SuMi TRUST Monthly Commentary October 2016 Contents 1. Topic of the month: The Nobel Prize and medical technologies The 2016 Nobel Prize in Physiology or Medicine was awarded to Mr Yoshinori Ohsumi, a Japanese emeritus professor. He discovered and elucidated mechanisms underlying “autophagy”, a fundamental process for degrading and recycling cellular components. "Autophagy" is expected to be used to create new medicines for the treatment of cancer and other illnesses. Science is one of Japan's strengths. Many investment opportunities have been created in the past by its advanced technologies in science. In this report, we touch upon the Nobel Prize and related medical technologies. 2. Market Review 1. Topic of the month: The Nobel Prize and medical technologies Nobel Prize The Royal Swedish Academy of Sciences selects and awards the Nobel Prize in Physics, Chemistry and Economics, while the Karolinska Institute awards the Prize in Physiology or Medicine. The agencies awarding the three prizes in natural sciences issue a recommendation request for the following year’s candidates to major research institutions and universities around the world, and select the prize winners by reviewing these recommendations. A person will not be able to receive the prize without a recommendation. The award ceremony of the Nobel Prize is carried out on 10th December, which is the anniversary of Alfred Nobel’s passing. The 2016 Nobel Prize in Physiology or Medicine was awarded to Mr Yoshinori Ohsumi, a Japanese emeritus professor. He discovered and elucidated mechanisms underlying “autophagy”, a fundamental process for degrading and recycling cellular components. "Autophagy" is expected to be used to create new medicines for the treatment of cancer and other illnesses. In recent years, many Japanese scientists have received high acclaim in the field of science including physics and chemistry. Table 1 shows the number of Nobel Prize winners in the three natural science divisions. From 1991 to 2000, the United States was the dominant country. But, in the 21st Table 1: The number of Nobel Prize winner in science divisions century (2001～2015), 15 Japanese 1991-2000 2001-2015 scientists were awarded the prize, the second most in the world. USA 39 55 It is said it takes about 30 years on average Japan 1 15 to win the Nobel Prize since the start of the UK 3 10 study. The awards for Japan in the 21st century can Germany 5 6 be considered the harvest of seeds sowed in France 3 6 1970s and 80s. Source: Ministry of Education, Culture, Sports, Science and Technology, SuMi TRUST Autophagy Autophagy is a recycling mechanism performed by decomposing proteins and the turnover of destroyed cell organelles for new cells. Autophagy and its elucidation should lead to the development of treatments for diseases such as cancer and neurological diseases. After the Nobel Prize announcement, companies associated with autophagy have attracted attention in the stock market and news media. Going forward, we expect the practical use and expansion of this technology. From an equity investors' view, the focus is on further support by the government and the emergence of companies involved in this new technology. In this context, we are taking a closer look at Takara Bio, a company that we'll touch upon in this report. Cover A reference case : iPS cells As a reference, we have reviewed the case of "iPS cells" discovered by Shinya Yamanaka, who won the Nobel Prize in Physiology or Medicine in 2012. iPS cells are versatile cells that can be divided into various types of cells. Because it can proliferate infinitely and transform into various cells such as nerve cells and heart muscle cells, their application to regenerative medicine and drugs are expected. There are pharmaceutical companies including emerging venture capital companies which are investing in iPS-related businesses and trying to put them into practical use. This is because huge potential is seen in the regenerative medicine market (Figure1) The Nobel Prize award has brought much attention to regenerative medicine and has led the government to start supporting it aggressively. The Abe government, in its "Japan Revitalization Strategy", has placed health and medicine as the next generation growth industries. It has reformed the system and executed measures for the expansion of medical-related industries and its markets. The government has also decided to issue about 110 billion yen in the 10 years from FY 2013 to support the research of regenerative medicine and drug discovery related to iPS cells. In addition, in 2014, an early approval system for regenerative medicine has been introduced, and regenerative medicine can now be commercialised quicker. Until that measure was introduced, a great deal of time and cost was required in the clinical trial process before introducing regenerative medicine products to the market. The government has now made it possible to save time and costs in clinical trials (Figure 2) We believe the government may announce further support measures for further expansion of the healthcare market, and that there will be attractive investment opportunities forthcoming in this field. Figure 1: Future Expectation for the Regenerative Medicine Market JPY (billion) JPY (billion) 3,000 Japan World Related Industries Market 2,500 40,000 38,000 Related Industries Market 2,500 35,000 2,000 Manufactured and Processed Products 30,000 Manufactured and Processed Market 25,000 Products Market 1,300 1,500 20,000 1,000 15,000 1,000 15,000 12,000 550 10,000 500 5,200 95 95 5,000 1,100 1,000 0 0 2020 2030 2050 Year 2020 2030 2050 Source: Ministry of Economy, Trade and Industry, SuMi TRUST Figure 2: Revised approval system Longertime and higher development cost for data collection and evaluation Before Clinical Clinical trial Approval Sales Enforcement research Sales Approval Clinical Clinical Early /conditional After + Further or Sales Enforcement research trial Approval clinical trial disapproval Condition: Safety verification and effectiveness Effectiveness Fewer cases verification Source: Ministry of Health, Labour and and shorter trial after sales Welfare, SuMi TRUST Takara Bio (4974) Takara Bio is a chemical company which sells research reagents and scientific instruments to universities and companies. It began as the biomedical business unit of Takara Shuzo (now Takara Holdings Inc.). Takara Bio focuses on three business segments, the Bioindustry Business, the AgriBio Business and the Gene Therapy Business. It has acquired companies which have leading-edge medical technology to expand its product line-up. Reagent sales and development contracts, Takara Bio‘s flagship business, are growing because research and development of gene therapy and cell therapy is growing globally. We believe that the company is at a turning point, moving from a reagent manufacturer to a drug developer with multiple developing pipelines, such as the oncolytic virus HF10 and CAR-T gene therapy. 2. Market Review The TOPIX was down by 0.51% in September. The market started the month with a short rally over expectations for an increase in US interest rates. However, the tone stepped back over decreasing consensus for a US rate hike and concerns over possible further rate cuts by the BoJ. The market continued to fluctuate in a range after the monetary policy announcement in the US and Japan. At the beginning of the month, US employment data fuelled expectations for an increase in US interest rates, and this supported the short rally associated with Yen depreciation. However, as the US non- manufacturing PMI showed its weakest number over the past 6 years, expectations pulled back and the market declined alongside concerns that further rate cuts by the BoJ could impact the financial sector. The market showed some rebound after the BoJ announced that the central bank will maintain its current negative interest rate policy. However the market dropped and the Yen appreciated after the FOMC maintained its current monetary policy. The market then moved in a range over the increase in oil prices after an OPEC agreement to cut oil production, and fears over the global financial system with the credit issue of Deutsche Bank. Financial sector stocks such as Mitsubishi UFJ Financial Group (8306 JT) and Resona Holdings (8308 JT) , underperformed the market over fears for global financial system. Nintendo (7974 JT) was among the top performers on the news that it would release a mobile game, Super Mario Run, on Apple Inc.'s App Store. Figure 3: TOPIX and USD/JPY in 2016 Table2: Global Equity Market Performance (as of 30th Sep. 2016) 1,600 130 TOPIX Index September QTD YTD 125 USD/JPY(RHS) USD 1.62% 7.57% 1.55% TOPIX 1,400 120 JPY -0.51% 6.18% -14.51% 115 S&P500 USD -0.12% 3.31% 6.08% USD 0.78% 4.84% -2.77% 1,200 110 Eurofirst 300 EUR -0.12% 3.64% -6.04% 105 MSCI AC Asia USD 1.42% 9.38% 10.20% (ex. Japan) 1,000 100 Jan Feb Mar Apr May Jun Jul Aug Source: Bloomberg, SuMi TRUST Disclaimer This marketing communication is issued by Sumitomo Mitsui Trust International Limited (“SMTI”). 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