BRIDGE REPORT
(4592)

東証マザーズ

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
Year-end
End of January
URL
Stock Information
Share Price Number of shares issued
(excluding treasury shares)
Total market cap ROE
(Actual)
Trading Unit
¥1,520 45,319,561 shares ¥68,885 million - 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥0.00 - -¥87.82 - ¥52.82 28.8 times
*The share price is the closing price on September 25, 2017. The number of shares issued and BPS were taken from the latest 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 (Actual) 949 -1,932 -2,166 -1,835 -40.88 0.00
January 2018 (Estimate) 662 -3,945 -3,957 -3,982 -87.82 0.00
This Bridge Report outlines the first half earnings results of the SanBio Group (SanBio Co., Ltd. and its subsidiary in the US, SanBio, Inc.) for the term ending January 2018.
 
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 resulting from ischemic stroke, for which no effective treatment methods have been developed to date. SanBio plans to develop a global business based on its existing dual operations 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 disease indications 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 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 products and markets in the biotech arena," 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 founding 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 to SanBio as a founding scientist. Meanwhile in the US, 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 the 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 US Food and Drug Administration (FDA). In September 2010, SanBio signed an option agreement for the treatment of disability resulting from stroke in the US 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 chronic stroke in the US, and in August 2013, the administration of SB623 to 18 patients was completed. There were no obvious product-related safety concerns, no dose-limiting toxicity, and statistically significant efficacy across multiple endpoints was observed.

During this same time period, the presence of Japan in the field of regenerative medicine became recognized internationally. Professor Shinya Yamanaka of Kyoto University received the Nobel Prize for his development of iPS cells in December 2012. And 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 located in Japan. In January 2014, SanBio Company Limited in Japan became the parent company, and SanBio, Inc. in the US 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, raising 7.3 billion yen, one of the largest IPOs to date for a Japanese biotech venture.
 
SanBio Group and development systems
As mentioned in the section on corporate history above, the SanBio Group is composed of SanBio Company Limited and its consolidated subsidiary, SanBio, Inc. (California, US).
Since the company's founding in 2001, the development and production teams of SanBio, Inc. in the US 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.
 
Dr. Hideyuki Okano, a SanBio founding scientist, is a leading expert in regenerative medicine and iPS cell research in the brain. His work has been 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.
Dr. Donald Kennedy, the former FDA Commissioner, and president of Stanford University, and Dr. George Martin, the former Scientific 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 regenerative medicine field.
Dr. Damien Bates, SanBio's Chief Medical Officer and Head of Research, 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, Dr. Michael McGrogan, 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 represent the proprietary information of SanBio.
 
Corporate mission
The mission of the SanBio Group is to develop treatments based on regenerative cell medicines for diseases that represent 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 use these innovative products to treat patients suffering from such diseases around the world.
*Unmet medical needs: Diseases for which no effective treatment methods have been developed.
**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.
 
 
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 stem cells, brain regeneration, and regenerative medicine.
 
Cells
The human body has 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 making up 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 and 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 produces 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 that 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, and blood, and iPS cells are free from the ethical issues presented by ES cells. One drawback of iPS cells is the risk of causing cancer 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 a 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 projected to reach 2.5 trillion yen in Japan and 38 trillion yen outside Japan by 2050.

Research into regenerative medicines is very competitive. 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 medicines 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, injury, 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.
The skeletal myoblast sheet produced by Terumo is an example of a 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, 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 medicines”.

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 Mass-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 has also developed other cell medicines, known as SB618 and SB308, which are intended for other applications.
 
 
 
(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 suggests that these effects may act synergistically.

Stroke, which is the first indication targeted 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 and speech therapy. Typically, physical and speech therapy benefits level off after the first 6-12 months following stroke.

In 2011, SanBio began a 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 trial, Phase 2b, which is now ongoing.
 
 
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. This clearly indicates that the more time has passed after administration, the better the motor function becomes with continuous effect.
The latest graph shows that the improvement of motor function is maintained for 24 months after administration.
 
 
As examples of the improvement in the function following 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 of SanBio's 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 typically discharged from the hospital on the day following administration. Other important advantages of SB623 are that immunosuppressive agents are not needed, and that the same product can be used for all patients just as with traditional pharmaceutical products.
 
(3) Progress of development
◎ Chronic-phase stroke
After receiving the result of phase 1/2a clinical trial of "SB623" in the U.S. in Jun. 2014, SanBio obtained the FDA approval to move to the next phase 2b clinical trial. In Sep. 2014, Dainippon Sumitomo Pharma Co., Ltd., executed an option contract and started joint development of "SB623" to treat patients suffering from chronic motor disabilities caused by ischemic stroke in the U.S. and Canada.

The 2-year follow-up period of the phase 1/2a ended in Aug. 2015 and SanBio advanced to the phase 2b. The Company received a milestone payment of 5 million US dollars from a joint development partner for SB623 in North America, Sumitomo Dainippon Pharma, upon entering into an agreemnt with the first clinical site in Sep. 2015.
In Dec. 2015, SanBio started recruiting subjects for phase 2b (156 subjects, double blind study) in "patients suffering from chronic stroke with motility disorder 6 months to 5 years after the onset of stroke", and the first subjects were incorporated on Mar. 8, 2016. SanBio received a milestone payment of 5 million US dollars from Dainippon Sumitomo Pharma for this.
SanBio is currently activating clinical sites of about 60 facilities throughout the US and also recruiting patients.

As of Sep. 8, 2017, 17 surgical sites (20 sites planned) and 39 assessment sites (45 sites planned) are open and activated.

The company aims to enroll 156 patients in the phase 2b by the end of Mar. 2018. After the follow-up period, it plans to announce the results in 2019.

In Japan, development of SB623 for stroke is licensed out to Teijin Ltd.
 
◎ Traumatic brain injury
SanBio is also developing SB623 for the treatment of motor disability caused by TBI, which is the next target indication for SB623 following stroke.

Traumatic brain injury results from a strong impact to the head (e.g., from a 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 one's 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 US, about 2.5 million patients receive emergency TBI medical treatment every year, and the number of patients with residual disability in the US is estimated to be 5.3 million.

For the clinical trials in the U.S., since traumatic brain injury is similar to stroke in damaged parts and symptoms and the administration method of SB623 is the same as that for stroke, it was regarded as an expanded indication of SB623. Therefore, in Apr. 2015, the FDA agreed that SanBio could skip phase 1 and start from phase 2, and the Company obtained approval to start the clinical trials from phase 2.

This phase 2 for traumatic brain injury is now being conducted as a Japan and U.S. global study for "patients with chronic motor disabilities, at least 12 months after the onset of traumatic brain injury" at about 30 clinical sites in the US and Japan and the number of patients incorporated will be 52 in total (double blind study).
In the U.S., the patient recruitment started in Oct. 2015, and the first subject was incorporated in Jul. 2016.
In Japan, with an approval for clinical trials by Pharmaceuticals and Medical Devices Agency (PMDA) in Apr. 2016, SanBio started a clinical trial in Sep. 2016 and incorporated the first subject in Oct. 2016.

As of Sep. 8, 2017, 12 surgical sites (15 facilities planned) and 17 assessment sites (24 facilities planned) are activated in the US and Japan.

The company aims to launch SB623 in Japan as soon 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 clinical development in Japan. We will conduct the clinical development of SB623 to treat 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. As a person ages, 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 trials for IND approval, a prerequisite for FDA approval of clinical trial initiation in the US.
 
<Business Model>
① Outline
After acquiring technologies from universities and internal development, SanBio performs both clinical and non-clinical trials 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.
In order to maximize value, the company verifies the safety and efficacy of products in human trials before considering out-licensing.
 
 
 
*The above table summarizes several income types, using the contract with existing partner Sumitomo Dainippon Pharma as an example.

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 resulting from stroke, SanBio concluded contracts with Sumitomo Dainippon Pharma Co., Ltd. in the US and Canada, and Teijin Ltd. in Japan.
 
 
 
SanBio is planning to establish partnerships with the most appropriate pharmaceutical companies regarding the development and marketing rights for its regenerative medicine against chronic motor disability resulting from stroke and other target diseases in countries other than the US, Canada, and Japan.
 
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 6.6 million in the US. 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 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; 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 obtained all of the basic patents for its initial regenerative cell medicines, SB623, SB618, and SB308.

As seen below, SanBio has been issued basic patents in all major markets. The company plans to seek partnerships with leading pharmaceutical companies, such as Sumitomo Dainippon Pharma Co., Ltd. in the US 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 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 shares 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 the unique fruits of in-house research and development. 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 receives 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 established technologies for formulation, production, storage, shipping, and administration and is able to mass-produce products for the market yielding a cost advantage. Another differentiating factor compared to companies focused on embryonic stem cells is that mesenchymal stem cells are considered to be safer and do not face obvious ethical issues. Mesenchymal cells are also considered safer than iPS cells with respect to tumorigenic risk. Therefore, SanBio's regenerative cell medicines are expected to be readily accepted in clinical practice.
 
 
First Half of Fiscal Year January 2018 Earnings Results
 
 
Clinical trials progressed as planned. Operating loss augmented.
Operating income was 249 million yen, down 63.6% year on year and up 101.8% from the previous quarter. This came from the development support revenue based on the contract for the joint development and licensing of "SB623" concluded with Sumitomo Dainippon Pharma Co., Ltd. in North America.
As clinical trials progressed continuously, R&D cost augmented 112.0% year on year to 2,001 million yen nearly as estimated.
An operating loss of 2,149 million yen was posted.
 
 
Total assets were 5,386 million yen, down 905 million yen from the end of the previous term, due to the decline in cash and deposits. Total liabilities augmented 1,279 million yen from the end of the previous term to 2,976 million yen, as the company procured development funds through long-term debts.
Net assets declined 2,184 million yen from the end of the previous term to 2,410 million yen, due to the increase in the deficit of retained earnings.
Equity ratio decreased 28.4 points from 72.8% at the end of the previous term to 44.4%.
 
 
The deficits of operating and free CFs grew due to the increase in net loss before taxes and other adjustments and the payments into time deposits. Financing CF became positive due to long-term debts.
The cash position declined 3.7 billion yen.
 
(3) Topics
◎ Progress of clinical trials
The progress of the clinical site activation has been going well. The company considers that it has already activated a necessary number of sites for completing clinical trials.

According to the disclosed press releases regarding the grant from California Institute for Regenerative Medicine (CIRM) , which will be received as development advances, it is obvious that the company has achieved 65% of the target patient enrollment, that is, 156 patients in total. It seems that the pace has accelerated for both activating clinical sites and patient enrollment.
 
◎ Conclusion of a commitment line contract for 1.6 billion yen
On Aug. 21, 2017, the company signed a commitment line contract with Mizuho Bank for backup funds to prepare for commercializing the regenerative cell medicine "SB623" against chronic traumatic brain injury. With this contract, it became possible to borrow necessary funds, up to 1.6 billion yen, at any time during a period until the end of Jul. 2021 (the maximum period).
 
◎ Regarding the grant from California Institute for Regenerative Medicine (CIRM)
As mentioned in the previous report, the company has awarded a grant of 20 million US dollars from CIRM for the phase 2b clinical trial of the regenerative cell medicine "SB623" against chronic stroke.
Based on the contract with CIRM, the company will receive the grant in installments in accordance with the progress of development, with the timeline described below. On Sep. 23, 2017 (U.S. time), the company received 4.5 million US dollars for the conclusion of the contract. The company is entitled to receive 4.9 million US dollars as it achieved 65% of patient enrollment, but the timing of receipt is still to be determined.
 
 
According to the news release dated Sep. 28, 2017, this subsidy is posted as non-operating income. The effects of the receipt of subsidies on the consolidated earnings forecast of the SanBio group for the term ending Jan. 2018 are being estimated. The company will swiftly announce all items to be disclosed.

CIRM is a state organization established for the purpose of promoting R&D for regenerative medicine through competitive grant programs, etc. With funds amounting to 3 billion dollars, CIRM currently supports over 300 programs for researching and developing stem cells.
Grant recipients are evaluated and selected by an independent screening team composed of experts in regenerative medicine, medical institutions specializing in neurological diseases, and others.

The phase 2b clinical trial for stroke conducted by the SanBio group in the U.S. received a grant with the highest ranking "1" . This implies not only that it will contribute to the improvement in the financial soundness of the SanBio group at the development phase, but also that the potential of "SB623" has been highly evaluated.
 
 
Fiscal Year January 2018 Earnings Estimates
 
 
No revision to the earnings forecast. The company is developing products with the aim of completing the incorporation at the phase 2.
There is no revision to the earnings forecast at the time this report was prepared. Operating income is estimated to be 662 million yen, down 30.2% year on year, due to the development support fees from the joint development partner, Sumitomo Dainippon Pharma Co., Ltd.
With the aim of completing the patient enrollment in the phase 2b for stroke and the phase 2 for traumatic brain injury, the company will proceed with development by spending 1.8 billion yen in R&D, which was not spent in the previous term. Accordingly, operating loss is forecasted to increase 2 billion yen year on year.
Personnel cost is projected to be unchanged from the previous term, as the personnel for development have been already recruited.
The effects of the grant from CIRM on business performance are being estimated. These effects have not yet been reflected in the earnings forecast.

The company will shift from the "development phase" where it studies the efficacy and safety, and establish a mass production system of SB623, to the "commercialization phase" where it prepares for mass production, logistics and sale.
As for sales, the company will consider both direct sale (including sales entrustment) and licensing.
 
 
Conclusions
 
As mentioned in the news release on Aug. 28, 2017, the SanBio group procured funds amounting to 4.7 billion yen through 3 procurement activities in this term.
 
 
In the first half, the company spent 2 billion yen in R&D. Although the company needs to spend more cash for R&D to prepare for launching its products, the company believes that it has procured sufficient funds to proceed with R&D with confidence.
We would like to pay attention to whether the patient enrollment in the phase 2b for stroke in the U.S. will complete by the end of Mar. 2018 as planned.
 
 
<Reference: Regarding corporate governance>
 
 
◎ Corporate Governance Report
Last update Date: April 28, 2017
 
◎ Reasons for Non-compliance with the Principles of the Corporate Governance Code
The report mentions "Our company implements all of the basic principles of the corporate governance code, and so there are no items to be written in this blank."
 
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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