Daiichi Sankyo Earnings: Results Beat on Strong Enhertu Sales, but Timing for Key Readouts Delayed

Narrow-moat Daiichi Sankyo 4568 reported strong first-quarter results, mostly due to better-than-expected sales in the U.S. of its flagship drug Enhertu. Operating profit margins were in line with expectations. However, the expected top-line readout for Destiny-Breast06, or DB06, has been delayed to the second half of fiscal 2023. We lower our fair value estimate to JPY 5,100 per share from JPY 5,200 to reflect small adjustments to our forecasts for Dato-DXd and Enhertu. We think the stock is attractive at current levels.

The expected top-line readout timeline for both DB06 (for Enhertu) and Tropion-Breast01 (for Dato-DXd) has been pushed back from the first half of fiscal 2023 to the second half of fiscal 2023 due to fewer events than expected in both trials. Although we do not think the delay in readout can be interpreted as a negative indicator for either trial’s outcome at this time, it may result in a later potential approval timeline. This in turn may slightly reduce any “early market entry” advantage that either drug may have. We believe DB06 is the most important near-term data readout for the stock, as positive data for Enhertu in HER2-low, chemo-naive breast cancer patients could substantially augment the drug’s existing approvals.

Despite an underwhelming top-line readout for Tropion-Lung01 in July, we continue to view Dato-DXd as having a reasonably high chance of approval in the second- and third-line setting for lung cancer, since the standard of care, docetaxel, sets a low bar. However, the prospective drug’s chances of approval in the much larger first-line setting seem low at this point in time, given the known safety issue of interstitial lung disease and the lack of evidence (so far) of groundbreaking efficacy in lung cancer.