4577.T

• Overall Financial Results

  • Total second quarter revenue reached 25.14 billion yen, with EBITDA of 3.75 billion yen. This marks the first profit growth in 4 reporting periods, while the company has maintained consecutive revenue growth since its listing.
  • Operating cash flow hit 5.34 billion yen, a new all-time high for the second quarter, driven by cash conversion cycle (CCC) improvement initiatives under the mid-term plan DTP2027. The target of a 220-day unadjusted CCC by the final plan year is already within reach ahead of schedule.
  • Free cash flow was positive at approximately 3 billion yen, which was used for debt repayment and increased shareholder returns including treasury share purchases.
  • Overall operating profit increased by 150 million yen year-over-year, driven by top-line growth and a higher proportion of higher-margin drug product sales. The only material drag on profit was significantly reduced operations at the Shimookui Plant (former Yamato Pharmaceutical Industry, absorbed in June 2025) due to extended regulatory approval processes.
  • The 10th Drug Product Building is progressing on schedule with preparation for production launch, with no changes to prior timelines.

• Mid-term Plan DTP2027 Core Pillar 1: Existing Business Efficiency Improvement

  • New Consortium Initiative to exit small-batch multi-product production structure: 2 new companies have joined, bringing total participation to 8 companies. This is a free-participation, win-win alliance to accelerate product consolidation. Negotiations are ongoing for 23 low-volume products under the simple discontinuation-replacement model, and 33 products are undergoing facility consolidation. Regulatory authorities have shortened approval timelines from 6 months to 1.5 months for qualified consolidation projects, eliminated equivalence data requirements and GMP inspection steps, and offered subsidy support for related capital investment, all of which strongly support the initiative. Daito has newly secured 3 contracted products (7 total specifications) via the consortium, with the first launching this fiscal year and the remaining two next fiscal year.
  • Governance Reform: The existing Portfolio Meeting for development pipeline and S&OP Meeting are now fully functional. A new Life Cycle Management (LCM) Meeting has been launched to handle decision-making for existing product efficiency initiatives (facility consolidation, product consolidation, API switching to lower-cost alternatives), completing the company's data and profitability prioritized governance structure.
  • Continuous API Production Technology Development: Daito, as Japan's leading API business with 106 API master files across the group and integrated API-drug product manufacturing capabilities, is participating in the national K Program (Economic Security Important Technology Development Program) led by AIST, alongside iFactory and Katayama Pharmaceutical. The project targets portable continuous production of small-molecule APIs for on-site emergency production, with Daito playing a key role to establish this technology and contribute to national economic security.

• Mid-term Plan DTP2027 Core Pillar 2: China Business Expansion

  • Since the July 2025 full year earnings call, Daito has secured 3 manufacturing and marketing approvals and 1 contract manufacturing approval in China. Two fully owned products (Pregabalin Capsules and Celecoxib Capsules) have been approved: Pregabalin is already launched, and Celecoxib is in final preparation for first shipment. Two former contract products (Eugratimod Tablets and Metformin Hydrochloride/Vildagliptin Combination Tablets) have been converted to Daito-owned products via mutual agreement with the original partner, as holding manufacturing and marketing approval is more advantageous under current Chinese regulatory requirements. One product (Eperisone Hydrochloride Tablets) remains a contract manufacturing product.

• Mid-term Plan DTP2027 Core Pillar 3: New Mid/Long-Term Growth Business (CDMO)

  • Development of NPC-29, a ubiquinol-containing drug for multiple system atrophy (MSA) in partnership with Nobel Pharma, has successfully completed challenging clinical drug product development after overcoming technical hurdles. Phase III clinical trials are scheduled to start in March 2026, with the first batch of clinical drug already completed.
  • Daito recently entered a partnership agreement with Dainippon Printing (DNP) to explore new business opportunities, leveraging DNP's advanced packaging technology to improve stability of hard-to-transport/administer drugs and develop new high-value-added products.

• Mid-term Plan DTP2027 Core Pillar 4: Address PBR below 1x and Improve Capital Allocation

  • The company is actively pursuing IR activities, which have recently received public recognition from the Tokyo Exchange's TSE Money Department media. Policy-held share reductions are progressing steadily through mutual discussions with counterparties. The company is aggressively pursuing treasury share purchase and cancellation, especially in the current fiscal year, and is preparing to launch a new shareholder benefit program with a dedicated user-friendly website launching soon.

• Mid-term Plan DTP2027 Core Pillar 5: Human Capital Investment

  • Daito conducted its first company-wide employee engagement survey to surface previously hidden operational and cultural issues, followed by off-site management meetings to identify department-specific improvement areas. Improvement targets have been integrated into all departmental key priorities, with ongoing continuous improvement planned to improve employee retention and workplace satisfaction. Off-site meetings also break down silos and improve communication across departments, particularly for the large proportion of factory-based employees. The company is also undergoing a major evaluation system reform, and has expanded staggered work hours for factory employees without impacting production schedules.

• Full-year 2026 May fiscal year earnings guidance is maintained unchanged, despite second quarter profit progress exceeding 50% of the full-year target. This decision reflects ongoing headwinds including rapid yen depreciation after the launch of the new Japanese administration and underperformance of some contracted product items against budget.
• Full-year capital expenditure guidance remains unchanged at 4.5 billion yen.
• No changes to previously disclosed full-year operating profit projection components.

1. API (Active Pharmaceutical Ingredient) Segment: The segment exceeded internal budget for the reporting period, but saw a slight year-over-year revenue decrease. Anti-allergy API products performed well, while hemostatic and anticoagulant APIs saw a revenue decline. APIs sold to large generic drug manufacturers grew revenue alongside increasing market share of these large players, while APIs for small and medium-sized manufacturers missed budget targets amid the customers' declining market position. Revenue contribution percentage for the API segment is not explicitly stated in the transcript. 2. Drug Product Segment: The segment offset the API segment's slight year-over-year decline, driving overall group revenue growth. Both generic and OTC drug products performed steadily, with sales to subsidiary Felsen Pharma and top generic manufacturers Sawai Pharmaceutical and Towa Pharmaceutical all trending positively. Revenue contribution percentage for the Drug Product segment is not explicitly stated in the transcript.

• Extended regulatory approval delays for chemical substances at the absorbed Shimookui Plant led to a 200 million yen negative impact on operating profit in the first half, which was not included in the original full-year budget.
  • Rapid yen depreciation has progressed far beyond the company's full-year average assumption of 150 yen to the USD, with current rates around 158-159 yen, creating cost pressure.
  • Industry-wide generic product consolidation is creating temporary negative impacts for Dito, as some API products lose orders when customer products are consolidated to other manufacturers, while new orders from products consolidated to Dito have a time lag before contributing to revenue.
  • China's evolving regulatory environment and country risk require ongoing monitoring, although no material issues have emerged to date.
  • Continued industry consolidation is increasing market concentration among large generic manufacturers, creating uncertainty for smaller players including Daito, even as new contracting opportunities emerge from large players outsourcing non-core products.

Q: Was the impact of the Shimookui Plant temporary suspension not included in the original full-year earnings guidance, and is the entire 200 million yen impact a negative deviation?

A: That is correct. When we created the full-year budget, we did not expect the regulatory approval process to take this long, so no provision for this impact was included. The entire 200 million yen is recorded as a negative variance in cost of goods sold for the first half year-over-year comparison.

Q: Is the lower-than-expected first half contribution from "sales volume/product mix" (full-year forecast 500 million yen, first half only 80 million yen) related to product consolidation from the New Consortium Initiative, or industry-wide product consolidation? What is the outlook going forward?

A: Product consolidation is a national industry-wide push, regardless of the New Consortium Initiative, and all companies including Daito are conducting individual negotiations. There is always a chance that Daito-supplied APIs will be discontinued when a customer's product is consolidated to another manufacturer, leading to lost orders. While Daito also gains new orders when products are consolidated to Daito customers, these gains have a natural time lag: lost orders have an immediate negative impact, while new orders only translate into higher sales after existing inventory is cleared and new production ramps up. In the current first wave of consolidation, more negative than positive impacts have materialized so far, but the first wave has largely concluded, and visibility on remaining high-risk lost orders is now clear. Several large positive projects are already in the pipeline that will offset prior negative impacts over time.

Q: As market share shifts to large generic manufacturers like Sawai and Towa, what impact will this power balance shift have on Daito's business?

A: It is true that large players gained disproportionate share after the introduction of the selected treatment system, but the industry cannot function with only large manufacturers covering all products. There is still unmet supply need, and large manufacturers increasingly outsource non-core product manufacturing to smaller players like Daito, so it is not the case that only large players can succeed. Daito is strengthening its engagement with large generic manufacturers, and is prioritizing speeding up its development timelines to match large customers' fast pace, particularly for API, where competition with overseas manufacturers is intense. Daito will continue to monitor the situation and adjust its mid-term strategy accordingly.

Q: The large expansion of the Generic Drug Manufacturing Base Enhancement Fund via the 2025 supplementary budget (to 84.4 billion yen from 7 billion yen last year) — does this favor only large players, or can small/medium players like Daito also benefit?

A: The core goal of the policy is to ensure stable generic drug supply, which cannot be achieved by relying only on large companies. Small and medium enterprises support niche products that large manufacturers do not want to produce, and the New Consortium Initiative's structure lets SMEs share and consolidate capacity to meet the policy goals. Daito believes that qualified applications from SMEs will be approved, and will advocate for fair access if the process becomes skewed toward large players.

Q: What is the breakdown of your 4.5 billion yen full-year capital expenditure budget, with first half spending already at 3.126 billion yen? Why is spending concentrated in the first half this year, when it has historically been concentrated in the second half?

A: Most of the first half capital expenditure goes to equipping the newly completed 10th Drug Product Building, which accounts for the majority of the full-year budget. There is no intentional strategy to shift spending to the first half; historical second half concentration was just coincidental, not a deliberate policy.

Q: Current yen depreciation has gone far beyond your full-year assumption of 150 yen, with rates around 158 yen. Do you have mitigation plans for this currency risk?

A: The long-term ideal solution is to build USD revenue streams (primarily via the China business) to reach currency neutrality, but this will take time to materialize. In the near term, Daito will respond via strict smart spending controls to absorb the impact.

Q: What is the impact of shifting from contract manufacturing approval to Daito-owned marketing approval for Chinese products, and will this trend continue?

A: China recently revised its pharmaceutical production permit classification, where an A Permit (for companies that hold marketing approval and own production facilities) is now strongly preferred for stable supply, confers advantages in centralized procurement, and has higher business status in the market. In the case of the two converted products, the original B Permit holding partner agreed to transfer the marketing approval to Daito (while continuing to handle sales), which is a win-win outcome that aligns with the new regulatory environment. Daito expects more contract products may convert to this structure in the future where it benefits both parties.

Q: How do you manage China country risk for your Chinese operations?

A: Daito maintains close communication with its 2 API related companies and 1 drug product company based in Hefei, Anhui, and no material operational issues or geopolitical impacts have been reported to date. Unlike commodities that are not immediately critical to human life, pharmaceutical products have strong global ethical norms that favor uninterrupted production and supply, so Daito expects material disruptions are unlikely, but will continue to closely monitor the situation.