6-K

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

450, 5th Street

Washington, D.C. 20549

REPORT OF FOREIGN PRIVATE ISSUER

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the month of May, 2006

Daiichi Sankyo Company, Limited

(Translation of registrant’s name into English)

5-1, Nihonbashi 3-chome

Chuo-ku, Tokyo 103-8426

Japan

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F  þ            Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes  ¨            No  þ

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes  ¨            No  þ

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes  ¨            No  þ

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DAIICHI SANKYO COMPANY, LIMITED
DATE: May 25, 2006	By:	/s/ Takashi Shoda
	Name:	Takashi Shoda
	Title:	President and Representative Director

EXHIBIT INDEX

Exhibit Number		Description of Exhibit
99.1	—	Financial Results for Fiscal 2005 (Year Ended March 31, 2006) for Daiichi Sankyo Company, Limited
99.2	—	Financial Results for Fiscal 2005 (Year Ended March 31, 2006) for Sankyo Company, Limited
99.3	—	Financial Results for Fiscal 2005 (Year Ended March 31, 2006) for Daiichi Pharmaceutical Co., Ltd.

EX-99.1

Exhibit 99.1

FASF                            

May 12, 2006

Consolidated Financial Results

for Fiscal 2005

(Year Ended March 31, 2006)

Listed company name: DAIICHI SANKYO COMPANY, LIMITED

Stock code number: 4568

Listed exchanges: Tokyo, Osaka, and Nagoya

Head office: Tokyo, Japan

URL: http://www.daiichisankyo.co.jp

Representative: Mr. Takashi Shoda, President and Representative Director

Contact: Mr. Toshio Takahashi, Corporate Officer, General Manager of Corporate Communications Department

Telephone: +81-3-6225-1126

Meeting of the Board of Directors: May 12, 2006

U.S. accounting standards: Not applicable

1. Consolidated Financial Results for Fiscal 2005

(1) Consolidated Financial Results

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Net sales		Operating income		Ordinary income
	Millions of yen	Percent change	Millions of yen	Percent change	Millions of yen	Percent change
Fiscal 2005	925,918	—	154,728	—	159,714	—
Fiscal 2004	—	—	—	—	—	—

	Net income		Basic net income per share	Diluted net income per share	Return on equity	Ordinary income as a percentage of total assets	Ordinary income as a percentage of net sales
	Millions of yen	Percent change	Yen	Yen	%	%	%
Fiscal 2005	87,692	—	119.49	119.47	7.3	10.3	17.2
Fiscal 2004	—	—	—	—	—	—	—

Notes:

1. Equity in earnings (losses) of subsidiaries and affiliates accounted for by the equity method:

Fiscal 2005:	(¥349million)
Fiscal 2004:	None

2. Weighted average number of common shares issued and outstanding during the fiscal year (consolidated):

Fiscal 2005:	730,938,068 shares
Fiscal 2004:	—

3.      Changes in accounting policies: No

4. Percentages for net sales, operating income, ordinary income and net income represent a change from the corresponding results in the previous fiscal year.

(2) Consolidated Financial Position

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Total assets	Shareholders’ equity	Shareholders’ equity ratio	Shareholders’ equity per share
	Millions of yen	Millions of yen	%	Yen
Fiscal 2005	1,596,126	1,237,529	77.5	1,696.97
Fiscal 2004	—	—	—	—

Note: Total number of common shares issued and outstanding at the end of the fiscal year (consolidated):

Fiscal 2005:	729,052,296 shares
Fiscal 2004:	—

(3) Consolidated Cash Flows

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Net cash flows from operating activities	Net cash flows from investing activities		Net cash flows from financing activities		Cash and cash equivalents at the end of year
	Millions of yen	Millions of yen		Millions of yen		Millions of yen
Fiscal 2005	132,759	(39,258	)	(50,106	)	400,967
Fiscal 2004	—	—		—		—

(4) Scope of Consolidation and Application of Equity Method:

Number of consolidated subsidiaries:	57
Number of non-consolidated subsidiaries accounted for by the equity method:	0
Number of affiliates accounted for by the equity method:	5

(5) Changes in Scope of Consolidation and Application of Equity Method:

Consolidated subsidiaries:
(Increase)	2
(Decrease)	15
Companies accounted for by the equity method:
(Increase)	3
(Decrease)	0

2. Forecast of Consolidated Results for Fiscal Year 2006 (April 1, 2006—March 31, 2007)

	Net sales	Ordinary income	Net income
	Millions of yen	Millions of yen	Millions of yen
Interim 6-month period	470,000	60,000	38,000
Full fiscal year	865,000	115,000	47,000

Reference: Forecasted annual net income per share (basic): ¥64.47

* Note: The forecast figures shown above are based on information that was available at the time of preparation and may contain certain uncertainties. Actual performance and other factors may differ from these forecasts due to changes in circumstances and other developments. For more information concerning these forecasts can be found in the attached Supplementary Information on page 15 and 16.

1. State of the Group

DAIICHI SANKYO COMPANY, LIMITED (“DAIICHI SANKYO” or the “Company”) is a joint holding company established on September 28, 2005 through the joint stock transfer implemented by Sankyo Company, Limited (“Sankyo”) and Daiichi Pharmaceutical Co., Ltd. (“Daiichi”)

The DAIICHI SANKYO Group (the “Group”) consists of the Company, its two wholly owned direct subsidiaries (Sankyo and Daiichi) and their 71 subsidiaries and 8 affiliates, for a total of 82 companies. The Group’s principal business is the manufacture and sale of pharmaceuticals, its main product line, as well as food, agrochemicals and chemicals. The following chart illustrates the organization of the DAIICHI SANKYO Group:

Consolidated Subsidiaries

Name	Location	Capital (Million of yen)	Principal business operations	% of voting rights held (indirect holdings)	Relationship
Consolidated subsidiaries
Sankyo Co., Ltd.	Chuo-ku, Tokyo	68,793	Pharmaceuticals	100.0	Management contract Concurrent directors
Daiichi Pharmaceutical Co., Ltd.	Chuo-ku, Tokyo	45,246	Pharmaceuticals	100.0	Management contract Concurrent directors
Daiichi Asubio Pharma Co., Ltd.	Minato-ku, Tokyo	11,000	Pharmaceuticals	100.0 [100.0]	Concurrent directors
Daiichi Fine Chemical Co., Ltd.	Takaoka-shi, Toyama	2,276	Pharmaceuticals Other	100.0 [100.0]
Daiichi Radioisotope Laboratories, Ltd.	Chuo-ku, Tokyo	1,400	Pharmaceuticals	100.0 [100.0]
Daiichi Pure Chemicals Co., Ltd.	Chuo-ku, Tokyo	1,275	Pharmaceuticals Other	100.0 [100.0]	Concurrent directors
Saitama Daiichi Pharmaceutical Co., Ltd.	Kasukabe-shi, Saitama	1,005	Pharmaceuticals	100.0 [100.0]
Sankyo Organic Chemicals Co., Ltd.	Takatsu-ku, Kawasaki-shi, Kanagawa	300	Pharmaceuticals Other	93.4 [93.4]	Concurrent directors
Daiichi Pharmatech Co., Ltd.	Chuo-ku, Tokyo	100	Pharmaceuticals	100.0 [100.0]
Sankyo Yell Yakuhin Co., Ltd.	Chiyoda-ku, Tokyo	96	Pharmaceuticals	100.0 [100.0]
Sankyo Chemical Industries, Ltd.	Chuo-ku, Tokyo	65	Pharmaceuticals	100.0 [100.0]
Daiichi Butsuryu Co., Ltd.	Sumida-ku, Tokyo	50	Pharmaceuticals	100.0 [100.0]
Daiichi Medical Co., Ltd.	Chuo-ku, Tokyo	50	Pharmaceuticals	100.0 [100.0]
Institute of Science and Technology, Inc.	Shinagawa-ku, Tokyo	20	Pharmaceuticals	100.0 [100.0]	Concurrent directors
Kanto Daiichi Service Co., Ltd.	Edogawa-ku, Tokyo	10	Pharmaceuticals	100.0 [100.0]
Daiichi Sankyo Healthcare Co., Ltd.	Chuo-ku, Tokyo	10	Pharmaceuticals	100.0 [100.0]
Wakodo Co., Ltd.	Chiyoda-ku, Tokyo	2,918	Other	61.2 [61.2]	Concurrent directors
Wako Food Industry Co., Ltd.	Nagano-shi, Nagano	25	Other	100.0 [100.0]
Wako Logistics Co., Ltd.	Chofu-shi, Tokyo	21	Other	100.0 [100.0]
Nihon Shoni Iji Shuppansha Co., Ltd.	Shinjuku-ku, Tokyo	20	Other	100.0 [100.0]
Fuji Flour Milling Co., Ltd.	Shimizu-ku, Shizuoka-shi, Shizuoka	500	Other	66.4 [66.4]
Sankyo Agro Co., Ltd.	Bunkyo-ku, Tokyo	350	Other	100.0 [100.0]
Utsunomiya Chemical Industry Co., Ltd.	Utsunomiya-shi, Tochigi	20	Other	100.0 [100.0]	Concurrent directors
Hokkai Sankyo Co., Ltd.	Kitahiroshima-shi, Hokkaido	331	Other	80.0 [80.0]	Concurrent directors
Nippon Nyukazai Co., Ltd.	Chuo-ku, Tokyo	300	Other	100.0 [100.0]	Concurrent directors
Sankyo Lifetech Co., Ltd.	Bunkyo-ku, Tokyo	300	Other	100.0 [100.0]
Daiichi Jisho Co., Ltd.	Chuo-ku, Tokyo	100	Other	100.0 [100.0]
Meguro Chemical Industry Co., Ltd.	Meguro-ku, Tokyo	40	Other	100.0 [100.0]	Concurrent directors
Daiichi Sankyo Inc.	New Jersey, U.S.	24.9 million U.S. dollars	Pharmaceuticals	100.0 [100.0]
Luitpold Pharmaceuticals, Inc.	New York, U.S.	200 thousand U.S. dollars	Pharmaceuticals	100.0 [100.0]
Daiichi Asubio Pharmaceuticals, Inc.	New Jersey, U.S.	1 U.S. dollar	Pharmaceuticals	100.0 [100.0]
Daiichi Asubio Holdings, Inc.	Delaware, U.S.	6,272 thousand U.S. dollars	Pharmaceuticals	100.0 [100.0]
Daiichi Asubio Medical Research Laboratories LLC	Massachusetts, U.S.	3 million U.S. dollars	Pharmaceuticals	100.0 [100.0]
Sankyo Pharma GmbH	Munich, Germany	16 million euros	Pharmaceuticals	100.0 [100.0]
Sankyo Pharma UK Ltd.	Amersham, UK	19.5 million pounds	Pharmaceuticals	100.0 [100.0]
Sankyo Pharma Espana S.A.	Madrid, Spain	120 thousand euros	Pharmaceuticals	100.0 [100.0]
Sankyo Pharma Italia S.p.A.	Rome, Italy	120 thousand euros	Pharmaceuticals	100.0 [100.0]
Sankyo Pharma Portugal Lda.	Porto Salvo, Portugal	349 thousand euros	Pharmaceuticals	100.0 [100.0]
Sankyo Pharmazeutika Austria GmbH	Vienna, Austria	18 thousand euros	Pharmaceuticals	100.0 [100.0]
Sankyo Pharma (Schweiz) AG	Thalwil, Switzerland	3 million Swiss Francs	Pharmaceuticals	100.0 [100.0]
Sankyo Pharma Nederland B.V.	Zwanenburg, the Netherlands	18 thousand euros	Pharmaceuticals	100.0 [100.0]
N.V. Sankyo Pharma Belgium S.A.	Louvain-La- Nueve, Belgium	62 thousand euros	Pharmaceuticals	100.0 [100.0]
Oy Sankyo Pharma Finland Ab	Helsinki, Finland	25 thousand euros	Pharmaceuticals	100.0 [100.0]
Sankyo Manufacturing France S.a.r.l.	Altkirch, France	457 thousand euros	Pharmaceuticals	100.0 [100.0]
Dignos-Chemie GmbH	Munich, Germany	40 thousand euros	Pharmaceuticals	100.0 [100.0]
Sankyo Pharma France S.A.S.	Rueil Malmaison, France	2,182 thousand euros	Pharmaceuticals	100.0 [100.0]
Sankyo Grundstücks GmbH	Munich, Germany	5.1 million euros	Pharmaceuticals	100.0 [100.0]
Sankyo Grundstücks GmbH & Co. Object Munich KG	Munich, Germany	38.2 million euros	Pharmaceuticals	94.0 [94.0]
Daiichi Pharmaceuticals UK Ltd.	London, UK	400 thousand pounds	Pharmaceuticals	100.0 [100.0]
Laboratoires Daiichi Sanofi–Aventis	Paris, France	154 thousand euros	Pharmaceuticals	51.0 [51.0]	Concurrent directors
Daiichi Fine Chemical Europe GmbH	Dusseldorf, Germany	511 thousand euros	Other	100.0 [100.0]
Daiichi Pharmaceutical (Beijing) Co., Ltd.	Beijing, China	63,800 thousand U.S. dollars	Pharmaceuticals	100.0 [100.0]	Concurrent directors
Daiichi Pharmaceutical Asia Ltd.	Hong Kong, China	3,000 thousand HK dollars	Pharmaceuticals	100.0 [100.0]
Daiichi Pharmaceutical Taiwan Ltd.	Taipei, Taiwan	80 million NT dollars	Pharmaceuticals	100.0 [100.0]
Daiichi Pharmaceutical Korea Co., Ltd.	Seoul, Korea	3,000 million W	Pharmaceuticals	70.0 [70.0]	Concurrent directors
Daiichi Pharmaceutical (Thailand) Ltd	Bangkok, Thailand	10,000 thousand baht	Pharmaceuticals	100.0 [100.0]
Sino-Japan Chemical Co., Ltd.	Taipei, Taiwan	144 million NT dollars	Other	52.0 [52.0]	Concurrent directors
Affiliated companies accounted for by the equity method
Sanofi-Pasteur-Daiichi Vaccines Co., Ltd.	Edogawa-ku, Tokyo	310	Pharmaceuticals	50.0 [50.0]	Concurrent directors
Laboratoires Daiichi Sanofi–Synthelabo	Shinjuku-ku, Tokyo	100	Pharmaceuticals	49.0 [49.0]	Concurrent directors
Tokyo Iyaku Shiki Co., Ltd.	Shimada-shi, Shizuoka	163	Pharmaceuticals	30.9 [30.9]
Nishimura Shiki Co., Ltd.	Takatsuki-shi, Osaka	30	Pharmaceuticals	30.9 [30.9]
Hitachi Pharma Evolutions, Ltd.	Shinagawa-ku, Tokyo	250	Other	49.0 [49.0]

(Notes)

1. The information under the principal business operations column indicates the name of operating segment used in the segments information, to which the respective entity belong.

2. Of the consolidated subsidiaries and affiliates listed above, Sankyo Company, Limited, Daiichi Pharmaceutical Co., Ltd., Daiichi Asubio Pharma Co., Ltd. and Daiichi Pharmaceutical (Beijing) Co., Ltd. are qualified as a “significant subsidiary” as defined in the regulations under the Securities and Exchange Law of Japan.

3. Of the consolidated subsidiaries and affiliates listed above, Sankyo Company, Limited, Daiichi Pharmaceutical Co., Ltd., Wakodo Co., Ltd. and Fuji Flour Milling Co., Ltd. file a separate securities report to the Ministry of Finance in Japan.

4. Figures in parentheses under the percentage of voting rights held column refer to the percentage of ownership held indirectly through other subsidiaries.

5. Daiichi Sankyo Healthcare Co., Ltd., a new consolidated subsidiary, was established in December 2005, for the purpose of integrating the healthcare business of Sankyo Company, Limited. and Daiichi Pharmaceutical Co., Ltd. On April 1, 2006, Sankyo and Daiichi each divested their respective healthcare (OTC drug) operations into Daiichi Sankyo Healthcare Co., Ltd.

6. Sankyo Grundstücks GmbH & Co. Object Munich KG, a 94% owned partnership newly established by Sankyo Grundstücks GmbH is included in the scope of consolidation from the year ended March 31, 2006.

7. Daiichi Suntory Pharma Co., Ltd. changed its name to Daiichi Asubio Pharma Co., Ltd. on October 1, 2005.

8. Daiichi Pharmaceutical (Beijing) Co., Ltd. took over Daiichi Pharmaceutical (China) Co., Ltd. by merger on January 10, 2006.

9. On March 31, 2006, Sankyo Pharma Inc., a U.S. subsidiary of Sankyo Company, Limited, took over by merger three U.S. subsidiaries of Daiichi Pharmaceutical Co., Ltd. (Daiichi Pharma Holdings, Inc., Daiichi Pharmaceutical Corporation and Daiichi Medical Research, Inc.), and changed its name to DAIICHI SANKYO, INC.

10. F.P. Processing Co., Ltd., which was a consolidated subsidiary of the Company, has been excluded from the scope of consolidation in the year ended March 31, 2006 due to the disposition of the Company’s entire share holdings in this company in January 2006.

11. Fuji Flour Milling Co., Ltd., a consolidated subsidiary, was merged with Nitto Flour Milling Co., Ltd. on April 1, 2006. The merged entity changed its name to Nitto-Fuji Flour Milling Co., Ltd. The percentage of the Company’s voting interests in Nitto-Fuji Flour Milling Co., Ltd. was diluted so that it is no longer an affiliate of the Company from that date.

12. The Company sold its entire equity interests in Oy Sankyo Pharma Finland Ab in January 2006.

13. Sanofi-Synthelabo Daiichi Pharmaceutical Co., Ltd. changed its name to Sanofi-Aventis Daiichi Pharmaceutical Co., Ltd. on April 1, 2006.

2. Management Policies

1. Principal Management Policies

The Company is a joint holding company established on September 28, 2005 through the joint stock transfer implemented by Sankyo Company, Limited and Daiichi Pharmaceutical Co., Ltd. The Company and all the other companies in the DAIICHI SANKYO Group (the “Group”) are currently focused on solving various business issues, for the complete integration which is scheduled in April 2007.

The vision of the Group is to become a Japan-based “global pharma-innovator” that meets the medical needs of people worldwide by continuously developing innovative pharmaceuticals and related services. As a leading company in Japan’s pharmaceutical industry, DAIICHI SANKYO aims to develop a continuous stream of innovative drugs, and to expand its operations, built upon a global business bases, in the world’s major countries, and thereby to become a global player with its strong competitiveness in certain therapeutic areas.

In pursuit of this vision, the Company is determined to create three corporate values: economic value for shareholders through strong growth generated by innovative products; social value for the society by fulfilling a contributory role as a good corporate citizen; and human value by enhancing human development of the employees through proactive support for skill improvement.

2. Shareholder Profit Distribution Policies

The Company has prioritized the distribution of profits generated by the DAIICHI SANKYO Group businesses among the key management issues. The profit distribution is determined, while focusing on a level of return that is commensurate with underlying business performance and capital efficiency, based on comprehensive consideration of other factors, such as the need to build up retained earnings to fund future business development for growth strategies.

The Company has set a medium-term goal of achieving a dividend-on-equity (DOE) ratio of 5% (i.e. payout of total dividends equal to 5% of shareholders’ equity) by the fiscal year ending March 2010. Going forward, the Company plans to increase the level of dividends steadily toward this goal. The Company also plans to buy back, in a strategic manner, its own shares.

Undistributed earnings will be primarily used for investments in Daiichi Sankyo’s future growth strategies including the strengthening of R&D, corporate collaboration, and overseas business development.

3. Number of Shares of Common Stock per Unit

To increase the liquidity of its shares and expand its shareholder base, the Company has set the size of its share trading unit at 100 shares.

4. Business Performance Targets

The DAIICHI SANKYO Group aims to greatly enhance its earning power through the synergies created by the business integration, and a steady sales growth from its existing mainstay products and contribution by new products, while maintaining R&D spending at a level required to pursue the “global pharma-innovator” status. The performance goals for the fiscal year ending March 31, 2010 have been set to at net sales of ¥932.0 billion and operating income of ¥255.0 billion.

5. Medium- to Long-Term Management Strategies and Challenges

For the DAIICHI SANKYO Group, the ongoing integration process is an opportunity to make it prepared to take its first step as a Japan-based “global pharma-innovator.” The Company is actively tackling the issues discussed below as part of this process.

(1) Realization of Complete Integration

In line with the integration schedule, the first step toward the complete business integration was the establishment of the Company as a joint holding company through the stock transfer. Operational integration has since progressed in several areas. The integration of sales and marketing functions in the U.S., development functions in both Europe and the U.S., and the healthcare businesses was completed on schedule by April 2006. The two remaining goals to complete by the end of March 2007 are: the establishment of an independent operation outside the DAIICHI SANKYO Group by all the non-pharmaceutical businesses; and the complete integration of the pharmaceutical businesses of Sankyo Company, Limited and Daiichi Pharmaceutical Co., Ltd. through merger with the holding company, DAIICHI SANKYO.

The DAIICHI SANKYO Group is focusing its collective efforts on the realization of complete integration with an aim of realizing the highest level of operational efficiency in the industry. Various business integration committees have been formed to guide this process, including the installation of common support teams, such as one for the integration of the HR systems. By the time the merger has been completed, the Company expects the integration process will have delivered substantial benefits, ranging from improved use of personnel, streamlined cost structures and other operational synergies to stronger management and business development functions as well as more effective HR training and development.

(2) Concentration on the Pharmaceutical Business

To promote superior earnings and consistent growth, the DAIICHI SANKYO Group plans to concentrate on the pharmaceutical business consisting of prescription drug and healthcare product operations. The plan is to complete the establishment of an independent operation outside the DAIICHI SANKYO Group by the non-pharmaceutical businesses before the end of March 2007.

Fuji Flour Milling Co., Ltd. already concluded a merger agreement with Nitto Flour Milling Co., Ltd. in September 2005 and became independent of the Group when the merger came into effect in April 2006. Wakodo Co., Ltd. also will become independent of the Group in May 2006 as the Group is to sell its equity interests in Wakodo through a TOB by Asahi Breweries, Ltd.

(3) Enhancement in Innovative Drug Discovery

In order to achieve its goal of developing innovative new drugs to fulfill unsatisfied medical needs, the Company is working to build an R&D operation with specific management objectives. The principal objectives include (1) a global R&D organization of an appropriate scale; (2) sufficient scale to support innovative researches in the key therapeutic areas; (3) retention and development of researchers for in-house discovery of key drug candidates; and (4) effective and efficient controls on development projects coupled with timely decision-making.

The integration of the R&D management functions of Sankyo and Daiichi is one of the top management priorities within the overall integration process. Upon successful completion of the integration of the development organizations in Europe and the United States in April 2006, the Company has already started a global drug development process, a year ahead of the original schedule. Back in October 2005, the Company established the Global Executive Meeting of Research and Development (GEMRAD) as the deliberative body to facilitate the R&D-related decision making. GEMRAD has designated cardiovascular, glucose metabolic, infectious and cancer diseases as the strategic therapeutic areas for the DAIICHI SANKYO Group. The selection of drug development candidates within these areas has also been completed. Based on a priority evaluation on each candidate, GEMRAD has selected five pipeline drugs as the top-priority development projects for the DAIICHI SANKYO Group: prasugrel (CS-747), an antiplatelet agent; DU-176b, a factor-Xa inhibitor; CS-8663, a combination drug containing the antihypertensives olmesartan and amlodipine; DJ-927, a taxane derivative (oral anticancer); and DZ-697b, an antiplatelet agent. A development project team has been set up to manage R&D activities for each of these key pipeline drug candidates.

(4) Enhancement of Earnings Bases in Japan and Overseas

The integration of the domestic prescription drug businesses will result in a combined sales force of over 2,500 medical representatives (MRs), which will afford the DAIICHI SANKYO Group superior marketing power in terms of both quality and quantity. The integration will also facilitate further strengthening of relationships with medical wholesalers operating on a national scale, thereby enabling the implementation of a distribution strategy that make most use of economies of scale. Beginning in April 2007, the Company plans to concentrate its marketing power on promoting sales of the leading products, thereby increasing sales and creating a stronger base of sales operations within the domestic market. Collaborative activities have already commenced for Olmetec^® (November 2005) and Cravit^® (April 2006) to accelerate the realization of merger benefits.

In overseas markets, the Company plans to take full advantage of larger economies of scale created by the integration and thereby achieve substantial increases in product value by conducting both development and marketing in-house for certain high-priority projects, particularly in the United States. To this end, management recognizes a critical need in the expansion of overseas development and marketing bases in the United States and other markets. The Company plans to focus on such expansion through various means which include the selective acquisition of external resources based on an alliance- and M&A-centered strategy.

The Company established DAIICHI SANKYO, INC. by integrating the U.S.-based operations of Sankyo and Daiichi, in April 2006 and has been expanding the U.S. operations.

In the healthcare drug operations, the Company established Daiichi Sankyo Healthcare Co., Ltd., by integrating the healthcare businesses of Sankyo and Daiichi, and started its operations in April 2006.

Going forward, the Company plans to strengthen its earnings base by constructing a low-cost operational structure and by expanding sales of exiting brands as well as new products, through its focus on integrated capabilities in R&D, sales and marketing.

In addition, in April 2006, the Company acquired all the shares of Zepharma Inc., the healthcare business of Astellas Pharma Inc. The plan is to integrate the operations of Zepharma with those of Daiichi Sankyo Healthcare in April 2007, which will strengthen its earnings base by further expanding the scale of operations and by boosting brand asset values.

6. Litigation

(1) In the United States, numerous lawsuits seeking damages and other compensation were brought against Warner-Lambert Company and other pharmaceutical companies by certain patients who took the diabetes drug Rezulin, which had been sold until March 2000 using a compound whose generic name is troglitazone supplied by the Sankyo Company, Limited, a wholly-owned subsidiary of the Company. A U.S. subsidiary of the Company, Sankyo Pharma Inc. (currently, DAIICHI SANKYO, INC.), is named as a defendant in a small portion of these cases, and it is defending these cases in cooperation with Warner-Lambert. In these cases, the compensation demanded from all defendants includes claims for both compensatory and punitive damages. In connection with the costs and damages to be borne by the Sankyo Company, Limited and its subsidiaries, there is a provision in the license agreement with Warner-Lambert indemnifying the Sankyo Company, Limited and its subsidiaries.

(2) Daiichi Pharmaceutical Co., Ltd., a subsidiary of the Company, has settled with most of the civil claims in the United States, following the earlier antitrust judgment against Daiichi related to its sales of bulk vitamins. In Europe, Daiichi was in the process of an appeal with the European Court of First Instance to reduce the fine initially imposed by the European Commission.

In March 2006, the court ruled a reduction in the amount of the fine to §1,800 million and the Company accepted the ruling. As a result, the Company, which had already expensed a part of the fine as an extraordinary loss in the fiscal year ended March 31, 2002, charged the balance in the extraordinary losses in the fiscal year ended March 31, 2006.

(3) With its local U.S. licensee as co-plaintiff, Daiichi Pharmaceutical Co., Ltd., a subsidiary of the Company, filed a patent infringement lawsuit in a U.S. district court against the Mylan Group, who had filed an application for a generic version of levofloxacin (one of the Company’s leading products). The U.S. district court ruled in favor of Daiichi in December 2004, which was then appealed by the Mylan Group. In December 2005, the appellate court affirmed the decision by the U.S. district court.

Going forward, the DAIICHI SANKYO Group will continue to rigorously defend its intellectual property rights.

7. Matters Relating to the Parent Company, etc.

Not applicable.

3. Results of Operations and Financial Position

The Company was established on September 28, 2005, as a joint holding company through the share transfer. Accordingly, as the current fiscal year is the Company’s first year of operation, year-by-year performance comparisons are not presented.

Performance figures for the fiscal year include the two subsidiaries’ consolidated results from April 1, 2005 through March 31, 2006, as well as the Company’s non-consolidated results from September 28, 2005 through March 31, 2006.

1. Result of Operations

(1) Overview of the fiscal year

While, the global pharmaceutical market continues to realize a certain level of growth, led by the U.S. market, the global market is characterized by such trends as the progressive globalization and the increasing strictness of new drug development standards as well as the intense competition centered on global mega pharmaceutical companies in the areas of both R&D and marketing activities. In the Japanese market, measures to contain healthcare costs advanced further as national university hospitals were reorganized into independent medical corporations and an increasing number of medical institutions have been adopting a new comprehensive in-hospital treatment evaluation system. In addition, the competition among increasingly prominent foreign-owned pharmaceutical companies and other major companies has intensified, which resulted in our business environment being intensively harsh.

The DAIICHI SANKYO Group focused its marketing efforts on expanding markets for its products by promoting the proper use of drugs through the provision of accurate information related to the efficacy and safety of its products. As a result, the Company posted consolidated net sales of ¥925.9 billion in its first inaugural fiscal year. The Company’s top-selling products in Japan included the antihypertensive agents Olmetec^® and Calblock^®, the broad-spectrum oral antibacterial agent Cravit^®, and Artist^®, a treatment for high blood pressure, angina, and chronic cardiac insufficiency. In overseas markets, leading contributors to the net sales included bulk exports of the synthetic antibacterial levofloxacin and the antihypertensive agent olmesartan (sold as Benicar^® in North America and as Olmetec^® in Europe).

In terms of profitability, the Company invested in improving quality and technology levels while promoting cost-reduction measures. As a result, the total cost of sales amounted to ¥290.7 billion (cost-of-sales ratio: 31.4%); selling, general and administrative expenses totaled ¥480.4 billion, of which research and development expenses accounted for ¥158.7 billion. Operating income was ¥154.7 billion and ordinary income was ¥159.7 billion.

The Company took an charge of ¥9.8 billion related to the business integration and also posted an impairment loss of ¥5.2 billion for idle property, plant and equipment in the extraordinary losses. Net income for the year ended March 31, 2006 amounted to ¥87.6 billion.

(2) Segment Information

(Operating Segments) Net sales of each operating segment include only sales to outside customers.

1) Pharmaceuticals

Net sales in the pharmaceuticals segment totaled ¥784.6 billion, and operating income amounted to ¥148.1 billion.

Uncertainty plagued the business environment in the Japanese prescription drug market with an ongoing impact of government initiatives to reduce healthcare spending, including more affirmative measures to promote the use of generic medicines, and a downward revision in the National Health Insurance (NHI) drug reimbursement tariff implemented in April 2006 by an average of 6.7%.

Under these harsh market conditions, sales of prescription drugs in the Japanese market totaled ¥431.4 billion. Although sales of the antihyperlipidemic agent Mevalotin^® declined, several leading products recorded higher sales, including the broad-spectrum oral antibacterial agent Cravit^® and the antihypertensive agent Olmetec^®. Sales revenue was also increased by a receipt of the milestone payments related to the approval on manufacturing and marketing of Plavix^®.

Sales of prescription drugs in overseas markets totaled ¥289.5 billion. Sales of bulk pravastatin, an antihyperlipidemic agent, declined due to its patent expiration in Europe and fierce competition in the United States. Sales of the antihypertensive agent olmesartan (marketed as Benicar^® in North America and as Olmetec^® in Europe) increased significantly, and bulk exports of the synthetic antibacterial levofloxacin also generated a steady growth. In addition, favorable currency translation arising from yen depreciation contributed to the higher sales amount.

Sales of healthcare drugs amounted to ¥27.9 billion. Depressed market conditions in Japan and the entry of rival products resulted in lower sales of leading products such as the hair growth agents Karoyan Gush^® and Cystina C^®, a vitamin complex. The decrease was offset by brisk sales of Lamisil AT^®, the switch-OTC formulation of a prescription drug for treating athlete’s foot.

2) Other

Sales in the other segment totaled ¥141.2 billion, and operating income amounted to ¥6.1 billion.

The DAIICHI SANKYO Group plans to focus its resources on the pharmaceutical business. To this end, the Company plans to spin off the non-pharmaceutical businesses as independent enterprises, and thereby to realize greater operational efficiency.

(3) Dividends

As initially projected, the Company will pay a year-end dividend of ¥25 per share.

As a result, together with the share transfer payment of ¥25 per share paid in lien of interim dividends on December 12, 2005, the dividend payout ratio (consolidated) will be 40.5 % and the dividends on equity ratio (consolidated) will be 2.9 %.

(4) R&D Activities

R&D spending by the DAIICHI SANKYO Group, which was mostly incurred in the pharmaceutical segment, totaled ¥158.7 billion (17.1% of net sales).

The R&D activities of the DAIICHI SANKYO Group are directed at realizing the Company’s vision of being a “global pharma-innovator.” The Group focused its R&D investments in the strategic therapeutic areas with the aim of bringing a continuous stream of world-class innovative drugs to the market, while also trying to shorten the lead time to launch a new product.

As part of the ongoing integration process, the Company first moved to integrate the R&D decision-making bodies of Sankyo and Daiichi. By unifying R&D management into an integrated structure, the Company aims to accelerate those high-priority development projects that are positioned to become the driving force for future business growth.

In terms of the development status of key projects, on the Sankyo side a regulatory approval was obtained in January 2006 for Loxonin^® poultice (generic name: loxoprofen sodium), a percutaneous absorption-type analgesic and anti-inflammatory preparation, and the launch of the product is planned for May 2006 in Japan. In addition, on the Daiichi side, a regulatory approval was obtained in January 2006 for Urief^® (generic name: silodosin), an agent for treating dysuria that was jointly developed with Kissei Pharmaceutical Co., Ltd., and for Plavix^® (generic name: clopidogrel sulfate), an antiplatelet agent. Both products were launched also in May 2006. Based on an agreement reached in September 2005 to transfer the marketing rights to the Sanofi-Aventis Group, Daiichi transferred the approval for Plavix^® to their Japanese subsidiary Sanofi-Aventis K.K. in March 2006. The Company plans to continue collaborating with Sanofi-Aventis K.K. on the manufacture and promotion of Plavix^® in Japan.

In January 2006, Sankyo concluded an agreement with U.S.-based KAI Pharmaceuticals, Inc. for KAI-9803 (internal code: CS-9803), a treatment for myocardial infarction and cerebral infarction currently in Phase I/II clinical trials in the United States, in which the Company gained exclusive worldwide development, manufacturing and distribution rights for that drug. The joint development of the drug with KAI Pharmaceuticals is expected to continues.

Based on its ongoing reviews of the R&D projects, the DAIICHI SANKYO Group terminated its involvement in the development of two drug candidates, CS-505, a treatment for arteriosclerotic disorders developed in-house due to its failure to demonstrate sufficient clinical efficacy in Phase II trials in the United States; and Fidarestat^®, a diabetic neuropathy agent being jointly developed with Sanwa Kagaku Kenkyusho Co., Ltd. in order to concentrate its R&D resources on more strategic candiates.

The results of a large-scale clinical trial “MEGA Study” featuring a Sankyo drug, pravastatin (brand name: Mevalotin^®), were presented in November 2005 at the annual American Heart Association (AHA) Scientific Sessions. This trial was a special study initiated in 1993 as a contract research project sponsored by the Ministry of Health, Labor and Welfare (the Ministry of Health and Welfare at the time) targeting approximately 8,000 mild to moderate hyperlipidemia patients with no past history of coronary heart disease. It represents the first large-scale randomized, comparative study in Japan to test the drug’s efficacy in primary prevention against cardiovascular disease over an average observation period of more than five years. The results of the study clearly underlined the significant potential clinical benefits of antihyperlipidemic therapy in Japan. Going forward, the Company plans to communicate this information accurately and appropriately to the healthcare professionals communities.

2. Financial Position

Statement of Cash Flows

Cash and cash equivalents increased by ¥46.8 billion during the year ended March 31, 2006, to ¥400.9 billion. Contributing factors are summarized as follows:

Cash Flows from Operating Activities

Net cash provided by operating activities amounted to ¥132.7 billion. The amount mainly consisted of ¥136.8 billion in income before income taxes and minority interests, ¥41.1 billion in depreciation expense, and ¥53 billion in payments of income taxes.

Cash Flows from Investing Activities

Net cash used in investing activities totaled ¥39.2 billion. The Company used ¥48.5 billion for the capital expenditures in property, plant and equipment and intangible assets, and ¥10.2 billion for the acquisition of investments in subsidiaries.

Cash Flows from Financing Activities

Cash used in financing activities amounted to ¥50.1 billion. A total of ¥16.6 billion was used to purchase treasury stock, ¥17.3 billion was paid as cash dividends, and ¥17.1 billion was paid as stock transfer payments.

<Principal Financial Indicators>
	Fiscal 2005
Shareholders’ equity ratio (%)	77.5
Market capitalization ratio (%)	122.6
Interest-bearing debt ratio (years)	0.1
Interest coverage ratio (times)	593.9
Shareholders’ equity ratio: total shareholders’ equity/total assets
Market capitalization ratio: total market capitalization/total assets
Interest-bearing debt ratio: interest-bearing debt/operating cash flows
Interest coverage ratio: operating cash flows/interest paid

(Notes)

1. All indicators are calculated on a consolidated basis.

2. Total market capitalization = closing stock price on the balance sheet date times the number of outstanding common shares at the balance sheet date (net of treasury shares)

3. Interest-bearing debt includes all consolidated balance sheet liabilities which are subject to an interest payment.

4. Operating cash flows equal to the amount of cash flows from operating activities in the consolidated statement of cash flows less the amounts of “interest paid” and “income taxes paid.” Interest paid equals to the “interest paid” included in the consolidated statement of cash flows.

3 Forecast of Consolidated Results for Fiscal 2006 (April 1, 2006 – March 31, 2007)

			(Billions of yen)
	Net sales		Operating income		Ordinary income		Net income
Fiscal 2006	865		108		115		47
Fiscal 2005	925		154		159		87
Change (%)	(6.6	)	(30.2	)	(28.0	)	(46.4	)

The DAIICHI SANKYO Group expects the business environment in the year ending March 31, 2007 to remain challenging in Japan and in overseas markets. The Company plans to leverage its combined marketing forces to boost market presence and thereby strengthen the earnings base. At the same time, the Company will continue to focus on realizing increased efficiency.

On the sales front, the Company faces a particularly tough challenge due to a number of factors that will significantly depress revenues, including the effect of NHI price cuts in Japan; the expiration of the U.S. patent on pravastatin; and the planned reorganization of the DAIICHI SANKYO Group’s non-pharmaceutical businesses. On the other hand, the Company will be able to reinforce sales and promotional efforts in prescription drug market in Japan by utilizing its superior sales force for core mainstay products such as the antihypertensive Olmetec^®, the antihyperlipidemic agent Mevalotin^® and the broad-spectrum oral antibacterial agent Cravit^®. Another key sales goal in Japan is a smooth market introduction for Urief^®, an agent for relieving symptoms of dysuria associated with prostatic hypertrophy (launched in May 2006).

In overseas prescription drug markets, the two major sales-related objectives are the prioritized allocation of resources to expand sales of the antihypertensive agent olmesartan (marketed as Benicar^® in North America and as Olmetec^® in Europe) and a continued focus on building cooperative relationships with alliance partners to maximize sales of the bulk agents pravastatin (an antihyperlipidemic agent) and levofloxacin (a synthetic antibacterial), as well as other major products. In the healthcare drug business, by having divested and integrated the healthcare operations of Sankyo and Daiichi into one entity and having also acquired Zepharma Inc., the main focus will be on expanding and strengthening the business base. Taking into account all the above factors, the DAIICHI SANKYO Group projects a 6.6% decline in overall sales to ¥865.0 billion.

On the profit side, the Company plans to invest consistently in critical R&D areas, as well as investing in sales bases outside of Japan. The Company also expects business integration costs to be incurred to achieve the complete integration in April 2007. A variety of efforts are now underway across the entire DAIICHI SANKYO Group to maintain profitability and build operational efficiency by restructuring the infrastructures and business processes, and by reducing cost and containing expenses. The company will continue to work on making group companies in non-pharmaceutical business become completely independent companies outside of the Group by March 2007. For the year ending March 31, 2007, the DAIICHI SANKYO Group projects a 30.2% decline in operating income to ¥108.0 billion and a 28.0% decrease in ordinary income to ¥115.0 billion, and a 46.4% decrease in net income to ¥47 billion.

Earnings at overseas subsidiaries are calculated using the foreign exchange rates of ¥115 = U.S.$1.00 and ¥135 = € 1.00.

Regarding dividend payment in fiscal 2006, although the Company forecasts its earnings to decline, it plans to pay cash dividend of 60 yen per share, up 10 yen compared to the current fiscal year, based on its policy to increase a level of cash dividends at a stable rate to the mid-term targeted ratio of 5% on a cash dividend on shareholders’ equity (DOE).

4. Business Risks

The following section provides an overview of the principal risks that could affect the business results and financial condition of the DAIICHI SANKYO Group. Any forward-looking statements or projections contained in this overview represent the best judgment of DAIICHI SANKYO Group management as of the end of the last fiscal year (March 31, 2006).

(1) Research and Development Risk

Research and development of new drug candidates is an extremely costly process that requires many years to complete successfully, during which time there is a continual risk that R&D activities on a particular compound may be terminated due to failure to demonstrate expected clinical efficacy. In addition, any changes in the terms of agreements with other third-parties governing R&D-related alliances, or the cancellation thereof, can also materially affect the outcomes of R&D programs.

(2) Manufacturing and Procurement Risk

The DAIICHI SANKYO Group manufactures some of its products at its own production facilities using original technology, but is also dependent on specific suppliers for the supply of some finished products, raw materials and production intermediates. Any delay, suspension or termination of such manufacturing or supply activities for any reason could have a material impact on the Company’s business results and financial position. Manufacture of pharmaceuticals in Japan is subject to strict regulation as stipulated in the Pharmaceutical Affairs Law. Any quality assurance problem that necessitated a product recall could have a material adverse impact on the Company’s business results and financial position.

(3) Sales-related Risk

Any decline in sales due to the emergence of unanticipated side effects of a drug, or due to the entry of generic products into a sector following the expiration of a patent, and the introduction of a rival product within the same therapeutic area, could have a material impact on the Company’s business results and financial position. Any changes in the terms of sales or technology transfer agreements, or the expiration or cancellation thereof, could have a material impact on the Company’s business results and financial position.

(4) Legal and Regulatory Risk

Prescription drugs in Japan are subject to a variety of laws, regulations and ordinances. Trends in regulatory measures relating to the medical treatment systems and the national health insurance, most notably the NHI price revisions that occur every two years, could have a material impact on the Company’s business results and financial position. Similarly, sales of prescription drugs in overseas markets are also subject to a variety of legal and regulatory constraints.

(5) Intellectual Property Risk

The business activities of the DAIICHI SANKYO Group could be subject to restraint or dispute in an event of the infringement of the patents or other intellectual property rights of other parties. Conversely, infringement of the intellectual property rights of the DAIICHI SANKYO Group by other parties could lead to a legal action by the Company to protect such rights. In either case, the resulting outcome could have a material impact on the Company’s business results and financial position.

(6) Environmental Risk

Certain of the chemicals used in pharmaceutical research and manufacturing processes include substances with the potential to exert a negative impact on human health and natural ecosystems. All DAIICHI SANKYO Group facilities operate on a self-regulated basis according to the internal standards designed to prevent the occurrence of any air or water pollution caused by plant emissions. The DAIICHI SANKYO Group also takes a proactive stance on environmental protection, for instance by employing substitute chemicals wherever possible to reduce a potential environmental impact of chemical substances used. Notwithstanding those efforts, there could be a material impact on the Company’s business results and financial position, were the emissions of a DAIICHI SANKYO Group facility determined to have resulted in a serious environmental problem.

(7) Litigation-related Risk

Besides potential antitrust issues, the DAIICHI SANKYO Group could also face litigation of various forms concerning its business activities, such as lawsuits related to drug side effects, product liability or labor disputes. Such developments could have a material impact on the Company’s business results and financial position.

(8) Currency Fluctuation Risk

Fluctuations in foreign currency exchange rates could be a financially adverse effect on the Company. The DAIICHI SANKYO Group conducts business, including production, sales, import and export activities, on a global basis, and foreign exchange movements could therefore have a material impact on the Company’s business results and financial position.

(9) Other Risks

Other risks besides those noted above that could have a material impact on the Company’s business results and financial position include the suspension of its business activities due to an earthquake or other large-scale natural disaster; the interruption of the Company’s computer systems due to a network-mediated virus or other causes; changes in stock prices and interest rates; and collection issues on accounts and loans receivable due to default by a customer or a country specific problem at the customer.

4. Consolidated Financial Statements

(1) Consolidated Balance Sheets

(Millions of yen)

	See Note	As of March 31, 2006
		Amount				%
ASSETS
I        Current assets:
1. Cash and time deposits				223,979
2. Trade notes and accounts receivable				240,173
3. Marketable securities				274,510
4. Mortgage-backed securities				16,500
5. Inventories				121,694
6. Deferred tax assets				40,911
7. Other current assets				41,313
Allowance for doubtful accounts				(599	)
Total current assets				958,483		60.1
II      Non-current assets:
1. Property, plant and equipment:	*1
(1) Buildings and structures	*3	164,047
(2) Machinery, equipment and vehicles	*3	47,888
(3) Land	*3	48,892
(4) Construction in progress		10,010
(5) Other	*3	18,874		289,712		18.1
Total property, plant and equipment, net
2. Intangible assets:
Goodwill, net		9,788
Other intangible assets, net		26,378		36,166		2.3
3. Investments and other assets:
(1) Investment securities	*2, 3	256,338
(2) Long-term loans		6,154
(3) Prepaid pension costs		17,307
(4) Deferred tax assets		7,403
(5) Other assets	*2	25,090
Allowance for doubtful accounts		(529	)	311,763		19.5
Total non-current assets				637,643		39.9
Total assets				1,596,126		100.0

(Millions of yen)

	See Note	As of March 31, 2006
		Amount		%
LIABILITIES
I        Current liabilities:
1. Trade notes and accounts payable		65,596
2. Short-term bank loans	*3	13,547
3. Income taxes payable		26,169
4. Deferred tax liabilities		31
5. Allowance for sales returns		657
6. Allowance for sales rebates		2,204
7. Allowance for contingent losses		3,379
8. Other current liabilities		125,246
Total current liabilities		236,833		14.9
II      Non-current liabilities:
1. Long-term debt	*3	3,374
2. Deferred tax liabilities		23,926
3. Accrued retirement and severance benefits		68,321
4. Accrued directors’ retirement and severance benefits		3,140
5. Accrued soil remediation costs		2,850
6. Other non-current liabilities		8,540
Total non-current liabilities		110,154		6.9
Total liabilities		346,987		21.8
MINORITY INTERESTS
Minority interests		11,609		0.7
SHAREHOLDERS’ EQUITY
I        Common stock	*7	50,000		3.1
II      Additional paid-in-capital		179,858		11.3
III     Retained earnings		936,513		58.7
IV    Net unrealized gain on investment securities		80,254		5.0
V      Foreign currency translation adjustments		735		0.0
VI    Treasury stock at cost	*8	(9,832	)	(0.6	)
Total shareholders’ equity		1,237,529		77.5
Total liabilities, minority interests and shareholders’ equity		1,596,126		100.0

(2) Consolidated Statement of Income

(Millions of yen)

	See Note	Fiscal 2005 (Year Ended March 31, 2006)
		Amount		%
I        Net sales			925,918	100.0
II      Cost of sales	*1		290,735	31.4
Gross profit			635,182	68.6
III     Selling, general and administrative expenses:
1. Advertising and promotional expenses		74,690
2. Salaries and bonuses		98,570
3. Retirement and severance costs		4,899
4. Research and development expenses	*1	158,716
5. Other		143,577	480,454	51.9
Operating income			154,728	16.7
IV    Non-operating income:
1. Interest income		3,326
2. Dividend income		1,995
3. Rent income		1,148
5. Other income		4,480	10,951	1.2
V      Non-operating expenses:
1. Interest expense		313
2. Loss on disposal and write-down of inventories		1,587
3. Charitable contributions		1,099
4. Amortization of start-up costs		361
5. Equity in net losses of affiliated companies		349
6. Other expenses		2,253	5,964	0.7
Ordinary income			159,714	17.2

(Millions of yen)

	See Note	Fiscal 2005 (Year Ended March 31, 2006)
		Amount			%
VI    Extraordinary gains:
1. Gain on sale of property, plant and equipment	*2	4,897
2. Gain on sale of investments in affiliates		1,179
3. Gain on sale of investment securities		649
4. Gain from the return of the substitutional portion of the employees’ pension fund to the government		163		6,890	0.8
VII   Extraordinary losses
1. Loss on disposal of property, plant and equipment	*3	5,550
2. Loss on business integration	*4	9,893
3. Loss on impairment of property, plant and equipment	*5	5,253
4. Provision for contingent losses	*6	3,379
5. Provision for soil remediation costs		2,850
6. Restructuring charge	*7	1,153
7. Loss on settlement of vitamin-related anti-trust litigations	*8	1,125
8. Loss on valuation of investment securities		346
9. Supplemental retirement benefit cost		160		29,712	3.2
Net income before income taxes and minority interests				136,892	14.8
Income tax expense – current		54,207
Income tax benefit – deferred		(5,011	)	49,196	5.3
Minority interests in net income of subsidiaries				3	0.0
Net income				87,692	9.5

(3) Consolidated Statement of Retained Earnings

(Millions of yen)

	See Note	Fiscal 2005 (Year Ended March 31, 2006)
		Amount
ADDITIONAL PAID-IN CAPITAL
I        Additional paid-in capital, beginning of year			180,027
II      Decrease in additional paid-in capital:
Loss on reissuance of treasury stock		169	169
III     Additional paid-in capital, end of year			179,858
RETAINED EARNINGS
I Retained earnings, beginning of year			956,658
II Increase in retained earnings:		87,692	87,692
Net income
III     Decrease in retained earnings:
1. Cash dividends		17,311
2. Share transfer payment		17,167
3. Bonuses to directors		405
4. Retirement of treasury stock		72,419
5. Loss on reissuance of treasury stock		298
6. Decrease due to changes in scope of consolidation		235	107,837
IV    Retained earnings, end of year			936,513

(4) Consolidated Statement of Cash Flows

(Millions of yen)

		Fiscal 2005 (Year Ended March 31, 2006)
	See Note	Amount
I        Cash flows from operating activities:
Income before income taxes and minority interests		136,892
Depreciation		41,128
Loss on impairment of property, plant and equipment		5,253
Amortization of goodwill		1,424
Decrease in allowance for doubtful accounts		(27	)
Decrease in accrued retirement and severance benefits		(3,314	)
Increase in prepaid pension costs		(1,813	)
Interest and dividend income		(5,322	)
Interest expense		313
Loss on sale of property, plant and equipment		653
Loss on penalty and settlement		1,125
Equity in net losses of affiliated companies		349
Decrease in trade notes and accounts receivable		11,651
Decrease in inventories		8,251
Decrease in trade notes and accounts payable		(6,990	)
Other, net		(7,661	)
Subtotal		181,914
Interest and dividends received		5,285
Interest paid		(313	)
Penalty & legal settlement paid		(1,125	)
Income taxes paid		(53,001	)
Net cash provided by operating activities		132,759
II      Cash flows from investing activities:
Purchases of time deposits		(5,140	)
Proceeds from maturities in time deposits		4,409
Purchases of marketable securities		(86,578	)
Proceeds from sale of marketable Securities		119,972
Acquisitions of property, plant and equipment		(41,798	)
Proceeds from sale of property, plant and equipment		5,471
Acquisitions of intangible assets		(6,788	)
Acquisitions of investment securities		(38,975	)
Proceeds from sale of Investment securities		16,095
Acquisitions of investments in subsidiaries resulting in changes in percentage of equity holding		(10,268	)
Proceeds from sale of investments in consolidated subsidiary resulting in changes in scope of consolidation	*2	642
Payment for loans receivable		(2,451	)
Proceeds from collection of loans receivable		1,837
Other, net		4,313
Net cash used in investing activities		(39,258	)

(Millions of yen)

		Fiscal 2005 (Year Ended March 31, 2006)
	See Note	Amount
III     Cash flows from financing activities
Net decrease in short-term bank loans		(2,286	)
Proceeds from long-term debt		1,110
Repayments of long-term debt		(1,204	)
Purchases of treasury stock		(16,610	)
Proceeds from sale of treasury stock		2,919
Dividends paid		(17,326	)
Stock transfer payments		(17,167	)
Other, net		460
Net cash used in financing activities		(50,106	)
IV    Effect of exchange rate changes on cash and cash equivalents		3,793
V      Net increase in cash and cash equivalents		47,188
VI    Cash and cash equivalents, beginning of year		354,102
VII   Decrease in cash and cash equivalents due to changes in scope of consolidation		(322	)
VIII Cash and cash equivalents, end of year	*1	400,967

Basis of Presentation and Summary of Significant Accounting Policies for the Preparation of the Consolidated Financial Statements

Item	Fiscal 2005 (Year ended March 31, 2006)
1. Scope of consolidation	(1) Consolidated subsidiaries: 57 Principal consolidated subsidiaries: In Japan Sankyo Co., Ltd., Daiichi Pharmaceutical Co., Ltd., Daiichi Asubio Pharma. Co., Ltd., Daiichi Fine Chemical Co., Ltd., Daiichi Radioisotope Laboratories, Ltd., Daiichi Pure Chemicals Co., Ltd., Daiichi Pharmatech Co., Ltd., Wakodo Co., Ltd., Sankyo Agro Co., Ltd., Nippon Nyukazai Co., Ltd., Sankyo Lifetech Co., Ltd. Overseas Daiichi Sankyo, Inc. Luitpold Pharmaceuticals, Inc. Sankyo Pharma GmbH
	Nippon Daiya Valve Co., Ltd., Kyushu Sankyo Co., Ltd. and Sankyo Foods Co., Ltd., which were consolidated subsidiaries of Sankyo Co. Ltd. were excluded from the scope of consolidation because of the sale of their shares and other reasons.
	In addition, Daiichi Pharmaceutical Co. Ltd. sold off a part of its investments in two subsidiaries, Tokyo Iyaku Shiki Co., Ltd. and Nishimura Shiki Co. Consequently, the Company has excluded the two companies from consolidation and now accounts for them under the equity method. Daiichi Fine Chemicals Inc. completed its liquidation procedures and is no longer consolidated.
	Dismed AG, previously a consolidated subsidiary of Sankyo Co., Ltd., merged with another consolidated subsidiary, as did the following four former consolidated subsidiaries of Daiichi Pharmaceutical Co., Ltd.: Kansai Daiichi Service Co., Ltd.; Daiichi Technos Co., Ltd.; Daiichi Suntory Biomedical Research Ltd.; and Daiichi Pharmaceutical (China) Co., Ltd. On March 31, 2006, Sankyo Pharma, Inc., a consolidated subsidiary of Sankyo Co., Ltd., and Daiichi Pharma Holdings, Inc., Daiichi Pharmaceutical Corporation, and Daiichi Medical Research, Inc., the latter three former consolidated subsidiaries of Daiichi Pharmaceutical Co., Ltd., merged to form Daiichi Sankyo, Inc.
	The Company also began consolidating Daiichi Sankyo Healthcare Co., Ltd., Sankyo Grundstücks GmbH & Co. and Object München AG, which was established during the year.
	(2) Non-consolidated subsidiaries (including Sankyo Insurance Agency Co., Ltd., Godo Real Estate Co. Ltd. and Shanghai Sankyo Pharmaceuticals Co., Ltd.) are small and are not material when measured by the amounts of total assets, net sales, net income (based on the Company’s ownership percentage), retained earnings (based on the Company’s ownership percentage), and other indicators. They have therefore been excluded from the scope of consolidation.
2. Application of the Equity Method	(1) Affiliated companies accounted for under the equity method: 5 Name of principal company: Sanofi Pasteur Daiichi Vaccine Co., Ltd
	(2) Net income (based on the Company’s equity percentage), retained earnings (based on the Company’s equity percentage), and other indicators of those non-consolidated subsidiaries (including Sankyo Insurance Agency Co., Ltd., Godo Real Estate Co. Ltd. and Shanghai Sankyo Pharmaceuticals Co., Ltd.) and affiliated companies (including Tokyo Yakugyo Kaikan Co., Ltd.) that have not been accounted for under the equity method are not material or significant to the Company as a whole. Therefore, these companies have not been accounted for under the equity method, but are rather reported in the Company’s investment account under the cost method.

Item	Fiscal 2005 (Year ended March 31, 2006)
3. Fiscal Year-End of Consolidated Subsidiaries	The fiscal year-end of certain consolidated subsidiaries is December 31. In preparing the consolidated financial statements, the Company uses the financial statements of these companies as of their fiscal year-end. For major intervening transactions that occurred between the fiscal year-end of those companies and March 31, appropriate adjustments have been made in the consolidated financial statements.
	Name of subsidiaries that have fiscal year-end on December 31: Luitpoid Pharmaceuticals, Inc., Daiichi Asubio Pharmaceuticals, Inc., Sankyo Pharma GmbH and its 12 subsidiaries as well as Daiichi Pharmaceutical (Beijing) Co., Ltd. and 5 other subsidiaries.
	Following its merger with Daiichi Pharma Holdings, Inc. et al, Sankyo Pharma, Inc. changed its fiscal-year end to March 31. However, for the current fiscal year, the Company consolidated Sankyo Pharma’s financial statements as of December 31, 2005.
4. Accounting for Business Combination	(1) The Company was established through a joint transfer of shares by Sankyo and Daiichi (the wholly owned subsidiaries) and became the parent company of the wholly owned subsidiaries. The Company accounted for this business combination under the pooling of interests method in accordance with “Accounting for Business Combinations in the Establishment of Parent-Subsidiary Relationship Using the Exchange of Shares and the Transfer of Shares (Research Report No. 6 of the Accounting Systems Committee of the Japanese Institute of Certified Public Accountants). (2) As a result of the comprehensive review of the wholly owned subsidiaries’ business operations, financial conditions, and management performance, the Company has determined that the pooling of interests accounting is appropriate for this business combination, since the wholly owned subsidiaries continue jointly to share the risks and rewards of the Daiichi Sankyo group.

Item	Fiscal 2005 (Year ended March 31, 2006)
5. Summary of Significant Accounting Policies
(a) Methods of Valuation of Significant Assets	(1)    Marketable and Investment Securities Held-to-maturity securities: Mainly the amortized cost method (straight-line amortization) Available-for-sale securities: Securities with determinable market value; Mainly stated at market value based on the quoted market prices at the end of the fiscal year. Unrealized holding gains and losses are reported in a component of shareholders’ equity, with the cost of securities sold being calculated by the moving-average method. Securities without determinable market value; Mainly stated at cost based on the moving-average method (2)    Derivatives Market value method
	(3)    Inventories Mainly stated at the lower of cost, by the average method, or market
(b) Depreciation and Amortization of Significant Depreciable Assets	(1)    Property, Plant and Equipment The Company and its domestic consolidated subsidiaries account for depreciation of property, plant and equipment by the declining-balance method, except for the buildings (excluding fixtures) acquired on or after April 1, 1998, which are accounted for by the straight-line method. Overseas consolidated subsidiaries account for depreciation of property, plant and equipment mainly by the straight-line method.
	The principal useful lives are as follows: Buildings and structures: 15-50 years Machinery, equipment and vehicles: 4-7 years
	(2)    Intangible Assets Intangible assets are being amortized by the straight-line method. Software for internal use is amortized over the estimated useful lives of a five-year period.
(c) Method of Amortization of Deferred Charges	(1)    Start-up Costs Start-up costs are expensed as incurred.

Item

Fiscal 2005 (Year ended March 31, 2006)

(d) Methods of Accounting for Significant Allowances

(1)    Allowance for Doubtful Accounts The Company covers the risk of credit losses from potential customer defaults by providing for this allowance. For normal accounts, the allowance is computed on the basis of the historical default rates. For specific over-due accounts, the allowance is based on individual account-by-account estimates of the amounts that may not be recoverable. (2)    Allowance for Sales Returns To prepare for losses on potential returns of products after the end of the fiscal year, the Company’s certain subsidiaries provide for an amount equal to the sum of gross profits and inventory losses on such returned products, based on its estimate of possible sales returns. For the current fiscal year, the provision for this allowance of ¥268 million is included in cost of sales. (3)    Allowance for Sales Rebates To prepare for future sales rebates, the Company’s certain subsidiaries provide for this allowance calculated by multiplying an estimated sales rebate percentage for the fiscal year by the amounts of accounts receivable from and inventories held by wholesalers at the end of the fiscal year. (4)    Accrued Retirement and Severance Benefits To prepare for future payments of employee retirement severance benefit, the Company’s domestic consolidated subsidiaries provide for an amount incurred by the fiscal year-end based on estimated projected benefit obligations and plan assets at the end of the fiscal year. Certain overseas consolidated subsidiaries provide for such accruals in accordance with accounting principles generally accepted in the countries of their domicile. Prior service cost is amortized under the straight-line method over a period of 5 to 10 years, which is equal to or less than the estimated average remaining years of service of the eligible employees at the time such prior year service cost was incurred. Actuarial gains and losses are amortized under the straight-line method, beginning in the fiscal year following the year in which the gain or loss was initially measured, over a period of 5 to 10 years, which is equal to or less than the average remaining years of service of the eligible employees at the time such actuarial gain or loss occurred, except for Sankyo which recognizes actuarial gains or losses immediately as they occur. (Supplemental Information) Accompanying the enactment of the Defined Benefit Pension Plan Law, Daiichi, a consolidated subsidiary, received an approval of exemption from the Minister of Health, Labour and Welfare, on January 1, 2005, from the obligations for pension payment liabilities related to past employee service with respect to the substitutional portion of its Employees’ Pension Fund, and on May 31, 2005, a payment was made to transfer the plan assets related to the substitutional portion to the government based on the minimum liability. For the current fiscal year, as a result of this return of the plan assets, the Company recognized an extraordinary gain of ¥163 million. (5)    Accrued Directors’ Retirement and Severance Benefits To prepare for payments of directors’ retirement and severance benefits, the Company’s domestic consolidated subsidiaries provide for an amount equal to the total benefits that would have become payable at the end of the fiscal year, in accordance with the internal policies, had all directors resigned voluntarily. Certain of the Company’s overseas consolidated subsidiaries record a provision for an amount incurred by the end of the fiscal year. (6)    Allowance for Contingent Losses To prepare for possible future contingent losses, the Company provides an accrual for an amount of reasonably possible losses, by examining individual risks on a case by case basis.

Item	Fiscal 2005 (Year ended March 31, 2006)
	(7)    Accrued soil remediation costs Based on a survey completed on certain land for the scope of soil remediation, Sankyo, a consolidated subsidiary, has recognized a provision for soil remediation at an estimated amount of cleanup costs that Sankyo will reasonably incur for the fiscal year ending March 31, 2007 and thereafter.
(e) Translation of Assets and Liabilities Denominated in Foreign Currencies into Yen	Receivables and payables denominated in foreign currencies are converted into yen amounts at the rates of exchange in effect at the balance sheet date, with resulting translation gains or losses recognized currently in earnings. The assets and liabilities of overseas consolidated subsidiaries are converted into yen amounts at the rates of exchange in effect at their balance sheet dates, while income and expenses are converted into yen amounts at the average exchange rates in effect over the respective periods, with resulting translation gains and losses recorded in a component of shareholders’ equity under translation adjustments or in the minority interests section of the balance sheet.
(f) Accounting for Significant Lease Transactions	Financing leases are accounted for using the same accounting method applied to operating leases, with the exception of those financing leases in which the legal title of the underlying property is transferred from the lessor to the lessee.
(g) Significant Hedge Accounting Methods	(1)    Hedge Accounting Methods The Company employs the deferred hedge method of accounting. Foreign exchange forward contracts that meet certain criteria are accounted as a hedge of underlying assets and liabilities. Interest rate swaps that meet certain hedge criteria and whose notional amounts, interest payments and maturities match with those of the hedged borrowings are accounted for by the special short-cut method, as if the interest rates of the interest rate swaps had been originally applied to the underlying borrowings. (2)    Hedging Instruments and Hedged Items Hedging instruments: Foreign exchange forward contracts, and interest rate swaps Hedged items: Accounts payable and receivable and forecasted transactions denominated in foreign currencies, and loans (3)    Hedge Policy Certain consolidated subsidiaries hedge foreign exchange rate fluctuation risks relating to imports and exports and interest rate risks related to variable rate borrowings. The Company and its consolidated subsidiaries do not enter into speculative derivative transactions. (4)    Methods of Assessing Hedge Effectiveness The hedge effectiveness of foreign exchange forward contracts as a hedge has not been assessed, as the principal terms of the hedging instruments are the same as those of the hedged items. The effectiveness of interest rate swaps accounted for by the special short-cut method has also not been assessed, as permitted under the standard.
(h) Accounting for Consumption Tax	The tax-exclusion (net of tax) method is used to account for the national and local consumption taxes.
5. Valuation Method for Assets and Liabilities of Subsidiaries Acquired in Business Combination	All assets and liabilities of an acquired business that becomes a consolidated subsidiary are valued on a full fair value basis without taking into account minority interests’ share in such assets and liabilities.
6. Amortization of Goodwill	Goodwill is being amortized mainly over a period of five years. However, if the amount is immaterial, it is written off currently in earnings.
7. Appropriation of Retained Earnings	The consolidated statement of retained earnings reflects the appropriation of retained earnings approved during the fiscal year.
8. Cash and Cash Equivalent in the Consolidated Statement of Cash Flows	Cash and cash equivalents in the consolidated statement of cash flows consist of: cash on hand, deposits which can be withdrawn upon demand, and highly liquid short-term investments that are easily convertible into cash with little risk of fluctuation in value, and that mature within three months of their dates of acquisition.

Notes to Consolidated Financial Statements

(Notes to Consolidated Balance Sheet)

As of March 31, 2006

* 1.   Accumulated depreciation on property, plant and equipment totaled ¥543,118 million.

* 2.   The balances related to non-consolidated subsidiaries and affiliated companies were as follows:

Investment securities (stock)	¥	2,106 million
Other assets (other investments in capital)	¥	7,213 million

* 3.   Pledged assets and secured liabilities

Assets pledged as collateral and secured liabilities were as follows:

Pledged assets		(Millions of yen)
Buildings and structures	2,285	(1,840	)
Machinery, equipment and vehicles	2,321	(2,321	)
Land	900	(757	)
Other	60	(60	)
Investment securities	766	(—	)
Total	6,333	(4,979	)
Secured liabilities		(Millions of yen)
Short-term bank loans	415	(88	)
Long-term debt	1,367	(700	)
Total	1,782	(788	)

Figures in parentheses indicate factory foundation mortgaged assets and related obligations, and are also included in the figures of the left.

4. Contingent liabilities

Certain debt and other obligations of non-consolidated companies and employees owed to financial institutions are guaranteed by the Company. A breakdown of these obligations was as follows:

	(Millions of yen)
Guarantees provided on employees housing loans, etc	2,195
Sanofi-Pasteur-Daiichi Vaccines Co., Ltd.	350
Saudi Arabian-Japanese Pharmaceutical Co., Ltd.	322
One other company	52
Total	2,920

5. The discounted trade notes receivable totaled ¥93 million.

6. Commitment line contracts

Certain consolidated subsidiaries maintain committed lines of credit with 17 financial institutions in order to allow an efficient procurement of working capital. The balance of unused credit lines under these contracts at the end of the fiscal year was as follows:

	(Millions of yen)
Total commitments	63,000
Commitments used	—
Commitments unused	63,000

* 7.   The total number of common shares of the Company issued at the year-end was 735,011,343 shares.

* 8.   Consolidated subsidiaries owned 5,959,047 shares of the Company’s common shares at the year-end.

(Notes to Consolidated Statement of Income)

Fiscal 2005

(Year ended March 31, 2006)

* 1.   Research and development expenses included in selling, general and administrative expenses and manufacturing overhead expenses totaled ¥158,716 million.

* 2.   Breakdown of gain on sale of property, plant and equipment

	(Millions of yen)
Buildings and structures	1
Machinery, equipment and vehicles	33
Land	4,860
Other	2

* 3.   Breakdown of loss on disposal of property, plant and equipment

	(Millions of yen)
Buildings and structures	1,773
Machinery, equipment and vehicles	422
Land	44
Other	514
Other intangible assets	1,308

In addition, expenses for disposal of property, plant and equipment totaled ¥1,487 million.

* 4.   Loss on business integration

The loss represents one-time costs associated with integration of the pharmaceutical operations of the Sankyo Group and the Daiichi Group. The amount consisted of the following:

Expenses associated with the integration of overseas operations	¥	7,086 million
Expenses associated with the integration of healthcare business	¥	968 million
Other research and consulting expenses	¥	1,838 million

* 5.   Loss on impairment of property, plant and equipment

The Daiichi Sankyo Group (the Company and consolidated subsidiaries) classifies its assets held and used for its business operations into asset groups on the basis of operating segments in the management reporting in consideration of similarities of products or operating activities, consistency within the Group, and future maintenance sustainability. On the other hand, leased assets and idle assets that are not directly used for its business operations are grouped on a properly by properly basis.

For the current fiscal year, the Daiichi Sankyo Group recorded an impairment loss on the following asset groups:

Location	Function	Asset Type	Status
Iwaki, Fukushima	Onahama Plant (manufacturing facilities of pharmaceuticals)	Buildings and structures Machinery, equipment and vehicles	Idle
Shiraishi-ku, Sapporo	Former Sapporo Distribution Center facility	Land	Idle
Shimotoga-gun, Tochigi	Former Tochigi Research Center facility	Buildings, land, etc.	Idle
Tsuchiura, Ibaraki	Company housing, etc.	Land	Idle
Sanbu-gun, Chiba	Chiba plant site	Land	Idle

Because the above asset groups are idle and have uncertain prospects for future utilization, their book values have been written down to a recoverable amount, and such reductions in the mount of ¥5,253 million were recorded as a loss on impairment in the extraordinary losses.

The impairment loss consisted of ¥2,442 million associated with buildings and structures, ¥1,888 million associated with machinery, equipment and vehicles, ¥901 million associated with land and ¥20 million associated with other assets.

The recoverable amount of an assets group is an estimated net realizable value, which was obtained based on third-party appraisal or the valuation amount for real estate tax purpose, with reasonable adjustments.

* 6.   Provision for contingent losses

The amount represents an estimated amount of penalty arising out of the product purchase commitments that contain a minimum purchase provision.

* 7.   Restructuring charge

To concentrate on the pharmaceutical business, the Company has been carrying out a reorganization of its peripheral businesses. As part of this reorganization, the Company sold certain investments in affiliated companies. Restructuring charge includes a loss on such sales of investments and expenses paid to external advisers.

* 8.   Loss on settlement of vitamin-related anti-trust litigations

The amount represents fines resulting from an unsuccessful appeal against the EC ruling that the Company participated in a vitamin cartel.

(Notes to Consolidated Statements of Cash Flows)

Fiscal 2005

(Year ended March 31, 2006)

1. Reconciliation of cash and cash equivalents at the end of the fiscal year with the balance sheet accounts

	(Millions of yen)
Cash and time deposits	223,979
Less time deposits with maturities extending over three months	(2,901	)
Add short-term investments with maturities within three months	179,890
Cash and cash equivalents	400,967

* 2.   Breakdown of assets and liabilities of consolidated subsidiaries that are no longer consolidated due to sale of stock

The following table presents are the breakdown of the assets and liabilities of Nippon Daiya Valve Co., Ltd. and F.P. Processing Co., Ltd. which are no longer consolidated due to sale of their stock, and a reconciliation of the sale price of the stock and the proceeds from the sale:

	(Millions of yen)
Current assets	4,452
Non-current assets	939
Current liabilities	(3,526	)
Non-current liabilities	(561	)
Gain from sale of stock in affiliate	27
Loss on sale of investments in subsidiaries	(330	)
Gross proceeds from sale of investment of investments in subsidiaries	1,001
Cash and cash equivalents of subsidiaries disposed	(358	)
Proceeds from sale of investment in subsidiaries	642

(1) Lease Transactions

Pro-forma information on financing leases has not been presented herein because the Company discloses such information through EDINET (Electronic Disclosure for Investors’ NETwork).

(2) Marketable and Investment Securities

1. Held-to-Maturity Securities with Determinable Market Value

(Millions of yen)

	Carrying amount	Market value	Difference
Securities with market values greater than their carrying amounts:
(1) Government and local bonds	999	1,000	0
(2) Corporate bonds	22,808	22,866	58
(3) Other	—	—	—
Sub-total	23,808	23,866	58
Securities with market values at or less than their carrying amounts:
(1) Government and local bonds	42,397	42,311	(86	)
(2) Corporate bonds	83,695	82,639	(1,055	)
(3) Other	—	—	—
Sub-total	126,093	124,951	(1,141	)
Total	149,901	148,817	(1,083	)

2. Available-for-Sale Securities with Determinable Market Value

(Millions of yen)

	Acquisition cost	Carrying amount	Difference
Securities with carrying amounts greater than their acquisition costs:
(1) Stock	38,949	172,059	133,109
(2) Bonds
a) Government and local bonds	—	—	—
b) Corporate bonds	1,120	1,226	106
c) Other	—	—	—
(3) Other	2,155	3,276	1,121
Sub-total	42,224	176,562	134,337
Securities whose carrying amounts at or less than their acquisition costs:
(1) Stock	64	59	(4	)
(2) Bonds
a) Government and local bonds	—	—	—
b) Corporate bonds	—	—	—
c) Other	17,096	17,096	—
(3) Other	210	204	(6	)
Sub-total	17,371	17,360	(10	)
Total	59,595	193,922	134,327

Note:  During the fiscal year, an impairment loss of ¥301 million has been recorded on available-for-sale securities with determinable market value. When the market value of securities has dropped by 30% or more from the acquisition costs, the securities are classified as having ‘fallen significantly.’ When the securities’ market decline is 50% or more, the securities are written-down to their market value. When the market value of securities has dropped by 30% or more but less than 50%, likelihood of recovery is estimated on the basis of market value trends and the financial conditions of the issuing companies. Write-downs are recognized in all of such securities other than those for which there is a prospect for recovery.

3. Available-for-Sale Securities Sold During the Year

(Millions of yen)

Amount sold	Total gain on sale	Total loss on sale
4,593	752	206

4. Breakdown of Securities without Determinable Market Value

(Millions of yen)

	Carrying amount
(1) Held-to-maturity securities
a) Certificates of deposit	12,000
b) Commercial papers	84,981
c) Other	10
(2) Available-for-sale securities
a) Money management funds, etc.	65,811
b) Unlisted stock	11,847
c) Preferred securities	6,000
d) Other	4,267

5. Scheduled Maturities of Available-for-Sale with Maturity and Held-to-Maturity Securities

(Millions of yen)

	Within one year	Between one and five years	Between five and ten years	Over ten years
(1) Bonds
a) Government and local bonds	40,403	2,993	—	—
b) Corporate bonds	54,206	41,281	11,016	—
c) Other	96,991	—	—	—
(2) Other securities	—	1,226	—	—
Total	191,602	45,501	11,016	—

(3) Derivative Transactions

The fair value information of derivative instruments has not been presented herein because the Company discloses such information through EDINET (Electronic Disclosure for Investors’ NETwork).

(4) Retirement and Severance Benefits

1. Summary of Retirement and Severance Benefit Arrangements

Sankyo Company, Limited and its domestic consolidated subsidiaries have unfunded lump-sum retirement and severance benefit plans and qualified pension benefit plans as their primary defined benefit arrangement. In addition, certain of the domestic consolidated subsidiaries participate in a multi-employer employees’ pension fund plan. Daiichi Pharmaceutical Co., Ltd. and its domestic subsidiaries have adopted the group-wide retirement benefit arrangement comprising of a defined benefit corporate pension plan and a defined contribution pension plan. Certain overseas consolidated subsidiaries provide a defined benefit plan or a defined contribution plan.

Additional retirement benefits which are not subject to the actuarial valuation in accordance with the accounting standards for the retirement and severance benefits may be paid to employees upon retirement.

2. Retirement and Severance Benefit Obligation

(Millions of yen)

	As of March 31, 2006
(1) Projected benefit obligations (Note 1)	(148,160	)
(2) Plan assets at fair value (Note 2)	97,909
(3) Over-funded projected benefit obligations in excess of plan assets (1)+(2)	(50,251	)
(4) Unrecognized actuarial losses	2,064
(5) Unrecognized prior service costs	(2,827	)
(6) Net pension liabilities recognized in the consolidated balance sheet (3)+(4)+(5)	(51,014	)
(7) Prepaid pension assets	17,307
Accrued retirement and severance benefits (6)-(8)	(68,321	)

(Notes)

1. Certain consolidated subsidiaries use the simplified vested-benefit method in calculating their retirement and severance benefit obligations.

2. In addition, the plan assets in the multi-employer welfare pension fund, estimated based on the Company’s contribution ratio since the amount attributable to the Company’s contributions cannot be calculated reasonably, totaled 8,891 million yen. This amount has not been included in the plan assets presented above.

3. Employees’ Retirement and Severance Benefit Costs

(Millions of yen)

	Fiscal 2005 (Year ended March 31, 2006)
(1) Service cost for benefits earned (Notes 1, and 2)	8,715
(2) Interest cost	3,272
(3) Expected return on plan assets	(2,338	)
(4) Amortization of actuarial gain or loss	(1,437	)
(5) Amortization of prior service costs	(870	)
(6) Additional retirement benefits	1,620
(7) Net periodic retirement and severance costs (1)+(2)+(3)+(4)+(5)+(6)	8,961
(8) Gain from return of the substitutional portion of the Employees’ Pension Fund to the government	(163	)
(9) Others (Note 3)	884
Total retirement and severance costs (7)+(8)+(9)	9,681

(Notes)

1. Costs of retirement and severance benefits of those consolidated subsidiaries which have adopted the simplified vested-benefit method are included in service cost for benefits earned.

2. The amount is net of employees’ contributions to the multi-employer employees’ pension fund.

3. The amount consists of contributions to the defined contribution pension plan and prepayments of retirement benefit to certain employees based on the retirement benefit prepayment arrangement.

4. Principal Assumptions Used in the Calculation of Retirement and Severance Benefit Obligations

(Millions of yen)

	Fiscal 2005 (Year ended March 31, 2006)
Method of inter-period attribution of estimated retirement benefit costs	Straight line method
Discount rate	Mainly 2.5%
Expected rate of return on plan assets	2.5 - 3.0%
Amortization period of prior service costs	5 - 10 years (amortized under the straight-line method over a period not exceeding the average remaining years of service of the eligible employees at the time such prior service cost was incurred)
Amortization period of actuarial gain or loss	5-10 years (amortized beginning in the fiscal year following the year in which such actuarial gain or loss was first measured under the straight-line method over a period not exceeding the average remaining years of services of the eligible employees at the time such actuarial gain or loss occurred) Sankyo Company, Limited recognizes actuarial gains or losses immediately as they occur.

(5) Deferred Income Taxes

Fiscal 2005

(As of March 31, 2006)

1. Principal components of deferred tax assets and deferred tax liabilities

	(Millions of yen	)
Deferred tax assets
Accrued retirement and severance benefits	25,879
Prepaid consigned research and co-development expenses	21,546
Depreciation	16,914
Net operating loss carry forwards for income tax purposes	15,840
Accrued bonuses	10,330
Unrealized profit on inventories and loss on valuation of inventories	8,009
Unrealized holding gains on property, plant and equipment	6,106
Impairment losses	4,402
Accrued enterprise tax	2,181
Other	20,679
	131,891
Valuation allowance	(32,484	)
Total deferred tax assets	99,407
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities	(55,030	)
Reserve for reduction in bases of property, plant and equipment for income tax purposes	(9,604	)
Prepaid pension costs	(6,948	)
Other	(3,468	)
Total deferred tax liabilities	(75,052	)
Net deferred tax assets	24,355

Note: Net deferred tax assets are included in the following balance sheet captions:

(Millions of yen)

Current assets – deferred tax assets	40,911
Non-current assets – deferred tax assets	7,403
Current liabilities – deferred tax liabilities	(31	)
Non-current liabilities – deferred tax liabilities	(23,926	)

2. Reconciliation of the difference between the statutory tax rate and the effective tax rate

(percent)

Statutory tax rate	40.5
(Adjustments)
Non-deductible permanent differences including entertainment and other items	5.2
Deductible permanent differences including dividend received deductions and other items	(1.0	)
Decrease in valuation allowance	(3.1	)
Tax credit for research and development expenses	(6.2	)
Other	0.5
Effective tax rate	35.9

(6) Segment Information

a. Information by Operating Segment

(Millions of yen)

Fiscal 2005 (Year ended March 31, 2006)	Pharmaceuticals	Other	Total	Eliminations & corporate		Consolidated
I        Net sales and operating income
Net sales
(1) Outside customers	784,666	141,251	925,918	—		925,918
(2) Inter-segment sales and transfers	790	4,024	4,814	(4,814	)	—
Total	785,457	145,275	930,733	(4,814	)	925,918
Operating expenses	637,342	139,129	776,472	(5,282	)	771,190
Operating income	148,114	6,146	154,260	467		154,728
II      Assets, depreciation and capital expenditures
Assets	1,429,425	169,659	1,599,084	(2,957	)	1,596,126
Depreciation	35,795	5,333	41,128	—		41,128
Impairment loss	5,253	—	5,253	—		5,253
Capital expenditures	28,967	6,408	35,375	—		35,375

(Notes)

1. Method of classifying operating segments: Classification into ‘Pharmaceuticals’ and ‘Other’ is based on consideration of product type, market characteristics and other factors.

2. Principal products in each operating segment

Pharmaceuticals:	Prescription drugs and medicine, and healthcare products
Other:	Food products, agrochemicals, chemicals, and other

b. Information by Geographic Segment

(Millions of yen)

Fiscal 2005 (Year ended March 31, 2006)	Japan	North America	Other	Total	Eliminations & corporate		Consolidated
I        Net sales and operating income
Net sales
(1) Outside customers	752,793	116,061	57,063	925,918	—		925,918
(2) Inter-segment sales and transfers	21,553	18,212	5,805	45,572	(45,572	)	—
	774,347	134,274	62,869	971,490	(45,572	)	925,918
Operating expenses	644,098	108,816	62,690	815,605	(44,414	)	771,190
Operating income	130,249	25,457	178	155,885	(1,157	)	154,728
II      Assets	1,452,287	132,455	59,040	1,643,783	(47,656	)	1,596,126

(Notes)

1. Method of classifying geographic segments

Geographic segments are classified on the basis of geographic proximity.

2. Countries and regions included in each segment other than Japan

North America: the United States

Other: Germany, the United Kingdom, France, Spain, Italy, Taiwan and others

c. Overseas Sales

(Millions of yen)

Fiscal 2005 (Year ended March 31, 2006)	Americas	Europe	Other Areas	Total
I        Overseas net sales	182,614	98,440	26,210	307,265
II      Consolidated net sales				925,918
III     Percentage of overseas net sales to consolidated net sales (%)	19.7	10.6	2.9	33.2

(Notes)

1. Method of classifying countries and regions

Countries and regions are classified on the basis of geographic proximity.

2. Countries and regions included in each area

North America: the United States and Canada

Europe: Germany, the United Kingdom, Spain, Italy, Ireland, France, Switzerland and others

Other areas: Asia, the Middle East, Latin America and others

3. Overseas net sales are sales of the Company and its consolidated subsidiaries which were transacted in countries or regions outside of Japan.

(7) Transactions with Related Parties

There were no transactions during the fiscal year.

Per Share Information

	Fiscal 2005 (Year ended March 31, 2006)
Net assets per share	¥1,696.97
Net income per share (basic)	¥119.49
Net income per share (diluted)	¥119.47

(Note) Calculations of basic and diluted net income per share were based on the following numerators and denominators:

	Fiscal 2005 (Year ended March 31, 2006)
Net income per share (basic):
Net income (millions of yen)	87,692
Amount not available for common shareholders (millions of yen)	350
(Including directors’ bonuses paid from net income of) (millions of yen)	[350]
Net income available for dividends on common shares (millions of yen)	87,342
Weighted-average number of common shares outstanding during the year (1,000 shares)	730,938
Net income per share (diluted):
Adjustments to net income (millions of yen)	—
Additional dilutive common shares (1,000 shares)	136
Including dilutive effect of stock options of (1,000 shares)	[136]
Descriptions of potentially dilutive common shares that were not included in the computation of diluted net income per share because of their anti-dilutive effect	Two share subscription right plans (related to 1,001 thousand shares) issued by Daiichi and one share purchase option plan (related to 3,760 units of options) issued by Sankyo. All outstanding stock options have been cancelled prior to the fiscal year-end.

Subsequent Events

Fiscal 2005

(Year ended March 31, 2006)

(Acquisition of a subsidiary through purchase of shares)

The Company and Astellas Pharma Inc. agreed that the Company would acquire all of the outstanding shares of Zepharma Inc., a subsidiary of Astellas Pharma Inc. A written agreement was entered into on March 31, 2006, and the transaction was closed on April 13, 2006.

(1) Purpose of acquisition

To strengthen the healthcare business in the area of non-prescription drugs

(2) Name of company selling the shares

Astellas Pharma Inc.

(3) Name of the company acquired; nature of business; and its size

Name:	Zepharma Inc.
Nature of business:	Development and sale of drugs, non-prescription drugs, cosmetics, foods, etc.
Capital:	¥300 million
Sales:	¥22.4 billion (pro-forma amount for the year ended March 31, 2005)

(4) Date of acquisition

April 13, 2006

(5) Number of shares purchased; cost of acquisition; and percentage of ownership held upon acquisition

Number of shares purchased:	6,000 shares
Cost of acquisition:	¥35.5 billion
Percentage of ownership held upon acquisition:	100%

(6) Source of financing

The full amount was paid out of on-hand cash

Fiscal 2005

(Year ended March 31, 2006)

(Sale of a subsidiary)

At its Board of Directors’ Meeting held on April 24, 2006, Sankyo Co., Ltd., a wholly owned subsidiary of the Company, approved to apply for a sale of the shares of its subsidiary, Wakodo Co., Ltd., in response to a tender offer to be made by Asahi Breweries, Ltd. for Wakodo shares.

(1) Reasons for sale

To concentrate management resources on the pharmaceutical business, the Company has been reassessing its involvement in non-pharmaceutical businesses. In the course of this reassessment, a tender offer to purchase Wakodo Co. Ltd.’s shares was proposed by Asahi Breweries, Ltd., who has valued highly of both the nature of Wakodo’s business and the growth prospects of that business. The Company has concluded to accept the tender offer taking into consideration Asahi Breweries’ management’s pursuit of customer satisfaction and quality, its technologies and know-how, and its variety of sales channels that would contribute to the future development of Wakodo’s business, as well as the price and other terms of the tender offer.

(2) Name of buyer

Asahi Breweries, Ltd.

(3) Date of sale

April 25, 2006 Date of public notice of the tender offer

May 15, 2006 Last day of the tender offer period

May 19, 2006 Commencement date of settlement

(4) Name of subsidiary; nature of business; and nature of transactions with the Company

Name: Wakodo Co., Ltd.

Nature of business: Manufacture and sale of powdered baby milk; baby foods; vending machine foods; household food items; commercial-use milk powder; pharmaceuticals; non-prescription drugs; cosmetics; sanitary goods; and general merchandise

Transactions with the Company: None

(5) Number of shares to be sold; sale price; gain or loss on sale and ownership percentage upon disposition

Number of shares to be sold: 3,533,000

Sale price: ¥27.9 billion

Ownership percentage upon disposition: 0%

5. Production, Orders and Sales

(1) Production

Production by operating segment for the fiscal year is summarized as follows:

Operating segment	Amount (Millions of yen)	Changes (%)
Pharmaceuticals	633,177	—
Other	102,782	—
	735,960	—

(Notes)

1. Production amounts are based on net selling prices and are after elimination of inter-segment sales.

2. The above amounts are stated exclusive of consumption tax.

(2) Orders

The Daiichi Sankyo Group performs production according to its own production plans, which are primarily based on its sales forecast. Order-based production is carried out at certain subsidiaries; however, the amount of order back-log is not presented herein as such amounts were insignificant.

(3) Net Sales

Net sales by operating segment for the fiscal year were as follows:

Operating segment	Amount (Millions of yen)	Changes (%)
Pharmaceuticals	784,666	—
Other	141,251	—
	925,918	—

(Notes)

1. Net sales amounts are after elimination of inter-segment sales.

2. Net sales to major customers and their percentage of total net sales were as follows:

Customers	Fiscal 2005
	(Millions of yen)	%
Alfresa Corporation	105,010	11.3

3. The above amounts are stated exclusive of consumption tax.

FASF                      

May 12, 2006

Non-consolidated Financial Results

for the Fiscal Year 2005

(Year Ended March 31, 2006)

Listed company name: DAIICHI SANKYO COMPANY, LIMITED

Stock code number: 4568

Listed exchanges: Tokyo, Osaka, and Nagoya

Head office: Tokyo, Japan

Homepage: http://www.daiichisankyo.co.jp

Representative: Mr. Takashi Syoda, President and CEO

Contact: Mr. Toshio Takahashi, Corporate Officer, General Manager of Corporate Communication Department

TEL: +81-3-6225-1126

Meeting of the Board of Directors: May 12, 2006

Interim dividends: Yes

Scheduled date of dividend payments: From June 30, 2006

Annual meeting of the shareholders: June 29, 2006

Adoption of the unit share system: Yes (One unit equals 100 shares)

1. Financial Results for the Interim Period of Fiscal 2005

(1) Non-Consolidated Financial Results

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Operating revenue		Operating income		Ordinary income
	Millions of yen	Percent change	Millions of yen	Percent change	Millions of yen	Percent change
Fiscal 2005	76,656	—	73,948	—	73,591	—
Fiscal 2004	—	—	—	—	—	—

	Net income		Basic net income per share	Diluted net income per share	Return on equity	Ordinary income as a percentage of total assets	Ordinary income as a percentage of net sales
	Millions of yen	Percent change	Yen	Yen	%	%	%
Fiscal 2005	73,545	—	100.06	—	6.3	6.2	96.0
Fiscal 2004	—	—	—	—	—	—	—

Notes:

1. Weighted-average number of common shares issued and outstanding during the fiscal year:

Fiscal 2005:	734,991,327 shares
Fiscal 2004:	—   shares

2. Changes in accounting policies:                                                                    No

3. Percentages for operating revenue, operating income, ordinary income and net income represent a change from the corresponding results in the previous fiscal year.

(2) Dividends

	(yen)
	Dividends per share for the year			Total dividend payments (millions of yen)	Dividend payout ratio (%)	Dividends as a percentage of Shareholders’ equity (%)
		Interim	Year-end
Fiscal 2005	25.00	—	25.00	18,374	25.0	1.5
Fiscal 2004	—	—	—	—	—	—

Note: In lieu of an interim dividend, the Company made a share transfer payment of ¥25 per common share to the shareholders of record in the final shareholders registries, as of September 27, 2005, of Sankyo Company, Limited and Daiichi Pharmaceutical Co., Ltd.

(3) Non-Consolidated Financial Position

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Total assets	Shareholders’ equity	Shareholders’ equity ratio	Shareholders’ equity per share
	Millions of yen	Millions of yen	%	Yen
Fiscal 2005	1,209,278	1,206,810	99.8	1,641.98
Fiscal 2004	—	—	—	—

Notes     1.     Total number of common shares issued at the end of the fiscal year

Fiscal 2005:	735,011,343 shares
Fiscal 2004:	—   shares

              2.     Number of common shares in treasury stock at the end of the fiscal year

Fiscal 2005:	37,608 shares
Fiscal 2004:	—   shares

2. Forecasts of Non-Consolidated Results Fiscal Year 2006 (April 1, 2006—March 31, 2007)

	Operating revenue	Ordinary income	Net income	Cash dividends per share
				Interim	Year-end
	Millions of yen	Millions of yen	Millions of yen	Yen	Yen	Yen
Interim 6-month period	3,000	100	100	30.00	—	—
Full-fiscal year	6,300	300	200	—	30.00	60.00

Reference: Forecasted annual net income per share (basic) : ¥0.27

* Note: The forecast figures shown above are based on information that was available at the time of preparation and may contain some uncertainties. Actual performance and other factors may differ from these forecasts due to changes in circumstances and other developments. For more information concerning these forecasts can be found in the attached Supplementary Information on page 15 and 16.

6. Non-Consolidated Financial Statements

(1) Non-Consolidated Balance Sheets

(Millions of yen)

		As of March 31, 2006
	See Note	Amount		%
ASSETS
I        Current assets:
1. Cash and time deposits			41,900
2. Deferred tax assets			172
3. Other receivables			1,380
4. Income tax refunds receivable			14,541
5. Other current assets			193
Total current assets			58,187	4.8
II      Non-current assets
1. Property and equipment
(1) Buildings		32
Less accumulated depreciation		4	27
(2) Furniture, tools and fixtures		12
Less accumulated depreciation		1	11
Total property and equipment, net			39	0.0
2. Intangible assets, net:
(1) Trade marks			296
(2) Other			0
Total intangible assets, net			296	0.0
3. Investments and other assets:
(1) Investments in affiliated companies			1,150,654
(2) Deferred tax assets			16
(3) Other assets			83
Total investments and other assets			1,150,755	95.2
Total non-current assets			1,151,090	95.2
Total assets			1,209,278	100.0

(Millions of yen)

		As of March 31, 2006
	See Note	Amount			%
LIABILITIES
I        Current liabilities:
1. Accounts payable			2,110
2. Accrued expenses			165
3. Income tax payable			138
4. Consumption taxes payable			45
5. Advance receipts			8
Total current liabilities			2,467		0.2
Total liabilities			2,467		0.2
SHAREHOLDERS’ EQUITY
I        Common stock	*1		50,000		4.1
II      Additional paid-in-capital:
1. Capital surplus		1,083,349
2. Other capital surplus
(1) Gain on reissuance of treasury stock		0
Total additional paid-in-capital			1,083,350		89.6
III     Retained earnings:
1. Unappropriated retained earnings		73,545
Total retained earnings			73,545		6.1
IV    Treasury stock at cost	*2		(84	)	(0.0	)
Total shareholders’ equity			1,206,810		99.8
Total liabilities and shareholders’ equity			1,209,278		100.0

(2) Non-Consolidated Statement of Income

(Millions of yen)

	See Note	Fiscal 2005 (Year Ended March 31, 2006)
		Amount			%
I        Operating revenue
1. Dividend income	*1	73,501
2. Management fee income		3,155		76,656	100.0
II      Operating expenses:
1. Directors’ compensation, salaries and bonuses:		528
2. Retirement and severance costs		30
3. Welfare benefit expenses		57
4. Depreciation expense		22
5. Outsourcing service fees		440
6. Corporate advertising expenses		869
7. Other		758		2,707	3.5
Operating income				73,948	96.5
III     Non-operating income
1. Interest income		2
2. Other income		2		4	0.0
IV    Non-operating expenses
1. Start-up costs		361
2. Other expenses		0		361	0.5
Ordinary income				73,591	96.0
V      Extraordinary gains				—
VI    Extraordinary losses				—
Net income before income taxes				73,591	96.0
Income tax expense — current		235
Income tax expense — deferred		(189	)	45	0.1
Net income				73,545	95.9
Unappropriated retained earnings, end of year				73,545

(3) Proposal for Appropriations of Retained Earnings

	See Note	Fiscal 2005 (Year Ended March 31, 2006)
		Approval date at the general meeting of shareholders: June 29, 2006
		Amount
I        Unappropriated retained earnings			73,545
II      Appropriations:
Dividends		18,374	18,374
III     Unappropriated retained earnings carried forward to the next fiscal year			55,170

Significant Accounting Principles and Policies for the Preparation of the Non-Consolidated Financial Statements

Item	Fiscal 2005 (Year Ended March 31, 2006)
1.      Methods of Valuation of Investment Securities	Investments in subsidiaries: Accounted for by the moving-average cost method
2.      Depreciation and Amortization of Significant Depreciable Assets	(1) Property and Equipment Depreciation is calculated based on the declining-balance method. (2) Intangible Assets Amortization is calculated based on the straight-line method.
3.      Method for Amortization of Deferred Charges	Start-up Costs Start-up costs are expensed as incurred.
4.      Accounting for Significant Lease Transactions	Finance lease transactions are accounted for using the same method applied to operating lease transactions, with the exception for those finance leases in which the legal title of the underlying property is transferred from the lessor to the lessee.
5.      Accounting for Consumption Tax	The tax-exclusion (net of tax) method is used to account for the national and local consumption taxes.

Notes to Non-Consolidated Financial Statements

(Notes to Non-Consolidated Balance Sheet)

As of March 31, 2006

*1. Authorized number of common shares	2,800,000,000 shares
Number of common shares issued	735,011,343 shares

The Articles of Incorporation provides that in the event of the retirement of shares, the number of shares the Company is authorized to issue shall be reduced by the number of shares retired.

*2. Treasury stock

Treasury stock owned by the Company at the end of the fiscal year was 37,608 shares of common stock.

(Notes to Non-Consolidated Statement of Income)

Fiscal 2005

(Year Ended March 31, 2006)

*1. Transactions with affiliated companies

The Company’s principal transactions with its affiliates were as follows.

Dividend income ¥ 73,501 million

(1) Lease Transactions

Pro-forma information on financing leases has not been presented herein because the Company discloses such information through EDINET.

(2) Marketable and Investment Securities

None of the stock of subsidiaries and affiliates has a quoted market price.

(3) Deferred Income Taxes

Fiscal 2005

(Year ended March 31, 2006)

1. Breakdown of deferred tax assets and deferred tax liabilities

(Millions of yen)

Deferred tax assets:
Accrued expenses	61
Accrued bonuses	56
Accrued enterprise tax	42
Depreciation	16
Other	11
Total deferred tax assets	189
Net deferred tax assets	189

2. Reconciliation of the difference between the statutory tax rate and the effective tax rate (percent)

Statutory tax rate	40.7
(Adjustments)
Deductible permanent differences including dividend received deductions and other items	(40.6	)
Other	0.0
Effective tax rate	0.1

(Per Share Information)

	Fiscal 2005 (Year Ended March 31, 2006)
Net assets per share	¥1,641.98
Net income per share	¥100.06

(Notes)

1. No information on diluted net income per share is presented because the Company has no potentially dilutive shares.

2. Calculation of net income per share was based on the following numerators and denominators.

	Fiscal 2005 (Year Ended March 31, 2006)
Net income per share (basic)
Net income (millions of yen)	73,545
Net income not available for dividends on common shares (millions of yen)	—
Net income available for payment of dividends on common shares (millions of yen)	73,545
Weighted - average number of common shares outstanding during the year (1,000 shares)	734,991

Subsequent Events

Fiscal 2005

(Year ended March 31, 2006)

(Acquisition of a subsidiary through purchase of shares)

The Company and Astellas Pharma Inc. agreed that the Company would acquire all of the outstanding shares of Zepharma Inc., a subsidiary of Astellas Pharma Inc. A written agreement was entered into on March 31, 2006, and the transaction was closed on April 13, 2006.

(1) Purpose of acquisition

To strengthen the healthcare business in the area of non – prescription drugs

(2) Name of company selling the shares

Astellas Pharma Inc.

(3) Name of the company acquired; nature of business; and its size

Name: Zepharma Inc.

Nature of business: Development and sale of drugs, non-prescription drugs, cosmetics and foods, etc.

Capital: ¥300 million

Sales: ¥22.4 billion (pro-forma amount for the year ended March 31, 2005)

(4) Date of acquisition

April 13, 2006

(5) Number of shares purchased; cost of acquisition; and percentage of ownership held upon acquisition purchase

Number of shares purchased: 6,000

Cost of acquisition: ¥35.5 billion

Percentage of ownership held upon acquisition: 100%

(6) Source of financing

The full amount was paid out of on-hand cash

7. Proposed Changes in the Membership of the Board of Directors

(as of June 29, 2006)

1. Changes in Representative Directors

(Representative Director Scheduled to Retire)

None

2. Changes in Directors

(Candidates for Election to the Board of Directors)

Executive Director      Yukio Sugimura (currently Executive Vice-President and Representative Director of Sankyo Co., Ltd.)

(Directors Scheduled to Retire)

Executive Director      Hideho Kawamura (scheduled to be elected Advisor of Sankyo Co., Ltd.)

3. Changes in Corporate Auditors

None

4. Candidates for Election to Substitute Corporate Auditors

Substitute auditor      Sumio Moriwaki (attorney)

5. Changes in Executive Officers

None

EX-99.2

Exhibit 99.2

FASF                        

May 12, 2006

Consolidated Financial Results for Fiscal 2005

(Year Ended March 31, 2006)

Sankyo Company, Limited

Listed company: DAIICHI SANKYO COMPANY, LIMITED

Stock code number: 4568

Listed exchanges: Tokyo, Osaka, and Nagoya

Head office: Tokyo, Japan

Homepage: http://www.sankyo.co.jp/

Contact: Toshio Takahashi, Executive Officer and General Manager, Corporate Communications Department

Phone: (03) 6225-1126

Meeting of Board of Directors: May 12, 2006

Parent company name: DAIICHI SANKYO COMPANY, LIMITED (stock code: 4568)

Parent company shareholding in the Company: 100.0%

U.S. accounting standards: Not applicable

Consolidated Financial Results for Fiscal 2005

(1) Consolidated Financial Results

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Net sales			Operating income			Ordinary income
	Millions of yen	Percent change		Millions of yen	Percent change		Millions of yen	Percent change
Fiscal 2005	579,949	(1.3	)	78,335	(7.8	)	82,164	(0.4	)
Fiscal 2004	587,830	(1.4	)	84,925	(11.1	)	82,506	(12.2	)

	Net income		Basic net income per share	Diluted net income per share	Return on equity	Ordinary income as a percentage of total assets	Ordinary income as a percentage of net sales
	Millions of yen	Percent change	Yen	Yen	%	%	%
Fiscal 2005	50,627	4.9	118.57	118.56	7.1	8.5	14.2
Fiscal 2004	48,282	11.2	111.78	111.74	6.9	8.7	14.0

Notes:

1. Equity in earnings of subsidiaries and affiliates accounted for by the equity method:

Fiscal 2005:	19 million yen
Fiscal 2004:	None

2. Weighted-average number of common shares issued and outstanding during the fiscal year (consolidated):

Fiscal 2005:	425,007,394 shares
Fiscal 2004:	429,527,836 shares

3. Changes in accounting policies: Yes

4. Percentages for net sales, operating income, ordinary income and net income represent a change from the corresponding results in the previous fiscal year.

(2) Consolidated Financial Position

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Total assets	Shareholders’ equity	Shareholders’ equity ratio	Shareholders’ equity per share
	Millions of yen	Millions of yen	%	Yen
Fiscal 2005	964,389	713,715	74.0	1,687.71
Fiscal 2004	976,230	716,587	73.4	1,667.76

Note: Total number of common share issued and outstanding at the end of the fiscal year (consolidated):

Fiscal 2005:	422,753,456 shares
Fiscal 2004:	429,508,509 shares

(3) Consolidated Cash Flows

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Net cash flows from operating activities	Net cash flows from investing activities		Net cash flows from financing activities		Cash and cash equivalents at the end of year
	Millions of yen	Millions of yen		Millions of yen		Millions of yen
Fiscal 2005	79,806	(20,295	)	(70,359	)	254,708
Fiscal 2004	96,703	(16,265	)	(12,716	)	262,530

(4) Scope of Consolidation and Application of Equity Method:

Number of consolidated subsidiaries:	34
Number of non-consolidated subsidiaries accounted for by the equity method:	0
Number of affiliates accounted for by the equity method:	1

(5) Changes in Scope of Consolidation and Application of Equity Method:

Consolidated subsidiaries:	(Increase)	2
	(Decrease)	5
Companies accounted for by the equity method:	(Increase)	1
	(Decrease)	0

1. State of the Group

On September 28, 2005, Sankyo Company, Limited together with Daiichi Pharmaceutical Co., Ltd. jointly implemented a share transfer and thereby created the DAIICHI SANKYO GROUP comprising two wholly owned subsidiaries and their group companies. The Sankyo Group consists of Sankyo Company, Limited (the “Company”), its 47 subsidiaries, and its 3 affiliates, for a total of 51 companies. The Group’s operating activities consist mainly of the manufacture and sale of pharmaceuticals, food products, agrochemicals, veterinary drugs and chemical products.

The following chart illustrates the organization of the Sankyo Group:

Parent Company

Name	Location	Capital/ Investment	Principal Business Operations	Percentage of Voting Rights Held	Nature of Relationship
					Concurrent Directors, etc.	Financial Support	Operating Transactions	Facilities Leased	Other
		(Million yen)		(%)
DAIICHI SANKYO COMPANY, LIMITED	Chuo-ku, Tokyo	50,000	Business administration of subsidiaries and group companies, and related operations	100.0	Yes	—	—	Sankyo leases offices	Receipt of services related to business administration
(Notes) 1.      DAIICHI SANKYO file a separate securities report (‘yukashoken todokedesho’ or ‘yukashoken hokokusho’) to the Ministry of Finance in Japan. 2.      DAIICHI SANKYO is a joint holding company established through stock transfer on September 28, 2005. Consolidated Subsidiaries
Name	Location	Capital/ Investment	Principal Business Operations	Percentage of Voting Rights Held	Nature of Relationship
					Concurrent Directors, etc.	Financial Support	Operating Transactions	Facilities Leased	Other
		(Million yen)		(%)				(Million yen)
Wakodo Co., Ltd.	Chiyoda-ku, Tokyo	2,918	Food	61.2 (0.7)	Yes	Wakodo Co., Ltd.	Chiyoda-ku, Tokyo	2,918	Food
Fuji Flour Milling Co., Ltd.	Shimizu-ku, Shizuoka-shi	500	Food	66.4 (0.2)	Yes	—	Sankyo purchases raw materials	Research facilities and warehouses	—
Sankyo Organic Chemicals Co., Ltd.	Takatsu-ku, Kawasaki-shi	300	Pharmaceuticals and other	93.4	Yes	—	Sankyo purchases raw materials and consigns manufacturing	Manufacturing facilities	—
Nippon Nyukazai Co., Ltd.	Chuo-ku, Tokyo	300	Other	100.0	Yes	Loan guarantees	Sankyo purchases raw materials	Land	—
Sankyo Chemical Industries, Ltd.	Chuo-ku, Tokyo	65	Pharmaceuticals	100.0	No	Facility- related Loans and working capital	Sankyo purchases raw materials and consigns manufacturing	—	—
Hokkai Sankyo Co., Ltd.	Kitahiroshima-shi	331	Agrochemicals	80.0	Yes	—	—	—	—
Meguro Chemical Industry Co., Ltd.	Meguro-ku, Tokyo	40	Other	100.0	Yes	—	Sankyo purchases materials and consigns manufacturing	Manufacturing facilities	—
Utsunomiya Chemical Industry Co., Ltd.	Utsunomiya-shi	20	Agrochemicals	100.0 (100.0)	Yes	Facility- related loans	—	—	—
Institute of Science and Technology, Inc.	Shinagawa-ku, Tokyo	20	Pharmaceuticals	100.0	Yes	—	Sankyo consigns pharmaceutical testing	Offices	—
Sankyo Yell Yakuhin Co., Ltd.	Chiyoda-ku, Tokyo	96	Pharmaceuticals	100.0	Yes	Facility- related loans and working capital	Sankyo sells raw materials Sankyo purchases products	—	—
Nihon Shoni Iji Shuppansha Co., Ltd.	Shinjuku-ku, Tokyo	20	Food	100.0 (100.0)	No	—	—	—	—
Wako Logistics Co., Ltd.	Chofu-shi	21	Food	100.0 (100.0)	No	—	—	—	—
Wako Food Industry Co., Ltd.	Nagano-shi	25	Food	100.0 (100.0)	Yes	—	—	—	—
Sankyo Agro Co., Ltd.	Bunkyo-ku, Tokyo	350	Agrochemicals	100.0	Yes	—	Sankyo conducts R&D for the company	Land, buildings and offices	—
Sankyo Lifetech Co., Ltd.	Bunkyo-ku, Tokyo	300	Other	100.0	Yes	—	Sankyo conducts R&D and manufacturing for the company	Offices	—
Daiichi Sankyo Healthcare Co., Ltd.	Chuo-ku, Tokyo	10	Pharmaceuticals	50.0	Yes	—	—	Offices	—
Sino-Japan Chemical Co., Ltd.	Taipei, Taiwan	144 million NT$	Other	52.0 (3.4)	Yes	—	—	—	—
DAIICHI SANKYO, INC.	New Jersey, U.S.	24.9 million U.S. dollars	Pharmaceuticals	80.8	Yes	Trade payables related to co-promotion, and office and car lease guarantees	Sankyo sells products and consigns pharmaceutical R&D	—	Sankyo provides pharmaceutical technologies
Luitpold Pharmaceuticals Inc.	Shirley, U.S.	0.2 million U.S. dollars	Pharmaceuticals	100.0 (100.0)	Yes	—	—	—	—
Sankyo Grundstücks GmbH	Munich, Germany	5.1 million euros	Pharmaceuticals	100.0	No	—	—	—	—
Sankyo Grundstücks GmbH & Co. Object Munich KG	Munich, Germany	38.2 million euros	Pharmaceuticals	94.0 (94.0)	No	—	—	—	—
Sankyo Pharma GmbH	Munich, Germany	16.0 million euros	Pharmaceuticals	100.0	No	—	Sankyo sells raw materials and consigns manufacturing and pharmaceutical R&D	—	Sankyo provides pharmaceutical technologies
Sankyo Pharma UK Ltd.	Amersham, UK	19.5 million pounds	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
Sankyo Pharma Espana S.A.	Madrid, Spain	120 thousand euros	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
Sankyo Pharma Italia S.p.A.	Rome, Italy	120 thousand euros	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
Sankyo Pharma Portugal Lda.	Porto Salvo, Portugal	349 thousand euros	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
Sankyo Pharmazeutika Austria GmbH	Vienna, Austria	18 thousand euros	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
Sankyo Pharma (Schweiz) AG	Thalwil, Switzerland	3 million Swiss Francs	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
Sankyo Pharma Nederland B.V.	Zwanenburg, the Netherlands	18 thousand euros	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
N.V. Sankyo Pharma Belgium S.A.	Louvain-La-Nueve, Belgium	62 thousand euros	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
O. Y. Sankyo Pharma Finland Ab	Helsinki, Finland	25 thousand euros	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
Sankyo Manufacturing France S.a.r.l.	Altkirch, France	457 thousand euros	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
Dignos-Chemie GmbH	Munich, Germany	40 thousand euros	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—
Sankyo Pharma France S.A.S.	Rueil Malmaison, France	2,182 thousand euros	Pharmaceuticals	100.0 (100.0)	No	—	—	—	—

(Notes)

1. The information in the ‘Principal Operating Activities’ column represents the name of operating segment defined in the operating segment information section.

2. The following two subsidiaries file a separate securities report (‘yukashoken todokedesho’ or ‘yukashoken hokokusyo’) to the Ministry of Finance in Japan: Wakodo Co., Ltd. and Fuji Flour Milling Co., Ltd., whose common shares are publicly traded on the Tokyo and Nagoya Stock Exchanges, respectively.

3. Figures in parentheses in the ‘Percentage of Voting Rights Held’ column represent the percentage of voting shares held indirectly, and are also included in the respective total percentages.

4. Daiichi Sankyo Healthcare Co., Ltd., which was established in December 2005 as a vehicle for the integration of the OTC drug operations of the Company and Daiichi Pharmaceutical Co., Ltd., is included in the scope of consolidation from the year ended March 31, 2006.

5. Sankyo Grundstücks GmbH & Co. Object Munich KG, a 94% owned partnership newly established by Sankyo Grundstücks GmbH is included in the scope of consolidation from the year ended March 31, 2006.

6. Nippon Daiya Valve Co., Ltd., which was a consolidated subsidiary of the Company until the year ended March 31, 2005, has been excluded from the scope of consolidation in the year ended March 31, 2006 due to the disposition of the Company’s entire share holdings in this company in April 2005.

7. Kyushu Sankyo Co., Ltd., which was a consolidated subsidiary of the Company until the year ended March 31, 2005, has been excluded from the scope of consolidation in the year ended March 31, 2006 due to its integration with two other consolidated subsidiaries, Sankyo Agro Co., Ltd. and Utsunomiya Chemical Industry Co., Ltd., in April, 2005.

8. Sankyo Foods Co., Ltd., which was a consolidated subsidiary of the Company until the year ended March 31, 2005, has been excluded from the scope of consolidation in the year ended March 31, 2006 due to the sale of its business in July 2005.

9. Dismed AG, which had been a consolidated subsidiary of the Company until the year ended March 31, 2005, merged with Sankyo Pharma (Schweiz) AG, a consolidated subsidiary, in June 2005.

10. F.P. Processing Co., Ltd., which was a consolidated subsidiary of the Company until the year ended March 31, 2005, has been excluded from the scope of consolidation in the year ended March 31, 2006 due to the disposition of the Company’s entire share holdings in this company in January 2006.

11. Sankyo Pharma Inc., a consolidated subsidiary of the Company, absorbed Daiichi Pharma Holdings, Inc., Daiichi Pharmaceutical Corp. and Daiichi Medical Research Inc., which are U.S.-based subsidiaries of Daiichi Pharmaceutical Co., Ltd., by merger on March 31, 2006. The name of the merged entity was changed to DAIICHI SANKYO, INC.

12. The Company sold its entire ownership of O.Y. Sankyo Pharma Finland Ab in January 2006.

13. Fuji Flour Milling Co., Ltd., a consolidated subsidiary, were merged with Nitto Flour Milling Co., Ltd. on April 1, 2006. The name of the merged entity was changed to Nitto Fuji Flour Milling Co., Ltd. The percentage of the Company’s voting interests in Nitto-Fuji Flour Milling was diluted so that it is no longer an affiliate of the Company from that date.

14. Net sales (excluding inter-group sales among consolidated subsidiaries) at DAIICHI SANKYO, INC. accounted for more than 10% of consolidated net sales.

Information on earnings, etc:

(1) Net sales	¥	69,555 million
(2) Ordinary income	¥	8,435 million
(3) Net income	¥	10,699 million
(4) Shareholders’ Equity	¥	38,462 million
(5) Total assets	¥	63,890 million

Affiliate Accounted for by the Equity Method

Name	Location	Capital/ Investment	Principal Business Operations	Percentage of Voting Rights Held	Nature of Relationship
					Mutual Directors	Financial Support	Operating Transactions	Facilities Leased	Other
		(Million yen)		(%)
Hitachi Pharma Evolutions, Ltd.	Shinagawa-ku, Tokyo	250	IT	49.0	Yes	—	—	Offices	—

Hitachi Pharma Evolutions, Ltd. was established though joint investment by the Company, Hitachi, Ltd. and Hitachi Systems & Services, Ltd.

2. Management Policies

On September 28, 2005, Sankyo Company, Limited and Daiichi Pharmaceutical Co., Ltd. jointly established a holding company, DAIICHI SANKYO COMPANY, LIMITED, through the joint stock transfer. For information regarding the principal management policies and corporate strategies of the DAIICHI SANKYO Group, please refer to DAIICHI SANKYO’s report on the consolidated results (“Kessan Tanshin”) for the fiscal year.

III. Results of Operations and Financial Position

I. Results of Operations

1. Overview of the fiscal year

(Millions of yen)

	Net sales		Operating income		Recurring income		Net income
March 31, 2006	579,949		78,335		82,164		50,627
March 31, 2005	587,830		84,925		82,506		48,282
Change (%)	(1.3	)	(7.8	)	(0.4	)	4.9

(1) Overview of Performance

Business conditions remained harsh in the year ended March 31, 2006, particularly in the developed country markets in Japan, the United States and Europe, as the governments tried to contain healthcare costs while the R&D related expenses continued to rise. Competition among the U.S. and European pharmaceutical “global mega” firms continued to intensify at the global level.

Facing such challenging conditions, the Company reached an agreement with Daiichi Pharmaceutical Co., Ltd. to fully integrate both companies’ pharmaceutical operations by April 2007 with the aim of creating a new “global pharma-innovator” with global-level R&D capabilities. The first step in the integration process was the establishment on September 28, 2005 of DAIICHI SANKYO COMPANY, LIMITED as a joint holding company.

In the year ended March 31, 2006, the Sankyo Group posted consolidated net sales of ¥579,949 million (a decline by 1.3% compared with the previous year), operating income of ¥78,335 million (a decrease by 7.8%), ordinary income of ¥82,164 million (a decrease by 0.4%) and net income of ¥50,627 million (an increase by 4.9%). Robust growth in sales in Japan, Europe and the United States of the strategic global product olmesartan, an antihypertensive agent (sold in the United States as Benicar^® and in Europe and Japan as Olmetec^®), helped to offset a number of factors that depressed net sales, including lower sales of the flagship antihyperlipidemic agent Mevalotin^®; the termination of the co-promotion agreements for Espo^® (renal anemia), Gran^® (leukopenia) and Alesion^® (allergic disorders); and the exclusion of certain non-pharmaceutical subsidiaries from the scope of consolidation. As a result, net sales declined only slightly.

Operating income decreased by 7.8% due to a rise in R&D expenditures and other factors. However, ordinary income was kept at virtually the same level as in the previous year owing to an improved non-operating income and expenses.

At the net income level, a lower tax rate at U.S.-based subsidiaries resulted in substantially higher after-tax income, despite the fact that net extraordinary losses increased due to a reduction in gain on sale of property, plant and equipment compared to the previous year and other factors, resulting in a 4.9% increase in net income compared with the previous year.

(2) Segment Information

Operating Segments

(Millions of yen)

	Net Sales						Operating Income
	Fiscal 2005	Fiscal 2004	Change		Change (%)		Fiscal 2005	Fiscal 2004	Change		Change (%)
Pharmaceutical	454,451	455,633	(1,181	)	(0.3	)	72,226	77,495	(5,269	)	(6.8	)
Other	127,331	134,843	(7,512	)	(5.6	)	5,672	6,587	(914	)	(13.9	)

1) Pharmaceuticals

Net sales in the pharmaceuticals segment totaled ¥454,451 million, a decline of 0.3% compared with the previous year. Operating income fell by 6.8% to ¥72,226 million.

With respect to prescription drugs, sales of antihypertensive agent olmesartan, (sold in the United States as Benicar^® and in Europe and Japan as Olmetec^®), demonstrated a strong growth in Japan and overseas markets. In contrast, sales of the mainstay product Mevalotin^®, an antihyperlipidemic agent, declined due to fiercer competition in Japan and the United States from rival products, and due to its patent expiration in some European countries. The termination of the co-marketing agreements for Espo^® (renal anemia), Gran^® (leukopenia) and Alesion^® (allergic disorders) also depressed sales. Overall sales were at a level with the previous year sales.

Operating income fell, reflecting a rise in R&D expenditures and other factors.

2) Other Businesses

Net sales in this segment totaled ¥127,331 million, a decline of 5.6% compared with the previous year. Operating income fell by 13.9% to ¥5,672 million.

As part of initiatives to focus on the pharmaceutical business, the Sankyo Group sold its interests and transferred businesses of three of the non-pharmaceutical subsidiaries (Nippon Daiya Valve Co., Ltd., Sankyo Foods Co., Ltd. and F.P. Processing Co., Ltd.), all of which became excluded from the scope of consolidation. As a result, net sales and operating income both declined compared with the previous year.

Geographic segments

(Millions of yen)

	Net Sales						Operating Income
	Fiscal 2005	Fiscal 2004	Change		Change (%)		Fiscal 2005		Fiscal 2004		Change		Change (%)
Japan	443,906	473,867	(29,961	)	(6.3	)	54,914		73,313		(18,399	)	(25.1	)
North America	109,389	80,327	29,061		36.2		24,836		13,143		11,693		89.0
Other	53,474	52,645	828		1.6		(424	)	(1,310	)	886		—

Net sales in Japan totaled ¥443,906 million, a decline of 6.3% compared with the previous year. Operating income declined by 25.1% to ¥54,914 million.

Although Olmetec^® posted a steady growth in sales, sales of Mevalotin^® fell amid intense competition. The transfer of the distribution rights for Espo^®, Gran^® and Alesion^®, along with the exclusion of certain non-pharmaceutical subsidiaries from the scope of consolidation also had a negative effect on net sales.

Operating income declined sharply compared with the previous year, reflecting higher R&D expenditures as well as the decrease in sales.

2) North America

Net sales rose by 36.2% compared with the previous year, to ¥109,389 million, and operating income jumped by 89.0%, to ¥24,836 million.

Soaring sales of the antihypertensive agent Benicar^® and its diuretic combination Benicar^® HCT and a growth in sales of the antihyperlipidemic agent, WelChol^®, at DAIICHI SANKYO, INC. (formerly Sankyo Pharma Inc.), coupled with a strong performance of the antianemia agent, Venofer^®, at Luitpold Pharmaceuticals Inc., brought the significant increase in net sales in North America.

Operating income increased substantially compared with the previous year due to higher sales.

3) Other

Net sales were up by 1.6%, to ¥53,474 million, and operating loss was reduced from ¥1,310 million in the previous fiscal year, to ¥424 million in the current year.

In Europe, the Sankyo Pharma GmbH Group contributed a growth in sales of Olmetec^®.

2. R&D Activities

R&D expenses, which were mostly incurred in the pharmaceuticals business, totaled ¥97,265 million in the year ended March 31, 2006 (16.8% of net sales).

The Sankyo Group focuses its R&D resources on cardiovascular disorders and five other major therapeutic areas with the aim of bringing a continuous stream of world-class innovative drugs to the market. In line with the integration process with Daiichi Pharmaceutical Co., Ltd., the Company integrated management of R&D management activities and has identified high-priority R&D projects to ensure the efficient distribution of resources. Sankyo’s R&D projects that have been given a high-priority designation include CS-747 [Phase III (U.S. and Europe); Phase I (Japan)], a treatment for ischemic disease being jointly developed with the Eli Lilly Company, and CS-8663 [Phase III (U.S. and Europe)], a combination drug of antihypertensive agents olmesartan and amlodipine.

The results of a large-scale clinical trial (“MEGA Study”) featuring the antihyperlipidemic agent Mevalotin^® were presented in November 2005 at the annual American Heart Association (AHA) Scientific Sessions. This trial was a special study initiated in 1993 as a contract research project sponsored by the Japanese Ministry of Health, Labor and Welfare (the Ministry of Health and Welfare at the time) targeting approximately 8,000 mild to moderate hyperlipidemia patients with no past history of coronary heart disease. It represented the first large-scale randomized, comparative study in Japan to test the drug’s efficacy in primary prevention against cardiovascular disease over an average observation period of more than five years. Mevalotin^® demonstrated high efficacy in the trial. The results also underlined the clear clinical value of antihyperlipidemic therapy in Japan.

In other R&D-related development areas, during the year ended March 31, 2006, Sankyo concluded a licensing and development agreement with U.S.-based KAI Pharmaceuticals, Inc. for KAI-9803, a treatment for myocardial and cerebral infarction to further reinforce Sankyo’s R&D efforts in the cardiovascular field.

II. Financial Position

1. Overview of the fiscal year

Consolidated Cash Flows

(Millions of yen)

	2006		2005		Change
Net cash provided by (used in) operating activities	79,806		96,703		(16,896	)
Net cash provided by (used in) investing activities	(20,295	)	(16,265	)	(4,029	)
Net cash provided by (used in) financing activities	(70,359	)	(12,716	)	(57,643	)
Effect of exchange rate changes on cash and cash equivalents	3,342		(123	)	3,466
Net increase (decrease) in cash and cash equivalents	(7,506	)	67,596		(75,103	)
Cash and cash equivalents at the end of period	254,708		262,530		(7,821	)

Cash and cash equivalents at the end of the fiscal year declined by ¥7,821 million from the end of the previous fiscal year, to ¥254,708 million. Contributing factors are summarized as follows:

Cash Flows from Operating Activities

Net cash provided by operating activities decreased by ¥16,896 million from the previous fiscal year, to ¥79,806 million. This is mainly a result of a ¥7,220 million decline in income before income taxes and minority interests and a ¥7,183 million increase in corporate tax payments.

Cash Flows from Investing Activities

Net cash used in investing activities increased by ¥4,029 million from the previous fiscal year, to ¥20,295 million, largely as a result of a ¥9,285 million decrease in proceeds from sale of property, plant and equipment due to an absence of the sale of land for the site of Sankyo’s former Tanashi Plant posted in the previous fiscal year.

Cash Flows from Financing Activities

Net cash used in financing activities increased by ¥57,643 million compared with the prior year, to ¥70,359 million. This increase principally reflected higher cash outflows compared with the previous year due to purchases of treasury stock (an increase of ¥16,413 million) and dividends paid to shareholders (an increase of ¥39,068 million), reflecting a higher year-end dividend plus an interim dividend paid to the holding company).

Trends in key cash flow indicators are summarized as follows:

	As of March 2003	As of March 2004	As of March 2005	As of March 2006
Shareholders’ equity ratio (%)	71.9	73.6	73.4	74.0
Debt redemption period (year)	0.4	0.3	0.2	0.3
Interest coverage ratio (times)	157.5	212.4	269.8	255.2

Shareholders’ equity ratio: Shareholders’ equity / total assets

Debt redemption period: Interest-bearing debt / operating cash flows

Interest coverage ratio: Operating cash flows / interest paid

* All figures in the above table were calculated on a consolidated basis.

* Interest-bearing debt represents all liabilities subject to the payment of interest included in the consolidated balance sheets.

* Operating cash flows represent net cash provided by operating activities in the consolidated statements of cash flows. In addition, interest paid equals to “interest paid” in the consolidated statement of cash flows.

IV. Consolidated Financial Statements

1. Consolidated Balance Sheets

(Millions of yen)

		As of March 31, 2005			As of March 31, 2006			Change
	See Note	Amount		%	Amount		%	%
ASSETS
Current assets
Cash and time deposits		175,960			162,976			(12,983	)
Trade notes and accounts receivable		162,442			149,870			(12,572	)
Marketable securities		146,632			158,625			11,993
Parent company stock		—			8,912			8,912
Inventories		89,979			84,071			(5,907	)
Deferred tax assets		21,832			22,874			1,041
Other current assets		9,704			11,471			1,767
Allowance for doubtful accounts		(483	)		(564	)		(80	)
Total current assets		606,067		62.1	598,238		62.0	(7,829	)
Non-current assets
Property, plant and equipment	*1
Buildings and structures	*3	111,966			108,690			(3,275	)
Machinery, equipment and vehicles	*3	31,831			28,259			(3,572	)
Land	*3	30,655			32,265			1,609
Construction in progress		10,005			4,076			(5,929	)
Other non-current assets	*3	11,980			12,789			809
Total property, plant and equipment, net		196,439		20.1	186,080		19.3	(10,358	)
Intangible assets
Goodwill, net		845			547			(298	)
Other, net		24,181			19,589			(4,592	)
Total intangible assets, net		25,026		2.6	20,136		2.1	(4,890	)
Investments and other assets
Investment securities	*2, 3	114,480			133,471			18,991
Long-term loans		5,876			5,273			(603	)
Deferred tax assets		14,967			4,016			(10,951	)
Prepaid pension costs		—			2,950			2,950
Other assets	*2	13,702			14,450			748
Allowance for doubtful accounts		(329	)		(228	)		101
Total investments and other assets		148,696		15.2	159,934		16.6	11,237
Total non-current assets		370,163		37.9	366,150		38.0	(4,012	)
Total assets		976,230		100.0	964,389		100.0	(11,841	)

(Millions of yen)

		As of March 31, 2005				As of March 31, 2006		Change
	See Note	Amount		%		Amount	%	%
LIABILITIES
Current liabilities
Trade notes and accounts payable		54,435				47,997		(6,437	)
Short-term bank loans	*3	16,699				13,546		(3,153	)
Income taxes payable		16,904				2,621		(14,283	)
Deferred tax liabilities		689				31		(658	)
Accrued bonuses		13,481				—		(13,481	)
Allowance for sales returns		476				412		(64	)
Allowance for sales rebates		1,022				894		(127	)
Allowance for contingent losses		—				3,379		3,379
Other current liabilities		70,002				78,591		8,589
Total current liabilities		173,712		17.8		147,475	15.3	(26,236	)
Non-current liabilities
Long-term debt	*3	3,373				3,369		(3	)
Deferred tax liabilities		441				2,306		1,864
Accrued retirement and severance benefits		66,843				63,389		(3,454	)
Accrued directors’ retirement and severance benefits		1,830				1,619		(211	)
Accrued soil remediation costs		—				2,850		2,850
Other non-current liabilities		4,006				5,792		1,786
Total non-current liabilities		76,495		7.8		79,326	8.2	2,831
Total liabilities		250,208		25.6		226,802	23.5	(23,405	)
MINORITY INTERESTS
Minority interests		9,434		1.0		23,870	2.5	14,435
SHAREHOLDERS’ EQUITY
Common stock	*7	68,793		7.0		68,793	7.1	—
Additional paid-in capital		66,862		6.8		66,862	6.9	—
Retained earnings		580,514		59.5		529,144	54.9	(51,370	)
Net unrealized gain on investment securities		27,857		2.9		47,933	5.0	20,076
Foreign currency translation adjustments		(7,026	)	(0.7	)	982	0.1	8,008
Treasury stock at cost	*8	(20,412	)	(2.1	)	—	—	20,412
Total shareholders’ equity		716,587		73.4		713,715	74.0	(2,872	)
Total liabilities, minority interests and shareholders’ equity		976,230		100.0		964,389	100.0	(11,841	)

2. Consolidated Statements of Income

(Millions of yen)

		Fiscal 2004 (Year ended March 31, 2005)		Fiscal 2005 (Year ended March 31, 2006)		Changes from fiscal 2004
	See Note	Amount	%	Amount	%	Amount
Net sales		587,830	100.0	579,949	100.0	(7,880	)
Cost of sales	*1	213,874	36.4	198,328	34.2	(15,545	)
Gross profit		373,956	63.6	381,621	65.8	7,664
Reversal of provision for sales returns		—	—	64	0.0
Provision for sales returns		15	0.0	—	—
Adjusted gross profit		373,940	63.6	381,685	65.8	7,745
Selling, general and administrative expenses		289,015	49.2	303,350	52.3	14,335
Advertising and promotional expenses		51,738		58,515
Salaries and bonuses		46,401		56,486
Provision for accrued bonuses		8,282		—
Retirement and severance benefits		3,976		1,715
Provision for allowance for directors’ retirement and severance benefits		248		430
Provision of allowance for doubtful accounts		—		111
Research and development expense	*1	86,551		97,265
Amortization of goodwill		389		400
Other		91,427		88,423
Operating income		84,925	14.4	78,335	13.5	(6,590	)
Non-operating income		6,425	1.1	8,490	1.4	2,064
Interest income		1,178		2,488
Dividend income		2,126		1,257
Amortization of goodwill		11		3
Equity in earnings of affiliated companies		—		19
Rent income		889		1,053
Other		2,219		3,667
Non-operating expenses		8,844	1.5	4,660	0.8	(4,183	)
Interest expense		358		312
Loss on disposal of inventories		3,983		1,314
Charitable contributions		737		1,099
Other		3,765		1,934
Ordinary income		82,506	14.0	82,164	14.1	(342	)

(Millions of yen)

		Fiscal 2004 (Year ended March 31, 2005)			Fiscal 2005 (Year ended March 31, 2006)			Changes from fiscal 2004
	See Note	Amount		%	Amount		%	Amount
Extraordinary income		15,775		2.7	6,521		1.1	(9,254	)
Gain on sale of property, plant and equipment	*2	12,179			4,897
Gain on sale of investments in affiliates		544			1,179
Gain on sale of investment securities		983			444
Reversal of allowance for doubtful accounts		2,026			—
Reversal of accrued directors’ retirement and severance benefits		41			—
Extraordinary losses		20,603		3.5	18,227		3.1	(2,375	)
Loss on disposal of property, plant and equipment	*3	2,333			4,706
Loss on impairment of property, plant and equipment	*4	15,865			3,913
Provision for contingent losses		—			3,379
Provision for soil remediation costs		—			2,850
Loss related to business integration	*5	—			2,231
Loss on disposal of investments in affiliates		—			374
Restructuring charge	*6	—			345
Loss on deemed sale of investments in affiliates		—			333
Supplemental retirement benefits		662			47
Loss on valuation of investment securities		4			44
Loss on sale of investment securities		5			—
Loss on valuation of investments in affiliates		1,483			—
Loss on valuation of other investments in capital		249			—
Income before income taxes and minority interests		77,678		13.2	70,457		12.1	(7,220	)
Income tax expense - current		33,224			22,075
Income tax benefit - deferred		(4,550	)	4.9	(2,710	)	3.3	(9,309	)
Minority interests in net income of subsidiaries		722		0.1	465		0.1	(256	)
Net income		48,282		8.2	50,627		8.7	2,345

3. Consolidated Statements of Capital Surplus and Retained Earnings

(Millions of yen)

		Fiscal 2004 (Year ended March 31, 2005)		Fiscal 2005 (Year ended March 31, 2006)		Changes from fiscal 2004
	See Note	Amount		Amount		Amount
ADDITIONAL PAID-IN CAPITAL
Additional paid-in capital, beginning of year			66,862		66,862	—
Increase in additional paid-in capital			—		—	—
Decrease in additional paid-in capital			—		—	—
Additional paid-in capital, end of year			66,862		66,862	—
RETAINED EARNINGS
Retained earnings, beginning of year			546,422		580,514	34,091
Increase in retained earnings:
Net income		48,282		50,627
Increase due to merger with a non-consolidated subsidiary		117	48,399	—	50,627	2,227
Decrease in retained earnings:
Cash dividends		13,959		53,013
Bonuses;
Bonuses to directors		326		240
Bonuses to corporate auditors		21		20
Retirement of treasury stock		—		35,736
Loss on reissuance of treasury stock		—		229
Decrease in retained earnings due to dilution of ownership in consolidated subsidiaries		—		12,522
Decrease due to changes in scope of consolidation		—	14,308	235	101,997	87,689
Retained earnings, end of year			580,514		529,144	(51,370	)

4. Consolidated Statements of Cash Flows

(Millions of yen)

		Fiscal 2004 (Year ended March 31, 2005)		Fiscal 2005 (Year ended March 31, 2006)		Changes from fiscal 2004
	See Note	Amount		Amount		Amount
Cash flows from operating activities:
Income before income taxes and minority interests		77,678		70,457		(7,220	)
Depreciation		28,811		27,100		(1,710	)
Loss on impairment of property, plant and equipment		15,865		3,913		(11,951	)
Gain on sale of marketable and investment securities		(1,064	)	(395	)	668
Loss on valuation of marketable and investment securities		1,736		(232	)	(1,968	)
Amortization of goodwill		378		397		19
Increase (decrease) in allowance for doubtful accounts		(2,021	)	14		2,036
Increase (decrease) in accrued retirement and severance benefits		(3,498	)	(2,986	)	511
Increase (decrease) in accrued bonuses		224		(13,391	)	(13,615	)
Interest and dividend income		(3,304	)	(3,745	)	(440	)
Interest expense		358		312		(45	)
Gain on sale of property, plant and equipment		(10,731	)	(190	)	10,540
Decrease in trade notes and accounts receivable		8,147		13,657		5,510
Decrease in inventories		122		5,259		5,136
Increase (decrease) increase in trade notes and accounts payable		3,473		(7,369	)	(10,843	)
Other, net		6,329		19,747		13,418
Subtotal		122,504		112,550		(9,954	)
Interest and dividends received		3,407		3,603		195
Interest paid		(358	)	(312	)	45
Income taxes paid		(28,851	)	(36,034	)	(7,183	)
Net cash provided by operating activities		96,703		79,806		(16,896	)
Cash flows from investing activities:
Purchases of time deposits		(7,889	)	(1,786	)	6,103
Proceeds from maturities of time deposits		10,842		2,363		(8,478	)
Purchases of marketable securities		(62,969	)	(59,538	)	3,431
Proceeds from sale of marketable securities		77,786		78,943		1,157
Acquisitions of property, plant and equipment		(27,282	)	(28,166	)	(883	)
Proceeds from sale of property, plant and equipment		14,696		5,411		(9,285	)
Acquisitions of intangible assets		(2,439	)	(4,513	)	(2,073	)
Proceeds from disposal of intangible assets		—		625		625
Acquisitions of investment securities		(21,704	)	(18,712	)	2,991
Proceeds from sale of investment securities		1,561		2,959		1,397
Proceeds from sale of investments in subsidiaries resulting in changes in scope of consolidation	*2	527		642		114
Payments for loans receivable		(904	)	(1,951	)	(1,046	)
Proceeds from collection of loans receivable		1,342		1,812		470
Other, net		169		1,615		1,446
Net cash used in investing activities		(16,265	)	(20,295	)	(4,029	)

(Millions of yen)

		Fiscal 2004 (Year ended March 31, 2005)		Fiscal 2005 (Year ended March 31, 2006)		Changes from fiscal 2004
	See Note	Amount		Amount		Amount
Cash flows from financing activities:
Net (decrease) increase in short-term bank loans		2,365		(2,286	)	(4,652	)
Proceeds from long-term debt		470		1,110		640
Repayments of long-term debt		(1,282	)	(1,186	)	95
Proceeds from share issued to minority shareholders		—		876		876
Purchases of treasury stock		(76	)	(16,490	)	(16,413	)
Proceeds from sale of treasury stock		—		936		936
Dividends paid to shareholders		(13,960	)	(53,028	)	(39,068	)
Dividends paid to minority shareholders		(109	)	(194	)	(84	)
Other, net		(123	)	(97	)	25
Net cash used in financing activities		(12,716	)	(70,359	)	(57,643	)
Effect of exchange rate changes on cash and cash equivalents		(123	)	3,342		3,466
Net (decrease) increase in cash and cash equivalents		67,596		(7,506	)	(75,103	)
Cash and cash equivalents, beginning of year		194,789		262,530		67,740
Decrease in cash and cash equivalents due to changes in scope of consolidation		—		(314	)	(314	)
Increase in cash and cash equivalents due to merger with a non-consolidated subsidiary		144		—		(144	)
Cash and cash equivalents, end of year		262,530		254,708		(7,821	)

Basis of Presentation and Summary of Accounting Principles and Policies for the Preparation of the Consolidated Financial Statements

1. Scope of Consolidation

Consolidated subsidiaries: 34

The names of the consolidated subsidiaries are included in ‘1. State of the Group.’

The Company added Daiichi Sankyo Healthcare Co. Ltd., Sankyo Grundstücks GmbH & Co. and Object München KG to its scope of consolidation during the fiscal year.

Nippon Daiya Valve Co., Ltd., Sankyo Foods Co., Ltd., Kyushu Sankyo Co., Ltd., F.P. Processing Co., Ltd. and Dismed AG, which were previously consolidated subsidiaries of the Company, have been excluded from the scope of consolidation in the current fiscal year.

Reasons for adding these companies to and removing from the scope of consolidation are stated in ‘1. State of the Group.’

The Company’s shares of total assets, net sales and net income in its non-consolidated subsidiaries have an immaterial impact on its overall consolidated financial statements, as does its share of retained earnings in these companies. Accordingly, they were not included in the scope of consolidation.

The Company’s primary non-consolidated subsidiaries are Sankyo Insurance Agency Co., Ltd., Godo Real Estate Co., Ltd. and Shanghai Sankyo Pharmaceuticals Co., Ltd.

2. Application of the Equity Method

(1) The Company does not use the equity method for any of its non-consolidated subsidiaries.

(2) The Company applies the equity method to one affiliate, Hitachi Pharma Evolutions, Ltd., which was newly established during the fiscal year. Each has an inmaterial impact on consolidated net income and retained earnings, and in the aggregate they are not material to the overall consolidated financial statements. The Company’s principal non-consolidated subsidiaries are Sankyo Insurance Agency Co., Ltd., Godo Real Estate Co., Ltd. and Shanghai Sankyo Pharmaceuticals Co., Ltd. The Company’s principal affiliate that is not accounted for by the equity method is Tokyo Pharmaceutical Industry Kaikan Co., Ltd.

3. Fiscal Year End of Consolidated Subsidiaries

The fiscal year-end of 18 of the Company’s overseas consolidated subsidiaries is December 31. The financial statements of those subsidiaries as of their year-end are used in the preparation of the consolidated financial statements. However, appropriate adjustments have been made in the consolidation financial statements for major intervening transactions that took place between the fiscal year-end of those companies and March 31.

4. Summary of Significant Accounting Policies

(1) Methods of Valuation of Significant Assets

Marketable and Investment Securities:

Held-to-maturity securities:

Mainly the amortized cost method (straight-line amortization)

Available-for-sale securities:

Securities with determinable market value;

Mainly stated at market value based on the quoted market prices at the end of the fiscal year. Unrealized holding gains and losses are reported in a component of shareholders’ equity, with the cost of securities sold calculated by the moving average method.

Securities without determinable market value:

Mainly stated at cost based on the moving average method

Derivatives:

Market value method

Inventories:

Mainly stated at the lower of cost, by average method, or market

(2) Depreciation and Amortization of Significant Depreciable Assets

Property, Plant and Equipment:

The Company and its domestic consolidated subsidiaries account for property, plant and equipment by the declining balance method, except for the buildings (excluding fixtures) acquired on or after April 1, 1998, which are accounted for by the straight-line method. Overseas consolidated subsidiaries account for property, plant and equipment mainly by the straight-line method. The principal useful lives are as follows:

Buildings and structures: 2~60 years

Machinery, equipment and vehicles: 2~17 years

Intangible Assets:

Intangible assets are being amortized by the straight-line method. Software for internal use is amortized over the estimated useful lives of a five-year period.

(3) Methods of Accounting for Significant Allowances

Allowance for Doubtful Accounts

The Company and its consolidated subsidiaries cover the risk of credit losses from potential customer defaults by providing for this allowance on the basis of the historical default rates for regular accounts, and individual evaluation of collectible amount for specific overdue accounts that are considered unlikely to be repaid in full.

Allowance for Sales Returns

The Company and certain of its domestic subsidiaries provide for losses on estimated future returns of products and merchandise based on historical past return experience. The amount recognized is the sum of estimated gross profit on sales and losses on disposal of returned inventories.

Allowance for Sales Rebates

To prepare for future sales rebates, the Company records this allowance calculated by multiplying an estimated sales rebate percentage for the fiscal year by the amounts of accounts receivable from and inventories held by wholesalers’ at the end of the fiscal year.

Retirement and Severance Benefits

To prepare for retirement and severance benefits, the Company and its domestic consolidated subsidiaries provide for an amount based on projected benefit obligation and plan assets at the end of the fiscal year. In addition, provisions have been made for six of the Company’s overseas consolidated subsidiaries in accordance with accounting principles generally accepted in the countries of their domicile.

Prior service cost is amortized by the straight-line method over a period of five years, which is less than the estimated average remaining years of service of the eligible employees at the time such prior service cost was recognized.

The Company itself recognizes actuarial gain and losses immediately as they occur. The domestic consolidated subsidiaries amortize actuarial gain and loss by the straight-line method beginning in the fiscal year following the year in which the gain or loss was initially measured over a period of five years, which is less than the average remaining years of service of the eligible employees at the time such actuarial gain or loss occured.

Directors’ Retirement and Severance Benefits

To prepare for directors’ retirement and severance benefits, the Company and its domestic consolidated subsidiaries provide for an amount that would have become payable at the end of the fiscal year in accordance with the internal policies, had all directors resigned voluntarily. Two overseas consolidated subsidiaries provide for an amount incurred by the end of the fiscal year.

Allowance for Contingent Losses

To prepare for possible future contingent losses, the Company provides an accrual for an amount of reasonably possible losses, by examining individual risks on a case by case basis.

Accrued for soil remediation costs

To provide for potential soil remediation costs, the Company has recognized a provision for losses on soil remediation based on estimated costs of the cleanup.

(4) Translation of Significant Assets and Liabilities Denominated in Foreign Currencies into Yen

Receivables and payables denominated in foreign currencies are converted into yen amounts at the rates of exchange in effect at the end of the fiscal year, with resulting translation gains or losses recognized currently in earnings. The assets and liabilities of overseas consolidated subsidiaries are converted into yen amounts at the rates of exchange in effect at their balance sheet dates, while income and expenses are converted into yen amounts at the average exchange rates in effect over the respective periods, with resulting translation gains and losses recorded in a component of shareholders’ equity under translation adjustments and in the minority interests section of the balance sheets.

(5) Accounting for Significant Lease Transactions

The same accounting method applied to operating leases is used for financing leases, except for those in which the legal title of the underlying property is transferred from the lessor to the lessee.

(6) Significant Hedge Accounting Methods

Hedge Accounting Methods

The deferral hedge method of accounting has been adopted. Foreign exchange forward contracts that meet certain hedge criteria are accounted for as a hedge of underlying assets and liabilities. Interest rate swaps that meet certain hedge criteria are accounted for by the special short-cut method, in accordance with the accounting standard, as if the interest rates of the interest rate swaps were originally applied to the underlying borrowings.

Hedging Instruments and Hedged Items

Hedging instruments: Foreign forward exchange contracts and interest rate swaps

Hedged Items: Accounts payable and receivable and forecasted transactions denominated in foreign currencies and loans

Hedge Policy

The Company hedges hedge foreign exchange rate fluctuation risks relating to imports and exports and interest rate risks relating to variable rate borrowings. The Company and its consolidated subsidiaries do not enter into speculative derivative transactions.

Methods of Assessing Effectiveness of Hedge

The hedge effectiveness of foreign exchange forward contracts as a hedge has not been assessed, as the principal provisions of the transactions are the same. The effectiveness of interest rate swaps accounted for by the special short-cut method has also not been assessed, as permitted under the standard.

(7) Other Significant Accounting Policies

Accounting for Consumption Tax

The tax-exclusion (net of tax) method is applied to account for national and local consumption taxes.

5. Valuation Method for Assets and Liabilities of Subsidiaries Acquired in Business Combination

All assets and liabilities of an acquired business that becomes a consolidated subsidiary are valued on a full fair value basis without taking into account minority interests’ share in such assets and liabilities.

6. Amortization of Goodwill

Goodwill is being amortized mainly over a period of five years. However, if the amount is inmaterial, it is written off currently in earnings.

7. Appropriations of Retained Earnings

The consolidated statements of retained earnings reflect the appropriation of retained earnings approved during the respective fiscal year.

8. Cash and Cash Equivalents in the Consolidated Statements of Cash Flows

Cash and cash equivalents in the consolidated statements of cash flows consist of: cash in hand, deposits which can be withdrawn upon demand, and highly liquid short-term investments that are easily convertible into cash, have little risk of fluctuation in value, and that mature within three months of their dates of acquisition.

Changes in Significant Accounting Principles and Policies for the Preparation of the Consolidated Financial Statements

(Valuation Method of Inventories)

Previously, inventories of the Company and its domestic consolidated subsidiaries were principally stated at cost determined by the average method; however, effective in the current year, inventories are principally stated at the lower of average cost or market.

This change was made to appropriately reflect the valuation of inventories, the effect of market price changes caused by the severe operating environment in the pharmaceutical industry.

This change resulted in a ¥299 million decrease in ordinary income and income before income taxes for the current fiscal year compared to the amounts that would have been reported had the previous method been applied consistently.

The effects of the above change to the operating segments information are described in the “6. Segment Information” section.

(Accounting for Allowance for Sales Returns)

Previously, the Company and certain domestic consolidated subsidiaries recorded this provision based on the maximum amounts deductible for income tax purpose in accordance with the Corporate Tax Law in Japan; however, effective in the current fiscal year, the provision is recorded in an amount equal to the sum of gross profits and inventory losses on estimated returned products, mainly based on its historical experience of sales returns.

This change was made to appropriately reflect to the reported earnings the effect of the fact that most of the returned products are disposed of and are not reused or resold to customers.

As a result, operating income, ordinary income, and income before income taxes for current fiscal year decreased by ¥19 million as compared to the amounts that would have been reported had the previous method been applied consistently.

The effects of the above change to the operating segments are described in the “6. Segment Information” section.

Supplemental Information

(Accounting for Accrued Bonuses)

Previously, the Company and consolidated subsidiaries accrued an estimated amount of bonuses payable for the fiscal year in “accrued bonuses”; however, effective in the current fiscal year, accrued bonuses are included in “accrued expenses” as the amount of bonuses applicable to the fiscal year has become determinable. As a result of this change, bonuses of ¥14,044 million, which were attributable to the current fiscal year, have been recorded in “accrued expenses.”

(Accounting for Allowance for Contingent Losses)

During the current fiscal year, the Company recognized an allowance for contingent loss in the amount of ¥3,379 million for potential penalties arising out of its product purchase commitments with a minimum purchase provision, for which the payment of penalties has become probable and the amount of such penalties can be reasonably estimated.

In the interim period of the current fiscal year, the company provided an allowance for an amount of possible losses due to devaluation of excess inventories. However, at this fiscal year-end the Company has changed its accounting standard along with a revision of product purchase agreements.

(Accounting for Soil-Remediation Costs)

The Company has recognized an accrual for soil-remediation costs of ¥2,850 million, which was an estimated amount of the cleanup costs that the Company would reasonably incur, based on a survey completed on certain land for the scope of soil remediation.

Notes to Consolidated Financial Statements

Notes to Consolidated Balance Sheets

As of March 31, 2005

*1. Accumulated depreciation on property, plant and equipment totaled ¥322,172 million.

*2. The balance related to non-consolidated subsidiaries and affiliated companies were as follows:

	(Millions of yen)
Investment securities (stock)	1,801
Other assets (other investments in capital)	6,598

*3. Pledged assets and secured liabilities

Assets pledged as collateral and secured liabilities were as follows:

Pledged assets	(Millions of yen)
Buildings and structures	1,912	(1,562	)
Machinery, equipment and vehicles	2,087	(2,087	)
Land	277	(56	)
Other	33	(33	)
Investment securities	415	(—	)
Total	4,727	(3,740	)
Secured liabilities	(Millions of yen)
Short-term bank loans	3,314	(2,931	)
Long-term debt	622	(289	)
Total	3,936	(3,221	)

Figures in parentheses indicate factory foundation mortgaged assets and related secured obligations, and are also included in the figures on the left.

As of March 31, 2006

*1. Accumulated depreciation on property, plant and equipment totaled ¥325,891 million.

*2. The balance related to non-consolidated subsidiaries and affiliated companies were as follows:

	(Millions of yen)
Investment securities (stock)	1,597
Other assets (other investments in capital)	6,598

*3. Pledged assets and secured liabilities

Assets pledged as collateral and secured liabilities were as follows:

Pledged assets	(Millions of yen)
Buildings and structures	1,893	(1,448	)
Machinery, equipment and vehicles	2,075	(2,075	)
Land	176	(32	)
Other	38	(38	)
Investment securities	766	(—	)
Total	4,949	(3,595	)
Secured liabilities	(Millions of yen)
Short-term bank loans	415	(88	)
Long-term debt	1,367	(700	)
Total	1,782	(788	)

Figures in parentheses indicate factory foundation mortgaged assets and related secured obligations, and are also included in the figures on the left.

As of March 31, 2005

4. Contingencies

(1) Certain debt and other obligations of non-consolidated companies and employees owed to financial institutions are guaranteed by the Company. A breakdown of these obligations was as follows:

	(Millions of yen)
Saudi Arabian-Japanese Pharmaceutical Co., Ltd.	366
One other company and employees	129
Total	496

(2) For purchase contracts with a minimum volume purchase commitment, the Company is exposed to a risk of valuation loss due to excess inventory.

5. The discounted trade notes receivable totaled ¥561 million.

6. Overdraft contracts and commitment line contracts.

The Company and its consolidated subsidiaries maintain overdraft contracts and commitment line contracts with 16 financial institutions and 15 financial institutions, respectively, in order to allow an efficient procurement of working capital. The balance of unused credit lines under these contracts at the fiscal year-end was as follows:

	(Millions of yen)
Overdraft limit and commitments totals	82,679
Overdrafts and commitments used	10,035
Overdrafts and commitments unused	72,643

*7. Total number of common shares of the Company issued at the year-end was 439,498,765 shares.

*8. Treasury stock owned by the Company at the year-end was 9,990,256 shares of common stock.

As of March 31, 2006

4. Contingencies

(1) Certain debt and other obligations of non-consolidated companies and employees owed to financial institutions are guaranteed by the Company. A breakdown of these obligations was as follows:

	(Millions of yen)
Saudi Arabian-Japanese Pharmaceutical Co., Ltd.	322
One other company and employees	49
Total	372

(2)                     

5. The discounted trade notes receivable totaled ¥65 million.

6. Overdraft contracts and commitment line contracts.

The Company and its consolidated subsidiaries maintain overdraft contracts and commitment line contracts with 15 financial institutions and 15 financial institutions, respectively, in order to allow an efficient procurement of working capital. The balance of unused credit lines under these contracts at the fiscal year-end was as follows:

	(Millions of yen)
Overdraft limit and commitments totals	81,429
Overdrafts and commitments used	7,675
Overdrafts and commitments unused	73,753

*7. Total number of common shares of the Company issued at the year-end was 422,753,456 shares.

*8.

Notes to Consolidated Statements of Income

Fiscal 2004

(Year ended March 31, 2005)

*1. Research and development expenses included under selling, general and administrative expenses and manufacturing overhead expenses totaled ¥86,551million.

*2. Breakdown of gain on sale of property, plant and equipment:

	(Millions of yen)
Buildings and structures	31
Machinery, equipment and vehicles	14
Land	12,133
Other	0

*3. Breakdown of loss on disposal of property, plant and equipment

	(Millions of yen)
Buildings and structures	455
Machinery, equipment and vehicles	332
Land	567
Other	133
Other intangible assets	300

In addition, expenses for disposal of property, plant and equipment totaled ¥545 million.

Fiscal 2005

(Year ended March 31, 2006)

*1. Research and development expenses included under selling, general and administrative expenses and manufacturing overhead expenses totaled ¥97,265 million.

*2. Breakdown of gain on sale of property, plant and equipment:

	(Millions of yen)
Buildings and structures	1
Machinery, equipment and vehicles	33
Land	4,860
Other	2

*3. Breakdown of loss on disposal of property, plant and equipment

	(Millions of yen)
Buildings and structures	1,635
Machinery, equipment and vehicles	234
Land	44
Other	255
Other intangible assets	1,307

In addition, expenses for disposal of property, plant and equipment totaled ¥1,228 million.

Year ended March 31, 2005

*4. Loss on impairment of property, plant and equipment

The Company and its consolidated subsidiaries (the Sankyo Group) classify their assets held and used for the business operations into asset groups, on the basis of operating segments about which separate financial information is regularly identified for management reporting purpose (e.g., product groups), whereas the Sankyo Group classifies lease assets and idle assets which are not directly used for its business operations on a property by property basis.

For the fiscal year, the Sankyo Group recorded impairment losses in the amount of ¥15,865 million on the following asset groups:

(1) Assets held and used for its business operations

With respect to a distribution right of certain imported products (¥13,059 million) in the pharmaceutical segment, the Company recognized a full impairment loss in extraordinary losses because the Company expects negative cash flows from the imported products due to a decrease in profitability resulting from their sluggish sales.

(2) Lease assets and idle assets

Location	Function	Asset Type	Status
Iwaki, Fukushima	Onahama Plant (manufacturing facilities of pharmaceuti-cals)	Buildings and structures Machinery, equipment and vehicles	Idle
Yasu, Shiga	Former Yasugawa Plant (manufacturing facilities of agrochemicals)	Buildings	Idle
Shizuoka, etc., Shizuoka	Company dormitory land	Land	Idle

Since the asset groups shown in the table above were idle and their expected use was uncertain in the foreseeable future, the Sankyo Group reduced their book values to a recoverable amount and recorded such reductions of ¥2,806 million as a loss on impairment in the extraordinary losses. These impairment losses consisted of the losses on buildings and structures of ¥2,159 million, on machinery, equipment and vehicles of ¥525 million, on land of ¥112 million, and on other assets of ¥9 million.

The Sankyo Group measures the recoverable amount of an asset group by its net realizable value. The Sankyo Group calculates the net realizable value of land based on the valuation amount for real estate tax purpose, with reasonable adjustments. With respect to buildings and machinery, equipment and vehicles, their net realizable values were estimated at five percent of their acquisition costs.

*5. __________

*6. __________

Year ended March 31, 2006

*4. Loss on impairment of property, plant and equipment

The Company and its consolidated subsidiaries (the Sankyo Group) classify their assets held and used for the business operations into asset groups, on the basis of operating segments about which separate financial information is regularly identified for management reporting purpose (e.g., product groups), whereas the Sankyo Group classifies lease assets and idle assets which are not directly used for its business operations on a property by property basis.

For the fiscal year, the Sankyo Group recorded impairment losses on the following asset groups:

Location	Function	Asset Type	Status
Iwaki, Fukushima	Onahama Plant (manufacturing facilities of pharmaceuti-cals)	Buildings and structures Machinery, equipment and vehicles	Idle
Tsuchiura, Ibaraki	Company housing etc.	Land	Idle

There was no indication of impairment for the assets that are held and used for operations of the Sankyo Group’s business. However, since the asset groups shown in the table above were idle and their expected use was uncertain in the foreseeable future, the Sankyo Group reduced their book values a to a recoverable amount and recorded such reductions of ¥3,913 million as a loss on impairment in the extraordinary losses. These impairment losses consisted of the losses on buildings and structures of ¥2,004 million, on machinery, equipment and vehicles of ¥1,881 million, on land of ¥11 million, and on other assets of ¥16 million.

The Sankyo Group measures the recoverable amount of an asset group by its net realizable value. The Sankyo Group calculates the net realizable value of land based on the valuation amount for real estate tax purpose, with reasonable adjustments. With respect to buildings, and machinery, equipment and vehicles, their net realizable values were estimated at five percent of their acquisition costs.

*5. Loss on business integration

The loss represents one-time costs associated with the integration of the business operations of the Sankyo Group and the Daiichi Pharmaceutical Group within the Daiichi Sankyo Group.

*6. Restructuring charge

The amount represents one-time costs associated with the restructuring of non-pharmaceutical businesses within the Sankyo Group.

Notes the Consolidated Statements of Cash Flows

Year ended March 31, 2005

1. Reconciliation of cash and cash equivalents at the end of the fiscal year to the balance sheet accounts.

	(Millions of yen)
Cash and time deposits	175,960
Marketable securities	146,632
Less time deposits with maturities extending over three months	(2,484	)
Less stock and securities with maturities extending over three months	(57,577	)
Cash and cash equivalents	262,530

*2. Breakdown of assets and liabilities of consolidated subsidiaries that are no longer consolidated due to sale of stock

The following table presents a breakdown of the assets and liabilities of Sankyo Trading Co., Ltd, which is no longer consolidated due to sale of its stock, and a reconciliation of the sales price of the stock and the proceeds from the sale:

	(Millions of yen)
Current assets	466
Non-current assets	2,532
Current liabilities	(1,237	)
Non-current liabilities	(1,196	)
Other	(7	)
Gain on sale of investments in subsidiary	86
Gross proceeds from sale of investments in subsidiary	644
Cash and cash equivalents of subsidiary disposed	(116	)
Proceeds from sale of investments in subsidiary	527

Year ended March 31, 2006

1. Reconciliation of cash and cash equivalents at the end of the fiscal year to the balance sheet accounts.

	(Millions of yen)
Cash and time deposits	162,976
Marketable securities	158,625
Less time deposits with maturities extending over three months	(1,905	)
Less stock and securities with maturities extending over three months	(64,987	)
Cash and cash equivalents	254,708

*2. Breakdown of assets and liabilities of consolidated subsidiaries that are no longer consolidated due to sale of stock

The following table presents are the breakdown of the assets and liabilities of Nippon Daiya Valve Co., Ltd. and F.P. Processing Co., Ltd. which are no longer consolidated due to sale of their stock, and a reconciliation of the sale price of the stock and the proceeds from the sale:

	(Millions of yen)
Current assets	4,452
Non-current assets	939
Current liabilities	(3,526	)
Non-current liabilities	(561	)
Gain on sale of investments in subsidiaries	27
Loss on sale of investments in subsidiaries	(330	)
Gross proceeds from sale of investment of investments in subsidiaries	1,001
Cash and cash equivalents of subsidiaries disposed	(358	)
Proceeds from sale of investment in subsidiaries	642

Lease Transactions

Pro-forma information on financing leases has not been presented herein because the Company discloses such information through EDINET (Electronic Disclosure for Investors’ NETwork).

Marketable and Investment Securities

Fiscal 2004 (as of March 31, 2005)

1. Trading Securities

No applicable.

2. Held-to-Maturity Securities with Determinable Market Value

(Millions of yen)

	Carrying amount	Market value	Difference
Securities with market values greater than their carrying amounts
(1) Government and local bonds	1,002	1,002	0
(2) Corporate bonds	39,237	39,382	144
(3) Other	—	—	—
Total	40,239	40,384	145
Securities with market values were less than their carrying amounts
(1) Government and local bonds	28,088	28,088	—
(2) Corporate bonds	14,987	14,974	(13	)
(3) Other	—	—	—
Total	43,076	43,063	(13	)
Total	83,316	83,448	132
3.      Available-for-sale Securities with Determinable Market Value
			(Millions of yen	)
	Carrying amount	Market value	Difference
Securities with carrying amounts greater than their acquisition costs:
(1) Stocks	20,545	67,899	47,353
(2) Bonds
a) Government and local bonds	—	—	—
b) Corporate bonds	—	—	—
c) Other	—	—	—
(3) Other	220	229	8
Total	20,766	68,128	47,362
Securities with carrying amounts at or less than their acquisition costs:
(1) Stocks	7	7	(0	)
(2) Bonds
a) Government and local bonds	—	—	—
b) Corporate bonds	—	—	—
c) Other	—	—	—
(3) Other	2	2	(0	)
Total	9	9	(0	)
Total	20,776	68,137	47,361

(Notes)

When the market value of securities has dropped by 30% or more from the acquisition costs, the securities are classified as having ‘fallen significantly. When the securities’ market decline is 50% or more, the securities are written-down to their market value. When the market value of securities has dropped by 30% or more but less than 50%, likelihood of recovery is estimated on the basis of market value trends and the financial conditions of the issuing companies. Write-downs are recognized for all of such securities other than those for which there is a prospect for recovery.

4. Available-for-Sale securities Sold During the Year

(Millions of yen)

Amount sold	Total gain on sale	Total loss on sale
1,184	983	5

5. Breakdown of Securities without Determinable Market Value

(Millions of yen)

	Carrying amount
(1) Held-to-Maturity securities
a) Commercial papers	29,998
b) Other	10
(2) Available-for-sale securities
a) Unlisted stock	14,416
b) Money management funds, etc.	60,848
c) Other	2,583

6. Scheduled Maturities of Available-for-Sale Securities with Maturity and Held-to-Maturity Securities

(Millions of yen)

	Within one year	Between one and five years	Between five and ten years	Over ten years
(1) Bonds
a) Government and local bonds	29,077	13	—	—
b) Corporate bonds	26,707	27,517	—	—
c) Other	—	10	—	—
(2) Other
Commercial papers	29,998	—	—	—
Total	85,783	27,540	—	—

Fiscal 2005 (as of March 31, 2006)

1. Traded Securities

No applicable items.

2. Held-to-Maturity Securities with Determinable Market Value

(Millions of yen)

	Carrying amount	Market value	Difference
Securities with market values greater than their carrying amounts
(1) Government and local bonds	—	—	—
(2) Corporate bonds	11,203	11,222	18
(3) Other	—	—	—
Total	11,203	11,222	18
Securities with market values were less than their carrying amounts
(1) Government and local bonds	39,403	39,403	—
(2) Corporate bonds	35,619	35,403	(215	)
(3) Other	—	—	—
Total	75,022	74,807	(215	)
Total	86,226	86,029	(197	)
3.      Available-for-sale Securities with Determinable Market Value
			(Millions of yen	)
	Carrying amount	Market value	Difference
Securities with carrying amounts greater than their acquisition costs:
(1) Stocks	21,461	101,432	79,970
(2) Bonds
a) Government and local bonds	—	—	—
b) Corporate bonds	—	—	—
c) Other	—	—	—
(3) Other	7	21	14
Total	21,469	101,454	79,984
Securities with carrying amounts at or less than their acquisition costs:
(1) Stocks	0	0	—
(2) Bonds
a) Government and local bonds	—	—	—
b) Corporate bonds	—	—	—
c) Other	17,096	17,096	—
(3) Other	210	204	(6	)
Total	17,308	17,302	(6	)
Total	38,777	118,756	79,978

(Notes)

When the market value of the securities has dropped by 30% or more from the acquisition costs, the securities are classified as having ‘fallen significantly. When the securities’ market decline is 50% or more, the securities are written-down to their market value. When the market value of securities has dropped by 30% or more but less than 50%, likelihood of recovery is estimated on the basis of market value trends and the financial conditions of the issuing companies. Write-downs are recognized in all cases other than those for which there is a prospect for recovery.

4. Other Securities Sold During the Year Ended March 31, 2006

(Millions of yen)                                

Amount sold	Total gain on sale	Total loss on sale
563	282	0

5. Breakdown of Securities without Determinable Market Value

(Millions of yen)

	Carrying amount
(1) Held-to-Maturity securities
a) Commercial papers	29,994
b) Other	10
(2) Available-for-sale securities
a) Unlisted stocks	13,610
b) Money management funds, etc.	46,546
c) Other	4,267

6. Scheduled Maturities of Available-for-Sale Securities with Maturity and Held-to-Maturity Securities

(Millions of yen)

	Within one year	Between one and five years	Between five and ten years	Over ten years
(1) Bonds
a) Government and local bonds	39,403	—	—	—
b) Corporate bonds	25,574	21,248	—	—
c) Other	10	—	—	—
(2) Other
Commercial paper	29,994	—	—	—
Total	94,981	21,248	—	—

Derivative Transactions

The fair value information of derivative instruments has not been presented because the Company discloses such information through EDINET (Electronic Disclosure for Investors’ NETwork).

Retirement and Severance Benefits

1. Summary of the Company’s Retirement Benefits Arrangements

The Company has an unfounded lump-sum retirement and severance plan and a qualified pension benefit plan as its defined benefit arrangement.

The Company’s domestic consolidated subsidiaries have unfunded lump-sum retirement and severance plans and certain domestic consolidated subsidiaries have qualified pension benefit plans. Certain other domestic consolidated subsidiaries participate in a multi-employer employees’ pension fund-plan. Certain overseas consolidated subsidiaries provide adopt a defined benefit plan or a defined contribution plan.

Additional retirement benefits which are not subject to the actuarial valuation in accordance with the accounting standards for retirement and severance benefits may be are occasionally paid to employees upon retirement.

2. Retirement and Severance Benefits Obligation

(Millions of yen)

	Fiscal 2004 (As of March 31, 2005)		Fiscal 2005 (As of March 31, 2006)
(1) Projected benefit obligations (Note 1)	(84,085	)	83,945
(2) Plan assets at fair value (Note 2)	22,429		27,682
(3) Projected benefit obligations in excess of plan assets	(61,656	)	(56,263	)
(4) Unrecognized actuarial losses	73		(91	)
(5) Unrecognized prior service costs	(5,260	)	(4,083	)
(6) Prepaid pension costs	—		(2,950	)
(7) Accrued retirement and severance benefits (3)+(4)+(5)+(6)	(66,843	)	(63,389	)

(Notes)

1. Certain consolidated subsidiaries use the simplified vested-benefit method in calculating their retirement and severance benefit obligations.

2. In addition, the plan assets in the multi-employer employees’ pension fund, estimated based on the Company’s contribution ration since the amount of attributable to the Company’s contributions cannot be calculated reasonably, totaled ¥7,923 million as of March 2005 and ¥8,891 million as of March 2006 . This amount has not been included in the plan assets presented above.

3. Employees’ Retirement and Severance Benefit Costs

(Millions of yen)

	Fiscal 2004 (As of March 31, 2005)		Fiscal 2005 (As of March 31, 2006)
(1) Service cost for benefits earned (Notes 1, 2)	6,596		5,599
(2) Interest cost	1,844		1,723
(3) Expected return on plan assets	(392	)	(443	)
(4) Amortization of unrecognized actuarial gain or loss	(426	)	(2,773	)
(5) Amortization of unrecognized prior service costs	(603	)	(1,176	)
(6) Additional retirement benefits (Note 3)	693		128
Net periodic costs retirement and severance costs	7,712		3,058

(Notes)

1. Costs of retirement and severance benefits of those consolidated subsidiaries which have adopted the simplified vested-benefit method are included in service cost for benefits earned.

2. The amount is net of employees’ contributions to the multi-employer employees’ pension fund .

3. Of this amount, ¥662 million for the year ended March 31, 2005 and ¥47 million for the year ended March 31, 2006 are included in extraordinary losses.

4. Principal Assumptions Used in the Calculation of Retirement and Severance Benefits Obligations

	Fiscal 2004 (As of March 31, 2005)	Fiscal 2005 (As of March 31, 2006)
(1) Method of inter-period attribution of estimated benefit costs	Straight-line method	Straight-line method
(2) Discount rate	2.5%	2.5%
(3) Expected rate of return on plan assets	2.5%	2.5%
(4) Period of amortization of unrecognized prior service costs	Five years	Five years
(5) Period of amortization of unrecognized actuarial gain or loss	Between one and five years	Between one and five years

Deferred Income Taxes

Year ended March 31, 2005

1) Principal Components of Deferred Tax Assets and Liabilities

	(Millions of yen)
Deferred tax assets:
Accrued retirement and severance benefits	24,001
Prepaid consigned research and co development expenses	14,775
Net operating loss carry forwards for income tax purposes	14,012
Impairment losses	6,445
Accrued bonuses	4,898
Loss on valuation of inventories	3,350
Excess amortization on internal-use software	3,005
Depreciation	2,476
Unrealized profit on inventories	2,158
Loss on valuation of investment securities	1,932
Milestone payment received for co promotion agreement	1,263
Accrued enterprise tax	1,161
Other	8,557
Subtotal	88,040
Valuation allowance	(24,271	)
Total deferred tax assets	63,769
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities	(19,264	)
Reserve for reduction in bases of property, plant and equipment for income tax purposes	(5,954	)
Reserve for accelerated depreciation for income tax purposes	(1,881	)
Other	(999	)
Total deferred tax liabilities	(28,100	)
Net deferred tax assets	35,668

Note: Net deferred tax assets are included in the following balance sheet captions:

	(Millions of yen)
Current assets – deferred tax assets	21,832
Non-current assets – deferred tax assets	14,967
Current liabilities – deferred tax liabilities	(689	)
Non-current liabilities – deferred tax liabilities	(441	)

Year ended March 31, 2006

1) Principal Components of Deferred Tax Assets and Liabilities

	(Millions of yen)
Deferred tax assets:
Accrued retirement and severance benefits	24,112
Prepaid consigned research and co development expenses	14,441
Net operating loss carry forwards for income tax purposes	11,944
Unrealized holding gains on property, plant and equipment	6,106
Accrued bonuses	5,814
Impairment losses	3,860
Excess amortization on internal-use software	2,995
Loss on valuation of inventories	2,965
Depreciation	2,573
Unrealized profit on inventories	2,314
Allowance for contingent losses	1,371
Accrued soil remediation costs	1,156
Other	10,933
Subtotal	90,589
Valuation allowance	(21,415	)
Total deferred tax assets	69,174
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities	(33,005	)
Reserve for reduction in bases of property, plant and equipment for income tax purposes	(7,031	)
Reserve for accelerated depreciation for income tax purposes	(1,950	)
Prepaid pension costs	(1,129	)
Other	(1,506	)
Total deferred tax liabilities	(44,622	)
Net deferred tax assets	24,552

Note: Net deferred tax assets are included in the following balance sheet captions:

	(Millions of yen)
Current assets – deferred tax assets	22,874
Non-current assets – deferred tax assets	4,016
Current liabilities – deferred tax liabilities	(31	)
Non-current liabilities – deferred tax liabilities	(2,306	)

Year ended March 31, 2005

(2) Reconciliation of the difference between the statutory tax rate and the effective tax rate

	(Percent)
Statutory tax rate	40.6
(Adjustments)
Non-deductible permanent differences including entertainment expenses and other items	5.3
Valuation allowance	3.3
IT investment tax credit	(0.4	)
Deductible permanent differences including dividend received deductions and other items	(1.0	)
R&D expense tax credit	(6.1	)
Effect of overseas subsidiaries’ tax rates	(6.6	)
Other	1.8
Effective tax rate	36.9

Year ended March 31, 2006

(2) Reconciliation of the difference between the statutory tax rate and the effective tax rate

	(Percent)
Statutory tax rate	40.6
(Adjustments)
Non-deductible permanent differences including entertainment expenses and other items	7.0
Deductible permanent differences including dividend received deductions and other items	(1.1	)
R&D expense tax credit	(5.1	)
Decrease in valuation allowance	(12.1	)
Other	(1.8	)
Effective tax rate	27.5

Segment Information

(1) Information by Operating Segment

Fiscal 2004

(Millions of yen)

March 31:	Pharmaceuticals	Other	Total	Eliminations & corporate		Consolidated
I. Net sales and operating income
Net sales
(1) Outside customers	454,710	133,120	587,830	—		587,830
(2) Inter-segment sales and transfers	922	1,723	2,646	(2,646	)	—
Total	455,633	134,843	590,476	(2,646	)	587,830
Operating expenses	378,137	128,256	506,393	(3,488	)	502,904
Operating income	77,495	6,587	84,083	842		84,925
II. Assets, depreciation and capital expenditures
Assets	512,239	146,942	659,181	317,049		976,230
Depreciation	25,633	3,177	28,811	—		28,811
Impairment loss	15,853	11	15,865	—		15,865
Capital expenditures	25,276	8,517	33,794	—		33,794

(Notes)

1. Method of classifying operating segments

Classification into ‘Pharmaceuticals’ and ‘Other’ is based on consideration of product type, market characteristics and other factors.

2. Principal products in each operating segment

Operating segments		Principal products
Pharmaceuticals		Prescription drugs, healthcare products
Other	Food	Food products and additives
	Agrochemicals	Insecticides, herbicides and fungicides
	Other	Chemical products, veterinary drugs and bulbs

3. Of the assets as of March 31, 2005, corporate assets included under the category of “Eliminations & corporate” amounted to ¥318,220 million. The amount consisted mainly of temporary excess working capital (such as cash, time deposits and marketable securities) and long-term investment assets (investment securities) held at the parent company.

4. Depreciation includes the depreciation of property, plant and equipment, as well as the amortization of intangible assets and long-term prepaid assets.

5. Capital expenditures include additions to property, plant and equipment, intangible assets and long-term prepaid assets.

6. As noted in “Changes in Significant Accounting Principles and Policies for the Preparation of the Consolidated Financial Statements,” the Sankyo Group has adopted the accounting standards for impairment of fixed assets for effective this fiscal year.

7. As noted in “Supplemental Information,” in accordance with the guidance in “Practical Treatment Concerning the income Statement Presentation of the Pro Forma Standard Taxation Portion of Enterprise Tax, enterprise taxes levied in proportion to the value-added and the capital were recognized as selling, general and administrative expenses in the amount of ¥814 million and ¥157 million for the Pharmaceuticals Segment and the Other Segment, respectively, effective in this fiscal year.

Fiscal 2005

(Millions of yen)

March 31:	Pharmaceuticals	Other	Total	Eliminations & corporate		Consolidated
I. Net sales and operating income
Net sales
(1) Outside customers	453,856	126,092	579,949	—		579,949
(2) Inter-segment sales and transfers	594	1,238	1,833	(1,833	)	—
Total	454,451	127,331	581,783	(1,833	)	579,949
Operating expenses	382,225	121,658	503,883	(2,269	)	501,614
Operating income	72,226	5,672	77,899	435		78,335
II. Assets, depreciation and capital expenditures
Assets	507,790	140,704	648,494	315,894		964,389
Depreciation	23,186	3,914	27,100	—		27,100
Impairment loss	3,913	—	3,913	—		3,913
Capital expenditures	17,576	4,113	21,689	—		21,689

(Notes)

1. Method of classifying operating segments

Classifications into ‘Pharmaceuticals’ and ‘Other’ is based on a consideration of product type, market characteristics and other factors.

2. Principal products in each operating segment

Operating segments		Principal products
Pharmaceuticals		Prescription drugs, healthcare products
Other	Food	Food products and additives
	Agrochemicals	Insecticides, herbicides and fungicides
	Other	Chemical products and veterinary drugs

3. Of the assets as of March 31, 2006, corporate assets included under the category of “Eliminations & corporate” amounted to ¥316,751 million. The amount consisted mainly of temporary excess working capital (such as cash, time deposits and marketable securities) and long-term investment assets (investment securities) held at the parent company.

4. Depreciation includes the depreciation of property, plant and equipment, as well as the amortization of intangible assets and long-term prepaid assets

5. Capital expenditures include additions to tangible fixed assets, intangible fixed assets and long-term prepaid expenses

6. Changes in accounting principles and policies

(1) As noted in “Changes in Significant Accounting Principles and Policies for the Preparation of the Consolidated Financial Statements,” the Company changed its method of valuing inventories during the fiscal year to the lower of average cost or market method .This resulted in a reduction of ¥295 million and ¥4 million in year-end inventories for the Pharmaceutical Segment and Other Segment, respectively.

(2) As also noted in “Changes in Significant Accounting Principles and Policies for the Preparation of the Consolidated Financial Statements,” the Company changed its accounting for allowance for sales returns to a method that recognizes an amount equal to the sum of gross profits on sales and inventory losses on estimated returned products, mainly based on its historical experience of sales returns. As a result of this change, it recognized ¥19 million less in operating income for the Pharmaceutical Segment. There was no impact on segment income for the Other Segment.

(2) Information by Geographic Segment

Fiscal 2004

(Millions of yen)

	Japan	North America	Other		Total	Eliminations & corporate		Consolidated
Net sales and operating income
I. Net sales
(1) Outside customers	461,748	76,902	49,178		587,830	—		587,830
(2) Inter-segment sales and transfers	12,119	3,424	3,466		19,010	(19,010	)	—
Total	473,867	80,327	52,645		606,841	(19,010	)	587,830
Operating expenses	400,554	67,184	53,956		521,694	(18,789	)	502,904
Operating income (loss)	73,313	13,143	(1,310	)	85,146	(220	)	84,925
II. Assets	543,343	76,651	46,004		665,998	310,232		976,230

(Notes)

1. Method of classifying geographic segments

Geographic segments are classified on the basis of geographic proximity.

2. Countries and regions included in each segment other than Japan

North America: the United States

Other: Germany, the United Kingdom, France, Spain, Italy, Taiwan and other

3. Of the assets as of March 31, 2005, corporate assets included under the category of “Eliminations & corporate” amounted to ¥318,220 million. The amounts consisted mainly of temporary excess working capital (such as cash, time deposits and marketable securities) and long-term investment assets (investment securities) held at the parent company.

4. As noted in “Changes in Significant Accounting Principles and Policies for the Preparation of the Consolidated Financial Statements,” the Sankyo Group has adopted the accounting standards for impairment of fixed assets for effective this period.

5. As noted in “Supplemental Information,” in accordance with the guidance in “Practical Treatment Concerning the Income Statement Presentation of the Pro Forma Standard Taxation Portion of Enterprise Tax,” enterprise taxes levied in proportion to the value-added and the capital were recognized as selling, general and administrative expenses’ in the amount of ¥971 million for the Japan segment, effective in this fiscal year. This change had no effect on the segment income in the North America and Other segments.

Fiscal 2005

(Millions of yen)

	Japan	North America	Other		Total	Eliminations & corporate		Consolidated
Net sales and operating income
I. Net sales
(1) External sales	426,215	104,608	49,125		579,949	—		579,949
(2) Inter-segment sales and transfers	17,691	4,781	4,348		26,820	(26,820	)	—
Total	443,906	109,389	53,474		606,770	(26,820	)	579,949
Operating expenses	388,992	84,552	53,898		527,443	(25,828	)	501,614
Operating income (loss)	54,914	24,836	(424	)	79,327	(992	)	78,335
II. Assets	494,428	122,408	47,802		664,638	299,750		964,389

(Notes)

1. Method of classifying geographic segments

Geographic segments are classified on the basis of geographic proximity.

2. Countries and regions included in segments other than Japan

North America: the United States

Other: Germany, the United Kingdom, France, Spain, Italy, Taiwan and other

3. Of the assets as of March 31, 2006, corporate assets included under the category of “Eliminations & corporate” amounted to ¥316,751 million. The amounts consisted mainly of temporary excess working capital (such as cash, time deposits and marketable securities) and long-term investment assets (investment securities) held at the parent company.

4. Change in accounting methods

(1) As noted in “Changes in Significant Accounting Principles and Policies for the Preparation of the Consolidated Financial Statements,” the Company changed its method of valuing inventories during the fiscal year to the lower of average cost or market method. This resulted in a reduction of ¥299 million in year-end inventories for the Japan segment. This change had no impact on segment income for the North America and Other Segments.

(2) As also noted in “Changes in Significant Accounting Principles and Policies for the Preparation of the Consolidated Financial Statements,” the Company changed its accounting for allowance for sales returns to a method that recognizes an amount equal to the sum of gross profits on sales and inventory losses on estimated returned products, mainly based on its historical experience of sales returns. As a result of this change, it recognized ¥19 million less in operating income for the Japan Segment. There was no impact on segment income for the North America and Other Segments.

(3) Overseas Sales

Year ended March 31, 2005

(Millions of yen)

	North America	Europe	Other areas	Total
Overseas net sales	114,949	85,372	15,324	215,645
Consolidated net sales				587,830
Percentage of overseas net sales to consolidated net sales (%)	19.6	14.5	2.6	36.7

(Notes)

1. Method of classifying countries and regions

Countries and regions are classified on the basis of geographic proximity.

2. Countries and regions included in each area

North America: the United States and Canada

Europe: Germany, the United Kingdom, Spain, Italy, Ireland, France, Switzerland and others

Other areas: Asia, the Middle East, Latin America and others

3. Overseas net sales are sales of the Company and its consolidated subsidiaries which are transacted in countries or regions outside of Japan.

Year ended March 31, 2006

(Millions of yen)

	North America	Europe	Other areas	Total
Overseas net sales	134,895	82,291	15,538	232,724
Consolidated net sales				579,949
Percentage of overseas net sales to consolidated net sales (%)	23.2	14.2	2.7	40.1

(Notes)

1. Method of classifying countries and regions

Same as the previous year

2. Countries and regions included in each area

Same as the previous year

3. Overseas net sales are sales of the Company and its consolidated subsidiaries which are transacted in countries or regions outside of Japan.

Transactions with Related Parties

Not applicable.

(Subsequent Events)

Fiscal 2004

–

Fiscal 2005

(Sale of a subsidiary)

At its Board of Directors Meeting held on April 24, 2006, the Company approved to apply for a sale of the shares of its subsidiary, Wakodo Co., Ltd., in response to a tender offer to be made by Asahi Breweries, Ltd. for Wakodo shares.

(1) Reasons for sale

To concentrate management resources on the pharmaceutical business, the Company has been reassessing its involvement in non-pharmaceutical businesses. In the course of this reassessment, a tender offer to purchase Wakodo Co. Ltd.’s shares was proposed by Asahi Breweries, Ltd. who has valued highly of both the nature of Wakodo’s business and the growth prospects of that business. The Company has concluded to accept the tender offer taking into consideration Asahi’s management pursuit of customer satisfaction and quality, its technologies and know-how, and its variety of sales channels that would contribute to the future development of Wakodo’s business, as well as the price and other terms of the tender offer.

(2) Name of buyer

Asahi Breweries, Ltd.

(3) Date of sale

April 25, 2006	Date of public notice of the tender offer
May 15, 2006	Last day of the tender offer period
May 19, 2006	Commencement date of settlement

(4) Name of subsidiary; nature of business; and nature of transactions with the Company

Name: Wakodo Co., Ltd.

Nature of business: Manufacture and sale of powdered baby milk; baby foods; vending machine foods; household food items; commercial-use milk powder; pharmaceuticals; non-prescription drugs; cosmetics; sanitary goods; and general merchandise

Transactions with the Company: None

(5) Number of shares to be sold; sale price; gain or loss on sale and ownership interest upon disposition

Number of shares to be sold: 3,533,000

Sale price: ¥27.9 billion

Ownership interest upon disposition: 0%

Fiscal 2004

(Signing of an agreement to integrate businesses by establishing a joint holding company with Daiichi Pharmaceutical Co., Ltd. (“Daiichi”))

The Company signed an agreement to integrate its businesses with Daiichi through the resolution by the Board of Directors on May 13, 2005. The joint holding company, DAIICHI SANKYO COMPANY, LIMITED, will be established on September 28, 2005 through the approval at the 151st ordinary general shareholders’ meeting to be held on June 29, 2005.

1. Objectives of the integration

In response to unsatisfied needs from patients and health care professionals, the Company and Daiichi (together, “Both Companies”) will integrate their businesses with an objective to pursue a Japan-based “global pharma-innovator,” who provides innovative products and services continuously and demonstrates a unique competitiveness in the international pharmaceutical market.

2. Business integration process

(1) A joint holding company will be established in the form of a fully-fledged parent company through stock transfer from Both Companies on September 28, 2005. As a result of the joint stock transfer, common stocks of Both Companies traded on the stock exchanges will be delisted and the new holding company will apply for listing.

(2) The pharmaceutical businesses of both Companies will be integrated into the joint holding company by April 2007.

3. Profile of the joint holding company

Company name:	Daiichi Sankyo Company, Limited
Headquarters :	3-5-1 Nihonbashi-honcho, Chuo-ku, Tokyo, Japan
Common stock :	50 billion yen

Fiscal 2005

–

V. Production, Orders and Sales

1. Production

Production by operating segment for the fiscal year is summarized as follows:

Operating segment	Production (Millions of yen)	Changes (%)
Pharmaceuticals	347,995	101.7
Other	91,124	97.9
Total	439,120	100.9

(Notes:)

1. Production amounts are based on net selling prices and after elimination of inter-segment sales.

2. The above amounts are stated exclusive of consumption tax.

2. Orders

The Sankyo Group performs production according to its own production plans, which are primarily based on its sales forecast. Order-based production is carried out at certain subsidiaries; however, the amount of order back-log is not included herein as such amounts were insignificant.

3. Net Sales

Net sales by operating segment for the fiscal year were as follows:

Operating segment	Production (Millions of yen)	Changes (%)
Pharmaceuticals	453,856	99.8
Other	126,092	94.7
Total	579,949	98.7

(Notes)

1. Net sales amounts represent net sales to external customers.

2. Net sales to major customers and their percentage of total net sales were as follows:

Customers	Fiscal 2004		Fiscal 2005
	(Millions of yen)	%	(Millions of yen)	%
Bristol-Myers Squibb Company	72,074	12.3	61,509	10.6
Alfresa Corporation	64,985	11.1	59,220	10.2

3. The above amounts are stated exclusive of consumption tax.

FASF

May 12, 2006

Non-Consolidated Financial Results for Fiscal 2005

(Year Ended March 31, 2006)

Sankyo Company, Limited

Listed company: DAIICHI SANKYO COMPANY, LIMITED

Stock code number: 4568

Listed exchanges: Tokyo, Osaka, and Nagoya

Head office: Tokyo, Japan

Homepage: http://www.sankyo.co.jp/

Contact: Toshio Takahashi, Executive Officer and General Manager, Corporate Communications Department

Phone: (03) 6225-1126

Meeting of the Board of Directors: May 12, 2006

Interim dividends: Yes

Adoption of unit share system: Yes (One unit equals 100 shares)

Non-Consolidated Financial Results for Fiscal 2005

(1) Non-Consolidated Financial Results

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Net sales			Operating income			Ordinary income
	Millions of yen	Percent change		Millions of yen	Percent change		Millions of yen	Percent change
Fiscal 2005	318,127	(6.5	)	46,344	(28.1	)	48,955	(23.7	)
Fiscal 2004	340,091	(9.7	)	64,441	(30.6	)	64,124	(31.7	)

	Net income			Basic net income per share	Diluted net income per share	Return on equity	Ordinary income as a percentage of total assets	Ordinary income as a percentage of net sales
	Millions of yen	Percent change		Yen	Yen	%	%	%
Fiscal 2005	23,145	(38.4	)	54.26	54.26	3.2	5.8	15.4
Fiscal 2004	37,548	(33.2	)	87.23	87.19	5.2	7.5	18.9

Notes:

1. Weighted-average number of common shares issued and outstanding during the fiscal year:

Fiscal 2005:	425,007,394 shares
Fiscal 2004:	429,527,836 shares

2. Changes in accounting policies: Yes

3. Percentages for net sales, operating income, ordinary income and net income represent a change from the corresponding results in the previous fiscal years.

(2) Dividends

Beginning in the interim period of fiscal 2005, dividends are paid to the Company’s parent company Daiichi Sankyo Company, Limited.

(3) Non-Consolidated Financial Position

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Total assets	Shareholders’ equity	Shareholders’ equity ratio	Shareholders’ equity per share
	Millions of yen	Millions of yen	%	Yen
Fiscal 2005	821,595	702,194	85.5	1,660.81
Fiscal 2004	869,575	727,993	83.7	1,694.75

Notes:

1. Total number of common shares issued at the end of the fiscal year:

Fiscal 2005:	422,753,456 shares
Fiscal 2004:	429,508,509 shares

2. Number of common shares in treasury stock at the end of the fiscal year:

Fiscal 2005:	— shares
Fiscal 2004:	9,990,256 shares

VI. Non-Consolidated Financial Statements

1. Non-Consolidated Balance Sheets

(Millions of yen)

	See Note	2005			2006			Change
March 31:		Amount		%	Amount		%	Amount
ASSETS
Current assets
Cash and time deposits		133,346			108,784
Trade notes receivable		2,813			1,481
Account receivables - trade	*5	101,292			87,253
Marketable securities		98,697			92,381
Parent company stock		—			8,912
Merchandises		8,580			9,194
Products		10,727			7,913
Semifinished products		22,120			18,241
Raw materials		8,201			10,522
Work in progress		3,726			2,822
Prepaid expense		341			304
Deferred tax asset		18,158			18,391
Account receivables - others		2,360			3,674
Other current assets		1,372			2,456
Allowance for doubtful accounts		(34	)		(410	)
Total current assets		411,705		47.3	371,923		45.3	(39,782	)
Non-current assets
Property, plant and equipment
Buildings		161,128			160,776
Less Accumulated Depreciation		75,815			79,149
Buildings, net		85,312			81,626
Structures		19,842			20,114
Less Accumulated Depreciation		12,834			13,304
Structures, net		7,007			6,810
Machinery and equipment		133,544			132,351
Less Accumulated Depreciation		115,651			118,025
Machinery and equipment, net		17,893			14,326
Motor vehicles and transport equipment		400			396
Less Accumulated Depreciation		359			362
Motor vehicles and transport equipment, net		41			33
Tools, equipment and fixtures		42,492			44,552
Less Accumulated Depreciation		34,677			35,672
Tools, equipment and fixtures, net		7,814			8,879
Land		21,177			23,316
Construction in progress		7,518			3,009
Total property, plant and equipment, net		146,765		16.9	138,003		16.8	(8,762	)

(Millions of yen)

	See Note	2005			2006			Change
March 31		Amount		%	Amount		%	Amount
Intangible assets, net
Patent rights		84			144
Land-use rights		24			17
Trade marks		228			199
Software		6,850			4,656
Distribution rights		3,163			477
Other intangible assets		79			76
Total intangible assets, net		10,430		1.2	5,571		0.7	(4,858	)
Investments and other assets
Investment securities		109,720			128,085
Investments in affiliated companies		116,744			115,611
Other investments in capital		923			748
Other investments in affiliated companies		47,751			47,751
Long-term loans		7			—
Long term loans to employees		3,127			3,101
Long-term loans to affiliated companies		7,182			5,128
Long-term prepaid expense		263			314
Prepaid pension costs		—			2,740
Deferred tax assets		12,485			—
Insurance reserve fund		167			170
Guarantee money and deposits		2,540			2,615
Allowance for doubtful accounts		(240	)		(172	)
Total investments and other assets		300,673		34.6	306,096		37.2	5,423
Total non-current assets		457,869		52.7	449,672		54.7	(8,197	)
Total assets		869,575		100.0	821,595		100.0	(47,980	)

(Millions of yen)

		2005		2006		Change
March 31:	See Note	Amount	%	Amount	%	Amount
LIABILITIES
Current liabilities
Accounts payable	*5	25,891		19,753
Amounts payable-other		30,976		21,134
Accrued expenses		2,460		13,991
Income taxes payable		14,802		241
Consumption tax payable		1,037		1,311
Advance received		740		483
Accrued bonuses		7,908		—
Allowance for sales returns		362		273
Allowance for sales rebates		1,022		894
Allowance for contingent losses		—		3,379
Other current liabilities		2,074		338
Total current liabilities		87,276	10.0	61,801	7.5	(25,474	)
Non-current liabilities
Accrued retirement and severance benefits		53,573		51,743
Accrued directors’ retirement and severance benefits		732		489
Accrued soil remediation costs		—		2,850
Deferred tax liabilities		—		1,523
Other non-current liabilities		—		992
Total non-current liabilities		54,305	6.3	57,598	7.0	3,292
Total liabilities		141,581	16.3	119,400	14.5	(22,181	)

(Millions of yen)

		2005				2006		Change
March 31:	See Note	Amount		%		Amount	%	Amount
SHAREHOLDERS’ EQUITY
Common stock	*1	68,793		7.9		68,793	8.4	—
Additional paid-in capital:
Capital surplus		66,856				66,856
Total additional paid-in capital		66,856		7.7		66,856	8.1	—
Retained earnings
Legally appropriate retained earnings		13,214				13,214
Voluntary retained earnings reserve:
Reserve for special depreciation		2,536				2,742
Reserve for reduction in cost basis of fixed assets		2,281				7,648
Special reserve		485,600				485,600
Unappropriated retained earnings		81,947				10,457
Total retained earnings		585,580		67.3		519,664	63.3	(65,916	)
Net unrealized gain on investment securities		27,176		3.1		46,880	5.7	19,704
Treasury stock at cost	*2	(20,412	)	(2.3	)	—	—	20,412
Total shareholders’ equity		727,993		83.7		702,194	85.5	(25,798	)
Total liabilities and shareholders’ equity		869,575		100.0		821,595	100.0	(47,980	)

2. Non-Consolidated Statements of Income

(Millions of yen)

		2005		2006		Change
For the year ended March 31:	See Note	Amount	%	Amount	%	Amount
Net sales		340,091	100.0	318,127	100.0	(21,963	)
Sales of merchandise		258,595		263,255
Sales of product		81,495		54,872
Cost of sales	*2	113,632		98,812
Merchandise and products beginning of year		21,929		19,307
Production cost		45,545		46,233
Merchandise purchases		46,157		33,271
Merchandise and products end of year		19,307		17,107
		94,324	27.7	81,704	25.7	(12,620	)
Gross profit		245,766	72.3	236,422	74.3	(9,343	)
Reversal of provision for sales returns		—	—	89	0.0	89
Provision for sales returns		22	0.0	—	—	(22	)
Adjusted gross profit		245,744	72.3	236,511	74.3	(9,232	)
Selling, general and administrative expenses		181,303	53.4	190,167	59.7	8,863
Promotional expenses		13,676		14,107
Advertising expenses		12,708		11,691
Salaries and bonuses		23,577		28,354
Provision for accrued bonuses		4,378		—
Retirement and severance benefits		2,255		188
Provision for accrued directors’ retirement and severance benefits		51		90
Depreciation		7,203		5,338
Travel and transportation expenses		4,249		4,499
Research and development expense	*1, 2	75,052		85,911
Other		38,150		39,984
Operating income		64,441	18.9	46,344	14.6	(18,096	)

(Millions of yen)

		2005		2006		Change
For the year ended March 31:	See Note	Amount	%	Amount	%	Amount
Non-operating income		6,555	2.0	5,614	1.7	(941	)
Interest income		173		157
Interest income on marketable securities		272		229
Dividend income	*5	3,364		1,648
Rent income	*5	1,533		1,518
Other		1,211		2,060
Non-operating expenses		6,871	2.0	3,002	0.9	(3,868	)
Loss on disposal of inventories		3,610		739
Charitable contributions		728		1,087
Other		2,532		1.176
Ordinary income		64,124	18.9	48,955	15.4	(15,168	)
Extraordinary income		16,872	5.0	3,407	1.0	(13,464	)
Gain on sale of property, plant and equipment	*3	12,046		1,826
Reversal of allowance for doubtful accounts		2,040		—
Gain on sale of investments in affiliates		1,788		1,404
Gain on sale of investment securities		957		176
Reversal of accrued directors’ retirement and severance benefits		40		—
Extraordinary losses		19,899	5.9	15,955	5.0	(3,943	)
Loss on disposal of property, plant and equipment	*4	1,933		3,856
Loss on impairment of property, plant and equipment	*6	15,879		3,913
Provision for contingent losses		—		3,379
Provision for soil remediation costs		—		2,850
Loss on business integration	*7	—		1,551
Restructuring charge	*8	—		274
Loss on sale of investments in affiliates		—		44
Supplemental retirement benefits		348		43
Loss on valuation of investment securities		—		41
Loss on valuation of investments in affiliates		1,483		—
Loss on valuation of other investments in capital		249		—
Loss on sale of investment securities		5		—
Income before income taxes		61,098	18.0	36,407	11.4	(24,690	)

(Millions of yen)

		2005			2006		Change
For the year ended March 31:	See Note	Amount		%	Amount	%	Amount
Income tax expense-current		29,130			12,937
Income tax expense (benefit)-deferred		(5,580	)		324
		23,549		7.0	13,262	4.1	(10,287	)
Net income		37,548		11.0	23,145	7.3	(14,403	)
Unapproriated retained earnings brought-forward from the previous fiscal year		50,841			65,553		14,712
Loss on sale of treasury stock		—			229		229
Retirement of treasury stock		—			35,736		35,736
Interim dividends		6,442			42,275		35,832
Unappropriated retained earnings, end of year		81,947			10,457		(71,489	)

3. Proposal for Appropriation of Retained Earnings

(Millions of yen)

		2005		2006		Change
March 31:	See Note	Amount		Amount		Amount
Unappropriated retained earnings, end of year			81,947		10,457	(71,489	)
Reversal of voluntary retained earnings reserve:
Reserve for special depreciation		625		828
Reserve for reduction in cost basis of fixed assets		80		430
Special reserve		—	705	60,000	61,258	60,552
Retained earnings available for appropriation			82,653		71,716	(10,936	)
Appropriations
Cash dividends		10,737		—
Bonuses paid to :
Directors		72		72
Corporate Auditors		10		10
Voluntary retained earning reserve
Reserve for special depreciation		831		935
Reserve for reduction in cost basis of fixed assets		5,448	17,099	786	1,804	(15,295	)
Unappropriated retained earnings, carried forward to the next fiscal year			65,553		69,911	4,358

Summary of Significant Accounting Principles and Policies for the Preparation of Non-Consolidated Financial Statements

Item		Fiscal 2004	Fiscal 2005
1.	Methods of Valuation of Significant Assets	(1) Investment securities - Held-to-maturity securities: Stated at amortized costs (straight-line method) - Investments in subsidiaries and affiliated companies: Accounted for by the moving-average cost method Available-for-sale securities: With quoted market value; Stated at quoted market value at the balance sheet dates (Unrealized holding gains or losses are reported as a component of shareholders’ equity. Realized gains or losses are computed using the moving-average cost method.) - With no readily available market value; Accounted for by thee moving-average cost method	(1) Investment securities - Held-to-maturity securities: Same as for the previous year - Stocks of subsidiaries and affiliated companies: Same as for the previous year Available-for-sale securities: - With quoted market value; Same as for the previous year - With no readily available market value; Same as for the previous year
		(2) Inventories Accounted for at the lower of cost or market, with cost being determined under the average cost method.	(2) Inventories Same as for the previous year
2.	Depreciation and Amortization of Significant Depreciable Assets	(1) Property, Plant and Equipment: Depreciation is computed using the declining-balance method; except for the buildings (excluding fixtures) acquired on or after April 1, 1998 which are depreciated using the straight line method. The ranges of useful lives of principal assets are as follows: Buildings: 2 to 50 years Machinery and equipment: 2 to 17 years	(1) Property, Plant and Equipment: Same as for the previous year
		(2) Intangible Assets: Amortization is computed using the straight-line method. Software for internal use is amortized over the estimated useful lives of a five year period.	(2) Intangible Assets: Same as for the previous year
3.	Method of Accounting for Significant Allowances:	(1) Allowance for Doubtful Accounts The Company covers the risk of credit losses from potential customer defaults by providing this allowance. The allowance is estimated on the basis of historical default rates for normal accounts and individual account-by-account evaluation for specific over-due accounts.	(1) Allowance for Doubtful Accounts Same as for the previous year
		(2) Accrued bonuses To prepare for bonus payments, the Company accrues an amount based on a portion of the estimated total amount of bonus attributable to the fiscal year.	(2) Allowance for bonuses Not applicable
		(3) Allowance for sales returns The Company provides for loss on sales returns of products and merchandise based on the maximum amount deductible for tax purpose in accordance with the Corporate Tax Law in Japan.	(3) Allowance for sales returns The Company provides for loss on sales returns of products and merchandise based on its historical experience of sales returns. The Company recognizes an amount equal to the sum of gross profits on sales and inventory losses on estimated returned products.

Item	2005	2006
	(4) Allowance for sales rebates To prepare for future sales rebates, the Company records an allowance in an amount calculated by multiplying the sales rebate rate for the fiscal year by wholesalers’ inventory amounts or accounts receivable balances at the end of the fiscal year.	(4) Allowance for sales rebates Same as for the previous year
	(5) Accrued retirement and severance benefits To prepare for future payments of retirement and severance benefits, the Company provides for an allowance based on estimated projected benefit obligations and plan assets at the end of the fiscal year. Prior service cost is amortized under the straight-line method over a period of 5 years, which is equal to or less than the estimated average remaining years of service of the eligible employees at the time such prior service cost was recognized. Actuarial gains and losses are recognized immediately in the fiscal year in which such gain or loss was recognized.	(5) Allowance for retirement and severance benefits Same as for the previous year
	(6) Accrued directors’ retirement and severance benefits To prepare for future payments of directors’ retirement and severance benefits, the Company provides for an amount that would have become payable at the end of the fiscal year in accordance with internal regulations, had all directors resigned voluntarily.	(6) Allowance for directors’ retirement and severance benefits Same as for the previous year
	(7) Allowance for contingent losses -Not applicable	(7) Allowance for contingent losses To prepare for possible future contingent losses, the Company provides an accrual for an amount of reasonably possible losses by examining individual risk on a case by case basis.
	(8) Allowance for soil remediation measures -Not applicable	(8) Accrued soil remediation costs To provide for potential soil remediation costs, the Company has recognized a provision for losses on soil remediation based on estimated costs of the cleanup.

Item		2005	2006
4.	Translation of Assets and Liabilities Denominated in Foreign Currencies into Yen	Receivables and payables denominated in foreign currencies are converted into yen amounts at the rates of exchange in effect at the end of the fiscal year, with resulting translation gains or losses recognized currently in earnings.	Same as for the previous year
5.	Accounting for Significant Lease Transactions	The same accounting method applied to operating leases is used for financial leases, except for those in which the legal title of the underlying property is transferred from the lessor to the lessee.	Same as for the previous year
6.	Other Significant Accounting Policies	Accounting for Consumption Tax The tax-exclusion (net of tax) method is applied to account for national and local consumption taxes.	Same as for the previous year

Changes in Significant Accounting Principles and Policies for the Preparation of the Non-Consolidated Financial Statements

2005

–

–

(Accounting for Impairment of Property, Plant and Equipment)

Effective in the fiscal year, the Company adopted the new accounting standard for impairment of property, plant and equipment (“Opinion Concerning Establishment of Accounting Standard for Impairment of Fixed Assets” issued by the Business Accounting Deliberation Council on August 9, 2002) and its implementation guidance (the Financial Accounting Standard Implementation Guidance No. 6 issued by the Accounting Standards Board of Japan on October 31, 2003). The new accounting standard was allowed to be adopted beginning in the fiscal year ended March 31, 2004.

As a result of this adoption, income before income taxes decreased by ¥15,879 million.

An accumulated impairment loss is recorded as direct reduction in the book value of respective assets in accordance with the revised regulations for financial statement presentation.

2006

(Valuation Method of Inventories)

Previously, inventories of the Company were principally stated at cost determined by the average method; however, effective in the fiscal year, inventories are principally stated at the lower of average cost or market.

This change was made to appropriately reflect, in the valuation of inventories, the effect of market price changes caused by the severe operating environment in the pharmaceutical industry.

This change resulted in a ¥294 million decrease in ordinary income and income before income taxes for the fiscal year compared to the amounts that would have been reported had the previous method been applied consistently.

(Accounting for Allowance for Sales Returns)

Previously, the Company recorded this provision based on the maximum amount deductible for income tax purpose in accordance with the Corporate Tax Law in Japan; however, effective in the fiscal year, the provision is principally recorded in an amount equal to the sum of gross profits and inventory losses on estimated returned products, mainly based on its historical experience of sales returns.

This change was made to appropriately reflect to the reported earning the effect of the fact that most of the returned products are disposed of and are not reused or resold to customers.

As a result, operating income, ordinary income, and income before income taxes for the fiscal year decreased by ¥19 million as compared to the amounts that would have been reported had the previous method been applied consistently.

–

Supplemental Information

Fiscal 2004

–

–

(The Pro Forma Standard Taxation System)

In accordance with the guidance in Implementation Guidance Report No.12, “Practical Treatment Concerning the Income Statement Presentation of the Pro Forma Standard Tax Portion of Enterprise Tax” on February 13, 2004 by Accounting Standards Board of Japan, the Company recorded ¥809 million levied in proportion to the value-added and the capital as selling, general and administrative expenses in the fiscal year.

Fiscal 2005

(Accounting for Accrued Bonuses)

Previously, the Company accrued an estimated amount of bonuses payable for the fiscal year in “accrued bonuses”; however, effective in the fiscal year, accrued bonuses are recorded in “accrued expense” as the amount of bonuses applicable to the fiscal year has become determinable. As a result of this change, bonuses of ¥7,837 million, which were attributable to the fiscal year, have been recorded in “accrued expense.”

(Accounting for Allowance for Contingent Losses)

During the current fiscal year, the Company recognized an allowance for contingent loss in the amount of ¥3,379 million for potential penalties arising out of its product purchase commitments with a minimum purchase provision, for which the payment of penalties has become probable and the amount of such penalties can be reasonably estimated.

In the interim period of the current fiscal year, the company provided an allowance for an amount of possible losses due to devaluation of excess inventories. However, at this fiscal year-end the Company has changed its accounting standard along with a revision of product purchase agreements.

(Accounting for Soil Remediation Costs)

The Company has recognized an accrual for soil-remediation costs of ¥2,850 million, which was an estimated amount of the cleanup costs that the Company would reasonably incur, based on a survey completed on certain land for the scope of soil remediation.

–

Notes to Non-Consolidated Financial Statements

(Notes to Non-Consolidated Balance Sheets)

2005

*1. Authorized number of shares         1,168,099,000 common shares

Number of shares issued                         439,498,765 common shares

The Company’s Articles of Incorporation provides that when the shares are retired, the number of authorized shares shall be reduced.

*2. Treasury stock

The number of shares in treasury stock owned by the Company at the end of the fiscal year was 9,990,256 shares of common stock.

3. Contingencies

(1) Certain debt and other obligations of 3 affiliated companies and employees owed to financial institutions are guaranteed by the Company. A breakdown of these obligations was as follows:

	(Millions of yen)
Sankyo Pharma Inc.	4,738
Nippon Nyukazai Co., Ltd.	1,500
Saudi Arabian-Japanese Pharmaceutical Co., Ltd.	366
Employees	101
Total	6,707

(2) For purchase contracts with a minimum volume purchase commitment, the Company is exposed to a risk of valuation loss due to excess inventory.

4. Overdraft contracts and commitment line contracts

The Company and its consolidated subsidiaries maintain overdraft contracts and commitment line contracts with 2 financial institutions and 15 financial institutions, respectively, in order to allow an efficient procurement of working capital. The balance of unused credit lines under these contracts at the fiscal year-end was as follows:

	(Millions of yen)
Overdraft limit and commitments totals	60,000
Overdrafts and commitments used	—
Overdrafts and commitments unused	60,000

*5. Assets and liabilities related to affiliated companies were as follows:

Accounts receivable	1,701
Accounts payable	3,727

6. Limitations on Dividends

The restricted net assets of the Company, attributable to the mark-to-market adjustment to the assets specified in Article 124-3 of the Commercial Code of Japan, was ¥27,176 million.

2006

*1. Authorized number of shares         1,151,353,691 common shares

Number of shares issued                         422,753,456 common shares

The Company’s Articles of Incorporation provides that when the shares are retired, the number of authorized shares shall be reduced.

Total number of shares authorized in the Company’s Articles of Incorporation is 1,168,099,000 common shares, however the Company has retired 16,745,309 common shares of its treasury stock by September 26, 2005.

*2.

3. Contingencies

(1) Certain debt and other obligations of 3 affiliated companies and employees owed to financial institutions are guaranteed by the Company. A breakdown of these obligations was as follows:

	(Millions of yen)
DAIICHI SANKYO, INC.	7,059
Nippon Nyukazai Co., Ltd.	1,300
Saudi Arabian-Japanese Pharmaceutical Co., Ltd.	322
Employees	4
Total	8,687

(Note) Sankyo Pharma Inc. absorbed Daiichi Pharma Holdings, Inc., Daiichi Pharmaceutical Corp. and Daiichi Medical Research Inc., which are U.S.-based subsidiaries of Daiichi Pharmaceutical Co., Ltd., by merger on March 31, 2006. The name of the merged entity was changed to DAIICHI SANKYO, INC.

(2)                     

4. Overdraft contracts and commitment line contracts

The Company and its consolidated subsidiaries maintain overdraft contracts and commitment line contracts with 2 financial institutions and 15 financial institutions, respectively, in order to allow an efficient procurement of working capital. The balance of unused credit lines under these contracts at the fiscal year-end was as follows:

	(Millions of yen)
Overdraft limit and commitments totals	60,000
Overdrafts and commitments used	—
Overdrafts and commitments unused	60,000

*5. Assets and liabilities related to affiliated companies were as follows:

Accounts receivable	3,087
Accounts payable	3,034

6. Limitations on Dividends

The restricted net assets of the Company, attributable to the mark-to-market adjustment to the assets specified in Article 124-3 of the old Commercial Code of Japan, was ¥46,880 million.

Notes to Non-Consolidated Statements of Income

2005

*1. Research and development expenses included the following:

	(Millions of yen)
Provision for accrued bonuses	2,436
Salaries and bonuses	12,648
Retirement and severance benefits	1,187
Depreciation	6,361

*2. Research and development expenses included in selling, general and administrative expenses was ¥75,052 million.

*3. Breakdown of gain on sale of property, plant and equipment

	(Millions of yen)
Buildings	5
Machinery, equipment and vehicles	4
Tools, equipment and fixtures	0
Land	12,035
Total	12,046

*4. Breakdown of loss on disposal of property, plant and equipment

	(Millions of yen)
	Loss on disposal	Loss on sale
Buildings	335	36
Structures	50	0
Machinery and equipment	146	5
Motor vehicle and transport equipment	3	—
Tools and fixtures	78	—
Land	—	567
Other	300	—

In addition, expenses for disposal of property, plant and equipment totaled ¥410 million.

2006

*1. Research and development expenses included the following

	(Millions of yen)
Salaries and bonuses	14,646
Retirement and severance benefits	166
Depreciation	7,285

*2. Research and development expenses included in selling, general and administrative expenses was ¥85,911 million.

*3. Breakdown of gain on sale of property, plant and equipment

	(Millions of yen)
Buildings	1
Machinery, equipment and vehicles	0
Land	1,824
Total	1,826

*4. Breakdown of loss on disposal of property, plant and equipment

(Millions of yen)

	Loss on disposal	Loss on sale
Buildings	1,263	167
Structures	31	0
Machinery and equipment	64	56
Motor vehicle and transport equipment	0	0
Tools and fixtures	182	6
Land	—	38
Other	1,307	—

In addition, expenses for disposal of property, plant and equipment totaled ¥738 million.

2005

*5. Transactions with affiliated companies

The Company’s principal transactions with its affiliates were as follows.

	(Millions of yen)
Dividend income	1,902
Rental income	866

*6. Loss on impairment of property, plant and equipment

The Company classifies its assets held and used for its business operations into asset groups, on the basis of operating segments, about which separate financial information is regularly identified for management reporting purpose (e.g., product group), whereas the Company classifies lease assets and idle assets which are not directly used for its business operations on a property by property basis.

For the fiscal year, the Company recorded impairment losses in the amount of ¥15,879 million on the following asset groups.

(1) Assets held and used for its business operations

With respect to a distribution right of an imported product (¥13,059 million) in the pharmaceutical segment, the Company recognized a full impairment loss in extraordinary losses because the Company expects negative cash flows from the imported product due to a decrease in profitability resulting from their sluggish sales.

(2) Lease assets and idle assets

Location & Function	Asset type	Status
Iwaki, Fukushima Onahama Plant (manufacturing facilities of pharmaceuticals)	Buildings Machinery and equipment	Idle
Yasu, Shiga Former Yasu-gawa Plant (manufacturing facilities of agrochemicals)	Buildings	Idle
Shizuoka, etc., Shizuoka Company dormitory land	Land	Idle

Since the asset groups shown in the table above were idle and their expected use was uncertain in the foreseeable future, the Company reduced its book values to a recoverable amount and recorded such reductions of ¥2,820 million as a loss on impairment in the extraordinary losses. These impairment losses consisted of the losses on buildings of ¥2,094 million, on structures of ¥70 million, on machinery and equipment of ¥525 million, on tools, equipment and fixtures of ¥9 million, and on land of ¥120 million.

The Company measures the recoverable amount of an asset group by net realizable value. The Company calculates the net realizable value of land based on the valuation amount for real estate tax purpose, with reasonable adjustments. With respect to buildings, structures, machinery and equipment, motor vehicles and transport equipment, and tools, equipment and fixtures, their net realizable values were estimated at five percent of their

2006

*5. Transactions with affiliated companies

The Company’s principal transactions with its affiliates were as follows.

	(Millions of yen)
Dividend income	556
Rental income	820

*6. Loss on impairment of property, plant and equipment

The Company classifies its assets held and used for its business operations into asset groups, on the basis of operating segments, about which separate financial information is regularly identified for management reporting purpose (e.g., product group), whereas the Company classifies lease assets and idle assets which are not directly used for its business operations on a property by property basis.

For the fiscal year, the Company recorded impairment losses on the following asset groups.

Location & Function	Asset type	Status
Iwaki, Fukushima Onahama Plant (manufacturing facilities of pharmaceuticals)	Buildings Machinery and equipment	Idle
Tsuchiura, Ibaraki Company housing etc.	Land	Idle

There was no indication of impairment for the assets that are held and used for operations of the Company’s business. However, since the asset groups shown in the table above were idle and their expected use was uncertain in the foreseeable future, the Company reduced their book values to a recoverable amount and recorded such reductions of ¥3,913 million as a loss on impairment in the extraordinary losses. These impairment losses consisted of the losses on buildings of ¥1,877 million, on structures of ¥127 million, on machinery and equipment of ¥1,881 million, on tools and fixtures of ¥16 million and on land of ¥11 million. The Company measures the recoverable amount of an asset group by its net realizable value. The Company calculates the net realizable value of land based on the valuation amount for real estate tax purpose, with reasonable adjustments. With respect to buildings, structures, machinery and equipment, motor vehicles and transport equipment, and tools, equipment and fixtures, their net realizable values were estimated at five percent of their acquisition costs.

2005

*7.

*8.

2006

*7. Loss on business integration

The loss represents one-time costs associated with the integration of the business operations of the Sankyo Group and the Daiichi Pharmaceutical Group within the Daiichi Sankyo Group.

*8. Restructuring charge

The amount represents one-time costs associated with the restructuring of non-pharmaceutical businesses within the Sankyo Group.

Marketable and Investment Securities

Investments in Subsidiaries and Affiliated Companies with Determinable Market Value

(Millions of yen)

	2005			2006
	Carrying amount	Market value	Difference	Carrying amount	Market value	Difference
Investment in subsidiaries	4,512	13,075	8,563	4,512	17,987	13,474
investment in affiliated companies	—	—	—	—	—	—
Total	4,512	13,075	8,563	4,512	17,987	13,474

Deferred Income Taxes

Principal Components of Deferred Tax Assets and Liabilities

2005

1) Breakdown of deferred tax assets and deferred tax liabilities

	(Millions of yen)
Deferred tax assets:
Accrued retirement and severance benefits	20,540
Prepaid consigned research and co-development expenses	13,892
Impairment loss	6,440
Loss on valuation of inventories	3,133
Accrued employees’ bonuses	3,013
Excess amortization on internal-use software	2,853
Accrued enterprise tax	999
Other	7,689
Subtotal	58,561
Valuation allowances	(2,191	)
Total deferred tax assets	56,370
Deferred tax liabilities:
Unrealized holding gain on available-for sale securities	(18,632	)
Reserve for reduction in basis of property, plant and equipment for income tax purposes	(5,221	)
Reserve for accelerated depreciation	(1,872	)
Total deferred tax liabilities	(25,725	)
Net deferred tax assets	30,644

2006

1) Breakdown of deferred tax assets and deferred tax liabilities

	(Millions of yen)
Deferred tax assets:
Accrued retirement and severance benefits	21,008
Prepaid consigned research and co-development expenses	14,307
Impairment loss	3,860
Accrued bonuses	3,031
Excess amortization on internal-use software	2,875
Loss on valuation of inventories	2,857
Allowance for contingent losses	1,371
Accrued soil remediation costs	1,156
Other	7,503
Subtotal	57,972
Valuation allowances	(637	)
Total deferred tax assets	57,334
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities	(32,011	)
Reserve for reduction in bases of property, plant and equipment for income tax purposes	(5,465	)
Reserve for accelerated depreciation	(1,944	)
Prepaid pension costs	(1,044	)
Total deferred tax liabilities	(40,466	)
Net deferred tax assets	16,868

2005

(2) Reconciliation of the difference between the statutory tax rate and the Company’s effective tax rate

	(Percent)
Statutory tax rate	40.6
(Adjustments)
Non-deductible permanent differences including entertainment expenses and other items	5.7
Per capita inhabitant tax	0.2
IT investment tax credit	(0.1	)
Deductible permanent differences including dividend received deductions and other items	(2.1	)
R&D expenses tax credit	(7.2	)
Others	1.4
Effective tax rate	38.5

2006

(2) Reconciliation of the difference between the statutory tax rate and the Company’s effective tax rate

	(Percent)
Statutory tax rate	40.6
(Adjustments)
Non-deductible permanent differences including entertainment expenses and other items	10.9
Per capita inhabitant	0.3
IT investment tax credit	(0.2	)
Refund of corporate income taxes for the previous fiscal years	(0.7	)
Deductible permanent differences including dividend received deductions and other items	(2.6	)
Decrease in valuation allowances	(4.3	)
R&D expenses tax credit	(5.7	)
Others	(1.9	)
Effective tax rate	36.4

(Subsequent Events)

2005

—

2006

(Sale of a subsidiary)

At its Board of Directors Meeting held on April 24, 2006, the Company approved to apply for a sale of the shares of its subsidiary, Wakodo Co., Ltd., in response to a tender offer to be made by Asahi Breweries, Ltd. for Wakodo shares.

(1) Reasons for sale

To concentrate management resources on the pharmaceutical business, the Company has been reassessing its involvement in non-pharmaceutical businesses. In the course of this reassessment, a tender offer to purchase Wakodo Co. Ltd.’s shares was proposed by Asahi Breweries, Ltd. who has valued highly of both the nature of Wakodo’s business and the growth prospects of that business. The Company has concluded to accept the tender offer taking into consideration Asahi’s management pursuit of customer satisfaction and quality, its technologies and know-how, and its varity of sales channels that would contribute to the future development of Wakodo’s business as well as the price and other terms of the tender offer.

(2) Name of buyer

Asahi Breweries, Ltd.

(3) Date of sale

April 25, 2006     Date of public notice of the tender offer

May 15, 2006      Last day of the tender offer period

May 19, 2006     Commencement date of settlement

(4) Name of subsidiary; nature of business; and nature of transactions with the Company

Name: Wakodo Co., Ltd.

Nature of business: Manufacture and sale of powdered baby milk; baby foods; vending machine foods; household food items; commercial-use milk powder; pharmaceuticals; non-prescription drugs; cosmetics; sanitary goods; and general merchandise

Transactions with the Company: None

(5) Number of shares to be sold; sale price; gain or loss on sale and ownership interest upon disposition

Number of shares to be sold: 3,533,000

Sale price: ¥27.9 billion

Ownership interest upon disposition: 0%

2005

(Signing of an agreement to integrate businesses by establishing a joint holding company with Daiichi Pharmaceutical Co., Ltd. (“Daiichi”))

The Company signed an agreement to integrate its businesses with Daiichi through the resolution by the Board of Directors on May 13, 2005. The joint holding company, DAIICHI SANKYO COMPANY, LIMITED, will be established on September 28, 2005 through the approval at the 151st ordinary general shareholders’ meeting to be held on June 29, 2005.

1. Objectives of the integration

In response to unsatisfied needs from patients and health care professionals, the Company and Daiichi (together, “Both Companies”) will integrate their businesses with an objective to pursue a Japan-based “global pharma-innovator,” who provides innovative products and services continuously and demonstrates a unique competitiveness in the international pharmaceutical market.

2. Business integration process

(1) A joint holding company will be established in the form of a fully-fledged parent company through stock transfer from Both Companies on September 28, 2005. As a result of the joint stock transfer, common stocks of Both Companies traded on the stock exchanges will be delisted and the new holding company will apply for listing.

(2) The pharmaceutical businesses of both Companies will be integrated into the joint holding company by April 2007.

3. Profile of the joint holding company

Company name : Daiichi Sankyo Company, Limited

Headquarters :     3-5-1 Nihonbashi-honcho, Chuo-ku, Tokyo, Japan

Common stock : 50 billion yen

2006

—

(Other)

Year ended March 31, 2005

–

Year ended March 31, 2006

The Company separated its healthcare business as of April 1, 2006 and transferred said business to DAIICHI SANKYO HEALTHCARE CO., LTD., a company jointly established with Daiichi Pharmaceutical Co., Ltd. on December 16, 2005. Concurrently, Daiichi Pharmaceutical Co., Ltd. transferred its healthcare business to DAIICHI SANKYO HEALTHCARE CO., LTD.

The Company’s shareholding ratio after the business separation is 66.7%.

1. The Company’s assets and liabilities to be transferred

	(Millions of yen)
Current assets	9,193
Non-current assets	443
Total assets	9,637
Current liabilities	1,717
Total liabilities	1,717
Net assets	7,920

2. Net sales for the fiscal year ended March 31, 2006

Sankyo Company, Ltd. Healthcare Business

	(Millions of yen)
Net sales	20,383

VII. Proposed Changes in Membership of the Board of Directors

(as of June 27, 2006)

1. Changes in Representative Directors

(Representative Director Scheduled to Retire)

Executive Vice-President and Representative Director	Hideho Kawamura
	(scheduled to be elected Advisor of Sankyo Co., Ltd.)

2. Changes in Directors

(Directors Scheduled to Retire)

Executive Vice-President and Representative Director	Hideho Kawamura
	(scheduled to be elected Advisor of Sankyo Co., Ltd.)

3. Changes in Corporate Auditors

None

4. Changes in Executive Officers

None

EX-99.3

Exhibit 99.3

FASF             

May 12, 2006

Consolidated Financial Results for Fiscal 2005

(Year Ended March 31, 2006)

Daiichi Pharmaceutical Co., Ltd.

Listed company name: DAIICHI SANKYO COMPANY, LIMITED

Stock code number: 4568

Listed exchanges: Tokyo, Osaka, and Nagoya

Head office: Tokyo, Japan

Contact: Mr. Toshio Takahashi, Corporate Officer, General Manager of Corporate Communications Department

Telephone: +81-3-6225-1126

Meeting of the Board of Directors: May 12, 2006

Parent company name: DAIICHI SANKYO COMPANY, LIMITED (stock code 4568)

Parent company shareholding in the Company: 100%

U.S. accounting standards: Not applicable

Consolidated Financial Results for Fiscal 2005

(1) Consolidated Financial Results

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Net sales		Operating income		Ordinary income
	Millions of yen	Percent change	Millions of yen	Percent change	Millions of yen	Percent change
Fiscal 2005	346,447	5.5	76,087	35.7	77,929	36.0
Fiscal 2004	328,534	1.8	56,063	21.6	57,320	22.7

	Net income		Basic net income per share	Diluted net income per share	Return on equity	Ordinary income as a percentage of total assets	Ordinary income as a percentage of net sales
	Millions of yen	Percent change	Yen	Yen	%	%	%
Fiscal 2005	37,409	0.6	138.59	138.55	8.0	13.6	22.5
Fiscal 2004	37,175	39.4	137.95	137.90	8.5	10.7	17.4

Notes:

1. Equity in earnings (losses) of affiliated companies accounted for using the equity method:

Fiscal 2005:	(¥369 million)
Fiscal 2004:	(¥399 million)

2. Weighted-average number of common shares issued and outstanding during the fiscal year (consolidated):

Fiscal 2005:	269,078,712 shares
Fiscal 2004:	268,481,535 shares

3. Changes in accounting policies:     Yes

4. Percentages for net sales, operating income, ordinary income and net income represent a change from the corresponding results in the previous fiscal years.

(2) Consolidated Financial Position

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Total assets	Shareholders’ equity	Shareholders’ equity ratio	Shareholders’ equity per share
	Millions of yen	Millions of yen	%	Yen
Fiscal 2005	597,701	481,181	80.5	1,785.55
Fiscal 2004	546,555	448,563	82.1	1,670.71

Note:  Total number of common shares issued and outstanding at the end of the fiscal year (consolidated):

Fiscal 2005:	269,420,093 shares
Fiscal 2004:	268,404,023 shares

(3) Consolidated Cash Flows

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Net cash flows from operating activities	Net cash flows from investing activities		Net cash flows from financing activities		Cash and cash equivalents at the end of year
	Millions of yen	Millions of yen		Millions of yen		Millions of yen
Fiscal 2005	66,998	(18,528	)	(36,127	)	98,823
Fiscal 2004	35,571	(21,989	)	(12,369	)	91,571

(4) Scope of Consolidation and Application of Equity Method

Number of consolidated subsidiaries:	21
Number of non-consolidated subsidiaries accounted for by the equity method:	0
Number of affiliates accounted for by the equity method:	6

(5) Changes in Scope of Consolidation and Application of Equity Method

Consolidated subsidiaries
(Increase)	0
(Decrease)	10
Equity method affiliates
(Increase)	4
(Decrease)	0

1. State of the Group

On September 28, 2005, Daiichi Pharmaceutical Co., Ltd. and Sankyo Company, Limited jointly implemented a share transfer and thereby created a joint holding company—DAIICHI SANKYO COMPANY, LIMITED—under which both companies become wholly owned subsidiaries. Within this organizational structure, the Daiichi Group comprises Daiichi Pharmaceutical Co., Ltd. (the Company), its 24 subsidiaries (including 21 consolidated subsidiaries and 3 unconsolidated subsidiaries) and 7 affiliated companies, for a total of 32 companies. The lines of business of Daiichi Group companies, the positioning of principal companies within the Group, and the operating and geographic segments to which each company belongs are shown below.

Operating Segments	Lines of Business	Principal Group Companies
Pharmaceuticals	Prescription drugs Diagnostic and radiopharmaceuticals OTC drugs Veterinary and livestock feed products	Japan	Daiichi Pharmaceutical Co.,Ltd. Daiichi Pure Chemicals Co., Ltd. Daiichi Radioisotope Laboratories, Ltd. Daiichi Fine Chemical Co., Ltd. Saitama Daiichi Pharmaceutical Co., Ltd. Daiichi Asubio Pharma Co., Ltd. Daiichi Pharmatech Co., Ltd. Tokyo Iyaku Shiki Co., Ltd. Nishimura Shiki Co., Ltd. Daiichi Butsuryu Co., Ltd. D. P. C. Medical Co., Ltd. Kanto Daiichi Service Co., Ltd. Daiichi Sankyo Healthcare Co., Ltd. Unconsolidated subsidiaries: 2; affiliated companies: 2 Total 17 companies
		Overseas	Daiichi Pharmaceutical UK Ltd. Daiichi Pharmaceutical (Beijing) Co., Ltd. Daiichi Pharmaceutical Asia Ltd. Daiichi Pharmaceutical Taiwan Ltd. Daiichi Pharmaceutical Korea Co., Ltd. Daiichi Pharmaceutical (Thailand) Ltd. Laboratoires Daiichi Sanofi–Aventis Daiichi Asubio Pharmaceuticals, Inc. Daiichi Asubio Holdings, Inc. Daiichi Asubio Medical Research Laboratories LLC Daiichi Sankyo Inc. Total 11 companies
Other Business	Fine chemical business Safety research business Other business	Japan	Daiichi Pure Chemicals Co., Ltd. Daiichi Fine Chemical Co., Ltd. Daiichi Jisho Co., Ltd. Other affiliated company: 1 Total 4 companies
		Overseas	Daiichi Fine Chemical Europe GmbH Unconsolidated subsidiary: 1 Total 2 companies
Pure holding company (parent company)		Japan	DAIICHI SANKYO COMPANY, LIMITED

In Japan Overseas

As of March 31, 2006; Millions of yen

Name	Location	Capital or investment	Principal business operations	Percentage of voting rights held (%)		Details of Relationship
						Concurrently serving directors, etc.	Financial support	Operating transactions	Facilities leased
Parent Company
DAIICHI SANKYO COMPANY, LIMITED (Note 2)	Chuo-ku, Tokyo	50,000	Holding company	100		5	—	The Company contracted management service	—
Consolidated Subsidiaries
Daiichi Pure Chemicals Co., Ltd.	Chuo-ku, Tokyo	1,275	Pharmaceuticals Other	100		1	Facility- related loans and working capital	The Company purchases a portion of bulk pharmaceutical materials and diagnostics products, and also commissions testing and trials.	—
Daiichi Radioisotope Laboratories, Ltd. (Note 3)	Chuo-ku, Tokyo	1,400	Pharmaceuticals	100 (17	)	1	—	—	—
Daiichi Fine Chemical Co., Ltd.	Takaoka-shi, Toyama	2,276	Pharmaceuticals Other	100		1	Facility- related loans and working capital	The Company purchases bulk pharmaceutical materials.	—
Saitama Daiichi Pharmaceutical Co., Ltd.	Kasukabe-shi, Saitama	1,005	Pharmaceuticals	100		2	—	The Company purchases pharmaceutical products.	—
Daiichi Asubio Pharma Co., Ltd. (Notes 4 and 5)	Minato-ku, Tokyo	11,000	Pharmaceuticals	100		6	Working capital	The Company purchases pharmaceutical products.	—
Daiichi Pharmatech Co., Ltd. (Note 6)	Chuo-ku, Tokyo	100	Pharmaceuticals	100		—	Working capital	The Company purchases pharmaceutical products.	Manufacturing facilities and land
Daiichi Jisho Co., Ltd.	Chuo-ku, Tokyo	100	Other	100		1	—	The Company commissions building administration, etc.	Business-use office space
Daiichi Butsuryu Co., Ltd.	Sumida-ku, Tokyo	50	Pharmaceuticals	100		1	—	The Company commissions transport and storage of the Company’s products.	Business-use office space
D. P. C. Medical Co., Ltd.	Chuo-ku, Tokyo	50	Pharmaceuticals	100		1	—	The Company purchases marketing and promotion materials.	—
Kanto Daiichi Service Co., Ltd.	Edogawa-ku, Tokyo	10	Pharmaceuticals	100		—	—	The Company commissions equipment maintenance, etc.	Business-use office space
Daiichi Pharmaceuticals UK Ltd.	London, UK	400 thousand pounds	Pharmaceuticals	100		—	—	The Company commissions R&D	—
Daiichi Pharmaceutical (Beijing) Co., Ltd. (Notes 4 and 7)	Beijing, China	63,800 thousand U.S. dollars	Pharmaceuticals	100		1	Facility- related loans	The Company sells bulk pharmaceutical materials	—
Daiichi Pharmaceutical Asia Ltd.	Hong Kong, China	3,000 thousand HK dollars	Pharmaceuticals	100		—	—	The Company commissions academic marketing promotion activities.	—
Daiichi Pharmaceutical Taiwan Ltd.	Taipei, Taiwan	80,000 thousand NT dollars	Pharmaceuticals	100		1	—	The Company sells bulk pharmaceutical materials	—

Name	Location	Capital or investment	Principal business operations	Percentage of voting rights held (%)		Details of Relationship
						Concurrently serving directors, etc.	Financial support	Operating transactions	Facilities leased
Daiichi Pharmaceutical Korea Co., Ltd.	Seoul, Korea	3,000 million W	Pharmaceuticals	70		1	—	The Company commissions marketing of the Company’s products.	—
Daiichi Pharmaceutical (Thailand) Ltd.	Bangkok, Thailand	10,000 thousand baht	Pharmaceuticals	100		—	—	The Company commissions marketing of the Company’s products.	—
Laboratoires Daiichi Sanofi–Aventis (Note 8)	Paris, France	154 thousand euros	Pharmaceuticals	51		3	—	The Company commissions R&D.	—
Daiichi Fine Chemical Europe GmbH (Note 3)	Dusseldorf, Germany	511 thousand euros	Other	100 (100	)	—	—	The Company commissions marketing of the Company’s products.	—
Daiichi Asubio Pharma- ceuticals, Inc. (Note 3)	New Jersey, U.S.	1 U.S. dollar	Pharmaceuticals	100 (100	)	1	—	—	—
Daiichi Asubio Holdings, Inc. (Notes 3 and 9)	Delaware, U.S.	6,000 thousand U.S. dollars	Pharmaceuticals	100 (100	)	1	—	—	—
Daiichi Asubio Medical Research Laboratories LLC (Notes 3 and 9)	Massachusetts, U.S.	6,272 thousand U.S. dollars	Pharmaceuticals	100 (100	)	1	—	—	—
Affiliated Companies Accounted for by the Equity Method
Sanofi-Pasteur-Daiichi Vaccines Co., Ltd. (Note 10)	Edogawa-ku, Tokyo	310	Pharmaceuticals	50		3	Working capital	The Company commissions R&D.	Business- use office space
Laboratoires Daiichi Sanofi–Synthelabo (Note 11)	Shinjuku-ku, Tokyo	100	Pharmaceuticals	49		2	Working capital	The Company commissions R&D.	—
Tokyo Iyaku Shiki Co., Ltd. (Note 12)	Shimada-shi, Shizuoka	163	Pharmaceuticals	31		—	—		—
Nishimura Shiki Co., Ltd. (Note 12)	Takatsuki-shi, Osaka	30	Pharmaceuticals	31		—	—		—
Daiichi Sankyo Healthcare Co., Ltd. (Note 13)	Chuo-ku, Tokyo	10	Pharmaceuticals	50		1	—		Research- use office space
Daiichi Sankyo Inc. (Note 14)	New Jersey, U.S.	24.985 thousand U.S. dollars	Pharmaceuticals	19		—	—	The Company commissions marketing of the Company’s products, and R&D.	—

Notes

1. The “Principal business operations” column contains the name of the operating segment to which the business operations are classified.

2. This company files a separate securities report to the Ministry of Finance in Japan.

3. Figures in parentheses within the “Percentage voting rights held” column represent a percentage of indirect ownership held by the Company. Indirect ownership and voting rights in Daiichi Radioisotope Laboratories, Ltd., are owned by Daiichi Pure Chemicals Co., Ltd. Indirect ownership and voting rights in Daiichi Fine Chemical Europe GmbH is owned by Daiichi Fine Chemical Co., Ltd. Indirect ownership and voting rights in Daiichi Asubio Pharmaceuticals, Inc., Daiichi Asubio Holdings, Inc., and Daiichi Asubio Medical Research Laboratories, LLC, are all owned by Daiichi Asubio Pharma Co., Ltd.

4. These companies are qualified as significant subsidiary as defined in the regulations under the Securities Exchange Law of Japan.

5. Daiichi Suntory Pharma Co., Ltd. merged with Daiichi Suntory Biomedical Research Ltd. as of April 1, 2005. In addition, on September 15, 2005, the Company purchased from Suntory Ltd. all of the remaining shares in Daiichi Suntory Pharma Co., Ltd., and thereby increased its voting interests in Daiichi Suntory Pharma Co., Ltd. to 100%. Further, as of October 1, 2005, the corporate name of Daiichi Suntory Pharma Co., Ltd. was changed to Daiichi Asubio Pharma Co., Ltd.

6. On April 1, 2005, Daiichi Pharmatech Co., Ltd. took over the operations of the three factories—Osaka Factory, Shizuoka Factory, and Akita Factory—that had been spun-off from the Company. At the same time, Daiichi Pharmatech Co., Ltd. merged with two of the Company’s subsidiaries—Kansai Daiichi Service Co., Ltd. and Daiichi Technos Co., Ltd.

7. Daiichi Pharmaceutical (Beijing) Co., Ltd. took over Daiichi Pharmaceutical (China) Co., Ltd. by merger on January 10, 2006.

8. Laboratoires Daiichi Sanofi-Synthelabo changed its name to Laboratoires Daiichi Sanofi-Aventis on June 24, 2005.

9. Daiichi Asubio Holdings, Inc. and Daiichi Asubio Medical Research Laboratories, LLC decided to cease their operations in May 2005.

10. Aventis Pasteur-Daiichi Vaccines Co., Ltd. changed its name to Sanofi-Pasteur-Daiichi Vaccines Co., Ltd. on July 29, 2005.

11. Laboratoires Daiichi Sanofi–Synthelabo changed its name to Laboratoires Daiichi Sanofi–Aventis on April 1, 2006.

12. The Company sold a portion of its shares in Tokyo Iyaku Shiki Co., Ltd. and Nishimura Shiki Co., Ltd. and reduced its voting interests in each of those companies to 31%. As a result, at the end of the fiscal year, these two companies are accounted as affiliated companies.

13. On April 1, 2006, the Company divested its healthcare operations, which became part of Daiichi Sankyo Healthcare Co., Ltd. The Company holds 33.33% of its voting rights as a result of this divesture.

14. On March 31, 2006, Sankyo Pharma Inc., a subsidiary of Sankyo Company, Limited, merged with three subsidiaries of the Company (Daiichi Pharma Holdings, Inc., Daiichi Pharmaceutical Corporation and Daiichi Medical Research, Inc.), with Sankyo Pharma Inc. as the surviving entity. This company then changed its name to DAIICHI SANKYO, INC.

15. Because the percentage of consolidated net sales accounted for by an individual consolidated subsidiary (excluding inter-company transactions among the consolidated companies) was less than 10%, selected financial information of the subsidiaries has been omitted herein.

2. Management Policies

On September 28, 2005, the Company and Sankyo Company, Limited jointly implemented a joint stock transfer and thereby established a holding company—DAIICHI SANKYO COMPANY, LIMITED—under which both companies have become wholly owned subsidiaries. For information on the Daiichi Sankyo Group’s principal management policies and corporate strategies, please refer to the DAIICHI SANKYO COMPANY’s report on the Consolidated Financial Results (“Kessan Tanshin”) for the fiscal year.

3. Results of Operations and Financial Position

I. Results of Operations

1. Overview of the fiscal year

(Millions of yen)

	Net sales	Operating income	Ordinary income	Net income
Fiscal 2004	328,534	56,063	57,320	37,175
Fiscal 2005	346,447	76,087	77,929	37,409
Change (%)	5.5	35.7	36.0	0.6

(1) Overview of Performance

Competition continues to intensify in the pharmaceutical markets worldwide, particularly among “global-mega” pharmaceutical companies in the areas of both new drug-related R&D and marketing activities. In Japan, the reorganization of national university hospitals and other national hospitals into independent medical corporations is one of several factors promoting changes in the medical industry environment. With an increasing number of medical institutions adopting a new comprehensive hospital treatment evaluation system, conditions are becoming harsher as pressures grow to contain healthcare costs.

Facing such harsh conditions, the Daiichi Group focused its marketing efforts on expanding markets for its products by promoting the proper use of drugs through the provision of information related to the efficacy and safety of its products. Higher revenue from domestic sales of prescription drugs, an increase in bulk levofloxacin exports, and a receipt of milestone payments related to the approval on manufacturing and marketing of Plavix contributed to an increase in net sales. Net sales totaled ¥346,447 million, an increase of 5.5% compared with the previous year. Regarding profitability, increased expenses related to the expansion of global R&D programs and the business integration with Sankyo Company, Limited were offset by higher revenues plus cost-of-sales reductions following the start of operations at Daiichi Pharmatech Co., Ltd. Operating income and ordinary income both increased significantly compared with the previous year. Operating income rose significantly by 35.7% to ¥76,087 million, while ordinary income increased by 36.0% to ¥77,929 million. As a result, net income was kept higher than the prior year level even after an extraordinary loss arising from the integration with Sankyo Company, Limited, rising by 0.6% to ¥37,409 million. The amounts of net sales, operating income, ordinary income and net income all marked the new record highs.

The percentage of consolidated net sales derived from overseas operations was 21.5%.

(2) Segment Information

Operating segment

(Millions of yen)

Operating segment	Net sales				Operating income
	Fiscal 2004	Fiscal 2005	Increase (Decrease)		Fiscal 2004		Fiscal 2005		Increase (Decrease)
Pharmaceuticals	311,844	331,135	19,290		64,096		86,319		22,223
Other	16,689	15,312	(1,377	)	(78	)	446		525
Subtotal	328,534	346,447	17,913		64,017		86,766		22,748
Eliminations	—	—	—		(7,953	)	(10,678	)	(2,724	)
Consolidated	328,534	346,447	17,913		56,063		76,087		20,024

Note: Net sales are the amounts of sales to external customers.

Pharmaceuticals

<Prescription Drugs>

Harsh conditions prevailed for original drug manufacturers in the Japanese prescription drug market amid the ongoing impact of measures intended to reduce healthcare spending, including a move to promote the use of generic pharmaceuticals. Business conditions became particularly tougher toward the fiscal year-end, with the revisions to tariffs for medical treatment reimbursement and National Health Insurance (NHI) drug prices approaching in April 2006. Leading products Cravit, a mainstay broad-spectrum oral antibacterial agent, and Omnipaque, a nonionic contrast medium, both recorded sales significantly above the previous year level. Other products that contributed to sales growth included Artist, a long-acting beta-blocker for treating high blood pressure, angina, and chronic cardiac insufficiency; Mobic, a nonsteroidal anti-inflammatory agent; HANP, an agent for treating acute cardiac insufficiency; Zyrtec, a long-acting selective H1 receptor antagonist and anti-allergy agent; and Topotecin, an anticancer agent. Total domestic prescription drug sales increased by 7.8% to ¥221,866 million.

Overseas prescription drug sales were positively affected by such factors as increased bulk shipments of the antibacterial agent, levofloxacin, to the United States and Europe; sales growth generated by Evoxac, an agent for treating the symptoms of dry mouth in patients with Sjögren’s syndrome, and FLOXIN Otic, an antibacterial quinolone solution for treating ear infections; and an additional contribution due to favorable currency translation arising from yen depreciation. Overseas net sales of prescription drugs increased by 11.8% compared with the previous year to ¥68,534 million.

<Diagnostics and Radiopharmaceuticals>

Although measures aimed at containing medical costs and intensifying competition have kept the market conditions challenging, the Company recorded increased domestic sales and exports of diagnostics products. However, a decrease in sales of radiopharmaceuticals products caused total net sales of diagnostics and radiopharmaceutical products to decline by 1.9% from the previous year to ¥32,293 million.

<OTC Drugs>

Sales of two main OTC drug products—the hair-growth accelerator Karoyan Gush and the vitamin C product Cystina C—declined, due to such factors as the launch of new competing products by the competitors. Accordingly, OTC drug sales dropped by 26.3% from the previous year to ¥7,516 million.

<Other Businesses>

Although the profitability of its fine chemical operations was improved, a decrease in vitamin product sales primarily in North America and Europe and other factors caused net sales of fine chemical products to fall by 12.8% from the previous year to ¥11,308 million. Total net sales in the other businesses segment, including fine chemicals, declined by 8.3% from the previous year, to ¥15,312 million.

R&D Activities

Daiichi’s R&D programs aim to generate a stream of innovative drug development candidates by targeting the discovery of new drug target molecules and the acquisition of innovative new drug “seeds.” Preclinical research on DC-159a, a new quinolone drug candidate for treating a broad range of infections, has now been completed, and preparations are underway for the drug to enter Phase I clinical trials.

Daiichi has a number of alliances with external research institutions, including a collaborative research program with the UCSF Cancer Research Institute and Rigel Pharmaceuticals, Inc. (both based in the U.S.) to identify potential drug treatments that act on molecular targets in the cancer field and a joint genomic drug discovery program with Japan-based Kazusa DNA Research. Results obtained from these programs are facilitating new drug discovery. Another genomic drug discovery program conducted jointly with Japan-based Celestar Lexico-Sciences, Inc. has accomplished its research goals. With a view to a new drug discovery, this program is now focusing on verifying the potential clinical significance for treating disease of the protein interactions discovered. Separately, in March 2005, the Company and MediBIC ALLIANCE jointly established a drug development venture capital fund to facilitate the collection of promising technologies as well as the realization of collaborative researches.

Moreover, in September 2005, the Company reached an agreement with GE Healthcare (the healthcare division of U.S.-based General Electric Company) regarding R&D collaboration related to new imaging agents, and is engaged in R&D projects aimed at meeting potential therapeutic needs of patients in the Japanese market.

On the drug development front, global development work is currently underway with DU-176b, an oral factor-Xa inhibitor; DZ-697b, a novel antiplatelet agent; DX-619, a new quinolone compound for treating drug-resistant infections; DJ-927, a taxane derivative anti-cancer chemotherapeutic agent; and DW-908e, an anti-allergy agent.

In Japan, Kissei Pharmaceutical Co., Ltd. received regulatory approval in January 2006 to manufacture and distribute Urief (silodosin), an agent for treating dysuria jointly developed with the Company (the launch is planned for May 2006). Clinical trials with this drug are also currently underway in China. Based on an agreement reached in September 2005 to transfer all the marketing rights to the Sanofi-Aventis Group, Daiichi transferred the approval for Plavix (clopidogrel sulfate), an antiplatelet agent, to their Japansese subsidiary Sanofi-Aventis K.K. in March 2006. The Company and Sanofi-Aventis K.K. plan to continue collaborating on the production and promotion of Plavix in Japan. In addition, the Daiichi Group has applications pending in Japan for Sonazoid, an ultrasonic contrast medium, and for ActHIB, the first Haemophilus influenzae type b conjugate vaccine for pediatric use in Japan (the NDA is sponsored by Aventis Pasteur-Daiichi Vaccines Co., Ltd.) Elsewhere, in April 2006, Daiichi received regulatory approval with a partial change for the additional indication of hepatitis C-induced liver cirrhosis for Feron, a natural interferon-beta agent jointly developed with Toray Industries, Inc. of Japan.

Following the inclusion in the NHI reimbursement listing on April 1, 2006 of the Synchromed^® EL pump and InDura^® catheter medical devices required for continuous administration of the drug into the intrathecal cavity, the Company commenced sales in Japan of Gabalon Intrathecal Injection (baclofen), an anti-spasticity agent, for which the Company previously received manufacturing and marketing approval in April 2005, in combination with these delivery devices. Gabalon Intrathecal has been designated an orphan drug an agent for rare diseases. The Company also submitted an application to expand the efficacy to include pediatric applications in May 2005.

Other noteworthy products under development pipelines include DU-6859a (sitafloxacin), a quinolone antibacterial agent discovered and developed in-house, and HGF DNA plasmid, an agent for treating peripheral arterial disease and ischemic heart disease, for which exclusive marketing rights in Japan, the United States, and Europe have been obtained from AnGes MG, Inc.

In addition, Daiichi Asubio Pharma Co., Ltd. is proceeding with domestic clinical trials of SUN Y7017 (memantine hydrochloride), an agent for treating Alzheimer’s disease, and SUN 11031 (ghrelin), an agent for treating anorexia nervosa.

Regarding OTC products, the Company has conducted clinical testing of an orally administered tranexamic acid preparation designed to reduce skin wrinkles and confirmed the preparation’s efficacy based on objective evaluations.

Manufacturing and Technologies

In April 2005, Daiichi Pharmatech Co., Ltd. began full-scale operations, took over the operations of the three of the Company’s domestic manufacturing facilities and merged with Kansai Daiichi Service Co., Ltd. and Daiichi Technos Co., Ltd. with goals of improving quality and technology levels and achieving further cost reductions. The cost reductions achieved to date by such moves have exceeded initial expectations.

As part of its strategy of maintaining distribution quality while reducing the costs, the Company completed the closing of the Sapporo Distribution Center in July 2005 and transfer of that facility’s functions to the Tokyo Distribution Center. In January 2006, the Company also transferred distribution functions of Shizuoka Distribution Center to Osaka Distribution Center.

In order to realize considerable reduction in cost of sales, the Daiichi Group has been working to shift to a new levofloxacin manufacturing method involving a new synthesis technology. Having completed transition of levofloxacin exported to the United States during the previous fiscal year, the Daiichi Group is pursuing its effort to complete the transition with respect to levofloxacin exported to Europe during the year.

In October 2005, Daiichi Asubio Pharma Co., Ltd. completed the construction of a bio bulk manufacturing facility at its Chiyoda Pharma Factory that is designed to meet growing demands of HANP injectable 1000 as well as other newly developed products.

Group-wide Initiatives

Regarding structural reforms, the Daiichi Group has moved forward with an effort to create a slim and strong group business structure. This effort has resulted in the consolidation of Group drug discovery functions, the transfer of veterinary and livestock feed products business to a company outside the Group, the establishment of Daiichi Pharmatech Co., Ltd. to handle manufacturing functions, the closing and consolidation of distribution centers, and other achievements. In preparation for the integration of operations with Sankyo Company, Limited in April 2007, the Daiichi Group will continue to implement such other measures, with the objective of establishing the best and competitively strong Group structure.

Regarding moves to introduce and upgrade the information systems, the Company has been proceeding with the introduction of enterprise resource planning (ERP) systems at major domestic Group companies. The Company is currently working on an implementation of the supply-chain management systems, and the manufacturing administration function of the systems at Daiichi Radioisotope Laboratories, Ltd., began its full-scale operations in May 2005.

Litigation

The Company has now settled with most of the civil claims in the U. S., following the earlier antitrust judgment against the Company related to its sales of bulk vitamins. In Europe, the Company was in the process of an appeal with the European Court of First Instance to reduce the fine initially imposed by the European Commission. The Company has since accepted the verdict of the court, whose ruling issued in March 2006 resulted in the fine being reduced to €18 million. As a part of the fine had been expensed as an extraordinary loss in the year ended March 31, 2002, and the balance was charged in the extraordinary losses in the year ended March 31, 2006.

In the U. S., with its local licensee as co-plaintiff, Daiichi filed a patent infringement lawsuit in a U.S. district court against the Mylan Group, who had filed an application for a generic version of levofloxacin (one of the Company’s leading products). The U.S. district court ruled in favor of the Company in December 2004, which was then appealed by the Mylan Group. In December 2005, the appellate court affirmed the decision by the U.S. district court. Going forward, the Daiichi Group will continue to rigorously defend its intellectual property rights.

II. Financial Position

1. Overview of the fiscal year

<Assets, Liabilities and Shareholders’ Equity>

Total assets amounted to ¥597.7 billion at the end of the fiscal year, an increase of ¥51.1 billion compared with the previous year-end. Within current assets, marketable securities increased by ¥8.3 billion. Within non-current assets, investment securities increased by ¥33.8 billion, reflecting appreciation in market values. Total liabilities increased by ¥19.7 billion, due largely to higher income taxes payable. Within shareholders’ equity, although retained earnings declined by ¥24.9 billion due to factors such as dividend payments and treasury stock cancellations, net unrealized gains on investment securities increased by ¥17.7 billion. Total shareholders’ equity increased by ¥32.6 billion compared with the previous year-end.

<Consolidated Cash Flows>

(Millions of yen)

Accounting Items	Fiscal 2004		Fiscal 2005		Change
Net cash flows from operating activities	35,571		66,998		31,427
Net cash flows from investing activities	(21,989	)	(18,528	)	3,460
Net cash flows from financing activities	(12,369	)	(36,127	)	(23,758	)
Effect of exchange rate changes on cash and cash equivalents	12		451		438
Net increase (decrease) in cash and cash equivalents	1,225		12,794		11,569
Cash and cash equivalents at end of period	91,571		98,823		7,251

Net cash provided by operating activities amounted to ¥66,998 million, an increase of ¥31,427 million compared with the previous year. Besides higher net income before taxes and minority interests, the increase reflected an increase in net cash inflows of ¥30.3 billion due to a decrease in accrued retirement and severance benefits and an increase in prepaid pension costs, which were associated with changes in the Company’s pension benefit arrangements.

Net cash used in investing activities totaled ¥18,528 million, a decrease of ¥3,460 million from the previous year. This change reflected such cash payments as one for the acquisition of minority shares which was partially funded by the redemption of bonds with maturities exceeding three months.

Net cash used in financing activities amounted to ¥36,127 million, an increase in net cash outflows compared with the previous year of ¥23,758 million. Besides an increase in the year-end dividends paid to shareholders, the increase reflected the payment of an interim dividend totaling ¥31.2 billion as the first dividend from the Daiichi Group to its holding company.

After factoring in the effect of excluding certain U.S. subsidiaries from the scope of consolidation, total cash and cash equivalents at March 31, 2006 amounted to ¥98,823 million, an increase of ¥7,251 million compared with the previous year-end.

<Principal Financial Indicators>

	Fiscal 2003	Fiscal 2004	Fiscal 2005
Shareholders’ equity ratio (%)	80.9	82.1	80.5
Debt redemption period (years)	0.0	0.0	0.0
Interest coverage ratio (times)	48,280.4	51,372.9	138,405.3

Notes

1. Shareholders’ equity ratio = total shareholders’ equity/total assets

2. Interest-bearing debt ratio = interest-bearing debt/operating cash flows

3. Interest coverage ratio = operating cash flows /interest paid

• All indicators in the above table were calculated based on a consolidated basis.

• Interest-bearing debt includes all consolidated balance sheets liabilities which are subject to an interest payment.

• Operating cash flows equal to the amount of cash flows from operating activities in the consolidated statements of cash flows less the amounts of “interest paid” and “income taxes paid”.

• Interest paid equals to the “interest paid” included in the consolidated statements of cash flows.

4. Consolidated Financial Statements

(1) Consolidated Balance Sheets

(Millions of yen)

	See Note	As of March 31, 2005				As of March 31, 2006				Change
		Amount			%	Amount			%	Amount
ASSETS
I. Current assets:
1. Cash and time deposits			16,395				13,566
2. Trade notes and accounts receivable			88,168				89,892
3. Marketable securities			107,514				115,884
4. Parent company stock			—				6,986
5. Mortgage-backed securities			20,000				16,500
6. Inventories			40,486				36,690
7. Deferred tax assets			13,826				15,287
8. Other current assets			13,496				15,998
Allowance for doubtful accounts			(50	)			(35	)
Total current assets			299,836		54.86		310,772		51.99	10,935
II. Non-current assets:
1. Property, plant and equipment:
(1) Buildings and structures	*1	141,983				144,457
Less accumulated depreciation		86,013	55,969			89,128	55,328
(2) Machinery, equipment and vehicles	*1	112,430				114,615
Less accumulated depreciation		92,724	19,705			94,986	19,629
(3) Land	*1		17,526				16,627
(4) Construction in progress			6,029				5,934
(5) Other	*1	38,264				38,150
Less accumulated depreciation		31,892	6,372			32,107	6,042
Total property, plant and equipment, net			105,602		19.32		103,562		17.33	(2,040	)
2. Intangible assets:
(1) Goodwill, net			—				9,241
(2) Other intangible assets, net			6,796				6,280
Total intangible assets, net			6,796		1.24		15,521		2.60	8,725

(Millions of yen)

	See Note	As of March 31, 2005				As of March 31, 2006				Change
		Amount			%	Amount			%	Amount
3. Investments and other assets:
(1) Investment securities	*2		105,461				139,309
(2) Long-term loans			763				880
(3) Prepaid pension costs			15,493				14,356
(4) Deferred tax assets			3,167				3,370
(5) Other assets	*2		9,756				10,229
Allowance for doubtful accounts			(323	)			(301	)
Total investments and other assets			134,319		24.58		167,845		28.08	33,525
Total non-current assets			246,718		45.14		286,929		48.01	40,210
Total assets			546,555		100.00		597,701		100.00	51,145
LIABILITIES
I. Current liabilities:
1. Trade notes and accounts payable			17,182				17,599
2. Short-term bank loans	*1		18				0
3. Income taxes payable			8,401				23,410
4. Allowance for sales returns			448				245
5. Allowance for sales rebates			1,421				1,309
6. Other current liabilities			46,867				42,741
Total current liabilities			74,339		13.60		85,305		14.27	10,966
II. Non-current liabilities:
1. Long-term debt	*1		5				4
2. Deferred tax liabilities			9,791				21,620
3. Accrued retirement and severance benefits			4,754				4,932
4. Accrued directors’ retirement and severance benefits			2,200				1,520
5. Other non-current liabilities			5,318				2,748
Total non-current liabilities			22,070		4.04		30,827		5.16	8,757
Total liabilities			96,409		17.64		116,133		19.43	19,723
MINORITY INTERESTS
Minority Interests			1,582		0.29		385		0.06	(1,196	)

(Millions of yen)

	See Note	As of March 31, 2005					As of March 31, 2006					Change
		Amount			%		Amount			%		Amount
SHAREHOLDERS’ EQUITY
I. Common stock	*4		45,246		8.28			45,246		7.57
II. Additional paid-in-capital			49,130		8.99			48,961		8.19
III. Retained earnings			376,144		68.82			351,242		58.77
IV. Net unrealized gain on investment securities			18,215		3.33			35,977		6.02
V. Foreign currency translation adjustments			(1,305	)	(0.24	)		(246	)	(0.04	)
VI. Treasury stock at cost	*5		(38,867	)	(7.11	)		—		—
Total shareholders’ equity			448,563		82.07			481,181		80.51		32,618
Total liabilities, minority interests and shareholders’ equity			546,555		100.00			597,701		100.00		51,145

(2) Consolidated Statements of Income

(Millions of yen)

	See Note	Fiscal 2004 (For the year ended March 31, 2005)			Fiscal 2005 (For the year ended March 31, 2006)			Change
		Amount		%	Amount		%	Amount
I. Net sales			328,534	100.00		346,447	100.00	17,913
II. Cost of sales	*1		100,834	30.69		92,190	26.61	(8,643	)
Gross profit			227,699	69.31		254,257	73.39	26,557
III. Selling, general and administrative expenses:
1. Salaries and bonuses		38,076			38,895
2. Retirement and severance costs		3,429			3,153
3. Research and development expenses	*1	57,416			61,647
4. Other		72,713	171,636	52.24	74,473	178,169	51.43	6,532
Operating income			56,063	17.07		76,087	21.96	20,024
IV. Non-operating income:
1. Interest income		738			836
2. Dividend income		735			1,011
3. Foreign exchange gains		297			521
4. Other income		1,023	2,795	0.85	507	2,876	0.83	80
V. Non-operating expenses:
1. Interest expense		1			0
2. Loss on disposal and write-down of inventories		626			273
3. Equity in net losses of affiliated companies		399			369
4. Other expenses		510	1,538	0.47	391	1,034	0.30	(504	)
Ordinary income			57,320	17.45		77,929	22.49	20,609
VI. Extraordinary gains:
1. Gain on sale of investment securities		283			204
2. Gain on sale of land		384			—
3. Gain from the return of the substitutional portion of the employees’ pension fund to the government		11,747			163
4. Gain from the transfer to the defined contribution pension plan		3,769			—
5. Gain on sale of the veterinary and livestock feed product business	*2	800	16,983	5.17	—	368	0.11	(16,615	)

(Millions of yen)

	See Note	Fiscal 2004 (For the year ended March 31, 2005)					Fiscal 2005 (For the year ended March 31, 2006)						Change
		Amount			%		Amount				%		Amount
VII. Extraordinary losses:
1. Loss on business integration	*3	—					7,661
2. Loss on settlement of vitamin-related anti-trust litigations	*4	111					1,125
3. Loss on valuation of investment securities		32					301
4. Supplemental retirement benefits		—					113
5. Loss on sale of investments in affiliated Company		—					99
6. Restructuring charge	*5	7,316					—
7. Loss on settlement of employee pension fund plan	*6	381					—
8. Loss on impairment of property, plant and equipment	*7	—					1,339
9. Loss on disposal of property, plant and equipment	*8	1,792	9,633		2.93		843		11,485		3.32		1,851
Net income before income taxes and minority interests			64,670		19.69				66,813		19.28		2,142
Income tax expense-current		17,357					31,897
Income tax expense (benefit)-deferred		11,486	28,843		8.78		(2,028	)	29,868		8.61		1,024
Minority interests in net losses of subsidiaries			(1,348	)	(0.41	)			(463	)	(0.13	)	884
Net income			37,175		11.32				37,409		10.80		223

(3) Consolidated Statements of Retained Earnings

(Millions of yen)

	See Note	Fiscal 2004 (For the year ended March 31, 2005)		Fiscal 2005 (For the year ended March 31, 2006)		Change
		Amount		Amount		Amount
ADDITIONAL PAID-IN CAPITAL
I. Additional paid-in capital, beginning of year			48,961		49,130	169
II. Increase in additional paid-in capital:
Gain on reissuance of treasury stock		169	169	—	—	(169	)
III. Decrease additional paid-in capital:
Loss on reissuance of treasury stock		—	—	169	169	169
IV. Additional paid-in capital, end of year			49,130		48,961	(169	)
RETAINED EARNINGS
I. Retained earnings, beginning of year			347,973		376,144	28,170
II. Increase in retained earnings:
1. Net income		37,175		37,409
2. Increase in retained earnings due to dilution of ownership in consolidated subsidiaries		—	37,175	12,522	49,931	12,755
III. Decrease in retained earnings:
1. Cash dividends		8,071		37,935
2. Bonuses to directors		160		144
3. Changes in scope of investments accounted for under the equity method		772		—
4. Retirement of treasury stocks		—		36,683
5. Loss on reissuance of treasury stock		—	9,004	69	74,833	65,828
IV. Retained earnings, end of period			376,144		351,242	(24,901	)

(4) Consolidated Statements of Cash Flows

(Millions of yen)

	See Note	Fiscal 2004 (For the year ended March 31, 2005)		Fiscal 2005 (For the year ended March 31, 2006)		Change
		Amount		Amount		Amount
I. Cash flows from operating activities:
Income before income taxes and minority interests		64,670		66,813		2,142
Depreciation		15,946		14,133		(1,813	)
Loss on impairment of property, plant and equipment		—		1,339		1,339
Amortization of goodwill		3		1,026		1,023
Decrease in accrued retirement and severance benefits		(14,807	)	(328	)	14,479
Decrease (increase) in prepaid pension costs		(15,493	)	1,136		16,630
Decrease in allowance for doubtful accounts		(139	)	(41	)	97
Interest and dividend income		(1,474	)	(1,847	)	(373	)
Interest expense		1		0		(0	)
Loss on disposal of investment securities		34		303		269
Loss on disposal of property, plant and equipment		1,792		843		(948	)
Increase in trade notes and accounts receivable		(6,793	)	(2,389	)	4,403
Increase (decrease) in inventories		(1,290	)	2,750		4,041
Increase in trade notes and accounts payable		3,011		378		(2,633	)
Increase in accrued expenses and other liabilities		1,457		1,825		367
Other, net		6,453		(2,966	)	(9,419	)
Subtotal		53,373		82,979		29,605
Interest and dividends received		1,501		1,953		452
Interest paid		(1	)	(0	)	0
Fines, penalties and settlements paid		(89	)	(1,125	)	(1,035	)
Income taxes paid		(19,212	)	(16,807	)	2,405
Net cash provided by operating activity		35,571		66,998		31,427

(Millions of yen)

	See Note	Fiscal 2004 (For the year ended March 31, 2005)		Fiscal 2005 (For the year ended March 31, 2006)		Change
		Amount		Amount		Amount
II. Cash flows from investing activities:
Purchases of time deposits		(7,800	)	(3,353	)	4,447
Proceeds from maturities of time deposits		8,267		2,045		(6,221	)
Purchases of marketable securities		(26,601	)	(27,040	)	(438	)
Proceeds from sale of marketable securities		25,210		41,028		15,818
Proceeds from sale of mortgage-backed securities		—		3,500		3,500
Acquisitions of property, plant and equipment		(10,753	)	(13,589	)	(2,835	)
Acquisitions of intangible assets		(2,546	)	(1,961	)	585
Acquisitions of investment securities		(24,443	)	(20,267	)	4,176
Proceeds from sale of investment securities		22,181		13,136		(9,045	)
Acquisition of minority interests in subsidiary		—		(10,268	)	(10,268	)
Acquisition of other investments		(1,434	)	(507	)	926
Other, net		(4,065	)	(1,249	)	2,815
Net cash used in investing activity		(21,989	)	(18,528	)	3,460
III. Cash flows from financing activities:
Repayment of long-term debt		(18	)	(18	)	0
Dividends paid		(8,071	)	(37,935	)	(29,864	)
Purchases of treasury stock		(4,263	)	(24	)	4,239
Proceeds from reissuance of treasury stock upon exercise of stock options		—		1,970		1,970
Other, net		(15	)	(119	)	(104	)
Net cash used in financing activity		(12,369	)	(36,127	)	(23,758	)
IV. Effect of exchange rate changes on cash and cash equivalents		12		451		438
V. Net increase (decrease) in cash and cash equivalents		1,225		12,794		11,569
VI. Cash and cash equivalents, beginning of period		90,346		91,571		1,225
VII. Decrease in cash and cash equivalents due to changes in scope of consolidation		—		(5,543	)	(5,543	)
VIII. Cash and cash equivalents, end of period	*	91,571		98,823		7,251

Basis of Presentation and Summary of Significant Accounting Policies for the Preparation of the Consolidated Financial Statements

Fiscal 2004

(For the year ended March 31, 2005)

1. Scope of consolidation

(1) Consolidated subsidiaries: 31

Principal consolidated subsidiaries:

In Japan

Daiichi Pure Chemicals Co., Ltd.

Daiichi Radioisotope Laboratories, Ltd.

Daiichi Fine Chemical Co., Ltd.

Saitama Daiichi Pharmaceutical Co., Ltd.

Daiichi Suntory Pharma Co., Ltd.

Overseas

Daiichi Pharmaceutical Corporation

Daiichi Medical Research, Inc.

Daiichi Pharmaceutical (Beijing) Co., Ltd.

Daiichi Pharmaceutical (China) Co., Ltd.

During the fiscal year, three newly-established subsidiaries have been added to the scope of consolidation: Daiichi Pharmaceutical Corporation, Daiichi Medical Research, Inc., and Daiichi Pharmatech, Co., Ltd. Also, during the fiscal year, the corporate name of former Daiichi Pharmaceutical Corporation was changed to Daiichi Pharmaceutical Holdings, Inc

(2) Non-consolidated subsidiaries: 3

During the fiscal year, the Company excluded one newly established subsidiary from the scope of consolidation, and thereby increased the number of non-consolidated subsidiaries to three. Non-consolidated subsidiaries are small in size and are not material when measured by the amounts of assets, sales, net income (based on the Company’s ownership percentage), retained earnings (based on the Company’s ownership percentage), and other indicators. They have therefore been excluded from the scope of consolidation.

2. Application of the Equity Method

(1) Affiliated companies accounted for under the equity method: 2

Names of principal companies:

Aventis Pasteur Daiichi Vaccine Co., Ltd., plus one other company.

Since the significance of these affiliates to the consolidated financial statements has increased, they have been included in the scope of companies accounted for under the equity method beginning in the fiscal year.

(2) For the fiscal year, net income (based on the Company’s equity percentage), retained earnings (based on the Company’s equity percentage) and other indicators of the Company’s three non-consolidated subsidiaries and three of its 20%-50% owned affiliated companies are not material or significant to the Company as a whole. Therefore, these companies have not been accounted for under the equity method, but are reported in the Company’s investment accounts under the cost method.

Fiscal 2005

(For the year ended March 31, 2006)

1. Scope of consolidation

(1) Consolidated subsidiaries: 21

Principal consolidated subsidiaries:

In Japan

Daiichi Pure Chemicals Co., Ltd.

Daiichi Radioisotope Laboratories, Ltd.

Daiichi Fine Chemical Co., Ltd.

Saitama Daiichi Pharmaceutical Co., Ltd.

Daiichi Asubio Pharma Co., Ltd.

Daiichi Pharmatech Co., Ltd.

Overseas

Daiichi Pharmaceutical (Beijing) Co., Ltd.

During the fiscal year, the Company excluded the following companies from the scope of consolidation due to their merger with other companies within the group: Kansai Daiichi Service Co., Ltd. and Daiichi Technos Co., Ltd. (merged into Daiichi Pharmatech Co., Ltd.); Daiichi Suntory Biomedical Research Ltd. (merged into Daiichi Suntory Pharma Co., Ltd.); and Daiichi Pharmaceutical (China) Co., Ltd. (merged into Daiichi Pharmaceutical (Beijing) Co., Ltd.) Also during the year, Daiichi Suntory Pharma Co., Ltd. changed its name to Daiichi Asubio Pharma Co., Ltd.

In addition, the Company sold a part of its ownership interests in Tokyo Iyaku Shiki Co., Ltd. and Nishimura Shiki Co., Ltd. Consequently, it began accounting for both companies under the equity method in the second half of the fiscal year.

The Company also completed the liquidation of Daiichi Fine Chemicals, Inc., and eliminated it from the scope of consolidation.

Also during the year, Daiichi Pharma Holdings, Inc., Daiichi Pharmaceutical Corporation and Daiichi Medical Research, Inc. became subsidiaries of Sankyo Pharma, Inc. Although the Company has begun accounting for the companies using the equity method, it continued to consolidate their income statements during the fiscal year. Finally, during the fiscal year, Sankyo Pharma Inc. changed its name to Daiichi Sankyo Inc.

(2) Non-consolidated subsidiaries: 3

Non-consolidated subsidiaries are small in size and are not material when measured by the amounts of assets, sales, net income (based on the Company’s ownership percentage), retained earnings (based on the Company’s ownership percentage), and other indicators. They have, therefore, been excluded from the scope of consolidation.

2. Application of the Equity Method

(1) Affiliated companies accounted for under the equity method: 6

Names of principal companies:

In Japan

Daiichi Sankyo Healthcare Co., Ltd.

Sanofi Pasteur Daiichi Vaccine Co., Ltd.

Tokyo Iyaku Shiki Co., Ltd.

Nishimura Shiki Co., Ltd. plus one other company

During the interim period, the corporate name of Aventis Pasteur Daiichi Vaccine Co., Ltd. was changed to Sanofi Pasteur Daiichi Vaccine Co., Ltd.

Overseas

Daiichi Sankyo, Inc.

During the fiscal year, the corporate name of Aventis Pasteur Daiichi Vaccine Co., Ltd. was changed to Sanofi Pasteur Daiichi Vaccine Co., Ltd. Daiichi Sankyo Healthcare Co., Ltd., which was established during the year, has been added to the equity-method affiliates.

(2) Same as for the previous year.

Fiscal 2004

(For the year ended March 31, 2005)

(3) The equity method of accounting is applied on the basis of the affiliated companies’ fiscal years. One affiliated company has a fiscal year-end date that is different from the Company’s fiscal year-end.

3 Fiscal Year-end of Consolidated Subsidiaries

The fiscal year-end of the following consolidated subsidiaries is December 31: Daiichi Pharmaceutical (China) Co., Ltd.; Daiichi Pharmaceutical (Beijing) Co., Ltd.; Daiichi Asubio Pharmaceuticals, Inc.; Daiichi Asubio Holdings, Inc.; Daiichi Asubio Medical Research Laboratories LLC.

In preparing the consolidated financial statements, the Company uses the financial statements of these companies as of their fiscal year-end. For major intervening transactions that occurred between the fiscal year-end of these companies and March 31, appropriate adjustments have been made in the consolidated financial statements.

4 Summary of Significant Accounting Policies

(1) Methods of Valuation of Significant Assets

(a) Marketable and Investment Securities

Held-to-maturity securities: The Company reports held-to-maturity securities at an amortized cost using the straight-line amortization.

Available-for-sale securities:

Securities with quoted market prices:

The fair value method based on the quoted market prices at the end of the fiscal year (Unrealized holding gains/losses are reported in a component of stockholder’s equity, with costs of securities sold being calculated using the moving average method.)

Securities with no readily available market value:

Stated at cost based mainly on the moving- average method

(b) Inventories

Inventories are mainly stated at the lower of cost or market, with cost being determined by the average cost method.

(2) Depreciation and Amortization of Significant Depreciable Assets

(a) Property, plant and equipment:

The Company and its domestic consolidated subsidiaries account for depreciation of property, plant and equipment based on the declining-balance method. Certain overseas consolidated subsidiaries account for depreciation of property, plant and equipment under the straight-line method. The ranges of useful lives are as follows:

Buildings and structures: 38 to 50 years

Machinery, equipment and vehicles: 4 to 7 years

Fiscal 2005

(For the year ended March 31, 2006)

(3) Same as for the previous year

3. Fiscal Year-end of Consolidated Subsidiaries

The fiscal year-end of the following consolidated subsidiaries is December 31: Daiichi Pharmaceutical (Beijing) Co., Ltd.; Daiichi Asubio Pharmaceuticals, Inc.; Daiichi Asubio Holdings, Inc.; Daiichi Asubio Medical Research Laboratories LLC.

In preparing the consolidated financial statements, the Company uses the financial statements of these companies as of their fiscal year-end. For major intervening transactions that occurred between the fiscal year-end of these companies and March 31, appropriate adjustments have been made in the consolidated financial statements.

4. Summary of Significant Accounting Policies

(1) Methods of Valuation of Significant Assets

(a) Marketable and Investment Securities

Held-to-maturity securities: Same as for the previous year

Available-for-sale securities:

Securities with quoted market value:

Same as for the previous year

Securities with no readily available market value:

Same as for the previous year

(b) Inventories

Same as for the previous year

(2) Depreciation and Amortization of Significant Depreciable Assets

(a) Property, plant and equipment:

The Company and its domestic consolidated subsidiaries account for depreciation of property, plant and equipment based on the declining-balance method, except for buildings (excluding fixtures) purchased on and after April 1, 1998, which are depreciated using the straight-line method. Certain overseas consolidated subsidiaries account for depreciation of property, plant and equipment under the straight-line method. The ranges of useful lives are as follows:

Buildings and structures: 38 to 50 years

Machinery, equipment and vehicles: 4 to 7 years

Fiscal 2004

(For the year ended March 31, 2005)

(b) Intangible Assets and Long-term Prepaid Expenses:

The Company accounts for amortization under the straight-line method

(3) Methods of Accounting for Significant Allowances

(a) Allowance for Doubtful Accounts

The Company covers the risk of credit losses from potential customer defaults by providing this allowance. For normal accounts, the allowance is computed on the basis of the historical default rates. For specific over-due accounts, the allowance is based on individual account-by-account estimates of the amounts that may not be recoverable.

(b) Allowance for Sales Returns

To prepare for losses on potential returns of products after the fiscal year-end, the Company provides for an amount equal to the sum of gross profits and inventory losses on such returned products, based on its estimates of possible sales returns.

For the fiscal year, the Company’s reversal of sales return provision in the amount of ¥43 million was deducted from cost of sales.

Fiscal 2005

(For the year ended March 31, 2006)

(Changes in Accounting Policies)

Buildings (excluding fixtures) purchased on and after April 1, 1998, had been depreciated using the declining-balance method, however, beginning in the fiscal year, the Company depreciates such buildings using the straight-line method.

This decision to change the method of depreciation was made for the following reasons after a review of its depreciation policies: Since the benefit from capital spending on facilities is considered not being influenced by their level of utilization, but is realized constantly in each period, the new method better reflects the underlying performance of the Company in the statements of income, based on the Company’s capital investments going forward.

In connection with the agreement to integrate its operations with those of Sankyo Company, Limited on May 13, 2005, and the establishment of a joint holding company, DAIICHI SANKYO COMPANY, LIMITED on September 28, 2005, the Company has recognized a need to conform its accounting policies to those of the new corporate group.

As a result of this accounting change, depreciation expense for the fiscal year was decreased by ¥216 million. Accordingly, operating income, ordinary income and net income before income taxes and minority interests all increased by ¥216 million as compared to the amounts that would have been reported had the previous method of accounting been consistently applied.

The effect of this change on segment information is presented in the Segment Information section.

(b) Intangible Assets and Long-term Prepaid Expenses:

Same as for the previous year

(3) Methods of Accounting for Significant Allowances

(a) Allowance for Doubtful Accounts

Same as for the previous year

(b) Allowance for Sales Returns

To prepare for losses on potential returns of products after fiscal year-end, the Company provides for an amount equal to the sum of gross profits and inventory losses on such returned products, based on its estimates of possible sales returns.

For the fiscal year, the Company’s reversal of sales return provision in the amount of ¥203 million was deducted from cost of sales

Fiscal 2004

(For the year ended March 31, 2005)

(c) Allowance for Sales Rebates

To prepare for future sales rebates, the Company provides for this allowance calculated by multiplying an estimated sales rebate percentage for the fiscal year by the amounts of accounts receivable from and inventories held by wholesalers at the fiscal year-end.

(d) Accrued Retirement and Severance Costs

To prepare for future payments of employee retirement and severance benefits, the Company provides for an accrual based on estimated projected benefit obligations and plan assets at the end of the fiscal year.

Prior service cost is amortized under the straight-line method over a period of 10 years, which is equal to or less than the estimated average remaining years of service of the eligible employees at the time such prior service cost was incurred.

Actuarial gain and loss are amortized based on the straight-line method, beginning in the fiscal year following the year in which the gain or loss was initially measured, over a period of 10 years, which is equal to or less than the average remaining years of service of the eligible employees at the time such actuarial gain or loss occurred

(Supplementary Information)

Accompanying the enactment of the Defined Benefit Pension Law, the Company received an approval of exemption from the Minister of Health, Labour and Welfare, on January 1, 2005, from the obligation for pension payment liabilities related to past employee service with respect to the substitutional portion of its Employees’ Pension Fund.For the fiscal year, as a result, the Company recognized an extraordinary gain of ¥11,747 million from the return of the substitutional portion of the employees’ pension fund to the government.

In addition, accompanying the enactment of the Defined Contribution Pension Plans Law, the Company and certain of its domestic consolidated subsidiaries restructured a portion of their lump-sum retirement benefit plans to a defined contribution pension plan. This transaction was accounted for under the provisions of “Accounting for Transitions between Retirement Benefit Plans” (Corporate Accounting Guidelines No. 1).This change in retirement benefit arrangement resulted in an extraordinary gain of ¥3,769 million for the fiscal year.

(e) Accrued Directors’ Retirement and Severance Costs

To prepare for payments of directors’ retirement and severance benefits, the Company and its domestic consolidated subsidiaries provide for an amount equal to the total benefits that would have become payable at the end of the fiscal year, in accordance with the internal policies, had all directors resigned voluntarily.

Fiscal 2005

(For the year ended March 31, 2006)

(c) Allowance for Sales Rebates

Same as for the previous year

(d) Accrued Retirement and Severance Costs

To prepare for future payments of employee retirement and severance benefits, the Company provides for an accrual based on estimated projected benefit obligations and plan assets at the end of the fiscal year.

Prior service cost is amortized under the straight-line method over a period of 10 years, which is equal to or less than the estimated average remaining years of service of the eligible employees at the time such prior service cost was incurred.

Actuarial gain and loss are amortized based on the straight-line method, beginning in the fiscal year following the year in which the gain or loss was initially measured, over a period of 10 years, which is equal to or less than the average remaining years of service of the eligible employees at the time such actuarial gain or loss occurred

(Supplementary Information)

Accompanying the enactment of the Defined Benefit Pension Law, the Company received an approval of exemption from the Minister of Health, Labour and Welfare on January 1, 2005, from the obligation for pension payment liabilities related to past employee service with respect to the substitutional portion of its Employees’ Pension Fund, and on May 31, 2005, a payment was made to transfer the plan assets related to the substitutional portion to the government based on the minimum liability.For the fiscal year, as a result, the Company recognized an extraordinary gain of ¥163 million from the return of the substitutional portion of the employees’ pension fund to the government.

(e) Accrued Directors’ Retirement and Severance Costs

Same as for the previous year

Fiscal 2004

(For the year ended March 31, 2005)

(4) Translation of Significant Assets and Liabilities Denominated in Foreign Currencies into Yen

Receivables and payables denominated in foreign currencies are translated into yen amounts at the exchange rates prevailing at the end of the fiscal year, with resulting translation gains or losses recognized currently in earnings. The assets and liabilities of overseas consolidated subsidiaries are translated into yen amounts at the exchange rates prevailing at their balance sheet dates, while income and expenses are translated into yen amounts at the average exchange rates prevailing over the respective periods, with resulting translation gains or losses recorded in a separate component of shareholders’ equity under foreign currency translation adjustments or in the minority interests section of the balance sheets.

(5) Accounting for Significant Lease Transactions

Finance lease transactions are accounted for using the same method applied to operating lease transactions, with the exception for those finance leases in which the legal title of the underlying property is transferred from the lessor to the lessee.

(6) Significant Hedge Accounting Method

(a) Hedge Accounting Method

The Company employs the deferred hedge method of accounting. Foreign exchange forward contracts that meet certain hedge criteria are accounted for as a hedge of underlying assets and liabilities

(b) Hedging Instruments and Hedged Items

Hedging Instruments: Foreign exchange forward contracts and other

Hedged Items: Assets denominated in foreign currencies

(c) Hedge Policy

The Company hedges foreign exchange rate fluctuation risks in accordance with its internal policies.

(d) Method for Assessing Hedge Effectiveness

Based on its internal policies, the Company evaluates the effectiveness of hedges by examining the correlations between its hedging instruments and hedged items as a result of fluctuations of foreign currency exchange rates and confirms the effectiveness of its hedge relationship.

(7) Accounting for Consumption Tax

The tax-exclusion (net of tax) method is used to account for the national and local consumption taxes.

5. Valuation Method for Assets and Liabilities of Subsidiaries Acquired in Business Combinations

All assets and liabilities of an acquired business that becomes a consolidated subsidiary are valued on a full fair value basis without taking into account minority interests’ share in such assets and liabilities.

6. Amortization of Goodwill

Goodwill recorded in the consolidated financial statements is generally amortized on a straight-line basis over a period of five years.

7. Appropriations of Retained Earnings

The consolidated statements of retained earnings are prepared based on the appropriations of retained earnings approved during the fiscal year.

8. Definition of Cash and Cash Equivalents in the Consolidated Statements of Cash Flows

Cash and cash equivalents in the consolidated statements of cash flows consists of the following: cash in hand, deposits that can be withdrawn upon demand, and highly liquid short-term investments that are readily convertible to cash with little risk of fluctuation in value, and that mature within three months from the dates of acquisition.

Fiscal 2005

(For the year ended March 31, 2006)

(4) Translation of Significant Assets and Liabilities Denominated in Foreign Currencies into Yen

Same as for the previous year

(5) Accounting for Significant Lease Transactions

Same as for the previous year

(6) Significant Hedge Accounting Method

(a) Hedge Accounting Method

Same as for the previous year

(b) Hedging Instruments and Hedged Items

Same as for the previous year

(c) Hedge Policy

Same as for the previous year

(d) Method for Assessing Hedge Effectiveness

Same as for the previous year

(7) Accounting for Consumption Tax

Same as for the previous year

5. Valuation Method for Assets and Liabilities of subsidiaries Acquired in Business Combinations

Same as for the previous year

6. Amortization of Goodwill

Same as for the previous year

7. Appropriations of Retained Earnings

Same as for the previous year

8. Definition of Cash and Cash Equivalents in the Consolidated Statements of Cash Flows

Same as for the previous year

Changes in Significant Accounting Principles and Policies for the Preparation of the Consolidated Financial Statements

Fiscal 2004

(For the year ended March 31, 2005)

—

Fiscal 2005

(For the year ended March 31, 2006)

(Accounting for Impairment of Property, Plant and Equipment)

Effective in the current fiscal year, the Company adopted the new accounting standard as required for impairment of property, plant and equipment (“Opinion Concerning Establishment of Accounting Standard for Impairment of Fixed Asset” issued by the Business Accounting Deliberation Council on August 9, 2002) and its implementation guidance (the Financial Accounting Standard Implementation Guidance No. 6 issued by the Accounting Standards Board of Japan on October 31, 2003). As a result of this adoption, income before income taxes and minority interests was decreased by ¥1,339 million.

An accumulated impairment loss is recorded as direct reduction in the book value of respective assets in accordance with the revised regulations for consolidated financial statement presentation.

Notes to Consolidated Financial Statements

(Notes to Consolidated Balance Sheets)

As of March 31, 2005

1. Pledged assets and secured liabilities

Assets pledged as collateral and secured liabilities were as follows:

	(Millions of yen)
Pledged assets:
Buildings and structures	426	(426	)
Machinery, equipment and vehicles	264	(264	)
Land	724	(724	)
Other	26	(26	)
Total	1,441	(1,441	)
Secured liabilities:
Short-term bank loans	17	(17	)

Figures in parentheses indicate factory foundation mortgaged assets and related secured borrowings that are included in the figures on the left.

2. The balances related to non-consolidated subsidiaries and affiliated companies were as follows:

	(Millions of yen)
Investment securities	87
Other assets (other investment in capital)	600

3. Contingent Liabilities

(1) The Company guarantees the following debt and other obligations owed to financial institutions.

	(Millions of yen)
Guarantees provided on
Employees housing loans, etc	2,737
Aventis Pasteur-Daiichi Vaccines Co., Ltd.	350

(2) The trade notes receivable discounted 78

4. The Company’s common stock issued at the end of the fiscal year was 286,453,235 shares.

5. Treasury stock owned by the Company at the end of the fiscal year was 18,049,212 shares of common stock.

6. Commitment Line Contracts

To facilitate the efficient raising of working capital, the Company maintains committed lines of credit with four financial institutions. The unused balance of credit lines under these commitments at the fiscal year-end was as follows:

	(Millions of yen)
Total amount of committed credit lines	30,000
Less amount borrowed against credit lines	—
Credit lines unused	30,000

As of March 31, 2006

1. Pledged assets and secured liabilities

Assets pledged as collateral and secured liabilities were as follows:

	(Millions of yen)
Pledged assets:
Buildings and structures	391	(391	)
Machinery, equipment and vehicles	245	(245	)
Land	724	(724	)
Other	22	(22	)
Total	1,384	(1,384	)

Secured liabilities:

The Company had no outstanding secured liabilities as of the end of the fiscal year.

Figures in parentheses indicate factory foundation mortgaged assets and related secured borrowings that are included in the figures on the left.

2. The balances related to non-consolidated subsidiaries and affiliated companies were as follows:

	(Millions of yen)
Investment securities	16,858
Other assets (other investment in capital)	615

3. Contingent Liabilities

(1) The Company guarantees the following debt and other obligations owed to financial institutions.

	(Millions of yen)
Guarantees provided on Employees housing loans, etc	2,190
Sanofi- Pasteur-Daiichi Vaccines Co., Ltd.	350
Other	8

(2) The trade notes receivable discounted 28

4. The Company’s common stock issued at the end of the fiscal year was 269,420,093 shares

5.                     

6. Committed Line Contracts

To facilitate the efficient raising of working capital, the Company maintains committed lines of credit with four financial institutions. The unused balance of credit lines under these commitments at the fiscal year-end was as follows:

	(Millions of yen)
Total amount of committed credit lines	30,000
Less amount borrowed against credit lines	—
Credit lines unused	30,000

(Notes to Consolidated Statements of Income)

Fiscal 2004

(For the year ended March 31, 2005)

1. Research and development expenses included in selling, general and administrative expenses and manufacturing overhead costs were ¥58,605 million.

2. A gain on sale of the veterinary and livestock feed product business was recognized as a result of sale of the domestic distribution rights and other intangibles related to its veterinary and livestock feed product business to a third-party.

3.                     

4. Loss on settlement of vitamin-related anti-trust litigations

The loss on settlement of vitamin-related anti-trust litigations was related to a settlement of a part of the civil anti-trust class-action damage claims in connection with the Company’s vitamin transactions.

5. A restructuring charge was recorded for the one-time termination benefits provided to certain employees who were involuntarily transferred from the Company to a newly established wholly-owned subsidiary, Daiichi Pharmatech Co., Ltd.

6. The loss on settlement of an employee pension fund represented a one-time payment made by a consolidated subsidiary to settle its participation in a multi-employer Employee Pension Fund plan.

7.                     

Fiscal 2005

(For the year ended March 31, 2006)

1. Research and development expenses included in selling, general and administrative expenses and manufacturing overhead costs were ¥61,647 million.

2.                     

3. Losses on business integration

The loss represents one-time costs associated with the integration of business operations of the Daiichi and the Sankyo groups. The breakdown of this expense is as follows.

	(Millions of yen)
Expenses associated with the integration of overseas operations	6,406
Expenses associated with the integration of the healthcare business	448
Other research and consulting expenses	807

4. Loss on settlement of vitamin-related anti-trust litigations

The amount represents a penalty resulting from an unsuccessful appeal against the EC ruling that the Company participated in a vitamin cartel

5.                     

6.                     

7. Loss on impairment of property, plant and equipment

The Daiichi Group (the Company and its consolidated subsidiaries) classifies the operating assets held and used into asset groups on the basis of operating segments in the management reporting in consideration of similarities of products or business activities, the uniformity within the Group, and future maintenance sustainability. On the other hand, idle assets that are not directly used for its business operations are grouped on a property by properly basis.

For the fiscal year, the Group recorded an impairment loss on the following asset groups:

Location	Function	Asset type	Status
Shiroishi-ku, Sapporo	Former Sapporo Distribution Center site	Land	Idle
Shimotsuke-shi, Tochigi	Former Tochigi Research Center facility	Building land, etc.	Idle
Sanmu-shi, Chiba	Chiba plant site	Land	Idle

Because the above asset groups are idle and have uncertain prospects for future utilization, their book values have been written down to a recoverable amount and such reductions in the amount of ¥1,339 million were recorded as a loss on impairment in the extraordinary losses.

The impairment loss consisted of ¥420 million associated with buildings, ¥17 million associated with other structures, ¥7 million associated with machinery and equipment, ¥4 million associated with tools, furniture and fixtures, and ¥890 million associated with land.

A recoverable amount of an asset group is estimated from its net realizable value, which is obtained based mainly on third-party appraisal by real estate appraisals.

Fiscal 2004

(For the year ended March 31, 2005)

8. The breakdown of losses on sale of property, plant and equipment was as follows:

	(Millions of yen)
Buildings and structures	884
Machinery, equipment and vehicles	267
Other	639

Fiscal 2005

(For the year ended March 31, 2006)

8. The breakdown of losses on sale of property, plant and equipment was as follows:

	(Millions of yen)
Buildings and structures	259
Machinery, equipment and vehicles	252
Other	331

(Notes to Consolidated Statements of Cash Flows)

Fiscal 2004

(For the year ended March 31, 2005)

Reconciliation of cash and cash equivalents at the fiscal year-end with the balance sheet accounts:

(As of March 31, 2005)
	(Millions of yen)
Cash and time deposits	16,395
Less time deposits with maturities extending over three months	(579	)
Add short-term investments with maturities within three months	75,755
Cash and cash equivalents	91,571

Fiscal 2005

(For the year ended March 31, 2006)

Reconciliation of cash and cash equivalents at the fiscal year-end with the balance sheet accounts:

(As of March 31, 2006)
	(Millions of yen)
Cash and time deposits	13,566
Less time deposits with maturities extending over three months	(996	)
Add short-term investments with maturities within three months	86,252
Cash and cash equivalents	98,823

(1) Lease transactions:

Pro-forma information on financing leases has not been presented herein because the Company discloses such information through EDINET

(2) Marketable and Investment Securities

1. Held-to-Maturity Securities with Determinable Market Value (Millions of yen )

Type of securities	Fiscal 2004 (As of March 31, 2005)				Fiscal 2005 (As of March 31, 2006)
March 31;	Carrying Amount	Market value	Difference		Carrying Amount	Market value	Difference
Securities with market values greater than balance sheet carrying amounts
(1) National and local government bonds	—	—	—		999	1,000	0
(2) Corporate bonds	29,332	29,492	160		11,604	11,644	40
(3) Other securities	—	—	—		—	—	—
Total	29,332	29,492	160		12,604	12,644	40
Securities with market values at or less than balance sheet carrying amounts
(1) National and local government bonds	—	—	—		2,993	2,907	(86	)
(2) Corporate bonds	39,409	39,022	(387	)	48,076	47,236	(839	)
(3) Other securities	—	—	—		—	—	—
Total	39,409	39,022	(387	)	51,070	50,144	(925	)
Total	68,742	68,514	(227	)	63,674	62,788	(885	)

2. Available-for-Sale Securities with Determinable Fair Value (Millions of yen )

Type of securities	Fiscal 2004 (As of March 31, 2005)				Fiscal 2005 (As of March 31, 2006)
March 31;	Acquisition cost	Carrying amount	Difference		Acquisition cost	Carrying amount	Difference
Securities with balance sheet carrying values greater than acquisition cost
(1) Equity securities	26,285	56,955	30,669		27,235	86,525	59,290
(2) Debt securities.	—	—	—		—	—	—
a. National and local government bonds
b. Corporate bonds	1,120	1,176	56		1,120	1,226	106
c. Other securities	—	—	—		—	—	—
(3) Other	2,412	2,859	446		2,147	3,254	1,106
Total	29,818	60,990	31,172		30,502	91,006	60,504
Securities with balance sheet carrying values at or less than acquisition cost
(1) Equity securities	606	496	(109	)	63	58	(4	)
(2) Debt securities.	—	—	—		—	—	—
a. National and local government bonds
b. Corporate bonds	—	—	—		—	—	—
c. Other securities	—	—	—		—	—	—
(3) Other	3,260	2,840	(419	)	—	—	—
Total	3,866	3,337	(529	)	63	58	(4	)
Total	33,685	64,328	30,643		30,565	91,065	60,500

Notes: During the fiscal year, the Company recorded a loss on valuation of available-for-sale securities in the amount of ¥301 million. Impairment losses for marketable and investment securities are classified and computed as follows:

(1) An impairment loss is generally recognized on securities whose market value has declined 50% or more compared to the acquisition cost as of the beginning of the fiscal year. Exceptions are allowed only when there is a justifiable reason.

(2) For securities whose market value has declined more than 30% but less than 50% compared to the acquisition cost as of the beginning of fiscal year, after consideration of future prospects for recovery in market value of individual securities, an impairment loss is recognized on those securities that are considered not likely to recover in value.

(3) An impairment loss is not generally recognized on those securities whose market value has declined less than 30% compared to the acquisition cost as of the beginning of the fiscal year.

3. Available-for-Sale Securities Sold during the Year (Millions of yen )

Fiscal 2004 (For the year ended March 31, 2005)			Fiscal 2005 (For the year ended March 31, 2006)
Amount sold	Total gain on sale	Total loss on sale	Amount sold	Total gain on sale	Total loss on sale
1,935	283	27	4,029	469	206

4. Breakdown of Securities without Determinable Market Value (Millions of yen )

March 31	Fiscal 2004	Fiscal 2005
	Carrying value	Carrying value
(1) Held-to-maturity securities
Certificates of deposit	20,000	12,000
Commercial papers	47,492	54,987
(2) Available-for-sale securities
MMF, FFF and medium-term government bond funds	8,263	19,264
Preferred equity securities	1,000	1,000
Unlisted stock	2,061	2,329
Preferred securities	1,000	1,000

5. Scheduled Maturities of Available-for-Sale Securities with Maturity and Held-to-Maturity Securities (Millions of yen )

Type of securities	Fiscal 2004 (As of March 31, 2005)				Fiscal 2005 (As of March 31, 2006)
March 31	Within one year	Between one and five years	Between five and ten years	Over ten years	Within one year	Between one and five years	Between five and ten years	Over ten years
1. Debt securities
(1) National and local government bonds	—	—	—	—	999	2,993	—	—
(2) Corporate bonds	31,758	22,983	14,000	—	28,632	20,032	11,016	—
(3) Other	67,492	—	—	—	66,987	—	—	—
2. Other securities	—	2,359	—	—	—	1,226	—	—
Total	99,250	25,342	14,000	—	96,620	24,253	11,016	—

(3) Derivative transactions

The fair value information on derivative instruments has not been presented herein because such information is disclosed via EDINET

(4) Retirement and Severance Benefit

1. Summary of the Company’s Retirement Benefits Arrangements

Previously, the Company had maintained: an Employees’ Pension Fund plan and a lump-sum retirement benefit plan, both of which were a defined benefit arrangements. The Company received an approval of exemption from the Minister of Health, Labour and Welfare on January 1, 2005, from the obligation for pension payment liabilities related to past employee service with respect to the substitutional portion of its Employees’ Pension Fund, and on May 31, 2005, a payment was made to transfer the plan assets related to the substitutional portion to the government based on the minimum liability. In addition, domestic consolidated subsidiaries had previously maintained various defined benefit retirement arrangements including Tax Qualified Pension plans (adopted by 10 consolidated subsidiaries) and lump-sum retirement benefit plans.

Daiichi Pharmaceuticals Co., Ltd. and certain domestic group companies (10 consolidated subsidiaries), upon obtaining an approval of exemption from the obligation related to past employee service with respect to the substitutional portion of the Daiichi Pharmaceutical Employees’ Pension Fund, beginning on January 1, 2005, unified their retirement benefit arrangements. With an exception of certain lump-sum retirement benefit plans, the Company’s various retirement benefit arrangements have been transformed into a single group arrangement comprising a Defined Benefit Corporate Pension plan and a Defined Contribution Pension plan.

Also, under certain circumstances, when employees retire or otherwise leave the Company, additional retirement benefits may be paid.

Please note that certain of the Group’s overseas consolidated subsidiaries also maintain defined benefit pension plans.

2. Components of Retirement Benefit Obligations

(Millions of yen)

	Fiscal 2004 (As of March 31, 2005)		Fiscal 2005 (As of March 31, 2006)
a) Projected benefit obligations	(83,244	)	(64,215	)
b) Fair value of pension plan assets	83,197		70,227
c) (Under)/over-funded projected benefit obligations (a + b)	(47	)	6,011
d) Unamortized transition obligations	—		—
e) Unrecognized actuarial loss	9,222		2,156
f) Unrecognized prior service cost	1,563		1,256
g) Net pension assets recognized in the consolidated balance sheets	10,739		9,423
h) Prepaid pension costs	15,493		14,356
i) Accrued retirement and severance costs	(4,754	)	(4,932	)

(Notes)

    1. The above figures include the substitutional portion of the Employees’ Pension Fund.

    2. Certain of the Company’s subsidiaries use the simplified vested-benefit method in computing retirement and severance obligations.

    3. The effects of the transfer of a portion of the lump-sum retirement benefit plans to a defined contribution pension plan in 2005 were as follows:

Decrease in projected benefit obligations	11,779
Unrecognized actuarial loss	(1,334	)
Unrecognized prior service benefit	3,852
Decrease in accrued retirement and severance costs	14,297

The amount of plan assets to be transferred to the defined contribution pension plan totaled ¥10,528 million. The transfer is scheduled to take place over the next four-year period. The amount of the plan assets not yet transferred was ¥6,744 million at the end of fiscal 2004, which was included in Other Payables (other current assets) and Long-term Payables (other non-current liabilities) in the accompanying consolidated balance sheets.

3. Employees’ Retirement and Severance Costs

(Millions of yen)

	Fiscal 2004 (For the year ended March 31, 2005)		Fiscal 2005 (For the year ended March 31, 2006)
a) Service costs-benefits earned during the year	3,605		3,115
b) Interest cost	2,381		1,548
c) Expected return on plan assets	(1,993	)	(1,895	)
d) Amortization of actuarial loss	2,073		1,335
e) Amortization of prior service costs	(267	)	305
f) Net periodic retirement and severance costs	5,799		4,411
g) Gain from the return of the substitutional portion of the Employees’ Pension Fund to the government	(11,747	)	(163	)
h) Losses on business integration	—		1,378
i) Additional retirement benefits	—		113
j) Loss on settlement of Employees’ Pension Fund plan	381		—
k) Gain from the transfer to the defined contribution pension plan	(3,769	)	—
l) Restructuring charge	7,316		—
m) Other	204		884
Total retirement and severance costs	(1,814	)	6,623

(Notes)

1. Service cost is net of employee Contributions to be the Employees’ Pension Fund.

2. Retirement and severance costs of consolidated subsidiaries that are computed under the simplified vested-benefit method are included in “ Service costs-benefits earned during the year.”

3. The Restructuring charge was related to the payments of additional one-time termination benefits to the employees who were transferred to Daichi Pharmatech Co., Ltd., which was established through a split-off of three domestic manufacturing plants of the Company.

4. Other represents the Company’s contributions to the defined contribution pension plan and prepayments of retirement benefits to certain employees under the retirement benefit prepayment arrangement.

4. Principal Assumptions Used in the Calculation of Retirement and Severance Benefit Obligations

	Fiscal 2004 (As of March 31, 2005)	Fiscal 2005 (As of March 31, 2006)
a) Method for inter-period attribution of estimated retirement costs	Straight-line method	Same as for the previous year
b) Discount rate	Mainly 2.5%	Same as for the previous year
c) Expected return on plan assets	Mainly 3.0%	Same as for the previous year
d) Amortization period of prior service costs	Mainly 10 years (amortized under the straight-line method over a period not exceeding the average remaining years of service of the eligible employees at the time such prior service cost was incurred)	Same as for the previous year
e) Amortization period of actuarial gain and loss	Mainly 10 years (amortized beginning in the fiscal year following the year in which the actuarial gain or loss was first measured under the straight-line method over a period not exceeding the average remaining years of services of the eligible employees at the time such actuarial gain or loss occurred)	Same as for the previous year

(5) Deferred income taxes

1. Principal Components of Deferred Tax Assets and Liabilities

(Millions of yen)

	Fiscal 2004 (As of March 31, 2005)		Fiscal 2005 (As of March 31, 2006)
Deferred tax assets:
Depreciation	11,163		11,329
Prepaid consigned research and co-development expenses, etc.	5,435		7,104
Accrued expenses	4,544		4,458
Net operating loss carry forwards for income Tax purposes	—		3,895
Accrued enterprise tax	707		1,994
Accrued retirement and severance costs	1,553		1,767
Payables to the defined contribution pension plan	2,626		1,455
Inventories (unrealized profit and valuation losses)	1,290		1,431
Impairment losses on investment securities	776		385
Other	7,635		7,207
Subtotal	35,731		41,030
Valuation allowance	(6,637	)	(11,068	)
Total deferred tax assets	29,094		29,961
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities	(12,419	)	(24,520	)
Prepaid pension costs	(6,866	)	(5,819	)
Reserve for reduction in bases of fixed assets for income tax purposes	(2,588	)	(2,573	)
Reserve for accelerated depreciation	(17	)	(11	)
Total deferred tax liabilities	(21,892	)	(32,924	)
Net deferred tax assets (liabilities)	7,202		(2,963	)

(Note) Net deferred tax assets are included under the following balance sheet captions

	Fiscal 2004 (As of March 31, 2005)		Fiscal 2005 (As of March 31, 2006)
Current assets-deferred tax assets	13,826		15,287
Non-current assets-deferred tax assets	3,167		3,370
Current liabilities-deferred tax liabilities	—		—
Non-current liabilities-deferred tax liabilities	(9,791	)	(21,620	)

2. Reconciliation of the difference between the statutory tax rate and the Company’s effective tax rate

	Fiscal 2004 (As of March 31, 2005)		Fiscal 2005 (As of March 31, 2006)
	(percent)		(percent)
Statutory tax rate	40.5		40.5
(Adjustments)
Non-deductible permanent differences including entertainment and other expenses	3.2		3.3
Deductible permanent differences including dividend received deductions and other items	(0.5	)	(1.0	)
Per capita inhabitants’ taxes	0.2		0.3
Tax credit for research and development expenses	(4.2	)	(7.4	)
Increase in valuation allowance	—		6.4
Other	5.4		2.6
Effective tax rate	44.6		44.7

(6) Segment Information

a. Information by Operating Segment

Information by operating segment on a consolidated basis for the most recent two fiscal years was as follows:

(Millions of yen)

	Fiscal 2004 (For the year ended March 31, 2005)
	Pharmaceuticals	Other		Total	Eliminations and corporate		Consolidated
I. Net sales and operating income
Net sales
(1) Outside customers	311,844	16,689		328,534	—		328,534
(2) Inter-segment	73	2,783		2,857	(2,857	)	—
Total sales	311,917	19,473		331,391	(2,857	)	328,534
Operating expenses	247,821	19,552		267,373	5,096		272,470
Operating income	64,096	(78	)	64,017	(7,953	)	56,063
II. Assets, depreciation, and capital expenditures
Assets	288,257	28,768		317,026	229,529		546,555
Depreciation	14,342	1,518		15,861	85		15,946
Capital expenditures	12,937	1,747		14,684	113		14,798

Notes:

1. Method of classifying operating segments

The operating segments of the Company and its consolidated subsidiaries are the pharmaceutical segment, which is the principal business of the Company, and the other segment, which is businesses other than the pharmaceutical business.

2. Principal products in each operating segment

Business segment	Principal products
Pharmaceutical business	Pharmaceutical products, diagnostic and radiopharmaceutical products, over-the-counter drugs, and veterinary and livestock feed products
Other
Fine chemicals	Bulk vitamins, chemical products, industrial chemicals and other
Safety testing and research	Contract research and development
Other	Real estate rental and other

3. Included in operating expenses under elimination and corporate was ¥7,919 million that could not be allocated to the operating segments. These expenses consisted mainly of the expenses of the administrative departments of the parent company.

4. Included in assets under elimination and corporate was ¥231,328 million in corporate assets. These assets were comprised mainly of temporary excess working capital funds under management of the parent company (cash, time deposit, short-term investments and other), long-term investments (investment securities) and assets used by the administrative departments of the parent company.

Fiscal 2005

(Millions of yen)

	Fiscal 2005 (For the year ended March 31, 2006)
	Pharmaceuticals	Other	Total	Eliminations and corporate		Consolidated
I. Net sales and operating income
Net sales
(1) Outside customers	331,135	15,312	346,447	—		346,447
(2) Inter-segment	195	2,592	2,788	(2,788	)	—
Total	331,331	17,905	349,236	(2,788	)	346,447
Operating expenses	245,011	17,458	262,470	7,889		270,359
Operating income	86,319	446	86,766	(10,678	)	76,087
II. Assets, depreciation, and capital expenditures
Assets	310,948	28,978	339,926	257,774		597,701
Depreciation	12,616	1,435	14,052	80		14,133
Loss on impairment of property, plant and equipment	1,339	—	1,339	—		1,339
Capital expenditures	11,215	2,300	13,515	15		13,531

Notes:

1. Method of classifying operating segments

The operating segment of the Company and its consolidated subsidiaries are the pharmaceutical segment, which is the principal business of the Company, and the other, segment which is businesses other than the pharmaceutical business.

2. Principal products by business segment

Business segment	Principal products
Pharmaceutical business	Pharmaceutical products, diagnostic and radiopharmaceutical products and over-the-counter drugs
Other
Fine chemicals	Bulk vitamins, chemical products, industrial chemicals and other
Safety testing and research	Contract research and development
Other	Real estate rental and other

3. Included in operating expenses under elimination and corporate was ¥10,709 million that could not be allocated to business segments. These expenses consisted mainly of the expenses of the administrative departments of the parent company.

4. Included in assets under elimination and corporate was ¥259,843 million in corporate assets. These assets were comprised mainly of excess working capital funds under management of the parent company (cash, short-term investments and other), long-term investments (investment securities) and assets used by the administrative departments of the parent company.

5. Changes in Accounting Principles and Policies

Changes in Depreciation Method

As noted in “Changes in Significant Accounting Principals and Policies for the Preparation of the Consolidated Financial Statements”, the Company changed its method of depreciation during the year from the declining balance to the straight line for Buildings (excluding fixtures) purchased on and after April 1, 1998. As a result of this change, as compared to the amounts that would have been reported, had the previous depreciation method been applied consistently, operating expense for the fiscal year was decreased by ¥206 million for the pharmaceutical business segment and by ¥10 million for the other segment, and accordingly operating income for the two segments was increased by the same amount.

b. Information by Geographic Segment

Information by geographic segment has been omitted because more than 90% of total segment sales and segment assets were attributable to Japan.

c. Overseas Net Sales

Information about overseas net sales for the two most recent fiscal years was as follows:

(Millions of yen)

Fiscal 2004

(For the year ended March 31, 2005)

	Americas	Europe	Asia and other	Total
I. Overseas net sales	46,608	13,392	8,588	68,589
II. Consolidated net sales				328,534
III. Percentage of overseas net sales (%)	14.2	4.1	2.6	20.9

(Millions of yen)

Fiscal 2005

(For the year ended March 31, 2006)

	Americas	Europe	Asia and other	Total
I. Overseas net sales	48,975	16,148	9,416	74,540
II. Consolidated net sales				346,447
III. Percentage of overseas net sales (%)	14.1	4.7	2.7	21.5

Notes:

1. Geographic areas are classified on the basis of geographic proximity.

2. Principal countries for each geographic area include the following:

(1) Americas:	United States
(2) Europe:	Germany, France, Italy
(3) Asia and other:	China, Taiwan, Korea

3. Overseas net sales are defined as net sales of the Company and its consolidated subsidiaries transacted in countries or regions outside of Japan.

(Transactions with related parties)

None applicable

Per Share Information

Fiscal 2004 (For the year ended March 31, 2005)			Fiscal 2005 (For the year ended March 31, 2006)
Net assets per share	¥	1,670.71	Net assets per share	¥	1,785.55
Net income per share (basic)	¥	137.95	Net income per share (basic)	¥	138.59
Net income per share (diluted)	¥	137.90	Net income per share (diluted)	¥	138.55

Note: Calculations of basic and diluted net income per share were based on the following numerators and denominators:

(Millions of yen)

	Fiscal 2004 (For the year ended March 31, 2005)	Fiscal 2005 (For the year ended March 31, 2005)
Net income per share (basic):
Net income	37,175	37,409
Amount not available for common shareholders	137	118
(Including directors’ bonuses paid from net income of)	(137)	(118)
Net income available for dividends on common shares	37,037	37,291
Weighted-average number of common shares outstanding during the period (1,000 shares)	268,481	269,078
Net income per share (diluted):
Additional dilutive common shares (1,000 shares)	111	70
(Including dilutive effect of stock options of) (1,000 shares)	(111)	(70)
Descriptions of potentially dilutive common shares that were not included in the computation of diluted net income per share because of their anti-dilutive effect	Two share subscription right plans (related to 1,001 thousand shares) and one share purchase option plan (related to 4,090 units of options)	Two share subscription right plans (related to 1,001 thousand shares) All outstanding stock options were cancelled before the end of the fiscal year.

(Subsequent Events)

Fiscal 2004

• Details on the integration of the Company’s operations with Sankyo Co., Ltd. though the formation of a joint holding company are provided on EDINET.

• Details on the termination of stock option agreements are also available on EDINET.

Fiscal 2005

     None applicable

5. Production, Orders and Sales

(1) Production

Production performance by operating segment for the fiscal year is summarized as follows:

(Millions of yen)

Operating segment	Fiscal 2005 (For the year ended March 31, 2006)
	Amount	Changes from the previous year (%)
Pharmaceutical business	285,181	4.8
Other	11,658	1.2
Total	296,840	4.6

Notes:

1. Production amounts are stated based on selling prices, exclusive of consumption tax.

2. The above amounts are stated exclusive of consumption tax.

(2) Procurement

Procurement performance by operating segment for the fiscal year was as follows:

(Millions of yen)

Operating segment	Fiscal 2005 (For the year ended March 31, 2006)
	Amount	Changes from the previous year (%)
Pharmaceutical business	37,070	15.8
Other	1,285	(44.7	)
Total	38,356	11.7

Notes:

1. Procurement amounts are stated based on selling prices, exclusive of consumption tax.

2. The above amounts are stated exclusive of consumption tax.

(3) Orders

The Company manufactures products according to its production plans based not on advance customer orders but on forecasted product demand.

(4) Sales

Sales performance by operating segment for the fiscal year was as follows:

(Millions of yen)

Operating segment	Fiscal 2005 (For the year ended March 31, 2006)
	Amount	Changes from the previous period (%)
Pharmaceutical business	331,135	6.2
Other	15,312	(8.3	)
Total	346,447	5.5

Notes:

1. Inter-segment sales have been eliminated.

2. The above amounts are stated exclusive of consumption tax

3. During the fiscal year, net sales to major customers and their percentage of total net sales were as follows:

(Millions of yen)

Customers	Fiscal 2004 (For the year ended March 31, 2005)		Fiscal 2005 (For the year ended March 31, 2006)
	Amount	Percentage of total	Amount	Percentage of total
Alfresa Corporation	43,039	13.1	45,789	13.2
Mediceo Paltac Holdings Co., Ltd.	40,177	12.2	43,707	12.6
Suzuken Co., Ltd.	35,420	10.8	37,043	10.7

(Notes)

1. Mediceo Paltac Holdings Co., Ltd. was formed through the integration of Mediceo Holdings (formerly Kuraya Sanseido, Inc., which became Mediceo Holdings on October 1, 2004) and Paltac Corporation on October 1, 2005.

2. Alfresa Corporation is the former Fukujin Co., Ltd., which took control of certain operations of Azwell Inc. and Taishodo Co., Ltd. through a reorganization by corporate separation on October 1, 2004. Fukujin Co., Ltd. then changed its name to Alfresa Corporation on October 1, 2004.

3. The figures for the year ended March 31, 2005 are pro forma amounts that have been restated to allow for year-by-year comparisons following the foregoing reorganizations.

FASF              

November 7, 2005

Non-Consolidated Financial Results

For the Fiscal 2005

(Year Ended March 31, 2006)

Daiichi Pharmaceutical Co., Ltd.

Listed company name: DAIICHI SANKYO COMPANY, LIMITED

Stock code number: 4568

Listed Exchanges: Tokyo, Osaka, and Nagoya

Head office: Tokyo, Japan

Contact: Mr. Toshio Takahashi, Corporate Officer, General Manager of Corporate Communications Department

Telephone: +81-3-6225-1126

Meeting of the Board of Directors: May 12, 2006

Interim dividends: Yes

Adoption of the unit share system: Yes (One unit equals 100 shares)

Non-Consolidated Financial Results for the Interim Period of Fiscal 2005

(1) Non-Consolidated Financial Results

(Figures less than ¥1 million, except per share amounts, have been omitted)

	Net sales		Operating income		Ordinary income
	Millions of yen	Percent change	Millions of yen	Percent change	Millions of yen	Percent change
Fiscal 2005	278,193	7.0	71,174	30.7	74,160	31.7
Fiscal 2004	259,912	2.5	54,440	20.0	56,322	21.1

	Net income			Basic net income per share	Diluted net income per share	Return on equity	Ordinary income as a percentage of total assets	Ordinary income as a percentage of net sales
	Millions of yen	Percent change		Yen	Yen	%	%	%
Fiscal 2005	31,199	61.6		115,65	115.62	7.4	13.9	26.7
Fiscal 2004	19,303	(31.0	)	71.53	71.50	4.7	11.3	21.7

Notes

1. Weighted-average number of common shares issued and outstanding during the fiscal year

Fiscal 2005:	269,078,712 shares
Fiscal 2004:	268,481,535 shares

2. Changes in accounting policies: Yes

3. Percentages for net sales, operating income, ordinary income and net income indicate a change from the corresponding results in the previous fiscal years.

(2) Dividends

Beginning in the interim period of fiscal 2005, dividends are paid to the Company’s wholly owing parent company Daiichi Sankyo Company, Limited.

(3) Non-Consolidated Financial Position

(Figures less than ¥1 million, except per share amounts, have been omitted.)

	Total assets	Shareholders’ equity	Shareholders’ equity ratio	Shareholders’ equity per share
	Millions of yen	Millions of yen	%	Yen
Fiscal 2005	556,677	427,796	76.8	1,587.54
Fiscal 2004	508,932	415,020	81.5	1,545.88

Notes 1. Total number of common shares issued at the end of the fiscal year

Fiscal 2005:	269,420,093 shares
Fiscal 2004:	268,404,023 shares

2. Number of common shares in treasury stock at the end of the fiscal year

Fiscal 2005:	—
Fiscal 2004:	18,049,212 shares

6. Non-Consolidated Financial Statements

(1) Non-Consolidated Balance Sheets

(Millions of yen)

	See Note	As of March 31, 2005			As of March 31, 2006			Change
		Amount		%	Amount		%	Amount
ASSETS
I. Current assets:
1. Cash and time deposits			6,455			7,707
2. Trade notes receivable			6,771			4,563
3. Accounts receivable	*4		63,046			68,823
4. Marketable securities			107,514			115,884
5. Parent company stock			—			6,986
6. Mortgage-backed securities			20,000			16,500
7. Merchandises			5,911			18,677
8. Products			13,360			302
9. Semi-finished products			4,816			—
10. Raw materials			6,222			1,989
11. Work in process			1,249			—
12. Prepaid expenses			187			194
13. Deferred tax assets			10,850			12,182
14. Short-term loans to affiliated companies			9,715			431
15. Other receivables			4,277			12,637
16. Other current assets			8,806			6,113
Total current assets			269,185	52.89		272,993	49.04	3,807

(Millions of yen)

	See Note	As of March 31, 2005			As of March 31, 2006			Change
		Amount		%	Amount		%	Amount
II. Non-current assets:
1. Property, plant and equipment:	*1
(1) Buildings		86,374			63,030
Less accumulated depreciation		52,523	33,851		38,792	24,237
(2) Structures		8,624			5,618
Less accumulated depreciation		6,118	2,505		4,237	1,381
(3) Machinery and equipment		65,274			25,043
Less accumulated depreciation		55,150	10,124		21,217	3,826
(4) Vehicles and transportation equipment		496			91
Less accumulated depreciation		449	46		73	18
(5) Furniture, tools and fixtures		24,285			21,152
Less accumulated depreciation		21,195	3,090		18,445	2,706
(6) Land			7,241			6,847
(7) Construction in progress			1,273			177
Total property, plant and equipment, net			58,133	11.42		39,195	7.04	(18,937	)
2. Intangible assets, net
(1) Sales and distribution rights			2,921			3,028
(2) Patents			2,975			2,598
(3) Real estate lease rights			1			1
(4) Trademarks			66			56
(5) Software			1,873			2,441
(6) Other intangible assets			75			67
Total intangible assets, net			7,915	1.56		8,194	1.47	279

(Millions of yen)

	See Note	As of March 31, 2005				As of March 31, 2006				Change
		Amount			%	Amount			%	Amount
3. Investments and other assets:
(1) Investment securities			104,045				121,281
(2) Stock of affiliated companies			52,748				111,663
(3) Advances to affiliated companies			8,685				8,653
(4) Long-term loans to employees			4				2
(5) Long-term loans to affiliated companies			5,651				6,806
(6) Prepaid pension cost			15,385				14,266
(7) Other assets			6,524				7,330
(8) Allowance for doubtful accounts			(676	)			(1,356	)
(9) Allowance reserve for investment losses			(18,671	)			(32,353	)
Total investments and other assets			173,698		34.13		236,293		42.45	62,595
Total non-current assets			239,747		47.11		283,683		50.96	43,936
Total assets			508,932		100.00		556,677		100.00	47,744

(Millions of yen)

	See Note	As of March 31, 2004					As of March 31, 2005			Change
		Amount			%		Amount		%	Amount
LIABILITIES
I. Current liabilities:
1. Accounts payable	*4		16,163					24,704
2. Other payables			10,660					8,694
3. Accrued expenses			19,445					16,647
4. Income tax payable			7,023					20,518
5. Consumption taxes payable			502					881
6. Advance receipts			1,546					1,228
7. Advances received from affiliated companies	*5		22,774					31,462
8. Allowance for sales returns			448					245
9. Allowance for sales rebates			1,421					1,309
10. Other			—					36
Total current liabilities			79,985		15.72			105,727	18.99	25,742
II. Non-current liabilities:
1. Long-term payables			3,467					1,375
2. Deferred tax liabilities			9,035					20,638
3. Accrued retirement and severance benefits			213					220
4. Accrued directors’ retirement and severance costs			1,208					918
Total non-current liabilities			13,926		2.74			23,153	4.16	9,227
Total liabilities			93,912		18.46			128,881	23.15	34,969
SHAREHOLDERS’ EQUITY
I. Common stock	*1		45,246		8.89			45,246	8.13	—
II. Additional paid-in-capital:
1. Capital surplus		48,961					48,961
2. Other capital surplus
(1) Gain on reissuance of treasury stock		169					—
Total additional paid-in-capital			49,130		9.65			48,961	8.79	(169	)
III. Retained earnings:
1. Legally appropriated retained earnings		7,599					7,599
2. Voluntary retained earnings reserve:
(1) Reserve for reduction in cost basis of fixed assets		2,591					2,639
(2) Special reserve		306,762					266,762
3. Unappropriated retained earnings		24,442					20,805
Unappropriated retained earnings			341,395		67.08			297,807	53.50	(43,588	)
IV. Net unrealized gain on investment securities			18,115		3.56			35,780	6.43	17,665
V. Treasury stock at cost	*2		(38,867	)	(7.64	)		—	—	38,867
Total shareholders’ equity			415,020		81.54			427,796	76.85	12,775
Total liabilities and shareholders’ equity			508,932		100.00			556,677	100.00	47,744

(2) Non-Consolidated Statements of Income

(Millions of yen)

	See Note	Fiscal 2004 (For the year ended March 31, 2005)			Fiscal 2005 (For the year ended March 31, 2006)			Change
		Amount		%	Amount		%	Amount
I. Net sales:
1. Sales of products		175,635			1,520
2. Sales of merchandise		62,981			247,963
3. Royalty income		21,296	259,912	100.00	28,709	278,193	100.00	18,280
II. Cost of sales:	*1 *2 *3
1. Product and merchandise inventories, beginning of year		16,014			18,950
2. Merchandises purchased during the year		38,519			78,799
3. Costs of products manufactured during the year		48,130			592
Subtotal		102,663			98,342
4. Less amount transferred to other accounts		1,343			921
5. Less product and merchandise inventories, end of year		19,272			18,979
Total cost of sales		20,615	82,047	31.57	19,901	78,441	28.20	(3,605	)
Gross profit on sales			177,865	68.43		199,751	71.80	21,886
Reversal of provision for sales returns			491	0.19		448	0.17	(43	)
Provision for sales returns			448	0.17		245	0.09	(203	)
Adjusted gross profit			177,908	68.45		199,955	71.88	22,047
III. Selling, general and administrative expenses:	*3
1. Shipping and storage expenses		1,401			1,197
2. Advertising expenses		3,686			2,613
3. Sales promotion expenses		10,229			11,676
4. Royalty expense		791			823
5. Salaries and bonuses		25,395			26,305
6. Employee retirement and severance costs		3,043			2,759
7. Welfare expenses		3,831			3,820
8. Depreciation expense		3,035			2,493
9. Rent expenses		6,298			5,935
10. Travel and transportation expenses		3,991			4,014
11. Research and development expenses	*1	42,698			46,736
12. Other		19,063	123,467	47.50	20,404	128,781	46.30	5,313
Operating income			54,440	20.95		71,174	25.58	16,733

	See Note	Fiscal 2004 (For the year ended March 31, 2005)			Fiscal 2005 (For the year ended March 31, 2006)			Change
		Amount		%	Amount		%	Amount
IV. Non-operating income
1. Interest income		287			376
2. Interest income from investment securities		505			458
3. Dividend income		1,230			1,527
4. Rental income	*4	187			1,448
5. Foreign exchange gains		357			280
6. Other income		359	2,928	1.12	204	4,297	1.55	1,368
V. Non-operating expenses
1. Loss on disposal and write-down of inventories	*2	384			223
2. Expenses on rental assets		—			797
3. Provision of allowance for doubtful accounts		297			96
4. Other expense		363	1,046	0.40	193	1,310	0.47	264
Ordinary income			56,322	21.67		74,160	26.66	17,838
VI. Extraordinary gains:					683
1. Gain on sale of investments in affiliates		—			163
2. Gain from the return of the substitutional portion of the employees’ pension fund to the government		11,747			17
3. Gain on sale of Investment securities		20			—
4. Gain from the transfer to the defined contribution pension plan		3,073			—
5. Gain on sale of the veterinary and livestock feed products business	*5	679	15,520	5.97	—	864	0.31	(14,655	)
VII. Extraordinary losses:
1. Provision for allowance for investment losses		18,671			13,682
2. Loss on business integration	*6	—			1,255
3. Loss on settlement of vitamin- related anti-trust litigations	*7	111			1,125
4. Provision of allowance for doubtful receivables of affiliates		—			582
5. Loss on valuation on investments in affiliates		—			48
6. Restructuring charge	*8	7,042			—
7. Loss on valuation of investment securities		28			—
8. Loss on impairment of property, plant and equipment	*9	—			842
9. Loss on disposal of property, plant and equipment	*10	1,124	26,978	10.38	195	17,732	6.38	(9,245	)
Net income before income taxes			44,865	17.26		57,292	20.59	12,427

	See Note	Fiscal 2004 (For the year ended March 31, 2005)			Fiscal 2005 (For the year ended March 31, 2006)				Change
		Amount		%	Amount			%	Amount
Income tax expense-current		15,400			28,110
Income tax expense (benefit)-deferred		10,161	25,561	9.83	(2,016	)	26,093	9.37	531
Net income			19,303	7.43			31,199	11.22	11,895
Unappropriated retained earnings, brought-forward from the previous fiscal year			9,165				57,584		48,419
Loss on re-issuance of treasury stock			—				69		69
Retirement of treasury stock			—				36,683		36,683
Less interim dividends			4,026				31,225		27,199
Unappropriated retained earnings, end of year			24,442				20,805		(3,636	)

(3) Proposal for Appropriations of Retained Earnings

(Millions of yen)

	Fiscal 2004 (Approved at the general meeting of shareholders held on June 29, 2005)		Fiscal 2005 (Proposed for approval at the general meeting of shareholders to be held on June 29, 2006)		Change
I. Unappropriated retained earnings, end of year		24,442		20,805	(3,636	)
II. Reversal of voluntary retained earnings reserve
1. Reserve for reduction in cost basis of fixed assets	—		7
2. Special reserve	40,000	40,000	30,000	30,007	(9,993	)
Total retained earnings available for appropriation		64,442		50,813	(13,628	)
III. Appropriations
1. Dividends	6,710		—
2. Directors’ bonuses	100		80
(Including corporate auditors’ bonuses of)	(—)		(—)
3. Voluntary retained earnings reserve
(1) Reserve for reduction in cost basis of fixed assets	48		—
(2) Special reserve	—	6,858	—	80	(6,778	)
VI. Unappropriated retained earnings, carried-forward to the next fiscal year		57,584		50,733	(6,850	)

Summary of Significant Accounting Principles for the Preparation of the Non-Consolidated Financial Statements

Fiscal 2004

(For the year ended March 31, 2005)

1. Methods of Valuation of Investment Securities

Held-to-maturity securities:

Stated at amortized costs (straight-line method)

Investments in subsidiaries and affiliated companies:

Accounted for at moving-average costs

Available-for-sale securities:

With quoted market value: Stated at quoted market value at the balance sheet dates (Unrealized holding gains or losses are reported as a component of shareholders’ equity. Realized gains or losses are computed using the moving-average cost method.)

With no readily available market value: Accounted for at moving-average costs

2. Method of Valuation of Inventories

Accounted for at the lower of cost or market, with cost being determined under the average cost method.

3. Depreciation and Amortization of Depreciable Assets

Property, Plant and Equipment:

Depreciation is computed using the declining-balance method.

The ranges of useful lives of principal assets are as follows:

Buildings: 38 to 50 years

Machinery and equipment: 4 to 7 years

Intangible Assets:

Amortization is computed using the straight-line method. Software that is expected to generate future revenues or to contribute to a future cost reduction is amortized over estimated number of years it will be used internally.

4. Translation of Significant Assets and Liabilities Denominated in Foreign Currency to Yen

Foreign currency denominated assets and liabilities are translated into yen amounts at the exchange rates prevailing on the balance sheet dates. The resulting translation gains and losses are recognized currently in earnings. The foreign currency denominated assets that are hedged by specific foreign currency forward contracts are converted into yen based on the relevant contract rates.

Fiscal 2005

(For the year ended March 31, 2006)

1. Methods of Valuation of Investment Securities

Held-to-maturity securities:

Same as for the previous year

Stock of subsidiaries and affiliated companies:

Same as for the previous year

Available-for-sale securities:

Same as for the previous year

2. Method of Valuation of Inventories

Same as for the previous year

3. Depreciation and Amortization of Depreciable Assets

Property, Plant and Equipment:

Depreciation is computed using the declining-balance method, except for the buildings (excluding fixtures) purchased on and after April 1, 1998, which are depreciated using the straight-line method. The ranges of useful lives of principal assets are as follows:

Buildings: 38 to 50 years

Machinery and equipment: 4 to 7 years

(Changes in accounting policies)

Buildings (excluding fixtures) purchased on and after April 1, 1998 had been depreciated using the declining-balance method, however, beginning in the fiscal year, the Company depreciates such buildings using the straight-line method.

This decision to change the method of depreciation was made for the following reasons after a review of its depreciation policies: Since the benefit from capital spending on facilities is considered not being influenced by their level of utilization, but is realized constantly in each period, the new method better reflects the underlying performance of the Company in the statements of income, based on the Company’s capital investments going forward.

In connection with the agreement to integrate its operations with those of Sankyo Company, Limited on May 13, 2005, and the establishment of a joint holding company, DAIICHI SANKYO COMPANY, LIMITED on September 28, 2005, the Company has recognized a need to conform its accounting policies to those of the new corporate group.

As a result of this accounting change, depreciation expense for the fiscal year was decreased by ¥121 million. Accordingly, operating income, ordinary income and income before income taxes all increased by ¥121 million as compared to the amounts that would have been reported had the previous method of accounting been consistently applied.

Intangible Assets:

Same as for the previous year

4. Translation of Significant Assets and Liabilities Denominated in Foreign Currency to Yen

Same as for the previous year

Fiscal 2004

(For the year ended March 31, 2005)

5. Methods of Determining Significant Allowances:

(1) Allowance for Doubtful Accounts

The Company covers the risk of credit losses from potential customer defaults by providing this allowance. The allowance is estimated on the basis of historical default rates for normal accounts and individual account-by-account evaluation for specific over-due accounts.

(2) Allowance for Investment Losses

To cover a decline in value of the investments in affiliated companies, the Company provides for an allowance based on the financial condition and future prospects for recovery of the affiliated companies.

(3) Allowance for Sales Returns

To prepare for losses from potential returns of products after the fiscal year-end, the Company provides for an amount equal to the sum of gross profit and inventory losses on such returned products, based on its estimate of possible sales returns.

(4) Allowance for Sales Rebates

To prepare for future sales rebates, the Company provides for this allowance in an amount calculated by multiplying in an estimated sales rebate percentage for the fiscal year by the amounts of accounts receivable from and inventories held by wholesalers’ at the end of the fiscal year.

(5) Accrued Retirement and Severance Costs

To prepare for future payments of retirement and severance benefits, the Company provides for an accrual based on estimated projected benefit obligations and plan assets at the end of the fiscal year.

Prior service cost is amortized under the straight-line method over a period of 10 years, which is equal to or less than the estimated average remaining years of service of the eligible employees at the time such prior service cost was incurred.

Actuarial gains and losses are amortized based on the straight-line method, beginning in the fiscal year following the year in which the gain or loss was initially measured, over a period of 10 years, which is equal to or less than the average remaining years of service of the eligible employees at the time such actuarial gain or loss occurred.

(Supplemental Information)

Accompanying the enactment of the Defined Benefit Pension Law, the Company received an approval of exemption from the Minister of Health, Labor and Welfare, on January 1, 2005, from the obligation for pension payment liabilities related to past employee service with respect to the substitutional portion of its Employees “Pension Fund.

For the fiscal year, as a result, the Company recognized an extraordinary gain of ¥11,747 million from the return of the substitutional portion of the employees’ pension fund to the government.

In addition, accompanying the enactment of the Defined Contribution Pension Plan Laws, the Company and certain of its domestic consolidated subsidiaries transferred a portion of their lump-sum retirement benefit plans to a defined contribution plan, which was accounted for under the provisions of “Accounting Principles for Transitions among Retirement Benefit Plans” (Corporate Accounting Guidelines No. 1).

This change in retirement benefit arrangement resulted in an extraordinary gain of ¥3,073 million for the fiscal year.

(6) Accrued Directors’ Retirement and Severance Costs

To prepare for payments of directors’ retirement and severance benefits, the Company provides for an amount equal to the total benefits that would have become payable at the end of the fiscal year, in accordance with the internal policies, had all directors resigned voluntarily.

6. Accounting for Significant Lease Transactions

Finance lease transactions are accounted for using the same method applied to operating lease transactions, with the exception for those finance leases in which the legal title of the underlying property is transferred from the lessor to the lessee.

Fiscal 2005

(For the year ended March 31, 2006)

5. Methods of Determining Significant Allowances:

(1) Allowance for Doubtful Accounts

Same as for the previous year

(2) Allowance for Investment Losses

Same as for the previous year

(3) Allowance for Sales Returns

Same as for the previous year

(4) Allowance for Sales Rebates

Same as for the previous year

(5) Accrued Retirement and Severance Costs

To prepare for future payments of retirement and severance benefits, the Company provides for an accrual based on estimated projected benefit obligations and plan assets at the end of the fiscal year.

Prior service cost is amortized under the straight-line method over a period of 10 years, which is equal to or less than the estimated average remaining years of service of the eligible employees at the time such prior service cost was incurred.

Actuarial gains and losses are amortized based on the straight-line method, beginning in the fiscal year following the year in which such gain or loss was initially measured, over a period of 10 years, which is equal to or less than the average remaining years of service of the eligible employees at the time such actuarial gain or loss occurred.

(Supplemental Information)

Accompanying the enactment of the Defined Benefit Pension Law, the Company received an approval of exemption from the Minister of Health, Labour and Welfare on January 1, 2005, from the obligation for pension payment liabilities related to past employee service with respect to the substitutional portion of its Employees’ Pension Fund, and on May 31, 2005, a payment was made to transfer the plan assets related to the substitutional portion to the government based on the minimum liability.

For the fiscal year, as a result of this return of plan assets, the Company recognized an extraordinary gain of ¥163 million.

(6) Accrued Directors’ Retirement and Severance Costs

Same as for the previous year

6. Accounting for Significant Lease Transactions

Same as for the previous year

Fiscal 2004

(For the year ended March 31, 2005)

7. Significant Hedge Accounting Method

(1) Hedge Accounting Method

The Company employs the deferred hedge method of accounting. Foreign exchange forward contracts that meet certain hedge criteria are accounted for as a hedge of underlying assets and liabilities.

(2) Hedging Instruments and Hedged Items

Hedging Instruments: Foreign exchange forward contracts and other Hedged

Items: Assets denominated in foreign currencies.

(3) Hedge Policy

The Company hedges foreign exchange rate fluctuation risks in accordance with its internal policies.

(4) Method of Assessing Hedge Effectiveness

Based on its internal policies, the Company evaluates the effectiveness of hedges by examining the correlations between its hedging instruments and hedged items as a result of fluctuations in foreign currency exchange rates and confirms the effectiveness of its hedge relationship.

8. Other Significant Accounting Policies

Accounting for Consumption Tax

The tax-exclusion (net of tax) method is used to account for the national and local consumption taxes.

Fiscal 2005

(For the year ended March 31, 2006)

7. Significant Hedge Accounting Method

(1) Hedge Accounting Method

Same as for the previous year

(2) Hedging Instruments and Hedged Items

Same as for the previous year

(3) Hedge Policy

Same as for the previous year

(4) Method of Assessing Hedge Effectiveness

Same as for the previous year

8. Other Significant Accounting Policies

Accounting for Consumption Tax

Same as for the previous year

Changes in Significant Principles and Policies for the Preparation of the Non-Consolidated Financial Statements

Fiscal 2005

Fiscal 2004

(For the year ended March 31, 2005)

–

Fiscal 2005

(For the year ended March 31, 2006)

(Accounting for Impairment of Property, Plant and Equipment)

Effective in the current fiscal year, the Company adopted the new accounting standard as required for impairment of property, plant and equipment (“Opinion Concerning Establishment of Accounting Standard for Impairment of Fixed Assets” issued by the Business Accounting Deliberation Council on August 9, 2002) and its implementation guidance (the Financial Accounting Standard Implementation Guidance No. 6 issued by the Accounting Standards Board of Japan on October 31, 2003). As a result of this adoption, income before income taxes was decreased by ¥842 million.

An accumulated impairment loss is recorded as direct reduction in the book value of respective assets in accordance with the revised regulations for financial statement presentation.

Notes to Non-Consolidated Financial Statements

(Notes to Non-Consolidated Balance Sheets)

As of March 31, 2005

*1.    Authorized number of shares	789,000,000 common shares
Number of shares issued	286,453,235 common shares

*2.  Treasury stock

The number of share in treasury stock owned by the Company at the end of the fiscal year was 18,049,212 shares of common stock.

3. Contingent Liabilities

(1) The Company guarantees certain debt and other obligations owed to financial institutions

	(Millions of yen)
Guarantees provided for employees’ (housing loans, etc)	2,540
Aventis Pasteur-Daiichi Vaccines Co., Ltd.	350

(2) Trade export notes receivable discounted 78

*4. Assets and liabilities related to affiliated to companies were as follows:

	(Millions of yen)
Accounts receivable	831
Accounts payable	5,402

*5. The Company holds the excess working capital of its subsidiaries

6. Commitment Line Contracts

To facilitate the efficient raising of working capital, the Company maintains committed lines of credit with four financial institutions. The unused balance of credit lines under these commitments at the fiscal year-end was as follows:

	(Millions of yen)
Total amount of committed credit lines	30,000
Less amount borrowed against credit lines	—
Credit lines unused	30,000

7. Limitations on Dividends

The restricted net assets of the Company, attributable the mark-to-market adjustment to the assets specified in Article 124-3 of the Commercial Code of Japan, was ¥18,115 million.

As of March 31, 2006

*1.    Authorized number of shares 771,966,858 common shares

Under its Articles of Incorporation, the Company is authorized to issue 789,000,000 common shares. However on September 26, 2005, 17,033,142 common shares were retired.

Number of shares issued 269,420,093 common shares

*2.–

3. Contingent Liabilities

(1) The Company guarantees certain debt and other obligations owed to financial institutions

	(Millions of yen)
Guarantees provided for employees’ (housing loans, etc)	2,038
Sanofi- Pasteur-Daiichi Vaccines Co., Ltd.	350

(2) Trade export notes receivable discounted 28

*4. Assets and liabilities related to affiliated companies were as follows:

	(Millions of yen)
Accounts receivable	891
Accounts payable	14,074

*5. Same as for the previous year

6. Commitment Line Contract

To facilitate the efficient raising of working capital, the Company maintains committed lines of credit with four financial institutions. The unused balance of credit lines under these commitments at the fiscal year-end was as follows:

	(Millions of yen)
Total amount of committed credit lines	30,000
Less amount borrowed against credit lines	—
Credit lines unused	30,000

7. Limitations on Dividends

The restricted net assets of the Company, attributable to the mark-to-market adjustment to the assets specified in Article 124-3 of the old Commercial Code of Japan, was ¥35,780 million.

(Notes to Non-Consolidated Statement of Income)

Fiscal 2004

(For the year ended March 31, 2005)

*1. Research and development expenses included under selling, general and administrative expenses and manufacturing overhead costs

(Millions of yen)

43,886

*2.

(1) Losses from application of the lower of cost or market method to inventories were accounted for at their net amount in non-operating expenses (loss on disposal and write-down of inventories) under the periodic reserve method.

	(Millions of yen)
Reversal of valuation losses	414
Provision for evaluation losses	277
Net difference	(137	)

(2) The amount transferred to other accounts included expense items such as sales promotion and valuation losses.

*3. The amount of procurement from affiliated companies included in cost of sale and selling, general and administrative expenses

(Millions of yen)

33,083

*4. Of allowance for doubtful accounts recognized during the year, the amount relating to affiliates was as follows.

(Millions of yen)

297

*5. A gain on sale of the veterinary and livestock feed product business was recognized as a result of sale of the domestic distribution rights and other intangibles related to its veterinary and livestock feed product business to a third-party.

*6.

*7. Loss on settlement of vitamin-related anti-trust litigations

The loss on settlement of vitamin-related anti-trust litigations was related to a settlement of a part of the civil anti-trust class-action damage claims in connection with the Company’s vitamin transactions.

*8. A restructuring charge was recorded for the one-time termination benefits provided to certain employees who were involuntarily transferred from the Company to a newly established wholly- owned subsidiary, Daiichi Pharmatech Co., Ltd.

*9.

Fiscal 2005

(For the year ended March 31, 2006)

*1. Research and development expenses included under selling, general and administrative expenses and manufacturing overhead costs

(Millions of yen)

46,736

*2.

(1) Losses from application of the lower of cost or market method to inventories were accounted for at their net amount in non-operating expenses (loss on disposal and write-down of inventories) under the periodic reserve method. During the fiscal year, the Company allocated to Daiichi Pharmatec Co., Ltd. a portion of the reversal, in the amount of ¥23 million, of the valuation losses that the Company had recognized in the previous fiscal year.

	(Millions of yen)
Reversal of valuation losses	253
Provision for evaluation losses	207
Net difference	(46	)

(2) Same as for the previous year

*3. The amount of procurement from affiliated companies included in cost of sale and selling, general and administrative expenses

(Millions of yen)

120,557

*4. Of rental income recognized during the year, the amount relating to affiliates was as follows.

(Millions of yen)

1,448

*5.

*6. Losses from business integration

The loss represents one-time costs associated with the integration of business operations of the Company and Sankyo Company, Limited. The breakdown of this expense is as follows

	(Millions of yen)
Expenses associated with the integration of the healthcare business	448
Other research and consulting expenses	807

*7. Loss on settlement of vitamin-related anti-trust litigations

The amount represents a penalty resulting from an unsuccessful appeal against the EC ruling that the Company participated in a vitamin cartel.

*8.

*9. The Company classifies the operating assets held and used into asset groups on the basis of operating segments in the management reporting in consideration of similarities of products or business activities, the uniformity with group management, and future maintenance sustainability. On the other hand, idle assets that are not directly used for its business operations are grouped on a property by properly basis. For the fiscal year, the Company recorded an impairment loss on the following asset groups:

(Idle Assets)

Location	Function	Asset type	Status
Shiroish-ku, Sapporo	Former Sapporo Distribution Center site	Land	Idle
Shimotsuke-shi, Tochigi	Former Tochigi Research Center facility	Building, land, etc.	Idle

Because the above asset groups are idle and have uncertain prospects for future utilization, their book values have been written down to a recoverable amount and such reductions in the amount of ¥842 million were recorded as a loss on impairment in the extraordinary losses.

The impairment loss consisted of ¥420 million associated with buildings, ¥17 million associated with other structures, ¥5 million associated with machinery and equipment, ¥4 million associated with tools and instruments, and ¥394 million associated with land.

Fiscal 2004

(For the year ended March 31, 2005)

*10. The breakdown of losses on sales of fixed assets was as follows:

	(Millions of yen)
Buildings	382
Machinery, and equipment	132
Furniture, tools and fixtures	610

Fiscal 2004

(For the year ended March 31, 2005)

A recoverable amount of an asset group is estimated from its net realizable value, which is obtained based on third party appraisals.

*10. The breakdown of losses on sales of fixed assets was as follows:

	(Millions of yen)
Buildings	97
Machinery, and equipment	62
Furniture, tools and fixtures	35

(1) Marketable and Investment Securities

None of the stock of subsidiaries and affiliated companies has a quoted market price.

(2) Deferred Income Taxes

1. Principal Components of Deferred Tax Assets and Liabilities

(Millions of yen)

	Fiscal 2004 (As of March 31, 2005)		Fiscal 2005 (As of March 31, 2006)
Deferred tax assets:
Allowance for investment losses on affiliated companies	7,567		13,112
Depreciation	9,567		9,323
Prepaid consigned research and co-development expenses, etc.	3,468		4,389
Accrued expenses	3,183		2,996
Accrued enterprise tax payable	578		1,762
Payables to the defined contribution pension plan	2,127		1,131
Impairment losses on investment securities	1,005		848
Accrued retirement and severance costs	86		89
Other	3,706		4,778
Subtotal	31,291		38,433
Valuation allowance	(8,510	)	(14,927	)
Total deferred tax assets	22,781		23,505
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities	(12,345	)	(24,386	)
Prepaid pension costs	(6,822	)	(5,782	)
Reserve for reduction in basis of fixed assets for tax purposes	(1,798	)	(1,793	)
Total deferred tax liabilities	(20,967	)	(31,961	)
Net deferred tax assets (liabilities)	1,814		(8,456	)
2. Reconciliation of the difference between the statutory tax rate and the Company’s effective tax rate
	Fiscal 2004 (As of March 31, 2005)		Fiscal 2005 (As of March 31, 2006)
	(percent)		(percent)
Statutory tax rate	40.5		40.5
(Adjustments)
Non-deductible permanent differences including entertainment and other expenses	3.8		3.2
Deductible permanent differences including dividend received deductions and other items	(0.7	)	(1.1	)
Per capita inhabitants’ taxes	0.2		0.2
Tax credit for research and development expenses	(5.5	)	(7.8	)
Increase in valuation allowance	19.0		10.9
Other	(0.3	)	(0.2	)
Effective tax rate	57.0		45.7

Per Share Information

Fiscal 2004 (For the year ended March 31, 2005)			Fiscal 2005 (For the year ended March 31, 2006)
Net assets per share	¥	1,545.88	Net assets per share	¥	1,587.54
Net income per share (basic)	¥	71.53	Net income per share (basic)	¥	115.65
Net income per share (diluted)	¥	71.50	Net income per share (diluted)	¥	115.62

Note: Calculations of basic and diluted net income per share were based on the following numerators and denominators:

(Millions of yen)

	Fiscal Year 2004: (For the year ended March 31, 2005)	Fiscal Year 2005: (For the year ended March 31, 2006)
Net income per share (basic):
Net income	19,303	31,199
Amount not available for common shareholders	100	80
(Including directors’ bonuses paid from net income of)	(100)	(80)
Net income available for dividends on common shares	19,203	31,119
Weighted-average number of common shares outstanding during the year (1,000 shares)	268,481	269,078
Net income per share (diluted):
Additional dilutive common shares (1,000 shares)	111	70
(Including dilutive effect of stock options of) (1,000 shares)	(111)	(70)
Descriptions of potentially dilutive common shares that were not included in the computation of diluted net income per share because of their anti-dilutive effect.	Two share subscription right plans (related to 1,001 thousand shares) and one share purchase option plan (related to 4,090 units of options).	Two share subscription right plans (related to 1,001 thousand shares) All outstanding stock options were cancelled before the end of the fiscal year.

(Subsequent Events)

Fiscal 2004

• Details on the integration of the Company’s operations with Sankyo Co., Ltd. though the formation of a joint holding company are provided on EDINET.

• Details on the termination of stock option agreements are also available on EDINET.

Fiscal 2005

      None applicable

5. Proposed Changes in Membership of the Board of Directors and Corporate Officers

(as of June 28, 2006)

1. Changes in Representative Directors*

(1) Candidates scheduled for election to Representative Director

Representative Director and Senior Managing Director	Tadao Suzuki
	(Currently, Senior Managing Director)
Representative Director and Senior Managing Director	Tsutomu Une
	(Currently, Managing Director)

(2) Directors Scheduled to Retire

    Kenichi Mizutani (Currently, Representative Director and Senior Managing Director)

    Scheduled to be elected advisor of Daiichi Pharmaceutical Co., Ltd.

2. Promotions of Directors

Managing Director	Hiroshi Sugiyama (Currently, Board Director, General Manager of Clinical Development Department 1)
Managing Director	Toru Kuroda (Currently, Board Director, General Manager of Corporate Planning Department)
Managing Director	Akira Nagano (Currently, Board of Director, Post-Marketing Surveillance/Quality Assurance)

3. Changes of Corporate Officers

(Candidates scheduled for election to Corporate Officers)

Corporate Officer	Masayuki Okamura (Currently, General Manager of Osaka Branch)
Corporate Officer	Tatsuro Miyagawa (Currently, General Manager of Corporate Communications Department)
Corporate Officer	Seiichi Yokoyama (Currently, Board Director of Daiichi Asubio Pharma Co., Ltd.)

(Corporate Officer scheduled to retire)

Corporate Officer	Yuichi Kanou (Currently, Board Director and Executive Vice President of Daiichi Sankyo Healthcare Co., Ltd.)
	Scheduled to be re-elected Board Director and Executive Vice President of Daiichi Sankyo Healthcare Co., Ltd.