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Annual Report 2004 December

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					CHUGAI PHARMACEUTICAL CO., LTD.
Annual Report 2004 December
Profile

Chugai Pharmaceutical aims to transform itself into a company that creates value globally.
To this end, the Company has focused on strengthening its prescription pharmaceutical
business, its core business activity, establishing a position as a leading company in
biotechnology, and enhancing its business platform to engage in the pharmaceutical
business on a global scale.
        In pursuit of these aims, Chugai Pharmaceutical signed an agreement in December
2001 to enter into a strategic alliance with F. Hoffmann-La Roche Ltd. Following share-
holders’ approval in June 2002, Chugai Pharmaceutical merged with Nippon Roche K.K.
in October 2002 and made a fresh start as “new Chugai.” Shortly beforehand, the
Company’s shares in Gen-Probe Incorporated were distributed to Chugai Pharmaceutical
shareholders and Chugai Diagnostics Science Co., Ltd. was sold, completing the
Company’s withdrawal from the non-core diagnostics business.
        In addition, the Company withdrew from the agrichemical and medical device busi-
nesses in fiscal years ended March 2002 and 2003 respectively, in order to increase
focus on the Company’s priority business areas and reallocate management resources.
        Through these measures the Company has further strengthened management
resources in its core business and has enhanced its global business platform.



Contents

Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Dear Shareholders and Investors . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Special Feature: Chugai’s Future Growth Strategy
— Integration to Transformation. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
    Part I — Results of the Strategic Alliance to Date
              First Stage — Integration . . . . . . . . . . . . . . . . . . . . . 6
    Part II — Future Growth Strategy
              Second Stage (Mid-Term Management Plan
              Sunrise 2010) — Transformation. . . . . . . . . . . . . . . . 8
Review of Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
    Oncology Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
    Renal Diseases Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
    Bone and Joint Diseases Field. . . . . . . . . . . . . . . . . . . . . . . . 18
    Other Fields. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
    Market related Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Technologies and Human Resources — the Basis for Growth . . . 23
   Research & Development (R&D),
        Human Resources Strategy . . . . . . . . . . . . . . . . . . . . . . 24
   Development Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
   Status of Intellectual Property (IP) . . . . . . . . . . . . . . . . . . . . . 28
Coporate Social Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
   Corporate Social Responsibility . . . . . . . . . . . . . . . . . . . . . . . 30
                                                                                                     Forward-Looking Statements
   Corporate Governance System (Governance, Compliance) . 32
   Board of Directors/Executive Officers . . . . . . . . . . . . . . . . . . 33                      This annual report includes forward-looking statements
   Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34         pertaining to the business and prospects of the
Financial Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35       Company. These statements reflect the Company’s cur-
                                                                                                     rent analysis of existing information and trends. Actual
Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68   results may differ from expectations based on risks and
Corporate Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70        uncertainties that may affect the Company’s businesses.
Financial Highlights
Chugai Pharmaceutical Co., Ltd. and consolidated subsidiaries
Years ended December 31, 2004, December 31, 2003, and March 31, 2003




                                                                                                                                                         Thousands of
                                                                                                                                                           U.S. dollars
                                                                                                                    Millions of yen                              (Note)
                                                                                                     (Except as otherwise specified)     (Except as otherwise specified)
                                                                                        2004/12             2003/12          2003/3                              2004/12
For the year:
 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     ¥294,671         ¥ 232,748        ¥ 237,391                          $2,833,375
 Prescription pharmaceuticals . . . . . . . . . . . . . . . . . . . .                   278,485           218,158          217,476                           2,677,740
 Nonprescription products . . . . . . . . . . . . . . . . . . . . . .                    16,186            14,590           19,915                             155,635
 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . .                51,497            42,719           30,317                             495,163
 Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             34,117            28,446          (20,135)                            328,048
 Research and development expenses . . . . . . . . . . . . . .                           48,166            43,525           48,511                             463,135

At year-end:
 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        ¥411,449         ¥ 405,197        ¥ 425,301                          $3,956,240
 Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . .                 320,847           296,717          277,254                           3,085,067
 Interest-bearing debts . . . . . . . . . . . . . . . . . . . . . . . . .                 6,167            10,761           12,108                              59,298

Amounts per share (Yen, U.S. dollars):
 Net income (loss) -basic- . . . . . . . . . . . . . . . . . . . . . . .               ¥    62.27       ¥     51.73      ¥   (51.75)                         $      0.60
 Net income (loss) -fully diluted- . . . . . . . . . . . . . . . . .                        61.34             50.94              ––                                 0.59
 Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 18.00             13.00           16.00                                 0.17
 Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . .                  583.61            542.96          503.41                                 5.61

Number of outstanding shares . . . . . . . . . . . . . . . . . . .                   555,004,964      550,691,219     550,633,518

Ratios:
 Operating income to net sales (%) . . . . . . . . . . . . . . . .                           17.5              18.4            12.8
 ROE (%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                11.0               9.9             (8.5)
 Total shareholders’ equity to total assets (%) . . . . . . . .                              78.0              73.2            65.2
 Debt-to-equity ratio (%) . . . . . . . . . . . . . . . . . . . . . . .                        1.9              3.6              4.4
 Interest coverage ratio (Times)** . . . . . . . . . . . . . . . . .                        169.3              79.4            78.7
 Research and development expenses to net sales (%) . .                                      16.3              18.7            20.4
 Number of employees . . . . . . . . . . . . . . . . . . . . . . . . .                      5,327             5,680           5,774
Note: The U.S. dollar amounts have been converted from Japanese yen at the rate of ¥104 to US$1.00, the exchange rate prevailing on December 31, 2004.
      Figures are not fully comparable due to the merger with Nippon Roche, the spin-off of Gen-Probe and the sale of Chugai Diagnostics Science in the fiscal
      year ended March 2003, as well as the change in fiscal year-end in the year ended December 2003.
      * ROE=Net income/Total shareholders' equity (yearly average) x 100
      **Interest coverage ratio=Net cash provided by operating activities (prior to deductions of interest paid and income taxes paid, and addition of income taxes
        refunded) / interest paid.




                                                                                                                          Chugai Pharmaceutical Co., Ltd. Annual Report 2004 1
                         Dear Shareholders and Investors




                                                                                                                                                  Osamu Nagayama
                                                                                                                                         Chairman, President and CEO




                         Two years have passed since we entered into the strategic alliance with Roche and the subse-
                         quent merger with Nippon Roche. Since then, Chugai Pharmaceutical has aggressively sought
                         synergies in sales, research and development, and cost. During the same period, our efforts
                         have led to notable results, including establishing leading positions in the fields of “oncology,”
                         “renal diseases,” and “bone and joint diseases,” firmly strengthening our foundation in the bio-
                         pharmaceutical area, and making robust improvements to profitability. As part of our business
                         strategy, in order to concentrate all management resources on the prescription pharmaceutical
                         business field, we divested our OTC operations to Lion Corporation.
                                Chugai will continue to push ahead with reforms and innovations, aiming to be a top
                         Japanese pharmaceutical company at the pinnacle of the industry that provides a range of
                         groundbreaking and innovative drugs both in Japan and overseas.


                         Review of Our 2004 Consolidated Results
                         The pharmaceutical business in 2004 was marked by increasingly severe competition. With the revision to the
                         reimbursement of medical fees in April, the industry average of drug prices dropped by 4.2%. Due to govern-


                         Prescription Drug Market Trends in Japan

                          8 (Trillions of yen)                                                                                                           (%) 25

                                                                                                                                           7.1     7.2
                          7                         6.8                                                                            6.8                      20
                                                                6.7          6.5                          6.5          6.7
                                         6.4                                                  6.4
                          6                                                           6.1                                                                   15
                          5                                                         CAGR* (1993-2004):1.1%                                                  10
                          4                       6.9                                       5.7                                                              5
                                                                                                                 3.8                     4.1
                          3                                                                                                                      2.1         0
                                                                      -1.8                          0.4                      1.2
                                     -1.1
                          2                                  -2.1                                                                                           -5
                          1                                                        -7.0                                                                    -10
                          0                                                                                                                                -15
                                       1994        1995       1996     1997         1998     1999    2000         2001       2002        2003     2004    (CY)
                                               Market size      Growth rate                                                             Source: IMS
                                                                                                                *CAGR = Compound Annual Growth Rate



2   Chugai Pharmaceutical Co., Ltd. Annual Report 2004
ment measures to control medical costs, market growth of domestic prescription drugs slowed to 2.1% in 2004
from 4.1% in 2003. At the same time, drug development competition further intensified, propelling pharmaceu-
tical companies to actively engage in M&As on a global scale. Japan was no exception to this trend, with several
mergers being announced by companies aiming to survive the reshuffle within the pharmaceutical industry.
     Even in this severe environment, sales of Chugai’s prescription products significantly outpaced growth in the
prescription drug market, growing by a brisk 8.1% (on the basis of wholesale shipment price to medical institu-
tions) on the back of strong sales in our core fields. This was even more meaningful when taking into account
that last year saw a large decline in sales of our anti-influenza agent Tamiflu® due to a relatively mild influenza
season in 2004. As a result, we achieved consolidated net sales of 294.7 billion yen and a consolidated operating
income of 51.5 billion yen (with an operating income margin of 17.5%), both of which represent record results.
     The year 2004 also marked a year in which we took the bold decision to divest our OTC operations.
Accounting for 60% of our sales in the 1950s, OTC operations constituted the foundation on which today’s
Chugai was built. However, as the OTC business is becoming increasingly consumer-oriented, we recognized
that in order to develop a platform for growth in the OTC business in the future, it would be essential to make
further investment in cultivating new fields as well as in strengthening brand competitiveness. At the same
time, given the even greater necessity of focused investment to enhance the foundation of our prescription drug
business, we concluded that it would be extremely difficult for the OTC business division to sustain invest-
ment on the scale that would be required for future success and hence the decision was made to divest this divi-
sion to Lion Corporation, who has OTC business as one of their core areas. I have no doubt that this decision
was optimal for the future development of both our prescription drug business as well as the OTC business.
     Our financial position was further strengthened during the year 2004 as the company’s shareholders’
equity ratio rose from 73.2% to 78.0% due to a 20.8 billion yen increase in retained earnings as well as a
4.6 billion yen increase in common stock and additional paid-in capital resulting from conversion of con-
vertible bonds and exercise of warrants.
     Net income totaled 34.1 billion yen, with the transfer of OTC operations contributing 9.3 billion yen.
Furthermore, we decided to pay an increased dividend of 18 yen per share against 13 yen per share of the pre-
vious fiscal year (or 17.3 yen per share adjusting the previous nine-month fiscal year to a twelve-month basis).


Looking Back On the Two Years Since the Merger: Triple Synergies Gained (Sales, R&D, Cost)
The strong growth achieved up to 2004 in the domestic market has been clearly a result of the sales synergies
gained through the strategic alliance with Roche. With the expansion of our product lineup, we further
strengthened our number one domestic market position in terms of both sales and share in the fields of renal
diseases as well as bone and joint diseases. We also rapidly increased our share in the oncology field, jumping
from ninth place to second place. Since the merger with Nippon Roche we have strengthened our competitive
position in each of these fields thanks to the domestic market launches of the following four new products:
Renagel® (the hyperphosphatemia treatment launched in June 2003), Evista® (the treatment for osteoporosis
in postmenopausal women launched in May 2004) as well as two Roche products, Xeloda® (the anti-tumor
agent launched in June 2003), and Pegasys® (the chronic hepatitis C agent launched in December 2003).
     On the cost front, we utilized the merger with Nippon Roche as an opportunity to push ahead with
dramatic reform of our cost structure. This first step of focused facility reorganization was completed by
December 2003. With the offering of a voluntary retirement plan in September 2004, the total number of
employees on a non-consolidated basis has declined from 5,208 before the integration, which was the com-
bined number of the two companies, to 4,713 as of December 2004.
     On the R&D front, by constantly improving our research productivity in partnership with Roche, we’ve


                                                                                     Chugai Pharmaceutical Co., Ltd. Annual Report 2004 3
                     been able to boost both the quality and volume of our research activities. The number of new molecular entities
                     (NMEs) that are included in our development portfolio amounts to 20, which ranks top class among our peers in
                     the domestic market (as of end-December 2004). Since the alliance with Roche, we ranked number one in the
                     domestic market for obtaining new approvals for drugs (four approvals in 2003-4). At the same time, we are lead-
                     ing the way in the development of new global class drugs such as the antibody drug MRA. Roche and Chugai
                     jointly began phase III clinical trials of MRA overseas in January 2005 for rheumatoid arthritis.
                          By the end of 2005, by further maximizing these three integration synergies, we are confident that we
                     can offset the decrease in sales due to the divestment of our OTC operations (OTC accounted for sales of
                     16.2 billion yen in 2004) and achieve our goals of 1) sustaining 2004 levels of net sales of 293.5 billion yen,
                     and 2) realizing an operating income margin of 20.9% (on an operating income of 61.3 billion yen). (All of
                     these figures are on a consolidated basis.)


                     New Management Theme: Transformation
                     December 2004 saw the successful completion of Stage One of our management plan, which we labeled
                     “Integration,” or quickly realizing integration synergies. Building upon the achievements of Stage One,
                     2005 marks the beginning of Stage Two, the theme for which is “Transformation.” This is the stage in
                     which we are dedicated to dramatically enhancing our competitive strengths. The benchmark for our Stage
                     Two strategy is set out in our new mid-term management plan entitled “Sunrise 2010.”
                          During Step One (2005-2007) of “Sunrise 2010,” our most important task will be to rapidly strength-
                     en our competitiveness through revolutionary changes in RDPMS (Research, Development, Production,
                     Marketing and Sales).
                          In Step Two (2008-2010), capitalizing fully upon the competitive edge achieved through successful
                     completion of Step One, we aim to attain strong growth in sales by achieving swift market entry of break-
                     through products such as MRA and Avastin®. This will be accompanied by the creation of a development
                     product portfolio that will allow even greater growth from 2010 onwards.
                          Our financial goals for the year 2010 include consolidated net sales exceeding 360 billion yen, and an
                     operating income margin of over 20% (with an operating income of more than 72 billion yen).


                     Becoming A Unique, Innovative and High Growth Company
                     By further enhancing our own competitiveness as well as maximizing the benefits of the strategic alliance
                     with Roche, we will reinforce our corporate base with the aim of becoming a unique, innovative and high
                     growth company. In tandem with these medium and long-term goals, we stand ready to make further
                     efforts to improve annual results, and to see to it that we will actively return the fruits of these efforts to all
                     of our shareholders. It is our aim to maintain stability in dividend payments in line with a benchmark divi-
                     dend pay-out of 30%. As we move forward, I ask all of our shareholders and investors for your continued
                     understanding and support as Chugai enters another exciting phase in its growth.


                     March 2005




                     Osamu Nagayama
                     Chairman, President and CEO



4   Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Special Feature:
Chugai’s
Future Growth Strategy
— Integration
to Transformation




                         Chugai Pharmaceutical Co., Ltd. Annual Report 2004 5
                             Part I — Results of the Strategic Alliance to Date
                             First Stage – Integration

                                                          Chugai aims to achieve high profitability and strong growth by concentrating our
                                                          efforts in prescription drugs. Through an accumulation of experience in research
                                                          and development we have amassed a wealth of technology and knowledge of
                                                          biopharmaceuticals, such as antibody drugs, which gives us our competitive
                                                          edge. The agreement to form a strategic alliance with Roche in December 2001
                                                          and the subsequent merger with Nippon Roche in October 2002 allowed us to go
                                                          a step further in implementing bold reforms. With synergies being realized in the
                                                          three areas of Sales, R&D, and Cost, we have successfully secured the foothold
                                                          we need to ensure future growth.




    1. Sales Synergy — Market Share Increase through                           2. R&D Synergy – Research Productivity Improvement
       Expansion of the Product Lineup and Strengthened                           and Pipeline Enrichment
       Sales Infrastructure                                                    Since forming the alliance, both Chugai and Roche have shared a
    Since the merger with Nippon Roche in October 2002, Chugai has             wide range of drug discovery platform technologies. In September
    vastly increased both sales and market share by implementing spe-          2002, we signed a small molecules research agreement and then in
    cific activities meant to utilize our expanded product lineup and          April 2004 we signed another research agreement, this time in the
    strengthened sales infrastructure. In the domestic prescription drug       area of non-small molecules, which includes biopharmaceuticals
    market, Chugai’s pre-merger sales in 2001 ranked 10th, while those         such as antibody drugs.
    of Nippon Roche ranked 34th. In 2004, we leapt to 4th place.                    Research collaboration with Roche has greatly improved our
    During the same period, our market share rose from a combined              research productivity. Efficiency in the screening of small molecules
    total of 3.8% (Chugai 2.8%, Nippon Roche 1.0%) to 4.3%.                    has increased dramatically, which in turn has led to a reduction in
          Through the merger with Nippon Roche, we expanded our                development time and increased our drug development success rate.
    product lineup from 45 to 70 products, with Chugai holding first-          Even before the alliance, we had been working independently to
    refusal rights for development and sales of Roche products in the          strengthen our genomic antibody drug discovery platform. These
    Japanese domestic market. Among these are the core products such           efforts are bearing fruit in the form of potential new antibody
    as the anti-influenza agent Tamiflu®, anti-tumor agents Furtulon®,         drugs. This enhanced research productivity has quickened project
    Herceptin®, Rituxan® as well as the anti-emetic agent, Kytril®. Since      turnover and we are now seeing improvements in both the quality
    the merger we have continued our efforts in developing Roche               and balance of our R&D portfolio.
    products, with market launches for the anti-tumor agent, Xeloda®,               Chugai’s development pipeline expanded as a result of the
    in June, and the chronic hepatitis C treatment, Pegasys ®, in              merger with Roche and the pipeline is now being further enriched.
    December of 2003. Our market positions in strategic fields current-        Plans are being made to introduce Roche-developed products into
    ly stand at second in oncology, and first in both renal diseases and       the Chugai pipeline through decision-making bodies such as the
    bone and joint diseases. In particular, synergies as a result of the       joint development committee formed between the two companies.
    merger have been highly apparent in oncology, where we have                From 2005 onwards, we will be able to continuously file applica-
    redoubled our efforts to achieve the number one position.                  tions for new products on an annual basis. In particular, we expect
          While our medical representative (MR) count already enjoys           our growth to gain extra momentum from 2008 fueled by promis-
    a leading position in the domestic market through the integra-             ing new drugs such as Avastin® (R435, humanized anti-VEGF
    tion with Nippon Roche, we are now looking ahead to strength-              [Vascular Endothelial Growth Factor] monoclonal antibody) and
    en our sales force, with particular emphasis on the oncology and           CERA (R744, continuous erythropoiesis receptor activator).
    hepatitis fields, in pace with new product launches and addition-               In addition to the development of products in Japan licensed
    al indications.                                                            from Roche, we are making steady progress in the global develop-




6    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Chugai’s Domestic Prescription Drug Sales and Market Share                                    Quantum Leap in Research Productivity
Sales                                                                        Market Share
350 (Billions of yen)                                                             (%) 7.0      Collaboration with Roche                  •   Enhancement of chemical
                                                                                               • Small molecules                             libraries
                                                                4th Sales Position             • Bio-products                            •   Increased efficiency of small
300                                                4th                                  6.0
                                                                                               Genome-based Antibody                         molecular compound screening
                                   8th                                                         Drug Discovery                            •   Improved efficiency of antibody
250                                                                                     5.0
                                                                                                 Strengthening of research                   drug generation
200              34th                                                      4.3%         4.0      platform
                               3.9%                      4.1%
150                     3.8%                                                            3.0   2001-2002 (before the merger)

                        2.8%   3.1%                                                     2.0   Lead
100                                                                                                                      Lead optimization                    EIH enable
                 10th                                                                         identification
 50                                                                                     1.0
                                                                                                               Duration: 25% reduction   Duration: 45% reduction
   0                                                                                    0.0
                                                                                                               Success rate: 4.6 times
                                                                                              2003-2004                                  Success rate: 2.0 times
                    2001          2002           2003                2004      (Year)
       former Nippon Roche                                               Source: IMS          Lead              Lead
                                                                                              identification    optimization             EIH enable
       Chugai                      Integration (October, 2002)
       Chugai + former Nippon Roche                                                                                                                       EIH: Entry Into Human


ment of promising products originally developed by Chugai. These                              reduced the total number of employees to 4,713 from 5,208, as of
include, amongst others, the antibody drug MRA, and GM-611                                    December 2004. In addition, in October 2004 we revamped the
(an agent for gastrointestinal motility). In October 2004, we estab-                          retirement program so that it can withstand the changing socio-
lished a global center for clinical research for the Chugai Group,                            economic climate, including interest rates and the operating envi-
Chugai Clinical Research Center Co., Ltd. In addition to strength-                            ronment. As part of our efforts to raise the efficiency of head office
ening the global development structure through the consolidation                              functions, we plan to relocate our headquarters in the fourth quar-
of common operations in clinical trials in Japan, the United States,                          ter of fiscal 2005.
and Europe, we are building an even stronger infrastructure for                                    These measures have created a stronger cost structure and
improvement in the speed and quality of our development opera-                                allowed us to provide management resources to strategic fields in a
tions.                                                                                        much more focused way. Our selling, general and administrative
     Chugai’s R&D expenditure in fiscal 2004 totaled 48.2 billion                             (SG&A) ratio (excluding R&D expenses) fell from 34.1% ahead of
yen (16.4% of net sales). While this figure is comparable with simi-                          the merger in March 2002 to 28.5% in December 2004. Looking
lar corporations in Japan, Chugai differentiates itself in its efficient                      towards the future, we are now planning to further raise efficiency
and targeted research that draws on the R&D foundation of the                                 and revise cost structures.
Roche Group.                                                                                       In addition to realizing synergies in the three areas of Sales,
                                                                                              R&D, and Cost, we have also successfully strengthened our finan-
3. Cost Synergy – Focus on Efficient Operations and                                           cial position. Specifically, shareholders’ equity has grown from
   Strategic Fields                                                                           200.8 billion yen in March 2002 to 320.8 billion yen in December
Following the merger with Nippon Roche in October 2002,                                       2004, while shareholders’ equity ratio has dramatically improved
Chugai embarked upon the task of reorganizing and streamlining                                from 57.5% to 78.0% during the same period.
its facilities. This has reduced the number of research centers from
six at the time of the merger to three (Gotemba, Kamakura,
Ukima) and our factories from seven to five (Ukima, Kagamiishi,
Fujieda, Utsunomiya, Kamakura).
      Chugai has always been dedicated to identifying and focusing
on key businesses. In December 2004 we focused our efforts by
transferring our OTC operations to Lion Corporation, establishing
a business structure that specializes in prescription drugs.
      Furthermore, we implemented an early retirement program in
September 2004 in which 216 employees participated. Since the
time of the merger, selective hiring and natural attrition have




                                                                                                                         Chugai Pharmaceutical Co., Ltd. Annual Report 2004 7
    Part I I — Future Growth Strategy
    Second Stage (Mid-Term Management Plan Sunrise 2010) – Transformation

    During the course of the Integration stage implemented at Chugai, we harnessed
    a three-part synergy in Sales, Research and Development, and Cost, establishing
    a solid foundation as a top-class pharmaceutical firm in Japan.


    Moving forward, our second stage strategy is to focus on the theme of
    Transformation, and as we proceed with innovation in RDPMS (Research,
    Development, Production, Marketing, Sales), we are aiming to achieve even fur-
    ther growth through dramatic enhancement of our competitive strengths.




    1. Mid-Term Management Plan “Sunrise 2010”                                2. Issues in the Implementation of Our Goals for 2010
       – Towards Transformation                                               Turning towards the implementation of our 2010 goals, the follow-
    Turning our attention towards the goal of Transformation, we              ing three issues will be of key importance: 1) creation and acquisi-
    established our new mid-term management plan – “Sunrise 2010”             tion of innovative new drugs, 2) product value maximization, and
    – that is to be carried out between 2005 and 2010. In the Sunrise         3) overseas development.
    2010 plan, we set goals of reaching in excess of 360 billion yen in
    consolidated net sales and an operating profit margin of over 20%         (1) Creation and Acquisition of Innovative New Drugs
    by the year 2010. The sales target is based on the current product        Chugai intends to pick up speed in its global development and
    composition and development pipeline as well as future forecasts          improve productivity, with the aim of realizing new product
    for a highly competitive market, and, accordingly, assumes a certain      launches and additional indications for over ten different projects
    degree of risk. The target operating margin represents a baseline,        by 2010. In order to create and acquire innovative new drugs, the
    which incorporates the expected rise in the sales cost ratio due to       active introduction of promising development compounds from
    the expansion of products introduced by Roche, and takes into             Roche and the improvement of our own R&D activities as well as
    account the future required R&D expenditure. Furthermore, in              the utilization of third-party R&D networks will be of even greater
    tandem with this, we are continuing to aim to have a top-class pres-      importance.
    ence in the domestic market, as well as realize a win-win relation-
    ship with Roche.                                                          Next Generation Antibody Drug Development through
          Under Sunrise 2010, we have positioned the first three years        Successful Development of Small-Molecular Agonist Antibodies
    (2005-2007) as Step One and the latter three years (2008-2010)            Chugai currently possesses world-class biopharmaceutical drug cre-
    as Step Two.                                                              ation technology. Beginning with the commercialization of first-
          During Step One, we are taking the prudent view that it is high-    generation biopharmaceuticals such as EPO (recombinant human
    ly likely our sales growth rate will remain in the low single digits, a   erythropoietin), G-CSF (recombinant human granulocyte-colony
    result of the domestic market continuing to feel the pressure of the      stimulating factor) and other bioactive proteins, Chugai has been
    medical cost containment efforts as well as the anticipated heightened    making steady progress in the development and commercialization
    competition due to factors such as the introduction of products that      of antibody agents centering on the next-generation biopharmaceu-
    will directly compete with our mainstay products. Given this harsh        tical drug, MRA. We are also seeing significant progress in improv-
    operating environment, in order to build the basis for our strong new     ing our production ability of these products.
    growth phase, finding ways to dramatically strengthen our competi-              Furthermore, as a result of devoting extensive time and energy
    tiveness by investing in the core strategic fields and promoting inno-    to the research of next generation antibody drugs, Chugai was able
    vation in RDPMS (Research, Development, Production, Marketing,            to contribute to the recent successful creation of a small-molecular
    and Sales) will be vital during this period.                              agonist antibody that works on TPO (thrombopoietin) receptors.
          In Step Two, we will push our sales growth rate to the upper        Engineering a small-molecular agonist antibody with high activa-
    single digits with the expected contribution, both domestically and       tion through changes in the antibody molecule has the following
    internationally, of MRA (tocilizumab, a humanized anti-human IL-          advantages: 1) manufacturing costs can be cut since the molecule
    6 receptor monoclonal antibody) and other new products as well as         volume is small, 2) amounts administered can be reduced since
    by taking full advantage of the strengthened competitiveness as fos-      drug activity is high, and 3) since the serum half-life is short,
    tered in Step One. At the same time, we will aim to create a prod-        amounts administered can be easily controlled by supplemental
    uct development portfolio with the potential to fuel even stronger        administration and other means in accordance with patient condi-
    growth from 2010 and beyond.                                              tions. If further clinical research on the TPO receptor agonist anti-


8    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Steps Toward FY2010 Targets                                                     Strategic Marketing
                                                                                ——

  STEP 1 (2005-07)            STEP 2 (2008-10)             FY2010 Targets
                                                                                Old Model
   Strategic Investment        Transition Period for   Consolidated Sales of     Research Strategy       Development Strategy                        Sales Strategy
                               “High Growth”
                                                       > JPY360 Billion                                                     Late stage
                                  High single-digit                               Drug discovery              PoC*          development                   Sales
           Threat from            Sales Growth                                                                              Filing
                                                       Operating Profit of
   StagnantCompetitive                                 > 20%
   Domestic Products                                                            Strategic Marketing
    Market                                                                       Seamless therapeutic area strategies from drug discovery to Sales
                                                       •   Top-class presence
                                     Growth of         •   Highest growth          Expansion of area franchise
                                      promising                                                                                Late stage
                                    new products
                                                       •   WIN-WIN with Roche
                                                                                  Drug discovery               PoC*            development                Sales
    Low single-digit Sales Growth                                                                                              Filing
   Promote innovations                                                                                     Consistent product lifecycle strategies after PoC
   throughout RDPMS*           Top-class Growth
                                                                                                             Product Value Maximization
 * RDPMS=Research, Development, Production, Marketing and Sales
                                                                                 * PoC = Proof of Concept
                                                                                   (Verifies that the development concept shows efficacy in humans)


body demonstrates its efficacy, it will provide the world with a                (2) Product Value Maximization
potential new option in the treatment of thrombocytopenia. To                   With the constant introduction of innovative new products into
that end, we are accelerating our research in order to commence                 the market, it is crucial to strive towards maximizing the market
the clinical testing phase as soon as possible.                                 value of these new products. Taking into consideration product life
     Looking forward, we are committed to pioneering high activi-               cycle and a strengthening of strategic fields, we will push forward
ty, low cost, and easy-to-administer small molecular agonist anti-              with innovation in our marketing and production systems.
bodies as a new category of second-generation antibody drugs.
                                                                                a. Strategic Marketing
Future-Oriented Research Network and Participation in New                       Strengthening the RDPMS (Research, Development, Production,
Fields                                                                          Marketing and Sales) Cycle
In order to maximize the research and development synergies from                Given the dramatic changes taking place in the market environment
our strategic alliance with Roche, we are fully utilizing our numer-            and within technology, it will be very difficult to maximize product
ous cooperative relationships, and proceeding with the formulation              value and achieve rapid growth if we continue separately dealing with
of highly productive drug creation platforms and the establishment              different functions, such as research, development and marketing.
of research project management methods.                                               From now on, Chugai will carry out strategic planning and
      Moreover, by combining the strength of our own independent                promotion for the entire product lifecycle from the beginning of
research platform with the ideas and technology of academia and                 the development stage through to post-launch indication expan-
venture firms we are creating an organic, future-oriented network,              sion, formulation additions and evidence creation. We will establish
which, in turn, will allow us to develop new approaches in our drug             consistent strategic marketing functions from drug discovery
discovery research. Specifically, in addition to our core fields of             through to sales for our strategic fields (oncology, renal diseases,
oncology, renal diseases, and bone and joint diseases, we are now               and bone and joint diseases) in order to further enhance our pres-
looking towards the creation of drugs for use in the treatment of               ence in these fields and maximize product value.
lifestyle-related diseases, such as diabetes. As part of these efforts,
we are implementing an approach that is based on both the clinical              Reorganizing Related Departments
epidemiological and pharmacoepidemiological view of the disease                 With an eye on strengthening our RDPMS cycle, in October 2004
process, and are seeking to discover new medication targets and cre-            we reorganized the Product Lifecycle & Medical Information
ate innovative, high value-added drugs.                                         Division into the Product Lifecycle Division, which is expected to
      This future-oriented research network is one that incorporates            specialize in creation of medical evidence that can maximize prod-
various ideas and development ‘seeds’ from the academia, venture                uct value. Following launches, we will be able to attain a vast
firms and other sources into an organic network that is structured              amount of information from the medical field pertaining to effica-
around the goal of drug discovery. Unlike the traditional research              cy and safety that we were unable to gain during clinical testing.
model with its one-to-one relationship, this new type of research               Using this information, we will then be able to carry out detailed
network allows for many parties to participate, thus sparking                   research with the aim of achieving more effective and safer drug
ground breaking ideas and incubating the seeds that lead to new                 usage. In addition, the role of the Medical Business & Science
drug discoveries. It is a new interdisciplinary research approach to            Division was strengthened to better serve customers by providing
future drug discovery that integrates new ideas and approaches to               MRs with more detailed information on EBM (evidence-based
create high value-added drugs in the short term.                                medicine), new indications, and new formulations. The division
                                                                                will also strive to raise customer satisfaction levels through provid-
                                                                                ing reference documentation, hosting research seminars as well as


                                                                                                             Chugai Pharmaceutical Co., Ltd. Annual Report 2004 9
     Construction of New Research Network
     Through “network targeted drug development”, it is possible to utilize the functions of new
     ideas and technology, creating a consolidated research process and developing new medicines
     with added value.
                                                                                                                      * Clinical epidemiology and pharmacoepidemiology are sci-
                                                                               Molecular       New
                                                                               Imaging         Technology               ences that study the clinical condition process and the
                         Renal                    Academia
                                                                                                                        effects following drug administration on human genes
                                                 Ventures                                                               using an integrated, chronological method for gaining
     Clinical Epidemiology
     Medical Epidemiology*                                                                                              understanding of a drug’s working process at a molecular
                                             New Network                                                                level. They combine physiology, pharmacology, and
     Metabolic
     Syndrome                               Incubation of Ideas                              Pharmacogenomics**         pathology to understand the illness and identify the true
                                        Offer of Feasibility Function                          Clinical Forecast        drug discovery target.
         Target Search
                                                                                                                      ** Pharmacogenomics is an important technology that uti-
                                                                                                                         lizes the individual’s DNA information to create a tailor-
                       Oncology                                             Drug Product Strengthen
                                                                            Technology   Drug Development                made treatment with the highest efficacy and safety, thus
                                                                                                                         allowing us to determine the most appropriate drug to use
           Create new medicines with high value, such as antibodies, in the short term                                   with a particular patient.




     providing other information and services that are in strong                                 uct manager will first gain an understanding of the new drug’s effi-
     demand from healthcare professionals.                                                       cacy and side effects. Afterwards, while closely monitoring the
           At the same time, we must not be negligent in the pursuit of                          development situation as the drug moves towards application
     efficacy and safety from the R&D stage as well. Specifically, as a                          approval, the product manager will carry out planning in areas such
     result of the revised Pharmaceutical Affairs Law of April 2004, it is                       as the number of applicable patients, creating differentiation from
     presumed that pharmaceutical companies will have to shoulder                                competing products, and methods of approaching university hospi-
     more responsibility concerning safety. In response to this, we estab-                       tals and other potential users. They will also develop training pro-
     lished the Corporate Regulatory Compliance and Quality                                      grams for the MRs in charge of sales. Our expectation of product
     Assurance Division directly under the President in October 2004                             managers is that they will serve as specialists, handling the drug for
     and strengthened the system for ensuring safety across all areas from                       which they are responsible in a cross functional manner.
     R&D to production and sales.                                                                      During our October 2004 organizational reforms, we deployed
                                                                                                 product managers for a total of 13 strategic products in our core
     Establishing the Product Manager System                                                     fields of oncology, renal diseases, and bone and joint diseases. These
     A cross-organizational product manager system for strategic prod-                           included product managers for the anti-tumor agent Herceptin®,
     ucts was established as a new type of specialist system, allowing                           renal anemia treatment agent Epogin®, osteoporosis treatment agent
     product managers to be involved from the product development                                Evista®, the promising developmental drug MRA and the osteoporo-
     stage, in addition to being responsible for pre-launch marketing                            sis treatment ED-71. Our next step is to establish product managers
     activities. In the past, there was a tendency to approach research,                         for all promising new drugs at the clinical development stage.
     development, and sales separately; however, the aim of this new sys-
     tem is to consolidate drug information for each product so as to                            b. Strengthening the Domestic Sales Structure
     extract the maximum value of new drugs, which are ultimately our                            Concerning our sales function, we will push for improvements in
     main source of competitiveness. Product managers will begin their                           responding to changes in the healthcare environment. In terms of
     activities when drug candidates reach the latter half of clinical                           our domestic MR count, we plan to expand to 1,500 MRs by the
     development (second to third phase of clinical testing.) The prod-                          end of 2006.




10    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
      In October 2004, we carried out a large-scale system reorgani-          tion. As a part of this, we will look to consolidate biopharmaceuti-
zation centered on the Sales & Marketing Group.                               cals at the Utsunomiya Plant and synthetic pharmaceuticals at the
      With respect to sales centers, we reorganized our 30 sales depart-      Fujieda Plant, and establish a seamless production process from
ments, 55 depots, and 140 groups into a structure with 25 depart-             bulk pharmaceutical chemicals to formulation in each of these
ments, 58 depots, and 188 groups. This was carried out to 1) promote          areas. As the first step, we decided to divest our Kagamiishi Plant,
local-based sales as partnering between hospitals and clinics strength-       that mainly produces tablets and ointments, to Nipro Corporation
ens, and 2) allow for more thorough leadership and management by              as of the end of June 2005, and subcontract to them our existing
reducing the number of MRs each group manager supervises.                     tablet production. At the same time, with regard to the Fujieda
      Amidst the continuing specialization of healthcare, demands             Plant, we will invest approximately 20 billion yen in the plant
from healthcare workers for more product information such as                  between 2005 and 2008 focusing on the construction of a cutting-
medical benefits, safety and medical cost efficiency are growing, as          edge solid drug production line. Furthermore, following the consol-
are the corresponding demands on MRs to provide even more                     idated spin-off of our Production Division, the new company will
detailed information. As one step in meeting these growing                    continue as a wholly-owned subsidiary of Chugai and serve as the
demands, Chugai has created specialist MRs responsible for facili-            same production function as before, yet through the spin-off it will
ties specializing in cancer treatment. More than 100 such specialists         establish optimal business operations and a personnel system as a
will work with other MRs to focus on providing information to the             specialized production firm.
approximately 300 regional cancer treatment facilities nationwide                  In short, we expect to be able to carry out large-scale restruc-
that have been designated by the Ministry of Health, Labour and               turing of production by pushing forward with a combination of
Welfare. Within Chugai, the oncology field boasts the strongest               two factors: the first involves exercising our strength in flexibly
product lineup and development pipeline, and is expected to see               responding to each product's specific characteristics as well as
strong growth in the future. Utilizing this new MR system, Chugai             enhancing our technical capabilities, quality and cost competitive-
aims to become number one in this field.                                      ness through handling both bulk manufacturing and formulation at
                                                                              one plant. The other is the spinning-off of our Production
c. Production System Reorganization                                           Division, which simplifies human resources development, intelli-
As mentioned previously, although Chugai has streamlined its pro-             gence sharing and the management of technical know-how.
duction facilities into five domestic plants, we plan even further reor-
ganization of our production structure in the future. Namely, within          (3) Overseas Development
five to six years we will consolidate our production facilities to just two   Based on the acute awareness that the success of MRA in Europe
plants – Utsnomiya and Fujieda – and by January 2006, our                     and the United States is vital to further developing our win-win
Production Division will be spun off into a wholly-owned subsidiary.          relationship with Roche, in addition to accelerating Chugai’s
      Through the enactment of the revised Pharmaceutical Affairs             growth abroad, we are further strengthening our cooperation in
Law in April 2004, it is expected that total subcontracting of manu-          global development and sales.
facturing will be permitted. As a result, the options for research-ori-             With the global population aging, demand is growing in
ented pharmaceutical companies concerning the maintenance and                 Japan, the United States, Europe and the rest of the developed
strengthening of in-house technical know-how and the establish-               world for new drugs to be brought to market that are safe and high-
ment of efficient cost structures will increase. As Chugai advances           ly effective. Chugai’s antibody drug, MRA, is a highly promising
forward with innovation across all areas of RDPMS, we plan to use             drug that the Roche Group is counting on to meet the needs in this
these developments as an opportunity for innovation in produc-                field. Since antibody drugs have high selectivity and compatibility




                                                                                                     Chugai Pharmaceutical Co., Ltd. Annual Report 2004 11
     against targeting agents, expectations are high that they will have     3. Further Strengthening Our Business Foundation
     high efficacy with reduced side effects.                                To ensure further growth beyond 2008, streamlining our business
           We are expecting multiple indications for MRA. Domestically,      organization will be absolutely essential. To that end, our goal in
     we have completed the approval application for use on the               the first half of Sunrise 2010 is to accelerate the pace of our struc-
     intractable illness Castleman’s disease, and are hoping to receive      tural reforms in administrative and other areas with the objective of
     approval by as soon as the middle of 2005. Still, MRA’s largest         strengthening our earnings foundation and securing sources for
     market is expected to be in the area of rheumatoid arthritis.           strategic investment whilst also sustaining and improving the quali-
     Domestically, in February 2004, we started the third stage of clini-    ty of our business operations.
     cal testing and, if all goes well, expect to be able to submit the            As part of this, Business Process Reengineering (BPR) is
     approval application by the first half of 2006. It is estimated there   expected to play a core role with the implementation of SAP R/3,
     are 300,000 rheumatoid arthritis patients in Japan, and 2,500,000       which, excluding personnel, will serve as the backbone of opera-
     in the United States and Europe combined. With the aging of the         tions from purchasing through to accounting. With its implemen-
     world’s population, the increase in the number of patients in this      tation in January 2005, Chugai will 1) create a strategic decision-
     market is expected to continue well into the future.                    making tool for management, 2) introduce a management informa-
           Overseas, as of January 2005, we have already begun joint         tion platform to be shared by the Roche Group, 3) implement nec-
     phase III clinical testing with Roche, and are planning to conduct      essary BPR once business processes have been clarified, and 4) press
     clinical studies involving more than 4,000 patients in over 20 coun-    forward with improvements in and restructuring of management
     tries. In conjunction with this, we are further strengthening our       efficiency via extrication from the black box tendencies that are
     cooperation in global development and sales aimed at MRA’s early        inherent in mainframe systems. Furthermore, with the cost savings
     market launch and penetration. In addition, we will continue to         gained through BPR benefits, we estimate a cumulative benefit of
     proceed with both the licensing in and out of effective projects to     6.0 billion yen for this investment in the five years to 2009, with
     follow MRA and Avastin® (R435, humanized anti-VEGF [Vascular            the funds invested in the introduction of SAP R/3 being expected
     Endothelial Growth Factor] monoclonal antibody).                        to be recovered within three years.
                                                                                   Furthermore, since employees form the pillar that supports our
                                                                             business, we are stepping up efforts in the development of manage-
                                                                             ment resources and succession planning to reenergize and raise
                                                                             employee motivation.
                                                                                   Additionally, we are moving to strengthen our business foun-
                                                                             dation across the board by bolstering group management, and rein-
                                                                             forcing appropriate CSR management, risk management, and
                                                                             investor relations activities.




12    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Review of Operations




                       Chugai Pharmaceutical Co., Ltd. Annual Report 2004 13
     Oncology Field

     Consolidated Sales Breakdown by Main Product
                                                                                       Sales (Billions of Yen)
     Product name (generic name)          Brief Overview                      2003/3        2003/12              2004/12   Launch Year in Japan
                                                                                              (9 mon.)
     Neutrogin® (lenograstim)             Agent for neutropenia associated      25.1             24.7               27.8   1991 (
                                          with chemotherapy
     Rituxan® (rituximab)                 Anti-CD20 monoclonal antibody,         3.0              8.2               16.8   2001 (
                                          anti-tumor agent
     Furtulon® (doxifluridine)            Anti-tumor agent                       8.1             12.2               12.0   1987 (
     Kytril® (granisetron)                5-HT3 receptor antagonist,             5.1              9.2               11.0   1992 (
                                          anti-emetic agent
     Herceptin® (trastuzumab)             Anti-HER2 monoclonal antibody,         3.5              6.8                9.3   2001 (150mg) (
     (                                    anti-tumor agent                                                                 2004 (60mg)(
     Xeloda® (capecitabine)               Anti-tumor agent                        —*              0.9                2.1   2003 (
     * launched in June 2003



     Main Product Overview                                                       Furtulon®, Xeloda®
     Neutrogin®                                                                  Furtulon ® and Xeloda ® are orally administered treatments for
     Neutrogin® is a recombinant human granulocyte colony-stimulat-              malignant tumors that combine greater safety with a high level of
     ing factor (G-CSF) developed by Chugai. G-CSF is a type of                  efficacy. Both are pro-drug forms of the 5-FU (5-fluorouracil) anti-
     hematopoietic factor that specifically promotes the differentiation         tumor agent discovered by previous Nippon Roche’s Kamakura
     and growth of the granulocytic series (especially neutrophils) in           Research Laboratories in 1954. Furtulon ®, a fluoropyrimidine
     bone marrow. Neutrogin® has the effect of reducing the period               derivative, is effectively converted to 5-FU within tumors and
     when the neutrophil count is low and promoting recovery for vari-           reduces damage to healthy cells. Xeloda®, also a fluoropyrimidine
     ous types of neutropenia. For this reason, Neutrogin® is used in            derivative, is designed to be converted into Furtulon ®. After
     supportive cancer treatments for neutropenia caused by the side             Xeloda® spreads through the body it is converted into Furtulon® by
     effects of anti-cancer agents, as well as in hematopoietic cell trans-      high concentrations of enzymes in the liver and the tumor. 5-FU
     plantation, myelodysplastic syndrome (MDS), HIV infection treat-            then accumulates within the tumor. Furtulon ® has long been
     ments and immunosuppressive therapy (kidney transplants).                   praised for its low degree of bone marrow toxicity and immunosup-
          This drug was prescribed to approximately 25,000 patients in           presion. Xeloda® is even more safe and efficacious than Furtulon®,
     Japan in 2004.                                                              making it an excellent drug.
          As of December 2004, Neutrogin® has been approved in 73                      In 2004 there were 48,000 patients being prescribed Furtulon®
     countries around the world including Japan. Neutrogin® is sold              in Japan (including 8,000 gastric cancer patients, 16,000 colorectal
     under the name Granocyte® overseas and sales have been increasing,          cancer patients, and 22,000 breast cancer patients). Xeloda® is pre-
     primarily in France and Germany, in recent years.                           scribed as a standard treatment for metastatic breast cancer and col-
                                                                                 orectal cancer in over 70 countries around the world (as of
     Rituxan®                                                                    December 2003). In Japan, it is approved for the treatment of
     Rituxan® is an antibody drug for treating non-Hodgkin’s lym-                inoperable or recurrent breast cancer and was prescribed for the
     phoma patients for the CD20 differentiated antigen positive on the          treatment of approximately 7,200 patients in 2004. Xeloda® is also
     surface of B lymphocytes. It is a molecule-targeting drug, designed         under development for an additional indication of gastric cancer
     to target specific molecules (CD20) which are found on the surface          and colorectal cancer and the application is scheduled for 2005 for
     of tumor cells. Rituxan® offers a new choice of treatment that is           colorectal cancer.
     highly effective, yet its effect on healthy cells is minimal, thereby
     reducing side effects.                                                      Kytril®
          As of May 2004, Rituxan® had been approved by 83 countries             Kytril® is a selective inhibitor for the 5-HT3 (serotonin) receptor
     worldwide, including Japan, and has been prescribed to a cumula-            involved in inducing nausea and vomiting caused by anti-cancer
     tive total of over 540,000 patients. Up to this point, 80-90% of            agents, which is found in afferent vagal nerve endings leading to
     malignant lymphoma patients in Japan have already been pre-                 vomiting centers mainly distributed along the gastrointestinal tract.
     scribed Rituxan®, and at the end of September 2004 their number             Kytril® is an antiemetic agent that alleviates nausea and vomiting,
     stood at approximately 29,000.                                              which are side effects of anti-cancer agents.




14       Chugai Pharmaceutical Co., Ltd. Annual Report 2004
      Currently, Kytril® has been approved in more than 40 coun-          Development Pipeline
tries around the world including Japan. It is being widely pre-           Oncology is a major area for Chugai, and our portfolio offerings in
scribed as a drug to prevent nausea and vomiting before the admin-        this field are extensive. There are currently 19 oncology projects in
istration of chemotherapy.                                                the development stage and eight NMEs in pre-clinical development
                                                                          (as of the end of December, 2004).
Herceptin®                                                                      Progress has been made in the development of Epogin®, for
Herceptin®, a humanized monoclonal antibody, is an anti-breast            the treatment of anemia associated with cancer chemotherapy, and
cancer drug used to treat metastatic breast cancer in patients who        phase III clinical trials were launched in February 2004. In addi-
overexpress HER2 (Human Epidermal Growth Factor Receptor                  tion, phase I clinical trials began for two antibody drugs after being
Type 2). Herceptin® is a molecule-targeting drug, targeting the           introduced from Roche in December 2003: Omnitarg™ (R1273,
HER2 protein that contributes to cancer cell growth. The drug has         HER dimerization inhibitory humanized monoclonal antibody)
little effect on healthy cells and few side effects. This, along with     and Avastin® (R435, humanized anti-VEGF [Vascular Endothelial
the drug’s high efficacy, make it a new choice for treatment.             Growth Factor] monoclonal antibody, created by Genentech). The
      As of January 2004, Herceptin® had been approved by more            target indications for R1273 and R435 include non-small cell lung
than 84 countries around the world including Japan, and by the            cancer and metastatic or recurrent colorectal cancer, respectively.
end of May 2004, a cumulative total of 170,000 patients had been                Avastin® is a new type of treatment which targets VEGF, a
prescribed the drug. Approximately 3,200 patients were prescribed         protein involved in the formation of new blood vessels. Avastin
Herceptin® in 2004 in Japan.                                              inhibits new blood vessel formation and in doing so cuts off the
                                                                          blood supply necessary for tumors to grow and proliferate. Roche
Field Overview                                                            and Genentech have already received approval in Europe and the
In the field of oncology, sales of the mainstay product Neutrogin®        United States for the use of the drug in treating colorectal cancer,
were strong at 27.8 billion yen (5.3% above our initial forecast).        and clinical trials to test its use in treating other types of cancer are
Rituxan®, which received approval for additional indications in           currently underway.
September 2003, and Herceptin® have been increasingly recognized
as standard form of treatment. Both drugs are increasingly being
administered, which has caused sales to rise well above predictions,
with Rituxan® sales totaling 16.8 billion yen (8.4% above our ini-
tial forecast) and Herceptin® sales totaling 9.3 billion yen (13.4%
above our initial forecast). This offset factors such as the decreasing
sales of Furtulon® (12.0 billion yen, or 9.1% lower than our initial
forecast) to bring mainstay product sales in the oncology field to
79.0 billion yen (26.8% of Chugai’s overall sales).




                                                                                    Left: Neutrogin®   Center: Rituxan®   Right: Kytril®




                                                                                                   Chugai Pharmaceutical Co., Ltd. Annual Report 2004 15
     Renal Diseases Field

     Consolidated Sales Breakdown by Main Product
                                                                                       Sales (Billions of Yen)
     Product name (generic name) Brief Overview                               2003/3        2003/12              2004/12   Launch Year in Japan
                                                                                              (9 mon.)
     Epogin® (epoetin beta)           Agent for anemia associated               66.1             55.7               69.0   1990 (
                                      with end-stage renal disease
     Oxarol® (maxacalcitol)           Agent for secondary hyperpara-             5.2              4.6                6.7   2000 (
                                      thyroidism in hemodialysis patients
     Renagel® (sevelamer HCl)         Agent for hyperphosphatemia                 —*              1.7                3.6   2003 (
     * launched in June 2003




     Main Product Overview                                                       Oxarol®
     Epogin  ®
                                                                                 Oxarol® is the first intravenous activated vitamin D3 derivative syn-
     Erythropoietin is a hemopoietic factor produced mainly in the kid-          thesized domestically by Chugai. It treats secondary hyperparathy-
     neys that speeds up erythrocyte production by acting on nor-                roidism – a result of prolonged dialysis – by acting directly on the
     moblastic progenitor cells found in bone marrow. The full utiliza-          parathyroid gland to control PTH (parathyroid gland hormone)
     tion of Chugai’s unique gene recombinant technology has enabled             synthesis and secretion and to improve osteitis fibrosa and excess
     the creation of Epogin®, a human erythropoietin drug formulation            remodeling. Even in cases where previous oral vitamin D3 deriva-
     that uses epoetin beta as its main active ingredient. Epogin® has           tives had no positive effect, or where they could not be adminis-
     been found to improve renal anemia as well as relieve the accompa-          tered due to hypercalcemia, Oxarol® is producing great results.
     nying symptoms both before and during dialysis and also during
     CAPD – processes which are all thought to cause the decline in ery-         Renagel®
     thropoietin production levels. Additionally, Epogin® prevents the           Renagel® is Japan’s first aluminum- and calcium-free non-absorbent
     drop in hemoglobin levels in pre-operative patients who are storing         treatment for hyperphosphatemia. As the ability of dialysis patients
     autologous blood deposits to be used during operations, thus allow-         to eliminate phosphorous excretions is impaired due to depressed
     ing the transfusions to take place on schedule.                             renal functions, phosphorous intake is controlled by phosphorous-
          In 2004 there were an estimated 240,000 dialysis patients liv-         eliminating dialysis and strictly controlled diets. However, these
     ing in Japan. However, this number is thought to be growing at a            methods are not 100% effective in correcting oversupplies of phos-
     rate of 10,000 each year, mainly due to the increased use of dialysis       phorous, so a phosphate binder is required to eliminate the excess
     treatment in patients with diabetes-related renal disease, and this in      phosphorous amounts. Since Renagel® differs from conventional
     turn creates constant market growth for this product.                       calcium carbonates used to treat this condition and as it is almost
                                                                                 impossible for hypercalcemia to occur with Renagel® use, synergies
                                                                                 with Chugai’s other products can be expected. For instance, the
                                                                                 dosage of vitamin D3 derivatives can be increased, making it easier
                                                                                 to then use Oxarol®, an agent for the treatment of secondary hyper-
                                                                                 parathyroidism.




16    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Field Overview                                                          Development Pipeline
Chugai ranks first in sales in the renal disease domestic market.       Renal disease is one of our main fields. We currently have four
Sales of the company’s mainstay product, Epogin® (an agent for          projects in the research stage and one new molecular entity in the
anemia associated with end-stage renal disease), were essentially in-   development stage (as of end-December 2004).
line with initial forecasts totaling 69.0 billion yen (0.3% higher           In 2004, phase II clinical trials began for CERA (R744, con-
than the initial forecast). Additionally, benefiting from a growing     tinuous erythropoiesis receptor activator) for the treatment of renal
market thanks to synergies with Renagel®, sales of Oxarol® grew         anemia. CERA was originally introduced from Roche and it is our
solidly, reaching 6.7 billion yen (8.1% above the initial forecast).    aim to develop this drug as a new core product in this field.
     With these contributions, sales from the renal disease field
amounted to a total of 79.3 billion yen in 2004 (26.9% of Chugai’s
total sales), despite the slump in Renagel® sales (3.6 billion yen,
14.3% less than our initial forecast).




Left: Epogin®   Upper Right: Oxarol®   Lower Right: Renagel®




                                                                                               Chugai Pharmaceutical Co., Ltd. Annual Report 2004 17
     Bone and Joint Diseases Field

     Consolidated Sales Breakdown by Main Product
                                                                                       Sales (Billions of Yen)
     Product name (generic name)         Brief Overview                       2003/3        2003/12              2004/12   Launch Year in Japan
                                                                                              (9 mon.)
     Alfarol® (alfacalcidol)             Agent for osteoporosis                 18.0             13.5               16.0   1981 (capsule, solution)
                                                                                                                           1994 (powder)
     Suvenyl (sodium hyaluronate)
                ®
                                         Agent for knee pain associated          6.0              5.4                6.9   2000 (
                                         with rheumatoid arthritis
     Evista® (raloxifene HCl)            Agent for osteoporosis                   —*               —*                3.0   2004 (
     * launched in May 2004




     Main Product Overview                                                       Evista®
     Alfarol®
                                                                                 Released in May 2004, Evista® is a drug that is used to treat post-
     Alfarol® reduces bone mass loss caused by osteoporosis and elimi-           menopausal osteoporosis. Evista® is a selective estrogen receptor
     nates symptoms such as back pain. It has also been reported that            modulator (SERM) that makes use solely of estrogen’s bone-build-
     Alfarol® has the effect of reducing the occurrence of new fractures.        ing properties. The clinical trials showed that Evista® was highly
     Alfacalcidol, the main component of Alfarol®, is a 1 -hydroxide of          effective in reducing fractures and the results did not indicate any
     vitamin D3 that Chugai synthesized independently. Alfacalcidol is           increase in the incidence of breast cancer. In Japan, the mainstream
     quickly metabolized into its final active form, 1 , 25-(OH)2 D3, in         method of treating osteoporosis was to use vitamin D preparations.
     the body (liver) and plays a crucial role in calcium and bone metab-        In the future, however, it is likely that more and more treatments
     olism in the body.                                                          for osteoporosis will consist of vitamin D as a basic drug in addition
          As of December 2004, Alfarol® has been approved in four                to Evista®, which has been established as an evidence-based medi-
     countries around the world – Japan, South Korea, Taiwan and                 cine (EBM) through large-scale clinical trials overseas.
     Hong Kong. There were approximately 600,000 patients being pre-                  If a person breaks a bone due to osteoporosis and becomes
     scribed this drug in Japan in 2004.                                         bedridden, it will take a toll on his or her quality of life (QOL).
                                                                                 Not only that, it will place an increased burden on family members
     Suvenyl®                                                                    who have to provide nursing care, and incur social consequences,
     As a sodium hyaluronate preparation, Suvenyl® is an effective treat-        such as driving up nursing care costs. As a result, it is becoming
     ment for osteoarthritis of the knee and periarthritis humeroscapu-          increasingly important to develop treatments to reduce fractures.
     laris. In addition, it was the first drug to obtain approval as having      Chugai believes that there will be a growing need in particular to
     efficacy and effectiveness against knee arthralgia caused by rheuma-        have drugs, such as Evista®, which has been scientifically proven to
     toid arthritis. Suvenyl ® has a viscoelasticity that is similar to          reduce the risk of fracture.
     hyaluronic acid found in normal synovial fluid and enhances lubri-               As of January 2004, Evista® has been approved in over 90
     cation of synovial fluid.                                                   countries around the world and worldwide sales have topped
           There were approximately 400,000 patients being prescribed            100 billion yen.
     this drug in Japan in 2004.




18    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Field Overview                                                            Development Pipeline
In the field of bone and joint diseases, sales of the mainstay product    As bone and joint diseases constitute one of Chugai’s major fields,
Alfarol®, a drug that improves bone metabolism, were 16.0 billion         we intend to continue developing drugs to treat osteoporosis and
yen (4.2% lower than our initial forecast) due to factors such as         rheumatoid arthritis as one of our main disease domains. 13 proj-
drug price revisions and the introduction of competitor products to       ects are in the research stage and three new molecular entities are in
the market.                                                               the clinical stage (as of the end of December 2004).
     Despite the continued increase in the number of units sold,                Chugai has been making steady progress in developing the
Suvenyl®, a drug that improves joint function, reached sales of just      antibody drug, MRA (tocilizumab, humanized anti-human IL-6
6.9 billion yen (12.7% lower than our initial forecast) because of        receptor monoclonal antibody). Regarding clinical trials for
drug price revisions, amongst other factors.                              rheumatoid arthritis, Chugai began phase III clinical trials in Japan
     For Evista®, a drug for treating post-menopausal osteoporosis        in February 2004 and jointly launched phase III clinical trials for
that was released in May 2004, sales amounted to 3.3 billion yen.         overseas with Roche in January 2005.
As it took some time for Evista® to penetrate the market, sales are             As for drugs to treat osteoporosis, Chugai began phase III
slightly less than the intended figure (10.8% lower than the initial      clinical trials in Japan for ED-71 (an activated vitamin D deriva-
forecast). However, sales are expected to grow in the future as a         tive) in October 2004. Chugai also completed phase II clinical
result of the increase in demand and market penetration.                  trials for Bonviva® (R484, bisphosphonate) and is currently con-
     Sales in the field of bone and joint diseases totaled 26.2 billion   ducting phase II clinical trials for CHS13340 (a recombinant
yen (8.9% of Chugai’s total sales).                                       parathyroid hormone).




                                                                                                        Left: Alfarol® Upper Right: Suvenyl®
                                                                                                        Lower Right: Evista®




                                                                                                  Chugai Pharmaceutical Co., Ltd. Annual Report 2004 19
     Other Fields

     Consolidated Sales Breakdown by Main Product
                                                                                                              Sales (Billions of Yen)
      Product name (generic name)                Brief Overview                                     2003/3         2003/12              2004/12   Launch Year in Japan
                                                                                                                     (9 mon.)
      Sigmart® (nicorandil)                      Anti-anginal agent                                   18.0              14.5               17.8   1984 (
      Tamiflu® (oseltamivir)                     Anti-influenza agent                                 12.5              11.6                8.6   2001 (capsule)
                                                                                                                                                  2002 (dry syrup)
      Rythmodan® (disopyramide)                  Anti-arrhythmic agent                                 8.5               6.4                7.5   1978 (100mg)
                                                                                                                                                  1987 (50mg)
      Pegasys® (peginterferon alfa-2a) Chronic hepatitis C                                              —*               0.2                6.4   2003 (
      Euglucon® (glibenclamide)                  Agent for oral hyperglycemic                           —**              1.8                5.3   1971 (2.5mg)
                                                                                                                                                  1981 (1.25mg)
      Rocephin® (ceftriaxone)                    Cephem-type antibiotic                                2.0               3.7                4.6   1986 (0.5g and 1g IV injection)
                                                 ceftriaxone sodium                                                                               2003 (1g IV drip bag)
      * launched in December 2003
      **transferred to Chugai in October 2003




     Main Product Overview                                                                             Rythmodan®
     Sigmart    ®
                                                                                                       This is a typical antiarrhythmic agent that was released in France in
     Sigmart® is a drug that is effective for treating various types of angi-                          1969. As of February 2003, it is widely used on a clinical basis in
     na pectoris. It was developed with the purpose of overcoming the                                  37 countries around the world.
     flaws of nitric acid compounds such as nitroglycerin. In recent                                         Even now, after 27 years of being on the market, Rythmodan®
     years, it has been reported that Sigmart® has a new heart-protecting                              is still considered the drug of first choice for various types of
     effect that is lacking in nitric acid drugs, and it was also proven in                            arrhythmia, as stated in the guideline on antiarrhythmic treatment
     large-scale trials overseas that this agent improves the prognosis of                             issued in November 2004.
     angina pectoris patients. It is currently being sold in 13 countries
     worldwide including France and the UK.                                                            Pegasys®
                                                                                                       Pegasys® was developed by covering a conventional interferon with
     Tamiflu®                                                                                          polyethylene glycol (pegylation). Pegylating the interferon extends
     Tamiflu® is an oral anti-influenza agent that works against the Type                              the time that the drug level is sustained in the body, making it
     A and Type B influenza virus infection. It is the only product that                               effective even if the time between doses is lengthened. Thus, while
     is approved for use by persons ranging from one-year-olds to the                                  it was necessary to administer the conventional interferon agent
     elderly. Tamiflu® binds to neuraminidase (NA), which is required                                  three times a week or more, Pegasys® need only be administered
     for the influenza virus multiplication cycle. Tamiflu® blocks the                                 once a week, improving convenience for patients and reducing the
     influenza virus from multiplying by inhibiting the function of NA.                                occurrence of side effects. The Ministry of Health, Labour, and
          In July 2004, Tamiflu® was additionally approved for the indi-                               Welfare also recommended the drug in its guidelines for standardiz-
     cations for “the prevention of Type A and Type B influenza virus                                  ing chronic hepatitis C treatment as the first choice of therapy
     infections.” With this additional indication, it became possible to                               against a widest range of virus genotypes.
     orally administer Tamiflu® to elderly persons aged 65 and over and                                      An estimated 450,000 – 500,000 people in Japan suffer from
     “high-risk patients*” aged 13 and over who are either cohabitants                                 chronic hepatitis C, but only 30,000 – 40,000, less than 10%, actu-
     or family members living with patient(s) with the influenza virus                                 ally receive interferon treatment. In recent years, sales of convention-
     infection.                                                                                        al interferon drugs have slowed amidst criticism that they are not
                                                                                                       cost-effective given the physical and economic burden they place on
     * “High risk patients”: Patients suffering from chronic respiratory diseases [“COPD”
                                                                                                       patients. However, we at Chugai believe that Pegasys® will be able to
       (chronic obstructive pulmonary disease), bronchial asthma, chronic bronchitis, pul-
       monary tuberculosis, etc.], chronic cardiac diseases (cardiac failure, valvular disease,        break this stereotype and change perceptions of interferon.
       myocardial infarction, etc.), metabolic diseases (diabetes, etc.), and renal dysfunctions.




20     Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Euglucon®                                                                  Field Overview
Euglucon ® provides stable glycemic control in oral hypo-                  In the field of cardiovascular disease, sales of the anti-angina drug
glycemic therapy for non-insulin-dependent diabetes (in cases              Sigmart® totaled 17.8 billion yen (exactly on par with our initial-
where sufficient effects cannot be obtained by dietary and exer-           term forecast) and sales of the antiarrhythmic agent Rythmodan®
cise therapy alone).                                                       totaled 7.5 billion yen (2.7% more than our initial forecast).
     It is currently sold in Japan, Austria, Germany, Belgium,                  In the area of transplant, immunology and infectious diseases,
France, Taiwan, the Philippines and other countries. Although more         sales of the anti-influenza agent Tamiflu® stagnated at 8.6 billion
than 30 years have passed since its launch in Japan, Euglucon® is one      yen (16.5% less than our initial forecast) due to factors including
of the most widely prescribed oral anti-diabetes drugs, with approxi-      wholesalers adjusting excess inventory and the relatively mild 2004
mately 700,000 patients receiving the drug in 2004.                        influenza season. Sales of Rocephin® totaled 4.6 billion yen (4.2%
                                                                           less than our initial forecast). Pegasys®, launched in December
Rocephin®                                                                  2003, also sold less than expected at 6.4 billion yen due to an initial
Compared to existing cephem antibiotic agents, the serum half-life         delay in its penetration of the market.
of Rocephin® is extremely long and is excellent in its ability to pass          In other fields, sales of Euglucon®, transferred back in October
through tissue. Therefore, Rocephin® is highly evaluated as a drug         2003, remained strong and exceeded expectations at 5.3 billion yen.
that can treat various types of infections by administering it once a
day. A new type of 1g intravenous drip bag was released in June            Development Pipeline
2003. In June 2004, Rocephin® was additionally approved for                Development in the field of infectious diseases progressed as phase
gonococcus, pharyngitis, urethritis, cervicitis, pelvic inflammatory       III of the clinical trials for R964 (Copegus®, planned brand name)
disease (PID), epididymitis and proctitis.                                 concluded. Preparations to file an application for the drug are cur-
     Rocephin® has been approved in approximately 120 countries            rently underway. In addition, in clinical trials conducted overseas it
including Japan as of January 2005. In the US, sales of Rocephin®          was found that combination therapy of Pegasys® and Copegus® dra-
were over 100 billion yen in 2003, which was the highest among             matically improved the ability to eliminate the hepatitis C virus.
cephem antibiotic agents.                                                  Even for patients found to have a high viral load of genotype 1b,
                                                                           for which interferon is said to be less effective, the combination
                                                                           therapy resulted in an impressive 46% sustained virological
                                                                           response rate. (Genotype 1b is a genomic strain of the chronic hep-
                                                                           atitis C virus. 70% of chronic hepatitis C patients in Japan have
                                                                           this strain.)




                                                             Pegasys s.c.180           g
                                                             Peginterferon Alfa-2a
                                                             (Genetical Recombination)

                                                             180 g
 Tamiflu caps.
 Oseltamivir phosphate

 75mg          Oseltamivir




                                                             1mL X 1vial                          Upper Left: Sigmart®   Lower Left: Tamiflu®
 10 capsules
                                                                                                  Right: Pegasys®




                                                                                                   Chugai Pharmaceutical Co., Ltd. Annual Report 2004 21
     Market-related Data

     Oncology
     Incidence Trend by Cancer Type                                                           Incidence Trend by Cancer Type
     According to Primary Site (Japan, Female)                                                According to Primary Site (Japan, Male)
      50,000 (Cases)                                                                            80,000 (Cases)


      40,000
                                                                                                60,000

      30,000
                                                                                                40,000
      20,000

                                                                                                20,000
      10,000


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        1995                                                                                     1995




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                                                                                                        ig
        2010 (Estimates)                                                                         2010 (Estimates)
               M




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              al




                                                                                                      al
             M




                                                                                                     M
     Source: “2004 White Paper on Cancer Statistics” (Edited by Akira Oshima, Tetsuo Kuroishi, Kazuo Tajima. Shinohara Shuppan Shinsha, 2004)
     Note: Values for 2010 are predicted values based on analysis using Bayesian Poisson cohort models.


     Renal Diseases
     Incidence of ESRD* in Japan                                                              Incidence of ESRD* (per million population, 2002)

     250,000 (Cases)                                                                               500 (Cases)
                                                                                                           471
                                                                              219,966
                                                                208,791
     200,000                                      199,280                                          400
                        186,251     182,810                                                                      365
                                                                                                                       336
     150,000                                                                                       300
                                                                                                                             254

     100,000                                                                                       200                             200
                                                                                                                                         177 174 170 165
                                                                                                                                                         154 144
                                                                                                                                                                 136 131 129 129
      50,000                                                                                       100


             0                                                                                        0
                        1998        1999           2000         2001           2002
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     * ESRD: End-Stage Renal Disease
                                                                                                          So




     Source: International Comparisons (USRDS 2004 Annual Report)




     Bone and Joint Diseases
     Incidence Trend of Osteoporosis Patient Population                                       Incidence Trend of Rheumatoid Arthritis Patient Population
     (treated), 2001-2011                                                                     (treated), 2002-2012
      10,000 (Thousands of cases)                                                                2,000 (Thousands of cases)

                                                                               8,333                                                                                  1,631
        8,000
                                                                                                 1,500                                            1,507
                                                                                                                                                                   1,427
                                                                                                                       1,396
                                                   6,361                                                                                      1,275
        6,000                                                                                                      1,142
                                                                                    5,081        1,000
                         4,711
        4,000                                           3,842
                            3,063                                           3,199
                                                2,291                                              500
        2,000                                                                                                                               333                 361
                    1,627                                                                                        308


             0                                                                                        0
                        2001                  2006(Estimates)             2011(Estimates)                          2002                  2007(Estimates)      2012(Estimates)
        Japan                                                                                    Japan
        United States                                                                            United States
        Europe*                                                                                  Europe
     * Estimates for Europe cover France, Germany, Italy, Spain, and the United Kingdom.      Source: Rheumatoid Arthritis (Decision Resources, Inc., March 2004)
     Source: Osteoporosis (Decision Resources, Inc., March 2003)



22    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Technologies and
Human Resources
— the Basis for Growth




                         Chugai Pharmaceutical Co., Ltd. Annual Report 2004 23
     Research & Development (R&D),
     Human Resources Strategy
     The creation and development of innovative medical products constitutes the
     source of Chugai’s competitiveness. At Chugai, a solid infrastructure for original
     research and an outside network allow us to conduct drug research with a fresh
     perspective, producing innovative medical products with high added-value.
     Chugai will strive to further expand its presence in target areas and maximize
     product value by utilizing the Product Life Cycle Strategy and by increasing
     investment efficiency through thorough portfolio management.




     R&D’s Position in Management                                             Target Therapeutic Area Strategies and Portfolio
     As a pharmaceutical company, Chugai’s competitiveness lies in the cre-   Management
     ation and development of innovative medical products. In its new mid-    The four target therapeutic areas include Chugai’s three strategic
     term management plan, “Sunrise 2010,” Chugai clearly states its inten-   areas of “oncology,” “renal diseases,” “bone and joint diseases” as
     tion to dramatically strengthen its competitive edge through greater     well as “lifestyle-related diseases.” The demand for products dealing
     innovations in each of the areas of RDPMS (Research, Development,        with lifestyle-related diseases will continue to grow together with
     Production, Marketing and Sales). In order to achieve a top-class        the aging population, and Chugai is striving to create innovative
     domestic presence and maximum growth potential in 2010, Chugai           medical products, primarily diabetes drugs, that will be ideally suit-
     will continue to boost strategic investment in R&D in 2005 and           ed to the international market.
     beyond.                                                                        R&D activities can be broadly categorized into three stages:
           In 2004, Chugai’s R&D expenditures came to 48.2 billion            drug discovery, early stage development, and late stage develop-
     yen, or 16.8% of total revenue. As a member of the Roche Group,          ment. Chugai manages product portfolios according to each of
     the company also participates widely in Roche Group R&D activi-          these stages. For target therapeutic areas, however, Chugai goes
     ties including global joint development and the sharing of com-          even further in following a consistent strategy by including product
     pound libraries. Research and development expenditure of the             portfolio management in the post marketing stage in addition to
     Group as a whole amounts to over 370 billion yen annually for pre-       the R&D stages. Chugai then formulates a “Life Cycle Strategy”
     scription drugs. Chugai continues to develop its own strengths           that reaches from the development to the post marketing stage
     while fully maximizing synergistic effects with Roche in order to        based on each product’s target therapeutic area strategy. By formu-
     create innovative medical products in strategic areas.                   lating consistent strategies and monitoring processes in a compre-
                                                                              hensive manner, Chugai aims not to simply plan individual strate-
     Collaboration Between Medical Practitioners and the                      gies for each stage or target area, but rather to optimize the alloca-
     R&D Department                                                           tion of funds based on a consistent strategy.
     In light of the dramatic changes that are taking place in both the             An effective decision-making system that caters to the charac-
     medical environment and market trends, it is becoming increasingly       teristics of each stage is required in the R&D process. For instance,
     important that pharmaceutical companies can deliver products that        decisions include how R&D funds should be allocated and linked
     precisely meet medical needs. In order to achieve this, companies are    to maximizing product value, and whether a product can advance
     required to plan a flawless strategy for each target therapeutic area    to the next stage. Chugai has set up the following committees as
     from development to launch as well as formulate and implement a          decision-making bodies: the Research Portfolio Committee (RPC),
     Product Life Cycle Strategy from the initial stage of R&D. Chugai is     which evaluates portfolios at the drug discovery stage, the Research
     currently in the process of reinforcing its strategic marketing func-    and Development Committee (RDC), which evaluates early devel-
     tion, which will incorporate all of these elements, in order to expand   opment stage portfolios, and the Life Cycle Committee (LCC),
     its presence in the target areas and maximize product value.             which evaluates portfolios in the late development and post-mar-
                                                                              keting stages. Evaluating the priority of portfolios in the drug dis-
                                                                              covery and early development stages places emphasis on the scien-
                                                                              tific aspect of development, while evaluating the priority of portfo-
                                                                              lios in the late development and post marketing stages focuses on
                                                                              the product’s market value.




24    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Framework of Portfolio Management and Decision-making
                                             Business strategy


                                             Oncology field strategy
                                                                           Renal disease
                                                                           field strategy
                                  New medical          Bone and joint
                                  area strategy         field strategy



             Research portfolio           Development portfolio          Product portfolio
             management                   management                     management

      Drug discovery                   PoC               Late stage                      Sales
                                                         development
                                                         Filing

       RPC                              RDC                                    LCC



R&D System                                                                                       Human Resources Strategy
In the course of establishing a futuristic research network, Chugai                              Chugai places great emphasis on human resource development and
decided to combine the Tsukuba Research Laboratories, which had                                  the training of employees. We offer the following three self-develop-
been involved in drug discovery research specializing in antibody                                ment opportunities: Management By Objectives (MBO, yearly
drugs, with the Fuji-Gotemba Research Laboratories, in order to                                  basis); the Career Development Program (CDP, mid-to-long-term);
quickly and effectively make the transition to the stage of develop-                             as well as Off-The-Job training (OFF-JT, training outside the work-
ing antibody drugs. As a result, Chugai’s research laboratories have                             place), which through effective usage we aim to develop profession-
been consolidated to three sites (Fuji-Gotemba, Kamakura and                                     als who are competitive on a global scale. Employees are evaluated in
Ukima). As for clinical development overseas, Chugai Pharma                                      fair and transparent performance evaluations based on their role and
USA, LLC and Chugai Pharma Europe Ltd. are conducting these                                      job performance, with the common criteria for the evaluation agreed
activities in the United States and Europe, respectively.                                        upon by both the company and employees. Training programs such
      In October 2004, Chugai newly established the Chugai                                       as the “Division Program” are being further developed so that
Clinical Research Center Co., Ltd. in order to boost the degree of                               employees can improve their skills and gain position-specific and
specialization in clinical development and improve efficiency. The                               specialized knowledge needed to perform their tasks.
Chugai Clinical Research Center is the Chugai Group’s global cen-                                      Chugai, in accordance with its Regulations on Rewards
ter for clinical development, and is responsible for the statistical                             Including Inventions, also employs a system of rewarding inventors
analysis and data management of global development, clinical phar-                               as an incentive to its researchers, paying total rewards in the upper
macology and the management of good clinical practice (GCP). It                                  range of 60 million yen when, 1) patents are executed, 2) after 5
also plays a part in domestic monitoring. At the same time, by com-                              years from launch, and 3) at patent expiry. The existing system is
bining the joint operations associated with clinical trials, the                                 currently now under revision to ensure compliance with Article 35
Chugai Clinical Research Center will reinforce collaboration among                               of the Patent Law, which refers to employee inventions, and is
the three regions – Japan, the United States and Europe – to enhance                             scheduled to be amended and put into effect in April 2005.
efficiency and promote low-cost operations.                                                            Human resources strategy is also crucial for Chugai to main-
                                                                                                 tain confidentiality in its technological and business aspects, the
                                                                                                 source of its competitiveness, and to respond to violations by other
                                                                                                 companies of Chugai’s rights. Regarding confidentiality, Chugai
                                                                                                 established new company regulations entitled Regulations on
                                                                                                 Maintaining Business Confidentiality, held training for various
                                                                                                 departments such as R&D, Business and Sales, and is working to
                                                                                                 raise employee awareness of rights.




                                                                                                                        Chugai Pharmaceutical Co., Ltd. Annual Report 2004 25
     Development Pipeline (As of February 10, 2005)


     Development Code       Indication / *Additional Indication           Area            Status (Filing date)
                                                                                          Preparing
                                                                                          for Phase 1   Phase 1   Phase 2   Phase 3       Filed   Approved
     Oncology
                            Breast cancer in                              Japan                                                       ’
                            postmenopausal women
                            Breast cancer (adjuvant)*                     Multinational
                                                                          Study
                            Cancer chemotherapy associated anemia*        Japan
                            Multiple myeloma                              France
                                                                          US
                            Colorectal cancer*                            Japan
                            Gastric cancer*                               Japan
                            Lung cancer                                   Japan


                            Bone metastases                               US
                            Hypercalcemia of malignancy                   Japan
                            Ovarian cancer / Non-small cell lung cancer   Japan
                            Non-small cell lung cancer                    Japan
                            Colorectal cancer                             Japan


     Bone and Joint
                            Rheumatoid arthritis                          Japan
                                                                          EU
                            Systemic onset juvenile                       Japan
                            idiopathic arthritis (soJIA)                  US
                            Osteoporosis                                  Japan
                            Osteoporosis                                  Japan


                            Osteoporosis                                  Japan
     Renal disease
                            Hyperphosphatemia                             Taiwan
                            Renal anemia                                  Japan
     Cardio/Cerebro-vascular disease
                            Acute heart failure*                          Japan                                                       (’03/06)
                            Subarachnoidal hemorrhage                     Japan                                                       (’95/04)
     Transplant, Immunology and Infectious disease
                            Castleman’s disease                           Japan                                                       (’03/04)
                            (Orphan drug status in Japan)                 US
                            Crohn’s disease                               Japan
                            Systemic lupus erythematosus (SLE)            US
                            Chronic hepatitis C                           Japan
     Other field
                            Predeposit of autologous blood transfusion*   Japan                                                       (’02/03)
                            Anemia in premature infants*                  Japan                                                       (’02/03)
                            Post-hepatectomy / Liver transplantation      Japan
                            Decompensated cirrhosis                       Japan
                            Diabetic gastroparesis                        Japan
                                                                          US
                            Irritable bowel syndrome (IBS)                US
                            Type 2 diabetes                               Japan




26   Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Dosage Form   Origin (Collaborator)           Generic Name               Mechanism of Action
                                              (Trade mark)



Tablet        Novartis                        letrozole / Femara®        Aromatase inhibitor
              (Novartis Pharma)
Injection     Roche / Genentech               trastuzumab / Herceptin®   Humanized anti-HER2 monoclonal antibody


Injection     In-house                        epoetin beta / Epogin®     Recombinant human erythropoietin
Injection     In-house (Roche)                tocilizumab                Humanized anti-human IL-6 receptor monoclonal antibody


Tablet        Roche                           capecitabine / Xeloda®     Antimetabolite, 5-FU derivative


Oral          OSI / Genentech / Roche         erlotinib / Tarceva®       Epidermal growth factor receptor (EGFR/HER1)
                                                                         tyrosine kinase inhibitor
Injection     In-house                                                   Humanized anti-PTHrP monoclonal antibody


Injection     Cell Therapeutics                                          Poly-(L-glutamic acid)-paclitaxel conjugate
Injection     Roche / Genentech (Omnitarg™)   pertuzumab                 HER dimerization inhibitory humanized monoclonal antibody
Injection     Roche / Genentech (Avastin®)    bevacizumab                Humanized anti-VEGF (Vascular Endothelial Growth Factor)
                                                                         monoclonal antibody


Injection     In-house                        tocilizumab / Actemra®     Humanized anti-human IL-6 receptor monoclonal antibody
              In-house (Roche)                tocilizumab
              In-house                        tocilizumab / Actemra®
              In-house (Roche)                tocilizumab
Oral          In-house                                                   Activated Vitamin D derivative
Injection     Roche                           ibandronic acid            Bisphosphonate
Oral          (Boniva™ (US) / Bonviva® (EU)
Nasal spray   Daiichi Suntory Pharma                                     Recombinant parathyroid hormone (rhPTH1-34)


Tablet        Genzyme                         sevelamer HCl / Renagel®   Phosphate binding agent
Injection     Roche                                                      CERA (Continuous erythropoiesis receptor activator)


Injection     In-house                        nicorandil / Sigmart®      Potassium channel opener
Injection     In-house                        nicaraven / Antevas®       Hydroxyl radical scavenger


Injection     In-house                        tocilizumab / Actemra®     Humanized anti-human IL-6 receptor monoclonal antibody
              In-house (Roche)                tocilizumab
              In-house                        tocilizumab / Actemra®
              In-house (Roche)                tocilizumab
Tablet        Roche                           ribavirin / Copegus®       Anti-viral agent in combination with Pegasys®


Injection     In-house                        epoetin beta / Epogin®     Recombinant human erythropoietin


Injection     In-house                        valine                     Recovery of liver function
Oral
Tablet        In-house                        mitemcinal fumarate        Motilin agonist for recovery of gastrointestinal motility



Oral          Roche                                                      Insulin sensitizer




                                                                                              Chugai Pharmaceutical Co., Ltd. Annual Report 2004 27
     Overview of Intellectual Property (IP) Strategy




     Position of Intellectual Property in Management                            applications. Its operations can be broadly divided into the following
     Chugai has placed IP strategies as the basis for formulating R&D           four categories: (1) guaranteeing Chugai’s rights, or patent applications
     and Sales & Marketing strategies, and believes that they are also vital    to effectively protect the results of Chugai’s research, (2) conducting var-
     in supporting the overall management strategy.                             ious studies into issues such as those necessary when applying for patents
           Patents are a fundamental source of competitiveness and for          and the rights of other companies that would impede Chugai’s R&D,
     this reason Chugai has placed them at the center of its intellectual       (3) using patents: the licensing out of general-purpose patents, and (4)
     property strategy. It is also taking measures to prevent leakage of        updating Patent Law related information and other relevant legislations.
     technological and business information.                                           Chugai is considering establishing a patent information man-
           One of the most distinguishing characteristics of patents for        agement system that would allow the relevant departments within the
     medical products is that one product can be covered by a substance         company to access Chugai’s patent information. It is also eyeing the
     patent and several other patents (such as patents for medical pur-         possibility of making this system accessible to Roche in the future.
     poses, process patents and drug formulation patents). A company’s
     success or failure in acquiring a patent for a product may determine       A Protective Strategy for Intellectual Property
     whether it will dominate the world market for that product or be           Another unique characteristic of medical product patents is the spe-
     excluded from it. It could therefore be said that a single medical         cial exception regarding patent lifespan granted in consideration of
     product patent is extremely valuable.                                      the long time it takes for medical products to go from the research to
                                                                                the commercialization stage. Ordinarily the patent term is valid for
     Guidelines and Company Systems for Intellectual                            20 years after application; however, the term of medical patents can
     Property Acquisition and Management                                        be extended to a maximum of 25 years. Chugai protects its IP by har-
     Chugai positions “high quality patent applications and clearly             nessing this patent term extension system and vigorously acquiring
     defined investment of resources” as its basic policy regarding patent      surrounding patents (including patents for medical purposes, process
     applications. It invests a great number of resources (labor and capi-      patents and drug formulation patents).
     tal) in vital patents, such as promising substance patents. The acqui-
     sition of foreign patents is also vital as a means of recovering the       Status of Disputes
     large amounts of R&D funds that are spent. As a result, Chugai is          In April 2004, Ajinomoto Co., Inc. filed an appeal saying that the
     vigorously filing applications for important patents in accordance         medical products Epogin® and Neutrogin® manufactured and sold
     with its own company regulations.                                          by Chugai infringe on a process patent held by Ajinomoto Co., Inc.
            Meanwhile, from the viewpoint of product selection and con-         The plaintiff is requesting payment of 3 billion yen as partial pay-
     centration, it is also necessary to swiftly abandon patents for medical    ment for the damages incurred through the patent violation; howev-
     products that are presumed difficult to develop. Patents are essential     er, Chugai remains convinced that there has been no patent viola-
     management resources. Therefore Chugai allocates resources in a            tion. Chugai is asserting the legitimacy of its position at the trial cur-
     clearly defined manner to ensure their effective and efficient usage.      rently under way and does not expect that this lawsuit will affect
            The Intellectual Property Department plays a major role in patent   Chugai’s performance during this period.




28    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Corporate Social
Responsibility




                   Chugai Pharmaceutical Co., Ltd. Annual Report 2004 29
     Corporate
     Social
     Responsibility




     Chugai will further enhance its corporate ethics policy in all            resources. In addition, we will continue to fulfill our social respon-
     its management processes and functions. At the same                       sibility by paying taxes, paying dividends to our shareholders and
     time, we as a pharmaceutical company will prove worthy of                 making reinvestments.
     the trust that all our stakeholders have placed in us by pro-
     viding innovative medical products and services.                          To the society and community
                                                                               By being aware of our role and responsibility as a good corporate
     The System Supporting Our Activities                                      citizen, Chugai will maintain collaboration with society and contin-
     Chugai’s mission is to “dedicate itself to adding exceptional value       ue its social contribution activities. Furthermore, we will encourage
     through the creation of innovative medical products and services for      employees to participate in social contribution activities and sup-
     the benefit of the medical community and human health around the          port them in this respect.
     world.” We have outlined our basic ideas including this mission in
     the Mission Statement and are meeting our stakeholders’ expecta-          To our employees
     tions through the process of implementing the specific action guide,      We will raise awareness and encourage personal growth so that all
     the Chugai Business Conduct Guidelines (Chugai BCG).                      employees can decide and act independently in accordance with the
           As a pharmaceutical company, our most important stakehold-          Chugai BCG in their respective work places. Also, by working to
     ers are our patients and consumers. We also view our shareholders         establish an appropriate system to ensure employee satisfaction
     and investors, as well as society and the community, as important         (ES), we will fulfill our social responsibility as a collective of indi-
     stakeholders and an integral part of carrying out sound corporate         viduals who engage in quality work .
     management. Moreover, we consider our employees, who are in
     charge of putting our mission statement into practice, to be impor-       To our business partners
     tant stakeholders. We will fulfill our social responsibilities by con-    We treat our business partners as fair, equal partners and carry out
     sidering and acting in a well-balanced manner in a wide range of          transactions based on a fair purchase policy. We select our business
     areas both in Japan and overseas. These areas include compliance          partners based on a comprehensive evaluation of factors such as
     with the law, respect for human rights, fair trade, managing compa-       quality, price, timing, information, stable supply and whether or
     ny assets, information disclosure, social contribution activities, con-   not they give consideration to social responsibility.
     tributing to global environmental protection, relations with the
     government, and relations with external organizations.                    Specific Measures
                                                                               Chugai believes that it is most important to harmonize the three
     To our patients and consumers                                             pillars of its management, society, environment and economy, on
     Chugai provides innovative medical products and services based on         a high level. We will take a balanced and faithful approach in
     high scientific standards and ethics in order to treat patients and       striving to achieve this end by maintaining the linkages among
     consumers worldwide and improve their quality of life (QOL)               the pillars.
     while lowering medical costs. We will ensure the stable manufac-
     ture and sales of medical products by maintaining, improving and          Social contribution through pharmaceutical activities as a
     taking full advantage of our technological capabilities.                  whole
                                                                               Chugai is strong in biopharmaceutical development, particularly in
     To our shareholders and investors                                         developing antibody drugs that are expected to be effective in treat-
     In managing the capital entrusted to us by our shareholders, we           ments with reduced side effects. Chugai harnesses such strengths to
     consistently strive to enhance productivity of our management             provide innovative medical products primarily in the fields of


30    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
“oncology,” “renal diseases” and “bone and joint diseases.” First,                  Chugai also has a system in place allowing employees to take
excellent medical products contribute to improving the QOL of                 leave for volunteer activities in order to support all employees who
patients. Second, they contribute to the medical economy by                   want to participate in social contribution activities. With this sys-
encouraging patients to return to the workforce and boosting labor            tem, employees can take up to two years and four months of leave
productivity. Third, excellent medical products contribute to the             to participate in volunteering activities.
progress of life science through the process of superior research and
development (R&D). Chugai believes that the synergistic effect of             Efforts in environmental aspects
these three factors can help it fulfill its social responsibility.            The 21st century has been called the “century of the environment”
                                                                              and it has become our great mission to mitigate the impact that
Efforts concerning social aspects                                             human beings have had so far on the global environment since the
Recruiting takes place using a fair selection process based on ability.       beginning of modern industrialized society and restore a clean envi-
As a result, over half of the new graduates who are scheduled to be           ronment. As a corporate citizen, Chugai will steadily take steps
employed in 2005 are women. Chugai also worked vigorously to                  toward achieving this great mission. Chugai has been carrying out
employ persons with disabilities in 2003-2004. Their employment               company-wide activities to this end, such as establishing the Chugai
rate increased in 2004 to 1.93%, meeting the legally established              Environmental Management System (CEMS) based on the Chugai
employment rate of persons with disabilities. Chugai is also advanc-          Environmental Charter. Chugai will continue to seriously tackle
ing its measures concerning human rights. It periodically conducts            environmental challenges that will become increasingly important,
training on human rights for all employees to foster an organiza-             including global warming countermeasures.
tional culture that encourages employees to recognize diversity and           * Please look at the Social Responsibility Report for details on Chugai’s CSR
value others as well as themselves as they work.                                activities: http://www.chugai-pharm.co.jp/english/corporate/environmental.html




Data on performance concerning social aspects
Data on social aspects                                            2003 (9 months)                   2004
Full-time employees (consolidated)*                                 5,680 persons        5,431 persons
Full-time employees (non-consolidated)*                             4,977 persons        4,713 persons
Number of persons employed (non-consolidated)*                       120 persons           155 persons
                                                      Directors           11 persons         11 persons
Number of board members (non-consolidated)*
                                                      Auditors             4 persons          4 persons
Employment rate of persons with disabilities*                                 1.65%               1.93%
Number of employees who participated in training (cumulative)       9,579 persons       11,117 persons
Number of hours spent on training (cumulative)                     335,162 hours         336,297 hours
Total cost of training                                             815 million yen       900 million yen
Note: * indicates figures as of the end of December


Economic effects resulting from environmental conservation measures
Effect                                                                                          Amount
Cutting costs by conserving energy                                                        49 million yen



                                                                                                         Chugai Pharmaceutical Co., Ltd. Annual Report 2004 31
     Corporate Governance System (Governance, Compliance)

     As an autonomous, listed company that promotes business independently in
     Japan and overseas, Chugai pursues corporate governance that is consistent
     with global standards as a member of the Roche Group.




     The Concept and Status of Implementation of Measures                    environment and expand global business based on a sound corporate
     Concerning Chugai’s Corporate Governance Policy                         stance. The IAC meets once a year and other meetings and individ-
     Chugai views enhancing corporate governance as a major task of          ual meetings are held as necessary. IAC members offer valuable
     management. It places particular emphasis on strengthening deci-        advice to Chugai’s senior management on issues such as corporate
     sion-making and clarifying responsibility with the aim of expanding     governance, company management and business conduct. Chugai
     corporate value in a sustainable manner.                                will continue to further enhance its current system and strive to
            To date, Chugai has adjusted the number of members on its        strengthen its decision-making system and clarify accountability.
     Board of Directors and appointed outside directors in order to bol-
     ster the function of the Board of Directors and accelerate the deci-    Compliance System
     sion-making system. Chugai has also introduced the executive offi-      We established the Chugai Business Conduct Guidelines, “Chugai
     cer system to clearly identify the responsibilities of each business    BCG,” as our corporate code of practice. In October 2003, the
     operation. As of March 23, 2005, Chugai’s Board of Directors con-       Corporate Social Responsibility Committee, chaired by our Deputy
     sists of 12 members, six of whom are outside directors. Chugai also     President, was established, and the Corporate Social Responsibility
     has four corporate auditors, two of whom are outside auditors, and      Promotion Department (the reorganized Corporate Ethics
     the Audit Department has been set up to monitor business opera-         Department) was created as a specific department. Since their estab-
     tions internally. Business operations are conducted mainly by the       lishment, these two bodies have been working to achieve the aims of
     CEO and the executive officers, and the status of these operations is   enhancing and strengthening Chugai’s ability to fulfill our social
     reported quarterly to the Board. Comprised of key executive offi-       responsibilities in line with the Chugai BCG, including corporate
     cers, the Executive Committee is responsible for making critical        ethics, human rights, environment and social contributions.
     decisions in conducting business operations entrusted by the Board.           As for risk management, the entire Group works together
     The Executive Committee informs the Board of all the important          under the guidance of the Risk Management Committee, a sub-
     decisions it makes.                                                     organization of the Executive Committee, and the General Affairs
            In addition, Chugai runs an International Advisory Council       Department’s Risk Management Group to mitigate risks. In addi-
     (IAC), which consists of specialists in various fields from Japan and   tion, the Company has a framework in place for rapidly and appro-
     overseas, in order to respond appropriately to the global business      priately dealing with contingencies if they arise.

     Corporate Governance System

                      Shareholder's Meeting                                  Members of the International Advisory Council
                                                      Corporate Auditors
                                                                             Prof. Victor Halberstadt
                                                      Corporate Auditors'     Professor of Economics, Leiden University
                         Board of Directors           Committee
                                                                             Dr. Keith Jones
                                                                              Retired Non-executive Chairman of the European Medicines Evaluation Agency (EMEA)
                                 CEO
                                                                             Dr. Gerald D. Laubach
                                                                              Retired President & COO, Pfizer Inc.
      Executive Committee
                                                                             Dr. Andres Leuenberger
                                                                              Retired Vice Chairman, Roche Holding Ltd.
      International Advisory Council                                         Judge Abraham D. Sofaer
                                                                              George P. Shultz Distinguished Scholar and Senior Fellow,
                                Executive Officers                            Hoover Institution, Stanford University
                                                                             Prof. Dr. Dieter E.H. Spethmann
                                                                              Retired Chairman and CEO, Thyseen Steel
                                                                             Mr. Goro Watanabe
                                                                              Retired Chairman, Mitsui Chemicals, Inc.
                                                                                                                               (As of March 23, 2005)
32    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Board of Directors/Executive Officers (As of March 23, 2005)




                                       Yasuo Maeno                                                         Osamu Nagayama                                              Akira Okazaki
                                       Executive Vice President                                            President, CEO                                              Executive Vice President
Dr. Tatsumi Yamazaki                                                  Ryuzo Kodama                                               Motoo Ueno
Executive Vice President                                              Executive Vice President, CFO                              Deputy President



Board Members                                                     Executive Officers

Osamu Nagayama                                                    Osamu Nagayama                                             Kotaro Miwa
 Chairman of the Board, Representative Director, President, CEO    President, CEO                                             Vice President,
                                                                                                                              General Manager of Human Capital & Personnel Dept.
Motoo Ueno                                                        Motoo Ueno
 Representative Director, Deputy President                         Deputy President                                          Yuichiro Onitsuka
                                                                                                                              Vice President, General Manager of External Affairs Dept.
Ryuzo Kodama                                                      Ryuzo Kodama
 Executive Vice President, CFO                                     Executive Vice President, CFO                             Dr. Yasuhiro Tsuji
                                                                                                                              Vice President,
Akira Okazaki                                                     Akira Okazaki                                               Department Manager of Product Strategy Dept.
 Executive Vice President,                                         Executive Vice President,
 Managing Director of Technology & Production Group                Managing Director of Technology & Production Group        Satoshi Miki
                                                                                                                              Vice President,
Yasuo Maeno                                                       Yasuo Maeno                                                 Department Manager of Development Planning Dept.
 Executive Vice President,                                         Executive Vice President,
 Managing Director of Sales & Marketing Group                      Managing Director of Sales & Marketing Group              Tatsuo Miyauchi
 & General Manager of Product Lifecycle Div.                       & General Manager of Product Lifecycle Div.                Vice President, General Manager of Research Div.

Dr. Tatsumi Yamazaki                                              Dr. Tatsumi Yamazaki                                       Shunji Yokoyama
 Executive Vice President,                                         Executive Vice President,                                  Vice President,
 Managing Director of Research & Development Group                 Managing Director of Research & Development Group          General Manager of Clinical Development Div.

Dr. Etsuro Ogata                                                  Harutaka Fujita                                            Koichi Shoji
 Director Emeritus of Cancer Institute Hospital                    Senior Vice President, CPO (Chief Privacy Officer)         Vice President,
                                                                                                                               President of Chugai Clinical Research Center Co.,Ltd
Mitsuo Ohashi                                                     Hironobu Komiya
 Representative Director and Chairman of                           Senior Vice President,                                    Dr. Eigoro Murayama
 the Board of Directors, Showa Denko K.K.                          General Manager of Corporate Regulatory Compliance         Vice President,
                                                                   and Quality Assurance Div.                                 General Manager of Pharmaceutical Technology Div.
Abraham E. Cohen
 Chairman, Chugai Pharma USA                                      Dr. Mikio Arisawa                                          Tomoyuki Nakayama
                                                                   Senior Vice President, Deputy Managing Director of         Vice President,
Dr. Franz B. Humer                                                 Technology & Production Group                              General Manager of Pharmaceutical Production Div.
 Chairman of the Board and Chief Executive Officer,
 F. Hoffmann-La Roche Ltd.                                        Tatsuro Kosaka                                             Masaharu Unno
                                                                   Senior Vice President, Deputy Managing Director of         Vice President,
William M. Burns                                                   Sales & Marketing Group & Head of Strategic Marketing      Department Manager of Marketing Education & Training Dept.
 Head of Pharmaceuticals Division, F. Hoffmann-La Roche Ltd.       Preparatory Office
                                                                                                                             Naotaka Nakamura
Prof. Dr. Jonathan K.C. Knowles                                   Kazunori Komiyama                                           Vice President,
 President of Global Research, F. Hoffmann-La Roche Ltd.           Senior Vice President, Deputy Managing Director of         General Manager of Medical Business & Science Div.
                                                                   Sales & Marketing Group
                                                                                                                             Yoichi Yamanaka
Corporate Auditors                                                Yoshinori Hibino                                            Vice President, General Manager of Sales Coordination Div.
                                                                   Senior Vice President, International Business
Takao Honma                                                                                                                  Katsuyori Kunii
 (full-time)                                                      Dr. Hiroyuki Ohta                                           Vice President, Branch Manager of Tokyo Branch 1
                                                                   Vice President, Head of MRA Coordination Office
Motoo Saito                                                                                                                  Akira Suzuki
 (full-time)                                                      Fumihiko Kamoshida                                          Vice President, Branch Manager of Osaka Branch
                                                                   Vice President, General Manager of Legal Affairs Dept.
Yasunori Fujii                                                                                                               Yoshiki Uchikura
                                                                  Hirotaka Konno                                              Vice President, General Manager of International Div.
Toshio Kobayashi                                                   Vice President, General Manager of Secretarial Dept.       & Department Manager of International Dept.




                                                                                                                            Chugai Pharmaceutical Co., Ltd. Annual Report 2004 33
     Organization (As of April 1, 2005)

                                                                            Corporate Planning Dept.
                                                                            Corporate Communications Dept.
                                                                            Business Development Dept.
                                                                            Legal Dept.
                                                                            General Affairs Dept.
                                                                            Secretarial Dept.
                                                                            Corporate Social Responsibility Dept.
                                                                            Human Capital & Personnel Dept.
                                                                            Finance & Accounting Dept.
                                                                            Purchasing Dept.
                                                                            Information System Dept.
                                                                            ERP Coordination Dept.
                                                                            External Affairs Dept.
                                                                            Audit Dept.
                                                           Corporate        Regulatory Compliance and
                                                           Regulatory       Quality Assurance Coordination Dept.
                                                           Compliance
                                                           and Quality      Development Regulatory Affairs Dept.
        Shareholder’s Meeting                              Assurance Div.   Drug Safety Compliance Dept.
                                   Corporate Auditors                       Drug Safety Evaluation Dept.
            Board Meeting          Corporate Auditors’                      Quality Assurance Dept.
                                   Committee                                Regulatory Affairs Audit Dept.
                                                           Research &                                                      Research Div.
              President                                    Development
                                 Globalization Committee                    Product Strategy Dept.                               Business Support Dept.
                                                           Group
                                                                            Development Planning Dept.                           Research Planning & Coordination Dept.
                                                                            Intellectual Property Dept.                          Pharmaceutical Technology Dept.
                                   Executive Committee
                                                                            Development Information Dept.                        Chemistry Research Dept. 1-2
                                                                            MRA Coordination Office                              Pharmaceutical Research Dept.1-3
                                           IAC
                                                                                                                                 Genome Antibody Product Research Dept.
                                                                                                                                 Pre-Clinical Research Dept. 1-2
                                                                                                                                 Safety Assessment Dept.
                                                                                                                           Clinical Development Div.
                                                                                                                                 Clinical Research Coordination Dept.
                                                                                                                                 Clinical Research Dept. 1-4
                                                                                                                                 Post-Marketing Clinical Trial Dept.
                                                           Technology &                                                    Pharmaceutical Technology Div.
                                                           Production
                                                                            CMC Planning & Coordination Dept.                    Synthetic Technology Research Dept.
                                                           Group
                                                                            Engineering Dept.                                    Bio-Product Technology Research Dept.
                                                                                                                                 Formulation Technology Research Dept.
                                                                                                                                 Analytical Technology Research Dept.
                                                                                                                           Pharmaceutical Production Div.
                                                                                                                                 Production Coordination Dept.
                                                                                                                                 Production Technology Coordination Dept.
                                                                                                                                 Ukima Business Support Dept.
                                                                                                                                 Kamakura Business Support Dept.
                                                                                                                                 Plants
                                                                                                                                          Ukima, Fujieda, Utsunomiya,
                                                                                                                                          Kamakura, Kagamiishi
                                                           Sales &                                                         Product Lifecycle Div.
                                                           Marketing
                                                                            Sales & Marketing Planning Dept.                     Product Development Dept.
                                                           Group
                                                                            Sales & Marketing Coordination Dept.                 Product Research Dept.
                                                                            Sales & Marketing Education & Training Dept.   Medical Business & Science Div.
                                                                                                                                 Medical Business & Science Dept. 1-5
                                                                                                                                 Drug Information Center
                                                                                                                           Sales Coordination Div.
                                                                                                                                 Wholesaler Business Planning Dept.
                                                                                                                                 13 Domestic Branches
                                                                                                                           International Business Div.
                                                           Strategic                                                             International Business Coordination Dept.
                                                           Marketing
                                                                                                                                 Representative Offices
                                                           Preparatory
                                                           Office                                                                         Beijing, Shanghai, Guangzhou




34   Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Financial Section




Contents

Financial Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Management’s Discussion & Analysis . . . . . . . . . . . . . . . . . . . . . 37
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . 42
Consolidated Statements of Shareholders’ Equity . . . . . . . . . . . . 43
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . 44
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 45
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 57




                                                                                              Chugai Pharmaceutical Co., Ltd. Annual Report 2004 35
     Financial Summary
     Chugai Pharmaceutical Co., Ltd. and consolidated subsidiaries




                                                                                                                                                               Thousands of
                                                                                                   Millions of yen except per share amount and other statistics U.S. dollars
                                                                                               Nine months
                                                                                    Year ended       ended                                                       Year ended
                                                                                  December 31, December 31,                            Years ended March 31 December 31,
                                                                                         2004        2003         2003          2002       2001          2000         2004
      Results for the year:
      Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     ¥ 294,671     ¥ 232,748   ¥ 237,391 ¥ 211,705 ¥ 203,005        ¥ 195,506 $ 2,833,375
      Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          183,563       149,207     158,006   146,743   140,959          136,511   1,765,029
      Selling, general and administrative expenses . . . . .                           83,900        62,963      79,178    72,189    69,527           66,540     806,731
      Research and development expenses . . . . . . . . . . .                          48,166        43,525      48,511    47,845    41,189           39,993     463,135
      Operating income . . . . . . . . . . . . . . . . . . . . . . . .                 51,497        42,719      30,317    26,709    30,243           29,978     495,163
      Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . .                34,117        28,446     (20,135)   14,598    15,500            8,761     328,048
      Capital investments . . . . . . . . . . . . . . . . . . . . . . .                 9,865        11,819      17,815    14,292     9,689           13,321      94,856
      Depreciation and amortization . . . . . . . . . . . . . . .                      14,383        10,514      14,905    12,939    14,408           14,462     138,298

      Amounts per share (Yen and U.S. dollars):
       Net income (loss) -basic- . . . . . . . . . . . . . . . . . .                ¥   62.27     ¥   51.73   ¥ (51.75) ¥      57.93   ¥   61.70   ¥    35.53 $        0.60
       Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . .               18.00         13.00      16.00         16.00       16.00        13.00          0.17

      Financial position at year-end:
      Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        ¥ 411,449     ¥ 405,197   ¥ 425,301    ¥ 349,226 ¥ 340,174     ¥ 321,087 $ 3,956,240
      Property, plant and equipment, net . . . . . . . . . . .                         90,051        91,970      93,969       81,445    77,798        80,225     865,875
      Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . .                5,167        10,750      11,968       26,269    66,279        66,512      49,683
      Total shareholders’ equity . . . . . . . . . . . . . . . . . . .                320,847       296,717     277,254      200,779   190,257       170,972   3,085,067

      Other statistics:
      Number of employees* . . . . . . . . . . . . . . . . . . . . .                    5,327         5,680        5,774       4,964       4,931        4,877
     * In June 2003, the Company changed its fiscal year-end from March 31 to December 31. As a result of this change, the nine months ended December 31, 2003 are
       presented as a transitional period.
     Note: The accompanying notes to the consolidated financial statements are an integral part of this summary.




36     Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Management’s Discussion & Analysis

Operating Environment and Chugai’s Growth                                         Net Sales
Strategy
                                                                                  300 (Billions of yen)
The domestic pharmaceutical industry in the fiscal year under
review continued to operate amidst a tough environment.
There was no change witnessed in the continued government
                                                                                  200
measures to curtail medical expenses, which included a 4.2%
industry average reduction in the National Health Insurance
Drug Price Standard in April 2004.
                                                                                  100
   Despite this harsh backdrop, Chugai, as one of the most
important members of the Roche Group, was able to establish
stronger foundations for the development and sale of new
                                                                                    0
drugs and further increase its globally competitive edge, not to
mention endeavoring to speed up the development of new                                         01/3 02/3 03/3 03/12 04/12
                                                                                                               (9 months)
products. Furthermore, as well as aiming for greater market
recognition of its products both in Japan as well as overseas,
Chugai also initiated marketing campaigns, based on sound
ethical and scientific principles, that would promote the
appropriate use of pharmaceutical drugs and raise customer                        Overseas sales and Ratio
confidence. As a result, Chugai was ranked at fourth position
                                                                                  40 (Billions of yen)                        (%) 20.0
in the domestic prescription pharmaceutical market in 2004
and had a market share of 4.3%.
                                                                                  30                                               15.0

Consolidated Business Results of the Fiscal Year
Under Review (January 1, 2004 – December 31, 2004)                                20                                               10.0
  Net Sales
  Net sales in the fiscal year under review amounted to 294.7                     10                                                5.0
  billion yen.
     When we look at prescription pharmaceuticals, Epogin®,
                                                                                   0                                                  0
  a preparation of recombinant human erythropoietin and
  our mainstay product, delivered a steady performance.                                       01/3 02/3 03/3 03/12 04/12
                                                                                                               (9 months)
  Rituxan®, an anti-CD20 monoclonal antibody anti-tumor                                Overseas sales
  agent which gained additional indications in September                               Overseas sales to net sales
  2003, and Herceptin®, an anti-HER2 humanized mono-
  clonal antibody anti-tumor agent both received higher                          Note: The decline in overseas sales for the fiscal year
                                                                                       ended March 31, 2003, is mainly owing to
  recognition as standard treatments, which, in turn, con-                             the exclusion of Gen-Probe Incorporated
  tributed to sales. Meanwhile, the influenza prevalence rate                          from the scope of consolidation due to the
  was not large, affecting demand for our anti-influenza                               capital reduction accompanied by the alloca-
  agent, Tamiflu®. As a result, net sales for prescription phar-                       tion of Gen Probe shares to shareholders.

  maceuticals amounted to 278.5 billion yen.
     Sales of nonprescription products totaled 16.2 billion yen.
     Overseas sales including exports amounted to 18.5 bil-
  lion yen, with a ratio to net sales of 6.3%.
     * The major products that constitute overseas sales are lenograstim
       (Neutrogin® on the Japanese market), an agent for treating neutropenia,
       and nicorandil (Sigmart® on the Japanese market), an anti-angina agent.


   Due to the change in financial year-end from March 31 to
   December 31, the accounting period for the fiscal year
   ended December 2003 was for the nine months from April
   1, 2003 to December 31, 2003. Therefore, a comparison
   of performance figures with those from the previous fiscal
   year is not provided.




                                                                                               Chugai Pharmaceutical Co., Ltd. Annual Report 2004   37
        Costs and Expenses                                                 Fixed assets, however, fell by 13.2 billion yen to 136.5 bil-
        Cost of sales amounted to 111.1 billion yen, with a ratio to       lion yen, mainly due to a fall in investment securities and
        net sales of 37.7%. Selling, general, and administrative           deferred tax assets.
        expenses – excluding research and development expenses –              Total liabilities fell 18.4 billion yen from the end of the
        amounted to 83.9 billion yen as a result of strengthened sales     previous fiscal year to 89.1 billion yen. Current liabilities rose
        promotion activities and the implementation of information         by 7.1 billion to 63.4 billion yen due to factors such as the
        security measures ahead of schedule. The ratio of these            increase in income tax payable. Meanwhile, long-term liabili-
        expenses to net sales was 28.5% and this continues to steadi-      ties fell 25.5 billion yen to 25.8 billion yen, mainly as a result
        ly fall as a result of cost containment efforts. Research and      of a reduction in reserve for employees’ retirement benefit.
        development expenses amounted to 48.2 billion yen as a                With a net working capital (defined as current assets minus
        result of a portion being deferred to the following fiscal year,   current liabilities) of 211.6 billion yen and a current ratio of
        and the ratio of these expenses to net sales was 16.3%. With       434.0%, Chugai is currently in a sound financial position.
        efficient research and development activities fully utilizing         Shareholders’ equity climbed 24.1 billion yen from the previ-
        the alliance with Roche, the ratio of research and develop-        ous fiscal year end to 320.8 billion yen as a result of the increase
        ment expenses to net sales has stabilized to below 20%.            in both retained earnings (20.8 billion yen) as well as common
                                                                           stock and additional paid-in capital (4.6 billion yen) due to the
        Earnings                                                           conversion of convertible bonds and warrant execution. The
        While selling, general, and administrative expenses were for       ratio of shareholders’ equity increased to 78.0% from 73.2%
        the most part as expected, net sales fell below expectations,      the previous fiscal year.
        and operating income amounted to 51.5 billion yen. Other
        income included gains of 9.3 billion yen of gain on the            Cash Flow
        transfer of nonprescription products business and 2.5 bil-         Net cash provided by operating activities rose from negative
        lion yen of gain on termination of defined benefit pension         36.8 billion yen in the previous year to 51.5 billion yen in
        plan. Meanwhile, other expenses included 2.1 billion yen of        the fiscal year under review. This is mainly due to the fact
        loss on disposition of equipment and environmental recov-          that, compared to the previous fiscal year, net income before
        ery costs under termination activities and 4.2 billion yen of      income tax rose from 49.2 billion to 57.5 billion yen, and
        additional lump-sum payments for early retirement pro-             income tax paid fell from 53.6 billion to 10.9 billion yen.
        gram. As a result, Chugai’s net income in the fiscal year             Net cash used in investment activities amounted to 15.2 bil-
        under review amounted to 34.1 billion yen.                         lion yen, mainly due to the fact that while proceeds from the
                                                                           sales of marketable securities amounted to 85.9 billion yen,
     Financial Position and Cash Flow                                      purchases of investment securities totaled 84.0 billion yen.
        Financial Position                                                    Net cash used in financing activities amounted to 13.7
        The amount of total assets in the fiscal year under review         billion yen, mainly as a result of cash dividend paid to the
        totaled 411.4 billion yen, a 6.3 billion yen increase from         amount of 12.0 billion yen.
        the end of the previous fiscal year. Current assets increased         Cash and cash equivalents at the end of the fiscal year
        by 19.4 billion yen to 274.9 billion yen as a result of sever-     under review amounted to 57.4 billion yen – 21.2 billion yen
        al factors, including increased cash and cash equivalents.         higher than the balance as of the beginning of the fiscal year.




38    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Cost of Sales and Ratio                               Net Income and ROE

200 (Billions of yen)                      (%) 40.0   40 (Billions of yen)                           (%) 20.0

                                                      30                                                15.0
150                                            30.0
                                                      20                                                10.0

                                                      10                                                  5.0
100                                            20.0
                                                        0                                                 0.0

                                                      -10                                                -5.0
 50                                            10.0
                                                      -20                                               -10.0

  0                                              0    -30                                               -15.0

            01/3 02/3 03/3 03/12 04/12                           01/3 02/3 03/3 03/12 04/12
                              (9 months)                                            (9 months)

     Cost of sales                                       Net income
     Cost of sales to net sales                          ROE




SG&A and R&D Expenses                                 Composition of
                                                      Total Capital Employed
150 (Billions of yen)                      (%) 60.0   500 (Billions of yen)                         (%) 100.0


                                                      400                                               80.0

100                                            40.0
                                                      300                                               60.0


                                                      200                                               40.0
 50                                            20.0

                                                      100                                               20.0


  0                                              0      0                                                  0

            01/3 02/3 03/3 03/12 04/12                           01/3 02/3 03/3 03/12 04/12
                              (9 months)                                            (9 months)

     SG&A                                                Total capital employed
     R&D expenses                                        Ratio of total shareholders’ equity to
     SG&A and R&D Expenses to net sales                  total capital employed
                                                         Total shareholders’ equity
                                                         Interest-bearing debt
                                                         Other liabilities and Minority interests
Operating Income and Ratio

80 (Billions of yen)                       (%) 20.0



60                                             15.0



40                                             10.0



20                                              5.0



 0                                               0

            01/3 02/3 03/3 03/12 04/12
                              (9 months)

     Operating income
     Operating income to net sales




                                                                  Chugai Pharmaceutical Co., Ltd. Annual Report 2004   39
     Consolidated Balance Sheets
     Chugai Pharmaceutical Co., Ltd. and consolidated subsidiaries




                                                                                                                                                                                  Thousands of
                                                                                                                                                                                   U.S. dollars
                                                                                                                                                                Millions of yen       (Note 3)
                                                                                                                                                                    December 31   December 31,
      Assets                                                                                                                                                2004          2003          2004
      Current assets:
       Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                ¥ 57,381     ¥ 36,226      $ 551,740
       Marketable securities including short-term investments (Note 12) . . . . . . . . . . . . . . . . . . . . . .                                       39,937       30,695        384,010
       Receivables:
         Trade notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           3,322        12,488         31,942
         Trade accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            101,363       101,373        974,644
         Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       2,920        10,501         28,077
         Reserve for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      (656)         (649)        (6,308)
       Inventories (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             57,917        53,157        556,894
       Deferred tax assets (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  9,993         9,502         96,087
       Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       2,760         2,211         26,539
      Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         274,937       255,504      2,643,625




      Property, plant and equipment, at cost:
       Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       10,703        10,939         102,914
       Buildings and structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              104,096       102,309       1,000,923
       Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    94,174        98,489         905,519
       Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 10,017         6,669          96,317
                                                                                                                                                         218,990       218,406       2,105,673
       Accumulated depreciation (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      (128,939)     (126,436)     (1,239,798)
      Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      90,051        91,970         865,875




      Investments and other assets:
        Investment securities (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    12,965       17,042        124,663
        Unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          299           60          2,875
        Long-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               122          163          1,173
        Lease deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          3,565        3,720         34,279
        Deferred tax assets (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 17,039       20,809        163,837
        Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      12,471       15,929        119,913
      Total investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     46,461       57,723        446,740
      Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    ¥ 411,449    ¥ 405,197     $3,956,240




40     Chugai Pharmaceutical Co., Ltd. Annual Report 2004
                                                                                                                                                                               Thousands of
                                                                                                                                                                                U.S. dollars
                                                                                                                                                           Millions of yen         (Note 3)
                                                                                                                                                               December 31     December 31,
Liabilities and shareholders’ equity                                                                                                                   2004          2003            2004
Current liabilities:
 Long-term debt due within one year (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           ¥     1,000    ¥        11     $      9,615
 Payables (Note 17):
   Trade notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 1            133               10
   Trade accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               19,164         20,472          184,269
   Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              3,260          4,718           31,346
   Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         3,700          5,883           35,577
 Income taxes payable (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       8,132            242           78,192
 Deferred tax liabilities (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         4              4               38
 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            21,776         20,782          209,385
 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         6,319          4,059           60,760
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             63,356         56,304          609,192

Long-term liabilities:
 Long-term debt (Notes 6 and 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           5,167         10,750           49,683
 Deferred tax liabilities (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         3             18               29
 Reserve for employees’ retirement benefits (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 20,190         39,558          194,135
 Reserve for officers’ retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           393            511            3,779
 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            30            435              288
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               25,783         51,272          247,914

Minority interests in consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            1,463           904            14,067

Contingent liabilities (Note 15)

Shareholders’ equity (Notes 7,18 and 19):
 Common stock, without par value:
   Authorized: 799,805,050 shares
   Issued:
     December 31, 2004 – 555,004,964 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 70,532             —            678,192
     December 31, 2003 – 550,691,219 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                     —          68,237                —
 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 90,388         88,099           869,115
 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             164,855        144,062         1,585,144
 Net unrealized holding gain on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           2,405          2,341            23,125
 Translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     284            (86)            2,731
 Treasury stock, at cost
   December 31, 2004 – 5,400,239 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           (7,617)            —           (73,240)
   December 31, 2003 – 4,376,622 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               —          (5,936)              —
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             320,847        296,717        3,085,067
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 ¥ 411,449      ¥ 405,197       $3,956,240
The accompanying notes are an integral part of these consolidated financial statements.




                                                                                                                                         Chugai Pharmaceutical Co., Ltd. Annual Report 2004     41
     Consolidated Statements of Operations
     Chugai Pharmaceutical Co., Ltd. and consolidated subsidiaries




                                                                                                                                                                            Thousands of
                                                                                                                                                                             U.S. dollars
                                                                                                                                                          Millions of yen       (Note 3)
                                                                                                                                               Nine months
                                                                                                                                    Year ended       ended Year ended         Year ended
                                                                                                                                  December 31, December 31,    March 31,    December 31,
                                                                                                                                         2004        2003           2003           2004
      Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     ¥ 294,671    ¥ 232,748     ¥ 237,391     $2,833,375
      Cost of sales (Note 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               111,108       83,541        79,385      1,068,346
      Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        183,563      149,207       158,006      1,765,029
      Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         83,900       62,963        79,178        806,731
      Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          48,166       43,525        48,511        463,135
      Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               51,497       42,719        30,317        495,163
      Other income (expenses):
       Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         515          423           503          4,952
       Interest expense (Note 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      (327)        (210)         (277)        (3,144)
       Other (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               5,803        6,312       (23,683)        55,798
                                                                                                                                        5,991        6,525       (23,457)        57,606
      Income before income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . .                                57,488       49,244         6,860        552,769

      Income taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                22,339       19,797        26,479        214,798

      Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (1,032)      (1,001)          (516)       (9,923)
      Net income (loss) (Note 18) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 ¥ 34,117     ¥ 28,446      ¥ (20,135)    $ 328,048
      The accompanying notes are an integral part of these consolidated financial statements.




42     Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Consolidated Statements of Shareholders’ Equity
Chugai Pharmaceutical Co., Ltd. and consolidated subsidiaries




                                                                                                                                                                                    Thousands of
                                                                                                                                                                                     U.S. dollars
                                                                                                                                                              Millions of yen           (Note 3)
                                                                                                                                                   Nine months
                                                                                                                                        Year ended       ended Year ended             Year ended
                                                                                                                                      December 31, December 31,    March 31,        December 31,
                                                                                                                                             2004        2003           2003               2004
 Common stock (Note 7):
  Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                ¥ 68,237      ¥ 68,215       ¥ 24,035        $ 656,125
    Add:
      Issuance of capital stock in accordance with merger agreement (Note 7) . . . . . . . . .                                                 —              —          18,782               —
      Conversion of convertible bonds (Notes 6 and 7) . . . . . . . . . . . . . . . . . . . . . . . . . . .                                   790             22         25,651            7,596
      Exercise of warrants (Notes 6 and 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          1,505             —          18,807           14,471
    Deduct:
      Capital reduction due to spin-off of Gen-Probe Incorporated (Note 7) . . . . . . . . . .                                                 —             —          (19,060)              —
  Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 70,532        68,237          68,215          678,192
 Additional paid-in capital (Note 7):
  Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   88,099        88,078          35,181          847,106
    Add:
      Issuance of capital stock allocated to
        Roche Pharmholding B. V. upon merger (Note 7) . . . . . . . . . . . . . . . . . . . . . . . .                                          —              —           8,800               —
      Issuance of capital stock in accordance with merger agreement (Note 7) . . . . . . . . .                                                 —              —          18,782               —
      Conversion of convertible bonds (Notes 6 and 7) . . . . . . . . . . . . . . . . . . . . . . . . . . .                                   787             21         25,610            7,567
      Exercise of warrants (Notes 6 and 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          1,501             —          18,765           14,433
      Gain on disposal of treasury stock (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 1              0             —                 9
    Deduct:
      Capital reduction due to spin-off of Gen-Probe Incorporated (Note 7) . . . . . . . . . .                                                 —             —          (19,060)              —
  Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 90,388        88,099          88,078          869,115
 Retained earnings (Note 7):
  Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  144,062       120,114        137,189         1,385,212
  Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              34,117        28,446        (20,135)          328,048
  Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (12,021)       (4,405)        (4,457)         (115,588)
  Increase in retained earnings resulting from merger . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                  —             —          11,450                —
  Decrease in retained earnings due to decrease in shareholding in
    a consolidated subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                (1,213)           —          (3,590)          (11,663)
  Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       —             —            (280)               —
  Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (90)          (93)           (63)             (865)
  Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                164,855       144,062        120,114         1,585,144
 Net unrealized holding gain on securities:
  Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    2,341          1,025          2,528           22,510
  Net change during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       64          1,316         (1,503)             615
  Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  2,405          2,341          1,025           23,125
 Translation adjustments:
  Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      (86)          (109)         1,915              (827)
  Net change during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      370             23         (2,024)            3,558
  Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    284            (86)          (109)            2,731
 Treasury stock, at cost:
  Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   (5,936)          (69)           (69)         (57,077)
  Net change during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   (1,681)       (5,867)             0          (16,163)
  Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 (7,617)       (5,936)           (69)         (73,240)
 Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   ¥ 320,847     ¥ 296,717      ¥ 277,254       $3,085,067


                                                                                                                                                   Nine months
                                                                                                                                        Year ended       ended      Year ended
                                                                                                                                      December 31, December 31,     March 31,
                                                                                                                                             2004        2003             2003
 Number of shares of common stock:
  Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550,691,219 550,633,518 252,068,564
   Add:
     Issuance of capital stock allocated to
       Roche Pharmholding B.V. upon merger (Note 7) . . . . . . . . . . . . . . . . . . . .                               —           — 196,628,960
     Issuance of capital stock in accordance with merger agreement (Note 7) . . . .                                       —           — 21,103,544
     Conversion of convertible bonds (Notes 6 and 7) . . . . . . . . . . . . . . . . . . . . . . 2,068,178                        57,701 52,957,790
     Exercise of warrants (Notes 6 and 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,245,567                     — 28,069,610
   Deduct:
     Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             —           —     (194,950)
  Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555,004,964 550,691,219 550,633,518
 The accompanying notes are an integral part of these consolidated financial statements.




                                                                                                                                               Chugai Pharmaceutical Co., Ltd. Annual Report 2004    43
     Consolidated Statements of Cash Flows
     Chugai Pharmaceutical Co., Ltd. and consolidated subsidiaries




                                                                                                                                                                                Thousands of
                                                                                                                                                                                 U.S. dollars
                                                                                                                                                            Millions of yen         (Note 3)
                                                                                                                                                 Nine months
                                                                                                                                      Year ended       ended Year ended           Year ended
                                                                                                                                    December 31, December 31,    March 31,      December 31,
                                                                                                                                           2004        2003           2003             2004
      Cash flows from operating activities
      Income before income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . .                               ¥ 57,488     ¥ 49,244      ¥     6,860       $ 552,769
      Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        14,383       10,514          14,905         138,298
      (Decrease) increase in reserve for employees’ retirement benefits . . . . . . . . . . . . . .                                     (19,369)      (2,749)          8,237        (186,240)
      Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         (515)        (423)           (503)         (4,952)
      Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                327          210             277           3,144
      Loss on disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      450          397             372           4,327
      Gain on sales of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    (124)      (3,467)             —           (1,192)
      Gain on sales and revaluation of investment securities . . . . . . . . . . . . . . . . . . . . . .                                    (67)      (1,276)            (67)           (644)
      Decrease (increase) in notes and accounts receivable . . . . . . . . . . . . . . . . . . . . . . .                                  8,781      (16,175)         (9,966)         84,433
      Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                (4,665)     (12,364)         (1,561)        (44,856)
      (Decrease) increase in notes and accounts payable . . . . . . . . . . . . . . . . . . . . . . . . .                                (1,245)       3,654           5,756         (11,971)
      Increase (decrease) in accrued consumption tax . . . . . . . . . . . . . . . . . . . . . . . . . . .                                2,228       (1,430)            986          21,423
      Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (1,064)      (9,491)          7,659         (10,231)
        Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           56,608       16,644          32,955         544,308
      Interest and dividends received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         515          423             594           4,952
      Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              (338)        (215)           (426)         (3,250)
      Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               (10,947)     (53,647)        (10,567)       (105,260)
      Income taxes refunded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   5,657           —               —           54,394
      Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . .                                51,495      (36,795)         22,556         495,144
      Cash flows from investing activities
      Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      (84,002)      (40,896)       (76,027)       (807,712)
      Proceeds from sales of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           85,897        62,397         73,970         825,933
      Purchases of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       (8,093)       (1,802)        (9,094)        (77,817)
      Proceeds from sales of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            1,248         3,893          5,365          12,000
      Purchases of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               (11,746)      (15,973)       (14,366)       (112,942)
      Proceeds from sales of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       1,427         7,242          1,522          13,721
      Net decrease (increase) in short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 5            (5)            50              48
      Net decrease in long-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          53             6          1,608             509
      Additional acquisition of shares of consolidated subsidiaries . . . . . . . . . . . . . . . . .                                        —           (448)          (140)             —
      Proceeds from sales of investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . .                                   —             —           1,087              —
      Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . .                             (15,211)       14,414        (16,025)       (146,260)
      Cash flows from financing activities
      Net decrease in short-term bank loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                              —            —         (3,690)               —
      Net decrease in long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          (11)      (1,302)          (95)             (106)
      Redemption of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        (0)          (0)       (9,982)               (0)
      Proceeds from issuance of common stock (Note 7) . . . . . . . . . . . . . . . . . . . . . . . .                                        —            —         37,564                —
      Decrease resulting from reduction in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 —            —        (12,494)               —
      Net increase in treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   (1,680)      (5,867)         (280)          (16,154)
      Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               (12,021)      (4,405)       (4,457)         (115,586)
      Cash dividends paid to minority shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                   (6)          (8)          (17)              (58)
      Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . .                               (13,718)     (11,582)        6,549          (131,904)
      Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . .                                        170         (333)         (274)            1,635
      Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .                                 22,736      (34,296)       12,806           218,615
      Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .                                 36,226       70,593        53,426           348,327
      Cash increase upon merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          —            —         16,421                —
      Cash decrease resulting from exclusion of subsidiaries from consolidation (Note 16) . . .                                          (1,581)         (71)      (12,060)          (15,202)
      Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          ¥ 57,381     ¥ 36,226      ¥ 70,593          $ 551,740
      The accompanying notes are an integral part of these consolidated financial statements.




44     Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Notes to Consolidated Financial Statements
Chugai Pharmaceutical Co., Ltd. and consolidated subsidiaries
December 31, 2004




1. Basis of Financial Statements                                   (d) Inventories
Chugai Pharmaceutical Co., Ltd. (the “Company”) and its            Inventories other than work in process are stated at cost deter-
domestic consolidated subsidiaries maintain their books of         mined principally by the average cost method. Work in
account in accordance with accounting principles generally         process is stated at cost determined principally by the first-in,
accepted in Japan, and its overseas subsidiaries maintain their    first-out method.
books of account in conformity with those of their countries       (e) Depreciation
of domicile.                                                       Depreciation of property, plant and equipment is calculated
  The accompanying consolidated financial statements of the        primarily by the declining-balance method at rates based on
Company and consolidated subsidiaries are prepared on the          the estimated useful lives of the respective assets.
basis of accounting principles generally accepted in Japan,        (f) Leases
which are different in certain respects as to the application      Non-cancelable leases are primarily accounted for as operating
and disclosure requirements of International Financial             leases (whether such leases are classified as operating or
Reporting Standards, and have been compiled from the con-          finance leases) except that leases which stipulate the transfer of
solidated financial statements prepared by the Company as          ownership of the leased assets to the lessee are accounted for
required by the Securities and Exchange Law of Japan.              as finance leases.
Certain modifications of, and reclassifications in, the presen-    (g) Securities
tation of the accompanying financial statements, including         Securities other than equity securities issued by subsidiaries
the presentation of statements of shareholders’ equity, have       and affiliates are classified into three categories; trading, held-
been made to facilitate understanding by readers outside Japan.    to-maturity and other securities. Trading securities are car-
  In 2003, the Company changed its financial year end from         ried at fair value and held-to-maturity securities are carried at
March 31 to December 31 in order to adopt the F.                   amortized cost. Marketable securities classified as other secu-
Hoffmann-La Roche Ltd. (“Roche”) calendar-based fiscal year        rities are carried at fair value with any changes in unrealized
as a member of the Roche Group. This change was approved           holding gain or loss, net of the applicable income taxes,
by the shareholders of the Company at its annual general           included directly in shareholders’ equity. Non-marketable
meeting held on June 25, 2003.                                     securities classified as other securities are carried at cost. If the
                                                                   value of the marketable securities classified as other securities
                                                                   has declined significantly, such securities are written down to
2. Significant Accounting Policies                                 fair value thus establishing a new cost basis, and the amount
(a) Basis of consolidation and accounting for investments in       of each write-down is charged to income as an impairment
    unconsolidated subsidiaries and affiliates                     loss unless the fair value is deemed to be recoverable.
The consolidated financial statements include the accounts of      (h) Retirement benefits
the Company and significant companies which it controls            The reserve for employees’ retirement benefits is stated at the
directly or indirectly. All significant intercompany accounts      amount required to cover the liability as of the balance sheet
and transactions have been eliminated in consolidation.            date and is based on the Company’s estimate of its liability for
  The excess of cost over net assets acquired with respect to      retirement benefits and its pension fund assets as of the bal-
the consolidated subsidiaries is amortized on a straight-line      ance sheet date.
basis over a period of twenty years or amortized fully when           The retirement benefit obligation is attributed to each peri-
acquired if the amount is immaterial.                              od by the straight-line method over the estimated years of
  Investments in companies which are not consolidated or           service of the employees.
accounted for by the equity method are carried at cost or less.       Prior service cost is being amortized as incurred by the
Where there has been a permanent decline in the value of           declining-balance method over a period (10 years) which is
such investments, the Company has written them down.               shorter than the average remaining years of service of the par-
(b) Foreign currency translation                                   ticipants in the plans.
The revenue and expense accounts of the overseas consolidat-          Actuarial gain and loss are amortized in the year following
ed subsidiaries and their balance sheet accounts, except for the   the year in which the gain or loss is recognized by the declin-
components of shareholders’ equity, are translated into yen at     ing-balance method over a period (10 years) which is shorter
the rates of exchange in effect at the balance sheet date. The     than the average remaining years of service of the participants
components of shareholders’ equity are translated at their his-    in the plans.
torical rates. Translation differences are presented as transla-      See Note 10 for the method of accounting for the separa-
tion adjustments in shareholders’ equity.                          tion of the substitutional portion of the benefit obligation
(c) Cash equivalents                                               from the corporate portion of the benefit obligation under the
Cash equivalents consist principally of cash in banks, money       Welfare Pension Fund Plan.
market funds and highly liquid investments with maturities of         Directors and corporate auditors are not covered by the
three months or less when purchased.                               retirement benefit plans referred to above. However, the lia-




                                                                                         Chugai Pharmaceutical Co., Ltd. Annual Report 2004   45
     bility for their retirement benefits are calculated based on       3. U.S. Dollar Amounts
     management’s estimate of the amounts which would be                The U.S. dollar amounts in the consolidated financial state-
     payable if these corporate officers resigned their offices as of   ments as of and for the year ended December 31, 2004 have
     the balance sheet date. Amounts payable to directors and cor-      been translated from Japanese yen amounts at the rate of
     porate auditors upon retirement are subject to the approval of     ¥104 to U.S. $1.00, the exchange rate prevailing on
     the shareholders.                                                  December 31, 2004. This translation is presented for conven-
     (i) Research and development expenses                              ience only and should not be construed as a representation
     Research and development expenses are charged to income            that Japanese yen have been, could have been, or could in the
     when incurred.                                                     future be, converted into U.S. dollars at that or any other rate.
     (j) Income taxes
     Deferred tax assets and liabilities are determined based on the
     differences between financial reporting and the tax bases of       4. Inventories
     the assets and liabilities and are measured using the statutory    Inventories at December 31, 2004 and 2003 consisted of the
     tax rates which will be in effect when the differences are         following:
     expected to be realized.                                                                                                       Thousands of
     (k) Derivative financial instruments                                                                         Millions of yen    U.S. dollars
     The Company has entered into various derivative transactions                                                     December 31   December 31,
     in order to manage certain risks arising from adverse fluctua-                                           2004          2003          2004
     tions in foreign currency exchange rates and interest rates.       Finished products . . . . . .      ¥ 34,177     ¥ 29,431       $ 328,625
     Derivatives are carried at fair value with any changes in unre-    Work in process and
     alized gain or loss charged or credited to operations.               semifinished products . .          12,437       14,618        119,586
     (l) Appropriation of retained earnings                             Raw materials
     Under the Commercial Code of Japan (the “Code”), the                 and supplies . . . . . . . . .     11,303        9,108         108,683
     appropriation of retained earnings with respect to a given                                            ¥ 57,917     ¥ 53,157       $ 556,894
     financial period is made by resolution of the shareholders at a
     general meeting held subsequent to the close of such financial
     period. The accounts for that period do not, therefore, reflect    5. Depreciation
     such appropriations. Refer to Note 19.                             Depreciation of property, plant and equipment for the year
     (m) Reclassifications                                              ended December 31, 2004, the nine months ended December
     Certain amounts in the prior year’s financial statements have      31, 2003, and the year ended March 31, 2003 amounted to
     been reclassified to conform to the presentation for the year      ¥12,142 million ($116,750 thousand), ¥9,239 million and
     ended December 31, 2004. These changes had no impact on            ¥10,964 million, respectively.
     the previously reported results of operations or on sharehold-
     ers’ equity.




46    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
6. Short-Term Bank Loans and Long-Term Debt
The Company had no short-term bank loans as of December 31, 2004 and 2003.

Long-term debt at December 31, 2004 and 2003 consisted of the following:
                                                                                                                                                                             Thousands of
                                                                                                                                                      Millions of yen         U.S. dollars
                                                                                                                                                             December 31     December 31,
                                                                                                                                                 2004              2003            2004
1.05% unsecured convertible bonds due 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       ¥   1,861         ¥   3,438          $ 17,895
0.8969% unsecured bonds with warrants due 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               3,306             6,312            31,788
Unsecured loans:
 — from a financial institution due 2005 bearing interest at 3.62% . . . . . . . . . . . . . . . . . . . . .                                    1,000             1,000              9,615
 — Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         —                 11                 —
                                                                                                                                                6,167            10,761             59,298
Amounts due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              (1,000)              (11)            (9,615)
                                                                                                                                             ¥ 5,167           ¥ 10,750           $ 49,683

The conversion price and period of the convertible bonds are summarized as follows:
                                                                                                                                   Conversion price per               Conversion period
                                                                                                                           share at December 31, 2004              (up to and including)
1.05% unsecured convertible bonds due 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                              ¥762.50              September 29, 2008

The warrants issued with the 0.8969% unsecured bonds due                                                                                                                   Thousands of
2008 entitle the holders to subscribe for shares of common                                              Years ending December 31                  Millions of yen           U.S. dollars
stock of the Company at ¥1,338.5108 per share from                                                      2005      ....................                   ¥     1,000          $  9,615
October 1, 2002 to September 29, 2008.                                                                  2006      ....................                            —                 —
  Under the terms of the related indentures, trust deeds and                                            2007      ....................                            —                 —
warrant agency agreements, the conversion and exercise prices                                           2008      ....................                         5,167            49,683
are subject to adjustment in certain cases which include stock                                                                                           ¥     6,167          $ 59,298
splits. Sufficient shares of common stock are reserved for the
conversion of all outstanding convertible bonds and the exer-                                         The Company has entered into loan commitment agreements
cise of all warrants.                                                                                 amounting to ¥30,000 million ($288,462 thousand) with 13
  The aggregate annual maturities of long-term debt subse-                                            banks. There were no loans payable outstanding at December
quent to December 31, 2004 are summarized as follows:                                                 31, 2004 under those loan commitment agreements.


7. Legal Reserve and Additional Paid-in Capital                                                       alliance to create a leading research-driven Japanese pharmaceu-
In accordance with the Commercial Code of Japan (the                                                  tical company to be formed by the merger of the Company
“Code”), the Company has provided a legal reserve, which                                              (excluding Gen-Probe Holding Company Incorporated and
was included in retained earnings. The Code provides that an                                          Gen-Probe Incorporated) and Nippon Roche, a wholly owned
amount equal to at least 10% of the total amount disbursed as                                         subsidiary of Roche Pharmholding B.V. Roche
distributions of earnings be appropriated to the legal reserve                                        Pharmholding B.V. agreed to make an additional cash contri-
until the sum of the legal reserve and additional paid-in capi-                                       bution in order to raise its participation to 50.1% of the
tal equals 25% of the common stock account.                                                           agreed combined value. The alliance was approved by the
  The Code provides that neither additional paid-in capital                                           shareholders of the Company at its annual general meeting
nor the legal reserve is available for dividends, but both may                                        held on June 27, 2002.
be used to reduce or eliminate a deficit by resolution of the                                           In accordance with terms of the alliance, the Company spun-
shareholders or may be transferred to common stock by reso-                                           off its wholly owned U.S. diagnostic business subsidiaries, Gen-
lution of the Board of Directors. The Code also provides                                              Probe Holding Company Incorporated and Gen-Probe
that, to the extent that the sum of additional paid-in capital                                        Incorporated, in September 2002. As a result, the common
and the legal reserve exceeds 25% of the common stock                                                 stock and additional paid-in capital accounts each decreased by
account, the amount of any such excess is available for appro-                                        ¥19,060 million. In addition, the Company issued 21,103,544
priation by resolution of the shareholders.                                                           shares in September 2002 to Roche Pharmholding B.V. (the
  On December 10, 2001, the Company and F. Hoffmann-                                                  direct parent company) for ¥37,564 million and common stock
La Roche Ltd. announced that they would enter into an                                                 and additional paid-in capital accounts each increased by



                                                                                                                                     Chugai Pharmaceutical Co., Ltd. Annual Report 2004       47
     ¥18,782 million. Furthermore, pursuant to the merger agree-                                                             with the 0.8969% unsecured bonds due 2008 issued by
     ment between the Company and Roche Pharmholding B.V.,                                                                   Nippon Roche. In this connection, the common stock and
     the Company merged with Nippon Roche effective October 1,                                                               additional paid-in capital accounts increased by ¥18,807 mil-
     2002. As a result, 196,628,960 shares were issued in October                                                            lion and ¥18,765 million, respectively, and 28,069,610 shares
     2002 to Roche Pharmholding B.V. for ¥8,800 million which                                                                were issued in October 1, 2002 to Roche Pharmholding B.V.
     was credited to the additional paid-in capital account. At the                                                          As a result, the equity participation of Roche Pharmholding
     same time as the merger with Nippon Roche, Roche                                                                        B.V. in the Company was raised to approximately 50.1%.
     Pharmholding B.V. exercised warrants which had been issued


     8. Other Income (expenses)
     The components of “Other” in “Other income (expenses)” for the year ended December 31, 2004, the nine months ended
     December 31, 2003, and the year ended March 31, 2003 were as follows:
                                                                                                                                                                                              Thousands of
                                                                                                                                                                            Millions of yen    U.S. dollars
                                                                                                                                                                 Nine months
                                                                                                                                                      Year ended       ended Year ended         Year ended
                                                                                                                                                    December 31, December 31,    March 31,    December 31,
                                                                                                                                                           2004        2003           2003           2004
     Milestone royalty payments made by Roche . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                             ¥      —     ¥    3,294    ¥      —        $      —
     Gain on disposition of land,
       buildings and structures of Takada research laboratory . . . . . . . . . . . . . . . . . . . .                                                        —          3,467           —               —
     Loss on disposition of equipment and
       environmental recovery costs under termination activities . . . . . . . . . . . . . . . . .                                                      (2,094)      (2,777)            —          (20,135)
     Gain on sales of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                           —         1,313             —               —
     Integration costs (*1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                   —            —         (18,119)             —
     Written-off of long-term prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                —            —          (3,882)             —
     Gain on the transfer of nonprescription products business (*2) . . . . . . . . . . . . . . .                                                        9,337           —              —           89,779
     Gain on termination of defined benefit pension plan (Note 10) . . . . . . . . . . . . . . .                                                         2,496           —              —           24,000
     Additional lump-sum payments for early retirement program . . . . . . . . . . . . . . . .                                                          (4,242)          —              —          (40,788)
     Loss on devaluation of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                 —            —          (1,703)             —
     Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           306        1,015             21           2,942
                                                                                                                                                      ¥ 5,803      ¥ 6,312       ¥ (23,683)      $ 55,798
     (*1) Integration costs consisted of ¥13,444 million for the amortization of the unrecognized retirement benefit obligation under the prior retirement benefit plan
          and ¥4,675 million of consulting and IT integration services and other expenses.
     (*2) This is due to transfer of nonprescription products business to Lion Corporation, and transfer of insecticide manufacturing business of the Company’s wholly-
          owned subsidiary Eiko Kasei Co., Ltd. to Lion Packaging Co., Ltd., a wholly-owned subsidiary of Lion Corporation.



     9. Income Taxes
     Income taxes in Japan applicable to the Company and its domestic subsidiaries consist of corporation tax, inhabitants’ taxes, and
     enterprise tax. The approximate aggregate statutory tax rate was 40.4% for year ended December 31, 2004, and 41.5% for the
     nine months ended December 31, 2003 and the year ended March 31, 2003. Income taxes for the year ended December 31,
     2004, the nine months ended December 31, 2003, and the year ended March 31, 2003 consisted of the following:
                                                                                                                                                                                              Thousands of
                                                                                                                                                                            Millions of yen    U.S. dollars
                                                                                                                                                                 Nine months
                                                                                                                                                      Year ended       ended Year ended         Year ended
                                                                                                                                                    December 31, December 31,    March 31,    December 31,
                                                                                                                                                           2004        2003           2003           2004
     Income taxes:
       Current (*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      ¥ 18,824     ¥ 16,533      ¥ 38,605        $ 181,000
       Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        3,515        3,264        (12,126)         33,798
                                                                                                                                                      ¥ 22,339     ¥ 19,797      ¥ 26,479        $ 214,798
     (*) Income taxes for the year ended March 31, 2003 included ¥22,384 million of taxes resulting from a taxable gain on the transfer of the Company’s investment
         in Gen-Probe Incorporated (“Gen-Probe”) following its spin-off. Refer to Note 7 with respect to the spin-off of Gen-Probe.




48    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
The significant components of deferred tax assets and liabilities at December 31, 2004 and 2003 were as follows:
                                                                                                                                                                                                Thousands of
                                                                                                                                                                   Millions of yen               U.S. dollars
                                                                                                                                                                        December 31             December 31,
                                                                                                                                                             2004             2003                    2004
Deferred tax assets:
 Reserve for employees’ retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           ¥ 11,676            ¥ 14,584                 $ 112,269
 Amortization of deferred charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        4,008               5,569                    38,539
 Enterprise tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    755                   1                     7,260
 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                2,531               2,182                    24,337
 Reserve for bonuses to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          1,553               1,748                    14,933
 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           8,933               8,993                    85,894
  Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            29,456              33,077                   283,232
Amounts offset by deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        (2,424)             (2,766)                  (23,308)
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              ¥ 27,032            ¥ 30,311                 $ 259,924

Deferred tax liabilities:
 Unrealized gain on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  ¥  1,633            ¥  1,536                 $ 15,702
 Deferred gain on sales of properties for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                   794                 854                     7,635
 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               4                 398                        38
  Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             2,431               2,788                    23,375
Amounts offset by deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       (2,424)             (2,766)                  (23,308)
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            ¥      7            ¥     22                 $      67



Disclosure of a reconciliation of statutory and effective tax rates for the year ended December 31, 2004 and the nine months ended
December 31, 2003 has been omitted as the differences between the statutory tax rates and effective tax rates were immaterial.

A reconciliation of the statutory and effective tax rates for the year ended March 31, 2003 is summarized as follows:
                                                                                                                                                                                                Year ended
                                                                                                                                                                                                March 31,
                                                                                                                                                                                                      2003
Statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              41.5%
Permanently non-deductible expenses for tax purposes such as entertainment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                       21.3
Permanently non-taxable income such as dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                          (3.4)
Inhabitants’ per capita taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    1.5
Different tax rates applied for overseas subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                             (5.6)
Tax benefits of research and development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               (12.9)
Gain on transfer of investment in Gen-Probe for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                       326.3
Effect of tax rate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 15.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2.3
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           386.0%




                                                                                                                                           Chugai Pharmaceutical Co., Ltd. Annual Report 2004                   49
     10. Retirement Benefits                                                                                    Effective October 1, 2004, the transition from a tax-quali-
     (a) Overview of retirement benefits                                                                     fied pension plan to a defined contribution pension plan and
     The Company has various retirement benefits plans, which                                                a prepaid retirement allowance plan was made pursuant to the
     are defined benefit plans, such as the Welfare Pension Fund                                             enactment of the Defined Contribution Pension Law. Upon
     Plan (WPFP) and a lump-sum payment plan. In addition,                                                   this change, ¥2,496 million ($24,000 thousand) of the reserve
     the Company has defined contribution pension plans. The                                                 for employees’ retirement benefits was reduced and recognized
     Company’s domestic consolidated subsidiaries participate in                                             as gain on termination in income.
     the lump-sum payment plan.                                                                                 In December 2004, an employee retirement benefit trust of
       Certain employees may be entitled to additional special                                               ¥10,000 million ($96,153 thousand) was set up to fund the
     retirement benefits which have not been provided for base on                                            lump-sum payment plan.
     the conditions under which termination occurs.

     (b) Retirement benefit obligation
                                                                                                                                                                             Thousands of
                                                                                                                                                          Millions of yen     U.S. dollars
                                                                                                                                                               December 31   December 31,
                                                                                                                                                      2004           2003          2004
      Retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         ¥ (77,829)    ¥ (90,916)    $ (748,355)
      Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      64,284        50,527        618,115
      Unfunded retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  (13,545)      (40,389)      (130,240)
      Unrecognized prior service cost (*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              (7,741)         (639)       (74,433)
      Unrecognized actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,391         1,470         13,375
      Prepaid pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (295)           —          (2,837)
      Reserve for employees’ retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                ¥ (20,190)    ¥ (39,558)    $ (194,135)
      The government-sponsored portion of the WPFP is included in the amounts presented.
      (*) On October 7, 2004, the Company received approval from the Minister of Health, Labor and Welfare with respect to its application for exemption from the
          obligation for benefits related to future employee services under the substitutional portion of the WPFP. In accordance with “Practical Guidelines for
          Accounting for Retirement Benefits,” the Company will account for the separation of the substitutional portion of the benefit obligation from the corporate
          portion of the benefit obligation under its WPFP as of the date when the transfer of the substitutional portion of the benefit obligation and the related pension
          plan assets to the Japanese government is completed. Had the transfer of the substitutional portion of the benefit obligation and the related pension assets to
          the Japanese government been completed as of December 31, 2004, a gain of ¥10,503 million ($100,990 thousand) would have been recognized as of that date.

     (c) Retirement benefit expenses
                                                                                                                                                                             Thousands of
                                                                                                                                                          Millions of yen     U.S. dollars
                                                                                                                                            Nine months
                                                                                                                                 Year ended       ended         Year ended     Year ended
                                                                                                                               December 31, December 31,        March 31,    December 31,
                                                                                                                                       2004        2003               2003          2004
      Service cost (*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      ¥  3,887        ¥   3,074     ¥  3,934        $ 37,375
      Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,741            1,558        1,937           16,740
      Expected return on pension plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      (1,019)            (618)        (679)          (9,798)
      Amortization of unrecognized retirement benefit obligation under the prior plan . . .                                             —                —        13,444               —
      Amortization of actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 345              137          742            3,317
      Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  (524)            (117)        (248)          (5,038)
      Additional retirement benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    7,678               11        1,167           73,827
      Contribution payment to a defined contribution pension plan . . . . . . . . . . . . . . .                                        150               —            —             1,442
      Total retirement benefit expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 ¥ 12,258        ¥   4,045     ¥ 20,297        $ 117,865
      (*) The participants’ contributions to the WPFP have been deducted from the amounts presented.

     (d) The assumptions and policies adopted in accounting for the retirement benefit plans are summarized as follows:
                                                                         Year ended                                     Nine months ended                                     Year ended
                                                                       December 31,                                          December 31,                                     March 31,
                                                                               2004                                                  2003                                           2003
     (1) Discount rates: . . . . . . . . . . . . . . . . . . . .                  2.0% 2.0%                                    2.5%
                                                                                       (at the beginning of the current fiscal (at the beginning of the current fiscal
                                                                                        year, the rate applied was 2.5%)        year, the rate applied was 3.0%)
     (2) Expected rate of return on plan assets: . . .                            2.0% 2.0% (*)                                2.0% (*)
      (*) In respect of the life insurance company’s portion of the retirement benefit plan assets, the rate of return guaranteed at the time of the signing of the contract
          was approximately 5.5% and this rate has been utilized in calculating the overall expected rate of return on the retirement benefit plan assets.



50     Chugai Pharmaceutical Co., Ltd. Annual Report 2004
11. Leases
The Company holds certain machinery and equipment under finance leases which do not transfer the ownership to the lessee.
These leases are not capitalized, but are accounted for as operating leases. If the leases had been capitalized, the acquisition costs,
accumulated depreciation and net book value of the leased assets at December 31, 2004 and 2003 would have been as follows:
                                                                                                                   Millions of yen                         Thousands of U.S. dollars
December 31, 2004                                                                   Machinery         Equipment                  Total      Machinery      Equipment            Total

Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       ¥         70      ¥       2,376      ¥       2,446       $     673      $ 22,846       $ 23,519
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . .                          13              1,018              1,031             125         9,788          9,913
Net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        ¥         57      ¥       1,358      ¥       1,415       $     548      $ 13,058       $ 13,606

                                                                                                                   Millions of yen
December 31, 2003                                                                   Machinery         Equipment                  Total
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       ¥         62      ¥       2,020      ¥       2,082
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . .                          29              1,203              1,233
Net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        ¥         33      ¥         817      ¥         850

Rental expenses, primarily for office space and equipment,                                            year ended December 31, 2004, the nine months ended
amounted to ¥5,748 million ($55,269 thousand), ¥4,514 mil-                                            December 31, 2003, and the year ended March 31, 2003,
lion and ¥5,783 million for the year ended December 31,                                               respectively, which are equal to the depreciation expense of the
2004, the nine months ended December 31, 2003, and the                                                leased assets computed by the straight-line method over the
year ended March 31, 2003, respectively.                                                              respective lease terms. Future minimum lease payments subse-
  Lease payments relating to finance leases accounted for as                                          quent to December 31, 2004 for finance leases accounted for as
operating leases included in the above figures totaled ¥558 mil-                                      operating leases are summarized as follows:
lion ($5,365 thousand), ¥320 million and ¥464 million for the
                                                                         Thousands of
Years ending December 31                         Millions of yen          U.S. dollars
2005 . . . . . . . . . . . . . . . . . . . . .         ¥      568               $  5,462
2006 and thereafter . . . . . . . . . .                       847                  8,144
                                                       ¥    1,415               $ 13,606



12. Securities
Securities consisted of marketable securities and non-marketable securities classified as other securities. The acquisition costs,
carrying value and unrealized gain (loss) on marketable securities at December 31, 2004 and 2003 are summarized by type of
security as follows:

(a) Other securities with determinable market value
                                                                                                                      Millions of yen                      Thousands of U.S. dollars
                                                                                        Acquisition           Carrying       Unrealized     Acquisition      Carrying      Unrealized
December 31, 2004                                                                              cost              value       gain (loss)           cost         value      gain (loss)
(1) Securities whose carrying value
      exceeds their acquisition cost:
         Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          ¥    3,372       ¥     7,404        ¥     4,032     $ 32,423       $ 71,192       $ 38,769
         Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             15,836            15,845                  9      152,269        152,356             87
         Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 989               999                 10        9,510          9,606             96
           Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                20,197            24,248              4,051      194,202        233,154         38,952
(2) Securities whose carrying value
      does not exceed their acquisition cost:
         Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                12                3                    (9)          115             29           (86)
         Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           28,099           28,095                    (4)      270,183        270,144           (39)
           Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              28,111           28,098                   (13)      270,298        270,173          (125)
           Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           ¥ 48,308         ¥ 52,346           ¥     4,038     $ 464,500      $ 503,327      $ 38,827




                                                                                                                                   Chugai Pharmaceutical Co., Ltd. Annual Report 2004    51
                                                                                                                                      Millions of yen
                                                                                                             Acquisition       Carrying   Unrealized
     December 31, 2003                                                                                              cost          value   gain (loss)
     (1) Securities whose carrying value
           exceeds their acquisition cost:
              Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          ¥    4,367   ¥     8,265    ¥     3,898
              Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                              6,799         6,803              4
                 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               11,166        15,068          3,902
     (2) Securities whose carrying value
           does not exceed their acquisition cost:
              Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               114           95               (19)
              Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           32,000       31,991                (9)
                 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                             32,114       32,086               (28)
                 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          ¥ 43,280     ¥ 47,154       ¥     3,874


     (b) Sales of securities classified as other securities
     The sales and aggregate gain and loss on sales of securities classified as other securities for the year ended December 31, 2004, the
     nine months ended December 31, 2003, and the year ended March 31, 2003 are summarized as follows:
                                                                                                                                                    Thousands of
                                                                                                                                    Millions of yen U.S. dollars
                                                                                                                         Nine months
                                                                                                              Year ended       ended     Year ended   Year ended
                                                                                                            December 31, December 31,     March 31, December 31,
                                                                                                                   2004        2003           2003         2004
     Sales proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           ¥   1,251    ¥     5,304    ¥     4,535        $ 12,029
     Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           271          1,313          1,792           2,606
     Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          (161)           (26)        (1,256)         (1,548)


     (c) Securities without determinable market value
                                                                                                                                                                                         Thousands of
                                                                                                                                                                   Millions of yen        U.S. dollars
                                                                                                                                                                        December 31       December 31,
                                                                                                                                                               2004           2003              2004
     Other securities:
      Unlisted securities, except for those traded on the OTC market and other . . . . . . . . . . . . . . . .                                           ¥       556      ¥       583        $   5,346


     (d) The schedule for redemption of other securities with maturity dates is summarized as follows:
                                                                                                                                              Millions of yen                 Thousands of U.S. dollars
                                                                                                                           Due in one     Due after one year       Due in one        Due after one year
     December 31, 2004                                                                                                     year or less   through five years       year or less      through five years
     Other securities with maturity dates:
      Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     ¥ 22,939              ¥      5,002         $ 220,567             $ 48,096
      Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 16,998                        —            163,443                   —
       Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              ¥ 39,937              ¥      5,002         $ 384,010             $ 48,096

                                                                                                                                              Millions of yen
                                                                                                                           Due in one     Due after one year
     December 31, 2003                                                                                                     year or less   through five years
     Other securities with maturity dates:
      Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     ¥ 18,695              ¥      8,100
      Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 12,000                        —
       Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              ¥ 30,695              ¥      8,100




52    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
13. Derivatives                                                                                  high credit ratings.
The Company utilizes derivative financial instruments such as                                      The Company enters into these derivatives transactions in
forward foreign exchange contracts, currency swaps and inter-                                    accordance with the policies and strategies established by
est-rate swaps for the purpose of hedging its market risk, but                                   management. Routine operations involving derivatives trans-
does not enter into such transactions for speculative trading                                    actions are subject to strict oversight by management.
purposes.                                                                                          The contract amounts of the financial derivatives in the fol-
  The Company is exposed to certain market risk arising from                                     lowing tables are nominal amounts or notional principal
the forward foreign exchange contracts and swap agreements                                       amounts and thus do not fully reflect the potential risk associ-
referred to above. The Company is also exposed to the risk                                       ated with these derivatives positions.
of a credit loss in the event of non-performance by its coun-                                      Summarized below are the notional amounts and the esti-
terparties to these derivatives positions; however, the                                          mated fair value of the open derivatives positions at December
Company does not anticipate non-performance by any of the                                        31, 2004 and 2003:
counterparties, all of whom are financial institutions with

(a) Currency-related transactions
                                                                                                                Millions of yen                   Thousands of U.S. dollars
                                                                                             Notional                 Unrealized         Notional                  Unrealized
December 31, 2004                                                                            amounts     Fair value         gain         amounts      Fair value         gain
Currency swaps:
  Euro/yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 1,000 ¥          35    ¥         35       $   9,615    $     337    $     337
    Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       ¥         35                                 $     337

                                                                                                                Millions of yen
                                                                                             Notional                 Unrealized
December 31, 2003                                                                            amounts     Fair value         gain
Forward foreign exchange contracts
 Buy:
   Swiss francs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 14,008 ¥ 14,561 ¥             554
 Sell:
   Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    945      922                 23
Currency swaps:
   Euro/yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1,000       64                64
    Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 ¥             641


(b) Interest-related transactions
                                                                                                                Millions of yen                   Thousands of U.S. dollars
                                                                                             Notional               Unrealized           Notional                Unrealized
December 31, 2004                                                                            amounts     Fair value gain (loss)          amounts      Fair value gain (loss)
Interest-rate swaps:
  Receive/floating and pay/fixed . . . . . . . . . . . . . . . . . . . . . . .               ¥   5,000   ¥    (311) ¥        (311)       $ 48,077     $ (2,990) $ (2,990)
  Receive/fixed and pay/floating . . . . . . . . . . . . . . . . . . . . . . .                   5,000         318            318          48,077        3,057     3,057
   Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          ¥           7                               $     67

                                                                                                                Millions of yen
                                                                                             Notional               Unrealized
December 31, 2003                                                                            amounts     Fair value gain (loss)
Interest-rate swaps:
  Receive/floating and pay/fixed . . . . . . . . . . . . . . . . . . . . . . .               ¥   5,000   ¥    (404) ¥         (404)
  Receive/fixed and pay/floating . . . . . . . . . . . . . . . . . . . . . . .                   5,000         415             415
   Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          ¥           11




                                                                                                                          Chugai Pharmaceutical Co., Ltd. Annual Report 2004    53
     14. Segment Information                                                            Geographical segments
     The Company and its consolidated subsidiaries are engaged                          As net sales and total assets of the overseas consolidated sub-
     principally in the manufacture and sales of pharmaceutical                         sidiaries constituted less than 10% of the consolidated totals
     products in Japan and overseas.                                                    for the year ended December 31, 2004, the nine months
     Business segments                                                                  ended December 31, 2003, and the year ended March 31,
     As net sales, operating income and total assets of the non-                        2003, the disclosure of geographical segment information has
     pharmaceutical segments constituted less than 10% of the                           been omitted.
     consolidated totals for the year ended December 31, 2004,                          Overseas sales
     the nine months ended December 31, 2003, and the year                              As overseas sales constituted less than 10% of the consolidated
     ended March 31, 2003, the disclosure of business segment                           sales for the year ended December 31, 2004, the nine months
     information has been omitted.                                                      ended December 31, 2003, and the year ended March 31, 2003,
                                                                                        the disclosure of overseas sales information has been omitted.


     15. Contingent Liabilities
     At December 31, 2004 and 2003, the Company was contingently liable as guarantor of loan obligations of ¥978 million ($9,404
     thousand) and ¥1,276 million in the aggregate, respectively, for its employees.


     16. Supplementary Cash Flow Information
     (a) Summary of assets and liabilities of the Company and a subsidiary excluded from consolidation due to business transfers
     The following is a summary of the assets of Chugai Pharmaceutical Co., Ltd. and Eiko Kasei Co., Ltd. transferred to Lion
     Corporation and Lion Packaging Co., Ltd.:
                                                                      Thousands of
     December 31, 2004                              Millions of yen    U.S. dollars
     Current assets . . . . . . . . . . . . . .         ¥    2,044      $ 19,654
     Noncurrent assets . . . . . . . . . . .                   257         2,471
     Total assets . . . . . . . . . . . . . . . .            2,301        22,125


     (b) Significant non-cash transactions
     Convertible bonds and warrants
                                                                                                                                               Thousands of
                                                                                                                             Millions of yen    U.S. dollars
                                                                                                                  Nine months
                                                                                                       Year ended       ended Year ended         Year ended
                                                                                                     December 31, December 31,    March 31,    December 31,
                                                                                                             2004        2003          2003            2004
     Decrease in convertible bonds resulting from conversion . . . . . . . . . . . . . . . . . . . .     ¥   1,577   ¥      43    ¥ 51,261        $ 15,163
     Decrease in bonds with warrants resulting from exercise . . . . . . . . . . . . . . . . . . . . .   ¥   3,006   ¥      —     ¥ 37,571        $ 28,904




54    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
17. Related Party Transactions
The Company is substantively a 50.6%-owned consolidated subsidiary of Roche Pharmholding B.V. (the parent company). The
parent company is indirectly owned by Roche Holding Ltd. (Roche Holding). The Company principally purchases raw materials
from F. Hoffmann-La Roche Ltd. (Roche), a consolidated subsidiary of Roche Holding.
  Significant balances at December 31, 2004 and 2003 and transactions for the year ended December 31, 2004, the nine months
ended December 31, 2003 and the year ended March 31, 2003 with related parties are summarized as follows:
                                                                                                                                                                         Thousands of
                                                                                                                                                    Millions of yen       U.S. dollars
                                                                                                                                                      December 31        December 31,
                                                                                                                                                2004          2003              2004
Balances:
 The parent company:
   Bonds with warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        ¥   3,306     ¥    6,312        $ 31,788
   Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           7             14              67
 Roche:
   Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   ¥ 11,379      ¥ 10,827          $ 109,413

                                                                                                                                                                        Thousands of
                                                                                                                                             Millions of yen             U.S. dollars
                                                                                                                                  Nine months
                                                                                                                       Year ended       ended     Year ended               Year ended
                                                                                                                     December 31, December 31,     March 31,             December 31,
                                                                                                                            2004        2003           2003                     2004
Transactions:
 The parent company:
   Interest expense on bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             ¥         49       ¥     43     ¥       28         $     471
 Roche:
   Purchases of raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            ¥ 43,518           ¥ 35,523     ¥ 21,623           $ 418,442




                                                                                                                                    Chugai Pharmaceutical Co., Ltd. Annual Report 2004   55
     18. Amounts Per Share
                                                                                                                                                                         Yen      U.S. dollars
                                                                                                                                            Nine months
                                                                                                                                 Year ended       ended          Year ended        Year ended
                                                                                                                               December 31, December 31,         March 31,       December 31,
                                                                                                                                      2004        2003                 2003              2004
       Net income (loss):
        Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥        62.27      ¥    51.73       ¥ (51.75)    $      0.60
        Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            61.34           50.94             —             0.59


                                                                                                                                                                         Yen      U.S. dollars
                                                                                                                                                              December 31        December 31,
                                                                                                                                                         2004       2003               2004
       Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   ¥   583.61   ¥     542.96     $      5.61

     Basic net income per share is computed based on the net income                                           9,081,829 shares and 9,256,440 shares of common stock have
     available for distribution to shareholders of common stock and                                           been included in the computation of the weighted-average num-
     the weighted-average number of shares of common stock out-                                               ber of shares for the year ended December 31, 2004, and the nine
     standing during each year, and diluted net income per share is                                           months ended December 31, 2003, respectively.
     computed based on the net income available for distribution to                                             Diluted net loss per share for the year ended March 31, 2003 has
     the shareholders and the weighted-average number of shares of                                            not been presented because conversion of the convertible bonds
     common stock outstanding each year after giving effect to the                                            would have had an anti-dilutive effect on the computation of net
     dilutive potential of common shares of common stock to be                                                loss per share. Net assets per share are based on the number of
     issued upon the conversion of convertible bonds, and the exercise                                        shares of common stock outstanding at each balance sheet date.
     of warrants and stock options. The dilutive potential impact of


     19. Subsequent Event                                                                                              technical know-how as well as pursuing further cost
     (a) The following appropriations of retained earnings, which                                                      efficiency. Given these considerations, the Company
         have not been reflected in the accompanying consolidated                                                      has developed a restructuring plan to integrate the five
         financial statements for the year ended December 31,                                                          existing domestic plants into two, one in Utsunomiya
         2004, were approved at a general meeting of the share-                                                        (Utsunomiya-shi, Tochigi) and the other in Fujieda
         holders of the Company held on March 23, 2005:                                                                (Fujieda-shi, Shizuoka), within the next five to six
                                                                                 Thousands of                          years. As part of this restructuring, the Company
                                                      Millions of yen             U.S. dollars                         decided to divest its manufacturing business at the
     Cash dividends . . . . . . . . . . . . .               ¥     4,946               $ 47,558
                                                                                                                       Kagamiishi Plant to Nipro, in order to enhance its
     Bonuses to directors . . . . . . . . .                          94                    904                         manufacturing businesses, primarily the production
                                                                                                                       and packaging of solid-form drugs, and to subcontract
     (b) On February 25, 2005, the Board of Directors of the                                                           these functions to Nipro.
         Company approved a resolution for the divestiture of both                                                 (2) Properties to be divested
         the Kagamiishi Plant and Tohoku Chugai Pharmaceutical                                                         Land, building, facilities, and other assets at the
         Co., Ltd., a wholly-owned subsidiary which has handled the                                                    Kagamiishi Plant
         manufacturing and packaging of pharmaceutical products at                                                 (3) Book value of properties to be divested as of December
         the Kagamiishi Plant, to Nipro Corporation (“Nipro”).                                                         31, 2004
         The Company entered into a divestiture and acquisition                                                        Current assets        ¥ 527 million
         agreement with Nipro effective February 28, 2005.                                                             Noncurrent assets ¥ 4,803 million
                                                                                                                   (4) Expected date of divestiture
         An outline is as follows:                                                                                     June 30, 2005
                                                                                                                   (5) Amount of divestiture
         (1) Objectives                                                                                                Both companies will independently determine the
             The Company is committed to streamlining its pro-                                                         amount involved based on the appropriate book value
             duction operations and focusing the allocation of its                                                     no later than the expected date of the divestiture.
             resources on maintaining and reinforcing in-house




56    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Independent Auditors’ Report




                               Chugai Pharmaceutical Co., Ltd. Annual Report 2004   57
     Network (As of April 1, 2005)

     Head office                                           Domestic subsidiaries                       Overseas subsidiaries and affiliate
     1-9, Kyobashi 2-chome
     Chuo-ku, Tokyo 104-8301, Japan                        Chugai Research Institute                   Chugai Pharma Europe Ltd.
     Telephone: +81-(0) 3-3281-6611                        for Medical Science, Inc.                   Mulliner House, Flanders Road
     Facsimile: +81-(0) 3-3281-2828                        Chugai Business Support Co., Ltd.           Turnham Green, London W4 1NN, U.K.
     URL: http://www.chugai-pharm.co.jp/english            Medical Culture Inc.                        Telephone: +44-(0) 20-8987-5600
                                                           Chugai Distribution Co., Ltd.
     Branches                                              Chugai Techno Business Co., Ltd.            Chugai Pharma Marketing Ltd.
     Sapporo, Sendai, Tokyo 1, Tokyo 2,                    Tohoku Chugai Pharmaceutical Co., Ltd.      Mulliner House, Flanders Road
     Yokohama, Kanshinetsu, Nagoya, Osaka,                                                             Turnham Green, London W4 1NN, U.K.
     Kyoto, Kobe, Takamatsu, Hiroshima,                    Overseas representative offices             Telephone: +44-(0) 20-8987-5656
     Fukuoka
                                                           Beijing Representative Office               Chugai Pharma U.K. Ltd.
     Plants                                                1610 Beijing Fortune Bldg.                  Mulliner House, Flanders Road
     Ukima (Tokyo), Kagamiishi (Fukushima),                No. 5 Dong San Huan Bei Lu                  Turnham Green, London W4 1NN, U.K.
     Fujieda (Shizuoka), Utsunomiya (Tochigi),             Chao Yang District                          Telephone: +44-(0) 20-8987-5680
     Kamakura (Kanagawa)                                   Beijing 100004, China
                                                           Telephone: +86-(0) 10-6590-8061             Chugai Pharma Marketing Ltd.
     Research laboratories                                                                             Germany Branch
     Fuji Gotemba (Shizuoka),                              Shanghai Representative Office              Lyoner Strasse 15, Atricom 7 OG
     Kamakura (Kanagawa), Ukima (Tokyo)                    Unit 1209B, Lansheng Building               60528 Frankfurt am Main, Germany
                                                           NO.2-8, Huaihai Road Centre                 Telephone: +49-(0) 69-663000-0
                                                           Shanghai 200021 China
                                                           Telephone: +86-21-6319-1881                 Chugai Pharma France S.A.S.
                                                                                                       Tour Franklin, La Defence 8
                                                           Guangzhou Representative Office             92042 Paris La Defence cedex, France
                                                           Unit 2508, Yian Plaza                       Telephone: +33-(0) 1-56-37-05-20
                                                           No. 33 Jian She 6th Road
                                                           Guangzhou 510060, China                     Chugai - Aventis S.N.C.
                                                           Telephone: +86-(0) 20-8363-4399             20 Avenue Raymond Aron
                                                                                                       92165 Antony Cedex, France
                                                           Chugai Clinical Research Center Co., Ltd.   Telephone: +33-(0) 1-55-71-60-89
                                                           1-9, Kyobashi 2-chome
                                                           Chuo-ku, Tokyo 104-8301, Japan
                                                           Telephone: +81-(0) 3-3273-1173




58    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Chugai U.S.A., Inc.                           Chugai Pharma U.S.A., LLC                              C&C Research Laboratories*
Crossroads Business Center,                   Crossroads Business Center,                            146-141, Annyung-ri, Taean-up
1 Crossroads Drive, Building A/2nd floor,     1 Crossroads Drive, Building A/2nd floor,              Hwasung-si, Kyunggi-do
Bedminster, NJ 07921 USA                      Bedminster, NJ 07921 USA                               445-970 Republic of Korea
Telephone: +1-908-947-2700                    Telephone: +1-908-947-2700                             Telephone: +82-(0) 31-2306-542


Chugai U.S.A., Inc.                           Chugai Pharma Taiwan Ltd.                              * Affiliate
New York Office                               4F, No. 180, Sec. 2, Min-Sheng E. Road
444 Madison Avenue                            Taipei, Republic of China
New York, NY 10022, U.S.A.                    Telephone: +886-(0) 2-2506-6699
Telephone: +1-212-486-7780




Chugai’s global network

          Chugai Pharma Europe Ltd.
          (London, U.K.)

          Chugai Pharma Marketing Ltd.                     Beijing Representative Office                                 Chugai U.S.A., Inc.
          (London, U.K.)                                   (Beijing, China)                                              (New Jersey, U.S.A.)

          Chugai Pharma U.K. Ltd.                          C&C Research Laboratories                                     Chugai Pharma U.S.A., LLC
          (London, U.K.)                                   (Kyunggi, Republic of Korea)                                  (New Jersey, U.S.A.)




                                                                 Chugai Pharmaceutical Co., Ltd.                                   Chugai U.S.A., Inc.
                                                                                                                                   New York Office
                                                                                                                                   (New York, U.S.A.)




                                                                                            Overseas Subsidiaries
                                                                                            Branches/Office
                                                                                            Overseas Representative Offices
                                                                                            R&D Partner




               Chugai Pharma Marketing Ltd.             Chugai Pharma Taiwan Ltd.
               Germany Branch                           (Taipei, Republic of China)
               (Frankfurt, Germany)
                                                        Shanghai Representative Office
               Chugai Pharma France S.A.S.              (Shanghai, China)
               (Paris, France)
                                                        Guangzhou Representative Office
               Chugai - Aventis S.N.C.                  (Guangzhou, China)
               (Antony, France)
                                                        PharmaLogicals Research Pte. Ltd.
                                                        (Singapore)




                                                                                                   Chugai Pharmaceutical Co., Ltd. Annual Report 2004 59
     Corporate Data

     Chugai Pharmaceutical Co., Ltd.                                                Major Shareholders (Top10)

     Year of Foundation:                            1925                            Name                                                 Number of     Percentage of
                                                                                                                                        Shares Held Ownership Voting
     Stated Capital:                                ¥ 70,531,989,941                                                                    (Thousands)             (%)
     Number of Shares Issued of                                                     Roche Pharmholding B.V.                                      278,047          50.62
      Common Stock:                                 555,004,964
                                                                                    The Chase Manhattan Bank, N.A., London                           27,165        4.94
     Number of Shareholders:                        23,278                          The Master Trust Bank of Japan, Ltd. (trust account)             23,677        4.31
     Stock Listing:                                 Tokyo                           State Street Bank and Trust Company                              15,292        2.78
     Fiscal Year-End:                               December 31                     Japan Trustee Services Bank, Ltd. (trust account)                13,954        2.54
     General Meeting of Shareholders: March                                         State Street Bank and Trust Company 505103                        9,722        1.77
                                                                                    The Chase Manhattan Bank, N.A., London
     Stock Transfer Agent:                          UFJ Trust Bank Limited           Secs Lending Omnibus Account                                     9,174        1.67
     Newspaper for Public Notices:                  Nihon Keizai Shimbun            The Nichido Fire and Marine Insurance Co., Ltd.                   7,574        1.37
                                                                                    Investors Bank and Trust Company (west)-Treaty                    5,238        0.95

                                                      (As of December 31, 2004)     Nomura Securities Co., Ltd.                                       5,210        0.94
                                                                                    Note: 5,400,239 shares of treasury stock held by the Company are not included in the
                                                                                          above breakdown of major shareholders.




                                                                                    Stock Price Information
       For further information, please contact:
       Investor Relations                                                                                                                                Stock Price
       Tel:         +81-(0)3-3273-0554                                                                                                                High          Low
       Fax:         +81-(0)3-3281-6607                                              From January 1, 2004 to December 31, 2004
       E-mail:      ir@chugai-pharm.co.jp                                             First Quarter                                              ¥ 1,779       ¥ 1,456
       URL:         http://www.chugai-pharm.co.jp/english                             Second Quarter                                               1,792         1,554
                                                                                      Third Quarter                                                1,751         1,520
                                                                                      Fourth Quarter                                               1,710         1,581

     Share Performance of Chugai

     120

                 Chugai
                 Nikkei 500 by industry (Medical)
                 TOPIX


     110




     100




      90
           2004.1       2004.2         2004.3        2004.4   2004.5    2004.6    2004.7      2004.8         2004.9       2004.10          2004.11      2004.12

      Share price on January 5, 2004 (¥1,562) = 100




60    Chugai Pharmaceutical Co., Ltd. Annual Report 2004
Chugai Pharmaceutical Co., Ltd. Annual Report 2004 61
1-9, Kyobashi 2-chome, Chuo-ku
Tokyo 104-8301, Japan

				
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