KAKEN PHARMACEUTICAL CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥39.36B
• Operating Income: ¥203M
• Net Income: ¥992M
• EPS: ¥26.16

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Weak quarter with severe profit compression and negative operating cash flow despite a very strong balance sheet. Revenue was 393.56 (−23.4% YoY), with gross profit of 215.80 and SG&A of 213.77, yielding operating income of just 2.03 (−99.0% YoY). Ordinary income was 6.07 (−96.9% YoY), supported by non-operating income of 4.71, mainly dividends (3.20) and interest (1.17). Net income came in at 9.92 (−93.0% YoY), with an effective tax rate of 28.9%. Gross margin was 54.8%, but operating margin collapsed to roughly 0.5%, implying nearly all gross profit was absorbed by SG&A. Based on YoY deltas, prior-year operating income is implied around ~203, pointing to a margin compression of approximately 3,900 bps (from ~39.5% to ~0.5%), likely driven by lower sales and fixed-cost deleverage and/or one-time items last year. Ordinary margin also compressed sharply to ~1.5% from ~38.1% (−~3,660 bps). Cash generation deteriorated: operating cash flow (OCF) was −80.64 versus net income of 9.92, an OCF/NI ratio of −8.13x (a clear earnings quality red flag). Liquidity remains ample, with cash and deposits of 451.16, current assets of 987.57, and current liabilities of 224.31 (current ratio 440%). Leverage is conservative (D/E 0.20x) and interest coverage 9.67x, indicating low solvency risk. Intangibles are sizable (intangible assets 187.80, including goodwill 134.20), which raises medium-term impairment sensitivity if profitability remains depressed. Non-operating income accounted for a large share of pre-tax profit this quarter (non-operating income ratio 47.5%), highlighting reliance on financial income while core operations struggled. Shareholder returns continued via buybacks of 23.42, while financing CF was −52.25, likely including dividends, funded from cash amid negative FCF. Forward-looking, restoring operating leverage (rebalancing SG&A to lower sales) and improving cash conversion are critical, while the strong balance sheet provides time but not a solution if revenue pressure persists. Key monitoring points include revenue trajectory post price revisions, SG&A discipline, working capital normalization, and any impairment signals on goodwill/intangibles. Overall, near-term outlook hinges on stabilizing core product sales and reining in fixed costs; otherwise, ROIC (0.1%) will remain below cost of capital.

Profitability Analysis

ROE decomposition (DuPont): ROE ≈ Net Profit Margin × Asset Turnover × Financial Leverage = 2.5% × 0.222 × 1.20 ≈ 0.7% (matches reported 0.7%). The biggest swing factor is the net profit margin, as operating income fell 99% YoY while leverage stayed low and asset turnover is modest. Business driver: revenue dropped 23.4% YoY, and SG&A (213.77) nearly matched gross profit (215.80), erasing operating margin and forcing reliance on non-operating income. This suggests sharp fixed-cost deleverage and/or the absence of prior-year one-time gains. Sustainability: the current margin trough may be partly cyclical or one-off, but without revenue recovery or SG&A resets, margins will remain structurally compressed. Concerning trends include implied SG&A growth versus sharply falling revenue (i.e., SG&A not flexing down with sales), non-operating income bolstering ordinary profit, and ROIC at 0.1% far below typical 7–8% targets for value creation.

Growth Assessment

Top-line contracted 23.4% YoY to 393.56, indicating a significant slowdown in core operations. With gross margin at 54.8% but operating margin at ~0.5%, the negative operating leverage is acute. The mix of non-operating income (dividends and interest totaling 4.37) provided a buffer to ordinary income but does not address core growth. EBITDA was 14.76 (margin 3.8%), underscoring depressed operating profitability. Given R&D expense was unreported, it is unclear if pipeline or development costs rose, but SG&A absorption is clearly the main headwind. Near-term growth sustainability depends on stabilizing unit volumes and pricing, improving SG&A efficiency, and normalizing working capital to support sales. Outlook: absent a rebound in revenue or cost base reconfiguration, profit growth is likely constrained; any recovery would need to show up first in operating margin expansion and better cash conversion.

Financial Health

Liquidity is very strong: current ratio 440.3% and quick ratio 405.4%. No warning on current ratio (<1.0) or D/E (>2.0); D/E is 0.20x. Cash and deposits of 451.16 exceed short-term loans of 38.50, indicating low refinancing pressure. Working capital is ample at 763.26, and current assets (987.57) far exceed current liabilities (224.31), implying minimal maturity mismatch risk. Total liabilities are modest at 294.76 versus equity of 1,478.02 (equity ratio ~83%). Interest coverage is 9.67x, comfortable despite low EBIT, thanks to low interest expense (0.21). Off-balance sheet obligations are not disclosed in the data provided; none identified.

Cash Flow Quality

Earnings quality is weak: OCF/Net Income is −8.13x (<0.8 threshold), signaling significant divergence between accrual profit and cash generation. With OCF at −80.64 and capex at 8.63, indicative FCF is approximately −89.27 (estimate; investing CF details are unreported). The negative OCF likely reflects working capital outflows and the sharp profit decline; D&A of 12.73 was insufficient to offset these effects. Potential signs of working capital strain include elevated receivables (217.62) relative to the reduced sales base and possible inventory stickiness (78.26), though lack of prior-period balances limits confirmation. Non-operating income (dividends/interest) aided ordinary income but does not resolve core cash conversion issues if operating cash drivers are weak. Sustaining shareholder returns from cash on hand is feasible near term, but recurring negative FCF would erode the cash cushion over time.

Dividend Sustainability

Reported DPS and total dividends are unreported; financing CF was −52.25 and share repurchases were −23.42, implying cash returns occurred despite negative OCF. The calculated payout ratio of 845.4% suggests returns far exceed current period earnings, but the underlying DPS input is unavailable; treat this metric with caution. On an estimated basis, FCF was negative (~−89.3), so cash returns are currently funded by the balance sheet rather than internally generated cash. With cash and deposits of 451.16 and low leverage, near-term capacity to maintain dividends/buybacks exists, but sustainability depends on restoring positive OCF. Policy outlook is uncertain without disclosed DPS guidance; prudent expectation is for returns to align with FCF normalization if weakness persists.

Risk Assessment

Business Risks:

• Sharp operating margin compression (~−3,900 bps YoY) due to fixed-cost deleverage as revenue declined 23.4%.
• Reliance on non-operating income (dividends/interest: 4.37) to support ordinary profit while core operations are weak.
• Potential pricing pressure and product mix headwinds typical in pharmaceuticals (e.g., NHI price revisions, lifecycle erosion).
• Execution risk in cost containment as SG&A (213.77) nearly equals gross profit (215.80).
• Intangible assets (187.80) and goodwill (134.20) heighten impairment sensitivity if profitability remains depressed.

Financial Risks:

• Negative operating cash flow (−80.64) and estimated negative FCF (~−89.3) despite positive net income (9.92).
• ROIC of 0.1% indicates capital inefficiency and potential value-destruction risk if sustained.
• Ordinary income dependence on financial income raises volatility if market yields/dividends fall.
• Potential working capital stress (receivables/inventory vs lower sales), though period-to-period movements are undisclosed.

Key Concerns:

• Earnings quality flag: OCF/NI −8.13x.
• Durability of shareholder returns given cash-funded payouts amid negative FCF.
• Visibility on R&D and SG&A trajectory is limited due to unreported sub-breakdowns.
• Risk of goodwill/intangible impairment tests if low profitability persists.

Investment Implications

Key Takeaways:

• Core profitability collapsed: operating income 2.03 (−99.0% YoY) on revenue 393.56 (−23.4% YoY).
• Operating margin fell to ~0.5%, with SG&A absorbing nearly all gross profit.
• Ordinary income (6.07) heavily supported by non-operating income (4.71).
• Earnings quality is weak: OCF −80.64 vs NI 9.92 (OCF/NI −8.13x).
• Balance sheet strength (cash 451.16, D/E 0.20x) provides near-term resilience.
• ROE is only 0.7% and ROIC 0.1%, well below value-creation thresholds.
• Shareholder returns (buybacks 23.42; financing CF −52.25) are currently funded by cash, not FCF.

Metrics to Watch:

• Revenue rebound and order trends; price revision impacts.
• Operating margin and SG&A-to-sales ratio; any cost restructuring.
• OCF and working capital turns (AR and inventory) relative to sales.
• Non-operating income contribution and sustainability of dividends/interest income.
• Impairment indicators for goodwill/intangibles.
• Capex discipline and scale of buybacks/dividends versus cash balance.

Relative Positioning: Versus domestic mid-cap pharma peers, liquidity and leverage are stronger than average (very high cash, low debt), but current-period profitability and cash conversion are materially weaker; near-term equity story hinges on restoring operating leverage and cash flow while preserving balance sheet strength.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
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