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9

R & D A C T I V I T I E S

Building Efficiency and Getting Results

Current research is split between two specific areas ofexpertise—new products based on our long pioneeringinvolvement with Glycosaminoglycans (GAGs), a part of thebroad spectrum of glycoconjugates, and development ofnovel products to serve a wider area of joint disease extend-ing beyond, that now served by the ARTZ® -series products.With a keen sense of urgency, we have fortified our systemfor intensive timeline management.

We are also expanding our product pipeline through co-development and licensing activities while simultaneouslyaccelerating in-house research and development programs.Our triple emphasis on in-house development, licensing andcollaborative research and alliances with other institutions isthe best way to assure a consistent launch of the new prod-ucts that will bring profits to sustain further developmentand growth.

Seikagaku aims to pump 20% of net sales back intoresearch and development, which is conducted by a staff of

Taiichi Shirogane (Right)Assistant ManagerResearch & Development Department

Azumi Tanimoto (Left)Senior StaffResearch & Development Department

Newly approved for use in Japan

MucoUp® (SI-4404)Operating Aid for Endoscopic Mucosal Resection

By injecting SI-4404 as an operating aid into the sub-mucosal layer atthe lesion of tumors in the gastrointestinal tract, the lesion rises toform a dome that can be more easily, safely and completely removedby endoscopic mucosal resection.

“MucoUp ® was approved by the Japanese Ministry ofHealth, Labour and Welfare (MHLW) in October 2006.Endoscopic mucosal resection is thought to be a minimuminvasive operation. Compared with other types of surgery,it shortens hospital stays and reduces risk of long-termpost-surgical complications.

The launch of MucoUp ® is expected to promote endoscopic mucosal resection, to the benefit of patients, and reduce medical costs. We started negotiation withMHLW to decide the price for insurance reimbursementtoward the early start of sales.”

➟

Seikagaku has accumulated sizeable knowledge assetsthrough its long involvement in the growing field ofGlycoscience. This knowledge is the basis for develop-ment and supply of innovative pharmaceuticals andother products.

R&D Basic Policy and Structure

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SI-6603Treatment for Lumbar Disc Herniation

Chondroitinase ABC is a main ingredient of SI-6603 and a specific GAGdegrading enzyme that is produced from bacteria. It dissolves/degradeschondroitin sulfate, dermatan sulfate and hyaluronic acid, the main com-ponents of nucleus pulposus in the disc. A single injection of SI-6603 intoherniated lumbar disc is expected to show the same efficacy as surgicaltreatment, by reducing volume of nucleus pulposus in the disc.

Gel-200 Cross-linked Hyaluronate Hydrogel Treatment for Osteoarthritis of the Knees

Gel-200 is a medical device for the treatment of osteoarthritis of the kneesby single injection into a joint. The main ingredient is cross-linkedhyaluronate hydrogel manufactured using exclusive cross-linking technol-ogy. It possesses extremely high viscoelasticity, which allows it to remain inthe knee-joint cavity for long periods. The single injection is expected togive long-term pain relief, which is ideal for the U.S. market, where patientsand physicians prefer a lower frequency of joint injections.

“SI-6603 will not affect the sur-rounding tissues or organs of thedisc such as blood vessels andnerves. SI-6603 is expected to bea highly safe drug for patientswith lumbar disc herniation. InOctober 2005, we completedconstruction of an investigation-al drug substance productionfacility, based on the latestGMP* standards. We are nowpreparing for the next step,which is to conduct Phase II tri-als in Japan and the UnitedStates in spring 2007.”

179, or one-third of the total number of employees. Thislevel is sufficient to sustain projects now under way and weare hiring more as needed to sustain our licensing andexploratory research.

In October 2006, MucoUp®, aid for endoscopic mucosalresection, was approved by the Ministry of Health, Labourand Welfare for use in Japan, and in September 2006, twothemes were added to the pipeline:

Cross-linked hyaluronate hydrogel, Gel-200, whichentered directly into a Phase III clinical trial in the U.S.

An adenosine A3 receptor agonist (A3AR Agonist) forthe treatment of inflammatory diseases (excluding those

of the eye), licensed from Can-Fite BioPharma Ltd. ofIsrael for development, manufacturing, sales and sub-licensing in Japan.

There are now four themes in our developmentpipeline. In addition to these themes, many more projectsare currently at the pre-clinical trial stage. We anticipateannouncing three projects as their clinical trials begin overthe next one to two years.

At each milestone date in the development process,the Seikagaku Group carefully evaluates and judges itsprogress and, with stringent objectivity, selects themesfor continued work.

“Gel-200 was recently added toour development pipeline. InSeptember 2006, a Phase III clini-cal trial was started in the UnitedStates for this medical device. Weaim to bring the product into theU.S. market within four years inaddition to SUPARTZ ®. It isexpected that single-injectionGel-200 will also expand thetreatment options for patientswith knee osteoarthritisand strengthen the com-petitiveness ofSeikagaku-brandproducts in win-ning market sharein the U.S. We hopefor its early launch.”

Kenji MiyamotoSection ManagerChemistry DepartmentCentral Research Laboratories

Mine HiguchiSenior Staff Formulation DepartmentCentral Research Laboratories

Herniateddisc

*GMP means Good ManufacturingPractice—a production management and quality control standard for pharma-ceuticals and quasi-drugs.

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Research & DevelopmentDepartment

(Right) Takayuki FunamiAssistant Manager

Research & DevelopmentDepartment

“This is a low-molecular-weightcompound under development bythe licensor, Can-Fite BioPharma.Can-Fite BioPharma is currentlyconducting Phase IIb clinical tri-als in the U.S., Europe and Israel. The results from clinical trialsconducted to date have demon-strated promising efficacy asmonotherapy in patients withrheumatoid arthritis.

Seikagaku intends to devel-op the drug primarily for thetreatment of rheumatoidarthritis, and expects tocommence Phase I clinicaltrials in Japan in 2008.”

Pipeline update: In 2006, Gel-200 entered into a Phase III clinical trial and we licensed-in A3AR Agonist, currently in pre-clinical development in Japan. In accord-ance with our project evaluation policy, we withdrew from a joint development project relating to an NF-kB decoy oligonucleotide product, and terminated anoption agreement for the right to in-license an anti-psoriasis drug (CB-12181 owned by Carna Biosciences).

Market size: ● Large: ¥10 billion or higher ▲Middle: ¥2–¥10 billion ■ Small: Less than ¥2 billion*In the U.S. hyaluronate acid injection market, some sales overlap with existing SUPARTZ® sales.

PIPELINE

Target market

Gel-200: Cross-linkedhyaluronate hydrogel

SI-6603: Chondroitinase ABC

SI-3106: Anti-VAP-1 antibodies

A3AR Agonist ●

▲

●

●* Osteoarthritis of the knees

Lumbar disc herniation

Inflammatory diseases

Inflammatory diseases(Mainly rheumatoid arthritis)

U.S.

Japan / U.S.

Japan

Japan

Product Lead indicationMarket

sizePre-clinical Phase I Phase II Phase III

NDA/PMAapplication

“We have completed selection ofhuman antibody types for devel-opment candidates. The licenseholder, BioTie, is expected toreinitiate a Phase I clinical trialoverseas by spring 2007.”

PKB/AKT

AGONIST

A3AR

NF-κBInhibition ofProliferation

Induction of ApoptosisModulation of Cytokine Production

Inhibition of Bone Resorption

Other Cytokinesie)IL-10 RANKL

TNFTN -ααetc..

A3AR AgonistAdenosine A3 Receptor Agonistfor Inflammatory Diseases(In-license from Can-Fite BioPharma Ltd.)

This substance selectively stimulates the adenosine A3 receptor that is high-ly expressed in pathological inflammatory cells. By its agonistic effect on theadenosine A3 receptor, it modulates cellular signal transduction, whichplays an important role in the pathogenesis of inflammation, and suppress-es production of inflammatory cytokines such as TNF-α, IL-1 and IL-6. It isexpected that the drug will be widely accepted as an anti-inflammatory druggiven this novel mechanism of action and preferential safety profile.

SI-3106Anti-VAP-1 Antibodies for Suppression of Inflammation(In-license from BioTie Therapies Corp.)

As per the license agreement, Seikagaku is carrying out the development ofthis drug. Conventional anti-inflammatory drugs suppress the generation ofor inhibit proinflammatory substances, but this product acts on the VAP-l(vascular adhesive protein 1) that mediates adhesion of leukocytes to theendothelium of blood vessels and their infiltration into the site of inflamma-tion. Therefore, it will be a novel anti-inflammatory drug with its uniquemode of action.

Shingo Yabuuchi Section Manager Pharmacology Department Central Research Laboratories