Analyst Report ReproCELL. Inc

ANALYST NET Company Report

ReproCELL, Inc. （4978 JASDAQ Growth) Published Sep. 4, 2015

1/25

This report is created by J-Phoenix Research Inc. (hereinafter JPR) simply for the purpose of providing information to the investors, not for soliciting any trading of securities. Although the report is

based on information and resources that JPR believed to be reliable, JPR does not guarantee against the accuracy, reliability, completeness, conformity or timeliness of any of the content. JPR shall not

be liable for any direct or indirect damage caused by the investors resulting from the use or reliance on the information contained herein. Investors are responsible for their own trading of securities and

other financial products. The intellectual property rights of this report belong to Toward the Infinite World, Inc. No part of this report may be reproduced, transcribed or cited without the written consent

of the company.

Step-by-step Progression toward Becoming the

Global Leader in Regenerative Medicine Business Step-by-step Progression to Become the No. 1 in B2B/Upstream

Regenerative Medicine Business

ReproCELL (RC) was founded in 2003 in order to establish a business based on the outcome

of regenerative medical research on stem cells performed at the University of Tokyo and

Kyoto University, the two foremost national institutions of higher learning. RC has developed

the cutting-edge technologies and has accumulated achievements in embryonic stem (ES)

cells and induced pluripotent stem (iPS) cells. One example is development of a culture and

other research reagents for Dr. Yamanaka of Kyoto University for his research on human iPS

cells. RC has also concentrated its management resources on R&D of cells such as

cardiomyocytes, neurons, and hepatocytes generated from iPS cells, which could help new

drug development, and has become the global first provider of those products. In the 11th year

since foundation, RC became profitable and was listed in the JASDAQ market in 2013. In

2014, the proceeds from equity financing were used to fund acquisition of three venture

companies (one in the U.K. and two in the U.S.A.). RC has thereby strengthened its

technological base to enhance safety and efficiency, diversity, functionality, and quality, and

mass production in iPS cell culture technology. RC has established itself in an attractive

position to aim at becoming the global No.1, through business expansion and accelerated

globalization, in the iPS cell business centered on research reagents and drug development

support, or, in other words, the B2B/Upstream domain of the regenerative medicine field.

According to RC’s Mid-term Management Plan, the target is to return to profit-earning in fiscal

2016 (ending March 31, 2017) and to generate close to ¥600 million in ordinary profit by fiscal

2017.

No.1 in B2B/Upstream + No. 1 in B2C/Downstream = No.1 regenerative Medicine

In Japan, the Act on the Safety of Regenerative Medicine, and the Pharmaceutical and

Medical Device Act, PMDA (renamed from the revised Pharmaceutical Affairs Law were

enforced on November 25, 2014). This new legislative framework is expected to accelerate

development of regenerative medicine business. In this environment, RC plans to enter with

full force into the regenerative medicine field and aims at becoming the global No. 1 in this

market, i.e., the B2C/Downstream field. In order to fund needed capital spending and

expenses of facility operation, clinical tests, and R&D, an allotment of new acquisition rights

to a third party (Evolution Biotec Fund) is scheduled on August 31 and RC is expected to

procure ¥2.2 billion.

Probability of realizing the aim, and market evaluation

RC has a clear ambition and a long-term step-by-step plan to become the No. 1 player first in

the B2B/Upstream segment, then in the B2C/Downstream market, and ultimately in the

overall regenerative medicine market. RC’s stock is expected to have a significant upside

potential. According to estimates by the Ministry of Economy, Trade and Industry, the

regenerative medicine market is estimated to grow to ¥2 trillion in 2020, ¥30 trillion in 2030,

and ¥53 trillion in 2050 (of which, ¥42 trillion is a relevant market for RC.) Assuming that RC

gains a 10% share of the relevant market and attains about 15% operating margin, and using

20% for cost of capital in calculating corporate value, the stock price could be valued at

around ¥1,500 on a fully diluted basis. While RC’s losses have expanded due to goodwill

amortization resulting from the acquisition of three companies and for other reasons, RC’s

stock price, currently at around ¥500, could have a substantial upside potential if it becomes

highly probable that RC will realize its strategies. RC’s stepwise evolution toward becoming

the global No. 1 company in the regenerative medicine market is worth paying close attention.

Basic report

J-Phoenix Research Inc.

Osamu Miyashita, CFA

Basic corporate data

Location Kohoku-ku,

Yokohama City

Representative Chikafumi

Yokoyama

Established Feb. 2003

Capital ¥3,815million

Listed June 2013

URL www.reprocell.

com

Industry sector Chemical

Employees 79 (parent)

Share information

as of Sep. 2, 2015

Stock price ¥507

52-week high ¥945

52-week low ¥469

Shares o/s 52,240,750

Trading unit 100

Market cap ¥26,486 mln

DPS (E) ¥0

FY2015 EPS (E) -¥9.53

PER (E) －

BPS (A) ¥131.75

PBR (A) 3.84

Fiscal term end Sales ¥mn

YOY ％

Operating profit ¥mn

YOY ％

Ordinary profit ¥mn

YOY ％

Net profit ¥mn

YOY ％

EPS ¥

Term-end closing share price ¥ High Low

March 2014 460 - -93 - -132 - -133 - -3.08 3,660 856

March 2015 567 23.0 -740 - -456 - -451 - -9.01 1,026 648

3 mo to June 2014 87 2.9 -68 - -39 - -41 - -0.85 1026 648

3 mo to June 2015 263 201.3 -216 - -112 - -108 - -2.08 710 645

March 2016 Est. 1,530 169.8 -555 - -495 - -495 - -9.53 - -

ReproCELL, Inc. (4978 JASDAQ Growth) Published Sep. 4, 2015

2/25





of the company.

RC’s technological prowess

was proven by providing

culture reagents and other

research to Dr. Yamanaka of

Kyoto University and

contributing to his

development of human iPS

cells in 2007

RC is dedicated to becoming

global No.1 in the iPS cell

business centered on

research reagents and drug

development support, or in

the B2B/Upstream of the

regenerative medicine

market.

■ Founded in 2003 to establish business based on the outcome of

regenerative medicine research at University of Tokyo and Kyoto

University

With the aim of establishing next-generation medical business centered on cell

technologies, ReproCELL was founded in February 2003, using the

technological seeds of two researchers: Professor Norio Nakatsuji, Ph. D., who

then was the Director of the Institute for Frontier Medical Sciences, Kyoto

University, and Professor Hiromitsu Nakauchi, M.D., Ph. D., who is the Director

at the Center for Stem Cell and Regenerative Medicine, Institute of Medical

Science, the University of Tokyo. RC’s technological prowess was proven by

providing culture reagents and other research reagents to Professor Yamanaka

of Kyoto University and contributing to his development and culture of human

iPS cells in 2007. Since 2009, RC has concentrated its management resources

in R&D and has successfully launched the world’s first production and sales of

iPSC-derived cardiomyocytes, neurons, and hepatocytes, which help drug

development. RC’s culturing technology for iPS cells is at the leading edge in

the world. It turned profitable in the 11th year since its founding and was listed in

the JASDAQ market in fiscal 2013. The proceeds from the increased capital

were then used in acquiring three bio-venture companies in fiscal 2014. Those

acquisitions have helped further enhance RC’s technological base for the

enhancement of safety and efficiency, diversity, and function and quality of

products and services in iPS cell culturing technology. Moreover, they have

contributed to attainment of a global customer base and a structural base for

cross selling. Therefore, RC is well positioned by now to aim to become global

No. 1 in the iPS cell business centered on research reagents and drug

development support, or in the B2B/Upstream business of the regenerative

medicine field.

History and business portfolio

History


3/25





of the company.

2003 · ReproCELL Inc. is founded

· Joint research agreement with Institute of Medical Science of

the University of Tokyo and Kyoto University

2005 · Began production and sales of culture reagents, dissociation

solution, and freezing for human ES cells

2006 · Registered as a Sanitation Inspection Facility and began doing

assay service business

2007 · Professor Shinya Yamanaka, Kyoto University, succeeded in

establishing the world’s first human iPS cells. RC’s culture

reagents were used to establish and culture human iPS cells

2009 · Began production and sales of the world’s first human

iPSC-derived cardiomyocytes

2010 · Began production and sales of the world’s first human

iPSC-derived neurons

2011 · ReproCELL USA Inc. was established as a subsidiary

· Began production and sales of a new feeder-free culture

ReproFF2, to be used for human ES/iPS cells

2012 · Launch of the world’s first human iPSC-derived hepatocytes

and human iPSC-derived neuron model cells for Alzheimer’s

disease

2013 · Listed on the Osaka Securities Exchange (present Tokyo Stock

Exchange) JASDAQ Growth Market

· Established RC Partners, Inc., RC’s affiliate to invest in

unlimited liability partnerships of the venture capital fund “Cell

Innovation Partners, L.P,” that focuses on the creation of

next-generation pharmaceutical and medical businesses

2014 · Acquired Reinnervate (U.K.), which is engaged in

development, production, and sales of 3D culture devices, and

made it RC’s consolidated subsidiary

· Acquired BioServe (U.S.A.), engaged in human tissue banking

and its provision, and made it RC’s consolidated subsidiary

· ReproCELL USA, RC’s subsidiary in the U.S.A., acquired the

iPS cell business unit (engaged in production and sales of

research reagents for iPS cells) of Stemgent (U.S.A.)

2015 · A national patent on culture method of hematopoietic stem cell

was approved

· Entered into a collaborative research agreement with Japanese

National Cancer Center concerning human epithelial cell and

cancer cell culture reagents

· Began sales of “ReproCryo DMSO free”, a new freezing

medium for human ES/iPS that is optimal for use in


(Source: ReproCELL’s Securities Report)


4/25





of the company.

■ Positioned to aim to become the global No.1 in the B2B/Upstream of the

regenerative medicine market

RC can be said to have already established the No. 1 position in ES/iPS cell

culturing technology in Japan. RC’s business portfolio is as follows.

Business iPS Cell Business Clinical Assay Service

Business Research Reagents Cell Products

Product Research reagents for

human ES/iPS, coating

agent, etc.

Human iPS-derived functional

cells, such as for

cardiomyocytes, neurons,

and hepatocytes. Used in

drug discovery screening.

Provide assay services

specialized in bone-marrow

transplant and organ

transplant. HLA typing test,

anti-HLA antibody test, and

others.

Features Commercialized the

leading-edge culturing

technology of Kyoto

University. By using RC’s

research reagents, Professor

Yamanaka established the

first human iPS cells for the

first time in the world.

The world’s first

commercialized iPS cells.

Drew attention from the world

as a way to replace animal

experiments.

A niche market that large

analysis companies are

unlikely to be engaged in.

RC has a full lineup in

transplant-related assay

services and is in alliance with

major companies.

Present

and

outlook

Began in 2005. Services a

clear majority of ES/iPS cell

researchers in Japan. RC’s

major products at present.

Plans overseas expansion.

RC’s medium- to long-term

strategic area. Some

pharmaceutical companies

began technical assessment

of this area. Has a potential to

be a main player in the future

drug development

technology.

Began in 2006. Received

orders from over 100

institutions.

(Source: ReproCELL’s Result Briefing Material, with additional notes by JPR)

RC’s research reagents are

widely used by a vast

majority of ES/iPS cell

researchers in Japan, who

■ Becoming the global No.1 in research reagents for EP/iPS cell culture

RC’s business is broadly divided into the iPS Cell Business and the Clinical

Assay Service Business. The iPS business forms the core of the business base

in aiming to become the global No. 1 in the B2B/Upstream segment of the

regenerative medicine field. The iPS business can be further divided into

research reagents and cells products. Research reagents are widely used by a

vast majority of ES/iPS cell researchers in Japan, who are leading the world in

regenerative medicine. RC supplies a complete set of reagents needed for

Business portfolio

iPS Cell Business：

Research Reagents

Took over the No. 1 position in ES/iPS cell culture technology in Japan


5/25





of the company.

are leading the world in


Becoming No.1 in research

reagents in EP/iPS cell

culture by using its

globalized customer base,

through acquisition of three

companies

culturing ES/iPS cells (see graph below.) From 2015, the broadened customer

base, due to the acquisition of three companies, is enabling RC to expand sales

worldwide. RC and aims to become the global No. 1 in sales of research

reagents for culturing EP/iPS cells.


Use of iPS cells in preclinical

tests brings us closer to an

ideal drug development

process

■ Produce human iPSC-derived cardiomyocytes, neurons, and

hepatocytes and sell them mainly to pharmaceutical companies

In addition to cell products, RC also sells specialized culture media, coating

agent, and others as a set. They are used by pharmaceutical companies to

effectively conduct efficacy evaluation and toxicity assessment of new drug

candidate compounds. Using those cell products, RC also provides the

subcontracted service business to conduct the requisite in-house medicinal and

toxic testing.

Pharmaceutical R&D is a process of ultimately discovering a new drug out of

from the library of hundreds and thousands or even millions of compounds

owned by each pharmaceutical company, through screening by various efficacy

and toxicity testing. R&D processes are divided into exploratory research,

preclinical test, and clinical test. During clinical tests, the candidate compounds

for a new drug are administered to subjects. However, use of iPS cells in

preclinical tests allows a drug development process to be closer to an ideal one

(see graph below.)

Coating agent

Culture

medium

Contains matrix

needed for plate cells

when preparing cell

culture. Used for

coating of flasks and

dishes prior to plating

cells.

.

Dissociation

solution

Used to culture

cells. Depending

on cell species,

various types of

culture media are

used.

Used to detach cells

from a culture plate.

Used for

cryopreservation of

cells.

Freezing

medium

iPS Cell Business:

Cells


6/25





of the company.

hiPSC-Cardiomyocytes

hiPSC-Neurons


■ Human iPSC-derived (hiPSC-) Cardiomyocytes: Contribute to high

throughput screening of cardiotoxicity testing

RC developed pulsating cardiomyocytes made of human iPS cells and

commercialized it for the first time in the world in 2009. Cardiotoxicity of drugs

can be life-threatening through critical side effects and cardiotoxicity testing is

required for all drugs. Use of the pulsating cell lines in safety tests allows us to

see complex responsiveness to the drug. Moreover, RC developed a 96-well

plate, which enables 96 types of drug to be tested at once, resulting in a

significantly high efficiency in throughput screening, compared to animal

experiments, with drastic reduction in the necessary cost and time.

■ hiPSC-Neurons: Contribute to drug development for treating

Alzheimer’s disease and Parkinson’s disease

RC succeeded in developing various neurons derived from human iPS cells and

became the world’s first provider of iPS-derived neurons. The number of

patients who suffer from Alzheimer’s, Parkinson’s, and other neurodegenerative

diseases has been rising together with the aging of populations. This problem

needs to be addressed. Development of drugs for neurodegenerative diseases

ideally uses human neurons as experiment materials. However, it is difficult to

obtain them. With RC’s neurons, the experiments can be conducted efficiently.

RC’s line-up includes cerebrum cells as assessment material for Alzheimer’s

disease and mesocephalon cells for Parkinson’s disease.

Further, RC launched the world’s first hiPSC-derived Alzheimer’s disease model

neurons, utilizing gene modification technology, in 2012. Such products can be

Significance of supporting drug development with iPS cells

= To pursue an ideal drug development process

It is ideal to use human cells in preclinical tests but it is difficult to

obtain a supply.as it must rely on donors. That is why cancerous cells

or animal experiments are often used.

Use of human iPS cells in the drug development process enables

overcoming the problem of interspecies difference (i.e., different

reactive characters of humans and animals) and the challenge of

stable supply.


7/25





of the company.

hiPSC-Hepatocytes

valuable tools for researchers for drug screening and discovery in the field of

neurodegenerative disease research.

■ hiPSC-Hepatocytes: Contribute to assessment of drug-induced

hepatoxicity and effect on metabolism of the liver

RC launched the world’s first commercial hiPSC-hepatocytes in collaboration

with the National Institute of Biomedical Innovation in 2012. Most of the

administered drugs are processed in the liver. Therefore, examination of drug

metabolism in the liver and hepatotoxicity is required for new drug development.

At present, hepatocytes from deceased donors are most used for the tests but

there are issues of supply and lot-to-lot variations, resulting in difficulty in

obtaining reliable reproducible results. Therefore, RC’s hiPSC-hepatocytes are

promising as they represent virtually limitless supply and consistent

batch-to-batch characteristics.

■ Supplementary business in regenerative medicine

RC offers assay services specializing in bone-marrow transplant and organ

transplant treatments. Blood or serum samples are transported from medical

institutions to RC’s sanitation inspection facility for assay services. This market

is expected to grow in line with the expansion of the regenerative medicine

market.

■ iPS Cell Business representing the most part of sales

In fiscal 2014, the IPS Cell Business represented a large portion of sales. In

fiscal 2015, sales are expected to increase by about three times from ¥500

million in fiscal 2014, due to the acquisition of the three companies. As they are

all engaged in the iPS Cell Business, this business segment will further raise its

share of the business.

Fiscal 2014 sales (¥5.67 million)

(Source: ReproCELL’s Securities Report, prepared by JPR)

■ Post-acquisition iPS Cell Business segment in fiscal 2015

The iPS Cell Business segment sales forecast for fiscal 2015 can be further

divided into the drug development support and the basic research (including

research reagents.) Each sub-segment roughly represents a half. The regional

sales breakdown appears to be well-balanced globally. It can be regarded that

iPS Cell

Business,

¥5.07mn,

90%

Clinial

Assay

Service

Business, …

Clinical Assay

Service Business

Segment

Information


8/25





of the company.

RC has established a customer base to globalize its domestic No. 1 position in

the B2B/Upstream portion of the regenerative medicine area through cross

sales.

Estimated Fiscal 2015 Sales Contribution of the iPS Cell Business

Segment

(Source: ReproCELL’s Presentation Material, prepared by JPR)

■ A global network with worldwide prominent universities

Having leading-edge technologies which support research on ES/iPS cell

culturing, RC is aggressive in undertaking joint research with prominent

academic institutions, which includes Harvard University and MIT, in addition to

the University of Tokyo, Kyoto University, and Keio University. Such

relationships with those research universities helps drive RC toward becoming

global No. 1 in the B2B/Upstream portion of the regenerative medicine area.

RC’s network with joint research partner academic institutions

(Source: ReproCELL’s Securities press release)

Drug

development

support, 47%

Basic

research,

53%

Japan, Asia,

35%

U.S.A., 55%

Europe, 10%

Network with

worldwide research

institutions

Tokyo

Univ. Harvard

Univ.

MIT

Keio

Univ. Kyoto

Univ.

Durham

Univ.


9/25





of the company.

First step to be No. 1:

B2B/Upstream ties with

research institutions

↓

Second step: B2B/Upstream

ties with pharmaceutical

companies

↓

Third step: Establish the

leading technologies in

terms of safety and

efficiency, diversity,

functionality high quality,

and mass production

capability

■ Take a three-step approach to become global No. 1 in the

B2B/Upstream domain

RC intends to take a three-step approach to become the global No. 1 in the

B2B/Upstream domain.

■ First step: No. 1 in the B2B/Upstream domain, targeted to research

institutions

The first step is to become the No. 1 provider to research institutions. Being

the front runner in regenerative medicine research in Japan, most researchers

use RC’s research reagents for ES/iPS cells. At present, RC’s operations are

becoming more global with the acquisition of three overseas companies. RC

intends to solidify its position by doing joint research with prominent research

institutions overseas and aims to become the global No.1.

■ Second step: No. 1 in the B2B/Upstream domain, targeting the

pharmaceutical companies

The second step is to become the No. 1 provider to pharmaceutical

companies. RC has already developed the world’s first iPSC-derived cardio-

myocytes, neurons and hepatocytes, which are essential to support drug

development. By globally selling those cells together with research reagents

as a kit, RC plans to secure the global No. 1 position in the B2B and upstream

domain, targeting the pharmaceutical companies.

■ Third step: Establish the leading technologies in terms of safety and

efficiency, diversity, high functionality and high quality, and mass

production capability

The third step is to establish the No. 1 technologies for iPS cell culture in

terms of safety and efficiency, diversity, high functionality and high quality, and

mass production. For all these aspects except mass production, the

technological base of the three acquired companies is expected to contribute

greatly.

Vision of stepwise evolution toward No.1 in B2B/Upstream + No. 1 in B2C/Downstream

= No.1 regenerative medicine

Stepwise evolution to

be the global No.1 in

B2B/Upstream

business


10/25





of the company.

Enhan-

cement

of base

by the

three

com-

panies

Better safety and efficiency

More diversity

(Help reduce drug

development testing time)

High functionality and high

quality

The cutting-edge iPS cell

reagent company in the

U.S.A. Its advanced mRNA

Reprogramming method

enables production of iPS

cells in an efficient, safe way,

which is more similar to

clinical applications.

Production efficiency could

improve by 100-1,000 times

compared to conventional

methods.

One of the largest

commercial human tissue

banks in the world. Stocked

with more than 600,000

human tissues, DNA, and

serum samples. Provide to

over 700 affiliated medical

institutions in the world

tissues for their biorepository,

from human biological

samples of over 120,000

patients.

Leading the rapidly growing 3D

culture market, enabling

creation of sterical cells, which

are closer to ideal conditions

than 2D cell culture. It has

received much attention as a

new technology in the realms

of iPS cell and regenerative

medicine and has been used

by academic and corporate

researchers for screening in

drug development and

academic research.


Stemgent’s mRNA

Reprogramming eliminates,

in theory, risk in rewriting

DNA and when generating

iPS cells.

■Stemgent: Contribute RC to become No.1 in safety and efficiency

Using their cutting-edge mRNA Reprogramming method, Stemgent deploys

efficient, highly safe technologies to generate iPS cells without doing genetic

manipulation (see graph below). This method is 100-1,000 times more

efficient than conventional methods in generating iPS cells. In addition,

Stemgent has the technology of highly efficient and high-quality differentiation

by means of specialized chemical technology. This is used to induce neuron

or cardiomyoctye differentiation of iPS cells. Conventional methods are gene

manipulation, meaning to apply technologies to rewrite DNA, in generating

iPS cells. This, however, may potentially generate cancerous cells. In

contrast, mRNA Reprogramming, in theory, does not rewrite DNA of the target

cell, whereby there is no theoretical risk in rewriting DNA and of generating

cancerous cells. Stemgent’s technologies provide a strong technological base

for RC to become the global No. 1 in iPS cell technologies in terms of safety

and efficiency.

Three acquisitions to enhance the technological base for safety and efficiency, diversity,

and high function and high quality.

Global customer base and cross-sale capability have also been enhanced.

iPS Cell Business forcued on research institutions and drug developers

= Toward becoming No.1 in B2B/Upstream in regenerative medicine

すなわち再生医療分野の「B2B・上流」において世界 No.1 へ


11/25





of the company.

Bioserve’s human tissue

bank has dramatically

improved RC’s diversity in

iPS cells

(Source: ReproCELL’s Presentation Material)

■ Bioserve: Contribute to ensure No.1 in diversity

Bioserve is one of the largest commercial human tissue banks in the world,

stocked with more than 600,000 human tissue, serum, and DNA samples. It

provides those samples to universities and pharmaceutical companies. Such

a repository can be used for creating iPS cells with various features and

diverse disease record. By using multiple hiPS-Cardiomyocytes, neurons, and

hepatocytes with diverse features and diseases all at once, the time to be

spent on efficacy analysis, cardiotoxicity testing, and drug-induced effect

testing of the metabolism of the liver by pharmaceutical companies can be

reduced dramatically. Bioserve’s human tissue bank has dramatically

improved RC’s diversity in iPS cells, helping RC to aim at becoming the global

No.1 in this field.

mRNA Reprogramming Kit

Comparison in efficiency and safety of various

methods for generating iPS cells

Efficiency

Safety mRNA Reprogramming method is 100-1,000 times

more efficient in generating iPS cells, compared to

conventional methods, and has a high level of

safety, closer to clinical applications, with no gene

integration.


12/25





of the company.

Reinnervate’s 3D cell culture

technology contributes to

ensuring attainment of a

position as No. 1 in high

functionality and high quality


■ Reinnervate: Contribute to ensure being No.1 in high functionality and

high quality

Reinnervate is leading the rapidly growing 3D culture market. Its 3D culturing

technologies enables creation of sterical cells, which are closer to actual

ones, compared to 2D cultured cells that are cultured in ordinary flat culture

dishes. The technologies are also capable of culturing in near-vivo

environment and closer to ideal conditions than 2D cell culture. This also

means that it is easier to obtain near-vivo results than in the case of vitro

culture. It has received much attention as a new technology in the realms of

iPS cell and regenerative medicine and has been used by academic and

corporate researchers for screening in drug development and academic

research.

One of the largest commercial human

tissue banks in the world

Stocked with more than 600,000 human biological samples, from over 120,000 patients who gave informed consent and over 700 affiliated medical institutions in four continents. These samples are provided according to the relevant disease or organ for research purposes, such as preclinical tests and drug development, and for other applications.

USA Europe Africa

India Asia

Australia


13/25





of the company.

Technology to generate iPS

cells from blood cells, which

is easier to extract than

epidermis cells, ensures RC

to be No. 1 in mass

production


■ Generating iPS cells from blood cells: Contributing toward becoming

No. 1 in mass production

Based on the interviews at the company, RC is particularly focused on the

technology to produce iPS cells from blood cells. iPS cells are generated by

introducing genes in epidermis cells or blood cells to iPS cells. As blood cells

are easier to extract than epidermis cells, the technology to generate iPS cells

from blood cells will greatly facilitate mass production.

In addition, a joint research undertaking with Tokyo Women’s Medical

University on a mass production system of hiPSC-Cardiomyocytes is also

expected to help the advance toward mass production.

Side imaging of cells (fibroblasts) grown in 2D

and in Alvetex® Scaffold

Alvetex® enables the cell to retain its natural spherical shape and preserve more functions.

２D Culture VS 3D Culture

２D Culture ３D Culture


14/25





of the company.

Joint research with Tokyo Women’s Medical University on

a mass production system of hiPSC-Cardiomyocytes


■ The next three steps to become the global No. 1 in the

B2C/Downstream market

In Japan, the Act on the Safety of Regenerative Medicine, and the PMDA Law

were enforced on November 25, 2014. This new legislative framework is

expected to accelerate development of regenerative medicine business, as

regenerative and other products can be allowed to be used provided that the

risks were explained to the patients, the patients gave their consents, and

safety measures were ensured (see below).

Revised approval system (conditional temporary approval) corresponding to

practical use of regenerative and other devices


Stepwise evolution

toward the global

No. 1 in the

B2C/Downstream

market

50 culture plates 1 reactor 5 reactors 50 reactors

Stable mass production of cardiomyocytes, using 100ml reactors (culturing

devices)(Chosen to receive a Yokohama City subsidy for leading businesses)

100 reactors/mo 1,200 reactors/mo

(Worth approximate sales of) ¥150mn

500 reactors/mo

6,000 reactors/mo ¥700mn

1 reactor for 100ml solution (Production capacity of 50

plates) Future

Current

The aim is to gain a significant increase in production capacity by connecting

reactors in RC’s present manufacturing space. This is enabled by the reduction of

space required for reactors.

5,000 reactors/mo 60,000 reactors/mo

¥7,200mn

Previous procedure flow for product approval

Clinical trial (confirming efficacy and safety) Approval Launch

Clinical trial

(estimating efficacy and confirming

safety)

Conditional & Limited approval

Conditional Launch (examining efficacy and more safety)

Revised procedure flow for product approval, corresponding to practical use of regenerative and other devices

Re-application

for approval

within 7 years,

in principle

Approval (or

expiration of

conditional

temporary

approval)

Launch

Clinical

Research

Clinical

Research

Explain risks to the patients, receive their consents, and ensure post-launch safety measures


15/25





of the company.

In this environment, RC intends to fully enter into the regenerative medicine

market and aims to become the global No. 1 in the B2C/Downstream market.

The three steps to accomplish this are described below.

(Source: ReproCELL’s Press Release)

First step: Develop

business of culture media

and reagents

↓

Second step: Develop cell

drugs, using somatic body

cells

↓

Third step: Develop cell

drugs, using iPS cells

■ First step (Step3-1): Develp business of culture media and reagents

RC already possesses the world’s leading-edge know-how in iPS cell culture

technology for the B2B/Upstream market. Such know-how will be used to

enhance the global B2C target market in regenerative medicine. Through

equity financing, the establishment of safety, quality, test system, and clinical

research system will be funded. The market size of this segment is projected

to be ¥90.1 billion in 2020 and ¥3 trillion in 2050. This will be the first area to

start up. RC will concentrate on this step, which is likely to be executed

concurrently with the abovementioned third step for B2B/Downstream.

■ Second step (Step3-2): Develop cell drugs, using somatic body cells

RC set up a joint venture fund for regenerative medicine with Shinsei Bank in

2015. One of the targets of this fund is to gain access to complimentary

technology in the field of somatic stem cells, which will be critical for RC to

enhance its comprehensive technology in regenerative medicine. As

described later in more detail, the derivation technology enables iPS cells to

be differentiated into somatic stem cells, which are then differentiated into

somatic body cells. Therefore, the enhanced technology in somatic stem cells

is indispensable for RC’s targeting the global No. 1 position in regenerative

Stepwise evolution

toward being global

No. 1 in

B2C/Downstream

■Road map toward regenerative medicine (Step 3) ■How to develop ■Global market size (estimate)

Y2020 Y2050

Develop cell drugs

that utilize iPS cells

Develop cell drugs

that utilize somatic

stem cells

Develop culture and

research reagents for

regenerative

medicine

Apply the RC Group’s

advanced culture

technology

Technological alliance

with firms invested by

a joint venture fund

“Cell Innovation

Partners, L.P.”

Develop cell drugs

that utilize iPS cells

¥1,089.7bn ¥38,448.7bn

¥90.1bn ¥3,374.9bn

Source: 2012 Report on the Survey to Support

Small/Medium-Sized Companies (Survey

administration concerning commercialization and

industrialization of regenerative medicine)

Time

Business

scale


16/25





of the company.

medicine based on iPS cell technology. Somatic stem cells are closer to

somatic body cells. They are ahead of iPS cells in terms of safety verification

and probably future market expansion. This gives another reason for RC to

strengthen technology concerning somatic stem cells.

R&D efforts of the invested firms are projected to lead to establish business operating

companies after 5-7 years from the initial investment.


■ Third step (Step3-3): Develop cell drugs, using iPS cells

The third step is to promote development of cell drugs using iPS cells. Due to

its pluripotency or high proliferative capacity, iPS cells can be generated from

adult cells. However, much clinical research is needed to ensure safety before

commercial application can be done. It could take many years. That is why

RC focuses on areas where steady market growth is foreseen: development

of culture media and reagent products, and then, establishment of business in

somatic stem cells, which are expected to be launched first. Finally, RC will

expand into the business of iPS cells, with the objective of becoming global

No.1 in regenerative medicine. Their strategic roadmap is well outlined with

realistic understanding of the prospects of each business.

Fund investors (Closed in March 2015) ReproCELL, Shinsei Bank, SMBC Strategic Investment Fund 2

Limited Liability Partnership, One operating company

Fund size: ¥900mn

Venture firms related to iPS cells and


Venture firms related to iPS cells and


Acquire new technologies through investment medicine

ReproCELL & Shinsei Bank Group

Joint venture fund

“Cell Innovation Partners, L.P.”


17/25





of the company.

Equity financing on August

31 for investment needed to

expand to the

B2C/Downstream market

Successful financing opens

up the road roward a No.1 in


■ Financing through new share acquisition rights, due August 31, to

accelerate forward on the road toward a No.1

RC plans to procure ¥2.2 billion by issuance and allotment of new share

acquisition rights to a third party (Evolution Biotec Fund) on August 31, 2015.

The proceeds from this equity financing will be used to establish the testing

and clinical research system that ensures the level of safety and quality

required in the B2C/Downstream regenerative medicine market. There are

three specific investment projects, as follows.

① Expenses for facility investment and maintenance to comply with

GMP Guidelines

¥440 million will be used for expenses to comply with the Good Manufacturing

Practice (GMP) Guidelines for pharmaceuticals and quasi-pharmaceuticals.

This is to ensure that products will be consistently produced and controlled

basedon the quality standards. RC must conduct clinical trials in order to

launch reagents and cell products for regenerative medicine in the market.

② Expenses for clinital trials, using the revised approval system, to

accelerate business development

¥1.32 billion will be used for expenses of clinical trials to utilize a revised

procedure flow for product approval, which allows conditional sale of a

product, that has been given conditional or temporary approval, after a

shortened clinical trial using human subjects. Within Japan, the process has

been revised as such after the enforcement of the Act on the Safety of

Regenerative Medicine, and the PMDA Law.

③ R&D expenses for raising reagents and cell products to clinical

grade in compliance with GMP Guidelines

¥440 million will be used for R&D expenses to ensure a higher level of efficacy

and safety by reviewing existing materials and re-designng optimal cell

generating process. For development of reagent and cell products for

regenerative medicine, RC is required to upgrate not only production facilities

but also reagents and cells to the clinical grade in compliance with GMP

Guidelines.

Successful financing and execution of the above investments will pave the

way for RC to advance toward becoming global No. 1 in the B2C/Downstream

market, based on their position as global No. 1 in the B2B/Upstream market,

and ultimately becomin global No. 1 in the regenerative medicine field (see

below).

Financing to help

accelerate the

advance on the road

toward No. 1


18/25





of the company.

Road toward global No. 1 in the regenerative medicine field

(Source: JPR)

Toward global No. 1 in the B2B/Upstream market

Toward global No. 1 in the B2B/Upstream market

Established Japan’s No.1 position in the B2B/Upstream market. Globalized

with three acquisitions and enhanced technological base

Getting close to achieve the global No. 1

Equity financing on August 31:

Execute investment needed to expand to the B2C/Downstream market

Implement 3 steps toward global No. 1 in the B2C/Downstream market


19/25





of the company.

The objective of regenerative medicine is to regenerate human body cells that constitute neurons, heart, liver, and other organs. There

are three methods for generative medicine (see the graph below). The first method is to use stem cells, directly extracted from neurons,

the heart, or the liver. This is a highly safe method as actual human cells are used. However, proliferation of stem cells is limited and the

application potential is low. The second method is to use somatic stem cells that are differentiated from stem cells. The human body has

somatic stem cells that are differentiated ultimately to neurons or the heart. This method is to extract them from a human and those cells

are differentiated, proliferated, and used for regenerative medicine. This is a relatively safe method but extraction of somatic stem cells

can be extremely difficult, depending on the position of an organ, such as neurons or the heart, leading to challenges in application

potential. The third method is to use ES/iPS cells. By properly being differentiated and derived, ES/iPS cells can be established as

various somatic stem cells and ultimately as somatic body cells. They can also be proliferated, meaning very high application potential.

However, there may be significant safety issues as they are engineered. The third method can be most promising in terms of market

potential if safety is ensured, which, however is expected to take quite some time. Considering safety, the method involving use of

somatic stem cells, which utilizes the same technology as in case of iPS cells, is anticipated to be commercialized sooner. Based on the

above viewpoints, having both the somatic cell technology and the iPS cell technology is extremely important to ensure competitive

advantage in the regenerative medicine market.

Three methods for regenerative medicine and their safety and application potential

(Source: Prepared by JPR, based on the Company hearing)

(Reference) Overview of regenerative medicine: Relationship of the somatic stem cell technology and

the ES/iPS cell technology

Blood cells

Epidermis cells

iPS cells

Stem cells to differentiate to cardiomyocytes

Stem cells to differentiate to neurons

Stem cells to differentiate to hepatocytes

Stem cells to be used at a final stage

(Cardiomyocytes, neurons, hepatocytes)

ES cells

Fertilized egg

→Blastocyst

Culture

Engineer

Differentiate

Derive

Initialize

Differentiate

Derive

Human

Differentiate

Derive

Extract

Extract

Treatment of regenerative medicine to patients

Differentiate

Derive

Differentiate

Derive

Transplant

Method 3 Method 2

Transplant

Transplant

Method 1

Transplant

Use stem cells extracted

from a human body

Safety: High

Application: Low

Use ES/iPS cells

generated from blood cells

or blastocyst extracted

from a human body

Safety: Low

Application: High

Use stem cells extracted

from a human body

Safety: High

Application: Medium

Method 1

Method 2

Method 3


20/25





of the company.

■ Balanced business model that reflects long-term and short-term

perspectives

RC has been managing business development in a balanced manner that

reflects both long-term and short-term perspectives. While the regenerative

medical market has potential for explosive growth in the long run, various

issues remain ahead from a safety viewpoint, as the cells are to be

regenerated by artifical operations. This is an extremely difficult area to

establish a business in the short term. Undoubtedly, the basic research

segment, including research related to new drug development, is the first area

to expand most. This is why RC, since its foundation, has focused on

research reagents and drug development support, the area with the highest

probability for market creation. At the same time, the critical technological

base was established, with complimenting technologies acquired through

M&A. On top of such approach, RC has drawn a detailed roadmap, with a

long-term aim to become a global No. 1 in regenerative medicine, and has

undertaken financing needed to implement the plan.

■ Comprehensive and exhaustive

RC shall be highly valued for its extremely comprehensive and exhaustive

strategies. Concerning the value chain, RC plans to encompass both

B2B/Upstream and B2C/Downstream. Regarding technology, RC intends to

enhance technology for somatic stem cells, in addition to that for ES/iPS cells.

■ Sustainable

RC has established its No. 1 position in research reagents and drug

development support and thus acquired strong relationships with prominent

research institutions. Those connections are expected to be sustainable as

RC is well aware that it is important to ensure access to latest R&D and

technical information and trends in the regenerative medicine market, which is

still at its dawn stage, anticipating emergence of innovative technologies.

■ Expanding organization size can be a challenge

RC has roughly 100 personnel, which makes it quite small and perhaps

understaffed to aim to become a global No. 1 in the regenerative medicine

market. To timely build a corporate size sufficient for its business development

may become a challenge.

Balanced business

model that reflects

long-term and

short-term

perspectives

Comprehensive and

exhaustive

高い

Sustainable

Challenge in

managing

capability to

support

organizational

growth


21/25





of the company.

■ The acquisitions will help increase sales but goodwill amortization will

cause losses to increase

In fiscal 2015 (ending March 2016), RC is expected to almost triple its sales

from the previous year to around ¥1.5 billion. The operating loss is expected

to decrease as expenses are to be reduced with due to a decrease in

acquisition expenses, sales increase, and group-wide synergy effects in sales

and marketing expenses, etc. The operating loss, excluding the estimated

annual goodwill amortization of ¥135 million, can be ¥420 million.

(Millions of yen)

Fiscal year March 2014 March 2015 March 2015

1Q

March 2016

1Q

March 2016

RC’s forecast

Net sales 460 567 87 263 1,530

Gross profit 256 276 47 147 －

SG&A expenses 349 1,016 116 363 －

R&D expenses 120 280 30 66 －

Operating income △93 △740 △68 △216 △555

Ordinary income △132 △456 △39 △112 △495

Net income △133 △451 △41 △108 △495

(Source: ReproCELL’s Financial Statements)

Ample net assets even in

case of impairment in

goodwill

Sufficient financial

strength for executing the

strategy

■ Ample net assets and sufficient current assets

RC raised ¥2,349 million in total by private placement of shares to the London

Branch of Deutsche Bank AG in 2014. The proceeds are used to fund

acquisition of Reinnervate (¥451 million), BioServe (¥205 million), and

Stemgent (¥893 million). By consolidating these three companies, goodwill of

¥1,351 million was recorded in fixed assets. The goodwill will be amortized

over 10 years under the straight-line method.

(Millions of yen)

Fiscal year End of March 2014 End of March 2015 Difference

¥mn ¥mn % ¥mn %

Current Assets 5,343 98.6 5,359 70.6 16

Fixed Assets 75 1.4 2,234 29.4 2,159

Total Assets 5,418 100.0 7,594 100.0 2,175

Current Liabilities 135 2.5 299 3.9 163

Fixed Liabilities 87 1.6 209 2.8 121

Net Assets 5,195 95.9 7,085 93.3 1,889

Liabilities & Net Assets 5,418 100.0 7,594 100.0 2,175


■ Sufficient financial strength for executing the strategy

RC has sufficient financial strength to fund execution of its strategic plan up to

a stage to expand in the regenerative market. Even if goodwill were to be

impaired, its net assets of approximately ¥7 billion are sufficient and would

Financial record and mid-term management plan

Income statements

Balance sheet


22/25





of the company.

decrease only to around ¥5.7 billion. In addition, its current assets represent

70% of total assets, suggesting that RC has enough financial strength to

sustain itself even if an operating loss of ¥400 million were to be generated for

10 years or more.

■ Evolving from Japan’s No.1 in B2B/Upstream to a global No.1 in

B2B/Upstream

RC announced its Mid-term Management Plan in May 2015. RC has

disclosed its plan to globalize its operations with the three acquired

companies and stress cross selling so as to evolve from Japan’s No.1 in

B2B/Upstream to global No.1 in B2B/Upstream. Sales are projected to double

from the present fiscal 2015 to over ¥3 billion by fiscal 2017 and operating

profit of close to ¥0.6 billion is expected for the same year. Given the growth

outlook of the regenerative medicine market, RC should have a high

probability to achieve its target of doubling in sales if it can expand overseas,

leveraging its strengths in Japan and utilizing its globally-established base.


Mid-term

Management Plan

Establish a global sales network

Full entry to China and India

New product launch

Market growth

Expand sales network

Accelerate the iPS Cell

Business

New product launch

Market growth

Enhance sales

structure

Promote cross

selling Enhance

sales structure

Promote cross

selling

If 12-month

results of the

three

acquired

group

companies

were

consolidated

(Millions of yen) Consolidated

ordinary profit

Consolidated

sales

March 2015 result

March 2016 estimate

March 2017 target

March 2018 target


23/25





of the company.

Corporate value estimates,

based on assumption of

10% market share, about

15% operating margin, and

20% of cost of capital,

suggest ¥88.8 billion in

market cap and ¥1,579 in

stock price on a fully diluted

basis.

■ Higher probability of achieving strategic goals could justify a

theoretical stock price of around ¥1,500 fully diluted

On the basis of the above analysis RC stock is expected to have a significant

upside potential. Estimates by the Ministry of Economy, Trade and Industry,

are that the regenerative medicine market will grow to ¥2 trillion in 2020, ¥30

trillion in 2030, and ¥53 trillion in 2050 (of which, ¥42 trillion is a relevant

market for RC.) For a simple calculation of corporate value, we assumed that

RC has a market share of 2.5% to 10% in the relevant market and that

after-tax operating profit becomes cash flow, and using 20% for the cost of

capital in calculating corporate value,. All undiluted shares from the equity

financing through the third-party allotment on August 31, 2015 are included in

outstanding shares (56,240,750 shares). In case RC obtains a 10% market

share, a 10% operating margin, cost of capital of 20%, RC’s market cap can

be estimated to be ¥88.8 billion, implying a stock price of around ¥1,500 on a

fully diluted basis. If RC’s strategic probability gets higher, this level of stock

price can be likely to be achievable.

Corporate value estimates (Market cap) (¥mln)

RC’s global relevant market share in 2040

2.50% 5.00% 7.50% 10.00%

Cost of

capital

15.0% 61,202 112,962 164,721 216,481

17.5% 39,438 71,529 103,620 135,710

20.0% 26,550 47,305 68,060 88,815

22.5% 18,528 32,428 46,328 60,229

25.0% 13,325 22,913 32,500 42,088

Stock price estimates (¥)

RC’s global relevant market share in 2040

2.5% 5.0% 7.5% 10.0%

Cost of

capital

15.0% 1,088 2,009 2,929 3,849

17.5% 701 1,272 1,842 2,413

20.0% 472 841 1,210 1,579

22.5% 329 577 824 1,071

25.0% 237 407 578 748

(Source: JPR)

Corporate value estimates

Corporate value

estimates


24/25





of the company.

■ Comparison with other bio-ventures

If the above estimate of ¥88.8 billion in corporate value or market cap is

divided by RC’s sales forecast of ¥3.1 billion for fiscal 2017, the projected PE

ratio is 28 times. Looking at the data below, which compiles market cap and

sales data of bio-venture companies by Toyo Keizai, only two companies

carry a P/E ratio as high as around 28 times or more for fiscal 2016 (see the

column A/C). RC’s stock price could go up to around ¥1,500 only when the

probability to become a global No. 1 in the regenerative medicine market

becomes higher.

Code Abbreviated

name

A B C D E F G A/B A/C A/D

Mkt cap

(yen

100mn)

Sales

Est.

(2015

yen

100mn)

Sales

Est.

(2016

yen

100mn)

Sales

Com.

Est.

(Yen

100mn)

O.P.

Est.

(2015

Yen

100mn)

O.P.

Est.

(2016

Yen

100mn)

O.P.

Com.

Est.

(Yen

100mn)

Time Time Time

2191 Tella 112.52 19.5 22.0 19.5 -6.8 -7 -6.8 5.8 5.1 5.8

2369 MediBIC Group 54.40 7.0 7.0 3.1 0.05 0.1 -2.2 7.8 7.8 17.4

2370 Medinet 142.41 20.0 24.0 20.0 -18 -20 -18.0 7.1 5.9 7.1

4563 AnGes MG 124.39 4.5 9.0 4.5 -58 -25 -58.0 27.6 13.8 27.6

4565 Sosei Group 567.06 117.0 113.0 117.3 59 45 59.0 4.8 5.0 4.8

4579 Raqualia Pharma 81.83 6.0 12.0 6.0 -14.4 -11 -14.4 13.6 6.8 13.6

4591 Ribomic 139.42 6.5 7.0 2.0 0.3 0.8 -4.4 21.4 19.9 70.1

4592 SanBIO 453.72 20.7 30.0 20.7 -11 -10 -10.9 21.9 15.1 21.9

4593 Healies 428.41 0.7 2.0 0.7 -16.5 -5.5 -16.4 612.0 214.2 586.9

4978 ReproCELL 264.86 15.0 18.0 15.3 -5.6 -5 -5.6 17.7 14.7 17.3

7774 Jpn Tissue Eng. 402.56 17.5 22.5 17.3 -7.7 -3.5 -7.7 23.0 17.9 23.2

7776 Cellseed 62.20 0.9 1.0 0.9 -11.0 -10.0 -11.0 69.1 62.2 69.1

(Source: Toyo Keizai Quarterly, 2016 Forecasts based on Toyo Keizai Quarterly, Market cap as of Sep. 2)

Stock price chart (Yen)

(Source: Factset, prepared by JPR)

75 Days Moving Average



400

450

500

550

600

650

700

750

8002

015

/9/2

20

15/8

/28

20

15/8

/25

20

15/8

/20

20

15/8

/17

20

15/8

/12

20

15/8

/7

20

15/8

/4

20

15/7

/30

20

15/7

/27

20

15/7

/22

20

15/7

/16

20

15/7

/13

20

15/7

/8

20

15/7

/3

20

15/6

/30

20

15/6

/25

20

15/6

/22

20

15/6

/17

20

15/6

/12

20

15/6

/9

20

15/6

/4

20

15/6

/1

20

15/5

/27

20

15/5

/22

20

15/5

/19

20

15/5

/14

20

15/5

/11

20

15/5

/1

20

15/4

/27

20

15/4

/22

20

15/4

/17

20

15/4

/14

20

15/4

/9

Comparison with

bio-venture

companies


25/25





of the company.

This report is issued by Toward the Infinite World, Inc. under the name of "ANALYST NET" and written by

external partners and analysts as its main authors.

□ In the report issued under the brand name of "ANALYST NET", we are aiming to provide information and

explanations about the target companies using a different approach from the traditional method. In principle,

TIW does not seek a review or authorization against the contents herein. (However, we point out to the authors

only if there are errors or incorrect wording.)

□ TIW may receive compensation directly or indirectly from the target companies in the project proposal and

infrastructure offering to issue this report.

□ External partners and analysts may receive compensation directly or indirectly from the target companies for

additional work apart from writing this report. The external partners and analysts may have already been

involved or may be involved in some trading of securities of target companies in the future.

□ This report is created for the purpose of providing information for investors to refer to when they are making

decisions about investments, and not for soliciting trading of securities or other financial products. Investors are

responsible for their final decisions on trading of securities or other financial products.

□ Although authors collected information during interviews with the target companies in order to create this report,

the hypothesis and opinions in this report do not reflect the views of such companies, and are from the authors'

own analysis and evaluation.

□ Although this report is based on information that the authors believed to be reliable, we do not guarantee the

accuracy, completeness and/or timeliness of the contents. The opinions and forecasts in this report are conducted

at the time of publication and may be changed without notice.

□ In any event, TIW and authors are not liable for any direct, indirect, incidental, or special damages that the

investors may receive by relying on the information and analysis contained in this report.

□ All contents of this report are the copyright of TIW unless otherwise stated. No part of such information shall be

reproduced, sold, displayed, distributed, published, amended, or used for commercial purposes without TIW's

consent.

□ "ANALYST NET" is a registered trademark of TIW.

Disclaimer

Analyst Report ReproCELL. Inc

Health & Medicine

Transcript of Analyst Report ReproCELL. Inc