Interim results: revenue contracted on lower DW-1002 royalties, while a 31.7% cut in R&D spend and the Senju Pharmaceutical alliance advance the build-out of the next earnings base

Key Positives From The 2Q Results

Against a JPY 140M revenue decline, the company trimmed SG&A by JPY 118M, holding the operating loss at -JPY 312M versus -JPY 309M a year earlier — essentially flat. Late-stage pipeline milestones clustered in the first half: an option agreement with Senju Pharmaceutical for the glaucoma treatment "H-1337" alongside a JPY 194M equity investment, and completion of the observation period for both global Phase III trials of "K-321" in Fuchs' endothelial corneal dystrophy.

• R&D expenses of JPY 217M (-31.7% YoY) and other SG&A of JPY 128M (-12.1% YoY) demonstrate cost structure control
• H-1337: option agreement signed with Senju Pharmaceutical covering Japan and Asia, with a JPY 194M third-party allotment received; strategy shifts to prioritizing Japanese development
• K-321: the observation period for the remaining trial completed in March, putting both trials into the data analysis phase and advancing the 2027 filing plan
• DW-5LBT (Bondlido): basic agreement reached with US-based Terrain on a commercialization partnership, targeting launch in 4Q 2026
• Equity ratio rose to 68.7% (66.1% at end-FY); no going-concern note applicable

Key Concerns From The 2Q Results

Revenue of JPY 33M (-80.9% YoY) represents only 11.0% progress (company-disclosed) toward the full-year plan of JPY 300M, with DW-1002 royalty recognition hinging on the timing of a settlement in contract extension negotiations. Operating cash flow outflow widened to -JPY 343M (from -JPY 211M a year earlier), and investing cash flow of -JPY 601M — including JPY 595M placed into restricted deposits — reduced cash and cash equivalents to JPY 986M (-JPY 723M versus end-FY).

• Revenue of JPY 33M comprises Glanatec Alpha alone; DW-1002 royalties were zero as contract extension talks remain in progress
• Continued operating losses and negative operating cash flow constitute events that raise material doubt about the going-concern assumption (management assesses there is no material uncertainty)
• Weighted average shares outstanding rose from 44,764k to 55,719k (+24.5%); dilution from equity issuance and warrant exercises continues
• DW-5LBT revenue is excluded from full-year guidance as "a reasonable outlook is difficult"; with launch set for 4Q 2026, earnings contribution will be limited
• US development of H-1337 has had its start timing under review in light of Japanese progress, pushing back the US Phase III timeline

Focus Areas / Items To Monitor Going Forward

• Timing of a settlement on the terms for extending the DW-1002 licence agreement with DORC. US royalties for January–June are slated to be recognized in a lump sum upon contract signing, making this the key to achieving the JPY 300M full-year revenue target.
• Finalization of the Japanese Phase III trial protocol for H-1337 and progress on PMDA face-to-face consultation. The conditions under which Senju Pharmaceutical's option exercise converts into a licence agreement are also in focus.
• Formal execution of the exclusive distribution licence agreement for DW-5LBT and launch timing. Key question is how far profit-sharing payments from MEDRx can supplement the base revenue.

Key Financial Highlights

• Of the JPY 140M revenue decline, management attributes roughly 45% to lower royalties following DW-1002 patent expiry (ex-US). US royalties for January–June are to be recognized in a lump sum upon contract extension
• Gross profit margin of 100.0% (our estimate); no cost of goods sold was recorded in the interim period
• Non-operating expenses of JPY 12M include JPY 6M of interest expense and JPY 4M of share issuance costs

Performance By Business Segment

The company operates a single segment, drug discovery, so segment information is omitted. Revenue is centred on royalty income; in the interim period, only Glanatec Alpha ophthalmic solution among marketed products contributed.

Segment Performance Table

(Margin is operating loss ÷ revenue, our estimate)

Progress Versus Full-Year Guidance

Revenue progress of 11.0% (company-disclosed) reflects a second-half weighted plan: DW-1002 US royalties for January–June are to be recognized in a lump sum upon agreement on the contract extension, and DW-1002 Japan milestone income is embedded in the full-year plan. On the loss side, the recurring loss of -JPY 322M represents 40.3% of the -JPY 800M full-year plan (our estimate), and R&D expense progress stands at 27.9% (company-disclosed). Management describes progress as "broadly in line with plan," implying full-year R&D expenses of JPY 780M will accelerate in the second half.

(Revenue and R&D expense progress rates are company-disclosed; the three loss items are our estimates)

Changes To Guidance

No change from the full-year consolidated guidance announced on 13 February 2026 (revenue of JPY 300M, operating loss of -JPY 780M, recurring loss of -JPY 800M, and net loss attributable to owners of parent company of -JPY 800M). Guidance is maintained despite revenue progress of only 11.0%, predicated on settlement of the DW-1002 contract extension and second-half recognition of milestone income.

Commentary On Shareholder Returns

No dividend was paid for FY December 2025, and guidance for FY December 2026 is unchanged at JPY 0.00 year-end and JPY 0.00 annually. There has been no revision to dividend guidance and no disclosure of a new share buyback policy. Treasury shares stood at 11,387 at period-end (286 at end-FY), reflecting fractional-share processing related to restricted stock compensation. The company remains in a phase of prioritizing resource allocation to R&D.

Financial Position

The equity ratio improved to 68.7% from 66.1% at end-FY, and the company maintains a net cash position with JPY 1,581M in cash and deposits against JPY 583M of interest-bearing debt. On-hand liquidity is on a declining trend due to front-loaded R&D spending, with the shortfall continuing to be covered by equity capital from third-party allotments and warrant exercises.

News Released Alongside The Earnings Announcement

Major Announcements During The Quarter

Large-Shareholding Filings / Material Proposals Over The Past Year

• Yuichi Hidaka: 11.07% → 9.00% (2026/05/13) – Held as a stable, long-term shareholder in his capacity as President and Representative Director; no material proposal actions applicable
• Yuichi Hidaka: 12.11% → 11.07% (2026/01/27) – Same as above (long-term holding as a stable shareholder)
• SBI SECURITIES: 5.49% → 4.45% (2025/12/04) – Held as trading inventory in connection with securities operations
• SBI SECURITIES: 7.28% → 5.49% (2025/10/21) – Held as trading inventory in connection with securities operations
• SBI SECURITIES: 11.38% → 7.28% (2025/10/02, short-term bulk transfer) – Held as trading inventory in connection with securities operations; no material proposal actions applicable