SAWAI GROUP HOLDINGS Co.,Ltd. Q2 FY2026 earnings call

Overall Financial Performance

• Revenue increased year-over-year driven by price policy gains and growing sales volume, with existing products seeing strong growth from the effects of the selected treatment system.
• Full operating profit declined primarily due to the one-time patent infringement lawsuit settlement cost; core operating profit (excluding the settlement cost) grew on the back of higher revenue.

Production and Supply Status

• As of the reporting period, 112 products are under restricted shipment or shipment suspension. The company is prioritizing increasing production capacity to lift more restrictions.
• Production volume has been below plan, but started recovering in Q2. H1 2025 production was 950 million tablets below the 8.2 billion tablet target, with a 44.8% progress rate against full-year plan. The full-year original production target is no longer achievable, but management aims to hit the original H2 production plan.
  • Mita Plant accounted for half of the H1 production shortfall due to production deviations and extended inspection times; packaging production is now recovering, but the H1 shortfall cannot be fully recovered.
  • Trust Pharmatech recorded a 200 million tablet shortfall due to delayed new product manufacturing and excess inventory from market contraction.
  • The new building at Daini Kyushu Plant is largely on track with its 90 million tablet production plan.
• Target: reduce restricted shipment products from the current 83 items to around 50 items by end-2025; full elimination is not possible due to spillover impacts from other firms' restricted shipments.

Strategic Initiatives

• The company is pursuing one-on-one product integration and manufacturing site consolidation collaborations with other pharmaceutical companies to leverage excess production capacity (planned 5.5 billion additional tablets from Trust Pharmatech investment) and achieve volume-driven cost reductions. The Nichiiko collaboration is the first announced project, with 30 candidate products currently under review.
• Management is positioning to benefit from the ongoing trend of wholesale drug distributors consolidating their supplier bases to improve operational efficiency, as Sawai has restored supply reliability after past supply issues.

No separate product segment financial performance with absolute values and revenue contribution percentages is disclosed in the provided transcript. Overall revenue grew 12.5% year-over-year driven by existing products including 2024 launched products, items covered by the selected treatment system for long-listed drugs, and products that had restricted shipment lifted. Core operating profit grew 9.5% year-over-year, increasing 1.2 billion yen from the prior year period. Full-base operating profit fell 27.4% year-over-year due to the patent infringement lawsuit settlement cost. Intermediate profit attributable to parent company shareholders decreased sharply due to the non-recurring gain from the US business share sale in the prior year comparative period.

• The full-year full-year earnings guidance was revised to reflect H1 actual results, while the original H2 earnings guidance was maintained.
• Management does not see major downside risk for H2: production volume has been gradually increasing from August to October, and sales are expected to rise in line with production. The December 2025 new product launch is expected to outperform original forecasts, with additional upside potential if an authorized generic version is launched.
• The impact of the selected treatment system is already mostly reflected in prior year H2 results, so large additional upside from this policy is limited.
• Wholesale supplier consolidation could positively impact sales, but it is unclear if this trend will fully materialize in H2 or slip to next fiscal year; the company's ability to meet additional demand will depend on production recovery.
• Next fiscal year R&D spending is expected to stay around current fiscal year levels, and SG&A spending is planned to stay flat excluding incremental costs from new hiring.

• Production volume continues to be below plan, creating cost increases from higher unit costs and unabsorbed fixed manufacturing costs. The impact of H1 production shortfalls will gradually fade as existing inventory is depleted, with most of the impact resolved by next fiscal year, though some residual impact will remain in H2.
• Further yen depreciation beyond 155 yen to the USD could increase raw material costs; packaging material costs are already rising, and the company is implementing bulk purchasing discounts to offset this pressure.
• New regulatory changes for generic drug pricing and patent review are still being finalized, creating uncertainty about future impacts on profitability and new product launch timelines.
• The product integration and consolidation process with Nichiiko has long lead times (regulatory approval plus facility and packaging alignment can take 1-2 years per product), so financial benefits will not materialize until around 2027 at the earliest.
• The company faces capacity constraints that limit its ability to immediately meet all incremental demand from wholesale supplier consolidation.

Q: What is the strategic positioning of the Nichiiko product integration and manufacturing consolidation initiative, and what timeline and financial impact can be expected? / A: 30 products have been shortlisted as candidates, not all will move forward, and the companies hold regular meetings to vet each candidate to confirm it creates a win-win outcome. Regulatory approval takes 1.5 months, but packaging matching, facility adjustments, and materials sourcing create long lead times: the first converted products will not launch until around 2027, with 9-12 months required to shift a product between factories plus 3-6 additional months for approval. No aggregate financial projections are available at this stage, as the candidate list may still change. Other firms have approached Sawai with similar requests, but no other projects are far enough along to announce. The collaboration strategy leverages Sawai's planned 5.5 billion tablet production capacity expansion, and focuses on one-on-one deals with complementary firms to avoid antitrust risks, open to both generic and innovative drug makers.

Q: Why are drug wholesalers consolidating their supplier bases now, and why is Sawai expected to be a beneficiary of this trend? / A: The trend is driven by wholesaler profitability pressure: low-margin generic drugs now take up 65% of wholesaler warehouse space, as wholesalers have to hold inventory from multiple manufacturers of the same generic to ensure stable supply. Narrowing the supplier base to 10 or fewer reliable providers cuts warehouse and inventory management costs dramatically. Sawai has worked to restore supply reliability over the past two years after past restricted shipment issues, and is now the leading generic manufacturer in Japan, so it is seeing increased requests from wholesalers to add more of its products. The company will work with wholesalers to prioritize which products it can increase supply for, given current capacity limits. The benefit may start in H2 or slip to next year, but management sees meaningful upside potential.

Q: How has lower-than-planned production impacted H1 gross margin, and when will this impact fade? / A: The largest factor was the underperformance of newly launched rivaroxaban, which only hit 40% of its sales target, pushing up unit costs. An additional indication approval is expected in December, and the sales team is preparing for launch, which will resolve this drag on margin. Production shortfalls have already started to recover, so the negative impact on margin will gradually shrink. The company currently holds ~5 months of finished goods inventory, so the production shortfall impact will fade as inventory is drawn down, with nearly all impact gone by next fiscal year, though some residual impact will remain in H2. Next year will see higher fixed costs from planned new graduate hiring, which needs to be factored into margin projections. The December new product launch has a low planned cost ratio, so it will support gross margin improvement.