BRIDGE REPORT
CellSeed Inc. (7776)
Setsuko Hashimoto, President and CEO
Setsuko Hashimoto,
President and CEO
Corporate Profile
Company
CellSeed Inc.
Code No.
7776
Exchange
JASDAQ
Industry
Precision Instrument (Manufacturing)
President
Setsuko Hashimoto, Ph.D.
HQ Address
Telecom Center Building, Aomi 2-5-10, Koto-ku, Tokyo
Business Description
The leading company in regenerative medicine that is the first to employ the cutting edge technology of "cell sheet engineering" as its technological base to bring about fundamental changes in conventional medical treatments globally.
Year-end
December
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (Act.) Trading Unit
¥635 8,884,292 shares ¥5.642 billion - 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Act.) PBR (Act.)
- - - - ¥267.73 2.4x
* Stock price as of closing on March 1, 2016. Number of shares at the end of the most recent quarter excluding treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales  Operating income Recurring income Net income EPS (¥) DPS (¥)
2012 75 -846 -842 -913 - -
2013 105 -534 -581 -584 - -
2014 86 -601 -577 -582 - -
2015 193 -568 -531 -535 - -
2016 Est. 100 -1,200 -1,150 -1,150 - -
* Estimates are made by the Company. From the current fiscal year, the definition for net income has been changed to net income attributable to parent company shareholders (Abbreviated as parent net income).

We present our efforts for the commercialization of cell sheet regenerative medicine and project status in this Bridge Report along with overview of earnings results for CellSeed Inc. of the fiscal year 2015.
 
Key Points
 
 
Company Overview
 
CellSeed seeks to promote worldwide diffusion of "cell sheet regenerative medicine" that employs "cell sheets" to treat and cure patients, who previously could not be treated using conventional treatments, through the use of fundamental technologies of "cell sheet engineering" developed in Japan by Professor Okano of the Tokyo Women's Medical University. CellSeed conducts the "cell sheet regenerative medicine business" where research and development, manufacture and sales of product applications are performed for the diffusion of cell sheet regenerative medicine. It also conducts the "regenerative medicine support business" where temperature responsive cell cultureware used in the fabrication of cell sheets are researched, developed, manufactured and sold.
 
<Cell Sheet Regenerative Medical Technologies and Cell Sheet Regenerative Medicine>
"Cell sheet regenerative medical technologies" are the general purpose platform technology for regenerative medicine. Cells are taken from the patient to be cultivated into sheet form for use in various treatments. However, the most revolutionary aspect of CellSeeds's "cell sheet regenerative medical technologies" is the ability to use temperature responsive cell cultureware equipment to collect undamaged cells, which had not been possible previously. Cells are normally grown in culture dishes and multiply while adhering to the surface of culture dishes. When cells are collected, they are stripped from the dish using trypsin and other hydrolase proteins, which leads to damage of the protein surface of the cells (extracellular matrix) and causes cells to deform (Cell damage). Therefore, these damaged cells cannot graft or function properly.
 
 
 
At the same time, temperature responsive cell cultureware can be used to naturally collect cells from the surface of the culture dishes by altering the temperature to change cell adhesion characteristics, allowing for the collection of cell sheets that are close to their natural condition with cell protein characteristics remaining undamaged, making it possible to create tissue and organs close to their natural conditions. In addition to filling the space outside of the cell, the protein surface of the cell (extracellular matrix) also play a structural role and provide a foothold for cells to bond and allow cells to propagate while controlling division. This is a critical substance that allows cells to function normally and to contribute to the repair and regeneration of affected areas.
 
 
In the realm of regenerative medicine products using cell sheet engineering, clinical data of the treatments for cornea, periodontium, middle ear, cartilage, lung, heart, liver, pancreas, and esophagus is available. Furthermore, "HeartSheet®" used for regenerative medical treatment for hearts and made by Terumo, in which temperature responsive cell cultureware "UpCell®" manufactured by CellSeed is included, acquired conditional approval in September 2015.
 
<Market Trends under New Regulatory Environment - Industrialization of Regenerative Medicine Steadily Progressed>
The regulations ("Pharmaceutical and Medical Device Act" and "Act of Ensuring Safety in Regenerative Medicine") concerning the development of regenerative medicine products were enforced in November 2014 and "HeartSheet®" (conditional approval) and "TEMCELL@HS" (product for the treatment of acute graft-versus-host disease, a complication arising from hematopoietic stem cell transplant) respectively made by Terumo and JCR Pharma received approval under the expedited approval system. These two products have been officially listed in the National Health Insurance Drug Price Standard in January 2016, just two months after they were approved.

The insurance reimbursement price of "HeartSheet®", in which temperature responsive cell cultureware "UpCell®" is included, is divided into the prices. One for equipment to harvest human skeletal myoblast cells from femoral area (Kit A: ¥6,360,000) and another price for the cell sheet culture equipment used to cultivate cells into sheet form including "UpCell®" (Kit B: ¥1,680,000). (As the number of sheet needed for treatments is five that requires 5 "UpCell®s", thus the total price will be ¥14,760,000.)

In addition, price revisions of regenerative medical products manufactured by Japan Tissue Engineering Co., Ltd. ("autologous cultured epidermis" and "autologous cultured cartilage") were conducted in January 2016, with the price divided into Kits A and B in similar to that of "HeartSheet®". For example, "autologous cultured epidermis" is a regenerative medicine product used for treatment of serious burns. However, there were a number of cases where patients died during the cultivation process due to the severity of their burns. In these cases, medical institutions could not collect expenses which occurred in the process of the harvest and cultivation of skin cell. Therefore, price revisions were conducted and divided into Kits A and B.

Autologous cultured epidermis:   ¥4,380,000 (Divided into Kits A and B)
Autologous cultured cartilage:   ¥2,129,000 (Same as above)

Furthermore, the number of members of the Forum for Innovative Regenerative Medicine (FIRM), established in June 2011 to promote industrialization of the regenerative medicine, reached 183 companies and this indicates a high level of interest for regenerative medicine within corporations. CellSeed has served as one of the board members companies of FIRM since its establishment and Dr. Setsuko Hashimoto, President and CEO of CellSeed is one of the board members. Furthermore, one of the CellSeed employees also takes an active role in the steering and international committees of FIRM.
 
 
Progress Status in the Mid-term Business Plan and Review of Fiscal Year 2015
 
(1) The Mid-term Business Strategy (FY12/15-17) -Development of Cell Sheet Regenerative Medicine Products, Deployment to Global Market
Currently, the Mid-term Business Plan (FY12/15 to FY12/17) for the development of cell sheet regenerative medicine products and the deployment to global markets is in progress. In light of new acts regarding regenerative medicine, CellSeed identified Japan as a top priority realm for the development of cell sheet regenerative medicine. Consequently, business deployment strategy includes the goals of 1) prompt commercialization of regenerative medicine products, 2) expansion of earning opportunities along with the development of temperature responsive cell cultureware, and 3) development of global business.
 
Achievements in Fiscal Year 2015
The Mid-term Business Plan covering the period from fiscal year 2015 to 2017 can be broken down into three parts and progress was respectively seen in the realms of prompt commercialization of regenerative medicine products, device production and global business deployment during the first year of the Plan (see below). Furthermore, construction of the Cell Processing Center within the Telecom Center Building at Koto Ward, Tokyo has begun and the headquarter office moved into the building at the end of 2015 as well.
 
Prompt Commercialization of Regenerative Medical Products
An master agreement for the development of "Epithelial cell sheet for esophageal regeneration" has been signed with Tokyo Women's Medical University, and clinical trial notification was submitted to the Pharmaceuticals and Medical Devices Agency (PMDA) on December 3, 2015. At the same time, CellSeed has started preliminary consultation with the PMDA for "regenerated cartilage sheet" and it has received several advice regarding the process (PMDA has integrated functions for instructions and reviews from pre-clinical trials to approval). A project for assessment method of regenerated cartilage sheet was adopted by the Japan Agency for Medical Research and Development (AMED), which was jointly submitted by CellSeed and DNA Chip Research Inc..

With regards to "epithelial cell sheet for esophageal regeneration," some revisions on the clinical trial process were brought up during consultations with the PMDA and so the clinical trial notification was withdrawn on December 24, 2015. Resubmission of clinical trial notification is expected to take place around April 2016. In addition to the discovery of a lesser number of cases needed for clinical trials than previous plan, some revisions on ongoing non-clinical trials would be necessary including acquisition of results.
 
Intelligent Cell Cultureware Manufacturing (Outsourcing to Dai Nippon Printing Co., Ltd.)
Contracted manufacturing of cell cultureware products at Dai Nippon Printing got into gear. Accordingly, active exhibitions at academic conferences and client visits were conducted to raise customer awareness of products. CellSeed also strengthens collaborations with Dai Nippon Printing for the development of new products as well.
 
Global Business Deployment
CellSeed established a subsidiary in Sweden in May 2015, and began consultations with the Swedish Medical Products Agency (Similar to the PMDA in Japan) regarding " epithelial cell sheet for esophageal regeneration". The company participated in the International Society for Stem Cell Research (ISSCR) as part of accelerating activities in local markets.
 
 
Sales and Operating Loss of ¥193 and ¥568 Million in Line with Revised Estimates
CellSeed's earnings were in line with its earnings estimates revised on December 24, 2015 (Sales and operating, ordinary and net losses of ¥200, ¥570, ¥550 and ¥555 million respectively). With regards to sales, CellSeed booked JPY113 million as sales, which was a prepayment received in March 2012 along with the decision made in December 2015 to terminate the contracts for "joint development and commercialization of epithelial cell sheet for corneal regeneration in the United States" and for "master agreement for joint research and development" originally concluded with Emmaus Medical Inc. in April 2011. In addition, the Company booked ¥80 million in sales of temperature responsive cell cultureware within the regenerative medicine support business.

With regards to profits, they rose above estimates due to the higher sales than expected, ¥150 million reduction in expenses arising from the shortening of preparation plans for the Cell Processing Center (Expected to begin operations around summer 2016) and reductions in headquarter administrative expenses is recognized. Furthermore, the deferred expense of ¥250 million for the prioritized in-house development of epithelial cell sheet for esophageal regeneration in Japan and in Sweden was another factor influencing the lower loss than expected. Research and development expenses rose by ¥53 million compared with that of the ¥302 million in previous term.
 
 
Total assets declined by ¥561 million from the end of the previous fiscal year to ¥2.489 billion at the end of the current fiscal year. Noncurrent assets increased due to the booking of headquarter relocation expenses and construction expenses for the Cell Processing Center. At the same time, the termination of the existing contracts for cornea applications in the United States led to the booking of ¥113 million in prepayment as sales and this caused prepayments to decline. Capital adequacy ratio rose from 92.3% to 95.5%.
 
 
 
Mid-term Business Plan under Mid-term business strategies (FY12/16-FY12/18)
 
CellSeed continues to make various efforts based upon its Mid-term Business Plan which covers the three consecutive years from fiscal year 2016 to 2018. CellSeed will make efforts to achieve prompt commercialization of "epithelial cell sheet for esophageal regeneration" and "regenerated cartilage sheet" and then deploy to the global market based upon performance achieved within Japan. Moreover, earnings derived from the cell sheet regenerative medicine business will be used to enrich the product lineup of regenerative medicine support business and to expand the overall earnings opportunities.
 
 
With regards to epithelial cell sheet for esophageal regeneration, clinical trials are expected to begin in 2016, application of marketing authorization to be submitted in 2017 and approval to be received in 2018 (Sales are expected to begin booking in fiscal year 2018). At the same time, with regard to regenerated cartilage sheet, the preparation for clinical trials is expected to begin in 2016 (the conduct of development trials) and the clinical trials to start in 2017. On the other hand, facilities for cell cultivation are expected to complete constructions and begin operations in summer 2016. However, the burden of investments (FY12/16) for in-house cell processing facilities and the development of epithelial cell sheet for esophageal regeneration and regenerated cartilage sheets is expected to prevent from booking profits, with a decline in losses expected to continue until fiscal year 2018.
 
<Prompt Commercialization of Regenerative Medicine Products>
Epithelial Cell Sheet for Esophageal Regeneration
Regenerative treatment method for esophageal cancer (Treatment for wound and prevention of esophageal narrowing) was developed by the Institute of Advanced BioMedical Engineering and Science of Tokyo Women's Medical University. Mucosal epithelial cell sheets are prepared with mucosal membrane cells harvested from the autologous mouth in the temperature responsive cell cultureware for about two weeks at the Cell Processing Center. Along with the cultivation of cell sheets, the surgery to remove the esophageal cancer is conducted and the cell sheet is transferred to the esophageal ulcer.
 
 
30 Cases of Clinical Research
Clinical research was conducted at universities from 2008 to 2014, with a total number of 30 cases, including 10 cases at Tokyo Women's Medical University, 10 cases at Tokyo Women's Medical University together with Nagasaki University (for the verification of long-distance transportation by receiving cells at Nagasaki University that are cultivated at Tokyo Women's Medical University, with transplant operation conducted at the Nagasaki University) and 10 cases at Karolinska University Hospital in Sweden.
 
Efforts for Corporate Clinical Trials and Applications for marketing authorization
CellSeed has signed a master agreement for the development with the Tokyo Women's Medical University and assumed the research results of the university. As explained earlier in this report, the consultations with the PMDA has completed but clinical trial notification, which had initially been submitted on December 3, 2015, was withdrawn on December 24, 2015 due to some revisions needed. Notification is expected to be resubmitted in April 2016. Moreover, corporate clinical trials are being planned in Sweden and CellSeed Sweden AB was established in May 2015 for the promotion of these trials. Preliminary consultation with the Medical Products Agency in Sweden (MPA) was conducted on November 30, 2015. Currently, CellSeed is promoting preparations for preliminary consultations with the European Medicines Agency (EMA) with a goal of pursuing approval all over in Europe.
 
Regenerated Cartilage Sheet
Regenerated cartilage sheet is the result of a joint research project between CellSeed and Professor Masato Sato of the Department of Orthopedic Surgery of Tokai University School of Medicine and is used for indications of cartilage defect and osteoarthritis caused by sports injuries and aging (Both lack in methods for permanent cures currently). This technology enables fundamental regeneration of the cartilage surface through transplant of cell sheets (Three layered regenerated cartilage sheet) made from cultivated cartilage cells. Preliminary consultations have already started and recommendations from the PMDA have been received. At the same time, efforts to accumulate safety data and establish clinical protocols will be prepared through ongoing consultations.

Moreover, knee cartilage is called glass cartilage. It is superior in cushioning and abrasion, and is hard cartilage differs from cartilage in ears, nose and other parts of the body. One of characteristics of CellSeed's regenerated cartilage sheets is its ability to regenerate cartilage as glass cartilage.
 
 
<Enhance the Regenerative Medicine Support Business, Expand Earnings Opportunities>
CellSeed will expand the applications of its existing products, develop new products to become new earnings generators and diversify its marketing methods. Currently, the existing temperature responsive cell cultureware products include "UpCell®", "RepCell®" and "HydroCellTM". CellSeed makes efforts to develop products that expand clinical applications of these three products and to develop products for clinical use. In addition, in light of diversifying the marketing methods, CellSeed enhances post-sales technical support, supports for new research applications, develops user-friendly products and organizes booth for exhibitions and seminars to increase the opportunities to explain and to raise recognition of products. Efforts to strengthen and expand the sales networks within and outside of Japan will also be made.
 
<Domestic and Overseas Organizational Structure>
Japan
CellSeed's headquarters have been moved to the 15th floor of the Telecom Center Building (Aomi, Koto-Ward, Tokyo) and operations have started in January 2016. Moreover, an in-house Cell Processing Center (CPC) is also being constructed on the 6th floor in the same building. This CPC has clean room facilities with four production lines, covering a total floor space of 763 square meters. The facility is expected to be completed in spring 2016, with operations expected to begin this summer after the validations of manufacturing processes are completed. With close collaborative efforts with the Institute of Advanced BioMedical Engineering and Science of Tokyo Women's Medical University, epithelial cell sheets for esophageal regeneration is expected to begin manufacturing at one of the lines of the CPC in the University.
 
Europe
As explained earlier in this report, CellSeed Sweden AB was established in May 2015 as a part of the efforts to receive marketing authorization for epithelial cell sheets for esophageal regeneration in Europe. This is the third subsidiary established in Europe, including CellSeed France SARL in France and CellSeed Europe Ltd. in the United Kingdom, which were established in October 2008 and June 2010 respectively. These subsidiaries will play important roles in the deployment of the cell sheet regenerative medicine business throughout Europe.
 
<Fund Procurement Status>
CellSeed conducted a third party placement of new shares with stock options on August 31, 2015 to raise fund to allocate for the construction of in-house cell processing facilities, working capital for this facility's operations, regenerative medicine support business-related purchase and working capital to promote domestic and overseas businesses.
 
13th Options for New Shares
Allocation Date:August 31, 2015 (Monday)
Options Issuance Numbers, Value:2,000 Options, valued at ¥6.4 million (¥3,200 per option)
Latent Shares Resulting from Options:2,000,000 Shares (1,000 Shares per option), 23.06% dilution factor
Exercise Terms and Revision Conditions:¥705, potential for revision of exercise price (Lower limit is the exercise price, no upper limit)
Allocation Party:Milestone Capital Management
Exercise Period:August 31, 2015 to August 30, 2017
Value of Capital Procured:Approximately ¥1.4 billion (Assumption that all options are exercised)
 
In addition, CellSeed will continue to consider the utilization of public subsidies and grants for its businesses.
 
 
 
 
Conclusions
 
The clinical trial notification for epithelial cell sheet for esophageal regeneration was withdrawn within 20 days of being submitted due to the need for revisions of the ongoing non-clinical trial process discovered during consultations with the PMDA. However, the notification is expected to be resubmitted in April 2016. Also, no delays in the commercialization plans resulting from this resubmission are expected due to the outlook for a lesser number of cases of clinical trials than that of the previous plan. While investors might have concerned about the withdrawal, no pessimism is needed after the resubmission of clinical trial notification.

In addition, "HeartSheet®", a regenerated cardiac patch made by Terumo will be launched in April 2016. Currently, discussions with Terumo are being conducted because CellSeed's temperature-responsive cell cultureware is included in this product. While the contribution of earnings derived from this product is not expected to be large because of the relatively low number of cases, the clarification that temperature-responsive cell cultureware is included in clinical applications should be meaningful, considering the future growth.
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
Copyright(C) 2016 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
PAGE TOP