English translation

March 6, 2017

Annual Report(January 1, 2016 through December 31, 2016)

1.

Business Performance of SymBio Pharmaceuticals Limited(1) Business conditions and operating results
The accelerated decline in birthrate and aging of the population as well as increasing medical
expenses due to the advancement of medicine have long been pointed out as major economic
and financial challenges facing Japan. Promoting the use of generic drugs, conducting
appropriate evaluation of drugs, and rectifying the problem of excessive drug administrationand left-over drugs, are the areas which enable further efficiency in medical expenditures.
In such an environment, as a symbolic measure during FY 2016, the authorities declared apolicy via an urgent NHI price revision in which new drugs with expected annual sales of over
100 billion yen on the NHI price basis would be subject to price revisions. Fundamental
reforms of the NHI price scheme are required for the further revisions of medical fees.
Thus, while the environment surrounding the Japanese pharmaceutical industry has beenchanging at an unprecedented pace, progress in the Company’s business for FY 2016 is asfollows.
(i) Domestic[Anticancer agent: SyB L-0501 (generic name: bendamustine hydrochloride, trade name:TREAKISYM®)]
The Company markets TREAKISYM® in Japan through its business partner, Eisai Co.,
Ltd. (“Eisai”), for the indications of recurrent/refractory low-grade non-Hodgkin’s
lymphoma and mantle cell lymphoma, the first-line treatment of low-grade non-Hodgkin’s
lymphoma and mantle cell lymphoma, and chronic lymphocytic leukemia. Although net
sales showed a slight decrease of 99.2% year-on-year (NHI price basis), net sales throughEisai were generally as planned.
By pursuing four indications, the Company has already obtained approvals for three
indications, and continues to pursue approval for the remaining one additional indication,
for patients who need new therapies and for maximizing the product value of these agents.

-1-

The Company filed a supplemental New Drug Application (sNDA) in Japan to thePharmaceuticals and Medical Devices Agency (“PMDA”) in December 2015 for theindication of chronic lymphocytic leukemia, and obtained approval for the additional
indication in August 2016. The Company has developed and applied for this indication
upon request of the Ministry of Health, Labour and Welfare in Japan as one of the“Unapproved or Off-Label Drugs with High Medical Needs.” This is the second approval
after the approval of an sNDA for the indication of recurrent/refractory low-grade nonHodgkin’s lymphoma and mantle cell lymphoma which the Company has already received
in October 2010.
Regarding the first-line treatment of low-grade non-Hodgkin’s lymphoma and mantle
cell lymphoma, the Company filed an sNDA in Japan in December 2015 and received
approval for additional indications in December 2016. In Europe, while the Company
received a notice from Astellas Pharma GmbH (Head office: Germany) that they withdrew
their application in January 2016, the Company, upon consultation with the PMDA, went
ahead with the procedures for obtaining approval for the additional indications in Japanand was able to obtain such approval.
Lastly, regarding the indication of recurrent/refractory intermediate/high-grade nonHodgkin’s lymphoma, the Company continues to discuss the path forward for approvalwith the PMDA.
[Anticancer agents: SyB L-1101 (intravenous formulation) and SyB C-1101 (oralformulation), generic name: rigosertib sodium]
Regarding these agents, for which a license agreement was entered into in July 2011, theCompany has changed their generic name from “rigosertib” to “rigosertib sodium” inaccordance with the notice of decision on its Japanese Accepted Names for
Pharmaceuticals (JAN) received in October 2016. For the global Phase III trial of theintravenous formulation of rigosertib sodium conducted by Onconova Therapeutics, Inc.
(Head office: Pennsylvania, U.S.; “Onconova”), the U.S. Licensor, the Company is incharge of the clinical development in Japan and started the domestic trial in December
2015. The global Phase III trial is conducted with clinical trial sites in more than ten
countries worldwide, for higher-risk myelodysplastic syndromes (HR-MDS) which do notrespond to the current standard treatment with hypomethylating agents (HMAs) or which
relapse after treatment under the current standard of care (“primary HMA failure”). The
Company completed the first patient enrollment in Japan in July 2016. Enrollments are
currently accumulating.
Regarding the oral formulation of rigosertib sodium, the Company started its domestic
Phase I clinical trial of the oral formulation of rigosertib sodium in combination with-2-

azacitidine (Note) for the target indication of HR-MDS in December 2015. However, theprovision of the investigational drug of this clinical trial by Onconova has been delayed.
At present, patient enrollment has not yet been started. As soon as this issue on theprovision of the investigational drug is resolved, the Company will resume patient
enrollment, complete this clinical trial as planned, and consider its participation in the
global Phase III clinical trial to be conducted by Onconova.
(Note) About azacitidine (Vidaza®: currently marketed by Nippon Shinyaku Co., Ltd.):
This drug was approved in 2011 upon successful confirmation of extended
overall survival for the first time in the Phase III clinical trial for the indicationof MDS, and is currently used as a first-line drug for MDS patients who havedifficulties in hematopoietic stem cell transplantation.
[Patient-controlled iontophoretic transdermal system for the short-term management of acutepost-operative pain: SyB P-1501]
In October 2015, the Company entered into an agreement with Incline Therapeutics, Inc.,a wholly-owned subsidiary of U.S.-based The Medicines Company (Head Office: New
Jersey, U.S.) for an exclusive license to develop and commercialize in Japan SyB P-1501.
The Company commenced a domestic Phase III clinical trial for SyB P-1501 in June 2016
and completed the first patient enrollment in November 2016. The Company intends tocomplete the Phase III clinical trial at the earliest possible time, with the aim of obtaining
approval by the end of 2019.
[New drug candidates]
The Company continued with search and evaluation activities to acquire license rightsof new drug candidates in global terms, aiming to grow into a biopharmaceutical company
with both profitability and growth potential, always from a medium-to-long-term
perspective. Negotiations for multiple licensing agreements are currently underway.
Meanwhile, in May 2016, the Company established a wholly-owned subsidiary, SymBio
Pharma USA, Inc. (Head office: Menlo Park, California, U.S., “SymBio Pharma USA”),
as the Company’s strategic base for its overseas business development. By actively
acquiring the worldwide rights concerning new drug candidates with SymBio Pharma USA
as the base of global business, the Company will accelerate its transformation into a global
specialty biopharmaceutical company with the aim of developing and commercializing
new drugs in the U.S., Japan, Europe and other major global markets.

-3-

(ii) Overseas
SyB L-0501 is also marketed in South Korea, Taiwan and Singapore, and sales in thesecountries have been strong.

(iii) Business results
As a result of the above, net sales totaled 2,368,112 thousand yen for the fiscal year
ended December 31, 2016, primarily reflecting product sales of TREAKISYM® in Japan.
Product sales showed a year-on-year increase of 10.6%, and the Company recorded nonrecurring revenue including resulting from achieving the sales milestone of SyB L-0501 in
Taiwan. Accordingly, overall net sales rose 22.5% year-on-year.
Selling, general and administrative expenses totaled 3,031,242 thousand yen (a year-onyear decrease of 3.3%), including research and development (“R&D”) expenses of
1,667,098 thousand yen (a year-on-year decrease of 18.1%) primarily due to expenses
associated with the clinical trial for TREAKISYM®, the intravenous and oral formulationsof rigosertib as well as SyB P-1501, and other selling, general and administrative expenses
of 1,364,143 thousand yen (a year-on-year increase of 24.0%).
As a result, operating loss of 2,127,049 thousand yen was recognized for the fiscal year
ended December 31, 2016 (operating loss of 2,551,662 thousand yen for the previous fiscal
year). In addition, the Company recorded non-operating expenses totaling 196,467
thousand yen primarily comprising foreign exchange loss of 158,514 thousand yen, stock
issuance costs of 11,658 thousand yen and commission fees of 8,975 thousand yen, andnon-operating income totaling 6,710 thousand yen primarily due to interest income of
5,235 thousand yen and dividends income of insurance of 1,221 thousand yen. This resulted
in an ordinary loss of 2,316,806 thousand yen (ordinary loss of 2,630,386 thousand yen forthe previous fiscal year) and net loss of 2,313,233 thousand yen (net loss of 2,632,095
thousand yen for the previous fiscal year).
Segment information has been omitted as the Company operates within a single segmentof the pharmaceutical industry which includes the development and commercialization ofdrugs, manufacturing, marketing and other related activities.
(iv) Capital investment
The total amount of capital expenditures during the current fiscal year was 39,682
thousand yen, mainly consisting of office facilities and the purchase of lab equipment.

-4-(2) Status of fund procurement, etc.
Issuance of the third unsecured convertible bonds with stock acquisition rights and the 39thseries of stock acquisition rights
In order to secure the funds necessary for its research and development activities, theCompany made a resolution at the Board of Directors meeting held on April 6, 2016 to
issue the third unsecured convertible bonds with stock acquisition rights (total issue price:
3 billion yen) and the 39th series of stock acquisition rights (total issue price 9,776 thousand
yen by way of third-party allotment, total issue price of stocks when issued through theexercise of stock acquisition rights: 943,592 thousand yen), and completed the payment of
3,009,776 thousand yen.
(3) Status of assets, profit and loss in the current fiscal year and the three preceding fiscal
years(Unit: thousands of yen, except for per-share figures)
FY 2013
The 9th Term

FY 2014The 10th Term

FY 2015
The 11th Term

FY 2016
The 12th Term(current)

Net sales

1,532,054

1,955,027

1,933,241

2,368,112

Operating loss

(1,680,528)(1,303,279)(2,551,662)(2,127,049)

Ordinary loss

(1,601,424)(1,110,316)(2,630,386)(2,316,806)

Net loss(1,605,224)(1,115,877)(2,632,095)(2,313,233)

Net loss per share (yen)(69.29)(36.26)(81.26)(58.82)

Total assets

7,686,947

7,453,799

4,984,289

6,878,384

Net assets

7,432,996

6,963,576

4,431,811

5,484,870

Net assets per share (yen)239.48208.80127.56108.61

Fiscal year
Classification(4) Issues to be addressed
The Company has a commitment to improve the following issues as a priority challenge formanagement.
(i) Further expansion of pipeline
In order to enhance the enterprise value as a specialty pharmaceutical company, we needto expand the pipeline through continually in-licensing of new drug candidates fordevelopment.
Clinical trials are underway for our anticancer agents: SyB L-0501, SyB L-1101-5-

(intravenous formulation)/SyB C-1101 (oral formulation) and patient-controlled
iontophoretic transdermal system for the short-term management of acute post-operative
pain SyB P-1501. Currently we are in discussion with counterparties regarding the inlicensing of several new drug candidates, and will continue with our active efforts to inlicense new products in order to further expand our pipeline.
(ii) Pursuit of life cycle management in the existing pipeline
In order to enhance the enterprise value, it is critical to maximize returns from each drug
under development by adding indications for new drug candidates after their initialintroduction in pursuit of life cycle management.
TREAKISYM® has received approval for manufacturing and marketing with theindications of recurrent/refractory low-grade non-Hodgkin’s lymphoma and mantle cell
lymphoma, chronic lymphocytic leukemia as well as the first-line treatment of low-grade
non-Hodgkin’s lymphoma and mantle cell lymphoma. The Phase II clinical trial wascompleted for recurrent/refractory intermediate/high-grade non-Hodgkin’s lymphoma.
Progress is being made with development of intravenous and oral rigosertib formulations
for the indication of myelodysplastic syndromes (MDS). No useful therapeutic agents are
currently available for this indication, so it is an area with very high unmet medical needs.
As for the global Phase III trial of the intravenous formulation for the target indicationof recurrent/refractory higher-risk MDS conducted by Onconova, the Company isconducting its clinical trial in Japan. As for the oral formulation, the Company hascompleted the domestic Phase I clinical trial as a monotherapy for the target indication oflower-risk MDS, and a Phase I clinical trial in combination with azacitidine for the target
indication of higher-risk MDS is being conducted. The Company is considering
participating in global clinical trials after completing the Phase I clinical trial. The
development for the target indication of transfusion-dependent lower-risk MDS will beconsidered, with a view to development progress by Onconova.
For the patient-controlled iontophoretic transdermal system for the management of acutepost-operative pain SyB P-1501, approval has already been granted for manufacturing andmarketing by U.S. and European regulatory agencies, and the domestic Phase I clinical trial
has also been completed, and the Phase III clinical trial is underway. The Company isaiming for the prompt acquisition of manufacturing and marketing approval for this drug
and will consider subsequent additional indications.
The aim for the future is to maximize the value of TREAKISYM®, rigosertib, and SyB
P-1501 by further expansion of indications and by following through with life cycle
management.

-6-

(iii) Global expansion for further growth
The Company has been operating its businesses not only in Japan, but also in other Asian
countries including China, Korea, Taiwan, and Singapore as our important strategic
geographic domains.
However, with expanding medical expenditures due to the aging population in Japan,
and the advent of the “era of generic drugs comprising 80% of all drugs dispensed” as anational strategy, the business environment for innovator drug developers is expected toremain severe. Also, similar policies will possibly be implemented in other Asian countries
as well.
Under these circumstances, the Company will promote global expansion aiming for
further growth. The Company will carry out the search, evaluation, and negotiation
activities for new drug candidates, in order to acquire global rights on such candidates,
utilizing its experience fostered through its business development in Asia.
(iv) Securing people
The Company places the highest priority on personnel as the Company’s principal
management resource. We cannot make superior achievements in exploring and developing
new drugs without talent. We have been continually recruiting talented people, especiallyafter being listed; we have recruited the best and brightest people in order to strengthen the
management organization. Going forward, we plan to further strengthen our humanresources by providing development programs such as OJT and other trainings.
(v) Financial issue
It is necessary for the Company to raise funds required for business activities such as
R&D expenditures as the pipeline development progresses and the number of drugcandidates increases.
Therefore, we make every effort to strengthen the financial base by continually
diversifying the method for fund procurement and reducing costs through budget control.
(5) Major business activities (As of December 31, 2016)
The Company regards underserved therapeutic areas that lack the development of new drugs,
despite significant unmet medical needs, as business opportunities. We engage in thedevelopment of new drugs with main focus in the areas of oncology, hematology, and pain
management; search and evaluation, development and manufacturing to sales are the main
activities of our business.

-7-(6) Main office and employees(i) Main office (as of December 31, 2016)
Name

Location

Main office

Minato-ku, Tokyo(ii) Employees (as of December 31, 2016)

Male

53

Increase or
decrease fromprevious fiscal
year end
2 (increase)

Female24

Total or average

77

Classification

Number of
employees1

Average age(years)Average numberof years of service

50.8

4.0

1 (increase)

44.8

5.0

3 (increase)

48.9

4.3

(Note 1) Number of employees refers to full-time employees (12 temporary employees are not included).

(7) Status of parent company and significant subsidiaries
Not applicable.
(8) Status of main lenders (as of December 31, 2016)
Not applicable.

-8-2. Matters related to stock (as of December 31, 2016)(1) Total number of authorized shares

Common stock

167,000,000 shares(2) Total number of shares outstanding

Common stock46,530,749 shares(excluding 75 shares oftreasury stock)
20,538(3) Number of shareholders(4) Major shareholders (10 largest)
Name of shareholder

Number of shares held

Shareholding ratio

Fuminori Yoshida

3,120,000

6.7%

Cephalon, Inc.

2,589,000

5.6%

SBI SECURITIES Co., Ltd.

1,924,000

4.1%Japan Securities Finance Co., Ltd.

835,400

1.8%

Eisai Co., Ltd.

833,400

1.8%

Nomura Securities Co., Ltd.

691,100

1.5%

Waseda No. 1 Investment LP

684,000

1.5%

Daiwa Securities Co. Ltd.

676,600

1.5%

Matsui Securities Co., Ltd.

661,900

1.4%

Rakuten Securities, Inc.

422,200

0.9%(Note) Calculation of issued shares (%) excludes treasury stock from the number of shares outstanding.

-9-3. Matters related to stock acquisition rights(1) Stock acquisition rights held by the Company’s Directors and Audit & Supervisory Board
Members that were issued as compensation for services (as of December 31, 2016)
The 12th series of stock The 16th series of stock The 20th series of stockacquisition rights
acquisition rights
acquisition rights
by resolution of theby resolution of theby resolution of theExtraordinary General
Extraordinary General Ordinary General Meetingof Shareholders
Meeting of Shareholders Meeting of Shareholders
on September 30, 2008
on March 30, 2010
on December 1, 2006
Number of stockacquisition rights

230

700

3,445

Number of shares to beissued upon the exerciseof stock acquisitionrights

23,00070,000344,500

Amount paid for stockacquisition rights

None

None

None

1,461 yen per share

1,169 yen per share

585 yen per share

From: August 29, 2009
To: August 28, 2017

From: October 1, 2010
To: September 30, 2018

From: April 1, 2012
To: March 31, 2020--

1,800 units (1 holder)
180,000 shares

90 units (1 holder)
9,000 shares

60 units (1 holder)
6,000 shares

600 units (2 holders)
60,000 shares

Value of property to becontributed upon theexercise of each stockacquisition right (Note1)
Period in which exerciseof stock acquisitionrights is possible
Status of possession by
Directors (excluding
Outside Directors)
Status of possession by
Outside Directors- 10 -

The 22nd series of stock The 24th series of stock The 26th series of stockacquisition rights
acquisition rights
acquisition rights
by resolution of theby resolution of theby resolution of theOrdinary General Meeting Ordinary General Meeting Ordinary General Meetingof Shareholdersof Shareholdersof Shareholders
on March 30, 2010
on March 30, 2011
on March 29, 2012
Number of stockacquisition rights

1,530

1,920

3,625

Number of shares to beissued upon the exerciseof stock acquisitionrights153,000

192,000

362,500

Amount paid for stockacquisition rights

None

None

None

585 yen per share

682 yen per share

555 yen per share

From: April 1, 2012
To: March 31, 2020

From: March 31, 2013
To: March 30, 2021

From: April 18, 2014
To: April 17, 2022-

1,200 units (1 holder)
120,000 shares

2,600 units (1 holder)
260,000 shares

200 units (1 holder)
20,000 shares

300 units (2 holders)
30,000 shares

625 units (2 holders)
62,500 shares

Value of property to becontributed upon theexercise of each stockacquisition right (Note1)
Period in which exerciseof stock acquisitionrights is possible
Status of possession by
Directors (excluding
Outside Directors)
Status of possession by
Outside Directors- 11 -

The 30th series of stock The 32nd series of stock The 35th series of stockacquisition rights
acquisition rights
acquisition rights
by resolution of the Board by resolution of the Board by resolution of the Boardof Directors meetingof Directors meetingof Directors meetingon May 14, 2013
on April 15, 2014
on March 26, 2015
Number of stockacquisition rights

1,160

2,520

2,042

Number of shares to beissued upon the exerciseof stock acquisitionrights116,000

252,000

204,200

Amount paid for stockacquisition rights

None

22,900 yen per unit
(Note 2)30,600 yen per unit
(Note 2)799 yen per share

1 yen per share

1 yen per share

From: May 15, 2015
To: May 14, 2023

From: April 16, 2017
To: April 15, 2024

From: March 27, 2018
To: March 26, 2025

645 units (1 holder)
64,500 shares

1,830 units (1 holder)
183,000 shares

1,480 units (1 holder)
148,000 shares

305 units (3 holders)
30,500 shares

690 units (4 holders)
69,000 shares

459 units (4 holders)
45,900 shares

Value of property to becontributed upon theexercise of each stockacquisition right (Note1)
Period in which exerciseof stock acquisitionrights is possible
Status of possession by
Directors (excluding
Outside Directors)
Status of possession by
Outside Directors- 12 -

The 37th series of stock acquisition rights
by resolution of the Board of Directors meetingon March 30, 2016
Number of stock acquisition rights

2,365

Number of shares to be issued
upon the exercise of stockacquisition rights

236,500

Amount paid for stock acquisitionrights27,200 yen per unit
(Note 2)

Value of property to be contributed
upon the exercise of each stockacquisition right1 yen per share

Period in which exercise of stockacquisition rights is possible

From: March 31, 2019
To: March 30, 2026

Status of possession by Directors(excluding Outside Directors)

1,490 units (1 holder)
149,000 shares

Status of possession by Outside
Directors

875 units (5 holders)
87,500 shares(Note)1. New shares were issued through the public offering on December 4, 2013, andthird-party allotment on December 25, 2013, at the paid-in amount less thanthe value of property to be contributed upon the exercise of each stockacquisition right. Therefore, the stated value of property to be contributed upon
the exercise of each stock acquisition right excluding those of the 32nd, 35thand 37th series is adjusted in accordance with the adjustment provision.
2. The person who receives the allotment of stock acquisition rights shall offset
the amount to be paid for the relevant stock acquisition rights against cash
compensation equivalent to the amount.
3. There are no stock acquisition rights held by Audit & Supervisory Board
Members.

- 13 -

(2) Stock acquisition rights distributed to the Company’s employees as compensation forservices during the current fiscal year (as of December 31, 2016)
The 38th series of stock acquisition rights
by resolution of the Board of Directors meetingon March 30, 2016
Number of stock acquisition rights

3,950

Number of shares to be issued upon
the exercise of stock acquisitionrights395,000

Amount paid for stock acquisitionrights27,200 yen per unit
(Note 2)

Value of property to be contributed
upon the exercise of each stockacquisition right1 yen per share
From: March 31, 2019
To: March 30, 2026

Status of allotment to theCompany’s employees

3,950 units (73 holders)
395,000 shares(Notes) 1. Of the stock acquisition rights mentioned above, 495 units (49,500 shares) havebeen forfeited due to the retirement of employees.
2. The person who receives the allotment of stock acquisition rights shall offset theamount to be paid for the relevant stock acquisition rights against cash
compensation equivalent to the amount.

.

- 14 -

(3) Other important matters concerning stock acquisition rights (as of December 31, 2016)
Details of stock acquisition rights attached to the third unsecured convertible bonds withstock acquisition rights and the 39th stock acquisition rights issued by resolution of theBoard of Directors meeting held on April 6, 2016 are as follows.
The 3rd unsecured
convertible bonds withstock acquisition rights
by resolution of the Boardof Directors meetingon April 6, 2016

The 39th series of stockacquisition rights
by resolution of the Board of
Directors meetingon April 6, 2016

40

104

14,218,009

4,472,000

None

94,000 yen per share

Value of property to be contributed upon theexercise of each stock acquisition right

211 yen per share

211 yen per share

Period in which exercise of stock acquisitionrights is possible

From: April 23, 2016
To: April 19, 2019

From: April 23, 2016
To: April 22, 2021

Number of stock acquisition rights
Number of shares to be issued upon theexercise of stock acquisition rights
Amount paid for stock acquisition rights- 15 -

4. The Company’s Executives (as of December 31, 2016)(1) Names of Directors and Audit & Supervisory Board Members
Company Position

Name

Responsibility / Significant
Concurrent Position

Representative Director

Fuminori Yoshida

Chief Executive Officer

Director

Naoko Iino

Director

Lowell Sears

Sears Capital Management Inc.
Chief Executive Officer

Director

George Morstyn

G & R Morstyn Pty. Ltd.
Chief Executive Officer

Director

Milton Grannatt

Director

George Vandeman

Full-time Audit &Supervisory Board
MemberTakeshi Masuda

Audit & Supervisory
Board Member

Saneaki Ichijo

Audit & Supervisory
Board Member

Chikara Shimazaki

Vandeman & Company
Principal(Notes)1. Of the Directors, Naoko Iino, Lowell Sears, George Morstyn, Milton Grannatt and George
Vandeman are Outside Directors.
2. Takeshi Masuda, Saneaki Ichijo and Chikara Shimazaki are outside members of the Audit &Supervisory Board.
3. Audit & Supervisory Board Member Chikara Shimazaki has been designated as an independent
officer pursuant to the provisions of the Tokyo Stock Exchange and registered as such with the Tokyo
Stock Exchange.
4. Full-time Audit & Supervisory Board Member Takeshi Masuda has years of experience as acorporate Audit & Supervisory Board Member at listed companies, and possesses deep insight infinance and accounting.
5. Audit & Supervisory Board Member Chikara Shimazaki is a certified public accountant(Representative of the Shimazaki accounting office) with expertise in finance and accounting.
6. Changes in Directors during the current fiscal year are as follows:- Director Takako Ebata resigned upon expiration of her term of office at the closing of the 11th
Ordinary General Meeting of Shareholders held on March 30, 2016.
- Director Naoko Iino was newly appointed as Director at the 11th Ordinary General Meeting of
Shareholders held on March 30, 2016.
7. The Company has adopted the Corporate Officer System. Corporate Officers who do not hold aconcurrent position as Director are as follows:
Corporate Officer, Executive Vice President (COO) Kazuo Asakawa
Corporate Officer
Tsutomu Abe- 16 -

(2) The summary of the contents of the liability limitation agreement
The Company has executed an agreement with each Director (excluding those who engage
in business execution) and each member of the Audit & Supervisory Board with respect
to the liability in Article 423, Paragraph 1 of the Companies Act, setting forth that thehigher of the amount of 1,000,000 yen or the amount set forth in laws and regulations as
the maximum shall be borne, in cases where such Directors or members of the Audit &Supervisory Board performed their duties in good faith and without gross negligence.
(3) Compensation of members of the Board of Directors and the Audit & Supervisory Board

Company Board

Board of Directors

Number of
Directors/Board
Members Paid
7
(Outside: 6)

Total Amount of Compensation(thousands of yen)
130,918(Outside: 51,244)

Audit & Supervisory Board

3(Outside: 3)

19,371(Outside: 19,371)

Total

10
(Outside: 9)150,289(Outside: 70,615)(Notes) 1. Salary in the event of a Director doubling as an employee is not included in the above compensation
for Directors.
2. The maximum amount of compensation for Directors was resolved as an annual amount of 130
million yen at the Extraordinary General Meeting of Shareholders held on August 3, 2005. In
addition to the aforementioned compensation, it was resolved that compensation for Directors in theform of stock acquisition rights as stock options be granted up to a maximum annual amount of 80
million yen at the 9th Ordinary General Meeting of Shareholders held on March 27, 2014. (Of 80
million yen, 30 million yen was granted for Outside Directors, which was resolved at the 11th
Ordinary General Meeting of Shareholders held on March 30, 2016.)
3. The maximum amount of compensation for Audit & Supervisory Board Members was resolved as
an annual amount of 30 million yen at the Extraordinary General Meeting of Shareholders held on
June 30, 2011.
4. The number of Directors/Board Members paid as stated above includes one person who resigned at
the closing of the 11th Ordinary General Meeting of Shareholders held on March 30, 2016.
5. The total compensation paid includes expenses (for seven (7) Directors, a total of 70,098 thousandyen) in connection with stock acquisition rights as stock options for the current fiscal year.

- 17 -

(4) Matters Concerning Outside Directors and outside members of the Audit & Supervisory
Board(i) Status of concurrent positions as an executive at other companies, and the relationshipbetween such companies and the Company
Position

Name

Responsibility at the Company and significant
concurrent position

Director

Lowell Sears

Director

George Morstyn

Director

George Vandeman

Sears Capital Management Inc. - Chief
Executive Officer
Cellerant Therapeutics, Inc. - Chairman & Board
Member
G & R Morstyn Pty. Ltd. - Chief Executive
Officer
Biomedical Research Victoria - Chairman
Vandeman & Company - Principal(Note)

There are no significant transactions between any of the above companies and the Company.

(ii) Status of concurrent positions as an outside officer at other companies and the relationshipbetween such companies and the Company
Position
Name
Responsibility and significant concurrent
position
Director
Lowell Sears
Vital Therapies, Inc. – Member of the Board
Directors
SiteOne Therapeutics, Inc. - Member of theBoard Directors
Halcyon Medical, Inc. - Member of theBoard Directors
Director
George Morstyn
GBS Venture Partners Pty. Ltd. - Member ofthe Board Directors
Proacta, Inc. - Member of the Board
Directors
Cooperative Research Centre for Cancer
Therapeutics - Member of the Board
Directors
Biomedical Research Victoria - Chairman
Director
Milton Grannatt
ARKAY Therapeutics LLC - Member of theBoard Directors- 18 -

Director(Note)

George Vandeman

Genelux Corporation - Vice Chairman

There are no significant transactions between any of the above companies and the Company.

- 19 -

(iii) Status of main activities during the current fiscal year
Position
Name
Status of
Status ofattendance atattendance
the Board of
at the Audit
Directors&
meetings
Supervisory
Board
meetings
Director
Naoko Iino
11 out of 11(100%)

Director

Lowell Sears

14 out of 15
(93%)

-

Director

GeorgeMorstyn

15 out of 15(100%)-- 20 -

Opinions at the Board of
Directors meetings and the
Audit & Supervisory
Board meetings

Naoko Iino expressed
opinions from an objective
perspective independent
from the Company’s
management engaged inbusiness operations,leveraging her wealth ofknowledge and experiencein senior management.
Lowell Sears expressed
opinions from an objective
perspective independent
from the Company’s
management engaged inbusiness operations,leveraging his wealth ofknowledge and experiencein senior management.
George Morstyn expressed
opinions from an objective
perspective independent
from the Company’s
management engaged inbusiness operations,leveraging his wealth ofknowledge and experience
as a doctor.

Position

Name

Status ofattendance at
the Board of
Directors
meetings

Director

MiltonGrannatt

15 out of 15(100%)

Director

GeorgeVandeman

14 out of 15
(93%)

-

Full-time
Audit &
Supervisory
Board
MemberTakeshi
Masuda15 out of 15(100%)

13 out of
13(100%)- 21 -

Status ofattendanceat the Audit&
Supervisory
Board
meetings-

Opinions at the Board of
Directors meetings and the
Audit & Supervisory
Board meetings

Dr. Grannatt expressed
opinions from an objective
perspective independent
from the Company’s
management engaged inbusiness operations,leveraging his wealth ofknowledge of andexperience in healthcare
industries.
Mr. Vandeman expressed
opinions from an objective
perspective independent
from the Company’s
management engaged inbusiness operations,leveraging his wealth ofknowledge and experience
as an attorney and invarious industries.
Mr. Masuda proactively
expressed opinions in aneffort to fulfill his duty ofsupervising managementfrom a neutral standpoint
and to carry out highly
effective audits byleveraging his wealth ofexperience as a corporate
Audit & Supervisory
Board Member at listedcompanies.

Position

Name

Status ofattendance at
the Board of
Directors
meetings

Audit &
Supervisory
Board
MemberSaneaki
Ichijo15 out of 15(100%)

Audit &
Supervisory
Board
MemberChikaraShimazaki

15 out of 15(100%)

Status ofattendanceat the Audit&
Supervisory
Board
meetings
13 out of
13(100%)

13 out of
13(100%)

Opinions at the Board of
Directors meetings and the
Audit & Supervisory
Board meetings

Mr. Ichijo proactively
expressed opinions in aneffort to fulfill his duty ofsupervising managementfrom a neutral standpoint
and to carry out highly
effective audits byleveraging his expertise
and wealth of experience
as an attorney.
Mr. Shimazaki proactively
expressed opinions in aneffort to fulfill his duty ofsupervising managementfrom a neutral standpoint
and to carry out highly
effective audits byleveraging his expertise
and wealth of experience
as a certified public
accountant.

(Notes) 1. With regard to Director Naoko Iino, her status of attendance at the meetings is calculated fromthe Board of Directors meetings held after her appointment in March 2016.
2. In addition to the Board of Directors meetings mentioned above, two resolutions in writing wereapproved without holding a meeting, pursuant to Article 370 of the Companies Act and Article
26, Paragraph 2 of the Articles of Incorporation of the Company, and three reports were madeto the Directors pursuant to Article 372, Paragraph 1 of the Companies Act.

- 22 -

5. Status of accounting auditor(1) Name of accounting auditor

Ernst & Young ShinNihon LLC(2) Summary of the contents of the liability limitation agreement
Not applicable.
(3) Amount of compensation
Amount paid
Amount of compensation paid to the accounting auditor
concerning the current fiscal year

15,500 thousand yen

Total amount of monetary and other property benefits to be paidby the Company

15,500 thousand yen(Notes) 1. Reasons for the Audit & Supervisory Board’ approval of the amount of compensation to be paid
to the accounting auditor
The Audit & Supervisory Board verified the contents of the audit planning by the accounting
auditor, performance of its duties in previous years, and status of planning and actual performance,
and as a result of a careful review on the adequacy of the amount of compensation for this fiscal
year, has approved the amount of compensation to be paid to the accounting auditor, pursuant to
the provisions of Article 399, Paragraph 1 of the Companies Act.
2. The amounts of compensation for audits paid in accordance with the Companies Act, and theaudits conducted in accordance with the Financial Instruments and Exchange Act, are notdistinguished in the contract agreement between the Company and the accounting auditor. It is notpossible to distinguish between compensation paid for these two types of audits; therefore the total
amount thereof is stated.

(4) Policies for dismissal or non-reappointment of the accounting auditor
When it is deemed necessary to dismiss or refrain from reappointing the accounting
auditor for reasons such as difficulty in execution of duty by the accounting auditor, theAudit & Supervisory Board shall determine the contents of a proposal to be presented to a
General Meeting of Shareholders in respect of the dismissal or non-reappointment of theaccounting auditor. In addition, when the accounting auditor falls under any of the items of
Article 340, Paragraph 1 of the Companies Act, the Audit & Supervisory Board shall dismiss
the accounting auditor upon consent of all members of the Audit & Supervisory Board. If- 23 -

this is the case, an Audit & Supervisory Board Member selected by the Audit & Supervisory
Board shall report the dismissal of the accounting auditor and the reasons for such dismissal
at the first General Meeting of Shareholders convened after the dismissal.
(5) Matters concerning disposition of business suspension imposed on the accounting auditor
during the past two years(i) The entity on which the disposition was imposed
Ernst & Young ShinNihon LLC(ii) Description of the disposition
Suspension of business related to concluding new engagement contracts: threemonths (from January 1, 2016 to March 31, 2016)
An order to improve business operations (improvement of the operation management
system)- An administrative surcharge payment order (in the amount of 2,111 million yen)(iii) Reasons for the disposition- For the audit of financial documents of Toshiba Corporation, the audit firm, in
negligence of due care, attested financial documents containing material
misstatements as if they contained no misstatements.
The audit firm’s operation was found to be significantly unjust.

- 24 -

6. System to ensure the appropriateness of operations(1) The corporate system to ensure that Directors, other officers and employees comply withlaws and ordinances, as well as the Articles of Incorporation, in the process of performing
their duties(i) The Company has its Representative Director and President to instill in all Directors,
Audit & Supervisory Board Members, and employees the Company’s policy that any
and all corporate activities should be based on the spirit of compliance with laws andthe maintenance of ethics (hereinafter “Compliance”) by repeatedly urging them toabide by the spirit of the Corporate Action Charter.
(ii) The Company promotes thorough activities for Compliance by setting up a compliancecommittee comprised of the senior manager in charge of the corporate division as
Chairman, and the head or senior managers of relevant departments as members thereof.
(iii) The Company sets up compliance hot-lines within and outside the Company, as
designated compliance liaisons for compliance-related problems, to respond to requests
for consultation from employees and make efforts to find and cure any and all unfair
acts and practices as early as possible.
(iv) The Company sets up an internal audit office as an independent organizational unit
which acts under the direct control of the Representative Director and President andregular audits are conducted by this office. Through such audits, objective assessments
are made for the effectiveness and efficiency of business, reliability of various financial
reports, safeguarding of assets, status of compliance operation and appropriateness andeffectiveness of corporate risk management, and if necessary, reasonable assurance isobtained for advice and suggestions for the improvement in maintenance and operationof internal control.
(v) The Company resolutely opposes antisocial forces and organizations that threaten theorder or safety of society as a whole.
(2) Corporate system for maintenance and control of information regarding the performanceof duties by Directors
The head of the Legal Department of the Company is the person responsible for generalmanagement of corporate documents and to appropriately maintain and otherwise
control all important documents containing information as to the performance byDirectors of their duties in addition to legally required records of proceedings ofShareholders meetings and Board of Directors meetings, as provided in laws andordinances as well as in the Company’s own “Rules for the Management ofDocuments.”- 25 -

(3) Corporate system for control of risk of loss, including in-house rules for such control
The Company practices risk control under its basic policy and related rules for suchrisk control. Usually the Company’s permanent risk-management committee, which ischaired by its Representative Director and President, monitors the conditions of risk
control, and will take appropriate measures on a company-wide basis if necessary. In
the case of an emergency, the Company will temporarily set up a headquarters with its
Representative Director and President acting as chairman thereof, and take necessary
measures in accordance with decisions made at this temporary headquarters.
(4) Corporate system to ensure the efficient performance of duties by Directors(i) Directors, other officers and employees perform their duties as provided in theprocedural rules for appropriate decision-making under the “Rules for the Board of
Directors” and “Rules for the Internal Approvals” and other similar regulations.
(ii) The Company regularly holds Executive Management Committee meetings asprovided in the “Rules for the Executive Management Committee” for the purpose ofcontributing to sound and appropriate decision-making by the Representative Director
and President.
(iii) The Company develops long-term business plans, and operates and expands its
business in accordance with such long-term plans. The Company also predetermines
numerical targets for each business year for inclusion in such long-term plans, andconducts the evaluation of business results and the control of budgets in relation tosuch numerical targets. The Company reports to the Board of Directors every monthon the status of achieving such numerical targets.
(5) Matters related to an assistant to Audit & Supervisory Board Members to be appointed attheir request
Audit & Supervisory Board Members may request that the Representative Director andPresident appoint an employee to act as an assistant to Audit & Supervisory Board
Members, and if deemed to be necessary, the Representative Director and President
shall appoint such an assistant.
(6) Matters related to the independence of the employees who assist the Audit & Supervisory
Board Members in executing their duties
Any employee shall, if and when he/she is ordered by an Audit & Supervisory Board
Member in the performance of audit-related tasks, not receive any instruction or
direction from the Director in charge, the internal audit section or any other similar- 26 -

section; further instruction or direction is to be received from the Audit & Supervisory
Board Member.
(7) Matters related to ensuring effectiveness of the Audit & Supervisory Board Members’
instructions to the employees who assist them in executing their duties
Matters such as personnel evaluation and transfer and disciplinary actions concerning
the staff who assist the Audit & Supervisory Board Members, shall be subject to theprior consent of the Audit & Supervisory Board.
(8) Corporate system for Directors and employees to report to the Audit & Supervisory Board
Members; corporate system for other reports to the Audit & Supervisory Board Members
to ensure the efficient performance of audits by the Audit & Supervisory Board Members(i) Any Director or employee shall, if and when he/she becomes aware of any fact which
threatens to cause any significant damage or could adversely affect the Company,
promptly inform the Audit & Supervisory Board Members thereof.
(ii) Audit & Supervisory Board Members may attend Board of Directors meetings,
Executive Management Committee meetings, and any other important meetings for the
purpose of gaining a better understanding of the decision-making process andconditions of business execution.
(iii) The Audit & Supervisory Board provides an opportunity for all Directors andemployees having significant work responsibilities to consult on an individual basis.
(iv) The Audit & Supervisory Board holds meetings for the mutual exchange of views andopinions with the Representative Director and President, and independent Audit &Supervisory Board Members.
(9) Corporate system to ensure prevention of disadvantageous treatment to the person who
made a report to the Audit & Supervisory Board Members merely on account of suchconduct
The Company establishes a whistleblowing system with points of contact inside as wellas outside the Company, as part of the framework for early detection of violations
against laws and regulations within the Company, while ensuring prevention ofdisadvantageous treatment to whistleblowers.
(10) Matters related to the treatment of expenses or obligations associated with the executionof duties of the Audit & Supervisory Board Members, including the procedures for
prepayment or reimbursement of such expenses(i) With respect to a claim for prepayment of expenses based on Article 388 of the- 27 -

Companies Act, made by an Audit & Supervisory Board Member in association withthe execution of his/her duties, the Company processes settlement of such expenses or
obligations without delay, unless such expenses or obligations are recognized as
unnecessary for the execution of duties of such Audit & Supervisory Board Member
based on careful discussion thereof by responsible departments.
(ii) The Company authorizes expenses for seeking opinions and advice from external
experts including attorneys and certified public accountants, if it is found necessary for
the Audit & Supervisory Board Members to execute their duties.

7. Summary of the status of operation of the system to ensure the appropriatenessof operations(1) The Company is striving to ingrain awareness of legal compliance across the organization,by thorough communication thereon to Directors and employees, through publishing
information such as the corporate conduct policy for compliance and the whistleblowing
system manual on the bulletin board of the in-house Intranet.
(2) The Board of Directors of the Company comprises six (6) Directors (including five (5)Outside Directors), in which Outside Directors participate in resolutions from an
independent standpoint and monitor and supervise the management, while each Audit &Supervisory Board Member carries out management audits as well.
(3) Full-time Audit & Supervisory Board Members attend important meetings such as theBoard of Directors meetings as well as Executive Management Committee meetings,
while having regular exchange of opinions with the Representative Director once a month.

- 28 -

Balance Sheet(As of December 31, 2016)
Item(Assets)
Current assets
Cash and deposits
Accounts receivable-trade
Merchandise and finished goods

Supplies
Prepaid expenses
Advances paid
Consumption taxes receivable

Forward exchange contracts
Other

Amount
6,685,011
5,719,325
487,471
272,725
663
79,104
66,46534,766
11,603
12,886

Non-current assets

193,373

Property, plant and equipment

74,52435,84669,497(30,819)

Buildings
Tools, furniture and fixtures(Accumulated depreciation)
Intangible assets

41,985

Software41,985(Unit: thousands of yen)
Item
Amount(Liabilities)
Current liabilities
942,118
Accounts payable-trade
321,860
Accounts payable-other552,510
Income taxes payable
36,586
Other
31,161
Non-current liabilities
451,396
Bonds payable
450,000
Provision for retirement benefits
1,396

Total liabilities(Net assets)
Shareholders’ equity
Common stock
Capital surplus
Legal capital surplus
Retained earnings(Accumulated deficits)
Other retained earnings

1,393,514
5,053,735
9,948,298
9,918,298
9,918,298(14,812,843)(14,812,843)

76,863Retained earnings(Accumulated deficits)
brought forward(14,812,843)

Shares of subsidiaries
Long-term prepaid expenses

0
11,649Treasury stock
Stock acquisition rights(17)431,135

Lease and guarantee deposits

65,214

Total net assets
Total liabilities and net assets

Investments and other assets

Total assets

6,878,384(Note) Amounts less than one thousand yen have been omitted.

- 29 -

5,484,870
6,878,384

Statement of Operations
January 1, 2016
( toFrom
December 31, 2016 )(Unit: thousands of yen)
Item

AmountI. Net sales

2,368,112

II. Cost of goods sold1,463,919
904,192

Gross profit
III.Selling, general and administrative expenses

3,031,242

Operating loss
IV. Non-operating income
Interest income
Interest on securities(2,127,049)
5,235
249
1,221
4

Dividend income from insurance
Other
V. Non-operating expenses
Interest expenses

6,710

4

Commission fee
Stock issuance cost

8,975
11,658Foreign exchange loss
Other

158,514
17,315

Ordinary loss
VI. Extraordinary income
Gain on reversal of stockacquisition rights

196,467(2,316,806)

VII. Extraordinary loss
Loss on retirement of non-current
assetsLoss before income taxes
Income taxes – current
Net loss

8,512

8,512

1,139

1,139

3,800

(2,309,433)
3,800(2,313,233)(Note) Amounts less than one thousand yen have been omitted.

- 30 -

Statement of Changes in Net Assets
January 1, 2016
( Fromto December 31, 2016 )(Unit: thousands of yen)
Shareholders’ equity
Retained earnings
Capital surplus (Accumulated
deficits)
Total
Treasuryshareholders’stockequityLegal capital Retained earnings
surplus(Accumulated
deficits) brought
forward
Other retained
earnings

Commonstock

Balance at the beginning of year

8,330,775

8,300,775(12,499,609)(17)

4,131,924

1,617,522

1,617,522－－

3,235,044

Net loss－－(2,313,233)－(2,313,233)

Net changes of items other thanshareholders' equity
Total changes of items during the
year

－

－

－

－

－

1,617,522

1,617,522(2,313,233)－

921,811

9,948,298

9,918,298(14,812,843)(17)

5,053,735

StockacquisitionrightsTotal net assets

299,887

4,431,811

Issuance of new shares (exerciseof stock acquisition rights)－

3,235,044

Net loss－(2,313,233)

131,247

131,247

131,247

1,053,058

431,135

5,484,870

Changes of items during the year
Issuance of new shares (exerciseof stock acquisition rights)

Balance at the end of year

Balance at the beginning of year
Changes of items during the year

Net changes of items other thanshareholders' equity
Total changes of items during theyear
Balance at the end of year

(Note) Amounts less than one thousand yen have been omitted.

- 31 -

Notes on Financial Statements(Significant accounting policies)(1) Valuation basis and method for assets
Marketable securities
Shares of subsidiaries

Shares of subsidiaries are stated at cost determined by themoving average method.

Available-for-sale securities
Available-for-sale securities Available-for-sale securities with determinable market
with determinable market
value are stated at fair value with any changes in
unrealized holding gain or loss, net of applicable income
valuetaxes, included directly in shareholders’ equity. Cost of
securities sold is calculated by the moving averagemethod.
Available-for-sale securities Available-for-sale securities without determinable market
without determinablevalue are stated at cost determined by the moving averagemethod.
market value
Derivative transactions

Derivative financial instruments are stated at fair value.

Inventories

Inventories held for the purpose of ordinary sale aremeasured at the lower of cost determined by the weighted
average method or net selling value.

(2) Depreciation of non-current assets
Property, plant and equipment Straight-line method(excluding lease assets)
The useful lives of major property, plant and equipment
are summarized as follows:
Building
3 to 18 years
Tools, furniture and fixtures
5 to 15 years
Intangible assets(excluding lease assets)

Straight-line method
Capitalized software costs are being amortized over theperiod of the internal use of 5 years.

Lease assets

Depreciation of lease assets is computed by the straightline method over the lease term with no residual value.

(3) Accounting for deferred assets
Stock issuance cost and bond issuance cost are charged to income when incurred.

- 32 -

(4) Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are translated into yen at
the spot exchange rate prevailing on the balance sheet dates, and resulting gains or losses
are credited or charged to income.
(5) Basis for reserves and provisions
Allowance for doubtful
accounts

The allowance for doubtful accounts is provided at an
amount determined based on the historical experience ofbad debt with respect to ordinary receivables and an
estimate of uncollectible amounts determined by reference
to specific doubtful receivables from customers which areexperiencing financial difficulties.
For FY 2016, no allowance for doubtful accounts isprovided due to no historical experience of bad debt and noreceivable balances that are deemed uncollectible.

Provision for retirement
benefits

The provision for retirement benefits is provided at an
amount to be required as of the balance sheet date.
The Company applies the simplified method to calculate
amounts of retirement benefit obligation and retirement
benefit expenses. That is, amounts of retirement benefit
obligation are the payments required for voluntary
retirement as of each fiscal year end.

(6) Accounting for consumption taxes
Transactions are recorded at amounts exclusive of consumption taxes.

- 33 -

(Notes on balance sheet)
Not applicable.
(Notes on income statement)
R&D expenses included in general and administrative expenses

1,667,098 thousand yen(Notes on statement of changes in net assets)(1) Shares issued and outstanding / Treasury stock(Unit: number of shares)

Commonstock

At the beginning of
the year

Increase

DecreaseAt the end of
the year

Shares issued

32,390,923

14,139,901－

46,530,824

Treasury stock

75

－

－

75

(2) Number of shares to be issued upon exercise of stock acquisition rights issued at the end of
the current fiscal year
Common stock
9,316,133 shares(Note) Excludes stock acquisition rights for which the commencement date of the exercise period has
not yet arrived.

- 34 -

(Notes on deferred tax accounting)(1) Significant components of deferred tax assets and liabilities
Deferred tax assets:
Excess depreciation for lump-sum depreciable assets
Excess amortization for deferred assets
Research and development expenses
Accounts payable-other
Provision for retirement benefits
Enterprise tax payable
Asset retirement obligation
Share-based compensation expense
Loss carried forward
Subtotal
Valuation allowance(thousands of yen)
2,192
871,030
854,810243
427
10,704967
95,125
1,881,788
3,717,291(3,717,291)－

Total deferred tax assets(2) Revision of amounts of deferred tax assets and liabilities due to changes in rates of corporatetax, etc.
Following the enactment of the “Act for Partial Revision of the Income Tax Act, etc.” andthe “Act for Partial Revision of the Local Tax Act, etc.” on March 29, 2016 and theenactment of the “Act for Partial Revision of the Consumption Tax Act and for the Drastic
Reform of the Taxation System for Ensuring Stable Financial Resources for Social Security”
and the “Act for Partial Revision of the Local Tax Act and Local Allocation Tax Act for
the Drastic Reform of the Taxation System for Ensuring Stable Financial Resources forSocial Security” in the Diet on November 18, 2016, the statutory tax rate used in thecalculation of deferred tax assets and liabilities for this fiscal year (however, limited to those
expected to be reversed on or after January 1, 2017), has been changed from 32.34% of theprevious fiscal year to 30.86% for those that are expected to be collected or paid during theperiod from January 1, 2017 to December 31, 2018, and to 30.62% for those that are
expected to be collected or paid on or after January 1, 2019. There is no impact from thischange in the tax rate.
(Notes on properties under lease arrangements)
Not applicable.

- 35 -

(Notes on financial instruments)(1) Financial instruments(i) Policies for financial instruments
The Company procures the funds necessary in light of the pipeline development plan
(primarily by third-party allotment and offering by new stock issuance). A temporary
surplus fund is invested in financial instruments which are highly safe and liquid.
As a principle, the Company does not enter into derivative transactions for speculative
trading purposes but uses them within the scope prescribed in the Company’s internal
rules.
(ii) Types of financial instruments and related risks
Operating receivables such as accounts receivable-trade and advances paid inconnection with joint development are exposed to the credit risk of customers and joint
development partners. Operating receivables denominated in foreign currencies are
exposed to foreign exchange fluctuation risk.
The Company intends to invest in marketable and investment securities which have arelatively low risk of falling below initial investments, however, such might entail a finite
risk.
Operating payables such as accounts payable-trade and accounts payable-other are
mostly due within 75 days. Operating payables denominated in foreign currencies are
exposed to foreign exchange fluctuation risk.
The Company uses derivative transactions to avoid foreign exchange fluctuation risks
and enters into forward exchange contracts within the scope prescribed in the internal rules
based on balances of receivables and payables denominated in foreign currencies as wellas the actual volume of exports and imports transactions denominated in foreign
currencies.
Lease and guarantee deposits are mostly security deposits related to leased officepremises and their refunds are subject to the credit risk of the lessor.
Bonds with convertible bond type stock acquisition rights are used primarily for
financing relating to R&D and have a maturity of two years and four months after thecurrent fiscal year end.
(iii) Risk management for financial instruments
1. Monitoring of credit risks (the risk that customers or counterparties may default on
obligations)- 36 -

In accordance with the Company’s internal credit policies for managing credit risk
arising from operating receivables, the Company’s marketing department periodicallymonitors the creditworthiness of major customers and monitors due dates andoutstanding balances by individual customers. In addition, the Company is making
efforts to promptly identify and mitigate risks of bad debts from customers who arehaving financial difficulties.
The Company enters into derivative transactions only with financial institutions
which have a sound credit profile in order to mitigate the counterparty risk.
2. Monitoring of market risk (the risk arising from fluctuations in foreign exchange rates,interest rates and others)
The Company deposits cash primarily with financial institutions with high credit
ratings.
For marketable and investment securities, the Company intends to avoid risks offalling below initial investments by investing in securities with a satisfactory credit
rating and investment period in accordance with the Company’s internal investment
policies.
The Company enters into forward exchange contracts in order to avoid foreignexchange fluctuation risks in connection with receivables and payables denominated inforeign currencies.
Followed by appropriate authorization procedures prescribed in the Company’s
internal rules, the Finance & Accounting department executes and monitors derivativetransactions. Monthly transaction performances are reported to the Executive
Management Committee.
3. Monitoring of liquidity risks (the risk that the Company may not be able to meet its
obligations on the scheduled due date)
Based on the report from each department, the responsible department of theCompany prepares and updates its cash flow plans on a timely basis and ensures tomaintain the liquidity on hand to manage liquidity risk.
(iv) Supplementary explanation of the estimated fair value of financial instruments
The fair value of financial instruments is based on their quoted market price, if
available. When there is no quoted market price available, fair value is reasonably
estimated. Since various assumptions and factors are reflected in estimating the fair value,
different assumptions and factors could result in different fair value.

- 37 -

(v) Concentration of credit risk
As of December 31, 2016, all operating receivables are from one particular major
customer.
(2) Fair value of financial instruments
The carrying value on the balance sheets, fair values and their difference as of December
31, 2016 are as follows.
(Unit: thousands of yen)
Carrying value(1) Cash and deposits(2) Accounts receivable-trade(3) Advances paid
Assets, total(1) Accounts payable-trade(2) Accounts payable-other(3) Income taxes payable(4) Bonds with convertible bondtype stock acquisition rights
Liabilities, total

Fair value

Difference

5,719,325
487,471
66,4655,719,325
487,471
66,465－－－

6,273,262

6,273,262－

321,860
552,510
36,586

321,860
552,510
36,586－－－450,000

448,935(1,064)

1,360,956

1,359,892(1,064)

Derivative transactions, total (*)
11,603
11,603－(*) Net assets and liabilities arising from derivative transactions are presented on a net basis andnet liabilities are shown in parentheses.
(Note) 1. Fair value measurement of financial instruments and other matters related tosecurities and derivative transactions
Assets(1) Cash and deposits, (2) Accounts receivable-trade and (3) Advances paid
The carrying value is deemed as the fair value since these are scheduled to besettled in a short period of time.
Liabilities(1) Accounts payable-trade, (2) Accounts payable-other and (3) Income taxes
payableThe carrying value is deemed as the fair value since these are scheduled to besettled in a short period of time.

- 38 -

(4) Bonds with convertible bond type stock acquisition rights
The fair value of bonds with convertible bond type stock acquisition rights is
calculated by discounting total amounts of principal and interests at a rate
reflecting the remaining redemption period and credit risk.
Derivative transactions
Forward exchange contract
The fair value of forward exchange contracts is measured based on market
quotes obtained from financial institutions.
(Note) 2. Financial instruments whose fair value is extremely difficult to determine
Lease and guarantee deposits (carrying value of 65,214 thousand yen) are notincluded in the above tables since no market quote is available and their fair value
is extremely difficult to determine.
(Note) 3. The redemption schedule for monetary assets and securities with maturities

Due in one
year or less
Deposits
Accounts receivable-trade
Advances paid
Total

5,719,293
487,471
66,465
6,273,230

Due after
one yearthrough five
years
－
－
－
－

(Unit: thousands of yen)
Due after
five years
Due after
through ten
ten years
years
－
－
－
－
－
－
－
－

(Note) 4. Maturities of bonds with convertible bond type stock acquisition rights after the
fiscal year end(Unit: thousands of yen)
Due after Due after Due after Due after
Due in one one year two years three years four years Due after
year or less throughthroughthroughthrough five years
two years three years four years five years
Bonds withconvertible bondtype stockacquisition rights
Total

－

－

450,000

－

－

－

－

－

450,000－－－- 39 -

(Notes on per-share information)(1) Net assets per share(2) Net loss per share
Average number of shares outstanding during the year

108.61 yen(58.82) yen
39,329,706 shares(Other notes)
The Company has overdraft and commitment line contracts with three banks in a business
relationship to efficiently procure working capital. The status of the bank overdraft and loan
commitments based on these contracts at the end of the current fiscal year is as follows:

Total amounts of bank overdraft limit and loan
commitment line

(Unit: thousands of yen)
1,350,000－
1,350,000

Balance of borrowing outstanding
Unused balance- 40 -

(Significant subsequent events)(Significant subsequent events)（1）Issuance of new shares through the exercise of stock acquisition rights regarding bonds
with stock acquisition rights
During the period from January 1, 2017 to February 17, 2017, third unsecured bonds withconvertible bond type stock acquisition rights was converted into new shares through the exerciseof the rights. The summary of such exercise of stock acquisition rights is as follows.

Total amount issued:
Amount of decrease in bonds with convertible bond

2,132,700 shares ofcommon stock
450,000 thousand yen
450,000 thousand yen

type stock acquisition rights:
Amount transferred to common stock (capital):

225,000 thousand yen

Number and type of shares issued:（2）Issuance of new shares through the exercise of stock acquisition rights
During the period from January 1, 2017 to February 17, 2017, a portion of the 39th series ofstock acquisition rights was executed to new shares. The summary of such exercise of stockacquisition rights is as follows.
301,000 shares ofcommon stock
7 units

Number and type of shares issued:
Number of stock acquisition rights
Number of unexercised stock acquisition rights
Total amount issued:

97 units

Amount transferred to common stock (capital):

32,084 thousand yen- 41 -

64,169 thousand yen

Independent Auditor’s ReportFebruary 17, 2017
The Board of Directors
SymBio Pharmaceuticals Limited
Ernst & Young ShinNihon LLC

Tomoaki Minamiyama
Certified Public Accountant
Designated and Engagement Partner

Kazuto Shiratori
Certified Public Accountant
Designated and Engagement Partner

Pursuant to Article 436, Section 2, Paragraph 1 of the Companies Act, we have audited theaccompanying financial statements, which comprise the balance sheet, the statement of income,the statement of changes in net assets, the notes to the financial statements and the related
supplementary schedules of SymBio Pharmaceuticals Limited (the “Company”) applicable to the12th fiscal year from January 1, 2016 through December 31, 2016.
Management’s Responsibility for the Financial Statements and the Related Supplementary
Schedules
Management is responsible for the preparation and fair presentation of these financial statements
and the related supplementary schedules in accordance with accounting principles generally
accepted in Japan, and for designing and operating such internal control as management
determines is necessary to enable the preparation and fair presentation of the financial statements
and the related supplementary schedules that are free from material misstatement, whether due
to fraud or error.

- 42 -

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements and the related
supplementary schedules based on our audit. We conducted our audit in accordance with auditing
standards generally accepted in Japan. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and the related
supplementary schedules are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the financial statements and the related supplementary schedules. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of material
misstatement of the financial statements and the related supplementary schedules, whether due
to fraud or error. The purpose of an audit of the financial statements is not to express an opinion
on the effectiveness of the entity’s internal control, but in making these risk assessments theauditor considers internal controls relevant to the entity’s preparation and fair presentation of thefinancial statements and the related supplementary schedules in order to design audit proceduresthat are appropriate in the circumstances. An audit also includes evaluating the appropriatenessof accounting policies used and the reasonableness of accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements and the related
supplementary schedules.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide abasis for our audit opinion.
OpinionIn our opinion, the financial statements and the related supplementary schedules referred to above
present fairly, in all material respects, the financial position and results of operations of SymBio
Pharmaceuticals Limited applicable to the 12th fiscal year ended December 31, 2016 inconformity with accounting principles generally accepted in Japan.
Conflicts of Interest
We have no interest in the Company which should be disclosed in compliance with the Certified
Public Accountants Act.

- 43 -

Report of the Audit & Supervisory Board
We, Audit & Supervisory Board Members, prepare this report of audit with regard to the
execution of DdDirectors’ duties during the 12th Term of the Company from January 1, 2016 to
December 31, 2016, as the unanimous opinion of all the Audit & Supervisory Board Members
after careful discussion based on the audit reports prepared by respective Audit & Supervisory
Board Members, and report as follows.
1. Method and Contents of the Audit by the Audit & Supervisory Board Members and the Audit& Supervisory Board
The Audit & Supervisory Board formulated the audit policy and plan for the Term reported,
and received reports from the respective Audit & Supervisory Board Members with regard to thestate of implementation and results of audits as well as received the reporting from Directors andthe accounting auditor with regard to the state of execution of their duties, and requested
additional explanations as deemed necessary.
The respective Audit & Supervisory Board Members, in conformity with the standards foraudits by Audit & Supervisory Board Members that the Audit & Supervisory Board set forth andin accordance with the audit policy and plan for the Term, strove to collect information andimprove audit environments by communicating with Directors, the internal audit section, andother employees. We also attended Board of Directors meetings and other important meetings,
received the reporting from Directors and employees with regard to the state of execution of theirduties, requesting additional explanations as deemed necessary, reviewed documents forimportant settlements, and researched the situation of operations and assets. Moreover, withregard to the system to ensure that the execution of Directors’ duties described in the business
report was compliant with laws and ordinances and the Company’s Articles of Incorporation andother systems required to secure the appropriateness of operations as a stock company maintained
based on the contents of resolution by the Board of Directors with regard to the maintenance ofsystems stipulated by the Ordinance for Enforcement of Article 100, Paragraph 1 and 3 of theCompanies Act (hereinafter the “Internal Control System”), we received reporting on the statusof their establishment and operation from Directors and employees, requested additional
explanation as deemed necessary, and expressed our opinion. Based on the method describedabove, we reviewed the business report and supplementary documents with regard to the Term
reported.
In addition, we monitored and inspected the independent position of the accounting auditor
and the execution of appropriate audits by the accounting auditor, and also received the reportingfrom the accounting auditor with regard to the state of execution of its duties, requesting- 44 -

additional explanation as deemed necessary. Furthermore, we received the notification from theaccounting auditor that “the system to ensure that its duties are executed as appropriate (the items
listed by the respective paragraphs of Article 131 of the Ordinance on the Accounting ofCompanies)” is maintained in accordance with “the standards for quality control of audits(Business Accounting Council, October 28, 2005),” requesting additional explanation as deemednecessary. Based on the method described above, we reviewed the financial report (includingbalance sheet, profit and loss statement, statement of changes in net assets, and notes on nonconsolidated financial statements) and supplementary statements for the Term reported.
2. Results of audit(1) Results of the audit of the business reporta. We admit that the business report and supplementary statements fairly present theCompany’s situation in accordance with laws and ordinances and the Company’s
Articles of Incorporation.
b. No misconduct in the execution of Directors’ duties or any material facts inviolation of laws or ordinances or the Company’s Articles of Incorporation wasobserved.
c. We admit that the contents of resolution by the Board of Directors with regard to
the Internal Control System are appropriate. Also, there is no matter to be noted as
for the descriptions in the business report regarding such Internal Control Systemand the execution of Directors’ duties.
(2) Results of the audit of the financial statements and related supplementary statements
We admit that the method for and result of audits conducted by Ernst & Young
ShinNihon LLC, the accounting auditor, are appropriate.

February 23, 2017

- 45 -

Audit & Supervisory Board,
SymBio Pharmaceuticals Limited

Takeshi Masuda, (seal)
Full-time Audit & Supervisory Board
Member (Outside)

Saneaki Ichijo, (seal)
Audit & Supervisory Board Member(Outside)

Chikara Shimazaki, (seal)
Audit & Supervisory Board Member(Outside)

End of Report

End of Document- 46 -