STELLA PHARMA (4888) FY2026 Q3 Earnings Report

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Executive Summary

The operating loss expanded year on year, with the increase in SG&A expenses weighing on profitability despite higher revenue. Revenue was ¥2.6B (+3.0% YoY), operating income was ¥-5.1B (¥-3.8B in the previous year), ordinary income was ¥-5.1B (¥-3.7B in the previous year), and net income was ¥-5.1B (¥-3.7B in the previous year). The gross profit margin remained high at 86.6%; however, SG&A expenses increased to ¥7.4B (+24.0% YoY), substantially outpacing revenue growth and serving as the primary driver of the wider loss.

Factors Affecting Performance

【Revenue】Revenue was ¥2.6B, representing a +3.0% increase year on year. The gross profit margin was 86.6%, essentially flat compared with 86.8% in the same period of the previous year, indicating that the high-value-added business structure has been maintained. However, the revenue growth rate was limited, and the pace of business expansion remains moderate.

【Profit and Loss】SG&A expenses increased to ¥7.4B, up +24.0% year on year, substantially outpacing revenue growth. As a result, the operating loss widened to ¥5.1B, compared with ¥3.8B in the previous year. The ordinary loss and net loss were also ¥5.1B, with the impact of non-operating income and expenses (income of ¥0.2B and expenses of ¥0.1B) limited; the operating loss was therefore reflected almost directly in the bottom line. In conclusion, the company experienced higher revenue and lower earnings (effectively, higher revenue and a wider loss).

Key Financial Indicators

【Profitability】The operating margin deteriorated significantly to -196.2% from -147.6% in the previous year, while the net profit margin was also -196.2%. The gross profit margin remained essentially flat at 86.6%, compared with 86.8% in the previous year, indicating that the high-value-added business model itself has been maintained.【Cash Quality】Cash and deposits were ¥26.9B, accounting for 56.3% of total assets, while the current ratio was approximately 1,872%, indicating extremely strong short-term liquidity. Meanwhile, work in process was substantial at ¥11.0B, suggesting that research and development and manufacturing-related funds account for a significant proportion of assets and remain tied up.【Investment Efficiency】ROE (annualized) was -25.3% and ROIC (annualized) was -108.0%, indicating an extremely low capacity to generate profits from invested capital. Total asset turnover also remains low, reflecting a structure in which revenue is small relative to the asset base.【Financial Soundness】The equity ratio was 56.4% (59.2% in the previous year), while net assets declined to ¥26.9B (¥32.1B in the previous year). Although the level of interest-bearing debt, including ¥6.3B in long-term borrowings, remains conservative, the company is unable to cover interest expense through operating profit because of its operating loss. Attention should be paid to the potential erosion of equity if losses continue.

Cash Flow Analysis

Although detailed disclosure of the cash flow statement is not available, the movement of funds can be inferred from changes in the balance sheet. Cash and deposits declined by ¥5.4B, from ¥32.1B in the same period of the previous year to ¥26.9B. During this period, net assets also decreased from ¥32.1B to ¥26.9B, broadly consistent with cash outflows associated with the recognition of a net loss of ¥5.1B. Work in process remained high at ¥11.0B, indicating that the structure in which funds remain tied up in research and development and manufacturing processes may be affecting capital efficiency. Accounts receivable declined from ¥7.1B to ¥5.7B, providing some support to cash through collections. Overall, operating losses and the internal retention of assets appear to have been the primary causes of the decline in cash, while the substantial cash balance is serving as a buffer for near-term funding needs.

Quality of Earnings

Operating income, ordinary income, and net income were all nearly identical at a loss of ¥5.1B, with no divergence attributable to temporary factors such as extraordinary gains or losses. This indicates that the substance of the earnings results is almost entirely concentrated in the operating loss. Non-operating income of ¥0.2B and non-operating expenses of ¥0.1B (including ¥0.04B in interest expense) were both small, and their impact as recurring earnings adjustment factors was limited. On the asset side, however, a substantial amount of tied-up inventory exists in the form of ¥11.0B in work in process, creating a risk of future accrual adjustments, such as the recognition of valuation losses. No temporary factors that materially distort earnings quality are evident at present, but the results demonstrate that deterioration in operating performance remains an ongoing core business issue.

Earnings Forecast and Guidance

The full-year company forecast calls for revenue of ¥3.8B (-60.7% YoY), an operating loss of ¥9.2B, and a net loss of ¥9.1B. Revenue progress was 69.2% (¥2.6B/¥3.8B), slightly below the standard 75% progress level. Progress toward the operating loss forecast was 55.5% (¥5.1B/¥9.2B), with the company planning to record revenue of ¥1.2B and an operating loss of ¥4.1B in Q4. The high concentration of losses at the fiscal year-end suggests that the planned timing of research and development and commercialization-related expenses is weighted toward the second half.

Shareholder Returns

The annual dividend forecast is ¥0, and the company intends to continue paying no dividend for the current period. The payout ratio is effectively 0% because there is no applicable basis for calculation. Given the continued net losses, the company’s capital allocation policy appears to prioritize securing retained earnings and maintaining funding for business investment.

Risk Factors

1. Monetization risk: While revenue increased only +3.0% year on year, SG&A expenses rose +24.0%, indicating that the scale of the business is not absorbing fixed costs. The operating margin deteriorated to -196.2%.

2. Working capital retention risk: Work in process totaled ¥11.0B and accounted for a substantial portion of assets. If conversion into finished products and shipments is delayed, capital efficiency and the risk of valuation losses will increase. Accounts receivable also remained substantial at ¥5.7B, and fluctuations in collection timing could affect the working capital burden.

3. Declining profitability and capital efficiency: Annualized ROE was -25.3% and ROIC was -108.0%, and the operating loss means that interest expense cannot be covered by operating profit. Cash and deposits of ¥26.9B provide a buffer, but this balance has declined by ¥5.4B year on year, and the rate of cash consumption if losses continue could affect financial flexibility.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (pharma)

Profitability and Returns

The company’s profitability is below the industry median; however, the industry IQR itself is broad and reflects a distribution characteristic of the research and development stage, where many companies are loss-making.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median, with the company achieving relative revenue growth in an industry containing many companies reporting declining revenue.

※Source: Compiled by the Company

Key Points in the Financial Results

1. The high gross profit margin of 86.6% has been maintained, but the increase in SG&A expenses (+24.0%) has substantially exceeded the revenue growth rate (+3.0%), making the ability to absorb the cost structure a key determinant of earnings quality.

2. Progress in converting the substantial ¥11.0B of tied-up work in process into finished products and shipments is an important indicator for assessing the likelihood of future monetization.

3. The full-year forecast assumes revenue of ¥1.2B and an operating loss of ¥4.1B in Q4, with expenses planned to be concentrated at the fiscal year-end. It is important to monitor future cash movements together with the rate of decline in cash and deposits.

Theoretical Share Price (Reference Value)

Sensitivity: ¥16–¥17 at a ±1% change in the cost of equity, and ¥16–¥17 at a ±0.1 change in ω.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-08 / This is a mechanically calculated value based solely on publicly disclosed data and is not a forecast of the market share price or a recommendation of any specific investment action, nor does it forecast or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with a professional as necessary.

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