Business Risks

The annual securities report contains the following risk factors related to the business information and financial information that may significantly affect investors’ decisions.
The forward-looking statements in this document are based on the Group’s judgment as of the end of March 2023.

The Group manages vast amounts of data, including personal information and patient testing data. Ensuring the security of this information and establishing a corresponding structure that complies with Japan’s Personal Information Protection Act is a crucial management task. In line with these efforts, SRL, Inc. obtained PrivacyMark certification in February 2005. Additionally, SRL has acquired the Information Security Management System(ISMS) and ISO/IEC 27001 certifications as security measures for its operation using clinical laboratory testing systems. The Group utilizes multiple information systems to support its business operations , striving to operate these systems in a stable manner while proactively updating and upgrading aging systems. Efforts are also directed towards building information systems that prevent data leaks and ensure a comprehensive understanding of their operational rules.
However, information systems can experience disruptions in their normal operations due to various factors, including software or hardware problems, human errors, natural disasters, criminal activities, cyberattacks, computer viruses infections, or acts of terrorism. These failures may result in exposure of personal information, widespread service disruptions, incorrect billing, delayed test reports, or data loss. Such incidents have the potential to harm the Group’s reputation and adversely affect its business performance and financial position.
The Group undertakes the development of its own information systems to support its business operation. Significant efforts are dedicated to strengthening project management, including the utilization of third-party evaluations for system development when necessary. However, obstacles in recruitment and employee retention can impede the progress of development plans, leading to delays, increased costs, or potential challenges in implementing planned system functions. Such difficulties have the potential to adversely affect the Group’s ability to execute its business operations effectively and may result in unrecoverable development costs.

To ensure the accuracy of testing results, the Group prioritizes quality controls for Lab Testing and its related Services (LTS) business. The primary companies responsible for LTS actively participate in surveys conducted by organizations, including the Japan Medical Association, Japanese Association of Medical Technologists, Japan Registered Clinical Laboratories Association, and other public institutions. These engagements guarantee comprehensive quality controls. Additionally, the Group is committed to establishing an internal structure that enhances testing quality, demonstrated by certifications such as the service mark from the Japan Health Enterprise Foundation, College of American Pathologists (CAP), Clinical Laboratory Improvement Amendments (CLIA), and ISO 15189. In the LTS business, the Group swiftly identifies and addresses potential errors through diligent root cause analysis and appropriate countermeasures. Further preventative measures include improving procedures, implementing automation, and strengthening employee training protocols to elevate the standards and minimize errors.
The Group is dedicated to enhancing the quality of its products in the In Vitro Diagnostics (IVD) business through the development of an internal quality assurance structure. The major group companies involved in IVD have obtained ISO 13485 certification, an international standard for quality management systems for medical devices.
Similarly, for sterilization business in the Healthcare-related Services business (HS), the Group strives to improve the quality of services offered. To achieve this, the major sterilization centers have obtained ISO9001 certification, an international standard for quality management systems.
However, the Group recognizes that challenges in ensuring the quality of its products and services may arise due to human error or other unforeseen circumstances. Such challenges have the potential to adversely affect the Group’s business performance, financial position, reputation.

Fires, labor disputes, facility accidents or other man-made disasters at the Group’s business locations have the potential to adversely affect the Group’s business performance and financial position. Furthermore, pandemics characterized by significant health risks and high infectiousness can also impact the Group’s operations, further affecting its business performance and financial position.

The Group has introduced a robust business continuity plan (BCP) that includes provisions for potential large-scale natural disasters such as typhoons, earthquakes, and other emergencies. To prepare for these events. the Group has allocated emergency-use facilities and stockpiled essential supplies at its business sites and for its customers, including medical institutions.
Furthermore, in alignment with the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), the Group assesses and analyzes the business risks and opportunities associated with climate change. These findings are integrated into the Group’s business strategies, promoting transparent information disclosure, and striving to contribute to achieving carbon neutrality by 2050.

However, an escalation in severity of natural disasters and other physical damage resulting from climate change may adversely affect the Group's performance and financial position. Additionally, if regulations regarding greenhouse gas emissions or related factors become more stringent than anticipated, it may further affect the Group’s operations.

The Group continues investing in research and development to develop new products and technologies efficiently and promptly. To facilitate this, the Group has established H.U. Group Research Institute G.K., which streamlines and accelerates basic research activities while integrating group information. Additionally, the Group actively gathers market trends and technological development information by participating in academic societies both in Japan and overseas, seeking input from third parties when necessary. Moreover, the Group reinforces its management system by conducting periodic reviews of internal R&D progress.
However, certain factors may impede the achievement of expected outcomes. Challenges in recruiting and retaining employees may lead to delays or unattainable goals. Additionally, the Group faces the risk of competitors surpassing its technological advancements, which may affect its market position. During the research and development process, circumstances may arise that cause discontinuation, such as failure to meet efficacy and safety standards required for drug approval. This may result in an inability to recover associated costs or necessitate adjustments to the research and development policy. Furthermore, a significant decline in the competitiveness of the Group’s products, services, or business models due to slow adaptation to rapid technological innovation may adversely affect its business performance and financial position.

The Group holds a diverse portfolio of tangible and intangible fixed assets, including goodwill, as well as investment securities. These assets, which may significantly impact on the consolidated financial statements for FY2023, comprise investment securities of 5,459 million yen (1.8% of consolidated total assets) and loans receivable of 4,340 million yen (1.5% of consolidated total assets) both related to Baylor Miraca Genetics Laboratories, LLC, and 6,291 million yen of intangible assets recognized as Fluxus, Inc. and ADx NeuroSciences N.V. acquisition transactions (2.1% of consolidated total assets).
The evaluation of these assets requires accounting estimates. If the value of these assets declines or their expected future cash flows are unlikely to materialize, impairment may be necessary. This may adversely affect the Group’s business performance and financial condition.

The Group considers and executes M&A deals in both domestic and international markets as part of its growth strategy to enhance corporate value.
During the process of executing M&A deals, each operating company collaborates with specialized departments to conduct thorough investigations and studies in advance, aiming to assess profitability and return on investment. Additionally, the Group seeks the advice of outside experts such as lawyers and accountants when necessary.
However, acquired businesses may fail to meet expected targets due to sudden changes in their business climate or unforeseen circumstances after the acquisition. These outcomes may adversely affect the Group’s business performance and financial position.

The Group is committed to maintaining a stable supply structure for its products and services. It actively works on establishing a robust procurement system for the necessary raw materials and materials, including supplier diversification.
However, if there is a sudden increase in demand or an unforeseen situation that disrupts the supply structure of the Group or its suppliers, resulting in a shortfall in supply capacity and preventing the Group from maintaining a stable supply of products and services, it may adversely affect the Group's business performance and financial position. Furthermore, if the Group is unable to pass on the impact of sudden increases in labor costs, raw materials and other factors on to prices, it may further adversely affect the Group’s business performance and financial position.

The Group’s products are protected by multiple patents that cover substances, manufacturing methods, and other aspects for a certain period of time. The Group diligently manages its intellectual property rights, including patent rights, and consolidates its intellectual property management functions within the organization to enhance specialization and strengthen its management structure.
However, if a third party infringes upon the Group’s intellectual property rights, it may result in the loss of expected profits. Additionally, if any of its products infringe upon the intellectual property rights of another party, the Group may be liable to pay damages.

The Group’s business activities adhere to the Act on Securing Quality, Efficacy, and Safety of Products Including Pharmaceuticals and Medical Devices, as well as other relevant laws in Japan. Additionally, the Group complies with foreign statutory regulations including those of the Food and Drug Administration (FDA). The Group proactively gathers information on any revisions to these laws and regulations, and promptly examines appropriate countermeasures. Future revisions to laws or enhancements of regulations may potentially restrict the Group’s business activities or increase costs associated with business administration.

As Japan’s medical system undergoes significant reforms, the Group’s business environment is becoming increasingly challenging due to competition from other companies and various factors. The Group consistently gathers, analyzes, and evaluates market and competitor trends information to strengthen its business competitiveness and expand new ventures.
However, market prices are influenced by factors such as changes in the business environment, stricter policies limiting medical spending in different countries, and more stringent regulations. These ongoing trends are expected to potentially affect the Group’s business performance and financial position adversely.

The Group actively engages in business not only in Japan but also in North America, Europe, Asia and other regions. Its overseas business operations are of growing strategic importance and respond promptly to various incidents that may occur in the overseas regions. These incidents include market changes, economic downturns, policy changes, economic sanctions, labor issues, cultural and business practice differences, political and social factors, vulnerability of the industrial base, public hygiene issues, changes in laws and regulations, alterations to tax systems, terrorism and conflicts, pandemics, and disasters. Despite the Group’s efforts, these events have the potential to adversely affect its business performance and financial position.

The estimate of future taxable profit, used to value deferred tax assets, is calculated based on the financial targets for FY2023 and the Medium-term Plan (comprehensive approval by the Group), both adjusted considering the level of past achievements. Additionally, the calculation takes into account the occurrence of taxable income and tax losses (excluding extraordinary items) during FY2022.
The valuation of deferred tax assets is influenced by the level of achievement of the financial targets on FY2023 and Medium-term Plan. If the Group's business performance in FY2023 significantly falls short of the forecast, there is a possibility of a reduction in the amount of deferred tax assets, which may adversely affect its business performance and financial position.

The targets set for each fiscal year within the Medium-term Plan represent future forecasts reflecting the Group’s management targets. The Group’s ability to implement these initiatives and achieve the targets may be affected by the risks outlined in points (1) to (13) above, as well as other uncertainties. Notable uncertainties include intensified competition resulting in market price declines beyond expectations, failures in research and development investments, evolving customer needs, underperformance of alliances, unexpected changes in medical systems both in Japan and overseas, and potential risks associated with overseas business expansion and foreign exchange rate volatility.