TOWA PHARMACEUTICAL : INTEGRATED REPORT 2021

TOWA PHARMACEUTICAL

INTEGRATED REPORT

2021

Vision

We contribute to people's health

We are dedicated to people's genuine smiles

Genuine smiles

People's health

Supporting genuine smiles through everything that is contributing to health

Towa Group contributes to people's health by creating superior products and services.

Through our corporate activities, we aim to be a company that is valued and needed by patients,

medical professionals, local communities, and others.

INDEX

Our History and Today

1. Vision
2. Contents and Editorial Policy
3. Our History

1. Social Issues Addressed by Towa Group

1. Towa Group's Strength

Towa Group's Value Creation

1. Feature Topic 1: Quality Control and Stable Supply

1. Feature Topic 2: Developing Overseas Market

1. Financial and Non-Financial Highlights

1. Message from the President

1. Our Value Creation Process

1. External Environment Surrounding Towa Group
2. Towa Group's Capital
3. Looking Back on Previous Mid-term Business Plan
4. New Mid-term Business Plan

1. Businesses Pursued by Towa Group

Foundation Supporting Business

31 Governance

1. Risk Management
2. Risk Information
3. Compliance
4. Message from the Outside Directors
5. Board Members
6. Society

46 Environment

Financial and Corporate Data

47 11-Year Financial Summary

49 Management Discussion and Analysis of Financial Position, Operating Results, and Cash Flows

51 Corporate Data

[ Editorial Policy ] We issue Towa Pharmaceutical Integrated Report to communicate to shareholders, investors, and other stakeholders Towa Group's efforts to enhance our corporate value. This year's report presents our value creation story in the value creation process and the message from the President. It also explains our efforts to realize our vision through the 5th Mid-term Management Plan (2021-2023) PROACTIVE II formulated in May 2021. We strive to improve the content of the report to respond to various opinions and interests of our stakeholders. We look forward to your candid feedback.

[ Scope Covered ] Towa Group's consolidated accounts including some consolidated and non-consolidated figures in Japan.

[ Period Covered ] FY2020 (From April 1, 2020 to March 31, 2021)

* The financial information is as of March 31, 2021. The report also covers some initiatives that were taken before April 1, 2020 or after March 31, 2021.

[ Guidelines for Reference ] International Integrated Reporting Framework issued by the International Integrated Reporting Council (IIRC) Guidance for Collaborative Value Creation issued by the Ministry of Economy Trade and Industry

[ Forward-looking Statements ] In this report, described statements other than historical facts are future forecasts based on forward-looking statements and plans. These future forecasts contain factors, such as risks and uncertainties, and actual results and performances may differ from the forward-looking statements.

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Our History

History of Towa

Since our establishment in 1951, we have strived to research, develop, manufacture, and sell generics for 70 years. While promoting stable supply, quality assurance, and information provision, we will continue to focus on research and development of ingenious pharmaceutical products that are "easier to take" and "easier to handle." At the same time, we work to construct a structure that can provide Towa Group's value-added products to patients around the world and to create new health-related businesses in response to the new medical system.

*The years shown are fiscal years.

20102019

Acquired Daichi Kasei Co., Ltd. as a subsidiary

2016

Acquired Pensa Investments, S.L. in Spain as a subsidiary to enter into new markets

Current trade name: Towa Pharma International Holdings, S.L.

Production system

14.0 billion

tablets

Production capacity

11.0 billion tablets

Production system

14.0 billion

tablets

Production capacity

10.5 billion

tablets

Production system

14.0 billion Consolidated Sales

tablets for FY2020

Production capacity	JPY
11.5 billion
tablets	154.9
		billion

140.0

120.0

1951	Established	1996		2000	Launched value-added products
			Itsuro YOSHIDA was appointed President		Acquired J-Dolph Co., Ltd. as
1957	Started selling OTC drugs		and Representative Director	2003
	a subsidiary

1997

Established Greencaps

Pharmaceutical Co. Ltd.

Established T Square Solutions Co., Ltd.

2018 as a joint venture with TIS Co., Ltd. to create new businesses

			Production capacity
			8.5		billion
Production capacity
tablets
7.5 billion
tablets

100.0

80.0

1965	Shifted to manufacturing and			2004	Established
selling ethical drugs from OTC																			60.0
		RACTAB Technology
	drugs	Constructed new corporate headquarters
		1998		2004	Listed on the first section of																40.0
				the Tokyo Stock Exchange
		Constructed Osaka Research Center
[ Trends in Consolidated Sales ]																						20.0
1951 1970	1980	1990	2000	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	0

1st Growth Period from our establishment to FY2001

2nd Growth Period from FY2002 to FY2020

3rd Growth Period from FY2021

History of initiatives based on measures to promote the use of generics

	Osaka
		1977
Production
Okayama
	1983
system

Yamagata

Generics volume share targets set

2007

30% or more

by the government

by FY2012

Constructed

Constructed

1981

2005

Osaka Plant

Osaka 2nd Plant

Completed

Constructed

Expand the

rebuilding the

1995

the

1996

solid formulation

formulation

packaging

building in

building

Okayama Plant

building

Purchased Mect Co., Ltd.'s

1998

2008

Tohoku Plant

2013

60% or more

by the end of FY2018

Constructed New Osaka Plant (current Osaka Plant)

(Production capacity: 2.5 billion tablets)

2012

Started the plan

to construct 2012 Yamagata Plant

2015						2017
Boosting volume share target of generics up to 70% or
	80% or more
more in mid-FY2017 and 80% or more in
	by September 2020
the earliest possible period before the end of FY2020
			Expanded the warehouse and
	2013
		testing area in the Osaka Plant
					Expand the 2nd solid
	Constructed the 2nd solid
	2016	formulation building		2017
	formulation building in West
	Japan Distribution Center		(Production capacity: 2.5 billion tablets
						→ 3.5 billion tablets)
	Constructed Yamagata					Constructed
	Plant and East Japan		2017			(relocated)	2017
	Distribution Center				East Japan

(Production capacity:	Distribution Center
2.5 billion tablets)

Rebuilt the solid formulation building

(Production capacity: 3.5 billion tablets

• 5.0 billion tablets)

Renovated the solid formulation building and constructed the 2nd solid formulation building

(Production capacity: 2.5 billion tablets

• 3.5 billion tablets)

The production system achieved 6.5 billion tablets, and the Company has expanded its facilities since 2019.

		2011	Sales offices (as of October 2021): 71 offices
Sales		Towa Direct Sales
	Agents (as of October 2021): 31 agents at 59 sites
system		System
			Started collaboration with two wide-area wholesalers in 2017

Shifted to

Towa Sales System

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Social Issues Addressed by Towa Group

Japan's National Health Insurance System boasts the highest degree of fulfillment in the world. Every individual must save on medical costs to maintain this system. In this regard, choosing generics is an easy way for everyone to save the costs and one of the possible social contributions in our daily lives. We will address the social issues by creating related businesses that contribute to human health with generics business set as our core business.

Challenges

Swelling medical costs in Japan

To maintain the National Health Insurance System in the future

Towa Group's Initiatives

Generics contribute to cutting medical costs

Offering more than 750 products in our lineup

In Japan, medical costs continue to increase at a rate of approximately JPY 1 trillion per year in the context of an aging population and sophisticated medical care. The Ministry of Health, Labour and Welfare estimates that the amount will exceed JPY 60 trillion in 2025. On the other hand, as the workforce supporting insurance premiums and taxes decreases, the prerequisites for system design are likely to collapse. If medical costs continue to swell as estimated, some undesirable events may happen: an increase in patients' burden of medical costs and the taxes, and a loss of access to medical care that we naturally have had up to now. Stemming the increase in medical costs is essential to keep the National Health Insurance System in the future.

Medical costs continue to
increase at a rate of approx.
JPY 1 trillion per year
1985	1990 1995 2000 2005 2010 2015 2025
	(Forecast)

"Outline of National Medical Care Expenditure in 2015" released by the Ministry of Health, Labour and Welfare "Materials for the Medical Insurance Subcommittee, 76th Social Security Council"

Desiring to be of service to as many patients as possible, we provide value-added generics through cumulative improvements by responding to and satisfying requests voiced by medical professionals. We offer more than 750 products in our lineup to cover various therapeutic areas. We manufacture our products with particular attention to active pharmaceutical ingredients (APIs) to deliver safe and secure generics, which is one of our unique features. Our mission is to deliver drugs that are not merely low-cost but "more easily taken and handled" to a large number of people.

Ingenuity for products that can be more easily and safely taken by patients

Choosing generics cuts medical costs

Choosing generics enables us to cut the burden of medical costs (drug costs). This will reduce both the burden of medical expenses on individuals and contributions by the Japanese government and health insurance associations. For instance, we can save approximately JPY

900.0 billion in the annual cost of drugs just by replacing as many drugs as possible with generics.

*Our estimation as of July 2021

New drugs	Raw materials cost
and business	R&D expenditure
(brand-name drugs)
operation cost

Raw materials cost

Generics and businessR&D expenditure operation cost

Comparison of drug prices (conceptual chart)

Orally disintegrating (OD) tablets	Micro-granulation that reduces roughness	Smaller tablets with the same amounts
that can be taken without water	perceived when taking medicines	of active ingredients

Masking technology used to reduce	Product name printing to make medicine	Efficacy labels and letters to make drugs
bitterness by coating tablets	identity easily discernable even after scoring	more easily discernable
		Efficacy label

Extension of healthy life expectancy and disease prevention

Extending the healthy life expectancy toward the era of the 100-year Life is a major issue in Japan facing a super-aging society. The healthy life expectancy is proposed by World Health Organization (WHO) in 2000. In the past, we had emphasized the average life expectancy of a child aged 0, indicating how many years he or she can live. However, the healthy life expectancy, a period of healthy living, has attracted attention in recent years. Preventing disease and staying healthy and active is key to prolonging the healthy life expectancy. Moreover, extending the healthy life expectancy is essential from the viewpoint of curbing medical costs.

Considering care of pre-symptomatic diseases and disease prevention as well as contribution in medical care

Based on our vision: "contribute to the health of people," we aim at contributing to medical care through generics business as well as through the care of pre-symptomatic diseases and disease prevention to extend the healthy life expectancy. In the care of pre-symptomatic diseases, we are developing a wide range of health-related initiatives, including developing new products and services, looking at returning conditions before the onset of illness to healthy conditions or preventing them from deteriorating. We have started initiatives for disease prevention, such as disease risk testing service business to keep good health.

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Towa Group's Strength	Generics are marketed later than new drugs (brand-name
	drugs); therefore, we can produce better products with the
	same efficacy, quality, and safety as the new drugs by
	utilizing the latest formulation technologies. We are
	engaged in various initiatives to provide easy-to-take,
	easy-to-handle, safe drugs, let alone quality and safety.

Development of APIs

Developing and selecting the best API for manufacturing products

We use APIs meeting our original strict quality standard among country- authorized APIs. We also actively research APIs and select the best APIs for creating products based on our accumulated know-how. Additionally, we have established a manufacturing method for the APIs in-house and a system to outsource the production of the APIs to Daichi Kasei Co., Ltd., a group API manufacturer, and a collaborative APIs manufacturer. We regularly inquire and confirm each manufacturer whether it manufactures the drugs in accordance with standards, laws, and regulations to enable the stable procurement of the API.

Related information See page

41.

Product development

Based on our technologies and experiences, developing products that can be more easily taken and handled

We have the lineup consisting of more than 750 products to cover various therapeutic areas. With the desire to serve as many patients as possible, we offer value-added generics by responding to voices and requests from medical professionals and reflecting them in our manufacturing process. Among them, we have been developed better dosage forms and tastes so that they can be easily taken by pediatric patients and the elderly, and enhanced visibility and stability against light, temperature, and humidity so that they can be easily handled at hospitals and pharmacies.

Related information See page

27.

Quality control

Working diligently to ensure reliable quality and safety

In order to be a trustworthy company, we comply with strict quality control standards stipulated by the government, from product R&D, manufacturing, marketing, and after-sale operations. We carry out company-wide quality control initiatives to establish the quality assurance system required for ethical medicines. Especially in manufacturing pharmaceutical products, we strive to ensure adequate quality and safety through our specific system, education and training, and other ways as well as to comply with the Good Manufacturing Practice (GMP) established by the government and other related laws and regulations.

Related information See page

42.

Development of APIs

Product development

Quality control

Stable product supply

Information provision

Fostering talented human resources

Stable product supply

Established production capacity with three plants to ensure stable supply at any time

By adopting a back-up system supported by three sites, we ensure that any production disruption at one plant can be compensated by efforts at the other plants. Furthermore, by dividing the physical distribution bases in East Japan and West Japan, we have established an efficient arrangement and a reliable back-up system even in a worst-case scenario. At present, all the three plants can produce a total of 11.5 billion tablets* annually. We are expanding our production volume to 14.0 billion tablets by the end of FY 2022, aiming for further increasing demand. Furthermore, we plan to build 3rd solid formulation building in Yamagata Plant by the end of FY2023 and achieve the production capacity of 17.5 billion tablets after FY2024.

Related

*Production capacity of tablets and capsulesinformation See page

41.

Information provision

Active provision of relevant information to enable patients and medical professionals to feel comfortable while using ethical medicines

We have established a system that enables the prompt and appropriate provision of information on the proper use of our products and academic information to medical professionals, mainly through specially trained medical representatives (MR), to ensure that generics are used with reassurance. We also provide patients and their families with information to ensure their safe use of pharmaceuticals. In addition to providing information, we collect opinions from medical institutions and share feedback internally for creating better products.

Related information See page

40.

Fostering of talented human resources

Focusing on making job satisfaction and fostering talented human resources aiming for being a reliable company

We aim to be a more trusted and needed company as a comprehensive generics manufacturer. Under the belief that talented human resources are the foundation of a trusted company, we work to make job satisfaction, foster talented human resources, and strengthen our organization. The 5th Mid-term Business Plan 2021-2023 PROACTIVE II that will end in FY2023 sets out "Making Job Satisfaction and Fostering of Talented Human Resources" as one of the priority policies. While aiming for job satisfaction for each employee motivated by individual talent improvement and career enrichment, we seek to strengthen our system for encouraging employee growth.

Related information See page

43.

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