Eisai's Regional Shift, Or Just Restructuring? Daiichi Sankyo's U.S. Ranbaxy Dip: Japanese Earnings Roundup (Part 2 of 2)

[Editor's note: This is part two of a two-part feature on Japanese pharma earnings; part one covered Dainippon Sumitomo Pharma Co. Ltd. and its failed pan-Asia trials and Mitsubishi Tanabe Pharma Corp.'s efforts to rebound from Japan's March 11 earthquake. This second part covers Eisai Co. Ltd. and Daiichi Sankyo Co. Ltd.]

[Editor's note: This is part two of a two-part feature on Japanese pharma earnings; (Also see "Dainippon Sumitomo's Pan-Asia Trial Problem; Mitsubishi Tanabe Tries To Rebound From Earthquake: Japanese Earnings Roundup (Part 1)" - Scrip, 20 May, 2011.) covered Dainippon Sumitomo Pharma Co. Ltd. and its failed pan-Asia trials and Mitsubishi Tanabe Pharma Corp.'s efforts to rebound from Japan's March 11 earthquake. This second part covers Eisai Co. Ltd. and Daiichi Sankyo Co. Ltd .]

TOKYO - Eisai CEO Haruo Naito drew criticism from analysts in the previous quarter for his announcement that the company will create regional strategies for Europe and East Asia instead of a localized approach, and the company showed no sign of backing down from the strategy in its May 13 full-year earnings call.

While some analysts told Naito that this strategy is merely a euphemism for restructuring and layoffs, Naito stressed during the presentation that the company is making a strategic shift from a country-by-country marketing approach to a regional model. The company is "not going to pursue size anymore, but we will shift to...value creation," Naito said.

Eisai has eliminated positions in the U.S. and EU in the past year. The company reduced its staff in the EU from 900 to 700. In the U.S., Eisai has reduced its headcount by 700, exceeding its previous announcement of 500 layoffs (Also see "Eisai Revises Global Sales Strategy; Slashes U.S. Staff, Finds Ways To Retain Chinese Workers" - Scrip, 10 Mar, 2011.).

"One Europe" Approach In EU Moves Away From Country Model

The company will try to shift its EU model from a country-by-country approach to a pan-European business it calls "One Europe," to be headquartered in the UK. Naito told investors that speedy reimbursement approvals will be the primary task of the new EU business, with a focus on how pricing strategy will impact reimbursement decisions. Eisai will work on health technology assessments out of its EU headquarters in Hatfield, UK, that can be applied for reimbursement throughout Europe.

Eisai's Japanese domestic market will now serve as the core country in the company's East Asia business, which includes South Korea, China, Taiwan and Hong Kong markets. Currently, the company is grappling with the best approach for tapping into China's rapid growth, which Naito said has "overwhelmed the company." Naito explained further the company's decision to issue a rapid expansion of its sales reps in China.

"We have already understood there is a limit to what we can achieve by this [expansion] model," Naito said.

Instead, the company will focus on the core institutions in China's major cities and rely on partners for other regions in China, even as it introduces its OTC, generics and diagnostic brands from Japan into the new market.

The company's sales strategy in China is affected largely by staff retention issues that plague all pharma with operations in China. According to Naito, the sales rep turnover rate is roughly 30%, which makes it difficult to train staff. Naito said the company will try to reduce turnover by "nurturing" staff carefully, which Eisai believes it can only do in smaller volume.

Analyst Concerns Over Regional Approach

Analysts expressed concern that the company's regional approach would not be able to respond to the intricacies of local markets. Local environments are also currently in flux as East Asian countries try to revise their healthcare systems. But Naito views the reforms as advantageous, because when governments in the region look for universal healthcare models, for example, "Japan is always the model."

In addition, officials from Japan's Ministry of Health, Labor and Welfare often visit neighboring countries to help their counterparts develop regulations and their influence benefits companies that are familiar with Japanese regulations. Naito is also optimistic that the regulatory agencies in East Asia will eventually implement a "mutual recognition system" to allow product approval across the markets.

In India, Eisai announced it will establish pain clinics to encourage the use of Aricept (donepezil) for Alzheimer's disease and depression patients. The idea is to draw in large numbers of patients for pain management and to identify patients that may not know they have other conditions indicated for Aricept.

Eisai Japan President Hideshi Honda said company sales in China slowed in the past year. The company's main products - including Aricept and Pariet (rabeprazole) were listed on China's national drug reimbursement list in 2010, but Honda said prescription volume did not grow as much as the company expected.

Although global Eisai sales decreased 4.3% to ¥768.9 billion year-on-year due to the global sales drop in its mainstays Aricept and Aciphex, operating profits increased 30.9% compared to FY2009 because of decreases in SG&A costs and a ¥34.1 billion decrease in R&D costs.

In FY 2011, Eisai expects a sales decrease of 9.0% due to the impact of the patent expiration of Aricept in the U.S. and will decrease to ¥187.5 billion globally in FY2011 from ¥290.4 billion. However, sales of the drug in the Japanese market will increase 8.1% to ¥114.0 billion despite its substance patent expiration in Japan.

Daiichi Sankyo And Ranbaxy In The U.S.

Daiichi Sankyo Co. Ltd.'s sales increased 1.6% to ¥967.3 billion on a consolidated basis compared to the previous year. The sales increase were attributable to good performances of its Indian subsidiary Ranbaxy, sales of its anti-hypertensive olmesartan products including Olmetec and Rezaltas (olmesartan/azelnidipine), anti-inflammatory and analgesic Loxonin (loxoprofen), and anti-influenza drug Inavir (laninamivir).

UBS analyst Shigeru Mishima said the company's U.S. sales are in flux, in part because of Eisai's authorized generic for Aricept, which launched sooner than expected. Eisai's authorized generic holds 67% of the donepezil generics market, according to Eisai. But Ranbaxy also benefited from no authorized generic competition for its Valtrex (valacyclovir) generic. Mishima expects Ranbaxy's U.S. sales will fall 20% in FY2011.

The sales environment looks better for Daiichi Sankyo in Japan, thanks to deals with AstraZeneca PLC. Last October the companies signed a co-promotion deal for proton pump inhibitor Nexium (esomeprazole). The drug is expected to hit the market in FY2011, and despite competition from recent generics of rabeprazole and lansoprazole, Daiichi Sankyo expects to carve a share of Japan's ¥200 billion PPI market, which is growing 20% annually (Also see "Daiichi Sankyo To Revamp Prasugrel's U.S. Marketing After Sluggish Sales" - Scrip, 3 Nov, 2010.).

The two companies also announced a deal May 24 to co-promote denosumab in Japan for metastasis-related bone disorders. The companies did not disclose financial details. Daiichi Sankyo obtained rights for denosumab from Amgen Inc. in 2007. The compound holds promise for additional indications. Amgen reported this month that denosumab can delay time to symptomatic bone metastases, according to a post hoc analysis in Phase III of prostate cancer patients.

- Ro Midorikawa ([email protected]) and Daniel Poppy ([email protected])