SANTEN PHARMACEUTICAL (4536) FY2026 Q3 Earnings Report

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Executive Summary

Due to the decline in fixed-cost absorption associated with lower revenue, Operating Income and Net Income contracted at a faster pace than the decline in Revenue. Revenue was ¥210.76B (-5.4% YoY), Operating Income was ¥28.22B (-19.8%), and Net Income attributable to owners of the parent was ¥21.82B (-20.6%). Although the cost of sales declined slightly, selling, general and administrative expenses were maintained at approximately the previous-year level, causing the decline in Revenue to directly affect profit margins. Research and development expenses increased to ¥18.37B (+9.5% YoY), placing pressure on short-term earnings while demonstrating the continuation of medium- to long-term development investment.

Factors Affecting Business Performance

【Revenue】Revenue was ¥210.76B, down 5.4% YoY. The contraction of the top line has continued, and no recovery momentum has been confirmed as of the nine-month cumulative period.

【Profit and Loss】Gross profit was ¥117.95B, and the gross margin was 56.0%, slightly down from 56.2% in the previous year. Selling, general and administrative expenses were ¥64.78B, essentially flat YoY (+0.1%). Accordingly, as Revenue declined, the SG&A ratio rose to 30.7% from 29.0% in the previous year, and Operating Income was ¥28.22B (-19.8% YoY). The Operating Income margin was 13.4%, down 2.4pt from 15.8% in the previous year. Profit Before Tax was ¥28.08B, Net Income was ¥22.00B (-19.6%), and Net Income attributable to owners of the parent was ¥21.82B (-20.6%). The divergence from Operating Income was limited, indicating a small impact from temporary factors. In addition to the decline in Revenue, deterioration in fixed-cost absorption amplified the downward pressure on profit; in conclusion, the Company experienced both lower revenue and lower earnings.

Key Financial Indicators

【Profitability】The Operating Income margin was 13.4%, down 2.4pt from 15.8% in the same period of the previous year, while the Net Income margin also declined to 10.4% from 12.3% in the previous year. The gross margin was 56.0%, nearly unchanged from the previous year, and the primary cause of margin deterioration was the increase in the SG&A ratio to 30.7% from 29.0%. The R&D expense ratio rose to 8.7% from 7.5%, restraining short-term margins.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥22.52B, or 1.03 times Net Income attributable to owners of the parent of ¥21.82B, indicating generally sound cash conversion. However, OCF declined 46.4% from ¥42.04B in the previous year, primarily due to a ¥5.38B increase in inventories and a ¥6.95B decrease in trade payables.【Investment Efficiency】ROE (annualized) was 10.4%. Although profitability remains generally within a stable range, it declined from the previous year.【Financial Soundness】The Equity Ratio increased to 70.6% from 69.9% in the previous year. Current assets of ¥203.11B compared with current liabilities of approximately ¥75.67B indicate high liquidity. Total assets were ¥401.16B, and net assets were ¥282.44B, both slightly lower than in the previous year.

Cash Flow Analysis

Operating Cash Flow was ¥22.52B, down 46.4% from ¥42.04B in the same period of the previous year. The primary cause of the decline was deterioration in working capital: cash was consumed by a ¥5.38B increase in inventories and a ¥6.95B decrease in trade payables. Investing Cash Flow was -¥11.62B, reflecting cash outflows for investment activities, including ¥4.95B in capital expenditures and the acquisition of intangible assets. Free Cash Flow (OCF + Investing Cash Flow) was ¥10.90B, while Financing Cash Flow used a substantial amount of funds, totaling -¥47.83B, including ¥32.79B in share buybacks and ¥12.57B in dividend payments. As a result, cash and cash equivalents declined to ¥61.54B, a substantial decrease from ¥93.00B in the previous year. The continued active return of capital to shareholders despite the decline in OCF directly contributed to the decrease in cash balances.

Quality of Earnings

Operating Income of ¥28.22B and Profit Before Tax of ¥28.08B were nearly identical. Financial income of ¥1.34B and financial expenses of ¥1.48B largely offset each other, limiting the impact of non-operating factors on earnings. Net Income of ¥22.00B was approximately in line with OCF of ¥22.52B, and there was no indication that accounting profits were heavily dependent on uncollected, non-cash earnings. On the other hand, comprehensive income was ¥42.11B, substantially exceeding Net Income of ¥22.00B. Most of the difference was attributable to other comprehensive income, including foreign currency translation adjustments of ¥18.55B. This does not indicate an improvement in recurring earnings power, but rather reflects the Company’s high foreign-exchange sensitivity with respect to overseas assets and operations. Accordingly, the quality of earnings for the period was favorable from a cash-conversion perspective; however, caution is warranted in interpreting the expansion of comprehensive income as a sign of improved business performance.

Earnings Forecast and Guidance

The nine-month cumulative progress rates against the Company’s Full-Year forecasts were 71.7% for Revenue, 64.1% for Operating Income, and 64.2% for Net Income. Compared with the standard progress benchmark of 75% at the nine-month stage, both Operating Income and Net Income were approximately 11pt below the benchmark, indicating delayed progress. To achieve the Full-Year forecasts, the Company would need approximately ¥83.2B in Revenue and an Operating Income margin of approximately 18.9% in Q4, representing a 5.5pt improvement from the 13.4% recorded for the nine-month cumulative period. The Full-Year forecasts themselves anticipate declines of -6.1% in Operating Income and -6.2% in Net Income YoY, constituting a plan premised on improved profitability in the second half.

Shareholder Returns

As of Q2, the dividend was ¥19.00 per share. Assuming the Company’s Full-Year dividend forecast of ¥38.00 per share, the Payout Ratio against forecast Net Income of ¥33.50B would be approximately 36%. Meanwhile, during the cumulative period, the Company conducted ¥12.57B in dividend payments and ¥32.79B in share buybacks, resulting in total shareholder returns of ¥45.37B. This substantially exceeded cumulative Net Income attributable to owners of the parent of ¥21.82B, bringing the Total Return Ratio to more than approximately 200%. Total shareholder returns also substantially exceeded Free Cash Flow of ¥10.90B for the period, and cash and cash equivalents declined from ¥93.00B in the previous year to ¥61.54B. The Equity Ratio of 70.6% supports the Company’s capacity to return capital; however, recovery in cash-generation capacity would be a prerequisite for continuing shareholder returns of a similar scale.

Risk Factors

1. Delay in progress toward the Full-Year forecasts: The progress rates for Operating Income and Net Income were 64.1% and 64.2%, respectively, below the standard benchmark of 75%. Achieving the Full-Year forecasts requires an improvement in the Q4 Operating Income margin to 18.9%. If the reversal in Revenue and earnings is delayed, this could lead to the risk of downward revisions to the Full-Year forecasts.

2. Deterioration in working capital: A ¥5.38B increase in inventories and a ¥6.95B decrease in trade payables caused OCF to decline 46.4% YoY. Higher inventory levels entail the risk of inventory write-downs if demand falls short of expectations.

3. Sustainability of shareholder returns: The combined ¥45.37B in share buybacks of ¥32.79B and dividends of ¥12.57B substantially exceeded Free Cash Flow of ¥10.90B for the period, while cash and cash equivalents declined 33.9% YoY. Continued shareholder returns of a similar scale will require a recovery in cash-generation capacity.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (pharma)

Profitability and Returns

The Company’s profitability substantially exceeds the industry median, reflecting a stable earnings trend even within an industry that includes many loss-making companies.

Growth and Capital Efficiency

Although the Revenue growth rate is higher than the industry median, negative growth is also prevalent across the industry as a whole, indicating a sector-wide environment of declining Revenue.

Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The Operating Income margin was 13.4%, down 2.4pt from 15.8% in the previous year, confirming deterioration in fixed-cost absorption as SG&A expenses were maintained at approximately the previous-year level despite the decline in Revenue. The R&D expense ratio rose to 8.7% from 7.5%, indicating an allocation of expenses that prioritized medium- to long-term investment over short-term earnings.

2. OCF remained slightly above Net Income, and the gap between accounting profit and cash generation was limited. However, OCF itself declined 46.4% YoY due to the increase in inventories and decrease in trade payables. Changes in working capital efficiency represent a structural observation point that will determine future OCF levels.

3. Progress rates against the Full-Year forecasts (64.1% for Operating Income and 64.2% for Net Income) were below the standard pace. The degree to which profitability improves in the second half is therefore a key point to monitor in future financial results.

Theoretical Share Price (Reference Value)

Sensitivity: ¥941–¥996 at ±1% for the cost of equity, and ¥966–¥971 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end were used (there is a timing difference from the Full-Year forecast).

(Calculation model: Residual Income Model (Ohlson type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated using only publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, nor does it forecast or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with a professional as necessary.

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