Solasia Pharma K.K. （4597・TSE Mothers）portal.morningstarjp.com/stock/er_report/pdf/er4597e_190626.pdfThe company’s consolidated earnings forecasts for FY2019, ending December

（1/3）

Morningstar Equity Research Report　2019.06.26

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding the accuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

Moving onto the growth stage buoyed by the huge ‘Chinese’ market and two-product launches

Pharmaceutical company specialized in oncology and rare disease

Stock Price Unit of Investment Market Cap 52-Week High 52-Week Low PER（E）

157yen（6/25）

100Shares16.56Bil yen

（6/25）248yen

（19/2/22）137yen

（19/1/4）－

（6/25）

Solasia Pharma K.K. （4597・TSE Mothers）

■Revenue growth on strong product sales and milestone revenue

Solasia Pharma K.K. announced its consolidated financial results (under IFRS) for 1Q (January ~ March 2019) of the fiscal year ending December 31, 2019 (FY2019), in which the company posted sales revenue of Yen 61 million (8.7 times the level seen in the same period a year ago) but suffered an operating loss of Yen 494 million (compared with the Yen 325 million loss in the same period last year). The principal driver of revenue growth was the recognition of milestone revenue after it obtained approval from the Chinese pharmaceutical authorities of a newly developed product ‘SP-03’ (an oral liquid to control and relieve the pain in oral mucositis caused by chemo and/or radiotherapy; this is categorized as a ‘medical device’). Another newly developed drug ‘SP-01’ (a transdermal patch for the prevention of chemotherapy-induced nausea and vomiting) was launched in March in the Chinese market. Meanwhile, mounting costs for the conducting of final clinical studies on two potential drugs - Phase 2 study on ‘SP-02’ (a therapeutic agent for the treatment of peripheral T-cell lymphoma) and Phase 3 study on ‘SP-04’ (a pipeline for cancer chemotherapy-induced peripheral neuropathy) led to increased operating losses.

■Launch of two final-study stage pipelines will pave the way to revenue improvement

The company’s consolidated earnings forecasts for FY2019, ending December 2019, show that revenue will be in the range of Yen 500 million ~ 1,700 million (up 56.9% ~ 5.3 times on a year on year basis) while operating losses will be Yen 3,000 million ~ 2,000 million (last year saw a loss of Yen 2,420 million). The lower limit of the forecast revenue range reflects its cautious outlook, notably conservative ‘SP-01’ and ‘SP-03’ sales estimates in China (these products are sold directly by the company in Beijing, Shanghai and Guangzhou and via its marketing partner Lee’s Pharma in other regions), while the upper limit factors in the partial recognition of the fee revenue arising from out-licensing of either ‘SP-02’ or ‘SP-04’. The midpoint of the revenue range represents the case of further losses, but we see little concern on the horizon. The typical business model for new drug ventures with multiple product pipelines underway involves up-front R&D investment and aims to recover the investment over the medium to long term period. Especially, Solasia Pharma has two pipelines ready for the final clinical studies during this fiscal year, providing for the stronger possibility of a larger operating loss. The alternative view is that final clinical studies on ‘SP-02’ and ‘SP-04’ are expected to complete by the end of FY2019 and FY2020 respectively. The final studies are at the stage that precedes applications to obtain approval of these drugs from relevant countries’ pharmaceutical regulating authorities. This means that the exit (= market launch) for these pipelines is in sight and thus we can expect them to provide positive contri-

Revenue and Earnings Trend（As of June 25）

Recommendation rating（June 25）

butions to the company’s earnings from the next fiscal year. Solasia Pharma has started to launch ‘SP-01’, including direct selling,

in China from this fiscal year. Also, the launch of ‘SP-03’ in the country is expected to begin soon, on the heels of the Japanese launch in the previous fiscal year. ‘SP-01’ is the first officially approved adhesive skin patch that helps prevent cancer chemotherapy-induced nausea and vomiting. It has longer efficacy and effectiveness compared with other treatments, including injectable solutions, and imposes less burden on patients, demonstrating its competitive advantage. ‘SP-03’ is also the first officially approved medical device designed to relieve the pain in oral mucositis caused by chemo and/or radiotherapy, with almost no similar or alternative drugs existing in the Asian market. In consideration of the rising number of cancer patients, sales growth of both products is unlikely to peak until five to six years from now. In addition, approval of ‘SP-03’ from the Korean authorities, alongside the high credence given to ‘SP-01’ by the Chinese medical industry (for example endorsement as a designated drug in guidelines formulated by the medical association, academic society, among others in the country) should increase the possibility of accelerating the speed of their sales growth.

Based on our assumption that the accelerated ‘SP-01’ and ‘SP-03’ sales growth will offset various costs, Morningstar (MS) predicts that Solasia Pharma will achieve profitability in the fiscal year ending December 2021. MS’s estimated share price range is Yen 300 ~ Yen 440 (previously it was Yen 600 ~ Yen 735). We estimated the price range based on our five-year revenue forecasts through to the fiscal year ending December 2023 using the DCF (discount cash flow)

Overweight

Revenue（Yen Mil）

YoY （％）

Operating profit (loss)

（Yen Mil）YoY

（％）Pre-tax profit

(loss)(Yen Mil)

YoY （％）

Net profit(loss)

（Yen Mil）YoY

（％）EPS

（Yen）

2017-12 Past Results 410 ▲18.0 -1,009 Deficitexpansion -1,016 Deficit

expansion -1,007 Deficitexpansion -12.2

2018-12 Past Results 318 ▲22.4 -2,420 Deficitexpansion -2,445 Deficit


2019-12Past Results 500

～1,70056.9%

～5.3times-3,000

～-2,000 - -3,000～-2,000 - -3,000

～-2,000 - -29.65～-19.77

MS est. 1,100 3.5times -2,500 Deficitexpansion -2,500 Deficit


2020-12 MS est. 2,200 100.0 -500 Deficitreduction -500 Deficit

reduction -500 Deficitreduction -4.7

118

354

Volume13Weeks Moving Average

26Weeks Moving Average

13Weeks Moving Average

thousandShares

Yen

100

200

300

400

500

0

40,000

80,000

6 7 8 9 10 11 12 1 2 3 4 5 6

13 Weeks Moving Average

26 Weeks Moving Average

Volume（13 Weeks Average）

￥173 ￥173 5,304,138Shares

Estimated Share Price Range ￥300 ～￥440

（2/3）




Risk Factors

Shareholder Return

Source: The company’s information

Source: The company’s information

Pipeline Outline

　Track record of approval and commercialization

（commercialization by Meiji Seika Pharma in Japan）

Control and relief pain of oral mucositis caused by chemotherapy or radiotherapy – Medical Device

Since its founding, successfully advanced four programs (development without discontinuation)

2 programs : Launched– SP-03 (episil® oral liquid)：Launched in Japan, Preparation for

Launch in China– SP-01 (Sancuso®)：Launched in China

3 programs (SP-01, SP-02, SP-03) : Partnered for Commercialization

（package for China）

Granisetron transdermal delivery system

Sancuso® （善可舒® ※）

（As of June 25）

Dividend Per ShareFirst half Second half Annual

2017-12 Past Results ￥0 ￥0 ￥02018-12 Past Results ￥0 ￥0 ￥02019-12 Company est. ￥0 ￥0 ￥0

■ Dividends ■ Shareholder Special BenefitsNone

Businesses in the pharmaceutical industry need to comply with various countries’ laws and enforceable agencies that oversee their operations, comprising research, development, manufacturing and marketing. These include each country’s law relating to pharmaceuticals and medical devices, pharmaceutical administration, medical insurance plans and other relevant regulations. This means that substantial modification to any of these regulations or controls, including pharmaceuticals and medical devices law, may have critical influence on Solasia Pharma’s financial standing and earnings. Separately, the company operates its business in Asia with a focus on Japan and China. Especially, its China business makes a significant contribution to its earnings. In China, the company plans to implement a business model in which it deploys MRs and collaborates with a number of pharmaceutical wholesalers using its own-distribution channels in major cities. However, the company may come under pressure if the own-distribution channel project stagnates.

method, given the company’s launches of ‘SP-02’ and ‘SP-04’ in 2021 and 2022 respectively. We have now lowered the estimated price range in view of some factors, including the effect of the new share issuance to raise development funds for ‘SP-04’. That said, the company's development pipelines continued to show solid progress therefore, we believe its current share price is undervalued. There are strong possibilities that ‘SP-01’ and ‘SP-03’ will achieve sales growth as well as ‘SP-02’ and ‘SP-04’ becoming blockbusters and outshining existing new drugs. In light of this, we will keep our valuation of the company’s shares unchanged with an ‘Overweight’ rating. (Takahiro Arimura)

■Company OverviewSolasia Pharma K.K. was established in 2006, formed as a joint

venture between Itochu Corporation and MPM Capital, Inc., a U.S. bio-venture capital firm. The company operates by trying to identify ‘drug lag’ opportunities in which medicines that have been approved and marketed in the U.S.A., have not been approved in the Asian market, including Japan and China. Its business model is to in-license assets concerning oncology drugs or related products from U.S. and European pharmaceutical ventures and other firms, conduct clinical trial, obtain approval and launch in the market, and promoting those drugs through its own-distribution channel (or out-license to pharmaceutical companies) in Asia. Focuses on oncology and rare disease, in which the large drug companies, that pursue a larger earnings performance, pay little attention. This demonstrates the uniqueness of Solasia Pharma’s position. There are 4 assets in its development pipeline. The company features a group of clinical development specialists. They boast ‘superior ability to identify’ which developed drugs are likely to be given early approval from relevant countries’ authorities. These specialists have helped the company achieve highly efficient new drug development. Around the end of 2018, the company commenced a Phase 3 clinical study on ‘SP-04’ to evaluate its efficacy in the treatment of peripheral neuropathy, a side effect from standard treatments mainly for colon cancer. ‘SP-04’ has the potential to become a blockbuster drug that can apply to unmet medical needs (medical needs concerning patients suffering from diseases with no known cures) thanks to its efficacy of treatment for peripheral neuropathy.

■ Business Environment and OutlookRising trends in cancer incidence and cancer mortality rates have

shown no sign of slowing down. According to the company data, cancer mortality in Japan was roughly 70 per 100,000 a year in the early postwar period but in 2018 the rate exceeded 300 per 100,000 (approximately 1 in 3.6 deaths was attributed to cancer). In China, the same statistic exceeded 150 in 2015. In both countries, cancer is a leading cause of death. Considering this, it is said that the oncology and related drugs market has no limit. New drugs are not allowed to be launched or distributed in the market before they are approved by the relevant country’s authorities. These new drugs are not approved unless they can demonstrate higher overall benefits than existing ones. Most cancer chemotherapies apply multiple anticancer agents, and different agents are often administered to recurrent cancers. These practices have encouraged a steady increase in the number of oncology drugs.

Meanwhile, in the Chinese market where Solasia Pharma is focusing on enhancing its own-distribution channel, there is an estimated Yen 80 billion in demand for 5-HT3 receptor antagonists - supporting care treatments that prevent cancer chemotherapy-induced nausea and vomiting. The application for approval of new anticancer drugs needs to be filed with respect to the individual organs affected by cancer. However, supportive care treatments can be applied to any cancer therapy-induced effects, demonstrating great potential to adapt. In the medium to long term, with ‘SP-01’, the company intends to gain a share of around 20~30% of this Yen 80 billion market.

（3/3）



Morningstar Japan K.K.

　Research & Analysis Department　　　　　　　Analyst　　　　　　　　　 Takahiro Arimura　03-6229-0810 [email protected]


Solasia Pharma K.K.（4597・TSE Mothers）

Sosei Group Corporation（4565・TSE Mothers）

SymBio Pharmaceuticals Limited

（4582・JASDAQ）

Basic Point

Stock Price ￥157 ￥2,321 ￥159

Unit of Investment 100Shares 100Shares 100Shares

Minimum Investment Amount ￥15,700 ￥232,100 ￥15,900

Fiscal Year End December December December

Share Price Indicator

PER（E） ― ― ―

PBR 2.3 4.3 3.0

Dividend Yield（E） ― ― ―

Growth

Revenue Growth Rate（E） 245.9% ― 16.4%

Operating Profit Growth Rate（E） ― ― ―

EPS Growth Rate（E） ― ― ―

Profitability

Operating Margin（E） ― ― ―

ROE ▲36.4% ▲13.2% ▲77.8%ROA（Ordinary income/Total assets） ▲34.0% ▲11.3% ▲52.4%

FinancialHealth

Equity ratio 91.7% 70.5% 70.1%Debt-Equity Ratio 0.0% 22.1% 0.0%Current Ratio 727.6% 552.6% 451.9%

We chose: Sosei Group Corporation (4565) as it implements a similar business model to Solasia’s from the in-licensing of newly developed drugs to clinical studies, and SymBio Pharmaceuticals Limited (4582) which focuses on hematologic cancers.※ The forecast value of Solasia Pharma is calculated from the median of range forecasts.※ Sosei Group has anomalous results for the 9 months ended December 2018

Competitor Comparison（If the number is better than rivals, it's highlighted by red character）（As of June 25）

The main sources for the revenue and profit for FY2019 is likely to be sale proceeds from products centering on ‘SP-01’ and ‘SP-03’. Of the two pipelines under final clinical phase studies - ‘SP-02’ and ‘SP-04’, Solasia Pharma holds the global development rights for ‘SP-02’ and for ‘SP-04’ in Japan, China and Korea as well as Taiwan, Hong Kong and Macau. While the company plans to launch and market these drugs through its exclusive distributing channels, it may grant the development rights to other companies outside its markets. Consequently, it may post license fees as revenue. Although we foresee operating losses to increase as two pipeline drugs are in the final clinical study phase which requires higher development costs than the initial studies, the size of losses for this fiscal year alone should not be of concern, in view of these drugs becoming the core drivers of medium-to-long term revenue growth. 　With regard to comparison with industry peers, SymBio Pharmaceuticals is expected to achieve double-digit revenue growth on the back of strong hematologic cancer-related anticancer drug sales in Japan, but it posted larger operating losses year-on-year in the wake of expanding R&D spending. With regard to comparison with industry peers, SymBio Pharmaceuticals is expected to achieve double-digit revenue growth on the back of strong hematologic cancer-related anticancer drug sales in Japan, but it posted larger operating losses year-on-year in the wake of expanding R&D spending.

■Growth PotentialSolasia Pharma, alongside all of its

competitors, continued to suffer operating losses as up-front investment weighed on revenue, therefore both ROE (return of net income on equity) and ROA (return of ordinary income on total assets) were negative. However, a breakdown of its ROE shows a relatively low financial leverage ratio (108.2%), underlining that the company has lessened its dependency on financial leverage as it bolstered its equity capital through the issuance of new shares to raise funds principally for R&D projects.

■ProfitabilitySolasia Pharma reported a high-level

equity to total assets ratio at 91.7% at the end of FY2018. The high equity ratio owes much to the funds raised in September 2018 for R&D projects. With no interest-bearing debts, its debt to equity ratio stayed at a low level. Its liquidity ratio was 727.6% with a large proportion of current assets, demonstrating a sound balance sheet. In June 2018, the company signed a loan commitment-line agreement with Mizuho Bank, Ltd. and the Sumitomo Mitsui Banking Corporation. Although it views possible debt finance down the road, it has not taken any loans from the banks.

■ Financial Stability


How to Read Morningstar Equity Research Report

■ Analyst Comment Each analyst reports and evaluates the most recent earnings trend and business environment. It shows the most important information for stock investment such as evidence for investment decisions, perspectives on earnings forecasts and business prospects. Also to make sure it is easy to comprehend, we write in 2-4 paragraphs and use bold to emphasize important texts.

■ Revenue and Earnings Trend It reports earnings in past two fiscal years, company forecasts and our forecasts for the current and next fiscal year. We predict earnings based on research as well as past quarterly earnings trend and analysis by segments.

■ Company Overview It explains in detail what businesses the company is engaged in and how revenue sources are defined. Also on the basis of our research, it discusses what businesses the company will focus on in years to come and how it carries out mid-term business plan.

■ Business Environment and Outlook It discusses current circumstances and growth potential of the industry to which the company belongs. A comprehensive report on the industry from different perspectives is provided through research interviews to competitors. Specific figures of the industry data are also introduced.

■ Risk factors It shows the company’s risk factors and describes various aspects of risks such as business, earnings and financials. Typical stock market risks are also taken into consideration.

Analysis Points

（1）Emphasize Its Position as an Independent 　　Evaluation OrganizationMorningstar emphasizes its position as an independent evaluation organization and is committed to providing objective comparison and assessment in the Morningstar Equity Research Report. For all stocks covered by us, we determine investment decisions, estimated share price range and earnings forecasts based on expertise of an individual analyst as well as the stock assessment committee consisting of several analysts.

（2）Universe of Covered StocksThe stock assessment committee selects covered stocks based on the following criteria.

【Stock Selection Criteria】 ● Domestic emerging companies that are rarely covered by　　 analysts ● Stocks that are popular among retail investors 　　　　　

(refer to data from online security brokers) ● Size of market capitalization (over about 5 billion yen)● Exclude stocks which are liquidated or trade control, or　　　 stocks with going concern and excessive debt

（3）Investment Decisions Classified into Three GroupsWe determine investment decisions for covered stocks after consultation with the stock assessment committee based on research, interview and analysis by each Morningstar analyst.

Each stock is classified into either of three groups according to the following criteria.

Overweight

Neutral

Underweight

We flexibly respond to any changes of observations regarding earnings forecasts, financial situations and stock price trends, and change investment decisions accordingly. “Under Review” status may be applied if any new information comes out and extra time is needed to determine investment decisions. Also we don’t change investment decisions during trading hours. “Suspension” status may be applied when an analyst leaves our company.

（4）Estimated Share Price Range in the Medium TermIt shows the price range for a stock price in the next 6 months. We determine upper and lower range of stock price based on fair value estimates from share price indicator, technical factors such as chart points, most recent high and low prices, trend line and moving average, trading volume in each price range and such.

Our Uniqueness

： Forecasted to go beyond the current stock price level by 15% or more in the next 6 months.

： Forecasted to fall into the range of -15％~+15％ of the current stock price level in the next 6 months.

： Forecasted to go below the current stock price level by 15% or more in the next 6 months.

Documents

Solasia Pharma K.K. （4597・TSE Mothers）portal.morningstarjp.com/stock/er_report/pdf/er4597e_190626.pdfThe company’s consolidated earnings forecasts for FY2019, ending December