Pharmarise Holdings Corporation Q3 FY2025 earnings call

Overall Financial Highlights

• Total consolidated revenue was 46.579 billion yen, up 14.5% (5.904 billion yen) YoY, driven by M&A-driven expansion in the pharmacy business and strong performance in retail. Gross profit was 6.542 billion yen, up just 1.3% YoY, as rising procurement costs and personnel costs pushed up cost of goods sold. Operating profit was 95 million yen, down 88.9% YoY, while net income attributable to parent shareholders was a loss of 272 million yen.

• Balance sheet: Total assets increased 1.616 billion yen to 31.102 billion yen, driven by the Kanichi Shoten business acquisition. Cash and cash equivalents decreased 3.831 billion yen due to acquisition payments, while inventory increased 1.817 billion yen. Total liabilities increased 2.06 billion yen to 24.104 billion yen, driven by higher long-term borrowing for the acquisition, while net equity decreased 443 million yen to 6.998 billion yen.

Adjustments to Dispensing Fee Reforms

• Progress on meeting facility standards is ahead of plan, and higher-margin home and facility dispensing has grown, so technical fee per prescription is above plan. Full-year technical fee revenue is tracking 370 million yen above initial plan, driven by volume gains from newly acquired next PH stores and upgraded calculation classifications.
• Generic drug volume share reached 90.6%, holding at a high level after the introduction of the co-payment system for off-patent brand drugs increased adoption. 95.7% of all stores (386 out of 403 total stores) now qualify for the highest generic dispensing adjustment classification, exceeding the full-year plan.
• The share of stores qualifying for regional support adjustments has recovered to 49.6% (200 stores) after the 300+ store chain reclassification, already meeting the full-year plan, with additional stores from the acquired next PH expected to qualify in coming months.
• Cumulative family pharmacist consent forms reached 152,000 as of February, on track to hit the full-year target of 156,000 by May. As of February 2025, the company has 78 certified health support pharmacies and 101 certified regional collaboration pharmacies, with plans to increase certifications at newly acquired stores.

M&A and Strategic Shift

• The company shifted strategy from holding store count under 300 (to avoid lower dispensing fees for large chains) to large-scale M&A expansion to drive long-term growth, resulting in the acquisition of GOOD AID and the Kanichi Shoten pharmacy business. Profit is currently at a cyclical bottom due to temporary M&A costs, unabsorbed legacy inefficiencies, and PMI costs. The company is quickly integrating Pharmarise operating knowhow to cut costs, optimize headcount, improve efficiency, and boost technical revenue to restore profit growth. next PH has outperformed all expectations: December (first full month) profit was positive (vs expected loss), January posted over 34 million yen in profit, and February posted over 8 million yen in profit, even with headwinds from fewer operating days and heavy snow.

ESG and DX Initiatives

• The company has restarted community health events, including the dementia cafe program "Cafe Nyaramarise" in partnership with local governments, targeting 50 stores hosting regular events by May 2026.
• My Number insurance card utilization has grown to 44.1% as of February 2025, up from 1.6% in October 2023. 250 stores now qualify for the highest medical DX promotion adjustment, and 93% of all stores qualify for some level of the adjustment, meeting regulatory requirements for higher fee classifications.

1. Pharmacy Business: Segment revenue reached 383.29 billion yen, an increase of 5.229 billion yen (15.8%) year-over-year. This growth is driven by M&A-related store count expansion, with total prescription volumes increasing 524,882 prescriptions (15.9%) year-over-year, while average prescription price was nearly flat at -0.3% YoY. Revenue came in 136 million yen below plan, due to average prescription price coming in 0.7% below plan (prescription volume was almost exactly on plan). Segment profit decreased 734 million yen YoY, hit by lower dispensing fees for chains over 300 stores, rising personnel costs, higher drug procurement costs, and increased goodwill amortization. However, newly acquired GOOD AID performed in line with plan, and next PH (acquired from Kanichi Shoten Group) recorded over 5 million yen in operating profit from just one month (December) of results, far exceeding the expected initial loss. Good AID and next PH together contribute approximately 16.6% of total group revenue. 2. Product Retail Business: Segment revenue was 66.16 billion yen, an increase of 456 million yen (7.4%) YoY. The convenience store sub-segment grew 442 million yen (12.5%) YoY, driven by new store openings (Chiyoda and Nabebata FamilyMart locations) that increased foot traffic, while the drugstore sub-segment decreased 34 million yen (1.5%) YoY. Revenue came in 29 million yen (0.4%) below plan. Segment profit increased 90 million yen YoY, as new store profitability has held steady, though operating profit came in 35 million yen below plan due to rising drugstore procurement costs. This segment contributes approximately 14.2% of total group revenue. 3. Other Businesses (including medical mall business and pharma IT solutions): Total revenue increased 218 million yen YoY, and came in 36 million yen below plan. The shortfall is driven by delayed system development orders in the pharma IT solutions segment. Medical mall operating profit came in 14 million yen below plan due to higher utility, personnel and maintenance costs, while IT solutions operating profit was 17 million yen below plan due to the delayed orders. This segment contributes approximately 19.2% of total group revenue.

• Management is targeting a V-shaped profit recovery starting next fiscal year, after the current temporary profit downturn from M&A integration and regulatory changes. A new medium-term management plan is currently under development and will be published once completed.
• Full-year total revenue is tracking almost exactly in line with revised plan, with pharmacy operating profit also nearly on plan. Full-year technical fee revenue is expected to exceed the initial plan by at least 370 million yen, driven by stronger-than-expected adjustment classification gains and volume growth from new acquisitions.
• The company is actively accelerating unprofitable store closures at an unprecedented scale this fiscal year, to position the group for full profitability next fiscal year, with closures covering unprofitable locations across the entire group (not just newly acquired stores).
• Further profit growth from the two newly acquired subsidiaries is expected as the company expands higher-margin technical fee adjustment calculations at these locations, which have untapped upside in family pharmacist, regional collaboration, and other adjustment classifications.

• The 2022 dispensing fee reform introduced lower technical fee rates for chains with over 300 stores, which has created significant margin pressure after the M&A expansion pushed the company over this threshold, reducing overall segment profit.
• Volatility in drug procurement environments has pushed up raw material and wholesale costs, compressing gross margins across the pharmacy business.
• System integration costs and legacy inefficiencies from acquired businesses have temporarily reduced profitability in the short term, during the PMI integration period.
• Delays in large IT system development projects for pharmaceutical clients have created revenue and profit shortfalls in the other business segment.
• Higher interest rates have increased interest expenses on acquisition-related debt, expanding the operating loss for the current quarter.

Q: Why have GOOD AID and next PH delivered profit contributions faster than expected, will profit continue to grow from additional adjustment gains, and will unprofitable store closures target just the two new acquisitions or the whole group? / A: For GOOD AID, the main driver of faster-than-expected profit is rapid reduction in indirect costs: GOOD AID was pursuing an IPO and had an oversized management headcount, and the parent holding company has absorbed most management functions, cutting excess personnel and overhead significantly. For next PH, the previous owner had excessive headcount across all store and corporate roles, and natural attrition has already reduced personnel costs sharply, while unnecessary overhead (such as luxury vehicles for senior managers) and excessive external fees have also been eliminated quickly. Both firms have room to grow profit further: GOOD AID focused on over-the-counter retail and has untapped opportunity to increase adjustment calculations, while next PH already has strong generic adjustment but has upside in family pharmacist and regional collaboration adjustments. Closures are group-wide: all of GOOD AID's dedicated over-the-counter retail stores were closed by end of March, additional unprofitable GOOD AID stores are scheduled for closure, and large unprofitable stores across legacy Pharmarise group entities will also be closed, while next PH currently has no planned closures.