Astellas and Daiichi Sankyo

Japanese pharmaceutical companies are going through similar issues as their global peers experienced several years ago, although Japanese companies are unable to execute aggressive restructuring at home.

The home market is tough with regular price cuts, slow sales growth and a lot more generics than ever before which makes life challenging.  Add the expiration of overseas patents and things look pretty bleak.  The Platinum International Health Care Fund owns a number of Japanese pharmaceutical companies, with Astellas being an example of how best to achieve a turnaround.  Daiichi Sankyo on the other hand is the clear example of how not to restructure.  That said, the company now has a second chance and given its low valuation cannot be ignored.  Changes in Japan started off in earnest with consolidation among Japanese pharmaceutical companies, followed by acquisitions overseas, licensing deals and some internal pipeline successes.  Astellas has been smart on all fronts, while Daiichi Sankyo got some of it spectacularly wrong, although other efforts are still to pay off.  Looking back, Astellas’ efforts at the time were not clear cut and it is with hindsight that this company has morphed into a much more western-style pharmaceutical company.

In 2009 the company entered a licensing deal with Medivation for a new prostate cancer drug.   Subsequently, Astellas paid a lot of money for OSI Pharma, a deal that made us happy as we were OSI shareholders, though in general, raised eyebrows.  OSI’s lung cancer drug was already partnered with Roche (who would have been the natural contender) and so all that Astellas got was co-promotion rights in the US and royalty payments from Roche elsewhere in the world.  In the end, however, Astellas won a US oncology sales force and a very valuable cash flow cushion at times of patent problems.

Conversely, the Medivation alliance, has been a lot more powerful since Xtandi (prostate cancer drug) emerged as a real drug.  We are now seeing profit growth return and it is time to reassess what will be the next pillar.  Again, Astellas has been a smart deal maker, it has in-licensed a number of drugs (e.g. from Fibrogen), it has set up a joint venture with Amgen that provides access to Amgen’s pipeline (e.g. PCSK9 antibody for lowering cholestrol) and it has also out-licensed drugs (e.g. JAK inhibitor for inflammatory disease to Johnson and Johnson).  Astellas has been working hard and its valuation is relatively inexpensive at 2.6x EV/sales, about 20x earnings and with a growing balance sheet of about $3.6 billion in cash.

At the other end of the spectrum is Daiichi Sankyo which still has its patent expiration to come and a poor record with acquisitions.  Finally this year, Daiichi Sankyo closed the Ranbaxy chapter thanks to Sun Pharma taking over Ranbaxy.  Daiichi Sankyo will keep a 9% holding in Sun, worth about $2.6 billion or 23% of its market value.  Now the company is without distraction and can fully concentrate on the launch of its oral anticoagulant early next year.  The drug should be able to compete given its dosing and efficacy data.

There is no doubt Daiichi Sankyo has not been as deal savvy as Astellas.  It added a US biotech with a Roche partnered drug (Plexxikon which developed the BRAF inhibitor Zelboraf for melanoma) in 2011.  Zelboraf has been okay for Daiichi Sankyo but Plexxikon’s pipeline progress has been slow.  Most recently, Daiichi Sankyo announced the purchase of additional oncology assets (Ambit acquisition).  The lead drug is the most selective FLT3 inhibitor around.  It was once partnered with Astellas so Japanese analysts are dismissive, while haematologists are actually excited about the drug.  We know that pharma companies can get it wrong though.  This drug is aimed at Acute myeloid leukaemia exhibiting certain FLT3 mutations (very aggressive blood cancer with no new treatments approved for a decade).  The price was reasonable and Ambit complements Plexxikon.  Unlike Astellas, Daiichi Sankyo is not an easy story but this is also reflected in the price at less than 1x sales (taking into account the Sun stake).  We don’t expect this company will grow again.

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