BRIDGE REPORT
SanBio Co., Ltd. (4592)
President Keita Mori
President
Keita Mori
Corporate Profile
Company
SanBio Company Limited
Code No.
4592
Exchange
Mothers of Tokyo Stock Exchange
Business category
Pharmaceutical products
President
Keita Mori
Address
28th floor, St. Luke's Tower, 8-1 Akashi-cho, Chuo-ku, Tokyo
Business
Biotechnology company that develops regenerative medicines for central nervous system diseases and disorders. Founded in the US. and reorganized in Japan.
Year-end
End of January
HP
Stock Information
Share Price Number of shares issued
(excluding treasury shares)
Total market cap ROE
(Actual)
Trading Unit
¥1,597 44,621,725 shares ¥71,260 million - 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥0.00 - -¥81.62 - ¥142.66 11.2times
* The share price is the closing price on Apr. 5. The number of shares issued and BPS were taken from the latest brief financial report.
 
Consolidated Earnings Trends
Fiscal Year Net Sales Operating
 Income
Ordinary
 Income
Net Income EPS DPS   
January 2014 (Actual) 204 -584 -587 -589 -15.41 0.00
January 2015 (Actual) 3,229 2,248 2,228 1,736 44.31 0.00
January 2016 (Actual) 1,174 -1,125 -1,172 -988 -22.67 0.00
January 2017 (Estimate) 886 -3,814 -3,830 -3,641 -81.62 0.00
In the sections below, we describe recent progress in the development of regenerative cell medicines at the SanBio Group (SanBio Company Limited and its subsidiary); report on a lengthy interview with the Company's president; and summarize the Company's financial results and near-term projections.
 
Key Points
 
 
 
Company Overview
 
SanBio is a biotechnology company that develops regenerative cell medicines for treating central nervous system diseases and disorders, such as chronic motor disability secondary to stroke, for which no effective treatment methods have been developed to date. SanBio plans to develop a global business based on its strongholds in Japan and the United States, the two leading countries developing regenerative medicine products. SanBio's major strengths include well-established manufacturing technologies and patent strategies for creating competitive advantages. SanBio's strategy is to grow by expanding its portfolio of target diseases and geographic regions.
 
History
Previously, Mr. Keita Mori (currently the representative director and president of SanBio Company Limited) was an executive in research and development at Kirin Holdings, Ltd., but was eager to launch a new business in the biotechnology arena. He shared this goal with Mr. Toru Kawanishi, an old friend who had served as a consultant at the consulting firm The Boston Consulting Group, and was a cofounder and vice president of CareNet (2150, Mothers of Tokyo Stock Exchange), which assists pharmaceutical companies in sales activities.

They discussed various topics, including future directions and set a goal of "creating new fields and markets in the biotech field," as both of them had majored in biotechnology in the agricultural department at Tokyo University. They focused on "regenerative cell medicines," which appeared to be a new and promising field, and established SanBio, Inc. in California in February 2001, with the objective of developing and commercializing these therapies.

At the time of the foundation of the company, Messrs. Mori and Kawanishi became aware of the academic research of Professor Hideyuki Okano of Keio University (a leading expert in regenerative medicine and iPS research in the cranial nerve field, Dean of Keio Medical School, and Director of the Japanese Society for Regenerative Medicine). The two founders requested that Professor Okano collaborate in launching their business and ultimately reached agreement. In December 2002, following an introduction by Professor Okano, the intellectual property rights to certain technology required for producing SanBio's current products were transferred via Yokohama TLO Co., Ltd. (an institution that licenses intellectual property of research conducted at national public and private universities in Kanagawa Prefecture to commercial enterprises.) Since the founding of SanBio, Professor Okano has continued to consult with SanBio as a founding scientist. Meanwhile in the U.S., the company recruited advisors and top researchers in each discipline via its strong network in the regenerative medicine field and pursued the development of both regenerative cell medicines and production technologies necessary to scale them up for clinical use.

Following the development phase, SanBio sought partners among large pharmaceutical companies capable of bringing drug candidates through clinical trials and into widespread use. In December 2009, SanBio concluded a contract for licensing the development of the regenerative cell medicine SB623 for treating sufferers from chronic stroke disabilities with Teijin Ltd.. In May 2010, it received approval to conduct its first clinical trial from the U.S. Food and Drug Administration (FDA). In September 2010, SanBio signed an option agreement for the treatment of chronic disability resulting from stroke in the U.S. and Canada with Sumitomo Dainippon Pharma Co., Ltd.

In January 2011, SanBio commenced a Phase 1/2a clinical trial of SB623 in the field of stroke in the U.S.; and in August 2013, the administration of SB623 to 18 subjects was completed. There were no obvious product related safety concerns, no dose-limiting toxicity and statistically significant efficacy results across multiple endpoints were observed.

During this same time period, the presence of Japan in the field of regenerative medicine became globally significant. Professor Shinya Yamanaka of Kyoto University received the Nobel Prize for his development of iPS cells in December 2012; also, both an amended Pharmaceutical Affairs Act and a new law regarding regenerative medicines came into effect in November 2014, granting expedited approval for certain regenerative medicines. Considering this to be an historic opportunity, SanBio Company Limited was formed in Japan in February 2013, to establish global business operations, with R&D centered in its Silicon Valley laboratory, and management systems centered in Japan. In January 2014, SanBio Company Limited in Japan became the parent company; and SanBio, Inc. in the U.S. became a 100% owned subsidiary. Following this reorganization, SanBio Co. Ltd. filed its Initial Public Offering on the Mothers market of the Tokyo Stock Exchange in April 2015, procuring 7.3 billion yen, one of the largest IPOs to date for a Japanese biotech venture.

In June 2014, following promising results of the Phase 1/2a clinical trial of SB623 in the U.S., SanBio obtained FDA approval for a Phase 2b clinical trial. Then, in September 2014, Sumitomo Dainippon Pharma Co., Ltd. executed its option, and began collaborative development of SB623 for treating chronic motor deficits secondary to ischemic stroke in the U.S. and Canada.

As for the clinical trials of SB623 for traumatic brain injury (TBI) in the U.S., SanBio received initial regulatory approval from FDA in May 2013 to conduct another dose escalation study. However, given the results from the Phase 1/2a stroke study, SanBio modified the protocol to a larger Phase 2 double-blind randomized controlled study which was approved by FDA in April 2015. Since then, preparation for the clinical trials has progressed rapidly, and in October 2015, SanBio began to recruit subjects for its Phase 2 TBI study to evaluate the potential of SB623 in recovery from chronic motor deficits secondary to TBI. This trial will be global and recruit 52 subjects from Japan and the US.
In addition, in December 2015, SanBio began to recruit subjects for a 156-subject, double-blinded, randomized Phase 2b clinical trial in chronic motor disability resulting from ischemic stroke in North America.
Development continues to move forward at a rapid pace.
 
SanBio Group and development systems
As was mentioned in the section on corporate history above, the SanBio Group is composed of SanBio Company Limited and its consolidated subsidiary, SanBio, Inc. (California, U.S.).
Since its establishment in 2001, the development and production teams of SanBio, Inc. in the U.S. have engaged in the research and development of regenerative cell medicines. The SanBio Group is also establishing a network of contract research organizations (CROs) and collaborators in Japan to further its worldwide business operations. SanBio's R&D team includes:
 
Dr. Hideyuki Okano, a SanBio founding scientist, is a leading expert in regenerative medicine and iPS cell research in the brain. His work was instrumental in overturning the conventional theory that "the brain does not regenerate." Dr. Okano has advised SanBio on scientific issues since the company was founded.
The former FDA Commissioner, the former president of Stanford University, and the former director of the National Institute on Aging at the National Institutes of Health (NIH), are also members of SanBio's Scientific Advisory Board.
SanBio also cooperates with leading US research institutes, including Stanford University, the University of Pittsburgh, New York University (NYU), the University of California Los Angeles (UCLA), and Northwestern University, which pursue cutting-edge medical care, and form part of the Company's strong network of clinical researchers in the cutting-edge regenerative medicine field.
Dr. Damien Bates, SanBio's Chief Medical Officer, previously succeeded in obtaining the first approval for an "allogeneic" cell pharmaceutical product from US FDA. Prior to Dr. Bates' work, "autologous" transplantation had been approved in several cases, but not "allogeneic transplantation." ("Allogeneic transplantation" and "autologous transplantation" will be described later in the section titled "Business content and business model.")
SanBio's production executive is an innovator in the field of producing cells for therapeutic use and obtained the first FDA approval for conducting trials with regenerative medicines. He has worked with SanBio for the past 10 years perfecting the methods needed to produce SB623 in quantities needed for clinical studies and later marketing. Many of these production processes and scale-up methods are the proprietary information of SanBio.
SanBio appointed Dr. Jay Stout as Senior Vice President of Manufacturing in April 2016. Dr. Stout is a distinguished industry veteran with 25 years of experience in biologicals development and commercialization. Dr. Stout will be responsible for all production-related operations, from process development, production and quality control, to clinical cell preparation and final quality assurance.
 
Corporate ethos
The mission of the SanBio Group is to develop treatments based on regenerative cell medicines for diseases that have unmet medical needs*, such as chronic motor disability secondary to stroke*, traumatic brain injury, age-related macular degeneration, retinitis pigmentosa, Parkinson's disease, spinal cord injury, and Alzheimer's disease; and then contribute to the treatment of patients suffering from such diseases around the world and the improvement of their physical functions.
 
Chronic disability: Symptoms (e.g. weakness or paralysis of the limbs) persisting 6 months or more following brain injury such as stroke or traumatic brain injury.
Unmet medical needs: Needs for treatment of diseases for which no effective treatment methods have been discovered.
 
 
Points in understanding SanBio
There are several major topics where basic facts are necessary in order to understand SanBio's business and competitive advantages, such as cells, brain regeneration, and regenerative medicine.
 
Cells
The human body is constituted by over 37 trillion cells and over 200 different kinds of cells.
The human body is produced from a single fertilized egg, which divides and multiplies repeatedly, changing into a variety of cells constituting the adult body, including nerve, myocardial, and hepatic cells.
The human body consists of both fully-differentiated and incompletely differentiated cells. The former are called somatic cells; the latter, stem cells.
Stem cells include hematopoietic, adipose, neural, and mesenchymal stem cells. These cells have the capacity to change into various cell types within a limited range. For example, hematopoietic stem cells exist abundantly in bone marrow, and they produce all types of blood cells, including white blood cells and platelets; but they do not typically change into other types of cells.
 
Brain Regeneration
During fetal life (about nine months from fertilization), the human brain contains neural stem cells, which are the origin of neurons, and produce new neurons through active cell division and differentiation. It was previously thought that this cell division ceases and that new neurons were no longer produced in adults.
Contrary to this view, recent research indicates that neural stem cells exist also in the adult brain and the adult brain has the capacity to produce new neurons and other types of brain cells.
Dr. Hideyuki Okano, a founding scientist of SanBio, was one of the first to discover this, and he succeeded in regenerating brain neurons.
 
ES and iPS Cells vs. MSC
Embryonic stem (ES) cells have a greater capacity to differentiate into different types of cells than adult stem cells. In theory, ES cells can differentiate into all of the types of cells in the body, including the heart muscle, nerves, liver, and blood.
While adult stem cells typically only develop into a limited range of cells, ES cells can differentiate into a much wider range of cells. This is a remarkable characteristic.
ES cells are produced from embryos used in treating infertility. Despite the fact that surplus embryos would otherwise be discarded, the use of fertilized eggs has raised ethical issues in many countries. In some cases ES cells are derived from aborted fetuses, which is also considered ethically problematic by some. In 2007, Professor Shinya Yamanaka of Kyoto University invented a new cell called the "induced pluripotent stem cell (iPS cell)." iPS cells have similar characteristics to ES cells but do not require the use of embryonic or fetal cells. iPS cells are produced from human skin cells.
iPS cells have almost the same characteristics as ES cells in that they can change into various cells such as heart muscle, nerves, liver, blood, etc., and iPS cells are free from the ethical issues of ES cells. One drawback of iPS cells is the risk of becoming cancerous because iPS cells multiply without limit.
Mesenchymal Stem Cells (MSCs) are extracted from the bone marrow of healthy donors, and have been used for many years for patients requiring complete replacement of their marrow and blood cells. There are no obvious ethical issues with the use of these cells, and they are not known to pose any risk of promoting cancer. While they can differentiate into other cell types, they usually persist for less than a month after injection or implantation. During this time, in vivo MSCs secrete growth factors that can influence other cell types, and can be genetically manipulated (as demonstrated by SanBio) to further encourage nervous system recovery.
 
 
Regenerative Medicine
①What is regenerative medicine?
Regenerative medicines are medicines designed to recover or revitalize organs that are not functioning normally by using cells, extracellular matrices and growth factors. For example, the stem cells of a patient or a donor may be transplanted into the patient, and the transplanted cells induced to differentiate into desired cells or act on existing cells, to treat diseases. Regenerative medicine is expected to enable innovative treatments that would have otherwise been impossible.
 
②The Japanese business environment is attracting attention from around the world
According to data released by the Ministry of Economy, Trade and Industry, the size of the regenerative medicine market was 9 billion yen in Japan and 100 billion yen outside Japan in 2012, and is estimated to reach 2.5 trillion yen in Japan and 38 trillion yen outside Japan by 2050.

The competition in research into regenerative medicines is becoming fierce. Professor Yamanaka produced epoch-making results regarding iPS cells in 2006 and 2007. Shortly thereafter, in 2009, US President Obama signed a bill lifting the ban on federal funding for ES cell research, which had been prohibited under the Bush administration.

Later, in 2012 Japanese government officials stated that "systems based on the cooperation among government, industry, and academia are indispensable for surviving the fierce research competition and actualizing clinical technologies for patients" (Current situation and problems in regenerative cell medicine, Sep. 26, 2012; Research and Development Division, Health Policy Bureau, the Ministry of Health, Labour and Welfare), and "regenerative medicine" became one of the most important themes in the government's strategies for supporting the Japanese economy.

Consistent with this trend, the Pharmaceutical and Medical Device Act (the new title for the amended Pharmaceutical Affairs Act) and the Act for Securing the Safety of Regenerative Medicine, were enacted on November 25, 2014, and the legal framework for approving regenerative medicine was established. Most notably, an early approval system was adopted in the amended Pharmaceutical Affairs Act, which shortened the period for approval from 5-8 years to 3.5 years.

In addition, the outsourcing of cell culturing and processing was permitted through the Act for Securing the Safety of Regenerative Medicine. Following the legislative changes enacted by Japan, many overseas companies announced that they would enter the Japanese market through various alliances and agreements with Japanese companies. Clearly, the environment surrounding regenerative medicine in Japan is attracting global attention.
 
 
Under the amended Pharmaceutical Affairs Act, the Japanese government approved the production and sale of a skeletal myoblast sheet for treating serious heart failure, which was developed by Terumo (4533, First Section of Tokyo Stock Exchange), on September 2, 2015, and a remedy for serious complications after the transplantation of hematopoietic stem cells, which was developed by JCR Pharmaceuticals (4542, First Section of Tokyo Stock Exchange), on September 18, 2015. For both products, the period from application to approval was as short as one year.
 
Business content and business model
SanBio develops, produces, and sells regenerative cell medicines for diseases that have unmet medical needs, such as chronic disability from stroke, chronic disability from traumatic brain injury, age-related macular degeneration, retinitis pigmentosa, Parkinson's disease, spinal cord injury, and Alzheimer's disease. All of these are related to brain neurons.
 
Regenerative Cell Medicines
① What are regenerative cell medicines?
SanBio's approach to treating these conditions is by administering regenerative cell medicines. These are pharmaceutical products that induce or promote the natural regeneration of cells and tissues responsible for physical functions lost due to loss of blood flow, accident, or aging. Regenerative medicines stimulate regeneration or recovery of cells responsible for functions such as mobility, speech, sight, and cognition.
 
② Allogenic and Autologous Cells
Cells used in regenerative medicines typically fall into two categories: autologous and allogeneic.
Autologous transplantation refers to the transplantation of cells that have been harvested from a patient and transplanted back into the same patient to treat the patient's own disease or disability. This involves engraftment and establishment of a blood supply to nourish these transplanted cells. Alternatively, in many cases autologous cells may be implanted with for the same purpose. Furthermore, these cells may be minimally manipulated or they may be processed and further cultured.

The skeletal myoblast sheet produced by Terumo is an example of regenerative medicine based on autologous transplantation. Muscular tissue is taken from the thigh of a patient. The skeletal myoblast portion of the tissue is cultured, a sheet of tissue is produced, and the sheet is transplanted back onto the heart of the patient, to treat serious heart failure. An important advantage of this method is that, since cultured cells are autologous, they are theoretically free from immune rejection. However, there is the possibility that substances used to culture these cells (e.g. albumin) may cause an immune reaction. In addition, processing and culturing of autologous cells is typically very time consuming and expensive, as it is performed on individual patients, and results may vary from individual to individual.

In contrast, allogeneic cells are taken from healthy adult donors and processed and cultured for large scale production. Because cells from one donor can potentially treat thousands of patients, allogeneic cell based treatments are inherently lower cost and easier to implement than autologous cell-based treatments. If issues related to immunological compatibility and safety are solved, allogeneic cell-based treatments will be the preferred method of regenerative medicine for many indications.
 
 
SanBio has developed and scaled-up allogeneic cell production technology. The objective is to produce "cell-based pharmaceutical products" rather than "transplantation medicine."

In order to fulfill the mission of the SanBio Group to develop new therapies for diseases that have unmet medical needs and to improve patients' physical functions by using cost effective regenerative cell medicines, the company has chosen to use allogeneic cell-based pharmaceutical products which are delivered to patients through existing distribution channels.
 
 
③ Allogeneic Cell Production
Large scale production methods are needed in order to put regenerative cell medicines into practical use. SanBio has overcome this hurdle.
 
 
SanBio has established the technology needed for mass-producing regenerative cell medicines. Frozen cell products are delivered to hospitals through the existing supply chain for pharmaceutical products, thawed there, and administered to patients.

Very few companies have established the technology needed for mass-producing regenerative cell medicines. In the regenerative medicine business, in which medicines are more complex than conventional drugs, there exists a significant hurdle in order to achieve large scale production. This is sometimes called the "production valley of death," and must be faced before practical application. As SanBio has already surpassed this "valley of death," it is well ahead of potential competitors.
 
④ Regenerative Cell Medicine SB623
SanBio's most advanced cell medicine is SB623, for treating chronic disability due to stroke and traumatic brain injury. For the time being, SanBio plans to concentrate on the expansion of indications for SB623. SanBio also owns other cell medicines, known as SB618 and SB308, which are intended for other applications.
 
 
 
★ Phase 1/2a efficacy and safety data in stroke supported initiation of a Phase 2 study in TBI without a prior Phase 1 or 2a dose exploration study.
 
(1) Efficacy of SB623
SB623 treatment has the potential to improve certain neurological functions, and is aimed at facilitating the recovery processes of the body by stimulating the patient's own capacity for tissue regeneration. In the brain, this would ideally manifest itself by revitalizing the weakened functions of mobility, sight, speech, and cognition following brain injury. Its effects may include: neuronal growth and differentiation, neuro-protection, angiogenesis, and anti-inflammation. Research in the regenerative medicine field suggest that these effects may act synergistically.

Stroke, which is the first indication targetted for SB623, is a result of occlusion of blood vessels in the brain, preventing oxygen and nutrients from reaching neural tissue, causing loss of brain function or death. Thrombolytic agents are effective against stroke during the acute phase, for several hours after onset; but after the acute phase, there are no treatment methods other than physical therapy. Typically, physical therapy benefits level off after the first 6-12 months following stroke.

In 2011, SanBio began its US based two-year Phase 1/2a clinical trial to provide initial safety and efficacy data for SB623 in patients suffering chronic motor disability caused by ischemic stroke. In February 2014, the last patient in the Phase 1/2a study reached the 6 month follow up timepoint. There were no obvious product related safety concerns, no dose-limiting toxicity and statistically significant efficacy results across multiple endpoints were observed. In June 2014, FDA approved SB623 to move to the next stage of clinical testing, Phase 2b.
 
 
This graph shows one of the results of the Phase 1/2a clinical trials with the Fugl-Meyer Motor Scale, which is a representative indicator of efficacy with respect to motor function. The horizontal axis represents the number of months elapsed after the administration of SB623, and the vertical axis denotes the degree of improvement in motor function. It was observed that the more time elapsed following the administration, the further the function improved, and that the medicine remained effective.
 
 
As examples of the improvement in the function through SB623 administration, it was observed that "a patient confined to a wheelchair became able to walk," "a patient became able to raise her paralyzed arm," and "a speech-disabled person became able to speak smoothly." The videos showing the improvements among patients are available at SanBio's website.
https://www.youtube.com/watch?v=E4WXwhTp7Ow&end=215
 
(2) SB623 Administration
In the case our stroke study, the medicine is administered with local anesthesia in a stereotactic neurosurgical operation, which is a common method in this field.

Patients do not need to be hospitalized for a long period of time. In the clinical trial, subjects were hospitalized for one day and typically discharged from the hospital on the day following administration. Other important advantages of SB623 are that immunosuppressive agents are unnecessary, and that the same product can be used for all patients like traditional pharmaceutical products.
 
(3) Progress of development
◎ Chronic-phase stroke
In the U.S., the Phase 1/2a trial, two-year follow up was completed in August 2015; recruiting of patients for Phase 2b began in December 2015, and actual administration to patients was conducted for two cases on March 8, 2016. Based on this achievement, SanBio earned a milestone payment of US$5 million from Sumitomo Dainippon Pharma Co., Ltd., a development partner.

SanBio plans to administer SB623 to 156 patients who have been suffering from motor disability subsequent to stroke for six months to five years, at 60 facilities in the U.S.

In Japan, Teijin, which is licensed by SanBio, is in charge of development relating to stroke-related chronic disability.
 
◎ Traumatic brain injury
SanBio is also developing SB623 for recovery from motor disability resulting from TBI, which is the next target indication for SB623 after stroke.

Traumatic brain injury results from a strong impact to the head (e.g. traffic accident or fall) and can be accompanied by serious permanent disorders, such as partial or complete paralysis, sensory impairment, memory loss, and higher cerebral dysfunction, which makes it difficult to control behavior and emotions. The period during which physical therapy is effective is 6-12 months after onset, slightly longer than that of stroke; and after that period, there are no effective therapies. In the U.S., about 2.5 million patients receive emergency TBI medical treatment every year, and a considerable number of these patients suffer from chronic effects of this injury.

Since motor disability following traumatic brain injury can be similar to stroke in the area of the brain affected and in its clinical presentation, SanBio believes this to be a promising next indication for SB623. Given the data from the its Phase 1/2a data in stroke and the plan to use a similar approach (e.g. SB623 cells via same route, doses and technique of administration) in TBI, SanBio reached an agreement with FDA to skip Phase 1 and begin clinical trials directly from Phase 2. In Oct. 2015, the company began screening subjects.

In Japan, the company's application to conduct a clinical trial in TBI was submitted to the Pharmaceutical and Medical Devices Agency (PMDA) on March 7, 2016. Since the standard examination period of 30 days has passed, it is now possible for SanBio to conduct the Phase 2 TBI study at Japanese clinical trial sites as part of a global trial. During FY2017, the company aims to administer SB623 to 52 TBI patients in approximately 25 facilities around Japan and the U.S. It is anticipated that the addition of Japanese clinical trial sites will speed up overall enrollment for this study.

The company intends to release SB623 in Japan as quickly as possible by taking full advantage of the early approval system specified in the amended Pharmaceutical Affairs Act.

<Voices of SanBio staff>
Damien Bates, Chief Medical Officer and Head of Research "SanBio's regenerative cell medicine SB623 appears to have the potential to improve the motor function of patients suffering from persistent disability post ischemic stroke. Furthermore, our non-clinical data support the the possibility that this medicine could also be effective for patients with persistent motor deficits secondary to TBI. We are now aggressively pursuing this hypothesis in both Japan and the US with our global Phase 2 clinical trial - the first of its kind in the world. With this gateway to clinical studies for our regenerative medicine product in Japan now open we are actively exploring other target indications for SB623."

Takehiko Kaneko, Head of SanBio's Clinical Development Department Japan and Medical Director "I'm delighted to see SB623 entering the phase of clinical development also in Japan. We will conduct the clinical development of SB623 so as to contribute to patients with motor disorder as soon as possible."
 
◎ Age-related Macular Degeneration
Since SB623 appears to have strong neuroregenerative activity, SanBio is exploring the possibility that it will prove effective against certain retinal disorders as well.

The macula is located at the center of the retina in the back of the eye. The macula is the most important part of the eye. It is the source of most optical information, including shape, size, colors, dimensions, and distance. When a person gets older, the cells of the retina gradually die, and the function of the macula starts to decline. As a result, eyesight degrades, and the field of view is blurred. Such symptoms are called age-related macular degeneration (AMD). There is currently no effective treatment for the most common form of AMD - Dry AMD.

Given the particularly large unmet medical need and growing market, SanBio is exploring Dry AMD and retinitis pigmentosa as potential targets for SB623.

In January 2014, SanBio held a pre-pre-IND meeting with the US FDA to discuss its non-clinical data in animal models of retinal degeneration. Further to these discussions and guidance, SanBio is now completing additional non-clinical studies for IND approval, a prerequisite for the FDA approval of clinical study initiation in the US.
 
<Business Model>
① Outline
After acquiring technologies from universities and internal development, SanBio performs preclinical studies and develops production methods for its products. Then SanBio enters into license agreements with larger pharmaceutical companies to fund clinical studies and market products. In this business model, SanBio receives (1) upfront payments, (2) milestone payments, (3) fees for cooperation in development, (4) royalties, and (5) income related to supplying final product to the licensee.

SanBio performs research work both in-house and at university and contract laboratories. Production is typically contracted with firms specializing in cell harvesting and production.
 
 
 
At the development stage, income is composed of (1) upfront payments, (2) development milestone payments, and (3) fees for cooperation in development. After marketing approval, SanBio will receive mainly (2) milestone payments with respect to sales, (4) royalties, and (5) income from product supply. Both (4) Royalties and (5) income from product supply increase in proportion to sales, because they are paid as specified percentages of sales.
 
 
② Existing Pharmaceutical Partnerships
For the development, production, and sale of SB623 for treating chronic motor deficit secondary to stroke, SanBio concluded contracts with Sumitomo Dainippon Pharma Co., Ltd. in North America and Teijin Ltd. in Japan.
 
 
The conditions for payments from Sumitomo Dainippon Pharma Co., Ltd. are as follows.
 
 
SanBio is planning to establish partnerships with the most appropriate partner pharmaceutical companies regarding the development and marketing rights for its regenerative medicine against chronic motor disability resulting from stroke in countries other than the U.S., Canada, and Japan, and such rights for other target diseases.
 
Characteristics and Strengths
① Huge Target Markets
The target diseases of SanBio's regenerative cell medicines are mainly neurodegenerative diseases and other central nervous system disorders, which have no effective therapies. These represent very large markets.

The number of stroke patients is said to be about 6.6million in the U.S. According to the "Survey on Patients in 2014" by the Japanese Ministry of Health, Labour and Welfare (announced in December 2015), the estimated number of patients of cerebrovascular disease (stroke) in Japan in 2014 was 1.179 million, which is slightly smaller than the number (1.235 million) obtained in the previous survey (2011); but this accounts for about 1% of the population.
 
 
There were 534,000 patients of Alzheimer's disease and 141,000 patients of Parkinson's disease in 2011 in Japan.
The total number of patients with these two diseases is smaller than the number affected by stroke; but the number of patients with Alzheimer's disease has been rapidly increasing in recent years, and the need for effective treatments is growing.
 
 
In addition, if the efficacy of SanBio's regenerative cell medicines against other neural disorders, such as age-related macular degeneration and retinitis pigmentosa (which cannot be effectively treated by existing medical services or pharmaceutical products), is established, SanBio will create a huge global market and make a significant contribution to society.
 
② Patent Strategies to Create Competitive Advantages
SanBio's basic patent strategy is to acquire all of the necessary intellectual property for developing regenerative cell medicines, with the goal of maximizing income from the development and sale of products. SanBio has already obtained all of the basic patents for its initial regenerative cell medicines, SB623, SB618, and SB308.

As seen below, SanBio has already obtained basic patents in all major markets, and plans to seek partnerships with leading pharmaceutical companies such as Sumitomo Dainippon Pharma Co., Ltd. in the U.S. and Canada, and Teijin Ltd. in Japan, and will develop a strong foundation for clinical trials, production process development, and product sale around the world.
 
 
The patents for pharmaceutical products can be classified into four types: "substance patents," "process patents," "formulation patents," and "use patents."

Substance patents are for protecting substances themselves; they are the most important type of patents for pharmaceutical products, and they confer the broadest scope of rights. Accordingly, obtaining them requires significant cost and time. The owner of a substance patent is able to produce and sell developed pharmaceutical products exclusively, for any use. Therefore, the SanBio Group is particularly focused on acquiring substance patents.
 
③ Securing of rights to supply products
Certain drug discovery ventures in-license drug candidates from other companies and develop them further- meaning that the licensor ends up sharing in any eventual royalty. Other ventures turn over the rights to produce drug products to their partner pharmaceutical companies; therefore, the income of the ventures is limited to royalties for product sale.

In the case of SanBio, regenerative cell medicines are not in-licensed from other companies, but are unique fruits of in-house research and development from the fundamental stage. In addition, SanBio engages in the production of regenerative cell medicines, and does not turn over production rights to its partners. Therefore, SanBio receives all the royalties from product sale, and also product supply revenue resulting in a more complete and diversified set of revenues than that of many development companies.
 
④ Established mass-production technology and safety of regenerative cell medicines
As mentioned above, SanBio has already established technologies for formulation, production, storage, shipping, and administration, and is able to mass-produce products after release, which is a great advantage. Another differentiating factor vs. companies focused on embryonic stem cells is that mesenchymal stem cells are thought to be safer and do not face obvious ethical issues. Mesenchymal cells are also thought to be safer than iPS cells with respect to tumorigenic risk. Therefore, SanBio's regenerative cell medicines are expected to be readily accepted in clinical practice.
 
 
Interview with President Mori
 
We interviewed SanBio's President Keita Mori about the progress of development, the company's future outlook, and other topics:
 
"Development is progressing steadily as planned. Staffing is being enriched."
Development is progressing steadily. The initial drug administration in Phase 2b in the U.S. was delayed till the current fiscal year, but it was executed this March. As a result, the company received a substantial milestone payment from Sumitomo Dainippon Pharma.
SanBio's schedule for the clinical development of SB623 in patients suffering from the chronic effect of stroke and TBI is aggressive and progressing as expected.
SanBio is carrying out not only clinical development, but also building out its staffing resources for full-scale business operations, including manufacturing and sale. The company is recruiting top personnel who have the experience of working for a world-class pharmaceutical company, and those who have strong medical qualifications.
The company is attracting skilled and highly-motivated personnel, who agree with and are attracted by the opportunity to create an unprecedented new class of therapeutics and treat patients with incurable diseases.
Through the recent amendment to the Pharmaceutical Affairs Act, it became possible to grow globally from an early base in Japan; and this increased the attractiveness of SanBio, which has development footholds in both Japan and the U.S.
Given this environment, our highly ambitious staff are overflowing with excitement.
 
"This the year when we move from "hop" and "skip" to "jump." SanBio aims to become the global No.1 in our field."
In the fiscal year ended January 2015 before its IPO, SanBio concentrated on Phase 1/2a of clinical development in the U.S. with the aim of actualizing proof-of-concept early. In the fiscal year ended January 2016, a successful IPO was conducted, to procure funds, and key personnel were recruited to move from clinical research to scaled-up manufacturing and marketing.
If the past two years are considered as a "hop" and "step," the current year can be considered as the year of "jump": commencement of Phase 2b for stroke in the US and Phase 2 for TBI in Japan and the US.
It is widely recognized that it is indispensable to become a global category leader, in order to become a top biotech company. Therefore, our company focuses on the new category of regenerative cell medicines, which are unprecedented in market potential, and aims to become global No.1 at full throttle. We hope that you will expect a lot from SanBio; the management team certainly does.
 
 
 
 
Fiscal Year January 2016 Earnings Results
 
 
Steady progress of development. R&D continued.
Sales were 1,174 million yen, down 63.6% year on year, primarily due to the timing of milestone payments. SanBio received one milestone payment of US$5 million for the joint development of SB623 under a licensing contract from Sumitomo Dainippon Pharma. In addition, during FY2016 the company was scheduled to receive a milestone payment of a total of US$10 million, composed of US$5million for opening the first clinical trial facility and US$5 million for administering the medicine to the first subject; but the administration to the first subject was delayed till the beginning of the following fiscal year, due to external factors, such as the progress of screening and the schedule of individual subjects. Accordingly, the latter income of US$5 million will be carried over to the fiscal year ending January 2017. Sales decreased, because of the timing of income from other contractual sources in the previous fiscal year.

There was an operating loss of 1,125 million yen, because R&D cost augmented considerably due to the commencement of Phase 2b clinical development for chronic-phase stroke and Phase 2 for chronic-phase traumatic brain injury in the U.S., and the start of preparation for clinical trials for traumatic brain injury in Japan. Although an exchange gain of 19 million yen was posted, an ordinary loss of 1,172 million yen was recorded, since a stock delivery expense of 32 million yen for new listing, a listing-related cost of 18 million yen, and other costs were posted.
 
 
Current assets rose 6.9 billion yen from the end of the previous fiscal year, due to the increase in cash and deposits through fund procurement via SanBio's public offering. As noncurrent assets decreased 400 million yen due to the decline in investments and other assets (including long-term deposits), total assets grew by 6.5 billion yen from the end of the previous year to 8.2 billion yen.

Total liabilities were 1.9 billion yen, nearly equal to the value at the end of the previous term, as current liabilities increased by 1 billion yen due to the growth of short-term debt, and noncurrent liabilities dropped 900 million yen due to the decrease in long-term debt.

Net assets grew 6.4 billion yen to 6.3 billion yen, due to the increase in funds and capital surplus through fund procurement and other sources.

The equity ratio rose considerably from -5.0% at the end of the previous term to 77.0%.
 
 
Operating cash flow dropped further as operating losses were booked. Investing cash flow is nearly equal to the value in the previous term.

Financing CF increased considerably through the issuance of shares, and the cash position improved by 5.6 billion yen.
 
 
Fiscal Year January 2017 Earnings Estimates
 
 
Prior investment to be continued for building the development and production capabilities
Sales are estimated to decrease 24.6% year on year to 886 million yen. A milestone payment of US$5 million paid by Sumitomo Dainippon Pharma, which was carried over from the previous term, as well as income from cooperative development funds and other sources will be included.

Operating expenses are estimated to be 4.7 billion yen, up 104.4% year on year. The cost for clinical development will increase considerably from the previous fiscal year, as Phase 2b of the clinical trial for chronic-phase stroke and Phase 2 for chronic-phase traumatic brain injury have been commenced in the U.S. Also, in Japan, clinical trials for the traumatic brain injury program are scheduled to begin. Almost all of the expenses for completing the three Phase 2 clinical trials will be posted in the current fiscal year. SanBio will also keep adding staff as clinical operations grow and manufacturing operations are prepared for scale-up. Accordingly, R&D cost is estimated to be 3,883 million yen, up 129.1% year on year. As a result, operating loss is estimated to increase by 2,689 million yen year on year to 3,814 million yen.
 
 
Conclusions
 
As mentioned in the section "Interview with the President Mori," the current term is considered to be the year of "jump" for SanBio, as the base for becoming the global No.1 company in regenerative medicine will be established.
If the clinical trials and development against the two initial target diseases (chronic-phase stroke and chronic-phase TBI) progress smoothly in Japan and the U.S., SanBio will indeed achieve the company's objective of "growing in a multiplying way by increasing target diseases and expanding target regions." We intend to pay close, continuing attention to the company's activities and releases.
 
 
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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