Racing Major New Drugs to Market - Astellas Pharma · Infergen® (interferon alfacon-1) and the 2 A...

3-11, Nihonbashi-Honcho 2-chome,Chuo-ku, Tokyo 103-8411, Japanhttp://www.yamanouchi.com

Printed in Japan on recycled paper

Annual Report 1999

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Racing Major

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Yamanouchi cover 99.8.6 7:07 PM ページ 1 (1,1)

Yamanouchi’s Medium-Term Vision

1To develop a continuing stream of big-selling new drugs. Backed by a formidable R&D

pipeline both domestically and overseas, Yamanouchi Pharmaceutical Co., Ltd., is poised

to enter a new era of growth.

2To ensure the long-term strength of our R&D pipeline. We have strengthened our

capabilities for in-house drug discovery while proactively encouraging strategic alliances

with other research organizations.

3To commence operations through an independent sales network in the United States. This

is Yamanouchi’s top priority over the medium term. Yamanouchi will become a truly global

enterprise once this sales network is fully established and joins the Company’s growing

networks in Asia and Europe.

4To further develop and commercialize such drug delivery technologies as WOWTAB® and

OCAS™. Another pillar of its pharmaceutical operations, Yamanouchi’s drug delivery

technology business is set to take off in the United States.

5To further develop the nutritional products and food and roses businesses. Yamanouchi will

expand these operations in tandem with its pharmaceutical business to continue

advancing toward its goal of being a comprehensive health care enterprise.

Financial Highlights 1A Report to Our Shareholders and Friends 2Racing Major New Drugs to Market 4Review of Operations 14

Pharmaceuticals 14Nutritional Products 18Food and Roses 20

Corporate Citizenship 21Environmental Protection 22

Financial Section 23Board of Directors 45Principal Subsidiaries and Affiliates 46Corporate Data 47Corporate Information 47

CONTENTS

47

Corporate Data

HEAD OFFICE3-11, Nihonbashi-Honcho 2-chome,Chuo-ku, Tokyo 103-8411, Japan

Seoul OfficeDuckmyung Bldg., 3rd Floor, #170-9, Samsung-dong, Kangnam-ku, Seoul, Republic of Korea

Beijing Office20/F, A-7-10, East Wing, HANWEI PLAZA,No. 7, Guanghua Road,Chaoyang District, Beijing 100004,People’s Republic of China

Jakarta Office17th Floor, #1701, Jakarta Stock Exchange Tower 2, Jl. Jend. Sudirman Kav. 52-53,Jakarta 12190, Indonesia

Taipei BranchShin Kong World Commercial Bldg., 6th Floor, No. 287, Sec. 3, Nanking East Road, Taipei, Taiwan

Domestic BranchesSapporo, Sendai, Tokyo 1, Tokyo 2, Tokyo 3,Yokohama, Nagoya, Osaka, Kyoto, Kobe,Hiroshima, Takamatsu, Fukuoka

PlantsAzusawa, Yaizu, Takahagi, Nishine

Research LaboratoriesTsukuba, Azusawa, Takahagi, Yaizu

Annual MeetingThe annual meeting of shareholders was heldat 10 a.m. on Tuesday, June 29, 1999, at: Royal Park Hotel 1-1, Nihonbashi-Kakigaracho 2-chome, Chuo-ku, Tokyo, Japan

Stock Trading InformationYamanouchi stock is listed on: Tokyo Stock Exchange (code number 4503)Osaka Stock Exchange Nagoya Stock Exchange Sapporo Stock Exchange Paris Stock Exchange

Independent Certified Public AccountantsShowa Ota & Co.Osaka Kokusai Bldg., 3-13, Azuchi-machi 2-chome, Chuo-ku, Osaka 541-0052, Japan

Shareholders’ ServiceShareholders with questions on such stock-related matters as proxy voting should write to:Finance & Accounting Dept.Yamanouchi Pharmaceutical Co., Ltd.3-11, Nihonbashi-Honcho 2-chome, Chuo-ku, Tokyo 103-8411, Japan

Investor RelationsSecurities analysts and investors with business-related questions should write to: Investor RelationsCorporate Communications Dept.Yamanouchi Pharmaceutical Co., Ltd.3-11, Nihonbashi-Honcho 2-chome, Chuo-ku, Tokyo 103-8411, Japan

Yamanouchi on the InternetOur home page is: http://www.yamanouchi.com

(As of August 1999)

Corporate Information


YAMANOUCHI PHARMACEUTICAL CO., LTD. AND CONSOLIDATED SUBSIDIARIES

Financial HighlightsYears ended March 31, 1999, 1998 and 1997

1

Thousands ofMillions of yen U.S. dollars

1999 1998 1997 1999

Net sales ................................................................................................. ¥423,217 ¥477,356 ¥454,740 $3,526,808Operating income*.................................................................................. 89,445 102,845 101,229 745,375Net income** .......................................................................................... 48,002 6,092 41,866 400,017Total assets............................................................................................. 789,362 806,641 839,475 6,578,017Shareholders’ equity, net ........................................................................ 563,303 511,441 480,775 4,694,192

Research and development expenses ................................................... 54,299 43,639 42,309 452,492Capital expenditures ............................................................................... 51,405 57,575 36,112 428,375Depreciation............................................................................................ 29,338 18,454 12,748 244,483

Yen U.S. Dollars

Per share:Net income**:

Basic ............................................................................................... ¥ 140.79 ¥ 18.18 ¥ 129.12 $ 1.17Diluted ............................................................................................. 129.21 17.51 116.56 1.08

Shareholders’ equity ........................................................................... 1,635.35 1,510.45 1,482.51 13.63Cash dividends applicable to the year................................................ 23.00 25.00 25.00 0.19

Note: Yen figures have been translated into U.S. dollars at the rate of ¥120=US$1, the approximate exchange rate on March 31, 1999.

384.

3 414.

2

454.

7 477.

4

423.

2

95.3 96.3 97.3 98.3 99.3

108.

84

111.

65 116.

56

17.5

1

129.

21

95.3 96.3 97.3 98.3 99.3

39.7 40

.5 41.9

6.1

48.0

95.3 96.3 97.3 98.3 99.3

Net Sales (billion ¥)

Net Income**(billion ¥)

Net Income per Share**(diluted) (¥)

*Due to a change effective the year ended March 31, 1999, in the Japanese regulations relating to the presentation of amortization of excess of cost over net assetsacquired in the consolidated statements of income, the corresponding amounts in the prior years’ consolidated financial statements have been reclassified to conformto the presentation for the fiscal year under review.

**Effective April 1, 1997, the Company changed its methods of accounting for the amortization period of excess of cost over net assets acquired and for income taxesto adopting tax effect accounting. As a result of these changes, the effect of the change in the amortization period was to increase the amortization of excess of costover net assets acquired by ¥72.7 billion and to decrease net income by the same amount for the year ended March 31, 1998. Also, the effect of adopting tax effectaccounting was to decrease income tax expense by ¥24.5 billion and to increase net income by the same amount for the year ended March 31, 1998.

yamanouchi AR '99前半 99.8.18 1:36 PM ページ 1

The fiscal year ended March 31,

1999, was challenging for

Yamanouchi Pharmaceutical Co., Ltd.

The Yamanouchi Group posted net

sales of ¥423.2 billion (US$3,527 mil-

lion, at ¥120=US$1, the approximate

exchange rate on March 31, 1999), a

drop of 11.3%, and operating income

of ¥89.4 billion (US$745 million), a

decrease of 13.0%. In contrast, net

income rose to ¥48.0 billion (US$400

million), the highest such figure in our

corporate history.

The key factor contributing to the

decreases was a decline in domestic

sales that was mainly attributable to

special circumstances. Specifically, in

March 1998 the Company terminated

domestic marketing agreements with

Novo Nordisk A/S, of Denmark, and

Schering–Plough K.K., of Japan, which

in the previous fiscal year accounted for

sales worth ¥49.3 billion for Yama-

nouchi, and discontinued sales of Elen®

(indeloxazine), a treatment for symp-

toms of mental dysfunction that in the

previous fiscal year yielded sales of

¥9.2 billion, following the May 1998

reevaluation of the drug by Japan’s

Central Pharmaceutical Affairs Council.

Coupled with these was a downward

revision in National Health Insurance

drug prices for the third successive

year in April 1998.

Amid this harsh business climate, the

H2 antagonist Gaster® (famotidine)

continued to register growth in domes-

tic sales and Harnal® (tamsulosin), a

treatment for the functional symptoms

of benign prostatic hyperplasia, saw

substantial sales rises in Japan and

Europe. Since its September 1997 U.S.

launch through licensee Boehringer

Ingelheim Pharmaceuticals, Inc.,

Harnal® has recorded rapidly expanding

sales and is securing a strong repu-

tation within the U.S. medical com-

munity. Overseas sales—encompassing

results from the pharmaceuticals, nutri-

tional products, and food and roses

businesses—accounted for 41.0% of

net sales as Yamanouchi moved toward

full-fledged globalization during the

year under review.

Looking at the operating environment

in the medium term, Yamanouchi is

facing some factors that may negatively

affect results. Chief among these are

anticipated contractions in the

Japanese pharmaceutical market due

to impending reforms to the health care

system and the effect on sales of the

forthcoming expiration of Yamanouchi’s

patents on Gaster®. However, to

counter these adverse factors, we have

worked to ensure a strong R&D pipeline

that contains a number of exciting new

drug candidates that are expected to

be strong sellers. Backed by this

pipeline, we believe that we will be able

to quickly recover from the aforemen-

tioned declines and achieve further

upturns in performance.

Our goal is to be a truly global

enterprise that is competitive with

major pharmaceutical manufacturers

throughout the world. To obtain suffi-

cient funds for achieving global expan-

sion, we are aiming to strengthen

business performance in Japan through

the continual introduction of new drugs

and the enhancement of our sales

force. Moreover, the planned domestic

release of a number of new drugs and

drug candidates over the next five

years is expected to have a great

impact on results. Starsis® (nateglin-

ide), an oral hypoglycemic agent,

received approval in June 1999, and in

July 1999 we launched CHOLEBINE®

(colestilan), a nonabsorbable anion-

exchange resin compound for the treat-

ment of hypercholesterolemia. In

August 1998, atorvastatin (YM548), an

HMG-CoA reductase inhibitor for the

treatment of hyperlipidemia and familial

hypercholesterolemia licensed from

Warner–Lambert Company, of the

United States, and incadronate

(YM175), an oral third-generation bis-

phosphonate compound for the treat-

ment of bone loss associated with

osteoporosis, were filed for approval in

Japan. Drug candidates currently

undergoing clinical development include

interferon alfacon-1 (YM643), a con-

sensus interferon for the treatment of

chronic hepatitis C virus infection now

in Phase III clinical studies, and cele-

coxib (YM177), an oral non-steroidal

anti-inflammatory drug (NSAID)

licensed from G.D. Searle & Co., of

the United States, that selectively

inhibits cyclooxygenase-2 activity and

is now in Phase II clinical studies. In the

long term, we are looking toward the

continuous domestic launch of drug

candidates that will emerge from a com-

prehensive R&D agreement signed with

Searle as well as of drug candidates

created through in-house drug discov-

ery research.

To achieve the quick market penetra-

tion and maximize the market potential

of these new drugs, we will enhance

our domestic sales capabilities. As a

result, although the domestic market for

pharmaceuticals is not expected to

show further growth in the medium term,

our presence in Japan—the world’s

second largest market for pharmaceuti-

cals—should see strong expansion.

In Europe, Yamanouchi has already

established operations that extend

the entire length of the value chain,

from R&D through production and mar-

keting. At present, we are expanding

operations centered on Harnal®

(Omnic® in Europe) and are planning to

launch several new drugs, including

Infergen® (interferon alfacon-1) and the

2

A Report to Our Shareholders and Friends


long-acting calcium antagonist Hypoca®

(barnidipine, under the name Cyress® in

the Netherlands) by 2000. In addition, in

our pipeline we have nine drug candi-

dates currently undergoing clinical

development in Europe.

Yamanouchi’s most important task

in the medium term is the estab-

lishment of an independent sales net-

work in the United States, the world’s

largest pharmaceutical market. With

R&D and manufacturing operations now

under way in that country, the creation

of this sales network has become our

next and greatest challenge. The

Company now has five drug candidates

in Phase II clinical studies in the United

States. Among these candidates are

YM087, a total vasopressin antagonist

for the treatment of heart failure and

hyponatremia for which we have signed

a l icensing-out agreement with

Warner–Lambert, and YM872, an

injectable AMPA antagonist for the

treatment of acute ischemic stroke, as

well as the oral antidepressant YM992.

Once the Phase II clinical studies of two

of these candidates is completed, we will

set out our strategies for the U.S. market.

In Asia, the Company’s bases of

operations in Taiwan, China, Korea, and

the Philippines were joined by sales

networks in Thailand and Indonesia that

commenced operations in 1999. Once

the independent marketing network is

in place in the United States, Yama-

nouchi will have established the foun-

dations of a truly global enterprise.

The nutritional products businesses

of Shaklee Corporation, of the

United States, and Shaklee Japan K.K.

as well as the food and roses business

of Shaklee subsidiary Bear Creek

Corporation are expected to play

increasingly important roles in advancing

Yamanouchi toward its goal of being a

comprehensive health care enterprise.

By strengthening the multi level

marketing of nutritional products and

reinforcing mail-order and store opera-

tions for food and roses, we expect to

see growth in sales and earnings in

these segments in the medium term.

To ensure our competitiveness in

the fierce global business arena,

we must aggressively push forward

with R&D. To maximize the quality and

quantity of compounds in our pipeline,

we are not only bolstering our drug dis-

covery research capabil it ies, but

aggressively pursuing strategic R&D

alliances with other major pharmaceuti-

cal manufacturers as well as bioven-

tures, universit ies, and research

institutes. We are also focusing on

speeding up the clinical development

process by enhancing our global drug

development structure and ensuring the

precise and timely evaluation of the

potential of drug candidates.

We will continue to make strategic

investments in R&D in l ight of our

medium-to-long-term prospects. At the

same time, we will work to improve

upon and maintain a high level of prof-

itability. To this end, the Company is

working to achieve the most appropri-

ate level of costs and selling, general

and administrative expenses while

maximizing the expansion of sales.

In line with the philosophy “Creating

and Caring...for Life,” the Yamanouchi

Group will continue to contribute to the

advancement of medicine and the health

and happiness of people around the

world while endeavoring to satisfy the

expectations of shareholders and cus-

tomers. As always, we respectfully thank

you and ask for your continued support.

August 1999

Masayoshi Onoda

President and Chief Executive Officer

3


Racing Major New DBacked by a Powerful R&D Pipeline

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Yamanouchi’s formidable R&D pipeline is its engine of future

growth. Now the challenge is to rapidly launch new products

and maximize market penetration. Achievements to date:

1. Starsis®and CHOLEBINE®

launched in Japan

in summer 1999

2. Atorvastatin and incadronate filed in Japan

in August 1998

3. Numerous drug candidates, including a BMP-2 and

celecoxib, under development in Japan

4. In Europe, Infergen®and Cyress®

approved in

1999 and nine other products under development

5. Five drug candidates, including YM087,YM872, and YM992, in Phase II clinical studies

in the United States

6.Harnal® (Omnic®, Flomax®) captures substantial mar-

ket shares worldwide, joining with new drug lineup to

accelerate growth

4


Drugs to Market

YM337(High-risk PTCA)

YM992(Depression)

MinodronateYM529(Bone metastasis of breast cancer)

YM905(Urinary incontinence)

CHOLEBINE®

(Hypercholesterolemia)

1999DOMESTIC

YM087(Heart failure)

NMEs* from an R&Dalliance with G.D.Searle & Co.

Scheduled Launch of New Products

Celecoxib YM177(RA, OA,dental pain)

YM872(Acute ischemic stroke)

OVERSEAS

Libian®

(Oral contraceptive)

Starsis®

(Diabetes)

Infergen®

(Chronic hepatitis C)

Successor toGaster® ODapplyingWOWTAB®

AtorvastatinYM548(Hyperlipidemia)

IncadronateYM175(Loss of bone massassociated with osteoporosis)

Interferon alfacon-1YM643(Chronic hepatitis C)

OprelvekinYM294(Chemotherapy-induced thrombocytopenia)

Cyress®

(Hypertension)

)

*NMEs: New Molecular Entities

BMP-2YM484(Promotion of bone formation)

5


STARSIS® (NATEGLINIDE)

Approved in June 1999 in Japan,

Starsis® (nateglinide) is a fast-acting

oral hypoglycemic agent for treating

patients suffering from non-insulin-

dependent diabetes mellitus (NIDDM).

NIDDM patients tend to either fail to

secrete sufficient quantities of insulin

after meals or have slower than normal

rates of insulin secretion, resulting in

hyperglycemia.

In Japan, there are currently 6.9 mil-

lion probable diabetics—95% of whom

have NIDDM—and this number is

expected to increase to 7.8 million by

2003. Consequently, the need for safe

and effective hypoglycemic agents is

expected to expand steadily.

Starsis® is a derivative of the amino

acid d-phenylalanine, which acts direct-

ly on pancreatic beta cells. A 90mg

dose of Starsis® three times a day

before each meal reduces the post-

prandial blood glucose level by enhanc-

ing the secretion of insulin in a rapid but

short-term manner. Compared with cur-

rently available sulfonylurea insulin sec-

retagogue medications, Starsis® is less

likely to cause hypoglycemia because

of its short-acting enhancement of

insulin secretion.

In clinical trials in Japan involving

patients with mild diabetes (defined as

a slight but significant elevation in

blood glucose levels), Starsis® showed

greater efficacy in reducing postprandi-

al blood glucose levels than placebo.

Starsis® and CHOLEBINE®

APPROVED

0

100

150

200

250

300

18012060300Time following meals (minutes)

Average ± Standard deviation

Source: Y. Shigeta et al.: Clinical Pharmacology and Therapy, 7:729-754, 1997

Before first administration At final administrationBefore first administration At final administration

Placebo (n=21)

Starsis® (n=14)

(mg/dl)

Bloo

d gl

ucos

e le

vels

Changes in Blood Glucose Level overa 180-Minute Period after a Meal(Eight-week administration study)

CHOLEBINE® (COLESTILAN)

Approved in March 1999,

CHOLEBINE® (colestilan) is a non-

absorbable anion-exchange resin

compound for the treatment of hyper-

cholesterolemia and familial hypercholes-

terolemia. CHOLEBINE® inhibits the

enterohepatic circulation of bile acid and

thus promotes the catabolism of choles-

terol to bile acid as well as an increase

in the number of LDL receptors. Due to

the resulting decrease in cholesterol in

the liver, the level of serum LDL choles-

terol is reduced. Because the drug is

not itself absorbed by the body but

excreted, it causes no severe adverse

side effects. Also, compliance is

expected to be vastly improved

because the drug can be administered

in a dose that is comparatively smaller

6

Starsis®


ATORVASTATIN (YM548)

Atorvastatin (YM548) is an HMG-

CoA reductase inhibitor for the

treatment of hyperlipidemia and familial

hypercholesterolemia developed by

U.S.–based Warner–Lambert Company

that Yamanouchi filed for approval in

Japan in August 1998. Already on the

market throughout the world, atorva-

statin has earned high marks within the

medical community as the most effec-

tive HMG-CoA reductase inhibitor avail-

able. Clinical trials in Japan have

demonstrated this agent’s ability to

reduce not only total cholesterol and

LDL cholesterol levels but also triglyc-

eride levels. In addition, the effects of

the drug increase dose-dependently

without reaching a plateau.

Hyperlipidemia is thought to be a

major cause of coronary artery dis-

eases; consequently, treating it effec-

tively has become a major medical

issue. According to the “Guidelines for

the Diagnosis and Treatment of

Hyperlipidemia in Adults,” presented at

the Japan Atherosclerosis Society

Meeting in 1997, the desirable level of

total serum cholesterol is under 220

mg/dl and that of LDL cholesterol is

under 140 mg/dl in cases where coro-

nary artery diseases or other risk fac-

tors are absent. There are growing

expectations that drugs will be able to

control cholesterol levels effectively. As

shown in the chart, the prevalence of

patients in Japan with a total choles-

terol level of 240 mg/dl or higher is esti-

mated to be around 10 million people.

Under the new guidelines, this number

jumps to 20 million.

INCADRONATE (YM175)

Osteoporosis is the pathologic loss

of bone mass that often accompa-

nies aging. This loss of mass makes

bone fragile. Osteoporosis is particular-

ly prevalent among postmenopausal

women; in Japan it is estimated that

women lose an average of 20% of their

bone mass in the 8 to 10 years follow-

ing menopause. Moreover, about 50%

of Japanese women in their late 70s are

thought to have bone mass measuring

less than 70% of the average for a

healthy premenopausal woman. The

number of osteoporosis patients in

Japan is expected to reach 11 million

in 2000.

Created by Yamanouchi, incadronate

(YM175) is an oral third-generation bis-

phosphonate compound that was filed

for approval as a treatment for the loss

of bone mass associated with osteo-

porosis in August 1998 in Japan. Acting

on mature osteoclasts while not dis-

rupting the formation of new ones,

incadronate powerfully suppresses

bone resorption, which leads to steadily

increasing bone mass.

Atorvastatin and Incadronate

FILED FOR APPROVAL

The rising incidence of

lifestyle-related and geri-

atric diseases is a major tar-

get of Yamanouchi’s R&D. Our

goal is to enhance the quality

of life by continually launching

superior new drugs to address

these needs.

Total prevalence9,655

Total drug-treated population2,694

Source: Decision Resources, Inc.

7

than those needed for existing anion-

exchange resin compounds. Regarding

mechanism of action, CHOLEBINE®

and HMG-CoA reductase inhibitors are

completely different and therefore can

be used in combination.

With the introduction of CHOLEBINE®

and atorvastatin, Yamanouchi is aiming

to strengthen its presence in the antihy-

perlipidemia market through a full-

fledged push.

1997 Hyperlipidemia PatientPopulation in Japan(Total cholesterol level of 240 mg/dl or higher)(thousands)


INTERFERON ALFACON-1 (YM643)

Interferon alfacon-1 (YM643) is a

consensus interferon—a unique,

highly active, non-naturally occurring

interferon—for the treatment of chronic

hepatitis C virus infection. The drug

was approved in Europe in February

1999 and is currently in Phase III clini-

cal studies in Japan. Created by

Amgen Inc., of the United States, the drug

is a next-generation interferon designed

to have increased efficacy. It is manu-

factured using a synthesized composite

DNA sequence derived from the amino

acid sequences of several human inter-

feron alpha subtypes. In clinical trials

conducted in the United States and

Japan, the drug has shown high effi-

cacy in treating patients with high viral

titers and providing virological respons-

es in relapsing patients as well as

responding patients.

OPRELVEKIN (YM294)

Oprelvekin (YM294), a recombinant

human interleukin-11 (rhIL-11) agent

now in Phase III clinical studies in Japan,

is expected to prevent thrombocytope-

nia associated with cancer chemothera-

py and to stimulate platelet production,

thus reducing the need for frequent

transfusions to speed platelet recovery

in patients. This allows the next course

of chemotherapy treatment to be carried

out on schedule. In addition, the drug is

expected to reduce the incidence of

fervescence, a common adverse event

caused by interleukin agents.

YM484 (BMP-2)

YM484, a recombinant bone morpho-

genetic protein-2 (BMP-2) deriva-

tive, is currently in Phase III clinical

studies in Europe for orthopedic

surgery applications. Interim analysis of

data from current Phase III clinical stud-

ies shows that YM484 is effective in

promoting bone formation. In Japan,

Phase II/III clinical studies are in progress

for orthopedic surgery applications;

preparations for Phase II clinical study

for periodontal surgery applications are

under way.

MINODRONATE (YM529)

Minodronate (YM529) is a highly

promising third-generation bis-

phosphonate agent created by

Yamanouchi that powerfully suppresses

bone resorption activity. The injectable

formulation of minodronate is currently

in Phase II clinical studies on patients

with bone metastasis of breast cancer,

and its oral formulation is in Phase II

clinical studies on patients with multiple

myeloma.

In January 1999, Yamanouchi granted

Ono Pharmaceutical Co., Ltd., of Japan,

exclusive rights to develop and market

domestically minodronate for the treat-

ment of osteoporosis, hypercalcemia,

and indications other than those that

Yamanouchi is pursuing.

CELECOXIB (YM177)

Celecoxib (YM177) is an oral non-

steroidal anti-inflammatory drug

(NSAID) developed by G.D. Searle & Co.,

of the United States, that selectively

inhibits cyclooxygenase-2 (COX-2) activ-

ity induced in inflammation. Celecoxib

is currently undergoing late Phase II

clinical studies in Japan for the treat-

ment of chronic rheumatoid arthritis,

osteoarthritis, and postsurgical dental

pain.

Celecoxib’s mechanism of action is

designed to suppress inflammation

without triggering the side effects asso-

ciated with currently available NSAIDs.

In clinical trials conducted in the United

States, celecoxib exhibited superior

gastrointestinal and renal safety com-

pared with NSAIDs. The drug was

launched in the beginning of 1999 in the

United States, where it has been widely

accepted by physicians and patients.

Promising Drug Candidates in Japan, Europe, and the United States

PHASES III AND IITotal Drug-Treated Population in Japan(thousands)

Source: Decision Resources, Inc.* Estimates

Rheumatoid Arthritis

Osteoarthritis

2007*2002*1997

554630

717

2,3112,594

2,933

2007*2002*1997

8


Japan, Europe, and the United States.

Prepared in both oral and injectable for-

mulations, YM087 can display an

antagonistic action against both vaso-

pressin V1 and V2 receptors. The drug is

being evaluated to determine whether it

can improve cardiac dysfunction, car-

diac hypertrophy, and pulmonary con-

gestion while alleviating edema and

maintaining blood sodium levels.

Designed for oral administration, pre-

liminary studies suggest that YM087

has strong-acting, long-lasting effects,

and, while additional studies are need-

ed, the Company believes that the drug

has great potential as an effective treat-

ment for congestive heart failure.

In April 1998, Yamanouchi entered

into a licensing-out agreement with

Warner–Lambert for YM087 as part

of a cross-licensing agreement for

atorvastatin. This agreement gives

Warner–Lambert the right to market

YM087 in North America, South

America, Europe, and Africa, while

Yamanouchi retains copromotional

rights in these regions.

YM905

YM905 is being evaluated for the

treatment of urinary incontinence

and is now in Phase II clinical studies in

Europe and the United States. YM905

is a muscarinic M3 antagonist that acts

selectively on the smooth muscle of the

bladder. Although additional studies

are needed to determine the drug’s

safety and efficacy, because of its

selectivity, YM905 is expected to

reduce the frequency and intensity of

such adverse events as dry mouth and

blurred vision, which accompany the

use of existing drugs.

YM872

YM872, an injectable medication that

may improve various symptoms

associated with acute ischemic stroke, is

currently being evaluated in Phase II

clinical studies in the United States and

Europe. Acute ischemic stroke is thought

to cause excessive glutamate release

and the stimulation of glutamate recep-

tors, which increases the calcium ion

level inside neurons, causing cerebral

nerve cells to die. YM872 selectively

antagonizes the AMPA (a-amino-3-

h y d r o x y - 5 - m e t h y l i s o x a z o l e - 4 -

propionate) receptor, the glutamate

receptor subtype responsible for regu-

lating calcium flow into cerebral neurons.

YM087

YM087, a treatment for heart failure,

edema, and hyponatremia, is

currently in Phase II clinical studies in

The molecular structure of YM087

9

It is now evident that acute ischemic

stroke is a treatable disorder. Both

intravenous and intraarterial throm-

bolytic therapies are of proven benefit

in selected patient populations. Very

promising neuroprotective agents are

now entering the final stages of clinical

evaluation. Recent improvements in

clinical trial design will likely allow the

identification of safe and effective

neuroprotective agents within the

next few years.

Gregory W. Albers, MD

Director, Stanford Stroke Center


YM337

YM337, a Fab fragment of a human-

ized monoclonal antibody, inhibits

GPIIb/IIIa action in the final common

pathway of platelet aggregation. Although

additional investigation is necessary to

establish this antiplatelet drug’s efficacy,

it is expected to be useful for the preven-

tion of cardiac ischemic complications in

patients after they have undergone per-

cutaneous transluminal cardiac angio-

plasty (PTCA). YM337 is in Phase II

clinical studies. Because YM337 has a

short-action profile, it is being tested to

determine whether, as expected, it can

minimize bleeding risks during intra-

venous bolus dose administration fol-

lowed by infusion.

The Netherlands is another country

with a growing senior citizen popu-

lation where the need for such drugs

as Harnal® (Omnic®) is continuing to

rise. Yamanouchi’s MRs are thus work-

ing to provide health care professionals

with appropriate information on

Harnal® while gathering market intelli-

gence on the needs of Dutch patients.

Eric Mijnlieff

Account Manager,

Yamanouchi Pharma B.V.

10

Clinical Pharmacology Unit at Yamanouchi Europe

In December 1997, Yamanouchi

concluded a comprehensive

four-year R&D agreement

with G.D. Searle & Co. that

gives the Company the rights

to develop and market in

Japan any Searle compound

that reaches the preclinical

trial stage in Europe or the

United States. This agreement

covers more than 10 drug

candidates. These compounds

include novel hematopoietic

growth factors and both anti-

inflammatory agents and

anticancer drugs with novel

mechanisms.

Regarding future product

launches, Yamanouchi and

Searle’s Japanese branch

will copromote products

under the Yamanouchi brand

name or the two companies

will comarket products under

their respective brand names.

Searle’s research projects

take the lead in the world

among competitors in many

cases. Accordingly, in the

competition for rapid drug

development, the firm boasts

many compounds that are

first or second to market.

Comprehensive R&D Agreement with Searle

YM992

YM992, an oral antidepressant now

in Phase II clinical studies in the

United States and Europe, is a selective

serotonin (5-HT) reuptake inhibitor and

noradrenaline augmenting 5-HT2A

antagonist (SINAS). It is being investi-

gated to determine whether it is effec-

tive in treating symptoms of depression

by raising serotonin concentration

levels in the brain to stimulate 5-HT1A

receptors. Due to its 5-HT2A antagonistic

action, YM992 may further stimulate 5-

HT1A receptor-mediated neurotrans-

mission and have a noradrenaline

releasing property. Although additional

studies are needed to determine the

drug’s safety and efficacy, YM992 may

be able to deliver strong, fast, and

effective therapeutic action while trig-

gering low levels of 5-HT reuptake

inhibitor associated adverse events,

such as insomnia, anxiety, and sexual

dysfunction.


HARNAL® (TAMSULOSIN)

Harnal® is a treatment for the func-

tional symptoms of benign prostatic

hyperplasia (BPH). Launched in Japan

in 1993, Harnal® is currently marketed

in 46 countries around the world under

such names as Omnic® and Flomax®.

Generally occurring in older men,

BPH is a condition in which the

prostate gland enlarges, constricting

the urethra and gradually restricting the

flow of urine. BPH places a burden on

patients by making it difficult to urinate

while triggering a frequent urge to uri-

nate at night and hampering their free-

dom to enjoy an active l ifestyle.

Eliminating the symptoms of BPH thus

has a direct impact on a patient’s daily

life. According to a study undertaken in

Japan, an estimated 20% of men in

Japan 55 years of age and over suffer

from BPH to some degree. Since the

release of Harnal®, the number of peo-

ple receiving pharmaceutical treatment

has increased; however, there remains

a large latent market for BPH treat-

ments. Moreover, patient populations in

Japan, Europe, and the United States

are expected to grow as more citizens

enter their golden years.

As an alpha1-blocker that acts selec-

tively on the lower urinary tract, Harnal®

has the characteristic of improving the

functional symptoms of BPH while

exerting a minimal effect on blood pres-

sure. In addition, the drug can be

administered to the majority of patients

without the need for dose titration. In

recognition of the unique characteris-

tics of and excellent clinical results

yielded by Harnal®, in 1997 Yamanouchi

received Japan’s Prime Minister’s Prize

in the National Commendation for

Innovation. In Japan, the most common

BPH treatments used previously were

drugs derived from plants as well as

antiandrogens; however, since the intro-

duction of Harnal®, the market has

changed greatly. At present, Harnal®’s

share of the domestic market for BPH

treatments is estimated to exceed 55%.

Outside Japan, the number of pre-

scriptions written in Europe for Harnal®—

sales of which under such names as

Omnic® are handled through Yama-

nouchi Europe B.V. and l icensee

Boehringer Ingelheim International

GmbH of Germany—has surged since

the product’s European launch in 1995.

Harnal® has also become the number

Sales of Harnal® continue to climb worldwide

MAIN PRODUCTS

19981996199419921990

12%13%

17%

21%23%

3,290

3,1002,960

2,770

2,600

Source: In-house material

Percentage of drug- treated population

Estimated Number of BPHSufferers in Japan(thousands)

11

Harnal® (Omnic®) is shipped from ManufacturingMeppel to countries throughout Europe.


one selling alpha1-blocker in many

European markets for BPH treatments,

including the Netherlands, Germany, Italy,

and the United Kingdom. In the United

States, where it is sold through licensee

Boehringer Ingelheim Pharmaceuticals,

Inc., under the name Flomax®, the

drug’s market share has been growing

since its launch in 1997. Global sales of

Harnal® are expected to continue to

expand in light of the worldwide growth

of markets for BPH treatments.

GASTER® (FAMOTIDINE)

Gaster®, an H2 antagonist used as a

treatment for peptic ulcers, gastri-

tis, and reflux esophagitis, is Yama-

nouchi’s top-selling pharmaceutical.

Launched in Japan in 1985, the drug is

now the second largest selling drug in

Japan. Overseas, Gaster® is marketed

through licensee Merck & Co., Inc., of

the United States, under the name

Pepcid® and is now being sold in more

than 110 countries around the world.

In Japan, Gaster® has captured a

45% share of the market for H2 antago-

nists and proton pump inhibitors (PPIs).

Although sales of PPIs now outnumber

those of H2 antagonists in the United

States and Europe, sales of H2 antago-

nists still account for more than 85% of

the Japanese market. Within the

Japanese medical community, H2 antag-

onists have long been the first choice in

the treatment of acid-related gastroin-

testinal ailments, as they can be admin-

istered for a wide range of indications

and without imposing limitations on the

duration of treatment.

In 1997, Yamanouchi launched Gaster®

OD, an orally disintegrating tablet

applying WOWTAB® technology. In a

study conducted in Japan in 1997

through 1998, Gaster® OD was evaluated

as easy to take by approximately 75% of

patients surveyed. Yamanouchi has

filed for approval in Japan a successor

to Gaster® OD that incorporates next-

generation WOWTAB® technology. The

new formulation is smaller, harder, and

more cost-effective to manufacture.

Through the introduction of such new

formulations, Yamanouchi is working to

maintain its strong market position.

FAROM® (FAROPENEM)

Farom® is the first oral penem-type

antibiotic to be developed using

computer-generated molecular design.

With a penem ring structure, Farom®

boasts strong antibacterial strength

against a wide spectrum of bacteria

and represents a new option in the

treatment of infectious diseases.

Moreover, Farom® has been proven

effective against such antibiotic-

resistant bacteria as penicillin-resistant

Streptococcus pneumoniae (PRSP) and

ofloxacin-resistant Staphylococci.

Farom®’s share of the antibiotic market

has risen since its release in 1997 in

Japan, and Yamanouchi now plans to

introduce the drug in a new dry syrup for-

mulation, a move that should expand the

prescription of the drug for pediatric use.

DORNER® (BERAPROST)

The world’s first oral prostacycline

(PGI2) analogue, Dorner® is an

antiplatelet agent effective in both pro-

tecting endothelial cells and increasing

blood flow. Dorner® is effective in reliev-

ing the ulcers, rest pain, and the feeling

of coldness associated with chronic

arterial occlusion, a peripheral circulatory

disorder. Launched in 1992, Dorner®

has secured a more than 10% share of

the domestic market for antiplatelet

agents. Dorner® has also been filed for

the additional indication of primary pul-

monary hypertension, which would

make it the world’s first oral antiplatelet

agent intended for use in the treatment

of this disease.

HYPOCA® (BARNIDIPINE)

Hypoca® is a long-acting calcium

antagonist for the treatment of

hypertension that is administered just

once a day. From 1995 through 1998,

the Japanese Multicenter Study on

Barnidipine with Ambulatory Blood

Pressure Monitoring (J-MUBA) was

conducted to examine the long-term

effects of Hypoca® on circadian blood

pressure (BP) variations in hypertensive

patients. Data from the study showed

that, in the more than 600 cases exam-

ined, Hypoca® effectively controlled BP

throughout a 24-hour period. In patients

New drugs that are superior in

effectiveness and safety are com-

ing onto the market continually, and the

importance of ensuring proper usage

through instruction in drug administra-

tion is becoming greater than ever. As

professionals in the field of medicine,

pharmacists work to promote an

enhanced quality of life for patients.

Yuko Shimoyama, Pharmacist

Department of Pharmacy,

Juntendo University Hospital

Mainstay Yamanouchi products

12


whose BP was high at night (non-dipper),

Hypoca® decreased nighttime BP

as well as daytime BP; however, in

patients whose BP was low at night

(dipper), the hypotensive effect of

Hypoca® was minimal at night. In the

highly competitive market for hyperten-

sion agents, these results are expected

to bolster demand for Hypoca®.

Hypoca® received approval under

the name Cyress® in the Netherlands in

June 1999.

SOLINASE® (PAMITEPLASE)

Created by Yamanouchi using

recombinant gene technology and

launched in Japan in February 1999,

Solinase® is a modified tissue plasmino-

gen activator (t-PA) for the treatment of

coronary thrombolysis associated with

acute myocardial infarction. Available in

vials, Solinase® can be administered via

bolus intravenous injection in a one-

minute time frame. Thus, Solinase® is

expected to speed the time needed for

the reperfusion of infarcted arteries.

Solinase® is outstanding in terms of

convenience as an emergency treatment.

OTC PRODUCTS

In Japan, Yamanouchi offers a wide

variety of OTC products, including

gastrointestinal agents, cold remedies,

skin care products, and first-aid anti-

septic products. Gaster® 10, a switch-

OTC formulation of the H2 antagonist

Gaster® that was launched in 1997, is

expected to record steady growth in

sales as public interest in self-medication

increases.

40

60

80

100

120

140

160

180

200

(hours)

(mmHg)

Before administrationAfter administration

40

60

80

100

120

140

160

180

200

40

200

2015105040

60

80

100

120

140

160

180

200

(hours)

(mmHg)

Before administrationAfter administration

40

60

80

100

120

140

160

180

200

40

200

20151050

Effects of Hypoca® on Differential Patterns of Circadian BP VariationDipper (n=175) Non-dipper (n=130)

13

Source: I. Kuwajima. 1999. Multicenter Study on the effects of a calcium antagonist oncircadian blood pressure variation: J-MUBA. Japanese Circulation Journal Vol.63, Sup. I, 322


14

Review of Operations

P h a r m a c e u t i c a l s

R&D

As described in the preceding special feature,

Yamanouchi’s formidable R&D pipeline con-

tains a number of major drug candidates the

Company expects to launch during the forth-

coming medium-term period. Important issues

Yamanouchi now faces include how to speed-

ily achieve the successful launch of these drug

candidates onto world markets as well as the

need to create an extensive lineup of innova-

tive new drug candidates that will be ready for

marketing subsequent to this period. Key to

addressing these issues effectively is the

ability of Yamanouchi to increase the speed

and quality of its R&D activities.

In the year under review, R&D expenditures

reached ¥54.3 billion, or 12.8% of net sales. In

Japan and the United Kingdom, Yamanouchi

focuses on drug discovery research; in Japan,

the Netherlands, and the United States on

drug development research; and in Japan,

Europe, and the United States on clinical

development. At present, the Company

boasts a worldwide R&D staff of approximate-

ly 1,500 people and is continuing to aggres-

sively invest in forward-looking R&D. At the

same time, to ensure the most effective and

efficient use of its R&D resources Yamanouchi

is focusing on the crucial elements of speed

and quality.

When we talk about speed, we are referring

to the time it takes for a new molecular entity

(NME) to progress from discovery as a

substance with potential to global launch. One

of Yamanouchi’s aims is to launch drugs that

are at least among the first three to be intro-

duced in their respective classifications, there-

by securing an advantage that will help ensure

a foothold in the market. One means of

achieving this is to accelerate the clinical

development process through the expansion

of a global development structure that elimi-

nates the duplication of effort and thus short-

ens development time. To this end, for a

number of drug candidates Yamanouchi is

carrying out Phase I clinical studies in Europe

and Phase II clinical studies in Europe and/or

the United States. This approach has allowed

several new drug candidates to move from

Phase I clinical studies in Europe to Phase II

clinical studies in the United States during the

year under review. In Japan, Yamanouchi has

a strong development capacity and has readi-

ly adapted to the new Good Clinical Practice

(GCP) criteria. Because of progress made by

the International Conference on Harmonization,

we are now able to use data gathered in over-

seas clinical trials when applying for approval.

Thus, Yamanouchi expects to shorten the

time needed for clinical development by utiliz-

ing its global development structure.

Yamanouchi’s global clinical development

capabilities are supported in large part by

Yamanouchi Europe B.V. (YEU)’s Clinical

Pharmacology Unit (CPU) in the Netherlands.

The CPU, which is responsible for Phase I

clinical studies of Yamanouchi compounds,

was constructed according to the GCP guide-

lines of the U.S. Food and Drug Administration

and has a skilled staff of physicians, nurses,

and technical experts. In June 1999, we com-

pleted a second phase of expansion at the

CPU, further enhancing our readiness to handle

the expected increase in new drug candidates.

Quality in R&D refers to the capacity to cre-

ate innovative NMEs with world-class poten-

tial, and maintaining drug discovery research

capabilities—the upstream of the R&D pro-

cess—is essential to sustaining this capacity.

Yamanouchi’s drug discovery research is han-

dled by the Tsukuba Research Center in

The Yamanouchi Research Institute (U.K.) pursues molecular and

cell biology research.


R&D PIPELINE

Stage Product Name/ Generic Therapeutic Target ClassificationCode No. Name

Starsis® nateglinide Non-insulin-dependent diabetes mellitus (NIDDM) Rapid onset insulinotrophic agent

Approved Libian® Contraception Oral contraceptive

Cyress®(1) barnidipine Hypertension Calcium antagonist

YM548 atorvastatin Hyperlipidemia, familial hypercholesterolemia HMG-CoA reductase inhibitor

Filed YM175 incadronate Loss of bone mass associated with osteoporosis Bisphosphonate

YM152 finasteride Benign prostatic hyperplasia 5 alpha-reductase inhibitor

YM643(2) interferon Chronic hepatitis C virus infection Consensus interferon (CIFN)alfacon-1

P-III YM294 oprelvekin Prevention of chemotherapy-induced thrombocytopenia Thrombocytopoietic factor (rhIL-11)

YM484 Promotion of bone formation Bone morphogenetic protein-2 (rhBMP-2)

YM177 celecoxib Rheumatoid arthritis, osteoarthritis, dental pain Cyclooxygenase-2 (COX-2) inhibitor

YM529 minodronate Osteolytic bone metastasis of breast cancer and Bisphosphonateosteolytic lesions of multiple myeloma

YM087 Heart failure, edema, hyponatremia Total vasopressin antagonist

YM992 Depression Selective 5-HT reuptake inhibitor and noradrenaline augmenting 5-HT2A antagonist (SINAS)

YM872 Acute ischemic stroke AMPA antagonistP-II YM337 High-risk PTCA GPIlb/Illa antagonist (monoclonal antibody)

YM905 Urinary incontinence Muscarinic M3 antagonist

YM103 Acute myocardial infarction Na+/H+ antiporter inhibitor

YM511 Breast cancer, endometriosis, uterine myoma Aromatase inhibitor

YM440 Diabetes Insulin sensitivity enhancer

YM454 Contrast medium Ultrasound contrast agent

(1) Approved in the Netherlands. Launched in Japan under the name Hypoca®. (2) Approved in Europe under the name Infergen®. Phase III in Japan. (As of July 1999)

Japan and the Yamanouchi Research Institute

(U.K.) in Oxford.

Yamanouchi is now strengthening its human

genome research capabilities with the goal of

discovering revolutionary new compounds. In

addition to carrying out such research at the

Molecular Medicine Laboratories in Tsukuba,

Yamanouchi is striving to incorporate new

genome research technologies through strate-

gic alliances with other pharmaceutical enter-

prises and participation in a number of

public/private-sector human genome research

projects. For example, Yamanouchi is involved

in two cooperative research projects that began

in 1998 and 1999, respectively, organized by

the Japanese Ministry of International Trade and

Industry that focus on technologies that help

predict the functional expression of genes.

To expedite drug discovery research on

NMEs with world-class potential, Yamanouchi

utilizes the latest technologies, including com-

binatorial chemistry and high throughput

screening, technologies that have paved the

way for a number of focused research

projects. In the mid-1990s, Yamanouchi

became one of the first domestic pharmaceu-

tical makers to introduce these new technolo-

gies in earnest, and, in the fiscal year under

review the Company enhanced the range of

applications for these vanguard technologies.

Yamanouchi recognizes the crucial impor-

tance of forming strategic R&D alliances with

other major pharmaceutical makers and orga-

nizations if it is to boast a substantial number

of high-quality innovative NMEs with global

market potential. In recent years, the Company

has vigorously pursued strategic alliances

covering various R&D stages with universities

and bioventures as well as a number of lead-

ing pharmaceutical companies. These include a

comprehensive R&D agreement with

U.S.–based G.D. Searle & Co., licensing-in and

licensing-out activities with Warner–Lambert

Company, of the United States, and coopera-

tive R&D on two drug candidates with Merck

KGaA, of Germany. Yamanouchi will continue

to actively participate in strategic alliances.

15

Creating innovative NMEs with world-classpotential is the goal of Yamanouchi’sresearchers.


16

MARKETING

During the fiscal year under review, Yama-

nouchi saw substantial drops in sales of phar-

maceutical products. Key factors behind this

performance included the termination of

domestic marketing agreements with Novo

Nordisk A/S, of Denmark, and Schering–Plough

K.K., of Japan, in March 1998 as well as the

discontinuation of sales of Elen® (indelox-

azine), a treatment for symptoms of mental

dysfunction, following a reevaluation by

Japan’s Central Pharmaceutical Affairs

Council in May 1998. However, sales of

Harnal® (tamsulosin, Omnic®, Flomax®), a

treatment for the functional symptoms of

benign prostatic hyperplasia, continued to

surge worldwide, playing a prominent role in

supporting the Company’s performance.

In Japan during the year under review, the

environment surrounding the pharmaceutical

market remained severe, partly due to the

third year in succession of downward revi-

sions to National Health Insurance drug prices

in April 1998. In addition, in the wake of

increases in the out-of-pocket expenses

charged to patients as a result of the 1997

implementation of Health Insurance Law

reforms, calls to contain the number of drugs

prescribed by medical institutions strengthened.

In such an environment, the performances of

major pharmaceutical manufacturers hinge on

whether or not they market blockbuster drugs

as well as their ability to adapt effectively to

changes in the pharmaceutical market.

Domestic sales of Gaster® (famotidine) rose

steadily during the term, as the drug’s share of

the combined H2 antagonist and proton pump

inhibitor market held at 45%. At the same

time, Harnal® continued to record double-digit

growth while domestic sales of Farom®

(faropenem), an oral penem-type antibiotic in

its second year on the market, surged. As a

result, Yamanouchi captured a 4.4% share of

the domestic market and maintained its posi-

tion as the third largest pharmaceutical com-

pany in Japan. Moreover, the reputation of

Hypoca® (barnidipine), a once-a-day calcium

antagonist, was boosted by the results of the

Japanese Multicenter Study on Barnidipine

with Ambulatory Blood Pressure Monitoring

(J-MUBA), Japan’s first large-scale clinical

study of the effects of a calcium antagonist on

circadian blood pressure variations.

Yamanouchi is using these favorable results to

further invigorate the market for Hypoca®.

In Europe, YEU, which maintains marketing

operations in 13 countries—including the

Netherlands, Germany, Italy, France, the

United Kingdom, Spain, Eastern European

countries, and Russia—continued to record

strong sales of Harnal® during the year under

review in each of these countries. To ade-

quately meet surging demand for Harnal® and

handle the expected launch of other new

products, YEU plans to substantially increase

the number of its medical representatives over

the next five years. Moreover, in many major

European countries Yamanouchi has entered

into copromotion agreements, including an

agreement with Glaxo Wellcome UK Ltd. to

market Harnal® in the United Kingdom. In

addition, in 1999 YEU began to export such

mainstay products as Harnal® to Latin

American countries, including Argentina.

Meanwhile, sales of Harnal® by licensee

Boehringer Ingelheim International GmbH and

Boehringer Ingelheim Pharmaceuticals, Inc.,

continued to surge in Europe and the United

States, respectively. Thus Yamanouchi’s sales

to licensees, including royalties, rose.

Regarding Asian operations, in the year

under review the results of Shenyang Yama-

nouchi Pharmaceutical Co., Ltd., of China,

were newly included in Yamanouchi’s consoli-

dated financial statements. In Korea, Taiwan,

and the Philippines, the Company maintains

independent marketing networks. In addition,

the Company’s wholly owned subsidiary in

Thailand began operations in April 1999, and

Yamanouchi plans to commence operations in

Indonesia in summer 1999 as it works to bol-

ster its presence in Southeast Asia in light of

the region’s strong potential for market growth.

Yamanouchi U.S.A. providessupport for licensed sales of

Harnal® (Flomax®).

To meet surging demand for ourproducts, Yamanouchi Europe is

strengthening its medicalrepresentative force.


PRODUCTION

During the term, Yamanouchi increased the

capacity of its Harnal® production lines to

meet strong global demand. At Yamanouchi

Ireland Co., Ltd., a production base for bulk

pharmaceuticals for the European and U.S.

markets, the Company completed a new

Harnal® production line in March 1998 and

began shipments of the drug to Europe in

March 1999. In Japan, Yamanouchi completed

the construction of a new production line at the

Takahagi plant in May 1999, elevating that

facility’s bulk Harnal® production capacity. In

November 1998, the Harnal® formulation

capacity of YEU’s Manufacturing Meppel facil-

ity was also increased. Moreover, at the

Yamanouchi Shaklee Pharma Manufacturing

Center in the United States plans are under

way to begin the formulation of Harnal® for the

U.S. market beginning in 2000.

To adequately meet demand for new drugs

to be marketed both in Japan and overseas,

Yamanouchi is making substantial invest-

ments in new facilities. As part of these efforts,

in February 1999 the Company completed the

large-scale renovation of an injectable formu-

lation facility at the Yaizu plant and in May

1999 constructed a new building for produc-

ing investigational drugs at the Takahagi plant,

both of which are located in Japan.

DRUG DELIVERYTECHNOLOGY BUSINESS

During the year under review, Yamanouchi

took great strides toward setting up a drug

delivery technology business in the United

States. A division of Shaklee Corporation,

Yamanouchi Shaklee Pharma (YSP) is respon-

sible for Yamanouchi’s North American phar-

maceutical technology related operations.

Following the completion of the construction

of the YSP Research Center on the grounds of

the Stanford Research Park in Palo Alto,

California, in 1997, YSP opened the YSP

Manufacturing Center in Norman, Oklahoma,

in September 1998. With the completion of

these two facilities, Yamanouchi’s U.S. drug

delivery technology business now has the

infrastructure necessary for future growth.

Yamanouchi’s drug delivery technology

business involves applying the Company’s in-

house-developed drug delivery technologies

to the pharmaceutical products of other drug-

makers and encompasses all stages from the

early development of formulations through

production. Revenues from this business will

be generated through royalties paid by

licensees as well as manufacturing margins.

Among our drug delivery technologies are

WOWTAB®, an orally disintegrating tablet

designed to be taken without water, and

OCAS™, which enables a constant rate of drug

absorption throughout the digestive tract,

including the lower digestive tract (colon). YSP

has signed agreements with Glaxo Group

Limited to apply WOWTAB® technology to

Glaxo’s original prescription migraine drugs as

well as with Warner–Lambert and Johnson &

Johnson • Merck Consumer Pharmaceuticals

Co. In addition, negotiations are under way

with a number of other pharmaceutical manu-

facturers for licensing agreements involving

WOWTAB® and OCAS™.

Research on drug delivery technologies is

carried out through Yamanouchi’s tripolar R&D

network, consisting of the Yaizu Technology

Center in Japan, YEU’s Research Laboratories

in the Netherlands, and the YSP Research

Center in the United States. Unti l now,

Yamanouchi’s successes in this field have

come through the development and practical

application of such technologies as WOWTAB®

and OCAS™. The Company continues to focus

on creating new drug delivery technologies to

follow WOWTAB® and OCAS™. In January

1998, Yamanouchi began a research project

(UNYPHAR) in the Netherlands that focuses

on the latest drug delivery systems. Financed

partly by a grant provided by the Dutch gov-

ernment, UNYPHAR is being conducted with

three leading Dutch universities, namely,

Groningen, Leiden, and Utrecht, and is con-

centrating on research into the ultimate drug

delivery technology—drug targeting.

17

Yamanouchi Ireland enhanced its bulkHarnal® production line.

Members of UNYPHAR working tocreate new drug delivery systems

The Yamanouchi Shaklee PharmaManufacturing Center manages the formulationof Harnal® and WOWTAB® manufacturing.


The Yamanouchi Group is a comprehensive

health care provider that contributes to the

prevention and treatment of disease as well as

the maintenance and enhancement of every-

day good health.

Yamanouchi’s nutritional products busi-

ness, another pillar of the Company’s business

structure, is conducted through Shaklee

Corporation, of the United States, and

Shaklee Japan K.K. These companies develop,

manufacture, and distribute a wide array of

nutritional products as well as personal care

items, household goods, and home water

treatment products through a multilevel mar-

keting system covering the United States,

Canada, Mexico, Malaysia, and Japan.

During the term, demand for Shaklee prod-

ucts in the United States was stimulated by

the introduction of Enfuselle®, a revolutionary

new skin care line. However, in Southeast Asia

sales fell, mainly due to the adverse effects of

the ongoing financial crisis. In Japan, despite

the introduction of such new nutritional prod-

ucts as Colestop® and Fusihelp, which made

solid contributions to sales, the harsh operating

environment resulting from lackluster consumer

spending and fierce competition led to a slight

drop in sales for the term under review.

In the United States, the seven drivers for

the successful multilevel marketing business

include a number of measures to invigorate

the field sales force as well as the introduction

of exciting, original products. The current field

sales force continues to focus on the Own

Your Life™ vision and to take advantage of

the benefits of a new sales compensation plan

introduced during the prior fiscal year. The

implementation of a duplicable process during

the year under review has created significant

activity. In addition, the Shaklee Web site was

expanded to include on-line ordering, and

member’s direct orders showed significant

monthly increases during the fiscal year.

Shaklee Corporation continues to build its

reputation as an industry leader with new and

improved products that help people lead

healthier lives. The introduction of the revolu-

tionary skin care line Enfuselle® was a spec-

tacular sales success, generating more than

three times the sales of any previous Shaklee

skin care l ine. Products that showcase

Shaklee Corporation’s expertise in nutrition

and wellness include the following:

Vita-Lea Multivitamin and

Multimineral Supplement

Vita-Lea is one of the most technically

advanced multivitamin and multimineral sup-

plements on the market. A long-term clinical

study found that taking Vita-Lea for one year

provides support for the immune systems of

healthy elderly adults. The highly significant

results were presented at the annual meeting

of the American College of Nutrition.

18

N u t r i t i o n a l P r o d u c t s

Shaklee provides health-promoting products as well asattractive lifestyle choices.


Optiflora™ Prebiotic and

Probiotic Dietary Supplement

Developed by Shaklee scientists, Optiflora™

is the first product in North America that

guarantees the delivery of l iving micro-

organisms directly to the intestine. Its patent-

ed triple encapsulation technology enables

Optiflora™ to support a normal healthy bal-

ance of intestinal microflora. Shaklee

Corporation expects Optiflora™ to become a

best-selling product.

Enfuselle® Skin Care Products

Shaklee Corporation applied its expertise in

nutrition to launch Enfuselle®, a vitamin-based

skin care line that has seen sales significantly

exceed forecasts. Shaklee scientists have filed

four patent applications for the line. Enfuselle®

formulations have been clinically proven to

block and reverse the visible signs of aging.

Clinical studies to confirm safety and efficacy

also proved the line’s ability to impart significant

improvements in the look and feel of the skin.

Continued economic difficulties and a falloff

in consumer confidence negatively impacted

operations in both the Malaysian and

Philippine businesses. Following the closing of

the Shaklee operations in Taiwan and Argentina

in March 1998, Shaklee Corporation elected

to shut down its operations in the Philippines

in 1999.

During the fiscal year, Shaklee Japan intro-

duced the “Career Coordinator Bonus” as a

measure to invigorate sales leaders. Moreover,

the company launched two new publications:

the Business Builder Guide and the Shaklee

Difference Booklet. New products launched

included Colestop® and Fusihelp. These new

products have unique characteristics and are

expected to attract new customers for

Shaklee products.

Colestop® Cholesterol Control

Colestop® is an innovative natural nutritional

product that helps control cholesterol levels.

The supplement’s primary ingredient is benikoji,

or red malted rice, which has a long history in

Japan as an ingredient in fermented foods.

The benikoji used in Colestop® is BYS-114, a

special strain co-developed with Yamanouchi.

Fusihelp Joint Cartilage Builder

Fusihelp is a supplement designed to supply

glucosamine, an important constitutional nutri-

ent for the cartilage of the joints. Since glu-

cosamine in various joints is known to

decrease with aging, hard exercise, excess

weight, and many other causes, Fusihelp is

expected to become one of the ideal nutrition-

al products for people in modern society.

Shaklee Corporation and Shaklee Japan

continue to work together on the transfer of

technology to enable the local manufacturing

of both nutritional and personal care products.

For example, Fusihelp is the outgrowth of

research performed in the United States for its

Osteokinetics® product. In addition, collaboration

between Shaklee and Yamanouchi’s Institute

for Consumer Healthcare has resulted in valu-

able sports nutrition information that specifical-

ly targets male and female triathletes and

female athletes in general.

Shaklee Corporation plays a leadership role

in the industry through active participation in

the Direct Selling Association, the Council for

Responsible Nutrition, and the Consumer

Healthcare Products Association.

Shaklee Corporation supports Team Shaklee,

a bicycle racing team. Team Shaklee cyclists

earned more than 100 podium victories and an

incredible six National Championships during

the year’s racing season. Team Shaklee riders

also won gold medals at both the Goodwill

Games and the Commonwealth Games, pro-

viding international visibility for Shaklee at

these world-famous competitions.

19

The Enfuselle® lineup

Colestop®

Team Shaklee—symbolizing thebenefits of Shaklee Sports Nutrition—enjoyed a winning year.


Supported by the robust U.S. economy, the

specialty retailer Bear Creek Corporation, a

Shaklee Corporation subsidiary responsible

for Yamanouchi’s food and roses business,

recorded the highest sales and earnings in its

history on a local currency basis during the

year under review. Bear Creek is engaged in

the mail-order, store, Internet, and wholesale

marketing of gourmet gift foods, horticultural

items, clothing, and other products. Bear

Creek businesses include Harry and David,

North America’s largest direct marketer of fruit

and food gifts; Jackson & Perkins, a leading

mail-order supplier of roses and other garden-

ing products; Northwest Express, a unique

catalog business that offers products show-

casing the l ifestyle of the U.S. Pacific

Northwest; Harry and David Stores; and Bear

Creek Gardens, a wholesale rose company.

Showing double-digit sales growth on a

local currency basis, Harry and David Stores

increased the number of store locations to 72.

In addition, sales over the Internet grew during

the year under review and made a solid contri-

bution to overall performance.

Among Bear Creek’s operational highlights

during the year were the implementation of a

Warehouse Management System, a Human

Resource Management System, and a new

management and financial reporting system for

Bear Creek Gardens and Bear Creek Production.

In addition, Bear Creek purchased a 3% inter-

est in Catalog City, an Internet company that

offers more than 600 catalogs at its Web site.

In the interest of reducing overall delivery

expenses while improving the quality of deliv-

ery, Bear Creek worked to position more

product at the Hopewell Distribution and

Customer Operations Center completed in

Hebron, Ohio, in September 1997. The com-

pany also strengthened its national partner-

ship with the U.S. postal service and

significantly increased its use of Priority Mail,

a cost-efficient alternative to overnight and

two-day service. These and other efforts

enabled Bear Creek to reduce delivery expens-

es while cutting down delivery-related com-

plaints more than 20%.

In addition, Bear Creek continued to actively

pursue expansion. Harry and David completed

a bakery remodeling project and upgraded its

public tour route. Jackson & Perkins opened a

Redi-Plant rose packing facility at its rose-

growing center in Wasco, California, and relo-

cated its preexisting Redi-Plant operation

from Medford, Oregon, to Wasco.

Notably during the year, Bear Creek contin-

ued to win awards, receiving Catalog Age gold

awards for Jackson & Perkins’ 1998 Rose cat-

alog and Harry and David’s Christmas catalog

as well as a si lver award for Jackson &

Perkins’ 1998 Rose Wholesale catalog. In

addition, Harry and David won a silver award

for their Web site. Moreover, Jackson &

Perkins won two All-America Rose Selection

awards for 1999.

Also, Bear Creek received the Oregon

Governor’s award for occupational safety and

was selected by Oregon Business Magazine

as one of the “Best Companies in Oregon to

Work For” in 1998.

20

F o o d a n d R o s e s

Harry and David fruit and food gifts


21

Amid the rapid aging of Japanese society and

the growing recognition of the importance of

medicine and health care in everyday life,

Yamanouchi continues to carry out corporate

citizenship activities that concentrate on

health care in l ine with its philosophy

“Creating and Caring. . . for Life.”

The Company works to provide the public

with useful and understandable information on

medicine and health through a variety of chan-

nels that include a radio program that pro-

vides health care related information and a

health hot line that offers free medical advice

from experienced nurses and specialists in the

fields of gynecology and digestive and circula-

tory systems.

Yamanouchi also works to promote techni-

cal advances in health care, medicine, and

medical science through foundations set up

for this purpose in Japan, Europe, and the

United States. The foundation in Japan—

which has made available a total of more than

¥1.4 billion in research grants—celebrated its

30th year of existence during the period, while

the Company’s foundation in Europe con-

tributed to such institutions as the Czech

Republic’s Masaryk University. In the United

States, Yamanouchi’s foundation continued to

make donations to several universities.

In Japan, the Company’s efforts encompass

various charitable donations. For example, the

Company furnishes ambulances to communi-

ties nationwide and in the year under review

contributed 4 ambulances, bringing its total of

donated vehicles thus far to 172. Also, Yama-

nouchi provides vehicles equipped with

wheelchair lifting devices through the Three-

Nine Fund, a matching gift program within the

Company to which employees contribute.

In the United Kingdom, the Yamanouchi

Research Institute (U.K.) (YRI) works to benefit

the local community through donations to local

organizations, including a hospice for the ter-

minally ill, a shelter for the homeless, and a

hospital as well as the local police and fire ser-

vices. In addition, YRI is concerned about the

preservation of the environment and the cul-

tural heritage of the region in which it is situated,

sponsoring the annual “Walk for Wildlife”

organized by the Buckinghamshire, Berkshire

and Oxfordshire Naturalists Trust and helping

restore and maintain Edwardian architecture in

Oxford—an activity for which it has received

awards.

In the United States, Shaklee Corporation

strives to improve the quality of life for people

and communities. This is demonstrated by

such innovative programs as Shaklee Cares,

an organization that supports disaster relief,

and the Shaklee Community Caretakers

Awards, which honor outstanding community

volunteers. In addition, the Company main-

tains a matching gift program that encourages

employees to make individual contributions to

nonprofit organizations and makes regular

corporate contributions, including four-year

college scholarships through the Dr. Forrest

C. Shaklee Memorial Scholarship Program.

During the year under review, Shaklee

Cares provided much-needed help in 13

states to communities, families, and individu-

als struck by tornadoes, floods, hurricanes,

fires, and other natural disasters. Shaklee

Cares is a publicly supported charitable orga-

nization, the administrative costs for which are

donated by Shaklee Corporation, thus ensur-

ing that donations go directly to those in need.

Bear Creek continued its tradition of gener-

ously supporting the communities in which it

operates, with the company and employees

contributing to the United Way through a

matching gift program. Bear Creek also sup-

ports homeless children by contributing to the

Better Homes Foundation Kidstart Program

through Harry and David and Jackson &

Perkins. In addition, during the year under

review Bear Creek announced a multiyear

donation to support the construction of a

Center of the Visual Arts at Southern Oregon

University in Ashland, Oregon, and completed

a multiyear grant to provide classroom com-

puters to the Medford City School District,

also in Oregon.

C o r p o r a t e C i t i z e n s h i p

The Three-Nine Fund provides vehiclesequipped with wheelchair lifting devices.

The Yamanouchi EuropeanFoundation provides grants toCzech scientists.

Shaklee Cares helps people struck bynatural disasters.


22

As an active global enterprise, the Yama-

nouchi Group continues to strengthen its envi-

ronmental auditing systems and implement

measures that promote energy conservation

as well as the reduction of waste and use of

chlorofluorocarbons (specifically, CFCs 11,

12, and 13).

Yamanouchi Lotus Garden, the parent com-

pany’s recently completed office building in

Tokyo, Japan, was awarded the 11th annual

Nikkei New Office prize. This prize is given in

recognition of a new office building’s energy-

saving design, such as the efficient use of natural

light, as well as the harmony of its architec-

tural design with the natural surroundings.

In July 1998, the Takahagi plant received

ISO 14001 certification. Also, the Yaizu plant

and Tohoku Yamanouchi Pharmaceutical

Co., Ltd., are now preparing for ISO 14001

certification.

Yamanouchi Ireland, which has already

received ISO 14001 certification, was one of

the first companies in Ireland to participate in

the Eco-management & Audit Scheme, which

is regarded as the leading EU program for

corporate transparency regarding environ-

mental issues. During the year, Yamanouchi

Ireland issued its second fully audited and val-

idated environmental statement. Moreover, the

company’s approach to environmental issues

was further demonstrated during the year

through the expansion of its sophisticated

system for recovering solvent from waste.

Yamanouchi Europe pushed forward with

measures to reduce the volume of packaging

used for commercial products and minimize

emissions from its plants.

The environmental protection efforts of the

YSP Research Center in Palo Alto, California,

include four major program areas: wastewater

treatment, air quality management, hazardous

waste management, and environmental

awareness training. The wastewater treatment

program was a major consideration in the

construction of the research center laboratory.

Laboratories were built with state-of-the-art

designs and preventive safeguards, which

regulators have adopted for use as a model

for all local industries. The air quality program

was another major consideration in the cen-

ter’s design. Air pollutant emissions have been

less than 50% of permitted allowances.

As part of ongoing efforts to conserve ener-

gy and reduce the production of greenhouse

gases, Shaklee Corporation’s Norman

Manufacturing Center invited a team of univer-

sity engineers to perform a comprehensive

energy audit at the facility. The audit team

reported that the facility was one of the clean-

est and most efficiently run manufacturing

operations in Oklahoma.

In March 1999, Shaklee Corporation’s

Director of Environmental Health and Safety

visited Nepal’s Sagamartha National Forest

near Mount Everest to view firsthand the

progress of several reforestation projects

Shaklee Corporation has supported since

1979. Working with Sir Edmund Hillary and the

American Himalayan Foundation, more than a

million trees have been planted thus far

through these projects. Forests provide impor-

tant habitats for wildlife, protect against soil

erosion, and help fight global warming by scrub-

bing greenhouse gases from the atmosphere.

As a large agricultural products based com-

pany, one of Bear Creek Corporation’s prima-

ry concerns is environmental preservation.

Accordingly, the company is converting heat-

ing at its orchards to an environment-friendly

propane gas system, a move that will result in

cleaner air for the people in the communities

in which it operates. In addition, Bear Creek

has played a leading role in local water con-

servation efforts over the years. An

Environmental Steering Committee made up

of employees from Medford, Hopewell, and

Wasco has worked with Shaklee Corporation

to develop policies and procedures to docu-

ment the company’s ongoing compliance with

environmental regulations as well as a mainte-

nance program. The committee continues to

meet monthly to evaluate new opportunities

for prudent and responsible environmental

improvements at the company’s three princi-

pal sites.

E n v i r o n m e n t a l P r o t e c t i o n

The Takahagi plant acquired ISO 14001 certification.

The Yamanouchi Ireland plant, which cele-brated its 10th anniversary during the year

under review, is renowned as a modelfacility for environmental protection.

Shaklee Corporation has supportedseveral reforestation projects in

the Himalayas.


23

FINANCIAL SECTION

Selected Financial Highlights ...................... 24Financial Review ................................ 25Consolidated Balance Sheets .................... 30Consolidated Statements of Income................ 32Consolidated Statements of Shareholders’ Equity.... 33Consolidated Statements of Cash Flows ............ 34Notes to Consolidated Financial Statements ........ 35Report of Independent Certified Public Accountants 44


24


Selected Financial HighlightsYears Ended March 31, 1999, 1998, 1997, 1996 and 1995

Millions of yen, except per share amounts1999 1998 1997 1996 1995

Results for the Year:Net sales .................................................................................... ¥ 423,217 ¥ 477,356 ¥ 454,740 ¥ 414,177 ¥ 384,324Cost of sales .............................................................................. 127,513 166,563 158,664 147,502 128,679Selling, general and administrative expenses* ......................... 206,259 207,948 194,847 178,460 168,908Operating income*..................................................................... 89,445 102,845 101,229 88,215 86,737Net income** ............................................................................. 48,002 6,092 41,866 40,542 39,719

Research and development expenses....................................... 54,299 43,639 42,309 40,920 38,225Capital expenditures .................................................................. 51,405 57,575 36,112 23,704 —Depreciation............................................................................... 29,338 18,454 12,748 12,720 —

Per Share:Net income** (basic).................................................................. ¥ 140.79 ¥ 18.18 ¥ 129.12 ¥ 125.38 ¥ 122.88Net income** (diluted) ............................................................... 129.21 17.51 116.56 111.65 108.84Shareholders’ equity .................................................................. 1,635.35 1,510.45 1,482.51 1,375.04 1,271.05Cash dividends applicable to the year....................................... 23.00 25.00 25.00 23.00 20.50

Financial Position at Year-End:Working capital .......................................................................... ¥ 273,475 ¥ 346,552 ¥ 362,557 ¥ 379,668 ¥ 362,705Property, plant and equipment, net ........................................... 185,587 176,739 128,936 115,602 109,066Total assets................................................................................ 789,362 806,641 839,475 786,706 795,343Total long-term liabilities ............................................................ 88,555 136,558 180,564 223,041 242,801Shareholders’ equity, net ........................................................... 563,303 511,441 480,775 444,599 410,973

Number of shares of common stock issued (in thousands) ...... 344,468 338,605 324,308 323,338 323,338

*Due to a change effective the year ended March 31, 1999 in the Japanese regulations relating to the presentation of amortization of excess of cost over net assets

acquired in the consolidated statements of income, the corresponding amounts in the prior years’ consolidated financial statements have been reclassified to conform to

the presentation for the fiscal year under review.

**Effective April 1, 1997, the Company changed its methods of accounting for the amortization period of excess of cost over net assets acquired and for income taxes

to adopting tax effect accounting. As a result of these changes, the effect of the change in the amortization period was to increase the amortization of excess of cost over

net assets acquired by ¥72.7 billion and to decrease net income by the same amount for the year ended March 31, 1998. Also, the effect of adopting tax effect account-

ing was to decrease income tax expense by ¥24.5 billion and to increase net income by the same amount for the year ended March 31, 1998.


25

Financial Review

OPERATING OUTLOOKDuring the year ended March 31, 1999, business conditions

in the operating environment surrounding Yamanouchi

Pharmaceutical Co., Ltd.’s business were even more difficult.

In the Company’s mainstay pharmaceutical business, intensi-

fying efforts on the part of the Japanese government to contain

medical costs, the termination of the Company’s domestic

marketing agreements with Novo Nordisk A/S, of Denmark, and

Schering–Plough K.K., of Japan, and the discontinuation of

sales of Elen® (indeloxazine), a treatment for symptoms of men-

tal dysfunction, following a reevaluation of the drug by Japan’s

Central Pharmaceutical Affairs Council, resulted in a significant

drop in net sales for the fiscal year under review.

However, domestic sales of such mainstay products as the

H2 antagonist Gaster® (famotidine), a treatment for peptic ulcers

and gastritis, and Harnal® (tamsulosin), a treatment for the func-

tional symptoms of benign prostatic hyperplasia (BPH), contin-

ued to surge despite severe market conditions.

Harnal® (Omnic®, Flomax®) is now marketed in more than 40

countries and achieving strong sales growth. In light of this suc-

cess, Yamanouchi worked to increase its Harnal® production

capacity in Europe. In addition, the Company completed the

construction of formulation production facil it ies at the

Yamanouchi Shaklee Pharma (YSP) Manufacturing Center in

the United States in September 1998 to meet surging demand

for the drug in North America.

In Asian countries other than Japan, in addition to strength-

ening its marketing capacity in Taiwan, China, Korea, and the

Philippines, the Company is bolstering its presence in Asia in

anticipation of economic growth. To this end, Yamanouchi estab-

lished a subsidiary in Thailand during the year under review.

During the term, Yamanouchi made great strides in its R&D

activities that it expects to yield a number of new drugs.

Yamanouchi anticipates that the introduction of these drugs will

help speed the Company’s recovery from the aforementioned

declines. In August 1998, atorvastatin (YM548), an HMG-CoA

reductase inhibitor for the treatment of hyperlipidemia and

familial hypercholesterolemia, and incadronate (YM175), an oral

bone resorption inhibitor for the treatment of bone loss asso-

ciated with osteoporosis, were filed for approval in Japan.

Also in Japan, the oral hypoglycemic agent Starsis® was

approved in June 1999. Through such activities, Yamanouchi

continues to make great progress toward launching new prod-

ucts that are expected to be big sellers. In addition,

Yamanouchi has ensured the long-term stability of its R&D

pipeline with the reaching of a comprehensive R&D agreement

with U.S.–based G.D. Searle & Co. in December 1997 as well as

through the creation of new drugs through in-house drug dis-

covery research.

In Europe, Infergen® (interferon alfacon-1, YM643), a treatment

for chronic hepatitis C virus infection, was approved in February

1999; the antihypertensive drug barnidipine was approved in the

Netherlands, where it will be marketed under the name Cyress®;

and nine other drug candidates are now undergoing clinical devel-

opment. In the United States, Yamanouchi began clinical studies

of several new drug candidates during the term and expects

that the success of these studies will enable the establishment

of an independent sales network in that country.

Also, to ensure the quality of and quantity of drugs produced

by its R&D pipeline, the Company is aggressively pursuing

strategic alliances with pharmaceutical manufacturers, research

institutes, bioventures, and universities. During the term,

Yamanouchi entered into an agreement with Merck KGaA, of

Germany, for the worldwide development and marketing rights

to two jointly discovered drugs. Moreover, Yamanouchi has

entered into a licensing-out agreement with U.S.–based

Warner–Lambert Company for YM087, a total vasopressin

antagonist for the treatment of heart failure and hyponatremia

as part of a cross-licensing agreement for atorvastatin. In addi-

tion, Yamanouchi has concluded an agreement with Ono

Pharmaceutical Co., Ltd., of Japan, for the rights to develop and

market minodronate (YM529), a drug that has such indications

as osteoporosis and hypercalcemia. Furthermore, the Company

acquired the rights to market CHOLEBINE®, a treatment for

hypercholesterolemia developed by Mitsubishi Chemical

Corporation, of Japan. This agreement will help Yamanouchi to

quickly become a major player in the market for antihyperlipidemia

medications, which is seeing exponential growth in demand.

Yamanouchi is also aggressively pursuing business in the

area of drug delivery technologies. To this end, Yamanouchi

Shaklee Pharma, a division of the U.S. subsidiary Shaklee

Corporation that is responsible for pharmaceutical technology

related operations in the United States, has concluded agree-

ments with three major pharmaceutical companies in the United

States for applying Yamanouchi’s WOWTAB®—an orally disinte-

grating tablet designed to be taken without water—technology

to those companies’ products. Manufacturing facilities have

been installed within the YSP Manufacturing Center and prepa-

rations are now under way for the start of production on a con-

tract basis. Furthermore, in the Netherlands, Yamanouchi is

participating with three leading universities on a joint research

project (UNYPHAR) focused on developing new drug delivery

systems that is receiving funding from the Dutch government.

Yamanouchi’s goal is to be a comprehensive health care enter-

prise. The Company’s nutritional products businesses are handled

by Shaklee Corporation and Shaklee Japan K.K., while the food

and roses business is conducted by Bear Creek Corporation.

By strengthening the multilevel marketing of nutritional products

and reinforcing mail-order and store operations for food and

roses, these companies are demonstrating their commitment to

contributing to health and happiness through the development

of products and services that address evolving consumer needs.

yamanouchi AR '99後半/PDF 99.8.18 7:25 PM ページ 25

26

FINANCIAL RESULTSIn the fiscal year ended March 31, 1999, the Japanese govern-

ment implemented a downward revision in National Health

Insurance drug prices for the third consecutive year. In addition,

the Company terminated licensing agreements with Novo

Nordisk A/S and Schering–Plough K.K. that in the previous fiscal

year had accounted for sales of ¥49.3 billion and discontinued

sales of Elen®, which had yielded ¥9.2 billion in sales in the pre-

vious fiscal year, following the May 1998 reevaluation by

Japan’s Central Pharmaceutical Affairs Council. As a result of

these factors, the Company saw significant declines in net sales

and operating income. Despite these factors, net income in the

fiscal year under review rose to its highest level ever. During the

term, Yamanouchi estimates that exchange rate movements

had the net effect of causing declines in net sales, operating

income, and net income of ¥12.0 billion, ¥2.0 billion, and ¥1.8 bil-

lion, respectively, in comparison with the previous fiscal year.

SALES

Net Sales Breakdown

Net sales amounted to ¥423.2 billion, falling 11.3% on a

year-on-year basis.

Sales by Geographical AreaYears ended March 31, (billion ¥)

1999 1998

Japan ............................................................... ¥269.5 ¥326.8Europe ............................................................. 66.6 60.9America............................................................ 85.7 89.7Asia (except Japan) ......................................... 1.4 —

Consolidated.................................................... ¥423.2 ¥477.4

In Japan, sales plunged 17.5%, primarily as a result of a sub-

stantial drop in sales of pharmaceuticals. In Europe, sales grew

9.5%, thanks largely to the strong performance of Harnal®

(Omnic®). (Adjusting for the exchange rate effect, sales were up

16.3%.) In the United States, sales fell 4.4%. (Adjusting for the

exchange rate effect, sales grew 4.4% thanks to a favorable

performance in the food and roses business.) From this term,

because sales by Shenyang Yamanouchi Pharmaceutical Co.,

Ltd., of China, are newly included in the consolidated financial

statements, a new category—Asia (except Japan)—has been

added.

’95

’96

’97

’98

’99

21.83.6

47.2 311.7

28.0 46.0 336.4

35.8 54.5 359.6

44.2 54.3 373.1

43.9 49.9 323.7

3.7

4.8

5.7

5.7

Pharmaceuticals Nutritional Products Food and Roses Other

(billion ¥)

Overseas SalesYears ended March 31, (billion ¥)

1999 1998

America ......................................................... ¥115.6 ¥123.7Europe........................................................... 50.0 43.4Asia (except Japan) ...................................... 7.1 7.2

Consolidated ................................................. ¥173.4 ¥175.0

Percent of total sales..................................... 41.0% 36.7%

Overseas sales—which include export sales by the Company

and its domestic consolidated subsidiaries and sales (other

than exports to Japan) by its foreign consolidated subsidiaries—

as a percentage of total sales rose 4.3 percentage points, to

41.0%. During the term under review, approximately 67% of

overseas sales were recorded in U.S. dollars, and the exchange

rate on March 31, 1999, was ¥120.55 to US$1.00 (¥132.10 on

March 31, 1998).

Consolidated Overseas Sales and Overseas Sales to Net Sales

Sales by Business SegmentYears ended March 31, (billion ¥)

1999 1998

Pharmaceuticals .............................................. ¥323.7 ¥373.1Nutritional products.......................................... 49.9 54.3Food and roses................................................ 43.9 44.2Other................................................................ 5.7 5.7

Consolidated.................................................... ¥423.2 ¥477.4

Pharmaceuticals Sales of pharmaceutical products fell 13.2%, largely due to a

decline in the Company’s domestic pharmaceutical business.

However, sales of Yamanouchi’s core products continued to

expand, with demand for Harnal® remaining strong worldwide

and sales of both Gaster® and the oral penem-type antibiotic

Farom® showing growth in Japan.

SALES OF MAINSTAY PRODUCTS

Years ended March 31, (billion ¥)

1999 1998

Gaster® ............................................................ ¥106.9 ¥108.5Harnal® ............................................................ 56.1 42.3Calcium antagonists ........................................ 27.2 28.9Dorner® ............................................................ 11.3 11.6Farom®............................................................. 6.3 3.6

Sales of Harnal® (Omnic®, Flomax®) rose 32.6% during the

term under review. As an alpha1-blocker that acts selectively on

99.5

119.8

153.1

175.0

173.4

25.9%

28.9%

33.7%

36.7%

41.0%

’95

’96

’97

’98

’99

(billion ¥, %)


27

the lower urinary tract, Harnal® has the characteristic of improv-

ing the symptoms of BPH while exerting a minimal effect on

blood pressure. Harnal® has received widespread praise from

the medical community, and its share of the domestic market

has risen to more than 55%. Moreover, the drug has been

launched in over 40 countries. In Europe under the name

Omnic®, Harnal® has become the number one alpha1-blocker in

many major markets for BPH treatments, including the

Netherlands, Germany, Italy, and the United Kingdom. Yama-

nouchi has enjoyed great success through its comarketing

activities with licensee Boehringer Ingelheim International GmbH,

of Germany. Since the close of the fiscal year under review, the

Company has begun copromotion activities for the drug in the

United Kingdom with Glaxo Wellcome UK Ltd. In the United

States, sales of Harnal® through licensee Boehringer Ingelheim

Pharmaceuticals, Inc., under the name Flomax®, continued

to surge.

Although overall sales of Gaster® fell 1.5% during the term,

domestically sales of the drug grew steadily amid strong com-

petition, increasing 5.1% compared with the previous fiscal

year. Sales to licensee Merck & Co., Inc., of the United States,

which is mainly in charge of the overseas marketing of Gaster®,

fell during the term due to the strong yen. In the domestic mar-

ket, Yamanouchi filed for the approval of the successor to

Gaster OD®, which applies in-house-developed, next-generation

WOWTAB® technology.

Sales of calcium antagonists, including Perdipine®, Perdipine®

LA, and Hypoca®, fell 5.8% during the term. From 1995 through

1998, Japan’s first large-scale clinical study on a calcium

antagonist, the Japanese Multicenter Study on Barnidipine with

Ambulatory Blood Pressure Monitoring (J-MUBA), was conduct-

ed to examine the long-term effects of Hypoca® on circadian

variations in blood pressure. Data from the study showed that

Hypoca® was effective in controlling blood pressure throughout

a 24-hour period. Amid fierce competition in the anti-hypertensive

drug market, Yamanouchi expects sales of Hypoca® to expand,

bolstered by this data. Hypoca® was approved under the name

Cyress® in the Netherlands in June 1999.

In the domestic market, sales of Dorner® (beraprost), for the

treatment of chronic arterial occlusion, shrank 2.6% compared

with the previous term. Dorner® has also been filed in Japan for

the additional indication of primary pulmonary hypertension.

In the domestic market, sales of Farom® (faropenem), an oral

penem-type antibiotic, shot up 75% from the previous term.

Farom® has been proven as being effective against such

antibiotic-resistant bacteria as penicil l in-resistant

Streptococcus pneumoniae (PRSP) and ofloxacin-resistant

Staphylococci. A new dry syrup formulation of Farom® has

been filed for approval in Japan.

Also, Solinase®, a modified tissue plasminogen activator

(t-PA) for the treatment of coronary thrombolysis, was launched

in February 1999 in Japan.

Nutritional Products Sales of nutritional products marketed through Shaklee

Corporation and Shaklee Japan fell 8.1%. (Adjusting for the

exchange rate effect, sales slipped 1.5%.) During the year under

review, Shaklee Corporation released Enfuselle®, a revolutionary

skin care line, and Shaklee Japan K.K. launched the choles-

terol control product Colestop®. Both of these newly launched

products showed steady sales growth in the United States and

Japan, respectively.

Food and Roses Sales of food and roses through Bear Creek Corporation

declined 0.7%. (Adjusting for the exchange-rate effect, sales

increased 8.9%, and the company recorded its highest sales

ever.) On a local currency basis, Bear Creek’s store business

showed double-digit sales growth and increased the number of

its store locations to 72. In addition, sales over the Internet

increased during the year under review and made a solid contri-

bution to overall performance.

COST, EXPENSES, AND EARNINGSThe cost of sales decreased 23.4% from the previous fiscal

year, resulting in an improvement in the cost of sales ratio, from

34.9% to 30.1%. A principal factor behind this decline was the

termination of the sales agreement with Novo Nordisk as of

April 1, 1998.

Selling, general and administrative (SG&A) expenses slipped

0.8%. Adjusting for the effects of a sharp increase in R&D

expenses, SG&A expenses fell 7.5% due largely to the success

of cost-cutting efforts. Labor costs, which accounted for 27% of

SG&A expenses during the fiscal year under review, remained

flat. The number of employees increased 6.6% in the fiscal year

under review, to 8,113. Advertising and sales promotion

expenses, which accounted for 26% of SG&A expenses, shrank

11.2%, principally due to large advertising and promotional

expenses associated with the launch of the OTC drug Gaster® 10

in the previous fiscal year.

R&D Expenses and R&D Expenses to Net Sales

R&D expenses, which accounted for 26% of SG&A expens-

es, grew 24.4%. As a percentage of net sales, R&D expenses

rose from 9.1% to 12.8%. The main reason for the increase

was a ¥6.1 billion front-loading, lump-sum amortization of

patent rights. Basically, Yamanouchi is aiming at spending pref-

erentially on R&D expenses as much as possible to create

38.2

40.9

42.3

43.6

54.3

9.9%

9.9%

9.3%

9.1%

12.8%

’95

’96

’97

’98

’99

(billion ¥, %)


28

growth potential. The Company estimates that R&D expenses

will rise to ¥57 billion in the fiscal year ending March 31, 2000.

Operating income fell 13.0% and as a percentage of net

sales slipped 0.4 percentage point, to 21.1%.

Interest and dividend income reached ¥7.0 billion, an

increase of ¥0.5 billion from the previous fiscal year, and inter-

est expense declined ¥1.8 billion, to ¥2.7 billion, reflecting a

43.6% reduction in interest-bearing debt, to ¥68.1 billion, dur-

ing the fiscal year under review. As a result, financial profit rose

from ¥1.9 billion to ¥4.3 billion. Loss on devaluation of securities

improved from ¥6.1 billion to ¥2.1 billion. Due to exchange rate

movements, an appraised exchange loss of ¥2.9 billion was rec-

ognized in the financial assets of a subsidiary at the year-end.

An appraised exchange profit of ¥2.5 billion was registered in

the previous fiscal year. Other, net, was an expense of ¥1.7 bil-

lion, compared with income of ¥3.4 billion in the previous term.

This is mainly due to losses on the disposal of inventories

owing to the Company’s discontinuation of sales of Elen®.

Income taxes increased 62.4%. The effective tax rate was

44.4%, down from 78.8% in the previous fiscal year. (See Note

9 of the notes to consolidated financial statements.)

Net Income

Net income skyrocketed 688% in the fiscal year under

review, to ¥48.0 billion, the highest the Company has ever

recorded. Net income as a percentage of net sales was 11.3%,

compared with 1.3% in the previous fiscal year. The increase in

this ratio is principally attributable to accounting changes made

in the previous fiscal year. In line with Yamanouchi’s ongoing

objective of maintaining the accurate and transparent disclo-

sure of its financial situation and results of operations, effective

April 1, 1997, the Company changed its method of accounting

for excess of cost over net assets acquired to amortizing this

amount over a period of five years, which is considered a rea-

sonable amortization period under International Accounting

Standards. Yamanouchi, in prior years, amortized the excess of

cost over net assets acquired over a 40-year period. The

change in the amortization period was retroactively applied. The

effect of this change was to increase the amortization of excess

of cost over net assets acquired by ¥72.7 billion and to

decrease net income by the same amount in the previous fiscal

year. On the other hand, effective April 1, 1997, the Company

changed its method of accounting for income taxes to adopting

tax effect accounting using the liability method for the

Company and all its consolidated subsidiaries. The effect of this

39.7

40.5

41.9

6.1

48.0

’95

’96

’97

’98

’99

(billion ¥)

change was to decrease income tax expense by ¥24.5 billion

and to increase net income by the same amount for the previ-

ous fiscal year.

Net Income per Share (Diluted)

Earnings per share (basic) increased 674%, to ¥140.79, from

¥18.18, in the fiscal year under review. Diluted net income per

share is shown in the graph above.

CASH FLOWSCash provided by operating activities continued to be a primary

source of funds for the Company. For the year under review,

suspense payments of income taxes for the transfer price defi-

ciency assessment related to arm’s length transactions caused

cash provided by operating activities to decrease ¥35.9 billion.

(See Note 13 of the notes to consolidated financial statements.)

A total of ¥40.9 billion in cash provided by operating activities

and ¥100.4 billion in proceeds related to changes in marketable

securities and short-term investments were used to fund

¥29.1 billion in capital expenditures as well as to repay ¥39.0

billion in long-term debt. As of March 31, 1999, cumulative cash

and cash equivalents and marketable securities and short-term

investments were ¥252.9 billion, a decrease of ¥77.6 billion from

the previous fiscal year. Major shareholdings of ¥40.3 billion

transferred to investments in other securities were an additional

factor in the ¥134.6 billion reduction, from ¥184.3 billion to

¥49.7 billion, in overall marketable securities and short-term

investments. In the year under review, interest-bearing debt fell

¥52.6 billion, or 43.6%, to ¥68.1 billion, primarily due to the

¥30.0 billion redemption and a ¥12.7 billion conversion of con-

vertible bonds. Shareholders’ equity grew ¥51.9 billion.

KEY FINANCIAL INDICATORS

March 31, (%, times)

1999 1998 1997

Debt-to-equity ratio (%).............................. 12.1% 23.6% 38.6%Interest coverage (times) ........................... 35.8 24.2 22.2Shareholders’ equity ratio (%).................... 71.4% 63.4% 57.3%

When the financial position of a company is strengthened, it

is reflected as improvements in the capital structure ratio. Thus,

Yamanouchi’s debt-to-equity ratio fell to 12.1%, compared with

23.6% at the previous fiscal year-end. The interest coverage ratio

was 35.8 times, up from 24.2 times in the previous fiscal year. The

108.8

111.7

116.6

17.5

129.2

’95

’96

’97

’98

’99

(¥)


29

shareholders’ equity ratio increased to 71.4%, up from 63.4%

at the previous fiscal year-end.

CAPITAL EXPENDITURESCapital expenditures decreased to ¥51.4 billion in the year

under review, from ¥57.6 billion in the previous fiscal year.

In the pharmaceutical business segment, capital expenditures

rose ¥1.2 billion, to ¥33.6 billion. Investments in tangible fixed

assets totaled ¥14.5 billion and included investment in research

facilities related to investigational drugs and injectable formula-

tion production facilities as well as the improvement of quality

assurance at a manufacturing facility. A ¥9.0 billion milestone

payment in connection with a comprehensive R&D agreement

with Searle was made in the fiscal year under review.

In the nutritional products business segment, capital expen-

ditures were ¥10.5 billion, a decrease of ¥1.2 billion. Investment

in tangible fixed assets included expenses connected with a

new head office for Shaklee Corporation and an increase in the

production capacity of the YSP Manufacturing Center, which

will produce Harnal® for the U.S. market and commercialize in-

house-developed drug delivery technologies.

In the food and roses business segment, capital expendi-

tures were ¥5.1 billion, a decrease from ¥6.3 billion in the previ-

ous fiscal year.

Depreciation rose from ¥18.5 billion to ¥29.3 billion in the fis-

cal year under review. This sharp increase was mainly due to

the aforementioned ¥6.1 billion front-loading lump-sum amorti-

zation expense related to patent rights.

CAPITAL EXPENDITURES AND DEPRECIATIONRELATED TO TANGIBLE FIXED ASSETSIn the fiscal year under review, capital expenditures related to

tangible fixed assets decreased from ¥39.5 billion to ¥31.2 bil-

lion, and depreciation rose from ¥15.1 billion to ¥16.6 billion.

For the year ending March 31, 2000, capital expenditures and

depreciation related to tangible fixed assets are expected to be

¥34.0 billion and ¥18.5 billion, respectively.

CONTINGENT LIABILITIESIn June 1998, the Company received a tax deficiency notice

from the Tokyo Regional Taxation Bureau (TRTB) adjusting tax-

able income upwards by ¥54.2 billion in the aggregate for the

six-year period ended March 31, 1997. This adjustment was

made because the TRTB concluded that royalties received

based on a licensing agreement with Yamanouchi Ireland Co.,

Ltd., (a subsidiary) for the drug Gaster® (famotidine) had been

understated as compared with that calculated based on prices

derived from arm’s length transactions. The Company paid

additional income taxes of ¥35.9 billion and has accounted for

this amount as suspense payments of income taxes under

investments and other assets in the accompanying consolidated

balance sheets at March 31, 1999. The Company filed an

appeal with the TRTB against this deficiency assessment of

additional income taxes in August 1998. In addition, in

November 1998, the Company requested competent authority

negotiations on this issue between the governments of Japan

and the Republic of Ireland. (See Note 13 to consolidated finan-

cial statements.)

YAMANOUCHI’S Y2K READINESSYamanouchi has given great consideration to the potential

impact of the Y2K issue on both corporate management and on

society as a whole. We have thus been proactive in protecting

our IT infrastructure against potential failure in recognition of the

severe consequences such effects could have on our opera-

tions.

Yamanouchi’s Y2K compliance efforts have occurred in par-

allel with computer system upgrades and migrations that have

been implemented since the early 1990s. In November 1998,

the Company introduced the Y2K Compliance Project, which

has directed Yamaouchi’s compliance efforts on a Groupwide

basis. Moreover, the status of Yamanouchi’s Y2K readiness is

reported to the executive committee. Yamanouchi has com-

pleted Y2K analyses and made necessary replacements to such

IT systems as host computers, networks, and production facili-

ties. Testing plans for these systems are now being finalized,

and tests on major systems and equipment are scheduled for

completion by September 1999.

In addition, Yamanouchi formulated a contingency plan at the

end of June 1999 to protect mission-critical systems in the unlike-

ly event that a Y2K problem might arise and has been preparing

for the execution of this plan. In addition, Yamanouchi is con-

firming the status of the Y2K readiness of its key business part-

ners, including suppliers of raw materials and finished products,

distributors, and comarketing agents, through information

exchange, questionnaires, and meetings. We believe that the

Y2K issue will not affect our business in a material way.

However, Yamanouchi cannot guarantee that its systems will

not be disrupted by unforeseeable Y2K-related problems.

CAUTIONARY FACTORS FOR FORWARD-LOOKING INFORMATIONThis annual report as well as other written reports and oral

statements made by the Company contain such forward-

looking statements as those regarding the Company’s results of

operations, financial position, and potential competition. These

forward-looking statements are based on current expectations.

Certain factors that could cause the Company’s actual results

to differ materially from expected and historical results have

been identified by the Company. The Company does not

assume the obligation to update any forward-looking statement.


30

Thousands ofU.S. dollars

Millions of yen (Note 3)ASSETS 1999 1998 1999

Current Assets:Cash and cash equivalents ........................................................................................... ¥203,195 ¥146,134 $1,693,292Marketable securities and short-term investments ...................................................... 49,679 184,310 413,992Notes and accounts receivable:

Unconsolidated subsidiaries and affiliates ............................................................... 936 1,168 7,800Trade ......................................................................................................................... 98,319 112,715 819,325

...................................................................................................................................... 99,255 113,883 827,125Allowance for doubtful receivables ........................................................................... (3,080) (2,780) (25,667)

...................................................................................................................................... 96,175 111,103 801,458Inventories (Note 5) ....................................................................................................... 39,500 41,126 329,167Deferred income taxes (Notes 4 (b) and 9) ................................................................... 8,869 9,021 73,908Other current assets ..................................................................................................... 8,548 8,258 71,233

Total current assets .............................................................................................. 405,966 499,952 3,383,050

Property, Plant and Equipment, at Cost:Land .............................................................................................................................. 29,447 27,966 245,392Buildings ....................................................................................................................... 141,263 141,318 1,177,192Machinery and equipment ............................................................................................ 122,377 118,291 1,019,808Other ............................................................................................................................. 7,477 8,079 62,308Construction in progress .............................................................................................. 23,224 10,041 193,533Accumulated depreciation ............................................................................................ (138,201) (128,956) (1,151,675)

Property, plant and equipment, net ...................................................................... 185,587 176,739 1,546,558

Investments and Other Assets:Investments in other securities ..................................................................................... 55,770 22,363 464,750Investments in and advances to unconsolidated subsidiaries and affiliates ................ 8,072 23,419 67,267Intangible assets ........................................................................................................... 38,347 31,557 319,558Prepaid expenses ......................................................................................................... 4,206 4,222 35,050Suspense payments of income taxes (Note 13)............................................................ 35,895 — 299,125Deferred income taxes (Notes 4 (b) and 9) ................................................................... 16,559 16,356 137,992Other assets .................................................................................................................. 25,629 28,127 213,575

Total investments and other assets ...................................................................... 184,478 126,044 1,537,317

Translation Adjustments ............................................................................................ 13,331 3,906 111,092

Total Assets ..................................................................................................... ¥789,362 ¥806,641 $6,578,017

See accompanying notes to consolidated financial statements.


Consolidated Balance SheetsMarch 31, 1999 and 1998


31


Millions of yen (Note 3)LIABILITIES AND SHAREHOLDERS’ EQUITY 1999 1998 1999

Current Liabilities:Short-term bank loans (Note 6) ..................................................................................... ¥ 542 ¥ 744 $ 4,517Current portion of long-term debt (Note 7) .................................................................. 27,344 30,447 227,867Notes and accounts payable:

Unconsolidated subsidiaries and affiliates ............................................................... 1,355 1,516 11,292Trade ......................................................................................................................... 43,297 59,087 360,808Construction.............................................................................................................. 7,224 5,146 60,200

Accrued expenses......................................................................................................... 25,068 21,977 208,900Accrued income taxes (Note 9) ..................................................................................... 18,396 24,440 153,300Deferred income taxes (Notes 4 (b) and 9)................................................................... 4,009 3,069 33,408Other current liabilities .................................................................................................. 5,256 6,974 43,800

Total current liabilities ........................................................................................... 132,491 153,400 1,104,092

Long-Term Liabilities:Long-term debt (Note 7) ............................................................................................... 40,239 89,549 335,325Retirement allowances (Note 10) .................................................................................. 33,901 32,771 282,508Deferred income taxes (Notes 4 (b) and 9) ................................................................... 2,695 2,023 22,458Other long-term liabilities .............................................................................................. 11,720 12,215 97,667

Total long-term liabilities ....................................................................................... 88,555 136,558 737,958

Minority Interests ........................................................................................................ 5,013 5,242 41,775

Shareholders’ Equity:Common stock, ¥50 par:

Authorized: 800,000,000 sharesIssued: 344,467,758 shares in 1999 and 338,605,140 shares in 1998..................... 80,072 73,740 667,267

Additional paid-in capital (Note 8) ................................................................................. 93,996 87,665 783,300Retained earnings (Notes 8 and 17) .............................................................................. 389,288 350,046 3,244,067

Total ...................................................................................................................... 563,356 511,451 4,694,634Treasury stock, at cost:

13,946 shares in 1999 and 3,447 shares in 1998 ..................................................... (53) (10) (442)

Shareholders’ equity, net ...................................................................................... 563,303 511,441 4,694,192

Contingent Liabilities (Note 13)Total Liabilities and Shareholders’ Equity .................................................... ¥789,362 ¥806,641 $6,578,017


32


Millions of yen (Note 3)1999 1998 1997 1999

Net Sales .................................................................................................. ¥423,217 ¥477,356 ¥454,740 $3,526,808Cost of Sales ........................................................................................... 127,513 166,563 158,664 1,062,608

Gross profit ........................................................................................... 295,704 310,793 296,076 2,464,200Selling, General and Administrative Expenses (Note 11) ..................... 206,259 207,948 194,847 1,718,825

Operating income.................................................................................. 89,445 102,845 101,229 745,375

Other Income (Expenses):Interest and dividend income ................................................................ 6,966 6,425 6,202 58,050Interest expense .................................................................................... (2,694) (4,522) (4,846) (22,450)Amortization of excess of cost over net assets acquired (Note 4 (a))................................................... — (72,730) — —

Loss on devaluation of securities .......................................................... (2,075) (6,066) (1,268) (17,292)Exchange (loss) gain ............................................................................. (2,903) 2,474 (330) (24,192)Equity in loss of unconsolidated subsidiaries and affiliates .................................................................... (226) (1,765) (5,892) (1,883)

Other, net .............................................................................................. (1,674) 3,448 175 (13,950)

................................................................................................................... (2,606) (72,736) (5,959) (21,717)

Income before income taxes and minority interests ......................... 86,839 30,109 95,270 723,658Income Taxes (Notes 4 (b) and 9):

Current .................................................................................................. 37,294 47,660 53,556 310,783Deferred ................................................................................................ 1,236 (23,939) (447) 10,300

................................................................................................................... 38,530 23,721 53,109 321,083

Income before minority interests....................................................... 48,309 6,388 42,161 402,575

Minority Interests in Earnings of Consolidated Subsidiaries .............. (307) (296) (295) (2,558)

Net Income (Note 14) ................................................................... ¥ 48,002 ¥ 6,092 ¥ 41,866 $ 400,017



Consolidated Statements of IncomeYears Ended March 31, 1999, 1998 and 1997


33



Common Stock:Balance at beginning of year

(1999 — 338,605,140 shares; 1998 — 324,308,013 shares;1997 — 323,337,553 shares) ........................................................... ¥ 73,740 ¥ 56,949 ¥ 55,989 $ 614,500

Add:Shares issued upon conversion

of convertible bonds and exercise of warrants(1999 — 5,862,618 shares; 1998 — 14,297,127 shares; 1997 — 970,460 shares) ................................................................. 6,332 16,791 960 52,767

Balance at end of year(1999 — 344,467,758 shares; 1998 — 338,605,140 shares;

1997 — 324,308,013 shares) .......................................................... ¥ 80,072 ¥ 73,740 ¥ 56,949 $ 667,267

Additional Paid-in Capital (Note 8):Balance at beginning of year..................................................................... ¥ 87,665 ¥ 70,877 ¥ 69,917 $ 730,542Add:

Conversion of convertible bonds and exercise of warrants .................. 6,331 16,788 960 52,758

Balance at end of year .............................................................................. ¥ 93,996 ¥ 87,665 ¥ 70,877 $ 783,300

Retained Earnings (Notes 8 and 17):Balance at beginning of year..................................................................... ¥350,046 ¥352,974 ¥318,698 $2,917,050Add:

Net income ............................................................................................ 48,002 6,092 41,866 400,017Deduct:

Adjustments to retained earnings at beginning of yearto reflect initial consolidation of subsidiaries ...................................... (148) (330) — (1,233)

Cash dividends paid ............................................................................. (8,469) (8,544) (7,445) (70,575)Bonuses to directors and corporate auditors ....................................... (142) (146) (145) (1,183)

Balance at end of year .............................................................................. ¥389,288 ¥350,046 ¥352,974 $3,244,067



Consolidated Statements of Shareholders’ EquityYears Ended March 31, 1999, 1998 and 1997


34



Operating Activities:Net income ................................................................................................ ¥ 48,002 ¥ 6,092 ¥ 41,866 $ 400,017Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization .............................................................. 30,243 93,678 17,662 252,025Deferred income taxes .......................................................................... 1,977 (23,939) (447) 16,475Provision for retirement allowances, net of payments .......................... 1,134 1,054 1,156 9,450Equity in loss of unconsolidated subsidiaries and affiliates .................. 226 1,765 5,892 1,883Other ..................................................................................................... (537) 2,146 2,775 (4,475)Changes in operating assets and liabilities:

Notes and accounts receivable......................................................... 13,920 400 5,936 116,000Inventories ......................................................................................... 696 (197) (4,224) 5,800Other current assets.......................................................................... (466) 8,755 (9,470) (3,883)Suspense payments of income taxes ............................................... (35,895) — — (299,125)Notes and accounts payable ............................................................ (14,979) (2,187) 7,025 (124,825)Accrued expenses ............................................................................ 3,777 (55) 2,185 31,475Accrued income taxes ...................................................................... (5,771) (6,481) 4,857 (48,092)Other current liabilities ...................................................................... (1,392) 1,246 1,141 (11,600)

Net cash provided by operating activities..................................... 40,935 82,277 76,354 341,125

Investing Activities:Additions to property, plant and equipment ............................................. (29,139) (36,841) (21,352) (242,825)Proceeds from sales of property, plant and equipment ........................... 2,352 648 470 19,600Decrease (increase) in investments in and advances to unconsolidated subsidiaries and affiliates .............................................. 3,297 (9,649) (4,369) 27,475

Decrease (increase) in marketable securities and short-term investments ........................................................................... 100,350 32,854 (36,662) 836,250

Decrease (increase) in investments in other securities ............................. 6,973 (7,107) (6,204) 58,108Increase in other assets ............................................................................ (18,750) (17,712) (6,616) (156,250)Other ......................................................................................................... (506) (1,057) 1,735 (4,217)

Net cash provided by (used in) investing activities ....................... 64,577 (38,864) (72,998) 538,141

Financing Activities:Proceeds from issuance of long-term debt .............................................. 100 2,972 10,891 833Proceeds from exercise of warrants ......................................................... — 14,750 — —Increase (decrease) in short-term bank loans .......................................... 388 (14,565) 11,715 3,233Payment of long-term debt ....................................................................... (39,019) (41,665) (25,160) (325,158)Cash dividends and bonuses to directors and corporate auditors .......... (8,611) (8,690) (7,590) (71,758)Other ......................................................................................................... (43) 15 (21) (358)

Net cash used in financing activities ............................................. (47,185) (47,183) (10,165) (393,208)

Effects of exchange rate changes on cash ............................... (1,266) (262) 554 (10,550)

Increase (decrease) in cash and cash equivalents ................... 57,061 (4,032) (6,255) 475,508Cash and cash equivalents at beginning of year ...................... 146,134 150,166 156,421 1,217,784

Cash and cash equivalents at end of year ................................ ¥203,195 ¥146,134 ¥150,166 $1,693,292



Consolidated Statements of Cash FlowsYears Ended March 31, 1999, 1998 and 1997


35

Yamanouchi Pharmaceutical Co., Ltd. (the “Company”) and its domestic subsidiaries maintaintheir accounting records and prepare their financial statements in accordance with accountingprinciples and practices generally accepted in Japan, and its foreign subsidiaries maintain theirbooks of account in conformity with those of the countries of their domicile. The accompanyingconsolidated financial statements have been prepared in accordance with accounting principlesand practices generally accepted in Japan and have been compiled from the consolidated financialstatements prepared by the Company as required under the Securities and Exchange Law ofJapan. Accordingly, the accompanying consolidated financial statements are not intended to pre-sent the consolidated financial position, results of operations and cash flows in accordance withaccounting principles and practices generally accepted in countries and jurisdictions other thanJapan. The Company has prepared consolidated statements of cash flows for the purpose ofinclusion in these consolidated financial statements, although such statements are not currentlyrequired in Japan.

Due to a change effective the year ended March 31, 1999 in the regulations relating to the pre-sentation of amortization of excess of cost over net assets acquired and equity in loss of unconsol-idated subsidiaries and affiliates in the consolidated statements of income, as well as certainaccounts including the legal reserve in the consolidated balance sheets and the consolidatedstatements of shareholders’ equity, the corresponding amounts in the prior years’ consolidatedfinancial statements have been reclassified to conform to the current year’s presentation.

(a) Basis of consolidation and accounting for investments in unconsolidated subsidiaries and affiliates

The accompanying consolidated financial statements include the accounts of the Company and itssignificant subsidiaries. All significant intercompany balances and transactions have been elimin-ated in consolidation.

Certain foreign subsidiaries are consolidated on the basis of fiscal periods ending December 31,January 31 or the end of February, which differ from that of the Company; however, the effect ofthe difference in fiscal periods is immaterial.

Investments in certain unconsolidated subsidiaries and significant affiliates (companies owned20% to 50%) are stated at cost plus equity in their undistributed earnings or losses. Consolidatednet income includes the Company’s equity in the current net income or loss of such companies,after the elimination of unrealized intercompany profits.

Investments in unconsolidated subsidiaries and affiliates not accounted for by the equitymethod are carried at cost.

The excess of cost over underlying net assets at the date of acquisition is amortized over a peri-od of five years on a straight-line basis. Such amortization is included in selling, general andadministrative expenses except for the cumulative effect of the accounting change described inNote 4 (a) which was presented as other expense in the consolidated statements of income for theyear ended March 31, 1998.(b) Foreign currency translationRevenue and expense accounts of the foreign consolidated subsidiaries are translated at the ratesof exchange in effect at the balance sheet date, and, except for the components of shareholders’equity, the balance sheet accounts are also translated into yen at the same exchange rates. Thecomponents of shareholders’ equity are translated at their historical exchange rates.

Translation differences are presented as “Translation Adjustments” in the accompanying consol-idated financial statements.(c) Cash equivalentsAll highly liquid investments with a maturity of three months or less when purchased are consid-ered cash equivalents.(d) InventoriesMerchandise is stated principally at the lower of cost or market, cost being determined by theaverage method. Finished goods are stated principally at cost determined by the average method.Work in process and semi-finished goods, and raw materials and supplies are stated principally atcost determined by the first-in, first-out method and the average method, respectively. However,inventories of the foreign consolidated subsidiaries are stated principally at the lower of cost ormarket, cost being determined by the first-in, first-out method.

2. SUMMARY OF SIGNIFICANTACCOUNTINGPOLICIES

1. BASIS OF PREPARATION


Notes to Consolidated Financial StatementsMarch 31, 1999


36

(e) Depreciation and amortizationDepreciation of property, plant and equipment is mainly computed by the declining-balancemethod at rates based on the estimated useful lives of the respective assets.

Intangible assets are amortized by the straight-line method over their estimated useful lives.(f) LeasesNoncancelable lease transactions of the Company and its domestic consolidated subsidiaries areaccounted for as operating leases (whether or not such leases are classified as operating orfinance leases) except that lease agreements which stipulate the transfer of ownership of theleased assets to the lessee are accounted for as finance leases. However, lease transactions of theforeign consolidated subsidiaries are generally classified and accounted for as either finance oroperating leases.(g) Marketable securities and investmentsMarketable equity and bond securities are stated principally at the lower of cost or market, costbeing determined by the moving average method. Investments in securities other than marketableequity and bond securities are stated at cost determined by the moving average method.(h) Stock and bond issuance expenses and discounts on bondsStock and bond issuance expenses are charged to income as incurred. Discounts on bonds areamortized by the straight-line method over the terms of the bonds.(i) Research and development expensesResearch and development expenses are charged to income as incurred.(j) Income taxesDeferred tax assets and liabilities are determined based on the differences between financialreporting and the tax bases of the assets and liabilities and are measured using the enacted taxrates and laws which will be in effect when the differences are expected to reverse. See Note 4 (b).(k) Retirement allowances and pension plansThe Company’s employees are covered by an employee retirement allowances plan and an employ-ee pension plan. The employee retirement allowances plan provides for a lump-sum payment,payable upon mandatory retirement or earlier termination of employment, based on the approx-imate rate of pay at the time of termination, years of service and certain other factors. The employeepension plan, which is noncontributory and funded, was instituted to replace one-half of the benefitsunder the retirement allowances plan for employees who retire at the mandatory retirement age.

Domestic consolidated subsidiaries have unfunded employee retirement allowances plansand/or pension plans which are noncontributory and funded and which cover substantially all theiremployees. These plans provide for lump-sum payments and/or annuity payments payable upontermination of employment. The majority of the Company’s foreign consolidated subsidiaries havenoncontributory funded pension plans which cover substantially all their employees.

The liability for retirement allowances is stated at the amount which would be required to bepaid if all eligible male and female employees terminated their employment involuntarily and volun-tarily, respectively, at March 31, 1999 and 1998, less the balance of the funds in the pension plan.

In addition, directors and corporate auditors of the Company and certain consolidated sub-sidiaries are customarily entitled to lump-sum payments under their respective unfunded retire-ment allowances plans. The provision for retirement allowances for these officers has been madeat an estimated amount.(l) Appropriation of retained earningsUnder the Commercial Code of Japan, the appropriation of retained earnings with respect to a givenfinancial period is made by resolution of the shareholders at a general meeting held subsequent tothe close of such financial period. The accounts for that period do not, therefore, reflect suchappropriation. See Note 17.

The translation of yen amounts into U.S. dollar amounts is included solely for convenience, as amatter of arithmetic computation only, at the rate of ¥120=US$1.00, the approximate rate ofexchange on March 31, 1999. The translation should not be construed as a representation thatyen have been, could have been, or could in the future be, converted into U.S. dollars at the aboveor any other rate.

3. U.S. DOLLARAMOUNTS


37

(a) Effective April 1, 1997, the Company changed its method of accounting for excess of cost overnet assets acquired to amortizing this amount over a period of five years, which is considered areasonable amortization period under International Accounting Standards. The Company, in prioryears, amortized the excess of cost over net assets acquired over a 40-year period. This change,which has been retroactively applied, was made to achieve a further improvement in theCompany’s consolidated financial position in response to increasing competition in thepharmaceutical and nutritional products sectors as well as to an increasing need for global standard-ization of its accounting and finance areas resulting from the globalization of its business. The effectof this change was to increase amortization of excess of cost over net assets acquired by ¥72,730 mil-lion and to decrease net income by the same amount for the year ended March 31, 1998.(b) Effective April 1, 1997, the Company changed its method of accounting for income taxes toadopting tax effect accounting by the liability method for the Company and all its consolidatedsubsidiaries. Until the year ended March 31, 1997, tax effect accounting had been adopted only bythe foreign consolidated subsidiaries. This change was made in order for the consolidated financialstatements to reflect the Company’s consolidated financial position and operating results moreaccurately, considering that the amount of temporary differences recognized at the Company andits domestic consolidated subsidiaries has become material and that Japanese accounting stan-dards for consolidation, which were amended in June 1997 and will become effective the year end-ing March 31, 2000, require full adoption of tax effect accounting by the liability method. The effectof this change was to decrease income tax expense by ¥24,477 million and to increase net incomeby the same amount for the year ended March 31, 1998.

Inventories at March 31, 1999 and 1998 were as follows:


1999 1998 1999

Merchandise ............................................................................................... ¥ 6,421 ¥ 6,651 $ 53,509Finished goods ........................................................................................... 16,741 17,479 139,508Work in process and semi-finished goods ................................................. 9,792 9,645 81,600Raw materials and supplies........................................................................ 6,546 7,351 54,550

¥39,500 ¥41,126 $329,167

Short-term bank loans consisted mainly of unsecured loans at interest rates of 1.375% and1.625% per annum at March 31, 1999 and 1998, respectively.

Long-term debt at March 31, 1999 and 1998 consisted of the following:


1999 1998 1999

Yamanouchi Pharmaceutical Co., Ltd.:1.14% unsecured loans from banks, payable in yen, due through 2005 .. ¥ 100 ¥ 37 $ 8332.75% unsecured convertible bonds, payable in U.S. dollars, due 2000 .. 83 82 6921.50% unsecured convertible bonds, payable in yen, due 2002 ........... 14,921 14,938 124,3422.7% unsecured convertible bonds, payable in yen, due 2000 ............. 1,343 1,361 11,192Unsecured zero coupon convertible bonds, payable in yen, due 1999 ... — 29,990 —1.625% unsecured convertible bonds, payable in yen, due 2000 ......... 25,390 30,000 211,5831.25% unsecured convertible bonds, payable in yen, due 2014 ........... 19,040 27,040 158,667

60,877 103,448 507,309Consolidated subsidiaries:

Unsecured loans from banks and insurance companies, at rates from 1.5% to 4.8%, due through 2010 ......................................................... 2,970 3,460 24,750

Revolving credit debt.............................................................................. 361 2,576 3,008Unsecured loans from banks, payable in U.S. dollars,

at 6.4375%, due 2001 .......................................................................... 3,375 10,512 28,1256,706 16,548 55,883

67,583 119,996 563,192Less: current portion................................................................................... (27,344) (30,447) (227,867)

¥40,239 ¥ 89,549 $335,325

7. LONG-TERM DEBT

6. SHORT-TERM BANK LOANS

5. INVENTORIES

4. ACCOUNTINGCHANGES


38

The conversion prices and periods of the convertible bonds are summarized as follows:

Conversion priceper share at Period

March 31, 1999 (up to and including)

2.75% convertible bonds due 2000 ............................................................ ¥2,635.20 December 21, 20001.50% convertible bonds due 2002 ............................................................ 3,620.60 December 30, 20022.7% convertible bonds due 2000 .............................................................. 3,091.70 March 30, 20001.625% convertible bonds due 2000 .......................................................... 2,555.70 March 24, 20001.25% convertible bonds due 2014 ............................................................ 1,979.00 March 24, 2014

At March 31, 1999, if all the outstanding convertible bonds had been converted and exercised atthe then current conversion prices, 24,142 thousand new shares would have been issuable.

Under the indentures and trust deeds of the convertible bonds, each conversion price is subjectto adjustment in certain cases which include stock splits. A sufficient number of shares of commonstock is reserved for the conversion of all outstanding convertible bonds.

The aggregate annual maturities of long-term debt subsequent to March 31, 1999 are summarizedas follows:

Thousands ofYears ending March 31 Millions of yen U.S. dollars

2000 .......................................................................................................................... ¥27,344 $227,8672001 .......................................................................................................................... 3,914 32,6172002 .......................................................................................................................... 560 4,6672003 .......................................................................................................................... 15,482 129,0162004 .......................................................................................................................... 803 6,6922005 and thereafter ................................................................................................... 19,480 162,333

¥67,583 $563,192

In accordance with the Commercial Code of Japan, the Company has provided a legal reserve,which is included in retained earnings. This reserve amounted to ¥8,154 million ($67,950 thousand)and ¥7,294 million as of March 31, 1999 and 1998, respectively, as appropriations of retainedearnings. The Code provides that neither additional paid-in capital nor the legal reserve is availablefor dividends, but both may be used to reduce or eliminate a deficit by resolution of the sharehold-ers or may be transferred to common stock by resolution of the Board of Directors.

Income taxes applicable to the Company and its domestic consolidated subsidiaries comprisecorporation tax, inhabitants’ taxes and enterprise tax which, in the aggregate, resulted in a statuto-ry tax rate of approximately 47% for 1999 and 51% for 1998 and 1997. Income taxes of foreignconsolidated subsidiaries are based generally on the tax rates applicable in their countries of incor-poration. The effective tax rates reflected in the accompanying consolidated statements of incomefor the year ended March 31, 1997 differ from the statutory tax rates primarily due to the effect oftiming differences in the recognition of certain income and expenses for tax and financial reportingpurposes and the effect of permanent nondeductible expenses.

The effective tax rates reflected in the consolidated statements of income for the years endedMarch 31, 1999 and 1998 differ from the statutory tax rates for the following reasons:

1999 1998

Statutory tax rates ....................................................................................................................... 47.4% 51.0%Effect of:

Cumulative effect of accounting change (Note 4 (b)) .............................................................. — (86.9)Different tax rates applied to income of foreign consolidated subsidiaries ............................ (5.2) (17.5)Expenses not deductible for income tax purposes ................................................................. 2.8 13.3Amortization of excess of cost over net assets acquired........................................................ — 123.2Dividend income deductible for income tax purposes............................................................ (0.6) (2.6)Net effect of tax rate changes on deferred taxes .................................................................... 3.6 6.7Other, net................................................................................................................................. (3.7) (8.4)

Effective tax rates ........................................................................................................................ 44.4% 78.8%

9. INCOME TAXES

8. ADDITIONAL PAID-IN CAPITALAND RETAINEDEARNINGS


39

Net deferred income tax assets primarily consisted of deferred tax assets related to retirementallowances, depreciation and amortization, enterprise tax and inventories.

New legislation was enacted in 1998 which changed the aggregate statutory tax rate fromapproximately 51% to 47% effective the fiscal year beginning after March 31, 1998. The net effectof this tax rate change on deferred tax assets and liabilities was to increase income tax expense by¥2,027 million for the year ended March 31, 1998. Subsequently, new legislation was enacted in1999 which changed the aggregate statutory tax rate from approximately 47% to 42% effective thefiscal year beginning after March 31, 1999. The net effect of this tax rate change on deferred taxassets and liabilities was to increase income tax expense by ¥3,130 million ($26,083 thousand) forthe year ended March 31, 1999.

The charges to income for retirement allowances and pension costs for the years ended March 31,1999, 1998 and 1997 were as follows:

Thousands of Millions of yen U.S. dollars

1999 1998 1997 1999

Provision for retirement allowances ............................................... ¥3,866 ¥4,337 ¥3,237 $32,217Pension costs ................................................................................. 2,362 2,537 2,383 19,683

The assets of the pension plan of the Company at March 31, 1999 were ¥23,033 million ($191,942 thousand).

Past service cost in relation to the Company’s pension plan is being funded at an annual rate of 30%.

Research and development expenses included in selling, general and administrative expenses forthe years ended March 31, 1999, 1998 and 1997 were ¥54,299 million ($452,492 thousand),¥43,639 million and ¥42,309 million, respectively.

The following pro forma amounts represent the acquisition costs (including the interest portion),accumulated depreciation and net book value of leased assets as of March 31, 1999 which wouldhave been reflected in the balance sheets if finance lease accounting had been applied to thefinance lease transactions currently accounted for as operating leases:

March 31, 1999

Millions of yen

Acquisition Accumulated Net bookcosts depreciation value

Tools, furniture and fixtures............................................................................. ¥5,762 ¥3,737 ¥2,025

Thousands of U.S. dollars

Tools, furniture and fixtures........................................................................... $48,017 $31,142 $16,875

Lease payments relating to finance lease transactions accounted for as operating leasesamounted to ¥1,249 million ($10,408 thousand), ¥1,445 million and ¥1,420 million for the yearsended March 31, 1999, 1998 and 1997, respectively. Depreciation of the leased assets calculatedby the straight-line method over the respective lease terms amounted to ¥1,249 million ($10,408 thou-sand) for the year ended March 31, 1999.

Future minimum lease payments (including the interest portion thereon) subsequent to March 31,1999 for finance lease transactions accounted for as operating leases are summarized as follows:

Thousands of Years ending March 31 Millions of yen U.S. dollars

2000 ......................................................................................................................... ¥ 979 $ 8,1582001 and thereafter ................................................................................................. 1,046 8,717Total ......................................................................................................................... ¥2,025 $16,875

12. LEASES

11. RESEARCH ANDDEVELOPMENTEXPENSES

10. RETIREMENTALLOWANCES AND PENSIONPLANS


40

At March 31, 1999, the Company and its consolidated subsidiaries were contingently liable asguarantors of indebtedness of the Company’s employees and an affiliate in the aggregate amountof ¥12,098 million ($100,817 thousand).

At June 29, 1998, the Company received a tax deficiency notice from the Tokyo RegionalTaxation Bureau (“TRTB”) adjusting taxable income upwards by ¥54,158 million ($451,317 thousand)in the aggregate for the six-year period ended March 31, 1997. This adjustment was made becausethe TRTB concluded that royalties received based on a licensing agreement with YamanouchiIreland Co., Ltd. (a subsidiary) for the drug famotidine had been understated as compared with thatcalculated based on prices derived from arm’s length transactions. The Company paid additionalincome taxes of ¥35,895 million ($299,125 thousand) and has accounted for this amount as sus-pense payments of income taxes in the accompanying consolidated balance sheets at March 31,1999. The Company filed an appeal with the TRTB against this deficiency assessment in August1998. In addition, in November 1998, the Company requested competent authority negotiations onthis issue between the governments of Japan and the Republic of Ireland.

Yen U.S. dollars

1999 1998 1997 1999

Net income:Basic ............................................................................. ¥ 140.79 ¥ 18.18 ¥ 129.12 $ 1.17Diluted .......................................................................... 129.21 17.51 116.56 1.08

Cash dividends ................................................................ 23.00 25.00 25.00 0.19Net assets ........................................................................ 1,635.35 1,510.45 1,482.51 13.63

The computation of basic net income per share is based on the weighted average number ofshares of common stock outstanding during each year. Diluted net income per share is computedbased on the weighted average number of shares of common stock outstanding each year aftergiving effect to the dilutive potential of common stock to be issued upon the exercise of warrantsand the conversion of convertible bonds.

Cash dividends per share represent the cash dividends declared as applicable to the respectiveyears together with the interim cash dividends paid.

Net assets per share are based on the number of shares outstanding at the respective balancesheet dates.

Cash payments for income taxes and interest expense, and the conversion of convertible bondsinto common stock and additional paid-in capital for the years ended March 31, 1999, 1998 and1997 were as follows:


1999 1998 1997 1999

Cash paid for:Income taxes ....................................................................... ¥43,338 ¥54,063 ¥47,034 $361,150Interest expense .................................................................. 1,875 3,432 3,769 15,625

Conversion of convertible bonds ............................................ 12,663 18,829 1,920 105,525

The Company and its consolidated subsidiaries are primarily engaged in the manufacture and saleof products in Japan and overseas, primarily in North America and Europe, in three major seg-ments: the pharmaceuticals segment conducted principally by the Company, the nutritional prod-ucts segment conducted principally by the Shaklee Group, and the food and roses segmentconducted principally by the Bear Creek Group.

16. SEGMENTINFORMATION

15. SUPPLEMENTARYCASH FLOWINFORMATION

14. AMOUNTS PERSHARE

13. CONTINGENT LIABILITIES


41

The business and geographical segment information for the Company and its consolidated sub-sidiaries for the years ended March 31, 1999, 1998 and 1997 is outlined as follows:

Year ended March 31, 1999

Pharma- Nutritional Food andBusiness Segments ceuticals products roses Other Total Eliminations Consolidated

Millions of yen

I. Sales and operating income

Sales to third parties ........... ¥323,706 ¥49,892 ¥43,934 ¥ 5,685 ¥423,217 ¥ — ¥423,217Intergroup sales

and transfers ..................... 171 24 — 4,397 4,592 (4,592) —Total sales ........................... 323,877 49,916 43,934 10,082 427,809 (4,592) 423,217Operating expenses ............ 242,235 48,248 40,101 7,780 338,364 (4,592) 333,772Operating income ............... ¥ 81,642 ¥ 1,668 ¥ 3,833 ¥ 2,302 ¥ 89,445 ¥ — ¥ 89,445

II. Assets, depreciationand capital expenditures

Total assets ......................... ¥828,088 ¥63,131 ¥37,760 ¥64,532 ¥993,511 ¥(204,149) ¥789,362Depreciation ........................ 21,094 3,573 2,057 2,614 29,338 — 29,338Capital expenditures ........... 33,583 10,451 5,077 2,294 51,405 — 51,405



Sales to third parties ........ $2,697,550 $415,767 $366,116 $47,375 $3,526,808 $ — $3,526,808Intergroup sales and transfers .................... 1,425 200 — 36,642 38,267 (38,267) —

Total sales........................ 2,698,975 415,967 366,116 84,017 3,565,075 (38,267) 3,526,808Operating expenses......... 2,018,625 402,067 334,175 64,833 2,819,700 (38,267) 2,781,433Operating income ............ $ 680,350 $ 13,900 $ 31,941 $19,184 $ 745,375 $ — $ 745,375

II. Assets, depreciation and capital expenditures

Total assets...................... $6,900,728 $526,090 $314,667 $537,769 $8,279,254 $(1,701,237) $6,578,017Depreciation..................... 175,786 29,778 17,144 21,775 244,483 — 244,483Capital expenditures ........ 279,854 87,094 42,309 19,118 428,375 — 428,375



Millions of yen


Sales to third parties .................. ¥373,144 ¥54,261 ¥44,216 ¥5,735 ¥477,356 ¥ — ¥477,356Intergroup sales

and transfers ........................... 138 241 — 3,176 3,555 (3,555) —Total sales ................................. 373,282 54,502 44,216 8,911 480,911 (3,555) 477,356Operating expenses .................. 276,897 53,911 40,457 7,339 378,604 (4,093) 374,511Operating income ...................... ¥ 96,385 ¥ 591 ¥ 3,759 ¥1,572 ¥102,307 ¥ 538 ¥102,845


Total assets ............................... ¥848,493 ¥62,033 ¥35,240 ¥71,677 ¥1,017,443 ¥(210,802) ¥806,641Depreciation .............................. 11,539 2,942 2,197 1,776 18,454 — 18,454Capital expenditures ................. 32,377 11,642 6,326 7,230 57,575 — 57,575


42



Millions of yen


Sales to third parties .................. ¥359,586 ¥54,540 ¥35,828 ¥4,786 ¥454,740 ¥ — ¥454,740Intergroup sales

and transfers ............................ 135 75 — 2,873 3,083 (3,083) —Total sales .................................. 359,721 54,615 35,828 7,659 457,823 (3,083) 454,740Operating expenses................... 266,706 51,841 32,949 5,790 357,286 (3,775) 353,511Operating income ...................... ¥ 93,015 ¥ 2,774 ¥ 2,879 ¥1,869 ¥100,537 ¥ 692 ¥101,229


Total assets................................ ¥810,138 ¥102,818 ¥27,312 ¥46,342 ¥986,610 ¥(147,135) ¥839,475Depreciation............................... 8,973 1,310 1,244 1,221 12,748 — 12,748Capital expenditures .................. 22,929 5,516 4,816 2,851 36,112 — 36,112


Geographical Areas Japan Europe America Asia Total Eliminations Consolidated

Millions of yen

Sales to third parties ......... ¥269,469 ¥ 66,611 ¥85,725 ¥1,412 ¥423,217 ¥ — ¥423,217Intergroup sales

and transfers ................... 8,316 2,434 1,643 — 12,393 (12,393) —Total sales ......................... 277,785 69,045 87,368 1,412 435,610 (12,393) 423,217Operating expenses .......... 211,212 48,572 84,160 2,000 345,944 (12,172) 333,772Operating income (loss)..... ¥ 66,573 ¥ 20,473 ¥ 3,208 ¥ (588) ¥ 89,666 ¥ (221) ¥ 89,445Total assets ....................... ¥676,577 ¥144,254 ¥96,329 ¥5,438 ¥922,598 ¥(133,236) ¥789,362


Sales to third parties ...... $2,245,578 $ 555,090 $714,377 $11,763 $3,526,808 $ — $3,526,808Intergroup sales

and transfers ................ 69,298 20,290 13,695 — 103,283 (103,283) —Total sales ...................... 2,314,876 575,380 728,072 11,763 3,630,091 (103,283) 3,526,808Operating expenses ....... 1,760,092 404,767 701,333 16,674 2,882,866 (101,433) 2,781,433Operating income (loss)... $ 554,784 $ 170,613 $ 26,739 $ (4,911) $ 747,225 $ (1,850) $ 745,375Total assets .................... $5,638,141 $1,202,117 $802,742 $45,317 $7,688,317 $(1,110,300) $6,578,017


Geographical Areas Japan Europe America Total Eliminations Consolidated

Millions of yen

Sales to third parties .................................... ¥326,809 ¥ 60,853 ¥89,694 ¥477,356 ¥ — ¥477,356Intergroup sales

and transfers .............................................. 5,351 3,903 2,123 11,377 (11,377) —Total sales .................................................... 332,160 64,756 91,817 488,733 (11,377) 477,356Operating expenses ..................................... 253,983 42,882 88,449 385,314 (10,803) 374,511Operating income ......................................... ¥ 78,177 ¥ 21,874 ¥ 3,368 ¥103,419 ¥ (574) ¥102,845Total assets .................................................. ¥701,786 ¥137,726 ¥94,402 ¥933,914 ¥(127,273) ¥806,641


Geographical Areas Japan Foreign Total Eliminations Consolidated

Millions of yen

Sales to third parties ............................................. ¥324,448 ¥130,292 ¥454,740 ¥ — ¥454,740Intergroup sales

and transfers ....................................................... 4,127 4,642 8,769 (8,769) —Total sales ............................................................. 328,575 134,934 463,509 (8,769) 454,740Operating expenses .............................................. 248,604 112,833 361,437 (7,926) 353,511Operating income ................................................. ¥ 79,971 ¥ 22,101 ¥102,072 ¥ (843) ¥101,229Total assets ........................................................... ¥716,368 ¥202,582 ¥918,950 ¥(79,475) ¥839,475


43

Overseas salesOverseas sales, which include export sales of the Company and its domestic consolidated sub-sidiaries and sales (other than exports to Japan) of its foreign consolidated subsidiaries, for theyears ended March 31, 1999 and 1998 are summarized as follows:


America Europe Asia Other Total

Millions of yen

Overseas sales ..................................................... ¥115,551 ¥49,982 ¥7,119 ¥757 ¥173,409Consolidated net sales ......................................... 423,217


Overseas sales ..................................................... $962,925 $416,517 $59,325 $6,308 $1,445,075Consolidated net sales ......................................... 3,526,808

Ratio of overseas sales to consolidated net sales.................................... 27.3% 11.8% 1.7% 0.2% 41.0%


America Europe Asia Other Total

Millions of yen

Overseas sales ..................................................... ¥123,678 ¥43,415 ¥7,214 ¥684 ¥174,991Consolidated net sales ......................................... 477,356

Ratio of overseas sales to consolidated net sales ................................... 25.9% 9.1% 1.5% 0.2% 36.7%

Overseas sales for the year ended March 31, 1997 totaled ¥153,109 million, or 33.7% of consoli-dated net sales.

The following appropriations of retained earnings of the Company, which have not been reflectedin the consolidated financial statements for the year ended March 31, 1999, were approved at ashareholders’ meeting held on June 29, 1999:


Cash dividends (¥13.00=$0.11 per share) ................................................................ ¥4,478 $37,317Bonuses to directors and corporate auditors .......................................................... 129 1,075

¥4,607 $38,392

17. SUBSEQUENTEVENT


44

Report of Independent Certified Public Accountants

The Board of Directors and ShareholdersYamanouchi Pharmaceutical Co., Ltd.

We have examined the consolidated balance sheets of Yamanouchi Pharmaceutical Co., Ltd. and consolidated

subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of income, shareholders’

equity, and cash flows for each of the three years in the period ended March 31, 1999, all expressed in yen. Our

examinations were made in accordance with auditing standards, procedures and practices generally accepted

and applied in Japan and, accordingly, included such tests of the accounting records and such other auditing

procedures as we considered necessary in the circumstances.

In our opinion, the accompanying consolidated financial statements, expressed in yen, present fairly the con-

solidated financial position of Yamanouchi Pharmaceutical Co., Ltd. and consolidated subsidiaries at March 31,

1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years

in the period ended March 31, 1999 in conformity with accounting principles and practices generally accepted in

Japan consistently applied during the period except for the changes, with which we concur, in the methods of

accounting for excess of cost over net assets acquired and income taxes as described in Note 4 (a) and (b) to

the consolidated financial statements.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year

ended March 31, 1999 are presented solely for convenience. Our examination also included the translation of

yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis

described in Note 3 to the consolidated financial statements.

Osaka, JapanJune 29, 1999


45

President and Chief Executive OfficerMasayoshi Onoda

Managing DirectorKiyoshi Kawaishi

Managing DirectorNoriyoshi Inukai

Managing DirectorKaoru Kimura

Managing DirectorHidehiko Ueda

President and Chief Executive OfficerMasayoshi Onoda

Senior ManagingDirectorsJiro IchinakaToichi Takenaka

Managing DirectorsKiyoshi KawaishiHidehiko UedaNoriyoshi InukaiKaoru Kimura

DirectorsTeruya KashiwagiYohshi KobayashiKiyoshi MuraseYoshio AkiyaHiroshi SuzukiYozo NouraMasakatsu InoueMunetoshi KakitaniNobuji TakayamaToshinari TamuraKunihide IchikawaShigekazu Takahashi

Corporate AuditorsYukio KikuchiYasuo NagamoriToshio SabaYoichi Okamatsu*Ichiro Isaka*

*Outside Corporate Auditor

(As of June 29, 1999)

Board of Directors

Senior Managing DirectorJiro Ichinaka

Senior Managing DirectorToichi Takenaka


46

Principal Subsidiaries and Affiliates

PHARMACEUTICALS

Tohoku Yamanouchi Pharmaceutical Co., Ltd.154-13, Dai-2 Chiwari, Obuke, Nishinecho, Iwate-gun, Iwate 028-7111, Japan

Yamanouchi U.K. LimitedYamanouchi House, Pyrford Road, West Byfleet, Surrey KT14 6RA, U.K.

Yamanouchi Research Institute (U.K.)Littlemore Park, Oxford OX4 4SX, U.K.

Yamanouchi U.S.A. Inc.Mack Centre IV, 4th Floor, S.61 Paramus Road, Paramus, NJ 07652, U.S.A.

Yamanouchi Ireland Co., Ltd.Damastown, Mulhuddart, Dublin 15, Ireland

Yamanouchi Europe B.V.Elisabethhof 19, 2353 EW Leiderdorp, The Netherlands

Yamanouchi Europe B.V., Research Laboratories & Development FacilitiesElisabethhof 1, 2353 EW Leiderdorp, The Netherlands

Yamanouchi Europe B.V., Manufacturing MeppelHogemaat 2, 7942 JG Meppel, The Netherlands

Yamanouchi Europe B.V., International DepartmentElisabethhof 17, 2353 EW Leiderdorp,The Netherlands

Yamanouchi Pharma B.V.Elisabethhof 17, 2353 EW Leiderdorp, The Netherlands

Yamanouchi Pharma GmbHIm Breitspiel 19, 69126 Heidelberg,Germany

Yamanouchi Pharma S.A.10, Place de La Coupole, 94223Charenton-Le-Pont, Cedex, France

Yamanouchi Pharma Ltd.Yamanouchi House, Pyrford Road, West Byfleet, Surrey KT14 6RA, U.K.

Paines & Byrne, LimitedYamanouchi House, Pyrford Road, West Byfleet, Surrey KT14 6RA, U.K.

Yamanouchi Pharma S.p.A.Via delle Industrie, 2, 20061 Carugate (MI), Italy

Yamanouchi Pharma B.V.Riverside Business Park,Internationalelaan 55, 1070 Brussels, Belgium

Yamanouchi Pharma a/sNaverland 3, 2600 Glostrup, Denmark

Yamanouchi Pharma ABHans Michelsengatan 1B, 21120 Malmö, Sweden

Yamanouchi Pharma, S.A.Centro Empresarial, El Plantio, Calle Ochandiano 6, 28023 Madrid, Spain

Yamanouchi Pharma Lda.Avenida Ferreira Godinho, Cruz Quebrada, Apartado 2293, 1107 Lisboa Codex, Portugal

Yabrofarma LDAAvenida Ferreira Godinho, 1495-690Cruz Quebrada Oeiras, Portugal

Yamanouchi Europe B.V., Moscow Representative Office Marksistskaya Ulitsa 16, Moscow, Russia

Yamanouchi Pharma Sp. z o. o.ul. Poleczki 21, 02-822 Warsaw, Poland

Yamanouchi Europe B.V., Prague Branch OfficeRadimova 36/2257, 160-00 Praha 6, Czech Republic

Shenyang Yamanouchi Pharmaceutical Co., Ltd.No. 3 Jia 6 Road 10, Shenyang Economic & Technological Development Zone, Shenyang, Liaoning Province, People’s Republic of China

Taiwan Yamanouchi Pharmaceutical Co., Ltd.*Shin Kong World Commercial Bldg., 6th Floor, No. 287, Sec. 3, Nanking East Road,Taipei, Taiwan

Korea Yamanouchi Pharmaceutical Co., Ltd.*Duckmyung Bldg., 3rd Floor, #170-9, Samsung-dong, Kangnam-ku, Seoul, Republic of Korea

Yamanouchi Philippines, Inc.*17B, Multinational Bancorporation Centre, 6805 Ayala Avenue, Makati City, Metro Manila, The Philippines

Yamanouchi (Thailand) Co., Ltd.*10th Floor, Wave Place, 55 Wireless Road,Bangkok 10330, Thailand

GPDC Partnership*87 CambridgePark Drive, Cambridge, MA 02140, U.S.A.

NUTRITIONAL PRODUCTS

Shaklee Japan K.K.2-6, Nishiazabu 3-chome, Minato-ku, Tokyo 106-8601, Japan

Shaklee CorporationShaklee Terraces, 444 Market Street, San Francisco, CA 94111, U.S.A.

Shaklee U.S.Shaklee Terraces, 444 Market Street, San Francisco, CA 94111, U.S.A.

Shaklee Research Center1992 Alpine Way, Hayward, CA 94545, U.S.A.

Shaklee Manufacturing Center3300 Marshall Avenue, P.O. Box 1550, Norman, OK 73069, U.S.A.

Yamanouchi Shaklee Pharma Research CenterStanford Research Park, 1050 ArastraderoRoad, Palo Alto, CA 94304, U.S.A.

Shaklee Canada, Inc.952 Century Drive, Burlington, Ontario L7L 5P2, Canada

Shaklee Mexico, S.A. de C.V.Boulevard Avila Camacho No. 40, Desp. 615, Col. El Parque C.P. 53390,Naucalpan, Mexico

Shaklee Products (Malaysia) Sdn. Bhd.7 Jalan USJ 10/1, UEP Subang Jaya, 47620 Petaling Jaya, Selangor, Darul Ehsan, Malaysia

FOOD AND ROSES

Bear Creek Corporation(a subsidiary of Shaklee Corporation)2518 South Pacific Highway, P.O. Box 299, Medford, OR 97501, U.S.A.

Harry and David2518 South Pacific Highway, P.O. Box712, Medford, OR 97501, U.S.A.

Jackson & Perkins2518 South Pacific Highway, P.O. Box1028, Medford, OR 97501, U.S.A.

Bear Creek Gardens, Inc.2518 South Pacific Highway, P.O. Box9100, Medford, OR 97501, U.S.A.

Bear Creek Stores, Inc.2518 South Pacific Highway, P.O. Box712, Medford, OR 97501, U.S.A.

OTHERS

Yamanouchi Real Estate Co., Ltd.17-1, Hasune 3-chome, Itabashi-ku, Tokyo 174-8612, Japan

*Unconsolidated company

(As of August 1999)


Yamanouchi’s Medium-Term Vision

1To develop a continuing stream of big-selling new drugs. Backed by a formidable R&D

pipeline both domestically and overseas, Yamanouchi Pharmaceutical Co., Ltd., is poised

to enter a new era of growth.

2To ensure the long-term strength of our R&D pipeline. We have strengthened our

capabilities for in-house drug discovery while proactively encouraging strategic alliances

with other research organizations.

3To commence operations through an independent sales network in the United States. This

is Yamanouchi’s top priority over the medium term. Yamanouchi will become a truly global

enterprise once this sales network is fully established and joins the Company’s growing

networks in Asia and Europe.

4To further develop and commercialize such drug delivery technologies as WOWTAB® and

OCAS™. Another pillar of its pharmaceutical operations, Yamanouchi’s drug delivery

technology business is set to take off in the United States.

5To further develop the nutritional products and food and roses businesses. Yamanouchi will

expand these operations in tandem with its pharmaceutical business to continue

advancing toward its goal of being a comprehensive health care enterprise.

Financial Highlights 1A Report to Our Shareholders and Friends 2Racing Major New Drugs to Market 4Review of Operations 14

Pharmaceuticals 14Nutritional Products 18Food and Roses 20

Corporate Citizenship 21Environmental Protection 22

Financial Section 23Board of Directors 45Principal Subsidiaries and Affiliates 46Corporate Data 47Corporate Information 47

CONTENTS

47

Corporate Data

HEAD OFFICE3-11, Nihonbashi-Honcho 2-chome,Chuo-ku, Tokyo 103-8411, Japan

Seoul OfficeDuckmyung Bldg., 3rd Floor, #170-9, Samsung-dong, Kangnam-ku, Seoul, Republic of Korea

Beijing Office20/F, A-7-10, East Wing, HANWEI PLAZA,No. 7, Guanghua Road,Chaoyang District, Beijing 100004,People’s Republic of China

Jakarta Office17th Floor, #1701, Jakarta Stock Exchange Tower 2, Jl. Jend. Sudirman Kav. 52-53,Jakarta 12190, Indonesia

Taipei BranchShin Kong World Commercial Bldg., 6th Floor, No. 287, Sec. 3, Nanking East Road, Taipei, Taiwan

Domestic BranchesSapporo, Sendai, Tokyo 1, Tokyo 2, Tokyo 3,Yokohama, Nagoya, Osaka, Kyoto, Kobe,Hiroshima, Takamatsu, Fukuoka

PlantsAzusawa, Yaizu, Takahagi, Nishine

Research LaboratoriesTsukuba, Azusawa, Takahagi, Yaizu

Annual MeetingThe annual meeting of shareholders was heldat 10 a.m. on Tuesday, June 29, 1999, at: Royal Park Hotel 1-1, Nihonbashi-Kakigaracho 2-chome, Chuo-ku, Tokyo, Japan

Stock Trading InformationYamanouchi stock is listed on: Tokyo Stock Exchange (code number 4503)Osaka Stock Exchange Nagoya Stock Exchange Sapporo Stock Exchange Paris Stock Exchange

Independent Certified Public AccountantsShowa Ota & Co.Osaka Kokusai Bldg., 3-13, Azuchi-machi 2-chome, Chuo-ku, Osaka 541-0052, Japan

Shareholders’ ServiceShareholders with questions on such stock-related matters as proxy voting should write to:Finance & Accounting Dept.Yamanouchi Pharmaceutical Co., Ltd.3-11, Nihonbashi-Honcho 2-chome, Chuo-ku, Tokyo 103-8411, Japan

Investor RelationsSecurities analysts and investors with business-related questions should write to: Investor RelationsCorporate Communications Dept.Yamanouchi Pharmaceutical Co., Ltd.3-11, Nihonbashi-Honcho 2-chome, Chuo-ku, Tokyo 103-8411, Japan

Yamanouchi on the InternetOur home page is: http://www.yamanouchi.com

(As of August 1999)

Corporate Information


3-11, Nihonbashi-Honcho 2-chome,Chuo-ku, Tokyo 103-8411, Japanhttp://www.yamanouchi.com

Printed in Japan on recycled paper

Annual Report 1999

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Racing Major

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to Market


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