Daiichi Sankyo Company, Limited

Daiichi Sankyo Company, Limited

Native name	第一三共株式会社
Romanized name	Daiichi Sankyō kabushiki gaisha
Type	Public KK
Traded as	TYO: 4568 TOPIX Large 70 Component TOPIX 100 Component Nikkei 225 Component
Industry	Pharmaceutical
Predecessors	Daiichi Pharmaceutical Company Sankyo Company
Founded	Tokyo, Japan (2005 (2005)) (by merger)
Headquarters	Daiichi Sankyo Building A/B 3-5-1, Nihonbashi-honcho, Chūō-ku, Tokyo 103-8426, Japan
Key people	Sunao Manabe (Representative Director, and President) Ken Keller (President and CEO, Daiichi Sankyo, Inc.)
Products	Medical equipment Pharmaceutical products
Revenue	$ 9.015 billion USD (FY 2023) (¥ 1.28 trillion JPY) (FY 2023)
Net income	$ 769.3 million USD (FY 2023) (¥ 109.1 billion JPY) (FY 2023)
Number of employees	17,435 (2023)
Website	http://www.daiichisankyo.com
Footnotes / references

Daiichi Sankyo Company, a Tokyo-based global pharmaceutical leader, operates across various sectors of the medical industry, providing an extensive portfolio of treatments for a wide range of conditions.

In the cancer domain, they offer innovative treatments like trastuzumab deruxtecan, gefitinib, bicalutamide, and tamoxifen. They also provide drugs for pain management, neurological disorders, such as Alzheimer's, and epilepsy.

Their diabetes and heart disease portfolio includes products like teneligliptin, canagliflozin, pravastatin, and edoxaban, while their gastrointestinal and infectious disease lineups offer treatments like esomeprazole and vaccines for various conditions.

Daiichi Sankyo also contributes to the skincare and oral care sectors with products such as Transino and Breath Labo. Their range even extends to over-the-counter medicines, animal healthcare products, cosmetics, medical equipment, and food products.

In a partnership with Guardant Health, they are developing a companion diagnostic for a lung cancer treatment. Founded in 1899, Daiichi Sankyo's legacy of innovation continues to shape the global pharmaceutical landscape.

Macro Analysis

The global macroeconomic environment has a significant influence on the performance of Daiichi Sankyo and the pharmaceutical industry as a whole.

A PESTLE Analysis of the Pharmaceutical Industry shows that the future holds mixed results.

Economic

The recent inflation print shows that the annual inflation rate of the yen has dropped to 3% from 4% the previous month, settling into an acceptable range. This is a positive sign for companies like Daiichi Sankyo as it reduces the cost pressure on raw materials and other inputs for production.

However, over the last 3 years, the value of the yen has dropped in relation to the dollar, meaning costs may rise as indicated by an increase in cost of sales by 3.3% from Q4 2021 to Q4 2023. But this appears to be a negligible factor in Daiichi Sankyo's success, as the company experienced in increase in operating profit of 89% over the same period.

Sociocultural

Changing sociocultural factors such as an aging population and growing obesity rates has a positive impact on Daiichi Sankyo, as it specializes in a variety of pharmaceuticals associated with treating diseases linked to aging (e.g. Anti-hypertensives, Anti-epileptics, and drugs for: Type 2 diabetes, pain, bone erosion associated with rheumatoid arthritis, lowering cholesterol, etc.)

Technological

A growing biotechnology industry positively impacts the company, with the beginning of human trials of drugs designed by AI indicating a potential revolution in drug discovery. With this inevitably leading to significant investment and profit for companies within the pharmaceutical industry.

AstraZeneca, a partner of Daiichi Sankyo for an antibody-based tumour treatment, has signed a research collaboration and licensing deal with Quell Theraputics. This company uses genetic engineering of regulatory T-cells to treat autoimmune diseases, a new use of cell therapy outside of oncology. This, along with other examples of genetic engineering in treatment, alludes to a technological boom in the biotech industry resulting in large growth in the pharmaceutical market.

The S&P 500 gained 2.4% and the NASDAQ jumped 3.3%, indicating a positive market sentiment which could benefit the company. However, the tightening of interest rates, with the US 10-year moving from 4.06% to 3.83%, could increase the cost of borrowing for the company.

Industry Overview

Daiichi Sankyo operates in the pharmaceutical industry, which is characterized by high levels of research and development, stringent regulatory environments, and intense competition. The industry is driven by innovation, with companies constantly seeking to develop new treatments and therapies. The industry has been positively impacted by the COVID-19 pandemic, with increased focus on healthcare and accelerated vaccine development.

Competitor Comparison

Daiichi Sankyo's main competitors in the pharmaceutical industry include global giants like Eli Lilly, Johnson & Johnson, Novo Nordisk, Merck & Co., Roche Holding, Abbvie, Novartis, Astrazeneca, Pfizer, and Sanofi. These companies have a broad product portfolio and significant resources for research and development.

Company Overview and Breakdown

Daiichi Sankyo Co., Ltd. is a Japan-based company primarily engaged in the manufacture and sale of pharmaceuticals. The company is involved in the research, development, manufacture, and sale of pharmaceuticals, over-the-counter drugs, and vaccines. The company has outlined a 5-Year Business Plan for Sustainable Growth which outlines the company's plans from FY2021 - FY2025.

As of 2023 Apr, the revenue and revenue in oncology targets for 2025 have been vastly exceeded, with current values at 2.0 Tr JPY and >900 Bn JPY, respectively. However, the USD/JPY exchange ratio needs to be taken into account. The exchange rate in 2021 being 1 USD = 105 JPY, and the exchange rate at the time of 2023 Apr being 1 USD = 130 JPY, and as of July 2023, 1 USD = 138 JPY. This indicates that an increase in revenue may be misleading depending upon how much of Daiichi Sankyo's revenue comes from overseas. As of 2022, overseas sales made up 58% of total sales.

The 5-Year Plan is built upon 4 key strategic pillars, with these being:

Maximize 3ADCs

• Maximize ENHERTU and DAto-DXd through strategic alliance with AstraZeneca
• Maximize HER3-DXd without a partner
• Expand work force and supply capacity flexibly depending on changes around product potential

Profit growth for current business and products

• Maximize Lixiana profit
• Grow Tarlige, Nilemdo, etc. quickly
• Transform to profit on structure focused on patented drugs
• Profit growth for American Regent and Daiichi Sankyo Healthcare

Identify and build pillars for further growth

• Identify new growth drivers following 3ADCs
• Select and advance promising post DXd-ADC modalities

Created shared value with stakeholders

• Patients: Contributing to patents through "Patient Centric Mindset"
• Shareholders: Balanced investment for growth and shareholder returns
• Society: Environment load reduction across the value chain, and actions against pandemic risks
• Employees: Create one DS culture through fostering our core behaviours

The first 2 strategic pillars are outlined below in "Products".

Daiichi Sankyo has several emerging candidates for new growth following 3ADCs. One such driver is the development of DS-7300 which has shown promising durable response in patients with several types of advanced cancer, this is a "first-in-class" B7-H3 directed DXd antibody drug conjugate (ADC), which continues to show promising durable tumour response in patients with several types of heavily pre-treated cancers, including lung, prostate or oesophageal cancer. In 2022, the drug was found to have a response rate of 32%, with 32 responses in 118 patients with various solid tumours.

Products

The company specializes in a diverse array of pharmaceutical goods, with drugs devoted primarily for oncological and cardiovascular treatment, with its 2 flagship products being ENHERTU® a HER2 directed antibody drug conjugate (ADC) used in the treatment of HER2 positive breast cancer, and LIXIANA® a direct factor Xa inhibitor, used to prevent blood clots and thus inhibiting risk of heart attack and stroke.

The company entered a collaboration with AstraZeneca in 2020 for a Daiichi Sankyo DXd (potent DNA topoisomerase I inhibitor) antibody drug conjugate (ADC), with $1 billion being paid upfront to Daichii Sankyo from AstraZeneca and a further $5 billion upon achievement of future regulatory and sales milestones. The company is developing a number of DXd drugs, known as the "3ADCs" in the company's R&D pipeline, however the agreement with AstraZeneca concerns Dato-DXd drugs. Both companies will jointly develop and commercialize Dato-DXds worldwide, except with Daiichi Sankyo holding exclusive rights in Japan. This is the second global collaboration with AstraZeneca, with the first being a similar agreement for Daiichi Sanyo's ENHERTU®.

The 3ADCs are a crucial strategic pillar of Daiichi Sankyo's 5-Year Plan, with oncology making up a significant portion of the revenue target by FY2025 (Total Revenue: 1.6 Tr HPY, Oncology > 600.0 Bn JPY), and ENHERTU® being a significant portion of oncology revenue (~90%).

Other product avenues are also explored in DS's 5-Year Plan, with another strategic pillar being "Profit Growth for Current Business and Products", with cardiovascular-targeting drugs such as LIXIANA® providing a steady stream of revenue (>220.0 Bn JPY), with increased product value being provided via offering a variety of additional dosages and administration routes. Sustainable growth in the business outside of oncology is further being aimed for, with sales for: Tarlige®, Injectafer®, Venofer®, Nilemdo®, being forecasted to increase by FY2025, as well as via additional formulation

Dato-DXd

Trophoblast cell surface antigen 2 (TROP2) is highly expressed on a variety of epithelial tumours and correlates with a poor prognosis, Dato-DXd is being developed as a novel TROP2-directed ADC. Dato-DXd demonstrated potent antitumor activity against TROP2-expressing tumors via efficent payload delivery into tumors alongside acceptable safety profiles in preclinical models, suggesting Dato-DXd could be a valuable treatment.

Daiichi Sankyo has a variety of Dato-DXd products currently in different phases of clinical trials:

Phase 1:

• TROPION-PanTumor01 - solid tumours
• TROPION-PanTumor02 - NSCLC (Non-small cell lung cancer), TNBC (Triple negative breast cancer)
• TROPION-Lung02 - NSCLC
• TROPION-Lung04 - NSCLC
• PETRA (AZD5305 combo) - solid tumors

Phase 2:

• TROPION-PanTumor03 - solid tumors
• TROPION-Lung05 - NSCLC
• BEGONIA - TNBC
• ORCHARD - EGFR (Epidermal Growth Factor Receptor) mutated NSCLC
• NeoCOAST-2 - recectable* early-stage NSCLC (durvamulab combo) neoadjuvant**

*able to be removed via surgery

**treatment given as first step to shrink tumour

Phase 3:

• TROPION-Lung01 - NSCLC
• TROPION-Lung07 - non-squamous* NSCLC
• TROPION-Lung08 - NSCLC
• TROPION-Breast01 - BC (HR+, HER2 low or negative BC)
• TROPION-Breast02 - TNBC (Triple negative breast cancer)
• TROPION-Breast03 - TNBC (mono or durvalumab combo) adjuvant**

*either Adenocarcinomas or large cell (undifferentiated) carcinomas

** treatment given after main treatment to reduce chance of cancer returning by destroying any remaining cancer cells

A list of Dato-DXd drugs currently in clinical trials can be found here in blue.

T-DXd

T-DXd is an ADC that uses the HER-2 targeted antibody trastuzumab to deliver a cytotoxic payload selectively to HER2-expressing cells. In the DESTINY-Breast01 phase II clinical trial, T-DXd showed clinical activity in the third-line setting for patients with HER2-positive metastatic breast cancer, these results led to accelerated approval of T-DXd in 2019 as a third-line therapy for patients with metastatic or unresectable breast cancer who have received two or more prior HER2-targeted therapies.

ENHERTU® is approved in over 30 countries for treatment of adult patients with unresectable or metastatic HER2 positive breast cancer.

A list of T-DXd drugs currently in clinical trials can be found here in orange.

HER3-DXd

Approximately 10% to 15% of patients with NSCLC in the US and Europe and 30% to 40$ of those in Asia have an EGFR-activating mutation. In these patients EGFR (Epidermal Growth Factor Receptor) -targeted tyrosine kinase inhibitors (TKI) result in high response rate and can provide extended disease control. However, relapse is typical with the development of resistance to EGFR TKI treatment, with the mechanisms associated with resistance being diverse, and a significant amount of which being unidentified.

Given that resistance mechanisms to EGFR TKIs are diverse and the efficacy of chemotherapy is limited, there is a need to develop novel treatment approaches for previously treated EGFR-mutated NSCLC that provide salvage therapy* across a broad spectrum of resistance-associated genomic alteration.

HER3 is expressed across a variety of malignant solid tumors and has been found in 83% of primary** NSCLC tumors. HER3 overexpression is associated with metastatic progression and decreased relapse-free survival in patients with NSCLC. EGFR-mutated NSCLC is associated with higher expression of HER3 compared to EGFR wild-type*** NSCLC.

HER3-DXd is a novel ADC, which specifically targets HER3. In a study 57 patients recieving HER3-DXd the objective response rate**** was found to be 39% and the median progression-free survival***** was 8.2 months. Responses were also observed in patients with known and unknown EGFR TKI resistance mechanisms

A list of T-DXd drugs currently in clinical trials can be found here in green.

*treatment recieved after standard treatment has failed

** used to describe the first, or primary tumor, the one from which metastatsis (development of secondary tumors) occurs

*** non-mutated gene

**** The total number of people whose cancer has either gone away (complete response) or shrunk (partial response)

***** Time between treatment aimed at shrinking or controlling cancer, and signs that it has started to grow again

3ADC Conclusion

In conclusion, Daiichi Sankyo is developing a wide range of cancer-targeting drugs, with a primary focus on breast cancer, with Dato-DXds targeting hormone receptor positive, HER2 low or HER2 negative breast cancer, and triple negative breast cancer. T-DXds (such as ENHERTU®) targeting HER2 positive breast cancer, particularly when a patient has received prior anti-HER2 treatment. HER3-DXds targeting HER3 positive breast cancer, and particularly in cases where the patient has become resistant to first-line treatments (such as EGFR TKIs).

Financials

Income Statement

Year end date	3/30/2020	3/30/2021	3/30/2022	3/30/2023
All numbers in thousands of JPY. (¥'000)
Revenue	981,793,000	962,516,000	1,044,892,000	1,278,478,000
Cost of Revenue	343,206,000	338,289,000	353,328,000	363,525,000
Gross Profit	638,586,000	624,227,000	691,563,000	914,952,000
Operating Expenses:	499,785,000	560,432,000	618,537,000	794,370,000
General & Administrative Expense	302,320,000	333,079,000	358,309,000	471,221,000
Research & Development Expense	197,465,000	227,353,000	260,228,000	341,570,000
Other Operating Expenses	-	-	-	680,000
Operating Income	138,801,000	63,795,000	73,026,000	120,582,000
Interest Income	9,849,000	12,916,000	6,114,000	14,773,000
Interest Expense	7,813,000	2,755,000	5,753,000	8,480,000
Pretax Income	141,164,000	74,124,000	73,516,000	126,854,000
Income Tax	12,196,000	-1,705,000	6,543,000	17,666,000
Net Income	129,074,000	75,958,000	66,972,000	109,188,000

Balance Sheet

Year end date	3/30/2020	3/30/2021	3/30/2022	3/30/2023
All numbers in thousands of JPY. (¥'000)
Assets:
Current Assets:
Cash And Cash Equivalents	424,184,000	380,547,000	662,477,000	441,921,000
Other Short Term Investments	466,528,000	444,368,000	181,368,000	383,205,000
Inventory	173,362,000	200,860,000	217,910,000	301,608,000
Assets Held for Sale Current	134,000	-	-	-
Other Current Assets	10,548,000	10,609,000	16,841,000	19,206,000
Total Current Assets	1,384,119,000	1,268,420,000	1,345,271,000	1,495,051,000
Non-Current Assets:
Net PPE	247,053,000	265,281,000	304,070,000	348,912,000
Goodwill	76,760,000	77,706,000	83,555,000	98,330,000
Other Intangible Assets	172,499,000	172,822,000	163,884,000	159,609,000
Other Non Current Assets	12,082,000	30,992,000	53,515,000	95,191,000
Total Non-Current Assets	721,499,000	816,757,000	876,131,000	1,013,837,000
Total Assets	2,105,619,000	2,085,178,000	2,221,402,000	2,508,889,000
Liabilities:
Current Liabilities:
Current Provisions	5,367,000	6,051,000	6,795,000	7,626,000
Current Debt	40,389,000	20,391,000	20,394,000	41,396,000
Other Current Liabilities	15,021,000	14,175,000	25,619,000	24,655,000
Total Current Liabilities	351,071,000	353,571,000	395,268,000	530,263,000
Non-Current Liabilities:
Long Term Provisions	10,597,000	8,741,000	18,290,000	16,376,000
Long Term Debt	183,811,000	163,441,000	143,067,000	101,692,000
Other Non-Current Liabilities	195,844,000	228,944,000	256,222,000	359,100,000
Total Non-Current Liabilities	448,274,000	459,554,000	475,262,000	532,772,000
Total Liabilities	799,345,000	813,125,000	870,530,000	1,063,035,000
Equity:
Common Stock	144,633,000	144,494,000	50,000,000	50,000,000
Retained Earnings	1,241,600,000	1,277,332,000	1,170,208,000	1,231,788,000
Treasury Stock	162,519,000	261,252,000	37,482,000	36,808,000
Other Equity Interest	82,095,000	111,479,000	168,146,000	200,874,000
Total Equity	1,306,274,000	1,272,053,000	1,350,872,000	1,445,854,000

Cash Flow

Year end date	3/30/2020	3/30/2021	3/30/2022	3/30/2023
All numbers in thousands of JPY. (¥'000)
Operating Cash Flow	196,601,000	192,207,000	139,226,000	114,514,000
Investing Cash Flow	81,673,000	-39,246,000	212,339,000	-257,782,000
Financing Cash Flow	-91,637,000	-202,433,000	-86,231,000	-89,594,000
Beginning Cash Position	243,155,000	424,184,000	380,547,000	662,477,000
Changes in Cash	186,637,000	-49,472,000	265,334,000	-232,862,000
Effect of Exchange Rate Changes	-5,608,000	5,834,000	16,595,000	12,306,000
End Cash Position	424,184,000	380,547,000	662,477,000	441,921,000
Capital Expenditure	-52,565,000	-64,093,000	-76,682,000	-67,366,000
Free Cash Flow	144,036,000	128,114,000	62,544,000	47,148,000

Financial Ratios and Key Metrics

Year end date	3/30/2020	3/30/2021	3/30/2022	3/30/2023
Earnings per share (EPS)	¥199.2	¥39.2	¥34.9	¥57
Dividend per share	¥70	ー	¥27	¥30
Dividend payout ratio	35.1%	68.9%	77.3%	52.7%
Return on equity (ROE)	10.1%	5.9%	5.1%	7.8%
Dividend on equity (DOE)	3.5%	4%	3.9%	4.1%
Book value per share (BPS)	¥2,014.9	¥663.85	¥704.76	¥754.09
Equity ratio	60.6%	59.6%	56.7%	52.4%
Total number of common shares	647 million	1,939 million	1,917 million	1,917 million

Daiichi Sankyo has shown strong financial performance with revenues increasing by 22% to 1.278 trillion yen and net income increasing by 63% to 108.95 billion yen for the fiscal year ending in March 2023. The company's current ratio is 2.8, indicating a strong liquidity position. The company's debt ratio is 9.7, which is relatively low, indicating a manageable level of debt.

The company's return on assets (ROA) is 4.6% and return on equity (ROE) is 7.8%, indicating efficient use of assets and equity. The company's gross margin is 71.6% and net profit margin is 8.5%, indicating strong profitability.

Valuation

The company's current price-to-earnings (P/E) ratio is 69.15, which is relatively high, indicating that the company's stock may be overvalued. The company's price-to-book (P/B) ratio is 5.21, which is also relatively high.

Technical Analysis

The company's stock price has shown some volatility, with a 1-year return of 11.47%. However, the stock price has declined by 6.29% year-to-date. The company's beta is 1.06, indicating that the stock is slightly more volatile than the market.

Catalysts

Based on the recent developments and news, the following catalysts have been identified that could impact the future stock performance of Daiichi Sankyo:

1. New Drug Approvals: Daiichi Sankyo has recently received approval for its drugs in different regions. For instance, VANFLYTA, a FLT3 inhibitor, has been approved in the U.S. and Japan specifically for patients with newly diagnosed FLT3-ITD Positive AML. This could potentially lead to increased revenues for the company, positively impacting the stock performance.
2. Progress in Research and Development: For example, their drug, Datopotamab deruxtecan (Dato-DXd), met dual primary endpoint of progression-free survival in patients with advanced non-small cell lung cancer in the TROPION-Lung01 Phase 3 trial. Positive results from clinical trials can often lead to increased investor confidence and a rise in stock prices.
3. Expansion in China: ENHERTU, another drug by Daiichi Sankyo, has been approved in China as the first HER2 directed therapy for patients with HER2 low metastatic breast cancer. This approval allows the company to tap into the large Chinese market, potentially leading to increased sales and a positive impact on the stock.
4. COVID-19 Vaccine Development: Daiichi Sankyo has initiated a Phase 3 clinical trial of its mutant strain COVID-19 vaccine (DS-5670) in Japan. If successful, this could significantly boost the company's revenues and positively impact its stock performance.
5. Corporate Changes: There have been recent changes in the company's corporate structure, including the stock transfer of DAIICHI SANKYO ESPHA CO., LTD. and appointments of new directors and audit & supervisory board members. These changes could potentially impact the company's strategic direction and stock performance.

However, it's important to note that while these developments have the potential to positively impact the company's stock performance, they also carry risks. For example delays or failures in drug development, changes in regulatory environments, or shifts in market dynamics may negatively impact the company's stock performance.

Risk

Investing in Daiichi Sankyo involves risks such as market risk, regulatory risk, and competition risk. The company's high valuation ratios also indicate a risk of overvaluation.

Investment Thesis

In conclusion, Daiichi Sankyo presents a mixed investment opportunity. The company has strong financial performance and operates in a growing industry. However, the company's high valuation ratios indicate that the stock may be overvalued. Investors should carefully consider these factors before making an investment decision.