MEDICAL SYSTEM NETWORK Co.,Ltd. Q4 FY2025 earnings call

Consolidated Overall Performance

• The company achieved a 6.1% year-over-year increase in consolidated revenue to 122.387 billion yen, ending the period with 3.154 billion yen in operating profit (down 17.7% YoY), 3.162 billion yen in ordinary profit (down 17.3% YoY), and 1.262 billion yen in net income attributable to parent shareholders (down 32.2% YoY). The full-year plan was achieved for both revenue and profit, with small positive upside versus initial targets.
• Operating cash flow totaled +4.459 billion yen. Investing cash flow totaled -3.726 billion yen, driven by 3.193 billion yen in new store openings and M&A, 798 million yen in existing store renovations, and a 500 million yen share acquisition, partially offset by 1.428 billion yen in proceeds from the facility sale. Free cash flow has been positive for 6 consecutive periods, enabling 9.5 billion yen in interest-bearing debt reduction over that timeframe.

Regional Pharmacy Segment Operational Highlights

• Over half of new openings are mall-based, and the 10-store target for clinic co-location was achieved. In April 2025, 4 regional subsidiaries in Kyushu were merged into a single entity named Nanohana Kyushu to streamline hiring and operations, targeting 100 stores in the region from the current 73, following the first Okinawa opening in March 2025.
• Successfully increased average technical fee revenue per prescription by 79 yen through proactively securing various service add-on fees: 70%+ of stores now qualify for regional support system add-on fees, and fee increases from regulatory changes were fully offset via expanded linkage and DX promotion add-on fees. Total prescription revenue at existing stores increased just over 1% YoY.
• Continued long-term investment in pharmacist quality improvement: 49.7% of pharmacists have reached Step 3+ in the company's in-house CP Step training program, near the 50% target. 415 pharmacists hold external specialized certifications, a number that continues to grow. The company collected 2,620 adverse drug reaction prevention (pre-avoidance) cases and held its annual case contest to promote patient safety.

Pharmaceutical Network Segment Operational Highlights

• Expanded collaborative activities with regional pharmacists associations, holding required and optional training for 3,673 pharmacists across 17 associations covering topics including cybersecurity, disaster response, emerging infections, and dementia care.
• Scaled the LINCLE Chiiiki regional inventory sharing system, which is now live at three associations after strong initial reception, with multiple additional inquiries for expansion pending.

Growth Strategy Highlights

• Management has begun developing a new 10-year long-term vision, which is targeted for publication in fall 2025, followed by the 7th mid-term management plan in May 2026. Management expects the network to expand to at least 15,000 pharmacies with over 1 trillion yen in total handled drug value over the vision timeframe.

1. Regional Pharmacy Segment: Total prescription volume exceeded 10 million units for the first time, but operating profit declined 807 million yen year-over-year due to a 0.6% drop in total prescription volumes, near-600 million yen in initial-year losses from new mall-based openings, rising drug procurement costs, and wage increases. This segment is the largest revenue contributor, accounting for the majority of consolidated sales. As of period-end, the segment operated 457 total stores, with 21 new openings and 15 closures/transfers in the period.
2. Pharmaceutical Network Segment: Operating profit increased year-over-year. Member pharmacies grew by 1,247 to end at 11,003, exceeding the full-year target of 1,000 net new members. New additions reached 1,688, while withdrawals fell to 441, almost all of which stemmed from M&A/closure rather than defection to competitors.
3. Pharmaceutical Manufacturing and Sales Segment: Operating profit increased year-over-year. Revenue grew 56% year-over-year to 5 billion yen, exceeding the 4.4 billion yen target. Partner retail pharmacies grew by 2,183 to 7,181, exceeding the 7,000 store target. Product portfolio expanded to 52 ingredients and 120 SKUs, adding 7 ingredients and 17 SKUs in the period.
4. Digital Shift Segment: Operating profit increased year-over-year. Partner installed pharmacies reached 6,020, exceeding the 5,700 store full-year target. LINE friend registrations hit 146 million, and core service volumes for prescription transmission and online medication counseling grew steadily.
5. Rental & Facility Related Business: Operating profit increased year-over-year. After transferring the Senri Central Osaka facility in October 2024, the segment operates 4 facilities in Hokkaido with an overall occupancy rate of 90.2%. One facility holds 100% occupancy with a waiting list.
6. Catering Business: Returned to profitability in the period after persistent price increase negotiations with clients.
7. Home-Visit Nursing Business: Narrowed its net loss, resulting in an improvement in profit compared to the prior year.

• For the Fiscal Year 2026 (March 2026 year-end), management forecasts consolidated revenue of 125.5 billion yen, operating profit of 3.4 billion yen, ordinary profit of 3.2 billion yen, and net income of 1.3 billion yen, representing modest growth in both revenue and profit from the prior year, with this guidance framed as a minimum target.
• Key segment targets: 25 new pharmacy openings, 2.4% YoY growth in existing store prescription volumes, 12,000 total member pharmacies in the Pharmaceutical Network Segment, 9,000 partner stores for Pharmaceutical Manufacturing and Sales with 7 billion yen in revenue, and 6,850 installed stores for the Digital Shift Segment.
• The annual dividend per share is maintained at 12 yen (6 yen interim, 6 yen year-end), with a forecast dividend payout ratio of 27.0%.
• The 6th mid-term management plan's 4-year operating profit target of 6.5 billion yen is no longer expected to be achieved by plan end, due to unforeseen headwinds in the core regional pharmacy business.

• Difficult drug price negotiations have compressed margins, with the average drug price deviation rate falling from 5.2% to the 4% range, reducing profitability for the pharmacy business.
• Wage inflation to improve employee compensation has increased operating costs faster than expected, which could not be fully offset by other improvements in the 2025 fiscal year.
• Prescription volumes for the core regional pharmacy segment declined 0.6% YoY, driven by a reversal after strong acute disease prescription volumes in the prior fiscal year, and sustained weak acute disease demand in the current period. Achieving the 2.4% prescription growth target for FY2026 is the core operational risk for the coming year.
• New mall-based pharmacy openings generate initial-year losses that pressure near-term profitability, even as they are expected to contribute to profit in later years.
• Current occupancy at one Hokkaido senior housing facility is below the 90% target, creating remaining profitability pressure for the rental segment.

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