Kaken Pharmaceutical : Corporate Report 2023

CORPORATE REPORT 2023

Bringing Smiles to Everyone

KAKEN helps improve the quality of life of patients by serving as many people as possible to return smiles of happiness to their faces, through supplying superior pharmaceuticals.

In this endeavor, we always strive to be "the best," rather than pursuing the scale of business.

We aspire to be, and to remain, a company that can create "Joys" for patients, society and our employees.

We also hope to contribute to society by demonstrating KAKEN's distinctive and vigorous presence.

Corporate Philosophy	KAKEN helps improve the quality of life of patients by serving
	as many people as possible to return smiles of happiness to
	their faces, through supplying superior pharmaceuticals.
Business Philosophy	KAKEN "Three Joys"

C O N T E N T S

2 A History of Value Creation

Value Creation Story4 Value Creation Process

6 KAKEN's Six Types of Capital

8 Sources of Value Creation

10 President's Message

Strategy14 Priority (Material) Issues

16 Long-Term Business Plan 2031 Progress and Achievements 21 Growth Strategy

24 Sustainability Strategy

26 Engagement with Customers

28 Management Team

30 Corporate Governance

Foundation for Creating Value 34 Messages from Outside Directors 35 Compliance and Risk Management

37 Engagement with Society and Local Communities

38 Environmental Management

42 Human Resource Strategy

46 FY2022 Operating Results and Financial Condition

48 Consolidated Balance Sheets

50 Consolidated Statements of Income

51 Consolidated Statements of Comprehensive Income Financial and Corporate Data 52 Consolidated Statements of Changes in Net Assets

53 Consolidated Statements of Cash Flows

54 Notes to the Consolidated Financial Statements

86 Financial and Non-Financial Highlights​

88 Corporate and Share Information

Joy for patients	Joy for society	Joy for employees
We strive to create and	We recognize our social	Our objective is to become
supply efficacious drugs that	responsibility as a pharmaceutical	a company with vitality and
satisfy the needs of patients	company, engage in all activities	presence whose employees
and medical professionals.	with high ethical standards,	enjoy and take pride in
	and aspire to earn	their work.
	society's trust.

Editorial Policy

Our policy in issuing this report is to help KAKEN's various stakeholders (including shareholders and investors) to understand the Company's management foundation and strengths, as well as the sustainable growth it aspires to achieve through creation of corporate value in the future. We have compiled the report using the International Integrated Reporting Framework by the IFRS Foundation and Guidance for Collaborative Value Creation by the Ministry of Economy, Trade and Industry as reference.

Reporting Period

FY2022 (April 1, 2022 to March 31, 2023)

Note: Some information from before and after the period above is included.

Scope of This Report

Kaken Pharmaceutical Co., Ltd. ("the Company" or "KAKEN") and its consolidated subsidiaries (collectively, "the KAKEN Group" or "the Group")

Cautionary Statement

This report contains forward-looking statements on the Group's business. They are projections based on information available at the time this report was written, and may differ from actual results due to a variety of factors.

In addition, although this report includes information related to pharmaceuticals (including those under development), these statements are not intended to be advertisements or medical advice.

Position of the Corporate Report in Information Disclosure

To communicate with stakeholders, we use various tools to disseminate a wide range of information in addition to the information in this report. Our purpose in issuing this report is to tell our value creation story by integrating financial and non-financial information.

	Financial						Non-Financial
	Investor relations section of the Company website
		Corporate Report
	Presentation materials					ESG data (Japanese only)
							Sustainability section of
							the Company website
	Annual Securities Report
	(Japanese only) and					Corporate Governance
	Consolidated financial results					Report (Japanese only)
Investor relations section	ESG data	Sustainabiliy section of
	of the Company	(Japanese only) the Company website

KAKEN Corporate Report 2023 1

Launched Clenafin (onychomycosis treatment)

As the first topical treatment for onychomycosis in Japan, Clenafin gave patients a new treatment option that can be applied with a brush. It was discovered and developed in-house,and global sales are expanding as the product becomes available to patients worldwide, partly through out-licensingto local companies in North America, Asia and Europe.

Kyoto Research Institute (established in 1975)

Mentax, which was awarded the Okochi Memorial Grand Production Prize

Brand logo renewal

Value Creation Story

A History of Value Creation

With a deep dedication to meeting the needs of patients, KAKEN conducts collaborative research and development and clinical development with companies in Japan and overseas, in addition to in-house drug discovery, to provide products that are the first of their kind in Japan or the world.

KAKEN's History

1940S1960S

1990S

2000S and beyond

Founding Ideas

With its origins in the Institute of Physical and Chemical Research (Riken), which was established in 1917, the Company started its business in 1948 as Kagaku Kenkyusho. Its first president, Yoshio Nishina, who has been called the father of modern physics in Japan, said that his mission was to apply basic scientific research and its findings to industry, and began manufacturing and selling pharmaceuticals as a way of implementing theoretical research in business.

Technologies developed by

Riken form the roots of Kaken Pharmaceutical

With its roots in Riken, which has made many contributions to modern science in Japan, KAKEN has provided medicines to meet the needs of the times based on its technological

development capabilities. The Company applied Riken's culturing techniques to commercialize penicillin, which had been attracting interest as a treatment specifically for pneumonia, an intractable disease at the time. KAKEN took the lead in penicillin production in Japan. It went on to introduce streptomycin, a specific treatment for tuberculosis, as well as related products, forming the business foundation that led to the KAKEN of today.

The Company's first office building

Growth driven by establishment of new research facilities and a strengthened sales structure

Based on ideas from academia, KAKEN developed products from new viewpoints, including Japan's first digestive enzyme preparation in capsule form and the world's first oral anti-inflammatory enzyme preparation.The Company also applied its technologies to addressing social problems. In response to Minamata disease (methylmercury poisoning), for example, it successfully synthesized an antifungal agent to replace organic mercury compounds that were the primary medicines for athlete's foot at the time. In the 1970s, the Company opened new research facilities, and built a system capable of adapting to increasingly stringent laws and regulations, and enhanced its sales capabilities. The Kyoto Research

Institute in particular was equipped with state-of-the-art equipment and tools, demonstrating highly reliable safety testing (preclinical studies).

Provision of medicines of

excellent quality in a drive to be "the best"

In the 1990s, KAKEN increased its R&D investment and further improved its technologies. The Company became the first in the world to successfully synthesize and develop benzylamine-derived butenafine hydrochloride. Used as a treatment for athlete's foot, it had a chemical structure completely different from that of existing athlete's foot medicines, and grew into

strategic global product Mentax. For Artz, which had been sold in ampoule form, the Company launched Artz Dispo, a kit product with a disposable pre-filled syringe, to reduce the risk of infection. Underpinning the Company at this time was its belief, set forth in the late 1980s, in striving to be "the best company, even if not the biggest."

Advancing priority research themes through organizational

improvements and concentration of resources Started Long-Term Business Plan 2031 in FY2022

The Drug Research Center and the CMC

Center cooperate and collaborate in discovery research, focusing their financial

and human resources on R&D themes in

fields where their strengths can best be utilized-the immune system, the nervous

system and infectious diseases. In FY2022,

KAKEN launched Long-Term Business Plan 2031, and is working to enhance its corporate value based on its vision of being 1) a company that contributes to longer healthy life expectancy by developing and supplying innovative new drugs in a speedy manner, and 2) a research-based pharmaceutical company with a global presence, primarily in the areas of dermatology and orthopedics. In addition, we renewed our brand logo to gain broader recognition from stakeholders as we develop our business globally. The shape of the logo, which spreads out in three directions, uses the "K" in KAKEN as a motif to express the "Three Joys"-Joy for patients, Joy for society, and Joy for employees-that comprise our business philosophy. It reflects our dedication to always taking on new challenges while pursuing more advanced technology and reliable quality.

Launched Athletan (antifungal agent)

1953	Developed following initial formulation in Japan involving an animal	2014
testing method for topical antifungal agents, this product became the

foundation for current antifungal agent development. It was the first product from in-house drug discovery and played a significant role in building the Company's corporate image.

Launched Artz (anti-osteoarthritis agent)

The world's first hyaluronic acid drug administered by intra-articular

1987 injection, Artz has been marketed for more than 30 years. Widely used to treat osteoarthritis of the knee and periarthritis of the shoulder, it is one of the products that greatly expanded KAKEN's presence in the area of orthopedics.

Acquired Domestic Biotech Startup ARTham Therapeutics Inc.

2021	KAKEN bolstered its development pipeline by making its first acquisition since the
	Company was incorporated. By applying ARTham's technology and experience in
	drug repositioning, KAKEN will also enhance its own R&D capabilities.

Product History

Antifungal agent	Anti-inflammatory, analgesic	Anti-osteoarthritis agent	Wound-healing agent	Onychomycosis treatment	Primary axillary	Burn eschar removal agent
Athletan	and antipyretic agent	Artz Dispo	Fiblast	Clenafin	hyperhidrosis treatment	NexoBrid
	Brufen				Ecclock

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KAKEN Corporate Report 2023 3

Value Creation Story

Value Creation Process

With the aim of fulfilling its corporate philosophy of "help improve the quality of life of patients by serving as many people as possible to return smiles of happiness to their faces, through supplying superior pharmaceuticals," the KAKEN Group provides drugs and information that contribute to the quality of life of patients from a distinctive viewpoint. We will continue striving to create value based on our unique strengths.

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

INPUT

Financial Capital

Safe and

sound financial position

BUSINESS MODEL

We leverage our strengths to provide new treatment

options to patients. Patients and

Medical

Professionals

OUTPUT

Innovative drugs, including products that are the first of their kind in Japan

OUTCOMES

Joy for patients

• Longer healthy life

Manufacturing Capital

Operating base that ensures stable supply

Human Capital

A team of professionals

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Long-Term

Business Plan

2031

-KAKEN Vision for

Transformation-

For details, see pages 16-20

or the world

Dermatology

Clenafin		Fiblast

expectancy

• Treatments that improve

quality of life of patients

and their family members

• Meeting medical needs

for adequate treatments

• Addressing global needs

• Provision of proper

pharmaceutical and related

medical information

Contributing to people's well-being

who help to achieve the

"Three Joys"

Intellectual Capital

The source of new treatment options for patients

Social Capital

Building strong

relationships with

stakeholders

Natural Capital

Eco-conscious

business activities

For details, see pages 6-7

KAKEN's heritage

Sharing joy through

pharmaceuticals

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For details, see pages 8-9

Foundation for Creating Value

Human Resource	Corporate	Environmental
Strategy	Governance	Management
For details, see pages 42-45	For details, see pages 30-34	For details, see pages 38-41

Ecclock

Orthopedics

Artz Hernicore

Other Areas

Seprafilm		Regroth
	First in the				First in Japan
	world

Joy for society

• Development of sustainable supply chains
• Consideration for local communities and the environment based on high ethical standards
• Stable and continuous returns to shareholders

Joy for employees

• Job satisfaction as professionals who meet patient needs

through better quality of life

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KAKEN Corporate Report 2023 5

Value Creation Story

KAKEN's Six Types of Capital

We have continued to provide new treatment options to patients using the capital we have accumulated since the Company was founded.

To continue to understand and meet needs on the frontlines of healthcare, we will further build up that capital in pursuit of greater value creation.

Financial Capital Safe and sound financial position

Operating cash flow	Equity-to-asset ratio
¥9,253million	81.9%

Our continuous launch of new drugs is a stable source of revenue, based on which we are able to maintain a sound financial position, which in turn enables us to make proactive growth investments to enhance our future earnings foundation. In allocating the cash flow generated from our business activities, we give priority to research and development to create innovative new drugs that will provide joy to patients and society. By doing so, we will achieve sustainable growth in corporate value.

Intellectual	The source of new treatment options for patients
Capital
	R&D investment	Number of projects under development
	¥15,789million	8

(As of August 2023)

We deliver new treatment options for patients primarily through products in the areas of dermatology and orthopedics. In FY2022, we in-licensed two development projects for the treatment of rare diseases in new therapeutic areas. In addition to our efforts in therapeutic areas where we are strong, we will expand into rare diseases and other new areas, aggressively investing in research and development to steadily create world-class, innovative drugs.

Manufacturing	Operating base that ensures stable supply	Social Capital	Building strong relationships with stakeholders
Capital
	Capital expenditures	Manufacturing base		Sales offices	Number of countries/regions where
		efinaconazole is available
	¥1,968million	Shizuoka Factory		33	6

(As of April 2023)

Delivering stable, continuous supplies of high-quality pharmaceuticals to patients is our responsibility as a pharmaceutical company, and the Shizuoka Factory is our manufacturing site for that purpose. At the Shizuoka Factory, we are proactively investing to expand or upgrade pharmaceutical manufacturing facilities. We will improve production efficiency by making use of digital technology in production control and quality control as we work to establish and maintain a system for providing a stable supply of pharmaceuticals.

In supplying drugs to patients in Japan and overseas, it is essential to build strong relationships of trust with a wide range of stakeholders, including medical professionals and licensees. To ensure that KAKEN's pharmaceutical products are used properly, we have sales offices nationwide and have established a system for providing appropriate product information. We are also out-licensing products overseas, primarily Clenafin (INN: efinaconazole), a drug from in-house drug discovery.

Human Capital A team of professionals who help to achieve the "Three Joys"	Natural Capital Eco-conscious business activities
Number of employees	Average tenure		CO2 emissions	Energy consumption	Water consumption
(Kaken Pharmaceutical)
Male employees:	Female employees:	21,667t-CO2	11,779kl	2,808thousand m3
1,117
17.8years	19.1years

To achieve the "Three Joys" of our business philosophy, we endeavor to create an environment in which employees can enjoy and take pride in their work as professionals and can continue working with a sense of fulfillment. To foster a corporate culture that encourages employees to take on challenges, we offer personal development and reskilling opportunities, and develop employees with distinctive capabilities who can adapt to changing times. In doing so, we are transforming our organization into one where diverse people collaborate as one team.

Consideration for the environment is one of our priority issues. We are taking steps to reduce our environmental burden in all aspects of our business activities. We have set a long-term target for reduction of CO2 emissions and are implementing ongoing energy-saving activities to achieve it. Under the KAKEN Basic Environmental Philosophy, we recognize our social responsibility as a pharmaceutical company and shall take measures to address climate change and other environmental issues, and contribute to the realization of a sustainable, prosperous society.

6 KAKEN Corporate Report 2023

KAKEN Corporate Report 2023 7

Value Creation Story

Sources of Value Creation

KAKEN focuses on selected therapeutic areas and delivers new treatment options to patients.

Our ability to do so comes from our ability to perceive needs (our ability to identify issues) based on our corporate culture of adapting to the frontlines of medicine, and our ability to meet needs (our ability to find solutions) by applying a flexible approach.

Ability to Meet Needs (Ability to Find Solutions)

Ability to Perceive Needs

(Ability to Identify Issues)

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Ability to Meet Needs

(Ability to Find Solutions)

	We identify the best solution by applying a flexible approach and analyzing unmet medical needs
	using the patient feedback we obtain from medical professionals at the frontlines of medicine. We
Flexible Approach	strive to speed up the R&D process to provide the innovative drugs that patients need as quickly
as possible, not only by leveraging our own technologies and experience, but also by using
to Finding Solutions
advanced technologies and knowledge from outside the Company. We also apply the information
	that MRs obtain at the frontlines to devise product formulation and packaging solutions.

We are utilizing AI and other technologies to drive innovation

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The R&D Division aims to rapidly create innovative new drugs. We apply computerized simulations and analysis in addition to testing hypotheses through conventional experiments as we work to increase the speed of drug discovery research and improve the probability of success.

in the drug discovery process.

Hitoshi Kesamaru

In Silico Analysis Group, Chemistry Department,

Drug Research Center

model that applies KAKEN's expertise to raise our compound design to a higher level. Through collaboration and joint research with a partnership research organization (PRO), we are also strengthening our bioinformatics platform and innovating the drug discovery process by combining our

Ability to Perceive Needs (Ability to Identify Issues)

In addition to utilizing an AI drug discovery platform called Elix Discovery™, we are constructing a new AI prediction

in-house research infrastructure with the latest technologies.

Expertise and	We focus on dermatology and orthopedics, and have useful, innovative products in both of these
areas. By concentrating our efforts in these areas, we have raised the quantity and quality of the
Networks	specialized knowledge of our medical representatives (MRs), and when assigned to specific
from Focusing	regions they are able to tailor the information they provide to the medical needs of those regions.
on Specific	These actions have helped us build strong relationships of trust with medical professionals. As a
Therapeutic Areas	result, we are able to reflect the patient feedback that we obtain from medical professionals at the
	frontlines of medicine in new product development and formulation improvements.

Flexible Cooperation

To create advanced drugs that address new needs and make those drugs available to patients as quickly as possible, we assemble cross-departmental project teams for specific objectives. Through free and lively discussion based on their expertise, team members carry out efficient drug discovery. This serious and passionate approach across departmental boundaries is one of KAKEN's strengths.

We are striving to create further value, taking on new challenges by increasing cooperation with domestic and overseas biopharmaceutical startups that have innovative technologies, and with companies that have unique technologies in other areas.

I frequently go to the frontlines, and I value the information that can only be obtained by being there.

Shin Ito Tokyo Sales Office 1, Regional Marketing & Sales Department I

As a team, we are flexibly pursuing what is best for patients through open communication and smooth cooperation across departments.

KAKEN has a history of continuously providing products that are appreciated by many patients, mainly in dermatology and orthopedics. Behind that success are the strong relationships of trust we have built with medical professionals, which are the source of the Company's presence and product value. Our MRs do more than just provide information to doctors and pharmacists; by meeting frequently with medical professionals who are in close contact with patients, such as nurses and rehabilitation staff, we can explain diseases and inform them about how to use our products, as well as obtain feedback from more patients, which we then apply in our everyday work.

Although we are a pharmaceutical company, we also provide adhesion barrier materials, which are a medical device. Because of this, our MRs have opportunities to attend surgeries in operating rooms to explain the proper use of these products. By providing support to medical professionals in this setting, MRs can deepen trust. Moreover, being present to see our products properly used for the benefit of patients is a uniquely rewarding experience that other drug manufacturers do not offer. We remain committed to being a trusted medical partner through information-sharing activities.

The Medical Affairs Department is responsible for drug fostering and evolution (DFE), in other words, for increasing the value of pharmaceuticals with the information it provides to medical professionals and patients. For NexoBrid, a drug for burn eschar removal launched in August 2023, we shared information obtained from outside medical science experts, licensee MediWound and overseas scientific papers in an internal cross-departmental project from the early stages of

Takuya Nabeshima Medical Affairs Department

development. This information was reflected in easy-to- understand information materials for medical professionals and a video on drug preparation procedures, which have helped to ensure the appropriate use of the product.

We will continue working as a unified team to maximize the value of pharmaceuticals, cooperating with the highly professional employees in each department to solve problems.

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KAKEN Corporate Report 2023 9

Strategy

President's Message

The First Step toward 2031 VISION

We will promote the "Three Transformations" to contribute to well-being through better quality of life.

Hiroyuki Horiuchi

President and Representative Director

The First Year of Long-Term Business Plan 2031

which the Marketing & Sales Division directly supervises the 33 sales offices nationwide. This organization will enable faster coordination between the Marketing & Sales Division and frontline operations,

needs and create enduring products-we believe these changes to our organization will reinforce and deepen our unique strength of solving problems as a team and will speed up decision-making to achieve

For FY2022, as a positive result that will contribute in the long term, we enhanced our development pipeline by in-licensing two drugs in late-stage development for rare diseases-seladelpar, a primary biliary cholangitis treatment, and tildacerfont, a congenital adrenal hyperplasia treatment. Furthermore, in December 2022 we obtained regulatory approval for NexoBrid, a drug for burn eschar removal, and launched

for more patients.

On the other hand, financial results for FY2022 fell short of our original plan. Net sales declined due to National Health Insurance (NHI) drug price reductions in Japan and competition from rival products, and profit decreased mainly because of an increase in R&D expenses and an impairment loss associated with the termination of a development

ensuring decisions reach frontline operations smoothly and allowing frontline staff to move quickly and gather information and identify needs. In addition to our culture of adapting to the frontlines of medicine- the source of our ability to identify unmet medical

results. I have a real sense that we took positive steps in FY2022 toward achieving Long-Term Business Plan 2031, and were able to gauge the challenges we need to overcome to achieve our vision.

it in August 2023. Currently approved in over 40 countries, this topical agent removes necrotic burn tissue, or eschar, through proteolysis, a process that uses proteolytic enzymes extracted from the stem of

project by ARTham Therapeutics, a consolidated subsidiary. We regret that we were unable to achieve good results in the first year of Long-Term Business Plan 2031.

Promoting R&D Transformation and Overseas Expansion Transformation

the pineapple plant as its active ingredient. A major initiative taken on by KAKEN is to in-license products that have been launched overseas and launch them as new treatment options in Japan, where they were previously unavailable. Our hope is that these products will contribute to improved quality of life

We also made organizational changes in April 2023. In the Marketing & Sales Division, we restructured the five branches into three new regional marketing & sales departments in charge of the Greater Tokyo and Chubu, Western Japan, and Eastern Japan regions and changed to a structure in

Long-Term Business Plan 2031 presents "Three Transformations" as a strategy for achieving our vision.

In the first, "R&D Transformation," we envision continuously launching innovative, world-class drugs in our three priority fields of drug discovery. In FY2022, we established the In Silico Analysis Group and

began using AI in drug discovery to shorten the R&D period and improve the success rate of in-house drug discovery.

In January 2023, we started collaboration for creation of innovative new drugs with Axcelead Drug Discovery Partners, Inc., which has the wide range

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KAKEN Corporate Report 2023 11

of platform capabilities and extensive experience necessary for drug discovery. We will rapidly transform our discovery research process to be more data-driven so that we can produce positive results during the period of Long-Term Business Plan 2031.

The second of the "Three Transformations" is "Overseas Expansion Transformation." Here, we envision increasing our overseas sales ratio to 30% or higher by FY2031 and consolidating our position as an R&D-driven company with mainstay products in the areas of dermatology and orthopedics.

In our current product mix, we are expanding the regions where we launch our existing overseas products. For example, in May 2022 our European licensee Almirall S.A. filed an application for approval of Clenafin, an onychomycosis treatment, and in June 2023 we out-licensed Ecclock, a primary axillary hyperhidrosis treatment, to a company in South Korea. We are now preparing for our own clinical trial for KP-001, a treatment for refractory vascular malformations, in the United States. We intend to cooperate with partner companies to expand our presence in the United States, the center of the market for new drugs.

Becoming an Organization That Nurtures Professionals and Where People with Diverse Abilities Cooperate as One Team

In the third of our "Three Transformations," "Management Base Transformation," we envision increasing corporate value by establishing a strong organizational base that can flexibly respond to

when they do become leaders. I believe this will lead to their growth.

We will also take steps to boost employee motivation. Considering the current trend of

Pursuing Sustainability Based on the "Three Joys" and Striving to Achieve 2031 VISION

changes and by improving operational efficiency. The core of our management base is human capital, and we are focusing efforts on nurturing professionals and the next generation of leaders. In my view, professionals are people who take

responsibility for their work, who do not limit themselves to a single competency, but aim for more and reliably achieve goals. To develop such people, it is important to create the right environment. When I was in charge of marketing and sales, rather than giving specific instructions to each medical representatives (MRs), I encouraged them to act on their own volition. Asking them "What do you think?" helps them to think and act independently.

I have come to believe that doing this consistently leads to the growth of each individual.

To nurture the next generation of leaders, we have expanded and enhanced comprehensive education and training programs by employment year and position, and through internal and external training programs. I want employees who are not currently leaders to do their jobs with an image of

reskilling, we are enhancing online learning services for employees. For example, we have set up an environment for employees who want to work in overseas operations to learn English. In fact, I find it encouraging that more employees are taking online courses on their own volition, without being told to do so by the Company.

During the past fiscal year, we actively recruited experienced professionals in areas such as research and data science. Based on needs that our MRs can only perceive by being on the frontlines of medicine, we want to go a step further and conduct flexible problem-solving that incorporates digital technology. To do that, it is important to approach problems collaboratively as one team, integrating people who have diverse abilities. I myself create opportunities to talk with as many employees as I can, going to their workplaces to hear from them directly. If employees know that their work is being noticed and counted on, I think it motivates them to try even harder.

We established the Sustainability Committee in April 2023. Our main businesses of manufacturing and selling pharmaceuticals and agrochemicals are, in essence, sustainability initiatives, and combining them with other efforts to address sustainability issues has created a structure for sustainability management unique to KAKEN. Placing our business philosophy comprising the "Three Joys"-"Joy for patients," "Joy for society," and "Joy for employees"-at the center of our sustainability initiatives, we strive to become a company that can bring even greater joy to society by pursuing the well-being of our stakeholders.

As part of our consideration for the environment, we adopted the recommendations of the Task Force on Climate-related Disclosures (TCFD) in February 2023 and began disclosure in line with the four core elements of these recommendations in the first half of FY2023.

Our policy for shareholder returns is to provide shareholder returns aligned with profit growth by paying stable, continuous dividends and making flexible share buybacks. The annual dividend per share for FY2022 was ¥150, the same as in FY2021.

Creating KAKEN's distinctive value and providing it to society is the key to achieving 2031 VISION: "A company that contributes to longer healthy life expectancy by developing and supplying innovative new drugs in a speedy manner" and "A research- based pharmaceutical company with a global presence, primarily in the areas of dermatology and orthopedics." Long-Term Business Plan 2031 describes our vision for 10 years in the future, but it is important to know where we are headed in the first five years. We are fully committed to creating drugs that will ultimately increase our corporate value, and appreciate your continuing support as we strive for further success.

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Strategy

Priority (Material) Issues

The KAKEN Group delivers value to society and contributes to achieving a sustainable society by practicing its corporate philosophy: "KAKEN helps improve the quality of life of patients by serving as many people as possible to return smiles of happiness to their faces, through supplying superior pharmaceuticals." We believe that this will lead to the sustainable growth of the Group. In order to set out the challenges and initiatives in achieving this objective, we have identified priority issues related to the KAKEN Group's future value creation.

Process of Identifying Priority (Material) Issues

Step 1: Identify	Step 2: Compile
To determine the priority issues to be addressed through	We identified and mapped social issues on two axes:
KAKEN's business activities, the Corporate Planning &	"Relevance to KAKEN's business" and "Impact on stakeholders"
Coordination Department and the General Affairs Department	in order to narrow issues down to those with a high degree
first identified social issues, taking into account, among	of importance. From these, we compiled priority issues, their
other factors, the status of the Company's business,	associated risks, opportunities and main initiatives, taking
management plans, GRI Standards, and ISO 26000.	into account KAKEN's business philosophy.

Priority (Material) Issues

Extremely		Mapping of Priority (Material) Issues	Step 3: Designate	Step 4: Review
high
Impacton stakeholders			Priority (Material)		The items selected	These priority issues are reviewed
		Issues			designated as priority	initiatives, and stakeholder opinions
						were deliberated by	in light of changes in the Company's
							management and	operating environment, progress of
							issues for the KAKEN	collected through dialogue.
High			Relevance to KAKEN's business	Extremely	Group.
		high

Business Philosophy	Priority (Material) Issues	Associated Risks and Opportunities
"Three Joys"	(Risks: , Opportunities: )
	1 Contributing to medical solutions  For details, see pages 21-23	Insufficient development pipeline
	Changes in healthcare policies and market trends
	• Creation of innovative new drugs that satisfy unmet medical needs
	Fulfillment of unmet medical needs
	• Provision of pharmaceuticals with proven health economics
	Contribution to society and heightened Company
	• Partnerships with domestic and overseas companies and others
"Joy for patients"	presence through development of innovative drugs
We strive to create	2 Fulfilling responsibilities as a pharmaceutical company	Decline in corporate value due to disruption in supply of
and supply efficacious	pharmaceuticals
For details, see pages 26-27
drugs that satisfy the	Impact of intellectual property risks on business
needs of patients and	• Stable supply of high-quality pharmaceuticals with proven safety
Suspension of sales due to inappropriate activities
medical professionals.	• Activities to provide accurate information
Maximization of product value through stable supply
	• Intellectual property strategies
	and provision of useful information
	3 Strengthening corporate governance	Decline in stakeholder trust
	For details, see pages 30-34	Disruption of supply chain
"Joy for society"	• Strengthening relationships with stakeholders	Increased risk of violations of laws and regulations,
• Promotion of compliance	misconduct and other inappropriate actions
We recognize our	• Risk management to ensure business continuity	Earning stakeholder trust
social responsibility
as a pharmaceutical	4 Consideration for the environment  For details, see pages 38-41	Disruption in production due to factors including
company, engage in
• Proper management of waste and wastewater	depletion of water and other resources
all activities with high
ethical standards,	• Efficient use of water and other resources	Decline in public trust due to insufficient efforts
and aspire to earn	• Reduction of CO2 emissions	Cost reductions from energy conservation initiatives
society's trust.	• Supply of eco-friendly agrochemicals	Contribution to global food safety
	5 Creating fulfilling workplaces  For details, see pages 42-45	Outflow of personnel

Main Initiatives

• Focus management resources on research and development
• Promote alliances with overseas companies and others (for in-licensing of projects under development, out-licensing of in-house products, joint research and other purposes)
• Maintain domestic and international standards for good manufacturing practice (GMP)
• Contribute to better medical treatment by improving product value in ways such as generating evidence
• Utilize digital tools and other means to establish efficient systems for delivering information
• Global intellectual property strategies
• Strengthen governance framework
• Appropriate and timely information disclosure and dialogue
• Training and education in compliance, risk management, and relevant laws and regulations
• Contribute to local communities (participation in activities such as local beautification and disaster relief support)
• Develop/Update disaster and pandemic response plans
• Roll out environmental management system
• Maintain ISO 14001 certification (Shizuoka Site)
• Continue CO2 emission reduction initiatives
• Research and development of eco-friendly agrochemicals

Related SDGs

"Joy for employees"	• Generating and maintaining employment opportunities	Labor issues
• Work-style reform and improved productivity
	Decline in productivity
Our objective is to	• Employees' health, occupational safety and welfare
Corporate growth from increased employee fulfillment
become a company	• Diversity
and motivation
with vitality and	• Development of the next generation of human resources
Hiring and retention of talented personnel
presence whose
• Respect for human rights
employees enjoy and
take pride in their work.

• Work-stylereform (including digitalization of work processes)
• Appoint female directors
• Enhance systems for employing people with disabilities and seniors
• Help protect employees against disease and promote mental healthcare initiatives
• Training programs, self-development support and discrimination/harassment prevention

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Strategy

Long-TermBusiness Plan 2031 -KAKEN Vision for Transformation-

Progress and Achievements

Due to the aging of Japanese society and tighter public finances for medical care, the prescription pharmaceutical industry's business environment is expected to change dramatically. To respond to projected changes, in 2022 KAKEN created a vision for the 10 years to 2031 based on its long-term issues and set out the "3Xs" ("Three Transformations") as a strategy for achieving the vision.

Industry Environment

3Xs Strategy for Achieving the Vision

Strategy for Achieving the Vision

Target KPIs

External	Aging of society makes longer healthy life
expectancy even more important
Environment
Increased importance of ESG/SDGs
	[Japan] Shrinking market due to drug price
	revisions, decreasing population and generic
Market Forecast	penetration
	[Global] Growth in specialty areas and
	emerging economies
	The focus of medical care is broadening from
Shifts in	diagnosis and treatment to include prophylaxis
and prognosis
Healthcare
More customized medical care for each patient
Paradigm
or subpopulation by actively using genetic
	information and other healthcare data
Trends in In-	From lifestyle diseases to unmet medical needs
From small molecules to biopharmaceuticals
House Drug
and regenerative medicine
Discovery
Increased difficulty and cost in development

2031 VISION

• A company that contributes to longer healthy life expectancy by developing and supplying innovative new drugs in a speedy manner
• A research-based pharmaceutical company with a global presence, primarily in the areas of dermatology and orthopedics

1st X

R&D

Transformation

For details, see page 18

2nd X

Overseas Expansion

Transformation

For details, see page 19

3rd X

Management Base

Transformation

For details, see page 20

Vision

Continuously launch innovative, world-class drugs in our three priority fields of drug discovery

Vision

Increase the overseas sales ratio and consolidate our position as an R&D-driven company with mainstay products in the areas of dermatology and orthopedics

Vision

Increase corporate value by establishing a strong organizational base that can flexibly respond to changes and by improving operational efficiency

	FY2022	FY2026	FY2031
	¥72.9 billion	¥80.0 billion	¥100.0 billion
Net Sales
Operating	¥7.9 billion	¥18.0 billion	¥28.5 billion
Profit
ROE	4.0%	8% or higher	10% or higher
Overseas	9.9%	10% or higher	30% or higher
Sales

Ratio*

* Total for pharmaceuticals and agrochemicals

Message from the Director in Charge of the R&D Division

Mitsuru Watanuki

Director

Chief Officer of R&D Division

We will further accelerate transformation of R&D processes to generate innovation for quickly creating and supplying breakthrough new drugs.

FY2022 was the first year of Long-Term Business Plan 2031. To improve the probability of a successful launch, we focused mainly on innovation of drug discovery and other R&D processes, as well as on the progress and expansion of our development pipeline.

In new drug development, the low success rate, long development periods, and increasing development costs year after year are major challenges. Moreover, in order to demonstrate the value of their existences, pharmaceutical companies must continuously launch truly superior drugs, while the list of diseases with unmet medical need is tapering.

We are focusing on in-house drug discovery as an R&D- driven pharmaceutical company. In order to further establish a new drug discovery process that incorporates external research (contracting of drug discovery research), we began

collaboration with Axcelead Drug Discovery Partners Inc. (Axcelead DDP). Additionally, the digital transformation of research and development taking place across the pharmaceutical industry has the potential to dramatically shorten development periods. We have therefore introduced AI drug discovery engines, including Elix Discovery™, an all-in-one drug discovery platform, to start data-driven drug discovery processes quickly.

In expanding our development pipeline, a cornerstone of Long-Term Business Plan 2031, we began a Phase III clinical trial for KP-001(ART-001) in Japan. KP-001 is under development for the treatment of refractory vascular malformations, and we expect to expand its development and sales overseas in the future. In addition, a Phase I clinical trial for NM26-2198 began in the United States in collaboration with Numab Therapeutics AG for the treatment of atopic dermatitis, and for KP-910 in Japan, a drug discovered in-house for the treatment of peripheral neuropathic pain. Seladelpar and tildacerfont, which we in-licensed this year, have also been

added to our development pipeline, for a total of eight ongoing projects.

Research and development of various new modalities is taking place in addition to traditional small-molecule compounds and antibodies. We continue to explore ways to provide effective treatments by using appropriate modalities for each target molecule.

In FY2023, it is important to demonstrate that the data-driven drug discovery process we implemented in FY2022 and the various collaborations we have engaged in contribute to shortening the development period for each project, the search for original targets, and more. We will start by promoting the transformation of the R&D process. We will appropriately manage the development pipeline portfolio, ensuring the steady progress of development and drug discovery projects, including overseas development of KP-001, and determining early proof of concept (PoC).

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