DAIICHI SANKYO COMPANY,LIMITED FY2027 Q1 Earnings Report

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Executive Summary

The key feature of Q1 FY2026 was the simultaneous occurrence of substantial revenue growth driven by the core Oncology business and a decline in operating income due to business restructuring costs and increased R&D investment. Revenue rose strongly to ¥5,747.4B (+21.1% YoY), while operating income declined to ¥851.0B (-12.0% YoY) and net income attributable to owners of the parent, which equals consolidated net income, declined to ¥686.4B (-19.7% YoY). The main drivers of revenue growth were the expansion of Enhertu and Datroway and the positive impact of the weaker yen. The primary causes of the decline in earnings were the recognition of restructuring costs in the EU Specialty business and increases in R&D and SG&A expenses. Progress against the full-year company forecasts of ¥2 trillion 3,400B in revenue and ¥3,200B in operating income was 24.6% for revenue, 26.6% for operating income, and 27.0% for net income, exceeding the standard quarterly progress rate (25%).

Factors Affecting Performance

【Revenue】The +21.1% revenue growth was driven by the expansion of Enhertu (+¥523B YoY) and Datroway (+¥134B YoY) in the core Oncology business. In addition, the actual exchange rates in Q1 (USD/JPY 159.49 and EUR/JPY 185.38) represented yen depreciation of +¥14.89 and +¥21.57, respectively, compared with the previous year, increasing the yen-denominated value of overseas sales. The Japan Business declined slightly YoY, primarily due to lower revenue from Lixiana (-¥46B), but growth in the Oncology, EU, and ASCA businesses more than offset the decline.

【Profit and Loss】Operating income declined 12.0%. The gross margin fell 2.2pt to 78.4% from 80.5% in the previous year, while SG&A expenses increased to ¥2,499.6B (+38.6% YoY), outpacing revenue growth and causing operating leverage to reverse. R&D expenses rose to ¥1,154.5B (+9.0% YoY), reflecting continued investment in the DXd ADC portfolio, although they declined slightly as a percentage of revenue to 20.1% from 22.3%. The principal causes of the decline were the ¥240B restructuring cost for the EU Specialty Business Unit, a one-time factor, and the recognition of an inventory valuation loss. These were partially offset by the ¥69B reversal of a provision related to compensation for the cancellation of investment in the Odawara Plant, also a one-time factor and non-core income. Profit before tax was ¥913.4B (-13.4% YoY). After deducting income taxes of ¥227.0B, representing an effective tax rate of 24.9%, net income was ¥686.4B. The difference between profit before tax and net income was within the normal tax burden range, with no unusual divergence observed. In conclusion, the Company recorded higher revenue but lower earnings in the quarter.

Segment Analysis

The Company operates as a single Pharmaceutical segment and has no formal reportable segment classification. However, based on business-unit results presented in the earnings presentation, the Oncology Business generated revenue of ¥1,974B (+¥662B YoY, +50.4%), representing the largest composition ratio at approximately 34% of total revenue and serving as the core business. The Oncology Business was the primary driver of revenue growth this period due to the expansion of Enhertu and Datroway. Meanwhile, the EU Specialty Business generated revenue of ¥747B (+¥109B YoY) and recorded growth, but recognized ¥240B in restructuring costs, which reduced consolidated operating income. The Japan Business generated ¥1,200B (-¥49B YoY), declining mainly due to lower revenue from Lixiana. American Regent also fell below the previous year at ¥422B (-¥71B YoY), primarily due to lower revenue from Venofer and other products. Oncology, which drove revenue growth, and EU Specialty, which reduced earnings, played contrasting roles as the respective drivers of changes in revenue and profit.

Key Financial Metrics

Profitability: ROE was 4.0% (5.1% in the previous year), and the operating margin was 14.8% (20.4% in the previous year); both declined YoY.
Cash flow quality: Operating CF/net income was 0.30x (negative in the previous year), below 1.0x, while FCF was ¥487.5B.
Investment efficiency: Capital expenditure/depreciation was 1.73x, indicating a growth investment phase above 1.0x.
Financial soundness: The equity ratio was 41.4% (42.1% in the previous year), and the current ratio was 291.8%.

Cash Flow Analysis

Operating CF was ¥203.3B, and its ratio to net income of ¥686.4B was only 0.30x, indicating weak cash backing for earnings. Investing CF was positive at ¥284.2B. Although capital expenditures of -¥372.4B were recorded, cash inflows from the withdrawal of time deposits of ¥345.7B and proceeds from the sale of investments of ¥541.2B more than offset the outflows. Financing CF was ¥1,224.7B, primarily because funding from the issuance of ¥2,000B in bonds exceeded dividend payments of -¥712.2B and share buybacks of -¥4.8B. FCF was positive at ¥487.5B (operating CF + investing CF). Cash generation requires monitoring, as an increase in inventories (+¥406.1B), a decrease in trade payables (-¥337.3B), and an increase in income tax payments (-¥925.3B) weighed on operating CF.

Earnings Quality

As the Company applies IFRS, ordinary income is not used. Net income of ¥686.4B was calculated by deducting income taxes of ¥227.0B, representing an effective tax rate of 24.9%, from profit before tax of ¥913.4B. The difference between the two was within the normal tax burden range. Financial income was ¥97.4B, only 1.7% of revenue, indicating that the scale of non-operating income was limited. At the same time, the ¥240B EU Specialty business restructuring cost and the ¥69B reversal of the provision related to the Odawara Plant were offsetting one-time items included in operating income. Reported operating income of ¥851.0B was therefore affected by these one-time factors. Accruals arose because operating CF of ¥203.3B was substantially below net income of ¥686.4B, against a backdrop of increases in inventories, trade receivables, and tax payments. Earnings quality is consequently at a level requiring monitoring.

Earnings Forecasts and Guidance

Progress against the full-year forecasts was 24.6% for revenue (¥5,747.4B/¥2 trillion 3,400B), 26.6% for operating income (¥851.0B/¥3,200B), and 27.0% for net income (¥686.4B/¥2,540B), all exceeding the standard quarterly progress rate (25%). The Company revised its earnings forecasts during the quarter, raising revenue by +¥600B and operating income by +¥50B. The main factors were a revision to the foreign exchange assumptions from Q2 onward (USD/JPY 155 and EUR/JPY 180), strong U.S. sales of Enhertu, and an increase in non-core income from the reversal of the Odawara Plant-related provision. There was no revision to the dividend forecast, and the annual dividend remains ¥100.

Shareholder Returns

Based on the full-year company forecasts, forecast DPS of ¥100 against forecast EPS of ¥137.94 implies a payout ratio of 72.5%. Dividend payments reported in the cash flow statement for the quarter were ¥712.25B, up from ¥561.03B in the previous year. Share buybacks were limited to ¥4.8B, a significant decrease from ¥585.36B in the previous year. The payout ratio based solely on dividends is 72.5% as noted above, while the total return ratio including share buybacks was relatively low based on actual results for the quarter.

Catalysts

【Short Term】Key areas of focus include the divergence between actual exchange rates and the foreign exchange assumptions from Q2 onward (USD/JPY 155 and EUR/JPY 180), progress toward additional indications for Enhertu and Datroway, and the scheduled initiation of the FIH trial for the novel Treg cell-targeting ADC “DS1025” in 1H FY2026.

【Long Term】Medium- to long-term events of interest include progress under the R&D policy of positioning DXd ADCs as the 1st BGT and identifying multiple Next BGTs by FY2030, as well as the development of new modalities in the field of immuno-oncology.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (pharma)

Profitability and Returns

The operating margin was slightly below the industry median, while the net profit margin was substantially above the industry median, highlighting the contrast between front-loaded investment at the operating level and relatively strong efficiency after taxes.

Growth and Capital Efficiency

The revenue growth rate was more than twice the industry median, representing a high level of growth within the industry.

※Source: Compiled by the Company

Risk Factors

1. Declining cash conversion: Operating CF/net income was only 0.30x, while inventories increased to ¥7,330.5B (+5.9% from the end of the previous fiscal year). An inventory valuation loss was also recognized, indicating that inventory and working capital management are affecting cash generation.

2. Foreign exchange risk: The actual exchange rates in Q1 (USD/JPY 159.49 and EUR/JPY 185.38) were weaker yen levels than the full-year assumptions (USD/JPY 155 and EUR/JPY 180). If a divergence from these assumptions emerges toward the second half of the fiscal year, an impact on performance is anticipated.

3. One-time costs associated with business restructuring: The ¥240B restructuring cost for the EU Specialty Business Unit reduced operating income in the quarter. Depending on the progress of future business structural reforms, additional one-time costs may arise.

Key Earnings Takeaways

1. Revenue growth of +21.1% substantially exceeded the industry median of 9.8%, while the operating margin of 14.8% was below the industry median of 17.5%. The earnings data indicate a growth investment phase in which R&D investment and business restructuring costs are being incurred ahead of benefits.

2. The low cash conversion rate of 0.30x for operating CF/net income resulted from movements in inventories, trade receivables, and tax payments. The ability to convert earnings into cash will be a key monitoring point in future quarters.

3. The full-year forecast has already been revised upward, and progress rates for revenue, operating income, and net income all exceed the standard progress rate (25%). Based on the disclosed information, progress toward achieving the full-year plan appears reasonable.

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 five-year fade). It does not represent a forecast of the market share price or a recommendation to take any specific investment action.

Sensitivity: ¥1,075–¥1,136 for a ±1% change in the cost of equity, and ¥1,101–¥1,111 for a change of ±0.1 in ω.

Note:

• Net assets as of the quarter-end were used (there is a time difference relative to the full-year forecast).

(Model: Residual income model / Interest rate reference month: 2026-06 / This value does not predict or guarantee the future share price)

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This report is an earnings analysis document automatically generated through AI integration and analysis of XBRL earnings summary data and PDF earnings presentation materials. 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 professionals as necessary.

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