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
¥561 9,214,292 shares ¥5.169 billion - 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Act.) PBR (Act.)
- - - - ¥226.74 2.5x
* Stock price as of closing on August 24, 2016. Number of shares at the end of the most recent quarter excluding treasury shares. ROE and BPSD represent performance as of the last quarter.
 
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 created by the Company. Since the current fiscal year, the definition of net income has been changed to profit attributable to parent company shareholders (Abbreviated as parent net income).

We present this Bridge Report along with analysis of the first half of fiscal year 2016 earnings results for CellSeed Inc.
 
Key Points
 
 
Company Overview
 
CellSeed seeks to promote worldwide diffusion of "cell sheet regenerative medicine business" 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. The Company also conducts the "intelligent cell cultureware business" where temperature-responsive cell cultureware and the related research products used in the fabrication of cell sheets are developed, manufactured and sold.
 
<The Main Points to Understanding Cellseed>
Point 1: Superiority of Cell Sheet Engineering
"Cell sheet engineering" is the world's first platform technology for regenerative medicine developed in Japan. Regenerative medicine uses cultured cells, but conventional technologies led to damage of cells during the culturing process. Compared with these conventional technologies, Cellseed's innovative cell sheet engineering allows cells to be cultured without being damaged. The main point behind this technology is the use of cell cultureware that uses temperature-responsive polymer on the surface of culturing cells. These temperature-responsive polymers exhibit hydophobic properties at 37 degrees Celsius, which is the same as body temperature, and hydrophilic properties at temperatures below 20 degrees Celsius which allow the attached cells sloughing off naturally from the surface and enable collection of cells at these temperatures without being damaged.

Proteins called extracellular matrix in the surface of cells fill the space in between cells, play a structural role, provide a foothold for cells to bond, and control cells' proliferation and splinting . This is a critical substance that allows cells to function appropriately and to contribute to the repair and regeneration of affected areas.

Using conventional technologies, cells are collected by stripping them from culturing dishes by using trypsin and other hydrolase proteins, which leads to damaged extracellular matrix and causes cells to deform. Therefore, these damaged cells cannot be grafted or function properly.

At the same time, "cell sheet engineering" allows organically-bonded "cell sheet" to be collected out of cell cultureware in the form of extracellular matrix.
 
 
Point 2: CellSeed's Somatic Stem Cell Regenerative Medicine Products
Stem cells are the key to regenerative medical technology applications. Stem cells are the cells which can be differentiated into various cells to be used as a key component for regenerative medicine technology applications. There are various types of stem cells including ES, iPS and somatic stem cells. ES cells are created from fertilized eggs and can be differentiated into all types of cells. Because fertilized eggs represent "human" tissue itself, there are ethical issues with the usage of these cells. iPS cells are artificially pluripotent cells to implement genes in already-splinted cells but safety issues regarding the usages of these cells have yet to be resolved. At the same time, somatic stem cells are the stem cells found in various organs within the human body.
 
 
Despite the limited ability to differentiate cells compared with ES and iPS cells, somatic stem cell utilized in CellSeed's regenerative medicine has no safety issues. Therefore, these somatic stem cells are viewed as the most promising cells for use in realizing commercial applications of regenerative medical technologies.
 
Point 3: Gathering Clinical Data for Products Using "Cell Sheet Engineering"
 
Clinical data for regenerative medical products using "cell sheet engineering" including esophageal, cornea, peridontum, middle ear, cartilage, lung, heart, liver and pancreas applications have already been gathered, and clinical trials of "epithelial cell sheet for esophageal regeneration" are on-going for approval application and the clinical trials for "regenerated cartilage sheet" is expected to start in 2017.

Moreover, Terumo Corporation's (thereafter Terumo) "Heart Sheet" (Regenerated heart tissue patch) uses CellSeed's "UpCell", temperature-responsive cell cultureware and has received a conditional marketing approval. Cellseed signed a "fundamental agreement for provision of intelligent cell cultureware" with Terumo at the end of March 2016 and has a responsibility to provide Terumo with "UpCell", temperature-responsive cell cultureware as a part of this agreement. The conditional approval is part of an "expedited approval system" defined by the Pharmaceutical and Medical Devices Actthat enables evaluation of efficacy and safety in a short period of time. At the same time, further evaluation of efficacy and safety of treatments is conducted after market launch with a second round of approval being required within five years after the market launch under this limited time basis approval system.

"Heart Sheet" consists of "Kit A" that includes equipment when human skeletal muscle myoblasts are taken from the thigh portion of the patient, and "Kit B" that includes intelligent cell cultureware "UpCell", and the equipment to culture cell sheets. The insurance reimbursement price for Kit A and Kit B are ¥6.360 and ¥1.680 million respectively. But the total cost of Kit A and Kit B is ¥14.760 million (The actual cost charged to patients after reimbursement costs is considered to be several ten thousands yen per month) as five Kit Bs are required to accomplish applications. The quick listing of "Heart Sheet" on the drug price standard, which is just two months after the marketing approval in January 2016 was widely talked about within the industry.
 
Point 4: Introduction of a System for Quick Commercialization of Regenerative Medicine Products
Pharmaceutical and Medical Devices Act and Act of Ensuring Safety in Regenerative Medicine were implemented on November 25, 2014. The former act introduced the expedited approval system and the latter act introduced the approval for outsourcing cell culturing process . The introduction of the expedited approval system means the potential for the achievement of prompt profitability of CellSeed's "epithelial cell sheet for esophageal regeneration" and "regenerated cartilage sheet" pipelines has risen. In addition, CellSeed's temperature-responsive cell cultureware and cell culturing technologies can be leveraged to develop the consigned cell culturing business.
 
Medical Products and Equipment Law "Expedited Approval System" in Pharmaceutical and Medical Devices Act
Because quality of regenerative medical products using human cells is inconsistent, data accumulation and evaluation to confirm efficacy under the current approval system required a long period of time. However, the introduction of the expedited approval system (Conditional, and limited time approvals) allows for efficacy confirmation to be estimated based upon a limited number of cases and has enabled the evaluation of safety during the acute phase of side effect to be conducted in a reduced period of time.
 
 
 
Achievements of the Mid-term Business Plan (Fiscal Years 2016 to 2018)
 
Highlights of the current Mid-term Business Plan include efforts to 1) achieve commercialization of epithelial cell sheet for esophageal regeneration and regenerated cartilage sheet applications, 2) deploy CellSeed's business developed within not only in Japan but also overseas markets, and 3) fortify the earnings generating capabilities of the intelligent cell cultureware business. With regards to the achievement of commercialization of the epithelial cell sheet for esophageal regeneration and regenerated cartilage sheet at an early stage, clinical trials for epithelial cell sheets for esophageal regeneration have been started in August 2016 and sales approval application is expected to be submitted in 2017 with sales approval expected to be received in 2018 if all goes smoothly (Sales are expected to be booked beginning from fiscal year 2018). At the same time, preparations for the start of clinical trials for regenerated cartilage sheets began in 2016 (Developmental trials implemented), with actual clinical trials expected to begin from 2017 and strategic consultations with the Pharmaceuticals and Medical Devices Agency (PMDA), which is the supervising body for clinical trial applications, are currently being conducted.

As a part of the deployment of businesses from Japan to overseas markets, CellSeed has also begun strategic consultations with the European Medicines Agency (EMA) to start clinical trials of epithelial cell sheet for esophageal regeneration, and has currently been preparing to acquire CE mark (Approval as medical device in Europe) for the transplanting device of the epithelial cell sheet for esophageal regeneration in Europe. In addition, a patent licensing agreement for epithelial cell sheet for corneal regeneration was formed with Emmaus Medical Inc. of the United States (thereafter Emmaus) in June 2016. Efforts to expand earnings generating opportunities through fortification of intelligent cell cultureware business include a "basic agreement for providing intelligent cell cultureware" formed with Terumo at the end of March 2016. At the same time, CellSeed is endeavoring to improve the recognition of temperature-responsive cell cultureware through participations in academic symposiums, seminars and equipment exhibitions.

In addition, a cell processing center (763 square meters in floor space 4 lines) is currently being constructed on the sixth floor of the Telecom Center Building, where CellSeed's headquarter is located (Koto Ward, Tokyo). The construction of the facilities is nearly completed as of August 23, 2016 with operations expected to begin shortly.
 
 
According to the Mid-term Business Plan, profits are not expected to be booked due to investment burdens arising from the development of epithelial cell sheet for esophageal regeneration and regenerated cartilage sheet applications, and the construction of CellSeed's Cell Processing Center (Fiscal year 2016). However, the margin of loss is expected to be reduced during fiscal year 2018. In fiscal year 2016, plans are progressing on schedule with the start of clinical trials for epithelial cell sheets for esophageal regeneration, preparations for clinical trials for regenerated cartilage sheets in Japan and epithelial cell sheets for esophageal regeneration in Europe, and making progress for completion of cell processing center.
 
(1) Early Commercialization of Regenerative Medical Products
Epithelial Cell Sheet for Esophageal Regeneration
Regenerative medicine treatment for esophageal cancer (Esophageal wound treatment, narrowing prevention) has been jointly developed with the Tokyo Women's Medical University. Cells taken from patient's mucosal membrane are cultured in temperature-responsive cultureware for two weeks at CellSeed's Cell Processing Center (CPC) and made into cell sheets. Cell sheets are cultured to be transplanted to replace parts of the esophagus that are affected by cancer and removed during endoscopic surgery.

Clinical research was conducted from 2008 to 2014 with 10 cases at the Tokyo Women's Medical University, 10 at Nagasaki University ( Validation of remote transportation of cells acquired at Nagasaki University, cultured at Tokyo Women's Medical University, and then grafted to patients at Nagasaki University) and another 10 at Karolinska University Hospital (Sweden), for a total of 30 cases. CellSeed has concluded a Basic Agreement for Development of Applications with Tokyo Women's Medical University and assumed the successful results of joint research.
 
 
Clinical Trials Start from August 2016
Clinical trials conducted at the National Cancer Center Japan and Tokyo Women's Medical University started in August 2016 after the clinical trials notification was submitted in April 2016. Clinical trial information with nine cases of phase 3 clinical trials has been disclosed on the "ClinicalTrial.gov" registration system operated by the United States National Institutes of Health. In addition, clinical trials are expected to be conducted in Sweden by CellSeed Sweden AB, which was established in May 2015, and prior consultations with the Swedish Medical Products Agency were conducted on November 30, 2015. Also, prior consultations with the European Medicines Agency (EMA), aiming for preparation of the approval on a regional wide basis in Europe have also begun.
 
Simultaneous Development of Cell Sheet Transplant Devices
Because of the necessity to use highly-advanced technology for cell sheet transplant of epithelial cell sheet for esophageal regeneration , CellSeed has developed a cell sheet transplant device that reduces the workload as well. CellSeed will acquire a marketing authorization for epithelial cell sheet for esophageal regeneration in combination with this device (Clinical trials are being conducted jointly for both cell sheet and this device). However, the approval for sale and use in Europe still needs to be acquired. Therefore, CellSeed is currently attempting to receive the CE mark (Approval as medical device in Europe).
 
 
Regenerated Cartilage Sheet
Regenerated cartilage sheet is the result of research conducted jointly by CellSeed and Professor Sato of Tokai Medical University School of Orthopedics and is a treatment designed to be used on patients with damaged and deformed cartilage due to sports related injuries and osteoarthritis due to aging (Estimated number of patients is 12.00 million). While there are no effective treatments for either ailment currently available, joint clinical research on eight cases of cell sheets created from patient's own cells have been implemented. Cell sheets created from cultured cartilage cells (three-layered regenerated cartilage sheets) are transplanted to the affected area of patients for fundamental regeneration of cartilage surface. Consultations with the PMDA have already begun and further consultations for safety data accumulation and clinical protocols will be conducted. Knee cartilage is known as "glass cartilage" and differs from cartilage of the ear and nose etc in its superior cushioning and wear functions. An unique characteristic of CellSeed's regenerated cartilage sheets lies in its ability to regenerate this "glass cartilage" in the form of regenerated cartilage sheets.
 
 
Epithelial Cell Sheet for Corneal Regeneration
CellSeed formed a patent licensing agreement with Emmaus on June 15, 2016 for epithelial cell sheet for corneal regeneration-related applications in the United States. CellSeed formed agreements for "epithelial cell sheet for corneal regeneration application joint development and commercialization in the United States" and "joint research and development" with Emmaus in April 2011, proceeded technology transfer and provided development data on epithelial cell sheet for corneal regeneration transplant to Emmaus. Based upon the completion of development data provision and technology transfer, a new agreement was formed in December 2015 and ongoing negotiations based upon the assumption of licensing out of technologies have also been conducted. Based upon the most recent contract, Emmaus will promote development of epithelial cell sheets for corneal regeneration in the United States and it will pay commissions on sales of any epithelial cell sheet for corneal regeneration applications to CellSeed.
 
Company Name:Emmaus Medical, Inc. (Torrance, California, USA)
Representative:President & CEO Yutaka Niihara
Business Description:Discovery, development and commercialization of innovative treatments with high value in rare disease
Capitalization:US$50.51 million (As of end December 2015)
Established:September 2, 2003
Shareholders:Yutaka Niihara (37.7%), Dan Kimbell (8.7%)
 
(1) Expand Intelligent Cell Cultureware Business and Increase Earnings Opportunities
An expansion of existing product realm applications and new product development, and a diversification of marketing methods will be conducted to increase opportunities to generate earnings. CellSeed is developing new applications and new research intelligent cell cultureware in addition to its currently existing "UpCell", "RepCell" as temperature-responsive cell cultureware and "HydroCell", low cell binding cultureware. With regards to the diversification of marketing methods, efforts to strengthen the sales network both within Japan and in overseas markets and fortification of after-sales technical support will be implemented to support applications for new research. At the same time, the development of user-friendly products will be conducted. CellSeed will also increase the number of exhibitions and seminars for participating to raise its brand recognition.
 
(2) Domestic and Overseas Operational Structure
Within Japan, operations at the new headquarters located on the 15th floor of the Telecom Center Building (Aomi, Koto Ward, Tokyo) began from January 2016. In addition, the construction of an in-house cell processing center (CPC) on the 6th floor of the same building is nearing completion and validation of the manufacturing processes is in its final stages. Moreover, epithelial cell sheets for esophageal regeneration are expected to be manufactured at the number one cell processing line within the Advanced Biomedical Sciences Research Center of the Tokyo Women's Medical University and ongoing collaboration with the university is expected to continue.

CellSeed Sweden AB was established in Sweden in May 2015 (As separate companies in Europe, CellSeed France SARL was established in France in October 2008 and CellSeed Europe Ltd. in the United Kingdom in June 2010) to conduct the development of epithelial cell sheet for esophageal regeneration development in Europe.
 
(3) Funding Conditions
CellSeed conducted a third party placement of stock options for new shares on August 31, 2015 to raise capital required for construction of an in-house cell processing center, working capital for this facility's operations, purchases of intelligent cell cultureware business and working capital to promote businesses both within and outside of Japan.
 
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 Inc.
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. Details of on-going projects consigned from public institutions are described below.
 
 
 
Review of First Half of Fiscal Year 2016 Earnings Results
 
 
Sales of ¥28 Million in Temperature-Responsive Cell Cultureware Booked
With regards to the intelligent cell cutlreware business, delays in orders, which had been expected to be delivered during the first half of the current term to the second half caused sales to fall below expectations. At the same time, temporary postponement of clinical trialnotification for the cell sheet regenerative medicine business led to a delay of some research and development expenses into the second half and allowed the operating loss to fall below estimates. Research and development expenses rose by 74.1% to ¥234 million compared with those of last year. CellSeed has left its outstanding full-year earnings estimates unchanged and expect sales of ¥0.1 billion operating loss of ¥1.2 billion, and current and net losses of ¥1.150 billion respectively.

After the submission of clinical trial notification in April 2016, clinical trials for epithelial cell sheet for esophageal regeneration were started at National Cancer Center East and Central Hospitals and Tokyo Women's Medical University in August 2016. Furthermore, Cellseed signed a "fundamental agreement for provision of intelligent cell cultureware" with Terumo in March 2016 to provide Terumo with "UpCell", temperature-responsive cell cultureware specialized for use in Terumo's "Heart Sheet" product. Additionally, a patent licensing agreement for epithelial cell sheet for corneal regeneration was formed with Emmaus in June 2016.

Operations at the new headquarter located on the 15th floor of the Telecom Center Building (Aomi, Koto Ward, Tokyo) started in January 2016. In addition, the in-house cell processing center is in the final stages of construction on the 6th floor of the same building, with the process validation of the facilities in their final stages.
 
 
Total assets declined by ¥265 million from the end of the previous term to ¥2.224 billion at the end of the first half. While cash and equivalents declined due to increases in working capital, an establishment of the in-house cell processing center, and relocation of the headquarters, tangible assets rose. Capital and capital reserves each rose by ¥116 million due to an exercise of stock options. At the same time, retained earnings declined due to the booking of a ¥447 million net loss.
 
 
An increase in losses before taxes contributed to an expansion in the net outflow of operating cash flow. Investments for an in-house cell processing center also caused investing cash flow to turn to a net outflow. At the same time, the exercise of stock options contributed to the expansion in the net inflow of financing cash flow to ¥232 million.
 
 
Future Highlights
 
In addition to clinical trials for epithelial cell sheet for esophageal regeneration and the construction of the in-house cell processing center, the signing of a "fundamental agreement for provision of intelligent cell cultureware" with Terumo and the patent licensing agreement for epithelial cell sheet for corneal regeneration formed with Emmaus are progressed as planned. Should the CellSeed's plans continue to progress on schedule, epithelial cell sheet for esophageal regeneration are expected to contribute to earnings from fiscal year 2018. Therefore, attaining profitability from the cell sheet regenerative medicine business is will be realized soon.
 
 
<Reference: CellSeed's corporate governance>
 
 
◎Corporate Governance Report
On April 1, 2016, the company submitted a corporate governance report after the application of the corporate governance code and has implemented all the basic principles of the code.
 
Basic Policy
With the missions to introduce technological innovations, to exert creativity and to contribute to people's health and welfare by providing high-quality products and services, we are enhancing corporate governance to raise quality in all of our corporate activities.
In the future, we will increase our accountability further to improve the transparency of disclosed information and strengthen our checking system even more.
 
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.
 
 
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