HISAMITSU PHARMACEUTICAL CO.,INC. FY2026 FY Earnings Report

Financial Highlights

• Net Sales: ¥163.02B
• Operating Income: ¥17.92B
• Net Income: ¥9.25B
• EPS: ¥268.56

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

---

AI Financial Analysis

Executive Summary

FY2026 results show resilient top-line growth but softer profitability, with earnings supported by financial income and a still-strong balance sheet. Revenue rose 4.5% YoY to 1,630.24, driven by double-digit growth in the US and solid performance in other overseas markets, more than offsetting a decline in Japan. Gross profit increased to 961.21, lifting gross margin by roughly 50 bps to 59.0%. Operating income declined 5.2% YoY to 179.17, compressing the operating margin by about 110 bps to 11.0% as SG&A growth outpaced revenue. Ordinary income was nearly flat at 239.52 (-0.2% YoY), aided by 61.67 in non-operating income (notably interest and dividend income), cushioning weaker operating profit. Net income attributable to owners decreased 11.9% YoY to 191.60, and net margin fell about 219 bps to 11.8%, reflecting lower operating leverage and the absence of last year’s sizable gains on sales of securities in extraordinary income. EBITDA was 248.18 (15.2% margin), with GW amortization minimal under JGAAP, implying limited accounting drag versus IFRS peers. Cash generation was adequate but not stellar: operating CF of 174.78 was 0.91x net income, and reported free cash flow was modest at 6.12, constrained by working capital investment and capex. The balance sheet remains exceptionally strong: current ratio 408%, net cash far exceeds debt (Debt/EBITDA 0.10x), and interest coverage is above 1,100x on an EBITDA basis. Capital returns were aggressive relative to earnings: buybacks of 122.73 plus cash dividends resulted in a total return of roughly 104% of net income. Geographically, the US grew 15.4% and Other regions 8.8% YoY, while Japan declined 2.4%, raising overseas mix to over 50% of sales. Earnings quality is generally sound with low accruals (0.5%), but working capital intensity is high, with elevated DSO/DIO and a long CCC. Going forward, margins hinge on SG&A discipline and mix, while cash conversion must improve to sustainably fund shareholder returns without drawing down cash. With delisting scheduled in May 2026 following the tender offer, near-term market implications center on transaction closure rather than standalone guidance. Overall, fundamentals are solid with robust liquidity, though profitability normalization and cash conversion are key watchpoints.

Profitability Analysis

ROE (6.5%) decomposes into Net Profit Margin (11.8%) × Asset Turnover (0.444) × Financial Leverage (1.25x). The largest YoY change came from the margin leg: operating margin declined about 110 bps to 11.0% while net margin fell around 219 bps, outweighing modest changes in turnover and leverage. The business driver was SG&A growth outpacing revenue (SG&A up to 782.03) and the absence of prior-year extraordinary gains that had lifted bottom-line optics. Non-operating income (interest/dividends/FX, 61.67) partially offset the weaker core margin, indicating portfolio income support amid a large cash/investment balance. Asset turnover remains subdued at 0.444, typical for pharma with sizeable cash and investment securities; leverage stayed conservative at 1.25x. The margin compression appears largely cyclical/mix- and cost-driven rather than structural; sustainability hinges on cost control and product/geography mix normalization. A notable concern is operating expense growth exceeding revenue growth, which, if persistent, could cap operating leverage and keep ROE below the 8% threshold.

Growth Assessment

• Revenue +4.5% YoY to 1,630.24, led by overseas: US +15.4% to 44,871 and Other +8.8% to 37,803, offsetting Japan -2.4% to 80,349.
• Gross profit +5.4% YoY to 961.21 with margin at 59.0% (+~50 bps), aided by mix.
• Operating income -5.2% to 179.17 as SG&A rose to 782.03, diluting operating leverage.
• Ordinary income -0.2% to 239.52, supported by interest/dividend/FX income of 61.67.
• Net income attributable to owners -11.9% to 191.60; prior-year extraordinary gains were not repeated, weighing on YoY comparison.
• EBITDA 248.18 (+~9.8% vs EBIT basis), margin 15.2% consistent with a branded pharma profile.
• Outlook: US growth momentum and overseas mix are positives; margin recovery requires SG&A discipline and maintaining gross margin gains. Cash conversion and working capital efficiency are necessary to translate earnings into sustainable free cash flow.

Financial Health

• Liquidity: Current ratio 408.4% and quick ratio 380.7% indicate ample short-term solvency. Cash and deposits of 1,088.59 vs short-term loans of 9.07 imply no liquidity stress.
• Leverage: Debt-to-equity 0.25x (book), Debt/EBITDA 0.10x, Interest coverage 853x (EBIT basis) / ~1,182x (EBITDA), and Debt/Capital 0.9% — extremely conservative. No warnings (Current Ratio well >1.0; D/E well <2.0).
• Maturity profile: Short-term debt is negligible relative to cash; working capital of 1,554.91 comfortably covers current obligations.
• Off-balance sheet: No specific off-B/S obligations noted.
• Notable movements: Treasury stock reduction (less negative) to -191.27 (+59.8%), Investment securities +34.0% to 806.68, Retained earnings -10.6% to 2,306.53 reflect elevated shareholder returns and AOCI gains.

Notable B/S Changes

Treasury Stock: -475.50 → -191.27 (+59.8%) - Large net reduction in treasury stock balance due to buybacks and disposals; elevates per-share metrics but reduces retained earnings and cash. Investment Securities: 602.22 → 806.68 (+34.0%) - Increased financial assets bolster non-operating income potential and AOCI sensitivity to markets. Retained Earnings: 2,578.81 → 2,306.53 (-10.6%) - Reflects dividends and buybacks exceeding retained profit growth; signals elevated capital returns.

Cash Flow Quality

• OCF/Net Income = 0.91x (near but below 1.0) — acceptable but signals some accrual build.
• Free cash flow: 6.12, thin relative to dividends and buybacks; capex of 79.95 (CapEx/Depreciation 1.16x) indicates investment slightly above upkeep.
• Working capital: Receivables increased (Δ AR -91.78 in OCF) and inventories increased (Δ Inv -34.82), partially offset by higher payables (+28.90). These shifts, consistent with elevated DSO/DIO, constrained OCF.
• Cash conversion: OCF/EBITDA = 0.70x, at the lower boundary of comfort, indicating room to improve collections and inventory turns.
• No evident signs of short-term working capital manipulation; movements align with growth and mix dynamics.

Dividend Sustainability

• DPS: Interim 60 yen; year-end 0 yen. Payout ratio approximately 22.3% (60 / EPS 268.56), conservative on an earnings basis.
• Cash perspective: FCF coverage 0.14x indicates dividends were not covered by internally generated free cash flow this year; coverage relied on cash reserves.
• Total return: Dividends paid (~7.59bn yen) plus buybacks (12.27bn yen) imply a total return ratio near 104% of net income, above the sustainable threshold — feasible near term given net cash but not sustainable if cash conversion remains at ~0.7x.
• Policy outlook: With planned delisting in May 2026, future payout policy will depend on the new ownership structure rather than public-market norms.

Risk Assessment

Business risks include Operating margin compression from SG&A growth outpacing revenue, High working capital intensity (long DSO/DIO) impacting cash conversion, Geographic reliance shift: Japan softness vs US growth, exposing FX and regional pricing dynamics, Pipeline and product mix dependence inherent to pharma (pricing pressure and lifecycle management).

Financial risks include Total shareholder return exceeding 100% of net income, potentially pressuring cash if replicated, Market volatility of investment securities affecting non-operating income and AOCI, Inventory build risk if demand softens, given DIO levels.

Key concerns include CCC at an elevated level reduces FCF predictability, ROE at 6.5% below 8% benchmark, limiting capital efficiency, Earnings reliance on non-operating income cushion amid low leverage/large cash balances.

Investment Implications

Key takeaways include Top-line growth solid (+4.5%) with US strength; Japan contracted, Gross margin improved ~50 bps to 59.0%, but operating margin compressed ~110 bps to 11.0%, ROE at 6.5% remains below the 8–10% comfort zone, Cash conversion at 0.70x of EBITDA and OCF/NI at 0.91x indicate working capital drag, Balance sheet is fortress-like (Debt/EBITDA 0.10x; current ratio 408%), Total shareholder return ~104% of net income; not repeatable without better FCF, EBITDA-based comparison favorable; goodwill amortization immaterial.

Metrics to watch include SG&A growth vs revenue growth, DSO, DIO, and CCC trajectory, Gross margin stability amid geographic/mix shifts, OCF/EBITDA and FCF after capex, Japan vs US revenue growth mix and FX impact.

Regarding relative positioning, Within Japan mid-cap pharma, Hisamitsu exhibits above-average liquidity and conservative leverage, margins in the mid-teens on an EBITDA basis, but sub-8% ROE and weaker cash conversion vs best-in-class peers. Overseas growth is a relative positive; sustained margin discipline and WC efficiency are needed to close the ROE gap.