The following is a list of major risk factors related to the DWTI Group’s business activities and other matters.
Forward-looking statements are based on judgments made by the Group as of the end of December 2022 (fiscal year end).
(1) Business content
① The Group’s drug R&D
(a) Uncertainties involved with R&D
The Group’s main business is drug development. In general, the R&D period for pharmaceutical drugs, from the basic research stage to approval, extends over a long span and is known to require significant investment. Moreover, compared to other industries, the chances of eventual market success are extremely low. There are, therefore, risks associated both with the Group’s pipeline of out-licensed drugs and with drugs newly being developed. It is uncertain whether the safety and efficacy of a drug can be confirmed or whether a drug will reach the market, and development of new drugs may not always proceed as planned. Such uncertainties regarding the pipeline of out-licensed drugs and newly developed drugs could have a significant impact on the financial position and operating results of the Group.
(b) Competitive relationships in the pharmaceutical industry
The pharmaceutical industry in which the Group participates is characterized by intense competition among many domestic and overseas companies and research institutes, including huge global companies. In addition, technological innovation is advancing rapidly. Therefore, the outcomes of competition with such competitors in activities relating to research, development, manufacturing, and sales could have a significant impact on the financial position and operating results of the Group.
(c) Adverse effects
Drugs can demonstrate unforeseen adverse effects at any point, from the clinical trial stage until after market launch. If such an unforeseen adverse effect occurs, the loss of creditworthiness or the filing of legal proceedings could have a significant impact on the financial position and operating results of the Group.
(d) Act on Securing Quality, Efficacy and Safety of Drugs Including Pharmaceuticals and Medical Devices (Pharmaceuticals and Medical Devices Act) and other regulatory matters
The pharmaceutical industry in which the Group participates is subject to various regulations on its activities relating to research, development, manufacturing, and sales, in accordance with the pharmaceuticals and medical devices laws and official pharmaceutical guidance of each country, as well as other related laws and regulations.
Drug development requires a great deal of development outlay and many years, from the basic research stage to manufacturing and marketing approval. In some cases, however, it is impossible to obtain sufficient data on a drug’s quality, efficacy, and safety or to demonstrate the drug’s usefulness. In such cases, approval may not be obtained as scheduled and it may be difficult to launch the drug. This is also the case when licensing out newly developed drugs to other companies. Under the Pharmaceuticals and Medical Devices Act or other regulations, licensing out a drug under originally planned conditions, or out-licensing itself, may prove difficult.
If such an eventuality occurs, or if there are major changes in pharmaceuticals and medical devices laws or other regulations in various countries in the future, this could have a significant impact on the financial position and operating results of the Group.
(e) Product liability
In the pharmaceutical business, a company may incur product liability for activities relating to research, development, manufacturing, and sales. The expense burden of a sizable payment related to product liability could have a significant impact on the financial position and operating results of the Group.
② Group business activities
The DWTI Group has established a wide range of alliances at each stage of research and development, seeking thereby to avoid increases in fixed costs and to incorporate highly specialized technologies into its operations. Through both its own R&D staff and such alliances, the Group has built up a strategic, flexible R&D framework. We are forming various alliances in other operational areas as well. Any changes in these alliances could have a significant impact on the financial position and operating results of the Group.
The Group will continue to explore a broad array of alliances with the aim of reinforcing its business foundation and realizing the efficient development of new drugs. However, it may not be possible to build such partnerships as expected.
(b) Conducting joint research with a university
The Group is conducting joint research with the Mie University Faculty of Medicine based on an industry-academia-government collaboration agreement for joint research and education.
Regarding the expense burden of this joint research, the Group agreed with Mie University to pay joint research expenses to the university. These include research fees, based on the number of private-sector researchers dispatched by the Group to conduct joint research, as well as direct costs deemed necessary for research. The expenses are to be paid within the contract period and are recorded as expenses during this period. Depending on the status of research activities, additional costs may be incurred. Following mutual consultation and procedures to revise the collaboration agreement, the Group may pay these additional costs.
The Group intends to continue to conduct the joint research that underpins our business. Although this entails bearing a reasonable amount of joint research expenses, as mentioned above, drug R&D carries high uncertainties, and the earnings base of the Group is unstable at present. Thus, if the Group is unable to generate sufficient earnings to cover ongoing research expenses, or if there is an unforeseen accident in the course of R&D activities or an accident due to external factors or natural disasters, which makes it difficult to carry out joint research, this could have a significant impact on the financial position and operating results of the Group.
Based on its medium-term business plan, the Group’s earnings base derives from three sources: upfront payment received from licensing out a developed drug, milestone payments booked during the development process of an out-licensed drug, and royalties, which are a certain percentage of sales of a post-launch drug.
- （c-1）Risks related to the timing of revenue recognition associated with license-outs
The fiscal period in which income from out-licensing is received may differ from the Group’s forecast due to changes to the development schedule of a drug after it has been licensed out. With regard to drugs that are slated to be licensed out, the period of actual out-licensing may change, or such out-licensing itself may become difficult. In either case, this could have a significant impact on the financial position and operating results of the Group.
- （c-2）Risks related to suspension or discontinuation of drug development
After a developed drug is licensed out, if its further development is suspended or discontinued, and if it subsequently becomes no longer possible to generate income from out-licensing, this could have a significant impact on the financial position and operating results of the Group.
- （c-3）Risk of sales fluctuations after the start of sales of a developed drug
The Group’s sales forecast for a drug after manufacturing approval is obtained is dependent on the licensee. Thus, if the sales forecast cannot be achieved due to changes to the forecast made by the licensee or to deterioration in the licensee’s business environment, this could have a significant impact on the financial position and operating results of the Group.
- （c-1）Risks related to the timing of revenue recognition associated with license-outs
(d) Dependence on income from specific licensees
The Group’s business model, in which its income is based on licensing agreements, is highly dependent on specific licensees.
The contract with a licensee is valid for the term of contract period. However, there is no guarantee going forward that the licensee will develop the drug licensed out by the Group as originally planned. Therefore, if a licensee makes any changes to the R&D schedule or suspends R&D of the out-licensed drug, this could have a significant impact on the financial position and operating results of the Group.
(e) Burden of contract-based payment obligations
Under contracts with partner companies and other entities regarding the development pipeline, the Group may be obliged to make payments to these entities at the development stage before the start of sales, as well as after the start of sales. We recognize this form of payment is commonplace given the nature of business for drug discovery biotech venture companies, but the result of such payment obligations could have a significant impact on the financial position and operating results of the Group.
The Group has included a subsidiary since 2015. If the business activities of the subsidiary do not proceed as planned, or if development costs increase in line with expansion of the business, this could have a significant impact on the financial position and operating results of the Group.
Also, the Group may have joint investment or other capital relationships with partner companies or other entities regarding the subsidiary. If the relationships with these entities change, it could have a significant impact on the financial position and operating results of the Group.
(g) Being a small organization
The Group is a small organization, with 20 employees at the end of the consolidated fiscal year ended December 2022. The current internal control framework is adapted to this corporate scale. Going forward, we will further enhance the internal control framework, maintaining and reinforcing it at a level appropriate to the size of the organization.
(h) Attracting and developing personnel
The Group’s business activities are highly dependent on the management team and the managers and members of each department who run the business. We therefore constantly strive to attract and develop talented human resources. If our efforts to secure and develop such human resources do not progress favorably, this could have a significant impact on the financial position and operating results of the Group.
The Group has a policy of flexibly raising funds in line with ongoing R&D activities for drug development, primarily through capital increases. In such cases, the issue of additional shares by DWTI may dilute per share value. In addition, if it is difficult to raise funds flexibly, this may have a significant impact on the Group’s cash flow and business activities.
(j) Dividend policy
DWTI has not paid out dividends since the company was founded, and in the fiscal year ended December 2022, we were not in a financial position to pay dividends as stipulated by the Companies Act. At present, our priority is on striving to maintain internal reserves while safeguarding our capacity for ongoing R&D activities. However, we believe providing returns to shareholders is an important management issue, and will consider paying out dividends while taking into account current performance and financial conditions. However, the inability to record stable earnings in the future may make it difficult to provide returns to shareholders through dividends.
(k) Exchange rate risk
The Group is expanding its business activities globally. Although we have foreign currency-denominated transactions related to overseas R&D activities and licensing and other transactions with overseas companies, we do not carry out any special foreign exchange risk hedging. Therefore, significant fluctuations in foreign exchange rates could have a significant impact on the financial position and operating results of the Group.
(l) Public policy measures to control healthcare expenses
As part of public healthcare policy in Japan, measures are being implemented to control healthcare expenses, such as lowering the price of prescription drugs and promoting the use of generic drugs. Overseas as well, there is mounting pressure to reduce drug costs, especially in advanced economies. Future trends in public policy related to healthcare expenses could have a significant impact on the financial position and operating results of the Group.
(m) Key contracts
Of the contracts in which DWTI is involved, the contract with Mie University is especially important for maintaining the Group’s R&D framework, while contracts with various licensees are critical to the current pipeline. The Group’s relationships with Mie University and with each licensee are such that there are no impediments to the continuity of the contracts. In the future, however, if a contract is terminated due to a change in its terms, expiration, cancellation, or any other reason, this could have a significant impact on the financial position and operating results of the Group.
(n) Intellectual property rights
The Group makes use of various intellectual property rights in its R&D and other activities, and we recognize that these are either rights owned by the Group or legally licensed rights.
As of the end of the consolidated fiscal year ended December 2022, the Group held a total of 11 types of patent rights and patent applications.
However, there is no guarantee that all patents pending of the Group will be granted. Even if a patent is granted, there is always the possibility that technologies included under a Group patent might be made obsolete due to superior R&D that surpasses the Group’s R&D. If superior technology is developed which does not fall under the scope of the Group’s patent rights, this could have a significant impact on the business continuity as well as the financial position and operating results of the Group.
As of the end of the consolidated fiscal year ended December 2022, there were no lawsuits or complaints between the Group and any third parties regarding patent rights or other intellectual property rights related to the Group’s development. The Group conducts due diligence with regard to patents to avoid infringement of the patent rights of other entities. For R&D companies like DWTI, however, it is difficult to completely avoid intellectual property rights issues. If a dispute arises with a third party regarding intellectual property rights, this could have a significant impact on the business continuity as well as the financial position and operating results of the Group.
(o) Lawsuits or other legal proceedings
No lawsuits had been filed against the Group as of the end of the consolidated fiscal year ended December 2022. However, it is difficult to completely avoid the possibility of being subject to a claim due to a lawsuit or other legal proceeding arising from some grounds in the future. The outcome of any such claim could have a significant impact on the financial position and operating results of the Group.
(p) Information management
In the course of business, the Group holds confidential information regarding technology and sales, and also possesses certain personal information. To reduce the risk of leaks of such information, the Group strives to rigorously manage information, such as requiring non-disclosure agreements, etc. from executives and employees, business partners, and other related entities. However, if such information is leaked outside the Group, this could have a significant impact on the financial position and operating results of the Group.
(q) Disasters, infectious diseases, etc.
For each Group business site or for business partners and affiliated medical institutions and their regions, if business activities are suspended or restricted due to earthquakes, typhoons, or other natural disasters, fires or other accidents, or the spread of infectious diseases, this could have a significant impact on the financial position and operating results of the Group.
COVID-19 has had no significant impact on the Group’s businesses and currently presents no significant risks. However, if the pandemic is prolonged and R&D activities are delayed or stalled due to illness or movement restrictions affecting Group research facilities or employees of contract organizations, this could have a significant impact on the financial position and operating results of the Group. In addition to hygiene measures such as the wearing of masks and disinfection, the Group continues to take measures against infectious diseases, including the use of web conferencing and refrains from non-essential business travel.
(2) Business performance
① Regarding business results
The Group derives income primarily from upfront payment received when a drug is licensed out, milestone payments received when development of out-licensed drugs reaches a certain stage of progress, and royalties after a drug is launched to market. Since the Group currently has two drugs on the market, we expect to record ongoing income every fiscal year. However, since royalties are dependent on the sales performance of licensees, the Group in the future may not see the income we expected. Also, because upfront payment and milestone payments depend on whether or not out-licensing occurs or whether or not there is a certain level of progress of a developed drug, they are typically unstable and not recorded every fiscal year as a matter of course. Therefore, management indicators from past fiscal years and performance disclosed in the future are inadequate gauges for comparing performance in any given fiscal period or for projecting future performance of the Group.
The DWTI Group is striving to achieve ongoing profitability in the future by pursuing R&D of drugs and licensing out developed drugs. However, given the aggressive upfront investments needed to enhance the value of the development pipeline, the Group tends to operate in the red. Therefore, except for the fiscal year ended December 2019, we have recorded a loss attributable to owners of parent and negative cash flow from operating activities. Going forward as well, there is a possibility that these figures may not be positive.
② Regarding the recording of negative retained earnings
Because the Group is a drug discovery biotech venture company, we will continue to record a loss attributable to owners of parent until: (1) out-licensed drugs in the pipeline are launched to market, ensuring royalties and other stable income, and (2) such income exceeds the combined total of R&D expenses and other expenses.
The Group aims to achieve profitability as soon as possible by expanding the development pipeline, licensing out drugs, and carrying out activities to support clinical development of drugs that have been licensed out with a view to market launch. Going forward, however, it may not be possible to record profit attributable to owners of parent as forecast. Moreover, if the Group’s business does not expand as planned and we are unable to secure profit attributable to owners of parent, the improvement of negative retained earnings to positive levels may face delays.
③ Earnings forecasts
The Group announces earnings forecasts for every consolidated fiscal year. However, changes and uncertainties in the business and economic environment and other unpredictable factors can make it difficult to achieve such earnings forecasts within the expected timeframe or to maintain the forecasts.
④ About cash flow
If the Group’s business plan does not unfold as forecast and sufficient funds cannot be secured within the anticipated timeframe, a capital shortfall may occur. Depending on the cash flow situation of the Group, this may affect the viability of the business.
⑤About tax loss carryforwards
The Group had a tax loss carryforward as of the end of the consolidated fiscal year ended December 2020. Therefore, if Group performance is favorable and it is not possible to offset taxable income by means of the loss carryforward, the Group may have to record corporate tax, inhabitant tax, and business tax based on normal tax rates. Profit or loss attributable to owners of parent as well as cash flows may be affected.
① Use of raised funds
Funds raised by the Group, mainly by means of capital increases, will be allocated for use in R&D to expand the development pipeline and for working capital.
However, it takes a great deal of time for the fruits of R&D activities related to new drug development to tie in with Group earnings. Moreover, there are cases where R&D efforts do not bear fruit. Consequently, funds raised may not tie in with the returns expected by investors.
② Stock acquisition rights
On July 19, 2022, DWTI issued the series 1 unsecured convertible bond with stock acquisition rights and exercise of series 11 stock acquisition rights to Whiz AIoT Evolution Fund Investment LP through a third-party allotment. The number of shares to be issued upon exercise of these stock acquisition rights is 5,858,926 shares, consisting of 3,971,326 shares of bonds with stock acquisition rights and 1,887,600 shares of stock acquisition rights at the end of the consolidated fiscal year ended December 2022, which is equivalent to 7.5% of all outstanding shares. If the stock acquisition rights are exercised, the per share value of the Company’s shares may be diluted.
In addition, since the exercise of stock acquisition rights is, in principle, at the discretion of the holder of such rights, it is possible that all or part of the rights may not be exercised, depending on trends in the market price of DWTI’s stock. Therefore, it may take a certain amount of time to procure the planned funds, or it may not be possible to procure the funds. Furthermore, if the bonds with stock acquisition rights are not converted into shares, the remaining bonds with stock acquisition rights must be redeemed in a lump sum at par on the redemption date (December 27, 2027). If the stock acquisition rights are not exercised and it becomes difficult to raise funds in that way, the Group may review its business plan and explore other fundraising methods.