Financial Summary

Recent Updates

Highlights

On January 26, 2012, NanoCarrier announced it was to conduct a third party placement for convertible bonds with warrants attached and equity warrants.

(For original Japanese-language only announcement in PDF format, please click here.)

Details of the offering for two tranches convertible bonds with warrants and its eighth equity warrants issuance were as follows:

Convertible bonds with warrants-1

• Payment date: March 21, 2012
• Sale price: 30 million yen (total of 28 warrants)
• Potential dilution: 29,988 shares
• Total value of funds raised: 840 million yen
• Conversion price: 28,000 yen
• Subscribers: 780 million yen to be taken up by Whiz Healthcare PE Series 1 Fund limited investment partnership and CSK-VC Technology Innovation Fund Limited Partnership to subscribe for 60 million yen.

Convertible bonds with warrants-2

• Payment date: March 21, 2012
• Sale price: 20 million yen (total of 43 warrants)
• Potential dilution: 30,702 shares
• Total value of funds raised: 860 million yen
• Conversion price: 28,000 yen
• Subscribers: 800 million yen to be taken up by Whiz Healthcare PE Series 1 Fund limited investment partnership and CSK-VC Technology Innovation Fund Limited Partnership to subscribe for 60 million yen.

Equity Warrants-8

• Payment date: March 21, 2012
• Sale price: 15 million yen (total of 67 warrants)
• Potential dilution: 67,000 shares
• Total value of funds raised: 2.0 billion yen (15 million yen on issuance and 2.0 billion yen on exercise of warrants)
• Exercise price: 30,000 yen
• Subscribers: 62 warrants to be taken up by Whiz Healthcare PE Series 1 Fund limited investment partnership and five warrants to be taken by CSK-VC Technology Innovation Fund Limited Partnership

Extraordinary Shareholders meeting and Dilution Rate

Total new equity issuance amounts to 127,690 new shares, resulting in a dilution rate equivalent to 54.4% of the 234,885 shares outstanding as of 25 January, 2012.

As the exercise and conversion of all new warrants and the convertible bonds with attached warrants via this third party allotment would result in a dilution of over 25.0% the company is required under Article 432 of the Tokyo Stock Exchange’s Securities Listing Regulations to gain shareholders’ approval for the allotment. Nanocarrier said it was to hold an extraordinary shareholders' meeting on March 19, 2012.

Purpose of fund-raising:

• Nanoplatin ® (NC-6004) clinical development and manufacturing costs: 2.8 billion yen (earmarked spending period March 2012 to April 2016)
• DACH-Platin (NC-4016) clinical development and manufacturing costs: 912 million yen (earmarked spending period March 2012 to April 2016)

Background and Purpose of Fund-Raising

The company made the following comments regarding its financing decision:.

• The company will undertake a substantial change in strategy, and develop Nanoplatin® (NC-6004) and DACH-Platin (NC-4016) in-house (it was still planning to continue cultivating ties with external parties for licensing-out and joint developments).
• Although in-house development requires considerable funding, the company can control the development process as it sees fit and thereby stay closer to its development schedule. Moreover, by progressing through development stages and increasing the value of products, the company believes it can maximize the value of each of its offerings.
• The company plans to handle both the domestic and overseas development of Nanoplatin® (NC-6004) on its own. Including clinical studies, the company estimates that it will require 2.8 billion yen for clinical trial expenses, drug manufacturing costs, etc. to get regulatory approval and bring the drug market in the core markets of Japan, North America, and Europe.
• After DACH-Platin (NC-4016) completes phase II clinical trials, production will be passed onto a licensee. The licensee will cover development costs and then take a lead role in development. In order to advance to a stage where drug production is possible, the costs are anticipated to total 912 million yen, including clinical trials in Japan.
• As of end-January 2012, the company was still in preliminary talks to secure financing for its operations, while R&D and other costs were expected to exceed the company's revenues. As for financing methods, the company felt it was in a position where it required direct financing.
• As for exercising of the equity warrants and convertible bonds with warrants attached, the company will company will issue them over a relatively long period. Therefore, the company believes it will have more control over dilution versus a one-time issuing of new shares.

Prospective Investors

• Whiz Healthcare PE Series 1 Fund - limited investment partnership

The partnership was formed in April 2011 for the purpose of investing in companies that make original scientific discoveries and technological innovations, as well as new progress in drug development. Its planned financing commitment was expected to be around 3.2 billion yen. The investor ownership breakdown is: Organization for Small & Medium Enterprises and Regional Innovation (31.1%), Japan Trustee Services Bank Ltd. (15.5%), and Whiz Partners Inc. (11.5%).

• CSK-VC Technology Innovation Fund Limited Partnership

The partnership was established in September 2006 for the purpose of investing in the Japanese telecommunications, nanotechnology, exotic materials, new manufacturing technologies, life sciences, environment and energy sectors, and also for investing in start-ups that show potential to become market leaders in future industries. Its planned financing commitment was expected to be around 2.7 billion yen. The investor ownership breakdown is: Organization for Small & Medium Enterprises and Regional Innovation (37.0%), Japan Trustee Services Bank Ltd. (29.6%), and Whiz Partners Inc. (18.5%).

On January 11, 2012, the company announced that it had been granted a patent by the Japan Patent Office for a nucleic-acid drug delivery carrier.

(For original PDF announcement in Japanese language only please click here.)

On December 26, 2011, the comapny announced it had received a patent by Korean authorities for its genetic carriers.

(For original PDF announcement in Japanese language only please click here.)

On December 12, 2011, the company announced it had received a patent from US authorities for its therapeutic protein delivery carriers.

(For original PDF announcement in Japanese language only please click here.)

On December 6, 2011, the company announced it had received a patent in New Zealand for its pH-Sensitive Micelles.

(For original PDF announcement in Japanese language only please click here.)

On November 10, 2011, the company announced 1H/Q2 FY03/12 results:click here to go direct to the 1H FY03/12 results section.

(For original PDF announcement in Japanese-language only please click here.)

For corporate releases and developments more than three months old please refer to the News & Topics section.

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Trends & Outlook

Quarterly Trends

1H FY03/12 Results (Announced on November 10, 2011; please refer to tables above)

1H sales came in at 210 million yen vs. 18 million for 1H FY03/11, due to lump sum payments on the signing of a contract and licensing of Epirubicin Micelle (NC-6300) with Kowa Co. Research and development expenses though resulted in the company posting an operating loss of 109 million yen. (vs. an operating loss of 289 million yen a year earlier).

The company maintained its FY03/12 forecasts.

Main Pipeline Update

Paclitaxel Micelle (NK105)

Preparations by licensee Nippon Kayaku Co. (TSE 4272) for Phase III trials related to development of stomach and breast cancer treatments were ongoing. The trials were expected to start at the earliest in the beginning of 2012, according to the company.

Nanoplatin® (NC-6004)

Together with Orient Europharma Co., whom they have an Asia ex-Japan and China licensing agreement with, the company has been conducting phase I and II pancreatic cancer clinical trials for a combination therapy of Nanoplatin® (NC-6004) and Gemcitabine in Taiwan and Singapore. After concluding phase I trials, a recommended dose of 90mg/m2 of NC-6004 for this combined therapy was decided upon. In July, 2001 phase II trials began, which are intended to demonstrate efficacy and safety.

The company is also moving forward with preparations to conduct their own NC-6004 phase II trials in Japan. They expect to apply for and receive approval for it as an IND (Investigational New Drug) by March 2012, and begin trials once this has happened.

Nanoplatin ® is a micellar nanoparticle-encapsulated formulation of the anticancer drug cisplatin developed by the company as nano-medicine to be used in combination with Gemcitabine. According to the company, phase I studies demonstrated a suppression of side-effects associated with cisplatin and increased safety.

Moreover, combination treatment of Gemcitabine and Nanoplatin allows for longer continuous treatment cycles: 4-5 treatment cycles on average for Gemcitabine treatments alone, versus up to 19 treatment cycles (one cycle equals one dose per three weeks) for a combination treatment of Nanoplatin and Gemcitabine.

The company said it is expecting that phase II studies will demonstrate increased efficacy and extended progression-free survival (PFS) - the length of time during and after treatment during which the patient’s disease does not worsen.

Nanocarrier CEO Ichiro Nakatomi expressed his hope that Nanoplatin® (NC-6004) would become a blockbuster drug at the company’s 1H FY03/12 results meeting on November 22, 2011.

DACH-Platin (NC-4016)

The company was making plans for the resumption of phase I and the conducting of phase II clinical trials in Japan. It also noted that negotiations with new partners for the product both domestically and overseas were ongoing.

Epirubicin Micelle (NC-6300)

In September 2011 the company signed a licensing and co-development agreement for Epirubicin Micelle with Kowa Co., adding this product to its main pipeline. The company will cooperate with Kowa in developing NC-6300 into a commercial pharmaceutical product, conducting clinical and preclinical trials and in research and development. Nanocarrier said it would also continue its joint research with the National Cancer Center into Epirubicin micelle (NC-6300) that dates back to 2010.

The company raised 290 million yen via a third-party allotment of new shares to Kowa Co. and also entered into a Research Collaboration Agreement with them.

The basic outline of Nanocarrier’s agreement with Kowa Co. was as follows:

• Kowa is granted the global sales and manufacturing rights the final NC-6300 formulation
• In granting these rights to Kowa, the company will receive milestone payments (at each phase) of up to a maximum of 2.4 billion yen
• The company will supply Kowa with epirubicin micelles
• After the drug is released the company will receive royalties of a certain percentage of the sales value

The company noted by signing an initial license for non-clinical trials it was now in a position expand its main pipeline (pH-responsive micelles); push forward with development in a steady fashion; assure contractual revenue; and secure investment from contract partners.

New Pipeline

Protein micelles

In October 2011, the company signed a new Research Collaboration Agreement with LFB Biotechnologies Inc. (LFB) to test long-term the safety and efficacy of a micellar nanopartical formulation of the hemophiliac protein fhFVIIa (Factor VII) held by LFB. Based on the results of the collaborative research the pair have agreed to conduct further negotiations on the terms for an exclusive license agreement regarding the development and commercialization of the drug formula.

Q1 FY03/12 Results

On August 12, 2011, the company released Q1 FY03/12 results (see table above).

Sales of materials for use in cosmetics came to 4 million yen, down 57.0% YoY while thanks to research and development expenses the company posted an operating loss of 154 million yen. (vs. an operating loss of 145 million yen a year earlier).

The company maintained its 1H and FY03/12 forecasts.

Main Pipeline Update

Paclitaxel Micelle (NK105) According to the company, licensee Nippon Kayaku Co. (TSE 4272) was preparing for Phase III trials to begin in early 2012 related to development of stomach and breast cancer treatments.

Nanoplatin® (NC-6004)

The company and Orient Europharma Co., which holds licenses for Asia excluding China and Japan, conducted Phase I and II clinical trials in Singapore and Taiwan: Phase I trials had wrapped up and the drug was entering Phase II trials in July. The company was also making preparations to conduct in-house Phase II trials within Japan, and once its Investigational New Drug (IND) application approval was granted by the clinical studies review committee in 2H FY03/12 it was planning on beginning tests.

DACH-Platin (NC-4016)

The license agreement with Debiopharm ended in March 2011 and since then the company has been looking for new partners. The company is making plans for the resumption of phase I and the conducting of phase II clinical trials in Japan.

New Development Pipeline

Protein micelles

The company entered into an option agreement with LFB Biotechnologies to move to a licensing contract based on various studies, such as safety and basic pharmacological efficacy, by July 2011. The companies did not enter into a licensing contract, instead they decided to conduct a new one-year Research Collaboration Agreement. As of August 2011 the two companies were still discussing the terms of the agreement. According to the company, the motivation behind the new Research Collaboration Agreement was that further testing was required to verify long-term safety of the products.

Full Year (FY03/12) Outlook

The company forecasted 440 million yen in sales for FY03/12. While a full breakdown was not given the company made the following comments during its FY03/11 announcement on May 12, 2011:

• Steady progress on Phase I and II clinical trials of Nanoplatin® (NC-6004) was being made under the direction of Orient, and business development in areas of Asia where the drug is not yet licensed is progressing.
• Building on the positive results from the licensing contract with Debiopharm S.A. for DACH-Platin (NC-4016), the company is looking for new partners and aiming for further progress on clinical trials.
• The company plans to improve development of its new drug development pipeline and in doing so form new partnerships with other pharmaceutical companies.

SR Inc. believes the company’s sales plan is based on the assumption that among Nanoplatin® (NC-6004), DACH-Platin (NC-4016), or the new development pipelines at least one of these will become profitable and drive sales. While the company was expecting substantially higher sales it was still forecasting an operating loss of 512 million yen due to R&D expenses.

Longer Term Outlook

Developments within the company’s main drug pipeline should lay the foundation for increasing revenues, although the uncertain nature of payment timing (milestones) suggests that sales are likely to remain lumpy.

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Business

Core Technologies

The company's core strength in micellar nanoparticle (polymeric micelles) technology is the product of a combination of academic research into polymeric micelles and nanotechnology (see the Glossary for an explanation of terminology).

One of the company's key technologies is its ability to "engineer" micelles to have a variety of different properties. For example, it can manipulate the size of micelles and encase drugs inside these particles. This core technology helps drive growth and development, and is responsible for the company's competitive edge in the field.

The company maintains that its systems may be used not only with conventional monomer drugs but also polymers, including nucleic acid polymers, as well as bioactive peptides and proteins. (“Bioactive” means that it can have an effect on living organisms). Please note that protein targeting micelles are not the same technology that is used for passive targeting compounds (that comprise the existing pipeline) but rather an extension of the same principles.

Core technology focus (Micellar nanoparticle/nanomicelle particle technology)

• Micellar nanoparticles consist of block copolymers. These block copolymers are single molecules that are synthesized from polyethylene glycol (a hydrophilic polymer that easily dissolves in water) and a polyamino-acid-based hydrophobic polymer that is largely insoluble in water.

• When block polymers are mixed with water, spherical particles (i.e., micelles) 20-100 nm (nanometers) in size are formed. These micelles consist of two distinct layers, with the hydrophilic polymer forming the outer shell and the hydrophobic polymer forming the core. A drug is then packed into and sealed inside the core (i.e., the amino acid structure) of the micellar nanoparticles.

(Source: Company Data)

According to the company, nanomicelle particle technology offers the following attractive features:

• Few particles become trapped inside major organs. When particles are injected into the bloodstream, their size dictates the organs they are likely to become trapped in. Particles larger than 3,000 nm may end up in the lungs, particles larger than 300 nm in the spleen, and particles larger than 100 nm in the liver. As the company's micellar nanoparticles are less than 100 nm in diameter, fewer of them end up being trapped in organs, and more of them are able to circulate through the bloodstream until they reach a cancer cell.

• Prolonged circulation for particles. The immune system works to expel foreign substances, such as bacteria from the body similarly, it also attempts to remove drugs administered into the bloodstream. In contrast, the polyethylene glycol that covers the surface of the micellar nanoparticles is not easily recognized as a foreign substance by the immune system. So, after the particles have been injected intravenously they are able to circulate the bloodstream for a prolonged period thereby increasing the drug's efficacy.

• The particles are able to target cancer cells. Cancer tissue differs from normal tissue in that cancel cells proliferate faster. It is thought that many new blood vessels form to supply the various nutrients that these newly created cells require. Since these new blood vessels are formed very quickly, the bindings between cancer cells are larger than those found in normal cells and these blood vessels therefore are highly permeable. It is believed sub-100 nm micellar nanoparticles circulating in the bloodstream accumulate in cancer tissue easily. In addition, the lymphatic vessels found in cancer tissue are underdeveloped, so micellar nanoparticles have a tendency to remain inside the tissue rather than return to the bloodstream. In other words, particles do not leave the cancer cells as easily as they arrive. Together, these two phenomena are known as the EPR (Enhanced Permeation and Retention) Effect. The anticancer drug contained in the particle is able to persist in cancer cells for a long period of time due to the EPR Effect's ability to trigger a type of angiogenic activity that is unique to tumor tissue.

(Source: Company Data)

Main systems developed using the existing technology are:

NanoCap®System uses polyamino acids to form the inside of the micellar nanoparticle in order to lock in water-insoluble drugs without changing their properties. Polyamino acids have oil-like properties that prevent them from dissolving in water. NanoCap® effect: Improves solubility of insoluble drugs.

Medicelle®System encapsulate drugs by magnetic binding or chemical binding. Some medications have defined positive or negative electric charges. It is possible to bind them inside a micelle by using a polymer with the opposite electric charge. Chemical binding is performed by chemically attaching the drug to a polyamino acid. Medicelle® effect: Improves retention of drugs in the bloodstream.

NanoCoat®System is used to efficiently targeting cancer cells by attaching a substance that functions as a sensor onto the surface of the drug-carrying micellar nanoparticle, which then homes in on cancer cells. NanoCoat® effect: Enhances site specific targeting ability.

(Source: Company Data)

Core Patents

Product Pipeline

Main Pipeline Status (as of November 2011)

Source: Company Data Processed by SR Inc.

• NK105 (Paclitaxel Micelle)　

Paclitaxel (Taxol®) is an anticancer drug widely used around the world for treating a variety of cancers including ovarian, lung, breast, and stomach cancers. Because it does not dissolve well in water, special alcohol-based solvents msut be used in its administration, which cause significant side effects. Reducing these side effects requires the use of additional medicines such as steroids and antihistamines, which themselves also produce side effects. With its micellar nanoparticle technology (NanoCap® system), the company has succeeded in manufacturing a micellar nanoparticle into which Paclitaxel can be locked: NK105 Paclitaxel Micelle.

Several years ago, the company performed successful joint studies with Nippon Kayaku (TSE 4272) to improve paclitaxel using micellar technology. Nippon Kayaku then made a decision to develop NK105, based on results of those studies and inlicensed the technology from NanoCarrier in June 2002. The license gave Nippon Kayaku exclusive distribution rights for Japan and Asia, as well as non-exclusive rights for the rest of the world.

Phase I clinical trial was performed from May 2004 to April 2006 at the National Cancer Center Hospital and showed positive results. According to Drug Delivery System newsletter (24-1, 2009), NK105's AUC (Area Under Curve, the area under the blood-concentration-versus-time curve) was 15 times higher than that of the conventional paclitaxel (recommended dosage of NK105 of 150mg/sq.m vs. usual dosage of paclitaxel of 210mg/sq.m). Several patients showed stable disease for more than 4 weeks and one patient with metastatic pancreatic cancer showed clear shrinkage of liver metastasis.

Nippon Kayaku started Phase II trials in November 2007. The main objective of Phase II clinical trial in Japan is to prove efficacy and safety as well as to establish whether the drug prolongs patient survival. It is hoped that NK105 will show lower toxicity relative to paclitaxel, especially when administered for long periods of time. Combined with better AUC relative to paclitaxel, that could open the doors for NK105 to become a replacement for paclitaxel.

As of May 2011, Nippon Kayaku had completed the Phase II clinical trial targeting stomach cancer, and is now preparing for a Phase III trial.

In order to maximize the value of this technology, NanoCarrier started a Phase I clinical trial targeting breast cancer in 2010. The earliest it can move onto a Phase II study would be before end-2011, according to the company.

The company received an upfront payment from Nippon Kayaku for the initial contract, as well as milestone payments for the commencements of Phase I and Phase II trials. It stands to receive a further milestone payment and royalties (2% of net sales; gross royalties are 4.5% but 2.5% flows through to JST) upon filing of an application for a new drug. SR Inc. estimates that if trials go smoothly the drug could probably get approved in Japan in 2014.

While just a speculation at this point, SR Inc. thinks that if NK105 proved to be a successful replacement for paclitaxel, it could also probably compete with the current blockbuster market leader Taxotere. A 30% global market share within the taxanes group could mean sales of roughly $1.4 billion. That could produce around 2 billion yen plus in annual revenues for the company, based on the assumption of 2-2.5% royalty level (the assumptions are made by SR Inc. for reference purposes only; the company does not comment on potential sales or royalties).

• NC-6004 (Nanoplatin®)

Nanoplatin is a drug that NanoCarrier developed applying its micellar technology to cisplatin. While a good drug, cisplatin causes severe vomiting and requires intensive hydration during prolonged administration. This results in dramatic reduction of quality of life (QOL) of patients. The company believes Nanoplatin® could solve these problems。

NanoCarrier started Phase I clinical trial in the UK in May 2005. However, insufficient capital, primarily due to a turbulent equity market during and after the IPO, caused NanoCarrier to suspend further European trials and look for lower cost opportunities in Asia for its subsequent clinical trials. Eventually, NanoCarrier out-licensed NC-6004 to Orient Europharma Co. Ltd., a Taiwan based pharmaceuticals and cosmetics manufacturer and importer, granting it exclusive Oceania and Asia (ex-Japan, ex-mainland China) rights. Orient Europharma is now conducting Phase I and II trials in Taiwan and Singapore. for combination treatment with Gemcitabine, the standard medication for pancreatic cancer. After concluding phase I trials, a recommended dose of 90mg/m2 of NC-6004 in this combined therapy was decided upon. In July, 2001 they phase II clinical trials began to demonstrate the efficacy and safety of the treatment.

The company was also moving forward with plans to conduct their own NC-6004 phase II clinical trials in Japan. They expected to apply for and receive approval for it as an IND (Investigational New Drug) by March 2012, and begin trials once they had received approval.

In Phase I trials the characteristic side effects of cisplatin were suppressed and an increase in safety was also demonstrated, the company noted. It was also demonstrated using a combination Nanoplatin® (NC-6004) treatment it was possible to extend continuous treatment up to 19 cycles or more (one cycle equals one dose every three weeks) as opposed to arounf 4-5 cycles for Gemcitabine alone.

The company remarked they hope phase II trials to show both an increase in efficacy and extended progression-free survival (PFS: the period in which the patient survives without the illness worsening).

Nanocarrier CEO Ichiro Nakatomi expressed his hope that Nanoplatin® (NC-6004) would become a blockbuster drug at the company’s 1H FY03/12 results meeting on November 22, 2011.

According to company materials, the revenues under the agreement are the upfront payment and milestone payments. No direct royalties are mentioned. Instead, Orient Europharma will bear 1/2 of the clinical trial costs and at the same time buy the drug from NanoCarrier at a certain fixed percentage of the drug's selling price. This is effectively a scheme similar to royalties but allowing the company to lower its direct manufacturing cost burden and seems to be designed with the worst case scenario in mind, i.e. that the company would continue to have difficulties raising capital.

According to the company, about 190,000 people globally suffer from pancreatic cancer—the target of Nanoplatin®. The company projects peak sales of around 70–80 billion yen and plans to file for approval in 2016 at the earliest.

• NC-4016 (DACH-Platin Micelle)

NC-4016 is a new drug formulation consisting of DACH-Platin, a metabolite (product of metabolism) of oxaliplatin. Oxaliplatin is an effective and widely used drug but causes severe side effects such as vomiting and peripheral neuropathy, a condition characterized by chronic numbness in the limbs.

Oxaliplatin, once it is in the body, is metabolized into DACH-platin, a platin compound that was shown to prevent cancer cells from multiplying. NanoCarrier believes that when DACH-platinum is enclosed inside NanoCarrier nanomicelles, it will produce strong anticancer effects with milder adverse effects.

Once it enters the body, Oxaliplatin transforms into DACH-platin, a constituent that inhibits the reproduction of cancer cells. The company believes that by turning DACH-platin into a micellar nanoparticle by binding it with a block copolymer they can reduce the side effects of Oxaliplatin and at the same time increase its anti-carcinogenic effect.

Following a joint study on NC-4016 conducted in March 2005, NanoCarrier signed license and supply agreements with Debiopharm S.A.—which developed Oxaliplatin —in March 2009. Debiopharm proceeded with a Phase I trial in Europe, however, the agreement between the two was ended in March 2011. Based on these agreements, NanoCarrier received fees from Debiopharm, including an upfront payment and sales profits through supplying formulations for trials, as well as a milestone payment with the commencement of Phase I trials. In addition, if NanoCarrier signs a license agreement with a new partner in FY03/12 or later, it must pay part of any milestone payments it receives to Debiopharm.

The company commented that as of May 2011 it planned to conduct remaining trials domestically by itself, and it was making preparations for these trials.

According to the company, it plans to file for approval in 2018 at the earliest.

Epirubicinmicelle (pH-Sensitive Micelles, NC-6300)

Epirubicin is an anthracycline-class anti-cancer drug that fits into the double-helix structure of DNA, inhibits its synthesis, suppresses enzyme activity, and severs DNA. Anthracyclines have a wide range of applications, and are used particularly in breast cancer treatment. On the other hand, it is also highly cardiotoxic and the company hopes this side effect can be mitigated through micellization.

Epirubicinmicelle is an improved version of the pH-responsive micelle system originally developed of by Professor Kataoka’s team at Tokyo University, and that has been further developed by the company. According to the company, this is a cutting-edge system whereby the drug is introduced into a cancer cell using a micelle, which then lowers the pH level and the Epirubicin is released explosively within the cell. Preliminary research suggests the system may even be effective against anthracycline-resistant forms of cancer.

Significant improvement in the drug’s retention in the bloodstream and increased concentration of the drug in cancer cells was demonstrated in NC-6300 animal experiments.

(See: Improved anti-tumor activity of stabilized anthracycline polymeric micelle formulation, NC-6300：M.Harada, I.Bobe, H.Saito, N.Shibata, R.Tanaka, T.Hayashi, Y.Kato, Cancer Science 102 (1) 192-199(2011).) According to the company, in human liver cancer model experiments, tumors mostly vanished and in human breast cancer model experiments it was shown to be substantially more effective at inhibiting tumor growth than a simple administration of Epirubicin formula. Moreover, as accumulation of Epirubicin in the heart is also greatly reduced by micelle administration, there are high hopes for a reduction in side effects.

In September 2011, the company entered into a licensing and co-development agreement with Kowa Co. and added the drug to their main pipeline.

As of November 2011, the company said it planned to move forward with its joint research cooperation with Kowa to hold preclinical and phase I trials in order to receive approval for Epirubicinmicelle as a drug. Nanocarrier mentioned it would also continue to conduct collaborative research for Epirubicinmicelle preclinical trials with the National Cancer Research Center as it has been doing since 2010.

The basic outline of Nanocarrier’s agreement with Kowa Co. is as follows:

• Kowa is granted the global sales and manufacturing rights the final NC-6300 formulation
• In granting these rights to Kowa, the company will receive milestone payments (at each phase) of up to a maximum of 2.4 billion yen
• The company will supply Kowa with epirubicin micelles
• After the drug is released the company will receive royalties of a certain percentage of the sales value

New Development Pipeline and Compounds under Research

SR Inc. estimates that the majority of new research by NanoCarrier is focused on learning how to produce carrier structures to deliver short-lived biomolecules to targeted areas of the body. Most of the new projects are in a feasibility study stage.

Protein Micelles

Therapeutic protein targeting is an emerging area of biotechnological research. Protein targeting occurs naturally in the body, this is how various proteins get transported to their appropriate destinations in cells. Proteins are produced on ribosomes and their transport is directed by signaling peptides. When something goes wrong, some proteins get overproduced (overexpressed) causing cancer and other diseases. Switching off “bad” proteins and switching on the “good” ones could be the Holy Grail of pharmaceuticals. However, proteins and peptides have short half lives and can cause damage (adverse effects) when they get to the wrong places. Making them “live longer” and work selectively are therefore important tasks.

According to company materials, other firms' solutions, such as PEGylation (polyethylene glycol linking) of proteins, lead to lower biological activities of proteins in question. Techniques employed by the company do not change biological activities of proteins and make possible targeting to tissues affected by the disease.

NanoCarrier is focusing on G-CSF (granulocyte colony-stimulating factor). It is a growth factor (cytokine), i.e. substance that stimulates the bone marrow to produce stem cells and types of white blood cells. In rats NanoCarrier’s G-CSF micelle showed 9 times higher AUC than that of conventional G-CSF solution and resulted in 4 times higher neutrophil (type of white blood cell) count in the blood. This means that G-CSF micelle can be effectively used in cancer therapeutics, helping patients to recover from neutropenia (lower white blood cell count due to impaired formation of new neutrophils) and lowered immune response associated with cancer therapies.

According to company materials, protein micelles use the same core copolymers as in other technologies, a combination of PEG and polyamino acid derivatives. However researchers modified the hydrophobic core part by introducing different hydrophobic groups. That allowed encapsulation of proteins without using organic solvents, while preventing the so called burst effect. Burst effect means a large drug volume being quickly released (carrier “bursts”).

The market for protein therapeutics was expected to grow from about $95 billion in 2008 and to $160 billion in 2013, according to BCC Research.

siRNA Micelles

siRNA (small interfering RNA) regulates sequence-specific gene expression by breaking down intracellular mRNA (messenger RNA, RNA composed of protein which contains amino acid sequencing information). In other words, it has the ability to suppress the creation of specific illness-related proteins within cells, so it is hoped that “designer siRNA” could be made to specifically target a wide variety of illnesses. Areas where siRNA drugs could be therapeutically effective include cancer, AMD (age-related macular degeneration), respiratory syncytial virus, choroidal neovascularization, diabetic macular edema, asthma, and hypercholesterolemia symptoms, among others.

However, because siRNA is naturally broken down soon after being introduced into the body, major pharmaceutical manufacturers have recently given up development of the substance. Development of an “siRNA drug” has hit a wall. This is why a pharmaceutical that can be introduced into the bloodstream must have the ability to stabilize siRNA using some kind of intracellular delivery technology. The company licensed siRNA delivery technology from the University of Tokyo* and has been developing it. This nucleic acid delivery technology was patented in Japan in September 2010.

 *The company entered into an exclusive license contract on May 25, 2009 with the University of Tokyo and Todai TLO Ltd. for cationic polyamino acid (aggregation of positively charged amino acids). The license allows the company to introduce a new technology in addition to the pre-existing nanomicelle delivery technology. The new technology is a delivery technique using cationic polyamino acids. It forms a polymer ion complex with siRNA that makes it possible to specifically release siRNA within cells.

Sensor-Incorporated Micelles

The company is performing a feasibility study regarding the possibility of attaching biosensors to its polymeric nanomicelles for better tumor targeting. One of such sensors is an antibody. The company had a partnership with Kirin Pharma from 2006 to explore possible use of antibodies developed by Kirin but it appears that those particular antibodies were not suitable for this system and the relationship was terminated in June 2008. As of FY03/10, the company did not provide additional detail of the feasibility study status.

Docetaxel Micelle

Docetaxel (generic name) is used globally in a wide range of taxane-based anticancer drugs, such as in breast, stomach, uterine, prostate and ovarian cancer. However, docetaxel has serious side effects for patients, including edema, myelosuppression (bone marrow suppression), nausea, vomiting and other digestive disorders, hair loss, hepatic dysfunction, and hypersensitivity.

NanoCarrier reported that its Medicelle® technology enables the effective delivery of Docetaxel while reducing the possibility of adverse effects associated with the druge by adjusting the release rate of Docetaxel encapsulated in the micelles.

Docetaxel Micelle was announced in November 2009, and the company expects it to be a succeeding candidate of NK-105 (Paclitaxel Micelle). The company expects an approximate 6-year development gap between the Docetaxel Micelle and NK-105.

Skin Care Another emerging field for the company’s nanomicelle technology is in skin care: a skincare serum, Eclafutur-W, was released on October 1, 2010. While conducting research and development into pharmaceuticals the company discovered that nanomicelles can penetrate through the outer layer of human skin (stratum corneum) and into the epidermis making it also suitable for cosmetics and as a result the company has been developing nanomicelle applications for cosmetics.  

Business Model

The company develops new drug compounds using its nanomicelle manufacturing technology. In principle, it employs three approaches: in-house development, joint development, out-licensing.

1) In-house Development

In-house development requires the company to develop a drug up until it goes to market, or at least reaches the latter stages of clinical development; once it sells the drug the company then generates revenues. As the costs and personnel requirements of this method are high, the company usually chooses to out-license drugs after it conducts nonclinical tests and clinical trials to verify the drug's viability.

As of May 2011, NC-6004 (Nanoplatin®) was progressing down the pipeline from in-house development to joint R&D (see below) and out-licensing.

2) Joint Research and Development

In certain cases, the company will sign a joint-research agreement with a business partner that has shown interest in using the company's micellar nanoparticle technology to develop a micelle. Generally, NanoCarrier develops the drug formulation and its business partner will evaluate it. If the evaluation is favorable the drug then moves to the out-licensing stage.

3) Out-licensing

After the in-house development and joint-R&D stages is complete, the drug is out-licensed. There is some variation in licensing agreements, but generally the company receives an up-front payment and progress-based milestone payments from the licensee. The company also generates revenues in cases where it supplies drugs for R&D purposes. In addition, the company may receive royalties based on sales numbers once the drug is placed on the market.

As of May 2011, one example of the company's business model in action could be seen in its out-licensing of NK105 (paclitaxel micelle) to Nippon Kayaku.

The main revenue drivers of the business are:

R&D assistance payments and grants. Payments made under contracts with partner companies and government organizations.

Upfront payments. Payments received at the beginning of each licensing contract, upon its conclusion.

Milestones. Payments received at certain points of the development stages.

License fees. Fixed sum or net-sales-linked variable royalties that are paid once a drug is released in the market.

Estimates of typical royalty percentages that licensor (e.g. a biotech company like NanoCarrier) receives vary widely. According to one often mentioned study (Medius Associates 2001), royalties were in 0-5% range for nonclinical stage drugs, 5-10% for Phase I, 8-15% for Phase II, 10-20% for Phase III, and >20% for approved drugs.

Cost Structure It is impossible to discuss a specific cost structure of the company due to the nature of its business, i.e. the business is new and still unstable.

Rather than simply looking at current sales and costs, it is important to consider the relationship between SG&A expenses and cash on hand from a mid-term perspective. This is because SG&A expenses account for the company's largest cash outflows. At end-FY03/11, the company had approximately 1.9 billion yen in cash and cash equivalents (up from 1.0 billion yen at end-FY03/10). FY03/11 SG&A expenses were 553 million yen. Of that, the largest portion was R&D (223 million yen) followed by labor (129 million yen in salary and allowances/remuneration). While future R&D expenses depend on the fortunes of drugs in the development pipeline, cash on hand divided by SG&A expenses equals 3.4 years.

Strengths, Weaknesses

Strengths:

• Experience with polymeric nanomicelles. The company maintains that its main strength is in technological experience of modifying various block copolymer structures to construct micellar nanoparticles and incorporate organic and inorganic materials inside such particles.
• Patents. NanoCarrier's technologies are protected by more than 30 patent applications.
• Further access to primary technology. NanoCarrier has a strong primary technology source, Prof. Kataoka and his team. Kataoka was one of the company's founders and will probably remain supportive. Management stated that it has first refusal rights regarding technologies that are produced at Kataoka's lab at Tokyo University.

Weaknesses:

• Limited financial resources. NanoCarrier listed in early 2008, amid deep bear market for Japanese small cap and specifically biotechnology stocks. As such, the company was not able to raise the money the management thought it necessary to implement its strategy. The situation of unfavorable markets continued through FY03/11, restricting the company's ability to finance its growth.
• No successful approved drugs. Annual royalty payments would positively impact the cash flow and make strategic planning much easier, but as of FY03/11 NanoCarrier was still an early stage developer without a significant source of recurring revenue.
• Market perception. While the company is trying to position itself as a new drug development company, the fact that so far it mostly out-licenses early technology might create a temptation to regard it as a transport-only manufacturer. That could affect its market valuation restricting growth potential and access to funds. Management has been stressing NanoCarrier is indeed a drug development firm.

Main Facilities

NanoCarrier has an R&D center in Kashiwa, Chiba prefecture, the location of its headquarters. It also has an administrative office in Tokyo.

Geography of Operations

The company operates in Japan. However, it is seeking global alliances and is targeting global markets.

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Market & Value Chain

Market Overview

Cancer related drugs are the largest area of the pharmaceutical market. According to IMS Health MIDAS, they were at the top of the sales league tables worldwide in 2007, being the highest selling group in Europe and in Japan, the second highest in the U.S. after lipid regulators (e.g. cholesterol lowering drugs), and also second highest in the ”pharmerging” markets (BRICs, Korea, Turkey, and Mexico) after cephalosporins (antibiotics).

Taxol worldwide sales peaked at $1.6 billion in 2000 and it was subsequently overtaken by another taxane anti-cancer drug, Taxotere (docetaxel). Taxotere is marketed by Sanofi-Aventis. It is a highly regarded drug and its sales continue to grow reaching EUR 2 billion in 2008 (SEC Form 20-F). Its patent expired in 2010, while Taxol went off patent in 2003.

For a discussion of Oxaliplatin, the main platinum group drug, please see discussion in the Main Pipeline section.

Drug Delivery System (DDS) is a new area of research that emerged in the late 1990s fueled by advances in biochemistry and nanotechnology. The company is focusing on the cancer field and is continuing its DDS R&D. DDS makes possible both passive and active targeting to tumors and other disease afflicted cells, as well as release control. The technologies under DDS umbrella offer a promise of such improvements over conventional medications as:

• Better drug efficacy
• Less adverse side-effects
• Easier use (better quality of life)

Other DDS technologies, apart from nanomicelles developed by NanoCarrier and discussed in this report, include polymeric microspheres, hydrogels, biodegradable polymers, dendrimers, electroactive polymers, and modified C-60 fullerenes (“buckyballs”).

Some of the DDS and molecular target drugs currently available in the market are:

Doxil (ovarian cancer, AIDS-related Kaposi's sarcoma; Johnson & Johnson). Doxil is used primarily for treatment of ovarian cancer when platinum-based chemotherapy was not effective. (See also Competition section)

Abraxane (metastatic breast cancer). Abraxis BioScience (Nasdaq: ABII) launched Abraxane, the world’s first drug delivery system (DDS) version of paclitaxel in 2005. It uses albumin as a carrier. Abraxane is co-marketed with AstraZeneca. It reached $315 million in 2009 (vs. $336 million in 2008). SR Inc. notes that there are some concerns raised regarding Abraxane's ability to prolong life and it is an open question whether or not it is a valid comparator for NK105. While both are DDS drugs, they are using completely different transport systems and will probably have different efficacy and toxicity profiles.

Iressa (generic name Gefinitib) is a drug marketed by AstraZeneca and Teva. Iressa acts to inhibit EGFR (epidermal growth factor receptor; a protein in which mutation can cause cancer). Tarceva (Erlonitib by Chugai/Roche) is another EGFR inhibitor.

Herceptin (Trastuzumab) is an antibody drug that was developed by Genentech (acquired by Roche). It acts by binding to a so-called HER2/neu receptor that has been identified as one of direct trigger mechanisms for breast cancer.

Avastin (Bevacizumab) is another monoclonal (made by cloning of one cell) antibody drug developed by Genentech/Roche that acts by blocking formation of blood vessels in tumors (such formation is called angiogenesis and drugs stopping them are therefore angiogenesis inhibitors).

The problem highlighted in regards of those drugs has been that they delay growth of tumors but their effectiveness in killing cancer cells is low. At the same time they work well in combination with other drugs, oxaliplatin being one frequently mentioned.

NanoCarrier mentions in its IPO prospectus that it believes new drugs created by nanomicellar technology can be used in combination with above-mentioned drugs, so called molecular target drugs for cancer medications. Further it may be possible to incorporate these molecular target drugs inside nanomicelles for improved targeting.

Suppliers & Sources of Technology

NanoCarrier buys polymers and reagents necessary for production of nanomicelles. The level of dependence on particular suppliers appears to be high. (FY03/11 percent of total shown in parentheses).

• Ieda Chemical – 20.9 million yen (63.2%)

Kawahara Oil & Chemical acts as a reselling agent for NOF Corp. All relevant materials are manufactured by NOF Corp. NOF Corp. has exclusive rights to supply NanoCarrier with polymers necessary for production of polymeric micelles. The current exclusive contract is valid till December 2013.

NanoCarrier has been and is likely to continue to obtain the basic technologies to develop into practical manufacturing application from Todai TLO, a company formed by Tokyo University to commercialize discoveries of its researchers. In some cases in the past, such technologies were transferred to JST and NanoCarrier would source it from JST. In most cases, the base technologies were developed by Prof. Kataoka and his colleagues.

TSE rules do not require NanoCarrier to disclose the details of new in-licensing deals post listing. However, the IPO prospectus provides details of several existing arrangements that can be used as a reference (pp. 44-53). Simplistically, it appears that in Todai TLO deals 1% of net sales and a small upfront payment is a typical arrangement.

Barriers to Entry

Barriers to entry would be very high for successfully approved drugs due to patent protection. At the same time, it is hard to judge how high the barriers are at R&D stage. Indeed, while the company's access to what seems to be a world class basic research of Prof. Kataoka and others is probably a barrier, there are a large number of competing technologies and superiority claims. Winners will be determined as technologies approach the commercial stage.

In terms of the particular technology that NanoCarrier is pursuing, if this technology proves to be commercially successful then the barriers to entry into this area should be very high due to the company's learning curve (experience) advantage.

Competition

It is difficult to identify relevant potential competitors among new compounds. NanoCarrier is developing substantially novel technologies. There are several companies in Japan and worldwide that are developing new drugs using similar compounds or technologies based on similar principles.

NanoCarrier mentions in its IPO prospectus and elsewhere that liposome carriers applied to cancer drugs, particularly paclitaxel and cisplatin, are possible competitors. Liposomes are microscopic particles that are protected by a membrane and are used to store substances and deliver them to target cells. Doxil (PEGylated Liposome Encapsulated Doxorubicin) is an example of such drug. (Doxorubicin is an effective but highly cardiotoxic anticancer drug). Liposome carriers, while looking conceptually very similar to nanomicelles, are different in how they store, deliver and release drugs. Such differences result, according to the company, in poorer drug loading, release control and drug selectivity of liposome carriers.

There are several biotech companies that seem to be pursuing similar goals, trying to address issues of release control, targeting and reducing toxicity of anticancer and other drugs, as well as performing targeted therapy of cancers in general:

Novosom is a German biopharmaceutical company that uses so called “fully charge-reversible liposomal technology” for delivery of nucleic acid drugs. It uses liposomes that change their charge from negative to positive depending on pH of the environment. It has a compound called CD40 antagonist in a nonclinical stage.

Calando Pharma is a US biotech company developing a drug delivery technology. Its drug, IT-101, is Campothecin (another common anticancer drug) made soluble using Calando's Cyclocert(TM) technology in a nonclinical stage. The company’s strength seems to be in know-how related to manufacturing of polymer nanoparticles containing cyclodextrin and PEG. Calando is trying to apply this know-how to siRNA drugs.

Access Pharmaceuticals Inc., a US based company, has developed Prolindac (completed Phase II in US trials in 2010) which active metabolite is DACH-platinum, same as in NanoCarrier's NC-4016. The active agent in Prolindac is attached to an HPMA (hydroxy-propyl methacrylamide) copolymer backbone.

Supratek Pharma is a Montreal, Canada based company. It developed a technology called “pluronic block copolymers” and developed SP1049C, Doxorubicin based DDS drug. Phase II clinical trial for UGI applications was complete as of 2010, with other applications (NSCLC, colorectal and hematological) in earlier stages of development.

Substitutes

Any existing or new drug for the same application is a substitute. Many years after the drug is released and goes off-patent, the generic versions become powerful substitutes. Arguably, generics also raise the hurdle in terms of efficacy of new drugs. Unless a new drug is much more effective than available generics, it is less likely to achieve high level of sales due to its high comparative cost.
Alternative technologies for fighting cancer, if successful, could be a substitute although such technologies would be used most likely in combination with, not instead of, existing drugs. An example of such technology is provided by NanoBiotix, a French company developing nanoparticles that can accumulate inside cancer cells. These particles are inert, i.e. they are not drugs and do not have particular activity by themselves. However, when exposed to X-ray irradiation, they release free radicals and heat that can potentially shut down the cancer cells. NanoBiotix products are in the experimental nonclinical stage.

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Strategy

Management Strategy

The company is pursuing a narrowly-focused strategy determined by such constraints as high manufacturing cost and limited available capital. It is targeting those applications where its technological experiences and particular areas of research and licensing expertise are likely to produce high payout outcomes.

NanoCarrier will likely continue to seek existing therapeutic compounds that are potent but constrained by the lack of effective carriers and targeting devices. Specifically, new strategic areas of research are:

• Molecular targeting by single drugs using proteins, enzymes etc. (See also Market Overview)
• Drug cocktails. Anticancer drugs often work better in combination than in single drug use. However, it is sometimes very difficult to apply cancer drug cocktail therapy in practice, due to severe adverse effects caused by existing anticancer drugs.
• Non-cancer applications.

The company continues to pursue an independent drug development strategy. However, as of early FY03/12 it is more likely to out-license early stage compounds for lower upfront cost and quicker cash flow turnaround. SR Inc. believes that by raising additional equity capital in the public market or through 3rd party offerings, the company can substantially increase its strategic options and therefore the value of the business.

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Historical Financial Statements

Earnings Results Discussion for the Year Preceding Current Fiscal Year (For Reference Purposes)

FY03/11 Results

The company released FY03/11 results on May 12, 2011.

Main Pipeline Update

Paclitaxel Micelle (NK105)

According to the company, licensee Nippon Kayaku Co. (TSE 4272) had concluded Phase II clinical trials and was preparing for Phase III trials. The Nikkei newspaper reported in its February 21, 2011 edition “Nippon Kayaku will begin final stage Phase III trials within the year with the goal of putting the drug on the market during 2015.”

Nippon Kayaku has stated it should raise the price of the drug. It will begin Phase I clinical trials on breast cancer patients in 2010 and plans to move to Phase II clinical trials in 2011 at the earliest.

Nanoplatin ® (NC-6004)

The company alongside co-developer and licensee Orient Europharma Co. Ltd. were conducting Phase I and II clinical trials in Taiwan and Singapore. As these trials confirmed it was possible to administer dosages exceeding maximum tolerated dosage (MTD) levels based on UK-conducted Phase I trial results, increasingly high dosages of NC-6004 were being administered. The drug has performed above initial expectations from a safety and efficacy perspective, the company noted.

DACH-Platin (NC-4016)

The licensee contract with Debiopharm S.A.was terminated in March 2011. This company noted it was now free to use the results of preclinical and clinical trials and was committed to finding new partners. If the company finds a new partner and enters into a new licensing agreement, it will use part of any milestone payment received to pay Debiopharm (for details see page 17 of the Japanese-language only financial statements released by the company on May 12, 2011. To access this file please click here).

New Development Pipeline

Protein Micelles

The company is testing the efficacy and safety of rhFVIIa (recombinant human factor VIIa, genetically recombined blood coagulant VII factor) Protein Micelle under its option contract with LFB Biotechnologies (LFB) for the license for the drug.

The company and LFB agreed to enter into a licensing contract during FY03/11 but the March 2011 Tohoku earthquake and subsequent impact meant LFB cancelled a planned visit to Japan, delaying the conclusion of a full licensing contract. The option contract has thus been extended out until July 20, 2011 as further safety checks are conducted.

As a result, the company noted any earnings resulting from this licensing contract would be pushed out till FY03/12 rather than being recorded in FY03/11.

Other Topics

The company raised 1.4 billion yen from new share issuance during FY03/11 via third-party allocations, paid rights issues, and requests to exercise new warrants.

Q3 FY03/11 Results

The company released Q3 FY03/11 results on February 9, 2011.

Main Pipeline Update

Paclitaxel Micelle (NK105)

Phase II clinical trial was completed under the direction of Nippon Kayaku. At Nippon Kayaku’s results meeting held in December 2010, it announced that preparations were under way for Phase III clinical trials to be held during 2011.

The company’s scientific advisor, Professor Kazunori Kataoka (University of Tokyo Graduate School), published results of his research into DACH-Platin Micelle in the January 5, 2011 edition of the US journal Science Translational Medicine. DACH-Platin Micelle is a DDS (drug delivery system) that uses nanomicelles to improve delivery of the anti-cancer drug Oxaliplatin. The article described that nanomicelles (marked by fluorescent pigment) introduced into mice with a drug-resistant colorectal cancer were observed infiltrating cancer cells and releasing an anti-cancer drug under microscope. It is significant that the effect of the nanomicelles on a form of cancer that had become drug resistant was visually confirmed.

Nanoplatin® (NC-6004)

The Phase I/II clinical trial, conducted under the direction of NanoCarrier and Orient Europharma Co. was progressing. Clinical trials have begun in Singapore as well as Taiwan. NanoCarrier commented that improvement in patients’ quality of life (QOL) has been observed, as well as lengthening of the drug administration period, and that progress is satisfactory.

DACH-Platin (NC-4016)

The company commented that Phase I clinical trial was progressing smoothly in Europe under the direction of Debiopharm S.A. But because the license and supply agreement will terminate effective March 2011, the company was searching for a new partner.

New Development Pipeline

Protein Micelles

Efficacy trials are currently being carried out with LFB Biotechnologies (LFB). The company commented that it is making efforts toward finalizing a licensing contract in mid-March 2011.

siRNA Micelles

Prof. Kataoka made a presentation on siRNA Micelles at the First International Symposium “21st Centuty Medical Innovation—The Challenge of Advanced Medicine Opened Up by Nanobiotechnology,” held over January 17-18, 2011. Specifically, he discussed siRNA Micelles’ ability to slow the body’s natural elimination of siRNA (a known issue) so that it remains stable until it can reach the target tumor.

Other Topics

On December 21, 2010, the company sold 68,987 shares of stock at 10,000 yen per share via a rights issue (to existing shareholders) and raised 690 million yen. The intended uses of the funds were to offset clinical trial costs for the main pipeline and non-clinical trial costs for the new development pipeline. As of February 28, 2011, the company had raised an additional 480 million yen from the execution of outstanding warrants (see News and Topics for details on the offering).

Q2 FY 03/11 Results

The company released Q2 (1H) FY03/11 results on November 12, 2010. 1H results vs. FY estimates were as follows:

• Sales : 3.9% (vs. FY estimate of 475 million yen)
• Operating profit : -289 million yen (vs. FY estimate of -226 million yen)
• Recurring profit : -288 million yen (vs. FY estimate of -227 million yen)
• Net income : -289 million yen (vs. FY estimate of -229 million yen)

Main Pipeline Update

Paclitaxel Micelle (NK105)

Phase II clinical trial completed under the direction of Nippon Kayaku (TSE 4272); Phase III clinical trial is the next step.

Nanoplatin® (NC-6004)

The Phase I/II clinical trial, conducted under the direction of NanoCarrier and Orient Europharma Co. Ltd. (received a license from NanoCarrier and is a co-developer) is progressing. Clinical trials have begun in Singapore as well as Taiwan. NanoCarrier commented that improvement in patients’ quality of life (QOL) has been observed, as well as lengthening of the drug administration period, and that progress is satisfactory.

DACH-Platin (NC-4016)

The company commented that Phase I clinical trial is progressing smoothly in Europe under the direction of Debiopharm S.A. But because the license and supply agreement will terminate effective March 2011, the company is searching for a new partner. SR Inc. is keeping an eye on future developments, such as whether NanoCarrier will receive Phase I clinical trial data from Debiopharm, something which would help NanoCarrier’s pursuit of a new partner.

New Development Pipeline

Protein Micelle

As announced in NanoCarrier’s October 20, 2010 release, the company has entered into an option contract with LFB Biotechnologies (LFB) for worldwide development and marketing licenses for sustained production of rhFVIIa, which is a protein owned by LFB and used in the treatment of hemophilia.

According to the contract depending on the results of sustained production validation tests, the two firms may enter into a licensing contract by the end of FY03/11. NanoCarrier received a payment from LFB for the option contract. In exchange, LFB will have preferential bargaining rights with NanoCarrier for the production of VII factor Protein Micelle compared to competing manufacturers.

NanoCarrier commented that it anticipated improvement in patient QOL due to improved retention in the blood resulting from the development of sustained production of VII factor using its own techniques. The company also said that because hemophilia treatments in Japan have been designated as orphan drugs, Phase I to Phase III clinical trials are conducted without clear distinctions. Therefore, the development period may be short and in some cases only take five years from clinical trials to approval. According to the company, this is its first step in developing drugs for use on diseases other than cancer.

About LFB (according to NanoCarrier’s press release on October 20, 2010): LFB belongs to the LFB group, a global pharmaceutical manufacturer owned by the French government. Sales of its blood products rank sixth in the world, and it ranks third in sales of medical supplies to hospitals in France. Also, its specialties are the treatment of incurable and rare (orphan) diseases such as immunological diseases, hemophilia, and cancer. It is involved in the development, manufacture, and marketing of drugs based on biotechnology.

Q1 FY 03/11 Results

The company released Q1 FY03/11 results on July 30, 2010. Q1 results vs. 1H estimates were as follows:

• Sales : 2.0% (vs. 1H estimate of 516 million yen)
• Operating profit : -145 million yen (vs. 1H estimate of 119 million yen)
• Recurring profit : -145 million yen (vs. 1H estimate of 118 million yen)
• Net income : -146 million yen (vs. 1H estimate of 117 million yen)

Sales were from providing micelles for feasibility studies to licensing partners. The company minimized R&D spending, resulting in an operating loss of 145 million yen.

In Q1, the company also started test-selling the beauty serum ‘éclafutur-W’ which uses the company’s nanotechnology. Polymeric micelles are loaded with vitamin E and vitamin C derivatives that penetrate skin cells and help keep skin moist and clear. Although a full-scale sales campaign will start in October 2010, the main goal behind the product development is demonstrating the company’s technology.

There was no change to 1H and full year forecasts. The company expects that its 1H sales target is likely to be achieved with help from new contract revenues.

Main Pipeline Update

Paclitaxel Micelle (NK105)

Phase II clinical trial completed, entering data analysis. According to the company, progress is more or less as expected. Analysis could take 4-6 months to complete, after which Phase III clinical trial will start.

Nanoplatin® (NC-6004)

The Phase I/II clinical trial in Taiwan is progressing. Phase II is expected to start in 2011, which will take approximately one year.

DACH-Platin (NC-4016)

Phase I clinical trial is continuing. The company had indicated that results and underlying data from the trial would be available in Fall 2010, but this was pushed back to the end of 2010. Normally, the dosage amount is determined and drug safety is verified in Phase I. Adverse effects were less than anticipated by NanoCarrier and Debiopharm, and the dosage amount was increased - which required more trials. Although the completion of Phase I has been delayed, the company commented that Debiopharm is satisfied that safety of the drug has been verified and therefore the delay is not a negative development.

Full Year FY03/10 Results

The company announced FY03/10 Q4 and full year results on May 14, 2010.

Sales were 118 million yen (-66.7% YoY), operating loss of 493 million yen (vs. a loss of 532 million yen in FY03/09), recurring loss of 492 million yen (vs. a loss of 524 million yen in FY03/09), net loss 495 million yen (vs. a loss of 524 million yen in FY03/09).

FY03/10 Results Report Card

Revenues

Target: 505 million yen

Result: 118 million yen

Operating Profit

Target: -253 million yen

Result: -493 million yen

Net Income

Target: -257 million yen

Result: -495 million yen

Full-year FY03/10 results were in line with the revision made in March. Some negotiations that were expected to lead to licensing agreements in Q4 were extended to FY03/11, causing a miss relative to initial forecasts. Specifically, negotiations for Nanoplatin® (NC-6004) and DACH-Platin Micelle (NC-4016) were delayed. While the company does not disclose specifics, SR Inc. suspects that slower than expected progress of NC-6004 clincal trial might have been the main factor behind the delay. However, the delay might bring about additional tactical opportunities as discussed below.

R&D spending in FY03/10 was 219.2 million yen (-25.8% YoY). This was driven by budgetary constraints but also impacted by the absence of a specific research grant that the company used in FY03/09.

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Income Statement

Historical Earnings Trends

In FY03/03 Revenue was a milestone payment from Nippon Kayaku of about 96 million yen; high R&D expenses led to a recurring loss of 141 million yen.
In FY03/04 Revenue of approximately 123 million yen was mainly from Kirin Beer. (a subsidiary of Kirin Holdings Co. (TSE 2503)).
In FY03/05 The company received an upfront payment from Debiopharm S.A. and that accounted for most of about 113 million yen in revenues.
In FY03/06 The company received an R&D assistance payment from Debiopharm S.A. as well as R&D assistance and milestone payments from Eisai Co. (TSE 4523), for total revenues of approximately 108 million yen. It also started Phase I clinical trials of NC-6004 Nanoplatin in the U.K.
In FY03/07 Revenues received from Debiopharm were 27 million yen (25.7%), from Kirin Pharma – 29 million yen (28.2%), and from Eisai – 27 million yen (26.4%)

In FY03/08 Revenues received from Debiopharm were 148 million yen in FY03/08 (56.3% of total revenues). Revenues received from Nippon Kayaku were 101 million yen in FY03/08 (38.3%) as NanoCarrier received milestones for NK105.
In FY03/09 Revenues received from Debiopharm were 229 million yen in FY03/09 (64.6% of total revenues). Revenues received from Orient Pharma were 119 million yen (33.6% of total revenues). In FY03/10 The company announced a downward revision to its forecast for FY03/10 earnings on March 26, 2010 due to delays in contract negotiations with existing and new partners. The company said in the release that it was continuing the negotiations. FY03/10 results were in-line with the revised forecast.Revenues from Debiopharm were 55 million yen (46.6% of total revenues). Revenues from Ichimaru Pharcos were 14 million yen (11.4%). Approximately 28 million yen was from two other firms (names not disclosed).

Historical Performance vs. Estimates

Comparing NanoCarrier’s forecast accuracy is not entirely meaningful. The company’s product pipeline is still in development, and the speed of progress is to a large degree out of the company’s control (the license partners conduct clinical trials). SR Inc. therefore believes that it is more helpful to look more generally at the overall progress of the pipeline, both core and new, and compare it with the long term targets set by the company. According to the company, pipeline progress as of FY03/10 end was firmly on track.

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Balance Sheet

Assets

As of end-FY03/11, the company had 1.9 billion in cash or cash equivalents, up from 1.0 billion yen at end-FY03/10. During FY03/11, the company raised 99 million yen via a third-party allocation of new shares, 689 million yen from rights issues, and 601 million yen from the exercise of new warrants.

Fixed assets on the balance sheet are mostly intangibles (27 million yen of 57 million yen total fixed assets in FY03/11). Historically the most important of those have been licensing rights (24 million yen as of FY03/11).

Liabilities

Liabilities on the balance sheet have been negligible (debt free from FY03/07-FY03/11).

Shareholders’ Equity

NanoCarrier has used multiple sources of equity financing, including 3rd party offerings in FY03/07 and FY03/09 (generating 1.4 billion yen, and 75 million yen respectively), IPO in FY03/08 (raising 643 million yen), and issued warrants. The third party offering in FY03/09 was to Cyntec Co. Ltd. (a subsidiary of Orient Europharma Co.). Shareholders' equity increased in FY03/11 due to a third-party allocation of new shares (99 million yen), rights issues (689 million yen), and requests to exercise new warrants (601 million yen).

Potential Dilution

NanoCarrier announced a warrants offering in September 2009 (Warrants-6). The strike price is adjustable to prevent excessive dilution to equity holders. Assuming the warrants are exercised for the minimum price (31,500 yen), the maximum dilution potential as of FY03/11 was 4.6% (based on 10,200 warrants outstanding and 220,885 total shares outstanding at year end).

Per Share Data

Note: The company performed a pre-IPO stock split of 10:1

There were 220,885 shares outstanding as of end-FY03/11. At of the same date, there were stock options outstanding for 15,790 potential shares. If all converted, they would cause a 7.1% dilution.

Combining outstanding options and Warrants-6 results in 25,990 new shares, or 11.7% potential dilution, as of end-FY03/11.

NanoCarrier listed on TSE Mothers exchange on March 5, 2008. It initially aimed to raise 874 million yen gross (before fees), 34,950 shares (including 4, 950 shares as a “green shoe” option from Nomura Securities) at 25,000 yen. The IPO price was set at a lower level of 20,000 and the total amount of funds raised was 699 million yen.

The company planned to spend a significant amount of the funds raised to finance clinical trials of NC-6004 but had later changed the plan and out-licensed the compound to Orient Europharma Co.

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Cash Flow Statement

The negative operating cash flows from FY03/06-FY03/11 reflect the early stage of the company and its technology (the company has yet to create a mass-market product as of FY03/11, and R&D costs are fixed).

Investment cash flows have been negligible from FY03/06-FY03/11.

Financial cash flow in FY03/06 was the combination of bank debt (300 million yen) and share issuance (499 million yen). FY03/07 and FY03/08 financial cash flows were the result of share issuance (3rd party issue and IPO, respectively). In FY03/11 new equity was issued via a third-party allocation of new shares, rights issues, and exercise of warrants.

NanoCarrier’s simple free cash flow from FY03/07-FY03/11 illustrates the company’s early stage of growth. Net income has yet to turn positive, because products are still in the investment and development stage.

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Other Information

History

The story of NanoCarrier starts with academic research of micelle nanoparticle technology. Professors Kataoka of Tokyo University (see Top Management) and Okano of Tokyo Women's Medical University (see Top Management) were researching possibilities of medical application of polymeric nanomicelles (see detailed explanation of terminology in the Glossary). They found that if polymeric nanomicelles are injected intravenously they circulate in the bloodstream for a long time and can therefore be used as effective carriers of drugs. Current CEO Ichiro Nakatomi who had management experience in biotech companies started, together with fellow researchers, a company called NanoCarrier, to commercialize their discovery.

Head Office and Lab　(Source: Company Data)

Corporate Timeline

June 1996 NanoCarrier Co. Ltd. established to develop and commercialize pharmaceutical applications of micellar nanoparticle technology.

August 1997 Signed an agreement with Nippon Oil & Fats, presently [NOF Corp. (4403)], to jointly develop new block copolymers.

January 2001 Signed an agreement with CASTI (Todai TLO) on sub-licensing (in-licensing) of cisplatin-incorporated polymeric micelle.

June 2002 Out-licensed paclitaxel micelle to Nippon Kayaku (4272).

November 2002 Signed an agreement with Kirin Brewery (now Kyowa Hakko Kirin Co., Ltd.) to jointly develop anticancer drug in the form of antibody conjugate micelle (NC-4010), combining NanoCarriers's nano-micelle technology and Kirin's human antibody technology.

May 2004 Nippon Kayaku started a Phase I clinical trial of Paclitaxel Micelle (NK105) in Japan.

May 2004 In-licensed DACHPt (DACH-Platin) block-polymer based anticancer agent from Tokyo University and Todai TLO.

March 2005 Signed Research Collaboration and Option Agreement with Debiopharm S.A. (Switzerland) regarding NC-4016 (DACH-Platin Polymeric Micelle).

May 2006 Started a Phase I clinical trial of cisplatin derivative micelle, Nanoplatin (NC-6004), in the United Kingdom.

June 2006 Entered into a new agreement with Kirin Brewery to co-develop NC-4010.

July 2006 Obtained exclusive license for electrostatic bonding type macromolecular micelle drug carrier and resulting drugs from Japan Science and Technology Agency (JST).

February 2007 In-licensed a new bock copolymer for preparation of pH-sensitive polymeric micelle and its production process from Todai TLO.

October 2007 Signed License and Supply Agreement with Debiopharm S.A. regarding NC-4016 (DACH-Platin Polymeric Micelle).

November 2007 Nippon Kayaku started a Phase II clinical trial (for gastric cancer) of NK105 (Paclitaxel Micelle).

March 2008 Listed on Tokyo Stock Exchange MOTHERS market.

April 2008 Signed exclusive agreement with Todai TLO regarding processes of incorporating nucleic acids into micelles.

September 2008 Signed Licensing and Co-Development Agreement regarding NC-6004 (Nanoplatin®) with Orient Europharma Co. Ltd.

December 2008 Received approval to start a Phase I/II clinical trial of Nanoplatin® (NC-6004) in Taiwan.

December 2008 Received approval to start a Phase I clinical trial of NC-4016 (DACH-Platin Polymeric Micelle) in EU.

May 2009 Signed exclusive agreement with University of Tokyo and Todai TLO regarding cationic polyamino acids.

November 2009 Issued a news release disclosing the successful development of the Docetaxel Micelle - a sustained release micelle for the anti-cancer drug docetaxel.

December 2009 Announced a licensing agreement with the University of Tokyo and Todai TLO regarding Gene Therapy technology.

March 2010 Received final decision for registration of the US patent regarding the production process of the NC-4016 DACH-Platin Micelle.

August 2010 Licensee Nippon Kayaku started a Phase I clinical trial of Paclitaxel Micelle (NK105) for breast cancer patients in Japan.

October 2010 Entered an option agreement with LFB Biotechnologies for the license of RHFVIIa (factor VII) Protein Micelle.

March 2011 Signed a termination agreement with Debiopharm S.A. that marked the end of the license and supply agreement between the companies.

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News & Topics

Company News and Topics

October 2011

On October 23, 2011, Professor Kazunori Kataoka, Scientific Advisor to NanoCarrier released a paper on in the British scientific journal Nature Nanotechnology relating to one of the company’s pipeline drugs DACH-Platin (NC-4016) and its application in pancreatic cancer treatment.

(For original PDF announcement in Japanese language only please click here.)

This study confirmed micellar nanoparticles of 50 nanometers or less to be effective in treating pancreatic cancer in animal experiments. According to the company, pancreatic cancer is a particularly difficult form of cancer to treat and the results of the study affirming the effectiveness of the treatment and size of the micelles used were groundbreaking.

On October 11, 2011, the company and LFB Biotechnologies announced they had agreed to enter into a new Research Collaboration Agreement for the hemophilia-treatment use recombinant human blood coagulation Factor VIIa (rhFVIIa).

(For original PDF announcement in English language please click here.)

According to the company, the purpose of the new collaborative study was to collect long-term safety and efficacy data on the drug, and basic pharmacological and safety data of a sustained release drug product using NanoCarrier’s Micellar Nanoparticle Technology. Based on the results of their joint research, the two companies have agreed to conduct negotiations discussing the terms of any exclusive licensing, development and commercialization agreement.

September 2011

On September 26, 2011, the company announced that it had concluded a licensing and co-development agreement for the Epirubicin Micelle (NC-6300) with Kowa Co., and a capital increase by allotting shares to Kowa.

In addition, the company announced an upward revision to its 2H FY03/12 forecasts.

(For original PDF announcement in English relating to the Kowa agreements, and earnings forecast revision, please click here.)

Licensing and Co-Development Agreement with Kowa Co. for Epirubicin Micelle (NC-6300)

• NanoCarrier and Kowa agreed to enter into a license and co-development agreement for the pH-sensitive Epirubicin Micelle (NC-6300) aimed at commercialization of the product.
• Under the co-development and licensing agreement with Kowa Epirubicin Micelle (NC-6300) becomes part of the company’s main drug pipeline. Up until the Epirubicin deal, the company’s main drug pipeline was composed of three products: Paclitaxel Micelle (NK105), Nanoplatin ® (NC-6004), and DACH-Platin (NC-4016).
• Under the agreement, NanoCarrier has granted Kowa a license for the global right of sales and manufacture of the end NC-6300 product and will receive up to 2.4 billion yen in upfront and other milestone payments from Kowa. In addition, NanoCarrier will receive a continuous royalty stream following any commercial launch of NC-6300.

Third party allotment to Kowa

• Sale price: 26,370 yen per share (1.05x the average closing price of the company’s shares on the TSE Mothers market between September 22, 2011 and March 23, 2011)
• Number of shares to be issued: 11,000 shares
• Total value of Third Party Allotment: 290 million yen
• Payment date: October 14, 2011

The total dilution is expected to be 4.9% of the 223,885 outstanding shares on September 26, 2011 with the funds earmarked for preclinical trials of Epirubicin Micelle (NC-6300), and other research and development expenses.

Upward revision to 2H FY03/12 Earnings Forecast

The 2H FY03/12 revision was as follows:

• Sales: 207 million yen (vs. previous forecast of 115 million yen)
• Operating loss: 138 million yen (vs. previous operating loss forecast of 338 million yen)
• Recurring loss: 139 million yen (vs. previous recurring loss forecast of 339 million yen)
• Net loss: 140 million yen (vs. previous net loss forecast of 340 million yen)

The upward revision was due to an upfront payment of 200 million yen the company was to receive from Kowa. The company maintained its full year forecast.

On September 20, 2011, the company announced it had received a patent from the Japan Patent Office for its therapeutic protein delivery carriers.

(For original PDF announcement in Japanese language only please click here.)

On September 2, 2011, the company announced it had received a patent in China for its pH-Sensitive Micelles.

(For original PDF announcement in Japanese language only please click here.)

August 2011

The company announced on August 24, 2011,that its CEO and President, Ichiro Nakatomi, was participating as a committee member in the sixth working group on the extension of the duration of patents, which opened on August 19, 2011.

(For original PDF announcement in Japanese language only please click here)

The company announced on August 22, 2011, that it had received a patent from the South Korean authorities for Paclitaxel Micelle (NK105).

(For original PDF announcement in Japanese language only please click here)

On August 12, 2011, the company released Q1 FY03/12 results: click here to go direct to the Q1 FY03/12 results section.

(For original PDF announcement in Japanese language only please click here.)

The company announced on August 09, 2011, that it had signed a joint research agreement with Kyoto University into nucleic acid drugs. According to the company the joint research aims to create new nucleic acid drugs that would incorporate nucleic acids with new properties created by Kyoto University into the company’s micellar nanoparticles.

(For original PDF announcement in Japanese language only please click here.)

Note: nucleic acid drugs are pharmaceutical substances whose constituents are based on nucleic acids from DNA and RNA.

The company also announced on the same day that it had been granted a patent by Canadian authorities for its genetic carriers.

(For original PDF announcement in Japanese language only please click here)

July 2011

On July 20, 2011, the company announced that it had begun Phase II clinical trials for Nanoplatin ® (NC-6004).

(For original PDF announcement in Japanese language only please click here)

The company made the following comments on the development:

• The company in collaboration with Orient Europharma Co. (Taiwan 4120) has been conducting Phase I/II clinical trials for combination therapy of Nanoplatin ® (NC-6004) and gemcitabine for pancreatic cancer in Taiwan and Singapore.

• Phase I clinical trials have finished, resulting in a recommended dosage for the NC-6004 combination therapy of 90mg/m² . The first part of Phase II clinical trials (to be conducted at the National Cancer Centre Singapore) will focus on verifying the efficacy and safety of the therapy.

• The company was making preparations to conduct the same Phase II clinical trials for NC-6004 in Japan and after its Investigational New Drug (IND) application and approval is granted in 2H FY03/12 it was planning on beginning tests. This development is not expected to affect FY03/12 results

(IND application and approval: a dossier must be submitted to the authorities in order to obtain approval from the review board for approval of a clinical study.)

On July 15, 2011, the company and LFB Biotechnologies issued an announcement regarding an option agreement between the two companies.

(For original PDF announcement in English language please click here.)

On March 24, 2011, the company and LFB announced an extension of their option agreement to 20 July, 2011 to confirm further safety concerns of a sustained release drug using NanoCarrier’s Micellar Nanoparticle Technology applied to LFB’s recombinant human blood coagulation factor VIIa (rhFVIIa) for treatment of hemophilia with the objective of entering into a license agreement. However, the pair were unable to enter into a licensing agreement for rhFVIIa, and the two companies have decided to enter into a new one-year Research Collaboration Agreement instead covering areas such as long-term safety. The conditions of the agreement were still under discussion, as of July 15.

The company was expecting to generate up-front revenue in 1H FY03/12 from the LFB licensing agreement. However, the FY03/12 forecast remains unchanged given expectations of earnings from other pipeline projects, the company said.

June 2011

On June 10, 2011, the Australian Patent Office awarded the company a patent for its sensor-incorporated micelles while the Japan Patent Office also awarded the company a patent for its pH-sensitive micelle production method, the company said.

(For original PDF announcement in Japanese language only please click here)

On June 8, 2011, the company announced that it had received a patent for its production process of the DACH-Platin Micelle (NC-4016) from the Australian Patent Office.

(For original PDF announcement in Japanese language only please click here)

The company announced on June 3, 2011, that it had received a patent in Canada for Paclitaxel Micelle (NK105).

(For original PDF announcement in Japanese language only please click here.)

The company announced on June 1, 2011, that it had received a patent in Japan for Paclitaxel Micelle (NK105).

(For original PDF announcement in Japanese language only please click here.)

May 2011

On May 12, 2011, the company released FY03/11 results.

On May 10, 2011, the company said it had received a U.S. patent for DACH-Platin Micelle (NC-4016).

March 2011

On March 28, 2011, the company announced that it was successful in obtaining two patent registrations with the Japan Patent Office for a drug carrier that can be used in nucleic-acid drug delivery, which should open the way for it to obtain patents related to next generation polymeric nucleic acid carrier platform technology in Japan.

Invention #1

Title: Short-chain cationic poly (amino acid) and uses thereof

Patent application number: 2010-037014

Patentee: NanoCarrier Co., Ltd/ The University of Tokyo

Invention #2

Title: Cationic poly (amino acid) and uses thereof

Patent application number: 2010-524300

Patentee: The University of Tokyo

Because nucleic acids are naturally broken down by the body, nucleic acid drugs can be unstable in the human body. The short "half life" means that drug carriers are necessary to enable drug delivery to target cells. Therefore, developing a superior carrier would represent a major breakthrough in nucleic acid drug development.

On March 24, 2011, the company announced a downward revision of FY03/11 forecasts. The revised FY03/11 forecasts were as follows:

Sales: 83 million yen (vs. previous forecast of 475 million yen)

Operating profit: -544 million yen (vs. previous forecast of -226 million yen)

Recurring profit: -562 million yen (vs. previous forecast of -227 million yen)

Net income: -568 million yen (vs. previous forecast of -229 million yen)

The company commented that the downward revision was due to a combination two factors: an extension of the option contract with LFB Biotechnologies, and the termination of the license and supply agreement for DACH-Platin Micelle with Debiopharm S.A.

On March 16, 2011, the company announced that it was successful in obtaining a patent registration with the Japan Patent Office for a drug carrier that can be used in nucleic acid drug delivery. According to the company, this opens the way for obtaining a Japanese substance patent related to the next generation polymeric nucleic acid carrier platform technology.

On March 14, 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

• No employees were injured, and operations of the head office research laboratory and Tokyo office were unaffected.
• There was concern regarding equipment and animals in the research laboratory, but the company confirmed that the equipment, etc. was not damaged and research activities could continue normally.
• The company would release details as necessary if it became clear that earnings would be impacted.

February 2011

On February 9, 2011, the company announced Q3 FY03/11 results.

January 2011

On January 13, 2011, the company announced that its “Method of production of polymerized palatinum derivative complexes (NC-4016)” patent application was accepted in China.

December 2010

On December 21, 2010, the company announced a joint project with National Cancer Center. The project involves research related to the pH-sensitive Epirubicin micelle (NC-6300).

On December 17, 2010, the company announced the terms of its new shares issuance on September 30, 2010.

Details of the issuance of new shares were as follows:

• Number of new shares to be offered: 68,987 shares of common stock

• Issue price: 10,000 yen

• Total amount raised: 690 million yen

Stock dilution in the event is 51.7%.

On December 10, 2010, the company announced that DACH-Platin Guiding Micelle (NC-4016) patent application was accepted in Australia and Korea.

November 2010

On November 19, 2010, the company announced that pH Responsive Micelle patent applications were accepted in the EU and Sensor Incorporated Micelle patent applications were accepted in Canada.

On November 12, 2010, the company released Q2 (1H) FY03/11 results.

October 2010

On October 20, 2010, the company announced that it entered into an option agreement with LFB Biotechnologies. The agreement was for an exclusive worldwide license for development and marketing rights of a sustained release drug product combining NanoCarrier’s Micellar Nanoparticle Technology and LFB’s recombinant human blood coagulation factor VIIa for hemophilia patients. The company commented that the impact of the option agreement was included in the revised full year FY03/11 forecasts.

September 2010

On September 30, 2010, NanoCarrier announced a new share issuance through a rights issue.

Background and Purpose

According to the company, the reasons for issuing new shares were as follows:

1. Warrants from the third-party warrants issue announced September 29, 2009 have not raised much capital because the stock price has been almost under strike price. Exercised warrants have raised only 48 million yen vs. the expected 947 million yen.
2. The company needs additional capital to invest in projects listed below.
3. This way of financing is the best available.

Capital investments:

• Nanoplatin® (NC-6004) clinical trial - Amount needed: 400 million yen. Repayment expected after August 2011.

• DACH-Platin micelle clinical trial - Amount needed: 200 million yen. Repayment expected after November 2011.

• Preclinical trial expenses for new pipeline development candidates - Amount needed: 692 million yen. Repayment expected after January 2011.

Details

Number of new shares issued: 133,398 common shares (planned)

Issue price: 10,000 yen per share

Gross proceeds of offering: 1.3 billion yen (planned)

Application period: December1, 2010 through December 14, 2010

Payment date: December 21, 2010

The issue price of new shares is set at 10,000 yen. Using the September 29, 2010 closing price of NanoCarrier's shares as a reference (16,800 yen), the new shares are priced at a 40.5% discount. The dilution is 100%.

On September 21, 2010, NanoCarrier announced that the license and supply agreement for DACH-Platin Micelle (NC-4016) with Debiopharm S.A. will terminate, effective March 2011 (citing “strategic reasons” on behalf of Debiopharm). The company granted exclusive rights for the development and sale of the drug worldwide (except Japan) on October 15, 2007. The company suggested that the agreement termination may relate to a possible overlap between markets for Oxaliplatin, a drug previously developed by Debiopharm, and DACH-Platin Micelle.

Once the agreement terminates, NanoCarrier will have all of the rights for worldwide development and commercialization of the technology. The company plans to find an alternative partner for the DACH-Platin Micelle. The DACH-Platin Micelle Phase I clinical trial is underway in the EU, and the company thinks that a new alliance may be more easily obtained once it has pre-clinical and clinical trial data.

According to the company, the effective termination date for the agreement is March 2011, so any impact on FY03/11 results will be minor. However, taking a longer–term view, SR Inc. thinks that unless the company finds another partner to help sell the drug, achieving progress toward previously announced milestones could be significantly more challenging.

On September 3, 2010, the company revised 1H and full year FY03/11 forecasts. Details were as follows:

1H FY03/11 forecast:

Sales: 20 million yen

Operating Profit: -312 million yen

Recurring Profit: -312 million yen

Net Income: -313 million yen

Full year FY03/11 forecast

Sales: 475 million yen

Operating Profit: -226 million yen

Recurring Profit: -227 million yen

Net Income: -229 million yen

The company had expected licensing agreement revenues for new micellar nanoparticle therapy from overseas pharmaceutical companies in Q2 FY03/11. However, evaluating the technology would take longer, so instead the parties agreed on option agreement (to be signed in Q3). NanoCarrier expects the option to be exercised, which would mean that the license agreement would be concluded in Spring 2010. Revisions in profits were smaller than sales due to reduced costs. The delayed licensing agreement meant that NanoCarrier won’t incur associated costs, and a delay in Phase I of the NC-4016 clinical trial meant that the company will avoid manufacturing costs for preparations.

July

The company released Q1 FY03/11 results on July 30, 2010.

June

The company announced on June 28, 2010 that the Paclitaxel Micelle (NK105) patent was registered in Europe.

On June 21, 2010, the company announced that it developed a cosmetics product called ‘éclafutur-W’ that uses its nanotechnology. The serum will be sold from October 1, 2010.

May

The company announced on May 19, 2010 that its Board of Directors made a decision (on the same day) to issue new shares to Medinet through a 3rd party offering. 4,819 new shares will be issued at 20,750 yen for the total amount of 99,994,250 yen (or 98,194,250 yen of available capital after 1,800,000 yen in fees). The payment procedures were completed on June 7th, 2010. The number of shares outstanding following the issue was 133,398 shares.　The new capital will be used to pursue cancer-related therapy R&D under a comprehensive joint research agreement with Medinet. Specifically, R&D will focus on (1) development of new cancer therapy technologies combining cytokine micelle preparations and effector cells with antigen-presenting cell therapy and (2) research and development of cancer-related therapy technologies utilizing micelle antibody conjugates. The dilution from the issue is expected to be 3.74%, minor in SR Inc.’s view. While strengthening the relationship with Medinet amid challenging market conditions deserves certain praise, it will probably take some time before material results are produced.

The company released Full Year results on May 14, 2010.

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Top Management

Representative Director:
Ichiro Nakatomi, Ph.D. is President & CEO since June 1996. After a career at Hisamitsu Pharmaceutical Co., Ltd., he worked as Vice President, Business Development at TheraTech, Inc. in the US. He later became the President of TheraTech Japan. He is also Director at iPS Academia Japan Inc.

Directors:
Yasuki Kato, Ph.D. CSO (Chief Scientific Officer) since July 2005. Prior to NanoCarrier, he worked for 22 years at Kyowa Hakko Kogyo Co., Ltd., most recently as the Director of its Formulation Research Center.
Takuma Nakatsuka, CFO and head of General Administration, since June 2011. His career began in 1976 when he was appointed as a high-ranking government official. Thereafter, he gained experience at Mitsui Sumitomo Insurance Co. before joining Goodwill Group Inc. in April 1999. In September 2003, he was appointed CFO of AnGes MG Inc. (TSE 4563) before becoming President of NISHIHARA Environment Co. in January 2008.
Hiroyuki Hanada, CBO (Chief Business Development Officer), appointed in June 2008. He became an advisor to NanoCarrier in December 2007 and the Director of Business Development in May 2008. Prior to that he was an advisor at AnGes MG, Inc. Before AnGes MG, he was a director in charge of R&D at Sosei Co. Ltd. and held executive positions at Seikagaku Corporation. He started his career at Hisamitsu Pharmaceutical Co. Ltd. in 1980.
Teruo Okano, Ph.D. (Non Executive Director) is one of the core inventors of NanoCarrier technologies and plays an important role in advising the direction of research and development and making important strategic decisions. He is a Professor at Tokyo Women's Medical University, Professor at University of Utah, and Director of Institute of Advanced Biomedical Engineering and Science. His research specializes in biomaterials, artificial organs, DDS, tissue regeneration and other areas.
Akira Ohashi, M.D., Ph.D. (Non Executive Director) is a key member providing advice and input on clinical/non-clinical program strategies and execution of the company projects based on his rich experience and knowledge related to clinical development.

Scientific advisors:
Company has advisory contracts with professors Kazunori Kataoka of Tokyo University and Yukio Nagasaki of Tsukuba University (Tsukuba Research Center for Interdisciplinary Materials Science). Prof. Kataoka is advising the company on new technologies, while Prof. Nagasaki's advice is centered on siRNA applications.

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Employees

As of end-FY03/11, the company employed 28 full time staff. On average, employees were 39 years old.

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Major Shareholders

File:Nano-Eng-MajorSH.png

(As of March 31, 2011).

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Dividends and Shareholder Benefits

As of FY03/11, the company did not pay dividends or have a shareholder benefit program.

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Investor Relations

Contact: 03-3548-0217 (President Office)
Address: 3-2-2 Nihonbashi Chuo-ku Tokyo 103-0027 (Tokyo Office)

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By the Way

Glossary

Basic NanoCarrier Relevant Biochemistry Terms:

Amino acids

Building blocks of proteins. There are about 300 known amino acids and roughly 20 of them participate in protein synthesis.

Antibodies(Immunoglobulins, lg)

Unique proteins produced by the immune system as a response to presence of foreign substances, such as bacteria and viruses. They kill or help to kill invader cells. There are 5 types of antibodies with different protective functions.

Bond (chemical)

A process when atoms or molecules stick to each other.

Cell

A smallest unit of living organisms. Essentially, cell is a somewhat self-sustaining group of organic molecules and contains the information necessary for functioning and procreation of organisms they belong to.

Covalent bond

A process when atoms stick to each other (bond) by sharing pairs of electrons (subatomic particles with a negative electric charge).

Cytokine

A category of molecules with short lives, often proteins, that are produced by some cells to impact functioning of themselves or other cells. They are basically signaling (messenger) agents that cause cells to react in a certain way, e.g. produce certain chemicals. Cytokines are important in functioning of the immune system.

Diaminocyclohexaneplatinum(DACHPt; DACH-platinum)

A platinum organometallic compound and the basic building block of Oxaliplatin.

DNA (deoxyribonucleic acid)

A nucleic acid that contains the entire genetic information of a given organism. Its functions as a repository of information, or instruction code template, for vital processes such as protein synthesis. The segments of a DNA molecule that actually carry that information are called genes.

Endocytosis

A process by which cells absorb substances from outside the cells by engulfing through cell membranes.

Hydrophilic molecules

Molecules that form short-term temporary bonds with water. In other words, they “like water”.

Hydrophobic molecules

Molecules that are repelled from water. In other words, they “hate water”.

Ligand

A signal triggering molecule that binds particularly to a protein or a nucleic acid. It serves as navigation buoy or a sensor allowing, for instance, to attach medical substances to targeted cancer cells.

Macromolecule

A large molecule.

Micelle

A bunch (aggregate) of substances called surfactants that are dispersed in a water based colloid. Colloid is a mixture when two substances are dispersed evenly through each other. Different from a solution, these substances are only suspended but not dissolved, normally because their particles are too big to be dissolved. An example of a colloid is milk. Surfactants (“surface acting agents”) are a type of molecules that contain both hydrophobic “tails” and hydrophilic “heads”. This feature allows surfactants to dissolve in anything. When they reach a certain concentration in water they form tiny ball-like structures with hydrophobic tails of each surfactant molecule hiding inside forming a core and hydrophilic heads sticking outside forming an outer shell. Micelles can act in a fashion similar to soap or detergents where insoluble particles are picked up and packed inside the micelle core (which is insoluble itself and is basically oil), a “cleaning” effect. This is precisely the effect of NanoCarrier's technology, where small micelles pack insoluble and often toxic drugs and carry them around in bloodstream.

Micelle, Polymeric

A macromollecular assembly formed from block polymers and has a spherical inner core and an outer shell.

Molecule

A stable group of atoms with a definite structure held in place by strong chemical bonds. They can be organic (of biological origin) or inorganic (of mineral origin). Organic molecules always contain carbon but not all carbon containing molecules are organic.

Nanosize

A size that is measured on a nanoscale, i.e. in nanometers. Nanometer is one billionth (1/1,000,000,000) of a meter. Typically, term “nanoscale” is used when talking about sizes of 1-100 nanometers.

Nucleic Acid

A macromolecule that carries genetic information or form structures within cells. The most common ones are DNA and RNA. They are found in all cells and viruses.

Organometallic compound

A chemical compound containing bonds between carbon and a metal. Organoplatinum compound is an example where metal is platinum. DACH-Platin is an example of organoplatinum compound.

Peptide

Small polymer formed when certain amino acids, called alpha amino acids, bond together. These amino acids are the building blocks of all proteins.

pH

A measure of acidity according to an internationally agreed relative scale. Pure water is pH neutral at pH of close to 7. Environments with pH of less than 7 are called “acidic” and those with pH of more than 7 are called “alkaline” or “basic”. Blood plasma is slightly alkaline at pH of about 7.35. This value is referred to as physiological pH, the optimum level for the body to function without stress.

Plasma

A water like solution (mostly water) that is the main blood component making more than half of its volume. It is the natural environment of blood cells.

Platinum (Pt)

A chemical element and a precious metal. It is also known to have high cytotoxity (meaning it is toxic for living cells). In effect, it inhibits (blocks or reduces) DNA synthesis and prevents cells from dividing.

Polyethylene glycol (PEG)

A widespread type of polyether, a class of organic compounds. It is interesting for us because it is soluble in water and, when combined with some hydrophobic molecules, can form surfactants (building blocks of micelles).

Polymer

Macromolecule made of repeating structures connected by chemical bonds (covalent bonds).

• Monomer is a small molecule (usually organic) that can bond with other monomers to form polymers. The most famous monomers are glucose and amino acids. Amino acids are natural monomers that form polymers called proteins.
• Copolymer is a polymer made from more than one kind of monomer. If only one monomer was used, it would be a homopolymer.
• Homopolymer is a polymer made of a single monomer chain.
• Block Copolymer is a copolymer with two or more homopolymer units linked by (covalent bonds).

Protein

An organic compound made of amino acids. Proteins are the major structural part of a human organism. They can act as building blocks for our tissues or as “enzymes” (bio-catalysts) when they help to control various biochemical reactions.

RNA (ribonucleic acid)

A nucleic acid that is somewhat similar to DNA. One part where it is different is that it usually has only one strand compared to two of a DNA. This feature allows RNA to play a vital role, for instance a carrier of information necessary for protein synthesis.

• Antisense RNA is a single-stand RNA that is complementary to a mRNA meaning that it connects neatly to mRNA . It may be used to prevent cells from functioning by attaching it to a complementary mRNA and physically obstructing translation mechanism. Medical applications proved elusive so far. Antisense RNA is not the same as RNA interference (RNAi).
• mRNA (messenger RNA) carries information from DNA to ribosomes (combination of RNA and protein) which in turn produce proteins.
• RNA interference (RNAi) is a process when genes are silenced (prevented from duplicating). This is a part of body's natural defense against viruses. When scientists realized that it could also be used to silence certain harmful internal processes in the body, it became a hot medical and biotechnology venture topic. In RNAi fragments of siRNA couple themselves with “hostile” RNAs and prevent them from carrying information, effectively killing hostile cells. RNAi is also sometimes called posttranscriptional gene silencing (PTGS).
• siRNA (small interfering RNA, sometimes called also “short interfering RNA” or “silencing RNA”) is a class of RNA involved in RNA interference. Discovery of siRNA was first published in Science Magazine in 1999.
• Other RNA types. There are more than 20 types of RNA. Important ones seem to be tRNA (transfer RNA vital for protein production) and rRNA (ribosomal RNA, a catalyst).

Self-assembly (molecular)

Also called self-association, is a process in which a disorderly system forms an orderly structure by itself due to interaction of its components among themselves.

Virus

An infectious agent, usually 10-300 nanometers in size, which can be reproduced only inside host cells. Viruses hijack cells using cell structures to replicate viruses' own DNA or RNA. That usually results in host cells death while viruses rapidly propagate. Viruses are some of the most important sources of external diseases in humans.

Basic Relevant Pharmaceutical Knowledge:

Abraxane

An anti-cancer drug developed and marketed by Abraxis Bioscience Inc. It is one of the first commercially available DDS anti-cancer drugs. It is based on paclitaxel and uses albumin (water soluble protein) as a delivery system.

Active targeting

A non-invasive therapeutic approach that consists in transporting drugs to target organs using site-specific ligands, or signaling molecules. Those molecules act as sensors and, if attached to a drug carrying micelles, they improve drug delivery efficiency.

Cisplatin

A platinum-based anti-cancer (chemotherapy) drug. It was approved by FDA in 1978 and was the first in the group of drugs including carboplatin and oxaliplatin. It acts by forming in the body of platinum compounds that penetrate DNA and interfere with the cell division ultimately causing cell death. It is administered intravenously. While it is one of the most widely used and very effective anticancer drugs, it causes severe adverse effects which limit its use.

Cisplatin-Incorporated Polymeric Micelle

Also can be called Cisplatin-loaded Polymeric Micelle. Polymeric micelle with cisplatin incorporated inside the core of the micelle.

Clinical Trial

A biomedical or health-related research study in human beings that follow a pre-defined protocol and is conducted to confirm safety and efficacy of a new drug, treatment, or device. Clinical trials consist of several typical stages such as phase I, II, III and IV.

• Phase I is a test of a new drug on a small group of people, mostly healthy individuals. The objective is to evaluate safety, determine safe dosage range, and learn about adverse effects.
• Phase II is an exploratory test on a medium group of individuals to establish efficacy, safety and dose response of the drug. Phases I and II are sometimes done in one set.
• Phase III is usually a randomized test on large groups of patients to confirm efficacy and safety compared with a conventional treatment for similar conditions. If successful, the test results are submitted for a regulatory approval.
• Phase IV (Post-Marketing Surveillance) is a study of efficacy and safety of an approved drug in various population groups and sometimes its long term safety.
• Phase 0 is recently FDA designated human trial phase where very small amounts of drugs, below therapeutic level, are tested under FDA 2006 Guidance on Exploratory Investigational New Drug Studies. Phase 0 studies provide no data on safety or efficacy of compounds, only on whether they seem to be functioning the same way as during in-vitro and animal testing.

DACH-Platin micelles

A new diaminocyclohexaneplatinum (DACH-platinum) loaded nanomicelle developed by NanoCarrier.

DDS (Drug Delivery System)

A technology that improves drug profiles by modifying the way a drug is released, absorbed, distributed or eliminated from the body. The objective is to deploy drugs to targeted parts of the body. Simply, DDS is a system for drug targeting.

Docetaxel

An anticancer drug in the taxane group. Docetaxel is used for the treatment of a variety of cancers, such as breast, non-small cell lung, uterus, ovarian, and prostatic cancer.

Drug Carrier

A substance that works to improve the delivery of a drug to the target area.

GMP

An abbreviation for Good Manufacturing Practice which in the context of NanoCarrier's business is a part of the set of development and manufacturing guidelines approved by the International Conference on Harmonization.

In Vitro

A process that is performed in a controlled environment outside a living organism.

In Vivo

A process that is performed using living organisms, such as animals.

Metabolite

The intermediates and products of metabolism (chemical reactions necessary to maintain life).

Micelle Antibody Conjugate

A compound type developed by Company. Conjugate is a product of coupling bio molecules together via (covalent bonds). It can be used to attach sensors, for instance antibodies, to a drug-loaded micelle and improve drug delivery efficiency.

Milestone

A cash payment tied to achieving R&D or clinical trials phase milestones.

Nanoplatin

A trademarked experimental drug developed by NanoCarrier (see Existing Pipeline) utilizing its nanomicellar technology to create a cisplatin-incorporated polymeric micelle.

Oxaliplatin

A platinum based anti-cancer drug that belongs to the same family as cisplatin. It was discovered in Japan in 1976 and licensed out to Debiopharm S.A. Debiopharm developed it as a colorectal cancer drug and licensed it to Sanofi-Aventis in 1994. Sanofi-Aventis is selling the drug under the trade name of Eloxatin. It was approved for sale in Europe in 1999 and in the US in 2004. Its patent as NCE (New Chemical Entity) expired in 2007 but the drug will remain protected by patents for applications in colon cancer treatment till 2013-2016.

Paclitaxel

A generic name for an anticancer drug. It was discovered in the US in 1967 when it was isolated from the bark of a rare Pacific yew tree. It was developed commercially by Bristol-Myers Squibb and marketed as Taxol. Together with another drugs, docetaxel (marketed as Taxotere) and Abraxan, it forms a group of anti-cancer drugs called taxanes.

Royalty

A percentage of sales or a fixed amounted that is paid in relation to revenues of an out-licensed product.

Taxol

A paclitaxel marketed by Bristol-Myers Squibb. It is paclitaxel dissolved in a castor oil formulation (Cremophor EL) and ethanol.

Upfront payment

A cash or equity payment that normally takes place at the beginning of a licensing agreement.

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