Astellas and Daiichi Sankyo Revise Upwards in H1

Kindred Spirits

The two companies that initiated consolidation in the Japanese pharmaceutical sector over the past couple of years, Astellas and Daiichi Sankyo, today presented their interim results for the six months ending 30 September. Daiichi Sankyo continues to edge out its main rival in sales terms, but only by ¥38 billion (US$322 million); revenues at Daiichi Sankyo increased by 7.5% to ¥485.8 billion. This was almost entirely related to sales by its merged overseas operations (which held a nine-month merger-related fiscal period), as the domestic market slumped by 8% to ¥342 billion, accounting for 70% of sales. It also accounted for the enhanced critical mass in the company's over-the-counter (OTC) operations, through the acquisition of the Zepharma unit from Astellas itself. Sales, general and administrative (SGA) and R&D expenditure were both up by 17%, and underlying operating income consequently fell by 2.4%.

Half-year results at Astellas paint a similar picture, with overall sales up by 5% to ¥447.9 billion, driven largely by the prescription (Rx) unit, which gained 9%. Again, the domestic market provided little impetus for growth, with Japanese sales inching up negligibly by 0.4%, while North American sales grew by 20%. Like major domestic rivals Takeda and Eisai, post-merger Astellas has a more globalised profile, and obtains around 56% of its revenue from Japan. At the cost base, SGA, cost of sales and R&D were all up, by 6%, 13% and 75% respectively, resulting in a steep 38% drop in operating income, to ¥72.4 billion. The company maintains operating margins of around 16%, very similar to Daiichi Sankyo.

Astellas product sales were dominated by strength in the Prograf franchise, which grew by 18% to ¥82 billion, driven largely by domestic demand. Elsewhere, new urology drug Vesicare (solifenacin) continues to struggle to meet expectations, although sales were up by 212% to ¥16 billion, on the back of new Japanese sales; since the domestic launch of the product in June, uptake appears quicker here than in North America, where it got off to a slow start. Also, black-boxed eczema drug Protopic (tacrolimus) continues to struggle, with sales gaining just 6.3%, due in large part to a slight recovery in the U.S. market; however, this was still below forecast. Japanese sales are headlined by continued strong demand for hypertension drug Micardis (telmisartan), which gained 44% to ¥24 billion. Micardis forms a striking partnership with Lipitor (atorvastatin), though Astellas’ other big boy in the domestic market, gastric agent Gaster (famotidine), continues to fall, registering 7% contraction over the half-year.

Astellas has simultaneously announced that it is embroiled in a dispute with Pfizer (U.S.) over whether the companies' marketing agreement for Lipitor expires in 2011 or 2016, and the company has sought clarification in Tokyo courts. Elsewhere, Astellas holds a very diversified domestic portfolio, but it was hit hard by the April price cuts.

Daiichi Sankyo’s product sales were again dominated by demand for Olmetec/Benicar, and the company has raised forecasts for this franchise. Sales were up by 104% to ¥84 billion, and full-year forecasts have been revised up by ¥9 billion to ¥157.7 billion. Elsewhere, the decline in demand for genericised Pravachol/Mevalotin (pravastatin; cholesterol) continues to hit the top line, and sales were down by 34% to ¥52 billion, though the company has met 55% of full-year targets. Similarly, sales of Cravit (levofloxacin; antibiotic) were down by 0.9%. The company also sees strong demand for Venofer (iron sucrose; iron deficiency), Panaldine (ticlopidine; anti-clotting) and Loxonin (loxoprofen; painkiller), and has raised its forecasts for these drugs.

Outlook and Implications

Daiichi Sankyo’s results continue to be skewed by the lack of full integration, which will only occur in April 2007; the company is harmonising fiscal periods and engaging in a number of one-off costs, and the addition of Zepharma to its results provides another vagary to year-on-year (y/y) comparisons. Daiichi Sankyo raised sales guidance by ¥43 billion and operating profit guidance by ¥9 billion, to include strong demand for Olmetec/Benicar. In all, this makes for an expected 0.9% decline in net sales and an 18% decline in operating profits—around half the decreases that the company forecasted at the start of the year. The company announced two pipeline discontinuations, including oral taxane DJ-927, which did not prove efficacy in Phase IIa trials; this represents a major disappointment, and a rather unexpected one, as the drug had been highlighted as a key compound at Daiichi Sankyo’s R&D meeting earlier this year. Phase I oral factor Xa inhibitor CS-303 has also been suspended. Most attention is still focused on cardiac drug CS-747, which is being co-developed with Eli Lilly (U.S.), and the company merely confirmed that patient enrolment is progressing. Elsewhere, SUN-11031 has entered Phase II trials for cancer cachexia and nervous loss of appetite, in overseas and domestic studies respectively.

Astellas, meanwhile, also raised its forecasts, albeit more modestly. At the moment, R&D costs are being hit by the in-licensing of oral anaemia treatments from FibroGen (U.S.), and this continues to be the biggest factor in Astellas’ results, while we suspect that the acquisition of Amevive (alefacept) has significantly increased SGA spending. Sales are being affected by the divestiture of Zepharma to Daiichi Sankyo. In the pipeline, Astellas has announced the discontinuation of Phase III drug YM-643 for hepatitis C in Japan, although we considered this to be a low-priority drug at the company. FK-506 for asthma (Phase II in Europe and the United States) has also been discontinued. Elsewhere, venous thromboembolism (VTE) candidate YM-150 has entered Phase II in Japan. Phase III antibiotic telavancin has failed to prove superiority versus vancomycin, and we now consider this to be less of a blockbuster candidate. While Astellas is filling its pipeline through licensing deals, the company faces a bumpy ride with patent expirations for Prograf in April 2008 and Harnal in October 2009, while Mycamine/Funguard (micafungin) faces new competition from Pfizer’s Eraxis (anidulafungin) in the United States.