ZERIA PHARMACEUTICAL CO.,LTD. FY2026 FY Earnings Report

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Executive Summary

For the fiscal year ended March 2026, Revenue was ¥891.6B (YoY +¥18.5B +2.1%), Operating Income was ¥123.7B (YoY +¥1.8B +1.4%), Ordinary Income was ¥110.4B (YoY -¥18.0B -14.0%), and Net income attributable to owners of parent was ¥84.5B (YoY -¥14.9B -14.9%). The company achieved revenue and operating profit growth through the operating line, but expanded foreign exchange losses led to declines at the ordinary and net income levels. The Prescription Pharmaceuticals segment drove performance with Revenue +4.5% and Operating Income +13.0%, maintaining a high gross margin of 73.1%. However, foreign exchange losses of ¥13.6B emerged in non-operating items, reducing the ordinary income margin to 12.4% (prior year 14.7%), a -2.3pt decline. Working capital increased (Inventories +¥34.2B, Accounts Receivable +¥19.0B), causing Operating Cash Flow (OCF) to decline to ¥99.6B (-23.0% YoY), and the OCF/EBITDA ratio fell to 0.52x. The equity ratio is robust at 60.4%, but a maturity mismatch remains with short-term borrowings of ¥338.3B versus cash of ¥277.6B. ROE fell to 7.8% (approx. 11.7% prior-year equivalent), primarily due to compression of net profit margins from FX impacts. For FY2027 ending March 2027, management plans Revenue ¥950.0B (+6.6%), Operating Income ¥130.0B (+5.1%), and Net Income ¥100.0B (+18.4%), with normalization of FX effects and working capital improvement as key drivers.

Drivers of Performance

[Revenue] Revenue was ¥891.6B (prior year ¥873.1B, +¥18.5B +2.1%). By segment, the Prescription Pharmaceuticals Business grew to ¥616.3B (prior year ¥589.8B, +¥26.5B +4.5%) and led overall growth. Meanwhile, the Consumer Healthcare Business declined to ¥273.8B (prior year ¥281.8B, -¥8.0B -2.8%) as the self-medication market experienced a temporary adjustment. Other businesses were ¥6.3B (prior year ¥6.98B, -¥0.7B -9.9%). By region, domestic sales were slightly down at ¥363.2B (prior year ¥376.0B, -3.4%), while Europe expanded to ¥464.0B (prior year ¥437.5B, +6.1%), with the UK ¥124.1B (+9.3%) and France ¥101.7B (+12.5%) contributing. Other regions totaled ¥62.6B (+4.9%). The overseas sales ratio rose to about 59%, confirming increased geographic diversification. Foreign exchange translation adjustment contributed a positive ¥76.2B, with yen depreciation boosting the yen-equivalent of overseas sales.

[Profitability] Cost of sales was ¥239.8B (prior year ¥233.5B, +¥6.3B +2.7%), increasing faster than revenue growth, resulting in Gross Profit of ¥651.8B (prior year ¥639.6B, +¥12.2B +1.9%). Gross margin remained high at 73.1% (prior year 73.3%), a limited -0.2pt decline, as a high-value-added product mix was largely maintained. Selling, general and administrative expenses were ¥528.1B (prior year ¥517.6B, +¥10.5B +2.0%), roughly in line with revenue growth and including goodwill amortization of ¥7.2B (prior year ¥7.1B). Operating Income was ¥123.7B (prior year ¥122.0B, +¥1.8B +1.4%), with an operating margin of 13.9% (prior year 14.0%) remaining stable. In non-operating items, interest income ¥1.1B, dividend income ¥3.7B, and foreign exchange gains ¥6.3B were recorded, but non-operating expenses included interest expense ¥5.0B, foreign exchange losses ¥13.6B (net FX impact being a loss), other expenses ¥0.7B, and equity method investment losses ¥1.8B, resulting in non-operating balance of -¥13.3B (prior year +¥6.4B), a significant deterioration. Consequently, Ordinary Income declined to ¥110.4B (prior year ¥128.4B, -¥18.0B -14.0%). Extraordinary gains included gains on sales of investment securities ¥1.7B, while losses on valuation of investment securities ¥2.1B and loss on retirement of fixed assets ¥0.1B were recorded, netting to +¥1.6B and roughly neutral. Profit before tax was ¥112.0B (prior year ¥126.2B, -11.2%), and after corporate taxes ¥27.8B (effective tax rate 24.8%) and a positive non-controlling interest of ¥0.4B, Net income attributable to owners of parent was ¥84.5B (prior year ¥99.4B, -¥14.9B -14.9%). In summary, the company posted revenue and operating profit growth at the operating level, but expanded FX losses caused revenue-up but profit-down at ordinary and net levels.

Segment Analysis

The Prescription Pharmaceuticals Business performed strongly, with Revenue ¥616.3B (YoY +4.5%) and Segment Profit ¥121.8B (YoY +13.0%). Segment profit margin improved +1.5pt to 19.8% (prior year 18.3%), driven by expansion of high-margin products and efficiency gains. The Consumer Healthcare Business saw Revenue ¥273.8B (YoY -2.8%) reflecting a temporary demand adjustment, but Segment Profit remained ¥63.6B (YoY -0.6%) with a profit margin of 23.2% (prior year 23.3%), supported by brand-driven pricing premiums. Other businesses recorded Revenue ¥6.3B (YoY -9.9%) and Segment Profit ¥2.0B (YoY -17.5%) with a margin of 32.0%, small but high-return. After allocation of corporate adjustments of -¥63.6B (prior year -¥52.2B), consolidated Operating Income was ¥123.7B. The double-digit profit growth in Prescription Pharmaceuticals clearly drove consolidated results, and the CHC revenue decline appears to be within a short-term adjustment range.

Key Financial Metrics

[Profitability] Operating margin is 13.9%, down -0.1pt from 14.0% prior year; Gross margin 73.1% (prior year 73.3%) down -0.2pt, remaining high. ROE declined to 7.8% (prior year approx. 11.7%), mainly due to compression of net profit margin (9.5% vs prior year approx. 11.4%, -1.9pt). Operating-level profitability is stable, but FX losses have eroded the final profit margin. ROA declined to 4.7% (prior year approx. 6.2%). [Cash Quality] Operating Cash Flow (OCF) was ¥99.6B, 1.18x of Net income ¥84.5B, which is acceptable by definition, but the OCF/EBITDA ratio is low at 0.52x (benchmark >=0.9x). Pre-working capital OCF was ¥127.1B; however, increases in inventories -¥34.2B and accounts receivable -¥19.0B, partially offset by accounts payable +¥5.2B, resulted in working capital cash outflow of about -¥48.0B, impairing CFO quality. Free Cash Flow (FCF) was ¥72.5B, 0.86x of Net income. [Investment Efficiency] CapEx was ¥23.6B versus Depreciation ¥66.3B, giving an investment ratio of 0.36x, indicating restrained replacement investment. Total asset turnover declined to 0.50x (prior year approx. 0.55x), with inventory and receivables buildup pressuring asset efficiency. DSO (days sales outstanding) approx. 129 days, DIO (days inventory outstanding) approx. 168 days, and combined CCC approx. 297 days, trending longer. [Financial Soundness] Equity Ratio improved to 60.4% (prior year 56.4%), strengthening the capital base. Current ratio 148.4% and quick ratio 128.6% indicate generally healthy short-term liquidity. Interest-bearing debt totaled ¥391.0B (short-term borrowings ¥338.3B + long-term borrowings ¥52.7B), cash ¥277.6B, yielding net interest-bearing debt ¥113.4B. Debt/EBITDA is 2.06x (within investment-grade range), and interest coverage is 24.7x (EBITDA basis 37.9x), indicating ample ability to service interest. However, short-term debt ratio is high at 86.5% and cash/short-term debt ratio is 0.82x, leaving refinancing risk from maturity mismatch. Goodwill of ¥30.3B represents 2.8% of net assets and 0.16x of EBITDA, indicating limited impairment risk.

Cash Flow Analysis

OCF was ¥99.6B (prior year ¥129.2B, -23.0%). Profit before tax ¥112.0B plus non-cash expenses such as depreciation ¥66.3B and goodwill amortization ¥7.2B produced pre-working capital OCF subtotal of ¥127.1B. However, working capital movements included inventories -¥34.2B (inventory buildup) and accounts receivable -¥19.0B increase, and accounts payable +¥5.2B, resulting in aggregate working capital cash outflow of approximately -¥48.0B. After corporate tax payments of -¥27.4B, OCF settled at ¥99.6B, and the OCF/EBITDA ratio remained low at 0.52x. Investing Cash Flow was -¥27.0B, mainly capital expenditures -¥23.6B to tangible and intangible assets. CapEx to depreciation is 0.36x, restrained and supporting short-term FCF, but additional investment is needed for medium- to long-term competitiveness. Free Cash Flow was ¥72.5B (prior year approx. ¥119.7B), down -39.5% YoY. Financing Cash Flow was -¥59.3B, driven by long-term debt repayments -¥45.3B and dividend payments -¥21.1B. Net borrowings were neutral with short-term borrowings +¥0.07B. As a result, cash and cash equivalents increased by ¥41.7B from ¥276.4B to year-end ¥276.4B (prior year ¥234.7B, including FX impact +¥28.5B). Cash generation was constrained by working capital buildup; inventory and receivable reduction is key to improving cash flow next period.

Quality of Earnings

Operating Income ¥123.7B versus Ordinary Income ¥110.4B indicates non-operating items netted -¥13.3B. The main cause was expansion of foreign exchange losses: FX gains of ¥6.3B were recorded as non-operating income while FX losses of ¥13.6B were recorded as non-operating expense, creating an effective FX impact of -¥7.3B. Interest income ¥1.1B and dividend income ¥3.7B contributed to non-operating income, but interest expense ¥5.0B, equity method investment losses ¥1.8B, and other non-operating expenses ¥0.7B were recorded, resulting in a conversion rate from Operating Income to Ordinary Income of only 89.3%. Extraordinary items were roughly neutral at +¥1.6B (gains on sale of investment securities ¥1.7B offset by valuation losses ¥2.1B and retirement loss ¥0.1B). Temporary factors were limited; earnings quality is mainly affected by FX volatility in non-operating items. Comprehensive income was ¥209.3B (approximately 7.0x Net income ¥29.7B), with Other Comprehensive Income of ¥125.1B composed of foreign currency translation adjustments ¥76.2B, actuarial adjustments related to retirement benefits ¥39.3B, and valuation differences on securities ¥9.6B. Pension remeasurements and yen depreciation-driven valuation increases of overseas assets significantly boosted comprehensive income. OCF was ¥99.6B, 1.18x of Net income ¥84.5B, and 1.50x of pre-working capital OCF ¥127.1B; pre-working capital cash generation was healthy, but inventory and receivable buildup worsened accruals. Overall, operating earnings are recurring and high quality, but FX risk in non-operating items and working capital stagnation reduce cash conversion efficiency. Improving earnings quality requires stronger FX hedging and working capital management.

Forecasts & Guidance

For FY2027 ending March 2027, management forecasts Revenue ¥950.0B (YoY +¥58.4B +6.6%), Operating Income ¥130.0B (YoY +¥6.3B +5.1%), Ordinary Income ¥130.0B (YoY +¥19.6B +17.7%), and Net income attributable to owners of parent ¥100.0B (YoY +¥15.5B +18.4%). Revenue is expected to grow +6.6%, near double-digit growth, while operating margin is projected at 13.7% (prior year 13.9%, -0.2pt), broadly stable. Ordinary Income is planned equal to Operating Income at ¥130.0B, assuming normalization of FX losses and neutralization of non-operating items. Net income is forecast to increase +18.4%, assuming normalization of the effective tax rate. Against current year results, progress rates to the plan are: Revenue 93.9%, Operating Income 95.2%, Ordinary Income 84.9%, Net income 84.5%, implying profit recognition weighted to H2. If FX effects moderate and working capital management improves, the guidance appears achievable. EPS forecast is ¥226.86, up +18.3% from current EPS ¥191.80. Dividend forecast is annual ¥25 (year-end), consistent with the current year (interim ¥24, year-end ¥25) and implies a payout ratio of about 11.0% (based on full-year net income), a conservative policy.

Shareholder Returns

This fiscal year’s annual dividend was interim ¥24 and year-end ¥25, total ¥49, with total dividends of approx. ¥21.6B against Net income attributable to owners of parent ¥84.5B, yielding a payout ratio of about 25.6%, a conservative level. Dividend payout ratio relative to EPS ¥191.80 is 25.5%, a significant increase from prior year EPS ¥225.42 and total dividend ¥23 (payout ratio 10.2%). With FCF ¥72.5B and dividend payments ¥21.1B, dividend coverage is 3.4x, indicating high sustainability. Share buybacks were virtually nil this period (financing cash flow -¥0.03B), so total shareholder return ratio is limited to dividends at 25.6%. Next year’s dividend guidance is year-end ¥25 (no annual explicit figure), maintaining prior-year levels. DPS ¥49 against BPS ¥2,459.12 implies a dividend yield of about 2.0%. Treasury stock decreased by ¥60.4B during the period, contributing to an increase in the equity ratio, but no aggressive buybacks were executed. Dividends are balanced with cash generation, and if earnings growth and working capital normalization progress, scope for dividend increases exists. The capital allocation policy prioritizes strengthening the balance sheet through conversion of short-term borrowings to longer-term debt and working capital compression before expanding total shareholder returns.

Risk Factors

1. Foreign exchange risk: FX losses of ¥13.6B (previously a positive contribution) occurred in non-operating expenses, depressing Ordinary Income by ¥18.0B. With overseas sales around 59% and foreign currency translation adjustment of +¥76.2B, yen depreciation boosts reported revenue but non-operating FX losses may precede gains. Insufficient FX hedging could increase volatility of Ordinary and Net income.

2. Working capital stagnation risk: Inventories increased to ¥109.9B (+27.9% YoY), and Accounts Receivable expanded to ¥314.1B (+18.3%). Working capital movements caused approx. -¥48.0B cash outflow, resulting in an OCF/EBITDA ratio of 0.52x. Inventory buildup may indicate demand forecasting errors or longer production lead times; Accounts Receivable growth suggests lengthening collection terms or rising credit risk. CCC (DIO approx. 168 days + DSO approx. 129 days) at approx. 297 days is prolonged, continuing to impair cash conversion efficiency and exert funding pressure.

3. Short-term funding/refinancing risk: Short-term borrowings ¥338.3B versus cash ¥277.6B yields cash/short-term debt ratio 0.82x, indicating insufficient coverage. Short-term debt ratio is high at 86.5%, leaving a maturity mismatch and refinancing risk. Interest burden is limited (interest coverage 24.7x), but in a rising interest rate environment or worsened credit market, rollovers may be difficult. Converting to long-term borrowings or increasing liquidity are key priorities.

Industry Benchmark (Reference — Company Analysis)

Profitability & Return

Profitability ranks exceptionally high within the industry, with both operating and net margins substantially above medians.

Growth & Capital Efficiency

Revenue growth exceeds the industry median, indicating stable growth.

※ Source: Company compilation

Key Takeaways from the Financial Results

1. The revenue-driving power of Prescription Pharmaceuticals is evident, with segment profit margin improving to 19.8% (prior year 18.3%, +1.5pt) and high-margin business growth underpinning consolidated earnings. Operating Income increased slightly +1.4%, but Prescription Pharmaceuticals alone achieved +13.0% double-digit profit growth, confirming strong earning capability. Next year’s guidance targets Operating Income +5.1% and Net Income +18.4%, projecting recovery assuming FX normalization.

2. Working capital stagnation and a low OCF/EBITDA ratio of 0.52x highlight room to improve cash generation. Inventory +¥34.2B and Accounts Receivable +¥19.0B reduced OCF by -23.0% YoY; normalization could produce significant CF improvement. Improving DIO (~168 days) and DSO (~129 days) would materially boost FCF and ROE. Conservative CapEx (CapEx/Depreciation 0.36x) supported FCF short-term, and improving working capital management is a key catalyst for next-period earnings and cash flow improvements.

3. High reliance on short-term borrowings (short-term debt ratio 86.5%) and cash/short-term debt ratio 0.82x indicate room to strengthen the financial profile. Debt/EBITDA 2.06x and Interest Coverage 24.7x are healthy, but resolving the maturity mismatch would stabilize funding and improve credit standing. With Equity Ratio 60.4% and solid capital base, converting short-term borrowings to long-term or accessing capital markets can optimize the financial structure. Payout ratio 25.6% and FCF coverage 3.4x suggest ample shareholder return capacity, enabling both financial improvement and potential return expansion.

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This report is an AI-generated financial analysis document produced by analyzing XBRL earnings disclosure data. It does not constitute a recommendation to invest in any specific security. Industry benchmarks are aggregated by the company based on public financial statements and are for reference only. Investment decisions are your responsibility; please consult a professional advisor as needed.