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Summary of Business Report for the Fifth Fiscal Year ended December 31, 2012


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February 15, 2013

Summary of Business Report

for the Fifth Fiscal Year ended December 31, 2012

RaQualia Pharma Inc. (4579, Osaka Stock Exchange, Growth Market) today reported financial results for the fifth fiscal year ended December 31, 2012.


Summary of Business Report

The Fifth Fiscal Year

Period from January 1, 2012 to December 31, 2012

1. Status of the Company (1) Status of Operations

1) Progress and Results Overall Trend

During the twelve-month period under review, demand stabilized in the Japanese economy following months of stagnation in the aftermath of the 2011 Great East Japan Earthquake. Japan’s economic outlook remained unpredictable, however, amidst uncertainties including the downturn in the global economy, the strength of the Japanese yen, a slowdown in business investment, and weak employment.

Within the pharmaceutical industry, the government continued to implement policies designed to curtail medical expenditures by lowering regulated drug prices and promoting the use of generic medicines. Concurrently, pharmaceutical companies continued to face the “2010 problem,” the consecutive expiration of patents for blockbuster drugs. Companies are attempting to cope with these challenges by investing significant resources in the development of new drugs with the potential to emerge as revenue sources in future years.

Against this backdrop, the Company proactively implemented R&D, marketing and sales activities with a view towards continuously exploiting and developing new drugs, expanding its R&D portfolio of multiple projects, and licensing development compounds.

The Company entered into a joint research agreement with Ajinomoto Pharmaceutical Co., Ltd. in October 2012, focusing on compound discovery and research around a specific ion channel target for gastrointestinal treatments. In December, the Company extended the research term of its Product Development, Option, License and Commercialization Agreement with Eli Lilly and Company (United States), originally signed in December 2010, for compounds around a specific ion channel target for new pain treatments.

The Company launched “Project Reborn 90,” a fundamental review and revision of its business model and organization under a new management team in August. After a three-month review, the Company chose “Reinforcement and Revitalization of Research Drive” as its new slogan for research, a “Selection and Concentration” policy for development programs, and “Organizational Reform” for the entire firm. The Company also intends to optimize external resources in exploiting its portfolio, including via spin-outs.

Business revenue for the current fiscal year was ¥28 million (down by 95.8% compared to the previous year). Operating loss totaled ¥2,636 million (¥1,916 million for the previous year), ordinary loss totaled ¥2,891 million (¥1,906 million for the previous year), and current net loss was ¥2,905 million (¥1,916 million for the previous year). Total business expenses were ¥2,665 million (up by 2.5% compared with the previous year). Total research and development expenses were ¥1,804 million (up by 8.6% from the previous year), and other selling, general and administrative expenses were ¥861 million (down by 7.2% from the previous year).


Research and Development Activities

Research and Development expenses incurred through the Company’s Research and Development activities for the fiscal year under review totaled ¥1,804 million.

The main components of these activities were:

i. Exploratory and Discovery Research

The Company completed an investigation of the initial safety assessments for compounds to develop a 5-HT2B receptor antagonist primarily used for diarrhea-predominant irritable bowel syndrome

(D-IBS). RQ-00310941, a compound in the project, was promoted to the preclinical development stage.

The Company completed an investigation of preclinical efficacy, pharmacokinetics and the initial safety assessments for compounds to develop a Motilin receptor agonist primarily used for diseases related to the dysfunction of gastro-intestinal motility. RQ-00201894, a Motilin receptor agonist in the project, was promoted to the preclinical development stage.

The Company obtained good pharmacological evidence of efficacy in multiple preclinical pharmacology models for pain with a T-type calcium channel blocker primarily used for indications such as neuropathic pain, via a collaboration with academic laboratories.

The Company explored other new compounds and has continued to evaluate them around the TRPM8 blocker, another agent primarily used for indications such as neuropathic pain.

The Company continued to optimize and evaluate a selective sodium channel blocker compound for indications such as inflammatory pain and neuropathic pain.

The Company continued collaborative research it began with Eli Lilly and Company (United States) in December 2010 focusing on a specific ion channel, with a view toward exploring and discovering development compounds having high levels of efficacy and safety. In a separate project around another specific ion channel, the Company started collaborative research with Ajinomoto Pharma Inc. in October 2012, with a view toward exploring and discovering development compounds having high levels of efficacy and safety.

ii. Development [Core Programs ]

a) 5-HT4 Partial Agonist (RQ-00000010)

A First-in-Human (FIH) study of the compound was initiated in the U.K. in May 2012. A single ascending dose study, multiple ascending dose study, and study to investigate the effects of food, gender and age were completed in October. The Company is currently analyzing the data and preparing a final report.


b) 5-HT2B Antagonist (RQ-00310941)

Preparations were completed in the 3rd Quarter for non-clinical regulatory studies and manufacturing of the active pharmaceutical ingredient (API) to be used for a dose-finding toxicity study in rats and dogs for compounds initially targeted for diarrhea-predominant irritable bowel syndrome (D-IBS). Manufacturing of API for repeated dose toxicity studies began in the 4th Quarter.

c) Motilin Receptor Agonist (RQ-00201894)

Preparations of non-clinical regulatory studies and manufacturing of API began for a dose-finding toxicity and repeated dose toxicity studies. This compound has therapeutic potential for treatments of gastroparesis, postoperative ileus, functional dyspepsia, and other diseases related to the dysfunction of gastro-intestinal motility.

[Strategic Option Programs]

a) EP4 Antagonist (RQ-00000007 and RQ-00000008)

These development compounds have therapeutic potential for treatment of chronic inflammatory pain, acute pain, inflammation, autoimmune diseases, allergies, cancer, and other diseases. During the 3rd Quarter, the Company conducted several additional studies to verify pharmacological effects for these indications, including efficacy pharmacology studies at the Company, as well as collaborations with research laboratories specializing in the evaluation of anticancer effects in animal models. In addition, the Company conducted the regulatory toxicity study under GLP in preparation for the initiation of clinical studies.

2) Capital investments

Capital investments totaled ¥55 million during the current fiscal year. These investments focused on software improvements and replacement of analytical equipment for enhancing business capacity.

The Company did not make, remove, or sell any significant property or equipment during the current fiscal year.

3) Fund procurement status N/A


(2) Changes in assets and profit/loss

(In thousands of yen)

Item Second Fiscal year(January 2009 to December 2009)

Third Fiscal year (January 2010 to December 2010)

Fourth Fiscal year (January 2011 to December 2011) Current (Fifth) Fiscal year (January 2012 to December 2012) Business revenue ― 1,186,759 684,202 28,978 Ordinary loss (2,638,527) (1,295,839) (1,906,429) (2,891,267) Net loss (2,642,327) (1,307,679) (1,916,269) (2,905,463)

Net loss per share (in yen) (2,642,327.53) (261,094.08) (172.85) (219.00)

Total assets 4,111,171 4,460,773 8,379,143 5,501,134

Net assets 3,879,923 4,191,144 8,174,470 5,310,417

Net assets per share (in yen) (5,532,076.52) 180,902.28 616.14 400.27


1. The amounts stated in the Table above are rounded down to the nearest thousand yen, except for the net loss per share and net asset per share, which are shown in yen, rounded off to the third decimal point.

2. The current net loss per share was calculated based on the average number of outstanding shares issued during the fiscal year. 3. On January 28, 2011, one ordinary share of the Company was split into 400 shares. The net loss per share for the fourth term

was calculated as if the share split had been in effect at the beginning of the fiscal year.

(3) Status of material parent companies and subsidiaries N/A

(4) Issues to Address

The Company, an R&D-oriented company pursuing the discovery and creation of new pharmaceutical products, has defined the following issues as important to address.

1) Reinforce our research and development portfolio

To create new development compounds, the Company believes that it will be critical to incorporate new projects into our existing research and development portfolio. We have implemented the following measures:

- Discover new target molecules and increase the number of projects by leveraging our unique assessment system and related database.

- Strive to utilize collaborative research efforts with partners, in particular outside research laboratories, and to add projects outside of pain disease and gastrointestinal disease, areas in which we have a substantial inventory of pharmacology models.


2) “Selection and Concentration” in Pharmaceutical Development Projects

The Company will efficiently allocate R&D resources by implementing a “Selection and Concentration” policy, defining “Core Programs” to be funded with internal resources and “Strategic Option Programs” to pursue with external resources.

The Company will concentrate internal resources on“Core Programs” to improve value, including in-house development of compounds aimed at early acquisition of earnings.

In addition, the Company has identified programs where progress can most effectively be accelerated via utilizing external resources (financing and investment from external sources) as “Strategic Option Programs,” with the objective of achieving potential future earnings via a variety of means, including spin-outs.

3) Reinforce our System for Licensing Promotion

The Company believes that it is critical to continue to strengthen its ability to attract potential licensees based on its business strategy, in order to establish optimal licensing arrangements for its development compounds. The Company will adopt the following measures to address these issues:

- To achieve successful licensing arrangements, the Company will execute effective selection of appropriate licensees and determine the best timing for product launches for customers. The Company is committed to reinforcing its capabilities in collecting and analyzing customer information. - The Company strives to employ talented individuals with experience and expertise in licensing

activities at pharmaceutical companies, to provide internal education through on-the-job training, and to retain outside advisors with in-depth experience. By doing so, the Company will gain and maintain optimized marketing and sales activities.

- The Company will allocate significant management resources to its Licensing Department to achieve efficient contact and engagement with the management, development leaders, research leaders, relevant personnel, and licensing departments of licensee candidates.

4) Reinforcement of Alliance Management functions

The profit profile in our business model consists of up-front payments, milestone payments with the progression of R&D activities, and royalty payments after the marketing of products, following the licensing of our candidate compounds for new drug products. The Company’s Alliance Management is therefore carried out to support the satisfactory progression of development activities after a compound or program has been licensed to attempt to achieve the above-mentioned gains at each business stage as early as possible. In doing so, via effective collaboration with Licensees, we can best ensure long-term and stable gains for the Company. The Company will adopt the following measures to address these issues:

- Several of our candidate compounds have been licensed to regional companies in Asia. Several others have been licensed to an animal health company. In both cases, the Company expects to thereby reduce development time and costs. We endeavor to effectively support the development activities being undertaken by these respective Licensees, in order to facilitate the expeditious approval of these new drugs in the regional and animal health markets. At the same time, the Company is advancing opportunities, in collaboration with Licensees, for global licensing transactions to lead to the worldwide deployment of compounds as human health products.

- To effectively promote research collaboration, we emphasize best project governance practices with partners and efficiently support R&D activities.


5) Improve our financial strength

The Company has incurred an operating loss and operating cash outflow every year, from the first fiscal year to the fifth. Progress in R&D has continued steadily over the same period, but the Company expects R&D expenditures to continue rising. We will consequently place our primary emphasis on management stability and enterprise continuity. First, we will obtain revenue via licensing the growing number of development compounds we are producing through exploratory and discovery efforts, pre-clinical trials, and initial clinical trials. Second, we will build an agile structure by trimming down the Company’s organization. Third, we will continue to explore diverse routes for fundraising, including the use of public finance and other measures to improve our financial strength in support of our business.

6) Further Consolidation of Internal Structures and Systems in compliance with the Pharmaceutical Affairs Law and the Relevant Regulations

The Company has always complied and continues to fully comply with the regulations and standards for efficacy, safety, and quality set by each governing body in the countries within which it operates for research and development of pharmaceutical products. The Company recognizes the importance of internal structures and systems to ensure compliance with these regulations and continuously carries out employee training and education regarding our Standard Operating Procedures. These SOPs are regularly updated to reflect changes in regulations. We will continue to monitor and adjust to changes in the pharmaceutical affairs legislation and other relevant regulations in the countries within which we operate in order to reinforce our compliance practices.


(5) Main businesses (as of December 31, 2012)

The Company defines its main business as the licensing of intellectual property related to the research and development of drugs and development compounds.

(6) Main sales offices and factories (as of December 31, 2012)

Name Location Head Office 5-2 Taketoyo, Aichi, Japan

(7) Status of employees (as of December 31, 2012)

Number of employees Changes from the previous year Average age Average years of service

81 ― 42.8 years old 3.8 years


The number of employees represents full-time working employees and does not include temporary workers (employees contracted via a manpower service company).

(8) Main loans payable N/A


Non-Consolidated Balance Sheet

(As of December 31, 2012)

(In thousands of yen)

Item Amount Item Amount

(Assets) (Liabilities)

Current assets 5,089,862 Current liabilities 183,453

Cash and deposits 4,889,989 Accounts payable-other 90,936

Accounts receivable-trade 9,560 Accrued Expenses 72,132

Raw materials and supplies 47,754 Income taxes payable 16,471

Advance Payment-trade 101,082 Deposits received 3,913

Prepaid expenses 20,574 Noncurrent liabilities 7,264

Other 20,902 Deferred tax liabilities 7,264

Noncurrent assets 411,272 Total liabilities 190,717

Property, plant and equipment 101,304 (Net assets)

Buildings 40,978 Shareholders’ equity 5,298,211

Structures 13,212 Capital stock 8,489,850

Machinery and equipment 258 Capital surplus 3,773,850

Tools, furniture and fixtures 46,854 Legal Capital surplus 3,773,850

Intangible assets 20,972 Retained earnings (6,965,488)

Trademark rights 2,296 Other retained earnings (6,965,488)

Software 18,049 Retained earnings brought


(6,965,488) Other 626

Investments and other assets 288,995 Valuation and translation adjustments 12,205 Investment securities 476,190 Valuation difference on

available-for-sale securities

12,205 Long-term prepaid expenses 3,813

Guaranty deposited 69,527

Allowance for investment loss (260,535) Total net assets 5,310,417 Total assets 5,501,134 Total liabilities and net assets 5,501,134


Non-Consolidated Statements of Operations

(January 1, 2012 to December 31, 2012)

(In thousands of yen)

Item Amount

Business revenue 28,978

Business expenses

Research and development expenses 1,804,015

Other selling, general and administrative expenses 861,861 2,665,876

Operating loss (2,636,898) Non-operating income Interest income 4,115 Interest on securities 1,820 Subsidy income 10,871 Rent income 4,828 Intermediate income 3,390 Other 2,530 27,556 Non-operating expense

Foreign exchange losses 4,643

Provision of allowance for investment loss 260,535

Other 16,746 281,925

Ordinary loss (2,891,267)

Extraordinary loss

Early retirement package 10,356 10,356

Loss before income taxes (2,901,623)

Income taxes-current 3,840 3,840

Net loss (2,905,463)


Non-Consolidated Statements of Changes in Net Assets

(January 1, 2012 to December 31, 2012)

(In thousands of yen)

Shareholders’ equity

Capital stock

Capital surplus Retained earnings

Total shareholders’ equity Legal capital surplus Other retained earnings Retained earnings brought forward Balance as of December 31, 2011 8,489,850 3,773,850 (4,060,024) 8,203,675 Changes of items during the period

Net loss (2,905,463) (2,905,463)

Net changes of items other than shareholders’ equity

Total changes of items during the period ― ― (2,905,463) (2,905,463) Balance as of December 31, 2012 8,489,850 3,773,850 (6,965,488) 5,298,211

Variance and translation adjustments

Total net assets Valuation difference on available-for-sale securities Total valuation and translation adjustments Balance as of December 31, 2011 (29,205) (29,205) 8,174,470 Changes of items during the period

Net loss (2,905,436)

Net changes of items other than

shareholders’ equity 41,410 41,410 41,410

Total changes of items during the period 41,410 41,410 (2,864,053)

Balance as of December 31, 2012 12,205 12,205 5,310,417


1. Notes regarding matters related to significant accounting policies (1) Valuation basis and method for assets

1) Other securities - those without fair value

The cost method is applied by using the moving average approach. However, other securities denominated in foreign currencies are translated into Japanese yen at the prevailing spot rate of foreign exchange at the end of the fiscal year, and translation differences are accounted for as valuation adjustments. Moreover, the valuation adjustments are recognized directly into net assets in full.

2) Inventories – Raw materials and supplies

The last cost method is applied (the method to write down the values included in the balance sheet based on the lowering of productivity).

(2) Depreciation methods used for tangible fixed assets 1) Property, plant and equipment (excluding lease assets)

These are depreciated by using the declining-balance method; provided that buildings (excluding any ancillary equipment, etc. they contain) are depreciated by using the straight-line method.

Main useful lives are as follows:

Tools, furniture and fixtures: two to four years

2) Intangible assets (excluding lease assets)

These are amortized mainly by using the straight-line method.

Moreover, software for own use is amortized using a straight-line method over the period determined based on its potential internal use (5 years).

3) Long-term prepaid expenses

These are amortized mainly by using the straight-line method.

(3) Accounting for allowance Allowance for investment loss

In order to prepare for the loss regarding non-marketable securities, these are recognized in the allowance for investment loss in the frame equivalent to the fall of a natural price for an object of soundness.

(4) Other basis for presentation of financial statements Accounting for consumption taxes


2. Notes to balance Sheet

Accumulated depreciation of Property, plant and equipment ¥413,720 thousand

3. Notes regarding non-consolidated statements of changes in net assets

(1) Matters concerning the classes and the number of outstanding shares issued

Class of shares of

stock Number of shares as of December 31, 2011

Increase in the number of shares during the fiscal year

Decrease in the number of shares during the fiscal year

Number of shares as of December 31, 2012

Common stock 13,267,200 ― ― 13,267,200

(2) Matters concerning the classes and the number of own shares NA

(3) Matters concerning payment of dividends of surplus NA

(4) Matters concerning Stock options on December 31, 2012

3rd Stock option 5th Stock option 7th Stock option Class of shares of stock common stock common stock common stock

Number of shares of stock 72,800 87,381 7,980

Balance of Stock option 182 219 20

4. Notes to information per share

(1) Net assets per share ¥400.27


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