Takeda Pharmaceutical Company (TAK) Risk Analysis

We are subject to governmental regulations mandating price controls in various countries in which we operate. The growth of overall healthcare costs as a percentage of gross domestic product in many countries means that governments, insurance companies and consumers are under intense pressure to control spending even more tightly. See "Item 4. Information on the Company-B. Business Overview-Third-Party Reimbursement and Pricing." In the U.S., managed care groups (including pharmacy benefit managers), as well as institutional and governmental purchasers, have put significant pricing pressure on drug manufacturers. In particular, as managed care groups have grown in size due to market consolidation, pharmaceutical companies have faced pressure in pricing and usage negotiations and are engaged in fierce competition to have their products included in the care providers' formularies. Moreover, as a result of the legislative and regulatory environment, we continue to experience heightened pricing pressure on, and limitations on access to, our branded pharmaceutical products sold in the U.S. For example, expansion of the U.S. federal government's 340B discount program has continued, potentially increasing the proportion of our U.S. sales that are subject to such mandatory discounts. In addition, in 2022, Congress passed the Inflation Reduction Act (the "IRA"), which significantly changes the compensation terms for drugs under the Medicare program, including by imposing penalties on manufacturers who raise drug prices faster than inflation, instituting a cap on out-of-pocket expenditures by Medicare beneficiaries and allowing the federal government to set prices for certain drugs covered under Medicare beginning in 2026. We continue to expect the changes introduced by the IRA, including the Medicare Part D redesign to negatively impact profits and future price negotiations for Takeda products. In January 2026, the U.S. Centers for Medicare & Medicaid Services selected ENTYVIO, which was our highest-selling product in the fiscal year ended March 31, 2026, for Medicare price negotiations pursuant to the IRA effective January 2028, which could materially impact our sales of ENTYVIO through Medicare. In addition, in May 2025, the U.S. administration issued an executive order intended to encourage or impose the use of "Most Favored Nation" (MFN) pricing in the U.S. market. MFN is a price-setting mechanism, which generally would tie U.S. prescription drug prices to the lowest price available in selected "comparably developed nations." Since such order was issued, the U.S. administration has negotiated agreements with a number of biopharmaceutical companies implementing MFN pricing in certain respects, and has proposed pilot programs for Medicare and Medicaid that would apply MFN pricing to drugs sold through those programs. While the actual impact cannot yet be fully estimated with certainty, MFN pricing in the U.S. market could, among other things, result in the reduction of the prices of our products in the U.S., which could in turn materially and adversely impact our business, financial condition and results of operations. Various state legislatures and regulators have also enacted, or are pursuing, policy changes that could further increase pricing pressure on our products (e.g., prescription drug affordability boards, limited distribution network policies). As a result, we expect the healthcare industry in the U.S. will continue to be subject to increased pricing and spending pressure and our products could face adverse impacts in the U.S. In Japan, manufacturers of pharmaceutical products must have new products listed on the National Health Insurance (the "NHI") Drug Price Standard, a price list published by the MHLW (the "NHI price list"). The NHI price list provides rates for calculating the price of pharmaceutical products used in medical services provided under various public medical care insurance systems. Prices on the NHI price list have been previously subject to revisions based on the actual prices and amounts by which the pharmaceutical products are purchased by medical institutions in Japan, and the average price of previously listed products generally decreases as a result of these price revisions. The Japanese government is currently undertaking healthcare reform initiatives with the goal of sustaining the universal coverage of the NHI program and balancing competing national expenditures. As part of these initiatives, the annual NHI price list revision, implemented since April 2021, has led to more frequent downward price revisions. The government is also addressing the efficient use of generic drugs, with a primary target of 80% penetration in each prefecture by volume and a secondary target of 65% in value by March 2030 with respect to products for which market exclusivity has expired. In addition, products on the NHI price list nominated based on pre-defined criteria, such as innovativeness and the financial impact, are subject to a cost-effectiveness evaluation under MHLW rules, and subject to price adjustments depending on the outcome of this evaluation. Furthermore, effective June 1, 2026, for certain drugs under the MHLW's selected medical care framework, a surcharge equal to one-half of the difference in drug prices, will apply as a special charge if patients request a long-listed originator drug for which generic drugs are available (unless medically necessary or where generics cannot be provided), which may lead to reduced utilization of originator products and could adversely affect our results of operations in Japan. In Europe, drug prices have been subject to downward pressure due to measures implemented in each country to control drug costs, and prices continue to come under pressure due to parallel imports, generic competition, increasing use of health technology assessment based upon cost-effectiveness and other factors, such as pressure on government budgets and re-allocation of spending. European pricing and reimbursement authorities have also intensified efforts to increase transparency of prices as well as exchange of information among the various European pricing authorities in order to raise pressure towards the industry. This pricing debate has impacted the overall political climate in Europe and has triggered a European policy initiative to review the pharmaceutical industry's intellectual property incentives with a particular emphasis on orphan drugs. The European Commission has also proposed to revise the European Union ("EU") pharmaceutical legislation, which contains a proposal to reduce and/or modulate Intellectual Property incentives, regulatory data protection and orphan market exclusivity. While we expect that any new legislation in this area would take at least two to three years to be implemented, it could have significant impact on our business model. Starting in 2025, the EU Regulation on Health Technology Assessment took effect, initially to new oncology and advanced therapeutic medicinal products, expanding in 2028 to orphan drugs and from 2030 to all centrally registered products, adding an additional layer of scrutiny to subsequent national-level pricing and reimbursement processes. While the exact impact of this regulation is not yet known, it is expected to increase clinical evidentiary requirements on manufacturers by pooling specific data requirements from all EU member states. If we are unable to meet these heightened requirements, our products could face potential adverse impacts on pricing and reimbursement in EU markets. In addition, the recent Critical Medicine Act proposal expands the existing possibilities for collaborative procurement involving Member States and the Commission. It sets out the options for joint procurement by Member States (facilitated by the Commission), centralized procurement by the Commission on behalf of or in the name of Member States and joint procurement by Member States and the Commission (Articles 21 to 24 CMA Proposal). If implemented, this could exert downward pressure on prices of such jointly procured products. We are also facing similar pricing pressures in other regions, such as various emerging countries including China. We expect such pricing pressures to continue as we expand our business in those regions and countries. We expect these efforts to control costs to continue as healthcare payers around the globe, in particular government-controlled health authorities, publicly funded or subsidized health programs, insurance companies and managed care organizations, increasingly pursue initiatives to reduce the overall cost of healthcare, restrict access to higher-priced new medicines, increase the use of generics and impose overall price revisions. Such further implementation of these policies could have a material adverse effect on our business, financial condition and results of operations.

We have adopted certain corporate goals and programs to help us address environmental sustainability risks and may evolve them to address other sustainability-related risks in the future as our stakeholders increasingly focus on these topics. We are committed to the achievement of these goals and are working to meet them, but we may nevertheless be unable to meet expectations and such goals and initiatives may also result in increased costs. With respect to environmental sustainability, we have commitments validated by the Science Based Targets Initiative ("SBTi") to reduce our carbon footprint by achieving reductions in greenhouse gas emissions ("GHG") in our operations (Scope 1 and 2) of 65% from a FY2016 baseline and GHG emissions in our value chain (estimated Scope 3) of 25% from a FY2022 baseline by FY2030 and achieving net-zero (as defined in the SBTi Corporate Net-Zero Standard) for Scope 1 and 2 GHG?by FY2035 and Scope 3 by FY2040. We are also committed to minimizing waste sent to landfill from our operations, sourcing sustainable paper packaging and enhancing our water stewardship practices. Our ability to reduce Scope 3 emissions depends on our ability to secure emission reduction commitments from our suppliers and other business partners and continued advancements in technology that enables low emission activities and we have not always been successful, and may not be successful in the future, in achieving our goals. Moreover, although we have not yet recorded material expenses in connection with our net-zero initiatives, the costs of successfully implementing them, such as the costs of seeking renewable sources of energy, increasing the energy efficiency of our operations or reducing GHG emissions in our value chain, remain uncertain, and will depend on factors outside of our control (such as the effect of governmental and societal initiatives to reduce greenhouse emissions and technological developments and the actions of our business partners and other market actors in our industry). Our internal risk assessments show that those costs could potentially become significant in the future. Also, these initiatives may, for example, require us to consider alternative vendors or suppliers or impair our ability to procure or use certain materials. Governmental and regulatory authorities, counterparties such as suppliers, investors, the public at large and others have also increasingly focused on sustainability, with new laws and regulations regarding such matters increasing in number and scope. This includes evolving public reporting obligations such as the European Union's Corporate Sustainability Reporting Directive ("CSRD") and Corporate Sustainability Due Diligence Directive ("CSDDD"), as well as the sustainability disclosure rules set forth by the Sustainability Standards Board of Japan ("SSBJ") that have been adopted by Japan's Financial Services Authority, which we expect to apply beginning with the fiscal year ending March 31, 2027. These emerging requirements could increase costs associated with our business operations, including the allocation of additional staffing and other resources and exposure to regulatory, litigation and reputational risk. To the extent that we are unable to meet the expectations of stakeholders, including governmental and regulatory authorities, counterparties, investors, customers, or the public with respect to sustainability matters, our reputation may be harmed, we may face increased compliance or other costs and demand for securities issued by us and our ability to participate in the debt and equity markets may decrease. Furthermore, such standards and expectations are subject to ongoing change and refinement, and may shift in unexpected and potentially significant ways.

Our ability to offset the effects of losses of exclusivity in our existing products and to continue to grow our business depends significantly on the success of our research and development activities in identifying, developing and successfully bringing to market new products in a timely and cost-effective manner. To accomplish this, we commit substantial efforts, funds and other resources to research and development, both in-house and through collaborations with third parties. However, these research and development programs are expensive, involve intensive preclinical evaluation and clinical trials in connection with a highly complex and lengthy regulatory approval process, often requiring more than ten years from discovery to commercial launch. We discuss regulatory considerations below under "-If we fail to comply with government regulations over product development, regulatory approvals and reimbursement requirements, our business could be adversely affected." The research and development process for new biopharmaceutical products also requires us to attract and retain sufficient numbers of highly skilled employees and, in any event, may not be successful. Even if we successfully develop and bring to market new products, there is only a limited available patent life in which to recoup these development costs and the products may face competition that impacts their commercial success. During each stage of the approval process and post-approval life cycle of our products, there is a substantial risk that we will encounter serious obstacles, including unfavorable clinical results (whether overall or in comparison to products of competitors); indications of safety concerns; difficulty or delays in enrolling patients or in administering clinical trials; delays in completing formulation and other testing and work necessary to support an application for regulatory approval; insufficient clinical trial data to support the safety or efficacy of the product candidate; and difficulty in obtaining regulatory approval for additional indications, among others. As a result of the foregoing or other factors, we may decide to delay, discontinue, terminate or externalize the development of potential pipeline products in which we have invested significant resources, even where the product is in the late stages of development, and have done so in the past. For example, in June 2024, we announced that soticlestat did not meet the primary endpoints in the phase 3 SKYLINE and SKYWAY studies for the treatment of Dravet syndrome and Lennox-Gastaut syndrome, respectively, and subsequently determined that we will not file for regulatory approval for either indication. Additionally, in October 2025, we announced our decision to discontinue our cell therapy efforts as part of a strategic portfolio prioritization process. Products approved for use and successfully marketed in one market may be unable to obtain regulatory approval, become commercially successful or achieve satisfactory rates of reimbursement in other markets. Even following initial regulatory approval, the success of a product may be adversely affected by safety and efficacy findings in other clinical trials or larger real-world patient populations, as well as by the market entry of competitive products or other product-related developments, as a result of which we may not be able to recoup our investments in their development and commercialization. For example, in December 2024, Takeda announced the voluntary withdrawal of the EU marketing authorization for ALOFISEL, in coordination with the European Medicines Agency (the "EMA"), following the results of the ADMIRE-CD II study, which did not meet its primary endpoints. The EU marketing authorization has since been withdrawn, and the product has also been discontinued or is being phased out in certain markets outside the EU, including Japan. As a result, our business, financial condition and results of operations could be materially and adversely affected.

Our pharmaceutical products are generally protected for a defined period per jurisdiction by various patents (including those covering drug substance, drug product, approved indications, methods of administration, methods of manufacturing, formulations and dosages) and/or regulatory exclusivity, which are intended to provide us with exclusive rights to market the products for the life of the patent or duration of the regulatory data protection period. The loss of regulatory exclusivity for pharmaceutical products may open such products to competition from generic substitutes that are typically priced significantly lower than the original products, which typically adversely affects the market share and prices of the original products. Generic or biosimilar substitutes have high market shares in a number of key markets, including the U.S., Europe, Japan and many emerging countries, and the adverse effects of the launch of generic products are particularly significant in such markets. The introduction of generic or biosimilar versions of a pharmaceutical product frequently leads to a swift and substantial decline in the sales of the original product. Our continued innovation efforts cannot fully mitigate the impact of competition from generics or biosimilars. In the U.S., the EU and Japan for example, political pressure to reduce spending on prescription drugs has led, and may continue to lead, to legislation and other policy measures that encourage the use of generic products and biosimilars. In Japan, the government is implementing various measures to control drug costs, including by encouraging medical practitioners to use and prescribe generic drugs, and it has set a volume-based "primary" target of 80% generic penetration in each prefecture (region) for products for which market exclusivity has expired, to be achieved by the end of the fiscal year ending March 31, 2030, and, in March 2024, introduced value-based and biosimilar-related "secondary" targets, including a 65% generic share on a value basis and a biosimilar replacement rate of at least 80% on a volume basis for at least 60% of Active Pharmaceutical Ingredients (APIs) for which biosimilar versions are available, with the same deadline. Legislation has also been passed in the U.S. and Europe encouraging the use of biosimilar products. Similar to generics, biosimilars aim to provide less expensive versions of innovative biologic products. Legislation has provided abbreviated pathways for the approval and marketing of biosimilar products, which may affect the profitability and commercial viability of our biologic products. Certain products of ours have begun, or are expected over the next several years, to face declining sales due to the loss of patent protection or regulatory exclusivity. For example, patent protection covering VYVANSE and the associated pediatric exclusivity expired in the U.S. in August 2023. Sales of this product were particularly affected in the fiscal year ended March 31, 2026 as a result of market erosion caused by the introduction of lower-priced generics. In addition, we expect to face generic competition for TRINTELLIX, which generated JPY 121.8 billion in revenue in the fiscal year ended March 31, 2026, following expiration of certain patent rights in December 2026. Furthermore, our current top selling product, ENTYVIO, will face loss of regulatory exclusivity in the latter half of this decade and certain patents covering various aspects of this product are expected to expire in 2032. See "Item 4. Information on the Company-B. Business Overview-Intellectual Property" for details. We may also be subject to competition from generic or biosimilar drug manufacturers prior to the expiration of patents if a manufacturer successfully challenges the validity of our patents, if a manufacturer is able to design around our patents, or if a manufacturer obtains approval of their product and launches it at risk (i.e., prior to a judicial determination). If such a launch occurred prior to completion of court proceedings, a court may decline to grant a preliminary injunction. While we may be entitled to obtain damages subsequently, the amount we may ultimately be awarded and able to collect may be insufficient to compensate for the loss of sales and other harm caused to us. Furthermore, if we lose patent protection as a result of an adverse court decision or a settlement, in certain jurisdictions, we may face the risk that government and private third-party payers and purchasers of pharmaceutical products may claim damages alleging they have over-reimbursed or overpaid for a drug. If our patent and other intellectual property rights are infringed by generic or biosimilar drug manufacturers or other third parties, we may not be able to take full advantage of the potential or existing demand for our products. The protection that we are able to obtain for our prescription drugs varies from product to product and country to country and may not always be sufficient because of local variations in issued patents, or differences in national law or legal systems, including inconsistency in the enforcement or application of law and limitations on the availability of meaningful legal remedies. In particular, patent protection in emerging markets is often less certain than in developed markets. Certain countries may also engage in compulsory licensing of pharmaceutical intellectual property to other manufacturers as a result of local political pressure. Furthermore, the attention of our management and other personnel could be diverted from their normal business activities if we decide to litigate against such infringement. The realization of any such risks could adversely and materially affect our business, financial condition and results of operations.

As a pharmaceutical company, we are subject to significant risks related to product liability. Unanticipated adverse reactions or unfavorable publicity from complaints concerning any of our products, or those of our competitors, could have an adverse effect on our ability to obtain or maintain regulatory approvals or successfully market our products, and may even result in recalls, withdrawal of regulatory approval or adverse labeling of the product. While our products are subject to comprehensive clinical trials and rigorous statistical analysis during the development process prior to approval, there are inherent limitations with regard to the design of such trials, including the limited number of patients enrolled in such trials, the limited time used to measure the efficacy of the product and the limited ability to perform long-term monitoring. In the event that such unanticipated adverse reactions are discovered, we may be required to add descriptions of the adverse reactions as precautions to the packaging of our products, recall and terminate sales of products or conduct costly post-launch clinical trials. Furthermore, concerns relating to potential adverse reactions could arise among consumers or medical professionals, and such concerns, whether justified or not, could have an adverse effect on sales of our products and our reputation. We could also be subject to product liability litigation by patients who have suffered, or claim to have suffered, such adverse reactions resulting in harm to their health as well as product recalls or the revocation of regulatory approvals. Although we previously maintained a stand-alone comprehensive product liability insurance policy, currently we maintain reduced and limited product liability coverage through our self-insured General Liability insurance program, and we therefore could be subject to product liability that significantly exceeds our policy coverage and limits. As a result, the legal costs that we would bear for handling such claims and potential indemnifications to be paid to claimants could materially and adversely affect our financial condition. In addition, the negative publicity from product liability claims, whether justified, may damage our reputation and may negatively impact the number of prescriptions of the product in question or our other products. As a result, our business, financial condition and results of operations could be materially and adversely affected. We will continue to explore potentially re-visiting a stand-alone product liability insurance policy in the future.

Although we develop and manufacture the active ingredients used in some of our products at our own facilities, we are dependent on third-party suppliers for a substantial portion of the raw materials and compounds used in the products we produce. The price and availability of the raw materials for our products, including chemical compounds and biologics, are subject to the effects of weather, natural disasters, market forces, the economic environment, pandemics, geopolitical events, government regulations, fuel costs and foreign exchange rates. If our cost for such materials increases, we may not be able to make corresponding increases in the prices of our products due to regulations, market conditions or our relationships with our customers, and as a result, our profitability could be materially and adversely affected. In particular, we rely on third-party suppliers of key manufacturing inputs of certain drug products. We also rely in part on third-party sources to provide the donated plasma necessary for our plasma-derived therapies. In addition, although we often dual-source certain key products and/or active ingredients, we currently rely on a single source for production of certain key products and/or active ingredients and final drug products. Sources of some materials may be limited to a single supplier, and if such a supplier faces any difficulty in supplying the materials, we may not be able to find an alternative supplier in a timely manner or at all. If materials become unavailable or if quality problems related to the materials arise, we may be forced to halt production and sales of products that use them. In the event that any of our third-party suppliers is delayed in its delivery of such raw materials or compounds, is unable to deliver the full quantity ordered by us at the appropriate level of quality, or is unable to deliver any raw materials or compounds at all, our ability to sell our products in the quantities demanded by the market may be impaired, which could damage our reputation and relationships with customers and patients. In such a case, our business and results of operations could be adversely affected. Moreover, global supply chains have been affected by such varying but interconnected factors such as increased geopolitical tensions, trade tensions and military conflicts, including the Russian invasion of Ukraine, turmoil in the Middle East or Latin America and resulting disruptions to logistics, transportation, energy and other industries and significantly increased inflation in a number of markets. In December 2025, the U.S. president signed into law the BIOSECURE Act (the "Act"), which restricts U.S. federal agencies from entering, extending or renewing a contract with any entity that uses, in performance of its contract with the federal agency, biotechnology equipment or services provided by designated "companies of concern," which includes (i) companies on the U.S. Department of Defense's list of Chinese military companies operating in the United States, (ii) biotechnology-related entities designed pursuant to the BIOSECURE Act as subject to the governance, direction or control, or as operating on behalf of, the government of a "foreign adversary" as defined in the Act (i.e., China, North Korea, Russia, or Iran) and as posing a threat to U.S. national security as set forth in the Act and (iii) the subsidiaries, affiliates, parent companies or successors of such entities. While the effectiveness of the restrictions set forth therein are subject to publication of a list of designated entities, issuance of regulatory guidelines and revision of the Federal Acquisition Regulation, such steps are expected to occur at the latest by late 2028, and once in effect, the restrictions under the BIOSECURE Act, or additional restrictions that may be proposed in the future, could limit or impede our or our partners' ability to work with Chinese suppliers and other third parties in China or other countries deemed U.S. foreign adversaries. Escalating trade and other geopolitical tensions could impact our partners and have a material adverse impact on our global business operations. In addition, the current U.S. presidential administration has announced tariffs, including tariffs of 100% on patented pharmaceuticals imported to the U.S., subject to certain exemptions, including product-specific exemptions (e.g., orphan therapies and plasma-derived therapies), imports from countries such as the U.K., Japan, Switzerland and EU member states that have reached agreements for a lower 15% rate (0% for the U.K.) and for companies with most-favored nation pricing agreements and/or an approved onshoring plan. While, as of the date of this annual report, we believe that our exposure to tariffs and related risks is limited, the situation remains highly fluid (including the scope of goods and/or raw materials that will ultimately be subject to tariffs), and there can be no assurance that our current evaluation of such risk will remain accurate. Such pressures on global supply chains and other operations may also impede the ability of our third-party partners to supply us with the products and services we need to administer our business.

A significant portion of our global sales is made to a relatively small number of wholesale distributors, retail chains and other purchasing groups. In the fiscal year ended March 31, 2026, there were two wholesale distributors, McKesson Group and Cencora Group, that each individually accounted for over ten percent of Takeda's total revenue. If one of our significant wholesale distributors encounters financial or other difficulties, such a distributor may decrease the amount of business that it does with us, and we may be unable to collect the amounts that the distributor owes us on a timely basis or at all. Furthermore, the concentration of wholesale distributors has been increasing through mergers and acquisitions. In addition to increased credit risks, this has resulted in such distributors gaining additional purchasing leverage, which may increase pricing pressure on our products. Such credit concentration risks and pricing pressure could adversely affect our business, financial condition and results of operations.

We manufacture and sell products to customers in numerous countries, and we have entered and will enter into acquisition, licensing, borrowings or other financial transactions that give rise to translation and transaction risks related to foreign currency exposure. Fluctuations in currency exchange rates in the markets where we are active could negatively affect our results of operations, financial position and cash flows. For the fiscal year ended March 31, 2026, 90.4% of our sales were in markets outside Japan. Our consolidated financial statements are presented in Japanese yen, and by translating the foreign currency financial statements of our foreign subsidiaries into Japanese yen, the amounts of our revenue, operating profit, assets and equity, on a consolidated basis, are affected by prevailing rates of exchange. We utilize certain hedging measures with respect to some of our foreign currency transactions. However, such hedging measures do not cover all of our exposures and, even to the extent they do, they may only delay, or may otherwise be unable to completely eliminate, the impact of fluctuations in foreign currency exchange rates.