Seikagaku develops new drugs in-house, conducts clinical trials, and submits applications for approval from regulatory authorities such as the Ministry of Health, Labour and Welfare (Japan) and the FDA (US). It manufactures drugs itself, but sells through pharmaceutical companies of sales partner that are strong in specific areas. Earnings are driven by GPM of products sold to sales partners. Since its establishment in 1947, it has specialized in glycoscience (study of sugar chains and glycoconjugates), developing and manufacturing related drugs and bulk drugs.
Pharmaceuticals
Executive summary
Business overview
Seikagaku develops and manufactures drugs for orthopedic disorders and ophthalmic diseases (mainly joint function improving agents and ophthalmic surgery aids whose API [Active Pharmaceutical Ingredient] is hyaluronic acid) and sells them to partner pharmaceutical companies for distribution. Since it was established in 1947, the company has specialized in glycoscience—a niche area where it can avoid competition from major pharmaceutical companies. According to the company, its joint function improving agent has a 69% market share (value basis) in Japan and a 15% share in the US. In 1950, Seikagaku was the first in the world to commercially manufacture chondroitin sulfate. The extraction and purification technologies developed at that time remain the foundation of its operations.
By segment, Domestic Pharmaceuticals accounted for 43% of FY03/21 sales, Overseas Pharmaceuticals 25%, Bulk Products and Contract Development and Manufacturing Organization 7%, and LAL (Limulus Amebocyte Lysate, endotoxin-detecting reagents) 25%. Mainstay products are ARTZ, a joint function improving agent launched in March 1987 for improving the symptoms of knee osteoarthritis, and OPEGAN, ophthalmic surgery aid for cataract launched in January 1987. Both products have top domestic market share (accounting for 61.2％ and 53.7%, respectively, in FY03/21, according to the company). The company spends much of its sales on R&D (26.1% in FY03/21). Overseas sales accounted for 49.6% of total sales in FY03/21. RPM that includes royalty income booked under non-operating income has exceeded 10% every year over the past 10 years except in FY03/17 (10.9% in FY03/21).
The main pipeline includes six themes: SI-6603 (treatment for lumbar disc herniation), SI-613 (osteoarthritis treatment), SI-614 (treatment for dry eye), SI-449 (adhesion barrier), and SI-722 (treatment for interstitial cystitis). These can be broken down into seven projects taking into account different regions and indications. Seikagaku aims to expedite commercialization of new products by focusing R&D on glycoscience, its area of expertise. Gathering attention is treatment for lumbar disc herniation SI-6603, an injectable drug containing condoliase, an enzyme that selectively breaks down glycosaminoglycan (GAG) in the herniated nucleus pulposus, and thus when injected directly into the intervertebral disc can reduce pressure on nerves (the source of pain).
On March 23, 2018, Seikagaku obtained approval from the Ministry of Health, Labour and Welfare (MHLW) to manufacture and sell SI-6603 (brand name: HERNICORE®) in Japan. On May 22, 2018, HERNICORE was listed in the National Health Insurance drug price list (a 1.25-unit bottle was priced at JPY81,676 and then increased 1.9% to JPY83,189 in October 2019. The price was unchanged in April 2020 and April 2021, and according to the company, the number of patients receiving the agent is estimated at 5,200 with corresponding sales peaking at JPY420mn in the eighth year). Kaken Pharmaceutical Co., Ltd. (TSE1: 4521) launched the product in August 2018. It was increasingly adopted by medical institutions as it became more well-known, boosting total shipments to medical institutions to 11,500 units by end-FY03/21.
HERNICORE is an injectable drug that uses condoliase, an enzyme that selectively degrades glycosaminoglycans (GAG), the main component of nucleus pulposus. When injected directly into the intervertebral disc, it degrades GAGs and shrinks the nucleus pulposus, reducing the pressure on nerves (the source of pain) caused by the herniation and thus providing pain relief. HERNICORE is expected to improve the symptoms of lumbar disc herniation with a single injection, and Seikagaku anticipates that it will provide a new treatment option to patients and contribute to improving their quality of life (QOL).
In addition, an application for manufacturing and marketing of SI-613/ONO-5704 (brand name: JOYCLU®), jointly developed in Japan by Seikagaku and Ono Pharmaceutical (TSE1: 4528), was approved in March 2021 for treatment of osteoarthritis (knee and hip joints). JOYCLU 30mg Intra-articular Injection was listed in the National Health Insurance drug price list on May 19, 2021. It was priced at JPY4,394, and according to the company, the number of patients receiving the agent is estimated at 486,000 with corresponding sales peaking at JPY6.9bn in the tenth year.
JOYCLU is diclofenac (an anti-inflammatory drug) chemically bound to hyaluronic acid using the company’s proprietary drug binding technology, which releases diclofenac by hydrolysis in the joint. It has been approved as a treatment for osteoarthritis of the knee and hip joints, and is expected to improve symptoms by intra-articular injection once every four weeks. JOYCLU is the first ethical drug having the indication of osteoarthritis of the hip joint in Japan. The package insert carried a boxed warning citing the risk of serious shock and anaphylaxis, but after several patients were reported to have suffered shock and anaphylaxis after the drug’s administration, the company issued a "Dear Healthcare Professionals Letter of Rapid Safety Communication" (also known as a “Blue Letter”) on June 1, 2021. A “Blue Letter” is intended to promptly alert healthcare professionals as to the product’s risks and ensure the safety of patients through proper treatment and action.
SI-6603 Phase III clinical trial under way in the US has confirmed safety and efficacy, but failed to demonstrate a statistically significant improvement in the primary endpoint of reduction in worst leg pain at week 13 (November 2017). In response, the company announced on February 19, 2018 that it would initiate an additional US Phase III clinical trial, which it has started. The company aims to build on the findings from the previous study to increase the likelihood of success. Patient enrollment for the additional study began in Q1 FY03/19. The company had planned to complete the additional Phase III clinical trial in November 2022, but the schedule has been delayed due to some medical facilities having suspended or cancelled trials and increased postponement of hospital visits for trial subjects due to the COVID-19 pandemic.
As of end-March 2021, patient enrollment was proceeding apace, amid effective advertising activities aimed at recruiting patients and collaborations with local CROs to enlist new trial sites as activity at trial facilities picked up. The top priority remains to carry out clinical trials while taking steps to lower coronavirus infection risks.
US Phase II clinical trials on SI-613 for osteoarthritis have been completed and the company is concurrently considering a Phase III trial while working to select an alliance partner. In April 2020, Seikagaku concluded a joint development and marketing agreement with Eisai for SI-613 in China, and in September 2020 it reached a joint marketing agreement with Eisai in South Korea.
As for SI-613-ETP, analysis of the domestic late-stage Phase II data on enthesopathy in tendons and ligaments has been finalized, and Seikagaku is currently reviewing the next phase study with development and marketing partner Ono Pharmaceutical.
US-based Phase II/III clinical trials on the dry eye treatment SI-614 are complete, and the company is and the company is currently evaluating the results of the Phase III clinical studies while also working to select an alliance partner.
The company began Phase I/II clinical trials of SI-722 in the US in November 2019. The trial suffered delays as a result of the spread of COVID-19 in the US, but completed patient enrollment in January 2021. The study confirmed tolerability, and the company is now using the data acquired as basis for planning the next clinical trial.
Trends and outlook
FY03/21 results: The company reported full-year consolidated sales of JPY27.7bn (-3.4% YoY), operating profit of JPY1.5bn (-21.9% YoY), recurring profit of JPY3.0bn (-24.0% YoY), and net income (attributable to owners of the parent) of JPY4.3bn (versus loss of JPY10.8bn in FY03/20). By segment, sales were down 12.1% YoY for Domestic Pharmaceuticals, down 8.2% YoY for Overseas Pharmaceuticals, up 81.0% YoY for Bulk Products and Contract Development and Manufacturing Organization, and up 7.2% YoY for LAL. The jump in sales at Bulk Products and Contract Development and Manufacturing Organization segment reflects the addition of sales from Dalton Chemical Laboratories, a contract manufacturing organization (CMO) that was made into a subsidiary of the company. However, the full-year sales were impacted by the National Health Insurance (NHI) drug price reductions, and the decline in outpatient visits amid the pandemic, hurting drug sales at its domestic and overseas pharmaceuticals businesses.
Although marketing expenses declined due to lower depreciation charges associated with the asset impairment charges booked last year and a review of selling and promotional spending, R&D-related spending increased to JPY7.2bn (+4.8% YoY) on the back of rising costs for ongoing clinical trials in the US to evaluate SI-6603 for the treatment of lumbar disc herniation. Despite the decline in marketing expenses, the increased R&D expenses and a drop in sales YoY weighed on operating profit.
FY03/22 forecast: The company is projecting full-year consolidated sales of JPY32.2bn (+16.1% YoY), operating profit of JPY4.6bn (+102.3% YoY), recurring profit of JPY4.7bn (+53.7% YoY), and net income (attributable to owners of the parent) of JPY3.7bn (-14.4% YoY), and expects to pay dividends of JPY30.0 per share for year (versus JPY24.0 in FY03/21). The sales and recurring profit forecasts are higher than the goals set out in the medium-term business plan covering FY03/20–FY03/22 (see below). The company expects sales to rise on the back of an increase in royalty income reclassified as sales, and due to its adoption of ASBJ Accounting Standard for Revenue Recognition (see below; no impact expected on recurring profit).
The company will apply ASBJ Accounting Standard for Revenue Recognition and Guidance on Accounting Standard for Revenue Recognition from the beginning of FY03/22, and also reclassify royalty income, moving it from non-operating income to sales. For purposes of calculating YoY changes, these new accounting standards have been applied retroactively to FY03/21 figures.
On November 8. 2019, the company unveiled a new medium-term business plan covering FY03/20–FY03/22. Under the new medium-term plan, the company is targeting FY03/22 consolidated sales of JPY28.3bn (flat versus FY03/19), recurring profit of JPY4.5bn (+57% versus FY03/19), and SKK EBITDA (a profit indicator consisting of operating profit plus depreciation expense and royalty income) of JPY5.0bn (+8% versus FY03/19), with 50.0% of sales coming from overseas versus 42.2% in FY03/19. Introducing its new medium-term plan, the company said that with changes in the business environment surrounding the pharmaceuticals industry becoming increasingly severe, the need to lay out a new growth path yet again has made the continual creation of innovative new drugs essential. Under the new medium-term plan, the company will be focusing its efforts on (1) accelerating the development of new drugs that can become major profit centers, (2) strengthening its revenue base by expanding markets for its products, and (3) reforms for increasing productivity.
With respect to (1) its efforts directed towards accelerating the development of new drugs, plans call for further strengthening and utilization of proprietary core technology related to glycosaminoglycan (GAG), accelerated development of innovative drugs using an open innovation strategy, and steady expansion of its development pipeline with an eye on global market expansion. With respect to (2) efforts directed toward strengthening its revenue base by expanding the markets for its products, plans call for post-marketing drug development of HERNICORE for the domestic market; expedited cultivation of new markets in other countries for existing products and products under development; and global expansion of gene-recombinant endotoxin-detecting reagents that utilize genetic recombination technology. With respect to (3) efforts directed at increasing productivity, plans call for concerted cost-cutting in all areas, a more diversified earnings model, and the creation of an organizational structure that will maximize the value of resources.
Strengths and weaknesses
Strengths: R&D-focused pharmaceutical company with expertise in a niche area, leverages accumulated state-of-the-art technology, and has cash cow products. Weaknesses: high ratio of domestic drug sales, which are susceptible to NHI drug price reductions; constrained by limited target market size; and lack of returns on development of new blockbuster drugs. (See Strengths and weaknesses section).
Key financial data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Past figures have been retroactively revised in line with the “Revision of deferred tax assets and deferred tax liabilities.”
Note: The company will apply ASBJ Accounting Standard for Revenue Recognition and Guidance on Accounting Standard for Revenue Recognition from the beginning of FY03/22. For purposes of calculating YoY changes, this new accounting standard has been applied retroactively to consolidated figures for FY03/21.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company will apply ASBJ Accounting Standard for Revenue Recognition and Guidance on Accounting Standard for Revenue Recognition from the beginning of FY03/22. For purposes of calculating YoY changes, this new accounting standard has been applied retroactively to consolidated figures for FY03/21.
Recent updates
1H FY03/22 flash update
On November 9, 2021, Seikagaku Corporation announced earnings results for 1H FY03/22; see the results section for details.
Trends and outlook
Quarterly trends and results
Notes: Figures may differ from company materials due to differences in rounding methods.
The company has adopted the new Accounting Standard for Revenue Recognition from Q1 FY03/22, and figures for Q1 FY03/21 have been revised retrospectively to reflect this change.
Notes: Figures may differ from company materials due to differences in rounding methods.
The company has adopted the new Accounting Standard for Revenue Recognition from Q1 FY03/22, and figures for Q1 FY03/21 have been revised retrospectively to reflect this change.
1H FY03/22 (out November 9, 2021)
Overview
For 1H FY03/22, the company reported consolidated sales of JPY20.5bn (+54.6% YoY), operating profit of JPY6.0bn (+665.3% YoY), recurring profit of JPY6.4bn (+493.0% YoY), and net income attributable to owners of the parent of JPY5.0bn (+422.3% YoY).
Performance versus plan
Progress versus forecast: 1H sales reached 63.8% of the full-year FY03/22 forecast (47.9% of full-year FY03/21 results in 1H FY03/21), operating profit 132.7% (35.1%), recurring profit 137.5% (35.6%), and net income attributable to owners of the parent 137.5% (22.5%).
In 1H, all profit categories exceeded the company’s full-year forecast, but Seikagaku has left its forecast unchanged for full-year FY03/22. Profit exceeded the company's full-year forecast due to a concentration of factors lifting sales up toward the end of 1H, namely the receipt of royalty payments and advance shipments in the Overseas Pharmaceuticals business. However, R&D expenses are projected to rise from Q3 due to additional costs associated with measures to encourage participation in the additional clinical study in the US of SI-6603 for the treatment of lumbar disc herniation. The company also left its forecast unchanged in consideration of the impact on JOYCLU® sales from the issue of a “Blue Letter” (Dear Healthcare Professional Letters of Rapid Safety Communications).
Sales
Seikagaku’s 1H consolidated sales were up 54.6% YoY to JPY20.5bn, with sales at its Domestic Pharmaceuticals business finishing up 14.2% YoY, sales at its Overseas Pharmaceuticals business up 49.5% YoY, sales at its Bulk Products and Contract Development and Manufacturing Organization business up 40.3% YoY, royalties* up 3,818.3% YoY, and sales at its LAL business up 33.2% YoY. The 54.6% YoY increase in sales reflected sharp growth in royalty payments, the start of sales of joint function improvement agent JOYCLU, and a rebound from the impact caused by the COVID-19 pandemic in Japan and overseas a year ago.
Operating profit
1H consolidated operating profit was up 665.3% YoY to JPY6.0bn.
Gross profit margin was up 10.3pp YoY to 64.2%, on the back of higher sales and a decrease in the CoGS ratio accompanying changes in the sales mix. The SG&A expense ratio was down 13.3pp at 34.7%, as higher sales offset a JPY267mn (+7.6%) YoY increase in R&D expenditures due to an additional clinical study of SI-6603 in the US. As a result, the operating profit margin was 29.4%, up 23.5pp YoY.
Results by segment
Pharmaceuticals segment
Domestic Pharmaceuticals
1H sales of JPY6.8bn were up 14.2% YoY.
Joint function improving agent ARTZ
Shipment volumes of joint function improving agent ARTZ to medical institutions grew, as did the drug’s market share, amid a market recovery from the impact of the COVID-19 pandemic a year ago and because customers switched to ARTZ from rival products as success with new client acquisition initiatives continued. Sales value increased, offsetting the impact of the NHI drug price revision.
Joint function improving agent JOYCLU
The joint function improving agent JOYCLU was launched by sales partner Ono Pharmaceutical on May 19, 2021.The package insert carried a boxed warning citing the risk of serious shock and anaphylaxis, but after several patients were reported to have suffered shock and anaphylaxis after the drug’s administration, the company issued a “Dear Healthcare Professionals Letter of Rapid Safety Communication” (also known as a “Blue Letter”) on June 1, 2021. Seikagaku has said that it will continue efforts to proactively gather information including reports of side effects, in collaboration with sales partner Ono Pharmaceutical, and strive to provide safety information, while endeavoring to quickly investigate causes in cooperation with experts and medical institutions.
OPEGAN series (ophthalmic surgery aids)
Shipment volumes of the OPEGAN series of ophthalmic surgery aids to medical institutions grew in the absence of a prior-year contraction in the overall market, as fewer cataract surgeries were performed amid the spread of COVID-19. Sales value declined, though, owing to the NHI drug price revision and a decline in shipments from a high level in 1H FY03/21.
MucoUp (submucosal injection agent for endoscopic surgery)
The company’s sales for MucoUp (submucosal injection agent for endoscopic surgery) increased YoY owing to advance shipments to sales partners.
Lumbar disc herniation treatment HERNICORE
Shipment volumes of HERNICORE to medical institutions grew in the absence of a prior-year drop in outpatient visits amid the spread of COVID-19, and thanks to strengthened activities for the provision of information to sales partners and medical institutions. Sales were up YoY in value terms as well.
Overseas Pharmaceuticals
Sales of JPY4.4bn were up 49.5% YoY.
Gel-One (single-injection joint function improving agent)
Sales volume and sales value grew for Gel-One (intra-articular single-injection viscosupplement for the treatment of knee osteoarthritis) in the US in the absence of a prior-year contraction in the overall market due to the spread of COVID-19 and the success of measures at sales partners to encourage customers to switch to Gel-One from competing products.
SUPARTZ FX (five-injection joint function improving agent)
Despite an ongoing preference in the US market for products with lower administration frequency (single- and three-injection products), sales volume of SUPARTZ FX (five-injection joint function improving agent) increased YoY in the US due to the dropout of the prior-year drag from pandemic effects. Sales value also increased from shipments being brought forward to avoid distribution risks.
ARTZ in China
Sales volume of ARTZ in China increased YoY as the company ramped up activities to promote prescription. Sales value also increased sharply due to shipments being concentrated through to Q2.
Bulk Products and Contract Development and Manufacturing Organization
Sales of JPY1.3bn were up 40.3% YoY. Sales of bulk products were down, but the business’ sales increased YoY, including sales from the CMO business of Dalton Chemical Laboratories, which was made an overseas subsidiary of the company.
Amid a huge JPY3.6bn (+3,818.3%) YoY increase in royalty income, Pharmaceuticals segment sales grew 61.7% YoY to JPY16.1bn.
LAL segment
Sales of JPY4.4bn were up 33.2% YoY. This 33.2% YoY growth in sales was due to increased sales of endotoxin-detecting reagents and beta-glucan-detecting in vitro reagents from overseas subsidiary Associates of Cape Cod (ACC) increasing marketing initiatives, increased orders for contract research services, and firm domestic sales. In April 2021, ACC launched PyroSmart NextGen™, a recombinant LAL reagent for bacterial endotoxin testing, and the product debuted in Japan in May 2021.
Drug pipelines
R&D expenditures in 1H FY03/22 came to JPY3.8bn (18.5% of sales, or 22.4% if royalty income is excluded).
SI-6603 (for treatment of lumbar disc herniation; developed in the US)
The company initiated additional Phase III clinical trials in the US in February 2018 and had expected follow-up monitoring to be completed by November 2022, but experienced delays due to some medical facilities having suspended or cancelled trials and increased postponement of hospital visits for trial subjects due to the COVID-19 pandemic. As of March 2021, the trials were proceeding smoothly amid effective advertising activities aimed at recruiting patients and collaborations with local CROs to enlist new trial sites. The company continues to minimize delays while taking measures to reduce the risk of coronavirus infections.
SI-613 (for treatment of osteoarthritis; developed in Japan, US, China, and South Korea)
In Japan, the company obtained approval on March 23, 2021 to manufacture and market JOYCLU 30mg Intra-articular Injection (SI-613) for the indication of osteoarthritis (knee joint and hip joint). JOYCLU is the first joint function improvement agent in Japan indicated for osteoarthritis. Following the NHI drug price listing, the company also plans to market the product through a sales partner Ono Pharmaceutical (TSE1: 4528).
In the US, Phase II clinical studies of SI-613 in patients with knee osteoarthritis have been completed and the company is currently considering a Phase III study while moving forward with the selection of a sales partner. In April 2020 the company entered into a partnership agreement with Eisai (TSE1: 4523) to jointly develop SI-613 and market the new drug in China. In September 2020, the company concluded another partnership agreement with Eisai to jointly market SI-613 in South Korea.
SI-613-ETP (anti-inflammatory agent for enthesopathy in tendons and ligaments; developed in Japan)
Late Phase II clinical trials of SI-613-ETP for the treatment of enthesopathy in tendons and ligaments has been completed in Japan. The company is considering to move onto Phase III study together with Ono Pharmaceutical, its joint development and marketing partner.
SI-614 (treatment for dry eye: developed in the US)
Phase II/III clinical studies of SI-614 have been completed, and the company is currently evaluating the results of the Phase III clinical studies and is also looking for a sales partner.
SI-722 (for treatment of interstitial cystitis; developed in the US)
The company started Phase I/II clinical studies in the US in November 2019. As the pandemic put the studies behind schedule, patient enrollments was completed in January 2021. Now that the tolerability was confirmed in the studies, the company has been examining the obtained data as it considers moving onto Phase III studies.
SI-449 (adhesion barrier, developed in Japan)
In May 2020, Seikagaku started a pivotal study to confirm efficacy (adhesion prevention), safety, and operability of SI-449, but the pandemic has delayed the schedule. The company is now working to overcome the delays by increasing the number of trial sites and using remote methods at those trial sites that have restricted visiting arrangements.
For details on previous quarterly and annual results, please refer to the Historical financial statements section.
Company forecast for FY03/22
Note: Figures may differ from company materials due to differences in rounding methods. The company will apply ASBJ Accounting Standard for Revenue Recognition and Guidance on Accounting Standard for Revenue Recognition from the beginning of FY03/22, and will also reclassify royalty income, moving it from non-operating income to sales. For purposes of calculating YoY changes, this new accounting standard has been applied retroactively to FY03/21 figures.
Company forecast for FY03/22
For FY03/22, the company is projecting full-year consolidated sales of JPY32.2bn (+16.1% YoY; new accounting standard for revenue recognition applied retroactively to FY03/21 figures, same below), operating profit of JPY4.6bn (+102.3% YoY), recurring profit of JPY4.7bn (+53.8% YoY), and net income of JPY3.7bn (-14.4% YoY). The projection of a 14.4% YoY decline in net income reflects the recognition of deferred tax assets in FY03/21, as a result of which the company expects to recognize deferred income taxes of negative JPY1.5bn in FY03/22.
The company projects R&D costs of JPY7.9bn (+9.6% YoY), and an R&D cost to sales ratio of 28.3% (versus 26.7% in FY03/21, if the new accounting standard is retroactively applied). The R&D budget includes costs for SI-6603 clinical trials in the US, as well as clinical trial expenses for SI-722 and SI-449, and post-marketing surveillance costs for JOYCLU. Seikagaku also expects operating costs to increase in FY03/22, after a prior-year decline amid COVID-19.
The company expects to pay dividends of JPY30.0 per share for the year (versus JPY24.0 per share in FY03/21), for a dividend payout ratio of 46.4% (31.8%). It assumes an average exchange rate of JPY105/USD (versus JPY106.06/USD in FY03/21).
Based on the new accounting standard for revenue recognition, a JPY1/USD swing affects sales by around JPY150mn and operating profit by about JPY60mn (positively when the yen weakens and negatively when the yen strengthens).
The company will apply ASBJ Accounting Standard for Revenue Recognition and Guidance on Accounting Standard for Revenue Recognition (hereafter referred to as “new accounting standard”) from the beginning of FY03/22, and will also reclassify royalty income, moving it from non-operating income to sales. For purposes of calculating YoY changes, the new accounting standard has been applied retroactively to FY03/21 figures.
Application of new accounting standard: Sales commissions paid to sales partners previously were booked as SG&A expenses but now will be deducted from sales.
Reclassification of royalty income: Royalty income previously was recognized as non-operating income but now will be recognized as sales (in accordance with the new accounting standard).
Sales
Explaining its outlook for a 16.1% YoY increase in sales to JPY32.2bn, the company said the additions to the top-line coming from the reclassification of royalty income as sales coupled with a new product launch (JOYCLU) and rising sales at its Bulk Products and Contract Development and Manufacturing Organization business are expected to easily offset on drag on sales from NHI drug price reductions. Seikagaku forecasts overseas sales of JPY14.5bn (+6.3% YoY).
Under the previous accounting standard, the company’s FY03/22 sales forecast of JPY32.2bn would have been JPY28.3bn, the FY03/22 target set in the medium-term plan. The difference between the two stems from sales commissions now being deducted from sales (-JPY650mn), and royalty income being booked as sales rather than non-operating income (+JPY4.3bn).
Operating profit
The company expects operating profit to jump 102.3% YoY to JPY4.6bn reflecting increase in sales, while spending on R&D and other SG&A expenses are still expected to rise.
Recurring profit
Seikagaku projects recurring profit of JPY4.7bn (+53.8% YoY), JPY150mn (3.3%) above the JPY4.5bn target for FY03/22 set in the medium-term business plan.
Forecasts by segment
Domestic Pharmaceuticals
The company forecasts sales of JPY11.6bn (+1.3% YoY). It expects sales to be roughly flat YoY as factors including the May 2021 launch of JOYCLU offset the drag on sales from NHI drug price revisions.
Joint function improving agent ARTZ
Seikagaku assumes that the decline in outpatient visits will continue owing to ongoing effects from the COVID-19 pandemic. It expects ARTZ shipments to medical institutions to be lower YoY.
Joint function improving agent JOYCLU
The company seeks to achieve rapid market penetration through appropriate information provision. It aims to establish JOYCLU as a new base drug in the treatment of osteoarthritis alongside existing hyaluronic acid formulations and NSAIDs (see section on JOYCLU under FY03/21 results), and envisions that the following groups of patients will benefit.
People for whom existing hyaluronic acid formulations are insufficiently effective
People who want to avoid NSAIDs, such as oral drugs or patches, in consideration of side effects
People for whom frequent hospital visits are a hardship
According to its supplemental material for Q1 FY03/22 results, Ono Pharmaceutical (the company marketing JOYCLU) revised down its FY03/22 estimate of JPY7.0bn for sales of newly launched products to JPY2.5bn. As Ono Pharmaceutical also forecasts sales of JPY22.5bn (+2.7% YoY) for Orencia Subcutaneous Injection for rheumatoid arthritis and JPY4.0bn (+26,7% YoY) for Opalmon Tablets for conditions such as thromboangiitis obliterans, Ono Pharmaceutical has a well-established sales presence in the orthopedic field.
OPEGAN series (ophthalmic surgery aids)
Seikagaku assumes the number of surgeries will remain low, at the same level as in FY03/21. It sees OPEGAN deliveries to medical institutions decreasing YoY as shipments of rival products resume.
Lumbar disc herniation treatment HERNICORE
Although the company expects a continued decrease in outpatient visits, it assumes deliveries to medical institutions will remain at the prior-year level due to a steady increase in the number of new user institutions.
Overseas Pharmaceuticals
Seikagaku forecasts sales of JPY6.9bn (+1.8% YoY). It sees sales rising on the back of increasing volumes as effects from the COVID-19 pandemic ease. The company also anticipates higher local sales volumes for the single-injection joint function improving agent Gel-One, and for ARTZ in China and elsewhere.
Gel-One (single-injection joint function improving agent)
The company expects an increase in local sales driven by stronger sales promotion activities. It sees exports rising as a result.
SUPARTZ FX (five-injection joint function improving agent)
Seikagaku forecasts a decrease in local sales due to continuation of the trend favoring products that require a low number of injections. It sees exports falling as a result.
ARTZ in China and elsewhere
The company forecasts an increase in local sales resulting from maintenance of the current level of sales to large urban hospitals and opening up of the mid-size hospital market. It sees exports rising as a result. No recovery from the impact of COVID-19 in Italy is evident, and exports are projected to be at the prior-year level.
Bulk Products and Contract Development and Manufacturing Organization
The company forecasts sales of JPY2.4bn (+27.3% YoY). It anticipates an increase in sales at contract manufacturing organization Dalton Chemical Laboratories, now an overseas subsidiary that will contribute over the full-year in FY03/22 having been added to consolidated accounts in Q2 FY03/21.
Royalty income
Seikagaku projects royalty income of JPY4.3bn (+498.8% YoY).
LAL business
The company forecasts sales of JPY7.1bn (+1.6% YoY).
Shareholder returns
Annual dividend forecast
The company expects to pay an annual dividend of JPY30.0 per share (an interim dividend of JPY15.0, a year-end dividend of JPY15.0, and a dividend payout ratio based on earnings forecast of 46.4%). This includes a special dividend of JPY10 (an interim dividend of JPY5 and a year-end dividend of JPY5) to mark the launch of JOYCLU (versus the JPY4 JOYCLU approval commemorative dividend for FY03/21). The dividend payout ratio for FY03/21 was 31.8%.
Share buyback
Medium-term outlook
Medium-term business plan (FY03/20–FY03/22)
Along with its release of 1H results, the company also unveiled its new medium-term business plan covering FY03/20–FY03/22.
Numerical targets for final year of medium-term plan (FY03/22)
Under the medium-term plan, the company is targeting FY03/22 consolidated sales of JPY28.3bn (flat versus FY03/19), recurring profit of JPY4.5bn (+57% versus over FY03/19), and SKK EBITDA (= operating profit + depreciation + royalty income) of JPY5.0bn (+8% versus FY03/19), with 50.0% of sales coming from overseas versus 42.2% in FY03/19. The projections assume an average exchange rate of JPY105/USD.
Following a careful assessment of the current operating environment and medium- to long-term trends, the company decided to book JPY12.3bn in impairment loss against fixed assets belonging to its pharmaceuticals business in 1H FY03/20. Through this large impairment charge, the annual depreciation burden for FY03/20 and future years has been reduced from about JPY3.0bn per year previously to some JPY1.0bn from FY03/21. The revenue recognition standard for the medium-term business plan is different from that used for the company’s FY03/22 sales forecast (see the section on “Company forecast for FY03/22”).
A priority of the current medium-term plan is to strengthen business foundations to prepare for the next medium-term plan starting in FY03/23.
The company plans to compensate for the contraction of Domestic Pharmaceuticals by growth of Overseas Pharmaceuticals and LAL Business to maintain overall sales.
Having booked an impairment charge in 1H FY03/20, depreciation will decrease by JPY2.0bn per year in FY03/21 and FY03/22.
The company aims to increase SKK EBITDA by improving productivity and royalty income.
Of its pipeline drugs, the company is only factoring into its medium-term plan forecast SI-613 going on sale in Japan.
The company is not factoring US sales of SI-613 and SI-614 into its medium-term plan forecast due to uncertainty regarding selection of partner companies in the US (if a selection is made during the current plan period, it will be a factor that may raise plan targets).
Major initiatives
Introducing its new medium-term plan, the company said that with changes in the business environment surrounding the pharmaceuticals industry becoming increasing severe*, the need to lay out a new growth path yet again has made the continual creation of innovative new drugs an essential. Under the new medium-term plan, the company will be focusing its efforts on (1) accelerating the development of new drugs that can become major profit centers, (2) strengthening its revenue base by expanding the markets for its products, and (3) reforms for increasing productivity.
With respect to (1) efforts directed towards accelerating the development of new drugs, company plans call for further strengthening and utilizing its proprietary core technology related to glycosaminoglycan (GAG), accelerated development of innovative drugs using an open innovation strategy, and steady expansion of its development pipeline with an eye on global market expansion.
With respect to (2) efforts directed toward strengthening its revenue base by expanding the markets for its products, plans call for post-marketing drug development of HERNICORE for the domestic market and expediting the cultivation of new markets in other countries for existing products and products under development, and global expansion of gene-recombinant endotoxin-detecting reagents that utilize genetic recombination technology.
With respect to (3) efforts directed at increasing productivity, plans call for concerted cost-cutting in all areas, a more diversified earnings model, and the creation of an organizational structure that will maximize the value of resources.
Accelerating the development of new drugs that can become major profit centers
Strengthening and making use of the company’s own core technology related to GAGs: Leveraging proprietary drug discovery technology to the fullest extent to increase chances of discovering innovative drugs.
＜Proprietary core technologies>
Accelerating innovative drug discovery using an open innovation strategy: In addition to its own proprietary technologies, Seikagaku will actively seek to adopt compatible technologies from other companies in an effort to maximize synergies, increase the number of new drug development projects, and accelerate development work.
Steady expansion of the development pipeline with eye on global expansion: Seikagaku will foster the rapid development and launch of SI-613, a treatment for osteoarthritis and enthesopathy, as a new core product by applying for and successfully obtaining drug approval. The company also aims to speed up clinical trials for SI-722, a treatment for interstitial cystitis, and SI-449, an adhesion barrier. With regard to SI-6603 for the treatment for lumbar disc herniation, the company will focus on speeding up additional studies for the Phase III clinical trial as part of a concerted effort to prepare for a US market launch.
Strengthen revenue base by expanding markets for its products
Post-marketing drug development of HERNICORE in Japan: The company plans to focus on a product information campaign aimed at ensuring appropriate and safe use, and on collecting after-marketing safety information. After reaching agreements with the regulatory authorities and coordinating with relevant scientific societies, the company will also work to gradually increase its number of qualified medical practitioners and facilities as a means of steadily increasing HERNICORE’s market penetration. The company also plans to advance disease awareness activities related to lumbar disc herniation for patients.
Accelerating multinational expansion of existing products and products in development: The company plans to speed up the cultivation of new markets for existing products and products in development to help maximize product value and reinforce its medium/long-term revenue base. The company will also be actively working to enhance products and develop new applications in keeping with medical treatment needs in the targeted area.
Global expansion of endotoxin-detecting reagents utilizing genetic recombination technology: Overseas development of the LAL business is conducted by US subsidiary Associates of Cape Cod, Inc. (ACC). ACC aims for global expansion of gene-recombinant endotoxin-detecting reagents, a field that is expected to spread moving forward, leading to the creation of a new revenue base.
Reforms for increasing productivity
Concerted cost-cutting in all areas: On the manufacturing front, initiatives already underway have the company looking at ways to reduce procurement costs and optimize/streamline production to help ensure greater product profitability. On the SG&A expense front, the company is looking to increase operational efficiency cut costs. On the R&D spending front, the company will work to increase the efficiency of its R&D spending by prioritizing projects in order to sustain its new drug development programs.
More diversified earnings model: The company plans to actively look for new ways to generate revenues and earnings without relying on previous business models.
Creation of organizational structure that will maximize the value of resources: The company plans to move ahead with organizational reform that allows it to be more flexible in its response to changes in the business environment, cultivate talented employees that can create new value, and enable each employee reach their full potential.
Basic policy on returns to shareholders
Seeing the return of profits to shareholders as an important management concern, the company has set a basic policy of linking the distribution of dividends to business performance. Going forward, the company will also consider making share buybacks as appropriate after contemplating future expansion plans, total returns to shareholders, and other factors.
For FY03/20, the company plans to pay a dividend of JPY26.0 per share and in FY03/21 and FY03/22, will strive to maintain a dividend payout ratio of 50%, depending on the profitability of the business and other factors.
At the same time, the company also plans to actively invest in various strategic initiatives that will generate synergies and lead to future growth, including investment spending on R&D and new production systems that will create additional value.
(Reference) Previous medium-term business plan (FY03/17–FY03/19)
Overview
The company instituted a medium-term management plan covering the three-year period beginning April 2017 (FY03/17–FY03/19) as the final step of The Seikagaku Corp