H.U. Group has specified the following business risks including significant business risks as the matters which may substantially affect the judgment of investors.
Significant Business Risks
(1) Risks related to mergers and acquisitions (M&A)
The Group considers and executes M&A deals in the fields of its existing businesses both inside and outside Japan as part of its growth strategy to enhance corporate value.
When executing M&A deals, each operating company, along with the Company’s specialized departments, investigates and studies profitability and investment recoverability in advance. The Company also seeks the advice of outside experts such as lawyers and accountants when needed.
However, acquired businesses may not meet expected targets due to sudden changes in their business climate or unforeseen circumstances post acquisition, which could have an adverse effect on the Group’s business performance and financial condition.
(2) Risks related to impairment accounting
The Group owns a number of tangible and intangible fixed assets, including goodwill, as well as investment securities. Impairment is required in the event that the value of these assets declines or if their expected future cash flows are unlikely to occur. This could adversely affect the Group’s business performance and financial condition.
(3) Risks related to accuracy control
The Group’s accuracy controls are an extremely important element for maintaining the accuracy of testing results. The Group’s primary CLT business companies participate in surveys by the Japan Medical Association, Japanese Association of Medical Technologists, Japan Registered Clinical Laboratories Association, and other public institutions to ensure thorough accuracy controls. In addition, the Company is focusing on establishing its own internal structure for improving testing quality, including acquiring certification for the service mark of the Japan Health Enterprise Foundation, College of American Pathologists (CAP), Clinical Laboratory Improvement Amendments (CLIA), and ISO 15189. The Company strives to prevent mistakes in the CLT business by developing a structure that can quickly identify events and consider their causes and countermeasures. Other preventative efforts include improving procedures, implementing automation, and increasing rigor in employee training.
However, if testing cannot be conducted appropriately due to human error or other unforeseen circumstances, the Group’s business performance could be adversely affected due to declining test accuracy and loss of credibility.
(4) Risks related to information handling and information systems
The Group retains vast quantities of data, including personal and patient’s testing information. As a result, one important management task is to ensure the security of this information and build a corresponding structure that complies with Japan’s Personal Information Protection Act. As part of these efforts, SRL, Inc. acquired PrivacyMark certification in February 2005. SRL has also acquired the ISMS and ISO/IEC 27001 certifications for security countermeasures in information systems. The Group also utilizes multiple information systems for the execution of business. It strives to operate these in a stable manner, and to modify and upgrade aging systems. Further, it works to build information systems that help to prevent data leakages and to ensure their operational rules are well-understood so that this purpose can be achieved.
However, information systems can fail to operate normally due to software or hardware problems, human errors, disasters, criminal activities, cyberattacks, infection by computer viruses, or terrorism. These failures could result in exposure of personal information, large-scale stoppage of services, wrongful billing, delayed test reports, or loss of data, leading to lost credibility of the Group and its products and services, and furthermore adversely affect the Group’s business performance.
The Group develops its own information systems for business execution. Efforts are being focused on reinforcing project management, including obtaining outside evaluations for system development by a third-party as needed. If development plans are delayed, development costs rise, or the planned functions cannot be implemented, the Group’s business execution could be inhibited, and development costs may be unrecoverable.
(5) Impacts due to the stoppage of or constraints placed on business activities as a result of man-made disasters, infections, etc.
The Group’s business performance could be adversely affected by fires, labor disputes, facility accidents or other man-made disasters at the Group’s business locations. The Group’s business performance could also be adversely affected by pandemics that interfere with our operations due to their high infectiousness and the serious health hazards they pose.
(6) Risks related to research and development
The Group continuously invests in research and development for the efficient and prompt development of new products and new technologies. Therefore, we established H.U. Group Research Institute G.K., where we streamline and accelerate basic research activities and centralize the handling of information. In addition, we actively gather information on market trends and technological developments by participating in academic societies inside and outside of Japan, as well as by incorporating the views of third parties as needed.
Also, we reinforce our management system by conducting periodic reviews of internal R&D progress. However, expected outcomes may either be slow to reach or may be unattainable entirely. In addition, competitors may overtake us in a technological development.
Furthermore, there may be instances where we must give up on research and development due to reasons such as not fulfilling the required standards for drug approval in terms of efficacy and safety during the research and development process. This could result in the inability to recover the costs associated with this research and development or could force changes in our research and development policy.
(7) Impacts due to the stoppage of or constraints placed on business activities as a result of natural disasters, climate change, etc.
The Group has established a business continuity plan (BCP) and allocated emergency-use facilities and stockpiled supplies in preparation for a large-scale natural disaster. However, the Group’s business performance could be adversely affected in the event the Group’s business sites or its customers such as medical institutions suffer damage from a large-scale typhoon, earthquake or other natural disaster. The Group’s business performance could also be adversely affected in the event of tremendous physical damages arising from natural disasters due to climate change or the tightening of regulations on greenhouse gas emissions.
(8) Impacts caused by changes in the market environment
As Japan’s medical system continues to undergo major reforms, the Group’s business climate is becoming increasingly severe due to competition from other companies in the market and other factors. The Group gathers information on, analyzes, and evaluates markets and competitor trends on an ongoing basis. This information is utilized for measures reinforcing existing business competitiveness and expanding new businesses. However, market prices are impacted by a number of factors, including changes in the business climate, stricter policies within different countries curtailing medical spending and stricter regulations related to development, manufacturing, and distribution. These trends are expected to continue going forward. As a result, the Group’s business performance and financial condition could be adversely affected.
(9) Risks related to statutory regulation
The Group’s business activities abide by the Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices and other relevant laws in Japan, as well as other statutory regulations outside Japan including those of the FDA. The Group strives to constantly and actively gather information on revisions to these laws and regulations, examining countermeasures in a timely fashion. Future revisions to laws or enhancements of regulations could restrict the Group’s business activities or increase costs related to business administration.
(10) Risks related to intellectual property
Multiple patents protect the substances, manufacturing methods, and other aspects of Group products for a certain period of time. The Group appropriately manages its intellectual property rights including patent rights, and constantly keeps watch for infringements by outside parties. The Group’s intellectual property management functions are consolidated within the Company in order to enhance specialization and otherwise reinforce our management structure.
However, if our intellectual property rights are infringed upon by a third party, expected profits may be lost.
In addition, if one of the Group’s products infringes upon the intellectual property rights of another party, we could be required to pay damages.
(11) Risks related to the recoverability of deferred tax assets
The Group records deferred tax assets related to losses carried forward and deductible temporary differences, and evaluates their recoverability. The calculation of deferred tax assets is based on various forecasts and assumptions, including estimates of taxable income pursuant to the business plan covering a certain period into the future. Actual results may vary from these forecasts and assumptions. If these estimates need to be reviewed due to the level of achievement of the business plan or other factors, and if circumstances exist preventing recovery of deferred tax assets, deferred tax assets will need to be reversed and tax expenses booked, which could adversely affect the Group’s business performance and financial condition.
(12) Risks related to overseas business expansion and foreign exchange rate volatility
The Group actively engages in business not only in Japan, but also North America, Europe, Asia and other regions. As a result, our overseas business operations present a growing strategic importance, which increasingly exposes us to the impacts of foreign exchange rate volatility.
To address foreign exchange rate volatility, we take measures to minimize foreign exchange gains and losses, including working to maintain an appropriate ratio of held foreign versus domestic currency and to maintain a balance of foreign currency denominated assets and liabilities. These measures do not guarantee that we will avoid all foreign exchange rate volatility risks and there is a possibility our business performance, assets, liabilities, and net assets could be adversely affected by foreign exchange rates.
In addition, local business sites and the Company’s departments in charge of these sites work together and constantly gather information to ensure that immediate responses can be made to a variety of incidences in overseas regions where business is done. Such incidences may include market changes, economic downturns, policy changes, invocation of economic sanctions, labor issues, cultural and business practice differences, other political and social factors, industrial base vulnerability, public hygiene issues, changes in laws and regulations, changes in tax systems, terrorism and conflicts, pandemics, and disasters. Despite the efforts of the Group, these events could have an adverse effect on our business performance.
(13) Risks associated with the execution of management strategy
Targets set for each fiscal year within a Medium-term Plan represent future forecasts expressing the Company’s management targets. The ability of the Group to implement these initiatives and achieve these targets could be affected by the risks outlined in (1) to (11) above and other uncertainties. Notable uncertainties include harsher than expected competition and the resulting decline in market prices, failures of research and development investments, changing customer needs, poor performance of alliances, changes exceeding expectations in medical systems in Japan and overseas, as well as the emergence of risk concerning overseas business expansion and foreign exchange rate volatility. As for the new Medium-term Business Plan, the Company is continuing to assess such plans with its sights set on potential state of the business environment after the novel coronavirus infection has subsided. The Company will promptly release the plan as soon as it has been prepared.