Ono Pharmaceutical : Corporate Governance Report

Note: This document has been translated from the Japanese original for reference purposes only. In the event of any discrepancy between this translated document and the Japanese original, the original shall prevail.

Corporate Governance Report

Ono Pharmaceutical Co., Ltd.

Last Update: July 30, 2021

Ono Pharmaceutical Co., Ltd.

Gyo Sagara

President, Representative Director & CEO

Contact: Corporate Communications Division

Tel: [phone]

Securities Code: 4528

https://www.ono.co.jp/

The corporate governance of Ono Pharmaceutical Co., Ltd. (the "Company") is described below.

1. Basic Views on Corporate Governance, Capital Structure, Corporate Profile and Other

Basic Information

1. Basic Views

The Company believes that not only complying with laws and regulations but also strengthening supervisory functions to enhance management transparency with a view to increasing corporate value is among its management priorities.

The Company therefore has adopted an organizational framework with Audit & Supervisory Board Members (or the Audit & Supervisory Board), focusing on the enhancement of functions of the Board of Directors and the Audit & Supervisory Board, as part of endeavors to bolster corporate governance.

The Company works to ensure an appropriate number of members of the Board of Directors, with a focus on improving flexibility and expediting the decision-making process. Moreover, the Company has appointed three Outside Directors with specialized knowledge and abundant experience to maintain and improve the soundness of the Company's management as well as appropriateness of business execution, with the aim of further strengthening corporate governance.

Meanwhile, each Audit & Supervisory Board Member attends meetings of the Board of Directors and other important meetings, receives reports on business from Members of the Board of Directors, etc., and conducts hearings in order to audit execution of duties of Members of the Board of Directors. The Outside Audit & Supervisory Board Members include an attorney at law and a certified public accountant, who conduct audits from an objective and professional viewpoint.

[Reasons for Non-compliance with the Principles of the Corporate Governance Code]

The Company implements all the principles of the Corporate Governance Code.

[Disclosure Based on the Principles of the Corporate Governance Code]

UPDATED

Principle 1.4 Cross-Shareholdings Cross-Shareholdings>

The Company believes that it is essential to have partner companies with which the Company can maintain a long-term collaborative relationship, in order to discover innovative pharmaceutical products that bring true benefit to patients. The Company, therefore, holds shares that it deemed necessary to hold for strategic

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purposes, after comprehensively considering the business relationship with the issuers of those shares and the synergies created, in light of a medium- to long-term perspective for increasing corporate value.

When judging whether shareholding will lead to an increase in the corporate value of the Company from the medium- to long-term perspective, the Company reviews the purpose of the shareholding, the benefits and risks from shareholding with respect to each issuer of the cross-held shares at the Board of Directors once a year, and determines whether or not to continue holding those shares after comprehensively considering the business relationship with the issuers and synergies created as the basis for an overall review of its cross- shareholdings. For the shares that the Company decides to reduce holdings as a result of this review, dialogue will be held with the investees to obtain their understanding while implementing the reduction.

As part of the review of cross-shareholdings overall, the Company is currently implementing a plan to reduce its cross-shareholdings as of March 31, 2018 (111 issues, totaling 167.1 billion yen) by approximately 30% in three years from October 2018. Based on this plan, the Company reduced 41 issues by March 31, 2021 (a reduction rate of 36.9%). As a result, the value of its cross-shareholdings posted on the Company's balance sheet totaled 137.0 billion yen (a reduction rate of 18.0%), while their valuation based on market value as of March 31, 2018 amounted to 119.2 billion yen (a reduction rate of 28.7%).

The Company determines how it exercises its voting rights not by uniform standards, but by considering whether the cross-shareholding will lead to an increase in the corporate value of the Company from a medium- to long-term perspective, while respecting the management policies of the issuers of those shares.

Principle 1.7 Related Party Transactions

Any transaction with the related parties of the Company that may cause a conflict of interest requires approval of the Board of Directors pursuant to the Rules of the Board of Directors. In addition, transaction results are appropriately disclosed in accordance with laws and regulations.

Principle 2.6 Roles of Corporate Pension Funds as Asset Owners

In light of the fact that management of corporate pension funds impacts stable asset formation by beneficiaries and the Companies' own financial standing, the Company has set up the Corporate Pension Fund Management Committee, which is mainly comprised of managers responsible for the human resources section, the accounting section and the legal affairs section. The Committee monitors the status of the pension assets and regularly assesses the asset managers in a comprehensive manner. The Committee also reviews the composition of the assets as necessary in order to manage the pension fund appropriately.

Principle 3.1 Full Disclosure

1. Based on its corporate philosophy, "Dedicated to Man's Fight against Disease and Pain," the Company aims to discover innovative pharmaceutical products that bring true benefit to patients. In order to develop as a pharmaceutical company discovering new drugs, the Company has formulated the fundamental policy on drug discovery and challenges to tackle. The current challenges are maximizing product value, game-changing R&D, globalizing business, and strengthening corporate infrastructure. Tackling these challenges is one of the Company's medium-term management targets.
2. For the "basic views and guidelines on corporate governance," please refer to "I.1. Basic Views" of this report.
3. For the remuneration and other information of Members of the Board of Directors and Audit & Supervisory Board Members, please refer to "II.1. Remunerations of Members of the Board of Directors."
4. Appointment and dismissal of senior management officers and nomination of candidates for Member of the Board of Directors and Audit & Supervisory Board Member are discussed and approved by the Board of Directors after deliberation by the Executive Appointment Meeting, where Outside Directors account for a majority.
5. The Company explains about the reasons for nomination of Members of the Board of Directors and Audit
6. • Supervisory Members by providing brief biographic outlines and other information of individual candidates in the Reference Materials for the Shareholders' Meeting. If a proposal for dismissing a Member of the Board of Directors or Audit & Supervisory Member is submitted to a General Shareholders' Meeting, reasons for dismissal will be provided in the Reference Materials for the Shareholders' Meeting. The Company discloses any special circumstances for appointment/dismissal of senior management officers as appropriate.
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Supplementary Principle 4.1.1 Roles and Responsibilities of the Board of Directors

The Board of Directors deliberates matters stipulated by the Rules of the Board of Directors as well as the matters stipulated by laws, regulations and the Articles of Incorporation. Among the matters for deliberation by the Board of Directors, important matters on business execution are decided after taking account of the status and results of discussions by the Management Meeting and other meetings operated in accordance with the basic policies of the internal control system.

Principle 4.9 Independence Standards and Qualification for Independent Outside Directors

The Company nominates candidates for Independent Outside Director from those who have high level of expertise in corporate management on the premise that they satisfy the requirements under the Companies Act and the standards for Independent Directors set out by the Tokyo Stock Exchange.

Supplementary Principle 4.11.1 Balance, Diversity and Size of the Board of Directors as a Whole

The Company aims to have a Board of Directors with an appropriate size in line with the status of the development of the internal control system so that the Board of Directors can enhance management transparency and supervisory functions of management, and execute business based on expeditious decision- making. Currently, there are a total of eight Members of the Board of Directors.

In addition, in light of the nature of its business as an R&D-based pharmaceutical company, the Company nominates candidates for Member of the Board of Directors by taking into consideration the balance of their knowledge, experience, capability and diversity, regardless of gender, race, ethnicity, nationality and cultural background, etc., so that the Board of Directors as a whole can make technical and comprehensive management decisions to respond to the management environment surrounding the Company. Moreover, the Company has appointed three Independent Outside Directors (including one female) with a high level of expertise in corporate management to maintain and improve the soundness of the Company's management as well as appropriateness of business execution.

Nomination of candidates for Member of the Board of Directors and Audit & Supervisory Board Member is approved by the Board of Directors after deliberation by the Executive Appointment Meeting, where Outside Directors account for a majority.

Supplementary Principle 4.11.2 Positions of Members of the Board of Directors and Audit & Supervisory Board Members Held at Other Companies

The status of significant concurrent positions held by Members of the Board of Directors and Audit & Supervisory Board Members are disclosed in the Notice to Convene the General Shareholders' Meeting and annual securities report every year. The Company determines candidates for Outside Director/Outside Audit

• Supervisory Board Member of the Company after considering whether each of the candidates can appropriately fulfill his/her respective roles and responsibilities, including attendance at meetings of the Board of Directors of the Audit & Supervisory Board.
  For this reason, the Company especially confirms with the candidates for part-time Outside Directors/ Outside Audit & Supervisory Board Members whether they are able to attend at least 75% of the meetings of the Board of Directors and the meetings of the Audit & Supervisory Board (in the case of Outside Audit & Supervisory Board Members) before their appointment. Furthermore, Outside Directors (candidates) must, in principle, be able to maintain 100% attendance to the Executive Appointment Meeting and the Executive Compensation Meeting as their members. Taking into account the time required to be devoted to duties as the Company's Member of the Board of Directors or Audit & Supervisory Board Member, the Company sets a limit on the number of companies its Members of the Board of Directors and Audit & Supervisory Board Members are allowed to concurrently serve as officers or in other capacity (appointment as officers of listed companies, etc.) at up to, in principle, four companies not including the Company.

Supplementary Principle 4.11.3 Evaluation of the Effectiveness of the Board of Directors as a Whole The Company conducts self-evaluations on the composition, operation and other matters of the Board of Directors once a year with the aim of improving the effectiveness of the Board of Directors as a whole. Results of analysis and evaluation of the effectiveness of the Board of Directors as a whole conducted in 2021 are summarized as follows:

1. Method of evaluation
2. • 
     The Company conducted a questionnaire survey of all Members of the Board of Directors and all Audit
   • Supervisory Board Members requiring respondents to provide their names in the answer sheets, as well as one-on-one interviews with them, after explaining the purpose of the evaluation at a meeting of the
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Board of Directors. Based on the answers and opinions gained from the survey and interviews, the Board of Directors conducted analysis and self-assessments of its effectiveness and discussed challenges to tackle as well.

(Contents of the questionnaire and interviews)

・Size and composition of the Board of Directors ・Operation of the Board of Directors

・Roles and responsibilities of the Board of Directors

1. Summary of results of analysis and self-evaluation

• The Board of Directors makes important management decisions in an expeditious and appropriate manner, and the system that allows appropriate supervision of business execution has been ensured.
• Measures has been taken on an ongoing basis to improve the operation of the Board of Directors, including a review of matters for deliberation at the Board of Directors in light of the management environment and the situation of the Company.
• Members of the Board of Directors and Audit & Supervisory Board Members, including Outside Directors and Outside Audit & Supervisory Board Members, are freely expressing their opinions from their own perspectives, based on the common understanding of the corporate philosophy and the management issues of the Company.

Based on the results above, the Company concluded that the effectiveness of the Board of Directors of the Company has been ensured.

1. Initiatives towards the improvement of the effectiveness

Amid the drastically changing environment surrounding the Company, the Board of Directors of the Company will further improve its effectiveness by enhancing discussions on the direction of management from a medium- to long-term perspective.

Supplementary Principle 4.14.2 Training Policy for Directors and Audit & Supervisory Board Members

The Company appoints candidates for Member of the Board of Directors and Audit & Supervisory Board Member, including those for Outside Director and for Outside Audit & Supervisory Board Member, from those who are considered capable of fulfilling their expected roles and responsibilities. The Members of the Board of Directors and Audit & Supervisory Board Members newly appointed from within the Company then attend outside seminars, in order to deepen their understanding of the roles and responsibilities of Members of the Board of Director and Audit & Supervisory Board Members. On the other hand, for Outside Directors and Outside Audit & Supervisory Board Members, the Company provides trainings, in consideration of their backgrounds, to deepen their understanding of the business of the Company and industry trends. The Company also offers and arranges opportunities for trainings necessary for individual Members of the Board of Directors and Audit & Supervisory Board Members after their appointment, and bears costs for such trainings.

Principle 5.1 Policy for Constructive Dialogue with Shareholders

The Company aims to grow continuously and improve corporate value over the medium- to long-term by through holding a constructive dialogue with shareholders. Policies on the development of the systems and initiatives that facilitate such dialogue are as follows:

1. The Corporate Communications Division (Corporate Communications Department), which is under the direct control of the President is responsible for overall dialogue with shareholders and investors.
2. Opinions collected through dialogue with shareholders are appropriately conveyed to Members of the Board of Directors and Audit & Supervisory Board Members as well as relevant departments as necessary in order to share and utilize information.
3. To appropriately hold dialogue with shareholders and investors, the Corporate Communications Division (Corporate Communications Department) has built a framework of cooperation to share information with Directors of Corporate Planning, Finance & Accounting, Human Resources and General Affairs and other Departments.
4. If a shareholder requests a dialogue with the Company, the Company provides appropriate personnel for such a dialogue after confirming what the shareholder hopes and what the purpose of the dialogue is.
5. Other than personal interviews, the Company provides dialogue opportunities in the form of financial results briefings for analysts and investors after announcement of quarterly financial results, as well as annual R&D briefings. In addition, the Company actively offers briefings for individual investors hosted by securities companies.
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1. The Company works to ensure stringent management of insider information in accordance with the Regulations for the Prevention of Insider Trading. When holding dialogue with shareholders, the Company strives to disclose information in an easy-to-understand, fair and accurate manner, based on the policy on information disclosure. The Company sets a quiet period of four weeks prior to the financial results announcement, during which dialogue with investors is restricted.

2. Capital Structure

		Foreign Shareholding Ratio		From 20% to less than 30%
[Status of Major Shareholders]
		Name / Company Name				Number of Shares			Percentage
					Owned			(%)
		The Master Trust Bank of Japan, Ltd.(Trust account)	44,141,100	8.84
		Custody Bank of Japan, Ltd.(Trust account)			26,871,900	5.38
		STATE STREET BANK AND TRUST COMPANY 505001	21,422,520	4.29
		Meiji Yasuda Life Insurance Company			18,594,305	3.72
		Ono Scholarship Foundation			16,428,820	3.29
		KAKUMEISOU Co., LTD			16,161,915	3.23
		Custody Bank of Japan, Ltd.(Trust account7)			9,433,200	1.88
		MUFG Bank, Ltd.			8,640,740	1.73
		Aioi Nissay Dowa Insurance Co., Ltd.			8,193,275	1.64
		STATE STREET BANK WEST CLIENT - TREATY 505234	7,063,231	1.41
		Controlling Shareholder (except for Parent			―――
		Company)
		Parent Company			None

Supplementary Explanation

(Notes)

1. Other than the shares listed above, the Company holds 29,135,107 treasury shares (5.51%).
2. Sumitomo Mitsui Trust Bank, Limited and its joint holders, Sumitomo Mitsui Trust Asset Management Co., Ltd. and Nikko Asset Management Co., Ltd., submitted a Report of Large Volume Holding on September 23, 2020 (the date when filing requirement arose: September 15, 2020), which states that they owned shares as listed below. However, since the Company has not been able to confirm the actual number of shares owned by beneficial holders under the names of Sumitomo Mitsui Trust Asset Management Co., Ltd. and Nikko Asset Management Co., Ltd., except Sumitomo Mitsui Trust Bank, Limited, as of March 31, 2021, these shares are not included in the table of the Status of Major Shareholders above.

Name / Company Name	Number of Shares Owned	Percentage (%)
(1,000 shares)
Sumitomo Mitsui Trust Bank, Limited	3,500	0.66
Sumitomo Mitsui Trust Asset Management Co., Ltd.	15,709	2.97
Nikko Asset Management Co., Ltd.	7,576	1.43

3. Wellington Management Company LLP. and its joint holders, Wellington Management Japan Pte Ltd. and Wellington Management International Ltd., submitted a Change Report of the Report of Large Volume Holding on May 20, 2020 (the date when filing requirement arose: May 15, 2020), which states that it owned shares as stated below. However, since the Company has not been able to confirm the actual number of shares owned by the beneficial holder under the name of these companies as of March 31, 2021, these shares are not included in the table of the Status of Major Shareholders above.

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