MEDINET / 2370 COVERAGE INITIATED ON: LAST UPDATE:

Transcription

1 COVEAGE INITIATED ON: Shared esearch Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared esearch Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg. esearch eport by Shared esearch Inc.

2 esearch eport by Shared esearch Inc. INDEX How to read a Shared esearch report: This report begins with the trends and outlook section, which discusses the company s most recent earnings. First-time readers should start at the business section later in the report. Key financial data ecent updates Highlights Trends and outlook Business Summary Business segments Earnings structure Strengths and weaknesses Market and value chain Historical financial statements Previous earnings results (for reference purposes) Income statement Balance sheet Cash flow statement Other information Immuno-cell therapy History News and topics Top management Employees Major shareholders Dividends and shareholder benefits Other Company profile /70

3 esearch eport by Shared esearch Inc. Key financial data Income statement FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 FY09/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Total sales 2,900 3,202 2,674 2,191 2,110 1,844 1,674 1,909 1,704 1,970 YoY 57.8% 10.4% -16.5% -18.1% -3.7% -12.6% -9.2% 14.0% -10.8% 15.6% Gross profit 2,018 2,173 1,680 1,153 1, YoY 84.2% 7.7% -22.7% -31.4% -11.0% -19.5% -18.5% 27.9% -10.6% GPM 69.6% 67.9% 62.8% 52.6% 48.6% 44.8% 40.2% 45.1% 45.1% Operating profit ,407-1,742-1,681-1,802-1,400 YoY % OPM 10.1% 10.4% ecurring profit ,339-1,571-1,824-1,746-1,384 YoY % PM 11.2% 11.4% Net income ,581-1,712-1,643-2,604-1,395 YoY % Per share data Shares issued (year end; '000) 62,560 63,276 73,276 73,276 87,333 88,333 90,133 92, ,318 EPS EPS (fully diluted) Dividend per share Book value per share Balance sheet (JPYmn) Cash and cash equivalents 1,395 2,962 1,859 1,522 2,081 2,111 2,212 2,494 2,537 Total current assets 2,515 3,828 5,743 4,395 8,430 6,596 4,670 4,312 4,053 Tangible fixed assets ,702 1, Investment and other assets 763 1,321 1,442 2,180 3,109 2,256 2,204 1,600 1,314 Intangible fixed assets Total assets 3,890 5,760 8,024 7,314 12,242 9,947 8,897 7,647 6,266 Accounts payable Short-term debt Total current liabilities ,356 1,199 1,281 1,286 1,257 1, Long-term debt 5 1,000 1,000 1, Total liabilities 572 1,904 2,538 2,392 1,873 1,468 1,724 1, Net assets 3,318 3,855 5,486 4,922 10,370 8,479 7,173 5,931 5,480 Total interest-bearing debt 7 1,005 1,800 1, Cash flow statement (JPYmn) Cash flows from operating activities ,020-1,567-1,088-1,333 Cash flows from investing activities , Cash flows from financing activities 501 1,113 2, , Financial ratios OA (P-based) 9.5% 7.6% -5.1% -9.3% -9.7% -12.1% -16.7% -22.0% -25.1% OE 8.3% 12.2% -11.6% -12.0% -4.6% -16.8% -22.0% -25.2% -46.0% Equity ratio 85.3% 66.9% 68.4% 67.3% 84.7% 85.2% 80.6% 77.6% 87.5% Source: Shared research based on company data Figures may differ from company materials due to differences in rounding methods. YoY figures indicate year-on-year changes. 03/70

4 esearch eport by Shared esearch Inc. ecent updates Highlights On March 27, 2018, Shared esearch updated the report following interviews with MEDINET Co., Ltd. On March 22, 2018, the company announced that it had concluded a joint development agreement with the National Hospital Organization. The company and the National Hospital Organization concluded a joint development agreement with the goal of obtaining approval to manufacture and sell as a regenerative medicinal product ATL-DC-101, a dendritic cell vaccine for adult T cell leukemia (ATL). ATL is a refractory blood cancer, which occurs when lymphocytes (immune cells) are infected by the human T cell leukemia virus type 1 (HTLV-1). An estimated 1.1mn people in Japan are believed to be infected by HTLV-1, of which around 5% are expected to be presented with ATL symptoms. There is no established complete cure for the disease; mean survival after onset is 13 months. ATL is treated by chemotherapy or hematopoietic stem cell transplantation depending on the disease type and the patient5% are expected n the report. e every effort to pr are limited in their application as they carry the risk of severe adverse effects; and the development of a new treatment is much awaited. A joint research group led by the National Hospital Organization Kyushu Cancer Center is developing ATL-DC-101, which guides immune cells to attack ATL cells when injected subcutaneously. esearchers noted that virus proteins called Tax that are not found in normal lymphocytes appear on the surface of ATL cells, which are cells that have become cancerous as a result of being infected by HTLV-1. ATL-DC-101 is produced by adding peptides derived from the HTLV-1 Tax protein (HTLV-1 is the virus that causes ATL) to autologous dendritic cells made from the patientatl-dc-10 ATL-DC-100 is being developed with funding from Japan Agency for Medical esearch and Development as a Practical esearch for Innovative Cancer Control project. Clinical results so far suggest the vaccine has long-term effectiveness against ATL. Phase II investigator-initiated trials are scheduled to start in June 2018, because phase Ia and Ib investigator-initiated trials have confirmed the safety of ATL-DC-100. Having concluded a joint development agreement with the National Hospital Organization, the company and the organization will advance development of ATL-DC-101 as a regenerative medicinal product with a view to obtaining approval to manufacture and sell the vaccine in The company plans to manufacture the vaccine for use in the phase II investigator-initiated trial at the companynt as a Practical esearch for Innovaticonsidering commercial production after approval. On February 13, 2018, the company announced earnings results for Q1 FY09/18; see the results section for details. On January 26, 2018, the company announced the issuance (placement via third party allotment) of fourth series unsecured convertible bonds with stock acquisition rights (with provisions on resetting conversion price), and the issuance of series 13 stock acquisition rights with provisions on resetting exercise price. At the Board of Directors meeting held on the same day, the company decided on the issuance (placement via third party allotment) of fourth series unsecured convertible bonds with stock acquisition rights (with provisions on resetting conversion price), and the issuance of series 13 stock acquisition rights with provisions on resetting exercise price. 04/70

5 esearch eport by Shared esearch Inc. Main purpose of the financing Upfront payment to Histogenics Corporation Milestone payments to Histogenics for progress in NeoCart clinical trial Expenses for development of NeoCart and preparing a structure for its commercialization of NeoCart, including manufacturing and sales functions of regenerative medicinal products The capital raised through the issuance of fourth series unsecured convertible bonds with stock acquisition rights will be used for the following initiatives/objectives: epayment of JPY900mn of a JPY1.1bn short-term loan taken out for an upfront payment to Histogenics Corporation on January 9, 2018 The capital raised through the issuance of series 13 stock acquisition rights will be used for the following initiatives/objectives: epayment of JPY200mn of a JPY1.1bn short-term loan taken out to pay an upfront payment to Histogenics Corporation on January 9, 2018 MEDINET is to pay Histogenics milestone payments totaling approximately JPY1,160mn at various stages of development and addition of indications based on a licensing agreement concluded by the two companies for the development and sales of autologous chondrocyte cartilage implant NeoCart. Of this total, the capital raised through the issue of stock acquisition rights will be used for the JPY610mn milestone payments that is required before obtaining approval from the Japanese authorities to manufacture and sell NeoCart. Expenses incurred in the commercialization of NeoCart are estimated to total JPY2,049mn. This breaks down into JPY900mn for progressing clinical trials of NeoCart, JPY100mn costs associated with obtaining approval from the Japanese authorities to manufacture and sell NeoCart, and JPY1,049mn to establish a structure to manufacture and sell regenerative medicinal products. Total capital to be raised Amount paid in Estimated issuance costs Capital raised (net of expenses) JPY3,784mn JPY25mn JPY3,759mn Summary of the offerings Fourth series unsecured convertible bonds with stock acquisition rights (with provisions on resetting conversion price Payment date No later than February 13, 2018 Number of stock acquisition rights Issue prices of bonds and stock acquisition rights Number of dilutive shares from the issuance Capital raised Conversion price and provisions to reset conversion price Allottee edemption price Interest rate 48 units JPY18,750,000 per unit JPY100 per JPY100 face value of bond 5,487,800 shares JPY900,000,000 Initial conversion price set at JPY164 The conversion price will be reset to an amount equivalent to 91% of the closing price of the day immediately preceding the date when the stock acquisition rights become effective. However, if that price is below the designated minimum of the exercise price (JPY95), the minimum exercise price will be adopted as the reset price. Macquarie Bank Limited (100% placement) JPY100 per face value of JPY100 No interest paid 05/70

6 esearch eport by Shared esearch Inc. Series 13 stock acquisition rights (with provisions on resetting conversion price) Payment date No later than February 13, 2018 Number of stock acquisition rights 174,000 units Issue price JPY30,798,000 in total JPY177 per unit Number of dilutive shares from the 17,400,000 shares issuance Capital raised JPY2,884,398,000 Breakdown Stock acquisition rights: JPY30,798,000 Exercise of stock acquisition rights: JPY2,853,600,000 Exercise price and provisions to reset Initial exercise price set at JPY164 exercise price Minimum exercise price set at JPY95 (equivalent to 58% of initial exercise price) The exercise price will be reset to an amount equivalent to 91% of the closing price of the day immediately preceding the date when the stock acquisition rights become effective. However, if that price is below the designated minimum of the exercise price (JPY95), the minimum exercise price will be adopted as the reset price. Allottee Macquarie Bank Limited (100% placement) Exercise period February 14, 2018 to February 13, 2020 For corporate releases and developments more than three months old, please refer to the News and topics section. 06/70

7 esearch eport by Shared esearch Inc. Trends and outlook Quarterly earnings Cumulative FY09/17 FY09/18 FY09/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY FY Est. Sales ,315 1, % 1,970 YoY -3.0% -3.6% -6.3% -10.8% -34.6% 15.6% Gross profit YoY 5.7% -0.4% -4.4% -10.6% -39.4% GPM 42.4% 44.3% 44.8% 45.1% 39.4% SG&A expenses 606 1,433 2,044 2,571 1,639 YoY 9.0% 26.0% 16.7% 1.1% 170.4% SG&A ratio 134.3% 160.3% 155.5% 150.9% 555.7% Operating profit ,037-1,456-1,802-1, ,400 YoY OPM ecurring profit ,400-1,746-1, ,384 YoY PM Net income ,418-2,604-1, ,395 YoY Net margin Quarterly FY09/17 FY09/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales YoY -3.0% -4.1% -11.7% -23.0% -34.6% Gross profit YoY 5.7% -5.5% -11.7% -26.3% -39.4% GPM 42.4% 46.2% 45.8% 46.3% 39.4% SG&A expenses ,639 YoY 9.0% 42.1% -0.4% -33.4% 170.4% SG&A ratio 134.3% 186.8% 145.3% 135.3% 555.7% Operating profit ,523 YoY OPM ecurring profit ,502 YoY PM Net income ,186-1,126 YoY Net margin Source: Shared esearch based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Company forecasts based on most recently released figures. Note: Quarterly net income or loss is quarterly net income or loss attributable to parent company shareholders. Note: YoY figures indicate year-on-year changes. 07/70

8 esearch eport by Shared esearch Inc. Breakdown of SG&A Expenses Cumulative FY09/17 FY09/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 SG&A expenses 606 1,433 2,044 2,571 1,639 YoY 9.0% 26.0% 16.7% 1.1% 170.4% &D expenses ,221 YoY -22.7% 107.0% 69.3% 1.4% - Selling expenses YoY 36.1% 33.3% 21.4% 11.2% -19.8% General and administrative expenses ,123 1, YoY 11.7% 0.4% 0.5% -2.1% -20.0% Quarterly FY09/17 FY09/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 SG&A expenses ,639 YoY 9.0% 42.1% -0.4% -33.4% 170.4% &D expenses ,221 YoY -22.7% 239.2% -11.0% -71.8% - Selling expenses YoY 36.1% 31.3% 3.7% -13.1% -19.8% General and administrative expenses YoY 11.7% -11.0% 0.7% -9.9% -20.0% Source: Shared esearch based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: YoY figures indicate year-on-year changes. - in place of figure denotes YoY change greater than 1000%. Business results by segment Cumulative (JPYmn) Q1 FY09/17 Q2 Q3 Q4 Q1 FY09/18 Q2 Q3 Q4 Sales ,315 1, YoY -3.0% -3.6% -6.3% -10.8% -34.6% Contract Cell Manufacturing Business ,315 1, YoY -2.7% -2.8% -5.8% -9.3% -34.8% egenerative Medicinal Product Business YoY % - Operating profit ,037-1,456-1,802-1,523 YoY Contract Cell Manufacturing Business YoY egenerative Medicinal Product Business ,246 YoY Adjustments Quarterly (JPYmn) Q1 FY09/17 Q2 Q3 Q4 Q1 FY09/18 Q2 Q3 Q4 Sales YoY -3.0% -4.1% -11.7% -23.0% -34.6% Contract Cell Manufacturing Business YoY -2.7% -2.9% -11.7% -19.3% -34.8% egenerative Medicinal Product Business YoY -99.7% -98.3% % - Operating profit ,523 YoY Contract Cell Manufacturing Business YoY egenerative Medicinal Product Business ,246 YoY Adjustments Source: Shared esearch based on company data Note: Figures may differ from company materials due to differences in rounding methods. YoY figures indicate year-on-year changes. - in place of figure denotes YoY change greater than 1000%. 08/70

9 esearch eport by Shared esearch Inc. Contract Cell Manufacturing Business sales and profits Cumulative (JPYmn) Q1 FY09/17 Q2 Q3 Q4 Q1 FY09/18 Q2 Q3 Q4 Sales ,315 1, YoY -2.7% -2.8% -5.8% -9.3% -34.8% Specified Cell Products Manufacturing ,196 1, YoY 0.2% -0.2% -5.3% -9.2% -36.4% Value Chain YoY -50.0% -13.3% -5.3% -31.4% -13.3% Other YoY 11.1% -30.6% -16.0% 19.4% -25.0% Cost of sales YoY -9.2% -8.2% -9.4% -12.4% -31.8% Cost ratio 55.9% 53.6% 53.8% 53.4% 58.5% Gross profit YoY 7.0% 4.3% -1.3% -5.5% -38.7% GPM 44.1% 46.4% 46.2% 46.6% 41.5% SG&A expenses , YoY 1.4% 2.7% 4.9% 3.5% -9.7% Selling expenses YoY 37.0% 33.3% 21.5% 11.2% -19.8% &D expenses YoY -51.6% -46.4% -35.7% -31.0% -20.0% General and administrative expenses YoY -6.5% -6.5% 0.0% 2.7% -0.6% Operating profit YoY Quarterly (JPYmn) Q1 FY09/17 Q2 Q3 Q4 Q1 FY09/18 Q2 Q3 Q4 Sales YoY -2.7% -2.9% -11.7% -19.3% -34.8% Specified Cell Products Manufacturing YoY 0.2% -0.8% -14.4% -20.3% -36.4% Value Chain YoY -50.0% 60.0% 25.0% -64.4% -13.3% Other YoY 11.1% -47.7% 53.8% % -25.0% Cost of sales YoY -9.2% -7.0% -11.9% -21.4% -31.8% Cost ratio 55.9% 51.2% 54.2% 52.0% 58.5% Gross profit YoY 7.0% 1.9% -11.5% -17.0% -38.7% GPM 44.1% 48.8% 45.8% 48.0% 41.5% SG&A expenses YoY 1.4% 3.9% 9.2% -0.4% -9.7% Selling expenses YoY 37.0% 30.6% 3.9% -13.2% -19.8% &D expenses YoY -51.6% -40.0% 7.1% -7.1% -20.0% General and administrative expenses YoY -6.5% -6.4% 13.3% 10.8% -0.6% Operating profit YoY Source: Shared esearch based on company data Note: Figures may differ from company materials due to differences in rounding methods. YoY figures indicate year-on-year changes. The Specified Cell Products Manufacturing Business was referred to as the Immuno-Cell Therapy Total Support Service before FY09/17. In Q1 FY09/18, the company signed an agreement for contracted manufacturing of specified cell products with Medical Corporation KOSHIKAI replacing the Immuno-Cell Therapy Total Support Service agreement previously signed by the two parties. Q1 FY09/18 results Business environment Under a new legal framework* for regenerative medicinal and cell medicinal products, MEDINET has been advancing measures for growth through new business developments. Major business outcomes were as follows. MEDINET transferred to itself two cell processing centers (CPCs) in Shin-Yokohama and Osaka from contracted medical institution Medical Corporation KOSHIKAI (KOSHIKAI) with an aim to streamline its contract cell manufacturing operation. The 09/70

10 esearch eport by Shared esearch Inc. company previously provided cell processing centers to KOSHIKAI under an Immuno-Cell Therapy Total Support Service agreement. The company obtained a license for manufacturing specified cell products under the Act on the Safety of egenerative Medicine. Having obtained the license, MEDINET concluded a new agreement with KOSHIKAI to manufacture specified processed cells (replacing the Immuno-Cell Therapy Total Support Service agreement). The company now has a structure of three approved cell processing sites to manufacture processed cells including the Shinagawa Cell Processing Facility, which has already been approved. According to the company, the new structure will allow expansion of its Contract Cell Manufacturing and Contract Development and Manufacturing Organization (CDMO) Businesses by winning contracts to manufacture specified cell products and regenerative medicinal products for pharmaceutical companies, universities, medical institutions and research organizations engaged in regenerative medicine and cell medicinal products. On December 21, 2017, MEDINET entered into a licensing agreement with Histogenics Corporation for the development and marketing of the latter s investigational product NeoCart (autologous chondrocyte cartilage implant) in Japan. Based on the agreement, MEDINET will perform clinical trials targeting knee cartilage defects in Japan, with the goal of receiving approval to manufacture and market NeoCart as a regenerative medicinal product in *New legal framework includes egenerative Medicine Promotion Act, The Act on the Safety of egenerative Medicine, and The Act on Pharmaceuticals and Medical Devices. Sales and profits Sales in Q1 FY09/18 were JPY295mn (-34.6% YoY). Operating loss was JPY1.5bn (versus loss of JPY415mn in Q1 FY09/17), recurring loss was JPY1.5bn (versus loss of JPY303mn), and net loss attributable to parent company shareholders was JPY1.1bn (versus loss of JPY307mn). The company worked to expand the three business areas of Contract Cell Manufacturing Business, including the Specified Cell Products Manufacturing Business, the Value Chain Business, and the Contract Development and Manufacturing Organization (CDMO) Business. However, sales decreased YoY mainly due to a declining number of patients at its contracted medical institutions, with which MEDINET has signed an agreement for contracted manufacturing of specified cell products. With regard to profit and loss, SG&A expenses finished at JPY1.6bn (+170.4% YoY), widening operating loss from the previous year. Selling expenses were JPY89mn (-19.8%) and &D expenses came to JPY1.2bn (versus JPY83mn in Q1 FY09/17). The increase in &D expenses was due to an upfront payment of JPY1.1bn to Histogenics Corporation, with which the company entered into an in-licensing agreement. esults by business segment are as follows. From Q1 FY09/18, the company changed the name of the Cell Medicinal Product Business to the egenerative Medicinal Product Business. Contract Cell Manufacturing Business Sales: Segment loss: JPY295mn (-34.8% YoY) JPY136mn (segment loss of JPY86mn in Q1 FY09/17) Sales of the Specified Cell Products Manufacturing Business (the Immuno-Cell Therapy Total Support Service a year earlier) were JPY264mn (-36.4% YoY). The number of patients at its contracted medical institutions decreased partly because cancer treatment methods other than immuno-cell therapy, such as cancer treatment drugs, spread and partly because some information 10/70

11 esearch eport by Shared esearch Inc. magazines carried articles that criticized immuno-cell therapy without showing scientific grounds. As a result, sales of the Specified Cell Products Manufacturing Business to medical institutions decreased. Sales of the Value Chain Business in regenerative medicine and cell therapy were JPY13mn (-13.3%). Other sales were JPY15mn (-25.0%). Though the impact on earnings was small, there was the first booking of sales in the Contract Development and Manufacturing Organization (CDMO) Business for the company (sales included in the Specified Cell Products Manufacturing Business). Though the company made efforts to slash expenses, segment loss widened YoY due to the decline in sales. Gross profit was JPY122mn (-38.7%). In addition to the fall in sales, GPM declined 2.6pp YoY to 41.5%. Despite streamlining efforts to cut costs, the fall in sales led to a rise in the fixed cost ratio. selling expenses decreased to JPY89mn (-19.8%). egenerative Medicinal Product Business Sales: Segment loss: JPY0.8mn (JPY0mn in Q1 FY09/17) JPY1.2bn (segment loss of JPY113mn in Q1 FY09/17) Segment loss expanded due to increased &D spending, including an upfront payment of JPY1.1bn to Histogenics Corporation, with which the company entered into an in-licensing agreement. For details on previous quarterly and annual results, please refer to the Historical financial statements section. 11/70

12 esearch eport by Shared esearch Inc. Full-year company forecasts FY09/17 FY09/18 (JPYmn) 1H Act. 2H Act. FY Act. FY Est. Sales ,704 1,970 YoY -3.6% -17.5% -10.7% 15.6% Cost of sales ,450 Gross profit YoY -0.4% -19.4% -10.6% -32.4% GPM 44.3% 46.1% 45.1% 26.4% SG&A expenses 1,433 1,138 2,571 1,920 SG&A-to-sales ratio 160.3% 140.5% 150.9% 97.5% Operating profit -1, ,802-1,400 YoY OPM ecurring profit ,746-1,384 YoY PM Net income ,612-2,604-1,395 YoY Source: Shared esearch based on company data Figures may differ from company materials due to differences in rounding methods. YoY figures indicate year-on-year changes. For FY09/18, the company forecasts sales of JPY2.0bn (+15.6% YoY), operating loss of JPY1.4bn (loss of JPY1.8bn in FY09/17), recurring loss of JPY1.4bn (loss of JPY1.7bn), and net loss attributable to parent company shareholders of JPY1.4bn (loss of JPY2.6bn). For FY09/18, the company forecasts a YoY increase in CoGS and decrease in SG&A expenses. This is because up to FY09/17 it booked expenses for the Shinagawa CPF as SG&A expenses, but from FY09/18 it will book them as CoGS corresponding to the booking of sales for the Contract Cell Manufacturing Business. In a business environment affected by the Act on the Safety of egenerative Medicine and the Act on Pharmaceuticals and Medical Devices, MEDINET s plans in the Contract Cell Manufacturing Business involve further increasing sales of its Contract Cell Manufacturing Business and Contract Development and Manufacturing Organization (CDMO) Business, in regard to receiving orders for manufacturing of specified cell products and regenerative medicinal products from entities such as pharmaceutical companies, universities, and medical/research institutions that are involved in regenerative medicine and cell therapy. In addition, it also plans to focus on expanding sales in the Value Chain Business with respect to providing consulting related to regenerative medicine and cell therapy, operating and managing cell processing centers (CPCs), and dispatching and providing a training system for cell processing engineers. In spending, the company expects &D expenses mainly to strengthen development systems that would allow it to search for seeds leading to new cell medicinal products, protect intellectual property rights, and conduct clinical trials. It also plans to invest in an outlay of selling expenses for the purpose of strengthening its marketing capabilities to capture contract cell manufacturing for pre-clinical and clinical purposes commissioned by companies, universities, and medical and research institutions. Earnings forecast by segment In the Contract Cell Manufacturing Business, MEDINET expects sales of JPY2.0bn (+19.7% YoY) and a segment loss of JPY260mn (segment loss of JPY463mn in FY09/17). In the Cell Medicinal Product Business, the company expects sales of JPY0mn (JPY1mn in FY09/17) and a segment loss of JPY560mn (JPY707mn in FY09/17). 12/70

13 esearch eport by Shared esearch Inc. Future outlook, management strategy Market size According to a 2011 study by the Center for Cancer Control and Information Services (National Cancer Center), there were approximately 862,000 new cancer patients in Japan in 2013 ( Cancer incidence and incidence rates in Japan ). In addition, according to the Patient Survey 2014 by the Ministry of Health, Labour and Welfare, there were 1.63mn cancer patients in Japan. The number of patients who received treatment supported by MEDINET services peaked in FY09/10, at only about 2,000, and the company accordingly thinks that this indicates substantial room to grow. According to the company, the size of the domestic immuno-cell therapy market was about JPY10.0bn in The company estimates it holds a 20% share of the market. The company is targeting a 20% share of the cancer immuno-cell therapy market, which it projects will total about JPY95bn in 2020 and about JPY1.0tn in Management vision MEDINET aims to expand its Contract Cell Manufacturing and Cell Medicinal Product segments following the enactment of the Act on the Safety of egenerative Medicine and the Act on Pharmaceuticals and Medical Devices (PMD Act) in November It also plans to expand its businesses by promoting alliances and merger and acquisition activities. Sales growth (a rough projection) (JPYmn) 4,000 3,000 2,000 1,000 0 FY09/18 Est. FY09/19 Target FY09/20 Target FY09/21 Target FY09/22 Target Source: Shared esearch based on company data As a medium-term prospect for growth, the company expects sales to increase from JPY1.7bn in FY09/17 to JPY3.6bn in FY09/22 (CAG of 15.8%). Below are its growth strategies by segments. The company expects expansion of sales in businesses that had only a small impact on FY09/17 sales, such as the Contract Cell Manufacturing Business, the Value Chain Business, the CDMO Business (Contract Development and Manufacturing Organization), and Cell Medicinal Product Business. Contract Cell Manufacturing Business According to a fiscal 2012 survey for supporting small and medium size enterprises by Seed Planning, Inc. (a survey about industries related to regenerative medicine), announced in February 2013, the domestic market of industries related to regenerative medicine was JPY4.8bn as of The report expects the market to expand (mainly driven by contract manufacturing) to total JPY260bn in 2030 and JPY640bn in Targeting sales growth from contracts with medical institutions for cell processing related to immuno-cell therapy and CDMO business for regenerative medicinal products In addition to its mainstay Immuno-Cell Therapy Total Support Service, MEDINET plans to receive orders from medical institutions for contract cell manufacturing for immuno-cell therapy and for developing and manufacturing regenerative medicinal products as a CDMO to increase sales in these markets, in which it expects to see long-term growth. The company also plans to expand its 13/70

14 esearch eport by Shared esearch Inc. value chain through such things as the dispatch of cell processing engineers and management and operation of cell processing centers (CPCs). As of November 2017, MEDINET is conducting contracted cell manufacturing for Aoikai Medical Corporation s AOI Universal Hospital, the Kenkoigaku Association, and Miwa Central Clinic (refer to the Business segments section). In regard to CDMO Business for regenerative medicinal products and investigational products, MEDINET has concluded an agreement for development and manufacturing of immuno-cell processing technology, leading toward commercialization of an immune tolerance-inducing cell processing technology being jointly researched and developed by Gene Techno Science and Juntendo University. Cell processing centers (CPC) The enactment of the Act on the Safety of egenerative Medicine in November 2014 has allowed companies to undertake cell processing contracts for regenerative medicine and cell medicinal products. MEDINET completed the first phase of construction of a cell processing facility in Tokyo s Shinagawa district (Shinagawa CPF) in May 2015 and obtained a license for manufacturing specified cell products under the Act on the Safety of egenerative Medicine. The company designed Shinagawa CPF to cope with not only contract cell manufacturing related to immuno-cell therapy based on its previous achievements, but also the field of somatic-cell, stem-cell, and induced-pluripotent-stem-cell (ips-cell) processing. The facility is able to handle not only contract manufacturing of specified cell products but also development and commercial production of regenerative medicinal products. In regard to cell processing centers, on October 2, 2017, MEDINET received regulatory approval to manufacture specified cell products at its Shin-Yokohama Cell Processing Center and Osaka Cell Processing Center. Together with the already licensed Shinagawa Cell Processing Center, the company now has three centers that can conduct contracted cell manufacturing. Expansion of cell processing business Medical treatment model Act on the Safety of egenerative Medicine Medical institutions Product model Act on Pharmaceuticals and Medical Devices Companies Medical institution A Company A Medical institution B Contract processing Specified cell products Contract manufacturing of specified cell products and regenerative medicinal products Develop regenerative medicinal products Contract manufacturing Investigational products and regenerative medicinal products Company B Source: Shared esearch based on company data Cell processing center (CPC) reorganization With enforcement of the Act on the Safety of egenerative Medicine, MEDINET plans to reorganize its existing CPCs. As of September 2017, the company has three CPCs located in Shin-Yokohama (Kanagawa), Osaka, and Fukuoka, for which it has granted exclusive licenses to the Seta Clinic Group. The reason it granted such licenses for the three centers to medical institutions was that, prior to the enforcement of the Act on the Safety of egenerative Medicine (enacted November 2014), cell processing for use in immuno-cell therapy was restricted to medical institutions. It was necessary for 14/70

15 esearch eport by Shared esearch Inc. MEDINET to establish CPCs alongside medical institutions that conducted immuno-cell therapy. However, with enforcement of the act, it became possible for medical institutions to outsource cell processing to companies. For this reason, the company plans to reorganize its CPCs between May 2019 and May First, during FY09/17, it merged the operations of the Fukuoka CPC into the operations of the Shin-Yokohama CPC and transferred control of the Shin-Yokohama CPC and Osaka CPC back to MEDINET. Hereafter, it plans to merge the three centers into one. Shared esearch believes that by merging the CPCs, MEDINET will be able to reduce labor costs, depreciation, and other expenses. Cell Medicinal Product Business The PMD act that took effect in November The act provides a definition of regenerative medicinal products and stipulates that anyone who seeks to manufacture and sell regenerative medicinal products has to obtain approval for each item from the Minister of Health, Labour and Welfare. At the business, the company s pipeline as of December 2016 included AGS-003 for the treatment of metastatic renal cell cancer and UK-based TC BioPharm s ImmuniCell, in which MEDINET has invested. For the medium term, the company aims to expand its pipeline further, promote alliances and M&A to obtain approval for cell medicinal products (part of regenerative medicinal products), and expand sales by selling cell medicinal products. 15/70

16 esearch eport by Shared esearch Inc. Business Summary Shifting from Immuno-Cell Therapy Total Support Service to the Contracted Cell Manufacturing Business; sale and development of cell medicinal products Prior to November 2015, MEDINET was a biotechnology company mainly offering the Immuno-Cell Therapy Total Support Service to medical and research institutions. The Act on the Safety of egenerative Medicine and the Act on Pharmaceuticals and Medicals Devices (PMD Act) were enacted in November The company plans to shift from its former mainstay business the Immuno-Cell Therapy Total Support Service toward cell processing and developing cell medicinal products. Thus in FY09/14, the company changed reporting segments from the Cell Therapy Support Business to the Contract Cell Manufacturing Business and Cell Medicinal Product Business. Contract Cell Manufacturing Business: eceives cell processing orders In the Contract Cell Manufacturing Business, MEDINET provides its Immuno-Cell Therapy Total Support Service, takes cell processing orders for clinical and experimental trials from companies, universities, and medical and research institutions, and provides related services, including the operation of cell processing centers (CPCs). As the first phase of construction of its cell processing facility in Tokyo s Shinagawa district (Shinagawa CPF) was completed in May 2015, the company has been working to secure orders from companies, universities, and medical and research institutions for contract cell processing for clinical and experimental trials. The company also worked to establish relationships with companies, universities, and medical and research institutions by engaging in business and marketing activities such as the dispatch of cell processing engineers, education for maintaining product quality at CPCs, and consulting for establishing new CPCs. In FY09/17, however, its Immuno-Cell Therapy Total Support Service produced the majority of segment sales. The Immuno-Cell Therapy Total Support Service is a comprehensive package that enables medical institutions to safely and efficiently process cells used in immuno-cell therapy. The service encompasses the provision of technological expertise, equipment and materials. In addition, the company establishes cell processing centers (CPCs) alongside medical institutions, provides materials and engineers to carry out the actual cell processing, and conducts contracted cell processing at its CPCs for use in immuno-cell therapy. Through September 2017, MEDINET provided the use of three CPCs (Shin-Yokohama, Osaka, and Fukuoka) to Medical Corporation KOSHIKAI and conducted its Immuno-Cell Therapy Total Support Service. In order to merge the operations of the Fukuoka CPC into the operations of the Shin-Yokohama CPC and transfer control of the Shin-Yokohama CPC and Osaka CPC back to MEDINET in October 2017, the company pressed forward with procedures to obtain regulatory approval to manufacture specified cell products. Gaining the approval, it ended the Immuno-Cell Therapy Total Support Service agreements it had with medical institutions and replaced them with cell processing contracts. From October 2017 onward, rather than offering its Immuno-Cell Therapy Total Support Service to medical institutions, it receives cell processing orders and books resultant sales in the Contract Cell Manufacturing Business segment under Contract Cell Manufacturing Business. Cell Medicinal Product Business: Develops cell medicinal products MEDINET researches and develops cell medicinal products in the Cell Medicinal Product Business. The company has the exclusive right in Japan to manufacture AGS-003, a cell medicinal product being developed by Argos Therapeutics, Inc. of the US. In Japan, the company is exploring the feasibility of cell medicinal products through its own research and development projects and joint research projects so far conducted with university hospitals. The company is also looking toward acquiring pipeline products both at home and abroad. Spread of immuno-cell therapy can be expected on enactment of laws Since 1981, cancer has been the number one cause of death for Japanese people. According to the Patient Survey 2014 by the Ministry of Health, Labour and Welfare, there were 1.63mn cancer patients in Japan. However, the number of patients who received immuno-cell therapy treatment supported by MEDINET services peaked in FY09/10 at about 2,000 (See Market and 16/70

17 esearch eport by Shared esearch Inc. value chain ). Shared esearch understands that the spread of immuno-cell therapy may have been hindered by the fact that medical institutions had to establish cell processing centers (CPCs) before the November 2014 enactment of the Act on the Safety of egenerative Medicine. Furthermore, medical insurance did not cover immuno-cell therapy, and laws prohibited combining insured and uninsured care before the law took effect. With the Act on the Safety of egenerative Medicine and the PMD Act in force and the introduction of a new system from April 2016 that allows patients to receive non-approved therapies on request, these obstacles will be removed, which may result in more widespread use of immuno-cell therapy. 17/70

18 esearch eport by Shared esearch Inc. Business segments The company s business segments are the Contract Cell Manufacturing Business (99.9% of sales in FY09/17) and the Cell Medicinal Product Business (0.1%). Segment Contract Cell Manufacturing Business Cell Medicinal Product Business Outline In this segment, MEDINET provides the Immuno-Cell Therapy Total Support Service. It also takes tissue/cell processing and culturing orders from medical and research institutions involved in regenerative medicine and cell therapy, and corporations developing medicinal products for regenerative therapy. The company conducts research and development of cell medicinal products to sell to medical institutions, obtaining approval for the manufacture and sale of the products. esults by segment FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Cons. Cons. Cons. Cons. Sales 1,844 1,674 1,909 1,704 YoY -12.6% -9.2% 14.0% -10.8% Contract Cell Manufacturing Business 1,841 1,666 1,877 1,703 YoY % 12.6% -9.3% % of sales 99.8% 99.5% 98.3% 99.9% Cell Medicinal Product Business YoY % 290.0% -95.5% % of sales 0.2% 0.5% 1.7% 0.1% Operating profit -1,407-1,742-1,681-1,802 YoY Contract Cell Manufacturing Business YoY Cell Medicinal Product Business YoY Adjustments Source: Shared esearch based on company data Figures may differ from company materials due to differences in rounding methods. YoY figures indicate year-on-year changes. Contract Cell Manufacturing Business (99.9% of FY09/17 sales) In this segment, MEDINET takes tissue/cell processing and culturing orders from medical and research institutions involved in regenerative medicine and cell therapy, and corporations developing regenerative medicinal products and investigational products. In addition, the company conducts related services such as educating and dispatching cell processing engineers, preparing documents, and operating facilities under contract. In FY09/17, the Immuno-Cell Therapy Total Support Service was the main earnings driver. However, in October 2017, it ended the Immuno-Cell Therapy Total Support Service agreements it had with medical institutions and replaced them with cell processing contracts. From October 2017 onward, it conducts cell processing under contract and book resultant sales in the Contract Cell Manufacturing Business segment under Contract Cell Manufacturing Business. Breakdown of Contract Cell Manufacturing Business segment sales FY09/16 FY09/17 (JPYmn) Sales 1,877 1,703 YoY 12.6% -9.3% Immuno-Cell Therapy Total Support Service 1,702 1,546 YoY % Value Chain YoY % Other YoY % Source: Shared esearch based on company data Figures may differ from company materials due to differences in rounding methods. YoY figures indicate year-on-year changes. 18/70

19 esearch eport by Shared esearch Inc. Immuno-Cell Therapy Total Support Service The company pioneered support services for immuno-cell therapy in Japan in As of September 2017, it was the largest provider in the country. Anticipated synergy between immuno-cell therapy and conventional treatments In immuno-cell therapy, the patient s immune cells (e.g., lymphocytes) are collected, cultured or processed, and then returned to the patient s body. They suppress the growth of cancer cells by artificially magnifying the power of immune cells. According to the company, immuno-cell therapy s potential has been growing due to synergistic effects when combined with three conventional treatments (surgery, radiotherapy, and chemotherapy). This could lead to immuno-cell therapy developing as a frontline therapy. The company further points out that minimal adverse effects associated with immuno-cell therapy could help maintain patients quality of life (QOL) and quality-adjusted life year (QALY). Interested patients locate a doctor/clinic providing the therapy and undergo a medical examination. The clinic sends a sample of the patient s blood to MEDINET s CPC, and cell engineers at the CPC culture and process the blood for about two weeks. After processing, cells are administered intravenously to the patient in about 30 minutes. One course of treatment takes about three months and includes six infusions of immune cells. Immuno-cell therapy flow Source: Shared esearch based on company data Immuno-Cell Therapy Total Support Service It is difficult for ordinary doctors and medical institutions to provide immuno-cell therapy because cultivating and processing immune cells requires technology and expertise, specialist technicians, equipment, and facilities. MEDINET s Immuno-Cell Therapy Total Support Service provides everything necessary for medical institutions to offer the treatment, such as cell-treatment technologies and expertise, quality-control systems, cell processing centers and equipment, technicians, and information systems. According to the Medical Practitioners Law, doctors and medical institutions that provide immuno-cell therapy are legally responsible for providing the therapy and must obtain informed consent from patients and accept liability for medical errors and accidents. The company establishes CPCs for medical institutions offering the treatment or under contract uses its CPCs to process cells for use in immuno-cell therapy. In the former case, it retains ownership of the facilities and grants the medical institution exclusive usage rights. The company then provides cell engineers, supplies, and devices for CPC operation. Immuno-cell processing is the company s core competence, and its strength is engineering technology and expertise a mix of medical and manufacturing skills. 19/70

20 esearch eport by Shared esearch Inc. The Immuno-Cell Therapy Total Support Service Source: Shared esearch based on company data MEDINET operates and manages CPCs for medical institutions that perform clinical research on medical technology for regenerative medicine and cell therapy. CPC operation requires strictly controlled, safe facilities as well as effective quality control systems. All facilities and systems need to be compliant with Good Manufacturing Practice (GMP) a standard for pharmaceutical production and quality management and other guidelines. ecently, many research institutions and medical institutions have established CPCs in line with research developments in the field of regenerative medicine and cell therapy. However, the majority of these CPCs have operated at limited capacity due to economic and personnel constraints, and institutions lack of experience in this new field. This appears to have hindered the spread of regenerative medicine and cell therapy. MEDINET hopes to resolve the situation by providing CPC operational management services. As of end-september 2017, MEDINET was contracted to provide overall CPC operational management services at the Kyushu University Center for Advanced Medical Innovation (Fukuoka). Contracted and allied medical institutions Medical institutions that provide immuno-cell therapy using MEDINET s support service are called contracted medical institutions. As of September 2017, there were ten such facilities: Medical Corporation KOSHIKAI, Seta Clinic Group, Seta Clinic Tokyo (Tokyo) Seta Clinic Shin-Yokohama (Yokohama) Seta Clinic Osaka (Osaka) Seta Clinic Fukuoka (Fukuoka) The University of Tokyo Hospital (Tokyo) Osaka National Hospital, a National Hospital Organization (Osaka) Center for Advanced Medical Innovation, Kyushu University (Fukuoka) AOI Universal Hospital (Kawasaki, Kanagawa) Kenkoigaku Association (Tokyo) Miwa Central Clinic (Mito, Ibaraki) These medical institutions perform immuno-cell therapy using technology and support provided by MEDINET. They coordinate with other medical institutions to offer patients the same treatment. These other institutions are called allied medical institutions. elationship with Medical Corporation KOSHIKAI, Seta Clinic Group Seta Clinic was established in March 1999 as a medical institution specializing in immuno-cell therapy. Currently, the Medical Corporation KOSHIKAI, Seta Clinic Group ( Seta Clinic Group ) comprises four clinics and various Allied Medical Institutions providing immuno-cell therapy to patients across Japan. According to Seta Clinic, the cumulative number of patients had exceeded 20,000 by end-september 2017, and the company commented that Seta Clinic s experience in the field of immuno-cell therapy and its accumulated clinical data are unrivaled worldwide. 20/70

21 esearch eport by Shared esearch Inc. Based on a comprehensive agreement, MEDINET supports the Seta Clinic Group to provide safe and efficient immuno-cell therapy. Seta Clinic Group provides the therapy directly to patients and via Allied Medical Institutions. Physicians working at the Seta Clinic Group choose the most suitable therapy methods based on the characteristics of each patient s cancer. Furthermore, they provide tailor-made medical care, as the company puts it, offering immuno-cell therapy in conjunction with other treatment methods selected based on the patient s condition and stage of disease. MEDINET provides technology and services related to natural killer (NK)-cell therapy, dendritic cell (DC) vaccine therapy, gamma-delta T cell therapy, alpha-beta T cell therapy, and cytotoxic T-lymphocyte (CTL) therapy. It also manages a cancer tissue depository that collects and stores cancer tissue from patients. The company also provides immunostaining test technology that allows the analysis of individual cancer tissue characteristics. SELF CANCE TISSUE DEPOSITOY: One part of the immuno-cell therapy complex is DC vaccine therapy, which may evoke specific immune responses by using a patient s own cancer tissue. If cancer tissue is preserved after surgery, it is possible to use the tissue for treating the same cancer if it returns or spreads. The cancer tissue depository stores patients cancer tissue and returns it for future use if necessary. Immunostaining Test: Some immune cells directly harm cancer cells by recognizing particles on the surface of cancer cells. However, such target particles differ depending on the type of immune cells. It is possible that testing the expression of particles on the surfaces of cancer cells using immunostaining tests will become a key piece to providing patients individualized treatment. In cooperation with the Tokyo Central Pathology Laboratory Corporation, MEDINET provides the infrastructure that allows medical institutions to perform immunostaining testing. Expansion of cell processing business Before the enactment in November 2014 of the Act on the Safety of egenerative Medicine, only medical institutions were permitted to engage in cell processing for immuno-cell therapy. The enactment of the law allows medical institutions to outsource cell processing and culturing to corporations (see The Act on the Safety of egenerative Medicine and the PMD Act for details). The Act on the Safety of egenerative Medicine: The Act on the Safety of egenerative Medicine, enacted in November 2014, regulates regenerative medicine technology to ensure safety and establishes a mechanism to approve the manufacturing of products with the use of cells processed by entities other than medical institutions. Under the act, medical institutions that plan to provide regenerative medicine are obliged to create a plan for providing regenerative medicine, apply for consideration of the plan at the certified special committee for regenerative medicine, and submit the plan and other materials to the Ministry of Health, Labour and Welfare. This procedure will eliminate low-grade regenerative medicine but increase the burden on medical institutions. The law also stipulates that when an entity that is not a medical institution plans to process cells for medical treatment, it has to obtain a license for manufacturing specified cell products for each of its cell culturing and processing facilities (a medical institution that plans to process cells need only submit a notification to that effect). This law allows medical institutions to carry out immuno-cell therapy without establishing cell processing centers. MEDINET is now able to develop the Contract Cell Manufacturing Business with a focus on cell and tissue culturing and processing in addition to the Immuno-Cell Therapy Total Support Service as the conventional core operation. It is able to manufacture specified cell products for customers. MEDINET also engages in the dispatch of cell processing engineers, education concerning product quality control at CPCs, and consulting for establishing new CPCs. Under the Act on Pharmaceuticals and Medical Devices, the company is contracted to develop and manufacture newly defined regenerative medicinal products and investigational products as a CDMO. In FY09/17, the impact of these contract cell manufacturing operations was minimal and the core revenue driver continued to be the Immuno-Cell Therapy Total Support Service. Manufacture of specified cell products As mentioned, the Act on the Safety of egenerative Medicine allows medical and research institutions to outsource cell processing and culturing to corporations. MEDINET completed the first phase of construction of a cell culturing and processing facility in Shinagawa, Tokyo (Shinagawa Cell Processing Facility [CPF]) in May 2015 and obtained a license for manufacturing specified cell products at the new facility. In addition to orders for immune cells, Shinagawa CPF will take orders for tissue/cell 21/70

22 esearch eport by Shared esearch Inc. processing and culturing from medical and research institutions involved in regenerative medicine and cell therapy, and corporations developing medicinal products for regenerative therapy. In October 2017, MEDINET received regulatory approval to manufacture specified cell products at its Shin-Yokohama Cell Processing Center and Osaka Cell Processing Center. Together with the already licensed Shinagawa Cell Processing Facility, the company now has three centers that can conduct contracted cell manufacturing. As of November 2017, MEDINET is conducting contracted cell manufacturing for Aoikai Medical Corporation s AOI Universal Hospital, the Kenkoigaku Association, and Miwa Central Clinic. Agreement to manufacture specified cell products for Aoikai Medical Corporation s AOI Universal Hospital In February 2016, MEDINET concluded an agreement with Aoikai Medical Corporation s AOI Universal Hospital to manufacture specified cell products for the hospital. It will manufacture the cells at the company s Shinagawa CPF. AOI Universal Hospital is designated by the Japanese government as a medical institution that provides advanced medical treatments in the Tokyo National Strategic Special Zone under the National Strategic Special Zones Law. The hospital plans to provide immuno-cell therapies for cancer, targeting malignant tumors. May 2017 agreement to manufacture specified cell products for Kenkoigaku Association In May 2017, the company concluded an agreement to manufacture specified cell products for the Kenkoigaku Association, an affiliate of medical corporation Otsubokai, which operates more than 30 medical institutions and facilities in Tokyo, providing a wide range of medical care from medical examinations to nursing care and treatments. Kenkoigaku Association will be providing immuno-cell therapy to cancer patients (offering four types of treatments: dendritic cell vaccine therapy, alpha-beta T cell therapy, gamma-delta T cell therapy, and NK-cell therapy) at its consultation clinic that focuses on ion beam radiotherapy. MEDINET will manufacture specified cell products at its Shinagawa cell processing facility and provide them to the aforementioned consultation clinic for use in the immuno-cell therapy offered at the clinic. Agreement to manufacture specified cell products for Miwa Central Clinic The company concluded an agreement with Miwa Central Clinic regarding contracted manufacturing of specified cell products. The director of Miwa Central Clinic, Yasunori Akutsu, took part in clinical trials for a combination therapy of dendritic cell (DC) vaccine therapy and radiotherapy targeting esophageal cancer while at Chiba University Graduate School of Medicine (Department of Frontier Surgery), and has written multiple articles on immuno-cell therapy. He opened the Miwa Central Clinic in Mito (Ibaraki Prefecture) in April 2017, and has been focusing on treating cancer patients. The Miwa Central Clinic is putting in place a structure to provide immuno-cell therapy targeting cancer (DC vaccine therapy), and plans to offer treatment starting November 1, Based on the agreement, MEDINET will manufacture and provide specified cell products to Miwa Central Clinic for use in the clinic s immuno-cell therapy treatments. Dispatch of cell processing engineers MEDINET started the business of dispatching cell processing engineers from FY09/16. Cell processing engineers engaging in regenerative medicine and cell therapy are expected to possess not only cell processing skills and specialized knowledge of regenerative medicine and cell medicinal products, but are also required to have the ability needed for operating facilities and managing quality in accordance with laws, including the Act on the Safety of egenerative Medicine and the Act on Pharmaceuticals and Medical Devices. As such, a tremendous amount of time and effort are needed to develop each cell processing engineer to satisfy these requirements. The creation and implementation of comprehensive and systematic training systems based on experience are also essential. Accordingly, the shortage of cell processing engineers is an issue in the commercialization of regenerative medicine and cell therapy. Through distributing its Immuno-Cell Therapy Total Support Service to medical and research institutions, MEDINET has provided comprehensive services that have covered designing, installing, and managing cell-culturing and processing facilities, technologies to develop cell processing procedures, cell processing engineers, reliability assurance systems, and information 22/70

23 esearch eport by Shared esearch Inc. management systems. The company now has a pool of cell processing engineers that can be utilized for national research institutions and other entities that have contracts with MEDINET. Going forward, the company aims to further develop the business of dispatching cell processing engineers. Education for product quality control at CPCs In February 2016, the company received an order from the National Center for Child Health and Development to provide training support for the management and operation of the center s CPC. The aim is to educate those responsible for manufacturing and quality control and others involved in the manufacturing process at the center so that they will be able to properly manage and conduct investigational drug manufacturing related to regenerative medicinal products. Manufacture of regenerative medicinal products and investigational products as a CDMO Under the Act on Pharmaceuticals and Medical Devices, the company is contracted to develop and manufacture regenerative medicinal products and investigational products as a CDMO (Contract Development and Manufacturing Organization) for companies and others who want to develop and sell medical products using regenerative medicinal products and technologies as defined by the law. The Shinagawa CPF is also able to handle the manufacture of medical treatment products using regenerative medicinal products and technologies. Agreement to attempt commercialization of an immune tolerance-inducing cell processing technology being jointly researched and developed by Gene Techno Science and Juntendo University The company announced the conclusion of an agreement with Gene Techno Science Co., Ltd. (GTS) regarding outsourcing and subcontracting the development and manufacturing associated with an immuno-cell processing technology. GTS and Juntendo University have jointly conducted research and development of a cell processing technology that induces immune tolerance. With the aim of accelerating the development of regenerative medicinal products to reduce organ transplant rejection, MEDINET and GTS have concluded an agreement, in which GTS is to outsource to MEDINET the development and manufacture toward commercialization of this product. Immune tolerance is a state of unresponsiveness to certain antigens by the cells that control the immune system, as these cells do not recognize the antigens as foreign substances. 23/70

24 esearch eport by Shared esearch Inc. Cell Medicinal Product Business (0.1% of sales in FY09/17) In the Cell Medicinal Product Business, the company conducts research and development to obtain approvals for the manufacture and sale of cell medicinal products. The Act on Pharmaceuticals and Medical Devices (PMD Act) in November 2014 provides a new definition of regenerative medicinal products and stipulates that anyone wishing to manufacture and sell regenerative medicinal products has to obtain approval for each item from the Minister of Health, Labour and Welfare. Further, if the product is expected to be effective and its safety is confirmed it will be granted expedited approval for regenerative medicinal products with conditions and a limited term. After it goes on sale, upon examining efficacy and determining it meets additional safety criteria, the seller will be allowed to continue selling the product provided that it applies for and obtains approval again within the specified period (see The Act on the Safety of egenerative Medicine and PMD Act for details). The (PMD Act) outlines regulations necessary to ensure the efficacy, safety and quality of medical products, quasi-drugs, cosmetics, and medical equipment. In addition to formulating measures to regulate specified pharmaceutical drugs, the act aims to outline necessary measures to promote research and development of pharmaceuticals and medical equipment that are highly needed and implementing regulations needed to ensure the efficacy and safety of medical and other products. As the act newly categorizes regenerative medicinal products as products for medical treatment manufactured by using regenerative medicinal technologies, MEDINET must comply with the act when it develops products for medical treatment by using regenerative medicinal technologies. The PMD Act also has a new definition for regenerative medicinal products in Article 2, which regulates safety standards concerning such products. Under Article 23: 26, expedited approval for regenerative medicinal products with conditions and a limited term may be granted to manufacture and sell the product in cases where the medical product is expected to be effective and safety conditions are met. The Ministry of Health, Labour and Welfare in November 2014 proposed a change in the Health Insurance Act to coincide with the enactment of the PMD Act. Under the new law, products for regenerative medicine would be partly subsidized by the Japanese National Health Insurance until they are officially approved for full coverage after the completion of clinical trials. Products that win expedited approval for regenerative medicinal products, with conditions and a limited term will also be covered by this insurance. Shared esearch understands that the insurance coverage would lower medical costs for patients and remove the issue of combining insured and uninsured care, another barrier to the spread of immuno-cell therapy. As of November 2017, as examples of regenerative medicinal products approved in Japan, Shared esearch cites Autologous Cultured Epidermis JACE (for serious burns) and Autologous Cultured Cartilage JACC, both developed by Japan Tissue Engineering Co., Ltd. (TSE JASDAQ Growth: 7774); TEMCELL HS Inj., a human mesenchymal stem cell (MSC)-based regenerative medicine of JC Pharmaceuticals Co., Ltd. (TSE1: 4552): and Terumo Corporation s (TSE1: 4543) HeartSheet Autologous Skeletal Myoblast Sheets. MEDINET plans to use the expedited approval system for regenerative medicinal products with conditions and a limited term to obtain approval to manufacture and sell existing pipeline products. The company also aims to acquire pipeline products both in Japan and overseas. The company established a wholly owned subsidiary, MEDcell Co., Ltd., in December 2013, in a bid to strengthen the development system of cell medicinal products and win regulatory approvals to sell those products. As of February 2018, MEDINET is engaged in the development of autologous cultured cartilage NeoCart, in-licensed from Histogenics Corporation (US), and cell medicinal products based on a license agreement with Argos Therapeutics, Inc. (US) concerning AGS-003. In Japan, the company is exploring the feasibility of cell medicinal products through its own research and development, as well as joint development of immuno-cell therapy using ips-cell processing with the University of Tokyo and other joint research projects so far conducted with university hospitals. The company is also looking to acquire pipeline products both at home and abroad. &D status Autologous cultured cartilage NeoCart In-licensed autologous cultured cartilage NeoCart from US-based Histogenics In December 2017, MEDINET signed a license agreement with Histogenics Corporation (US) for the development and sale of 24/70

25 esearch eport by Shared esearch Inc. autologous cultured cartilage NeoCart in Japan. MEDINET decided to in-license NeoCart, seeing the product has the potential to immediately bring benefits to patients with knee cartilage defects in Japan. Around 10,000 patients in Japan suffer knee cartilage defects annually; chondrocytes taken from patients to be implanted into damaged parts. The company estimates that in Japan there are annually at least ten thousand patients with knee cartilage defects, who could potentially benefit from NeoCart. If left untreated, cartilage defects may result in osteoarthritis and ultimately require total knee replacements. According to Histogenics survey, about 60% of patients receive only surgical or conservative treatments. Some 60% to 70% of patients who have not received surgical treatment are likely to suffer from osteoarthritis in the future. The company expects NeoCart to become a new option for treatment as it consists of chondrocytes taken from the patients themselves and cultured in the shape of cartilage and can be implanted into damaged parts with less invasive treatment. Patient enrollment for phase III clinical trial completed in the US, application for approval to be made after trial outcome confirmed in July-September 2018 As of December 2017, Histogenics completed patient enrollment for a phase III clinical trial in the US. Based on the outcome of the trial, which will be known in Q3 (July-September) 2018, Histogenics plans to apply to the US Food and Drug Administration for approval as a biological product. Application for approval in Japan possible with a comparative test enrolling some 30 patients; phase III clinical trial to start in 2H 2018, approval for manufacture to be obtained in 2021 Histogenics had sought NDA consultation with Japan s Pharmaceuticals and Medical Devices Agency (PMDA) up to Q2 (April-June) During this process, it has obtained an opinion from PMDA that the data from phase III clinical trial in the US (249 cases) was applicable, and that it can apply for a manufacture and sales approval of NeoCart in Japan by conducting a phase III comparative clinical trial for microfracture surgery (same treatment method used in the US clinical trial) involving just around thirty patients. The company plans to start the phase III clinical trial for knee cartilage defects in 2H 2018 and obtain approval in 2021 for the manufacture and sale as a regenerative medicinal product. Microfracture surgery is a procedure of creating small holes with a space of 3-4mm in the injured area of cartilage, stimulating the bone marrow under the cartilage tissue to promote the regeneration of chondrocytes. Upfront payments and fees In in-licensing NeoCart, MEDINET is to pay Histogenics the upfront payment worth USD10mn (about JPY1.1bn), milestone payments totaling approximately JPY1.2bn at each stages of development and addition of indications, along with fees and royalties of up to JPY7.3bn subject to sales after the launch of the product in Japan. AGS-003 Argos Therapeutics (US) is developing AGS-003 for the treatment of metastatic renal cell cancer. Under the licensing agreement, MEDINET has obtained an exclusive license to manufacture in Japan. However, MEDINET announced in April 2016 that it would not exercise an option it had obtained for a non-exclusive license to develop, sell, and sublicense AGS-003 in Japan. According to the company, although efforts were made to reach agreement regarding the exercise of the option, the parties failed to come to an agreement within the period stipulated in the agreement for 25/70

26 esearch eport by Shared esearch Inc. the option and the company decided to forgo exercising the option. However, the company will continue to hold exclusive rights to manufacture AGS-003 in Japan, and will collaborate with Argos as it seeks to commercialize the product in Japan. Concerning the non-exclusive rights for commercialization, the company has also expressed its intent to remain flexible and continue deliberations with Argos. Phase III clinical trials are underway in several countries to test the use of AGS-003 in combination with sunitinib (the standard drug for treating metastatic renal cell cancer). A phase II clinical trial has already been completed in the US, and showed that median length of life doubled for patients using this product compared with patients who were on sunitinib monotherapy. As of November 2017, a phase III clinical trial for AGS-003 by Argos was underway in the US. The registration of the recipients has been completed and the final data analysis is scheduled to finish in the first half After results of the phase III clinical trial for AGS-003 come out in the US, Argos plans to prepare for a clinical trial in Japan. Depending on the development situation of AGS-003, MEDINET is to pay license expenses to Argos, which are reported as research and development expenses in the company s income statement. However, the expenses do not affect the company s cash flows because they are offset by repayments of long-term loans provided by MEDINET to Argos in FY09/14. When AGS-003 is approved and put on sale in Japan, MEDINET will manufacture the product and receive compensation for manufacturing. CA-T cell research: Joint development of CA-T cells introduced by electroporation method MEDINET is researching and developing T cells that are genetically engineered with chimeric antigen receptors (CA-T cells) jointly with researchers at the Graduate School of Pharmaceutical Sciences, Osaka University (led by Professor Shinsaku Nakagawa), and others. In December 2016, academic journal Molecular Therapy Oncolytics published a paper on the basic research results on the method of engineering CA-T cells that target vascular cells newly formed in tumors, along with evaluations of the cells quality and functions. CAs (chimeric antigen receptors) are receptors that can specifically recognize cancer antigens, engineered by fusing antibody-derived fragments that specifically recognize cancer antigens with T cell receptors. According to the company, &D and clinical trials of CA-T cell therapy for vascular cancer have been actively promoted and commercial use is expected in a few years. On the other hand, development of CA-T cells targeting solid tumors has yet to show satisfactory results. In addition, for CA to be expressed in a lymphocyte, generally a CA gene is introduced via a viral vector, which may affect the original gene of the lymphocyte, raising concern over the safety of the technique for manufacturing CA-T cells. To solve these challenges, MEDINET has been jointly researching and developing the treatment of solid tumors using a new manufacturing method of CA-T cells, with Naoki Okada, associate professor of pharmaceutics at the Graduate School of Pharmaceutical Sciences, Osaka University, and others. The basic research showed success in making CA express itself efficiently in target cells without damaging those cells by using a technique of introducing mna (messenger NA: transmits genetic information on protein synthesis) through the electroporation method (EP method: uses high voltage to create a pore in a cell membrane in order to cause transfection or cell fusion). In murine solid tumor models, the research confirmed that cancer growth could be suppressed when lymphocytes with mna encoding CA recognized a molecule called VEGF2 (vascular endothelial growth factor receptor 2) and damaged tumor vessels to prevent tumors from absorbing oxygen and nutrients. Due to these basic research results, the company will further consider clinical applications. As the mna-ep method enables the expression of CA without changing the characteristics of T-cells, the company will continue development that may lead to new detection technologies and manufacturing methods of CA-T cells. 26/70

27 esearch eport by Shared esearch Inc. Patent granted for method for producing reagents for antibody detection In joint research with Junichiro Futami, associate professor at the Graduate School of Natural Science and Technology, Okayama University, and others, the company succeeded in developing a method for producing reagents for antibody detection and applied for patents in various countries (such as Japan, the US, and Europe). In 2017, it acquired patents in China, Singapore, Taiwan, and Japan. The patents cover a new detection method, which focuses on a phenomenon that occurs in cases where cancer treatments are effective. When cancer cells collapse, they release cancer antigens into the patient s blood, increasing amounts of various cancer antigens and antibodies in the blood. With conventional methods, it was difficult to detect the many cancer antigens and antibodies at once. By using the protein solubilizing method developed by MEDINET, it is possible to detect antibodies in the blood, and the change in the amount of cancer antigens and antibodies shown by this method can be an evaluation indicator for all cancer treatment methods. By showing the changes in immune responses of patients during treatment, this method allows the effects of cancer immuno-cell therapy to be measured in real-time. It also enables the confirmation of the efficacy of treatment using radiation and immune checkpoint inhibitors, and can be used as a companion diagnostic when choosing treatment methods. MEDINET plans to accelerate joint development of this method. 27/70

28 esearch eport by Shared esearch Inc. Earnings structure In FY09/17, MEDINET s main revenue source was the Immuno-Cell Therapy Total Support Service for medical institutions. The revenue structure of the service is as follows. However, in October 2017, MEDINET ended the Immuno-Cell Therapy Total Support Service agreements it had with medical institutions and replaced them with cell processing contracts. From October 2017 onward, it conducts cell processing under contract and books resultant sales in the Contract Cell Manufacturing Business segment under Contract Cell Manufacturing Business. evenues in the Immuno-Cell Therapy Total Support Service are mainly royalties paid by Contracted Medical Institutions, which offer immuno-cell therapy. In DC vaccine therapy, patients pay about JPY1.51mn 2.22mn for one course of treatment (given over six to twelve sessions; see below) directly to a Contracted Medical Institution, which performs the therapy. In NK-cell, gamma-delta T cell, alpha-beta T cell, and CTL therapies, patients pay about JPY270, ,000 for one session (see below). MEDINET receives part of the treatment cost as a royalty; the type of cell processing determines the royalty amount. The number of cell processing units determines sales volume. As the number of new patients receiving treatment grows, so does total volume. Note: The actual number of therapy sessions depends on the number of cells obtained in apheresis (i.e., one blood sampling session). In addition, six sessions are generally required to accurately evaluate therapeutic results. Cost analysis Gross profit Shared esearch estimates that the company s gross profit margin (GPM) is influenced by the utilization ratio of its cell processing sites. The company discloses the breakdown of the cost of sales on a parent-only basis. In FY09/17, the ratios of both consolidated-to-parent sales and consolidated-to-parent gross profit were 1.0x. Accordingly, Shared esearch recognizes that there is no large difference between the consolidated and parent cost-of-sales breakdowns. After peaking at 71.2% in FY09/09, parent-only GPM has been on a downtrend due to falls in sales and increases in labor costs and other expenses. The main components of the cost of sales in FY09/17 were labor costs (21.6% of sales on a parent-only basis), followed by various costs (18.6%) and material costs (13. 7%). The various costs included rent and depreciation. Changes in parent-only cost of sales FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Par. Act. Par. Act. Par. Act. Par. Act. Par. Act. Par. Act. Par. Act. Par. Act. Par. Act. Sales 2,798 3,075 2,554 2,101 2,048 1,793 1,631 1,853 1,655 Cost of sales , Cost ratio 28.8% 30.7% 36.0% 46.8% 50.8% 53.8% 58.4% 53.6% 53.8% Material costs % of sales 11.7% 12.1% 13.0% 14.4% 15.1% 14.8% 15.0% 15.6% 13.7% Labor costs % of sales 7.7% 8.7% 10.7% 13.4% 14.9% 18.3% 21.4% 18.9% 21.6% Various costs % of sales 9.4% 9.9% 12.3% 18.8% 20.8% 20.6% 22.1% 19.1% 18.6% Gross profit 1,992 2,130 1,635 1,117 1, GPM 71.2% 69.3% 64.0% 53.2% 49.2% 46.2% 41.6% 46.4% 46.2% Source: Shared esearch based on company data Figures may differ from company materials due to differences in rounding methods. 28/70

29 esearch eport by Shared esearch Inc. SG&A expenses The main component of SG&A expenses is &D and personnel expenses. MEDINET strategically spends about JPY mn a year on &D. At other companies, personnel is frequently the largest portion of &D expenses, and is a fixed cost. MEDINET, however, performs many of its research activities in cooperation with university hospitals, so in FY09/17 personnel accounted for only about 30% of &D expenses. Changes in SG&A expenses FY09/15 FY09/16 FY09/17 (JPYmn) Cons. Cons. Cons. Total SG&A expenses 2,415 2,542 2,571 SG&A-to-sales ratio 144.2% 133.1% 150.9% &D expenses % of sales 38.6% 31.6% 35.9% % of SG&A expenses 26.7% 23.7% 23.8% Personnel expenses Selling expenses % of sales 20.7% 23.9% 29.8% % of SG&A expenses 14.3% 18.0% 19.8% Personnel expenses General and administrative expenses % of sales 84.9% 77.6% 85.0% % of SG&A expenses 58.9% 58.3% 56.4% Personnel expenses Source: Shared esearch based on company data Figures may differ from company materials due to differences in rounding methods. Profitability snapshot, financial ratios Profit margins FY09/09 FY09/10 FY09/11 FY09/12 FY09/13 FY09/14 FY09/15 FY09/16 FY09/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Gross profit 2,018 2,173 1,680 1,153 1, GPM 69.6% 67.9% 62.8% 52.6% 48.6% 44.8% 40.2% 45.1% 45.1% Operating profit ,407-1,742-1,681-1,802 OPM 10.1% 10.4% EBITDA ,212-1,464-1,324-1,481 EBITDA Margin 14.4% 14.5% Net margin 8.5% 13.7% Financial ratios OA (P-based) 9.5% 7.6% -5.1% -9.3% -9.7% -12.1% -16.7% -22.0% -25.1% OE 8.3% 12.2% -11.6% -12.0% -4.6% -16.8% -22.0% -25.2% -46.0% Total asset turnover Inventory turnover Days in inventory Working capital (JPYmn) Current ratio 444.0% 433.3% 423.4% 366.6% 658.0% 512.9% 371.7% 346.1% % Quick ratio 352.1% 398.8% 398.9% 333.6% 627.7% 482.8% 327.4% 317.3% 956.3% OCF / Current liabilities 67.9% 72.8% -22.5% -26.4% -41.6% -79.5% % -87.0% % Net debt / Equity -41.8% -50.8% -1.1% 5.7% -12.4% -15.5% -19.7% -28.6% -46.3% OCF / Total liabilities Cash cycle (days) Change in working capital Source: Shared esearch based on company data Figures may differ from company materials due to differences in rounding methods. 29/70

30 esearch eport by Shared esearch Inc. Strengths and weaknesses Strengths Early mover advantage: One of MEDINET s strengths is the cell processing technology the company developed as a pioneer in the field of immuno-cell therapy. The company has been involved in immuno-cell processing for more than 15 years. According to MEDINET, technological expertise, not facilities or equipment, makes the difference in cell processing quality. The company has developed its cell processing technology by handling about 170,000 cases. Close cooperation with the Seta Clinic Group: The company has a strong relationship with the Seta Clinic Group. Since its establishment in Tokyo in 1999, the Seta Clinic Group has been successful and opened branches in several major cities, providing MEDINET with a stable operating base and enabling it to expand its operations. Immuno-Cell Therapy Total Support Service as revenue driver: The company has provided the Immuno-Cell Therapy Total Support Service and reported revenues from the service since before the November 2014 enactment of the Act on the Safety of egenerative Medicine. MEDINET aims to grow sales by expanding the range of its cell processing business over the medium and long term. Shared esearch recognizes that the company will not be starting from scratch as the solid revenue base of the Immuno-Cell Therapy Total Support Service means it has the advantage of being able to cover fixed costs. Weaknesses Dependent on the Seta Clinic Group: The Immuno-Cell Therapy Total Support Service is the core business of the company, and sales to the Seta Clinic Group accounted for 93.6% of FY09/17 sales (compared to 90.1% of FY09/16 sales). The Seta Clinic Group specializes in immuno-cell therapy using MEDINET s Immuno-Cell Therapy Total Support Service and has a close and stable relationship with the company. If the relationship worsens, or if the Seta Clinic Group incurs a fall in patients or has to close its clinics due to an unexpected accident or any other issues affecting the group, there could be a direct impact on MEDINET s performances. Possibility of fall in demand for the immuno-cell therapy due to substitute technologies: The biotechnology industry is quickly changing and expanding. Especially in cancer treatment, more and more new technologies are being studied and developed. If highly efficient medicinal products or technologies not used along with the immuno-cell therapy or remedies that may replace the therapy are developed, there may be no more need for the therapy. elatively high costs for patients: The Japanese National Healthcare Insurance does not cover immuno-cell therapy, so patients bear 100% of the treatment costs, approximately JPY1.5mn-2.1mn for one treatment course, which could be a large financial burden. 30/70

31 esearch eport by Shared esearch Inc. Main facilities Head Office (Shin-Yokohama) Eastern egional Office Western egional Office Shin-Yokohama Cell Processing Center Osaka Cell Processing Center Cell Processing Center in the Tokyo University 22nd Century Medical and esearch Center (inside the University of Tokyo Hospital) Shinagawa Cell Processing Facility Group companies The company group comprises MEDINET and two consolidated subsidiaries (as of end-september 2017; stake in parentheses). Institute of Medical Service Management, Inc. (100%): Leases medical facilities and offers consulting services for medical treatment and clinical management. MEDcell Co., Ltd. (100%): Cell medicinal products. Capital and business alliances MEDINET forms capital and technical alliances with biotechnology ventures in Japan and overseas. Key examples include: Tokio Marine & Nichido Fire Insurance Co., Ltd.: JPY1bn third-party convertible bond offering, with a view to possible cooperation in cancer treatment. NanoCarrier Co., Ltd.: Comprehensive cancer research alliance in October MEDINET also invested in NanoCarrier though a third-party stock offering in May 2010 and in December 2010 the company subscribed to a rights issue for NanoCarrier. MaxCyte Inc. (US): MEDINET and MaxCyte Inc. collaborated to develop the Cell Loading System and formed a capital tie-up in December According to MEDINET, this may provide the company with significant business opportunities in the future. The scope of technological license offered by MaxCyte Inc. expanded in April eprocell Inc.: MEDINET made an investment in September It accepted a third-party stock offering from eprocell Inc., expecting synergies from eprocell s technological know-how in the field of ES/iPS and somatic stem cells. Cell Science & Technology Institute, Inc.: MEDINET made an investment in September Cell Science & Technology Institute, Inc. develops and manufactures serum-free fluid medium for human cells that is indispensable for cell processing in immuno-cell therapy. MEDINET accepted a third-party stock offering in order to secure a stable framework for cell medium supply, and to accumulate basic technologies and expertise regarding cell medicine in general. PISM BioLab Co., Ltd.: An alliance in the field of protein-protein Interaction and peptidomimetic technology. EGiMMUNE Corp.: MEDINET made an investment in the company in January The two companies intended to combine their research networks to drive forward development of new areas for immuno-cell therapy, starting with NK T-cell therapy and other new cancer immuno-cell therapies. TC BioPharm Ltd.: Established in July 2013 as a joint venture with investors in Scotland to develop immuno-cell therapy using the patient s own cells. The venture is owned 50% by MEDINET and the rest by various investors. In February 2014, MEDINET and TC BioPharm formed a strategic partnership for the development and sale of cell-therapy products in the UK and other European nations. Under the alliance, MEDINET will provide TC BioPharm with further capital and a license on cell culture technologies. TC BioPharm will have access to MEDINET technologies and expertise that the Japanese company 31/70

32 esearch eport by Shared esearch Inc. acquired through joint research projects with the University of Tokyo. TC BioPharm will begin clinical trials on immuno-cell therapy for cancer treatment and seek to win approval in the UK and other European nations. TC BioPharm has been granted approval by the UK s Medicines and Healthcare products egulatory Agency (MHA) to commence clinical trials using the cell-culturing technologies licensed by MEDINET. TC BioPharm started the trials in December The trials are phase II/III trials that will evaluate the safety and efficacy of the immuno-cell medical product, ImmuniCell, to treat patients with malignant melanoma, lung cancer, and renal cancer. ImmuniCell was developed with cell processing technologies and expertise pioneered by MEDINET. The trials involve giving the patients ImmuniCell six times in three months and observing the effects of the product such as tumor shrinkage and progression-free survival (PFS) for the following 12 months. Patient enrollment is expected to be completed in December After data analysis, the trials are scheduled to end in July MHA has recognized the clinical trial and treatment results amassed by MEDINET at medical institutions contracted in Japan as part of MEDINET s Immuno-Cell Therapy Total Support Service, further confirming the safety of the cell-based medicinal product ImmuniCell. As such, the clinical trials in the UK commenced from phases II/III instead of phase I. MEDINET also has a 10% stake in Lymphotech Inc., a company in a similar line of business, and has invested in MASA Life Science Ventures, LP, a venture capital fund focused on biotechnology and life science. Business strategy project In addition, MEDINET participates in the University of Tokyo Hospital s 22nd Century Medical and esearch Center project. In February 2007, the company signed an agreement with the University of Tokyo Hospital to provide the Immuno-Cell Therapy Total Support Service. At the 22nd Century Medical and esearch Center s Department of Immunotherapeutics, MEDINET plans and designs research, and the company and related in-hospital departments use the cell processing center (CPC) and jointly conduct clinical research projects related to gamma-delta T-cell, DC vaccine, and other leading-edge immuno-cell therapy technologies. Once efficacy and safety are confirmed, applicable therapies will be put to practical treatment. In June 2012, the MHLW approved immuno-cell therapy with zoledronic acid induced γδt-cells as an advanced medicine. MEDINET was contracted to perform cell culturing, quality assurance, facility operation and management and other tasks related to this therapy. MEDINET thinks that clinical development at the 22nd Century Medical and esearch Center and other related activities will help increase physicians and medical institutions trust, recognition, and understanding of immuno-cell therapy, which will in turn help the company grow its business. Joint research In May 2014, MEDINET began joint research in partnership with Osaka University. The research was established as the Department of Immunology and egenerative Medicine, and is based in the Center of Medical Innovation and Translational esearch attached to the Graduate School of Medicine, Osaka University (a national university corporation). The joint research aims to establish a technology for settling transferred cells in the body, and uncover the causes of the chronic inflammation that affects cultivated cells when they are transferred, in addition to analyzing related substances. 32/70

33 esearch eport by Shared esearch Inc. Market and value chain Market overview The cancer immuno-cell therapy market: JPY300bn in 2030; JPY570bn in 2050 egenerative medicine and cell medicine are areas of potential growth. Cell medicine (sometimes included in a broader definition of regenerative medicine) is a state-of-the-art technology that provides treatment using patients own (or other people s) cells. The field of cell medicine can be broadly divided into two areas: regenerative medicine that aims to re-grow body parts such as cultured skin or cartilage, and cell transplant medicine that treats cancer or congenital diseases. In FY09/17, the company s main revenue driver was the Immuno-Cell Therapy Total Support Service. Cancer immunotherapy, which is covered by the total service, is deemed to be part of cell therapy. The market of cancer immuno-cell therapy in the regenerative and cell medicine market Source: Final eport Compiled by the Study Group on Commercialization and Industrialization of egenerative Medicine, Bio-Industry Division, Manufacturing Industries Bureau, Ministry of Economy, Trade and Industry (February 22, 2013), S Inc. esearch Source: Final eport Complied by the Study Group on Commercialization and Industrialization on egenerative Medicine, Bio-Industry Division, Manufacturing Industries Bureau, Ministry of Economy, Trade and Industry (February 22, 2013), S Inc. esearch egenerative medicine-related market to total JPY260bn in 2030 and JPY640bn in 2050 In the Contract Cell Manufacturing Business, MEDINET provides its Immuno-Cell Therapy Total Support Service, takes cell processing orders for clinical and experimental trials from companies, universities, and medical and research institutions, and provides related services, including the operation of cell processing centers (CPCs). According to a fiscal 2012 survey for supporting small and medium enterprises by Seed Planning, Inc. (a survey about industries related to regenerative medicine), announced in February 2013, the domestic market of industries related to regenerative medicine was JPY4.8bn as of The report expected that the market to expand, mainly for contract manufacturing, to total JPY260bn in 2030 and JPY640bn in Industries related to regenerative medicine Cell management services ,117 Product and cell delivery Contract manufacturing ,698 3,724 4,191 CPF validation, safety and maintenance Other services Drug research and cell screening Total ,596 5,661 6,448 Source: Seed Planning, Inc., Fiscal 2012 survey for supporting SMEs (survey about industries related to regenerative medicine) 33/70

34 esearch eport by Shared esearch Inc. Cancer is number one cause of death for Japanese people Since 1981, cancer has been the number one cause of death for Japanese people. According to the 2016 Vital Statistics of Japan by the Ministry of Health, Labour and Welfare (MHLW), there were 373,000 deaths attributable to cancer (compared to 370,000 in 2015), which accounted for 28.5% of all deaths in Japan (compared to 28.7% in 2014). According to a 2011 study by the Center for Cancer Control and Information Services (National Cancer Center), there were approximately 862,000 new cancer patients in Japan in 2013, compared to approximately 620,000 in 2003 (source: Cancer incidence and incidence rates in Japan ). According to MHLW s Patient Survey 2014, there were a total of 1.63mn cancer patients in Japan. By 2025, the number of new cancer patients per year is forecast to be over 920,000, with 390,000 deaths (source: White Paper on Cancer Statistics, 2012; Shinoharashinsha Publishers Inc.). Number of patients who received immuno-cell therapy is limited The number of patients who received immuno-cell therapy supported by MEDINET has been increasing every year, with approximately 170,000 units of processed cells as of end-september However, the total number of new patients per year has been about 2,000 a very small proportion of the above mentioned new cancer cases annually in Japan. (New cases are defined as the number of newly diagnosed cancer cases among the selected population over a certain period.) If immuno-cell therapy is less physically burdensome for patients and has demonstrated some effectiveness, why isn t it used more? As shown below, Shared esearch thinks obstacles to the wide use of immuno-cell therapy include the costs to patients, awareness on the part of physicians and medical institutions, and evidence of the treatment s clinical effectiveness. Lack of understanding and awareness on the part of physicians and medical institutions In order to increase demand for immuno-cell therapy, physicians and medical institutions that effectively control the treatment decision process for their patients need to consider immuno-cell therapy as a viable cancer treatment option. apid advances in the fields of immunology, molecular biology, and cellular technology during recent years meant that average clinical doctors find it hard to keep up with the newest trends and techniques. This means that physicians and medical institutions do not have sufficient awareness and understanding of immuno-cell therapy. Still, it is true that medical technologies are advancing and discussions regarding new medical procedures are progressing, pushing Japan s cancer therapy strategy toward a turning point. For example, even in traditional methods of cancer treatment, such as surgery, chemotherapy and radiotherapy, less invasive methods with less physical burden on patients are spreading (e.g., endoscopy, molecular-targeted drugs, particle radiotherapy). Furthermore, since individual treatments have their limits, the medical industry has recognized the need for team medical care (i.e., doctors in different fields serve a patient) and multimodality therapy. Accordingly, university hospitals and other medical institutions are increasingly shifting away from the traditional structure of vertically separated departments and moving toward a new structure more oriented to patients needs. Evidence concerning clinical efficacy of the immuno-cell therapy (effects of treatment) Given the problems discussed above, the company feels that it has to work on increasing awareness and understanding among physicians and medical institutions. This in turn necessitates the practice of evidence-based medicine (EBM), collection and formulation of clinical evidence, and communication of such evidence to the medical community via announcements and other means. The company works on developing new immuno-cell therapy technologies as well as improving existing ones. It also pursues joint clinical research with leading medical institutions, primarily university hospitals, in order to evaluate the obtained evidence and develop new treatment protocols. However, one problem facing immuno-cell therapy is that there are no established methods to scientifically evaluate its validity using generally accepted indicators. At the same time, existing evaluation methods used for chemotherapy and radiotherapy, such as ECIST (esponse Evaluation Criteria In Solid Tumors), do not show sufficient clinical results when applied to immuno-cell therapy. It is therefore vital to build quality evidence to widen acceptance of immuno-cell therapy, including establishing evaluation methods and criteria. Cost of therapy As of November 2017, immuno-cell therapy was not covered by medical insurance. Consequently, patients receiving the therapy bear the full cost themselves (see Business Model for details of treatment costs). Additionally, since laws prohibit combining 34/70

35 esearch eport by Shared esearch Inc. insured and uninsured care, it is difficult for patients receiving other treatments covered by insurance to receive immuno-cell therapy treatment. Medical institutions must make a clear distinction between immuno-cell therapy and insured medical care, even when offering them together. Combining insured and uninsured treatments: In such a situation, health insurance will not even cover treatments that would normally be covered. The patient must bear all medical fees. Per the Advanced Medical Evaluation System, the MHLW permits combining advanced therapeutic methods not covered by the national insurance with insured therapies on an exceptional basis. If immuno-cell therapy methods offered by MEDINET are admitted as such advanced therapies in the future, this may allow the therapy to be combined with methods covered by insurance. The result: an increase in the number of patients receiving immuno-cell therapy. Advanced Medical Evaluation System: Under Japan s medical treatment system, conducting uninsured care is prohibited within insured medical treatment. However, there is a system called the Advanced Medical Evaluation System where the MHLW permits combining new advanced therapeutic methods, which are delivered in a plan to be covered by the national insurance in the future, with insured therapies, on registration by medical institutions that meet requirements for each technology. As of September 2013, the ministry approved six kinds of medical technologies related to cancer immuno-cell therapy as advanced therapies. Introduction of therapy by patient request Under the new system of introducing advanced therapies requested by patients, when a patient hopes to be treated with an advanced therapeutic method, the doctor will confirm the safety and efficacy and will submit an application regarding the new technologies and other requirements to a core hospital for clinical research or the government, which will judge whether or not to approve a combination of insured and uninsured treatments. The revised Health Insurance Act outlines the legal framework for the new system, which was introduced in April Shared esearch believes that the new system may solve the issue of a prohibited combination of insured and uninsured treatments when it comes to immuno-cell therapy. Government actions to boost regenerative medicine/cell therapy Comprehensive 10-Year Strategy for Cancer Control In 1981, the MHLW launched the Comprehensive 10-Year Strategy for Cancer Control. In the Third-Term Comprehensive 10-Year Strategy for Cancer Control, which began in 2004, the ministry has positioned immunotherapy as a priority research area. Under the theme of dramatically reducing cancer patients and deaths attributable to cancer, the strategy focuses on improving the clinical efficacy of immunotherapy. This is likely to mean an increased possibility of research output to date being applied clinically. According to a survey by the MHLW (2010 Age-adjusted Death ates by Prefecture), age-adjusted death rates per 100,000 people (for all causes of deaths) were significantly improving due to advances in medical technologies. On the other hand, age-adjusted cancer death rates have not improved much, clearly indicating the limits of traditional cancer treatment methods. Growing hopes for regenerative medicine and cell therapy Immuno-cell therapy a biomedical technology for systemic treatment essentially without side effects and for treatments combining traditional therapeutic methods in any given phase is increasingly expected to become a leading-edge cancer treatment option for patients. In particular, there have been many reports indicating that the use of immuno-cell therapy in the initial phase of treatment to prevent relapse improves patients survival rates and recurrence-free survival rates. Expectations are also increasing for regenerative and cell medicine to become effective cancer treatments, following several Nobel Prizes in Physiology or Medicine in recent years. In 2011, alph M. Steinman, a scientist at ockefeller University in the United States, received the prize for his discovery of the dendritic cell and its role in adaptive immunity. In 2012, Shinya Yamanaka, a Kyoto University professor who developed induced pluripotent stem cell (ips cells), received the prize for his discovery that mature cells can be reprogrammed to become pluripotent. 35/70

36 esearch eport by Shared esearch Inc. Five-Year Strategy for the Promotion of Medical Care Innovation On June 6, 2012, the Office for Promotion of Medical Innovation (under the Cabinet Secretariat) formulated the Five-Year Strategy for the Promotion of Medical Care Innovation. This strategy is the roadmap stipulating specific policies to drive medical innovation. These policies include the promotion of medical service innovation and the world-first establishment of practical therapeutic models in regenerative, individualized, and other advanced medicine fields. Based on such policies, the strategy designates regenerative and individualized medicine and biopharmaceuticals as priority &D areas in oncology. The strategy aims to develop innovative pharmaceuticals in Japan and therefore promote non-clinical trials that are compliant with the Good Laboratory Practice (GLP). In addition, the strategy calls for clinical research and physician-led therapeutic trials that conform to international standards to discover new cancer immunotherapy methods (e.g., cancer peptide vaccines), antibody and other molecular target drugs, and nucleic acid drugs, all primarily for refractory and orphan cancers. Through these research and trials, about 10 drug candidates are expected to undergo clinical trials, and the goal here is to originate innovative cancer drugs in Japan within the five-year timeframe. Together with these drug candidates, the Office for Promotion of Medical Innovation intends to eventually establish standards for cell culturing facilities and build a framework to promote the practical application of regenerative medicine by giving consideration to differences between pharmaceuticals and regenerative medicine and by ensuring the same level of safety as under current pharmaceutical laws. MHLW aims to use regenerative medicine and cell therapy at medical institutions On March 30, 2010, MHLW issued an administrative circular, The Implementation of egenerative/cell Medicine Using Autologous Cells and Tissues by Medical Institutions. The document set the requirements to conduct regenerative/cell medicine at medical institutions. It also established criteria for cases where multiple medical institutions jointly offer immuno-cell therapy. These criteria effectively allow medical institutions that do not have their own CPC to legally provide the treatment by tying up with other medical institutions that own cell processing facilities compliant with safety standards. This will likely provide a strong boost for its business by providing additional incentives for medical institutions and by increasing the number of medical institutions using its services. The Act on the Safety of egenerative Medicine and the Act on Pharmaceuticals and the Medicals Devices (PMD Act) The Act on the Safety of egenerative Medicine and the Act on Pharmaceuticals and the Medicals Devices (PMD Act) were enacted on November 25, The enactment of these laws may have a significant impact on the company s earnings in the medium term. Act on the Safety of egenerative Medicine allows outsourcing of cell processing/culturing The Act on the Safety of egenerative Medicine allows medical institutions to outsource cell processing work to companies that have been approved by the Ministry of Health, Labour and Welfare. For the outsourcing of specified cell products (processed cells for other purposes than regenerative medicine), each processing and culturing facility is to receive MHLW approval or companies, registered for producing particular processed cells, shall undertake a duty to manufacture them. Standards relating to the quality management and safety policies of facilities are to be established separately from the law. Outsourcing is only licensed to companies that clear the quality management and safety policy standards at processing facilities under the Act on the Safety of egenerative Medicine. Shared esearch recognizes that the competitive environment will turn favorably for MEDINET, which has accumulated cell processing technologies since the dawn of immuno-cell medicinal treatment. MEDINET, which used to establish cell processing centers at client medical institutions, will no longer have to do so under the new system. The company may be able to reduce costs as a result. 36/70

37 esearch eport by Shared esearch Inc. Outsourcing cell processing under the Act on the Safety of egenerative Medicine Clinical research, and therapy not egenerative medicine products Act on the Safety of egenerative Medicine With regard to regenerative medicine provided as medical treatment, procedures for collection of cells and tissue, standards for medical institutions and standards for cell processing facilities are stipulated, thereby obtaining quality assurance. Act on Pharmaceuticals and Medical Devices (PMD Act) Stipulates standards for manufacturing facilities of regenerative medicine products to obtain efficacy and safety of products. *Based on the new law, the PMD is not applied to the outsourcing of cell culturing and processing carried out under the authority of a physician. Company's production facilities (approved facilities) Medical institutions (notified facilities) Company's production facilities (approved facilities) Cell or tissue collection Obtain cells Process and store Outsource Process and store Process and store Implementation (transplant) Purchase of approved products Scope egenerative Medicine Act PMD Source: Shared esearch based on Ministry of Health, Labour and Welfare materials The PMD Act s expedited approval system for regenerative medicinal products with conditions and a limited term The PMD Act contains two key points: egenerative medicine products are newly defined and regulated. Expedited approval for regenerative medicinal products with conditions and a limited term granted if safety and efficacy are confirmed. Under the PMD Act, regenerative medicine products are newly defined, and those who plan to produce and sell regenerative medicine products have to receive approval from the Ministry of Health, Labour and Welfare (MHLW) for each product. Under the new system, even if clinical data are limited, if safety can be confirmed and efficacy can be estimated, it will be granted expedited approval for regenerative medicinal products, with conditions and a limited term. The system will allow efficacy to be validated at the post-marketing stage. According to the Ministry of Health, Labour and Welfare, (MHLW), under the expedited approval system for regenerative medicinal products with conditions and a limited term, the period necessary to gain approval is expected be shortened by two to three years (compared with the former approval system). Shared esearch believes that this development will allow MEDINET to obtain approval to manufacture products for regenerative treatment and further expand its operations. 37/70

38 esearch eport by Shared esearch Inc. The PMD Act s expedited approval system for regenerative medicinal products with conditions and a limited term Approval path: conventional Problems when applying the conventional approval system to regenerative medicine products: Since products use patients own cells, quality is not uniform, reflecting individual differences. Hence, a long time is required to collect and evaluate data for confirmation of efficacy. Clinical research Clinical research (confirmation of efficacy and safety) Approval Marketing Approval system for early commercialization of regenerative medicine products Offer patients earlier access to medicine products Clinical research C linical research (confirmation of efficacy and safety ) Conditional/ time-limited approval Marketing Post-marketing v alidation of efficacy, further validation of safety Approval or lapse of conditional/timelimited approval Continued marketing eapplication within time limit Explanation of risks to patients and receipt of agreement. Post-marketing safety measures taken. Source: Shared esearch based on company materials Suppliers Culture medium (culture fluid) for cell culture and cell processing is one of the most important procured items. MEDINET mainly purchases culture media produced at Cell Science & Technology Institute, Inc. (a wholly owned subsidiary of NIPO COPOATION (TSE1: 8086)) via NIPO. Barriers to entry Immuno-cell therapy requires CPCs and cell engineers. Building the facilities is not a major obstacle. However, there are opportunities for differentiation in training technical personnel and accumulating cell culturing expertise. According to the company, its experience accumulated after processing around 170,000 units of cultured cells gives it an overwhelming competitive advantage. Under the PMD Act, companies seeking to win orders for cell processing work must either be approved by the Ministry of Health, Labour and Welfare or submit documents notifying the ministry of their plan to begin such operations. These companies must comply with safety standards concerning product quality and safety. Competition According to the company, the market for immuno-cell therapy is still in its infancy; it is not yet large enough for companies to fight over market share. Others in the same line of business are following the business model developed by President Kimura and Dr. Egawa over ten years. The company thinks that healthy competition is desirable because it gives patients more options. tella, Inc. (JASDAQ: 2191) Founded by Dr. Yazaki in The company focuses on its IMAX Cancer Treatment (maximum immunotherapy for cancer), which aims to kill cancer cells efficiently by combining chemotherapy and radiotherapy with a type of immunotherapy called Dendritic Cell (DC) Vaccine Therapy. Lymphotech Co. Ltd. Founded in April MEDINET holds a 10% stake. The company provides services for clinics that specialize in cancer treatment using activated autologous lymphocytes. 38/70