（2183） | Publish:Tue, Jul 23, 2013 IR「BRIDGE REPORT」

BRIDGE REPORT
（2183）

スタンダード

Linical Co., Ltd. (2183)

Kazuhiro Hatano
CEO

Company	Linical Co., Ltd.
Code No.	2183
Exchange	First Section, TSE
Industry	Service
CEO	Kazuhiro Hatano
HQ Address	10 Flr., Shin-Osaka Brick Building, 6-1 Miyahara 1-chome, Yodogawa-ku, Osaka, Japan
Year-end	March
URL	http://www.linical.co.jp/english/

Share Price	Shares Outstanding		Market Cap.	ROE (actual)	Trading Unit
¥1,446	11,394,906 shares		¥16.477 billion	46.3%	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (actual)	PBR (actual)
¥14.00	1.0%	¥60.31	24.0x	¥139.05	10.4x

* Stock price as of closing on June 10, 2013. Number of shares issued at the end of the most recent quarter excluding treasury shares.
ROE, BPS based on previous term's results.

Fiscal Year	Sales	Operating Income	Ordinary Income	Net Income	EPS (¥)	Dividend (¥)
March 2010	2,404	480	473	273	22.16	11.00
March 2011	2,512	288	278	147	12.37	11.00
March 2012	3,110	728	723	424	37.23	11.00
March 2013	3,599	1,003	998	616	54.13	16.50
March 2014 Est.	4,031	1,151	1,144	687	60.31	14.00

* Estimates are those of the Company. An additional ¥2.5 per share was paid, including a commemorative dividend for the listing on the First Section of the TSE during FY3/13.

We present this Bridge Report about Linical Co., Ltd. and details of its fiscal year March 2013 earnings.

Key Points

Company Overview

Linical Co., Ltd. provides contract research organization (CRO) related services that include pre- and post-launch clinical trials of drugs that support the drug development process of pharmaceutical companies, and contract sales organization (CSO: sales and marketing functions for pharmaceutical products on a consigned basis) services. In the CRO business, Linical specializes in the most critical stages of clinical trials of phase II and III studies including major activities such as monitoring. Furthermore, Linical is able to differentiate itself from its competitors by focusing upon schizophrenia, depression, Alzheimer's disease, and other central nervous system (CNS) diseases, oncology, and other highly difficult disease realms(compared with these disease realms, it is more difficult to differentiate services in the highly difficult therapeutic areas associated with adult lifestyle habits where competition is intense.). At the same time, Linical will focus upon specific patient realms in the CSO business and leverage its knowhow established in the CRO business to provide product marketing and post-launch data planning and collection tasks to differentiate its CSO business from that of its competitors, who primarily provide the service of medical representative dispatch.

Linical's main customers include Takeda Pharmaceutical Company Limited, Daiichi Sankyo Company, Limited, Eisai Company, Limited, Otsuka Pharmaceutical Company, Limited, Shionogi & Company, Limited, and other major Japanese pharmaceutical companies. Moreover, phase II clinical trials are conducted to test the safety, efficacy, usage, and dosage of pharmaceutical products. Phase III clinical trials take these results and confirm them in actual treatments to test their efficacy and safety.

Linical Co., Ltd. was established in June 2005 by nine members who worked at Fujisawa Pharmaceutical Co., Ltd. (currently known as Astellas Pharma Inc.) on the development of immunosuppressant drugs. Established with the objective of becoming the ideal drug development outsourcing (CRO) company from Osaka, Linical focused its efforts in the realms of central nervous system diseases (CNS) and oncology since its founding, and received one of its first orders from Otsuka Pharmaceutical Company shortly after its establishment. Thereafter, the Company fortified its staffing as part of its efforts to strengthen its order taking capabilities. In addition, Linical is benefitting from human resources with bountiful experience in the realm of oncology pharmaceutical product development who formerly worked at foreign pharmaceutical companies and is seeing an expansion in orders near term.

With its advance into the site management organization (SMO, clinical trial facility support organization) business, Aurora Ltd. was turned into a subsidiary in January 2006. However, Linical sold all the shares of Aurora it held in May 2007 in order to focus management resources upon the CRO business. In July 2008, LINICAL USA, INC. was established in California, United States to provide support to Japanese pharmaceutical companies seeking to enter the United States market. Also in October of the same year, Linical listed its shares on the Mothers Market of the Tokyo Stock Exchange, and moved its listing to the First Section of the Tokyo Stock Exchange in March 2013.

Linical's business can be divided into the two main segments of the CRO and CSO businesses, with each accounting for 95.3% and 4.7% of fiscal year March 2013 sales respectively. The CRO business is focused upon "monitoring services," which include the "quality control" and "consulting" services. At the same time, the CSO business specializes in the provision of outsourced product marketing services and post-launch data planning and collection services as a means of differentiating itself from its competitors, which primarily focus upon medical representative dispatch.

(1) Strengths in CNS, Oncology Monitoring, Highly Difficult Realms with Few Competitors

One of Linical's strengths is its specialization in monitoring services for highly difficult disease realms of central nervous system and oncology, where there are few competitors. For example, in the realm of oncology evaluating symptoms to determine whether they are the result of side effects of drugs or the cancer itself is very difficult. In the realm of central nervous system diseases evaluating the efficacy of drugs prescribed for patients afflicted with Alzheimer's disease is also highly difficult. Therefore, high levels of responses and expertise in monitoring are necessary in these difficult realms. In addition, new drug development for patients of acute diseases and intractable diseases (difficult diseases), which are also highly difficult disease realms and, in addition to oncology and CNS realms, is very active (only a few number of CROs that can respond to these situations). Evaluation of the efficacy of drugs for adult lifestyle related diseases is easier because conditions of patients undergoing clinical trials tend to be relatively stable (for example, data gathering of blood sugar levels in diabetes patients).

New drug development trends are shifting from adult lifestyle related diseases towards the realms of oncology and CNS, where treatment satisfaction is low. However as stated above, the safety evaluation of oncology drugs and the efficacy evaluation of CNS drugs are more difficult. Therefore pharmaceutical companies, which had performed these functions internally, have begun to outsource these more difficult tasks to a greater extent in recent years. The CNS realm has been a main field for Linical since its establishment, and it started focusing on the oncology realm two years ago along with the hiring of staff from AstraZeneca. Total order backlog stood at ¥4.750 billion with oncology and CNS realms accounting for ¥1.155 and ¥1.998 billion or 24% and 42% of total order backlog respectively during fiscal year March 2013.

(2) High Profitability

In addition to high levels of various task execution capabilities in the clinical work field for efficacy and safety confirmation, high levels of knowledge and technology in the overall CRO operations are also strengths of Linical. The protocol deviation rates on projects undertaken by Linical have been extremely low, and the implementation period, including the period required for case introduction and data collection, for about 80% of all projects has been shortened. Because of its high levels of service quality and quick delivery times in highly difficult disease realms, Linical is able to book orders without having to offer reduced prices and is able to overcome its disadvantage in the economies of scale to achieve a higher profitability compare to its larger competitors.

Moreover, the source of Linical's earnings generation capability is its highly skilled and well trained clinical research associates (CRA) as reflected in the good clinical practice (GCP) passport certification examination passage rates. The GCP passport certification examination is designed to help cultivate human resources that can respond to jointly conducted global clinical trials and is conducted by the Japan Society of Clinical Trials and Research.

Management Strategy

The three important pillars of Linical's management strategy include the establishment of its brand through continued growth based upon its high quality, short delivery times and fair pricing, strengthening and fortification of its existing businesses (CRO and CSO businesses) through the fortification of services, and cultivation of new businesses. In the realm of new businesses, Linical will provide high value-added drug discovery process support services ranging from clinical trial planning to development of responses to drug authorities leveraging its bountiful experience and expertise in the CRO business.

(1) CRO Business

In the CRO business, Linical has focused upon monitoring operations in phase II and III stages of clinical trials and has received high regard from clients for its efforts in the highly difficult disease realms of oncology and CNS. Along with further extending its track record in the realm of difficult diseases, the Company will also increase its CRA staff numbers to expand its business (seeks to achieve 270 clinical research associates at an early stage).

Furthermore, Linical endeavors to create a multiple-country clinical trial implementation structure as a response to the international joint clinical trials led by Japan being focused upon by the Ministry of Health, Labor and Welfare. As part of these efforts, Linical Taiwan Co., Ltd. (Taipei, Taiwan, capitalized at 10 million Taiwanese Dollars) and Linical Korea Co., Ltd. (Seoul, Korea, capitalized at 500 million Korean Won) were established with Linical contributing 100% of the capital for these companies. In the future, Linical will also establish operational bases in Europe (currently conducting research on the CRO business in Europe), and LINICAL USA, INC. (California, USA) was established in July 2008 as part of a global structure linking Japan, the United States, Europe and Asia.

Along with the global business expansion, Linical is also stepping up its hiring of staff on a global basis with a particular emphasis in Asia, taking on Asian CRAs with Japanese and English language capabilities, in addition to their own mother language, to be trained so that Japanese standard level services can be provided locally. Initially, global study support tasks will be provided, with the goal of educating core staff to be able to provide Asian study services over the intermediate term. Furthermore, monitoring of Asian study and of Japanese led proof of concept trials will be offered in response to customer needs, while newly established subsidiaries in Taiwan and Korea are going to take over these human resources.

(2) CSO Business

Linical differentiates itself from its competitors, which offer primarily MR dispatch services, by focusing upon the consigned service type CSO business. Specifically, the Company seeks to differentiate itself by hiring MRs with bountiful experience in special patient realms and leveraging its bountiful knowhow built up in the CRO business to take on highly specialized tasks. Currently, Linical provides the two main services, namely product marketing and post-launch planning and collection. Along with fortification of these two businesses in the future, the Company will also develop the global clinical research business, which is expected to expand strongly, to become the third cornerstone of this business segment. In addition, the ability to receive work for physician led clinical research was responsible for the turn to profits of this business segment during fiscal year March 2013.

(3) Drug Discovery Support Business (New Business Development)

Linical is endeavoring to cultivate new drug discovery support services in order to meet customers' needs such as new drug development schemes that have little impact upon near term earnings, aggressive development of compounds of drug lag in various Asian countries, and one-stop outsourcing services covering everything from development plan creation to approval applications. Therefore, the Company will also focus efforts upon accumulating experiences in the strategic consignment of projects including clinical trial plan creation and data collection.

Fiscal Year March 2013 Earnings Results

Operating Income Reaches New Record High

Sales rose by 15.7% year-over-year to ¥3.599 billion. Cancelations of some projects during the first half were offset by increases in staffing on existing projects and higher orders from the acquisition of new projects in the CRO business. At the same time, sales of the CSO business rose on the back of booking of consigned work for physician-led clinical research.

Operating income rose by 37.7% year-over-year to ¥1.003 billion. The lack of project interruptions and cancelations during the second half contributed to an improvement in CRA capacity utilization rates and allowed the profitability of the CRO business segment to improve. At the same time, higher sales allowed the CSO business to clear its breakeven point and achieve profits. Consequently operating income margin improved by 4.5% points to 27.9% and operating income exceeded the previous record high seen during the previous term.

Backlog of orders at the term end rose by 35.4% year-over-year to ¥4.750 billion. Orders from Shionogi & Co., Ltd. , which has been active in new drug development, and Mitsubishi Tanabe Pharma Corporation rose by nine times to ¥2.044 billion and 16 times respectively. By category, oncology, CNS, others, and CSO accounted for 24.3%, 42.1%, 29.7% and 3.9% respectively.

In addition to a commemorative dividend of ¥2.5 per share to celebrate the move of Linical's shares to the First Section of the Tokyo Stock Exchange, the normal dividend is expected to be raised by ¥3 per share to a total dividend payment of ¥16.5 per share at the end of the current term (shares moved to the First Section of the TSE in March 2013.).

Total assets rose by ¥487 million from the end of the previous term to ¥2.642 billion at the end of the current term. Improvements in cash flow and strong earnings allowed both cash and equivalents and net assets to grow. Linical is virtually free of interest bearing liabilities and boasts of a high level of liquidity, and its capital ratio improved by 9.8% points to 60.0%. At the same time, the net cash inflow in operating activities grew on the back of an increase in profits and a progress in the collection of accounts receivables.

Fiscal Year March 2014 Earnings Estimates

Sales, Ordinary Income Expected to Rise 12.0%, 14.6% Year-Over-Year, Higher Sales for Eight Consecutive Terms, and Record High Profits for Three Consecutive Terms Expected

Linical's earnings estimates call for sales to rise by 12.0% year-over-year to ¥4.031 billion. Despite relatively conservative earnings assumptions that include the outlook for delays in booking of some consigned work projects, increases in staffing for existing projects and the acquisition of new project orders are expected to allow Linical to see higher sales for eight consecutive terms. With regards to profits, higher operating expenses due to increases in CRAs and deployment of business globally are expected to be absorbed by higher sales to allow operating income to rise by 14.7% year-over-year to ¥1.151 billion, expecting a record high profit for three consecutive terms. Dividends are expected to decline to ¥14 per share due to the disappearance of the commemorative dividend.

Conclusions

In recent years, the number of cases of international joint clinical trials is increasing with the speeding up of pharmaceutical product development in mind. Clinical trials led by the United States have been the generally accepted method used in this area, but many participants in the global arena have pointed out various issues in the process of validating efficacy and safety of the U.S. methodology. In fact, this methodology has not been very effective in the development of Alzheimer's disease and other CNS realm pharmaceutical products. Therefore, the Ministry of Health, Labor and Welfare is heading up a movement to make the meticulous methodology led by Japan to be a de facto standard of international joint clinical trials, and Linical is also launching full scale efforts to introduce the Japanese methodology through the establishment of subsidiaries in Taiwan and Korea and by hiring Asian CRAs. The Company will conduct training of its newly hired staff to infuse them with knowledge and knowhow necessary to provide the same high quality levels as clinical trials performed in Japan, and promote understanding of the Japanese clinical trial methodologies in overseas markets and to meet the needs of Japanese pharmaceutical companies operating in those local markets. Needless to say, one of Linical's best management resources is its highly skilled and trained staff, and the company thinks the cultivation of human resources is also crucial in its global strategy (in particular, the intensive education on the high-quality Japanese services).

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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