Rating Action: Moody's affirms Daiichi Sankyo's A2 ratings; maintains stable outlook
Global Credit Research - 03 Aug 2020
Tokyo, August 03, 2020 -- Moody's Japan K.K. has affirmed Daiichi Sankyo Company, Limited's A2 issuer and senior unsecured ratings. The rating outlook remains stable.
The rating affirmation reflects (1) the strong progress Daiichi Sankyo has made in its antibody conjugate (ADC) projects for cancer treatments, (2) the likely revenue expansion over the next two to three years following the launch of its first ADC drug, Enhertu, and (3) the medium to long-term growth potential stemming from its promising product pipeline.
RATINGS RATIONALE
Daiichi Sankyo's A2 rating reflects its strong market position in Japan's (A1 stable) pharmaceutical industry. While its current revenue is concentrated in Japan, favorable progress in its oncology pipeline development, particularly in its ADC project, will enhance its business portfolio.
With the successful launch of the breast cancer drug Enhertu, Daiichi Sankyo has taken important steps in establishing its oncology franchise, while also improving its geographic diversification with its expansion in the US. Further, Daiichi Sankyo's collaboration with AstraZeneca PLC (A3 stable) in the development and commercialization of Enhertu and DS-1062 will accelerate its sales globally and provide funds for R&D. Successful launches of these drugs will make its product portfolio more innovative than its previous focus on cardiovascular and metabolism treatments.
Profit sharing on these ADC drugs with AstraZeneca will moderate the future upside in profit. Nevertheless, favorable test results to-date indicate Enhertu could drive revenue growth of as much as 10% annually in two to three years. In addition to breast cancer, Enhertu is undergoing clinical studies globally for applications also for lung, gastric and colorectal cancer. Further, other ADC projects in its early-stage pipeline could provide organic growth in the latter half of this decade and temper its need to make acquisitions. The company's balance sheet is very strong, with cash exceeding its debt. Moody's expects that positive free cash flow and cash will enable the company to reduce debt and further improve its already low leverage.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that Daiichi Sankyo's revenue will grow from ADC drugs and that debt will be retired as they mature. Moody's also expects collaboration with AstraZeneca will provide earnings growth for Daiichi Sankyo, although their profit sharing arrangement will cause profit growth to lag revenue growth.
An upgrade is unlikely in the next several years, given the company's low profitability due to its reliance on the low-margin Japan market and more concentrated portfolio of therapeutic categories and products relative to its global peers. Nevertheless, the rating could be upgraded over time if Daiichi Sankyo becomes more diversified in its product and geographic mix, as well as improves its profitability.
Moody's could downgrade the rating if the ADC drug launch and commercialization fall below expectations and leverage increases, for example, with debt/EBITDA rising above 2.5x on a sustained basis.
The principal methodology used in these ratings was Pharmaceutical Industry (Japanese) published in July 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_196413. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Tokyo, Daiichi Sankyo Company, Limited is a leading pharmaceuticals company in Japan.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Yukiko Asanuma Analyst Corporate Finance Group Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100 Mihoko Manabe Associate Managing Director Corporate Finance Group JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100 Releasing Office: Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100
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