Linical Co., Ltd. (2183)
Kazuhiro Hatano CEO
Kazuhiro Hatano
Corporate Profile
Linical Co., Ltd.
Code No.
First Section, TSE
Kazuhiro Hatano
HQ Address
10 Fl., Shin-Osaka Brick Building, 6-1 Miyahara 1-chome, Yodogawa-ku, Osaka, Japan
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,193 11,394,906 shares ¥13.594 billion 22.3% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥14.00 1.2% ¥65.78 18.1x ¥180.83 6.6x
* Stock price as of closing on June 11, 2015. Number of shares issued at the end of the most recent quarter excluding treasury shares.
Consolidated Earnings Trends
Fiscal Year Sales    Operating
Net Income EPS (¥)  Dividend (¥)
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 3,721 706 703 449 39.42 14.00
March 2015 4,872 876 840 437 38.36 14.00
March 2016 Est. 6,586 1,235 1,225 749 65.78 14.00
* Estimates are those of the Company. An additional ¥2.5 per share was paid to commemorate the move of the Company's shares to the First Section of the Tokyo Stock Exchange during FY3/13.

We present this Bridge Report about Linical Co., Ltd. and details of fiscal year March 2015 earnings.
Key Points
Company Overview
Linical Co., Ltd. provides contract research organization (CRO) services that support the drug development processes of pharmaceutical companies on an outsourced consignment basis, and contract sales organization (CSO, sales and marketing functions for pharmaceutical products post market launch and including clinical research and surveys) services. Pharmaceutical products are required to receive the approval of the Ministry of Health and Welfare prior to their sales, and efficacy and safety of pharmaceutical products must be confirmed through clinical trials prior to their approval. Companies providing clinical trial support services are known as contract research organization (CRO) service providers. The importance of CRO companies is growing as pharmaceutical companies increase their outsourcing of various operations to make more effective and flexible use of their development staff and other resources, which are generally limited in number. Linical is a CRO service provider with particular strengths in the most important "phase 2 and 3 stages of clinical trials" and knowhow in the tasks of "monitoring," "quality control," and "consulting." The Company seeks to maintain its position as a true partner to pharmaceutical companies by providing high quality support 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 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 market 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, Shionogi & Company, Limited, Mitsubishi Tanabe Pharma Corporation, Ono Pharmaceutical Co., Ltd., Chugai Pharmaceutical Co., Ltd. and other major pharmaceutical companies. 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 treatment conditions to test for efficacy and safety.
<Corporate History>
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 benefiting from its employees, who boast of bountiful experiences in the realm of oncology pharmaceutical product development and 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, all shares held in Aurora were later sold 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 subsequently moved its listing to the First Section of the Tokyo Stock Exchange in March 2013. In May 2013, Linical Taiwan Co., Ltd. and Linical Korea Co., Ltd. were established in Taiwan and Korea respectively. In April 2014, Linical teamed up with its Linical Korea to acquire the Korean CRO company P-pro. Korea Co., Ltd. In October 29, 2014, all of the shares of Nuvisan CDD Holding GmbH, which conducts CRO business in Europe, were acquired and it was converted to a 100% owned subsidiary effective on December 1, 2014. In order to strengthen the collaboration within the Group, the company name of Nuvisan CDD was changed to Linical Europe GmbH.
<Business Description>
Linical's business can be divided into the two main segments of the CRO and CSO businesses, with each accounting for 92.5% and 7.5% of fiscal year March 2015 sales respectively. The CRO business is focused upon clinical trial operations outsourcing for the development of pharmaceutical products by pharmaceutical companies. Furthermore, the CRO business also focuses upon "monitoring services," which includes the "quality control" and "consulting" services. At the same time, the CSO business specializes in the provision of consigned support services for clinical research and product marketing as a means of differentiating itself from its competitors, which primarily focus upon medical representative (MR) dispatch.
The CRO business maintains duplicate functions and capabilities as the development divisions of pharmaceutical companies to be able to increase the speed of clinical trials, and to conduct effective support implementation of drug development. In order to collect reliable data on the clinical trial process, Linical focuses upon the main tasks and processes in clinical trials, and maintains a strategy of aggregating superior staff and knowhow. The Company seeks to support pharmaceutical company drug development tasks by breaking the traditional mold of CROs to become a "contact development organization (CDO)" that is focused upon development.
The CRO business leverages the strength of its human resources training and management knowhow. Amidst the trend of growing demand for clinical research outsourcing, an expansion in business is anticipated.
(1) Concentrated Specialized Knowledge, Knowhow, Experience that Respond to Pharmaceutical Companies' Needs
In general, a long period of time of between 10 to 18 years is required to obtain approval for the commercial launch of new drugs into the market. In this overall process, clinical trials require between three to seven years to complete, and lack of preparation, data, and other issues can lead to delays in the progress of trials and in the market launch of new drugs. Linical leverages its bountiful experience in the CRA services, including its highly accurate data, speedy data gathering capability and other knowhow to predict and prevent various problems from occurring and to ensure that the "clinical trials progress smoothly," allowing it to provide accurate explanation of the overall clinical development process at the orientation stage to clients. Furthermore, a characteristic of Linical's specialized CRO service is its focus upon the three highly efficient tasks mentioned below.
① Linical specializes in the three core tasks ("monitoring", "quality control" and "consulting") of development, and it maintains a structure that is able to perform 100% of this consigned work internally.
② The Company focuses upon the two most important stages of clinical trials of phase II and III.
③ Linical focuses upon major pharmaceutical companies that possess bountiful pharmaceutical product development information.
(2) 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 the 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. And 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, sophisticated 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, in addition to oncology and CNS realms is very active (There are only a few CROs that can respond to these situations). Evaluation of the efficacy of drugs for adult lifestyle related diseases is far 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, there is a trend of aggregation of CROs with bountiful experiences in consigned tasks in these realms. Order backlog in the realm of oncology is expanding.
(3) High Profitability
The deviation rates on projects undertaken by Linical have been held to extremely low levels, and the implementation period, including the period required for patient enrollment 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 economies of scale advantage of its larger competitors to achieve high profit margins.

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 promote improvements in the quality of Japan's clinical trials and clinical research and is conducted by the Japan Society of Clinical Trials and Research. Moreover, all of the employees eligible to obtain qualifications have gone through the examination process, and Linical achieved passage rates which are much higher than its competitors.
Management Strategy
(1) CRO Business
The main business strategy within the CRO business calls for 1) continued results to be achieved in the realms of oncology and central nervous systems, with repeat orders being converted into exclusive contracts, 2) early achievement of a structure with 300 CRAs within Japan, and 3) implementation of a global structure that enables one stop consignment order taking capability for global joint clinical trials.
Within Japan, new staff hiring will be aggressively promoted while ensuring that both quality and speed are maintained, and with a goal of achieving a structure of 300 CRAs at an early stage in order to respond to the increase in projects. Moreover, Linical will endeavor to maintain high capacity utilization rates of its CRAs while at the same time expanding the number of its exclusive contracts in the realms of oncology and central nervous systems.
Global Development
Linical will leverage its global consignment business structure for global joint clinical trials developed in Asia, the United States and Europe to accelerate the expansion in its global business. As part of the facilitation of a structure for clinical trials conducted between multiple countries, Linical Taiwan Co., Ltd. (Taipei City, Taiwan, capitalized at Taiwan $10 million) and Linical Korea Co., Ltd. (Seoul, Korea, capitalized at 1 billion won) have been established as 100% owned subsidiaries. In April 2014, Linical Korea Co., Ltd. was merged with the Korean CRO service provider P-pro. Korea Co., Ltd. And in July 2008, Linical USA, Inc. was established in California to expand business in the United States and an office was established in San Diego, California in September 2014. Furthermore, Linical reached an agreement with Nuvisan Pharma Holding GmbH to acquire Nuvisan CDD Holding GmbH as a subsidiary to provide CRO services in Europe on October 29, 2014, with the completion of the acquisition on December 1, 2014. At the same time, the company name was changed to Linical Europe GmbH. These developments have created a consignment business structure in the three regions of Asia, United States and Europe.

The consolidated subsidiary Linical Europe GmbH (Formerly known as Nuvisan CDD Germany GmbH) provides CRO services in major countries in Europe, and provides customers with comprehensive "one stop shopping" services through fortification and expansion of its consignment structure. Linical Europe GmbH's subsidiaries are located in Germany, Spain, France, Netherlands and Croatia, and monitoring services are offered to neighboring countries. Consequently, the number of countries where the Linical Group offers its services has instantly been expanded to around 40 countries through its various partners. In addition, Linical Europe boasts of bountiful experiences and implementations for global joint clinical trials of major global pharmaceutical companies in the realm of oncology. Furthermore, strong synergies within the Linical Group are expected to also be derived. Moreover, Linical Europe also boasts of strong experiences in the data management responses including eCRF and CDISK, statistical analysis, and medical writing in addition to monitoring service for global joint clinical trials. Consequently, the Linical Group is expected to be able to acquire comprehensive orders for full services on global joint clinical trials.

Also, Linical is considering expansion of its overseas facilities on the east coast of the United States (New Jersey and other states) where numerous Japanese and American pharmaceutical companies are located, and entering the South and Central American markets. With regards to Asia, facilities in Taiwan will be leveraged to establish offices in Singapore and the Philippines, and to enter the China market.
(2) CSO (Drug Development) Business
Linical differentiates itself from its competitors, which primarily offer only MR dispatch services, by focusing upon the consigned service type CSO (drug development) business. Specifically, the Company seeks to differentiate itself by hiring MRs with bountiful experience in special patient realms and leveraging its bountiful knowhow established in the CRO business to take on highly specialized tasks. Currently, Linical provides the two main services of clinical research support and product marketing (liaison). In addition, the ability to receive work for clinical research was responsible for the turn to profits of this business segment during fiscal year March 2013, and new orders for clinical research and development in fiscal year March 2014 allowed sales and profits to rise from the previous term.
(3) Drug Discovery Support Business (New Business Development)
Linical is endeavoring to cultivate new drug discovery support services by responding to customers' needs for comprehensive "one stop shopping" services by providing new drug development schemes that have little impact upon near term earnings and for which demand is growing. In addition, patients and the administrative authorities in Taiwan and Japan are encouraging companies to develop drug lag compound and new drugs in the realms of oncology, dementia, difficult diseases and regenerative medical treatments. Linical seeks to cultivate a new drug discovery support business that responds to these needs which have surfaced in recent years. Therefore, the Company will implement efforts for clinical trial implementation planning creation, data collection and other tasks, and plan development of compounds in house at an early stage by leveraging subsidies and new drug discovery funds. Development of compounds using new drug funds is expected to help grow the CRO business while allowing the experiences of the Company to also be leveraged. Also, experiences in consignment of tasks ranging from development planning to approval applications are expected to be gathered.
Fiscal Year March 2015 Earnings Results
Sales, Ordinary Income Rise 30.9%, 19.4% Year-On-Year
Sales and ordinary income rose by 30.9% and 19.4% year-on-year to ¥4.872 and ¥0.840 billion respectively. The markets for CRO and CSO services, in which Linical participates, is gradually expanding against the backdrop of increases in outsourcing of pharmaceutical development and sales activities, as well as global joint clinical trials. Sales increased on the back of fortification of the consignment structure for oncology and central nervous system realm projects, which are growing, and the acquisition of an increased number of consignment projects on the back of fortified marketing activities for the CRO businesses. In addition, strengthening of global responses to increases in global joint clinical trials have yielded results, with sales of subsidiaries in the United States, Korea, Taiwan and Europe growing. Moreover, the CSO business also saw higher operating income on the back of success in securing new consignment projects in the realm of clinical research for post market launch made possible by aggressive marketing activities. With regards to profits, profits of both the CRO and CSO businesses grew on the back of higher sales, which offset higher labor costs arising from anticipatory staff hiring.

However, amortization of goodwill arising from M&A activities in Korea and Europe, staff hiring, and office facility fortification expenses of subsidiaries in Taiwan and Korea contributed to losses in those companies and a decline in overall profit margins. Gross income margin declined by 1.5% points year-on-year to 36.7%, but selling, general and administrative expense to sales margin also declined by 0.5% points year-on-year to 18.7%. Consequently, ordinary income increased by 19.4% year-on-year to ¥840 million. Furthermore, the change to a compendium method calculation for retirement benefit obligations contributed to the booking of ¥105 million in extraordinary losses and caused net income to decline by 2.7% year-on-year to ¥437 million.
Amortization of goodwill and increased anticipatory investments contributed to a decline in profit margins in the CRO business. At the same time, CSO business saw an improvement in profit margin on the back of higher sales resulting from acquisition of new consignment projects.
Consignment contracts range from about 1 to 3 years in both the CRO and CSO businesses, with sales being booked in every month of the term of the contract (The total value of the consignment contract is divided evenly by the number of months of the contract term to be booked as sales). Order backlog represents the remaining value of those contracts already formed. Therefore, they reflect the amount of sales that can be expected to be booked approximately within the next 1 to 3 years, and serve as a leading indicator for future earnings.

As of May 15, 2015, order backlog rose by 97.0% compared with the end of fiscal year March 2014. This resulted because, while sales of already formed contracts were steadily booked, they were surpassed by the newly acquired consignment contracts, as well as the increased order backlogs due to the acquisition of a CRO company in Europe. The growing trend for outsourcing and increase in global joint clinical trials contributed to a favorable order environment in the near term. Furthermore, successful marketing activities led to large numbers of consignment work inquiries from both existing and new clients. Consequently, Linical maintains plans to fortify its consignment structure by further increasing the number of Clinical Research Associates (CRAs).
Total assets at end fiscal year March 2015 rose by ¥2.805 billion from the end of the previous term to ¥5.642 billion, due in part to the acquisition of Linical Europe during the third quarter of fiscal year March 2015. Both goodwill and long term interest bearing liabilities rose. With regards to cash flow, an increase in unpaid consumption tax, a decrease in corporate tax, etc., and other factors contributed to an expansion in the net inflow of operating cash flow. Changes in the scope of consolidation accompanying acquisition of subsidiary shares contributed to a large increase in the net cash outflow of investing cash flow, and caused free cash flow to turn from a net inflow in the previous term to a net outflow in the current term. At the same time, increases in long term interest bearing liabilities caused the net outflow of financing cash flow in the previous term to turn to a net inflow in the current term. Increases in debt accompanying M&A activities caused equity ratio to decline from 65.3% at the end of the previous term to 36.5% at the end of fiscal year March 2015.
Fiscal Year March 2016 Earnings Estimates
Estimates Call for Sales, Ordinary Income to Rise 35.2%, 45.8% Year-On-Year
Linical's fiscal year March 2016 earnings estimates call for sales and ordinary income to rise by 35.2% and 45.8% year-on-year to ¥6.586 and ¥1.225 billion respectively. Major pharmaceutical companies are attempting to offset the influence of major products that are going off patent by outsourcing to rationalize and optimize operations, and by acquiring overseas venture capital companies to secure new developmental pharmaceutical products. Therefore, Linical can be expected to see an increase in the number of clinical trial consignment projects it receives. In particular, development of pharmaceutical product treatments is being pursued because of as yet unestablished effective treatment methods in the realms of oncology and central nervous system diseases.

Against this backdrop, an expansion in sales is expected through repeat orders from existing customers based on their high regard for the Company's services in the CRO business, as well as booking of new projects through continued fortification of marketing campaign for new customers in the realms of oncology and central nervous systems, the two realms that are the Company's strength and that have strong customer demand. Moreover, the overseas subsidiaries in the United States, Korea and Taiwan, and the subsidiary in Europe newly acquired during the third quarter of the term just ended are expected to contribute significantly to sales on a full year basis. In addition, strengthening of marketing activities to new customers in the CSO business is expected to contribute to an expansion in the customer base. The knowhow and expertise cultivated in the CRO business is expected to be leveraged to acquire new consignment project orders in highly specialized realms.

With regards to profits, both cost of sales and selling, general and administrative expenses are expected to grow on the back of increases in CRAs and expansion of facilities in both Asia and North America. However, the higher sales and improvements in capacity utilization rates of CRAs are expected to contribute to a large margin of increase in profits compared with the previous term. Operating income is expected to rise by 40.9% year-on-year to ¥1.235 billion and operating income margin to rise by 0.8% points year-on-year to 18.8%. In addition, a decline in extraordinary loss resulting from a drop in retirement benefit obligations compared with the previous term is expected to allow net income to rise by 71.5% year-on-year. A dividend payment of ¥14 per share, on par with the previous term, is planned to be made at the end of the term.
Linical's orders are expanding rapidly. As of May 15, 2015, order backlog had risen by 97% from the end of fiscal year March 2014. This strong increase is attributed to the favorable booking of new orders and subsequent increase in order backlog for consignment work and to the acquisition of a CRO related company in Europe which offset the steady booking of sales for consigned work from existing orders.
Moreover, the order backlog as of May 15, 2015, rose by 12% from the order backlog at the end of fiscal year March 2015, which the European subsidiary's one was included. We can confirm favorable order trends for Linical group..

The large increase in orders in particular realms such as oncology, where the Company has particular strengths, appears to be proof of the strong competitive position of Linical resulting from the strengthening of its global business structure. Because order backlog is a leading indicator of sales, sales growth is expected to accelerate during the coming term.

While actual sales of ¥4.872 billion recorded during fiscal year March 2015 exceeded estimates of ¥4.846 billion, operating income fell shy of initial estimates of ¥1.023 billion at ¥876 million. This shortfall is attributed to the amortization of goodwill arising from the M&A activities in Korea and Europe, increases in staff hiring, and expenses arising from fortification of office facilities and the subsequent losses of subsidiaries in Taiwan and Korea. While these aggressive anticipatory investments are unavoidable given the Company's strategy of accelerating its growth, the fact that actual earnings fell short of initial estimates for the two consecutive terms may have been highly disappointing to investors. During the coming term, continued efforts to increase clinical research associates (CRAs) and expansion in the global network of facilities in Asia and North America are expected to contribute to increases in cost of sales, and selling, general and administrative expenses. However, the anticipated rise in sales, increase in capacity utilization rates of CRAs, and improvement in profitability of overseas subsidiaries are expected to allow profit margins to rise. Despite ongoing amortization of goodwill, Linical will implement efforts to improve profitability of subsidiaries in Europe and Korea in particular. And while there are few uncertainties over the ability of Linical to achieve its sales estimates, investors may remain somewhat skeptical over the possibility of the Company to achieve its profit estimates. Therefore, attention will be focused upon the Company's efforts to improve profitability of its overseas subsidiaries and whether or not Linical can meet its profit estimates. An important part of these efforts is how effective the Company will be in securing exclusive contracts for consignment work.

In addition, Linical has established a comprehensive "one stops shopping" consignment business structure that allows for jointly conducted global clinical trial consignment in Asia, Europe and the United States with the establishment of its subsidiary in Europe most recently. This new structure gives Linical the capability to provide a full lineup of services for global joint clinical trials, in addition to its previously offered monitoring services. Furthermore, various synergies to be derived from the establishment of the subsidiary in Europe are expected to surface from here forward. Therefore, investors should also keep a close watch upon new synergies derived from this newly established global business structure.
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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