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Management Policy

Message from President

Overview of Results and Management Initiatives for the First Half of the Fiscal Year Ended March 31, 2012 (fiscal 2011)

Ken Mizutani
President, CEO

In accordance with the Mid-term plan, Seikagaku seeks to foster basic corporate strength and develop core systems as it aims for steady growth as a "Global Category Pharma."

On the basis of The Seikagaku Corporation Ten-Year Vision, established in March 2009, we focus our research and development on glycoscience and to set out a "Global Category Pharma" that establishes global competitiveness.

In the first half of Fiscal 2011, the business environment remained adverse due to factors including the impact of the Great East Japan Earthquake and rapid yen appreciation. In these circumstances, although net sales were at roughly the first half of first 2010 level, profits rose, partly attributable to a decrease in depreciation and lower Research and Development expenses. The mainstay product ARTZ^®, an injectable treatment for osteoarthritis pain, has shown growth exceeding the market growth rate in Japan despite the impact of the earthquake, and overseas sales are developing favorably in China as well.

To this juncture in fiscal 2011, the final year of the three-year Mid-term plan, we have progressed with measures to reinforce the corporate foundation. These include the acquisition of approval for Gel-One^® in the U.S., establishment of profitability at our U.S. subsidiary, and the start of a new facilities expansion plan. Although the current Mid-term plan is drawing to a close, we will steadily proceed with the fostering of basic corporate strength and development of core systems to realize the Ten-Year vision.

Progress in Research and Development Activities

We are preparing for the start of a Phase III clinical trials for SI-6603

•SI-6603 (treatment for lumbar disc herniation)
SI-6603, in a single injection, is assumed to be as effective as surgery in alleviating symptoms, which means patients would also be expected to reap benefits in the form of patient's physical load and reduced medical costs including surgical and hospitalization costs . We submitted to the Pharmaceuticals and Medical Devices Agency a clinical trial notification for a Phase III clinical trial in Japan. The purpose of this clinical trial is to accumulate further data to supplement the results of a Phase II/III clinical trial obtained in December 2010. The trial will examine the improvement on symptoms of lumbar disc herniation, and safety. At the same time, Seikagaku will make efforts to progress with the Phase II clinical trial in the U.S.

•SI-657 (treatment for enthesopathy)
Jointly with sales partner Kaken Pharmaceutical Co Ltd., Seikagaku began an early Phase II study for SI-657, an additional indication of ARTZ^®, for treatment of enthesopathy. An early Phase II study started in July 2011 and completed case registration in August. Enthesopathy is a condition characterized by severe pain caused by undue burden where tendons and ligaments bond to the bone in the knees, elbows, heels and other joints. It is commonly known as tennis elbow or jumper's knee.

As for in-licensed themes, SI-615 for rheumatoid arthritis and SI-636 for inflammatory disease treatment, we will review our development policy taking into consideration progress of clinical trials conducted by the licensors.

In addition, we are developing two in-house themes at a pre-clinical stage, one for ophthalmic disease and another for arthritis, both with the aim of commencing clinical trials at an early date.

Our aim is to expand research and development themes by promoting in-house development and in-licensed themes with appropriate balance and launch new products earlier and consecutively.

Summary of Results for the First Half of Fiscal 2011

Net sales ¥13,795 million(-0.6% compared with the first half of fiscal 2010)

Net sales were ¥13,795 million, at roughly the first half of fiscal 2010 level. A decrease is attributable to the impact of yen appreciation. The decrease occurred even though overseas pharmaceutical sales volume rose, and an increase in sales of bulk hyaluronic acid compensated for a decrease in pharmaceutical sales in Japan due to the impact of the earthquake and high level shipments of ARTZ^® in the first half of the previous fiscal year.

Operating Income ¥3,213 million(+78.6%,compared with the first half of fiscal 2010)

Gross profit increased mainly from cost reductions in areas including depreciation of the No. 4 Production Building at the Takahagi Plant. In addition, there was a decrease in Research and Development expenses attributable to the absence of special factors in the first half of fiscal 2011, such as the posting in full in the first half of fiscal 2010 of Phase II/III clinical trial expenses in Japan of SI-6603 for treatment of lumbar disk herniation. Posting of the U.S. clinical trial expenses for SI-6603 was also slipped to the second half of fiscal 2011.

By these factors, Research and Development expenses decreased by 30.5% to ¥2,422 million and its ration to net sales declined to 7.5 points with 17.6%.

Net Income ¥2,190 million(+79.1%, compared with the first half of fiscal 2010)

Ordinary income rose 85.4% to ¥3,183 million, and net income rose to ¥2,109 million, because of a decrease in foreign exchange losses related to valuation of foreign currency assets.

Net sales by Business Segment

Pharmaceuticals ¥10,981 million ( -0.7% compared with the first half of fiscal 2010)

<Domestic>
Although the market in Japan for ARTZ^®, an injectable treatment for osteoarthritis pain, expanded as a result of an increase in the aged population and the impact of patient awareness campaigns targeting knee osteoarthritis sufferers conducted together with sales partner Kaken Pharmaceutical Co., Ltd., the growth rate slowed compared to the first half of fiscal 2010. This was because a tendency to curtail medical consultation was seen due to the impact of the Great East Japan earthquake. In these circumstances, sales expansion activities that capitalized on the brand reputation of ARTZ^® as the original drug in its category contributed to an increase in deliveries to medical institutions, resulting in a market share increase for ARTZ^®. However, shipments from Seikagaku to the sales partner decreased from the high level of the first half of fiscal 2010, when a new plastic syringe product was introduced.

Sales of the ophthalmic surgery aid OPEGAN^® decreased, although Seikagaku continued sales promotion activities focused on target medical institutions conducted in collaboration with sales partner Santen Pharmaceutical Co., Ltd. Deliveries to medical institutions and our sales also fell due to factors including a decrease in the number of cataract operations following the earthquake disaster and intensified competition.

Sales of MucoUp^®, a surgical aid for use in endoscopic mucosal resection, increased due in part to a focus on awareness activities to increase penetration of endoscopic surgical techniques conducted in cooperation with sales partner Johnson & Johnson K.K., although the number of endoscopic operations grew at a sluggish pace following the earthquake disaster.

As a result, sales of pharmaceuticals fell 1.0% from the first half of fiscal 2010 to ¥9,330 million.

<Overseas>
U.S. sales of SUPARTZ^® the product name of ARTZ^® in the U.S., were at roughly the level of the first half of fiscal 2010 as the impact of a tightening of insurance reimbursements by some insurance companies has nearly run its course and sales via specialty pharmacies, where SUPARTZ^® can be sold at comparatively high prices, increased. Seikagaku's export sales to the U.S. decreased due to the impact of yen appreciation, despite an increase on a volume basis.

Meanwhile, export sales to China continued to rise. ARTZ^® enjoys an excellent reputation in China for its high quality and globally original drug, particularly among medical institutions in major cities. In addition, export sales to Europe increased due to factors including carryover into the first half of fiscal 2011 of shipments planned for the end of fiscal 2010 due to the impact of the earthquake.

As a result, overall sales of pharmaceuticals rose 1.3% from the first half of fiscal 2010 to ¥1,650 million.

Fine Chemicals ¥2,814 million ( -0.5% compared with the first half of fiscal 2010)

Sales in overseas markets of endotoxin-detecting reagents for use in quality control developed favorably, and sales of bulk hyaluronic acid also increased. Nevertheless, overall sales fell due to yen appreciation, etc.

Improving Shareholder Value

We are working to improve shareholder value through the evolution of Seikagaku as a "Global Category Pharma." Our management policies will also continue to emphasize the maintenance of confidence in Seikagaku.

Seikagaku strives to increase shareholder value through sustained growth and considers the return of profit to our shareholders, as an important management priority. In the coming years, we will continue to pursue high confidence from all our stakeholders including shareholders.

We look forward to the continuing support and understanding of our shareholders.

December 2011
Ken Mizutani
President, CEO