Daito Pharmaceutical Co.,Ltd.

In FY2025 (ending May 2025), sales related to generic pharmaceuticals accounted for approximately 80% of the Group's consolidated net sales, and if growth in the generic drug market stagnates due to policy shifts or other reasons, business performance could be materially affected. The government has formulated a roadmap targeting a volume share of 80% or more and a value share of 65% or more by the end of FY2029, and while this is currently a tailwind, the risk of policy changes is ever-present. In response, the Group is focusing on segments with growth potential, such as highly potent formulation products.

Reimbursement prices for prescription drugs are determined by the government's drug price standards, and annual revisions have been implemented since FY2021, potentially impacting sales prices with each revision. As healthcare insurance finances deteriorate, the government intends to fundamentally review the healthcare insurance system, and depending on its content, this could affect business performance. In response, the Group is promoting the maintenance of appropriate pricing and cost reduction activities through improved production efficiency.

Because the Group handles a wide variety of manufactured products and processes, its capital expenditure burden relative to revenue is relatively larger than that of other companies in the same industry. In cases of large-scale investment, depreciation expenses may be incurred in advance, potentially causing a significant increase in the cost of sales ratio. Additionally, if expected orders are not obtained following large-scale investment, business performance could be materially affected. In response, the Group makes investment decisions only after thorough consideration from the perspectives of business strategy and profitability.

The Group procures part of its funds for business expansion through borrowings from financial institutions, and under the medium-term management plan "Daito Transformation Plan 2027," it envisions a D/E ratio of up to approximately 0.4 times. If market interest rates rise, borrowing rates may also rise, potentially affecting business performance. In addition, if the Group breaches financial covenants attached to some borrowings (such as net assets or ordinary income/loss criteria), it could lose the benefit of time on such borrowings, potentially affecting cash flow. In response, the Group strives to maintain financial soundness using the equity ratio as an indicator and to maintain good relationships with financial institutions.

The Group is subject to regulations such as the Pharmaceuticals and Medical Devices Act and GMP-related laws and regulations, and if licenses or approvals are revoked due to legal violations or other reasons, this could materially affect business activities. Additionally, if operational delays occur due to tightened regulations or the introduction of new regulations, this could affect business performance. In response, the Group continuously gathers information on relevant laws and regulations and ensures compliance.

If unexpected side effects are identified after launch, foreign matter contamination is discovered during the manufacturing process, or a product is deemed inappropriate in a re-examination or re-evaluation under the Pharmaceuticals and Medical Devices Act, this could result in discontinuation of sales, product recalls, or damages claims, affecting business performance. There is also a risk of decreased sales, damages claims, and damage to brand image if health foods of poor quality cause harm to consumers' health. In response, the Group has established quality control and quality assurance systems and maintains product liability insurance.

The Group's production facilities are concentrated in Toyama Prefecture, and if a large-scale natural disaster, infectious disease outbreak, or accident at a manufacturing facility occurs, this could damage manufacturing equipment, halt production activities, or result in compensation payments, affecting business performance. Concentration in a single region inherently poses a vulnerability to business continuity. In response, the Group has organized a crisis management committee, formulated a business continuity plan, and maintains various types of insurance (fire, flood, and liability insurance).

The Group depends on specific suppliers, including overseas companies, for the procurement of some raw materials and products as well as outsourced processing, and if procurement becomes difficult due to disasters or other causes, the Group may be forced to halt production of important products or suspend purchase and sales transactions. In addition, because a large portion of procurement is from overseas, sharp fluctuations in raw material and purchase prices due to exchange rate movements and other factors could become a cost-increasing factor, affecting business performance and financial position. In response, the Group secures multiple procurement routes through multi-sourcing and hedges risk through forward foreign exchange contracts and other means.

In the manufacture and sale of generic drugs, other companies' patent rights and design rights related to crystal forms, manufacturing methods, and formulations often remain in effect, and litigation may be filed alleging patent infringement, which could affect business performance. Although the Group conducts thorough investigations of various intellectual property rights, including substance and use patents, it is difficult to completely eliminate this risk. In response, the Group works to prevent disputes in advance through rights investigations conducted with the cooperation of lawyers and other experts, and through the conclusion of appropriate contracts.

The Group is expanding its overseas business in China, the United States, and elsewhere, but differences in the business environment, including laws and regulations and administrative guidance, may give rise to unexpected costs, potentially affecting business performance. In addition, if major foreign bulk API manufacturers enter the Japanese market, such as through acquisitions of domestic companies, intensified competition could affect business performance. In response, the Group works to reduce risk by gathering information from locally dispatched employees, joint venture partners, and relevant authorities, while promoting the development and sale of competitive products.