2023-05-26 03:13:14 ET
Summary
- Daiichi Sankyo is leading the world in the development of antibody-drug conjugates, which are finally paying off in cancer after more than a decade of ups and downs.
- The company stands poised to continue to stretch its arms in the space and reap significant growth.
- Next up: possible tissue agnostic approval, and expansion of the HER2 franchise.
Investment Thesis
Daiichi Sankyo ( DSKYF ) (DSNKY) sits at a valuation of $65 billion at the time of writing this, and if their ventures pay off, they could yet have a lot of room to grow and become a juggernaut in the global cancer market. Valuations more befitting the titans like Merck, AstraZeneca, and Pfizer are not out of the question as the company pushes forward their antibody-drug conjugate platforms and expands them outward. Investors should be wary of the hype surrounding these drugs after unprecedented results, and keep in mind that further growth is going to depend on success using unproven targets, which I discuss below.
Introduction: An Ode to HER2
DSKYF is a global pharma company based out of Japan, and although they've been around in the public markets for almost 2 decades, it's only been in recent years that they've really arrived on the scene, driven in large part by the success of their first approved anti-HER2 therapy, trastuzumab deruxtecan (Enhertu).
Enhertu is a type of drug called an antibody-drug conjugate (abbreviated ADC), which ties a strong chemotherapeutic agent to an antibody that sticks to a molecule that is made by cancer cells. Once it binds to the molecule of interest, the cell will internalize it, and the processing of the protein causes the chemotherapy to be released.
In effect, ADCs are thought of in the oncology community as something akin to a smart bomb. Like with trastuzumab emtansine (Kadcyla), the first target for DSKYF was HER2, a very important target for breast cancer and other solid tumors.
Unlike with Kadcyla, Enhertu has shown massive potency and benefit for patients, even extending for the first time to patients with so-called " HER2-low " breast cancer, which famously led to a standing ovation at the 2022 ASCO Annual Meeting. This was the first time we were able to make good on the promise that these ADCs might also act as a sort of cluster bomb, targeting cells in the tumor's vicinity that do not express HER2, as the target cell is destroyed, releasing chemotherapy to other cells.
And this is just one notch in the belt of Enhertu. It's shown staggering benefit for patients with HER2-positive breast cancer, beating out Kadcyla handily. It was the first HER2 drug to be approved after trastuzumab (Herceptin) in HER2-positive esophagogastric cancers, after many, many failures of other HER2 therapies.
HER2 positive colorectal cancer? Looking good there , too (and watch out for data to come out of ASCO 2023 just next week on the follow-up story).
HER2-mutated lung cancer? DSKYF has this covered , as well, showing that Enhertu can make an impact on other kinds of "HER2-positive" disease, not just cancer that's making too much of it.
They're even making good ground with Enhertu in HER2-positive biliary tract cancers.
Also, keep an eye out for the late-breaking abstract covering the pan-tumor study at ASCO 2023. Likely this will be a newsworthy item once we see the data!
Long story short: Enhertu has been ripping through HER2-related cancers over the past 5 years, finally making good on the promise of this important target. And DSKYF is poised to continue making breakthroughs in the coming years. It's little wonder how this agent has been the primary driver of success for the company.
Where Are ADCs Headed Next?
In the mind of DSKYF, Enhertu only proves the principle of their technology. There's not much stopping you from tying the deruxtecan moiety to almost any antibody, in theory allowing you to target nearly any cell surface molecule with similar success. And that's where DSKYF has their sights set next. In this segment, I want to highlight 3 key targets of interest for their drug platforms.
1. HER3 : The entire HER family is made up of 4 molecules: EGFR, HER2, HER3, and HER4. Of these, HER2 is the main molecule that can be the "initiating event" for cancer, but HER3 can play a very powerful supporting role. There's an interesting cell biology explanation for this, but suffice it to say that HER2 and HER3 are kind of built for one another, and when cells make too much HER2, HER3 can help boost the signal even further.
More importantly, HER3 can help drive resistance to therapies that block signaling from HER family members, which is a big problem in EGFR-positive lung cancer and HER2-positive breast cancer.
Enter patritumab deruxtecan, and HER3 ADC built on the same platform as Enhertu. This has already demonstrated highly promising early clinical results in patients with relapsed EGFR -mutant non-small cell lung cancer, as well as advanced breast cancer. Most notably, the J101 breast cancer study included all 3 major groups of the disease: hormone-positive, HER2-positive, and triple-negative, with favorable response rates shown for each.
2. Trop2 : Stepping away from the HER family, DSKYF is also targeting the Trop2 molecule, mainly in lung cancer, using datopotamab deruxtecan. Phase 1 results look very promising for this one, and I'm looking forward to seeing the data update at ASCO 2023. The study to be presented is giving datopotamab deruxtecan with or without chemotherapy to patients with NSCLC. A phase 3 study, Tropion-Lung-07, focusing on first-line NSCLC, was initiated in January 2023.
3. B7-H3 : Another contender is this obscure molecule that's in the same family as the vaunted CTLA-4 and PD-1 molecules. This one is still in very early days, but there was a highly encouraging data readout at ESMO 2022 for DS7300, a B7-H3 ADC, in patients with small cell lung cancer, a particularly challenging thoracic cancer. Now, there is an ongoing phase 2 study focused specifically on small cells, which will give a clearer sign as to whether DS7300 has legs in this tumor space.
Financial Assessment
For 2022 , DSKYF reported $9.1 billion in revenue, with operating profit of $864 million. Their cash reserves fell from $4.7 billion to $3.2 billion in the same time. Growth in their revenues was largely attributed to Enhertu sales, with profits increasing 72.6% year over year.
The company projects that in 2023 product revenues will increase by 13.4%, with a 12.0% increase in operating profit. This seems entirely within bounds if they continue to innovate with Enhertu like they have in recent years.
Risks and Challenges
DSKYF has a bright future on the back of the Enhertu project alone. It's shown no signs of slowing down, somewhat similar to what we were seeing in the breakout days of immune checkpoint inhibitors back in 2014-2018 or so. Success after success...
...until the roadblocks started as the drugs advanced into more and more challenging spaces. And this is the likely path Enhertu will have to take as DSKYF continues to push the envelope. Will Enhertu eventually become first-line therapy for HER2-positive cancers? We're waiting to see, but time has taught me to not be overly optimistic when the data are not yet fully formed. Failure of any one trial could be a big stumbling block for further Enhertu growth.
Diversification of the pipeline remains a big question mark, as well. While HER3, Trop2, and B7-H3 are all interesting targets, at the end of the day today there is no approval, no randomized trial. These are expensive science projects costing DSKYF a lot to push forward, with only signals that there might be a product at the end of the day. The potential investor should keep this in mind, and any setback for HER3 or Trop2 could take the wind out of the company's sails (B7-H3 is still so early in my mind that a failure there wouldn't surprise anyone).
Conclusion
Daiichi Sankyo is a strong pharma company that does not get nearly the kind of financial press that it deserves. They maintain solid financials, with steadily growing revenues and increasing dividend payouts. They have a massive blockbuster in Enhertu that is showing no signs of slowing down. They have numerous other projects in the tank that have a lot of promise and could potentially end up being blockbusters in their own rights.
What would it take for me to buy this stock? I think it's reasonable to consider them undervalued today, if they're able to play out even half of what they're working on.
What would it take for me to sell? In this case, some kind of catastrophic news relating to toxicity or reversal of strong randomized data for Enhertu. I see neither of these as likely, since the toxicity and efficacy of the drug are very widely studied and scrutinized.
In conclusion, DSKYF is worthy of another look if you've not given it your time. They're poised to be a steady grower in the years to come.
For further details see:
Daiichi Sankyo: There Is A Lot Of Room To Grow