FunPep Company Limited

Pharmaceutical research and development requires substantial funding and long time periods, and there is a risk that development may be extended or discontinued if useful efficacy cannot be confirmed in clinical trials or due to progress by competing products. Since investment recovery must occur within the patent term, extended development directly leads to the risk of failing to recover investment. The Company aims to prevent the materialization of such risks through advice from scientific and medical advisors and by utilizing consultation systems with regulatory authorities.

The Group's revenue is heavily dependent on two partnership agreements with Shionogi & Co., Ltd. (the SR-0379 (Skin Ulcer Treatment) license agreement and the FPP004X (Target: IgE, Indication: Pollen Allergy/Seasonal Allergic Rhinitis) option agreement). If these agreements were terminated before their expiration due to breach of contract terms or other reasons, it could materially affect the Company's business results and financial position. Additionally, the timing of development milestone revenue recognition is subject to uncertainty depending on development progress, and delays in development could worsen business performance. The Company aims to reduce this dependence by securing new partnership agreements, but there is no guarantee such agreements can be obtained.

Research and development of Functional Peptides (Sales for Cosmetics/Non-Pharmaceutical Use) requires substantial funding, but business revenue is expected to fluctuate unstably due to its high dependence on upfront payments from new partnership agreements and development milestones. If the Company is unable to raise funds from capital markets or elsewhere at the necessary timing, this could materially affect the progress of research and development. The Company intends to strengthen its financial base through fundraising via partnerships and by raising capital from capital markets at appropriate times.

As of the end of the month preceding the filing date of this document, the total number of issued shares was 40,563,800. In addition to the issuance of 352,900 new shares through a third-party allotment in March 2026, up to 393,000 new shares may be issued through the exercise of stock options, and up to 9,750,000 new shares may be issued through the exercise of the 13th series of stock acquisition rights. The exercise of these rights could dilute the value per share and affect share price formation. The Company may continue incentive plans in the future to secure talented personnel, which presents an additional dilution risk.

The Group's core technology, the antibody-inducing peptide creation platform "STEP UP (Antibody-Inducing Peptide Drug Discovery Platform)", faces the risk of losing competitiveness if other research institutions develop technologies with superior advantages. Loss of competitiveness could make it difficult to commercialize antibody-inducing peptides and to form partnerships with business companies, which could materially affect the Company's business strategy, business results, and financial position. The Company intends to continuously improve its platform technology.

The development of FPP003 (Target: IL-17A, Indication: Psoriasis/Ankylosing Spondylitis), FPP004X (Target: IgE, Indication: Pollen Allergy/Seasonal Allergic Rhinitis), and FPP005 (Target: IL-23, Indication: Psoriasis) is premised on a license agreement with Osaka University. If this license agreement were terminated due to a default by the Company or other reasons, it could materially affect the Company's business results and financial position. Furthermore, there is no guarantee that all pending patent applications will be granted, and the Company's business could be materially affected if superior technology is developed outside the scope of the Company's patent rights or if intellectual property disputes arise with third parties. The Company conducts patent searches, and no litigation with third parties has occurred to date.

The Group is a small organization consisting of 5 directors, 3 auditors, and 15 employees (including 2 officers who also serve as employees), and its business activities depend on the technical know-how held by management, including President and Representative Director Toshimi Miyoshi, and a small number of researchers. If the Company is unable to successfully secure and develop personnel, or if key personnel leave, this could disrupt business activities and materially affect the Company's business results and financial position. The Company intends to actively promote the securing and development of talented personnel and to enhance its internal control systems in line with business expansion.

The Group's research and development activities center on technology seeds from the Graduate School of Medicine at Osaka University, and joint research with Osaka University forms the foundation of the Company's research and development strategy. If collaboration with Osaka University or other universities were to become impossible for any reason, this could materially affect the Company's research and development strategy. The Company also conducts joint research with other universities and intends to continue expanding collaboration with universities and other research institutions in the future.

In an intensely competitive environment among domestic and international pharmaceutical companies and biotech ventures, there is a risk that royalty income from partner pharmaceutical companies could decline due to the development and launch of competing products, or that partner pharmaceutical companies could terminate agreements for business reasons. In addition, the strengthening of healthcare cost containment measures, periodic drug price reductions, and policies promoting the use of generic drugs in major countries, including Japan, could materially affect post-launch revenue. These are external environmental risks that the Group cannot directly control.

Unexpected side effects may occur from the clinical trial stage through the post-launch stage, and if various liabilities, including product liability, arise, there is no guarantee that insurance proceeds will cover the full amount of damages. Even if a damages claim is not upheld, the negative image resulting from the mere fact that a product liability claim was made could adversely affect trust in the Group and its products. The Company plans to obtain appropriate insurance when conducting clinical trials on its own.