Shionogi and Tanabe Kick Off Japanese Reporting Season

Mid-sized Japanese drug firms Shionogi and Tanabe today released their financial results for the third quarter of fiscal year (FY) 2006/07, making them the first two of Japan’s bigger names to do so. Expectations were relatively low for both companies, and neither announced much that changed their outlook, though there was more interest in Tanabe’s results. The company earlier this month confirmed that it was in “negotiations” with compatriot Mitsubishi Pharma, and it now appears increasingly likely that a final agreement will be made early next month, with completion due by October. Tanabe also announced that it has resumed development with GlaxoSmithKline (GSK) of Phase II multiple sclerosis (MS) drug T-0047, which had been placed on clinical hold by the U.S. FDA after the withdrawal of Tysabri (natalizumab; Biogen, U.S.), which has a similar receptor target.

Thus, there is immediately some brightness to Tanabe, and the company recorded 1.1% sales growth in the first nine months to reach ¥139.6 billion, despite the 6.7% price cuts imposed in April 2006. At the other end costs were relatively contained, and this has been the main source of bottom line growth over the years at the company. In particular, R&D spending was down 7%, largely due to a comparative decrease in expenditure on its PDE-IV inhibitor roflumilast. Overall operating income was down 1%, but net income was up 15%.

Shionogi tells a somewhat different story, largely because of its significant exposure both to the stagnant antibiotics market and to allergy seasons. Net sales were down 2% for the first nine months to ¥149 billion, and the company is unable to hold down its costs, particularly in the R&D department, which saw an 18% rise in spending. Overall net income was down 39%, and Global Insight’s assessment of operating income was down 14% to ¥21.3 billion.

On the product front, both companies suffer from a reliance on long-term listed drugs in the domestic market, where there is little-to-no growth. Tanabe has the slightly more diversified portfolio of the two, and its TNF inhibitor Remicade (infliximab) has sprung to the top of its leading products. Indeed, its growth is in line with expectations at nearly 60%, and now accounts for just over 10% of total sales. This enables the company to diversify beyond its traditional growth drivers, Herbesser (diltiazem; hypertension) and Tanatril (imidapril; cardiovascular), which are beginning to stagnate. The company also maintains a strong domestic vaccines portfolio, which has already reached full-year forecasts due to the strong launch of Mearubik.

For Shionogi, sales of Crestor (rosuvastatin) are not reaching expectations, despite the launch of full-scale promotional activities in September 2005. Domestic sales have reached only 35% of full-year estimates, and all of the company’s top three products recorded significant double-digit declines due to the vagaries of the antibiotics market. Major growth is only seen from the contract manufacturing business and royalties, but the latter is also struggling to meet its guidance. Royalties from Crestor are suffering from the impact of the entry of generic simvastatin in the United States, a factor which appears to have been underestimated and will not be helped by the entry of fully genericised versions this month.

Outlook and Implications

Neither company changed their forecasts, and Global Insight remains somewhat surprised that Shionogi has not altered its guidance. Many of its products are not meeting forecasts, and it is relying on a particularly strong performance in the final quarter to do so. Global Insight does not expect it to succeed. We remain more impressed with the realistic approach adopted by the management at Tanabe. More insight into its merger with Mitsubishi Pharma emerged last Friday (26 January), with the Daily Yomiuri reporting that the two companies will indeed move heavily into the generics market (as expected), and a role for Tanabe’s partner Nipro may be formed here. Either way, it appears that Tanabe and Mitsubishi Pharma are already agreeing on unified corporate strategies.

Coupled with the re-entry of T-0047 into its pipeline, Tanabe is slowly beginning to look a better proposition after years of slow productivity. However, its risks remain concentrated around Remicade, which is due to see new competition from Actemra, Humira and fully launched Enbrel in the year ahead. Tanatril’s patent expires in May. Shionogi is one of the main companies that will be left behind by a prospective Tanabe/Mitsubishi Pharma merger, and is forced to react accordingly, although it has been slow to do so. Its Phase II obesity candidate S-2367 remains its most attractive proposition, but its research joint venture (JV) with GSK has been slow in showing much promise. Shionogi has several new products in its portfolio (notably Finibax) which have resulted in increased costs, but the company should see more growth into its topline from these drugs next fiscal year.

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