STELLA PHARMA CORPORATION

Pharmaceutical research and development requires a long period of time and substantial investment from basic research through to obtaining approval, and there is a risk that development could be delayed or discontinued due to clinical trial failures or regulatory authority guidance. In particular, BNCT (Boron Neutron Capture Therapy) faces intense competition in the field of cancer treatment, and the competitive advantage of the development pipeline may decline. The Company aims to avoid such occurrences and respond appropriately, but there is uncertainty as to whether these efforts will succeed.

As of September 5, 2025, the company to which manufacturing of Steboronine® was outsourced entered bankruptcy proceedings and halted transactions. The Company entered into a development and manufacturing outsourcing agreement with a new contract manufacturer effective October 2, 2025, and is proceeding with the transfer of production; however, depending on the progress of this transfer, stable supply of the product may become difficult, which could have a material impact on the Company's financial position and operating results. The Company has designated the reconstruction of a stable supply system as a top priority and is responding accordingly.

Stella Chemifa is the only company in Japan that possesses the high-purity concentration technology for B-10 (a stable boron isotope), which is essential for manufacturing the active pharmaceutical ingredient of Steboronine®, and no substitute exists. If transactions and production with this company were to be halted due to a disaster or other event, manufacturing and sale of Steboronine® would become difficult. The exclusive basic transaction agreement is valid for 10 years from the date of approval (and automatically renews thereafter), but if exclusive rights are not granted after the 10-year period elapses, this could also have a material impact on the Company's financial position.

BNCT is a combination product that combines a boron agent with a neutron beam irradiation device (accelerator), and the progress of accelerator installation at medical institutions is a precondition for business expansion. If there are delays in the research, development, manufacturing, and sale of accelerators, or if malfunctions occur in already-installed equipment, treatment via BNCT would be restricted, directly impacting the Company's revenue. Accelerator manufacturers other than Sumitomo Heavy Industries are also advancing research and development, but uncertainty regarding installation status remains high.

Due to upfront investment in research and development expenses, the Company has continuously incurred operating losses and negative cash flow, and retained earnings remain negative. If the Company is unable to raise funds at the necessary times, material concerns regarding business continuity could arise. The Company intends to raise funds at appropriate times and strengthen its financial base, but there is no guarantee of certainty regarding such fundraising.

Financial covenants are attached to borrowings, and if these are breached, the Company would lose the benefit of the grace period, giving rise to material concerns regarding business continuity. The ratio of interest-bearing debt to total assets turned upward, increasing from 14.2% in FY2025 (ended March 2025) to 16.7% in FY2026 (ending March 2026), and borrowings may increase further as the business expands going forward. There is also a risk that fundraising may not proceed as planned due to sharp fluctuations in interest rates or changes in financial market conditions.

Although the Company adopts an in-house sales model, discrepancies between actual results and plans may arise depending on the progress of accelerator installation and the accuracy of patient number estimates. The number of BNCT treatment cases remains limited even including clinical research, and the appropriate number of cases and procedures is unknown, creating a risk that the sales plan may not progress as expected. If the plan is not achieved, valuation losses on inventory and fixed assets, or impairment losses, may be considered for recognition.

The pharmaceutical industry is regulated at every stage of research, development, manufacturing, and sales under pharmaceutical affairs laws and the medical insurance system, and if the Company's Type I Pharmaceutical Manufacturing and Marketing License (valid until June 2028) were revoked due to a violation of laws or regulations, the Company could be required to recall products or suspend manufacturing and sales. In addition, periodic drug price reductions tend to be implemented within Japan, creating a risk that the anticipated insurance price may not be assigned. These factors could have a material impact on the Company's financial position and operating results.

As of the end of the current fiscal year, the Company is a small organization consisting of 4 directors (excluding outside directors) and 47 employees, and its business activities are heavily dependent on management, the heads of each department, and a small number of research and development personnel. If the Company is unable to smoothly secure and develop excellent talent, or if personnel attrition occurs, this could impede business activities. As a company with a short history, having been founded in 2007, unknown risks also exist regarding the organization's capacity to respond systematically to unprecedented troubles.

As the Company's research and development activities expand in the future, it may flexibly carry out fundraising involving the issuance of new shares, such as capital increases, creating a risk of dilution of the value per share. As of the end of the current fiscal year, the number of potential shares from stock options was 888,800 shares (2.61% of the total number of issued shares of 34,034,100 shares), and dilution will also occur upon exercise of these rights. The Company may continue to implement incentive plans going forward in order to secure excellent talent.