（7776） | Publish:Tue, Jun 02, 2015 IR「BRIDGE REPORT」

BRIDGE REPORT
（7776）

グロース

CellSeed (7776)

Setsuko Hashimoto,
President and CEO

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

Share Price	Shares Outstanding		Market Cap.	ROE (actual)	Trading Unit
¥800	8,674,292 shares		¥6.939 billion	-	100 shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (actual)	PBR (actual)
-	-	-	-	¥324.80	2.7x

* Stock price as of closing on 2015/3/12. Number of shares at the end of the most recent quarter excluding treasury shares.

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

We present this Bridge Report along with analysis of the fiscal year December 2014 earnings results for CellSeed Inc.

Key Points

Company Overview

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

<Cell-sheet Regenerative Medical Technologies and Cell-sheet Regenerative Medicine>

"Cell-sheet regenerative medical technologies" are the general-purpose platform technology for regenerative medicine. Cells are taken from the patient to be cultivated into sheet form for use in various treatments. However, the most revolutionary aspect of "cell-sheet regenerative medical technologies" is the use of temperature-responsive cell cultureware equipment that enables the collection of undamaged cells, which had previously been impossible. Cells are normally cultivated (proliferated) in culture dishes and multiply while adhering to the surface of culture dishes. When cells are collected, they are stripped from the dish using trypsin and other hydrolase proteins, a method that may result in damage of the protein surface of the cells (extracellular matrix) and deformation on living cells (cell damage). Therefore, these damaged cells cannot graft or function properly.

On the other hand, temperature-responsive cell cultureware can be used to naturally collect cells from the surface of the culture dish by altering the temperature to change cell adhesion characteristics, allowing for the collection of cell-sheets that are close to their natural condition with cell protein characteristics remaining undamaged (Possible to create tissue, organs close to their natural conditions). In addition to filling the space between cells, cell surface proteins (extracellular matrices) also play a structural role and provide a foothold for cells to bond and allow cells to propagate while controlling division. This is a critical substance to allow cells to function as cells, and contribute to the repair (Regeneration) of the affected area.

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

Market Environment and CellSeed's Mission

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

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

(2) Facilitation of an Environment for Diffusion of Regenerative Medicine

Regenerative Medicine Founding Year

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

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

In case of autologous cell-based medicine, it is difficult to standardize like chemical substances, as the cells are different in each patient. For this reason, the idea to approve new drug at early stage is the point of the new Act, which is the fast-track approval is granted (drug price is listed in the National Health Insurance) if safety and efficacy of the product are confirmed with a few patients participating in the clinical trials. After launching, the monitoring for treatment is continued, the data is accumulated and then the product will be radically approved.

CellSeed's Mission

The Japan-originated "cell-sheet engineering," which is the basic technology of CellSeed's business, has come to the forefront on global basis as the world's first platform technology that will continuously create tissue-based medicine among the regenerative medicines. CellSeed's strength is its business that covers all the value chain of regenerative medicine, including intelligent cell culturewares, cell-sheet cultivation, and treatment with regenerative medicine.

With these background, CellSeed set three objectives as its Missions; (1) bringing regenerative medicine to patients (2) introducing the unique platform technology of "cell-sheet engineering" globally (3) initiating health innovation by providing safe and high quality products. CellSeed aims to accelerate its growth by implementing these missions and predicting the movements of the future medical industrialization of regenerative medicine, and to shift from a company supporting clinical development of the basic research at universities to a new stage as a company to realize regenerative medicine and to generate profits.

Intelligent Cell Cutureware Business

As described earlier, it is possible to collect cultured cells in a living state using CellSeed's revolutionary cell culturewares. "Temperature-responsive" types are exclusively produced and sold by CellSeed on global basis. Previously, these intelligent cell cultureware have been strategically sold to universities and research institutes as tools to develop partners rather than seeking profit from this segment. However, the new management team formed in June 2014 found its high potentials and placed this segment as important and potential commercial products for earning income. CellSeed plans to expand the product line up to meet various requirements in the market. CellSeed has made partnership agreement with Dai Nippon Printing Co., Ltd. for volume production while CellSeed will dedicate the development and sales of these product area.

Cell-sheet Manufacturing Business
The legislative changes particularly in the Act of Ensuring Safety in Regenerative Medicine, etc., enabled outsourcing to produce and provide cell-sheets. CellSeed still prioritizes the development of its cultureware products, but has an idea to expand the business for culturing cell-sheets for the future outsourcing needs based on the extensive experiences.

Regenerative Medicine Treatment Business

CellSeed has identified epithelial cell-sheet for esophageal regeneration and regenerated cartilage sheet as prioritized pipelines, aiming for fast commercialization of these as its first product in the market. CellSeed also aims for starting clinical trial in Japan and Sweden for the epithelial cell-sheet for esophageal regeneration in the latter half of fiscal 2015, and for autologous regenerated cartilage sheet in the fiscal 2016.

Review of Fiscal Year December 2014

A new management structure led by President and CEO Setsuko Hashimoto was established in June of fiscal year December 2014. The enforcement of the Pharmaceuticals and Medical Devices Act and the Act of Ensuring Safety in Regenerative Medicines, etc.. in November 2014 drastically changed the environment for regenerative medicine and paved the path for commercialization of regenerative medicine products at an early stage.

<New Management Structure>
President and CEO:	Setsuko Hashimoto, Ph.D.
Executive Director, Research and Development:	Katsumi Katayama
Executive Director, Business Development:	Hiroshi Yoshida
Executive Director, Corporate Strategic Management:	Eiji Takagi
Executive Director (External):	Teruo Okano, Ph.D.
Corporate Auditor:	Ichiro Kobayashi
Auditor (External):	Noriko Sawai
Auditor (External):	Toshio Yamaguchi

Sales declined by ¥19 million from the previous term (¥105 million) to ¥86 million during fiscal year December 2014. At the same time, operating loss expanded from ¥534 million in the previous term to ¥601 million in the current term. All of the ¥86 million in sales were derived from the regenerative medicine business support business (¥88 million in fiscal year December 2013) and no sales were recorded in the cell-sheet regenerative medicine business (¥17 million recorded during the previous term). Within sales, general and administrative expenses, increases were recorded in research and development and other expenses from ¥228 and ¥358 million in fiscal year December 2013 to ¥248 and ¥390 million in fiscal year December 2014, respectively.

With regards to the regenerative medicine support business, the outsourcing of the fabrication function of temperature-responsive cell cultureware to the collaborative partner Dai Nippon Printing Co., Ltd. (DNP) was undertaken to allow CellSeed to focus its resources upon the development and sales functions (The Tomioka Plant was closed along with the completion of transferring its technology and equipment in December 2014.). This arrangement should enable the Company to respond quickly and flexibly to increases in demand for equipment. In addition, CellSeed will promote development and expand sales of products which are adapted to the outlook for increases in clinical development applications. With regards to the cell-sheet regenerative medicine business, consultations with the Pharmaceuticals and Medical Devices Agency (PMDA), which is responsible for providing guidance and advice to manufacturers for the purpose of improving safety of pharmaceuticals and medical equipment, have been conducted as a part of preparations for the commercialization of cell-sheet regenerative medicine products at an early stage.

Mid-termMid-termMid-term Business Plan (FY12/15-17):
Develop Cell-sheet Regenerative Medicine, Achieve Global Diffusion

<Mid-termMid-termMid-term Business Plan Overview>

In light of the enforcement of the new law regarding regenerative medicine, CellSeed has identified Japan as the top priority hub of cell-sheet regenerative medicine development. Consequently, efforts to achieve commercialization of regenerative medicine products at an early stage and to fortify development and sales of temperature-responsive cell cultureware will be implemented as a means of securing earnings. In-house development of cell-sheet regenerative medicine product pipelines have been identified, including as high priority, with development of cell-sheet regenerative medicine pipelines to be expanded on a global basis.

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

Estimated sales include only those of the intelligent cell cultureware business. The product and service line-up will be fortified along with strengthening of the information sharing and customer service functions as a part of CellSeed's strategy of expanding sales channels to a diverse range of research institutions and corporations that handle cells, let alone those entities in the regenerative medical realm.

With regards to profits, increases in clinical trial related expenses, labor expenses arising from fortified marketing functions, and developmental expenses due to new product development for temperature-responsive cell cultureware are anticipated. In addition, the CPC is expected to begin operations from fiscal year December 2016 to 2017, and subsequent depreciation expense from the start of operation has been incurred into operating expenses from fiscal year December 2017. At the same time, scale merit is expected to be derived from an increase in sales and the transfer of fabrication of temperature-responsive cell cultureware to DNP are expected to lead to a significant improvement in profitability, supposedly exceeding the increase in sales.

<Strategies by Business Segment> (1) Cell-sheet Regenerative Medicine Business Epithelial Cell-sheet for Esophageal Regeneration
Characteristic:	Cell-sheets cultivated from epithelial cells taken from the patient's own mucosal lining
Indications:	Prevention of esophageal narrowing and treatment of surgery region after endoscopic esophageal cancer removal surgery

Epithelial cell-sheet for esophageal regeneration are cell-sheets used as regenerative treatment in esophageal cancer (Prevention of esophageal narrowing) and were developed by the Institute of Advanced Biomedical Engineering and Science of Tokyo Women's Medical University (ABMES). Temperature-responsive cell cultureware are used to create mucosal epithelial cell-sheets from mucosal membrane cells collected from the patient's own mouth to be transplanted to the affected area after the surgery to remove the esophageal cancer. Until now, physician-led clinical research has been performed on 30 cases at three locations including the Tokyo Women's Medical University in Japan and the Karolinska Institute in Sweden, and reports on the efficacy and safety of the treatment have been provided in dissertations and at academic conventions, etc..

A fundamental development agreement for cell-sheet regenerative medicine has been formed with "Cell-sheet Tissue Engineering Center (CSTEC) of Tokyo Women's Medical University's Institute of Advanced Biomedical Engineering and Science," which is the project of "Creation of Innovation Centers for Advanced Interdisciplinary Research Areas Program" for Developing Innovation Systems as part of the Ministry of Education, Culture, Sports, Science and Technology Promotion Adjustment Expenses," headed by Professor Teruo Okano, the principal proponent of esophageal regeneration epithelial cell-sheet clinical application development. For the purpose of promoting the development of esophageal regeneration epithelial cell-sheet business in Europe, CellSeed Sweden AB was established in Sweden in May 2015. In parallel with clinical trials, the Company will promote the development of cell-sheet transplant devices (since transplant surgery of cell-sheet for esophageal regeneration requires highly sophisticated technique, the development of specialized devices is anxiously awaited to reduce the burden on doctors) and market the devices as a combination product of an epithelial cell-sheet for esophageal generation. DNP which performs contracted manufacturing of temperature-responsive cell cultivation equipment products, is a participating company of CSTEC.

Market Size

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

Regenerated Cartilage Sheet
Characteristic:	Patient's own cartilage cells and cell-sheets cultivated from patient's cartilage cells
Indications:	Cartilage defect, knee osteoarthritis

Regenerated cartilage sheet is used for indications of cartilage defect and osteoarthritis caused by sports injuries and aging (both have no permanent cures currently), and allows fundamental regeneration of the cartilage surface by transplanting cell-sheets (Regenerated cartilage sheet) made from cultivated cartilage cells. Professor Masahito Sato of the Department of Orthopedic Surgery of Tokai University School of Medicine conducted the first clinical research in November 2011 and has since conducted eight transplants in total. Since then, one year evaluations of all cases have been completed in November 2014, and clinical research using the patients' own cells has been completed. Results of all cases in the clinical research have been favorable. The next step is to take cartilage tissue from hyperdactylia patients and submitted to the Minister the plan of clinical research for transplanting "allogeneic cell-sheet (Cells gathered from cells other than the patients) for joint treatments" using cell-sheets created from this tissue. CellSeed will continue the clinical research of cell-sheets created from the patients' own cells and will start preparation for the launch of corporate clinical trials in 2016.

Cell Processing Center: CellSeed (CPC) Installation Being Considered

CellSeed has a plan to set up a cell processing center (CPC) for its esophageal regeneration epithelial cell-sheet and regenerated cartilage sheet pipelines, and is currently conducting fundamental design work with engineering companies and location selection processes. Moreover, cells used in regenerative medicine require the use of CPC bio-clean rooms for cultivation in accordance with the new good clinical trial practice (GCTP) guidelines for the new legislation on regenerative medicine. Consequently the operation of CPCs is required along with the Act of Ensuring Safety in Regenerative Medicines, etc..enforced in November 2014.

(2) Regenerative Medicine Support Business

Opportunities to secure new earnings sources will be expanded along with the development of new product and new sales partners. In addition to the fortification of temperature-responsive cell cultureware products as a part of new product development efforts, the product development of clinical applications for cell-sheet transplant devices is also being considered. Moreover, efforts will be focused upon development of a diverse range of companies and research institutions that handle cells as a part of CellSeed's strategy of cultivating new customers.

CellSeed has adequate funding to execute its mid-termmid-termmid-term business plan as evidenced by the approximately ¥3.0 billion in cash and equivalents on hand at the start of fiscal year December 2014. However, the Company is also considering further capital procurement from the perspective of the mid to long term (Capital procurement is expected to be implemented within the framework of this mid-termmid-termmid-term business plan).

Conclusions

A revolutionary legal structure that leads the world has been facilitated within Japan, but the first product to receive sales approval is expected to take several years, despite the support for the regenerative medicine industry within Japan. Therefore, CellSeed cannot determine the precise timing of when the cell-sheet regenerative medicine business can turn profitable at the current point of time. However, deliberations with the Pharmaceuticals and Medical Devices Agency (PMDA), which provides instruction and advice on how to improve safety of pharmaceuticals and regenerative medicine products, have been started in the realm of esophageal regeneration epithelial cell-sheet. As the PDMA is the organization that gives sales approvals, conducting discussions with this organization is important in the process of pursuing acquisition of approvals. In this way, CellSeed is effectively promoting activities designed to "realize commercialization of regenerative medicine at the earliest stage."

At the same time, the strategic positioning of the regenerative medicine support business within CellSeed has changed dramatically. Until now, the cultivation and support of collaborating research institutions had been given higher priority than profit contribution regarding the sales of temperature-responsive cell cultureware. However, the potential of temperature-responsive cell cultureware is large, given the potential growth in the research market related to cells and regenerative medicine andits functionality are at the forefront of the world. Consequently, sales of these products will be aggressively pursued. In addition to the ability to acquire earnings opportunities in the short-term, sales of temperature-responsive cell cultureware is expected to contribute to stable long-term earnings and to support CellSeed's management foundation.

This report is created based upon information obtained from the results briefing and interview with President and CEO Setsuko Hashimoto. After the interviews were conducted, Hashimoto has made an announcement asking "for further patience to shareholders." While CellSeed has been forced to drastically revise its earnings projections due to changes in the approval process for regenerative medicines in Europe, Hashimoto's explanation of the current strategy of cultivating the seeds sewn and the current direction of the Company's strategy was convincing. Furthermore, Prime Minister Abe's policies have placed a top priority upon cultivating the regenerative medicine applications. Therefore, the strategy of cultivating the seeds sewn appears to be justified. The start of clinical trials in Japan and Sweden during the second half of fiscal year December 2015 and preparations for the start of clinical trials of regenerated cartilage sheet in fiscal year December 2016 are considered to be the first two milestones and should be watched closely.

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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