HISAMITSU PHARMACEUTICAL CO.,INC. FY2026 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥114.51B
• Operating Income: ¥12.61B
• Net Income: ¥12.22B
• EPS: ¥165.77

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

AI Financial Analysis

Executive Summary

Verdict: a mixed quarter with modest top-line growth but softer operating profitability and lower net income, cushioned by robust non-operating gains and an extremely strong balance sheet. Revenue grew 2.9% YoY to 1,145.1 (100M JPY), while operating income declined 4.6% to 126.1, indicating some operating margin pressure. Ordinary income rose 1.0% to 166.3, supported by higher interest and dividend income (non-operating income 41.7), offsetting weaker core operations. Net income fell 13.0% YoY to 118.9, driving EPS to 165.77 JPY. Gross margin stood at 60.5%, while operating margin was 11.0% versus roughly 11.9% in the prior period, implying about 87 bps of operating margin compression. Net margin was 10.4% versus approximately 12.3% a year ago, a compression of about 190 bps, reflecting higher tax burden on a lower base and the step-down from ordinary to net. The DuPont 3-factor ROE printed at 4.4% (net margin 10.4% × asset turnover 0.335 × leverage 1.26x), below industry and CFA benchmarks, mainly due to low asset turnover and conservative leverage. Earnings quality cannot be verified due to unreported cash flow data; however, the widening gap between operating and ordinary income suggests increased reliance on financial income. Liquidity and solvency are outstanding (current ratio 377%, quick ratio 350%, D/E 0.26x, interest coverage 840x), and cash/short-term debt coverage is 109x, indicating negligible refinancing risk. The balance sheet shows large investment securities (20.2% of assets), implying exposure to market value volatility but also dividend/interest inflows. Treasury stock decreased in absolute magnitude (less negative) and retained earnings fell YoY, consistent with treasury share cancellation accounting and dividend outflows. Dividend policy remains shareholder friendly; the calculated payout ratio is 56.9% on interim + year-end DPS of 90 yen, which is within a sustainable range given the cash-rich position. Forward-looking, core profitability needs stabilization (cost controls and mix uplift) while higher interest income will likely continue to support ordinary income if rates and balances hold. With ROE at 4.4%, capital efficiency is a key management focus area; further portfolio pruning, cross-holding reductions, or continued treasury cancellations could incrementally lift ROE. Overall, defensiveness is high, but fundamental upside hinges on improving operating leverage and sustaining product momentum.

Profitability Analysis

ROE decomposition: 4.4% = Net Margin (10.4%) × Asset Turnover (0.335) × Financial Leverage (1.26x). The largest drag is asset turnover (0.335), reflecting a sizable cash and securities base relative to revenue generation, with only modest operating margin (11.0%) and very low leverage. Versus last year, operating income declined despite revenue growth, indicating that margin deterioration (c. -87 bps operating) was the most notable moving part within the DuPont framework. Business drivers likely include cost inflation (e.g., SG&A or input costs), product mix, and promotional spend; ordinary income resilience reflects higher interest and dividend income from large financial assets rather than core operations. Sustainability: interest/dividend income support can persist while cash balances and rates remain elevated, but operating margin headwinds require structural actions (pricing/mix, cost discipline) to sustain. Watch for concerning trends such as SG&A growth exceeding revenue growth; SG&A breakdown is unreported, but the negative operating leverage suggests overhead growth outpaced sales.

Growth Assessment

Revenue growth of +2.9% is steady, consistent with a defensive pharma/OTC profile. Operating income declined -4.6% as cost pressure outweighed sales gains, indicating negative operating leverage. Ordinary income +1.0% YoY demonstrates beneficial tailwinds from non-operating items (interest income 17.4; dividends 8.1). Net income -13.0% YoY shows that below-the-line support could not fully offset weaker core profitability and a normalized tax burden (effective tax rate 25.4%). Given limited disclosure on product/geographic mix and R&D, the sustainability of revenue growth hinges on brand strength (e.g., topical analgesics) and stable domestic demand, with incremental support from overseas. Near term, performance likely tracks cost control and pricing/mix initiatives, while financial income remains a modest tailwind.

Financial Health

Liquidity is exceptionally strong: current ratio 377% and quick ratio 350%, with cash & deposits of 1,014.2 vs current liabilities of 518.5. Solvency is conservative: D/E 0.26x, debt/capital 0.9%, interest coverage 840x; no red flags (D/E well below 2.0). Maturity mismatch risk is negligible: short-term loans are 9.3 vs cash 1,014.2 (cash/STD 109x). Balance sheet composition features substantial investment securities (691.2; 20.2% of assets) and cash (29.6% of assets), providing flexibility but exposing equity to market valuation swings. Off-balance obligations not disclosed. Equity decreased YoY despite treasury stock becoming less negative, consistent with treasury stock cancellation offset by lower retained earnings (dividends and cancellation accounting).

Notable B/S Changes

Treasury Stock: -475.50 → -204.68 (+57.0%) - Likely share cancellation reduced contra-equity; enhances per-share metrics and marginally lifts ROE. Retained Earnings: 2,578.81 → 2,233.84 (-13.4%) - Reflects dividend outflow and accounting impact from treasury share cancellation; reduces equity buffer but remains ample. Investment Securities (level remains large): 691.15 (20.2% of assets) - High exposure to market valuation and dividend income variability; also a potential source of liquidity or capital reallocation.

Cash Flow Quality

Operating, investing, and financing cash flows are unreported, so OCF/NI and FCF cannot be assessed. Therefore, we cannot validate earnings convertibility (benchmark OCF/NI > 1.0). Working capital appears conservative given high cash and moderate receivables/inventory, but without flow data we cannot assess period-specific WC movements or potential pull-ins/deferrals. Given the sizable net cash, dividend and maintenance capex are likely covered; however, FCF sustainability should be confirmed upon full-year cash flow disclosure.

Dividend Sustainability

Interim (Q2) and year-end DPS total 90 JPY, implying a calculated payout ratio of 56.9%, within the <60% benchmark for sustainability. Absolute dividend outlay (~6.8bn JPY) appears comfortably covered by net income (~11.9bn JPY for the period-to-date) and ample cash on hand. FCF coverage is unverified due to missing OCF/CapEx data, but the cash-rich balance sheet and minimal debt provide a substantial buffer. The reduction in treasury stock (cancellation) indicates an additional shareholder return lever that can enhance per-share metrics without cash outflow at cancellation. Dividend outlook is stable to mildly positive, contingent on maintaining earnings and cash generation.

Risk Assessment

Business risks include Core margin pressure: operating margin fell to 11.0% despite revenue growth, indicating cost/mix headwinds., Product concentration and brand reliance in topical analgesics/OTC segments, with potential competitive pricing pressure., Regulatory and quality compliance risks in pharma manufacturing and approvals (PMDA/FDA)., Pipeline visibility risk due to unreported R&D and development milestones; potential for slower innovation., Geographic and channel dynamics (domestic reimbursement, OTC retail trends) affecting pricing and volumes..

Financial risks include Market value and dividend income volatility from large investment securities holdings (20.2% of assets)., Interest income support is rate-sensitive; a lower rate environment could reduce ordinary income., Equity valuation sensitivity to cross-shareholding markdowns in market downturns., Data limitations on cash flows hinder assessment of earnings convertibility and FCF stability..

Key concerns include Low capital efficiency (ROE 4.4%) versus benchmarks, driven by low asset turnover and conservative leverage., Negative operating leverage (opex growth likely outpacing revenue), compressing operating margin., Net income decline (-13% YoY) despite higher ordinary income, highlighting core profitability challenges..

Investment Implications

Key takeaways include Steady topline (+2.9% YoY) but softer core profitability; operating margin compressed ~87 bps., Ordinary income resilience supported by higher interest/dividend income on large financial asset base., ROE at 4.4% remains below benchmark; capital efficiency is the core medium-term challenge., Balance sheet strength (net cash, minimal debt) provides downside protection and return optionality., Dividend payout (~57%) appears sustainable; treasury stock cancellation supports per-share metrics..

Metrics to watch include Operating margin trajectory and SG&A growth versus revenue., OCF/Net income and FCF post year-end to validate earnings quality., Contribution of non-operating income (interest/dividends) and sensitivity to rates/markets., Inventory and receivables turns for signs of demand normalization or channel build., ROE/ROIC progression and any actions on cross-shareholding reductions or further cancellations..

Regarding relative positioning, Defensive, cash-rich profile with lower risk but modest growth and capital efficiency versus peers; upside depends on margin recovery and capital allocation to improve ROE.