KAKEN

Annual Report 2006
Year Ended March 31, 2006

Bringing smiles to everyone

The origin of Kaken Pharmaceutical Co., Ltd. can be traced back to the Institute of Physical and Chemical
Research (Riken), established in 1917. The Company started pharmaceutical business with full-scale development of penicillin and streptomycin based on Riken’s own technologies in 1948, and since then broadened the scope of its business and drug development activities through merger and alliance. Kaken’s prestige has soared accordingly.
While the Company has established strength in developing and selling pharmaceuticals 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, in the area ofregenerative 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 apharmaceutical company with ahigh ethical standard andsociety’s trust.

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

CONTENTSCONSOLIDATED FINANCIAL HIGHLIGHTS ........... 01
PRESIDENT’S MESSAGE ....................................... 02
SPECIAL FEATURE ................................................. 04
REVIEW OF OPERATIONS ...................................... 06
COMMITMENT AND EXCELLENCE ....................... 10
FULFILLING OUR
SOCIAL RESPONSIBILITIES ............................... 12
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 of existing
information and trends. Actual results may differ fromexpectations due to unforeseen risks and uncertainties.

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

Thousands of
U.S. dollars (Note)

Millions of yen

2006

2005

2006

¥ 75,541
8,360
3,887

¥ 74,923
7,897
3,417

$ 645,649
71,45333,222

54,637
98,73945,491
108,548466,983
843,923

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)

40.23.
15.00.

¥

36.54.
12.00.

$

0.344.
0.128.

(%)

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

7.76
55.33

7.71
41.91

–
–

.Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥117 = $1 effective on March 31, 2006.

7.71

7.76

98,739

02

03

04

05

06

54,637

7.19

05

6.51

04

4.70

03

108,548

02

45,491

06

105,61305

43,133

04

108,516

03

40,77102

39,018114,125(%)

75,541(¥ millions)
74,923(¥ millions)
72,706

ROE

74,003

Total Assets andShareholders' Equity

73,272Net Sales

06

Kaken Pharmaceutical Co., Ltd. 01

President’s Message

Business Climate and Performance

Targets

In fiscal 2005, ended March 31, 2006, Kaken Pharmaceutical faced
an increasingly challenging business climate. This included further measures to curtail medical expenses in response to Japan’s
aging society, as well as efforts to encourage use of generic drugs.
Under these circumstances, we worked hard to promote sales activities closely tied to local communities, in order to provide highvalue-added information that meets the needs of medical professionals in the field.
As a result, consolidated net sales for the year amounted to¥75,541 million, up 0.8% from fiscal 2004. Operating income increased 5.9%, to ¥8,360 million, and net income climbed 13.8%
to ¥3,887 million, representing the fourth consecutive year-onyear net income increase.
As a member of the pharmaceutical industry, we are required
to have a higher level of equity capital than companies in otherindustries, due to the large risks associated with our activities.
Consequently, we adopt a dividend policy that sets dividends
while maintaining a balance between returns to shareholders andstrengthening equity capital. The Board of Directors adopts a flexible stance toward the acquisition of treasury stock to enable theCompany to return profits to shareholders and adapt to futurechanges in the business climate. In the year under review, we
acquired treasury stocks at a total cost of ¥1,996 million. In addition, we continued efforts to maximize corporate value by allocating retained earnings to research and development, strengthening our sales force, and capital investment.

In the pharmaceuticals industry, where investment risk is high,
it is important that business performance is sufficient to sustain
ongoing research and development. For this reason, we are targeting consolidated operating income of more than ¥10 billion
and ROE of 8.0% or higher.
Furthermore, by maximizing the value of each of our divisions, we aim to establish a firm business foundation that will
enable us to prevail in the future as an “independent pharmaceutical company with a strong presence.”

Research and development expenses andcapital investment
During the year, we allocated ¥6,046 million to research and development to further strengthen our specialist fields. We also allocated ¥1,801 million to capital investment targeting additional
labor savings, rationalization, and enhanced quality, primarily infields earmarked for long-term growth. Spending in both areas
was financed through the Company’s own funds.

02 Kaken Pharmaceutical Co., Ltd.

Issues to Address
As government-induced policies to curb medical expenditures
begin to have an impact, we expect competition within the pharmaceutical industry, both in Japan and overseas, to intensify.
However, we view this change in the business climate as an excellent opportunity to undertake reforms aimed a maximizing
corporate value, as well as activities with a strong commitment
to compliance. Our four key reforms are outlined below.

Focus investments on research and development
Targeting specific research areas, we are working to expand our
product range by speeding up research and development. At thesame time, we will continue to actively pursue strategic allianceswith domestic and overseas companies and research institutions
and introduce new research themes.
To expedite research and development, we will outsource basic
testing procedures and make use of external clinical trial organizations. In addition, we will consider increasing expenditures on
specific R&D themes.
In December 2005, we liquidated N.K. Curex, a joint venture
established in April 1988 with Japan Energy. We took the decision to cease operation of this affiliate in light of the lack of success of a joint development initiative with SANWA KAGAKUKENKYUSHO on a drug to treat diabetic neuropathy.

Strengthen our sales force
Our sales activities are spearheaded by our medical representatives (MRs), who work closely with local communities to provide
high-value-added information to meet the needs of medical professionals in the field. We will focus on the further developmentof Fiblast Spray as we strive to become a leading company in thefield of regenerative medicine. In addition, we will expand ourmarket share to solidify our strong position in the field of orthopedics.

Enhance operating efficiency
We will reinforce our internal control system as we strive to enhance operating efficiency. On the production side, we will makefurther reassessments of procedures and standards as we strive
to lower manufacturing costs. In the field of agrochemicals, wewill expand consigned production to Chinese companies, whileworking to obtain FDA certification for those companies.
In the area of distribution, we have implemented outsourcing
for our entire pharmaceutical business. We began outsourcing at
the Western Distribution Center during the previous fiscal year,
and in November 2005 we commenced outsourcing at the Eastern Distribution Center.

Promote environmental protection
Kaken’s Shizuoka production and R&D facilities have obtained
ISO14001 certification, and our Kyoto research laboratories havebeen awarded Kyoto Environmental System (KES) certification by
Kyoto City in recognition of their environmental management systems. We view protection of the environment as a social responsibility, and to this end we are promoting activities at all levels of
our organization. For example, we have established an Environment Committee, and have also set up Environment Task Forcesat each worksite.

Future Challenges
In April 2006, government measures to curtail medical expenses
saw a further drop in drug prices by an average of 6.7% acrossthe industry, leading to even more intense competition within
the pharmaceutical industry. Kaken intends to expand sales byactively promoting MR activities. We will increase prescriptions
for Fiblast Spray and Lipidil by reinforcing our sales activities.
As a result of a number of factors, including the lump sum repayment of long-term debt and the liquidation of N.K. Curex during
the year under review, we are projecting an year-on-year increasein earnings for the year ending March 2007.
Kaken’s commitment to “bringing smiles to everyone” entails
providing superior pharmaceuticals that improve patients’ quality of life. Adhering to this commitment, we will work hard toutilize management resources efficiently and maximize corporate
value. In addition, by embracing strong principles and a compliance-oriented spirit, we will earn the trust of shareholders andall other stakeholders.
June, 2006

Shiro Inui
President

Kaken Pharmaceutical Co., Ltd. 03

Special Feature

Developing New
Using our strengths acquired through our history of R&D and marketing,
we are developing regenerative medicines and innovative new drugs to treat inflammation and allergies (including pain relief), as well as fungal infection diseases.

Advances in R&D on regenerative
medicines
Kaken succeeded in bringing a new regenerative medicine, Fiblast Spray, to market in 2001. That medicine issteadily gaining a reputation for its effectiveness in thetreatment of skin ulcers in many hospitals and clinics,
as well as university hospitals. Fiblast Spray is the world’s
first product to contain Trafermin, a recombinant humanbasic fibroblast growth factor (bFGF) that exists in trace
amounts in the human body and repairs injured tissues
in the skin, blood vessels, and bones. To extend clinicalapplications of bFGF, we are currently conducting research and development on a number of other potential
applications.
A new indication of Fiblast Spray, for diabetic ulcers
or skin ulcers resulting from complications associatedwith diabetes, is currently in Phase II clinical trials.
Kaken is also developing a product, coded as KCB-

04 Kaken Pharmaceutical Co., Ltd.

1D, to treat periodontal diseases. KCB-1D promotes regeneration of periodontal tissues, such as alveolar bone,
periodontal membrane, and dental cementum. We are
currently conducting Phase II clinical trials for KCB-1D,
and we plan to launch this new drug in 2010.
Another product containing bFGF that is in Phase II
clinical trials is KCB-1B. By promoting bone regeneration, KCB-1B is expected to enhance the healing of bone
fractures. We plan to launch this new product in 2012.
In March 2005, we obtained worldwide rights from
Chiron Corporation (U.S.A.) to develop, manufacture, andmarket bFGF. In December 2005, we granted the license
to develop and market Fiblast Spray to a Chinese pharmaceutical company, Beijing Tide Pharmaceutical Company. Using the know-how accumulated during thecourse of our research and development of bFGF, weare collaborating with our current and future overseas
partners to expand our global activities.

Products
New Drug Development Pipeline
Product

Development Stage

Category

LaunchIndication

Remarks

KCB-1 (Fiblast Spray)
KCB-1D
KCB-1B
KP-102LN
SPK-843
KN-48
KP-496
KP-103
SNK-860

Phase II
Phase II
Phase II
Phase II
Phase II
Phase II
Phase II

bFGF
bFGF
bFGF
GH secretagogue
Polyene antibiotic
Lidocaine patch
LT/TX dual inhibitor

2009
2010
2012
2012
2010
2010
2011

Diabetic ulcers
Periodontitis
Intractable bone fractures
Short stature
Systemic mycosis
Postherpetic neuralgia
AsthmaAntifungal agent for nailDiabetic neuropathy

New indication
New indication
New indication

Development
abandoned

Drug to treat onychomycosis (KP-103)
KP-103 is an antifungal agent discovered by Kaken’s
research group. In April 2006, Kaken concluded a license
agreement with Dow Pharmaceutical Sciences Inc.
(U.S.A.) for the development and marketing of KP-103
products in the United States and Europe. That firm plans
to develop and launch a product containing KP-103 forthe treatment of onychomycosis by topical use.
Growth hormone secretagogue (KP-102LN)
We are currently conducting Phase II clinical trials of KP102LN. This drug stimulates the secretion of growth hormones in people with short stature. As a nasal preparation, it is far less invasive than growth hormone drugs
applied through injections. It is estimated that around

Introduced from Aparts B.V.
Introduced from Teikoku Seiyaku Co., Ltd.
Own development
Licensed to Dow Pharmaceutical Sciences Inc.
Jointly developed with N.K. Curex Co., Ltd.
and Sanwa Kagaku Kenkyusho Co., Ltd.

350,000 children in Japan would benefit from this drug.
In other R&D activities, Kaken continues to develop
agents for the treatment of osteoporosis, inflammatory
disease, allergy, pain, and systemic mycosis.
Agrochemicals
We have developed new combination products and expanded applications for our Pentoxazone herbicide andPolyoxin fungicide, and we have applied for registration.
We have also conducted various trials aimed at meeting
new agrochemical registration guidelines.
Meanwhile, we have developed a new crop herbicide for overseas markets. We have also undertaken
basic evaluations and trials for the practical use of microbial pesticides and miticides.

Kaken Pharmaceutical Co., Ltd. 05

Review of Operations

During the year under review, the market for Artz, an anti-osteoarthritic made of hyaluronic
acid and one of Kaken’s mainstay products, expanded owing to the progressive aging ofJapanese society. Sales of Artz grew owing to the drug’s approval for the additional indication of rheumatoid arthritis. We plan to continue raising our market share for this drug, one of
our specialist fields.
We aim to expand sales of Adofeed and related products, a pain-relieving plaster, andLipidil, our new micronized formulation of the anti-hyperlipidemic Lipantil.
With the support of extensive medical information, we are working hard to promote theuse of Fiblast Spray, our proprietary wound healing agent used for the treatment of skinulcers and burns. Kaken aims to become a leader in the field of regenerative medicine.
We are also strengthening efforts aimed at the adoption of Seprafilm to treat Caesarian
sections and other obstetric indications.
Amid a growing market for Lipidil, we plan to utilize the large-scale clinical trials announced
in November 2005 in our sales activities, as well as for expanding our share of the market forthis fibrate type pharmaceutical.

06 06 Kaken Pharmaceutical Co., Ltd.

Pharmaceuticals
Artz (anti-osteoarthritic) Artz is made of ultra-pure sodium hyaluronic acid extracted fromrooster 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 ofthis diseased synovial fluid. It is injected directly into the knee joint by the physician.
Procylin (Prostacyclin analog) Procylin is an orally active and chemically stable prostacyclin
analog (Beraprost) that directly acts on the PGI2 receptor to inhibit platelet aggregation. It is already in wide clinical use for treating chronic artery occlusive disease. In September 1999, Procylin
was approved 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. 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 launched a new spray formulation of the antifungal agent Mentax.
Lipidil This is a new micronized formulation of the drug Lipantil, a fibrate type of lipid-lowering
agent containing Fenofibrate, which lowers both triglyceride and cholesterol. Thanks to the increased absorbability of Lipidil, patients can reduce the dosage by one-third compared with theprevious formulation, yet receive the same benefits. The capsules have also been made smaller tomake them easier to swallow.

Kaken Pharmaceutical Co., Ltd. 07

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 human recombinant form ofbFGF, this is a new type of drug for treating bedsores and other skin ulcers. Fiblast Spray strongly
stimulates the growth of endothelial cells and fibroblasts. It also accelerates wound healing by producing highly vascularized granulation tissues. Introduced by Scios Inc., Fiblast Spray was first developed by Kaken, which commenced sales in June 2001.

αEbrantil ( 1-blocker) Ebrantil is a specific α1-adrenergic receptor antagonist (Urapidil) for neurogenic dysuria. Clinicalstudies have shown that twice-daily administration of Ebrantil capsules significantly improves difficulty in urination caused bycentral or peripheral neural disorders without causing significant hypertension. It was approved for this indication in November
1999. Ebrantil already has been in use for hypertension and dysuria caused by BPH (Benign Prostatic Hyperplasia).
Cytotec (ulcer preventive) An ulcer preventive whose active ingredient is Misoprostol, Cytotec is effective for NSAIDs induced gastric ulcer. It was developed by Searle (now 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 is often observed byusers of this type product, is low. Norinyl T28 was developed by Monsanto Company and Daiichi Pharmaceutical Co., Ltd. andreceived approval in June 1999. In September 1999, Kaken launched this product into the Japanese market. Kaken is currently
marketing Norinyl T28 in collaboration with Morinaga Milk Industry Co., Ltd.
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 drop without heavy viscosity.
This product was launched in February 2001. Originally developed by Allergan Inc. in the U.S.,
Mirol was sublicensed to Kaken from a Japanese licensee, Kyorin Pharmaceutical Co., Ltd.
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.
GHRP Kaken 100 Injection This is a diagnostic agent for growth hormone deficiency (GHD) approved in Oct. 2004, whichworks via the hypothalamus by stimulation of the growth hormone secretagogue receptors. It is the first drug of its kind in theworld to receive approval. It is useful and easier to diagnose GHD than other existing agents for GHD.

Agrochemicals and Animal Health Products
Agrochemicals
Polyoxins (fungicides) Two different technical grade active ingredients (TGAIs), Polyoxin
AL and Polyoxin Z are produced by fermentation using a microorganism isolated from a soilof 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 have been 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 andused 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 are available, andcan be applied before, during and after transplantation of rice seedlings due to the high crop safety.

Animal Health Products
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 anti-coccidial 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 EP5
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
Kaken’s main drug discovery research themes are inflammation andallergies (including pain relief), as well as fungal infection diseases.
We channel substantial financial and human resources into suchresearch activities with the aim of developing new drugs that areboth effective and safe. To create new drugs that can compete in
the world market, we maintain an active program of drug discovery research, spearheaded by outstanding research professionals andtechniques refined over many years experience in pharmaceuticaldevelopment.
At present, we have a total of around 290 researchers. During
the year under review, R&D expenses amounted to ¥6,046 million.
To expedite our R&D activities, we are actively pursuing strategic
alliances with companies and research institutes both in Japan andoverseas, and are also outsourcing some of our operations.

Discovery Research andDevelopment Research
Kaken is fully committed to R&D activities that generate innovative
proprietary products, so that it can build a unique position as apharmaceutical manufacturer. To enable efficient R&D activities, we
adopt a multifaceted approach that includes pinpointing specificresearch programs, in-house development, joint development, licensing, and outsourcing.
Our Drug Discovery Research Laboratories are located in Kyoto,
the ancient capital of Japan, and our Development Research Laboratories are located in Shizuoka. This arrangement is designed toaid the development of new drugs, which requires long and arduous research and unrivalled expertise.
To expedite drug discovery research, we create new drugs using cutting-edge research equipment and facilities, as well as computer-aided drug design (CADD) technologies. To make effective
use of external organizations specializing in non-clinical trials associated with drug discovery research and the clinical trials that
follow, we will introduce and license new technologies on a global
basis.

10 Kaken Pharmaceutical Co., Ltd.

As a result of its innovative research activities, in 2001 we received the Young Investigator Award of the American Society forBone and Mineral Research (ASBMR) at its 23rd annual meeting in
Phoenix, Arizona, in recognition of our research in the field ofosteoporosis. In 2003, we received the Japan Prize for the Most
Outstanding Thesis from Academy of Pharmaceutical Science andTechnology, Japan (APSTJ), in recognition of our formation technology.
To expedite discovery research in genomic drug discovery andother areas, we will continue focusing on our specialist areas andactively pursue alliances with research institutions in Japan andoverseas. We will also introduce and license new technologies on a
global basis. In a related initiative, we established the Scientific Advisory Board, whose members discuss and advise on Kaken’s drug
discovery programs with the aim of creating innovative world-classdrugs.
Our production technology research laboratory engages in research on mass-production technologies in Shizuoka. It also develops and modifies devices with the aim of creating drugs with highadded value. The Company’s production technologies 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.

Quality Production andDistribution System
Our production facilities in Shizuoka Prefecture are on the east bankof the Ohi River, near Mt. Fuji. These facilities were among the firstin the industry to incorporate factory automation systems. They
comply with the Good Manufacturing Practices (GMP) of Japan,
which stipulate requirements for drug manufacturing and quality
control. In addition to satisfying these requirements, the quality of
products for export clears cGMP regulations in the United States,
which were formulated by that nation’s Food and Drug Administration (FDA).
We have also promoted outsourcing of the distribution function. We initiated outsourcing at our Western Distribution Centerin the previous fiscal year, and in November 2005 we commenced
outsourcing at the Eastern Distribution Center, which covers the
Kanto region and northern Japan.

Medical Representative System
Kaken’s Medical Representatives (MRs) provide doctors with updated information on the Company’s products and talk with professionals and patients on the medical front line. Our MRs also gather
medical information related to the safety and effectiveness of ourdrugs and provide feedback to the relevant research and production departments.
We have established nine branches and 66 sub-branches so thatour 671 MRs can work closely with local communities. We plan toincrease the number of MRs to 700.
Until recently, the area of orthopedics accounted for a large
proportion of our MR activities. However, in light of the recent
release of the anti-hyperlipidemic agent Lipidil, we are expanding
sales promotion activities directed at medical institutions engaged
in internal medicine. Our aim is to expand the market share heldby Kaken’s products in this area.

We have also recently increased our production and marketingof generic drugs. A major objective behind this move is the needfor a stable supply of good generic drugs in Japan, due to the introduction of policies in recent years to curb medical costs. In theprocess, we hope to make a positive social contribution. We alsoplan to enhance efficiency by having our MRs expand their activities, previously restricted to original products, to include peripheral areas.

Generic Drugs
Kaken is able to demonstrate its strengths, derived from its proprietary development technologies and cutting-edge manufacturing
technologies, in the area of generic drugs. We manufacture andmarket generic drugs while adding value through innovations, suchas making them easier for medical professionals to use and easierfor patients to swallow. This expands the activities of our MRs by
increasing the number of items they handle, which in turn promotes efficient sales and helps boost overall sales volume.

Kaken Pharmaceutical Co., Ltd. 11

Fulfilling our Social Responsibilities

Corporate GovernanceKaken recognizes that corporate governance is one of the most important issues facing management with regard to continually enhancing
corporate value. Through the implementation of appropriate systems, we have steadily raised the transparency of management, clarified theseparation of management’s supervisory and business execution functions. In addition, we are fulfilling our obligation to provide stakeholders with appropriate information.
We have introduced an operating officer system in order to expedite decision-making and clarify supervisory and business executionfunctions. While we fully recognize that reinforcing the control and auditing 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 iscritical to the functional operation of our company.

Our Initiatives
Kaken is aware that compliance is pivotal to earning the trust of society. To this end, we have established activity principles and guidelines
and adhere to high ethical standards in all of our business activities. Every executive and employee is strongly committed to these activity
principles and guidelines, reflecting our stance as a company that is directly concerned with people’s health and lives.
We established an Internal Auditing Office that, while under the direct control of the president, operates independently of otherbusiness execution functions. The Office monitors the validity of business execution functions and ensures that they comply with laws andregulations. It also facilitates the exchange of information between the Auditing Committee and the Company’s corporate auditors.

Kaken’s Activity Principles and Guidelines
Every executive and employee of Kaken Pharmaceutical and its group of companies is strongly committed to compliance with respectobserving Japanese and foreign laws and regulations, respecting different cultures and customs, 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 to facilitate 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 fostera fair and honest workplace culture.
6. We shall manage Company information appropriately and disclose information in a timely and appropriate manner.
7. We shall take seriously the impact of our activities on the global environment and contribute to society as a good corporate citizen,
including through environmental protection efforts.
8. We shall not tolerate terrorism and other anti-social behavior.

12 Kaken Pharmaceutical Co., Ltd.

Environmental Protection Activities
Seeking to help protect the global environment and maintain and enhance the health and well-being of people, in 1983 Kaken launched its
environmental protection program through the establishment of environment task forces at each worksite.
In 2000, we established an Environment Committee to oversee the implementation of policies across the Company. The Committee has
established regulations to help realize a prosperous society, mindful that all Company activities should contribute to the protection andimprovement of the global environment and the safety of people. In 2004, the Committee formulated basic principles and basic policies
related to environmental issues.
In 2001, our Shizuoka production and R&D facilities obtained ISO14001 certification, the international standard for environment
management. In 2005, our Kyoto research facilities were awarded Kyoto Environmental System (KES) certification by Kyoto City in recognition of their environmental management system. These both demonstrate Kaken’s strong commitment to strengthening activities aimed
at protecting the environment.
Our Shizuoka and Kyoto facilities continue to promote waste reduction, control of chemical substances, and energy-saving activities. Allof our worksites, including the Company’s headquarters and branches, will continue to reinforce and augment such initiatives by actively
engaging in activities to protect the environment.

Risk Factors
The factors outlined in the list below may materially affect investors’ decisions relating to the Company’s business activities. It should be
noted that not all risks are included in the list.

(1) Risks related to new drug development
Substantial investment and a long development period are required before a new drug is released in the market. While undertaking
development with due regard to verifying the efficacy and safety of a particular drug, it is possible that development will be halted.

(2) Risks related to occurrence of side effects
Clinical trials undertaken in the development stage involve the trial administration of drugs to a restricted number of patients. Consequently, once a drug is launched in the market further, we conduct post-marketing surveillance to supplement clinical trials. In the event of
the occurrence of a new side effect at this stage, it is possible that sales of the drug will be halted.

(3) Risks related to policies to curtail medical expenses
Drug prices are revised once every two years in Japan as part of a government initiative to curtail medical expenses, with the ultimate
objective of reforming the medical insurance system. When the price of a drug is reduced, there is a drop in sales, and it is possible that thiswill affect the Company’s performance.

(4) Risks due to competition
Sales competition with other pharmaceutical companies may result in a drop in prices. In addition, the emergence of generic products
upon the expiration of a patent causes a decline in sales of the original product, and it is possible that this will affect the Company’s
performance.

(5) Risks related to delay or cessation of production
Production may be delayed or halted as a result of various factors, such as problems with manufacturing facilities or delays in the procurement of raw materials. It is possible, therefore, that this will affect the Company’s performance.

(6) Risks related to legal action
We are exposed to the possibility of legal action in the course of our business activities, and it is possible that this will affect the Company’s
performance.

Kaken Pharmaceutical Co., Ltd. 13

Board of Directors and Corporate Auditors

From left: Motoyuki Yajima, Takeshi Hirahara, Shiro Inui, Shuji Komoto, and Takeji Saito

President and Representative Director
Shiro Inui
Executive Managing Director
Takeshi Hirahara(Administration)
Executive Managing Director
Takeji Saito(Marketing and Sales)
Executive Managing Director
Shuji Komoto(Accounting, Purchasing andAgrochemicals)
Executive Managing Director
Motoyuki Yajima, Ph.D.
(Research and Development)

14 Kaken Pharmaceutical Co., Ltd.

Executive Director
Yutaka Handa(Personnel)

AuditorOsamu Okamoto(Standing)

Executive Director
Shinichi Takamatsu(Accounting)

Auditor
Satoshi Shoji(Standing)

Executive Director
Tetsuo Onuma(Sales Planning)

Auditor
Sumio Yoshizawa

Executive Director
Masao Ishida(Global Business Development)

AuditorKeizo NemotoOrganizations

General Meetingof Stockholders

Board of Directors

Managing
Directors
Meeting
PresidentInternal Auditing
OfficeCorporate Auditors

Board ofCorporate Auditors

Corporate Planning & Coordination Department
Legal Affairs & Intellectual Property 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 Division
Regulatory Affairs Department
Pharmacovigilance Department
Quality Assurance Department
Global Business Development Department
Agrochemical & Animal Health Products Division
Planning & Coordination Department
Marketing Department
R&D Division
R&D Strategic Planning Department
FGF Development Planning Department
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
R&D Quality Assurance Department
R&D Administration Center
Marketing & Sales DivisionMarketing Planning & Coordination Department
Logistics Management
Marketing & Sales Department
Scientific Information Department
Drug Information Service
Marketing & Sales Branches (9) and Sub-Branches (66)Tokyo Administrative Office Center
Osaka Administrative Office CenterTokyo Sales Promotion & Information Service Center
Osaka Sales Promotion & Information Service Center
Production Division
Production Planning & Coordination Department
Shizuoka Factory
Production Technology Laboratories

Kaken Pharmaceutical Co., Ltd. 15

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

Consolidated Five-Year Summary

Thousands of
U.S. dollars (Note)

Millions of yen

2006

2005

¥ 75,541
8,360
3,887

2004

2003

2002

2006

¥ 74,923
7,897
3,417

¥ 72,706 ¥ 74,003 ¥ 73,272
7,526
7,947
7,725
3,017
2,598
1,765

$ 645,649
71,45333,222

54,637
98,73945,491
108,548

43,133
105,613¥ 40.23.
15.00.

¥ 36.54.
12.00.

¥ 31.87. ¥ 27.11. ¥ 18.74.
10.00.
8.25.
7.50.

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) ....................

40,771
108,516

39,018114,125

Yen

466,983
843,923
U.S. dollars (Note)

$

0.344
0.128

(%)

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

7.76.
55.33.

7.71.
41.91.

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 ¥117 = $1 effective on March 31, 2006.

Sales of Pharmaceuticals (Non-Consolidated)

Billions of yen

Items

2006

2005

Change (%)

Artz¥ 22.6¥ 21.7+4.0

Adofeed and related products

10.1

10.1

+0.3

Procylin

8.7

8.9

–1.7

Seprafilm

4.8

4.1

+17.3

Fiblast Spray

3.6

3.5

+4.3

Lipidil

3.5

3.7

–6.7

Cytotec

2.2

2.2

–1.8

Mentax

2.3

2.5

–7.3

Generic Products

3.6

2.5

+39.5

Note: The Company reclassified its product segment breakdown in the year ended March 31, 2006.

16 Kaken Pharmaceutical Co., Ltd.

Consolidated Financial Review

Revenues
In fiscal 2005, ended March 31, 2006, Kaken Pharmaceutical reported a 0.8% increase in consolidated net sales, to ¥75,541 million. Sales in our pharmaceuticals business totaled ¥73,216 million, or 96.9% of net sales, while sales in other areas amounted to¥2,325 million, or 3.1% of net sales.
Pharmaceuticals
Consolidated sales in the pharmaceuticals segment rose 1.3%, to¥73,216 million. Segment operating income grew 5.9%, to ¥7,127
million.
Our pharmaceuticals segment consists of two core categories:
pharmaceuticals (including medical devices), and agrochemicals
and animal health products.
In the year under review, sales of Artz, an anti-osteoarthritic
and one of our mainstay products, grew 4.0% on the back of approval for additional benefits, notably the treatment of knee joint
pain accompanying chronic rheumatoid arthritis. Sales of ourwound-healing agent Fiblast Spray increased 4.3%, and sales of
Seprafilm, a post-operative anti-adhesive, grew a substantial 17.3%.
Sales of the pain-relieving plaster Adofeed and related products
remained mostly unchanged from the previous year. Sales ofProcylin, a prostacyclin analog used for treating chronic artery
occlusive disease, edged down 1.7%. Sales of our anti-hyperlipidemic Lipidil fell slightly. In the area of generic drugs, sales of
Prink Injection Syringe, a Postaglandin E1 pre-filled syringe used
for the treatment of arterial occlusion, surged 39.5%, contributing to the overall increase in pharmaceutical sales.
As a result, sales in the pharmaceuticals (including medical
devices) category rose 1.0%, to ¥68,176 million.
In the agrochemicals and animal health products category, salesof Salinomycin, a feed additive, increased. However, difficult business conditions, caused by restrictions on the use of agriculturalchemicals and other factors, resulted in just a slight increase insales of the rice herbicide Pentoxazone. Sales of Polyoxin fungicides, used to control fungal diseases on fruit trees, vegetables,
and lawns, remained largely unchanged.
As a result, sales in the agrochemicals and animal health products category increased 5.3%, to ¥5,040 million.
Other
Sales in our other businesses declined 12.3%, to ¥2,325 million,
and operating income increased 5.8%, to ¥1,233 million.
Rental income from Bunkyo Green Court, the site of our Tokyo
headquarters, represents the bulk of revenues from other businesses. During the period under review, this income remained at
virtually the same level as the previous year. However, we recorded
a decline in total sales from other businesses due to the sale of allof our shares in Eiko Filter Co., Ltd., a consolidated subsidiary, inthe previous fiscal year.
Earnings
In the year under review, operating income increased 5.9%, to¥8,360 million. Despite posting minimal growth in sales, this increase was attributable to enhanced efficiency stemming from a
reduction in selling, general, and administrative expenses.

We posted ¥1,112 million loss on liquidation of affiliates, due
to the liquidation of N.K. Curex Co., Ltd., an equity-method affiliate. However, we also reported a ¥1,613 million gain on sales ofinvestment securities. As a result, net income grew 13.8%, to ¥3,887
million, rising the fourth consecutive year.
The operating income ratio grew 0.6 point, to 11.1%. Earnings per share increased ¥3.69 to ¥40.23, and ROE rose 0.05 point,
to 7.76%.

Profit Appropriation
In appropriating profit, we seek a balance between return to shareholders and strengthening equity capital. On this basis, the Company declared an annual dividend of ¥15.00 per share, up 25%
from the previous period. This was the fourth consecutive dividend increase. As a result, the dividend payout ratio increased
5.79 points, to 39.4%.
Retained earnings will be allocated to activities to prepare theCompany for future business growth, such as research and development, augmenting our sales force, and capital investment.
Financial Position
Total assets at fiscal year-end stood at ¥98,739 million, down ¥9,809
million from a year earlier. One major contributing factor was a¥8,874 million decrease in cash and deposits stemming from thelump sum repayment of long-term debt associated with the construction of residential units in Bunkyo Green Court.
Total liabilities amounted to ¥44,102 million, down ¥18,955
million. Long-term liabilities declined ¥16,189 million, to ¥19,848
million, owing to the lump sum repayment of long-term debt andthe exercising of rights regarding bonds with subscription warrants.
At fiscal year-end, total shareholders’ equity stood at ¥54,637
million, up ¥9,146 million. As a result, equity ratio was 55.3%, up
13.4 points. Despite the purchase of treasury stock, this increase
was attributable to an increase in common stock and capital surplus, resulting from the exercising of bonds with warrants, as wellas higher retained earnings and an increase in unrealized gains
from marketable securities.
Cash Flows
Cash and cash equivalents at the end of fiscal 2005 stood at ¥9,682
million, down ¥7,590 million from a year earlier. The main factor
behind this decrease was the lump-sum repayment of long-term
debt.
Net cash provided by operating activities amounted to ¥6,346
million, down ¥2,131 million from the previous year. This wasdue mainly to an increase in income taxes paid.
Net cash used in investing activities totaled ¥2,024 million.
This was mainly due to the acquisition of investment securities
and property, plant, and equipment.
Net cash used in financing activities was ¥11,912 million, up¥9,037 million from the previous year. This was largely the resultof a ¥8,561 million lump-sum repayment of long-term debt, acquisition of treasury stock, and cash dividends paid.

Kaken Pharmaceutical Co., Ltd. 17

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

Consolidated Balance Sheets
As of March 31, 2006 and 2005

Thousands of
U.S. dollars (Note 4)

Millions of yen

ASSETS

2006

2005¥ 9,682150¥ 17,272
150

32,3701,283

33,566770

276,666
10,966

Less: Allowance for doubtful receivables .........................................

33,653(6)

34,336(16)

287,632(51)

Inventories (Note 7) .............................................................................
Deferred tax assets (Note 15) ...............................................................
Other current assets ..............................................................................

33,647
9,657
993
1,127

34,320
10,2501,286
852

287,581
82,5388,487
9,633

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

55,256

64,130472,273

Property, Plant and Equipment (Notes 8 and 9):
Buildings and structures ........................................................................
Machinery and equipment ....................................................................

34,778
17,94434,912
18,235297,248
153,367

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

52,722(30,900)

53,147(31,007)450,615(264,012)

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

21,822
3,332
282

22,1403,960
303

186,51328,4792,410

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

25,436

26,403

217,402

Investments and Other Assets:
Investment securities (Notes 6 and 9) ..................................................
Investments in unconsolidated affiliates ................................................
Intangible assets and long-term prepaid expenses ................................
Deferred tax assets (Note 15) ...............................................................
Other assets ...........................................................................................

11,271
—
1,074
3,467
2,235

6,177
665
1,823
6,501
2,849

96,333—
9,180
29,632
19,103

Total investments and other assets .............................................

18,04718,015

154,248

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

¥ 98,739¥108,548$ 843,923

Current Assets:
Cash on hand and at bank (Note 5) ......................................................
Marketable securities (Note 6 ) .............................................................
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.

2006$

82,752
1,282

Thousands of
U.S. dollars (Note 4)

Millions of yen

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities:
Short-term bank loans (Note 9) ...........................................................
Current portion of long-term debt (Note 9) ........................................
Payables:Notes and accounts payable-trade ...................................................
Notes and accounts payable-construction ........................................
Accounts payable-other ...................................................................

2006

2005

2006

5,380
200

$ 45,983—

12,302930
2,601

12,965593
2,616

105,145
7,949
22,231

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

15,833
533
1,150
808
119
431

16,174
479
1,134
960
2,213
480

135,325
4,555
9,829
6,906
1,017
3,684

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

24,25427,020207,299

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

13,192
5,737
297
240
382

28,955
6,116
277
260
429

112,752
49,034
2,539
2,051
3,265

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

19,84836,037

169,641

Shareholders’ Equity:
Common stock - no par value
Authorized: 360,000,000 shares
Issued : 105,992,690 shares as of March 31, 2006
and 94,922,782 shares as of March 31, 2005 .............................
Capital surplus ......................................................................................
Retained earnings .................................................................................
Net unrealized gain on valuation of other securities,
net of taxes (Note 2 (c)) ....................................................................
Treasury stock, at cost: 5,543,567 shares in 2006
and 2,885,364 shares in 2005 ...........................................................

20,737
19,462
15,42917,12815,874
12,859177,239
166,342
131,872

2,793

1,345

23,872(3,784)(1,715)(32,342)

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

54,63745,491

466,983

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

¥98,739¥108,548$ 843,923¥ 5,380—¥

Kaken Pharmaceutical Co., Ltd. 19

Consolidated Statements of Income
For the years ended March 31, 2006 and 2005

Thousands of
U.S. dollars (Note 4)

Millions of yen

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

2006¥75,541
38,508

2005¥74,923
37,751

2006$645,649
329,128

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

37,03337,172

316,521

Selling, general and administrative expenses (Note 14) .............................

28,67329,275245,068

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

8,360

7,897

71,453

115
(411)
(525)

100
(423)
(525)

983
(3,513)(4,487)

(41)
(268)
1,613
(401)
(1,112)
(10)
8

(7)
—
0
(874)
—
(42)
(45)

(350)
(2,291)
13,786(3,427)(9,504)(86)
68(1,032)(1,816)(8,821)

7,328

6,081

62,632

1,129
2,312

3,167
(503)

9,649
19,761

3,441

2,664

29,410

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

3,887

3,417

33,222

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

—

0

—

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

¥ 3,887¥ 3,417$ 33,222

Other Income (Expenses):
Interest and dividend income ...............................................................
Interest expense ....................................................................................
Amortization of net obligation at transition ..........................................
Loss on sales/disposal of property, plantand equipment, net ............................................................................
Loss on impairment of fixed assets (Note 8) ........................................
Gain on sales of investment securities, net ............................................
Equity in losses of affiliates ...................................................................
Loss on liquidation of affiliates .............................................................
Revaluation loss of golf membership ....................................................
Others, net ............................................................................................

Income before income taxes and minority interests ...................................
Income taxes (Note 15):
Current .................................................................................................
Deferred ................................................................................................

Yen

U.S. dollars (Note 4)

Per share data:
Net income: (Note 17)
Basic ................................................................................................

¥ 40.23¥ 36.54$ 0.344

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

¥ 33.24¥ 28.49$ 0.284

Cash dividends (Note 2 (l)) ..................................................................

¥ 15.00¥ 12.00$ 0.128

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

20 Kaken Pharmaceutical Co., Ltd.

Consolidated Statements of Shareholders’ Equity
For the years ended March 31, 2006 and 2005

Millions of yen
Number ofcommonstock

Commonstock

Capitalsurplus

Balance at March 31, 2004 ..................... 94,518,374
Net income .......................................
Cash dividends ..................................
Directors’ bonuses ............................
Shares issued on conversionof convertible bonds .......................
404,408
Net unrealized gain on valuationof other securities, net of taxes ...........
Treasury stock acquired, net .............

¥ 17,000¥15,735 ¥ 10,540
3,417(1,064)(34)

Balance at March 31, 2005 ..................... 94,922,782
Net income .......................................
Cash dividends ..................................
Directors’ bonuses ............................
Shares issued on conversionof convertible bonds ....................... 11,069,908
Net unrealized gain on valuationof other securities, net of taxes ...........
Treasury stock acquired, net .............

¥ 17,128¥15,874

3,609

3,588

Balance at March 31, 2006 .................... 105,992,690¥ 20,737

128

Retainedearnings

Unrealized
gain (loss) onother securities¥

Treasurystock
at cost988 ¥(1,130)

139¥ 43,133
3,417(1,064)
(34)
267

357
(585)
¥12,859
3,887(1,278)(39)¥ 1,345 ¥(1,715)

357
(585)
¥ 45,491
3,887(1,278)
(39)
7,197

1,448
¥19,462

Total
shareholders’equity¥15,429(2,069)1,448(2,069)¥ 2,793 ¥(3,784)¥ 54,637

Thousands of U.S. dollars (Note 4)
Number ofcommonstock

Commonstock

Balance at March 31, 2005 ..................... 94,922,782
Net income .......................................
Cash dividends ..................................
Directors’ bonuses ............................
Shares issued on conversionof convertible bonds ....................... 11,069,908
Net unrealized gain on valuationof other securities, net of taxes ...........
Treasury stock acquired, net .............

$146,393

Balance at March 31, 2006 .................... 105,992,690$177,239

30,846

CapitalsurplusRetainedearnings

Unrealized
gain (loss) onother securities

Treasurystock
at costTotal
shareholders’equity$135,675 $109,906 $11,496 $(14,658) $388,812
33,22233,222(10,923)(10,923)
(333)
(333)
30,66761,513
12,376(17,684)$166,342 $131,872

12,376(17,684)$23,872 $(32,342) $466,983

Kaken Pharmaceutical Co., Ltd. 21

Consolidated Statements of Cash Flows
For the years ended March 31, 2006 and 2005

Thousands of
U.S. dollars (Note 4)

Millions of yen

2006

2005

7,328

¥ 6,081

1,941
268
818
—
(614)
(115)
411
401
1,112
10
(1,613)
179
(147)
1,196
593
(663)
(39)
(770)
10,296115(411)(3,654)
6,346

1,996
—
886
92
(615)
(100)
423
874
—
42
0
68
(64)
(1,078)
810
127
(34)
608
10,116100(423)(1,316)
8,477

16,590
2,291
6,991
—
(5,248)
(983)
3,513
3,427
9,504
86
(13,786)
1,530(1,256)
10,222
5,068(5,667)(333)(6,581)88,000983(3,513)(31,231)
54,239II. 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 ..........................................

(1,532)698(3,670)
2,601
(43)
(78)
(2,024)(1,360)
133
(234)
0
(59)
(50)
(1,570)(13,094)
5,966(31,367)
22,231(368)(667)(17,299)

III. Cash flows from financing activities
Decrease in short-term bank loans ........................................................
Proceeds from long-term debt ..............................................................
Repayment of long-term debt ...............................................................
Acquisition of treasury stock .................................................................
Cash dividends paid ..............................................................................
Net cash used in financing activities ..........................................
Net increase (decrease) in cash and cash equivalents ...............................
Cash and cash equivalents at beginning of year ........................................
Cash and cash equivalents at end of year (Note 5) ...................................

——(8,561)(2,073)(1,278)(11,912)(7,590)17,272¥ 9,682

(500)
70
(607)
(774)
(1,064)(2,875)
4,032
13,240¥ 17,272——(73,171)(17,718)(10,923)(101,812)(64,872)
147,624$ 82,752

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

¥

2006
$

62,632

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 whichwere prepared from accounts and records maintained by the Group and inaccordance with accounting principles and practices generally accepted inJapan, which are different in certain respects from the application anddisclosure requirements of International Accounting Standards, and filedwith the Director of Kanto Finance Bureau. The consolidated statements ofshareholders' equity have been 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 accepted incountries and jurisdictions other than Japan.

2. Summary of Significant Accounting Policies:(a) Principles of Consolidation
The Company had three subsidiaries as of March 31, 2006. The consolidated financial statements include the accounts of the Company and all of
its subsidiaries. KAKEN LOGISTICS CO., LTD. was excluded from the scopeof consolidation, because it was dissolved by the reason of a merger with
KAKEN REARITY & SERVICE CO., LTD. in this second semester. The consolidated subsidiaries as of March 31, 2006 are as follows:
KAKEN REALTY & SERVICE CO., LTD.
KAKEN PHARMA CO., LTD.
FUJIKA CORPORATIONThe Company had an affiliate as of March 31, 2005. The affiliate is N-K
Curex Co., Ltd. and is accounted for by the equity method. N-K Curex Co.,
Ltd. was excluded from the scope of equity method, because it was liquidated in December, 2005.
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 arecomposed of cash on hand, bank deposits which are able to be withdrawn
within three months and short-term investments with original maturityof three months or less and are considered to have minimal risk frommarket fluctuations.
(c) Marketable and Investment Securities
Securities are classified as one of four categories; (1) Trading, (2) Held-tomaturity debt, (3) Securities of subsidiaries and affiliated, and (4) Other.
Trading securities are recorded at market value with unrealized gains andlosses recognized in the current years earnings. Debt securities that are
expected to be held-to-maturity are carried at amortized cost. Securities ofsubsidiaries and affiliates are carried at cost. Other securities are expected
to be sold in the long term and those, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included
as a separate component in shareholders' equity, net of taxes. Other securities without market quotations are stated at cost, determined by the moving average method.

(d) Inventories
Inventories are stated at cost, this being determined by the average method.
(e) Property, Plant and Equipment
Depreciation is computed on the declining-balance method at rates basedon the estimated useful lives of assets, except for buildings, structures,
machinery and equipment for the Komagome office that are computed on
the straight-line method. Consolidated subsidiaries principally adopted thestraight-line method. Furthermore, depreciation of buildings, except for
ancillary facilities to buildings, acquired after April 1, 1998, is computed
using the straight-line method. The range of useful lives is from 3 years to
60 years for buildings and structures, and from 2 years to 17 years formachinery 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 of service andconditions 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 amount actuarially calculated projected benefit obligations less (1) the fair value of theplan assets (2) unrecognized actuarial loss or gain and (3) the unrecognized transition amount arising from adopting the new standard (4) unrecognized prior service cost. If the fair value of the plan assets exceeds the
projected benefit obligations, prepaid pension and severance costs are recorded. The transition amount is amortized on a straight-line basis over 15
years. Unrecognized actuarial loss or gain is amortized on a straight-line
basis over 10 years from the next year in which they arise. Unrecognizedprior service cost is amortized on a straight-line basis over 10 years fromthe year in which they arise. For the Company, prepaid pension and severance costs were recognized for a portion of the plan covered by the noncontributory pension plan assets and the accrued pension and severance
costs were recognized for a portion of the plan not covered by the plan
assets.

Kaken Pharmaceutical Co., Ltd. 23

Accrued retirement benefits to directors and statutory auditors is provided in an amount equivalent to the liability the relevant company would
have been required to pay upon retirement at the balance sheet date, asprescribed by its internal rules.
(g) Income Taxes
Income taxes are determined using the asset and liability approach, wheredeferred 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 the accompanying 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 theCompany's risk management of foreign currency and interest rate risk exposures of its financial assets and liabilities.
Foreign currency exchange forward contracts:
The Company enters into foreign currency exchange forward contracts tolimit exposure, affected by changes in foreign currency exchange rates, on
accounts receivable and payable and cash flows generated from anticipatedtransactions denominated in foreign currencies. For foreign currency exchange forward contracts which are designated and are effective as hedgesof such currency exchange rate risk on existing assets and liabilities, theCompany adopted the accounting method whereby foreign currency denominated assets and liabilities are measured at the contract rate of therespective foreign currency exchange forward contracts. With respect tosuch contracts for anticipated transactions, the contracts are marked-tomarket and the unrealized gains/losses are deferred in the balance sheet tobe 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 to lower
funding costs and limit the Company's exposure in respect of the underly-

ing financial instruments, resulting from adverse fluctuations in interest
rates. The related interest differentials paid or received under the 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) Appropriation of Retained Earnings
The Commercial Code of Japan provides that appropriations of retained
earnings, including bonuses to directors and statutory auditors, requireapproval by the shareholders at the annual ordinary general meeting ofshareholders. Appropriations of retained earnings are, therefore, not reflected in the consolidated financial statements for the period to which
they relate, but are recorded in the subsequent accounting period after
shareholders' approval has been obtained.
(k) Shareholders' Equity
Under the Commercial Code of Japan, at least 50 per cent of the issue priceof new shares is required to be designated as stated capital. The portion
which is designated as stated capital is determined by resolution of theBoard of Directors. Proceeds in excess of the amounts designated as statedcapital 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.
(l) 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 each financial
year appropriately adjusted for subsequent free distribution of shares (stock
splits), if applicable.
Cash dividends per share shown for each year in the accompanying
consolidated statements of income represent dividends approved or declared as applicable to the respective years.
Fully-diluted net income per share is computed, based on the assumption that the convertible bonds were fully converted into common stockon the date of issue or at the beginning of the respective years subsequent
to the issue, with appropriate adjustments of related interest expense (netof tax).

3. Change in Accounting Policies:(Accounting for impairment of Fixed Assets)
Effective April 1, 2005, the Group made an application of the new Japanese accounting standard for impairment of fixed assets ("Opinion Concerning Establishment of Accounting Standard for Impairment of Fixed
Assets" issued by the Business Accounting Deliberation Council of Japanon August 9, 2002) and the Implementation Guidance for Accounting Standard for Impairment of Fixed Assets (the Financial Accounting Standard

Implementation Guidance No.6 issued by the Accounting Standards Boardof Japan on October 31, 2003).
As a result, income before income taxes decreased by ¥268 million.
For cumulative impairment losses, the Group directly deducted from respective asset amounts based on the revised regulation on consolidated
financial statements.

4. United States Dollar Amounts:¥117 =U.S.$1. The inclusion of such dollar amounts is solely for convenience and is not intended to imply that yen amounts have been or could
be converted, realized or settled in dollars at ¥117 = U.S.$1 or any otherrate.

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

24 Kaken Pharmaceutical Co., Ltd.

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

Millions of yen

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

2006

2005

2006

¥9,682
150¥17,272150$82,752
1,282

9,832
—
(150)
(150)
¥9,682

17,422
—
(150)
(150)
¥17,272

84,034—(1,282)(1,282)$82,752

6. Marketable Securities and Investment Securities:
The costs and aggregate market values of marketable and investment securities are as follows:
Millions of yen
Marketvalue

Cost

Unrealized
gain (loss)

Thousands of U.S. dollars (Note 4)
Market
value

Cost

2006

Unrealized
gain (loss)

Cost

Unrealized
gain (loss)

March 31
Other securities:
Market value available
Equity securities ........................... ¥5,668
Other securities ............................
14
5,682
Market value not available .................
379
Total ............................................. ¥6,061¥10,377
15
10,392379¥10,771¥4,7091
4,710—¥4,710¥3,48645
3,531
379¥3,910¥5,75444
5,798
379¥6,177¥2,268(1)
2,267—¥2,267$48,444120
48,564
3,239$51,803$88,692
128
88,8203,239$92,059$40,248
8
40,256—$40,256

Held-to-maturity debt securities:
Market value not available ................. ¥ 650

¥

¥

¥ 150

¥ 150

¥

$ 5,556$ 5,556

$

650

2005

Market
value

—

2006

—

—

Other securities sold during the fiscal years ended March 31, 2006 and 2005 were as follows;
Thousands of
U.S. dollars (Note 4)

Millions of yen

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

2006

2005

2006

¥2,601
1,613
—

¥0
0
—

$22,231
13,786—

7. Inventories:
Inventories as of March 31, 2006 and 2005 are comprised of the following:Thousands of
U.S. dollars (Note 4)

Millions of yen

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

2006

2005

2006

¥ 4,115
1,435
3,202
732
173
¥ 9,657¥ 4,682
1,380
3,486
559
143
¥10,250$35,171
12,26527,367
6,256
1,479$82,538

Kaken Pharmaceutical Co., Ltd. 25

8. Impairment of Fixed Assets:
The group recorded impairment losses to the following asset group for theyear ended March 31, 2006.
Use

Classification

Location(Process of Recognizing Impairment Losses)
Regarding Tobu logistic center, board of director decided to sell it in January 2006. Based on this decision, the asset stated above was reduced to its
potential recovery value.

Storage facility

Buildings, Machinery andequipment, and Land

Tobu logistic center(Noda-shi, Chiba)(Breakdown of Impairment Losses)(Method of Grouping Asset)
The group classified its asset group according to separate standards fordifferent type of business segment.
Rental property and asset which is scheduled to sell were classified
based on individual basis.

Classification

Millions of yen

Thousands of
U.S. dollars(Note 4)

¥ 191
10
63
4
¥ 268

$ 1,63386538
34$ 2,291

Buildings ......................................................
Machinery and equipment ...........................
Land .............................................................
Others ...........................................................
Total .......................................................

9. Short-term Bank Loans and Long-term Debts:
Short-term bank loans outstanding as of March 31, 2006 and 2005 arerepresented the notes issued by the Group to banks. Customarily, thesenotes are renewed at maturity subject to renegotiation of interest rates andother factors. The weighted-average interest rates applicable to short-termbank loans as of March 31, 2006 and 2005 are 0.90 % and 0.86 %, respec-tively. Outstanding balance of short-term bank loans as of March 31, 2006
and 2005 were ¥5,380 million and ¥5,380 million, respectively.
Long-term debt as of March 31, 2006 and 2005 consisted of the following:Thousands of
U.S. dollars (Note 4)

Millions of yen

March 31

2006

2005

2006

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

¥ 3,000
1,797
8,395
—
13,192—¥ 3,000
7,394
10,0008,761
29,155(200)$ 25,641
15,35971,752—
112,752—

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

¥13,192¥28,955$112,752

Loans from banks and other financial institutions due 2008 (interest rate 1.77%) .........................
0.0% unsecured convertible bond due 2007 (a) .............................................................................
0.0% unsecured convertible bond due 2007 (b) ............................................................................
Other long-term debt with interest bearing due 2005 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 five fiscal
years 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.

¥—
10,192——¥10,192

Thousands of
U.S. dollars(Note 4)$—
87,111——$87,111Aggregate annual maturities of long-term bank loans are as follows:

Millions of yen

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

¥—

Thousands of
U.S. dollars (Note 4)

$

—

—

—

3,000

25,641———¥3,000—$25,641

As is customary in Japan, short-term and long-term bank loans are
made under general agreements which provide that security and guarantees for future and present indebtedness will be given upon request of thebank, and that the bank shall have the right, as the obligations become dueor 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, 2006 and 2005, assets pledged as collateral for certain
short-term and long-term debts, including current portion of long-term
debts, were as follows:

Thousands of
U.S.dollars(Note 4)

Millions of yen

March 31

2006

2005

2006

Assets pledged
Buildings and structures ............... ¥ 2,333
Machinery and equipment ............
2,267
Land ..............................................
103
Investment securities ....................
2,518
Total ........................................ ¥ 7,221¥ 9,746
2,076
108
1,324
¥13,254$ 19,940
19,376880
21,521$ 61,717

Liabilities and secured
Short-term bank loans .................. ¥ 1,400
Other interest bearing debt ...........
—
Total ........................................ ¥ 1,400¥ 1,400
8,761¥10,161$ 11,966—$ 11,966

10. Accounting for Leases:
Leases that transfer substantially all the risks and rewards of ownership of
the assets are accounted for as capital leases, however, leases that do nottransfer ownership of the assets at the end of the lease term are accounted
for as operating leases, in accordance with accounting principles and practices generally accepted in Japan.
Assumed data "as if capitalized" as to acquisition cost, accumulated
depreciation, net book value and depreciation expense of the leased assets,
which excluded the portion of interest thereon, were summarized as follows:

Periodic lease expenses on finance lease contracts without ownershiptransfer for the years ended March 31, 2006 and 2005 were summarized
as follows:

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

Millions of yen

2006

2005

2006

Acquisition cost .....................................
Accumulated depreciation .....................

¥15
12

¥15
11

$128
102

Net book value ......................................

¥ 3

¥ 4

$ 26

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

¥ 2

¥ 2

$ 17

2006

2005

2006

¥2

¥2

$17

The amount of outstanding future lease payments due at March 31,
2006 and 2005, which excluded the portion of interest thereon, was summarized as follows:

Thousands of
U.S.dollars(Note 4)

March 31

Thousands of
U.S.dollars(Note 4)

Millions of yen

Thousands of
U.S.dollars(Note 4)

Millions of yen

2006

2005

2006

Within one year .................................
Over one year .....................................

¥2
1

¥2
3

$17
9

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

¥3

¥5

$26

Depreciation is computed on the straight-line method over the lease term of theleased assets with no residual value.

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

Kaken Pharmaceutical Co., Ltd. 27

12. Pension and Retirement Benefits:
The benefit obligation and plan assets, funded status and composition ofamounts recorded in the consolidated balance sheets as of March 31, 2006
and 2005 is as follows:
Millions of yen

March 31

Thousands of
U.S.dollars(Note 4)

2005

2006

Projected benefit obligations ............ ¥(22,026) ¥(22,722)
Plan assets ........................................
10,6589,436$(188,256)
91,094

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

2006(11,368)

The components of net pension and severance costs for the years ended
March 31, 2006 and 2005 were as follows:(13,286)(97,162)

4,725
5,249
1,978
2,780
(154)
(176)
(4,819)(5,433)
Amounts recognized in the balance sheet consists of —Prepaid pension cost ...................
918
683
Accrued pension andseverance costs .......................... ¥ (5,737) ¥ (6,116)

40,384
16,906(1,316)(41,188)
7,846$ (49,034)

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 4)

2006

2005

2006

¥ 726
518
(236)
525
377
(22)
¥1,888

¥ 795
534
(219)
526
363
(22)
¥1,977$ 6,205
4,428(2,017)
4,487
3,222
(188)
$16,137

Assumptions used in calculation of the above information as of March 31,
2006 were as follows:
Discount rate ........................................................ 2.3%
Expected rate of return on plan assets .................. 2.5%
Method of attributing the projected
benefits to periods of services ............................ years of service

13. Shareholders’ Equity:
The following appropriations of the Company's retained earnings in respect of the year ended March 31, 2006 which were approved by theshareholders at the general meeting held on June 29, 2006, have not been
incorporated in the accompanying consolidated financial statements.

Millions of yen

Retained earnings at the end of the year ...........
Utilization of general reserve
Utilization of deferred gain on sales ofproperty, plant and equipment ................
Appropriations:
Dividends (¥7.50 per share) .....................
Bonuses to directors ...................................
[of which to statutory auditors] ................
Transfer to general reserve:
Others reserves .....................................
Retained earnings carried forward to
the following year .........................................

Thousands of
U.S.dollars(Note 4)

¥10,119$86,487

113
10,232966
87,453

(753)
(44)
[6]

(6,436)(376)[51](1,000)(8,547)¥ 8,435$72,094

14. Research and Development Costs:
Research and development costs included in selling, general and administrative expenses for the years ended March, 2006 and 2005 amounted to

28 Kaken Pharmaceutical Co., Ltd.

¥6,046 million($51,675 thousand) and ¥6,271 million, respectively.

15. Income Taxes:
The Group is subject to several taxes based on income, which in the aggregate resulted in statutory tax rates of approximately 40.69 % for the twoyears in the period ended March 31, 2006. Reconciliation of the differences between the statutory tax rate and the effective tax rate for the years
ended March 31, 2006 and 2005 is as follows:

2006

2005

Statutory tax rate ......................................................... 40.69%
Increase (decrease) in taxes resulting from:
Expenses not deductible for income tax
purpose (ex. Entertainment expenses) ................. 6.84
Income not included for income tax
purpose (ex. Dividend income) ........................... (0.08)
Equity in losses of affiliates ....................................
—
Inhabitant equalization taxes ................................. 1.14
Tax deduction for research expenses ..................... (1.82)
Other ................................................................... 0.19
Effective tax rate .......................................................... 46.96%

40.69%

8.29(0.01)(0.32)
1.34(7.55)
1.37
43.81%

Significant components of deferred tax assets as of March 31, 2006 and 2005 are as follows:
Thousands of
U.S. dollars (Note 4)

Millions of yen

2006
Deferred tax assets:
Reserve for bonuses ..................................................................................................................
Reserve for sales rebates ...........................................................................................................
Loss of supplies ........................................................................................................................
Devaluation of financial instruments ........................................................................................
Amortization of R&D ................................................................................................................
Amortization of long-term prepaid expenses ...........................................................................
Pension and severance costs .....................................................................................................
Retirement benefits to directors ...............................................................................................
Allowance for bad debt ............................................................................................................
Unrealized gain of property, plant and equipment ..................................................................
Other ........................................................................................................................................

¥

468
329
136
85
183
523
1,960
121
76
2,568
94

¥

2005

2006

461
391
135
2,062
41
837
1,926
113
76
2,568
343

$ 4,000
2,812
1,162
726
1,564
4,470
16,752
1,034
650
21,949804

Total ...........................................................................................................................
Valuation allowance .................................................................................................................
Deferred tax assets ......................................................................................................

6,543
(82)
6,461

8,953
(82)
8,871

55,924(701)
55,223

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

(323)(1,916)(2)(2,241)

(420)
(923)
(2)
(1,345)(2,761)(16,376)(17)(19,154)

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

¥ 4,220¥ 7,526$ 36,069

16. Related Party Transactions:
The Company conducted the debt write-off of ¥870 million ($7,436 thousand) of N-K Curex Co., Ltd. (affiliated company) for the year ended March
31, 2006.

17. Per Share Information:
Per share information for the years ended March 31, 2006 and 2005 is asfollows:

Yen

U.S. dollars (Note 4)

2006

2005

2006

Net assets per share .................................................................................................................. ¥ 543.49
Net income per share ...............................................................................................................
40.23
Diluted net income per share ...................................................................................................
33.24¥ 493.84
36.54
28.49

$4.6450.344
0.284

Kaken Pharmaceutical Co., Ltd. 29

Calculation for net income per share and diluted net income per share is as follows:
Thousands of
U.S. dollars (Note 4)

Millions of yen

2006

2005

2006

Net income ...............................................................................................................................
Net income relating to common stock .....................................................................................
Adjustment to net income ........................................................................................................

¥ 3,887
3,843—¥ 3,417
3,378—$ 33,222
32,846—(Share data)
Average number of share (thousand) .......................................................................................
Additional number of share (thousand) ...................................................................................

95,53420,08792,457
26,119For the years ended March 31, 2006 and 2005

18. Segment Information:
Information about operations in industry segments of the Group for the years ended March 31, 2006 and 2005 is as follows:
Millions of yen

2006
Eliminations
or Corporate

Pharmaceutical

Other*

Total¥73,216—
73,216¥ 2,325
303
2,628¥75,541
303
75,844

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

66,089¥ 7,127

1,395¥ 1,233

67,484¥ 8,360¥¥63,206¥17,589¥80,795¥17,944¥ 98,739

Depreciation ..............................................................................................
Loss on impairment of fixed assets ............................................................
....................................................................................................
Capital Expenditures ..................................................................................

¥ 1,983¥ 268¥ 1,915¥¥¥¥ 2,759¥ 268¥ 1,967

¥
¥
¥

¥
¥
¥

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

776
—
52

¥

Consolidated

—
(303)
(303)

¥ 75,541—
75,541

(303)
—

¥

—
—
—

67,181
8,360

2,759
268
1,967

Millions of yen

2005

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

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

30 Kaken Pharmaceutical Co., Ltd.

Eliminations
or Corporate

Pharmaceutical

Other*

Total¥72,272—
72,272¥ 2,651306
2,957¥74,923
306
75,22965,540¥ 6,732

1,792¥ 1,165

67,332¥ 7,897¥¥63,438¥ 2,192¥ 1,882¥18,132¥ 782¥
75¥81,570¥ 2,974¥ 1,957¥26,978¥—¥—¥

Consolidated

—
(306)
(306)

¥ 74,923—
74,923(306)—¥

67,026
7,897¥108,548¥ 2,974¥ 1,957

Thousands of U.S. dollars (Note 4)

2006
Eliminations
or Corporate

Pharmaceutical

Other*

Total$ 625,778—$ 19,871
2,590$645,649
2,590

625,778

22,461

648,239

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

564,863$ 60,915

11,923$ 10,538

576,786$ 71,453$$540,222$150,333$690,555$153,368$843,923

Depreciation ..............................................................................................
Loss on impairment of fixed assets ............................................................
Capital Expenditures ..................................................................................

$ 16,949$ 2,291$ 16,368$$$$ 23,581$ 2,291$ 16,812$$$$ 23,581$ 2,291$ 16,812

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

6,632
—
444

$

Consolidated—(2,590)$645,649—(2,590)645,649(2,590)—574,196$ 71,453———*Other business fields consist of mainly real estate.

19. Subsequent Event:
The 0.0% unsecured convertible bond due 2007 (b), issued on July 25, 2002, was fully converted in the period from April 18, 2006 to June 16, 2006.
As a result of this conversion, the description became as follows:
Treasury stock used for this conversion
Treasury stock, disposal gain
Stock issued
Increase in common stock
Increase in capital surplus

common stock .......................................................................................
5,393 thousand shares.......................................................................................
¥165 million ($1,410 thousand)common stock .......................................................................................
6,034 thousand shares....................................................................................... ¥2,214 million ($18,923 thousand)....................................................................................... ¥2,203 million ($18,829 thousand)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, 2006 and 2005 and the related consolidated statements of income, shareholders’ equity
and cash flows for the years ended, all expressed in Japanese yen. These consolidated financial statements are the responsibility of theCompany’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. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made bymanagement, 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, 2006 and 2005 and the consolidated results of their operations and their cash flows for the years
ended in conformity with accounting principles and practices generally accepted in Japan (See Note 1).
As described in Note 3, KAKEN PHARMACEUTICAL CO., LTD. and consolidated subsidiaries have adapted the new accounting standard for
impairment of fixed assets.
As described in Note 19, the 0.0% unsecured convertible bond due 2007 (b) held by KAKEN PHARMACEUTICAL CO., LTD. was fully
converted in the period from April 18, 2006 to June 16, 2006.
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 4 to the accompanying consolidated financial statements.

Hijiribashi Audit Corporation

Tokyo, Japan
June 29, 2006

32 Kaken Pharmaceutical Co., Ltd.

Corporate Data (As of March 31, 2006)

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
Executive Director & General Manager
Masao Ishida
Tel: 81-3-5977-5046
Fax: 81-3-5977-5133
E-mail: masao-ishida@kaken.co.jp
Main Branches
Sapporo Branch
Sendai BranchTokyo-1 BranchTokyo-2 Branch
Nagoya Branch
Osaka-1 Branch
Osaka-2 Branch
Hiroshima Branch
Fukuoka Branch
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

Incorporated
March 1948
Paid-in Capital¥22,977 million (As of Jul. 31, 2006)
Common Stock
Authorized: 360,000,000 shares
Issued: 112,106,450 shares (As of Jul. 31, 2006)
Number of Shareholders: 18,676
Employees (Non-Consolidated)
Administration: 137
Sales & Marketing: 985
Production & Technology: 251
Research & Development: 267
Regulatory Affairs: 37

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