EUR 850.00 For Business Accounts Only

Morningstar | We're Slightly Increasing Our Chugai FVE Following Strong 2Q

We’re slightly increasing our Chugai fair value estimate to JPY 4,680 from JPY 4,560 following strong second-quarter results, as we've slightly lowered our assumed tax rate, partly countered by a steeper assumed long-term decline in Rituxan sales in Japan. We continue to see Chugai's economic moat as narrow, as the firm's novel pipeline and collaboration with Roche is partly countered by pricing and demographic headwinds in Japan. Chugai's internally developed immunology drug Actemra has boosted profitability through both direct sales in Japan and sales to overseas partner Roche; a similar arrangement for both Alecensa and Hemlibra is poised to further support Chugai's sales growth, even as older biologics face headwinds. Actemra's overseas revenue has been particularly strong in 2018, and if current levels are maintained, there would be more upside to our fair value estimate (however, sales to Roche are lumpy and come in the form of specific orders). Countering strong sales for Chugai's newer biologics is the entry of biosimilar versions of older biologic treatments into the Japan market in 2018; Nippon Kayaku's biosimilar version of Herceptin launched in the second quarter, albeit only in gastric cancer, but Novartis/ Kyowa Hakko Kirin launched their biosimilar Rituxan in Japan in the first quarter and are seeing solid uptake. Rituxan and Herceptin are also seeing additional pressure from price declines due to the return of the innovative drug premium (these drugs were protected from the regular, biennial price declines in Japan) effective at the start of April.

In the pipeline, we’re most focused on the potential of oncology drug Tecentriq and hemophilia drug Hemlibra, but label expansions for Gazyva (granted in July) and Perjeta (pending) could also significantly drive sales of these products in Japan. Tecentriq is now launched as a second-line treatment for NSCLC in Japan and was filed in first-line NSCLC in March. Tecentriq’s late-stage development also includes a phase 3 liver cancer study, and Chugai expects to file for approval of Tecentriq in kidney cancer and breast cancer later this year and SCLC in 2019; we expect Japan sales of Tecentriq to eventually reach $1 billion annually. Hemlibra is now approved in Japan for patients with inhibitors and was filed globally in the broader noninhibitor hemophilia A market in April; we assume global peak sales for Hemlibra north of $3 billion a year.

While Chugai's 8.3% top-line growth in the second quarter was a slight dip from the very high 18% growth in the first quarter, this was largely due to a one-time boost to other income in the first quarter, as fundamental product sales growth remains steady. Domestic sales fell slightly following Japan price revisions in April, which were particularly heavy on Rituxan and Herceptin, but Actemra exports to Roche grew above our expectations. We expect smaller orders from Roche for the remainder of the year, but if third-quarter sales continue to track favorably, there could be upside to our valuation.