Kyowa Hakko Profits Decline on Higher R&D Spend but Recurring Income and Net Income Above Forecast.

TOKYO -- Kyowa Hakko Kogyo Ltd. (Kyowa Hakko) (TOKYO:4151) today announced its consolidated financial results for the year ended March 31, 2006 (Fiscal 2005). Consolidated sales and operating income declined by 1.5% and 23.8% respectively compared to fiscal 2004 but recurring income and net income for fiscal 2005 exceeded the upwardly revised forecasts announced in July 2005.

Operating income was slightly below the July forecast but exceeded the target set under Kyowa's three-year medium-term business plan in May 2005. Increased R&D expenses mainly related to the anti-Parkinson's disease agent KW-6002 was the main reason for the decline in operating income. R&D spending in fiscal 2005 was up 14.3% on fiscal 2004 to 32.8 billion Yen, which represented 9.3% of net sales.

For the fiscal year ending March 31, 2007 (fiscal 2006) Kyowa Hakko forecasts a 3.8% decline in net sales, a 1.8% increase in operating income and declines in recurring income and net income of 11.4% and 20.1% respectively. The sales forecast is in line with the business plan target and forecast operating income is higher than the plan target.

Commenting on the results, Dr. Yuzuru Matsuda, President of Kyowa Hakko said, "Fiscal 2005 was the first year of the business plan that we announced in May last year. In a challenging operating environment we exceeded our business plan profit target for fiscal 2005, and we expect to do so again in fiscal 2006. We will continue to invest to achieve sustained growth, by taking further steps to advance our research and development, invest in production facilities, promote sales growth, and implement cost reductions as we build the foundations for sustained growth in shareholder value."

I. Fiscal 2005 Results

Results for the fiscal year ended March 31, 2006

                                         (Billions of Yen)
                            ------------------------------------------
                               FY ended        FY ended        YOY
                            March 31, 2006  March 31, 2005  Change (%)
----------------------------------------------------------------------
Net sales                           353.4          358.9         -1.5%
Operating income                     25.5           33.5        -23.8%
Recurring income                     28.2           32.3        -12.8%
Net income                           16.2           17.9         -9.2%
Net income per share (Yen)          38.68          41.67         -7.2%
----------------------------------------------------------------------

Segmental results for the fiscal year ended March 31, 2006

 Sales
                                         (Billions of Yen)
                            ------------------------------------------
                               FY ended        FY ended        YOY
                            March 31, 2006  March 31, 2005  Change (%)
----------------------------------------------------------------------
Pharmaceuticals                     149.5          156.4         -4.4%
Bio-Chemicals                        57.4           57.7         -0.6%
Chemicals                            85.8           77.9        +10.1%
Food                                 42.4           44.4         -4.6%
Other                                55.3           57.7         -4.2%
----------------------------------------------------------------------


 Operating Income                        (Billions of Yen)
                            ------------------------------------------
                               FY ended        FY ended        YOY
                            March 31, 2006  March 31, 2005  Change (%)
----------------------------------------------------------------------
Pharmaceuticals                      14.2           18.1        -21.4%
Bio-Chemicals                         4.0            6.8        -40.7%
Chemicals                             4.5            5.3        -15.7%
Food                                  1.6            1.6         -3.6%
Other                                 1.1            1.6        -29.3%
----------------------------------------------------------------------

Fiscal 2005 Segmental Review

In the Pharmaceuticals business, sales declined 4.4%, to 149.5 billion Yen, while operating income decreased by 21.4%, to 14.2 billion Yen. Core prescription pharmaceuticals performed well but the large decline in the antimycological agent Itrizole, which is sold through a distribution agreement, meant that overall sales declined from the previous fiscal year.

Allelock, an antiallergic agent (olopatadine hydrochloride), Durotep Patch, an analgesic for persistent cancer pain, and Navelbine, an anticancer agent, each recorded growth in sales. Sales of Coniel, a treatment for hypertension and angina pectoris, and Depakene, an antiepileptic agent, were maintained at similar levels to those recorded in the previous fiscal year.

In the licensing-out of technologies and export of pharmaceutical products, the antiallergic agent Olopatadine performed well and patents were established in the U.S. for our POTELLIGENT(TM) technology that enhances monoclonal antibody activity. As a result of active promotion by US subsidiary BioWa, the number of licensing-out contracts is increasing steadily.

In new drug development, Phase III clinical trials in North America and Europe of KW-6002 as an anti-Parkinson's treatment have been completed, and it is expected to receive U.S. FDA approval in the latter half of 2006.

In the Bio-Chemicals business, sales decreased 0.6%, to 57.4 billion Yen, while operating income decreased 40.7%, to 4.0 billion Yen, reflecting increased price competition and higher raw material and fuel prices. Sales of amino acids, nucleic acids, and related compounds mainly used in pharmaceuticals and industrial materials were affected by intensified price competition in overseas markets but this was largely offset by increased domestic sales of raw materials for generic pharmaceutical products. In healthcare products, despite weak domestic demand for beverage-use amino acids, in overseas markets amino acids used in health foods showed growth, and expanded domestic mail-order sales led to increased sales compared to the previous fiscal year.

In the Chemicals business, sales increased 10.1%, to 85.8 billion Yen, while operating income decreased 15.7%, to 4.5 billion Yen. In Japan, rising crude oil prices, and the resulting increased fuel and raw material prices, led to rises in prices of core products and in consequence sales were significantly greater than in the previous fiscal year. However, as a result of a decrease in the volume of plasticizer raw materials and inventory adjustments at purchasers of raw materials for refrigerant oils, there was a decline in shipment volumes, causing pressure on profits.

In the Food business, sales decreased 4.6%, to 42.4 billion Yen, while operating income decreased 3.6%, to 1.6 billion Yen. In seasonings, sales of natural seasonings such as Kokumi seasoning, which has a full-bodied taste, and extract-type seasonings for take-out food were higher than in fiscal 2004, but sales decreased slightly overall. Umami seasonings increased their market share, and both sales volumes and net sales were up on the previous fiscal year. In bakery products and ingredients, sales improved from fiscal 2004 due to increased sales of sweet bread premixes, bread flavor enhancers and milk preparations.

In the Other business segment, sales decreased 4.2%, to 55.3 billion Yen, while operating income decreased 29.3% to 1.1 billion Yen.

II. Forecasts for the fiscal year ending March 31, 2007(a)

                                                     (Billions of Yen)
                 -----------------------------------------------------
                                                       Reference:
                    Fiscal 2006     Compared to    Fiscal 2006 target
                      Forecast      Fiscal 2005    announced May 2005
                 -----------------------------------------------------
                 Fiscal Year ending
                   March 31, 2007     Change (%)
----------------------------------------------------------------------
Net sales               340.0          -3.8%                340.0
Operating income         26.0          +1.8%                 24.0
Recurring income         25.0         -11.4%                    -
Net income               13.0         -20.1%                    -
----------------------------------------------------------------------

Forecast net income per share for the year ending March 31, 2007:
30.75 Yen.

These forecasts assume average exchange rates for fiscal 2006 of
115 Yen/USD and 140 Yen/euro.

While the Japanese economy is generally expected to continue its gentle recovery, further rises in crude oil prices and increases in long-term interest rates are sources of concern and the outlook for the economies of the United States and China is also unclear.

Amidst such an environment, Kyowa Hakko is looking towards future growth by carrying out active investments while implementing comprehensive cost-cutting measures. We will also increase investment in marketing to expand sales as we strive to build the foundations for future profits.

In fiscal 2006, we expect net sales to decline to 340.0 billion Yen, however we expect to maintain operating income of 26.0 billion Yen, similar to the level in fiscal 2005.

In the Pharmaceuticals business, net sales are forecast to decline significantly due to factors such as the termination of the distribution agreement for Itrizole with Janssen Pharmaceutical K.K., and the reduction in National Health reimbursement prices implemented in April 2006. Segmental operating income is also forecast to decline compared to fiscal 2005, despite a decrease in R&D expenses due to the conclusion of overseas Phase III clinical trials of KW-6002.

In the Bio-Chemicals business, both net sales and operating income are forecast to increase in fiscal 2006 as a result of the development of full-scale strategies to broaden sales of amino acids, Coenzyme Q10, and healthcare products. We also expect continued growth in sales volumes of industrial-use alcohol following deregulation in April 2006.

In the Chemicals business, whilst net sales are expected to grow due to increases in product prices, operating income is forecast to remain at a similar level to that recorded in fiscal 2005 due to rises in the price of fuel and raw materials.

In the Foods business, net sales and operating income are forecast to increase compared to fiscal 2005 as sales volumes of natural seasonings for take-out food and food service industries are expected to increase, driven by the implementation of solutions-based marketing.

(a) The above forecasts are based on information available and assumptions made at the time of release of this document about a number of uncertain factors that can affect results in the future. It is possible that actual results are materially different for a wide variety of reasons.

For further information please access: http://ir.kyowa.co.jp/english/index.cfm.

This document is an English translation of parts of the Japanese-language original. All financial information has been prepared in accordance with generally accepted accounting principles in Japan. It contains forward-looking statements based on a number of assumptions and beliefs made by management in light of information currently available. Actual financial results may differ materially depending on a number of factors, including fluctuations in exchange rates, changing economic conditions, legislative and regulatory developments, delays in new product launches, and pricing and product initiatives of competitors.