Financial Summary

Recent Updates

Highlights

On February 1, 2011, MEDINET released Q1 FY09/11 results.

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Trends & Outlook

Quarterly results

Q1 FY09/11 Results

The company announced Q1 FY09/11 results on February 2, 2011 (see table above).

Sales decreased 6.4% YoY. The company commented that lower sales were the result of a delayed public relations campaign and a news story on Immuno-Cell Therapy published in a Japanese newspaper. According to the company, the net result was limited effectiveness of its marketing activities, which pressured sales. Operating profit decreased by 62.9% YoY due to the combination of lower sales and increased spending on general and administrative areas and higher R&D costs. Net income decreased by 96.2% YoY. The main factors affecting net income were one-off expenses from a share issuance (19 million yen) and those related to asset retirement obligations (21 million yen).

Forecasts for FY09/11 were unchanged, and the company commented that operating profit was almost in line with expectations, and losses related to asset retirement obligations were limited.

Full Year FY09/10 Results

The company announced FY09/10 full year results on November 5, 2010. Results were as follows:

Sales: 3.2 billion yen (+10.4% YoY)

Operating profit: 334 million yen (+13.7% YoY)

Recurring profit: 366 million yen (+13.1% YoY)

Net income: 439 million yen (+78.4% YoY)

FY09/10 Results Report Card

Revenues

Target: 3.2 billion yen

Result: 3.2 billion yen

Operating Profit

Target: 210 million yen

Result: 334 million yen

Recurring Profit

Target: 210 million yen

Result: 366 million yen

Net Income

Target: 200 million yen

Result: 439 million yen

There has been an increase in the number of new patients starting treatment following improvements in patients’ recognition and understanding of immuno-cell therapy, resulting in a 10.4% increase in sales vs. last year. According to the company, this was a result of marketing through academic channels and making more information available to patients. The number of treatment facilities using the company’s technology increased from 52 in FY09/09 to 63 facilities in FY09/10. Operating profit reached 334 million yen (+13.7% YoY). Higher sales increased gross profit (155 million yen), but higher costs for research and development (30 million yen), sales (67 million yen), and general and administrative expenses (17 million yen) offset some of the effect.

Operating profits exceeded initial forecasts by 124 million yen. The breakdown of the difference includes: gross profit 78 million yen above expectations, general and administrative expenses that were 15 million yen higher than originally forecast, and both R&D costs and sales expenses were lower than the original budget (42 million yen and 19 million yen, respectively). Factors that pushed recurring profits above initial forecasts included foreign exchange gains of 32 million yen due to the strong yen, while corporate tax adjustments related to tax-deferred assets totaling about 141 million yen helped improve net income for the year.

Full Year (FY09/11) Outlook

The company forecasts for FY09/11 suggest lower recurring and net profits, however, this is because the FY09/11 forecasts do not include forex impact (non-operating gain of 32 million yen) and the corporate tax adjustment return (141 million yen) recorded in FY09/10. For that reason, SR Inc. believes it may be more informative to use operating profit as a gauge of the company’s business conditions.

The plan calls for 11.6% increase in gross profit. The company expects YoY sales growth of about 10%, roughly the same as FY09/10. On the other hand, the cost of sales is expected to increase by 6.5% YoY. This is due to higher personnel costs as the company is planning to increase the number of cell processing technicians as it is about to start a new service based on subcontracted CPCs (cell processing centers) at university hospitals.

MEDINET forecasts a 4.8% YoY increase in operating profit to 350 million yen, an increase of 16 million yen vs. FY09/10 (334 million yen). Changes in spending include higher research costs (+121 million yen), higher sales costs (+49 million yen), and increased general and administrative costs (+67 million yen). This cost increases will offset the bulk of 253 million yen increase in gross profit.

Increased research and development costs will be used to boost efforts to make personalized medicine a reality. Higher expected sales costs are related to anticipated increases in academic marketing activities involving a general public relations campaign aimed at physicians and treatment centers, with the objective of growing earnings.

Other notable items include the Government Revitalization Unit’s working group (“Regulatory Reforms in the Life Sciences”) review of the final conclusion regarding the use of CPCs at university research facilities and at corporations in general. The review is not expected to be completed until the end of March 2011. SR Inc. thinks it’s important to keep an eye on the effect it might have on MEDINET’s business.

Future Outlook

The company stated in its FY09/10 results materials (Tanshin) that it hopes to maintain at least a 10% operating profit margin. The company had already achieved this level in FY09/10 (operating profit margin was 10.4%) SR Inc. understands that for the time being MEDINET will likely focus on maintaining this minimum level and see it as satisfactory (the first time the company recorded an operating profit after its listing was in FY09/09). Over the next 2-3 years, the company targets 10% to 20% annual growth in sales and operating profit. According to a 2005 study by the Center for Cancer Control and Information services, there are approximately 680,000 new cancer patients in Japan each year (“Cancer incidence and incidence rates in Japan 1975-2005”). Only about 2,000 patients received treatment supported by MEDINET services in 2009, and the company believes that this indicates substantial room to grow. Although MEDINET does not provide more specific mid-term targets, it grew sales by about 20.3% per year from FY09/06 to FY09/10. The company commented that performance is driven primarily by the growth in the number of patients, which is relatively hard to predict because it depends on how quickly immuno-cell therapy gains popularity. Therefore, MEDINET thinks that providing figures for future expectations would be little help for investors because it’s difficult to determine the treatment’s rise to popularity.

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Business

Summary

MEDINET offers Immuno-Cell Therapy Total Support Service, a comprehensive package that enables medical institutions to safely and efficiently culture and process cells used in immuno-cell therapy. The service includes providing technological know-how, equipment, and materials. The company also develops technology related to immuno-cell therapy, cell processing, and abrogation of immunosuppression caused by regulatory T cells. Additionally, the company provides medical equipment rental services and medical practice management consulting through a subsidiary called the Institute of Medical Service Management, Inc. (established January 2008).

Business Description

The company pioneered support service for immuno-cell therapy in Japan in 1999. As of August 2010, it was the largest provider in the country. According to the company, immuno-cell therapy’s potential uses have been growing in recent years due to synergistic effects when combined with three conventional treatments (surgery, radiotherapy, and chemotherapy). This could lead to immuno-cell therapy developing as a baseline therapy for those conventional treatments. The company further points out that because there are minimal adverse effects associated with immuno-cell therapy, it is attracting attention as a treatment method that can be used while maintaining patients’ quality of life (QOL).

In immuno-cell therapy, the patient’s immune cells (e.g. lymphocytes) are collected, cultured/processed, and then returned to the patient’s body. The process allows suppressing the growth of cancer cells by artificially magnifying the power of immune cells.

Patients who want the treatment locate a doctor/clinic providing the therapy and undergo a medical examination, and blood is collected. The clinic sends the blood to a CPC (Cell Processing Center provided by MEDINET, but operated by a medical institution) to be cultured and processed 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 immuno cells.

Immuno-cell therapy flow

(Source: Company Data)

The concept of the Immuno-Cell Total Support Service business was created when Yoshiji Kimura (the current CEO of MEDINET) met Dr. Koji Egawa (deceased in 2009), a professor emeritus from the University of Tokyo. Doctor Egawa was involved in basic research on cancer immune systems at the Tokyo University Institute of Medical Science. Kimura started the Immuno-Cell Therapy Total Support Service at MEDINET to promote the use of immuno-cell therapy, and Dr. Egawa founded Seta Clinic as a specialist clinic to provide it. MEDINET’s development thus far has been inseparable from the success and growth of the Seta Clinic and Dr. Egawa’s influence (he helped manage MEDINET as the Scientific Founder).

Immuno-Cell Therapy Total Support Service

It is difficult for ordinary doctors and medical institutions to provide the treatment because cultivating and processing immune cells requires advanced technological know-how, specialist technicians, equipment, and facilities. MEDINET’s Immuno-Cell Therapy Total Support Service provides everything necessary for medical institutions to offer the treatment.

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. MEDINET establishes the CPC for the medical institution offering the treatment, but retains ownership of the facility; the company grants the medical institution exclusive usage rights. The company then provides cell engineers, supplies, and devices for CPC operation. Immune cell processing is the company’s core competence, and its strength is engineering technology and know-how - a mix of medical and manufacturing skills.

There are basically two choices for commercializing immuno-cell therapy: obtain approval under the Pharmaceutical Affairs Law (discussed later in detail), or (like MEDINET’s service) consider the treatment as “medical practice” regulated by the Medical Practitioners Law and Medical Care Act (discussed later in detail). The company developed its current business model after discussion and deliberation with related government ministries and agencies, with the aim of providing the best possible treatment to patients. MEDINET, a business entity, provides necessary hardware and software to medical institution, but the medical institution actually provides the treatment, under the supervision of doctors.

The company chose this business model partly due to complex issues between the Medical Care Act and Pharmaceutical Affairs Law. According to the company, immuno-cell therapy could be considered as an advanced therapy not initially imagined when the Pharmaceutical Affairs Law was created. Cultured and processed cells are autologous cells (derived from patients themselves). The company believes that because the cells come from the patient, they are conceptually different from conventional mass-produced drugs, and deserve different legal consideration. Laws concerning medical drugs and medical practices differ from country to country. In the US, for example, physicians can only provide therapies approved by the FDA (Food and Drug Administration). On the other hand, regulations in Asian countries such as Japan or China provide doctors with more discretion, partly due to the legacy of Oriental medicine in those countries. It is possible that such differences in regulatory structure contributed to the development of new therapeutic techniques, such as immuno-cell therapy in Japan.

The company believes that newer legislation should be created that incorporates the uniqueness of immuno-cell therapy. In its opinion, updating the legal status of immuno-cell therapy would lead to increased popularity and the development of a healthy market for the treatment.

Relation to the Medical Practitioners Law. The Medical Practitioners Law sets the requirements to become a physician and defines procedures a physician can perform. Article 17 of the law stipulates that only a physician can practice medicine. As part of the Immuno-Cell Therapy Total Support Service, cell engineers work on the premises of medical institutions performing cell processing and quality assurance duties. However, these services are performed under a physician’s guidance to help them in their “medical practice” (immuno-cell therapy). Therefore, the company understands that it does not practice medicine under the definition of the above-mentioned law. Furthermore, neither of the group companies currently performs any business operations that would fall within the purview of the Medical Practitioners Law.

Relation to the Pharmaceutical Affairs Law. The Pharmaceutical Affairs Law provides a regulatory underpinning to ensure efficacy and safety of medical drugs. Article 12 of the law stipulates that only licensed manufacturers can produce medical drugs. However, according to the company, the act of processing a patient’s own cells does not constitute drug manufacturing. The company provides facilities, technology, know-how, technical personnel, materials etc. as through its Immuno-Cell Therapy Total Support Service package. Cell processing is performed at Contracted Medical Institutions under a physician’s supervision. Therefore, the company maintains that its business is not regulated by Article 12 of Pharmaceutical Affairs Law. Furthermore, neither of the group companies currently performs any business operations that would fall within the purview of Pharmaceutical Affairs Law.

Relation to the Medical Care Act. The Medical Care Act regulates issues related to safety of medical care, medical facility standards, separation of functions, cooperation between medical facilities, etc. Article 1, Part 2 of the law stipulates that medical care should be provided with consideration to each patient’s mental and physical condition, including respect for life and individual dignity, and be based on trust between doctors, persons assisting them, and patients. Furthermore, the Ministry of Health, Labor, and Welfare commented that “physicians can perform any actions related to diagnosis and therapy as part of their profession, and there are no legal restrictions regarding the methods or nature of such actions” (MHLW Answers February 1, 1950). This means that in principle, the Medical Care Act does not restrict therapies that physicians can provide if there is mutual trust between physicians and their patients.

(Source: Company Data Processed by SR Inc.)

Medical institutions that provide immuno-cell therapy using MEDINET’s support service are called “Contracted Medical Institutions”. As of August 2010, there were 7 such institutions:

• Seta Clinic Tokyo (Tokyo)
• Seta Clinic Sapporo (Sapporo)
• 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)

These medical institutions perform immuno-cell therapy using technology and support provided by MEDINET, and closely coordinate with other medical institutions so that they can offer patients the same treatment. These other institutions are called “Allied Medical Institutions”. In total, there were 63 facilities offering the therapy supported by MEDINET as of September 2010 (7 Contracted Medical Institutions, 56 Allied Medical Institutions).

(Source: Company Data Processed by SR Inc.)

The relationship with Medical Corporation Koshi-Kai, Seta Clinic Group

Seta Clinic was established in March 1999 as a specialized medical institution that provides immuno-cell therapy. As of end of September 2010, it comprised 5 clinics and 56 cooperating medical institutions providing immuno-cell therapy to patients across Japan. The cumulative number of patients exceeded 10,000 in early 2010, and the company commented that Seta Clinic’s experience in the field of the immuno-cell therapy and its accumulated clinical data are unrivaled worldwide.

Based on a comprehensive agreement, MEDINET supports the Medical Corporation Koshi-Kai, Seta Clinic Group (“Seta Clinic Group”) to provide safe and efficient immuno-cell therapy. Seta Clinic Group provides the therapy directly to patients and via cooperating 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 “order-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 alpha-beta T cell therapy, CTL therapy, and dendritic cell vaccine therapy. It also manages a cancer tissue bank that collects and stores cancer tissue from patients. The company also provides immunostaining test technology that allows the analysis of individual cancer tissue characteristics.

Cancer Tissue Bank. One part of the immuno-cell therapy complex is dendritic cell 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 bank 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.

Business Model

MEDINET’s revenues are mainly royalties paid by Contracted Medical Institutions which offer immuno-cell therapy. Patients pay about 1.5-2.1 million yen for one course of treatment (given over six sessions) directly to a Contracted Medical Institution which performs the therapy. MEDINET receives part of the treatment cost as a royalty; the type of cell processing determines the royalty amount. The number of cell processing orders determines sales volume. As the number of new patients receiving treatment grows, so does total volume. Some patients take two or more courses of the treatment, but SR Inc. estimates that most patients would take no more than one course due to the high cost of treatment.

Assuming the patient’s cost for one course of treatment was 1.5 million yen, the per-session price is about 250,000 yen (each treatment is 6 sessions where the patient receives one batch of processed cells). Based on FY09/10 sales figures, SR Inc. estimates that MEDINET received revenues of about 180,000 yen from each batch of processed cells. Of total sales in FY09/10, revenues from CPCs in Shin-Yokohama, Osaka, and Fukuoka were 2.7 billion yen, according to the company results materials. SR Inc. estimates that the company processed about 15,000 units of cells in FY09/10.

Cost analysis

SR Inc. estimates that CPC utilization rates drive MEDINET’s gross profit margins. The gross profit margin improved from 59.6% in FY09/08 to 69.6% in FY09/09, a significant improvement driven by an increase in the number of patients. The main components of the costs of sales in FY09/10 were materials (approximately 12% of sales) and labor (approximately 9%). Other expenses (approximately 10%) were mainly fixed cost items such as rent and depreciation.

R&D expenses, labor, and advertising costs are the large components of SG&A expenses. MEDINET spends about 400-500 million yen a year on strategic R&D. At other companies, labor is frequently the largest portion of R&D expense, and is a fixed cost. MEDINET, however, performs many of its research activities in cooperation with university hospitals, so only 25-30 of its employees are directly involved, which keeps R&D-related labor costs low. The company therefore has discretion over R&D spending and can adjust if necessary.

Given the current business model, MEDINET needs to continue spending on promotional activities until immuno-cell therapy becomes a more widely recognized and well-understood choice among patients and medical institutions. SR Inc. believes that once the therapy reaches a tipping point, the company should be able to lower the ratio of promotional expenses and therefore could see higher profit margins.

The company’s cell processing capacity was approximately 28,800 units per year at of the end of FY09/10. The company only provided about 15,000 units of processed cells in FY09/10, implying a utilization rate of 52%. As a rough calculation, assuming that (a) utilization improves to 75% without building new CPC facilities, (b) the variable cost ratio component of COGS is 15%, (c) variable cost ratio portion of the SG&A expenses is 20%, and (d) fixed cost components of both COGS and SG&A do not change from FY09/09, the gross profit margin could theoretically increase to about 75% and the operating profit margin to 17%-22%.

Profitability Snapshot, Financial Ratios

Strengths, Weaknesses

Strengths:

• The Japanese regulatory environment allowed the creation of a highly unique business model. In order to offer immuno-cell therapy in other advanced nations, substantial amounts of time and financial resources are required to gain approval from the FDA or similar government agencies. In Japan, it is possible to transfer legal responsibility for decisions regarding safety and efficacy of therapies to physicians. Because doctors in Japan are liable for care they provide, companies can focus on their business and pursue profitability. MEDINET had a choice of getting approval under the Pharmaceutical Affairs Law, but chose the current business model so it could provide the best possible treatment in the fast-changing field of regenerative and cell therapy. Additionally, MEDINET’s relationship with the Seta Clinic provided access to patients’ clinical data, which improves technology development. The combination of Japan’s legal system and MEDINET’s edge in R&D meant that it was able to achieve profitability early, grow cash flows, and invest in R&D and future growth.
• Early mover advantage. One of MEDINET’s biggest 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 culturing for more than 10 years. According to MEDINET, technological know-how, not facilities or equipment, makes the difference in cell processing quality. The company developed its cell processing technology based partially on experience gained from providing over 94,000 units of cultured cells.
• 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 operation.

Weaknesses:

• Dependent on the Seta Clinic Group. The Immuno-Cell Therapy Total Support Service is the sole business of the company and sales to the Seta Clinic Group accounted for 99.7% of FY09/10 sales (Source: Tanshin FY09/10). The Seta Clinic Group specializes in immuno-cell therapy, and any issues affecting the Seta Clinic Group’s business would have a direct and immediate impact on MEDINET’s operations.
• Dependence on regulatory environment changes. The current business is a service provided to medical institutions, which is not subject to regulation under current healthcare laws. However, any changes in the regulatory environment could threaten the continuity of MEDINET’s business.
• Relatively high costs for patients. The Japanese National Healthcare Insurance does not cover immuno-cell therapy, so patients bear 100% of the treatment costs, approximately 1.5-2.1 million yen for 1 treatment course, which could be a large financial burden.

Main Facilities

Head Office (Shin-Yokohama)

Western Regional Office (Osaka)

Kyushu Regional Office (Fukuoka)

Laboratory/Cell Processing Centers:

MEDINET Medical Institute

Shin-Yokohama Cell Processing Center (inside Seta Clinic Shin-Yokohama)

Osaka Cell Processing Center (inside Seta Clinic Osaka)

Fukuoka Cell Processing Center (inside Seta Clinic Fukuoka)

Todai Cell Processing Center (inside the University of Tokyo Hospital)

The company currently operates only in Japan, but appears to be interested in expanding across the Asia Pacific region, particularly in China.

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Market & Value Chain

Market Overview

Regenerative medicine and cell medicine are areas of considerable potential growth. Cell medicine (sometime 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 broadly be 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.

Immuno-cell therapy is one of the few cell medicine areas that have gone beyond the R&D stage to actual clinical use. According to “Outlook of Research on Stem Cell/Regenerative Medicine and its Application in Business, 2010 – Japan Issue” issued by Seed Planning Inc., the annual Japanese market for cancer immunotherapy is an estimated 7 billion yen, growing at an annual rate of around 140%.

Units of cells processing and new patients receiving the therapy

(Source: Seta Clinic Group)

The number of patients who received immuno-cell therapy supported by MEDINET has been increasing every year, but at a relatively constant pace. The total number of new patients per year has been about 2,000 - a very small proportion of the estimated 680,000 new cancer cases annually in Japan (2005 National Cancer Center, Center for Cancer Control and Information Services [1975-2005 Data]). (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? SR Inc. looked at several possible factors hindering widespread use of the therapy:

Lack of understanding and awareness among doctors and medical institutions

In order to increase the demand for immuno-cell therapy, physicians and medical institutions that effectively control the treatment decision process for their patients actively need to consider immuno-cell therapy as a viable cancer treatment option. However, rapid advances in the fields of immunology, molecular biology, and cellular technology during recent years meant that average clinical doctors find it hard to catch 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.

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 radiation therapy, such as RECIST (Response 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.

SR Inc. estimates that there are some additional factors inhibiting more widespread use of the immuno-cell therapy, namely high cost for patients and lack of clarity concerning the regulation

Cost of therapy. Presently, immuno-cell therapy is not covered by insurance. As a result, patients receiving the therapy pay the full amount themselves, approximately 1.5-2.1 million yen per course of treatment. Also, because laws p rohibit combining insured and uninsured care, it is difficult for patients receiving other treatments covered by insurance to receive immuno-cell therapy treatment. However, there is a so-called Advanced Medical Evaluation System where the Ministry of Health, Labor, and Welfare permits, on an exceptional basis, combining new advanced therapeutic methods not covered by the national insurance with insured therapies. One could speculate that if immuno-cell therapy methods supported by MEDINET were admitted as such “advanced therapy” in the future, this could bring the possibility of combining the therapy with methods covered by insurance and lead to a increase in the number of patients receiving immuno-cell therapy.

Government’s actions to boost regenerative medicine. The national government started to work on increasing the use of regenerative and cell therapy methods by medical institutions while ensuring the efficacy and safety of such methods. It is clarifying existing legislation and communicating the policy course through administrative guidelines. The government acknowledges that regenerative/cell medicine is one of the strongest areas of Japan’s advanced technology. It also admits that the current legislative system governing the medical practice and medical drugs was created without taking into account new advanced technologies, which has been hampering R&D efforts and treatment using such technologies at hospitals and clinics. To address this, the government started the administrative reform in the field of life science.

On March 30, 2010 MHLW issued an administrative circular “The Implementation of Regenerative/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 when 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. According to the company, this should 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.

To facilitate regulation reforms in the area of life science, government discussions are continuing on several themes. The themes most relevant to MEDINET are the cooperation between medical practice and engineering (segmentation of doctors’ and cell engineers’ duties), and active utilization of the Advanced Medical Evaluation System.

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. via NIPRO CORPORATION (TSE 8086). MEDINET also has a stake in Cell Science & Technology Institute., Inc.

Customers

There are approximately 680,000 new cancer cases in Japan per year as mentioned in the Market Overview. There are estimates suggesting that this number may increase to 900,000 annually by 2020 (Cancer Statistics White Book 2004, Shinoharashinsha Publishing).

Barriers to entry

Immuno-cell therapy requires CPCs and cell engineers to operate them, and the barriers in terms of building such facilities are low. However, differentiating factors include training technical personnel and specific cell culturing know-how. The company maintains that its experience accumulated after processing more than 89,000 units of cultured cells gives it an overwhelming advantage over the competition.

Competition

The company believes that the market for immuno-cell therapy is still in its infancy and therefore competition is not at an advanced stage where companies fight for fractions of share. According to the company, others in the same line of business are following the business model that Mr. Kimura and Dr. Egawa developed over the course of ten years. The company thinks that healthy competition is desirable because it gives patients more options.

tella, Inc. (JASDAQ NEO 2191) founded by Dr. Yazaki in 2004. The company focuses on its “IMAX Cancer Treatment (maximum immunotherapy for cancer)” that aims to kill cancer cells efficiently by combining chemotherapy and radiotherapy with a type of immunotherapy called “Dendritic Cell Vaccine Therapy”.

Lymphotech Co. Ltd. founded in April 1999. MEDINET is a 10% investor in the company. The company provides services for clinics that specialize in cancer treatment using activated autologous lymphocytes. Lymphocyte-bank Co. Ltd. founded in 2001 and focusing on ANK (Amplified Natural Killer) therapy. The therapy is provided by Higashinotouin Clinic in Kyoto, and cultivates cells in a culture center owned by Lymphocyte-bank.

J.B. Therapeutic Inc. founded in 2001 by Dr. Tanigawa, a former surgeon at the Center of Gastroenteropathy of Tokyo Women’s Medical University. Medical institutions performing therapy supported by the company include Tokyo Women’s Medical University and Bio-Thera Clinic.

MEDINET has been cooperating with the above four competing companies and working on the establishment of the standard for immuno-cell therapy in order to promote the treatment’s acceptance.

Substitutes

The three main conventional cancer therapy methods are surgery, radiotherapy, and chemotherapy. These therapies can be administered in combination, and according to the company, it is also sometimes possible to improve therapeutic results by combining these methods with immuno-cell therapy.

(Source: Company Data Processed by SR Inc.)

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Strategy

R&D Strategy

The company’s area of expertise is technologies related to processing immune cells (antigen presenting, automatic culture equipment, DC vaccines, etc.).

The company’s R&D strategy focuses on the aggressive pursuit of alliances to develop new technologies. Numerous cell processing technologies are developed both domestically in Japan and overseas. The company is working on providing a combination of the newest and best of such technologies with its own know-how to medical institutions. MEDINET calls this approach “fusion of knowledge” and sees it as one of its strengths. Outside the cell processing technology area, the company signed a comprehensive cooperation agreement with NanoCarrier Ltd. (TSE 4571) to conduct joint cancer research.

MEDINET’s major R&D activities are as follows:

－Automated Cell Culture and Processing System (automating cell processing process): Automated CPCs could shorten culturing period, and substantially improve profitability.

－NK culturing method: Development of NK (Natural Killer) cell culturing methods.

－CTL (Cytotoxic T-Lymphocytes) culturing method: development of practical technologies such as mass culturing methods.

－Development of immuno-cell therapeutic technologies combining peptides, DC vaccines, and DDS (drug delivery systems).

－Development of immunosuppression abrogating technologies.

The scope of the R&D activities is likely to expand to include technologies related to regenerative medicine, e.g. stem and ES/iPS cell processing technologies.

Management Strategy and Growth Opportunities

MEDINET comments that it expects sales growth of about 10% p.a. in the mid-term, driven by increases in the number of patients. As discussed in the Market Overview, as of December 2010, factors restraining the growth are: regulatory environment, relatively high treatment costs, and low awareness of immuno-cell therapy.

Regulatory environment. SR Inc. believes that changes in this environment will strongly influence the company’s operations. There is some business risk associated with such changes but at the same time if laws change in MEDINET’s favor, the company business may receive an explosive growth boost.

Treatment costs. The costs of providing regenerative medicine are high. The company believes that a combination of the public health insurance and private insurance schemes can lower patients’ burden, driving substantial growth of MEDINET’s business. In August 2010, an average treatment cost 250,000-350,000 yen. One cycle, consisting of six treatment sessions, is therefore 1.5-2.1 million yen. Medicom, insurance for treatments outside of the national health insurance (offered by SECOM General Insurance Co., Ltd.), currently covers up to 3 cycles of immuno-cell therapy. Also, MEDINET completed a 3rd party offering to Tokio Marine & Nichido Fire Insurance Co., Ltd. in March 2010, with a view of possible future cooperation in the area of cancer treatment.

Low awareness. The company points out that a lack of understanding among doctors and medical institutions is a factor that inhibits the growth of the number of cooperating medical institutions. MEDINET has been focusing on marketing through academic channels and working to increase its credibility by conducting clinical research jointly with university hospitals and similar major medical institutions.

Tie-Ups and Investments

The company actively engages in capital/technical alliances with biotechnology ventures in Japan and overseas. Major examples include:

Tokio Marine & Nichido Fire Insurance Co., Ltd.: one billion yen 3rd party convertible bond offering, with a view of possible future cooperation in the area of cancer treatment.

NanoCarrier Co., Ltd.: Comprehensive cancer research alliance in October 2009. MEDINET also invested in NanoCarrier though a 3rd party stock offering in May 2010.

MaxCyte Inc. (US): MEDINET and MaxCyte Inc. were performing joint development of the Cell Loading System and formed a capital tie-up in December 2009. 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 2010.

INNOMEDISYS Inc. (South Korea): MEDINET offers technical support in immuno-cell therapy and receives royalties based on sales.

Reprocell Inc.: MEDINET made an investment in September 2008. It accepted a third party stock offering from Reprocell Inc., expecting synergies from Reprocell’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 2004. Cell Science & Technology Institute, Inc. develops and manufactures serum-free fluid medium for human cells that is indispensible 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.

PRISM BioLab Co., Ltd.: An alliance in the field of protein-protein Interaction and peptidomimetic technology.

Other than those mentioned above, MEDINET took a 10% stake in Lymphotech Inc., a company in a similar line of business, and invested in MASA Life Science Ventures, LP, a venture capital fund focused on biotechnology and life science areas.

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Historical Financial Statements

Summary

MEDINET began reporting consolidated accounts in FY09/09, following the establishment of a subsidiary (Institute of Medical Service Management, Inc.) in January 2008. The impact of the new subsidiary on the consolidated earnings is negligible.

Earnings Results Discussion for the Year Preceding Current Fiscal Year (for reference purposes)

Q3 FY09/10 Results

The company announced Q3 FY09/10 results on July 30, 2010. As a percentage of full year estimates, Q3 results were as follows:

• Sales: 72.8% (vs. full year estimate of 3.3 billion yen)
• Operating profit: 82.0% (vs. full year estimate of 330 million yen)
• Recurring profit: 80.5% (vs. full year estimate of 330 million yen)
• Net income: 75.7% (vs. full year estimate of 320 million yen)

At the end of Q3 FY09/10, there were 61 medical institutions providing immuno-cell therapy supported by MEDINET’s technology. The number of new patients in the previous quarter can be used to estimate sales for the next quarter. There were roughly the same number of new patients in Q3 FY09/10 as there were in Q2, implying that Q4 FY09/10 sales will be similar to Q3. Based on this information, SR Inc. speculates that full year sales may fall slightly behind the company’s estimates, but operating profit will be close to its estimates.

Q2 (1H) FY09/10 Results

The company announced Q2 FY09/10 results on May 7, 2010. As a percentage of full year estimates (revised on April 22, 2010) 1H results were as follows:

• Sales: 48.8% (vs. full year forecast of 3.3 billion yen)
• Operating profit: 77.1% (vs. full year forecast of 330 million yen)
• Recurring profit: 79.8% (vs. full year forecast of 330 million yen)
• Net income: 81.5% (vs. full year forecast of 320 million yen)

At the end of 1H, there were 56 medical institutions providing immuno-cell therapy supported by MEDINET’s technology vs. 44 a year earlier. The company suggested that improved recognition and understanding of immuno-cell therapy has led to an increase in new patients, which drove sales higher. The 1H results exceeded the company’s forecast, mostly due to a delay of some R&D and promotional spending during the half.

Q1 FY09/10 Results

The company announced Q1 FY09/10 results on February 4, 2010. As a percentage of 1H estimates, the results were as follows:

• Sales: 53.1% (vs. 1H forecast of 1.5 billion yen)
• Operating profit: 357.0% (vs. 1H forecast of 40 million yen)
• Recurring profit: 392.2% (vs. 1H forecast of 40 million yen)
• Net income: 441.9% (vs. 1H forecast of 35 million yen)

Income Statement

The company sales are an undisclosed percentage of the amount that patients pay to the clinic performing immuno-cell therapy. As such, the number of new patients and cell processing cases directly drives sales. Advertising directly to patients and increases in the number of clinics performing the immuno-cell therapy would naturally impact the number of new patients.

The gross profit margin has been very stable ranging between 53.8% and 59.6% from FY09/03 to FY09/08, but increased to 69.6% in FY09/09 due to higher CPC utilization from more patients.

The largest component in SG&A expenses after labor (See Business Model section for detailed discussion) is R&D at 13.0% of FY09/09 sales. According to the company, its policy has been to spend around 400-500 million yen a year on R&D and this will likely to remain a minimum annual spending. Another significant component of SG&A expenses is advertising, 7.5% of total sales in FY09/09. Advertising expenses include promotional efforts to increase patient awareness and marketing through academic channels.

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Balance Sheet

Assets

Cash and cash equivalents are the largest accounts; 51.4% of FY09/10 total assets. Main components of fixed assets are tangible assets (mainly CPC facilities) and investment securities. The company has not built any new CPCs since FY09/03 with the exception of the CPC in the University of Tokyo that began operations in FY09/07. Therefore, there has been little change in tangible assets. The company has a relatively large balance of long-term investments. As part of its business strategy, MEDINET has been investing in companies that possess relevant technologies. On the FY09/09 balance sheet, the largest investment was 416 million yen put into MASA Life Science Venture LP.

Liabilities

The company has a high equity ratio of 66.9% (FY09/10). Current liabilities are the majority of liabilities, but the amount is small and the company historically had very little interest-bearing debt; the balance was 1 billion yen at the end of FY09/09.

Net Assets

Shareholders’ equity increased due to series of new stock issuance from FY09/03 through FY09/10. The company posted net losses from FY09/04 through FY09/08 and net assets were on a decreasing trend. As of FY09/09 the company has achieved positive net profit, and net assets were on an increasing trend.

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Cash Flow Statement

Operating Cash Flow

Operating cash flows have typically reflected net income. Operating cash flow was positive in three periods from FY09/03-FY09/10: in FY09/03, FY09/09, and FY09/10.

Investing Cash Flow

Investing cash flows were typically due to purchase and sales of marketable securities and investment securities, and acquisition of tangible fixed assets. Investing cash flows in FY09/04 were mainly due to a cash outflow from purchase of securities (500 million yen). In FY09/05, investing cash outflows were due to acquisition of tangible fixed assets of 250 million yen, securities of 200 million yen, and investment securities of 196 million yen. In FY09/09, the company had a cash outflow as it extended a short-term loan.

Financing Cash Flow

The main factors in financing cash flows have been stock issuances, such as an IPO and third party offerings. Major stock issuances from FY09/03 were as follows:

• FY09/03: New stock issuance of 385 million yen
• FY09/04: 4.6 billion yen million mainly the IPO on the TSE (Mothers) in October 2003
• FY09/07: 266 million yen mainly due to a third party offering
• FY09/08: Stock issuance of 146 million yen
• FY09/09: Stock issuance from execution of stock acquisition rights of 502 million yen
• FY09/10: Corporate convertible bond and stock issuance raised a total of 1.1 billion yen

Simple Cash Flow

The company is still in an early growth stage, and had posted mostly net losses from FY09/04 through FY09/08 (FY09/07 being an exception), resulting in a negative trend in simple free cash flow. In FY09/09 the company recorded positive operating profit, the first time since IPO, and simple free cash flow reflected the improvement in profits.

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Other Information

Immuno-cell therapy

History of Cancer Immunotherapy

Cancer immunotherapy has a history of more than 100 years. In 1891, a surgeon named W.B. Coley treated cancer patients with a vaccine consisting of bacteria to activate their immune systems. Why it worked was not known at the time. The main research interest in cancer treatment subsequently moved to radiotherapy, and cancer immunotherapy was largely ignored until the 1970s. Since the middle of the 1980s, with the advancement of immunological studies, cellular and molecular analysis has gradually revealed the interaction between the immune system and cancer. These findings made the development of new therapies such as cytokine, immune cell, peptide vaccine, and other therapies possible.

Cytokine Therapy uses a therapeutic agent manufactured by the synthesis of cytokine molecules secreted by immune cells. Cytokines used in this therapy include anti-tumor immunoreactive cytokines such as interleukin 2 (IL-2) and interferons (IFN) alpha, beta and gamma. Large dosages of this therapy can cause severe adverse effects.

Immuno-cell therapy was developed after Cytokine Therapy. The most popular kind of immuno-cell therapy, “Activated Autologous Lymphocyte Therapy,” was developed by Dr. Steven A. Rosenberg, Chief Surgeon of the National Institute of Health (NIH) in the 1980s. The treatment method used by Dr. Rosenberg was as follows: cultivate the lymphocytes of cancer patients, activate them with IL-2 in vitro and then infuse activated cells with a large amount of IL-2 directly into patients. The hope was that the direct infusion of IL-2 would activate lymphocytes in vivo as well. Since adverse effects of this therapy were very strong, it failed to gain popularity in Western countries. Japanese researchers were the most active in trying to improve it, and in the 1990s immuno-cell therapy evolved into its current form and started being used in clinical studies for treatment of cancer patients. The first person in the world to work on making this therapy a commonly accepted clinical procedure was Kohji Egawa, professor emeritus of the University of Tokyo.

The National Cancer Institute in the US estimates that there are over 100 different kinds of cancer (http://www.cancer.gov/cancertopics/what-is-cancer). Surgery and radiotherapy are not effective against metastatic cancers. Metastatic cancers are rarely cured completely. Since immuno-cell therapy activates the immune system of the patient, SR Inc. believes that this therapy could hold promise for future cancer treatment.

The mechanism of immuno-cell therapy

There are several ways to attack cancer cells. There are four types of immune cells that possess anti-tumor properties: NK, NKT, gamma-delta T cells, and alpha-beta T cells. These immune cells can decrease activity of cancer cells. Immuno-cell therapies can be divided into two types: “tumor antigen specific treatment” and “tumor antigen non-specific treatment” depending on how these cells are used.

Tumor antigen specific treatment: There is usually an expression of an antigen called MHC Class I on the surface of a cancer cell. Therapies such as dendritic cell vaccine therapy and CTL Therapy use this antigen as a marker to attack cancer cells. These therapies can specifically (efficiently) attack cancerous cells by activating CTL cells.

Tumor antigen non-specific treatment: Some cancer cells do not express or hardly express MHC Class I. In such cases, this treatment is the only available option. By using lymphokine activated autologous killer cells (LAK), this treatment aims to enhance the body’s natural immunity to fight against the growth, metastasis, and recurrence of cancer. Among several LAK therapies, gamma-delta cell therapy is the most popular. Other therapies include gamma-delta cell therapy and NK cell therapy.

The company offers four types of immuno-cell therapies. It is possible to offer some in combination:

• Alpha-beta cell therapy
• Gamma-delta cell therapy
• CTL (Cytotoxic T-Lymphocyte) therapy
• Dendritic cell vaccine therapy

Choice of Immuno-Cell therapy for each patient

(Source: Company Data Processed by SR Inc.)

Alpha-beta T cell Therapy: General lymphocytes including alpha-beta cells, gamma-delta cells, NK cells and monocytes are isolated from the peripheral blood of a patient, and infused back into the patient after they are activated and proliferated by anti-CD3 antigen and IL-2. Post activation, alpha-beta cells represent about 90% of the total cell count.

Gamma-delta T cell Therapy: Mononuclear cells from the peripheral blood of a patient are cultivated using a combination of IL-2 and Zoledronate resulting in selective activation and proliferation of gamma-delta T cells, which are then infused back into the patient’s body. More gamma-delta T cells are activated compared to alpha-beta T cell therapy. The company started offering the service and technology from October 2007.

CTL (Cytotoxic T-Lymphocyte) Therapy: Mononuclear cells separated from the peripheral blood of a cancer patient are stimulated and cultivated using cancer cells collected from pleural effusion or peritoneal effusion of the patient. This induces cytotoxic T lymphocytes (CTL), killer cells that have a high capacity to attack specific cancer cells. Cells that include thus obtained CTLs are then returned to the patient’s body.

Dendritic Cell Vaccine Therapy (DC vaccine Therapy): Dendritic cells differentiated from the monocytes of a cancer patient are given the ability to identify target cells before infusion back into the patient. These dendritic cells are expected to inform T cells about the target and activate CTLs in vivo. The company has improved the CTL induction and absorption rate of cancer antigen (discussed later in detail). The company introduced the Cell Loading System and started processing dendritic cells in August 2008.

New Dendritic Cell Processing Technology Using Electroporation

The new dendritic cell processing is an example of the results of MEDINET’s R&D activities. Dendritic cells are a control tower of the immune response to cancer – they inform T-lymphocytes about the cancer antigen, and then induce and proliferate cytotoxic T cells (CTL; lymphocytes that attack cancer cells). Since a cancer antigen peptide can induce only a limited number of CTLs, it is desirable to use the antigen of autologous (patient’s own) cancer cells. The distinctive feature of MEDINET’s technology is that Zoledronate is used to encourage cells to induce more CTLs. When Zoledronate was used to treat the tumor cells collected from a patient, the CTL induction ability of dendritic cells was 60 times higher than when an adjuvant was used. Furthermore, when the cells were co-sensitized by both a peptide and Zoledronate, they induced about 100 times more CTLs compared to when peptides alone were used. The mechanism of increased immune strength caused by Zoledronate is as follows: when IPP is displayed on the surface of a dendritic cell, gamma-delta T cells recognize it via gamma-delta TCR (T cell receptor) and become activated, and then produce interferon gamma. At the same time, the antigen expression of MHC Class I and CD86 molecules is enhanced, and as a result increasingly more antigen specific CTLs will be induced.

Another feature of this process is that it enables the insertion of a much larger quantity of cancer antigens compared to the conventional co-culture method. This is achieved thanks to electroporation method (opening pores in the cell membranes by using a pulse of electricity) using the Cell Loading System. Electroporation is widely used when inserting DNA and proteins into cells. However, the electroporation method developed by MaxCyte Inc. is performed in a closed, sterile system and thanks to that is very safe and allows processing a large number of cells at any one time. It is also characterized by high efficiency of transfection and expression to dendritic cells, as well as a high ratio of live cells after processing. MEDINET introduced the equipment and technology of its partner MaxCyte, demonstrated the effectiveness of the dendritic cell vaccine therapy through tests in mice, and is performing clinical studies jointly with the National Hospital Organization Osaka Medical Center. MaxCyte Inc. granted the company an exclusive license to use the electroporation technique, and the two companies reached a broader license agreement in April 2010. It is now possible for the company to apply electroporation technology to treat other intractable diseases in addition to cancer. The MaxCyte Inc. license was originally only for Japan but was later expanded to include China, Australia, Singapore, Thailand, and Taiwan. The technical license agreement with MaxCyte Inc. could be an advantage for MEDINET as it seeks to make inroads into foreign markets in the future.

Obtaining Monoclonal Antibody to iTregs

Another result of the company’s research and development was obtaining the monoclonal antibody to a human iTreg (inducible regulatory T cell). The company has been conducting studies of the abrogation mechanism of immunosuppression at cancer locations as a part of its fundamental research program. Regulatory T cells (Treg) are a type of immune cell that regulates (suppress) activity of other immune cells. Part of MEDINET’s research involving establishing a way to abrogate the immunosupressive activity of Tregs was chosen as a research program on development of innovative technology by Japan Science and Technology Agency between September 2005 and March 2008. Tregs related to immunosuppression are divided into two large groups: naturally occurring Tregs and induced Tregs (iTregs). The former is mainly related to the onset of autoimmune diseases and the latter is related to tumor immunity. MEDINET successfully identified the molecule on the surface of a cell that is believed to be specific to human iTregs, and succeeded in obtaining the first monoclonal antibody in 2008. MEDINET expects that it will be able to develop a new therapy that enhances the efficacy of immuno-cell therapy by using the monoclonal antibody.

The ongoing technological development and commercialization of the technology are as follows:

(Source: Company Data Processed by SR Inc.)

Patent applications specifications are below (as of FY09/10):

Efficacy of Immuno-Cell Therapy

In general, the Efficacy of standard therapies for cancer treatment was evaluated by changes in tumor size measured before and after the treatment. Therefore, referring to “new guidelines to evaluation the response to treatment in solid tumors”, the Seta Clinic Group carried out the evaluation of the efficacy on immuno-cell therapy. The retrospective study on a large number of patients from April 1999 to March 2009 indicated that the total response rate was 13.3%, including patients with both complete and partial responses. When combined with long stable disease patients, the efficacy rate was 25.1%.

A Retrospective Study on a large number of patients by the Seta Clinic Group

• The study was carried on cancer patients who received immune-cell therapy at the Seta Clinic Group and cooperating medical institutions.
• In 5,460 cases of patients who underwent immuno-cell therapy at least six times (one course of treatment) at the Seta Clinic Group and cooperating medical institutions from April 1999 to March 2009, the primary tumor was lung, stomach, liver, pancreas, and breast.
• The evaluation of the efficacy on immuno-cell therapy was conducted referring to “new guidelines to evaluation the response to treatment in solid tumors” (which is called RECIST guidelines; internationally recognized guidelines for the evaluation of the effectiveness of medical treatment) and consisted of determining tumor reduction via diagnostic imaging. The study was conducted on 848 patients out of 5,460 patients who met the following criteria for determining comparative change in lesions via diagnostic imaging:

1. Imaging before treatment: images taken during a period from 60 days before the start of treatment until before the beginning of the second administration of treatment
2. Imaging after treatment: images taken during a period from the administration of the fifth treatment within 30 days after the administration of the sixth treatment

The images mentioned above are normally stored. Even when they are not stored, there is a precise record or a report by the attending physician.

• Out of the 848 patients, 9 patients were complete response, 104 patients were partial response, 100 patients were long stable disease, and 255 patients were stable disease as per the following categories.

(Source: Seta Clinic Group)

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History

MEDINET was founded in October 1995 by Yoshiji Kimura, who saw promise in immunology as a business field. The company started its current core business, immuno-cell therapy, when Kimura met Dr. Kohji Egawa (deceased in 2009, who would later be the company’s advisor, serving as its Scientific Founder). Dr. Egawa was involved in fundamental scientific research at the University of Tokyo’s Institute of Medical Science. When he was hospitalized and saw the harsh reality of the cancer treatment, he committed himself to finding way to treat cancer patients without making them suffer. Dr. Egawa resigned his professorship and focused on what became known as “immuno-cell therapy”. When Kimura met Dr. Egawa, he was deeply impressed by Egawa’s quest and focused MEDINET’s business on immuno-cell therapy. The new business started in March 1999. Seta Clinic, the first clinic in Japan specializing in immuno-cell therapy, opened in Tokyo’s Setagaya ward. MEDINET built a CPC and laboratory and started providing the Immuno-Cell Therapy Total Support Service to the clinic. The purpose of opening the clinic was to spread the therapy since it was patient-friendly and had fewer adverse effects. It had been reported that immuno-cell therapies were effective, but they were given to patients only as a part of clinical studies at a limited number of institutions such as university hospitals. As such studies involved only a small number of patients, many patients who desired the therapy could not receive it.

Immuno-cell therapy requires technological know-how of immune cell processing and it was difficult for a normal medical institution to perform it. What was needed was not a medical technology but an assembling technology similar to what many conventional manufacturing firms would have. Realizing that, Kimura and Dr. Egawa created MEDINET’s current business model after multiple consultations with officials from MHLW and METI (Ministry of Economy, Trade, and Industry). Since then, the growth of MEDINET was driven by the expansion of the Seta Clinic Group in Tokyo, Sapporo, Shin-Yokohama, Osaka, and Fukuoka.

Corporate Timeline

Oct 1995 MEDINET founded by current CEO Yoshiji Kimura with the aim of providing a new medical support business in preventive medicine (capital: 10 million yen).

Apr 1999 Started providing Immuno-Cell Therapy Total Support Service to Seta Clinic (established in March 1999).

Aug 2001 Ministry of Health, Labour and Welfare approved "Project for development of new business fields" under the Act for Facilitating the Creation of New Business.

Oct 2001 Started providing Immuno-Cell Therapy Total Support Service to Shin-Yokohama Medical Clinic (currently Seta Clinic Shin-Yokohama).

Jun 2003 Started providing Immuno-Cell Therapy Total Support Service to Kato Ryokuchi Koen Clinic (currently Seta Clinic Osaka).

Oct 2003 Started providing Immuno-Cell Therapy Total Support Service to Fukuoka Medical Clinic (currently Seta Clinic Fukuoka).

MEDINET’s shares were listed on Tokyo Stock Exchange (2370 Mothers).

Nov 2003 Entered into Technology Support Agreement with INNOMEDISYS Inc. (Seoul, South Korea).

Mar 2004 International Organization for Standardization certified ISO9001 Certification for quality management of cell culturing and processing.

Aug 2004 Started providing new cancer tissue storage service Cancer Tissue Bank™.

Sep 2004 Invested in Cell Science & Technology Institute, Inc.

Feb 2007 Started providing Immuno-Cell Therapy Total Support Service to the University of Tokyo.

May 2007 INNOMEDISYS Inc. received Manufacturing and Marketing approval of INNOLAK from Korean Food and Drug Administration (KFDA).

Jun 2007 Entered into License Agreement with National Hospital Organization, Osaka National Hospital.

Oct 2007 Commercialized new cell-processing technology of gamma-delta T Cell Therapy.

Jan 2008 Established subsidiary (Institute of Medical Service Management, Inc.) for providing support and consulting service in connection to general management of medical institutions.

Aug 2008 Commercialized new cell-processing technology (Dendritic Cell Therapy) using cell loading system to medical institutions.

Sep 2008 Invested in ReproCELL Inc. which provides services based on ES/iPS cell and somatic stem cell technology.

Oct 2008 Obtained a novel monoclonal antibody, which is an identified cell surface marker molecule specific to human regulatory T cells.

Mar 2009 Acquired patents of peptides deriving from HSP105.

Apr 2009 Acquired shares of Lymphotec Inc.

Oct 2009 Started comprehensive research and development for a novel cancer treatment with NanoCarrier Co., Ltd.

Dec 2009 Started collaborative clinical study on esophagus cancer with the University of Tokyo Hospital.

Acquired Preferred Stocks of MaxCyte Inc.

Apr 2010 Issued convertible bonds through a 3rd party offering to Tokio Marine & Nichido Fire Insurance.

Expanded licensing agreement with MaxCyte Inc.

Jun 2010 Invested in NanoCarrier Co., Ltd. through a 3rd party stock offering.

Nov 2010 Kanazawa University and the Seta Clinic Group began joint analytical research into the effectiveness of immuno-cell therapy on malignant tumors

Start of joint clinical research into the prevention of recrudescence of hepatocellular carcinoma associated with hepatitis C

Participation in Okinawa Prefecture’s Advanced Medical Technology Industrialization & Infrastructure Program

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News & Topics

Company News and Topics

November 2010

On November 30, 2010, the company announced the terms & conditions of its new shares issuance and the sale by existing shareholders, announced on November 19, 2010.

Details of the issuance of new shares were as follows:

• Issue price (offering price): 22,252 yen (a 4.0% discount to the closing price on November 30, 2010)
• Total amount raised: 2,225,200,000 yen
• Delivery Date: December 8, 2010

Details of the sale by existing shareholders were as follows:

• Issue price: 22,252 yen
• Total amount raised: 689,812,000 yen
• Delivery Date: December 8, 2010

On November 29, 2010, the company announced its participation in Okinawa Prefecture’s Advanced Medical Technology Industrialization & Infrastructure Program.

Program Summary

Under this program, Okinawa Prefecture called for proposals that would promote the industrialization of regenerative stem cell therapy and at the same time improve the prefectural infrastructure necessary for actual clinical use of such therapy. A proposal by a research team led by Tomishiro Central Hospital (Yuuai Medical Corporation) was selected.

MEDINET’s Involvement

The company will offer technical support and advice on the planning and operation of cell processing. In addition, MEDINET will promote the clinical development of dendritic cell vaccine therapy in association with Tomishiro Central Hospital.

The company commented that its participation in this project will likely contribute to the promotion of immuno-cell therapy for cancer and the improvement of the infrastructure with the local medical care system, so that anyone may enjoy the benefits of advanced medical technology. Given the early stage of the project, any potential impact on the company’s results was unclear at the time of the announcement, but it said that it would disclose details once they become relevant.

On November 19, 2010, MEDINET announced that its Board of Directors resolved to issue new shares and the sale by existing shareholders.

Details of the new share issuance were as follows:

• Type and number of new shares to be offered: 100,000 shares of common stock
• Method of offering: Public Offering
• Delivery Date: Any day between December 8 and December 13, 2010.
• Purpose of the fundraising: To secure investment capital for the next stage in the company’s growth, including research and development, capital investment, and public relations after FY09/11.

The company announced the following uses of the funds (estimated proceeds: 2,151,269,000 yen) raised by the offering:

1. R&D investment: 1.2 billion yen
2. Licensing payments to MaxCyte (until the end of December 2010): 408 million yen
3. Investment in system development (from December 2010 to the end of September 2012): 215 million yen
4. Working capital for sales promotion activities intended to promote the development of academic sales channels and general PR activities (from December 2010 to the end of September 2012): the remaining balance

Details of the R&D investment mentioned above were as follows: the funds will be appropriated to establishing evidence for immuno-cell therapy via clinical study (695 million yen from December 2010 to the end of September 2015) and the practical application of an Automated Cell Culture and Processing System (500 million yen from December 2010 to the end of September 2015).

In the event that the planned number of shares are issued, stock dilution would be 15.8% (total number of shares issued on October 31, 2010 was 632,755 shares).

Details of secondary offerings were as follows:

Sale by existing shareholders (secondary offering by way of the underwriters)

• Underwriter: Nikko Cordial Securities, Inc.
• Type and number of shares to be sold: 31,000 shares of common stock
• Seller and number of shares to be sold: IHN, Inc. 30,000 shares, Michio Yoshida 1,000 shares
• Delivery Date: Any day from Dec. 8 to Dec. 13, 2010

Sale by existing shareholders (secondary offering by way of over-allotment)

• Type and number of shares to be sold: a maximum of 19,650 shares of common stock
• Seller: Nikko Cordial Securities, Inc.
• Delivery Date: Any day from Dec. 8 to Dec. 13, 2010

On November 15, 2010, the company announced plans to begin joint analytical research with Kanazawa University, Kanazawa Advanced Medical Center (KadMedic), and the Medical Corporation Koshi-kai, Seta Clinic Group. The specific area of research was described as “the therapeutic effect of immuno-cell therapy against malignant tumors (excluding some types of blood cancer)”.

Following is a summary based on the company release:

• In addition to conducting large-scale research and analysis into the therapeutic effects of immuno-cell therapy, this joint research will use analytical research in investigative studies into the safety and efficacy of immuno-cell therapy. The studies will be based on such prospectively collected data as clinical information on patients with malignant tumors who are receiving immuno-cell therapy at KadMedic, cell-processing quality data, immunological research data etc. The intent is to use this research in clinical tests aimed at establishing the immuno-cell therapy as a standard method of treatment.
• Under the joint research arrangement, the Medical Corporation Koshi-kai, Seta Clinic Group will carry out immune cell processing and immunological testing, while MEDINET will be providing basic data involving immune cells processing as well as supporting immunological research and data analysis.
• KadMedic´s role will be to implement actual clinical research protocols and, in addition to obtaining highly precise image data utilizing PET-CTs, collect background data on the patients. This background data will include any other incidental treatment and all data gathered in periodic follow-up studies, and KadMedic will analyze it with Kanazawa University for evidence of adverse effects or post-therapeutic recurrence.

According to the company, the short-term effects of this project on company performance will be minimal. However, the hope is that it will help to boost the demand for immuno-cell therapy and substantially contribute to building a stable business base for MEDINET in the future.

On November 15, 2010, the company also announced a joint project with Tokyo Medical University and the Medical Corporation Koshi-kai, Seta Clinic Group. The parties have begun joint clinical research related to the use of combination therapy (radiofrequency ablation (RFA) and gamma-delta T-cell therapy) on liver cancer caused by the Hepatitis C virus.

According to the company release:

• This research continues clinical research related to the treatment of liver cancer caused by the Hepatitis C virus in which RFA therapy is followed by the local injection of dendritic cells into the tumor. The purpose is to evaluate the efficacy of using gamma/delta T-cell therapy, which has a different mechanism from the dendritic cell vaccine method, as a means of preventing recurrence.
• The company’s role will be to supply basic data, expertise, and technology related to immuno-cell therapy to Tokyo Medical University, Seta Clinic Tokyo, and Seta Clinic Shin-Yokohama.

According to the company, the short-term effects of this project on company performance will be minimal. However, the hope is that the results of the research will help to establish the role and evaluate efficacy of immuno-cell therapy in the area of cancer recurrence prevention, and as such become a driver of future performance.

On November 5, 2010, MEDINET released FY09/10 results.

October 2010

On October 28, 2010, the company announced a revision to its FY09/10 estimates. The revised figures were as follows:

Sales: 3.2 billion yen (previous estimate: 3.3 billion yen)

Operating Profit: 334 million yen (previous estimate: 330 million yen)

Recurring Profit: 366 million yen (previous estimate: 330 million yen)

Net Income: 438 million yen (previous estimate: 320 million yen)

The company cited as reasons for the revision to recurring profit the non-operating income related to foreign exchange (the strong Japanese yen effectively reduced the size of US dollar based debt). The revision to net income was due to the combination of a revaluation loss from investment securities (60 million yen) and a reversal of tax expense (140 million yen).

May 2010

On May 19, 2010, MEDINET announced that it would accept the 3rd party offering of shares from NanoCarrier Co. Ltd. 4,819 shares were priced at 20,750 yen per share for the total amount of 99,994,250 yen. MEDINET would own 3.61% of NanoCarrier after the acquisition. The funds were to be used for the development of new medical products and techniques in the field of cancer treatment conducted by NanoCarrier under the comprehensive contract with MEDINET. Specific areas mentioned were the development of new cancer therapy techniques by combining micelle formation medicines of cytokines with various effector cells and antigen expressing cells, and research and development of new technologies targeting cancer areas by antibody binding micelles.

April 2010

A new expanded licensing agreement with MaxCyte Inc. furthered the relationship started in 2007.

On April 12, 2010, MEDINET issued an unsecured corporate convertible bond through a 3rd party allotment to Tokio Marine & Nichido Fire Insurance Co. Ltd. The total amount was 1.0 billion yen. In its press release, MEDINET expressed hope that the company’s credibility would be increased by receiving funds from Japan’s largest financial group (and the share price indeed responded as if so). The release also mentioned the possibility of collaboration in the field of cancer treatment.

Industry News and Topics

June 2010

In the New Growth Strategy approved by the cabinet on June 18, 2008, as part of the national strategic project in Life Innovation, it was specified that the government will work on projects focusing on building the infrastructure that helps to demonstrate the nation’s technology and creativity in life science. Drugs, medical devices and regenerative medicine are the areas in life science where significant growth is expected

March 2010

MHLW officially accounted “the conditions that a medical institutions uses patient’s cell harvested by other medical institutions for the patient’s treatment (No. 0330-2)”.

April 2010 The U.S. Food and Drug Administration approved “Provenge”, a dendritic cell vaccine for prostate cancer on April 29, 2010. The vaccine was developed by Dendreon, a bio-venture company operating in Seattle, U.S.A.

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Top Management

Yoshiji Kimura (born in 1952) is the CEO. He established MEDINET in 1995 after working for HOYA Corp. (TSE 7741), where he sold contact lenses, laser equipment, and ophthalmologic medicines and was instrumental in the turnaround of an affiliate. An encounter with Dr. Kohji Egawa led him to his decision to embark on the immuno-cell therapy business. He became Representative Director of the Board, CEO in 2002.

Yoshiaki Haruyama (born in 1970) is the COO. He joined the company in May 2001, becoming Manager of Administrative Department. In November 2001, he became the General Manager of the Administrative Department. He became the General Manager of the Administrative Division in February 2002, CFO in September 2002, and was appointed COO in December 2009.

Daisuke Hara (born in 1963) is the CFO. He joined MEDINET in April 2004 to become a corporate officer, CAO (Chief Administrative Officer), after his career as Director of Investment Banking Division at Nikko Salomon Smith Barney Securities. He joined the Board of Directors in December 2005, and became CFO in April 2007.

Kohji Egawa (1937-2009). He became a professor of the University of Tokyo Institute of Medical Science in 1984. He became an emeritus professor in 1997. He became the Chairman of the Board at MEDINET in February 1998. He established Seta Clinic in March 1999, and assumed the position of the hospital director in November 2007. He became Director General of Koshikai, a non-profit medical corporation that controls the Seta Clinic Group. He was involved in MEDINET’s operation from the beginning, and through his role as Scientific Founder of MEDINET, had been providing advice on R&D and medical technologies.

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Employees

As of September 30, 2010, the company employed 146 people.

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Dividends and Shareholder Benefits

The company does not pay dividends or have a shareholder benefit plan.

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Investor Relations

The company hosts semiannual results meetings after Q2 and full year announcements. The company maintains an IR website, and publishes information in both English and Japanese (http://www.medinet-inc.co.jp/english/index.html).

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By the Way

Glossary

Abrogation of immunosuppression

Restoring the malfunctioning immune system (in a state of immunosuppression) caused by cancer or viral infection to the original activity.

Adjuvant

A pharmacological agent that increases the immune response.

Alpha-beta T cells

The most ubiquitous T cells in blood (estimated at over 90% of T cells in the body), which express TCR (T cell receptor) on their surface.

Antibody

An immunoglobulin that has the ability to bind to specific antigens thereby removing them from the living body.

Antigen

A molecule identified as “non-self” by antibodies and T lymphocytes, and provokes the immune system. Examples of antigens include foreign pathogens like bacteria and viruses as well as a sugar chain or protein on the surface of tumor cells that usually do not exist in the body. Through the activity of antibodies and lymphocytes, antigens are removed from the body.

Antigen presentation

Presentation of peptide antigen on the surface of the antigen presenting cells by bounding to MHC molecules.

B cell

A type of the lymphocytes that produces immunogloblin.

CPC (Cell Processing Center）

A professionally-managed facility for cell culturing and processing.

CTL

It is the abbreviation of a T cell named Cytotoxic T Lymphocyte. CTL belongs to a group of T lymphocytes that can identify and kill foreign cells such as grafted cells, virus infected cells and cancer cells.

Cell therapy

A therapy in which specific cells are used for treatment. Either processed or non-processed cells are used for the therapy. The cells are cultured and processed at a CPC.

Culture medium

A medium containing specific nutrients to culture cells or tissue.

Custom-made Medical Practice Management System

MEDINET’s highly advanced facilities and equipment management system. The concept is based on GMP (Good Manufacturing Practice).

Cytokines

Any of several regulatory proteins, such as the interleukins and lymphokines, that are released by immune cells and act as intercellular mediators in the generation of an immune response.

Degree of purity

Degree of cleanliness of a room. The number of particles that are between the sizes of 0.3 and 0.5 micrometers is measured in one cubic foot of air (about 28.3L), and the count is used to classify cleanliness. According to the Federal Standard 209D in the US, particles measuring 0.5 micrometers in diameter should be counted. When there are more than 1,000 and less than 10,000, it is described as Class 10,000.

Dendritic cells (DC)

Antigen presenting cell with a high ability to present antigen for T cells and activate the immune system. They can be found in skin tissue, inner lining of the nose, lungs, stomach, intestines, and peripheral blood.

Gamma-delta T cells

A kind of T cells that expresses TCR on their surface. These cells belong to a minority group of T cells and are believed to work at earlier stages of infection or remove cancer cells in the immune system.

GMP (Good Manufacturing Practice)

Part of a quality system regarding the standard for manufacturing and quality management. It can be separated into GMP software and GMP hardware. GMP software is concerned with manufacturing and quality management standards, while GMP hardware is concerned with equipment standards. GMP is the guideline that all pharmaceutical companies must follow.

IL-2 (Interleukin-2)

A kind of cytokine secreted from T cells when they are stimulated by an antigen. It is related to the regulation of immune response. Its main function is to activate T cells and induce T cell proliferation.

Immune system

The body system in human and other animals that protects its own organism by distinguishing “self” and “non-self” antigens. The immune system that eliminates cancer cells or virus-infected cells is called “cellular immunity”, and T lymphocytes play a central role in that system.

Lymphocytes

Any of various white blood cells, including T cells, B cells and NK cells that can recognize the difference between normal cells and bacteria or foreign objects and deactivate foreign objects. Lymphocytes account for about 25% of all white blood cells.

MHC Class I molecules

The immunological molecules expressed on surface of nucleated cells. The function of MHC Class I molecules is to bind to a peptide antigen and present the peptide on the surface of the cell. Cancer peptide antigens are presented for CD8 positive T cells via MHC Class I molecules and the antigen information is communicated. CD8 positive T cells are found among alpha-beta T cells.

Monocytes

A kind of white blood cell that have a round and non-protruding nucleus. They are precursor cells of macrophages.

Mononuclear cell

Collective term for lymphocytes and monocytes.

Percentage of viable cells

Percentage of living cells in a target cell group.

Plasma

The fluid portion of blood from which red blood cells and white blood cells have been removed. Plasma is composed of water, proteins, inorganic salt, and so on.

Radiofrequency Ablation (RFA)

A method of treatment in which radio waves are used to generate heat at the tip of a needle inserted into a cancerous lesion in the liver, killing the cancer cells. It is indicated when the cancer is 3cm or less in diameter and there are fewer than three lesions. The treatment has been covered by national Japanese health insurance since 2004.

RECIST (Response Evaluation Criteria In Solid Tumors)

An international guideline provided for clinical tests to determine the effectiveness of medicinal treatment in solid tumors. In clinical tests, it is a mechanism to measure the size of the tumor by CT and MRI as well as a way to evaluate anticancer effectiveness.

Perfect Efficacy (CR: All lesions disappeared)

Partial Efficacy (PR: Initial diameter decreases over 30%)

Progress (PD: Over 20% of an increase from the minimum diameter during the test)

Stable (SD: Insufficient decrease for PR, insufficient increase for PD)

T cells (T lymphocytes)

Any of the lymphocyets that mature in the thymus and play the central role in cell-mediated immune response. T cells express TCRs on their cell surface.

Treg cells (regulatory T cells)

Cells that can control the activity of lymphocytes. They suppress abnormal immune reactions in the body, but at the same time suppress normal activity of lymphocytes that kill cancer cells. They are believed to be a factor in proliferation of cancer cells.

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Latest Q&A

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