Daiichi-Sankyo and Astellas Forecast Sales Decline in Year Ahead

The two new boys on Japan's Big Pharma block, Daiichi-Sankyo and Astellas, today presented their results for fiscal year (FY) 2005/06, with both companies relying on overseas growth to offset the impact of a stagnant domestic market. Astellas recorded 2.0% year-on-year (y/y) net sales growth to ¥879.3 billion (US$8.0 billion), underpinned by 12.0% and 9.0% growth in the North American and European markets respectively. This was well below forecasts of ¥885 billion, and R&D expenditure was also significantly higher than expected; the 11.3% increase in R&D spending, largely accounted for by in-licensing and the development of garenoxacin, contributed to an overall increase in the company's cost base, and operating income showed flat growth of 0.4%. Again, this was significantly below forecasts of over-6% growth.

Meanwhile, Daiichi-Sankyo outperformed most forecasts, with sales increasing by 1% to ¥926 billion, against a forecast of ¥920 billion, largely due to higher-than-expected domestic sales of hypertension drug Olmetec (olmesartan) and allergy treatment Zyrtec (cetizirine), as well as greater exports of off-patent statin Pravachol (pravastatin) than had been anticipated. As was the case for Astellas, Daiichi-Sankyo's North American sales were strong (up by 32.1%), while the stagnant Japanese market contributed 81% of net sales (compared to 58% at Astellas). Overall, a major merger-related cut in the cost of sales (7.6%) contributed to a 9.7% increase in operating income, while there is considerable scope for cost-cutting in the combined R&D budget, which now equates to 17.1% of sales, and increased by 9.3% in FY2005/06.

Although Astellas' recent in-licensing spree has largely focused on the U.S. market, the company has a particularly strong presence in Europe, where it sells cancer drug Eligard (leuprolide acetate for injectable suspension; sales up 86%), benign prostatic hyperplasia drug Harnal/Omnic (tamsulosin; up 10.3%, largely on the back of the controlled-release version), transplant drug Prograf (tacrolimus; up 12.9%) and newly launched overactive bladder (OAB) product Vesicare (solifenacin; up 357%), all of which are showing strong growth in this market. In the United States, where it does not sell Eligard and Harnal, sales were focused on Prograf (up 17.3%), Vesicare (up 546%), imaging agent Adenoscan (up 7%) and newly launched anti-fungal Mycamine (micafungin). Overall, however, overseas sales margins were hit by the black-box labelling for atopic dermatitis treatment Protopic (tacrolimus), which reduced sales outside Japan to the tune of 38%. In Japan, sales continued to decline, largely due to off-patent ulcer drug Gaster (famotidine; down 5.8%), while angiotension II receptor blocker Micardis (telmisartan) goes from strength to strength, registering a 43% increase.

Daiichi-Sankyo's sales were largely derived from a strong performance by Benicar in the United States and Japan, where it grew by 66% and 184% respectively. Off-patent Pravachol/Mevalotin decreased across the board, despite achieving substantially higher-than-forecast exports. Exports, which grew by 22%, also drove sales of antibiotic Cravit/Levaquin (levofloxacin), which recorded an overall increase of 8.1%. Pain drug Mobic (meloxicam) continued to benefit from a strong global profile, and increased by 24.7% in Japan, whhile overseas sales of hypertension treatment Welchol (colesevelam hydrochloride) were also strong, growing by 17.5%.

Outlook and Implications

Like the rest of the industry, the outlook for both companies will be largely determined by the April 2006 price cuts, which averaged 6.7%, and, for Daiichi-Sankyo, the patent expiration of Pravachol. Last year's merger of Daiichi Pharmaceutical and Sankyo was designed to consolidate the latter's second position in the Japanese market, in the midst of competition from widespread mergers and acquisition (M&A) activity. The market has never quite accepted Daiichi as the ideal partner for Sankyo, and it appears that the merged company will be overtaken by Astellas during FY2006/07, as the latter is expecting 2.6% sales growth, against a 6.6% contraction at Daiichi-Sankyo. Astellas, with a more diversified portfolio, is clearly a stronger pick, and in the absence of its Zepharma over-the-counter (OTC) unit, which recorded 2.5% negative growth to ¥21.9 billion in FY2005/06, the company will also record a special profit in the year ahead. The purchase of Zepharma will continue to build critical mass in Japan for Daiichi-Sankyo, as it moves ahead towards the full integration of its two wholly owned subsidiaries in 2007, but will not contribute significantly to near-term operational growth.

In terms of pipelines, Astellas has dropped Phase II and III trials in Europe and the United States respectively for the development of a rheumatoid arthritis (RA) indication for tacrolimus, the active pharmaceutical ingredient of both Protopic and Prograf. This will significantly relieve costs, and appears to make sense in light of the purchase of Phase II European trials for newly acquired anaemia drug FG-2216/YM-311. RSD-1235 has been filed in the United States for atrial fibrillation, while FK-949 for dementia has also been stopped in Phase II trials. Daiichi-Sanko has already dropped a number of candidates following its first integrated R&D meeting, although company management is still assessing its pipeline prospects, which have taken a significant blow following the discontinuation of CS-505. Platelet inhibitor CS-747 remains the potential big ticket, and Daiichi's Plavix (clopidogrel) rights were sacrificed for its development. A filing for this treatment is expected at the end of 2007. The company's domestic outlook has been strengthened by the approval and listing of dysuria treatment Urief (silodosin), which will be co-marketed with Kissei (Japan).

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