then subsequently dispelled into rivers. To
further its efforts to prevent water pollution, the factory concluded an agreement with Fujieda City, Shizuoka Prefecture,
regarding pollution prevention in 1976. The factory has alsoestablished internal standards based on which it periodicallymeasures its environmental impact, and is practicing strict
compliance with environmental laws and regulations. In asimilar manner, the Drug Research Center in Kyoto treatsorganic wastewater using active sludge, and then mixes itwith wastewater from other systems before dispelling it into
public sewers. When dispelling such wastewater, this Drug
Research Center adheres to its own internal standards,
which are stricter than the standards of Kyoto City, and periodically measures its emissions and reports the findings.
Air Pollution Prevention
In order to prevent air pollution, the Shizuoka Factory
installed a city gas fired boiler to replace its previous boiler,
which used fuel oil A. As a result, the factory has continued
to boast zero emissions of sulfur oxide (SOx) since 2007. In
the fiscal year ended March 31, 2014, the facility revised its
agreement with Fujieda City regarding smoke dust concentration emissions. At this time, the Shizuoka Factory voluntarily lowered the mutually agreed limit to below 0.05g/m3N.
Smoke dust emissions are measured twice a year, and emission levels are always significantly lower than this limit.
The kerosene-fired boiler of the Drug Research Center in
Kyoto was also replaced with a city gas fired boiler to prevent
air pollution in May 2007, and the facility has continued tooperate with zero emissions of SOx ever since. Moreover,the Drug Research Center measures soot and smoke emissions twice a year, and its emissions figures are always substantially below the level permitted by the Air Pollution
Control Act.
Going forward, both the Shizuoka Factory and the Kyoto
Drug Research Center will continue strengthening environ­mental management procedures to better prevent air pollution.

Chemical Substance Management
Both the Shizuoka Factory and the Kyoto Drug Research Center are managing chemical substances on a voluntary basis.
In order to reduce exposure to potential risks from using
harmful chemical substances, the Company considers possible revisions to its processes for manufacturing and analyzing pharmaceuticals, and is working to reduce the amount ofsolvents used and switch to less harmful substances. In addition, internal regulations have been established for handlingharmful chemical substances, and the Company is working toprevent accidents and environmental pollution at all stages ofhandling these chemicals, from purchasing to use and thendisposal. The Company also manages chemical substances in
an integrated manner together with reagents. Safety data
sheets (SDSs) regarding the usage of such substances are
kept up-to-date to ensure readiness for emergencies.

Social Responsibility as a Pharmaceutical Company
Product Quality Assurance
Kaken believes that it is absolutely essential to possess aquality assurance system in which both its headquarters(a medical supplier) and its factory (a manufacturer of pharmaceuticals) maintain close coordination. At Kaken’s factory,
the effectiveness and appropriateness of each manufacturing
process and facility is evaluated to ensure that manufacturing
practices and quality are suitably managed. The Quality
Assurance Department evaluates and confirms these activities, which is believed will result in the creation of a more
stringent quality assurance system. These activities havebeen expanded to the R&D Division and the Marketing &Sales Division to guarantee the utmost quality throughout allstages of a product’s lifecycle.

Safety Assurance for Pharmaceuticals After Launch
Waste Reduction and Recycling
The production of waste is part of the process of manufacturing pharmaceuticals that cannot be avoided. However, thedevelopment of a recycling-based society requires that the
production of waste for final disposal be reduced to the greatest extent possible. To this end, the Shizuoka Factory acts inaccordance with the Basic Law for Establishing the Recyclingbased Society, and is actively practicing the 4Rs (refuse,
reduce, reuse, and recycle). In the fiscal year ended March 31,
2015, the total amount of waste produced by the Shizuoka
Factory was 4,383 tons. Of this, 93% was sludge produced
during the treatment of wastewater and residual materials
from fermentation processes (animal and plant remnants). The
entire volume of this sludge and residual materials producedin the year under review was used for composting. Goingforward, the Company will continue to advance activities
promoting the reduction and recycling of waste.

New pharmaceuticals receive marketing approval only after
undergoing stringent evaluations. However, these evaluations
are based on the results of clinical trials, which have a limited
scope in regard to such considerations as patient age andgender and the range of drugs taken simultaneously. Afterdrugs are launched, they are used by a wider range ofpatients, and this can result in the occurrence of unexpectedside effects. For this reason, it is necessary to continue toevaluate the efficacy and safety of drugs even after they havebeen launched. To this end, the Company has established thePharmacovigilance Department, which continues to collect,evaluate, and analyze data regarding the efficacy and safetyof the pharmaceuticals Kaken sells after they are launched. Itthen addresses any issues and provides information regarding proper usage methods to medical practitioners.

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

ANNUAL REPORT 201515

Board of Directors and Audit & Supervisory Board Members(As of June 26, 2015)(Standing, from left)

Noboru Shibata, Hirokazu Konishi, Yoshihiro Ieda, Kazuki Sekitani, Eiki Enomoto(Seated)Tetsuo Onuma

President and Representative Director

Audit & Supervisory Board Member

Tetsuo Onuma

Masanori Aoyama

Managing Director

Hirokazu Konishi(Marketing and Sales)

Managing Director

Yoshihiro Ieda

Audit & Supervisory Board Member

Atsutada Iwamoto(Standing)

Audit & Supervisory Board Member(Administration, Corporate Planning & Coordination)

Toshio Sakurai

Managing Director

Audit & Supervisory Board Member

Noboru Shibata

Kazuo Hara

(Accounting, Purchasing and Agrochemicals)Managing Director

Kazuki Sekitani(Research and Development)

Outside Director

Eiki Enomoto

16(Standing)

K AKEN PHARMACEUTICAL CO., LTD.

Financial Section

Consolidated Five-Year Summary�����������������������������������������18
Management Discussion and Analysis���������������������������������18
Consolidated Balance Sheets�����������������������������������������������20
Consolidated Statements of Income������������������������������������22
Consolidated Statements of Comprehensive Income����������23
Consolidated Statements of Changes in Net Assets�����������24
Consolidated Statements of Cash Flows�����������������������������25
Notes to the Consolidated Financial Statements�����������������26
Report of Independent Auditors�������������������������������������������46

ANNUAL REPORT 201517

Consolidated Five-Year Summary

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

2015

2014

2013

2012

2011

2015
$  782,408

FOR THE YEARS ENDED MARCH 31¥ 93,889¥ 88,946¥ 87,054¥ 87,997¥86,428

Operating income

Net sales

20,631

15,872

14,611

15,18014,179171,925

Net income

12,122

9,735

8,991

8,282

8,213

101,017

AT MARCH 31

Total net assets

77,10068,096

66,57862,07160,375642,500

Total assets

115,135

106,465

108,911105,108

98,493

959,458¥145.45¥114.14¥103.30¥92.46¥87.87$1.212

59.00

48.00

44.00

40.00

36.00

0.492

PER SHARE DATA

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

YEN

RATIOS

U.S. DOLLARS (NOTE)

%

ROE

16.66

14.46

13.98

13.53

13.69

Capital adequacy ratio

66.96

63.96

61.13

59.05

61.30

Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥120 = $1.00, effective on March 31, 2015.

Management Discussion and Analysis
Operating Performance
In the fiscal year under review, ended March 31, 2015, consolidated net sales were up 5.6% year on year, to ¥93,889
million, and operating income increased 30.0%, to ¥20,631
million. Net income rose 24.5%, to ¥12,122 million, regardless of the recording of loss on sales of noncurrent assets as
an extraordinary loss.

18

K AKEN PHARMACEUTICAL CO., LTD.

Segment Information
Pharmaceuticals
Kaken’s pharmaceuticals segment consists of two core categories: pharmaceuticals and medical devices as well as
agrochemicals.
In pharmaceuticals, sales of Artz, an anti-osteoarthritis
product and one of Kaken’s mainstay products, were down
as a result of National Health Insurance (NHI) drug price revisions. However, overall sales were up in this category as aresult of the strong performance of Clenafin, a topical treatment for onychomycosis, after its September 2014 launch.
Other contributions to the higher sales included growth ingeneric drug sales as well as revenues received from theoverseas company licensed to sell Clenafin.
In medical devices, sales increased for Seprafilm, an antiadhesive absorbent barrier.
In agrochemicals, sales grew overall due to higher sales of
Polyoxins.
As a result of the above, net sales in the pharmaceuticals
segment increased 5.8% year on year, to ¥91,458 million,
and segment income* was up 32.3%, to ¥19,080 million.
Net sales from overseas were ¥7,255 million.

Real EstateBusiness Risks

In the real estate segment, the majority of revenues are generated through rent fees related to the Bunkyo Green Court
commercial facility. Net sales for the real estate segment
decreased 1.3% year on year, to ¥2,431 million, while segment income* increased 7.3% year on year, to ¥1,550 million.

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

* Segment income is based on operating income.

Financial Position
Total assets were ¥115,135 million as of March 31, 2015, up¥8,669 million from the previous fiscal year-end, primarily due
to an increase in marketable securities. Total liabilities were¥38,035 million, down ¥333 million, which was largely attributable to a decrease in net defined benefit liability. Net
assets totaled ¥77,100 million, an increase of ¥9,003 million,
following higher retained earnings.

(1) Risks related to new drug development
Substantial investment amounts and development periodsof more than 10 years are required before a new drug canbe launched. The Company develops new drugs while taking
such factors as the efficacy and safety of a particular drug
into full consideration. However, it is possible that the development process could be halted before its completion.

Cash Flows(2) Risks related to the side effects
Clinical trials undertaken in the development stage involve
the trial administration of the drug to a limited number ofpatients. Accordingly, after a drug is launched onto the market, we conduct post-marketing surveillance to supplement
these clinical trials. In the event that new side effects are
identified at this stage, sales of the drug could be halted.

Cash and cash equivalents as of March 31, 2015, totaled¥24,767 million, an increase of ¥7,310 million compared withthe previous fiscal year-end. Principal factors related to cash
flows during the year under review are as follows.
Net cash provided by operating activities totaled ¥14,737
million, an increase of ¥1,073 million year on year, due tofactors including an increase in income before income taxes.
Net cash provided by investment activities totaled ¥473
million, compared with net cash used in investing activities of¥2,135 million in the previous fiscal year. This was due tofactors including the recording of proceeds from sales ofproperty, plant and equipment.
Net cash used in financing activities totaled ¥7,900 million,a decrease of ¥3,091 million year on year, which was largely
due to the rebound from the decrease in short-term loans
payable conducted in the previous fiscal year.

(3) Risks related to policies to curtail public healthcare
expenditure
As government initiatives to curtail healthcare expenditurecontinue, various medical system reforms are also being
implemented. These reforms may cause changes in themarket environment, which could subsequently affect theCompany’s performance.
(4) Risks due to competition
Sales competition with other pharmaceutical companies may
result in a drop in the sales price of products. In addition, salesof generic versions of Kaken products by other companies
may cause declines in sales of Kaken products. Such factors
could subsequently affect the Company’s performance.
(5) Risks related to delay or cessation of product supply
The supply of products may be delayed or halted as aresult of various factors, such as problems with the Company’s manufacturing facilities, or the facilities of its suppliers, and delays in the procurement of raw materials.
These factors could affect the Company’s performance.
(6) Risks related to litigation
The Company is exposed to the possibility of litigation
arising in relation to its business activities. Such litigation
could affect the Company’s performance.
ANNUAL REPORT 201519

Consolidated Balance Sheets
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
As of March 31, 2015 and 2014
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YENASSETS

2015

2014

2015

¥ 10,553¥  9,644$  87,942

14,214

7,812

118,450

28,20425,363

235,033

879

1,009

7,325

29,084

26,373242,367

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

—

(2)

—

29,084

26,370242,367

Inventories (Note 5)

13,483

13,222

112,358

Deferred tax assets (Note 14)

1,342

1,127

11,183

338

324

2,817

69,01658,501

575,133

38,55040,014321,250

Other    Total current assets

PROPERTY, PLANT AND EQUIPMENT (Notes 6, 7 and 8):
Buildings and structures
Machinery, equipment and vehicles

22,967

22,335

191,392

61,51862,350512,650(42,292)(42,511)(352,433)

19,225

19,838160,208

Land

4,313

6,646

35,942

Construction in progress

2,422

2,031

20,18325,961

28,516

216,342

15,357

10,994

127,975

474

598

3,950

3,226

5,588

26,883

Accumulated depreciation    Total property, plant and equipment

INVESTMENTS AND OTHER ASSETS:
Investment securities (Notes 4 and 9)
Intangible assets
Deferred tax assets (Note 14)
Other assets    Total investments and other assets
TOTAL ASSETS
See accompanying notes to Consolidated Financial Statements.

20

K AKEN PHARMACEUTICAL CO., LTD.

1,097

2,265

9,142

20,156

19,447

167,967¥115,135¥106,465$ 959,458

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

2015

2014

2015

¥  4,195¥  4,195$  34,958   Notes and accounts payable–trade (Note 9)

12,295

13,713

102,458  Notes payable–facilities

1,377

154

11,475   Accounts payable–other

4,790

3,590

39,917

18,462

17,458

153,850

542

370

4,517

1,361

1,355

11,342

383

506

3,192

3,807

3,628

31,725

LIABILITIES AND NET ASSETSCURRENT LIABILITIES:
Short-term bank loans (Notes 6 and 9)
Payables:Accrued expenses
Provision for bonuses
Provision for sales rebates
Income taxes payable (Note 14)
Other    Total current liabilities

1,616

540

13,46730,36928,056

253,075

59,683

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

7,162

9,493

Provision for directors’ retirement benefits

—

3

—

Deferred tax liabilities (Note 14)

121

135

1,008

Other

381

681

3,175

7,665

10,312

63,87523,85323,853

198,775

Capital surplus

11,406

11,587

95,050Retained earnings

52,932

49,789441,100 Treasury stock, at cost: 14,025,880 shares in 2015 and17,380,750 shares in 2014

(16,098)(17,656)(134,150)    Total shareholders’ equity

72,09467,574

600,783
45,650    Total non-current liabilities

NET ASSETS:
Shareholders’ equity (Notes 2 (l) and 11):
Common stock   Authorized: 360,000,000 shares (Note 19)  Issued: 96,879,461 shares as of March 31, 2015 and101,879,461 shares as of March 31, 2014

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

5,478

2,398

Remeasurements of defined benefit plans(472)(1,876)(3,933)

5,005

521

41,708    Total accumulated other comprehensive income    Total net assets
TOTAL LIABILITIES AND NET ASSETS

77,10068,096

642,500¥115,135¥106,465$ 959,458

See accompanying notes to Consolidated Financial Statements.

ANNUAL REPORT 201521

Consolidated Statements of Income
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2015 and 2014
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

NET SALES¥93,889¥88,946$782,408

COST OF SALES

44,75345,166372,942  Gross profit

49,13643,780409,467

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 12)28,50427,907

237,533

OPERATING INCOME

20,631

15,872

171,925

219

200

1,825

OTHER INCOME (EXPENSES):Interest and dividends income
Interest expenses

(28)

(44)

(233)

Amortization of net retirement benefit obligation at transition

(524)

(524)

(4,367)(9,825)(1,179)—Loss on retirement of non-current assets

Gain or loss on sales of non-current assets, net (Note 13)

(69)

(24)

(575)

Amortization of long-term prepaid expenses

(525)

—

(4,375)

Loss on sale of golf club membership

(8)

(0)

(67)

Other, net

96

17

800

(2,019)(376)(16,825)

18,611

15,496

155,092

Current

6,611

6,134

55,092

Deferred

(123)

(373)

(1,025)

6,488

5,761

54,067

INCOME BEFORE MINORITY INTERESTS

12,122

9,735

101,017NET INCOME¥12,122¥ 9,735$101,017

PER SHARE DATA:

2015

2014

2015

¥145.45¥114.14$1.212———¥ 59.00¥ 48.00$0.492

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

YEN

U.S. DOLLARS (NOTE 1)

Net income (Note 16):
Basic
DilutedCash dividends applicable to the year (Note 11)
See accompanying notes to Consolidated Financial Statements.

22

K AKEN PHARMACEUTICAL CO., LTD.

Consolidated Statements of Comprehensive Income
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2015 and 2014
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

¥12,122¥ 9,735$101,017

Net unrealized holding gain on securities

3,079

462

25,658Remeasurements of defined benefit plans

1,404

—

11,700   Total other comprehensive income

4,484

462

37,367COMPREHENSIVE INCOME

16,607

10,197

138,392¥16,607¥10,197$138,392

INCOME BEFORE MINORITY INTERESTSOTHER COMPREHENSIVE INCOME (Note 17):

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

ANNUAL REPORT 201523

Consolidated Statements of Changes in Net Assets
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2015 and 2014MILLIONS OF YEN
ACCUMULATED OTHERCOMPREHENSIVE INCOME

SHAREHOLDERS’ EQUITY

Common stock Capital surplus

BALANCE—April 1, 2013

Retainedearnings

Treasury stock

Total

Net unrealized Remeasurementsof defined
holding gain on
benefit planssecurities

Total

TOTAL NETASSETS¥23,853¥11,587¥43,997¥(14,796)¥64,642¥1,936¥     —

¥ 1,936¥66,578

23,853

11,58743,997(14,796)

64,642

1,936

—

1,936

66,578Cumulative effect of changes
in accounting policies  Restated balance
Changes during the year:  Cash dividends(3,942)(3,942)  Net income

9,735

9,735

9,735

(2,860)(2,860)(2,860)   Purchase of treasury stock  Other, net
Total changes during the year
BALANCE—March 31, 2014

462

(1,876)(1,414)

—

—

5,792

(2,860)

2,932

462

(1,876)(1,414)

1,518¥23,853¥11,587¥49,789¥(17,656)¥67,574¥2,398¥(1,876)¥  521¥68,096Cumulative effect of changes
in accounting policies  Restated balance(3,942)299
23,853

11,58750,089299(17,656)

67,874(1,414)299
2,398(1,876)521

68,395

Changes during the year:  Cash dividends(4,265)(4,265)(4,265)  Net income

12,122

12,122

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

(181)

(5,013)

5,195

—
3,079

1,404

4,484

4,484

—

(181)

2,843

1,557

4,220

3,079

1,404

4,484

8,704

¥23,853¥11,406¥52,932¥(16,098)¥72,094¥5,478¥   (472)¥ 5,005¥77,100  Other, net
Total changes during the year
BALANCE—March 31, 2015

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

SHAREHOLDERS’ EQUITY

Common stock Capital surplus

BALANCE—March 31, 2014

$198,775$96,558

Cumulative effect of changes
in accounting policies  Restated balance

Treasury stock

Total$414,908$(147,133)$563,117

2,492
198,775

96,558Net unrealized Remeasurementsof defined
holding gain on
benefit planssecurities

Retainedearnings

417,408$19,983$(15,633)

Total

TOTAL NETASSETS$ 4,342$567,467

2,492(147,133)

565,617

2,492
19,983(15,633)

4,342

569,958

Changes during the year:  Cash dividends(35,542)(35,542)(35,542)  Net income

101,017

101,017

101,017(30,308)(30,308)(30,308)

0

0

0
—

   Purchase of treasury stock   Sale of treasury stock0   Cancellation of treasury
stock(1,508)(41,775)

43,292—25,658

11,70037,36737,367—(1,508)23,692

12,97535,16725,658

11,70037,36772,533$198,775$95,050$441,100 $(134,150) $600,783$45,650$ (3,933)$41,708$642,500  Other, net
Total changes during the year
BALANCE—March 31, 2015

See accompanying notes to Consolidated Financial Statements.

24

K AKEN PHARMACEUTICAL CO., LTD.

Consolidated Statements of Cash Flows
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries
For the years ended March 31, 2015 and 2014
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

¥18,611¥ 15,496$155,092
20,000CASH FLOWS FROM OPERATING ACTIVITIES:
Income before income taxes
Adjustments for:  Depreciation

2,400

2,538

   Increase (decrease) in net defined benefit liability

348

464

2,900

   Interest and dividends income

(219)

(200)

(1,825)233  Interest expenses

28

44   Loss on retirement of non-current assets

67

24

558

   Loss (gain) on sales of non-current assets

1,179

—

9,825

   Decrease (increase) in notes and accounts receivable–trade(2,841)

5,811(23,675)(260)(1,690)(2,167)(1,418)(2,653)(11,817)   Decrease (increase) in inventories   Increase (decrease) in notes and accounts payable–trade  Other, net

3,093(1,198)25,775   Subtotal

20,99018,637

174,917   Interest and dividends income received

219

200

1,825

  Interest paid

(28)

(45)

(233)

   Income taxes paid, net(6,443)(5,128)(53,692)    Net cash provided by (used in) operating activities

14,737

13,663

122,808   Purchase of property, plant and equipment(1,954)(2,071)(16,283)   Proceeds from sales of property, plant and equipment

CASH FLOWS FROM INVESTING ACTIVITIES:
1,941

0

16,175   Purchase of intangible assets

(74)

(55)

(617)

   Purchase of investment securities

(3)

(3)

(25)

  Other, net

565

(4)

4,708

    Net cash provided by (used in) investing activities473(2,135)3,942

CASH FLOWS FROM FINANCING ACTIVITIES:   Decrease in short-term loans payable—(4,195)—   Net change in treasury stock(3,636)(2,860)(30,300)   Cash dividends paid

(4,263)(3,936)(35,525)    Net cash provided by (used in) financing activities(7,900)(10,992)(65,833)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

7,310

536

60,917

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

17,457

16,920145,475

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 3)¥24,767¥ 17,457$206,392

See accompanying notes to Consolidated Financial Statements.

ANNUAL REPORT 201525

Notes to the Consolidated Financial Statements

1. Basis of Presenting Consolidated Financial Statements:
The accompanying consolidated financial statements of KAKEN PHARMACEUTICAL CO., LTD.
(the “Company”) and its consolidated subsidiaries (collectively the “Group”) are prepared on
the basis of the accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial
Reporting Standards, and are compiled from the consolidated financial statements preparedby the Company as required by the Financial Instruments and Exchange Act of Japan.
In preparing these consolidated financial statements, certain reclassifications and rearrangements
have been made to the consolidated financial statements issued domestically in order to present
them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications
have been made in the 2014 financial statements to conform to the classifications used in 2015.
As permitted by the Financial Instruments and Exchange Act of Japan, amounts of less than
one million yen have been omitted. As a result, the totals shown in the accompanying consolidated ­financial statements (both in yen and U.S. dollars) do not necessarily agree with the sumof the ­individual amounts.
The U.S. dollar amounts in the accompanying consolidated financial statements have beentranslated from yen amounts solely for convenience and, as a matter of arithmetic computation
only, at ¥120 = U.S.$1.00, the approximate rate of exchange prevailing on March 31, 2015. Thistranslation should not be construed as a representation that yen amounts have been, could
have been, or could in the future be, converted into U.S. dollars at the above or any other rate.

2. Summary of Significant Accounting Policies:(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. For the years ended March 31, 2015 and 2014, the Company had two consolidated
subsidiaries as follows:
KAKEN REALTY & SERVICE CO., LTD.
KAKEN PHARMA CO., LTD.
For the years ended March 31, 2015 and 2014, there was no affiliate accounted for using theequity method.
All significant intercompany transactions, account balances and unrealized profits or losses
among the Group have been eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents in the consolidated statements of cash flows are composed of
cash on hand, bank deposits which are able to be withdrawn within three months, and shortterm investments with original maturity of three months or less and are considered to haveminimal risk from market fluctuations.
(c) Marketable and Investment Securities
Securities are classified into one of the following three categories: (1) Trading, (2) Held-to-maturity
debt securities, and (3) Available-for-sale securities. Trading securities are recorded at market
value with unrealized gains or losses recognized in the current year’s earnings. Held-to-maturity
debt securities are carried at amortized cost. Available-for-sale securities are expected to be soldin future and those whose fair values are readily determinable are carried at fair value and therelated unrealized gains or losses, net of taxes, are included as a component of “Accumulated
other comprehensive income” under net assets. Available-for-sale securities without market
quotations are stated at cost determined by the moving average method.

26

K AKEN PHARMACEUTICAL CO., LTD.

(d) Inventories
Inventories are stated at the lower of cost determined by the gross average method, or net
selling value, which is defined as the selling price less additional estimated manufacturingcosts and estimated direct selling expenses.
(e) Property, Plant and Equipment
Depreciation is computed using the declining-balance method at rates based on the estimateduseful lives of assets, except for buildings, structures, machinery and equipment for the Komagome office, which are computed using the straight-line method. Furthermore, depreciation ofbuildings, except for ancillary facilities to buildings, acquired on or after April 1, 1998, is computed using the straight-line method.
The range of useful lives is from 3 years to 60 years for buildings and structures, and from 2
years to 8 years for machinery, equipment and vehicles.
(f) Intangible Assets
Software for own use is amortized over the estimated useful life (five years) using the straightline method.
(g) Retirement and Pension Plan
The Company attributes projected benefits on a benefit formula basis.
The transition amount is amortized on a straight-line basis over 15 years. Unrecognized priorservice cost is amortized on a straight-line basis over 10 years from the year in which it arises.
Unrecognized actuarial difference is amortized on a straight-line basis over 10 years from theyear following the year in which it arises.
(Change in accounting policy)
Effective from the year ended March 31, 2015, the Company applied the Paragraph 35 of the
Accounting Standard for Retirement Benefits (Accounting Standards Board of Japan (“ASBJ”)
Statement No. 26, issued on May 17, 2012, hereinafter the “Accounting Standard”) and theParagraph 67 of the Guidance on Accounting Standard for Retirement Benefits (ASBJ Guidance No. 25, issued on March 26, 2015). Accordingly, the Company revised the calculation
method of retirement benefit obligation and service cost, and changed the period attribution
method for estimated retirement benefits from the straight-line basis to the benefit formulabasis. In addition, the method of determining the discount rates applied in the calculation ofretirement benefit obligation was changed from the method using the period approximate to
the expected average remaining working lives of employees in practice to the method using asingle weighted-average discount rate reflecting the estimated timing and amount of benefit
payment in each period.
When applying this new standard, the Company reflected the impact associated with thechange of the calculating method of retirement benefit liabilities and service costs as an
adjustment to retained earnings at the beginning of the current fiscal year in accordance withthe transitional treatment provided in the Paragraph 37 of the Accounting Standard.
As a result, net defined benefit liability decreased by ¥464 million ($3,867 thousand), andretained earnings increased by ¥299 million ($2,492 thousand) as of the beginning of the current fiscal year.
There was no material impact of the change on both operating income and income before
income taxes and minority interests. The impact of the change on per share information andsegment information is also minor.

ANNUAL REPORT 201527

(h) Income Taxes
Income taxes–deferred are determined using the asset and liability approach, where deferred
tax assets and liabilities are recognized for temporary differences between the tax basis ofassets and liabilities and their reported amount in the consolidated financial statements.
(i) Consumption Taxes
Consumption taxes withheld and consumption taxes paid are excluded from revenues andexpenses in the accompanying consolidated statements of income. The net balance of consumption taxes withheld and consumption taxes paid is included in current liabilities of theconsolidated balance sheets as of the end of the fiscal year.
(j) Derivative Financial Instruments
Derivative instruments, which include forward foreign exchange contracts, are used as a partof the Company’s risk management of foreign currency risk exposure of its financial assets
and liabilities.
Forward foreign exchange contracts:
The Company enters into forward foreign exchange contracts to limit risk exposure, affectedby changes in foreign currency exchange rates, on accounts receivable and payable and cash
flows generated from anticipated transactions denominated in foreign currencies. For forward
foreign exchange contracts which are designated and are effective as hedges of such foreign
currency risk on existing assets and liabilities, the Company adopted the accounting method
whereby foreign currency denominated assets and liabilities are measured at the contract rateof the respective forward foreign exchange contract. With respect to such contracts for anticipated transactions, the contracts are marked-to-market and the unrealized gains/losses aredeferred in the balance sheet to be released to income when the exchange gains/losses on
the hedged items or transactions are recognized.
(k) Appropriations of Retained Earnings
Appropriations of retained earnings at each year-end are reflected in the consolidated financial
statements for the following year upon shareholders’ approval.
(l) Shareholders’ Equity
Japanese companies are subject to the Companies Act of Japan. The Act provides that an
amount equal to 10% of the amount to be disbursed as distributions of capital surplus (otherthan the capital reserve) and retained earnings (other than the legal reserve) be transferred tothe capital reserve and the legal reserve, respectively, until the sum of the capital reserve andlegal reserve equals 25% of the stated capital. Such distributions can be made at any time byresolution of the shareholders or by the Board of Directors if certain conditions are met. The
above mentioned legal reserve is included in retained earnings in the accompanying consolidated balance sheets.
(m) Net Income and Dividends per Share
Net income per share of common stock is based upon the weighted average number ofshares of common stock outstanding during each financial year appropriately adjusted for subsequent free distribution of shares (stock splits), if applicable.
Cash dividends per share shown for each year in the accompanying consolidated statements
of income represent dividends approved or declared as applicable to the respective years.

28

K AKEN PHARMACEUTICAL CO., LTD.

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

2015

2014

2015

Cash and deposits¥10,553¥ 9,644$ 87,942

Marketable securities

14,214

7,812

118,450¥24,767¥17,457$206,392

Time deposits due in more than three months

Subtotal———Marketable securities due in more than three months

—

—

—

¥24,767¥17,457$206,392

Cash and cash equivalents

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

Fair value

Unrealized gain (loss)

Carrying amount

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

Fair value

Unrealized gain (loss)

2014

2015
¥      —¥—

¥     —

¥     —

¥—

6,999

6,999

—

1,999

1,999

—

¥6,999¥6,999¥—¥1,999¥1,999¥—

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

Fair value

Unrealized gain (loss)

2015
Fair values exceeding carrying amount$       —

$       —$—Fair values not exceeding carrying
amount58,32558,325—$58,325$58,325$—

Total

ANNUAL REPORT 2015

29

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

Acquisition cost

Unrealized gain (loss)

Fair value

Acquisition cost

Unrealized gain (loss)

2014

2015
Carrying amounts exceedingacquisition cost
¥15,295¥ 7,208¥8,086¥10,932¥ 7,205

OthersEquity securities

—

—

—

—

—

¥3,726—

Subtotal

15,295

7,208

8,086

10,932

7,205

3,726

Carrying amounts not exceedingacquisition cost
Equity securities
OthersSubtotal
		Total

—

—

—

—

—

—

7,214

7,214

—

5,812

5,812

—

7,214

7,214

—

5,812

5,812

—

¥22,510¥14,423¥8,086¥16,744¥13,018¥3,726

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

Acquisition cost

Unrealized gain (loss)

2015
Carrying amounts exceedingacquisition cost
Equity securities$127,458$ 60,067

Others——$67,383—

Subtotal

127,458

60,067

67,383Carrying amounts not exceedingacquisition cost
Equity securities
OthersSubtotal
		Total———60,117

60,117—

60,117

60,117—$187,583$120,192$67,383

There were no available-for-sale securities sold for the years ended March 31, 2015 and 2014.

5. Inventories:
Inventories as of March 31, 2015 and 2014, are comprised of the following:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

¥ 7,323¥ 6,855$ 61,025

Work in process

2,244

1,641

18,700Raw materials and supplies

3,915

4,724

32,625¥13,483¥13,222$112,358

Merchandise and finished products

Total

30

K AKEN PHARMACEUTICAL CO., LTD.

6. Short-term Bank Loans:
Short-term bank loans outstanding as of March 31, 2015 and 2014, amounting to ¥4,195 million ($34,958 thousand) and ¥4,195 million, represent the notes issued by the Group to banks.
Customarily, these notes are renewed at maturity subject to renegotiation of interest rates andother factors. The weighted-average interest rates applicable to short-term bank loans as ofMarch 31, 2015 and 2014, are 0.66% and 0.69%, respectively.
As is customary in Japan, short-term and long-term bank loans are made under generalagreements which provide that security and guarantees for future and present indebtedness
will be given upon request of the bank, and that the bank shall have the right, as the obligations become due or in the event of their default, to offset cash deposits against such obligations due to the bank. The Group has not received any such requests to date.
At March 31, 2015 and 2014, assets pledged as collateral for certain short-term bank loans
are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

Buildings and structures¥2,555¥2,582$21,292

Machinery and vehicles

2,181

2,254

18,175Tools, furniture and fixtures

460

420

3,833

Land

103

103

858

		Total¥5,300¥5,360$44,167¥1,400¥1,400$11,667¥1,400¥1,400$11,667

Assets pledged:

Liabilities secured:
Short-term bank loans
		Total

7. Accounting for Leases:
Operating leases
Future minimum lease payments receivable under non-cancellable operating leases subsequent
to March 31, 2015 and 2014, are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

Due within 1 year
Due after 1 year
Total

2015

2014

2015

¥  239¥  239$ 1,992

2,088

2,328

17,400¥2,328¥2,567$19,400

ANNUAL REPORT 201531

8. Investment Properties:
The Company and certain consolidated subsidiaries own rental office buildings (including land)in Tokyo and other areas. Rental income from these properties for the years ended March 31,
2015 and 2014, are ¥1,550 million ($12,917 thousand) and ¥1,445 million (Revenue from rental
properties and rent expense are reported as net sales and cost of sales, respectively).
Carrying amount, changes during the years ended March 31, 2015 and 2014, and fair value ofthese properties are stated as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

Carrying amount:
Balance at the beginning of the year

¥15,158¥15,734$126,317

Changes during the year

(3,637)(575)(30,308)

Balance at the end of the year

11,52015,15896,000Fair value at the end of the year

¥39,406¥38,991$328,383

Notes: 1.	 The carrying amount represents the acquisition costs less accumulated depreciation.
2.	The decrease for the fiscal year ended March 31, 2015 is mainly attributable to sale of Shin-Urayasu Building (Urayasu-City) (¥3,106
million ($25,883 thousand)).
3.	Fair value at March 31, 2015 and 2014 is calculated, with adjustments using indexes, by the Company based primarily on the “Realestate appraisal standards of Japan.”

9. Financial Instruments:
1. Outline of financial instruments(1) Policy for financial instruments
The Group is managing its cash surplus in the form of low-risk financial instruments with highliquidity, while raising short-term working capital through loans from financial institutions
including banks. Derivatives are used, not for speculative purposes, but to manage exposure
to financial risks as described later.
(2) Nature and extent of risks arising from financial instruments
Receivables such as notes and accounts receivable–trade are exposed to customers’ credit
risk. Trade receivables denominated in foreign currencies are exposed to foreign exchange
fluctuation risk. Marketable and investment securities are mainly held-to-maturity securities
and shares held to maintain business collaborations with clients and trade partners, which areexposed to the risk of market price fluctuations.
Payment terms of payables, such as notes and accounts payable–trade, are mostly less than
one year. Payables in foreign currencies incurred from the import transactions of raw materials
are exposed to foreign exchange fluctuation risk. Loans are used for short-term working capital.
Derivative transactions mainly include forward foreign exchange contracts for the purpose ofhedging foreign exchange fluctuation risk exposed to trade receivables and payables denominated in foreign currencies. Hedging instruments and hedged items, hedging policy, assessment method for hedge effectiveness, and other matters related to hedge accounting are as
follows:

32

K AKEN PHARMACEUTICAL CO., LTD.

a. Hedging instruments and hedged items
Hedging instrument: Forward foreign exchange contract
Hedged items:	Foreign currency denominated receivables and payables, and forecast
foreign currency denominated transactionsb. Hedging policy
Hedging instruments are used within the limits of anticipated foreign currency denominatedtransactions, and the Company makes it a policy not to use derivatives for speculative purposes.
c. Assessment method for hedge effectivenessSince material terms related to hedged items and hedging instruments are substantially
identical, and such hedging transactions are deemed to be highly effective so that the market fluctuations may be completely offset continuously after the inception of the related
hedge, assessment of hedging effectiveness is omitted.
Assessment of effectiveness is omitted also for the forward foreign exchange contracts,
under which the hedged items are translated using the forward contract rates.
(3) Risk management for financial instrumentsa. Credit risk management (customers’ default risk)
For the purpose of managing trade receivables within the Group, each concerned department, according to the credit management rules, is managing payment terms and balancesof each major customer by regularly monitoring their status, in an effort to achieve early
identification and mitigation of default risk of customers arising from their deteriorating
financial condition and other factors.
Held-to-maturity securities held by the Company are, under the short-term investment
rules, restricted to those with superior ratings only, involving minimal credit risk.
The Company enters into derivative transactions with high credit rating financial institutions to mitigate the counterparty risk.
b. Market risk management (foreign exchange and interest rate fluctuation risks)
The Company uses forward foreign exchange contracts as appropriate to hedge foreignexchange fluctuation risk associated with trade receivables and payables denominated inforeign currencies.
With respect to marketable and investment securities, the Company is periodically monitoring fair values and financial positions of the related issuers (business connections).
Derivative transactions are conducted under the authority of the general manager at eachconcerned department, under the forward foreign exchange contracts management rules,
and actual performance of derivative transactions is reported to the concerned departments
including the Accounting Department, as each transaction takes place. Then at the end ofeach month, the outstanding balance of forward exchange contracts is reported to the directors in charge, as well as to other concerned departments. The consolidated subsidiaries are
not engaged in derivative transactions.
c. Liquidity risk management on fund-raising
The Company manages its liquidity risk by the Accounting Department preparing and updating the cash flow management plan as appropriate based on the report from each concerned department.

ANNUAL REPORT 201533

(4) Supplementary explanation concerning fair values of financial instruments
Fair values of financial instruments comprise values determined based on market prices andvalues determined reasonably when there is no market price. Since variable factors are incorporated in computing the relevant fair values, such fair values may vary depending on different
assumptions.
(5) Concentration of credit risks
As of March 31, 2015 and 2014, 63% of all trade receivables are with specific major accounts.
2. Fair values of financial instruments
Carrying amount, fair value, and difference of the financial instruments as of March 31, 2015
and 2014, are as below. Financial instruments whose fair values are not readily determinable
are excluded from the following table:
MILLIONS OF YEN
Carrying amount

Fair value

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

6,999

6,999

b. Available-for-sale securities

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

¥—

4,195

4,195

—

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

MILLIONS OF YEN
Carrying amount

Fair value

Difference(1) Cash and deposits¥ 9,644¥ 9,644¥—(2) Notes and accounts receivable–trade25,36325,360—2014

Allowance for doubtful accounts (*1)(2)
25,360(3) Marketable and investment securities
a. Held-to-maturity securities

1,999

1,999

—

b. Available-for-sale securities

16,744

16,744—

		 Total assets¥53,750¥53,750¥—(1) Notes and accounts payable–trade¥13,713¥13,713

¥—

4,195

4,195

—

¥17,908¥17,908¥—(2) Short-term bank loans
		 Total liabilities(*1) Allowance for doubtful accounts in respect of notes and accounts receivable–trade.

34

K AKEN PHARMACEUTICAL CO., LTD.

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

Fair value

Difference

2015(1) Cash and deposits$ 87,942$ 87,942$—(2) Notes and accounts receivable–trade

235,033

235,033——(3) Marketable and investment securities
a. Held-to-maturity securities

58,32558,325b. Available-for-sale securities

187,583

187,583—

		 Total assets$568,900$568,900$—(1) Notes and accounts payable–trade$102,458$102,458$—

34,95834,958—$137,417$137,417$—(2) Short-term bank loans
		 Total liabilities

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

2015

2014

2015

¥61

¥62

$508

The above item is not included in “(3) Marketable and investment securities” because there is no market
price and it is very difficult to identify fair values.
3. Redemption schedules of monetary assets and securities with contractual maturities subsequent toMarch 31, 2015 and 2014, are as follows:
MILLIONS OF YEN
Within one year

2015
Cash and deposits¥10,553

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

6,999
900¥46,657

ANNUAL REPORT 2015

35

MILLIONS OF YEN
Within one year

2014
Cash and deposits¥ 9,644

Notes and accounts receivable–trade25,363Marketable and investment securities:
Held-to-maturity securities
Available-for-sale securities with contractual maturities
		Total

1,999
900¥37,907
THOUSANDS OF U.S.
DOLLARS (NOTE 1)
Within one year

2015
Cash and deposits$ 87,942

Notes and accounts receivable–trade

235,033

Marketable and investment securities:
Held-to-maturity securities
Available-for-sale securities with contractual maturities
		Total58,3257,500$388,808

4. Redemption schedules for long-term debt and other interest-bearing obligations subsequent to March
31, 2015 and 2014 are omitted since the Company only had short-term bank loans maturing within one
year as of March 31, 2015 and 2014.

10. Retirement Benefits:
The Company has defined benefit plans, i.e., a lump-sum retirement plan and defined benefit
pension plan. Retirement benefit trust is established for the lump-sum retirement plan. The
Company may pay a premium in addition to the retirement benefits. The simplified method isused for the calculation of retirement benefit obligation at consolidated subsidiaries.
Defined benefit plans(1) Changes in the retirement benefit obligation for the years ended March 31, 2015 and 2014
are as follows (excluding plans under the simplified method):
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

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

2014

2015

¥21,799$179,592(464)—(3,867)

Restated balance

21,087

21,799

175,725

Service cost

701

674

5,842

Interest cost

253

283

2,108

Actuarial differences

94

168

783

(1,428)(1,374)(11,900)¥20,707¥21,551$172,558

Retirement benefit paid
Retirement benefit obligation–Ending balance

36

2015
¥21,551

K AKEN PHARMACEUTICAL CO., LTD.

(2) Changes in the plan assets for the years ended March 31, 2015 and 2014 are as follows(excluding plans under the simplified method):
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

Plan assets–Beginning balance
Expected return on plan assets
Actuarial differences

2015

2014

2015

¥12,064¥11,133$100,533

286

264

2,383

1,307

781

10,892

Employer’s contributions

649

648

5,408

Retirement benefit paid

(756)

(763)

(6,300)¥13,551¥12,064$112,925

Plan assets–Ending balance(3) Changes in the net defined benefit liability under the simplified method for the years ended
March 31, 2015 and 2014 are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

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

2015

2014

2015

¥5

¥5

$42

0

0

0

¥6

¥5

$50

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

2015

2014

2015

Retirement benefit obligation under funded plan

¥ 20,707¥ 21,551$ 172,558

Plan assets(13,551)(12,064)(112,925)

7,156

9,487

59,633

6

5

50

7,162

9,493

59,683Net defined benefit liability¥  7,162¥ 9,493$   59,683

Net balance shown on the consolidated balance sheet¥  7,162¥ 9,493$   59,683

Retirement benefit obligation under non-funded plan
Net balance shown on the consolidated balance sheet

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

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

Service cost

2015

2014

2015

¥  701¥  674$ 5,842Interest cost

253

283

2,108

Expected return on plan assets

(286)

(264)

(2,383)
4,250

Amortization of actuarial differences

510

537

Amortization of prior service cost

(33)

(33)

(275)

Amortization of transition amount

524

524

4,367

Retirement benefit cost under simplified method

0

0

0

Retirement benefit cost for defined benefit plans¥1,669¥1,723$13,908

ANNUAL REPORT 201537

(6) The components of remeasurements of defined benefit plans in other comprehensive
income (before tax effect) for the years ended March 31, 2015 and 2014 are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

Prior service cost¥      (33)¥—$      (275)Actuarial differences

1,723

—

14,358Transition amount

524

—

4,367

¥2,214¥—$18,450

Total(7) The components of remeasurements of defined benefit plans in accumulated other comprehensive income (before tax effect) for the years ended at March 31, 2015 and 2014 are as
follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

Unrecognized prior service cost¥(205)¥ (238)$(1,708)

Unrecognized actuarial differences

906

2,629

7,550

Unrecognized transition amount

—

524

—

¥ 701

¥2,916$ 5,842

Total(8) Plan assets(a) Plan assets consist of the following:
2015

2014

Debt securities

28%

42%

Equity securities

54%

37%

General account

15%

17%

Other

3%

4%

Total

100%

100%

Note: The plan assets include retirement benefit trust which accounts for 6% and 5% of the total plan assets as ofMarch 31, 2015 and 2014.

(b) Long-term expected rate of return on plan assets is determined based on assumptions about:(i) allocation of plan assets and (ii) long-term expected rate of returns on such assets.
(9) Major assumptions used for actuarial calculation are as follows (weighted average):
2015

38

2014

Discount rate

1.2%

1.3%

Long-term expected rate of return

2.5%

2.5%

K AKEN PHARMACEUTICAL CO., LTD.

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

Class of treasury stock

Common stock

Common stock

101,879,461

17,380,750

Number of shares as of April 1, 2014
Increase—

1,645,319

Decrease(5,000,000)(5,000,189)

96,879,461

14,025,880

Number of shares as of March 31, 2015

Notes: 1.	Decrease in shares outstanding (5,000,000 shares) is due to cancellation of treasury stocks based on the resolution of the Board of
Directors’ meeting.
2.	Increase in treasury stock (1,645,319 shares) is due to purchase of shares in the market (1,590,000 shares) based on the resolutionof the Board of Directors’ meeting and purchase of shares less than one unit (55,319 shares).
3.	Decrease in treasury stock (5,000,189 shares) is due to cancellation of treasury stocks (5,000,000 shares) based on the resolution of
the Board of Directors’ meeting and purchase demand from shareholders holding shares less than one unit (189 shares).

b) Matters related to dividendsi) Dividend payment
Approvals by the ordinary general meeting of shareholders held on June 27, 2014, were as
follows:
Dividends on common stock
Total amount of dividends¥2,027 million ($16,892 thousand)
Dividends per share¥24.00 ($0.20)
Record date
March 31, 2014
Effective dateJune 30, 2014
Approvals by the Board of Directors’ meeting held on November 6, 2014, were as follows:
Dividends on common stock
Total amount of dividends¥2,237 million ($18,642 thousand)
Dividends per share¥27.00 ($0.23)
Record date
September 30, 2014
Effective dateNovember 28, 2014ii) Dividends whose record date is attributed to the accounting period ended March 31, 2015,
but become effective after the said accounting period
The Company obtained the following approval at the ordinary general meeting of shareholders
held onJune 26, 2015:
Dividends on common stock
Total amount of dividends¥2,651 million ($22,092 thousand)
Dividends per share¥32.00 ($0.27)
Record date
March 31, 2015
Effective dateJune 29, 2015

12. Research and Development Costs:
Research and development costs included in selling, general and administrative expenses forthe years ended March 31, 2015 and 2014, amounted to ¥7,615 million ($63,458 thousand) and¥7,045 million, respectively.

ANNUAL REPORT 201539

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

2015

2014

2015

Land

¥    7¥—$   58

Other

0

—

Gain on sales of non-current assets:

7

0
58

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

(784)

—

(6,533)

Land

(402)

—

(3,350)

Other

(1)

—

(8)

Gain or loss on sales of non-current assets, net(1,187)—(9,892)¥(1,179)¥—$(9,825)

14. Income Taxes:
Significant components of deferred tax assets and liabilities as of March 31, 2015 and 2014,
are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

¥  263¥     —$  2,192

106

124

883

2,568

2,568

21,400

Amortization of Research & Development

348

652

2,900

Amortization of long-term prepaid expenses

453

57

3,775

Provision for bonuses

430

455

3,583

Provision for sales rebates

126

180

1,050

Net defined benefit liability

2,475

3,552

20,625

Deferred tax assets:
Accounts receivable
Loss of supplies
Unrealized gain of property, plant and equipment

Other

497

567

4,142

		Total

7,271

8,158

60,592

Valuation allowance

(44)

(59)

(367)

		 Deferred tax assets

7,226

8,098

60,217

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

(170)

(189)

(1,417)(2,608)(1,328)(21,733)

—

(0)

—

		 Deferred tax liabilities(2,778)(1,518)(23,150)

		 Deferred tax assets, net¥ 4,447¥ 6,580$ 37,058

The Group is subject to several taxes based on income, which in the aggregate resulted instatutory tax rates of approximately 35.64% and 38.01% for the years ended March 31, 2015
and 2014.

40

K AKEN PHARMACEUTICAL CO., LTD.

Reconciliation of the differences between the statutory tax rate and the effective tax rate forthe years ended March 31, 2015 and 2014, is as follows:
Statutory tax rate

2015

2014

35.64%

38.01%

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

0.80

1.30

Income not included for income tax purpose (e.g. Dividend income)(0.21)(0.23)

Inhabitant per capita taxes

0.46

0.57

Tax credit for research expenses(4.05)(3.02)

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

2.18

—

Other

0.04

0.55

34.86%

37.18%

Effective tax rate

In line with the promulgation on March 31, 2015 of the “Act for Partial Revision of the Income
Tax Act, etc.” and the “Act for Partial Revision of the Local Tax Act, etc.,” the Company haschanged the statutory tax rate to calculate deferred tax assets and deferred tax liabilities forthe year ended March 31, 2015 from 35.64% to 33.06% for temporary differences assumed tobe reversed in the fiscal year beginning on April 1, 2015, and to 32.26% for those assumed tobe reversed in and after the fiscal year beginning on April 1, 2016.
As a result of this change, net deferred tax assets decreased by ¥166 million ($1,383 thousand), income taxes–deferred, net unrealized holding gain on securities increased by ¥405
million ($3,375 thousand) and ¥273 million ($2,275 thousand), and remeasurements of defined
benefit plans decreased by ¥34 million ($283 thousand), respectively.

15. Related Party Transactions:
There is nothing to be noted according to the disclosure requirements in Japan for the years
ended March 31, 2015 and 2014.

16. Per Share Information:
Per share information for the years ended March 31, 2015 and 2014, is as follows:
YEN

U.S. DOLLARS (NOTE 1)

2015

2014

2015

Net assets per share¥930.56¥805.89$7.75

Net income per share

145.45114.14

1.21

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

ANNUAL REPORT 2015

41

The basis of calculation for net income per share for the years ended March 31, 2015 and2014, is as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

Net income¥12,122¥ 9,735$101,107

Net income attributable to common stock

12,122

9,735

101,017———

83,34685,295—

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

17. Comprehensive Income:
Recycling and income tax effects for each component of other comprehensive income for theyears ended March 31, 2015 and 2014, are as follows:
THOUSANDS OF
U.S. DOLLARS (NOTE 1)MILLIONS OF YEN

2015

2014

2015

¥ 4,360¥ 718$ 36,333

—

—

—

4,360

718

36,333Net unrealized holding gain on securities:
Amount increased for the year
Recycling
Before income tax effect
Income tax effectNet unrealized holding gain on securities(1,280)(256)(10,667)¥ 3,079¥ 462$ 25,658$ 10,108

Remeasurements of defined benefit plans:¥ 1,213¥    —

RecyclingAmount increased for the year

1,001

—

8,342

Before income tax effect

2,214

—

18,450(810)—(6,750)Remeasurements of defined benefit plans

Income tax effect¥ 1,404¥    —$ 11,700

Total other comprehensive income¥ 4,484¥ 462$ 37,367

18. Segment Information:(a) Overview of reportable segments
The Group’s reportable segments are those for which separate financial information is available and regular evaluation by the Board of Directors is being performed in order to decide
how resources are allocated among the Group.
The Group produces and sells medical products, medical devices and agrochemicals, rents
real estates, and maintains buildings, operating business by category of industry. Each business operates on its own initiative, and creates comprehensive business strategies to conductbusiness activities. The Group consists of segments by category of industry based on theoperation of business; therefore, consists of two reportable segments: “Pharmaceuticals” and“Real estate.”“Pharmaceuticals” mainly produces and sells medical products, medical devices, and agrochemicals.
“Real estate” mainly rents Bunkyo Green Court.
(b) Method of calculating net sales, income, assets, and other items by reportable segment
Accounting policies for the reportable segments are consistent to those described in Note 2.
“Summary of Significant Accounting Policies.” Income by reportable segment is based on
operating income. Intersegment transactions are based on prevailing market prices.
Corporate assets are not allocated to each reportable segment. However, related expenses
are allocated to each reportable segment using reasonable criteria.

42

K AKEN PHARMACEUTICAL CO., LTD.

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

Real estate

Total

Adjustments

Consolidated¥ 93,889

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

—

322

322

(322)

—

¥91,458¥ 2,753¥94,211¥  (322)¥ 93,889

Segment income¥19,080¥ 1,550¥20,631¥       —

¥ 20,631

Segment assets¥70,863¥12,961¥83,824¥31,310¥115,135

Depreciation and amortization¥ 2,365¥   629¥ 2,995¥       —

¥  2,995

	Increase in property, plant andequipment and intangible assets

2,887

49

2,936

—

2,936

Adjustments

Consolidated¥      —

¥ 88,946

Other items:

MILLIONS OF YEN
Reportable segment
Pharmaceuticals

Real estate

Total

2014
Net sales:
Outside sales
Intersegment sales or transfers
		Total¥86,483¥ 2,463¥88,946

—

317

317

(317)

—

¥86,483¥ 2,780¥89,263¥  (317)¥ 88,946

Segment income¥14,427¥ 1,445¥15,872¥      —

¥ 15,872

Segment assets¥64,662¥16,615¥81,277¥25,188¥106,465

Depreciation and amortization¥ 1,902¥   707¥ 2,609¥      —¥  2,609

	Increase in property, plant andequipment and intangible assets

1,781

60

1,842

—

1,842

Adjustments

Consolidated$782,408

Other items:

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

Real estate

Total

2015
Net sales:
Outside sales
Intersegment sales or transfers
		Total$762,150$ 20,258$782,408$        
—

—

2,683

2,683

(2,683)—$762,150$ 22,942$785,092$  (2,683)$782,408

Segment income$159,000$ 12,917$171,925$        
—$171,925

Segment assets$590,525$108,008$698,533$260,917$959,458

Depreciation and amortization$ 19,708$  5,242$ 24,958$        
—$ 24,958

	Increase in property, plant andequipment and intangible assets

24,058408

24,467—

24,467

Other items:(d) Information about products and services
Information about products and services has not been disclosed since the classification by
products and services is the same as the reportable segments.

ANNUAL REPORT 201543

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

2015

2014

2015

Alfresa Corporation¥15,367¥13,806$128,058

Pharmaceutical

SUZUKEN CO., LTD.

14,133

13,879117,775

Pharmaceutical

MEDICEO CORPORATION

13,54613,140112,883

Pharmaceutical

19. Subsequent Events:
At the Board of Directors’ meeting held on May 12, 2015, it was resolved that the Company
shall (i) change the number of share unit, (ii) partially amend the Articles of Incorporation and(iii) submit a proposal for the consolidation of shares to the Company’s 95th ordinary general
meeting of shareholders held on June 26, 2015.
The consolidation of shares was approved at the shareholders’ meeting. The outline is summarized as follows:
1. Change in the number of share unit
(1) Reason of change
The Japanese stock exchanges announced the “Action Plan for Consolidating Trading Units,”
which aims to standardize share trading units of listed domestic corporations at 100 shares.
As a corporation listed on the Tokyo Stock Exchange, the Company respects the idea of thisplan and decided to change the number of share unit of common stock to 100 shares.
(2) Detail of change
On October 1, 2015, the Company will change its share unit of common stock from 1,000
shares to 100 shares.
2. Share consolidation(1) Purpose of share consolidation
As mentioned in “1. Change in the number of share unit,” the Company decided to change
its share unit of common stock to 100 shares and implement a two-to-one share consolidation (hereinafter the “share consolidation”) in order to adjust its investment unit to an
appropriate level in view of mid- to long-term share price fluctuation or other factors.
As a result of the change in the share unit and the share consolidation, the investment
unit of the Company’s common stock will become one-fifth of the previous unit.
(2) Details of share consolidationa) Class of stock to be consolidated
Common stock

44

K AKEN PHARMACEUTICAL CO., LTD.

b) Consolidation plan and ratio
On October 1, 2015, the Company will consolidate every two shares into one share basedon the number of shares held by shareholders listed in the Register of Shareholders as ofthe end of the day on September 30, 2015.
c) Decrease in number of shares due to consolidation
Total number of outstanding shares before share consolidation(as of March 31, 2015)
96,879,461 shares
Decrease in number of shares due to share consolidation
48,439,731 shares
Total number of outstanding shares after share consolidation
48,439,730 shares
Note: “Decrease in number of shares due to consolidation” and “Total number of outstanding shares after share consolidation” are theoretical numbers calculated based on the total
number of outstanding shares before consolidation and the consolidation ratio.
d) Treatment of fractional shares
Fractional shares arising from the share consolidation, if any, will be sold collectively inaccordance with the Article 235 of the Companies Act, and the proceeds will be distributed
to shareholders, who become fractional shareholders as a result of the share consolidation,in proportion to the number of fractional shares they held.
3. Change of total number of authorized shares(1) Reason of change
The Company decided to reduce its total number of authorized shares based on the total
number of outstanding shares after the share consolidation as stated above in order to
optimize the total number of authorized shares.
(2) Detail of change
Total number of authorized shares before share consolidation(as of March 31, 2015)
Total number of authorized shares after share consolidation

360,000,000 shares
193,000,000 shares

4. Schedule
Date of resolution made by the Board of Directors’ meetingMay 12, 2015
Date of resolution made by the ordinary general meeting of shareholdersJune 26, 2015
Effective date
October 1, 2015 (planned)
5. Impact on per unit information
Assuming that the share consolidation had been carried out at the beginning of the fiscal years
ended March 31, 2015 and 2014, per share information is as follows:
YEN

U.S. DOLLARS (NOTE 1)

2015

2014

2015

Net assets per share¥1,861.12¥1,611.78$15.51

Net income per share

290.90228.27

2.42

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

ANNUAL REPORT 2015

45

Report of Independent Auditors

To the Board of Directors
KAKEN PHARMACEUTICAL CO., LTD.
We have audited the accompanying consolidated financial statements of KAKEN PHARMACEUTICAL CO., LTD.
(the “Company”) and subsidiaries, which comprise the consolidated balance sheet as of March 31, 2015, and therelated consolidated statements of income, comprehensive income, changes in net assets, and cash flows for theyear then ended, and a summary of significant accounting policies and other explanatory information, all expressedin Japanese yen.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements inaccordance with accounting principles generally accepted in Japan, and for designing and operating such internal
control as management determines is necessary to enable the preparation and fair presentation of the consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Japan. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.
The purpose of an audit of the consolidated financial statements is not to express an opinion on the effectivenessof the entity’s internal control, but in making these risk assessments the auditor considers internal controls relevantto the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness ofaccounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
OpinionIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, theconsolidated financial position of the Company and subsidiaries at March 31, 2015, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with accounting principles generally
accepted in Japan.
Convenience Translation
The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader have beentranslated on the basis set forth in Note 1 to the accompanying consolidated financial statements.

Tokyo, Japan
June 26, 2015

46

K AKEN PHARMACEUTICAL CO., LTD.

Corporate Data
As of March 31, 2015

Directory

Company Information

Registered Head Office

Incorporated

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

March 1948

Paid-in Capital¥23,853 million

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

Authorized: 193,000,000 shares (As of October 1, 2015)
Issued: 48,439,730 shares (As of October 1, 2015)
Number of Shareholders: 8,935 (As of March 31, 2015)
OthersMain Branches (As of April 1, 2015)
Sapporo Branch
Sendai BranchTokyo BranchTokyo Branch II
Nagoya Branch
Osaka Branch
Chugoku and Shikoku Branch
Fukuoka Branch

Plant

15.5% Individuals
–2.2
17.0%
–5.4

Overseas
Investors

23.9%

+4.9

Domestic
Corporations

Financial
Institutions

32.0%

+2.3

11.6%

+0.4

Major Shareholders

Shizuoka Factory

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

NO. OFSHARES(THOUSANDS)SHARE OFTOTAL (%)

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

4,787

4.9

Toray Industries, Inc.

4,589

4.7

Mizuho Bank, Ltd.

3,686

3.8

The Norinchukin Bank

3,686

3.8

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

3,482

3.6

JPMorgan Chase Bank 380634

2,142

2.2

Kaken Pharmaceutical Employee Stock
Ownership Association

1,560

1.6

Nippon Life Insurance Company

1,360

1.4

KYORIN Pharmaceutical Co., Ltd.

1,294

1.3

Kyoei Fire & Marine Insurance Co., Ltd

1,248

1.3

SHAREHOLDERS

Employees (Non-Consolidated)
Administration: 76
Marketing & Sales: 964
Production: 145
Research & Development: 268
Regulatory Affairs: 40

ANNUAL REPORT 201547

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