KAKEN

Annual Report 2004
Year Ended March 31, 2004

Bringing smiles to everyone

The origin of Kaken Pharmaceutical Co., Ltd. can be traced back to the Institute of Physical andChemical Research (Riken), established in 1917. The Company started pharmaceutical business withfull-scale development of penicillin and streptomycin based on Riken’s own technologies in 1948, andsince then broadened the scope of its business and drug development activities through merger andalliance. Kaken’s prestige has soared accordingly.
While the Company has established strength in developing and selling pharmaceuticals for orthopedics, it is now expanding its involvement in other medical fields, such as hyperlipidemia and diabetes.
The Company contributes to improving people’s health by cultivating its own original technologies,
engaging in joint development initiatives, introducing new technologies and acquiring marketing rights.
As a fruit of its technology and product introduction, the Company has been since June 2001 marketing Fiblast Spray consisting of Trafermin, a recombinant form of human basic fibroblast growth
factor (bFGF) for the first time in the world, licensed from a US bio-pharmaceutical company, Scios, inthe area of regenerative medicine (wound healing medicine).

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

Business Philosophy: Three Joys

KAKEN

conducts business by

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

Creating joy as
a company.

Creating joy forour employees.

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

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

CONTENTSCONSOLIDATED FINANCIAL HIGHLIGHTS ........... 01
PRESIDENT’S MESSAGE ........................................... 02
SPECIAL FEATURE ................................................... 04
REVIEW OF OPERATIONS ....................................... 06
COMMITMENT AND EXCELLENCE ......................... 10
FULFILLING OUR
SOCIAL RESPONSIBILITIES .................................. 13
BOARD OF DIRECTORSAND CORPORATE AUDITORS ............................ 14
ORGANIZATIONS ................................................... 15
CONSOLIDATED FINANCIAL REVIEW .................... 16
CONSOLIDATED FINANCIAL STATEMENTS ............ 18
CORPORATE DATA ................................................. 33
Forward-Looking Statements
This annual report contains forward-looking statements
pertaining to the Company’s business and prospects.
These statements are based on current analysis ofexisting information and trends. Actual results may
differ from expectations due to unforeseen risks anduncertainties.

CONSOLIDATED FINANCIAL HIGHLIGHTS
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries.

Thousands of
U.S. dollars (Note)

Millions of yen

2004

2003

2004

¥ 72,706
7,526
3,017

¥ 74,003
7,947
2,598

$ 692,438
71,67628,733

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

43,133
105,613

40,771
108,516

410,790
1,005,838

Per share data:
Net income (Basic) .........................................................................................
Cash dividends (Non-Consolidated) ...............................................................

¥For the years ended March 31,

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

Yen

U.S. dollars (Note)

31.87.
10.00.

¥

27.11.
8.25.

$

0.304.
0.095.

(%)

ROE .................................................................................................................
Capital adequacy ratio ....................................................................................

7.19
40.84.

6.51
37.57.

.Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥105 = $1 effective on March 31, 2004.

03

04

7.19

02

6.51

01

4.70

00

5.63

04

6.08
43,133

03

105,613
40,771

02

108,516
39,01801

114,125
36,11200

121,803106,240
34,854(%)

72,706(¥ millions)
74,003(¥ millions)
73,272

ROE

70,306

Total Assets andShareholders'Equity71,801Net Sales

00

01

02

03

04

Kaken Pharmaceutical Co., Ltd. 01

PRESIDENT’S MESSAGE

Business Climate and Performance
In fiscal 2003, ended March 31, 2004, Kaken Pharmaceuticalachieved a 16.1% increase in net income, although net sales declined 1.8% because of tough business conditions. During theyear, the number of people seeking medical treatment decreased
due to a rise in the portion of medical expenses borne by patients,
part of a government policy to curb medical expenditures. Otherchanges impacting the pharmaceutical industry included themove to comprehensive medical care at specialized hospitals, anda policy promoting the use of generic drugs. Given these difficult
circumstances, we worked hard to develop new products destined
to become part of our next-generation lineup in the future—notably Fiblast Spray, Lipantil, and Seprafilm—while expanding
sales of flugship products. As a result, we recorded consolidated
net sales of ¥72,706 million, down 1.8% from fiscal 2002.
Operating income declined 5.3%, to ¥7,526 million, due toan increase in development and research expenditures. Net income grew 16.1%, to ¥3,017 million. This was attributable to a
decline in losses on investments accounted for by the equity
method and a decrease in taxes following an amendment to the
Corporation Tax Law. As a result, we posted an operating income
ratio of 10.4%, while ROE (return-on-equity) reached 7.2%.

To carry out this plan, we are committed to five core management initiatives: pursuing novel drug discovery research, strengthening our sales force, maintaining high quality and productivity,
strengthening our financial condition, and creating a dynamic
company environment. This entails setting and achieving goals
for R&D, sales, and production. Specifically, we are targeting
consolidated operating income of ¥10,000 million and ROE in
excess of 8% by the final year of the plan.

The five core management initiatives are outlined in moredetail below.
(1) Pursuing novel drug discovery research
We are broadening and strengthening our R&D activities to expedite the development of novel drugs that meet the needs of
medical professionals in the field. Our aim is to discover novel
drugs in-house in the Company’s key areas of inflammation andimmunology, infectious diseases (systemic mycosis), and endocrine and metabolic diseases. We will reinforce our R&D activities through strategic alliances with other companies, the introduction of leading-edge technologies, and outsourcing.
(2) Strengthening our sales force
We plan to have 700 medical representatives (MRs) in place by
the time of the plan’s completion to provide high-value-added

Profit Appropriation Policy
As a member of the pharmaceutical industry, we are required tohave a higher level of equity capital than companies in other industries. This is because of the large risk burden associated withnew drug development processes. Adhering to a flexible cash dividend policy, we set dividends according to our business performance while addressing the need to maintain a balance between
return to shareholders and strengthening equity capital.
Based on this policy, the Company declared annual cash dividends of ¥10.0 per share, up ¥1.75 from the previous year. Other
profits will be allocated to future investment in research and development.

Five-Year Management Plan
We are currently implementing a five-year management plan thatbegan in April 2001 and will conclude in March 2006. Under theplan, we intend to establish a firm business foundation that will
enable us to prevail in the future as an “independent pharmaceutical company with a strong presence.” Fiscal 2003 was the thirdyear of the plan.

02 Kaken Pharmaceutical Co., Ltd.

Being an independent pharmaceutical company
with a strong presence

Pursuing novel
drug discovery
research

Maintaining
high quality andproductivity

Strengthening
our sales force

Kaken
Pharmaceuticalin the21st Century

Creating a
dynamic company
environment

Strengthening
our financial
conditioninformation that meets the needs of medical professionals in thefield, and so that our MRs can work closely with local communities. We will also commit resources to Fiblast Spray as we strive to
become a leading company in the field of regenerative medicine.
In addition to solidifying our position in orthopedics, we will expand our market shares in external medicine, as well as in internal medicine, primarily in the areas of diabetes and lipidemia.
(3) Maintaining high quality and productivity
We are committed to further improving quality and reducing production costs, while expanding consignment production and otherinitiatives in the future.
(4) Strengthening our financial condition
In addition to expanding revenues, we aim to lower costs by raising production efficiency. We will also strive to increase operating income by reducing labor costs and outsourcing production,
distribution, and other functions. In addition, we plan to reduce
interest-bearing debt, strengthen our financial foundation, andinvest in further innovation and progress.
(5) Creating a dynamic company environment
To maintain and develop the Kaken’s unique strengths amid dramatically changing business conditions, we will nurture our human resources and create a company environment full of positive dynamism.

Future Plans
We believe that the harsh business climate experienced by thepharmaceutical industry will become even more severe. This isdue to such factors as the expanding market shares of foreignowned pharmaceutical companies and government-induced policies to curb medical expenditures, as seen in the average 4.2%
decline in drug prices in the industry in April 2004.
Faced with such circumstances, we intend to increase income
through sales growth of Artz, one of our core products, and maintaining sales of Procylin and Adofeed. At the same time, we willdevelop markets to increase sales of our new products: Fiblast
Spray, Lipantil, and Seprafilm.
In particular, we will develop new products and reinforce sales
in orthopedics, a medical field in which we are especially strong.
In internal medicine, covering such diseases as lipidemia and diabetes, we intend to increase product variation centering on
Lipantil, which holds a solid market share.

Maximizing corporate value is an important business challenge, and to this end we are carrying out comprehensive reforms
to our administration and corporate consciousness. These initiatives reflect our commitment to being an “independent pharmaceutical company with a strong presence.”
By providing more and more patients with superior drugs, we
intend to help reduce total medical expenditures by shortening
the length of hospital stays. In these ways, we will continue ourcontribution to enhancing patients’ quality of life.
June 2004

Shiro Inui
President

Kaken Pharmaceutical Co., Ltd. 03

SPECIAL FEATURE

bFGF:

Expanding applications for regenerative medicine
A protein called bFGF (Trafermin) is a cell growth factor existing in minute quantities in the human body. Kaken is strengthening its development of pharmaceuticals used in regenerative medicine that make use of bFGF. In 2001, we were the firstpharmaceutical manufacturer in the world to succeed in developing and bringing to market a new drug for use in the field of
regenerative medicine. This drug is our wound healing agent Fiblast Spray, which is widely recognized as being effective in thetreatment of skin ulcers caused by bed sores or burns. Today, it is by far the preferred treatment in many hospitals and clinics, aswell as university hospital.
bFGF is produced using a technique that originates from genetic modification. It has been shown to stimulate the growth ofcells, boost the formation of new blood vessels, and promote bone regeneration. It is estimated that two million patients receive
treatment for bone fractures annually, including treatment for bone defects and osteoporosis, and its estimated annual market
size is ¥10 billion. It is reliable statistically that more than 80% of adults have the potential to develop periodontal disease,
however no medical treatment exists for the this disorder, bFGF has enormous market possibilities if adopted by general dentists.
In the autumn of 2004, we will start the late Phase II of Fiblast Spray for skin ulcers, a complication associated with diabetes.
We recognize Fiblast Spray and other derivatives of bFGF as prospective product line. Accordingly, we are channeling research and development resources
into these products, with a view to their practical application by around 2009.

Expanding applications for the futureLine extension of bFGF as a regenerative medicine has great hidden potentialities. This includes vascularization of blood vessels in the areas of peripheral circulation and severe angina, treatment of osteoarthritis, propagation of stem cells,
and nerve regeneration.

Developing Innovative
Fiblast Spray

04 Kaken Pharmaceutical Co., Ltd.

Other clinical trials
At present, we are applying for approval for the diagnostic agent KP-102D. We are conducting Phase II trials of KP-102LN, used
to treat people with short stature; this is a new type of treatment that stimulates the secretion of growth hormones.
We are currently in Phase II of clinical trials for KN-48, used for the treatment of postherpetic neuralgia. We are preparing forPhase II trials for both SPK-843, a drug used in the treatment of systemic mycosis, and KP-496, a drug used for treating bronchialasthma.
N.K. Curex Co., Ltd. an affiliate of Kaken, is developing SNK-860, for treating diabetic neuropathy. In the year under review,
we decided to restructure a development strategy following the trials in the United States conducted by Sankyo Co., Ltd.
Grelan Pharmaceutical Co., Ltd. has introduced a new formulation of Lipantil called Lipantil M (micronized fenofibrate),
and is waiting for approval. Kaken has a co-marketing right of this product.

Expanded Mentax Line
Sales of the antifungal agent Mentax have increased in the United States since it was approved for over-the-counter (OTC) sales.
We also received approval to manufacture Mentax as an alternative OTC remedy for athlete’s foot in Japan, and have been
selling this product through partners. In addition, we have received approval for the manufacture of Mentax Spray, and havestarted its sales.

Strengthening Antifungal R&D
We had a collaboration with Elitra Pharmaceuticals covering R&D on genomic drug discovery for treating systemic mycosis.
This collaboration ended. However, Kaken will conduct screening for novel antifungal agents based on essential fungal gene
information obtained during the joint research process.

Products
New Drug Development Pipeline
Product

Development Stage

Category

LaunchIndication

Remarks

KP-102D(GHRP-2)

NDA

GH secretagogue

2004

Diagnostic for Hypothalamic-

Lipantil M

NDA

Micronized-fenofibrate

2005

Hyperlipidemia

KCB-1B

Phase II

bFGF

2009

Intractable bone fractures

New indication

KCB-1D

Phase II

bFGF

2009

Periodontitis

New indication

Diabetic ulcers

New indication

pituitary function in GH deficiency

Fiblast Spray

Phase IIbFGF

KP-102LN (GHRP-2)

Phase IIGH secretagogue

2009

Short stature

KN-48

Phase II

Lidocaine patch

2010

Postherpetic neuralgia

SPK-843

Phase I (completed)

Polyene antibiotic

2009

Systemic mycosis

KP-496

Phase I

LT/TX dual inhibitor

2010

Asthma

SNK-860

Under consideration ARI
for redevelopment

Diabetic neuropathy

Developed by Grelan Pharmaceutical

Jointly developed with Teikoku Seiyaku

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

Kaken Pharmaceutical Co., Ltd. 05

REVIEW OF OPERATIONS

Kaken is steadily expanding its fields of medical involvement and increasing sales of a broad spectrum ofmainstay products — including Artz, an anti-osteoarthritic; Procylin, used for treating chronic artery occlusive disease; Adofeed, a pain-relieving plaster; and Lipantil, an anti-hyperlipidemic. We are also actively promoting Fiblast Spray, a wound-healing agent that has garnered much attention in the field of
regenerative medicine, as well as Seprafilm, a post-operative anti-adhesive.
Fiblast Spray currently holds the top market share for wound-healing agents, and we intend to expand applications and become a leading company in this area. In addition, we recently released Mentax
Spray, a new formulation of the antifungal agent Mentax, onto the market.
As a result of co-promotion of Zyloric tablets, used for treating hyperuricaemia and developed andmanufactured by GlaxoSmithKline UK Ltd., we are expanding sales channels for Lipantil, which has become the appropriate treatment for hyperlipidemia associated with high levels of uric acid. Zyloric tablets
are used to treat gout and there is a close relationship between gout symptoms and orthopedics. We,
therefore, plan to co-promote sales of Zyloric tablets in the field of orthopedics, one of Kaken’s specialist
fields.
We have obtained exclusive marketing rights from Taiyo Yakuhin Co., Ltd. for Prink Injection Syringe,
which is used in the treatment of arterial occlusion and skin ulcers. Consequently, we are strengthening
our product line in orthopedics and internal medicine area.

06 Kaken Pharmaceutical Co., Ltd.

Review of Operations

Pharmaceuticals
Artz (anti-osteoarthritic) Artz is made of ultra-pure sodium hyaluronic acid ex-(

tracted from rooster combs. Hyaluronic acid is a naturally occurring, biocompatible
polymer found throughout the body, particularly in synovial fluid. A viscoelastic supplement, Artz replaces the diseased synovial fluid found in osteoarthritic knees and restores the physical properties and elastoviscosity of this diseased synovial fluid. It is
injected directly into the knee joint by the physician.

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

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

((

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

Mentax Spray In July 2004, we marketed a new spray formulation of the antifungal(

agent Mentax.

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

(

Kaken Pharmaceutical Co., Ltd. 07

Review of Operations)

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

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

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

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

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

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

08 Kaken Pharmaceutical Co., Ltd.

Review of Operations

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

)Prink Injection Syringe In June 2004, we began sales of Prink Injection Syringe, a Prostaglandin E1 pre-filled syringe used for the treatment of arterial occlusion.
We have obtained from Taiyo Yakuhin Co., Ltd. the exclusive marketing rights for
Prink Injection Syringe, which is also effective in the treatment of skin ulcers.

Agrochemicals and Animal Health Products
Agrochemic als
Polyoxins (fungicides) Two different technical grade active ingredients (TGAIs),
Polyoxin AL and Polyoxin Z are produced by fermentation using a microorganism
isolated from a soil of Mt. Aso in Japan. Formulations of WP, EC, SG and WG are
registered in various countries and used widely to control fungal diseases on fruit trees,
vegetables, flowers, turf and ornamentals. Due to natural source fungicides, they havebeen known to be highly safe for human, animals, plants and environment.

)

Pentoxazone (rice herbicide) Pentoxazone, a new oxazolidinedione compound, is known to be a Protox inhibitor
and used to control annual broad leaves, barnyard grass and monocholia in paddy fields with a long lasting effect. Formulations of GR, SC, TB and EW of pentoxazone alone or combination with sulfonylurea and other herbicidal compounds areavailable, and can be applied before, during and after transplantation of rice seedlings due to the high crop safety.

Animal Health P ro d u c t s
Salinomycin (ionophore anti-coccidial for chicken) Salinomycin was discovered and developed by Kaken,
and registered first in Japan in 1978. Through successful marketing and licensing, salinomycin is now the best selling anticoccidial feed additive in the world to produce economically million tons of healthy chicken meat. Kaken is producing salinomycin
under GMP and supplying worldwide a technical grade material or formulated products directly or through the distributors.

Colistin Sulfate (polypeptide antibiotic) Colistin sulfate is also Kaken’s original product and used as a veterinary medicine or feed additive to control diseases caused by gram-negative bacteria in poultry, swine, cattle and other animals. This antibiotic has been used widely for long in the world because of its excellent safety and efficacy. Kaken is producing the EP4.6 grade material under GMP and the Drug Master File (DMF) is available if required.

Kaken Pharmaceutical Co., Ltd. 09

COMMITMENT AND EXCELLENCE

R&D System

We enter licensing agreements with these entities as appropriate.

Discovery Research

These collaborations are designed to ensure more effective R&D

We are committed to strengthening and broadening our R&D

and minimize unforeseeable risks pertaining to R&D investments.

activities. To this end, we are reinforcing in-house drug discovery

Our laboratories are exploring a number of innovative tech-research and adopting a multifaceted approach to cultivating new

nologies in collaboration with leading academic scientists andR&D themes. At the same time, we will actively pursue joint re-pharmaceutical companies. As a result, our expertise has expanded

search and introduce new technologies, both in Japan and over-to the fields of asthma, endocrinology, systemic mycosis, cardiol-seas, in order to pinpoint and capitalize on lucrative opportuni-ogy, and oral care.

ties.

Our researchers are highly motivated and dedicated to excel-

Drug Discovery Research Laboratories are located in Kyoto,lence at every phase of drug discovery research. Moreover, we

the ancient capital of Japan. There, our dedicated researchers con-have a refined education program for young researchers to en-

stantly study the latest scientific information and technologies.

courage their motivation.

Our main in-house drug discovery research themes are inflam-

Our current policy is to focus on specific research areas, whilemation and immunology, endocrine and metabolic diseases, andexpanding our product range by speeding up research and devel-

infectious diseases, especially systemic mycosis. In endocrine andopment. By pursuing strategic alliances with, and outsourcing

metabolic diseases, in particular, drugs for treating osteoporosis,

processes to, companies and research institutions located both indiabetes, and obesity appear very promising for Kaken in light ofJapan and overseas, we are committed to global joint develop-

Japan’s aging society.

ment, and the introduction of new technologies and seeds.

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

Development Researchcontinue to explore chemical candidates synthesized in various

Kaken’s Development Research Laboratories are located inprojects in order to design a superior peptidemimetic focusing

Shizuoka Prefecture. There, we undertake a wide range of re-laboratory.

search activities in a stimulating environment. Our objective here

To establish a strong presence in genomic approach and otheris to develop candidate compounds identified during discovery

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

research into commercially acceptable new drugs. Our drug de-search programs with other laboratories and academic institutions.

velopment research covers pharmacokinetics research, drug formulation, safety evaluation, and quality assurance.
The Company’s drug development activities are highly acclaimed. We have received the Okochi Memorial Prize five times
in the past. This is the most respected prize in Japan for companies and researchers who have contributed to innovative drug
production.

10 Kaken Pharmaceutical Co., Ltd.

Commitment and Excellence

Our MRs play a key role in our R&D and production activities
through their communication with doctors and patients. Being on
the front line, they obtain valuable information from doctors’ offices and other medical institutions. In addition, they help us develop user-friendly package designs and product descriptions by
incorporating the suggestions of medical professionals.
We are currently strengthening our marketing and sales system
in order to expand sales of our pharmaceutical products. We haveestablished nine branches and 66 sub-branches so that medical
Our Pharmacokinetics Research Group uses the latest equip-

representatives (MRs) can work closely with local communities

ment and technologies to study the absorption, distribution, me-and provide up-to-date information on products that meet the needs

tabolism, and excretion of drugs in order to determine their ef-of medical professionals. We are also increasing the number of MRs,

fectiveness and safety in the body. Our Drug Formulation Group

with plans to have 700 of them in place by March 2005.

studies general pharmaceutical designs and formulations using

To date, we have directed our MR activities mainly at hospi-

drug delivery systems (DDSs) and pinpoints technologies to de-tals, due to our success in the area of orthopedics. However, invelop optimal dosage forms. Our Safety Evaluation Group strictly

light of the release of the hyperlipidemic agent Lipantil and theevaluates the safety of candidate compounds. Our Quality Assur-

pending approval of Lipantil M, we are expanding sales promo-

ance Group works to ensure that information generated in alltion activities directed at medical institutions engaged in internal

Kaken laboratories is of the highest quality and reliability.

medicine. Our aim is to expand the market share held by Kaken’s

To expedite clinical development, we will make effective use

products in this important area.

of outsourcing non-clinical trials, as well as outsourcing trials to

By raising the numbers of sub-branch offices and MRs, weoutside organizations specializing in clinical trials. Additional

hope to further reinforce our stronghold in the market for ortho-

measures for reinforcing the Company’s development structure

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

include the recruitment of young staff and increasing expendi-

areas of external medicine and internal medicine with drugs forture for specific R&D themes.

treating diabetes and lipid metabolism.

Medical Representative System
Kaken’s medical representatives (MRs) provide doctors with updated information on the Company’s products and respondpromptly to requests from medical professionals. Our MRs also
gather medical information related to the safety and effectivenessof our drugs and provide feedback from customers to the relevant
departments.

Kaken Pharmaceutical Co., Ltd. 11

Commitment and Excellence

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

Environmental Protection Activities

quality of products for export is governed by cGMP regulations

As a pharmaceutical manufacturer concerned with people’s well-in the United States, which were formulated by the U.S. Foodbeing, our important management priorities are to protect theand Drug Administration (FDA).

global environment and to help realize a prosperous society.

Our production facilities are constantly reviewing work pro-

To this end, our Shizuoka production and R&D facilities havecesses and reevaluating quality and standards, with the aim ofobtained ISO14001 certification, the international standard forboosting both quality and productivity. Keeping a close watch on

environment management, as part of the Company’s environmen-

market trends following revisions to the Pharmaceutical Affairs

tal protection activities. These facilities work to minimize waste,

Law, we are examining the adoption of efficient production sys-

incineration, and land reclamation, while reducing power con-tems that make use of our specialist manufacturing-related ex-

sumption and otherwise saving energy. They also work to moni-

pertise in production consignment and outsourcing. We are also

tor and control the volumes of chemical used, minimize discharge

conducting a review of our entire production system, which in-of harmful substances into the atmosphere, and improve the qual-

cludes consignment production of small lot products.

ity of effluent.

We are also promoting the outsourcing of the distribution func-

Our Shizuoka facilities have achieved a recycling ratio of overtion. Our Western Distribution Center began operations as an

99% for industrial waste. We have also established an environ-outsourcing center in May 2003, and we are examining a similar

ment committee to help promote environmental protection. Inrole for our Eastern Distribution Center, taking into consider-addition, we have initiated companywide activities aimed at pro-ation the facilities it has to offer.

moting the “3 Rs” (recycle, reduce, reuse) in an effort to develop products and production
technologies that have minimal
impact on the environment.
Shizuoka Factory

12 Kaken Pharmaceutical Co., Ltd.

FULFILLING OUR SOCIAL RESPONSIBILITIES

Compliance by the Kaken Group
Every executive and employee of Kaken Pharmaceutical and its group of companies is strongly committed tocompliance with respect observing Japanese and foreign laws and regulations, respecting different cultures andcustoms, and adopting high ethical standards.
1. We recognize the preciousness of life and shall contribute to the welfare of society by channeling all our efforts
into enhancing people’s health and patients’ quality of life.
2. We recognize the importance of maintaining appropriate relations with all our stakeholders, including
shareholders, investors, employees, business partners, and local communities.
3. We shall compete in a fair and free manner, and conduct our business activities in a just and proper way.
4. We shall handle all the Company’s assets, including information, in a legitimate and proper manner tofacilitate the smooth running of its operations.
5. We shall respect the human rights and individuality of employees, pay attention to health and safety issues,
and will work hard to foster a fair and honest workplace culture.
6. We shall manage Company information appropriately and disclose information in a timely and appropriatemanner.
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.

Corporate GovernanceIn fiscal 2001, we introduced an operating officer system in order to expedite decision-making and clarify supervisory and business execution functions. Faced with a choice between an auditor-style or committee-style of management, we opted for our existing auditor-style format. While we fully recognize that reinforcing the control andauditing functions is an important element of corporate governance, we chose our existing format—Board of
Directors, corporate auditor system, and operating officer system—because we believe it is critical to the functional operation of our company.

Kaken Pharmaceutical Co., Ltd. 13

BOARD OF DIRECTORS AND CORPORATE AUDITORS

From left: Shuji Komoto, Yoshinori Kambayashi, Shiro Inui, Takeshi Hirahara, and Takeji Saito

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

14 Kaken Pharmaceutical Co., Ltd.

Executive Managing Director
Shuji Komoto(Accounting & Purchasing)

AuditorOsamu Okamoto(Standing)

Executive Director
Yutaka Handa(Personnel)

Auditor
Satoshi Shoji(Standing)

Executive Director
Shinichi Takamatsu(Accounting)

Auditor
Sumio Yoshizawa

Executive Director
Masahiro Hori
(Agrochemicals and Animal Health Products)

AuditorKeizo NemotoORGANIZATIONSGeneral Meetingof Stockholders

Managing
Directors
Meeting

Board of Directors

President

Corporate Auditors

Board ofCorporate Auditors

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

Kaken Pharmaceutical Co., Ltd. 15

CONSOLIDATED FINANCIAL REVIEW
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries.

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

Millions of yen

2004

2003

2002

¥ 72,706
7,526
3,017

¥ 74,003
7,947
2,598

43,133
105,613¥ 31.87.
10.00.

2001

2000

2004

¥ 73,272
7,725
1,765

¥ 70,306 ¥ 71,801
6,805
5,925
1,999
1,989

$ 692,438
71,67628,733

40,771
108,516

39,018114,125

36,112
121,80334,854106,240

410,790
1,005,838¥ 27.11.
8.25.

¥ 18.74.
7.50.

¥ 21.78.
7.50.

¥ 21.68.
7.50.

5.63.
29.65.

6.08.
32.81.

For the years ended March 31,

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

Total shareholders’ equity ..................................
Total assets ..........................................................
Per share data:

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

Yen

U.S. dollars (Note)

$

0.304
0.095

(%)

ROE ....................................................................
Capital adequacy ratio .......................................

7.19.
40.84.

6.51.
37.57.

4.70.
34.19.

.
Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥105 = $1 effective on March 31, 2004.

(¥ millions)

Sales of Pharmaceuticals (Non-Consolidated)

Sales

Share

Change¥18,11528.3%+ 1.3%

Adofeed

9,175

14.3

- 3.2

Procylin

8,636

13.5

- 8.1

Seprafilm

3,226

5.0

+ 20.5

Fiblast Spray

3,219

5.0

+ 11.8

Lipantil

2,909

4.5

+ 8.0

Cytotec

2,138

3.3

- 3.2

Mentax

2,076

3.2

- 9.2

Others

14,565

22.7

- 3.4

¥64,059

100.0

- 0.8

Artz and related products

Total

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

16 Kaken Pharmaceutical Co., Ltd.

Revenues
In fiscal 2003, ended March 31, 2004, consolidated net sales
amounted to ¥72,706 million, down 1.8% from the previous year.
Major factors in this slight decline included a fall in the number ofpeople seeking medical treatment — due to the increase in the
portion of medical expenses borne by patients — as well as themove to comprehensive medical care by specialized hospitals andintensified competition in the domestic and overseas pharmaceutical industries.
Information on consolidated sales of pharmaceuticals, including medical devices, and agrochemicals in fiscal 2003 is provided
below. During the year, we focused on promoting sales of mainstay products — such as Artz, Procylin, and Adofeed — as well as
new offerings destined to become part of our next-generation lineup
in the future. We reported a year-on-year increase in sales of Artz,
due to proactive sales and marketing activities by our MRs, as well
as a rise in patient numbers. Sales of Procylin and Adofeed declined as a result of competing products, including generic offerings. Sales of Fiblast Spray and Lipantil expanded as these products steadily penetrated the market.
The expanding scope of Japan’s health insurance coverage
has enabled Seprafilm to be used in a broader range of treatments.
During the year, we promoted use of this product in gastrointestinal surgery. This led to major increases in usage frequency andamount, which boosted sales.
In the agrochemicals and animal food additives segment, curbs
on the use of agricultural chemicals and the entry into the Japanese market of foreign-owned companies led to a harsh businessclimate. Even so, there was a steady increase in both domestic sales
and exports of Polyoxin, a fungicide used on fruit, vegetables, andgrass. The herbicide Pentoxazon also performed strongly, generated a year-on-year sales increase. However, prices of the animal
feed additives Salinomycin and Colistin fell as a result of intensecompetition in overseas markets, leading to a decline in sales.
As a result, sales of pharmaceuticals, including medical devices,
and agrochemicals totaled ¥69,634 million, down 1.8% from theprevious year.
In other areas, we recorded sales of ¥3,072 million from renting our real estate holdings and other businesses.

Earnings
In the year under review, operating income declined 5.3%, to ¥7,526
million, owing to the effect of the increase in R&D expenditure.
Net income rose 16.1%, to ¥3,017 million, mainly due to a decrease in losses on investment accounted for by the equity method,

and a decrease in taxes accompanying amendments to the Corporation Tax Law.
The operating income ratio fell from 10.7% to 10.4%. Net income per share increased 17.6% to ¥31.87, and ROE was up 0.7 point,
to 7.2%.

Profit Appropriation
At the end of fiscal 2003, the Company declared an ordinary dividend of ¥5.50 per share. Following an interim dividend of ¥4.5 yen
per share, this took the annual dividend to ¥10.00 per share, up¥1.75 from fiscal 2002. Other profits will be allocated to researchand development to ensure the continual growth of the Company.

Performance Indicators
Although the operating income ratio dipped slightly to 10.4%, it hasremained above the 10% mark for the past five years. Earnings per
share increased 17.6%, to ¥31.87, and ROE rose 0.7 point, to 7.2%.
The ratio of shareholders’ equity to total assets at fiscal yearend was 40.8%, up 3.2 points from a year earlier, owing to anincrease in retained earnings and other factors. Shareholders’equity per share rose ¥33.86, to ¥465.77.

Cash Flows
Cash and cash equivalents at the end of fiscal 2003 stood at¥13,240 million, down ¥7 million from a year earlier.
Net cash provided by operating activities totaled ¥4,115 million, down ¥4,082 million from a year earlier. This was mainly
due to changes in accounts receivable and trade payables, as wellas payment of income taxes.
Net cash used in investing activities amounted to ¥464 million, down ¥3,790 million from fiscal 2002. This was mainly due
to the acquisition of property, plant and equipment and the saleof investment securities.
Net cash used in financing activities was ¥3,658 million, down
¥3,448 million compared with the previous year. This was mainly
the result of repayment of loans and acquisition of treasury stock.
In the previous fiscal year, the Company redeemed convertible
bonds totaling ¥18,491 million.

OutlookIn the fiscal year ending March 31, 2004, the Company expects
net sales to remain largely unchanged, or perhaps increase slightly,
from the year under review. Revenues will be constrained by acontinuation of the current harsh business climate and the lackof new drugs scheduled for release. We also project a modest
increase in earnings due to rationalization and improved efficiency.
Kaken Pharmaceutical Co., Ltd. 17

CONSOLIDATED FINANCIAL STATEMENTS
Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries.

Consolidated Balance Sheets
As of March 31, 2004 and 2003

Thousands of
U.S. dollars (Note 3)

Millions of yen

ASSETS

2004

2003

2004

¥ 13,257150¥ 13,264150$ 126,257
1,429

32,6391,116

34,390584

310,848
10,628Less: Allowance for doubtful receivables .......................................

33,755(21)

34,974(24)

321,476(200)

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

33,734
11,136964
919

34,950
10,2071,143
1,129

321,276
106,057
9,181
8,752

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

60,16060,843572,952

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

34,88917,83034,734
17,544332,276
169,810

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

52,719(29,662)

52,278(28,067)

502,086(282,495)

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

23,0573,723
16

24,211
3,638
43

219,591
35,457
152

Total property, plant and equipment .......................................

26,79627,892

255,200

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

5,346
1,538
2,491
6,604
92
2,586

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

50,914
14,64823,72462,895876
24,629Total investments and other assets ...........................................

18,657

19,781

177,686

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

¥105,613¥108,516$1,005,838

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

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

Thousands of
U.S. dollars (Note 3)

Millions of yen

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

2004

2003

5,940
802

¥ 6,175
1,668

12,964281
2,352

12,711
551
2,445

123,4672,676
22,400Accrued expenses .................................................................................
Accrued bonuses ..................................................................................
Accrued sales rebates ...........................................................................
Accrued income taxes (Note 13) .........................................................
Other current liabilities .......................................................................

15,597
503
1,185
756
196
570

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

148,543
4,790
11,286
7,200
1,867
5,429

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

25,54929,632

243,324

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

29,610
6,478
229
280
333

30,487
6,512
493
290
330

282,000
61,695
2,181
2,667
3,171

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

36,93038,112351,714

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

1

1

10

Shareholders’ Equity:
Common stock - no par value
Authorized: 360,000,000 shares
Issued : 94,518,374 shares
as of March 31, 2003 and 2004 ..................................................
Capital surplus .....................................................................................
Retained earnings ................................................................................
Net unrealized gain(loss) on valuation of other securities,
net of taxes (Note 2 (c)) .....................................................................
Treasury stock, at cost: 1,985,560 shares in 2004
and 206,857 shares in 2003 ...............................................................

17,00015,735
10,54017,00015,735
8,406

161,905
149,857
100,381

988

(262)

9,409

(1,130)(108)(10,762)

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

43,133

40,771

410,790

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

¥105,613¥108,516$1,005,838

¥

2004
$

56,571
7,638

Commitments and contingencies (Note 14)

Kaken Pharmaceutical Co., Ltd. 19

Consolidated Statements of Income
For the years ended March 31, 2004 and 2003

Thousands of
U.S. dollars (Note 3)

Millions of yen

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

2004¥72,706
36,447

2003¥74,003
38,0392004$692,438
347,114Gross profit ...........................................................................................

36,25935,964345,324

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

28,73328,017

273,648

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

7,526

7,947

71,676

78
(439)
(525)

79
(608)
(525)

743
(4,181)(5,000)

(47)
181
(70)
(921)
(29)
(492)

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

(448)
1,724
(667)
(8,771)(276)(4,686)(2,264)(2,293)(21,562)

5,262

5,654

50,114

2,259
(14)
2,245

4,656
(1,600)3,056

21,514(133)
21,381

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

3,017

2,598

28,733

Minority interests ......................................................................................

0

0

0

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

¥3,017¥2,598$28,733

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

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

Yen

U.S. dollars (Note 3)

Per share data:
Net income: (Note 2 (m))
Basic ...............................................................................................

¥31.87¥27.11$0.304.

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

¥24.92¥20.50$0.237.

Cash dividends (Note 2 (m)) ...............................................................

¥10.00¥ 8.25$0.095The accompanying notes are an integral part of the Consolidated Financial Statements.
20 Kaken Pharmaceutical Co., Ltd.

.

Consolidated Statements of Shareholders’ Equity
For the years ended March 31, 2004 and 2003

Millions of yen
Number ofcommonstock

Commonstock

CapitalsurplusRetainedearnings

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

94,518,374¥17,000¥15,735¥ 6,557
2,598
(709)
(40)

Balance at March 31, 2003 ...................
Net income ......................................
Cash dividends .................................
Directors’ bonuses ...........................
Net unrealized gain on valuationof other securities, net of taxes ...........
Treasury stock acquired, net ............

94,518,374

Unrealized
gain (loss) onother securities

Treasurystock
at cost¥ (258) ¥

(16)

(4)
(92)
¥17,000¥15,735¥ 8,406
3,017
(846)
(37)

¥ (262) ¥ (108)1,250

Balance at March 31, 2004 ................. 94,518,374¥17,000¥15,735¥10,540

Total
shareholders’equity¥ 39,018
2,598
(709)
(40)
(4)
(92)
¥ 40,771
3,017
(846)
(37)

(1,022)

1,250(1,022)¥ 988 ¥(1,130)¥43,133

Thousands of U.S. dollars (Note 3)

Balance at March 31, 2003 ...................
Net income ......................................
Cash dividends .................................
Directors’ bonuses ...........................
Net unrealized gain on valuationof other securities, net of taxes ...........
Treasury stock acquired, net ............

Number ofcommonstock

Commonstock

94,518,374$161,905

Balance at March 31, 2004 ................. 94,518,374

CapitalsurplusRetainedearnings

Unrealized
gain (loss) onother securities

Treasurystock
at cost$149,857 $ 80,057 $(2,495) $ (1,029)
28,733(8,057)(352)
11,904$161,905$149,857 $100,381

Total
shareholders’equity$388,295
28,733(8,057)(352)(9,733)

11,904(9,733)$ 9,409 $(10,762)$410,790

Kaken Pharmaceutical Co., Ltd. 21

Consolidated Statements of Cash Flows
For the years ended March 31, 2004 and 2003

Thousands of
U.S. dollars (Note 3)

Millions of yen

2004

2003

2004

¥ 5,262¥ 5,654$ 50,114

2,008
1,113
92
(226)
(78)
439
921
70
29
—
(181)
43
—
1,751
(929)
253
(37)
(1,227)
9,303
78
(441)
(4,825)
4,115

2,100
1,020
243
350
(79)
608
1,283
276
84
8
—
93
(789)
5,046
(411)
(1,771)(40)(1,549)12,12678(606)(3,401)
8,197

19,124
10,600876(2,152)
(743)
4,181
8,771
667
276
—
(1,724)410—
16,676(8,848)2,410(352)(11,686)
88,600743(4,200)(45,953)
39,190II. Cash flows from investing activities
Acquisition of property, plant and equipment ....................................
Proceeds from sales of property, plant and equipment .......................
Acquisition of investment securities ....................................................
Proceeds from sales of investment securities .......................................
Payment of long-term prepaid expenses ..............................................
Other, net .............................................................................................
Net cash used in investing activities ........................................

(1,139)
5
(3)
691
(72)
54
(464)

(1,419)1,248(3,382)
22
(200)
(523)
(4,254)(10,848)
48
(28)
6,581
(686)
514
(4,419)III. Cash flows from financing activities
Decrease in short-term bank loans ......................................................
Proceeds from long-term debt .............................................................
Repayment of long-term debt ..............................................................
Proceeds from issuance of convertible bonds .....................................
Redemption of convertible bonds .......................................................
Acquisition of treasury stock ................................................................
Cash dividends paid ............................................................................
Other, net .............................................................................................
Net cash used in financing activities .......................................
Net decrease in cash and cash equivalents.............................................
Cash and cash equivalents at beginning of year ....................................
Cash and cash equivalents at end of year (Note 4) ................................

(235)—(1,555)——(1,022)(846)—(3,658)(7)
13,247¥13,240

(29)
3,000
(508)
9,723
(18,491)
—
(709)
(92)
(7,106)(3,163)
16,410¥13,247(2,238)—(14,810)——(9,733)(8,057)—(34,838)(67)
126,162$126,095

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

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

Notes to the Consolidated Financial Statements

1. Basis of Presenting Consolidated Financial Statements:
The accompanying consolidated financial statements of KAKEN
PHARMACEUTICAL CO., LTD. (the “Company”) and its consolidated subsidiaries (collectively the “Group”) are basically an English
version of those which were prepared from accounts and records maintained by the Group and in accordance with accounting principles andpractices generally accepted in Japan, which are different in certain
respects from the application and disclosure requirements of International Accounting Standards, and filed with the Director of Kanto Fi-

nance Bureau. The consolidated statements of shareholders’ equity havebeen prepared to provide additional information.
Certain items presented in the consolidated financial statements havebeen reclassified for the convenience of readers outside Japan.
The consolidated financial statements are not intended to present theconsolidated financial position, results of operations and cash flows inaccordance with accounting principles and practices generally acceptedin countries and jurisdictions other than Japan.

2. Summary of Significant Accounting Policies:(a) Principles of Consolidation
The Company had five subsidiaries as of March 31, 2004 and 2003.
The consolidated financial statements include the accounts of theCompany and all of its subsidiaries. The consolidated subsidiaries as ofMarch 31, 2004 and 2003 are as follows:
KAKEN REALTY & SERVICE CO., LTD.
KAKEN PHARMA CO., LTD.
KAKEN LOGISTICS CO., LTD.
EIKO FILTER CO., LTD.
FUJIKA CORPORATIONThe Company had an affiliate as of March 31, 2004 and 2003. Investment
in N·K Curex Co., Ltd. is accounted for by the equity method.
All significant intercompany transactions, account balances and unrealized profits 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 bewithdrawn within three months and short-term investments with original maturity of three months or less and are considered to have minimal risk from market fluctuations.
(c) Marketable and Investment Securities
Securities are classified as one of four categories; (1) Trading, (2)Held-to-maturity debt, (3) Securities of subsidiaries and affiliated, and(4) Other. Trading securities are recorded at market value with unrealized gains and losses recognized in the current years earnings. Debt
securities that are expected to be held-to-maturity are carried at amortized cost. Securities of subsidiaries and affiliates are carried at cost.
Other securities are expected to be sold in the long term and those,
whose fair values are readily determinable, are carried at fair value
with unrealized gains or losses included as a separate component inshareholders’ equity, net of taxes. Other securities without market
quotations are stated at cost, determined by the moving averagemethod.

(d) Inventories
Inventories are stated at cost, this being determined by the averagemethod.
(e) Property, Plant and Equipment
Depreciation is computed on the declining-balance method at rates
based on the estimated useful lives of assets, except for buildings, structures, machinery and equipment for the Komagome office that arecomputed on the straight-line method. Consolidated subsidiaries principally adopted the straight-line method. Furthermore, depreciation ofbuildings, except for ancillary facilities to buildings, acquired after
April 1,1998, is computed using the straight-line method. The range ofuseful lives is from 3 years to 60 years for buildings and structures, andfrom 2 years to 17 years for machinery and equipment.
(f) Pension and Retirement Benefits
Employees who terminate employment are entitled, under most circumstances, to lump-sum payments or pension payments as described
below, determined by reference to current basic rate of pay, length ofservice and conditions under which the termination occurs. The minimum payment is an amount based on voluntary retirement. In addition to the minimum payment based on voluntary retirement,
employees receive additional benefits for retirement due to age limit,
death or other defined reasons. The Company has a non-contributory
defined benefit funded pension plan (entrusted) which covers 30% of
the benefits payable under the existing retirement plan to employees.
The accrued pension and severance costs represents the amountactuarially calculated projected benefit obligations less (1) the fairvalue of the plan assets (2) unrecognized actuarial loss or gain and (3)the unrecognized transition amount arising from adopting the newstandard (4) unrecognized prior service cost. If the fair value of theplan assets exceeds the projected benefit obligations, prepaid pension
and severance costs are recorded. The transition amount (unfunded
and unrecognized benefit obligation) of ¥7,902 million at April 1,
2000 is amortized on a straight-line basis over 15 years (for subsidiaries
mainly 10 years). Unrecognized actuarial loss or gain is amortized on a

Kaken Pharmaceutical Co., Ltd. 23

straight-line basis over 10 years from the next year in which they arise.
Unrecognized prior service cost is amortized on a straight-line basis
over 10 years from the year in which they arise. For the Company,
prepaid pension and severance costs were recognized for a portion of
the plan covered by the non-contributory pension plan assets and theaccrued pension and severance costs were recognized for a portion of
the plan not covered by the plan assets.
Accrued retirement benefits to directors and statutory auditors isprovided in an amount equivalent to the liability the relevant company
would have been required to pay upon retirement at the balance sheet
date, as prescribed by its internal rules.
(g) Income Taxes
Income taxes are determined using the asset and liability approach,where deferred tax assets and liabilities are recognized for temporary
differences between the tax basis of assets and liabilities and their reported amount in the financial statements.
(h) Consumption Taxes
Consumption taxes have been excluded from amounts shown on theaccompanying consolidated statements of income.
(i) Derivative Financial Instruments
Derivative instruments, which include foreign currency forward exchange contracts and interest rate swap agreements, are used as a part of
the Company’s risk management of foreign currency and interest raterisk exposures of its financial assets and liabilities.
Foreign currency exchange forward contracts:
The Company enters into foreign currency exchange forward contracts
to limit exposure, affected by changes in foreign currency exchange
rates, on accounts receivable and payable and cash flows generated fromanticipated transactions denominated in foreign currencies. For foreign
currency exchange forward contracts which are designated and are effective as hedges of such currency exchange rate risk on existing assets andliabilities, the Company adopted the accounting method whereby foreign currency denominated assets and liabilities are measured at thecontract rate of the respective foreign currency exchange forward contracts. With respect to such contracts for anticipated transactions, thecontracts are marked-to-market and the unrealized gains/losses are deferred in the balance sheet to be released to income when the exchange
gains/losses on the hedged items or transactions are recognized.
Interest rate swap agreements:
The Company enters into interest rate swap agreements, in order tolower funding costs and limit the Company’s exposure in respect of theunderlying financial instruments, resulting from adverse fluctuations ininterest rates. The related interest differentials paid or received under the

24 Kaken Pharmaceutical Co., Ltd.

interest rate swap agreements are recognized in interest expenses over
the terms of the agreements.
Derivative financial instruments have not been implemented by consolidated subsidiaries.
(j) Bond Issue Costs
Bond issue costs are capitalized and amortized over three years on thestraight-line basis.
(k) Appropriation of Retained Earnings
The Commercial Code of Japan provides that appropriations of retained earnings, including bonuses to directors and statutory auditors,
require approval by the shareholders at the annual ordinary general
meeting of shareholders. Appropriations of retained earnings are,therefore, not reflected in the consolidated financial statements for theperiod to which they relate, but are recorded in the subsequent accounting period after shareholders’ approval has been obtained.
(l) Shareholders’ Equity
Under the Commercial Code of Japan, at least 50 per cent of the issue
price of new shares is required to be designated as stated capital. The
portion which is designated as stated capital is determined by resolution of the Board of Directors. Proceeds in excess of the amounts designated as stated capital have been credited to capital surplus.
The Commercial Code of Japan permits the Company to use retained earnings distributable to shareholders to acquire its own stock
for retirement, following approval by the shareholders.
(m) Net Income and Dividends per Shares
Net income per share of common stock is based upon the weighted
average number of shares of common stock outstanding during eachfinancial year appropriately adjusted for subsequent free distribution ofshares (stock splits), if applicable.
Cash dividends per share shown for each year in the accompanying
consolidated statements of income represent dividends approved or
declared as applicable to the respective years.
Fully-diluted net income per share is computed, based on the assumption that the convertible bonds were fully converted into common stock on the date of issue or at the beginning of the respective
years subsequent to the issue, with appropriate adjustments of related
interest expense (net of tax).

3. United States Dollar Amounts:
The Group maintains its accounting records in yen. The dollar
amounts included in the consolidated financial statements and notes
thereto represent the arithmetical results of translating yen to dollars
on the basis of ¥105=U.S.$ 1. The inclusion of such dollar amounts issolely for convenience and is not intended to imply that yen amounts
have been or could be converted, realized or settled in dollars at¥105=U.S. $ 1 or any other rate.

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

Millions of yen

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

2004

2003

2004

¥13,257150
13,407
(17)
(150)
(167)
¥13,240¥13,264150
13,414
(17)
(150)
(167)
¥13,247$126,257
1,429
127,686(162)(1,429)(1,591)$126,095

5. Marketable Securities and Investment Securities:
The costs and aggregate market values of marketable and investment securities are follows:
Millions of yen
CostMarketvalue

Unrealized
gain (loss)

Cost

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

2004

Unrealized
gain (loss)

Cost

2003

Marketvalue

Unrealized
gain (loss)

For the years ended March 31,
Other securities:
Market value available
Equity securities .......................... ¥3,257
Other securities ...........................
44
3,301
Market value not available ...............
380
Total ............................................ ¥3,681¥4,92343
4,966
380¥5,346¥1,666(1)
1,665—¥1,665¥3,744
208
3,952
2,929
¥6,881¥3,356
155
3,511
2,929
¥6,440¥(388)(53)(441)—¥(441)$31,019419
31,4383,619$35,057$46,885410
47,295
3,619$50,914$15,866(9)15,857—$15,857

Held-to-maturity debt securities:
Market value not available ............... ¥ 150

¥ 150

¥

¥ 150

¥ 150

¥ —

$ 1,429$ 1,429

$

—

2004

—

Other securities sold during the fiscal years ended March 31, 2004 and 2003
Thousands of
U.S. dollars (Note 3)

Millions of yen

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

2004

2003

2004

¥691
181
—

¥22
—
8

$6,581
1,724—

Kaken Pharmaceutical Co., Ltd. 25

6. Inventories:
Inventories as of March 31, 2004 and 2003 are comprised of the following:Thousands of
U.S. dollars (Note 3)

Millions of yen

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

2004

2003

2004

¥ 5,016
1,419
3,351
1,188
162
¥11,136¥ 4,706
1,524
2,446
1,409
122
¥10,207$ 47,772
13,514
31,914
11,314
1,543$106,057

7. Short-term Bank Loans and Long-term Debts:
Short-term bank loans outstanding as of March 31, 2004 and 2003 arerepresented the notes issued by the Group to banks. Customarily, thesenotes are renewed at maturity subject to renegotiation of interest rates
and other factors. The weighted-average interest rates applicable toshort-term bank loans as of March 31, 2004 and 2003 are 0.86 % and0.88 %, respectively. Outstanding balance of short-term bank loans asof March 31, 2004 and 2003 were ¥ 5,940 million and ¥6,175 million,
respectively.

Long-term debts as of March 31, 2004 and 2003 consisted of the following:Thousands of
U.S. dollars (Note 3)

Millions of yen

March 31

2004

2003

2004

Less: current portion ......................................................................................................................

¥ 3,608
7,849
10,0008,955
30,412(802)¥ 5,162
7,849
10,0009,144
32,155(1,668)$ 34,362
74,752
95,23885,286289,638(7,638)

Total .......................................................................................................................................

¥29,610¥30,487$282,000

Loans from banks and other financial institutions due
2004 to 2009 (interest rate 1.77-2.10%) .....................................................................................
0.0% unsecured convertible bond due 2007 (a) ............................................................................
0.0% unsecured convertible bond due 2007 (b) ...........................................................................
Other long-term debt with interest bearing due 2004 to 2033 (interest rate 3.10%) ....................

a) 0.0% Unsecured convertible bond
Holders of this bond are entitled to convert these bonds into common stock at
a price of ¥630 during the period from August 9, 2000 to September 14, 2007.
b) 0.0% Unsecured convertible bond
Holders of this bond are entitled to convert these bonds into common stock at
a price of ¥732 during the period from August 8, 2002 to September 14, 2007.

Aggregate annual maturities of convertible bonds in the next fivefiscal year are as follows:
Millions of yen

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

26 Kaken Pharmaceutical Co., Ltd.

¥——
17,849—¥17,849

Thousands of
U.S. dollars(Note 3)$——
169,990—$169,990

Aggregate annual maturities of long-term bank loans and otherinterest bearing debt are as follows:
Thousands of
U.S. dollars (Note 3)

Millions of yen

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

Long-termbank loans

Other interest
bearing debt

Long-termbank loans

Other interest
bearing debt

¥ 608

¥ 194

$5,790$ 1,848

—

200

—

1,905

—

207

—

1,971

—

213

—

2,029

—

214

—

2,038

3,000
¥3,608

7,927¥8,95528,572$34,362

75,495$85,286As is customary in Japan, short-term and long-term bank loans are
made under general agreements which provide that security and guarantees for future and present indebtedness will be given upon requestof 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, 2004 and 2003, assets pledged as collateral for certain
short-term (¥1,460 million) and long-term debts (¥9,243 million),including current portion of long-term debts, were as follows:

Thousands of
U.S.dollars(Note 3)

Millions of yen

2004

2003

2004

Assets pledged
Buildings and structures .............. ¥10,228
Machinery and equipment ..........
1,885
Land .............................................
108
Investment securities ...................
1,744

March 31

¥10,679
2,005
108
1,254

$ 97,409
17,952
1,029
16,610Total ....................................... ¥13,965¥14,046$133,000

Liabilities and secured
Short-term bank loans ................. ¥ 1,460
Long-term bank loans ..................
288
Other interest bearing debt .........
8,955
Total ....................................... ¥10,703¥ 1,410842
9,144¥11,396$ 13,905
2,743
85,285$101,933

8. Accounting for Leases:
Leases that transfer substantially all the risks and rewards of ownership of the assets are accounted for as capital leases, however, leases
that do not transfer ownership of the assets at the end of the leaseterm are accounted for as operating leases, in accordance with accounting principles and practices generally accepted in Japan.
Assumed data “as if capitalized” as to acquisition cost, accumulated depreciation, net book value and depreciation expense of theleased assets, which excluded the portion of interest thereon, weresummarized as follows:
Thousands of
U.S.dollars(Note 3)

Millions of yen

March 31

2004

2003

2004

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

¥15
9
¥ 6

¥15
7
¥ 8

$143
86
$ 57

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

¥ 2

¥ 2

$ 19

Periodic lease expenses on finance lease contracts withoutownership-transfer for the year ended March 31, 2004 and 2003
were summarized as follows:
Thousands of
U.S.dollars(Note 3)

Millions of yen

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

2004

2003

2004

¥2

¥2

$19

The amount of outstanding future lease payments due atMarch 31, 2004 and 2003, which excluded the portion of interest
thereon, was summarized as follows:
Thousands of
U.S.dollars(Note 3)

Millions of yen

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

2004

2003

2004

¥2
5
¥7

¥2
7
¥9

$19
48
$67

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

9. Derivative Financial Instruments:
Derivative financial instruments are utilized by the Company principally to reduce interest rate and foreign exchange rate risks. The
Company has established a control environment which includes
policies and procedures for risk assessments and for the approval,reporting and monitoring of transactions involving derivative financial instruments. The Company does not hold or issue derivative financial instruments for speculative purposes.

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

Kaken Pharmaceutical Co., Ltd. 27

10. Pension and Retirement Benefits:
The benefit obligation and plan assets, funded status and compositionof amounts recorded in the consolidated balance sheet as of March
31, 2004 and 2003 is as follows:
Millions of yen

March 31

2004

The components of net pension and severance costs for the year
ended March 31, 2004 and 2003 were as follows:

Thousands of
U.S.dollars(Note 3)

2003

2004

Projected benefit obligations .......... ¥(23,444) ¥(24,175)
Plan assets ........................................
8,774
7,820

$(223,276)
83,562

Funded status ..................................
Unrecognized transition
amount ........................................
Unrecognized actuarial loss ............
Unrecognized prior service cost ......

(14,670)(16,355)(139,714)

5,786
3,010
(198)

6,313
3,743
—

55,10528,667(1,886)(6,072)(6,299)Amounts recognized in thebalance sheet consists of —Prepaid pension cost ..................
406
213
Accrued pension andseverance costs ......................... ¥ (6,478) ¥ (6,512)(57,828)3,867$ (61,695)

Millions of yen

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

Thousands of
U.S.dollars(Note 3)

2004

2003

2004

¥ 818
547
(117)
527
397
(22)
¥2,150

¥ 786
630
(121)
531
181
—
¥2,007$ 7,790
5,210(1,114)
5,019
3,781
(210)
$20,476

Assumptions used in calculation of the above information as of March
31, 2004 were as follows:
Discount rate ....................................................... 2.3%
Expected rate of return on plan assets ................ 1.5%
Method of attributing the projected
benefits to periods of services ............................ years of service

11. Shareholders’ Equity:
The following appropriations of the Company’s retained earnings in
respect of the year ended March 31, 2004 which were approved by theshareholders at the general meeting held on June 29, 2004, have notbeen incorporated in the accompanying consolidated financial statements.

Millions of yen

Retained earnings at the end of the year .........
Utilization of general reserve
Utilization of deferred gain on sales ofproperty, plant and equipment ...............
Appropriations:
Dividends (¥5.50 per share) .....................
Bonuses to directors ..................................
[of which to statutory auditors] .................
Transfer to general reserve:
Others reserves ....................................
Retained earnings carried forward to
the following year .........................................

28 Kaken Pharmaceutical Co., Ltd.

Thousands of
U.S.dollars(Note 3)

¥7,484$71,276

15
7,499

143
71,419

(509)
(33)
[5]

(4,848)(314)[48](1,000)(9,524)¥5,957$56,733

12. Selling, General and Administrative Expenses:
Major elements of “Selling, general and administrative expenses” for two years in the period ended March 31, 2004 are as follows:
Thousands of
U.S. dollars (Note 3)

Millions of yen

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

2004

2003

2004

¥6,568
2,635
1,210
50
6,360
2,002
594
1,927
1,426

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

$62,552
25,095
11,524476
60,571
19,067
5,657
18,352
13,581

13. Income Taxes:
The Group is subject to several taxes based on income, which in theaggregate resulted in statutory tax rates of approximately 42.05 % for
the two years in the period ended March 31, 2004. Reconciliation of
the differences between the statutory tax rate and the effective tax rate
for the years ended March 31, 2004 and 2003 is as follows:

2004

2003

Statutory tax rate ......................................................... 42.05%
Increase (decrease) in taxes resulting from:
Expenses not deductible for income tax
purpose (ex. Entertainment expenses) ............... 9.27
Income not included for income tax
purpose (ex. Dividend income) .......................... (0.04)
Equity in losses of affiliates ................................... (1.35)
Inhabitant equalization taxes ............................... 1.55
Tax deduction for research expenses ................... (5.69)
Other ................................................................... (3.13)
Effective tax rate ......................................................... 42.66%

42.05%

9.73(0.20)(3.49)
1.40—
4.57
54.06%

Significant components of deferred tax assets as of March 31, 2004 and 2003 are as follows:
Thousands of
U.S. dollars (Note 3)

Millions of yen

March 31

2004

2003

2004

Deferred tax assets:
Reserve for bonuses ...........................................................................................................
Reserve for sales rebates ....................................................................................................
Enterprise taxes payable ....................................................................................................
Devaluation of financial instruments ................................................................................
Amortization of R&D .........................................................................................................
Amortization of long-term prepaid expenses ...................................................................
Pension and severance costs .............................................................................................
Retirement benefits to directors ........................................................................................
Allowance for bad debt .....................................................................................................
Unrealized gain of property, plant and equipment .........................................................
Other ...................................................................................................................................
Total ......................................................................................................................
Valuation allowance ...........................................................................................................
Deferred tax assets ...............................................................................................

¥ 534
307
25
1,695
181
979
1,900
93
76
2,568
134
8,492
(76)
8,416

¥ 600
259
257
1,887
72
843
1,567
206
77
2,568
293
8,629
(28)
8,601

$ 5,085
2,924
238
16,143
1,724
9,324
18,095886
724
24,457
1,276
80,876(724)
80,153

Deferred tax liabilities:
Deferred gain on sales of property, plant and equipment ..............................................
Unrealized gain on other securities ..................................................................................
Other ...................................................................................................................................
Deferred tax liabilities ..........................................................................................

(450)
(678)
(1)
(1,129)

(470)
—
(1)
(471)

(4,286)(6,457)(9)(10,752)

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

¥7,287¥8,130$69,401

Kaken Pharmaceutical Co., Ltd. 29

14. Contingencies:
The Group had contingent liabilities arising from notes discounted atbanks in the ordinary course of business in the amount of ¥1,361 mil-lion as of March 31, 2004.

15. Segment Information:
Information about operations in industry segments of the Group for years ended March 31, 2004 and 2003 is as follows:
Millions of yen

2004

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

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

Eliminations
or Corporate

Pharmaceutical

Other*

Total¥69,634—
69,634¥ 3,072
310
3,382¥72,706
310
73,01663,303¥ 6,3312,187¥ 1,195

65,490¥ 7,526¥¥64,201¥ 2,414¥ 915¥19,278¥ 799¥
64¥83,479¥ 3,213¥ 979¥22,134¥—¥—¥105,613¥ 3,213¥979

Eliminations
or Corporate

Consolidated¥

Consolidated

—
(310)
(310)

¥ 72,706—
72,706(310)—¥

65,1807,526Millions of yen

2003

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

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

30 Kaken Pharmaceutical Co., Ltd.

Pharmaceutical

Other*

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

2,292¥ 1,085

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

¥

—
(304)
(304)

¥ 74,003—
74,003(304)—¥

66,056
7,947¥108,516¥ 3,363¥ 1,998

Thousands of U.S. dollars (Note 3)

2004

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

Eliminations
or Corporate

Pharmaceutical

Other*

Total$663,181—$ 29,257
2,952$692,438
2,952

663,181

32,210695,390602,886$ 60,295

20,829$ 11,381

623,714$ 71,676$$

Consolidated—(2,952)$ 692,438—(2,952)

692,438

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

$611,438$183,600$759,038$210,800$1,005,838

Depreciation .....................................................................................
Capital Expenditures ........................................................................

$ 22,990$ 8,714$$$ 30,600$ 9,324

$
$

$
$

7,610
610

(2,952)———$620,762
71,67630,6009,324*Other business fields consist of mainly real estate.

Kaken Pharmaceutical Co., Ltd. 31

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

We have audited the accompanying consolidated balance sheets of KAKEN PHARMACEUTICAL CO., LTD. and its consolidated
subsidiaries (collectively, the “Group”) as of March 31, 2004 and 2003 and the related consolidated statements of income, shareholders’ equity and cash flows for the years ended, all expressed in Japanese yen. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with auditing standards, procedures and practices generally accepted and applied in Japan.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of March 31, 2004 and 2003 and the consolidated results of their operations and their cash flows for theyears ended in conformity with accounting principles and practices generally accepted in Japan (See Note 1).
The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader have been translated on the basis
set forth in Note 3 to the accompanying consolidated financial statements.

Hijiribashi Audit Corporation

Tokyo, Japan
June 29, 2004

32 Kaken Pharmaceutical Co., Ltd.

Corporate Data (As of March 31, 2004)
Directory

Company Information

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

FoundedMarch 1917

Global Business Development
2-28-8, Hon-Komagome, Bunkyo-ku,
Tokyo 113-8650, Japan
Executive Officer & General Manager
Masao Ishida
Tel: 81-3-5977-5046
Fax: 81-3-5977-5133
E-mail: masao-ishida@kaken.co.jp
Branch Offices
Sapporo Branch
Sendai BranchTokyo-1 BranchTokyo-2 Branch
Nagoya Branch
Osaka-1 Branch
Osaka-2 Branch
Hiroshima Branch
Fukuoka Branch

Incorporated
March 1948
Paid-in Capital¥17,000 million (As of Sept. 30, 2004)
Common Stock
Authorized: 360,000,000 shares
Issued: 94,518,374 shares (As of Sept. 30, 2004)
Number of Shareholders: 24,087
Employees (Non-Consolidated)
Administration: 146
Sales & Marketing: 976
Production & Technology: 276
Research & Development: 265

Plant
Shizuoka Factory
Research Laboratories
Shizuoka Research Laboratories
Kyoto Research Laboratories
Production Technology Laboratories
Overseas Office:Kaken New York Office
245 Park Avenue, 24th Floor, New York, NY10167
Tel: 1-212-372-8910
Fax: 1-212-372-8970
E-mail: ny@kaken.co.jp

Kaken Pharmaceutical Co., Ltd. 33

Bringing smiles to everyone

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

Printed in Japan