SANTEN PHARMACEUTICAL CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

The Company secured earnings growth during the quarter despite largely flat revenue, driven by an improvement in the gross profit margin and a lower effective tax rate. Revenue was ¥689.6B (+0.3% year on year), Operating Income was ¥81.2B (+7.2%), Profit Before Tax was ¥83.3B (+11.9%), and Net Income attributable to owners of the parent was ¥71.9B (+22.4%; hereinafter, “Net Income” refers to this metric). Primarily due to a decrease in the cost of sales, the gross profit margin improved to 58.0% (prior year: 54.0%, +4.0pt), while the Operating Income margin expanded to 11.8% (+0.8pt), despite the SG&A expense ratio rising to 33.9% (+3.1pt). Furthermore, the decline in the effective tax rate from 21.3% to 13.6% boosted Net Income growth, resulting in earnings growth exceeding the growth rate of Profit Before Tax.

Factors Affecting Earnings

【Revenue】Revenue was ¥689.6B, essentially flat at +0.3% year on year. Although the Company does not disclose business-specific factors due to its single-segment management structure, the cost of sales decreased to ¥289.7B (-8.4%), while gross profit increased to ¥399.9B (+7.7%) and the gross profit margin improved to 58.0% (prior year: 54.0%, +4.0pt). Although growth in revenue itself was limited, the decline in the cost ratio drove a change in the earnings structure.

【Profit and Loss】SG&A expenses increased to ¥233.8B (+10.3%), and as a percentage of revenue rose to 33.9% (prior year: 30.8%, +3.1pt). Research and development expenses were ¥62.5B (9.1% of revenue; prior year: 9.0%), remaining largely flat. Despite the increase in the SG&A expense ratio, the impact of the improved gross profit margin exceeded it, resulting in Operating Income of ¥81.2B (+7.2%) and an Operating Income margin of 11.8% (+0.8pt). Financial income increased to ¥9.6B (prior year: ¥6.3B), and improvement in net financial income also contributed, bringing Profit Before Tax to ¥83.3B (+11.9%). The effective tax rate declined to 13.6% (prior year: 21.3%), and Net Income increased to ¥71.9B (+22.4%), exceeding the growth rate of Profit Before Tax. While revenue increased only slightly, profit at each stage grew by more, resulting in higher revenue and earnings.

Key Financial Metrics

【Profitability】The gross profit margin improved to 58.0% (prior year: 54.0%, +4.0pt), the Operating Income margin to 11.8% (prior year: 11.0%, +0.8pt), and the Net Income margin attributable to owners of the parent to 10.4% (prior year: 8.6%, +1.9pt), with all metrics improving year on year. ROE was 2.4% on a quarterly basis (equivalent to 2.0% for the prior-year period). 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥52.6B, representing only 0.73x Net Income of ¥71.9B, down from 1.31x in the prior-year period. 【Investment Efficiency】Total asset turnover was 0.166x on a quarterly basis (prior year: 0.163x), remaining largely flat, with no significant change in asset efficiency. 【Financial Soundness】The Equity Ratio increased to 72.2% (prior year: 70.2%, +2.0pt), and cash and cash equivalents stood at ¥782.6B. With a limited interest-bearing debt burden, the financial base remains solid.

Cash Flow Analysis

Operating Cash Flow was ¥52.6B, down -31.9% from ¥77.2B in the prior-year period. From the subtotal of ¥86.2B, decreases in trade payables (-¥83.0B) and increased income tax payments (-¥34.4B; prior year: -¥22.7B) were negative factors, while collection of trade receivables (+¥88.9B) made a positive contribution. Investing Cash Flow was -¥9.0B, primarily due to capital expenditures of -¥9.5B. Financing Cash Flow was -¥78.9B, comprising payment of the fiscal year-end dividend for the prior fiscal period of -¥60.5B, share repurchases of -¥9.6B (a substantial decrease from -¥80.5B in the prior-year period), and lease payments of -¥8.8B. As a result, Free Cash Flow (Operating Cash Flow + Investing Cash Flow) was ¥43.6B, below the combined ¥70.1B in dividends and share repurchases; this was attributable to the seasonality of fiscal year-end dividend payments. Cash and cash equivalents stood at ¥782.6B at the end of the period, down from ¥808.8B at the beginning of the period, although foreign exchange translation had a positive impact of +¥9.1B.

Earnings Quality

The quarter’s earnings were primarily generated by recurring business activities, and no significant one-time gains or losses were identified. Outside operating activities, financial income increased to ¥9.6B (prior year: ¥6.3B), and, net of financial expenses of ¥7.4B, contributed to higher Profit Before Tax; however, the amount was limited to approximately 1.4% of revenue. The primary reason Net Income growth (+22.4%) exceeded Profit Before Tax growth (+11.9%) was the decline in the effective tax rate (21.3%→13.6%). From an earnings-quality perspective, attention should be paid to the fact that a non-operating factor—tax-rate fluctuations—expanded the magnitude of earnings growth. Comprehensive income was ¥101.8B (¥102.1B attributable to owners of the parent), and the difference from Net Income of ¥71.9B was attributable to other comprehensive income, including foreign currency translation adjustments for foreign operations (+¥30.9B). Foreign exchange movements therefore created a divergence between comprehensive income and Net Income. The fact that Operating Cash Flow was only 0.73x Net Income also indicates that the cash conversion of earnings temporarily slowed due to working capital impacts, including a decrease in trade payables and higher tax payments.

Earnings Forecasts and Guidance

Progress against the full-year earnings forecasts was 22.2% for revenue (¥689.6B/¥3,110.0B), 16.4% for Operating Income (¥81.2B/¥495.0B), and 18.0% for Net Income (¥71.9B/¥400.0B), all below the 25% benchmark for evenly distributed quarterly progress. As of the current quarter, no revisions have been made to the earnings or dividend forecasts. The full-year Operating Income forecast represents +3.6% growth from the prior fiscal year, while the Net Income forecast represents +7.0% growth. Although the growth pace in Q1 (Operating Income +7.2%, Net Income +22.4%) exceeds the growth rates in the full-year plan, the pace of progress may fluctuate depending on expense allocation and tax-rate trends in the second half of the fiscal year.

Shareholder Returns

The full-year dividend forecast is ¥42 per share, resulting in a Payout Ratio of 33.8% based on forecast EPS of ¥124.42. During Q1, the Company paid ¥60.5B in the fiscal year-end dividend for the prior fiscal period and conducted share repurchases of ¥9.6B. Share repurchases declined substantially from ¥80.5B in the prior-year period, making dividends the primary form of shareholder returns during the quarter. No revision has been made to the dividend forecast as of the current quarter.

Risk Factors

1. Slower cash generation due to working capital fluctuations: Operating Cash Flow was ¥52.6B, down -31.9% year on year, and its ratio to Net Income declined to 0.73x (prior year: 1.31x). The primary factors were a decrease in trade payables (-¥83.0B) and increased income tax payments (-¥34.4B), with working capital fluctuations creating short-term cash flow volatility.

2. Sustainability of the lower effective tax rate: The effective tax rate for the quarter was 13.6%, substantially below 21.3% in the prior-year period, thereby boosting the increase in Net Income. Tax-rate fluctuations are independent of the business structure, and if the tax rate normalizes in the future, the growth rate of Net Income may slow.

3. Balance sheet impact from foreign exchange movements: Other comprehensive income included foreign currency translation adjustments for foreign operations of +¥30.9B, the primary factor behind the divergence between comprehensive income (¥101.8B) and Net Income (¥71.9B). Given the high proportion of overseas operations, foreign exchange movements may have a certain impact on equity accounts and earnings.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The Operating Income margin is below the industry median, while the Net Income margin exceeds the industry median, partly due to the lower tax rate.

Growth and Capital Efficiency

The revenue growth rate is substantially below the industry median, indicating relatively sluggish top-line growth within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings

1. While revenue remained essentially flat at +0.3%, the gross profit margin improved by +4.0pt, expanding the Operating Income margin to 11.8% (+0.8pt). This indicates an earnings growth structure without revenue growth. Whether the improvement in the gross profit margin is attributable to structural or temporary factors can be assessed through subsequent quarterly trends.

2. Operating Cash Flow was only 0.73x Net Income, down from 1.31x in the prior-year period. The impact of working capital from lower trade payables and higher tax payments was significant, making the full-year cash generation trend an area to monitor.

3. Full-year progress was 22.2% for revenue, 16.4% for Operating Income, and 18.0% for Net Income, all below the standard 25% benchmark. However, no revisions were made to the earnings or dividend forecasts, and the progress trend in the second half of the fiscal year will be an area for further monitoring.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation to undertake any specific investment action.

Sensitivity: ¥1,048–¥1,111 at ±1% for the cost of equity capital, and ¥1,075–¥1,084 at ±0.1 for ω.

Note:

• Net assets as of the end of the quarter are used (there is a timing gap relative to the full-year forecast).

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not predict or guarantee future share prices)

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

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