Risks and Opportunities

Dental materials, dental equipment, medicated toothpaste, and in-vitro diagnostics sold by the Group are used to diagnose, treat, or prevent oral diseases in humans, and are subject to detailed regulations under the Act on Pharmaceuticals and Medical Devices from the development and manufacturing stages to distribution (after sales). They are classified as pharmaceuticals, quasi- pharmaceuticals, cosmetics and medical devices, etc. under the Act.
To market these products, it is necessary to obtain a marketing authorization license from the prefectural governor. The licensing requirements include that there are no disqualification requirements for applicants, that a considerable number of qualified managers are secured and allocated, that a quality assurance organization is established to ensure that products are shipped and manufactured under appropriate manufacturing and quality control, and that a safety management organization is established to ensure (promote) safe and proper use even after marketing, and that management activities are carried out under the supervision of a General Marketing Compliance Officer in accordance with legal procedures. In addition, to manufacture pharmaceuticals, quasi-pharmaceuticals and medical devices, etc., a manufacturing business registration is required, and to sell them to medical institutions, a sales business license is required.
The Group recognizes that the continuation of these licenses is one of the most important issues for its business and takes appropriate measures. However, if these licenses are revoked for some reason, there is a possibility that the continuation of the Group's business may be adversely affected.
The above-mentioned licenses are valid for 5 years for marketing authorization licenses, 6 years for sales business licenses, and 5 years for manufacturing business registration. Licenses may be revoked if the licensing requirements specified by laws and regulations are not met, but at present there are no factors that hinder the continuation of licenses.

The Group complies with the Act on Pharmaceuticals and Medical Devices and other regulatory requirements and operates an appropriate quality management system. However, when the use of pharmaceuticals, quasi-pharmaceuticals, cosmetics, and medical devices, etc. manufactured and sold by the Group may cause or increase a hazard in health and hygiene, the Group must take necessary safety assurance measures, such as voluntary recall of products and goods, disposal, suspension of sales, and provision of information, to prevent such a hazard.
As a result, the Group's operating performance may be adversely affected by the loss of confidence in the quality and safety of its products.

The research, development, manufacture and sale of dental materials exposes us to potential product liability. To date, we have not faced any significant product liability prosecution, but there is a possibility that we may face such prosecution in the future. We have product liability insurance policies in place in Japan and overseas to cover these risks, but our financial position and operating results may be adversely affected if these policies are not sufficient to cover the risks that we may incur.

The Group's business is related to various laws and regulations such as the Companies Act, the Act on Pharmaceuticals and Medical Devices, environmental laws and regulations, and the Foreign Exchange and Foreign Trade Act. The Group strives to conduct management that always takes compliance into consideration, including legal compliance, but in the event of a violation of laws and regulations or the filing of a lawsuit for an unintended reason, the results may have a negative impact on the Group's financial position and operating results.

The Group has put in place a system for the protection of intellectual property so that it will not infringe on the intellectual property rights of third parties and that it will not be infringed on by third parties. However, it is impossible to rule out the possibility that a third party may file a lawsuit against the Group on the grounds of infringement of intellectual property rights, or that the Group may be subject to infringement of intellectual property rights by a third party. If such a situation occurs, it may have a negative impact on the Group's financial position and operating results.

The Group conducts research on the commercialization of artificial teeth and other dental materials in general, as well as research and development across the entire spectrum of dental care, including dental equipment. The Group's research and development focuses on applied research. However, in order to launch products after conducting industrialization research, it is necessary to -21- obtain regulatory approval based on the Act on Pharmaceuticals and Medical Devices as pharmaceuticals, quasi-pharmaceuticals, and medical devices etc.
During these processes, unforeseen issues related to efficacy and safety may be identified or arise, and a new product may not be launched at the expected time. In addition, even if a positive result is obtained in a test conducted by the Group and an application for approval or certification is filed, approval or certification may be delayed or may not be obtained due to various reasons such as the review process of the application, GMP/QMS compliance inspection, or voluntary withdrawal of the application may occur.
In such cases, the Group's profitability could decline, and its operating results could be adversely affected.

The products and goods handled by the Group are used directly and indirectly for dental care. Since most dental care in Japan is covered by health insurance, trends in the medical insurance system may affect demand for dental equipment. Changes in the system may affect the Group's operating results.

The Japanese dental market, like the U.S. and Europe is a large market. Considering the growth potential of the Asian market centered on China, the Asian market, including Japan, can be regarded as the most promising market in the world for European and U.S. material and equipment manufacturers. On a global scale, market reorganization led by European and U.S. companies has already become active, and it is necessary to recognize these as part of the global strategy of European and U.S. manufacturers, especially their strategy toward Japan and Asia. Until now, the Japanese market has been relatively unaffected by foreign competitors due to its unique health insurance system and complex distribution system, but with the globalization of the market, the Japanese market will be exposed to international competition. In addition, the entry of competitors from other industries could also intensify sales competition, which could have a negative impact on the Group's operating results.

The Group holds marketable equity securities. The Group verifies the rationality of holding strategic-shareholdings, but a significant decline in the stock market could adversely affect the Group's operating results due to the recording of a loss on valuation of securities.

The Group will continue to invest in businesses with Group synergies, however, the Group's shares in subsidiaries are valued using the cost method, and if the real value of shares without a market price declines significantly due to a deterioration in the financial position or other reasons, the Group may be forced to record an impairment loss on its shares in subsidiaries, which may have a negative impact on the Group's operating results.

Fluctuations in foreign exchange rates may affect the Group's operating results.
The Group's transactions denominated in foreign currencies may be affected by foreign exchange fluctuations, although the Group has taken measures to mitigate foreign exchange risks to a certain extent. On the other hand, there is a possibility that transactions denominated in Japanese yen may also be indirectly affected by requests for price reductions, etc.
Also, because the Group's financial statements are prepared using the Japanese yen as the reporting currency, fluctuations in foreign exchange rates when translating the results of overseas subsidiaries into Japanese yen may have an impact on the items in the financial statements, and as a result, may have an impact on the Group's financial position and operating results.

The Group is working to reduce risks in order to minimize damage in the event of an emergency. In addition to conducting training and stockpiling necessary for disasters such as earthquakes and fires, the Group is implementing various responses and measures to prevent the spread of infectious diseases caused by pandemics, and complying with related laws and regulations related to factory operations.
However, if the Group is forced to close or suspend operations of its factories, facilities, etc. due to natural disasters, fires, other man-made disasters, or the spread of infectious diseases such as the novel coronavirus, which are greater than expected, there is a possibility that the Group's operating results will be seriously affected.

Although the Group has implemented security measures for its networks, the possibility of intrusion by computer viruses, etc., or interference by hackers, etc., is not eliminated. If such damage occurs, the Group's operating results may be adversely affected.

The Group is engaged in a variety of business activities in various countries around the world. In addition to laws, regulations, and medical insurance systems in each country, the political, economic, cultural, legal, and business practices of each country make the environment surrounding the Group companies uncertain into the future. Differences in these environments and various problems arising from them may adversely affect the Group's financial position and operating results.

The Group procures funds from financial institutions to ensure stable fund management, however, the commitment line contracts are subject to financial covenants. Any breach of such covenants could have a negative impact on the Group's operating results and financial position.

The Group has one equity method affiliate. Deterioration in the performance and financial position of the equity method affiliate may affect the Group's financial position and operating results.