SANTEN PHARMACEUTICAL CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥137.88B
• Operating Income: ¥17.91B
• Net Income: ¥13.85B
• EPS: ¥41.76

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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: Soft quarter with meaningful margin compression and double-digit profit declines despite solid balance sheet and acceptable cash conversion. Revenue fell 5.8% YoY to 1,378.79, reflecting a weaker top line environment. Operating income declined 25.0% YoY to 179.15, and net income dropped 25.7% YoY to 139.40, indicating negative operating leverage. Gross profit was 772.00 with a gross margin of 56.0%, but SG&A at 425.16 (30.8% of sales) limited operating leverage. Operating margin contracted to roughly 13.0% from an estimated 16.3% last year, a compression of about 334 bps. Net margin compressed to about 10.1% from an estimated 12.8% last year, or roughly 272 bps of contraction. EBITDA was 271.03 (margin 19.7%), indicating depreciation and amortization of 91.88 remained a notable headwind to EBIT. ROE calculated via DuPont was 5.1% (Net Margin 10.1% × Asset Turnover 0.354 × Leverage 1.42x), flat with the reported figure but below typical cost-of-equity benchmarks. Earnings quality was acceptable: operating cash flow of 135.73 equated to 0.97x of net income, near parity and not suggestive of aggressive accounting. Free cash flow of 40.01 was positive but insufficient to fully cover dividends (64.79) and far short of share repurchases (277.93), leading to financing outflows of 359.64. The balance sheet remains conservative with an equity ratio of 70.6% and D/E of 0.42x, providing flexibility to absorb near-term cash shortfalls. Profit before tax was 176.34 with an effective tax rate of 21.4%, not unusually low or high. Intangible assets of 775.83 are sizable, consistent with a specialty pharma profile, and warrant ongoing impairment and amortization monitoring. Working capital is sizable (current assets 1,951.48) with large receivables (626.91) and inventories (592.82), but the lack of YoY detail limits conclusions on inventory or receivables quality. Forward-looking, sustaining dividends and buybacks at current levels would require an improved earnings and FCF trajectory or continued balance sheet draw. The key focus into 2H is margin stabilization via cost control and product mix while protecting ophthalmology franchise growth. Overall, defensible financial position but weaker profitability momentum necessitates execution on cost discipline and pipeline/pricing resilience.

Profitability Analysis

ROE decomposition (DuPont): ROE 5.1% = Net Profit Margin 10.1% × Asset Turnover 0.354 × Financial Leverage 1.42x. The largest adverse change QoQ/YoY appears to be in margin, inferred from operating income (-25.0%) falling faster than revenue (-5.8%), implying negative operating leverage. Business drivers likely include price pressure (Japan NHI revisions), product mix shifts, and elevated SG&A to support launches and markets, compressing operating margin to ~13.0% from ~16.3% (≈334 bps). Asset turnover at 0.354 suggests modest capital intensity and inventory levels typical for pharma; no clear evidence it changed materially without YoY balance sheet detail. Leverage at 1.42x remains conservative and likely stable, providing little ROE uplift versus peers that use more leverage. Sustainability: margin pressure could persist near term unless cost containment or higher-margin products offset; leverage is unlikely to be the lever to lift ROE given the solid equity base. Watch for SG&A growth outpacing revenue; current SG&A ratio of ~30.8% looks elevated versus the lower teens operating margin, indicating constrained operating leverage.

Growth Assessment

Top line declined 5.8% YoY to 1,378.79, indicating softer demand or pricing headwinds. Profitability fell more sharply: operating income -25.0% and net income -25.7%, evidencing negative operating leverage. Gross margin remained robust at 56.0%, suggesting product costs are not the core issue; rather, higher SG&A intensity and possibly lower pricing/mix weighed on EBIT. EBITDA margin of 19.7% vs operating margin ~13.0% shows D&A is a meaningful but stable headwind; core issue remains opex scalability. Profit quality is decent with OCF/NI at 0.97x, indicating earnings are largely cash backed. Outlook hinges on margin repair via SG&A discipline, mix shift to higher-margin ophthalmology assets, and stabilization in Japan price revisions; absent these, earnings recovery may be muted. No disclosed one-off gains/losses suggest declines are primarily operational, not transitory.

Financial Health

Liquidity appears solid but not precisely quantifiable due to missing current liability detail; current assets are 1,951.48 with cash and equivalents at 635.60. No explicit current ratio is available; therefore, no warning on Current Ratio <1.0 can be made. Solvency is strong: total equity 2,736.07, equity ratio 70.6%, and D/E at 0.42x, well below the 2.0 warning threshold. Maturity mismatch risk cannot be fully assessed without short-term debt data; however, sizable cash and receivables provide a cushion against near-term obligations. Off-balance sheet obligations are not disclosed in the provided data. Intangible assets of 775.83 are material; while not a liquidity risk, they elevate impairment sensitivity if pipeline underperforms.

Cash Flow Quality

OCF/Net Income is 0.97x, slightly below 1.0 but within a healthy range, indicating acceptable earnings quality. Free cash flow was 40.01, positive but insufficient to fund both dividends (64.79) and buybacks (277.93), resulting in significant financing outflows. Capex at 33.88 appears disciplined relative to EBITDA (capex/EBITDA ~12.5%), supporting FCF generation capacity once earnings stabilize. Potential working capital pressure exists given large receivables (626.91) and inventories (592.82), but absent YoY deltas, there is no evidence of manipulation; monitoring days sales outstanding and inventory days is advised. Overall, cash conversion is fair, but shareholder returns are outpacing internally generated cash.

Dividend Sustainability

Payout ratio is elevated at 88.3%, well above the <60% benchmark for comfort, implying limited buffer against earnings volatility. FCF coverage of dividends is weak at 0.32x in the period, indicating reliance on the balance sheet or reduced buybacks to sustain distributions. With buybacks of 277.93 executed, total shareholder returns far exceeded FCF, leading to financing CF of -359.64; this is not sustainably repeatable without stronger OCF or asset sales. Given the strong equity base (equity ratio 70.6%) and low leverage, near-term dividend continuity is likely, but medium-term sustainability requires margin recovery or revisiting payout calibration. Policy outlook: management may prioritize maintaining DPS while flexing buybacks in response to FCF volatility.

Risk Assessment

Business Risks:

• Pricing pressure from Japan NHI drug price revisions impacting margins
• Product mix shifts within ophthalmology portfolio reducing average margins
• Pipeline execution risk and potential delays in approvals/launches
• Regulatory and quality/compliance risks in manufacturing and clinical processes
• FX volatility affecting overseas revenue and costs

Financial Risks:

• Shareholder returns (dividends + buybacks) exceeding FCF, relying on balance sheet
• Potential inventory and receivables buildup risk to cash conversion (data limited)
• Intangible asset impairment risk if product performance lags
• Limited visibility on interest-bearing debt maturities and interest coverage due to unreported detail

Key Concerns:

• Operating and net margin compression (~334 bps and ~272 bps YoY, respectively)
• ROE at 5.1% below typical cost-of-equity and ROIC benchmarks
• High payout ratio (88.3%) with low FCF coverage (0.32x)
• Dependence on SG&A efficiency improvements to restore operating leverage

Investment Implications

Key Takeaways:

• Revenue down 5.8% YoY with disproportionate EBIT and NI declines
• Operating margin compressed to ~13.0% (≈334 bps YoY)
• OCF near NI (0.97x) implies acceptable earnings quality
• FCF positive but insufficient for dividends and buybacks executed
• Balance sheet conservative (equity ratio 70.6%, D/E 0.42x) providing flexibility
• ROE at 5.1% highlights profitability challenge versus capital base

Metrics to Watch:

• Operating margin trajectory and SG&A ratio
• OCF/NI and FCF to dividend coverage
• Receivables and inventories turnover (DSO/DIO) for working capital health
• R&D productivity and pipeline milestones impacting medium-term growth
• Pricing/mix impacts post NHI revisions on gross-to-net

Relative Positioning: Within Japan specialty pharma, Santen's balance sheet strength is above average and cash conversion is acceptable, but growth and margin momentum are below peers this quarter; restoring operating leverage and improving ROIC/ROE are key to re-rate potential.

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
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis