Daiichi Sankyo Company, Limited (Daiichi), founded in 2005 and based out of Japan, is a global healthcare company with a focus on creating new modalities and innovative medicines for people with cancer, cardiovascular, and other diseases with high unmet medical needs. The company, with over 18,700 employees, derives revenue through six business units - Japan Business (29% of 1HFY24 sales mix); Daiichi Sankyo Healthcare (5%); Oncology Business (26%); American Regent (13%); EU Specialty Business (15%); and ASCA (Asia, South and Central America) Business (12%).
Guidance upgrade on the back of sales momentum
The company has made good strides in its current 5-year business plan (FY21-25). In particular, the Group’s Oncology business unit, which was launched in FY20 (year ended March 2021), has come a long way in delivering sales of JPY215.5bn in 1HFY24. Much of the heavy lifting has been done by the unit’s main product, Enhertu®, an anti-cancer agent, launched through a strategic alliance with AstraZeneca in 2020. The product’s global revenues surged by over 10x to JPY449.2bn in FY23 (year ended March 2024), compared to JPY43.5bn in FY20. This was achieved on the back of market penetration in key regions, as well as expansion into new markets. Daiichi further initiated collaboration with Merck in the U.S. on digital pathology for HER3-DXd, I-DXd, and R-DXd, tracking rapidly growing demand for DXd ADCs. Accordingly, the company has planned to increase the capex allocation by JPY300bn to JPY800bn over the period FY21-25, thereby, strengthening its production infrastructure.
Due to positive fundamental trajectory and product demand, the company revised and upgrade its FY24 guidance. The revenue is now expected to be JPY1,830bn, reflecting an increase of over JPY80bn over the previous forecasts. The guidance upgrade reflects the solid sales of global products including Lixiana and Enhertu, as well as positive foreign exchange impact. Consequently, the operating profit has been revised 21.7% upward to JPY280bn (from earlier JPY230bn), and the net profit has been revised upward by JPY35bn and is now expected at JPY225bn.
Higher dividends on the back of positive fundamentals
Daiichi demonstrated a positive financial trajectory over the longer time frame, increasing its revenues at a CAGR of 11.5% over FY18-FY23, to reach JPY1.6tn. The operating profit performance fared better during the same time, growing at a CAGR of 20.3% to JPY211bn, aided by margin expansion of 420 basis points (bps). At the same time, its peers Astellas Pharma Inc. (Astellas) and Takeda Pharmaceutical (Takeda) witnessed revenue CAGR of 4.2% and 15.3% respectively. However, Daiichi registered strong operating income performance compared to its peers, Astellas and Takeda, which witnessed margin contraction of 1385 bps and 404 bps to reach 7.8% and 11.6% respectively, in FY23.
The company delivered strong results in 1HFY24, reporting 21.5% year-on-year (YoY) growth in revenues to JPY882.7bn. The growth was achieved on the back of increased sales from global mainstay products such as Enhertu and Lixiana from the Oncology business and EU Specialty Business, respectively. The revenue was also complemented by the positive effect of foreign exchange movement owing to the depreciation of the Japanese Yen. Core operating profit increased 74.8% YoY to JPY166.6bn, whereas operating profit surged 96.6% to JPY186.9bn, aided by an improvement in the gross margin performance and offset by a rise in SG&A expenses owing to an increase in the profit share of gross profit with AstraZeneca related to Enhertu. Consequently, the net profit increased 51.2% YoY to JPY146.7bn.
Bolstered by its solid results and with a higher probability of achieving the major financial targets in FY25, the management has announced its intention to pay a dividend per share of JPY60 (yield of 1.4%) in FY24, reflecting an increase of JPY10 from FY23. Accordingly, the company has announced an interim dividend of JPY30 per share payable on December 10, 2024. Additionally, Daiichi has decided to buy back 55mn shares for a total acquisition amount of JPY200bn from April 26, 2024, to January 15, 2025.
Analyst's upbeat on encouraging outlook
Daiichi is currently trading at a higher P/E valuation of 37x (based on the estimated FY24 EPS of JPY119), compared to its global peer average P/E of 32.5x. However, it is trading in sync along with its local peer, Astellas at 35.5x, but much lower compared to Takeda at 56.1x. The stock’s one year and YTD returns stand at 12.4%. Most of the 18 analysts covering the company appear to be bullish on the stock, with 11 of them giving a ‘Buy’ rating and 5 suggesting an 'Outperform' rating with an average target price of JPY 6,333, suggesting a significant upside potential of 45.5% from the current levels.
In conclusion, analysts appear to be optimistic about the company’s prospects going forward, driven by the robust growth of sales of key products, and aided by strategic partnerships and collaborations. Moreover, the management’s focus on rewarding the shareholders through dividends and buybacks makes the stock an interesting proposition for investors with a long-term view. However, the Group’s collaborative efforts with other partners give rise to operational risks. The company is also exposed to the regulatory risk of approval rejection on its drug discovery process, impacting revenues and profitability. Despite the presence of inherent risks, Daiichi appears to be well poised to deliver on its guidance, backed by favorable demand tailwinds for DXd ADC products.
