Growth Concerns Loom For Daiichi Sankyo on Drug Warning: Health

Daiichi Sankyo Co. risks losing a slice of revenue to generic-medicine competition next year. Now, the Japanese drugmaker’s plans to fill the gap have hit a roadblock and investors worry that growth may flounder.

The Tokyo-based company’s best-selling medicine is set to lose patent protection in 2016, and a new blood thinner had been seen as one of its best chances to offset the hit. Instead, a U.S. regulatory warning placed on the new drug’s packaging may limit its market potential.

Finding a way to boost earnings is becoming urgent for Daiichi Sankyo, once a high flyer with a lineup of promising drugs. Its 2008 purchase of India’s Ranbaxy Laboratories Ltd. resulted in share declines and lost profits. Benicar, the hypertension treatment whose patent is slated to expire next year, brings in about 27 percent of annual revenue.

“The market can’t expect earnings growth for Daiichi Sankyo for the next three to five years,” said Takashi Aoki, a fund manager at Mizuho Asset Management Co. “One of the common attractions for pharma stocks is stable cash flows that bring steady returns to shareholders. But its M&A track record is bad and hasn’t generated cash, which means shareholders can’t expect that.”

Daiichi Sankyo continues to look for opportunities to buy resources in the U.S. to make up for sales pressure from the patent expiration, Manabu Sakai, an executive vice president, said in a Jan. 30 earnings briefing. The drugmaker reiterated its full-year forecast last month, saying profit is expected to rise 6.7 percent to 65 billion yen ($554 million) for the fiscal year ending March.

New Opportunities

Daiichi Sankyo’s struggle to find new blockbusters offers a window into the broader pressures across Japan’s pharmaceutical industry. Japanese drugmakers produced a generation of new drugs in the 1990s, including Takeda Pharmaceutical Co.’s Actos for diabetes and Eisai Co.’s Aricept for Alzheimer’s disease.

In more recent years, they have struggled to replicate that success, failing to come up with major pharmaceutical breakthroughs even as blockbusters like Gilead Sciences Inc.’s Sovaldi for hepatitis C or Roche Holding AG’s cancer drug Avastin were developed by international competitors.

Daiichi Sankyo is preparing to sell the new blood thinner, called edoxaban, in the U.S. this month. In January, the U.S. Food and Drug Administration decided that edoxaban would sell with a so-called “boxed warning” that would caution against it being used for patients with normal renal function.

“The restricted label is a big negative,” said Emilia Falcetti, a health-care analyst at Cantor Fitzgerald Capital Markets Ltd. in Hong Kong. “The drug doesn’t have huge benefits compared with the competitors and doesn’t have a sales partner to boost promotion.”

Blood Thinner

The blood thinner faces plenty of competition. It will be the fourth drug to the market in the class of anti-coagulant drugs called factor Xa inhibitors. Competitors include one product from Bayer AG and Johnson & Johnson and another from Pfizer Inc. and Bristol-Myers Squibb Co.

“It’s unfortunate we had a small restriction,” said Sakai. “Sales will be affected by it slightly but we aren’t so pessimistic as we think the efficacy of the drug stands out within the approved area.” Daiichi Sankyo won’t comment further and will give a briefing on the promotional strategy and sales prospects of edoxaban on Feb. 17, he said.

Indian Deal

The Japanese drugmaker was created in 2005 from Sankyo Co.’s purchase of Daiichi Pharmaceutical Co. The two firms planned to tap international growth to offset a slowing domestic market. Aided by growing sales of Benicar, the stock of the merged company reached its peak in 2007.

In 2008, it paid $4.6 billion for a majority stake in India’s Ranbaxy to expand into generics and offset an impending patent cliff. That acquisition ran into trouble after the FDA banned several Ranbaxy plants from selling to the U.S. After taking writedowns and failing to turn around the India business, Daiichi Sankyo agreed to sell the stake to Sun Pharmaceutical Industries Ltd. last year.

Japanese pharmaceutical companies facing patent expirations have in the past had some success with acquisitions. Takeda bought Millennium Pharmaceuticals Inc. in 2008 and Nycomed in 2011, helping bolster sales when Actos lost patent protection and gaining experimental drugs and new markets. After years of absorbing costs of the Ranbaxy purchase, the resources Daiichi Sankyo has for more acquisitions may be limited.

‘Tricky Position’

“The company is in a little bit of a tricky position at the moment,” said Falcetti of Cantor Fitzgerald.“I can’t see an obvious solution to their problem. They have a little bit of money they could use for an acquisition, not a huge amount. But there’s nothing much that’s cheap, good value in the U.S.”

Falcetti expects edoxaban to generate 26 billion yen ($220 million) in fiscal 2019. By contrast, Benicar had sales of almost $2.6 billion last fiscal year. Edoxaban was approved in Japan in September and generated 2.1 billion yen in the quarter ended December and is under review by regulators in Europe.

Daiichi Sankyo cut 513 jobs, or 6 percent of its employees in Japan, it reported on Jan. 30. The company also aims to squeeze 20 billion yen of cash over about two years, primarily from shrinking inventory, Sakai said.

Job Cuts

The drugmaker expects to gain a stake of about 9 percent in Sun Pharma after completing the sale of Ranbaxy and may give an update on how it plans to utilize the proceeds in the mid-term plan, Sakai said. When the deal closes the Japanese company will benefit from a jump in Sun’s shares, which have risen about 60 percent since the deal was announced.

Daiichi Sankyo is reviewing its mid-term business plan and will give guidance before reporting full-year earnings in May, Sakai said. Only two of the 16 analysts who track the company suggest buying the stock, with the rest split between sell and hold ratings, according to data compiled by Bloomberg. Daiichi Sankyo’s stock closed at 1,785 yen on Feb. 6.

“Concerns on mid-term business will probably rise and the stock may start to fall,” said Kazuaki Hashiguchi, an analyst at Daiwa Securities Co., who estimates the shares may fall to 1,400 yen in the next 12 months. “It looks largely impossible to turn around the business in a few years with its current pipeline. I’m watching closely how quickly and strongly it can get out of it and recover its earnings.”

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