Tegoprazan drives +20.6% growth in royalty revenue; hitting the full-year plan hinges on booking milestones and upfront payments in 4Q

Key Positives From The 3Q Results

Royalty revenue from marketed products reached JPY 2,055M (+20.6% YoY), which the company describes as a record pace. Royalty growth more than offset the decline in other revenue, so cumulative operating revenue still grew YoY. Operating expenses were held down 2.5%, and standalone 3Q (Jul-Sep) operating income turned positive (our estimate).

• Standalone 3Q Royalties Up 31.3%
  : 3Q royalty revenue was JPY 827M, up 31.3% from JPY 630M a year earlier (our estimate). Drivers were 15.3% growth in K-CAB prescriptions in Korea (KRW 185.4B) and expansion to 22 countries.
• Quarterly Profit Without Milestones
  : Standalone 3Q operating income was JPY +100M, versus a JPY -154M loss a year earlier (our estimate). The company was profitable for the quarter on royalties alone.
• Cost Discipline
  : Cost of operations fell to JPY 481M (-12.1%) and other SG&A to JPY 845M (-3.0%). The absorption-type merger of TMRC is also streamlining administrative operations.
• K-CAB Label Expansion and US Approval Path
  : K-CAB secured its sixth indication in Korea (prevention of NSAID-induced ulcers), the most approved indications in its class. In the US, the NDA review is progressing, and the company expects approval in January 2027.
• Stronger Cash Flow and Balance Sheet
  : Operating CF turned to an inflow of JPY 930M (prior-year period: JPY -172M). Together with the third-party allotment to HK inno.N, this lifted the equity ratio to 72.2% (+7.1pt vs. FY-end).

Key Concerns From The 3Q Results

Other revenue, which covers upfront payments, milestones and research collaboration fees, roughly halved to JPY 295M (-51.4%). The full-year plan assumes non-royalty revenue is booked in 4Q. However, the company states explicitly that whether, when and how much will be booked remains uncertain. Income taxes were also heavy at JPY 231M despite a pre-tax loss, limiting the improvement at the bottom line.

• 4Q Deal Dependence
  : Other revenue was JPY 295M (-51.4%). Last year, JPY 1,130M was booked in 4Q (our estimate), so full-year results again hinge on whether a large 4Q deal materializes.
• Heavy Tax Charge
  : Income taxes of JPY 231M (prior-year period: JPY 142M) were booked despite a pre-tax loss. This was the main driver of the JPY -493M net loss. The company gave no breakdown, so investors need to assess whether the burden is structural.
• One-Off Cash Flow Boost
  : The improvement in operating CF mainly reflects a JPY 1,367M decrease in trade receivables (collection of amounts booked in the prior-year 4Q). It therefore contains a large one-off element.
• Dilution and Partner Concentration
  : The third-party allotment raised shares outstanding by 6.4%, from 24.46M to 26.03M. HK inno.N's stake rose to 25.1%, deepening reliance on the partner for both revenue and capital.
• Loss-Prone Cost Structure
  : R&D expenses of JPY 1,263M (+2.1%) equal 53.7% of operating revenue (our estimate). Combined with JPY 209M in goodwill amortization, the cost base tends to produce operating losses in periods without milestones.

Focus Areas / Items To Monitor Going Forward

• Size of 4Q Milestones and Upfront Payments
  : Meeting the full-year plan requires standalone 4Q operating revenue of JPY 1,630M and operating income of JPY 403M (our estimate). The key question is how much the Phase II initiation payment from Hisamitsu Pharmaceutical (announced 2026/10/21) will contribute.
• Tegoprazan US Approval and Launch
  : Watch for US approval (company expects January 2027) and launch preparations by Sebela/Braintree. Whether entry into the roughly JPY 400B US market lifts royalties to a new level is the key swing factor for medium-term earnings.
• Out-Licensing and Partnered Research
  : Watch for out-licensing of the ghrelin receptor agonist and the IRAK-M degrader, and for concrete progress in joint metabolic/endocrine research with HK inno.N. The question is whether the "second-floor" and "third-floor" value layers emerge as revenue sources beyond royalties.

Key Financial Highlights

The operating loss narrowed by JPY 106M. Higher royalties and lower cost of operations and SG&A absorbed the decline in other revenue. At the recurring level, a smaller FX loss (JPY 87M → JPY 17M) helped narrow the loss by JPY 165M. However, higher income taxes limited the reduction in net loss to JPY 75M (all our estimates).

Performance By Business Segment

RaQualia reports a single segment (pharmaceutical R&D). Royalty growth is driving a structural shift from milestone dependence toward a stable-revenue model. That said, the company is currently in a lull between other-revenue events.

Segment Performance Table

Progress Versus Full-Year Guidance

Operating revenue progress of 59.1% is roughly in line with 58.1% a year earlier (our estimate). However, last year the company booked JPY 1,130M of other revenue in 4Q to reach full-year revenue of JPY 3,979M, so a 4Q contribution of similar size is needed again. Against an operating income plan of JPY 165M, the 9M cumulative figure is JPY -238M. Standalone 4Q operating income of JPY 403M is therefore required (prior-year 4Q actual: JPY 827M; all our estimates). Hitting the plan depends on booking milestones and upfront payments in 4Q, which the company itself calls uncertain.

• Lumpy Quarters
  : Quarterly results swing widely depending on when milestones and upfront payments are booked. Last fiscal year, standalone 4Q operating revenue of JPY 1,668M made up 41.9% of the full year, mostly from JPY 1,130M of other revenue (our estimate).
• Steady Royalty Build
  : Royalty revenue accumulates quarter by quarter. Last fiscal year's standalone 4Q royalty revenue was JPY 539M (our estimate).

Changes To Guidance

Full-year guidance (announced February 13, 2026) is unchanged. The company says royalty revenue is solid, but the milestones and upfront payments assumed in guidance have not yet been booked. Booking them in 4Q is a condition for meeting the plan. Whether, when and how much will be booked depends on licensees and partners and remains uncertain. The company will disclose promptly if a revision becomes necessary.

Commentary On Shareholder Returns

The FY12/2026 dividend forecast is unchanged at a year-end dividend of JPY 0.00. The earnings presentation reiterates existing policy. Dividends will be paid as the financial base strengthens, and share buybacks will be considered flexibly.

Financial Position

The equity ratio rose to 72.2%. Cash and deposits of JPY 4,655M exceed interest-bearing debt of JPY 2,534M (including leases), leaving the company in a net cash position. With the equity raise and ongoing loan repayments, the balance sheet continues to strengthen.

Disclosures Released Alongside The Earnings Announcement

Major Announcements During The Quarter

Large-Shareholding Filings / Material Proposals Over The Past Year

• HK inno.N Corporation: 20.3% → 25.1% (2026/01/29) - Strategic investment for a capital and business alliance (increase from subscribing to the third-party allotment)
• Yuichi Kakinuma: 20.3% → 25.1% (2026/01/29) - Stable shareholder with long-term holding intent (increase in joint holders' stake)
• HK inno.N Corporation: 20.4% → 20.3% (2025/12/12) - Strategic investment for a capital and business alliance (change in material contracts, such as collateral agreements)
• Yuichi Kakinuma: 20.4% → 20.3% (2025/12/12) - Stable shareholder with long-term holding intent (change in material contracts, such as collateral agreements)