KAKEN

Annual Report 2005
Year Ended March 31, 2005

Bringing smiles to everyone

The origin of Kaken Pharmaceutical Co., Ltd. can be traced back to the Institute of Physical andChemical Research (Riken), established in 1917. The Company started pharmaceutical business withfull-scale development of penicillin and streptomycin based on Riken’s own technologies in 1948,
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 anddiabetes. The Company contributes to improving people’s health by cultivating its own originaltechnologies, 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 of regenerative medicine (wound healing medicine).
Corporate Philosophy
By serving as many people as possible
to return smiles of happiness to their faces,
through supplying superior pharmaceuticals,
Kaken helps improve the quality of life for patients.

Business Philosophy: Three Joys

KAKEN

conducts business by

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

Creating joy as
a company.

Creating joy forour employees.

We recognize our social
responsibility as 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.

CO N T E N T S
CONSOLIDATED FINANCIAL HIGHLIGHTS ................... 01
PRESIDENT’S MESSAGE ................................................... 02
SPECIAL FEATURE ............................................................... 04
REVIEW OF OPERATIONS ................................................ 06
COMMITMENT AND EXCELLENCE .................................. 10
FULFILLING OUR
SOCIAL RESPONSIBILITIES .......................................... 13
BOARD OF DIRECTORSAND CORPORATE AUDITORS ..................................... 14
ORGANIZATIONS ................................................................. 15
CONSOLIDATED FINANCIAL REVIEW ............................ 16
CONSOLIDATED FINANCIAL STATEMENTS ................... 18
CORPORATE DATA ............................................................... 33
Forward-Looking Statements
This annual report contains forward-looking statements
pertaining to the Company’s business and prospects.
These statements are based on current analysis ofexisting information and trends. Actual results may
differ from expectations due to unforeseen risks anduncertainties.

CONSOLIDATED FINANCIAL HIGHLIGHTS

01

Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries.

Thousands of
U.S. dollars (Note)

Millions of yen

2005

2004

2005

¥ 74,923
7,897
3,417

¥ 72,706
7,526
3,017

$ 700,215
73,80431,935

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

45,491
108,548

43,133
105,613425,150
1,014,467

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

¥ 36.54.
12.00.

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

7.71
41.91

For the years ended March 31,

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

Yen

U.S. dollars (Note)¥ 31.87.
10.00.

$

0.341.
0.112.

(%)

7.19
40.84

–
–.

.Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥107 = $1 effective on March 31, 2005.

6.51

7.19

7.71

108,548

04

01

02

03

04

05

45,491

43,133

105,613

03

4.70

02

5.63

01

108,51605

40,771

04

114,12503

39,01802

36,112
01

121,803(%)

74,923(¥ millions)
72,706(¥ millions)
74,003

ROE

73,272

Total Assets andShareholders' Equity

70,306Net Sales

05

Kaken Pharmaceutical Co., Ltd.

02

PRESIDENT’S MESSAGE

Business Climate and Performance
In fiscal 2004, ended March 31, 2005, Kaken Pharmaceutical faced
a number of challenges. These included a 4.2% average downward adjustment of drug prices, the introduction of the Diagnosis Procedure Combination (DPC) system, and efforts to encourage use of generic drugs. Nevertheless, we were able to boost bothrevenue and earnings thanks to our sales activities, which areclosely tied to local communities. These activities are spearheaded
by our medical representatives (MRs), who provide high-valueadded information to meet the needs of medical professionals in
the field.
Consolidated net sales for the year amounted to ¥74,923 million, up 3.0% from fiscal 2003. Operating income increased 4.9%,
to ¥7,897 million, and net income grew 13.3%, to ¥3,417 million.
Return on equity (ROE) rose 0.5 percentage point, to 7.7%.
As a member of the pharmaceutical industry, we are required
to have a higher level of equity capital than companies in otherindustries. This is because of the large risk burden associated withnew drug development processes. Adhering to a flexible cash dividend policy, we set dividends according to our business performance, while addressing the need to maintain a balance between
returns to shareholders and strengthening equity capital.
Based on this policy, the Company declared annual cash dividends of ¥12.00 per share, up ¥2.00 from the previous year. Other
profits will be allocated to future investment in research and development.

To expedite research and development, we will outsource basic testing procedures and make use of external clinical trial organizations. In addition, we will recruit young research staff andconsider increasing expenditures on specific R&D themes.

Strengthening our sales force
We plan to have 700 MRs in place by March 2006 to provide
high-value-added information that meets the needs of medical
professionals in the field, and so that our MRs can work moreclosely with local communities. We will also focus on the further
development of Fiblast Spray, the first product in the field of
regenerative medicine to be launched in Japan, as we strive to
become a leading company in this area. In addition, we will reinforce sales activities in order to solidify our strong position in thefield of orthopedics, as well as expand our market share.

Enhancing operating efficiency
We will make further reassessments of our production systems as
we strive to lower manufacturing costs. In agricultural chemicals, we will expand consigned production to Chinese companies, while working to obtain FDA certification for those companies.
In the area of distribution, we will work to reduce costs bypromoting outsourcing. We already undertake outsourcing at theWestern Distribution Center, and we plan to start such activities
at the Eastern Distribution Center some time during fiscal 2005.

Business Initiatives
We are currently implementing a medium-term management planthat began in April 2001 and will conclude in March 2006. Under
the plan, we intend to establish a firm business foundation thatwill enable us to prevail in the future as an “independent pharmaceutical company with a strong presence.”
Today, competition within the pharmaceutical industry is intensifying due to the far-reaching impact of measures to control medical costs. However, we view this change in the business climate
as an excellent opportunity to undertake reforms aimed at maximizing corporate value. Our six key reforms are outlined below.

Focusing investments in 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 joint research initiatives and introduce new research themes.

Kaken Pharmaceutical Co., Ltd.

Focusing
investments
in research anddevelopment
Responding to
the Personal
Information
Protection Law

Strengthening
our sales force

Independent
pharmaceuticalcompany with astrong presence

Addressing
amendments to thePharmaceuticals
Affairs Law

Enhancing
operatingefficiency
Promotingenvironmental
protection

03

Promoting 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 alllevels of our organization.

Addressing amendments to the Pharmaceuticals
Affairs Law
As a result of amendments to Japan’s Pharmaceuticals Affairs Law,
which came into effect in April 2005, pharmaceutical manufacturers are required to have stronger quality assurance and safety
management systems in place. In response, Kaken established a
dedicated division in January 2005 to ensure conformity with
the new requirements and strengthen ties between the Company’svarious departments. We also completed the introduction of new
in-house regulations in March 2005.

Responding to the Personal Information Protection Law
Under the Personal Information Protection Law, which came into
effect in April 2005, companies handling personal information
are required to establish systems for managing such information.
They must also declare the intended use of information they receive. Being subject to the new law, Kaken and its affiliates haveestablished a system for protecting personal information and put
in place in-house regulations. We have also declared our intentions vis-à-vis the use of such information on our corporatewebsite. We will continue working hard to prevent business risks,such as the leakage of personal data and information, throughthe operation of our personal information protection management
system.

Future Challenges
As government-induced policies to curb medical expenditures
begin to have an impact, we can expect competition within thepharmaceutical industry to intensify. However, the absence ofscheduled drug price adjustments in the coming fiscal year should
see an improvement in sales across the industry. Kaken intends
to expand sales in both volume and value terms by actively promoting MR and marketing initiatives. Consequently, we are projecting a 1.0% net sales increase in the fiscal year ending March
2006, to ¥75.7 billion.

In the pharmaceuticals industry, where investment risk ishigh, it is important that we implement R&D activities aimed atstable growth and pursue sound business development. For thisreason, we are targeting consolidated operating income of morethan ¥10 billion and ROE of 8.0% or higher.
Kaken has channeled considerable resources into the protein
bFGF, used in regenerative medicine, and has obtained manufacturing and marketing rights for bFGF in Japan and Asia. I am
pleased to report that these manufacturing and marketing rights
have been extended to include every country in the world. This
provides us with an excellent opportunity to build on our existing expertise and pursue global development with overseas partners.
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, 2005

Shiro Inui
President

Kaken Pharmaceutical Co., Ltd.

04

SPECIAL FEATURE

Development of
New Products■ Expanding applications for regenerative medicine
A protein called bFGF (Trafermin) is a basic fibroblast
growth factor existing in minute quantities in the human body. Kaken is channeling its resources into thedevelopment of pharmaceuticals for regenerative medicine that make use of bFGF. In 2001, we were the firstpharmaceutical manufacturer in the world to succeed inbringing to market a new drug for use in the field of
regenerative medicine. This drug is our wound-healing
agent Fiblast Spray, which is widely recognized as being
effective in the treatment of skin ulcers caused by bedsores or burns. Today, it is well reputed as treatment forskin ulcers in many hospitals and clinics, as well as university hospitals.
bFGF is produced using a technique that originatesfrom genetic modification. It has been shown to stimulate growth of cells and boost the formation of new bloodvessels. It also has a great many other potential applications.

Kaken Pharmaceutical Co., Ltd.

We are currently developing a product containing
Trafermin coded as KCB-1B, which is known to promotebone regeneration. KCB-1B enhances the healing of bone
fractures by regenerating osteoblast cells. The purpose
is to halve recuperation time so that total recovery of an
injury that would normally take two months can occur
in one month. It is estimated that two million patients inJapan annually receive treatment for bone fractures, including bone defects and osteoporosis, with an estimatedmarket size of around ¥10 billion.
We are also developing a product coded as KCB-1D
to treat periodontal diseases. KCB-1D has been recognized for promoting the regeneration of periodontal tissue, such as alveolar bone, periodontal membrane, anddental cementum. It is said that more than 90 million
persons in Japan, representing over 80% of the nation’s
adult population, have the potential to develop periodontal disease. At a time when tooth extraction is the only

05

medical treatment that exists for this disorder, there areenormous market possibilities for bFGF if it is developed
and adopted appropriately.
Fiblast Spray is also considered to be effective for treating skin ulcers resulting from complications associatedwith diabetes. This is being developed as KCB-1, which
is currently in clinical trials.
bFGF has an expansive range of applications as a regenerative medicine, all of which have great hidden potential. These include angiogenesis treatment in the areas of peripheral circulation and severe angina, treatment of osteoarthritis, proliferation of stem cells, andnerve regeneration. We recognize Fiblast Spray and otherderivatives of bFGF as prospective mainstay products.
Accordingly, we are channeling research and development resources into these products, with a view to theirpractical application by around 2010.
■ Endocrine diseases
In October 2004, we received approval for the diagnostic agent KP-102D. As a result, in February 2005 welaunched “GHRP Kaken 100 Injection.”
We are currently conducting Phase II trials of KP102LN. This is a new type of treatment that will be used
to stimulate the secretion of growth hormones in people
with short stature. Used to treat children with low levelsof growth hormones in the three-to-twelve age group,
KP-102LN works via the hypothalamus by stimulation of

the growth hormone secretagogue receptors. It is estimated that there are 100,000 children in Japan who
would benefit from this drug. It may be effective for aging. This drug, therefore, has significant potential for development into a major product.
N.K. Curex Co., Ltd., an affiliate of Kaken, is developing a drug called SNK-860 for the treatment of diabetic
neuropathy. We are currently restructuring our development strategy in light of trials in the United States conducted by Sankyo Co., Ltd.
■ Inflammation and allergies
We are currently conducting Phase II clinical trials for
KP-496, a drug used for treating bronchial asthma thathas proven effective in blocking the action of leukotrienes
and thromboxanes, substances released from inflammatory cells that make breathing difficult. Existing drugs affect only one or other of these substances, and there
have been cases where constitutional predisposition has
resulted in no clear benefits from such drugs. We arealso conducting Phase II clinical trials for KN-48, used
for the treatment of post-herpetic neuralgia. Additional
drugs for treating other inflammatory diseases are currently in the preliminary stages of development.
■ Infectious diseases
We are currently in Phase II clinical trials for SPK-843, adrug for use in the treatment of systemic mycosis.

New Drug Development Pipeline
Product

Development Stage

Category

LaunchIndication

Remarks

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

Phase II
Phase II
Phase II
Phase II
Phase II
Phase II
Phase II
Under consideration
for redevelopment

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

2008
2012
2010
2010
2009
2010
2011

Diabetic skin ulcers
Intractable bone fractures
Periodontitis
Short stature
Systemic mycosis
Postherpetic neuralgia
AsthmaDiabetic neuropathy

New indication
New indication
New indication

Jointly developed with Teikoku Seiyaku
Own development
Jointly developed by N.K. Curex Co., Ltd.
and Sanwa Kagaku Kenkyusho Co., Ltd.

Kaken Pharmaceutical Co., Ltd.

06

REVIEW OF OPERATIONS

Kaken is steadily expanding its fields of medical involvement and increasing sales of a broad spectrum of products, including Artz, an anti-osteoarthritic; Procyclin, used for treating chronic artery
occlusive disease; Adofeed, a pain-relieving plaster; and Lipidil, an anti-hyperlipidemic. We are also
actively promoting Fiblast Spray, a wound-healing agent that has garnered much attention in thefield of regenerative medicine, as well as Seprafilm, a post-operative anti-adhesive.
Fiblast Spray currently holds the top market share for wound-healing agents, and we intend to
expand indications and become a leading company in this area. We are also working hard to expand
sales of the antifungal agent Mentax, together with Mentax Spray. In March 2005, we launched
Lipidil, a new micronized formulation of the anti-hyperlipidemic Lipantil, featuring improved absorbability.
In February 2005, we launched GHRP Kaken 100 Injection (KP-102D), a diagnostic agent for
growth hormone deficiency.
We have obtained exclusive marketing rights from Taiyo Yakuhin Co., Ltd., for Prink Injection
Syringe, which is used in the treatment of skin ulcers and arterial occlusion. In this way, we arestrengthening our product line in the areas of orthopedics and internal medicine.

Kaken Pharmaceutical Co., Ltd.

R E V I E W O F O P E R AT I O N S

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 elastoviscosityof this 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 aday, Adofeed has proven effective in treating osteoarthritis, tennis elbow, muscle pain, and otherinflammatory 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. throughBertek/Mylan. In December 2001, Mentax was approved as OTC Drug in the U.S., which is soldunder 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

08

Seprafilm (post-operative anti-adhesive) Seprafilm is a sheet-type, bioabsorbable, antiadhesive, 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 of bFGF, this is a new type of drug for treating bedsores and other skin ulcers. Fiblast Spraystrongly stimulates the growth of endothelial cells and fibroblasts. It also accelerates wound healing by producing highly vascularized granulation tissues. Introduced by Scios Inc., Fiblast Spraywas 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. Clinical studies have shown that twice-daily administration of Ebrantil capsules significantly improves difficulty in urination
caused by central or peripheral neural disorders without causing significant hypertension. It was approved for this indication in November 1999. Ebrantil already has been in use for hypertension and dysuria caused by BPH (Benign Prostatic
Hyperplasia).
Cytotec (ulcer preventive) An ulcer preventive whose active ingredient is Misoprostol, Cytotec is effective for NSAIDs- induced gastric ulcer. It was developed by Searle (now 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 pillcontaining a combination of two hormones: norethisterone and ethinylestradiol. Incidence of metrorrhagia, which is often
observed by users of this type product, is low. Norinyl T28 was developed by Monsanto Company and Daiichi Pharmaceutical Co., Ltd. and received approval in June 1999. In September 1999, Kaken launched this product into the Japanesemarket. Kaken is currently marketing Norinyl T28 in collaboration with Morinaga Milk Industry Co., Ltd.
Eyecare 0.1 (Eye drop for corneal disorders) Hyaluronic acid, a naturally occurring, biocompatible polymer, wasfirst 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 Japanesemarket in July 2000 and co-marketed with Teika Pharmaceutical Co., Ltd. under the same brand name.

Kaken Pharmaceutical Co., Ltd.

R E V I E W O F O P E R AT I O N S

Mirol (Anti-glaucoma) Consisting of Levobunolol (0.5%), Mirol is a β-blocker fortreating glaucoma and ocular hypertension. Mirol is used once daily as eye drop without heavy viscosity. This product was launched in February 2001. Originally developedby 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 syringeused 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
the world to receive approval. It is useful and easier to diagnose GHD than other existing agents for GHD.

Agrochemicals and Animal Health Products
Agrochem ical s
Polyoxins (fungicides) Two different technical grade active ingredients (TGAIs), Polyoxin
AL and Polyoxin Z are produced by fermentation using a microorganism isolated from a soil of Mt.
Aso in Japan. Formulations of WP, EC, SG and WG are registered in various countries and usedwidely to control fungal diseases on fruit trees, vegetables, flowers, turf and ornamentals. Due tonatural source fungicides, they have been known to be highly safe for human, animals, plants andenvironment.
Pentoxazone (rice herbicide) Pentoxazone, a new oxazolidinedione compound, is known to be a Protox inhibitor
and used to control annual broad leaves, barnyard grass and monocholia in paddy fields with a long lasting effect. Formulations of GR, SC, TB and EW of pentoxazone alone or combination with sulfonylurea and other herbicidal compounds areavailable, and can be applied before, during and after transplantation of rice seedlings due to the high crop safety.

Animal Health Pr oducts
Salinomycin (ionophore anti-coccidial for chicken) Salinomycin was discovered and developed by Kaken, andregistered 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 theEP5 grade material under GMP and the Drug Master File (DMF) is available if required.

Kaken Pharmaceutical Co., Ltd.

09

10

COMMITMENT AND EXCELLENCE

R&D System
Discovery Research
We are committed to strengthening and broadening our R&D
activities. To this end, we are reinforcing in-house drug discovery research and adopting a multifaceted approach to cultivating
new R&D themes. At the same time, we are actively pursuing
joint research and introduce new technologies, both in Japan andoverseas, in order to pinpoint and capitalize on lucrative opportunities.
Drug Discovery Research Laboratories are located in Kyoto,
the ancient capital of Japan. There, our dedicated researchers
constantly study the latest scientific information and technologies. Our main in-house drug discovery research themes are inflammation and immunology, endocrine and metabolic diseases,
and infectious diseases, especially systemic mycosis. In endocrine
and metabolic diseases, in particular, drugs for treating osteoporosis, diabetes, and obesity appear very promising for Kaken in lightof Japan’s aging society.
Computer-aided drug design (CADD) is an important part ofour rational approach to drug discovery. Our medicinal chemists
continue to explore chemical candidates synthesized in various
projects in order to design superior drugs focusing the areas.
To establish a strong presence in genomic approach and otherleading-edge technologies, we are actively involved in joint research programs with other laboratories and academic institutions. We enter licensing agreements with these entities as appropriate. These collaborations are designed to ensure more effective R&D and minimize unforeseeable risks pertaining to R&D
investments.
Our laboratories are exploring a number of innovative technologies in collaboration with leading academic scientists andpharmaceutical companies. As a result, our expertise has expanded to the fields of asthma, endocrinology, systemic mycosis,
cardiology, and oral care.

Kaken Pharmaceutical Co., Ltd.

Our researchers are highly motivated and dedicated to excellence at every phase of drug discovery research. Moreover, wehave a refined education program for young researchers to encourage their motivation.
Our current policy is to focus on specific research areas, while
expanding our product range by speeding up ongoing R&D
projects. By pursuing strategic alliances with companies and research institutions both in Japan and overseas, we are active forcollaboration, introduction and licensing for new technologies
and seeds on a global basis.

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

COM MITMENT AND EXCELLENCE

Our Pharmacokinetics Research Group uses the up-to-dateequipment and technologies to study the absorption, distribution, metabolism, and excretion of drugs in order to support theireffectiveness and safety in the body. Our Drug Formulation Group
studies general pharmaceutical designs and formulations using
drug delivery systems (DDSs) and pinpoints technologies to develop optimal dosage forms. Our Safety Evaluation Group strictly
evaluates the safety of candidate compounds. Our Quality Assurance Group works to ensure that information generated in all
Kaken laboratories is of the highest quality and reliability.
As illustrated by the transition to Lipidil, a new formulation
for Lipantil, in the year under review, the manufacture of drugs
that are easy for patients to use is a major theme of our productdevelopment. We will continue to develop new products that takefull advantage of our highly advanced drug formulation techniques.
To expedite clinical development, we are also active for efficient outsourcing of non-clinical trials, as well as of clinical trials
to organizations specializing in such activities.

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

Our MRs play a key role in our R&D and production activities through their communication with doctors and patients. Being on the front line, they obtain valuable information from doctors’ offices and other medical institutions. In addition, they help
us develop user-friendly package designs and product descriptions by incorporating the suggestions of medical professionals.
We have established nine branches and 66 sub-branches so that
medical representatives (MRs) can work closely with local communities and provide up-to-date information on products thatmeet the needs of medical professionals. We plan to increase thenumber of MRs to 700.
To date, we have directed our MR activities mainly at hospitals, due to our success in the area of orthopedics. However, inlight 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 held by Kaken’s products in this area.
We have also commenced marketing of generic products. A
major objective of this strategy is to make use of efficiencies
achieved by having our MRs expand their information and sales
activities, which have previously been restricted to only original
products, to peripheral areas. This will contribute to further
growth in sales and improve cost efficiencies. Another reason
behind this move to generic products is the need for a stable supply of good generic products in the context of Japanese society,where policies have been introduced in recent years to curb medical costs.

Kaken Pharmaceutical Co., Ltd.

11

12

COMMITMENT AND EXCELLENCE

Production and Quality Control
Our production facilities in Shizuoka Prefecture are on the eastbank of the Ohi River, near Mt. Fuji. These facilities are among
the first in the industry to incorporate factory automation systems. They comply with Good Manufacturing Practices (GMP) of
Japan, which stipulate requirements for drug manufacturing andquality control.
While adhering to these requirements, we also maintain evenstricter in-house regulations for our production facilities. The
quality of products for export is governed by cGMP regulationsin the United States, which were formulated by the U.S. Food andDrug Administration (FDA).
We are constantly reviewing systems at our production facilities, with the aim of boosting quality and productivity. We
are also examining the adoption of efficient production systems
that make use of our specialist manufacturing-related expertisein production consignment and outsourcing.
In addition, we are promoting the outsourcing of the distribution function. Our Western Distribution Center is an
outsourcing facility that covers western Japan, and we are planning to begin operations at our Eastern Distribution Center sometime during fiscal 2005.

Kaken Pharmaceutical Co., Ltd.

Environmental Protection
Activities
As a pharmaceutical manufacturer concerned with people’s wellbeing, our important management priorities are to protect the
global environment and help realize a prosperous society.
To this end, our Shizuoka production and R&D facilities haveobtained ISO14001 certification, the international standard forenvironment management, as part of further strengthening ourcommitment to the protection of the environment. These facilities work to minimize waste, incineration, and land reclamation,
while reducing power consumption and otherwise saving energy.
They also work to monitor and control the volumes of chemical
used, minimize discharge of harmful substances into the atmosphere, and improve the quality of effluent.
Our Shizuoka facilities have also achieved a recycling ratio ofover 99% for industrial waste. In addition, our Kyoto researchfacilities have been awarded Kyoto Environmental System (KES)
certification by Kyoto City in recognition of their environmental
management systems.
We will continue to actively engage in companywide activities, while raising awareness that environmental protection activities are a social responsibility.

FULFILLING OUR SOCIAL RESPONSIBILITIES

13Compliance by the Kaken Group
Every executive and employee of Kaken Pharmaceutical and its group of companies is strongly committed tocompliance with respect observing Japanese and foreign laws and regulations, respecting different cultures andcustoms, and adopting high ethical standards.
1. We recognize the preciousness of life and shall contribute to the welfare of society by channeling all our efforts
into enhancing people’s health and patients’ quality of life.
2. We recognize the importance of maintaining appropriate relations with all our stakeholders, including
shareholders, investors, employees, business partners, and local communities.
3. We shall compete in a fair and free manner, and conduct our business activities in a just and proper way.
4. We shall handle all the Company’s assets, including information, in a legitimate and proper manner tofacilitate the smooth running of its operations.
5. We shall respect the human rights and individuality of employees, pay attention to health and safety issues,
and will work hard to foster a fair and honest workplace culture.
6. We shall manage Company information appropriately and disclose information in a timely and appropriatemanner.
7. We shall take seriously the impact of our activities on the global environment and contribute to society as agood corporate citizen, including through environmental protection efforts.
8. We shall not tolerate terrorism and other anti-social behavior.

Corporate Governance
We have introduced an operating officer system in order to expedite decision-making and clarify supervisory andbusiness execution functions. Faced with a choice between an auditor-style and committee-style of management,
we opted for our existing auditor-style format. 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 is critical to the functional operation of our company.
In addition, we undertake internal audits based on in-house regulations. The reason for internal audits is toensure that our internal control systems are functioning effectively. To reinforce these internal control functions,
we have established a new internal auditing office. While the office is under the direct control of the president, it
is no longer part of the Corporate Planning & Coordination Department, and it also operates independently ofother business execution functions.

Kaken Pharmaceutical Co., Ltd.

14

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 Director
Yutaka Handa(Personnel)

AuditorOsamu Okamoto(Standing)

Executive Director
Shinichi Takamatsu(Accounting)

Auditor
Satoshi Shoji(Standing)

Executive Director
Motoyuki Yajima, Ph.D.
(Research and Development)

Auditor
Sumio Yoshizawa

Executive Director
Tetsuo Onuma(Sales Planning)
Executive Director
Masao Ishida(Global Business Development)

Kaken Pharmaceutical Co., Ltd.

AuditorKeizo NemotoORGANIZATIONS

15

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 & CoordinationDepartment
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
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.

CONSOLIDATED FINANCIAL REVIEW

16

Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries.

Consolidated Five-Year Summary

Thousands of
U.S. dollars (Note)

Millions of yen

2005

2004

2003

¥ 74,923
7,897
3,417

¥ 72,706
7,526
3,017

45,491
108,548¥ 36.54.
12.00.

2002

2001

2005

¥ 74,003
7,947
2,598

¥ 73,272 ¥ 70,306
7,725
6,805
1,765
1,999

$ 700,215
73,80431,935

43,133
105,613

40,771
108,516

39,018114,125

425,150
1,014,467¥ 31.87.
10.00.

¥ 27.11.
8.25.

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

36,112
121,803

Yen

U.S. dollars (Note)¥ 18.74. ¥ 21.78.
7.50.
7.50.

$

0.341
0.112

(%)

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

7.71.
41.91.

7.19.
40.84.

6.51.
37.57.

4.70.
34.19.

5.63.
29.65.

.
Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥107 = $1 effective on March 31, 2005.

Sales of Pharmaceuticals (Non-Consolidated)

Billions of yen

Items

2005

2004

Change (%)

Arz¥ 21.7¥ 21.6+ 0.4

Adofeed and related products

10.1

10.4

- 2.9

Procylin

8.9

10.0

- 11.0Fiblast Spray

3.5

3.4

+ 2.9

Lipidil

3.7

3.3

+12.1

Mentax

2.5

2.2

+13.6

Cytotec

2.2

2.3

- 4.4

Seprafilm

4.1

3.3

+24.2

Note: The Company reclassified its product segment breakdown in the year ended March 31, 2005.

Kaken Pharmaceutical Co., Ltd.

FINANCIAL REVIEWRevenues
In fiscal 2004, ended March 31, 2005, Kaken Pharmaceutical reported a 3.0% increase in consolidated net sales, to ¥74,923 million. This was despite a drop in drug prices and a harsh businessclimate. We attribute the revenue gain to stepped-up activities
by our medical representatives to promote our products at hospitals and medical clinics.

Pharmaceuticals
Sales in our pharmaceuticals business grew 3.8%, to ¥72,272
million, or 96.5% of consolidated sales.
Our pharmaceuticals business consists of two core segments:
pharmaceuticals (including medical devices), and agrochemicals
and animal health products. At the beginning of the year underreview there was a drop in the price of Artz, one of our mainstay
products. Nevertheless, increased shipments in volume terms resulted in a year-on-year rise in sales. However, sales of Procyclin,
another mainstay product, declined due to price readjustments
and a lower volume of shipments. We posted an increase in sales
volume of Adofeed, but a decline in value terms due to a drop in
prices.
We are currently channeling resources into marketing Lipantil.
Combined sales of this product and Lipidil were up year-on-year.
Sales of Mirol grew as the result of an increase in sales volume, as
well as a rise in the number of medical institutions using thisproduct. Although we worked hard to promote Fiblast Spray, sales
increased just slightly. In the area of medical devices, we recorded
an increase in sales thanks to the growing number of institutions
using Seprafilm.
As a result, sales of pharmaceuticals (including medical devices) rose 3.6%, to ¥67,485 million.
In the agrochemicals and animal health products segment,
sales of Polyoxin declined as a result of a harsh business climate.
However, healthy exports of Salinomycin and Colistin led to anincrease in sales of these offerings. A concerted effort to increase
sales of Pentoxazone resulted in a significant sales gain.
As a result, sales of agrochemicals and animal health products increased 6.8%, to ¥4,787 million.

Other
Sales in our other businesses declined 13.7%, to ¥2,651 million,
representing 3.5% of net sales.
Rental income from Bunkyo Green Court, the site of our Tokyo headquarters, comprises the bulk of revenues from other businesses. During the period under review, this income remained at
virtually the same level as the previous year. In September 2004,17

however, we sold all of our shares in consolidated subsidiary Eiko
Filter Co., Ltd., which caused the decline in sales from other businesses.

Earnings
In the year under review, operating income increased 4.9%, to¥7,897 million, owing to the increase in net sales and a decline in
the selling, general and administrative expense ratio. Net income
grew 13.3%, to ¥3,417 million. This was due to a number of factors, including a decline in equity in losses of affiliates.
The operating income ratio edged up 0.1 point, to 10.5%.
Earnings per share increased 14.7%, to ¥36.54, and ROE rose 0.5
point, to 7.7%.

Profit Appropriation
In appropriating profit, we seek a balance between return to shareholders and strengthening equity capital. On this basis, the Company declared a year-end dividend of ¥6.00 per share, up ¥0.50
from a year earlier. This took total annual dividends in fiscal 2004
to ¥12.00 per share, up ¥2.00 from fiscal 2003. Retained earnings
will be allocated to preparing the Company for future businessgrowth and to research and development.

Financial Position
Total assets at fiscal year-end stood at ¥108,548 million, up 2.8%
from a year earlier. This was due to an increase in cash on handand at bank, which outweighed declines in property, plant, andequipment and long-term prepaid expenses. Total shareholders’equity rose 5.5%, to ¥45,491 million, owing primarily to a 22.0%
jump in retained earnings. As a result, the ratio of shareholders’equity to total assets at fiscal year-end was 41.9%, up 1.1 points
from a year earlier. Shareholders’ equity per share rose ¥28.07,
to ¥493.84.

Cash Flows
Cash and cash equivalents at the end of fiscal 2004 stood at¥17,272 million, up ¥4,032 million from a year earlier.
Net cash provided by operating activities amounted to ¥8,477
million, up ¥4,362 million from the previous year. This was mainly
attributable to an increase in income before income taxes andminority interests and a decrease in income taxes paid.
Net cash used in investing activities totaled ¥1,570 million,up ¥1,106 million from fiscal 2003. This was mainly due to theacquisition of property, plant, and equipment.
Net cash used in financing activities was ¥2,875 million, down
¥783 million compared to the previous year. This was largely the
result of repayment of loans and the acquisition of treasury stock.

Kaken Pharmaceutical Co., Ltd.

18

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

Consolidated Balance Sheets
As of March 31, 2005 and 2004

Thousands of
U.S. dollars (Note 3)

Millions of yen

ASSETS

2005

2004

2005

¥ 17,272150¥ 13,257150$ 161,421
1,402

33,566770

32,6391,116

313,701
7,196

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

34,336(16)

33,755(21)

320,897(150)

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

34,320
10,2501,286
852

33,734
11,136964
919

320,747
95,79412,019
7,963

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

64,13060,160599,346

Property, Plant and Equipment (Note 7):
Buildings and structures ................................................................
Machinery and equipment .............................................................

34,912
18,23534,88917,830326,280
170,421

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

53,147(31,007)52,719(29,662)496,701(289,785)

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

22,1403,960
303

23,0573,723
16

206,916
37,0092,832

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

26,403

26,796

246,757

Investments and Other Assets:
Investment securities (Notes 5 and 7) ..............................................
Investments in unconsolidated affiliates ..........................................
Intangible assets and long-term prepaid expenses ............................
Deferred tax assets (Note 13) ..........................................................
Deferred charges ............................................................................
Other assets ...................................................................................

6,177
665
1,823
6,501
0
2,849

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

57,7296,215
17,03760,757
0
26,626

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

18,01518,657

168,364

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

¥108,548¥105,613$1,014,467

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

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

19

Thousands of
U.S. dollars (Note 3)

Millions of yen

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

2005
¥

5,380
200

2004
¥

5,940
802

2005
$

50,2801,869

12,965593
2,616

12,964281
2,352

121,168
5,542
24,449Accrued expenses ..........................................................................
Accrued bonuses ...........................................................................
Accrued sales rebates .....................................................................
Accrued income taxes (Note 13) ......................................................
Other current liabilities ..................................................................

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

15,597
503
1,185
756
196
570

151,159
4,477
10,598
8,972
20,682
4,486

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

27,02025,549252,523

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

28,955
6,116
277
260
429

29,610
6,478
229
280
333

270,607
57,159
2,589
2,430
4,009

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

36,03736,930336,794

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

—

1

—

Shareholders’ Equity:
Common stock - no par value
Authorized: 360,000,000 shares
Issued : 94,518,374 shares as of March 31, 2004
and 94,922,782 shares as of March 31, 2005 ...........................
Capital surplus ...............................................................................
Retained earnings ..........................................................................
Net unrealized gain(loss) on valuation of other securities,
net of taxes (Note 2 (c)) ................................................................
Treasury stock, at cost: 2,885,364 shares in 2005
and 1,985,560 shares in 2004 ........................................................

17,12815,874
12,85917,00015,735
10,540160,075
148,355
120,178

1,345

988

12,570(1,715)(1,130)(16,028)

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

45,491

43,133425,150TOTAL LIABILITIES ANDSHAREHOLDERS’ EQUITY ..................................................

¥108,548¥105,613$1,014,467

Commitments and contingencies (Note 14)

Kaken Pharmaceutical Co., Ltd.

20

Consolidated Statements of Income
For the years ended March 31, 2005 and 2004

Thousands of
U.S. dollars (Note 3)

Millions of yen

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

2005¥74,923
37,7512004¨¥72,706
36,447

2005$700,215
352,813Gross profit ...................................................................................

37,17236,259347,402

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

29,27528,733

273,598

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

7,897

7,526

73,804

100
(423)
(525)

78
(439)
(525)

935
(3,953)(4,907)

(7)
0
—
(874)
(42)
(45)

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

(65)
0
—
(8,168)
(393)
(421)

(1,816)(2,264)(16,972)

6,081

5,262

56,832

3,167
(503)

2,259
(14)

29,598(4,701)

2,664

2,245

24,897

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

3,417

3,017

31,935

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

0

0

0

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

¥3,417¥3,017$31,935

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

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

Yen

U.S. dollars (Note 3)

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

¥36.54¥31.87$0.341

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

¥28.49¥24.92$0.266

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

¥12.00¥10.00$0.112

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

.

.

.

21

Consolidated Statements of Shareholders’ Equity
For the years ended March 31, 2005 and 2004

Millions of yen
Number ofcommonstock

Commonstock

CapitalsurplusRetainedearnings

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

94,518,374¥17,000¥15,735¥ 8,406
3,017
(846)
(37)

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

94,518,374¥17,000¥15,735

404,408

128

139

Balance at March 31, 2005.................

94,922,782

Unrealized
gain (loss) onother securities

Treasurystock
at costTotal
shareholders’equity¥ (262) ¥ (108)¥ 40,771
3,017
(846)
(37)

1,250
(1,022)¥10,540
3,417(1,064)
(34)

¥ 988

¥(1,130)¥15,874¥43,133
3,417(1,064)
(34)
267

357
¥17,128

1,250(1,022)¥12,859

(585)

357
(585)

¥1,345 ¥(1,715)¥45,491

Thousands of U.S. dollars (Note 3)
Number ofcommonstock

Commonstock

Capitalsurplus

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

94,518,374$158,879$147,056

404,408

1,196

1,299

Balance at March 31, 2005.................

94,922,782

Retainedearnings

Unrealized
gain (loss) onother securities$ 98,505 $ 9,234
31,935(9,944)(318)

Treasurystock
at costTotal
shareholders’equity$(10,561)$403,112
31,935(9,944)
(318)
2,495

3,336
$160,075$148,355 $120,178$12,570(5,467)

3,336(5,467)$(16,028)$425,150

Kaken Pharmaceutical Co., Ltd.

22

Consolidated Statements of Cash Flows
For the years ended March 31, 2005 and 2004

Thousands of
U.S. dollars (Note 3)

Millions of yen

2005

2004

2005

¥ 6,081¥ 5,262$ 56,832

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

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

18,6548,280
860(5,748)
(935)
3,953
8,168
—
393
—
636
(598)
(10,075)
7,570
1,187
(318)
5,683
94,542935(3,953)(12,299)
79,225

II. 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 ....................................

(1,360)
133
(234)
0
(59)
(50)
(1,570)(1,139)
5
(3)
691
(72)
54
(464)

(12,710)
1,243(2,187)
0
(551)
(468)
(14,673)

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 4) ............................

(500)
70
(607)
(774)
(1,064)(2,875)
4,032
13,240¥17,272(235)—(1,555)(1,022)(846)(3,658)(7)
13,247¥13,240(4,673)654(5,673)(7,234)(9,944)(26,870)
37,682
123,739$161,421

I. Cash flows from operating activities
Income before income taxes and minority interests .........................
Adjustments for:
Depreciation .............................................................................
Amortization of long-term prepaid expenses .............................
Amortization of deferred charges ..............................................
Accrual for pension and severance costs, less payments .............
Interest and dividend income ....................................................
Interest expense .......................................................................
Equity in losses of affiliates .......................................................
Revaluation loss of investment securities ...................................
Revaluation loss of golf membership .........................................
Gain on sale of investment securities .........................................
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 (Increase) in inventories ..............................................
Increase 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.
Kaken Pharmaceutical Co., Ltd.

23

Notes to the Consolidated Financial Statements

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

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

2. Summary of Significant Accounting Policies:(a) Principles of Consolidation
The Company had four subsidiaries as of March 31, 2005. The consolidated financial statements include the accounts of the Company andall of its subsidiaries. The company sold all the shares of EIKO FILTER
CO., LTD. in this second semester. The consolidated subsidiaries as ofMarch 31, 2005 are as follows:
KAKEN REALTY & SERVICE CO., LTD.
KAKEN PHARMA CO., LTD.
KAKEN LOGISTICS CO., LTD.
FUJIKA CORPORATIONThe Company had an affiliate as of March 31, 2005 and 2004. The affiliate
is N·K Curex Co., Ltd. and is accounted for by the equity method.
All significant intercompany transactions, account balances and unrealized
profits among the Group have been eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents in the consolidated statements of cash flows
are composed of cash on hand, bank deposits which are able to bewithdrawn within three months and short-term investments withoriginal maturity of three months or less and are considered to haveminimal risk from market fluctuations.
(c) Marketable and Investment Securities
Securities are classified as one of four categories; (1) Trading, (2) Heldto-maturity debt, (3) Securities of subsidiaries and affiliated, and (4)Other. Trading securities are recorded at market value with unrealized
gains and losses recognized in the current years earnings. Debt securities that are expected to be held-to-maturity are carried at amortizedcost. Securities of subsidiaries and affiliates are carried at cost. Other
securities are expected to be sold in the long term and those, whose
fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a separate component in shareholders’ equity, net 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 averagemethod.
(e) Property, Plant and Equipment
Depreciation is computed on the declining-balance method at rates
based on the estimated useful lives of assets, except for buildings,
structures, machinery and equipment for the Komagome office that arecomputed on the straight-line method. Consolidated subsidiaries principally adopted the straight-line method. Furthermore, depreciation ofbuildings, except for ancillary facilities to buildings, acquired after
April 1,1998, is computed using the straight-line method. The range ofuseful lives is from 3 years to 60 years for buildings and structures,and from 2 years to 17 years for machinery and equipment.
(f) Pension and Retirement Benefits
Employees who terminate employment are entitled, under most circumstances, to lump-sum payments or pension payments as described
below, determined by reference to current basic rate of pay, length ofservice and conditions under which the termination occurs. The minimum payment is an amount based on voluntary retirement. In addition to the minimum payment based on voluntary retirement,
employees receive additional benefits for retirement due to age limit,
death or other defined reasons. The Company has a non-contributory
defined benefit funded pension plan (entrusted) which covers 30% of
the benefits payable under the existing retirement plan to employees.
The accrued pension and severance costs represents the amountactuarially calculated projected benefit obligations less (1) the fairvalue of the plan assets (2) unrecognized actuarial loss or gain and (3)the unrecognized transition amount arising from adopting the newstandard (4) unrecognized prior service cost. If the fair value of theplan assets exceeds the projected benefit obligations, prepaid pension
and severance costs are recorded. The transition amount (unfunded
and unrecognized benefit obligation) of ¥7,902 million at April 1, 2000
is amortized on a straight-line basis over 15 years (for subsidiaries
mainly 10 years). Unrecognized actuarial loss or gain is amortized on a

Kaken Pharmaceutical Co., Ltd.

24

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

Interest rate swap agreements:
The Company enters into interest rate swap agreements, in order tolower funding costs and limit the Company’s exposure in respect of theunderlying financial instruments, resulting from adverse fluctuations in

Kaken Pharmaceutical Co., Ltd.

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

25

3. United States Dollar Amounts:
The Group maintains its accounting records in yen. The dollar
amounts included in the consolidated financial statements and notes
thereto represent the arithmetical results of translating yen to dollars
on the basis of ¥107=U.S.$ 1. The inclusion of such dollar amounts issolely for convenience and is not intended to imply that yen amounts
have been or could be converted, realized or settled in dollars at ¥107
=U.S. $ 1 or any other rate.

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

Millions of yen

Cash on hand and at 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 ......................................................................................................

2005

2004

2005

¥17,272150¥13,257
150$161,421
1,402

17,422
—
(150)
(150)
¥17,272

13,407
(17)
(150)
(167)
¥13,240

162,823—(1,402)(1,402)$161,421

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

Unrealized
gain (loss)

Cost

2005

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

Unrealized
gain (loss)

Cost

2004

Marketvalue

Unrealized
gain (loss)

For the years ended March 31,
Other securities:
Market value available
Equity securities ....................... ¥3,486
Other securities .........................
45
3,531
Market value not available ..............
379
Total ......................................... ¥3,910¥5,75444
5,798
379¥6,177¥2,268(1)
2,267—¥2,267¥3,25744
3,301
380¥3,681¥4,92343
4,966
380¥5,346¥1,666(1)
1,665—¥1,665$32,579
421
33,0003,542$36,542$53,776411
54,187
3,542$57,729$21,197(10)
21,187—$21,187

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

¥ 150

¥

¥ 150

¥ 150

¥ —

$ 1,402$ 1,402

$

—

2005

—

Other securities sold during the fiscal years ended March 31, 2005 and 2004
Thousands of
U.S. dollars (Note 3)

Millions of yen

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

2005

2004

2005

¥0
0
—

¥691
181
—

$0
0
—

Kaken Pharmaceutical Co., Ltd.

26

6. Inventories:
Inventories as of March 31, 2005 and 2004 are comprised of the following:Thousands of
U.S. dollars (Note 3)

Millions of yen

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

2005

2004

2005

¥ 4,682
1,380
3,486
559
143
¥10,250¥ 5,016
1,419
3,351
1,188
162
¥11,136$43,757
12,89732,5795,224
1,337$95,794

7. Short-term Bank Loans and Long-term Debts:
Short-term bank loans outstanding as of March 31, 2005 and 2004 arerepresented the notes issued by the Group to banks. Customarily, thesenotes are renewed at maturity subject to renegotiation of interest rates
and other factors. The weighted-average interest rates applicable toshort-term bank loans as of March 31, 2005 and 2004 are 0.86 % and0.86 %, respectively. Outstanding balance of short-term bank loans asof March 31, 2005 and 2004 were ¥ 5,380 million and ¥5,940 million,
respectively.

Long-term debt as of March 31, 2005 and 2004 consisted of the following:Thousands of
U.S. dollars (Note 3)

Millions of yen

March 31
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%) ...................
Less: current portion ..............................................................................................................
Total .............................................................................................................................
a) 0.0% Unsecured convertible bond
Holders of this bond are entitled to convert these bonds into common stock at
a price of ¥630 during the period from August 9, 2000 to September 14, 2007.
b) 0.0% Unsecured convertible bond
Holders of this bond are entitled to convert these bonds into common stock at
a price of ¥732 during the period from August 8, 2002 to September 14, 2007.

Aggregate annual maturities of convertible bonds in the next fivefiscal 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 ..................................................

Kaken Pharmaceutical Co., Ltd.

¥——17,394—¥17,394

Thousands of
U.S. dollars(Note 3)$——
162,561—$162,561

2005

2004

2005

¥ 3,000
7,394
10,0008,761
29,155(200)¥28,955¥ 3,608
7,849
10,0008,955
30,412(802)¥29,610$ 28,037
69,10393,45881,878272,476(1,869)$270,607

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

Millions of yen
Long-termbank loans

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

¥

Other interest
bearing debt

—

¥ 200

—

Long-termbank loans$

Other interest
bearing debt—

$ 1,869

207

—

1,935

—

213

—

1,991

3,000

214

28,037

2,000

—

221

—

2,065

—
¥3,0007,706¥8,761—$28,037

72,018$81,878

27

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 uponrequest of the bank, and that the bank shall have the right, as theobligations become due or in the event of their default, to offset cash
deposits against such obligations due to the bank. The Group has notreceived any such requests to date.
At March 31, 2005 and 2004, assets pledged as collateral for certain
short-term (¥1,400 million) and long-term debts (¥8,761 million),including current portion of long-term debts, were as follows:

Thousands of
U.S.dollars(Note 3)

Millions of yen

March 31

2005

2004

2005

Assets pledged
Buildings and structures ............ ¥ 9,746
Machinery and equipment .........
2,076
Land .........................................
108
Investment securities .................
1,324¥10,228
1,885
108
1,744

$ 91,084
19,402
1,009
12,374

Total .................................... ¥13,254¥13,965$123,869

Liabilities and secured
Short-term bank loans ............... ¥ 1,400
Long-term bank loans ................
—
Other interest bearing debt ........
8,761
Total .................................... ¥10,161¥ 1,460
288
8,955¥10,703$ 13,084—
81,878$ 94,962

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

Millions of yen

March 31

2005

2004

2005

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

¥15
11
¥ 4

¥15
9
¥ 6

$140
103
$ 37

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

¥ 2

¥ 2

$ 19

Periodic lease expenses on finance lease contracts withoutownership-transfer for the year ended March 31, 2005 and 2004
were summarized as follows:
Thousands of
U.S.dollars(Note 3)

Millions of yen

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

2005

2004

2005

¥2

¥2

$19

The amount of outstanding future lease payments due atMarch 31, 2005 and 2004, which excluded the portion of interest
thereon, was summarized as follows:
Thousands of
U.S.dollars(Note 3)

Millions of yen

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

2005

2004

2005

¥2
3
¥5

¥2
5
¥7

$19
28
$47

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

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

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

Kaken Pharmaceutical Co., Ltd.

28

10. Pension and Retirement Benefits:
The benefit obligation and plan assets, funded status and compositionof amounts recorded in the consolidated balance sheet as of March 31,
2005 and 2004 is as follows:
Millions of yen

March 312005

The components of net pension and severance costs for the year
ended March 31, 2005 and 2004 were as follows:

Thousands of
U.S.dollars(Note 3)

2004

2005

Projected benefit obligations ......... ¥(22,722) ¥(23,444)
Plan assets ....................................
9,436
8,774

$(212,355)
88,187

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

(13,286)(14,670)(124,168)

5,249
2,780
(176)

5,786
3,010
(198)

49,05625,981(1,645)(5,433)(6,072)
Amounts recognized in thebalance sheet consists of —Prepaid pension cost ................
683
406
Accrued pension andseverance costs ...................... ¥ (6,116) ¥ (6,478)(50,776)

6,383$ (57,159)

Millions of yen

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

Thousands of
U.S.dollars(Note 3)

2005

2004

2005

¥ 795
534
(219)
526
363
(22)
¥1,977

¥ 818
547
(117)
527
397
(22)
¥2,150$ 7,430
4,991(2,047)
4,916
3,393
(206)
$18,477

Assumptions used in calculation of the above information as of March
31, 2005 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

11. Shareholders’ Equity:
The following appropriations of the Company’s retained earnings in
respect of the year ended March 31, 2005 which were approved by theshareholders at the general meeting held on June 29, 2005, have notbeen incorporated in the accompanying consolidated financial statements.

Millions of yen

Retained earnings at the end of the year .........
Utilization of general reserve
Utilization of deferred gain on sales ofproperty, plant and equipment .............
Appropriations:
Dividends (¥6.00 per share) ....................
Bonuses to directors ................................
[of which to statutory auditors] ...............
Transfer to general reserve:
Others reserves .................................
Retained earnings carried forward to
the following year ......................................

Kaken Pharmaceutical Co., Ltd.

Thousands of
U.S.dollars(Note 3)

¥8,742$81,701

13
8,755

121
81,822

(552)
(39)
[5]

(5,159)(364)[47](1,000)(9,346)¥7,164$66,953

29

12. Research and Development Costs:
Research and development costs included in selling, general and administrative expenses for the years ended March, 2005 and 2004 amounted

to ¥6,271million ($58,607 thousand) ,¥6,360million, respectively.

13. Income Taxes:
The Group is subject to several taxes based on income, which in theaggregate resulted in statutory tax rates of approximately 40.69% and42.05% for the years ended March 31, 2005 and 2004. This change ofstatutory tax rate is due to the introduction of size-based corporate
tax by tax authority. Reconciliation of the differences between thestatutory tax rate and the effective tax rate for the years ended March
31, 2005 and 2004 is as follows:

2005

2004

40.69%

42.05%

8.29

9.27(0.01)(0.32)
1.34(7.55)
1.37(0.04)(1.35)
1.55(5.69)(3.13)

Effective tax rate .................................................... 43.81%

42.66%

Statutory tax rate ....................................................
Increase (decrease) in taxes resulting from:
Expenses not deductible for income tax
purpose (ex. Entertainment expenses) ...............
Income not included for income tax
purpose (ex. Dividend income) .........................
Equity in losses of affiliates ................................
Inhabitant equalization taxes .............................
Tax deduction for research expenses ..................
Other ..............................................................

Significant components of deferred tax assets as of March 31, 2005 and 2004 are as follows:
Thousands of
U.S. dollars (Note 3)

Millions of yen

2005

2004

2005

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

¥ 461
391
135
2,062
41
837
1,926
113
76
2,568
343
8,953
(82)
8,871

¥ 534
307
78
1,695
181
979
1,900
93
76
2,568
81
8,492
(76)
8,416

$ 4,308
3,654
1,262
19,271
383
7,822
18,0001,056
710
24,0003,206
83,672(766)
82,906

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

(420)
(923)
(2)
(1,345)

(450)
(678)
(1)
(1,129)(3,925)(8,626)(19)(12,570)

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

¥7,526¥7,287$70,335

Kaken Pharmaceutical Co., Ltd.

30

14. Contingencies:
The Group had contingent liabilities arising from notes discounted atbanks in the ordinary course of business in the amount of ¥ 1,361

million as of March 31, 2004.

15. Segment Information:
Information about operations in industry segments of the Group for years ended March 31, 2005 and 2004 is as follows:
Millions of yen

2005

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

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

Eliminations
or Corporate

Pharmaceutical

Other*

Total¥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¥

Consolidated

—
(306)
(306)

¥ 74,923—
74,923(306)—

67,026¥ 7,897¥26,978¥—¥—¥108,548¥ 2,974¥ 1,957

Eliminations
or Corporate

Consolidated

Millions of yen

2004

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

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

Kaken Pharmaceutical Co., Ltd.

Pharmaceutical

Other*

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

65,490¥ 7,526¥¥64,201¥ 2,414¥ 915¥19,278¥ 799¥
64¥83,479¥ 3,213
¥ 979

¥

—
(310)
(310)

¥ 72,706—
72,706(310)—

65,180¥ 7,526¥22,134¥—¥—¥105,613¥ 3,213¥979

31

Thousands of U.S. dollars (Note 3)

2005
Eliminations
or Corporate

Pharmaceutical

Other*

Total$675,439—$ 24,776
2,860$700,215
2,860

675,439

27,636703,075

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

612,523$ 62,916

16,748$ 10,888

629,271$ 73,804$592,878$169,458$762,336$252,131$1,014,467

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

$ 20,486$ 17,589$ 7,308$701$ 27,794$ 18,290$$$$

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

$$

Consolidated—(2,860)$ 700,215—(2,860)700,215(2,860)———$626,41173,804

27,794
18,290*Other business fields consist of mainly real estate.

Kaken Pharmaceutical Co., Ltd.

32

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, 2005 and 2004 and the related consolidated statements of income, shareholders’equity and cash flows for the years ended, all expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with auditing standards, procedures and practices generally accepted and applied in Japan.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of March 31, 2005 and 2004 and the consolidated results of their operations and their cash flows for theyears ended in conformity with accounting principles and practices generally accepted in Japan (See Note 1).
The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader have been translated on the basis
set forth in Note 3 to the accompanying consolidated financial statements.

Hijiribashi Audit Corporation

Tokyo, Japan
June 29, 2005

Kaken Pharmaceutical Co., Ltd.

CORPORATE DATA (AS OF MARCH 31, 2005)

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

Incorporated
March 1948
Paid-in Capital¥17,836 million (As of Jul. 31, 2005)
Common Stock
Authorized: 360,000,000 shares
Issued: 97,165,635 shares (As of Jul. 31, 2005)
Number of Shareholders: 21,896
Employees (Non-Consolidated)
Administration: 136
Sales & Marketing: 964
Production & Technology: 252
Research & Development: 273
Regulatory Affairs: 44

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

Kaken Pharmaceutical Co., Ltd.

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