（7776） | Publish:Mon, Oct 26, 2015 IR「BRIDGE REPORT」

BRIDGE REPORT
（7776）

グロース

CellSeed (7776)

Setsuko Hashimoto,
President and CEO

Company	CellSeed Inc.
Code No.	7776
Exchange	JASDAQ
Industry	Precision Instrument (Manufacturing)
President	Setsuko Hashimoto, Ph.D.
HQ Address	Haramachi 3-61, Shinjuku-ku, Tokyo
Year-end	December
URL	http://www.cellseed.com/index-e.html

Share Price	Shares Outstanding		Market Cap.	ROE (actual)	Trading Unit
¥601	8,674,292 shares		¥5.213 billion	-	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (actual)	PBR (actual)
-	-	-	-	¥287.00	2.1x

* Stock price as of closing on 2015/8/27. Number of shares at the end of the most recent quarter excluding treasury shares.

Fiscal Year	Sales	Operating income	Recurring income	Net income	EPS (¥)	Dividend (¥)
December 2011	86	-1,418	-1,358	-1,442	-	-
December 2012	75	-846	-842	-913	-	-
December 2013	105	-534	-581	-584	-	-
December 2014	86	-601	-577	-582	-	-
December 2015 Est.	90	-1,100	-1,085	-1,090	-	-

We present this Bridge Report along with analysis of the first half of fiscal year December 2015 earnings results for CellSeed Inc.

Key Points

Company Overview

CellSeed seeks to promote worldwide diffusion of "cell-sheet regenerative medicine" that employs "cell sheets" to treat and cure patients for whom there has been no treatment, through the use of fundamental technologies of "cell-sheet engineering" developed in Japan by Professor Okano of the Tokyo Women's Medical University. CellSeed's business can be divided into two categories: one is the "cell-sheet regenerative medicine business," where research and development, manufacture and sales of product applications are pursued for the diffusion of cell-sheet regenerative medicine; the other is 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 Engineering and Cell-Sheet Regenerative Medicine>

"Cell-sheet engineering" is the general-purpose platform technology for regenerative medicine. Cells are taken from patients to be cultivated into sheet form for use in various treatments. However, the most revolutionary aspect of "cell-sheet engineering" is the ability to use temperature-responsive cell cultureware equipment to collect undamaged cells, which had not been possible previously. Cells are normally cultivated in culture dishes (To increase the number of cells) and proliferated 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 be grafted or functioned properly. On the other hand, temperature-responsive cell cultureware can be used to naturally collect cells from the surface of the culture dish 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 (Possible to create tissue and organs that are close to their natural conditions). In addition to filling the space between cells, cell surface proteins (extracellular matrix) also play a structural role and provide a foothold for cells to bond and control cell proliferation and differentiation. This is a critical substance to allow cells to function as cells, and contribute to the repair (Regeneration) of the affected area.

By reducing the cultivation temperature, the characteristics of temperature-responsive polymers are changed to allow cell sheet detachment without damaging the cell surface protein (Extracellular matrix). Traditionally, trypsin and other protein type hydrolytic enzyme procedures were used. However, the protein type hydrolase degradative enzyme destroys cells binding and adhesion factors, leading to significant damage of cells.

Market Environment and CellSeed's Mission

(1) Growth Market: Regenerative Medicine Market Expected to Reach ¥2.5, ¥38 Trillion in Japan, Overseas by 2050

According to the Ministry of Economy, Trade and Industry, the regenerative medicine market in Japan and overseas amounted to ¥9.0 and ¥100.0 billion respectively in 2012, and is expected to grow to ¥2.5 and ¥38 trillion respectively in 2050. The enforcement of the Pharmaceuticals and Medical Devices Act (the Revised Pharmaceutical Affairs Act) and the Act of Ensuring Safety in Regenerative Medicines, etc. in November 25, 2014 has established the legal foundation for the official approval of regenerative medicine within Japan. In particular, the Pharmaceuticals and Medical Devices Act entails the introduction of an early approval system, and permission of outsourcing cell cultivation by the Act of Ensuring Safety in Regenerative Medicines, etc., which has gained the attention from regenerative medicine industry globally. Consequently, the enforcement of these Acts will accelerate the business opportunity of CellSeed's product pipelines including epithelial cell sheet for esophageal regeneration and regenerated cartilage sheet, etc.

(2) Medical Product Transition, and "Cell-Sheet Engineering" as a Regenerative Medicine Platform Technology

The pharmaceutical industry has evolved from pharmaceutical compounds created from chemical synthesis (Aspirin is the first medicine) at its start around 1900, to antibody-based pharmaceuticals made from genetically modified proteins around 1980, which led to the birth of "biotechnology based pharmaceuticals". Thereafter, revolutionary technologies including drugs called "gene medicines" made from genes, cancer immunotherapy that use "cell-based pharmaceuticals" made from living cells, and "tissue based pharmaceuticals" treatments that use living human tissue (Regenerative medicine) have been created. The regenerative medicine products specified in the Pharmaceuticals and Medical Devices Act and the Act of Ensuring Safety of Regenerative Medicine, etc. include not only "tissue medicines," but also "gene medicines," "cell medicines."

In addition to the challenging technology and cost issues, no supportive establishment of legal systems or policy reviews were available (Legal restrictions based upon the assumptions of pharmaceutical compounds acted as barriers to the diffusion of biotechnology based pharmaceuticals) at the time when "biotechnology-based pharmaceuticals" first appeared. In those days, establishing the market itself was questioned. Now, after 30 years, the sales of biotechnology-based pharmaceuticals accounts for 30% of the total pharmaceutical product sales. The technological and cost hurdles of "tissue-based pharmaceuticals" remain in place, but Prime Minister Abe's administration has identified these technologies as a strategic growth realm and has therefore promoted legal revisions designed to promote the diffusion of and facilitate the environment for "biotechnology-based pharmaceuticals", including the introduction of an "early approval system" in the Pharmaceuticals and Medical Devices Act and recognition of "outsourced cell cultivation processing" in the Act of Ensuring Safety in Regenerative Medicines, etc.

(3) CellSeed's Mission

・Realize regenerative medicines quickly
・Promote cell sheet technologies throughout the world
・Contribute to medical reforms by providing safe and high-quality products and services

CellSeed aims to accelerate its growth by implementing these missions and predicting the movements of the future industrialization of regenerative medicine, and to shift from a company supporting clinical development of the basic research at universities to a new stage as a company to realize regenerative medicine and to generate profits.

Progress in the Midterm Business Strategy (FY12/15-17)

In light of the enforcement of the new law regarding regenerative medicine, CellSeed has identified Japan as the top priority hub of cell sheet regenerative medicine development. Consequently, efforts to achieve commercialization of regenerative medicine products at an early stage and to fortify development and sales of temperature-responsive cell cultureware will be implemented as a means of securing earnings. CellSeed has also identified epithelial cell sheet for esophageal regeneration and regenerated cartilage sheet as the prioritized in-house development pipelines, and the developed cell sheet regenerative medicine products will be expanded on a global basis.

Profits are not expected to be realized during the period covered by the mid-term business plan due to the outlook for anticipatory investments to continue. Currently, the notification of the clinical trial for esophageal regeneration epithelial cell sheet, which is the closest to commercialization, is in preparation to submit for starting the trial in Japan during the latter half of fiscal year December 2015, and the Company is also preparing for the same clinical trial to be started in Sweden. The clinical trials of regenerated cartilage sheet with autologous cells, which is under the research, are expected to begin in fiscal year December 2016. In addition, the development of new intelligent cell cultureware product is being promoted along with the construction of a cell processing center (CPC: Bio-clean rooms) necessary for the cultivation of cells.

Estimated sales include only those of the intelligent cell cultureware business. The product and service line-up will be fortified along with strengthening of the information sharing and customer service functions as a part of CellSeed's strategy of expanding sales channels to a diverse range of research institutions and corporations that handle cells, let alone those entities in the regenerative medical realm. With regards to profit and loss, increases in clinical trial related expenses, labor expenses arising from fortified marketing functions, and developmental expenses due to new product development for temperature-responsive cell cultureware are anticipated. In addition, the CPC is expected to begin operations in fiscal year December 2016, and subsequent depreciation expense from the start of operation has also been incurred into operating expenses. At the same time, scale merit is expected to be derived from an increase in sales and the transfer of fabrication of temperature-responsive cell cultureware to Dai Nippon Printing Co., Ltd. (DNP) are expected in fiscal year December 2017, which leads to a significant improvement in profitability, supposedly exceeding the increase in sales.

(1)Cell cultivation Facility Newly Constructed

A cell processing center (CPC) will be built within the Telecom Center Building, 2-5-10 Aomi, Koto-ku, Tokyo (Total floor space of approximately 763 square meters). Capital investment for the CPC is expected to amount to ¥630 million and it is expected to be completed during the first half of 2016. CellSeed seeks to achieve a stable supply structure for regenerative cell sheets with a view to commercial production at an early stage, and to operate the new plant in line with the Ministry Ordinance Regarding Standards for Management of Quality and Production of Regenerative Medical Products. The CPC is comprised of four separate units, with the current cultivation method, able to produce regenerative cell sheets for 100 patients. Development of automated equipment is being promoted, along with efforts to improve productivity and increase output capacity. In addition, the headquarters will be moved to the same building as the CPC in order to pursue efficiency of operations (scheduled in January 2016).

(2)Early Commercialization of Regenerative Medical Products

Esophageal Regeneration Epithelial Cell Sheet

Epithelial cell sheet for esophageal regeneration is cell sheet used as regenerative treatment method in esophageal cancer (Prevention of esophageal narrowing) and was developed by the Institute of Advanced Biomedical Engineering and Science of Tokyo Women's Medical University. The cells are taken from the patient's oral mucosa and cultivated to be the cell sheet in the temperature-responsive cell cultureware. The cultured cell sheet is transplanted to the affected area of the patient after the surgery to remove the esophageal cancer.

Since transplant surgery of cell-sheet for esophageal regeneration requires highly sophisticated technique, CellSeed will develop specialized devices to be used to transplant the cell sheets to reduce the burden on doctors (While the partner has yet to be announced, CellSeed has already signed a contract for the outsourcing of the manufacture of these devices). These devices will be sold as a combination product of an epithelial cell-sheet for esophageal generation within Japan, and they will be sold as medical equipment (official marketing approval needed) in Europe.

Clinical Research Results of 30 Investigator-initiated Cases both Within and Outside of Japan

Until now, in the realm of esophageal cancer treatment using epithelial cell sheet for esophageal regeneration, investigator-initiated clinical research has been performed on 20 cases in Japan (10 cases at the Tokyo Women's Medical University, and another 10 cases at other Universities in Japan) and another 10 cases in Sweden (all at the Karolinska University Hospital). The efficacy and safety of the treatment have been reported in dissertations and at academic conferences, etc.

Corporate Sponsor-initiated Clinical Trials Begins in Japan, and Sweden

A fundamental development agreement has been formed with Tokyo Women's Medical University in Japan for corporate sponsor-initiated clinical trials. During the current term, preparations are being made to facilitate a clinical trial structure including strategic consultations with the Pharmaceuticals and Medical Devices Agency (PMDA) in preparation for submission of clinical trials notification. Moreover, corporate sponsor-initiated clinical trials are being planned in Sweden for the acquisition of sales approval in Europe, and CellSeed Sweden AB was established in May 2015 for the promotion of these trials. Besides the PMDA provides instruction and advice to improve the safety of medical products and equipment.

Market Size

According to the estimate by CellSeed that is based on the information on the cancer patients published by Center for Cancer Control and Information Services, National Cancer Center, as well as the survey conducted by Nikkei Newspaper on "the 47 Hospitals that have performed over 80 cases surgery for esophageal cancer patients", there were 20,700 esophageal cancer patients in 2012, and approximately 20 % (4,140) of them underwent endoscopic esophageal resection. These over 4,000 patients can be considered as potential recipients of cell-sheet treatments. A large number of esophageal cancer patients are male, and the disease prevalence rate is on the rise. Given that the growth in the number of deaths is lower than that of the disease prevalence rate, the demand for treatments for post esophageal cancer surgery and esophageal narrowing is estimated to be on the rise.

Regenerated Cartilage Sheet

Regenerated cartilage sheet is used for indications of cartilage defect and osteoarthritis caused by sports injuries and aging (both have no permanent cures currently), and allows fundamental regeneration of the cartilage surface by transplanting cell sheets (Regenerated cartilage sheet) made from cultivated cartilage cells.

Professor Masahito Sato of the Department of Orthopedic Surgery of Tokai University School of Medicine conducted the first clinical research case in November 2011 and has since conducted eight transplants in total. One-year evaluations of all cases have been completed in November 2014, and clinical research using the patients' own cells has been completed. Results of both the evaluations and clinical research have been favorable. The next step is to take cartilage tissue from hyperdactylia patients and report to the Minister results of transplants of "allogenic cell sheet (Cells gathered from cells other than the patients) for clinical research of joint treatments" using cell sheets created from this tissue. CellSeed takes over the above-mentioned clinical research of autologous cell sheets and is preparing for the start of corporate sponsored clinical trials in 2016.

(3) Global Business Deployment

As explained earlier, CellSeed Sweden AB has been established as a 100% owned subsidiary in May 2015. CellSeed Sweden AB will lead the clinical trials for esophageal regeneration epithelial cell sheets in Europe (A contract with a local CRO services company has been already concluded). In addition, CellSeed Sweden participated in the International Society for Stem Cell Research (ISSCR) 2015 convention held in Stockholm in June and had discussions with professors of the Karolinska Institute.

CellSeed Sweden AB Overview

Headquarter Location:	Vollmervägen 12 SE-187 36 Täby Sweden
Business Description:	Cell sheet regenerative medicine business in Europe
Capitalization:	6,800,000 SEK (Approximately ¥100 million)
President:	Setsuko Hashimoto
President, Country Manager:	Erik Walden (Director), Helena Nilshans (Director), Camilla Huse Bondesson (Country Manager)

(4)Promotion of Cell Cultureware Development and Expansion of Earnings Generation Opportunity

Outsourcing full-scale manufacturing of "temperature-responsive cell cultureware" to DNP has begun from this spring. Moreover, efforts will be made to develop cell cultureware, cell sheet transplant devices and other new products. In addition to the development for the new products in the realm of conventionally used for research application and earnings growth will be pursued through efforts to develop new products in the clinical application.

(5) Capital Sourcing: Issuance of Options for New Shares through Third Party Placement

While funds required for clinical trials expected to be conducted until fiscal year December 2017 have already been secured, options for new shares will be issued through a third party placement to secure working capital for preparation of in-house cell processing center facilitation, operations, intelligent cell cultureware business-related purchases and promotion of businesses inside 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
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 use of public subsidies and grants.

First Half of Fiscal Year December 2015 Earnings Estimates

Temperature-Responsive Cell Cultureware Sales of ¥29 Million Booked

With regards to temperature-responsive cell cultureware, sales of products during the first half, which had been expected to be delivered during the second half, contributed to the booking of ¥29 million in sales, compared with estimates of ¥25 million. At the same time, a portion of the ¥134 million (¥98 million in the previous first half) in research and development expenses which had been expected to be booked in the first half were delayed to the second half in the cell sheet regenerative medicine business allowing operating loss to decline to ¥209 million from ¥227 million.

Total assets at the end of the first half of the current term declined by ¥369 million from the end of the previous fiscal year to ¥2.682 billion. While cash and equivalents declined slightly to ¥2.587 billion, this level of cash is deemed to be adequate to cover CellSeed's funding needs for clinical trials until the end of fiscal year December 2017. As explained above, the third party placement of stock options conducted on August 31 is expected to raise a maximum of about ¥1.4 billion in new capital.

CellSeed's full year earnings estimates remain unchanged and calls for sales, and operating, recurring and net losses of ¥90, ¥1,100, ¥1,085 and ¥1,090 million, the same targets outlined in the midterm business plan. Only sales from the intelligent cell cultureware business have been factored into CellSeed's estimates. At the same time, higher expenses relating to clinical trials, labor arising from fortification of marketing capabilities, and new product development of temperature-responsive cell cultureware have been factored into estimates.

Conclusions

President Setsuko Hashimoto reflects upon the first half performance by saying that "I feel that CellSeed moved one step closer to realizing its goal of providing patients with new treatments based upon cell-sheet engineering developed in Japan." She further states that "the start of clinical trials of epithelial cell sheet for esophageal regeneration will be accelerated as the year end approaches". Upcoming milestones include the submission of clinical trials notification for epithelial cell sheet for esophageal regeneration and regenerated cartilage sheet, and the formation of clinical trial agreements with hospitals from the end of the second half to the start of the next term. In addition, the direction of development of corneal regeneration epithelial cell sheet will be reviewed in consideration of the existing cooperation agreement with Emmaus Medical of the United States. At the same time, further development of regenerated cardiac patch will be also reviewed to determine the direction of development activities as a result of screening the patents for commercialization of the human skeletal myoblast cell sheet.

CellSeed's step-up seems to be smooth from a "research support company" that is at the stage of seeking to "connect fundamental research seeds at university with clinical development" to become a company that is able to "create earnings by realizing commercial applications of regenerative medicine" under the new management team.

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.
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