Business Risks

This section describes major elements of potential risks in the Daito Group’s business operations. The description also includes some elements which our Group does not necessarily regard as business risks but may be important for investors in making investment decisions or understanding our Group’s business activities from the viewpoint of proactive information disclosure for investors. Our group recognizes the possibility of the occurrence of these risks, and it is our policy to avoid these risks and then respond to them in the event they do occur. However, stock investment decisions should be made after careful consideration based on the descriptions of this and other sections in this document. Please note that the forward-looking statements described below are based on the judgment of the Group at the time of writing. Please also note that the following descriptions do not cover all risks associated with investing in our stock.

The Group’s core businesses are (1) manufacture, purchase, and sale of APIs, (2) contract manufacture of formulation products developed by other companies, and (3) manufacture and sale of formulation products developed in-house or jointly with other companies.

With Japan’s aging population, national healthcare expenditures have shown a long-term upward trend. To curb this increase, the government has been actively promoting the use of generic drugs.
In September 2024, the Social Security Council, Medical Insurance Subcommittee formulated a “Roadmap for the Appropriate Use of Generic Drugs, Based on Ensuring Stable Supply”. The roadmap sets forth the following targets: Primary Goal: Ensure a stable supply of pharmaceuticals while achieving a generic drug volume share of at least 80% in all prefectures by the end of fiscal 2029 (continuing from the previous roadmap). Secondary Goal: Achieve a generic drug value share of at least 65% by the end of fiscal 2029. As of the fiscal year from April 2024 to March 2025, the volume share reached 86.5% (according to the Japan Generic Medicines Association).
Our group is working to strengthen the sale of APIs for generic manufacturers and the manufacturing and marketing of formulations developed in-house or through joint development. However, if market growth slows due to policy changes or other factors, our group’s business performance could be adversely affected.
Notably, in the fiscal year ending May 2025, revenue related to generic drugs accounted for approximately 80% of our group’s consolidated net sales. To address these risks, we closely monitor trends in the generic drug market and government policies, and we continuously review our business strategies.
In addition, we are focusing on high-potency formulations within the generic market, which are expected to drive future growth.

The reimbursement prices of ethical drugs under the National Health Insurance System are determined according to the government’s Drug Price Standards. As a general rule, the government used to revise the National Health Insurance Drug Price Standard once every two years based on the results of a survey of actual sales prices in the market. However, the Standard has been revised every year since fiscal 2021. After a drug price revision, our business may be adversely affected by a reduction in sales prices. Moreover, since the government is planning to drastically change the National Health Insurance System due to deteriorating medical insurance finances, our Group’s business performance may be affected depending on the details of the changes. In order to respond to such risks, our group collects information regarding the change in medical insurance system policies and considers our business development accordingly, strives to sell products at appropriate prices commensurate with their value, and reduces costs by improving production efficiency.
In order to respond to such risks, our group collects information on related laws and regulations, takes measures in accordance with laws and regulations, and strives to minimize risks. In order to respond to such risks, our group collects information on related laws and regulations, takes measures in accordance with laws and regulations, and strives to minimize risks.

Our group is subject to regulations under the Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices, its Enforcement Regulations as well as related GMP (Good Manufacturing Practice) standards governing pharmaceutical manufacturing and quality control. We make every effort to comply with these requirements and obtain all necessary approvals and licenses, and at present, there are no grounds for revocation of such authorizations. However, if any of these approvals or licenses were revoked due to legal violations, it could have a significant impact on our business operations.
Furthermore, future regulatory tightening or the introduction of new regulations could impose restrictions on our business activities and cause delays in operations, which may adversely affect our group’s performance.
To mitigate these risks, we actively gather information on relevant laws and regulations and implement compliance measures to ensure adherence and reduce potential risks.

After a drug is released, side effects that were not anticipated before the drug's release may be confirmed, or foreign substances may be found to have been mixed into the product during the manufacturing process. In addition, quality, efficacy, or safety may be judged to be inappropriate during re-examination or re-evaluation based on the Pharmaceutical and Medical Devices Act. In the event that sales are discontinued, product is recalled, or compensation for damages is incurred due to these circumstances regarding pharmaceuticals for which the Group supplies active pharmaceutical ingredients or is contracted for manufacturing, or products developed in-house by the Group, the Group's business results may be affected. may receive.
In addition, our group also sells health foods, and if a situation occurs that harms the health of consumers due to poor quality, etc., sales of the product may decrease, compensation for damages may occur, or the group's brand image may be affected. The Group's business results may be affected by damage to the Group's assets.
In order to respond to such risks, our group not only complies with various laws and regulations related to our business, but also seeks to prevent disputes by measures, including but not limited to, clarification of rights and obligations through the conclusion of appropriate contracts, and survey of others’ rights, with the cooperation of lawyers and other specialists.

Regarding generic drugs manufactured and sold by our group, there are many cases in which other companies' rights remain, such as patent rights related to crystal form, manufacturing method, formulation, etc., or design rights related to dosage form. We conduct thorough investigations on intellectual property rights centering on various patents. However, lawsuits may be filed due to suspected patent conflicts, and if such a situation occurs, the business results of the Group may be affected.
In order to respond to such risks, our group not only complies with various laws and regulations related to our business, but also clarifies rights and obligations through the conclusion of appropriate contracts, with the cooperation of lawyers and other experts. , We strive to prevent disputes by investigating the rights of others.

Because our group handles a wide variety of manufacturing items and manufacturing processes, we believe that the burden of capital investment in response to profits is relatively large compared to our peers that handle only a small number of manufacturing items and manufacturing processes. Masu. In addition, in order for our group to continue expanding its business, it will be necessary to make capital investments to support the handling of new manufacturing items and manufacturing processes.
If such capital investments are delayed, the Group's business results may be affected due to loss of order opportunities, etc. On the other hand, when large-scale capital investments are made, due to the characteristics of manufacturing active pharmaceutical ingredients and drug products, it takes a certain period of time to reach full-scale production, so depreciation costs are incurred in advance. The cost of goods sold ratio may rise significantly. In addition, if we are unable to receive the orders expected when we make large-scale capital investments, our group's business results may be materially affected.
In order to respond to such risks, our group has organized a crisis management committee to prevent crises whenever possible and respond quickly when they do occur, and has formulated a business continuity plan to ensure business continuity even in the event of a large-scale disaster. Through these efforts, we have strived to continually improve our ability to respond in the event of a disaster.
Furthermore, as part of our crisis management measures, we have purchased various types of insurance such as fire insurance, flood insurance, and liability insurance.

If a major natural disaster occurs in Toyama Prefecture, where our group’s production facilities are concentrated, or if there is an outbreak of infectious diseases—including COVID-19—or an accident at one of our manufacturing sites, our business performance could be adversely affected due to damage to production equipment, suspension of operations, and compensation obligations to business partners or local residents near our facilities.
To mitigate these risks, we have established a Crisis Management Committee to proactively prevent crises and ensure swift response in the event of an emergency. We have also formulated a Business Continuity Plan to maintain operations even in the event of a large-scale disaster and are committed to continuously improving our disaster response capabilities.
In addition, we have taken measures such as securing various types of insurance, including fire, flood, and liability coverage.

Our group is dependent on specific business partners, including overseas companies, for purchasing some raw materials and products and outsourcing processing, and due to factors such as disasters, we may be unable to purchase such raw materials or products or outsource processing. If this becomes difficult and we are forced to suspend the production of important products or suspend important purchasing and sales transactions, the Group's business results may be affected.
In order to respond to such risks, our group strives to stably procure raw materials and products by considering and securing purchasing routes by multiple purchasing.

Our group purchases a lot from overseas, and if the prices of raw materials for the manufacture and sale of active pharmaceutical ingredients and pharmaceutical products, or active pharmaceutical ingredients for purchase and sale, fluctuate rapidly due to circumstances such as foreign exchange rates, this could cause an increase in costs. The Group's operating results and financial condition may be affected.
In order to respond to such risks, our group hedges the exchange rate fluctuation risks associated with foreign currency-denominated transactions by implementing measures such as forward exchange contract transactions, as necessary.

Our group finances a portion of the funds required for business expansion through borrowings from financial institutions. Under our medium-term management plan, the “Daito Transformation Plan 2027,” we anticipate a debt-to-equity ratio of up to approximately 0.4 times. If market interest rates rise, our borrowing costs are also expected to increase, which could negatively impact our group’s business performance. In addition, some of our borrowings include financial covenants based on indicators such as net assets and ordinary income. If we were to breach these covenants in the future and lose the benefit of the loan term, it could affect our group’s liquidity and overall financial position.
To mitigate these risks, we strive to maintain a certain level of financial soundness, using indicators such as the equity ratio, and work to preserve healthy and constructive relationships with financial institutions.

In the event that our group's business partners undergo a business consolidation or merger, or if a business partner becomes affiliated with a foreign company expanding into the company, there is a possibility that transaction volume will decrease, and our group This may affect the company's business results, etc.
In order to respond to such risks, our group strives to maintain positive relationships with business partners, collects information regarding corporate restructuring, and when such corporate restructuring do occur, we will respond promptly to minimize the effects, including decreasing transaction volumes.

Some of the chemical substances used in the research and manufacturing process of pharmaceuticals include substances that have a negative impact on human health and the ecosystem. In the unlikely event that an environmental problem arises due to the business activities of our group, our business results may be affected due to compensation for damages or damage to our brand image. In addition, the Group's business results may be affected if a large amount of countermeasure costs are incurred due to revisions to laws and regulations related to environmental conservation.
In order to respond to such risks, our group complies with laws and regulations related to environmental conservation, strictly stipulates storage and handling methods for chemical substances, and conducts monitoring to implement appropriate management, in order to prevent soil contamination, water contamination, and the occurrence of bad odors.

Currently, we believe that our group has an advantage in meeting quality standards in Japan, but in the future, major foreign bulk bulk manufacturers of bulk pharmaceutical ingredients will seek to enter the Japanese market through acquisitions of domestic companies, etc. If the number of such overseas companies increases, the business results of the Group may be affected.
In order to respond to such risks, our group takes measures such as developing, manufacturing, and selling competitive products to meet the ever-changing needs of the pharmaceutical industry and our clients.

The Group strives to maintain and improve the quality of the active pharmaceutical ingredients and formulations it manufactures, sells, purchases and sells, or manufactures under contract through thorough production control, ingenuity based on continuous research and development, and securing qualified human resources. Regarding product quality, we have established a production system that complies not only with Japan's GMP (Medicinal Manufacturing and Quality Control Standards), but also with FDA (U.S. Food and Drug Administration) and EMA (European Medicines Agency) standards. We are prepared. However, if for some reason it becomes difficult to maintain this production system and the quality of manufactured products deteriorates, the Group's business results may suffer due to a decline in competitiveness in acquiring new business or loss of existing ongoing business. Your financial condition may be materially affected.
In order to deal with such risks, our group purchases liability insurance, including product liability insurance, and takes other measures as needed, such as clarifying the scope of liability through contracts with our clients.

The Group is expanding its business overseas, including in China and the United States. As the business environment differs overseas, including the nature of laws and regulations and administrative guidance, the Group's business results may be affected by the occurrence of unexpected costs.
In order to respond to such risks, our group collects information from our employees dispatched to the area concerned, joint venture partners, relevant authorities, and others, in order to respond as effectively and quickly as possible to reduce risks.

The Group may obtain highly confidential information regarding the production plans and new product development of business partners in the manufacturing and sales of active pharmaceutical ingredients and contract manufacturing of pharmaceutical products. If information leakage occurs for any reason, the Group's business results may be affected due to loss of trust in the Group.
In order to respond to such risks, our group has established regulations regarding information management, thoroughly educates employees on the importance of information management, and works to prevent information leakage.

The Group conducts research and development activities related to manufacturing and sales of drug substances and formulations, as well as outsourcing services. In most cases, these R&D activities begin several years in advance of the start of manufacturing and sales or business outsourcing, but investments related to these activities may not necessarily lead to profits as expected. In that case, the operating results of the Group may be affected.
In order to respond to such risks, our group takes these risks into account and examines them thoroughly before selecting products for development, formulating detailed development plans, and managing their progress.

Because our group owns a large amount of fixed assets (buildings, machinery, equipment, land, investment securities, etc.), the value of these assets fluctuates significantly due to changes in the business environment, resulting in impairment losses, retirement, and sales. In the event that losses or changes in valuation differences occur, the financial position and operating results of the Group may be affected.
In order to respond to such risks, our group collects information on related laws and regulations, takes measures in accordance with laws and regulations, and strives to minimize risks.