SEIKAGAKU CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

Although strong growth in the LAL Business partially offset the decline in revenue and widening losses in the Pharmaceutical Business, the operating loss widened due to deteriorating profitability in the core businesses. At the ordinary income level, the Company returned to profitability, supported by non-operating income such as gains on sales of securities. Revenue was ¥88.3B (up +1.2% YoY), essentially flat, while the operating loss widened to ¥-9.4B (¥-3.6B in the year-ago period). Ordinary income turned positive at ¥1.1B (¥-1.3B in the year-ago period), and the net loss narrowed to ¥-0.1B (¥-2.0B in the year-ago period). The deterioration in gross margin and increase in the SG&A ratio weighed on operating earnings, while gains on sales of investment securities and dividend income contributed to the return to profitability at the ordinary income level.

Factors Affecting Earnings

【Revenue】Revenue increased slightly by +1.2% YoY to ¥88.3B. By segment, the LAL Business led growth at ¥33.9B (+19.7%), while the Pharmaceutical Business decelerated to ¥54.5B (-7.7%). By product category, overseas pharmaceuticals declined sharply by -45.9% to ¥10.5B from ¥19.5B in the year-ago period. In contrast, active pharmaceutical ingredients and contract manufacturing increased to ¥12.6B (+34.2%), while domestic pharmaceuticals remained firm at ¥31.0B (+2.9%). The decline in overseas pharmaceuticals was the primary cause of the Pharmaceutical Business’s revenue decrease.

【Profit and Loss】The gross margin deteriorated to 36.7%, down -560bp from 42.3% in the year-ago period, while the SG&A ratio rose +90bp to 47.4% from 46.5%. As a result, the operating loss widened to ¥-9.4B from ¥-3.6B in the year-ago period. Meanwhile, non-operating income of ¥10.6B, including gains on sales of securities of ¥7.0B and dividend income of ¥2.5B, was recorded, resulting in a return to positive ordinary income of ¥1.1B compared with ¥-1.3B in the year-ago period. However, the recording of income taxes and other taxes of ¥1.2B limited net income to ¥-0.1B, and the structure of offsetting deteriorating operating earnings with non-operating income continues. Although revenue increased slightly, operating earnings deteriorated; therefore, the quarter should be characterized as higher revenue but lower earnings.

Segment Analysis

The contrast between the LAL Business and the Pharmaceutical Business was clear. The LAL Business recorded higher revenue and earnings, with revenue of ¥33.9B (+19.7% YoY), operating income of ¥2.2B (+97.3%), and a profit margin of 6.6%, effectively serving as the primary support for Company-wide earnings in Q1. The Pharmaceutical Business continued to deteriorate, with revenue of ¥54.5B (-7.7% YoY), an operating loss of ¥-11.7B, widening from ¥-4.8B in the year-ago period, and a profit margin of -21.4%, making it the primary cause of the Company-wide loss. The gap in profit margins between the two segments reached 28.0pt. Although the Pharmaceutical Business accounted for 61.7% of the revenue mix, profit contribution has shifted substantially toward the LAL Business.

Key Financial Indicators

【Profitability】The cost-of-sales ratio was 63.3%, and the gross margin declined to 36.7% from 42.3% in the year-ago period. The SG&A ratio increased to 47.4% from 46.5%, resulting in an operating margin of -10.7% compared with -4.2% in the year-ago period. Meanwhile, the ordinary income margin turned positive at 1.2% compared with -1.5% in the year-ago period.【Cash Flow Quality】Positive ordinary income was supported by non-operating income, including gains on sales of securities of ¥7.0B and dividend income of ¥2.5B. Comprehensive income was ¥-2.9B, below net income of ¥-0.1B, indicating a divergence.【Investment Efficiency】ROE was -0.0%, and EPS was ¥-0.21 (¥-3.68 in the year-ago period). Capital profitability remains low due to the continued operating loss.【Financial Soundness】The equity ratio was extremely high at 87.8% (87.2% in the year-ago period). Current assets of ¥396.2B substantially exceeded current liabilities of ¥70.3B, indicating a solid financial foundation.

Cash Flow Analysis

Cash and deposits decreased by ¥16.3B to ¥73.1B from ¥89.4B in the year-ago period, while short-term securities increased by ¥8.5B to ¥68.6B from ¥60.1B, suggesting that some funds have shifted into securities. Investment securities declined by ¥13.2B to ¥144.0B from ¥157.2B in the year-ago period, consistent with the ¥7.0B gain on sales of securities recorded during the period. Construction in progress increased to ¥89.8B from ¥86.6B in the year-ago period, indicating that large-scale capital investment is underway. Interest-bearing debt was minimal at ¥3.0B, and its impact on financing cash flow is expected to be limited. The combined balance of cash on hand and short-term securities was ¥141.7B, substantially exceeding current liabilities of ¥70.3B, indicating ample liquidity.

Quality of Earnings

The ordinary income surplus for the period was generated by non-operating income of ¥10.6B, including gains on sales of securities of ¥7.0B and dividend income of ¥2.5B, offsetting the operating loss of ¥-9.4B. It should therefore be evaluated separately from the earnings power of the core businesses. Income taxes and other taxes of ¥1.2B were recorded at nearly the same level as profit before tax of ¥1.1B, causing earnings to reverse between ordinary income and net income. Comprehensive income was ¥-2.9B, below net income of ¥-0.1B. The difference resulted from valuation differences on securities of ¥-4.9B and adjustments related to retirement benefits of ¥-0.8B, partially offset by foreign currency translation adjustments of +¥2.9B. Given the significant divergence between operating earnings and ordinary earnings, the period’s profit was driven more strongly by non-operating factors than by an improvement in the core businesses.

Earnings Forecast and Guidance

Progress against the full-year plan was 21.1% for revenue, at ¥88.3B/¥418.5B, below the 25% benchmark for quarterly progress. Ordinary income was ¥1.1B/¥42.0B, representing a low progress rate of 2.6%. Operating income started at ¥-9.4B against the full-year plan of ¥20.5B, while net income was also negative at ¥-0.1B against the full-year forecast of ¥22.5B. Progress against all indicators therefore assumes a substantial improvement in earnings in the second half. No revisions were made to the earnings forecast or dividend forecast on this occasion. Achieving full-year ordinary income growth of +150.0% will depend on improved profitability in the Pharmaceutical Business, continued growth in the LAL Business, and reduced dependence on non-operating income.

Shareholder Returns

Under the Company’s plan, the annual dividend is ¥30, and the payout ratio based on forecast EPS of ¥41.21 is approximately 72.8%. As the Company recorded an operating loss in Q1, achieving positive operating income for the full year is a prerequisite for the dividend plan. Given the financial foundation represented by an equity ratio of 87.8% and combined cash on hand and short-term securities of ¥141.7B, the Company has sufficient capacity to fund dividends in the short term. No revision was made to the dividend forecast.

Risk Factors

1. Deterioration in Pharmaceutical segment profitability: Against revenue of ¥54.5B (-7.7% YoY), the operating loss widened to ¥-11.7B and the profit margin was -21.4%, with the -45.9% decline in overseas pharmaceutical revenue serving as the primary factor.

2. Deterioration in gross margin and weakening cost absorption: The gross margin declined -560bp to 36.7% from 42.3% in the year-ago period, while the SG&A ratio increased to 47.4% from 46.5%. Correcting the cost and expense structure remains a challenge.

3. P&L volatility due to dependence on non-operating income: Ordinary income of ¥1.1B was heavily supported by gains on sales of securities of ¥7.0B and dividend income of ¥2.5B. The recurrence of these temporary income factors is not guaranteed while the operating loss of ¥-9.4B continues.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (pharma)

Profitability and Returns

Both the operating margin and net profit margin are substantially below the industry median, placing the Company’s profitability at the lower end of the industry.

Growth and Capital Efficiency

The revenue growth rate is also below the industry median, indicating below-average performance in terms of growth.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The LAL Business has emerged as the primary profit contributor in place of the Pharmaceutical Business. While LAL operating income expanded to ¥2.2B (+97.3% YoY), the Pharmaceutical Business’s loss widened to ¥-11.7B, indicating an ongoing shift in the earnings structure between the segments.

2. Against the deterioration of -560bp in gross margin and -650pt in operating margin, the return to positive ordinary income was largely attributable to non-operating factors such as gains on sales of securities. Until a recovery in the earnings power of the core businesses is confirmed, attention should be paid to the sustainability of earnings.

3. Progress against the full-year plan was limited to 21.1% for revenue and 2.6% for ordinary income, while operating income and net income were negative for the period, indicating that the plan is heavily weighted toward the second half. The timing of the utilization of the ¥89.8B in construction in progress related to large-scale investment may affect earnings trends from the second half onward.

Theoretical Share Price (Reference Value)

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

Sensitivity: ¥1,097–¥1,158 for a ±1% change in the cost of equity, and ¥1,119–¥1,131 for a ±0.1 change in ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used; there is a timing difference from the full-year forecast.
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

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

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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 responsibility, after consulting with a professional as necessary.

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