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Non-Consolidated Semiannual Financial Report for fiscal 1997

SEMIANNUAL FISCAL 1997 REVIEW

1. Overall View

During the period under review, in addition to the second consecutive year of reimbursement price revisions, Japan's pharmaceutical industry experienced an increase in patient copayments as a measure to reduce overall health care spending. In order to take into account the increased costs associated with the aging of society, policies of further drastic reforms in health insurance and the supply of health care are being implemented. All of the above reforms resulted in an extremely severe market environment for the pharmaceutical industry.
Under these conditions, the Company made further efforts in research and development, production, sales and international promotional activities to focus on the patients and their families and consumers with the corporate objective of increasing their benefits.

Operational Results

The Company posted net sales of ¥128,646 million, 0.2%percent above the previous year's interim period, operating income of ¥21,916 million (a 3.4%percent increase), ordinary income of ¥21,152 million (a 0.0%percent increase) and net income of ¥10,484 million (a 9.4%percent increase).
Although sales did not increase significantly, profitability was strengthened through increased efficiency in selling and administrative expenses and an increase in royalty revenue.
Breakdown of sales by business type was as follows. The "Pharmaceutical" segment sales were ¥116,408 million (down 0.5%percent). Within this area, prescription pharmaceutical product sales were ¥104,355 million (down 0.9%percent). Stable sales were recorded for GLAKAY, an osteoporosis drug and METHYCOBAL, a drug for peripheral neuropathies. The bulk substance exports of ARICEPT, a drug for Alzheimer's disease treatment, also contributed to sales. The sales of SELBEX, a gastritis/gastric ulcer medication, and IOMERON, a non-ionic contrast medium, among others, did not increase.
In over-the-counter drugs (OTC), cosmetics and toiletries, sales were ¥12,052 million (up 2.4%percent). Sales increased for CHOCOLA BB, a vitamin B2 complex, JUVELUX, a natural vitamin E, and NABOLIN, an active-type vitamin B12 complex.
Sales in the "Other" segment amounted to ¥12,237 million (up 7.8%percent). Sales of food, chemical products, and food additives were favorable, and sales of pharmaceutical machinery also contributed to sales. Sales of animal and veterinary products did not increase.

New Products

Major new products launched during the interim term included the PICOLUMI series of diagnostic products for the determination of abnormal prothrombin, and NABOLIN EB, containing an active type vitamin B12 complex.

Progress in R&D

In Japan, applications for manufacturing approval are in process for E6010, a thrombolytic agent, E5510, an anti-platelet drug, and E1077, a fourth generation cephalosporin antibiotic. In October, the Company received manufacturing approval for E3810 or PARIET, a proton pump inhibitor. Outside Japan, E2020 or ARICEPT, for the treatment of Alzheimer's disease, has been filed for approval in many countries worldwide and approval was received in 15 countries (as of the end of October 1997), including Germany and France. In addition, an application for marketing approval for E3810 has been made in the United Kingdom.

Foreign Operations

In the US, ARICEPT was launched in January 1997 and progress has been steady. In Europe, ARICEPT was launched in the UK in April 1997, and in Germany in October 1997. Launch preparation plans are currently underway in France.

Production

In order to increase the stability of supply of products and ensure the highest quality, the Company has increased investments in quality control systems and procedures. In September, the 4th Production Facility at the Company's Kawashima production facilities was completed and in April a facility in Massachusetts concentrating on process research technology was also completed. In China (Suzhou city), construction began on a pharmaceutical production facility in June.

Investment and Financing

The Company's capital expenditure in the period under review amounted to approximately ¥8,260 million, principally for investments at the Kawashima production facilities and improvements in the head office facilities.

Dividend Policy

The Company plans paying an interim dividend of ¥10.00 per share on December 5, 1997 which is an increase of ¥1.00 above the previous interim period.

2. OUTLOOK FOR FISCAL YEAR 1997

Market conditions within the pharmaceutical industry are expected to be more severe in the remainder of fiscal year 1997. The Company projects net sales of ¥260,000 million, operating income of ¥47,000 million, ordinary income of ¥46,000 million and net income of ¥22,500 million. The Company will continue focusing on strengthening all corporate operations by concentrating on health care needs with the aim of achieving a truly global human health care company.