Daito Pharmaceutical Co.,Ltd. Q4 FY2025 earnings call

2025 Full Year Core Financial Performance

• Total revenue reached 50.64 billion yen, up 3.74 billion yen (+8% YoY), with both API and drug product segments performing solidly.
• Gross profit fell to 8.63 billion yen, down 1.2 billion yen (-12.2% YoY), due to rising raw material costs from yen depreciation, higher depreciation, inventory valuation impacts, and increased quality compliance costs for nitrosamine handling.
• Operating profit fell 1.27 billion yen (-32.7% YoY), and EPS dropped to 62.74 yen (-40.2% YoY), partly due to a retroactive corporate tax levy related to transfer pricing at Daito's Chinese subsidiary.
• Inventory reduced 2.47 billion yen (-11.9% YoY), marking the 12th consecutive year of inventory growth ending, driven by company-wide inventory optimization efforts. Operating cash flow grew 13.8% YoY to 5.89 billion yen.

DTP2027 Medium-Term Plan Progress

Daito self-assessed progress across 5 core pillars:

• Existing business efficiency: Rated "Pass". The 100% absorption merger of Yamato Yakuhin Kogyo was completed successfully, and a mature portfolio management system for go/no-go development decisions is now in place.
• China business expansion: Rated "Needs Improvement". Daito's first in-house generic drug Pregabalin Capsules launched with steady orders, but overall development timelines have fallen behind schedule.
• New business entry: Rated "Pass". The orphan drug CDMO alliance with Nobel Pharma has signed its first formal contract, with a second project actively progressing, and policy advocacy for the "Japanese version 505(b)(2)" pathway is ongoing.
• PBR <1 improvement and capital allocation: Rated "Needs Improvement". Multiple measures have been implemented, but PBR remains below 1x.
• Human capital investment: Rated "Pass". A 7% base wage increase was implemented, and organizational development initiatives (engagement surveys, off-site management retreats, expanded e-learning) are underway.

Key Strategic Initiatives

• New Consortium Concept: A joint generic drug product consolidation initiative co-led with Meiji Seika Pharma, currently with 6 participating companies (including Tatsumi Chemical and Nihon Chemiphar). The initiative focuses on mutually beneficial product consolidation (not factory consolidation) to improve production efficiency, with a mid-term progress report planned for autumn 2025.
• Demand forecasting and inventory improvement: Daito is pushing for industry-wide adoption of S&OP process and PSI inventory management to reduce excess inventory and waste from inaccurate forecasting from contract clients, framing this as critical for stable supply across the Japanese generic drug industry.
• China market expansion: Daito has completed production facility upgrades at its Chinese plant, with 2 additional generic products awaiting approval and 11 contract product projects in the pipeline, leveraging local Chinese APIs for domestic production.
• Policy advocacy for Japanese 505(b)(2): Daito is advocating for the introduction of a US-style 505(b)(2) regulatory pathway in Japan, which would create a new category for value-added products based on already approved ingredients, to foster innovation in drug formulation and support startup growth.

For the 2025 May fiscal year:

• API (Active Pharmaceutical Ingredient) segment: Revenue grew 1.21 billion yen (+5.7% YoY), driven by strong sales of newly listed APIs and growing inbound demand for consumer products. This segment accounted for approximately 45.2% of total company revenue.
• Drug product segment: While some contract manufacturing business saw YoY revenue decline due to the impact of selected therapy for long-listed drugs, growth from in-house developed generic drugs and product sales offset this decline. Revenue grew 2.5 billion yen (+10.1% YoY). This segment accounted for approximately 54.8% of total company revenue.

• For the 2026 May fiscal year, Daito revised guidance downward to 52.5 billion yen in total revenue, 7.75 billion yen in EBITDA, with an EBITDA margin target of 14.8%, and a core operating profit target of 3.0 billion yen.
• The 2027 May fiscal year KGI targets for ROIC (6.5%) and ROE (8.0%) remain unchanged, but are now presented as a range of 5.5-6.5% for ROIC and 7.0-8.0% for ROE to reflect current delays and market impacts.
• Downward revisions reflect unmet expectations from the selected therapy policy for long-listed drugs, delays in China market launch plans, and delayed start of contracted production at the 10th Drug Product Building.
• Daito maintains a target of 2%+ for DOE, with a commitment to progressive dividends, targeting 2.3%+ DOE for the 2026 May fiscal year. The company also introduced a new shareholder discount program for its over-the-counter health food products.
• Free cash flow is expected to return to positive territory as capital investment has already passed its peak.

• Persistent raw material cost inflation driven by yen depreciation continues to pressure gross margins, even as price increases are implemented for customers.
• Regulatory changes including consecutive annual drug price revisions, selected therapy for long-listed drugs, and upcoming industry scoring for stable supply create pressure for rapid product consolidation and operational change across the industry.
• Current small-batch, multi-product manufacturing structure creates inherent operational inefficiency, quality risk, and low profitability for the Japanese generic drug industry, which requires painful restructuring to address.
• Inaccurate demand forecasting from contract manufacturing clients creates production scheduling disruptions, excess inventory, and unnecessary waste for Daito's manufacturing operations.
• PBR remains below 1x despite targeted corrective measures, creating continued pressure on capital allocation and shareholder returns.

Q: With all recent and upcoming target numbers revised downward, what were Daito's key failures in improving profitability, and how will you address these to hit next year's target?

A: Daito acknowledges that profitability has missed prior targets due to both external factors (raw material cost inflation, unexpected regulatory impacts on long-listed drug revenue) and internal factors (inaccurate demand forecasting leading to excess inventory write-downs). The company is addressing this through company-wide smart spending cuts to non-essential expenses, which will fund planned wage increases, continued inventory optimization, and gradual efficiency gains from the New Consortium product consolidation initiative. Management remains confident that profitability will improve step-by-step starting from the 2026 fiscal year.

Q: What is the biggest barrier to improving utilization of the 10th Drug Product Building via the New Consortium Concept, and how easy is it to get other companies to agree to consolidate production at Daito's facilities?

A: The biggest challenge is that most product portfolios have overlapping third-party contracts and sales arrangements that cannot be unilaterally changed by any single participant, so negotiations are slower than initially expected. Daito is currently working through a puzzle-like process: exiting low-margin products with less than 3% market share that other firms can take over, while taking over consolidated production for other products that fit Daito's existing capacity. While near-term revenue gains are limited, this process will improve overall operational efficiency, and as more participants join, Daito expects to see meaningful utilization gains starting from the 2027 fiscal year.

Q: What is Daito's competitive position in the New Consortium compared to other participants?

A: Daito benefits from recently expanded capacity at the 10th Drug Product Building and its integrated API and drug product manufacturing footprint, which makes it well-positioned to take on consolidated production. Exiting low-margin small-volume products will free up capacity for higher-volume more efficient production, and the net impact of exiting and taking on products will improve Daito's overall margin profile over time. There is no near-term pressure to hit full utilization, so the company can advance consolidation at a deliberate pace that maximizes long-term efficiency gains.