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Message from President

For Shareholders and Investors

Overview of Results and Management Initiatives

Ken Mizutani
President, CEO

In the first half of the current year, we recorded higher sales and lower income. Sales of key products expanded, and we also made progress on initiatives that will help to strengthen our business base.

Net sales were higher in the first half of the current year (April–September, 2009). Contributing factors included sustained domestic sales of the mainstay products, ARTZ^®, which improves joint function, and OPEGAN^®, an ophthalmic surgery aid. There was also transient royalty income. The increase in domestic sales of our pharmaceutical products is partly attributable to growth of Japan’s aged population. It was also the result of our market expansion initiatives and sales promotion in collaboration with our sales partners. Overseas sales were lower. Despite higher volume sales in the U.S., exports of ARTZ^® to the U.S. (under the brand name of SUPARTZ^®) were adversely affected by yen appreciation and reduced local selling prices. Sales were also affected by a postponement of shipments to China in the second half. Income was reduced by cost increases, including higher depreciation costs resulting from the start-up of operations in a new pharmaceutical manufacturing building. There was also an increase in R&D expenses associated with the completion of clinical trials for an additional indication for SUPARTZ^® in the U.S.

Positive developments in the first half of the current year included progress on a decision on a sales partner for a product that is currently waiting for FDA approval and R&D, the driving force of our future growth. In May 2009, we signed an exclusive distributorship agreement with the American company Zimmer, Inc. for Gel-200, our new joint function improving agent for which an approval application is under review in the U.S. Seikagaku and Zimmer are developing sales strategies and building a sales structure for Gel-200. In September 2009, we submitted an application to the FDA concerning the use of SUPARTZ^® for an additional indication, shoulder osteoarthritis. We are implementing this project with our U.S. sales partner, Smith & Nephew, Inc., with the goal of further enhancing the clinical value of SUPARTZ^®.

In summary, while the results for the first half of the current year show higher sales and lower income, it should be noted that sales of our mainstay products continued to expand. We also made progress on initiatives that will strengthen our business fundamentals, including the signing of an agreement with the new sales partner, and advancing projects to a higher development stage.

The Seikagaku Corporation 10-year Vision and Mid-term Plan

Our goal under the Seikagaku Corporation 10-year Vision is the evolution of our company as a “Global Category Pharma.” We are working toward that goal under a new mid-term plan launched in the current year.

We formulated our 10-year vision in March 2009. Under this vision, we aim to create a future for Seikagaku as a “Global Category Pharma*,” capable of developing products that are competitive across national borders through focused R&D on glycoscience, a field in which we excel. Specifically, we will build the capability to add a new market every three years, by launching a new product and/or developing new regions.

The first step on our path to the realization of this vision was the launch of our new three-year mid-term plan starting in the current year. Our slogan for this plan is “GPS,” which stands for “Global, Powerful, Sustainable.” These words express our determination to identify the right direction for the future, based on an accurate understanding of our current position. Over the next three years, we will work under this slogan to create a foundation for achieving our 10-year vision by fostering our fundamental corporate strengths and developing core systems.

*A “global category pharma” is defined as a company that achieves international competitiveness by targeting its research and development toward a specialized field to develop new drugs for world markets. This is one strategy for long-term success identified by the Ministry of Health, Labor and Welfare in their vision for Japan’s pharmaceutical industry.

Summary of Results for the First Half of the Current Year

Despite lower overseas sales because of the impact of yen appreciation, total net sales increased by 4.6% year on year to ¥13,965 million. This growth reflects higher sales of pharmaceutical products in Japan, as well as transient royalty income. Operating income was 5.6% lower at ¥2,862 million. The decline was attributable to cost increases, including higher depreciation costs resulting from the start of production in October 2008 in the new No. 4 Production Building at the Takahagi Plant, which was built to meet increased demand for ARTZ Dispo^®. Another factor was increased R&D expenses relating to the wrap up of clinical trials for an additional indication for SUPARTZ^® as a treatment of shoulder osteoarthritis, in the U.S. At ¥2,790 million, ordinary income was 17.3% lower year on year, while net income for the first half was 10.0% lower at ¥1,894 million.

Overview of Sales by Business Segment

<Pharmaceuticals>

ARTZ^®, which is used to improve joint function, is one of our mainstay products. The continuing expansion of the domestic market for ARTZ^® in the period under review reflects a growing aged population, as well as our campaign in collaboration with our sales partner, Kaken Pharmaceutical Co., Ltd., to raise public awareness of knee osteoarthritis. Unit deliveries of ARTZ^® to medical institutions increased in this market environment, resulting in higher sales.

Our main overseas market is the U.S. Sales of SUPARTZ^® increased in volume terms, but export sales by Seikagaku were lower because of the impact of yen appreciation and falling selling prices in the U.S. Sales in China remained on a growth trend. However, export sales declined because some shipments will be postponed until the third quarter.

Customer-focused sales promotion activities in cooperation with our sales partner, Santen Pharmaceutical Co., Ltd., resulted in increased sales of OPEGAN^®, which is used in ophthalmic surgery, and further growth in its market share. Sales of MucoUp^®, a surgical aid for endoscpic mucosal resection, also rose, due to market expansion initiatives in collaboration with our sales partner, Johnson & Johnson K.K., that promoted the use of endoscopic procedures.

Total net sales in this segment amounted to ¥10,583 million, an increase of 4.9% over the result year on year.

<Bulk products>

At ¥851 million, sales of bulk products were 11.2% higher than the figure for the same period in the previous year. This growth resulted mainly from higher sales of hyaluronic acid.

<Research reagents and diagnostics>

Domestic sales trends remained firm, led by endotoxin-detecting reagents for use in quality control. However, overseas sales were eroded by yen appreciation, and total net sales in this segment declined by 9.3% year on year to ¥2,219 million.

Improving shareholder value

We will earn the continuing confidence of all stakeholders by maintaining sustainable growth and management transparency.

We will continue our efforts to enhance shareholder value through sustained growth as a “Global Category Pharma.” We also recognize the importance of shareholder returns as a vital management priority. Our basic policy on profit distribution calls for balancing the payment of dividends, the internal reserve and the pursuit of a flexible capital policy. Our performance-oriented dividend policy emphasizes the dividend payout ratio. We aim at improving payout ratio, while maintaining 30%, and with an annual dividend of ¥20 per share as the base amount. As in the previous year, the interim dividend for the first half of the current year has been set at ¥12.5 per share. We plan to pay a year-end dividend of ¥12.5, bringing the total dividend for the year to ¥25. On the current forecast of this business year basis, the payout ratio will be 44.4%.

At the end of the previous fiscal year, we introduced a shareholder benefit program to express our gratitude for the support of existing shareholders, and also to encourage more investors to become long-term shareholders by enhancing the attractiveness of our shares.

We are determined to earn the continuing confidence of all stakeholders and recognition of our contribution to society by maintaining our firm commitment to sustainable growth and management transparency.

We look forward to the continuing support of our shareholders.

December 2009
Ken Mizutani
President, CEO