01 September 2016 Asia Pacific/Japan Equity Research Specialty Pharmaceuticals (Pharmaceuticals (Japan)) / MARKET WEIGHT
Nippon Shinyaku (4516 / 4516 JP) Rating OUTPERFORM* Price (31 Aug 16, ¥) 4,795 INITIATION
Target price (¥) 6,300¹ Chg to TP (%) 31.4 Early entry into niche indications paying off Market cap. (¥ bn) 323.65 (US$ 3.13) Enterprise value (¥ bn) 302.35 ■ Initiating coverage at OUTPERFORM with target price of ¥6,300 Number of shares (mn) 67.50 Free float (%) 55.0 (potential return 31%): We expect Nippon Shinyaku to be the next 52-week price range 5,960 - 3,760 Japanese pharmaceutical company to benefit from the global launch of
*Stock ratings are relative to the coverage universe in each Uptravi (selexipag), an internally-discovered drug of blockbuster calibre; and analyst's or each team's respective sector. a strong partnership. The company shifted focus to niche indications almost ¹Target price is for 12 months. a decade ago, and this strategy is on its way to paying off, in our view. Research Analysts ■ Uptravi (selexipag) the biggest driver: Selexipag was originally Yen Ting Chen, PhD 81 3 4550 9936 discovered by Nippon Shinyaku and ex-Japan rights licensed to Actelion. In [email protected] January 2016, selexipag was launched in the US market for pulmonary Fumiyoshi Sakai arterial hypertension (PAH) followed by Germany in June. We forecast peak 81 3 4550 9737 sales of $1.65bn globally, with ¥17.5bn in Japan for the PAH market. With [email protected] additional revenue from royalties and manufacturing, we expect total revenue from selexipag to reach ¥39bn for Nippon Shinyaku in FY3/21. ■ NS-065, possibly an underdog in DMD treatment: Drugs for Duchenne's muscular dystrophy (DMD) are having difficulty gaining approval by the FDA, but with strong interest in this drug class and lack of competition in Japan, we believe easier domestic approval may be possible. A best-case scenario of approval in both countries could lead to additional 8% increase in revenues in FY3/21. ■ Valuation: Our ¥6,300 target price is based on DCF using a 5.1% WACC (risk-free rate 0%, ERP 6.75%, beta 0.77, cost of debt 3%) and 0% terminal growth rate. Risks to our assumption include weak global penetration of selexipag, faster-than-expected generics erosion in Japan, pricing, and setbacks in clinical development. Key catalysts for the upcoming year are quarterly progress of selexipag sales by Actelion, Japan approval and price listing of selexipag in 3Q and 4Q, respectively.
Share price performance Financial and valuation metrics
Year 3/16A 3/17E 3/18E 3/19E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 84.2 95.6 97.6 104.5 6000 180 Operating profit (¥ bn) 8.5 13.5 12.3 17.7 5000 Recurring profit (¥ bn) 9.0 13.8 12.6 18.0 4000 130 Net income (¥ bn) 6.3 9.6 8.8 12.6 3000 EPS (¥) 94.1 142.5 130.6 187.0 2000 80 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 143.6 178.8 242.6 The price relative chart measures performance against the EPS growth (%) 7.8 51.4 -8.3 43.2 TOPIX which closed at 1329.54 on 29/08/16 P/E (x) 46.8 33.7 36.7 25.6 On 29/08/16 the spot exchange rate was ¥103.34/US$1 Dividend yield (%) 0.64 0.73 0.73 0.96 EV/EBITDA(x) 25.1 18.6 19.8 14.2 Performance over 1M 3M 12M P/B (x) 3.0 3.0 2.9 2.6 Absolute (%) -14.5 -17.8 12.3 ROE(%) 6.5 9.3 8.0 10.7 Relative (%) -16.8 -17.2 21.6 Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.
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01 September 2016 Table of contents
Key charts 3 Investment thesis 4 Early strategic shift to rare and niche indications 6 Selexipag the largest growth driver 8 Pipeline features two other products to drive growth after FY3/19 launch 11 Valuation 14 Risks 16 Earnings forecasts 17 HOLT analysis 22 Appendix: Brief background on pulmonary arterial hypertension (PAH) 23
Nippon Shinyaku (4516 / 4516 JP) 2 01 September 2016
Key charts
Figure 1: We forecast Nippon Shinyaku's revenues to Figure 2: We forecast selexipag to contribute ¥39bn to grow to ¥125bn by FY3/21 revenues by FY3/21 Revenue (¥ Bn) CAGR 150 (%, FY3/16A-FY3/21E) Revenue (¥ Bn) 50 125.3 Total 8.2% 114.2 39.6 120 14.7 104.5 Functional food 1.2% 40 95.6 97.6 14.5 0.7 84.2 14.3 9.5 90 76.5 80.0 13.9 14.1 28.6 13.7 30 13.2 13.7 60 19.8 7.0 11.7 110.6 Pharmaceuticals 9.4% 99.7 90.2 20 81.7 83.5 70.5 11.5 5.1 8.6 30 63.3 66.3 11.0 5.2 10 3.1 17.7 6.0 2.6 13.0 0 9.5 4.9 5.8 FY3/14A FY3/15A FY3/16A FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E 0 FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E Additional indications (Japan) API manufacturing PAH (Japan) Milestone & royalties
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 3: Nippon Shinyaku pipeline Figure 4: Key events in FY3/17–18 Launch Peak sales Product Indication Market Status year (¥ mn) Product Event FY3/17 Q3 Japan approval Pulmonary arterial hypertension Japan Filed 2016 17,300 Selexipag FY3/17 Q4 Price listing Chronic thromboembolic pulmonary selexipag Japan Phase 3 2020 2,400 hypertension (CTEPH) FY3/17 Q4 ASH conference Atherosclerosis obliterans (ASO) Japan Phase 2 2021 2,700 Presentation of GOYA and Obinutuzumab GALLIUM results GA101 Indolent Non-Hodgkin's lymphoma Japan Phase 3 2018 3,900 FY3/18 Q2 Japan filing Japan Phase 1/2 2018 4,900 NS-065 Duchenne's muscular dystrophy FY3/17 Q4 ASH conference US Phase 2 2019 9,000 NS-018 Presentation of Phase 1/2 study results NS-018 Myelofibrosis US Phase 1/2 2020 1,500 NS-065 FY3/18 Q3 Trial completion Prulifloxacin Bacterial infections China Filed 2016 -
NS-580 Endometriosis Japan Phase 1 - - ASH: American Hematology Society
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 5: Nippon Shinyaku has the second highest Figure 6: P/E of 44x (based on FY3/17 EPS) is historically forward three-year EPS CAGR (26%) after Ono in line with top performing peers
＝ Forward P/E ratio 60 Avg 3-yr EPS CAGR 2.8% P/E trend of Nippon Shinyaku & top performers (x) P/E ratio (x) Eisai 160 50 140 Takeda 40 120 Nippon Shinyaku 100 Otsuka HD 30 80 Arithmetic mean P/E=23.6
20 60 Shionogi Ono 40
10 20 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Nippon Shinyaku Ono Kyowa Hakko Kirin Chugai 0 -20% -10% 0% 10% 20% 30% 40% 50% EPS 3-yr CAGR Source: Company data, I/B/E/S, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Nippon Shinyaku (4516 / 4516 JP) 3 01 September 2016
Investment thesis Early strategic shift to rare and niche indications In the challenging Japanese pharmaceutical industry facing new price containment measures and government-supported generics penetration, Nippon Shinyaku took a unique strategy for a Japanese company by shifting focus to rare and niche indications. Through a series of in-licensing deals, it has essentially revamped its product portfolio and fended off generic erosion. Furthermore, we expect the company's key assets, selexipag for pulmonary arterial hypertension (PAH) and NS-065 to be key growth drivers in the near and medium term. Selexipag key growth driver, contributing 32% of revenues in FY3/21 Pulmonary arterial hypertension (PAH) is a rare disorder with a poor prognosis. It involves high blood pressure in the arteries that carry blood from the heart to lungs, which reduces the patient's ability to perform physical activities, and can lead to heart failure We expect selexipag to contribute ¥39bn in annual revenues for Nippon Shinyaku in FY3/21 in three ways: (1) commercialization in the Japanese market for PAH, (2) royalty payments based on global sales from their partner, Actelion, a Swiss company and one of the global leaders in PAH therapy, and (3) manufacturing of the selexipag active pharmaceutical ingredient (API) for Actelion. With robust data from a large phase 3 clinical study, and convenient twice-per-day dosing, we believe selexipag has blockbuster potential (drugs that can achieve over annual sales of $1bn US), with peak sales forecast of $1.65bn globally, with ¥17.5bn in Japan. Pipeline features two other products to drive growth after FY3/19 launch We identify NS-065 and obinutuzumab as the next drugs in the pipeline to contribute to Nippon Shinyaku's revenues NS-065: This drug is an exon-skipping antisense oligonucleotide for Duchenne's muscular dystrophy (DMD). It is the riskier project of the two, due to competitors' difficulty to receive FDA approval recently. However we are optimistic on Japan approval and forecast ¥5.1bn revenues by FY3/21 risk adjusted by 51% in Japan and 24% in the US markets. Our view is based on strong national interest in this class of drugs in Japan and the Sakigake designation which enables collaboration with regulators. As for the US market, we believe the FDA will constructively engage with Nippon Shinyaku for the best development strategy to facilitate approval for the drug for this disease with high unmet need. Obinutuzumab: This drug is a monoclonal antibody in development with Chugai Pharmaceuticals (4519) for two types of non-Hodgkin's lymphoma (NHL). Roche recently announced positive results from one of the global phase 3 trials which we believe will improve likelihood of approval in Japan. Earnings forecasts
■ We assume 15% royalties from ex-Japan sales for selexipag, and our market uptake trend is based on past examples of PAH drugs. Owing to the increasing share of company revenues from selexipag royalties and sales of high margin orphan drugs, we forecast an increase in gross margin from 48% in FY3/16 to 60% in FY3/21.
■ In FY3/17, we also expect additional revenue from ¥2.4bn in milestone payments for European approval of selexipag, and ¥6bn in API manufacturing which also includes revenue from selexipag inventory overstock. In FY3/18, we forecast a 2% increase in revenues but a 8% fall in OP mainly due to completion of milestone payments.
■ We expect key products to lose patent protection such as Cialis in FY3/17 and Adcirca in FY3/20, and this is already accounted for in our forecasts. Biannual price adjustments are also incorporated into our models assuming current intervals.
Nippon Shinyaku (4516 / 4516 JP) 4 01 September 2016
Valuation Our ¥6,300 target price is based on a DCF model and assumes a 5.1% discount rate and 0% terminal growth rate. Our target price implies P/E of 44x FY3/17E EPS and 48x FY3/18E EPS, which is in line with Nippon Shinyaku's average historical P/E of 47x over the last two years. Due to improved margins from royalties and sales from high-margin sales in Japan, we forecast an EPS CAGR of 26% over the next three years, which is the second largest growth (after Ono) expected among Japanese pharma companies, and doubling of ROE from 6.7% to 16.0%.
Figure 7: Valuation chart of Nippon Shinyaku and global and local peers Price Mkt Cap Mkt Cap P/E 3-YR EPS EV/EBITDA Dividend Ticker Company Currency Close Target CS Rating (¥mn) (US$mn) FY3/17E FY3/18E FY3/19E CAGR FY3/17E FY3/18E FY3/19E Yield Japan Simple Median 32.6 29.8 25.3 3.6% 14.9 13.5 14.0 1.7% 4516 Nippon Shinyaku JPY 4,795 6,300 O 323,650 3,137 33.7 36.7 25.6 25.7% 18.6 19.8 14.2 0.6% 4519 Chugai Pharmaceutical JPY 3,245 4,400 O 1,772,460 17,178 31.6 26.8 24.9 5.1% 17.6 15.2 13.9 1.7% 4523 Eisai JPY 6,030 5,900 N 1,724,882 16,717 51.4 54.7 58.4 -18.7% 19.8 21.2 22.4 2.5% 4528 Ono Pharmaceutical JPY 2,697 4,000 O 1,429,483 13,854 17.5 16.9 20.7 40.3% 12.2 11.8 14.3 1.7% 4151 Kyowa Hakko Kirin JPY 1,468 2,200 O 803,326 7,786 38.3 32.8 27.7 -0.9% 11.1 10.3 9.5 1.7% 4521 KAKEN PHARM JPY 5,840 N/R N/R 282,888 2,742 10.9 10.1 10.8 2.0% 7.0 6.3 6.5 2.5% US Simple Median 7.7 328.6 30.5 11.5% 3.8 5.7 56.1 0.0% BMRN BioMarin Pharmaceuticals, Inc. USD 95 111 O 1,673,142 16,216 - 648.3 51.4 - - - 104.2 0.0% ALNY Alnylam Pharmaceuticals, Inc. USD 71 145 O 625,789 6,065 - - - 23.2% - - - 0.0% UTHR United Therapeutics Corp. USD 122 N/R N/R 546,767 5,299 7.7 8.9 9.6 -0.2% 3.8 5.7 8.1 0.0% RARE UltraGenyx Pharmaceutical, Inc USD 67 N/R N/R 271,848 2,635 ------0.0% SRPT Sarepta Therapeutics, Inc. USD 27 N/R N/R 134,479 1,303 ------EU Simple Median 26.2 21.2 17.7 15.0% 19.1 14.1 11.0 0.7% ATLN Actelion CHF 166 N/R N/R 1,877,821 18,199 21.6 21.2 17.7 15.0% 19.1 18.8 15.7 1.0% BTG BTG GBp 610 N/R N/R 317,307 3,075 26.2 19.6 15.1 23.4% 19.1 14.1 11.0 0.0% ALK-B ALK-Abello DKK 925 N/R N/R 131,594 1,275 30.1 28.7 22.7 5.2% 13.5 12.0 10.1 0.7% ROW 61.0 50.1 33.1 6.5% 38.2 26.5 19.2 0.0% 128940 Hanmi Pharm KRW 594,000 N/R N/R 574,211 5,565 Missing61.0 a mandatory50.1 parameter.33.1 You6.5% must specify38.2 an item26.5 or a formula19.2 0.0% Notes: O=OUTPERFORM, N=NEUTRAL, N/R=Not Rated; data as of 31 August 2016 Source: Company data, I/B/E/S, Credit Suisse estimates
Nippon Shinyaku (4516 / 4516 JP) 5 01 September 2016
Early strategic shift to rare and niche indications Nippon Shinyaku is a mid-sized pharmaceutical company based in Kyoto and originally founded in 1911 as Kyoto Shinyakudo. The company changed its name to Nippon Shinyaku in 1919 and has been listed since 1949. It is the 26th largest Japanese pharmaceutical company with total revenues of ¥84.2bn in FY3/16 (with a CAGR of 6% since FY3/13) and OP of ¥8.5bn. Like most other mid-sized Japanese pharmaceutical companies, most of Nippon Shinyaku's business is in the Japanese market. In addition to pharmaceuticals, the company also has a functional food segment where it is involved in the manufacturing of ingredients and additives which contribute to 16% of revenues and 2% of OP, respectively, in FY3/16.
Figure 8: We forecast Nippon Shinyaku's revenues to grow to ¥125bn by FY3/21
Revenue (¥ Bn) CAGR 150 (%, FY3/16A-FY3/21E) 125.3 Total 8.2% 114.2 120 104.5 14.7 Functional food 1.2% 95.6 97.6 14.5 84.2 14.3 90 76.5 80.0 13.9 14.1 13.7 13.2 13.7 60 110.6 Pharmaceuticals 9.4% 99.7 90.2 81.7 83.5 70.5 30 63.3 66.3
0 FY3/14A FY3/15A FY3/16A FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E Source: Company data, Credit Suisse estimates Current pharma portfolio built through series of in-licensing activities and focus on rare and niche diseases The pharmaceuticals business includes around 40 products in the portfolio and is focused in five therapeutic areas: hematological cancer, urology, rare diseases, gynecology, and otorhinolaryngology (ear, nose, and throat). Its portfolio also includes 15% of revenues from branded products without patent protection and two generic drugs, imatinib and olopatadine for oncology and allergy, respectively. Its top 10 drugs by FY3/16 sales are dominated by oncology and urology, and also feature products for pain and gastrointestinal disorders. Interestingly, of these top 10 products, seven are in-licensed. We view this as a good balance of in-house R&D and strong record of business development activities to maximize the company's limited R&D budget. Nippon Shinyaku also has deals with several commercial partners to maximize sales potential such as Pfizer for co-promotion activities for Tramal/Onetram.
Nippon Shinyaku (4516 / 4516 JP) 6 01 September 2016
Figure 9: Nippon Shinyaku's top 10 drugs span seven therapeutic areas of which only three are of in-house origin First Launch Rank Product Generic Name Indication Therapeutic area Origin FY3/16 sales (¥ bn) (Japan) Myelodysplastic 1 Vidaza azacitidine Oncology In-licensed 3/11/2011 12.4 syndrome ethinyl estradiol; 2 Lunabell Dysmenorrhea Gynecology In-licensed 7/1/2008 6.7 norethindrone Urinary disorder caused 3 Zalutia tadalafil Urology In-licensed 4/17/2014 5.6 by BPH tramadol Cancer and chronic 4 Tramal Pain In-licensed 9/17/2010 4.3 hydrochloride pain
5 Eviprostat herbal extract Prostatic hypertrophy Urology Internal 4/20/1967 4.2
Pulmonary arterial 6 Adcirca tadalafil Cardiovascular In-licensed 12/11/2009 3.5 hypertension
7 Cialis tadalafil Erectile dysfunction Urology In-licensed 9/12/2007 3.5
irsogladine 8 Gaslon N Gastric ulcer; gastricitis Gastrointestinal Internal 4/4/1989 3.0 maleate azulene sulfonate 9 Azunol Gargle Pharyngitis, tonsilitis Otolaryngology Internal 8/19/2002 2.5 sodium dexamethasone 10 Erizas Allergic rhinitis Otolaryngology In-licensed 12/11/2009 2.3 cipecilate Source: Company data, EvaluatePharma, Credit Suisse Urology has traditionally been the company's strengths and continues to be so, and the last new launches in recent years have featured drugs for indications with limited treatment options such as pulmonary arterial hypertension (PAH), myelodysplastic syndrome (MS), and alcohol addiction. Within primary care settings, most of the recent launches emphasize on unique mechanisms to treat the particular disease. For example, urinary incontinence due to benign prostate hyperplasia (BPH) is a disorder with multiple treatment options such as Astellas' Harnal and Kissei's Urief. However, Nippon Shinyaku's Zalutia, which features the same ingredient as the ED drug, Cialis, works through a different pathway and thus offering different treatment options for patients.
Figure 10: Recent marketed products have features such as new mechanisms and formulations Deal date Product Indication Mechanism Description
Jun-15 Onetram Cancer and chronic pain Opioid agonist First controlled release tramadol pill approved in Japan
Apr-14 Zalutia Urinary disorder caused by BPH PDE5 inhibitor First PDE-5 inhibitor approved for this indication Gamma-aminobutyric acid First drug for this indication in 30 years with a new May-13 Regtect Alcohol addiction receptor agonist mechanism of action DNA methyltransferase Only drug shown to extend overall survival for this Mar-11 Vidaza Myelodysplastic syndrome inhibitor indication Target patients that cannot be effectively managed by Sep-10 Tramal Mild to moderate cancer pain Opioid agonist other non-narcotic analgesics First once daily dry powder type steroid nasal spray in Dec-09 Erizas Allergic rhinitis Corticosteroid Japan Dec-09 Adcirca Pulmonary arterial hypertension PDE5 inhibitor Second PDE5 inhibitor approved for this indication
Source: Company data, Credit Suisse
Nippon Shinyaku (4516 / 4516 JP) 7 01 September 2016
Selexipag the largest growth driver Top-line potential of ¥39bn by FY3/21 We expect selexipag to contribute ¥39bn in annual revenues to Nippon Shinyaku by FY3/21 in three ways: (1) commercialization in the Japanese market for PAH, (2) royalty payments based on global sales from Actelion, and (3) manufacturing of the selexipag active pharmaceutical ingredient (API) for Actelion. The drug is also under development for additional indications, but the larger financial impact will not be seen until after FY3/21. Nippon Shinyaku originally synthesized and discovered the compound through its internal R&D program and partnered with Actelion for development. In April 2008, the two companies signed an agreement where Actelion would be responsible for development and commercialization of selexipag outside of Japan, while both companies would jointly develop the drug in Japan, with Actelion supporting co-promotion activities. In December 2015 and May 2016, selexipag was approved for marketing in the US and EU, respectively, and in January 2016, launched in the US by Actelion, followed by Germany in June. Selexipag is also approved in Canada, Australia, and New Zealand, and filed in South Korea, Taiwan, Turkey and Switzerland. In Japan, selexipag was filed by Nippon Shinyaku in January 2016 and with orphan designation granted by the Ministry of Health Labor and Welfare (MHLW), we expect approval within this calendar year. Our peak sales forecast for selexipag is $1.65bn globally, of which $0.9bn (55%) is from the US market and ¥17.5bn in Japan. Nippon Shinyaku is scheduled to receive royalties in the mid-teens from Actelion, which we estimate as 15% in our forecasts.
Figure 11: Selexipag revenues for Nippon Shinyaku Figure 12: Selexipag sales trend in the global PAH market
Revenue (¥ Bn) Revenue ($ mn) 50 1,400 1,261 39.6 1,200 114 40 0.7 927 28.6 9.5 1,000 30 83 447 800 19.8 7.0 11.7 666 20 50 323 11.5 5.1 8.6 600 11.0 403 5.2 231 10 3.1 17.7 400 25 6.0 2.6 13.0 701 9.5 165 135 4.9 5.8 520 0 200 384 301 243 FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E 134 0 Additional indications (Japan) API manufacturing FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E PAH (Japan) Milestone & royalties JPN ex-US US Source: Company data, Credit Suisse Source: Company data, Credit Suisse How selexipag differentiates from competitors Pulmonary arterial hypertension (PAH) is a rare disorder involving high blood pressure in the arteries that carry blood from the heart to lungs, which leads to increased resistance to blood flow. The disease leads to lower levels of oxygen in the blood stream, leading to reduced ability to perform physical activities, and puts greater strain onto the heart, leading to heart failure (see Appendix A for a brief description of PAH). Several drugs for PAH have been approved over the last decade and largely target three pathways: (1) endothelin receptor antagonism, (2) increasing sensitivity to nitric oxide, and
(3) prostacyclin (PGI2) receptor agonism. Some of the issues regarding current agents targeting the prostacyclin receptor, are that they have high patient burden due to use of IV (intravenous) infusion or inhalation, and current oral prostanoids (prostacyclin and its analogs) have mixed clinical efficacy data.
Nippon Shinyaku (4516 / 4516 JP) 8 01 September 2016
Selexipag is a new therapeutic agent approved for PAH patients with WHO functional class II-III, or patients with medium level severity of disease. It is expected to act on the prostacyclin receptor pathway, but unlike other drugs in the class, selexipag is a selective non-prostanoid IP receptor agonist, meaning it is structurally distinct from prostacyclin and its analogs, and is highly selective for the IP receptor, one of the five prostacyclin receptors. Selexipag is also a prodrug, meaning that the compound breaks down rapidly once taken, to produce the active metabolite with the desired medical effect. Although it may appear that selexipag is entering a niche market, the high expectation of this drug is based on three factors due to robust clinical data and its unique chemical structure: (1) Evidence of efficacy: Selexipag is supported by the GRIPHON study, the largest clinical study ever for PAH, which involved 1,156 patients treated for up to 4.2 years and measured the time to a morbidity/mortality event. A morbidity/mortality event is defined as disease progression, hospitalization, or all-cause death. The trial results showed that selexipag was able to reduce risk of these events by 40%. (2) Potential to use in combination with other PAH drugs: Also based on the GRIPHON study, selexipag was shown to be effective when administered with other PAH drugs (ERA, PDE5 inhibitors, or both). (3) Ease of use: Due to its unique chemical structure, selexipag is stable, can be taken orally, and has a much longer half-life compared to prostanoids, which are delivered intravenously or inhaled. In Japan, there is one oral prostanoid, beraprost (sold by various companies such as Astellas), but it has a short half-life, requires several doses per day, and is in a lower recommendation category according to guidelines due to limited evidence available. Additional evidence and switch from inhalables provide further upside Additional studies on PAH: Selexipag is currently studied in additional clinical trials to further establish its position in PAH therapy and increasing market share. It is currently in studies through evidence on the effect of combination therapy with other oral PAH drugs, and long term safety. Effects of switching from inhaled prostanoids, are also being studied which may increase the patient population eligible for selexipag use.
Figure 13: Additional clinical studies for selexipag in pulmonary hypertension NCT Number Start date Completion Date Trial name Phase Size Study design Objective Compare efficacy and safety of initial triple oral treatment Multi-center, (macicentan, tadalafil, selexipag) vs initial dual oral treatment NCT02558231 Jan-16 Dec-18 TRITON 3 144 randomized, double- (macicentan, tadalafil, placebo) in newly diagnosed, treatment blind, placebo-controlled naïve PAH patients Investigate safety and tolerability of selexipag in patients Multicenter, open-label, NCT02471183 Jul-15 Mar-17 TRANSIT-1 3 30 transitioning from inhaled treprostinil and effects of selexipag single group on PAH severity and exercise ability before/after transition
Multi-center, open-lable, Evaluate long-term safety and tolerability of selexipag in PAH NCT01112306 Dec-09 Feb-21 - 3 670 single group patients who participated in the GRIPHON study
Source: Clinicaltrials.gov, Credit Suisse Additional indications: Nippon Shinyaku is currently developing selexipag for two additional indications: (1) chronic thromboembolic pulmonary hypertension (CTEPH) and (2) intermittent claudication due to atherosclerosis obliterans (ASO). Phase 3 study for chronic thromboembolic pulmonary hypertension (CTEPH) just began in June 2016, and is in collaboration with Actelion. Currently, Bayer's Adempas (riociguat) is the only approved drug for CTEPH in Japan, thus the market may present an attractive opportunity for selexipag. Phase 2 trial for intermittent claudication due to atherosclerosis obliterans was completed in 2015.
Nippon Shinyaku (4516 / 4516 JP) 9 01 September 2016
Figure 14: Japanese trials for additional indications for selexipag
NCT Number Start date Completion Date Partner Phase Size Study design Objective
Randomized, double- JapicCTI-163279 Jun-16 Apr-22 Actelion 3 72 Evaluate the efficacy and safety of selexipag in CTEPH patients blind, placebo-controlled
Multi-center, Dose finding study of selexipag in patients with intermittent JapicCTI-132141 May-13 Mar-15 None 2 100 randomized, double- claudication due to atherosclerosis obliterans blind, placebo-controlled Source: Company data, Credit Suisse Little competitive threat in the short term, but keeping an eye on ralinepag Currently, there are few other options for oral prostanoids. Orenitram (oral trepostinil) is marketed in the US, while in Japan, belaprost (Careload LA/Berasus LA) is also indicated for PAH, but these drugs are not backed by strong clinical evidence. Phase 3 trials of Orenitram were mixed and showed no additional benefit when used in combination with other oral PAH drugs. Use of Orenitram is also complicated, since it requires titration, where the patient starts with a smaller dose and slowly work their way to the most tolerable size. Beraprost in itself has a short half-life of 35–40 minutes which was addressed by a long acting formulation. Studies have found that the benefits of the drug start to lose effect after nine months and thus beraprost has a lower recommendation level according to guidelines. Arena Pharmaceuticals is developing ralinepag which is a non-prostanoid IP receptor agonist similar to selexipag which we view as the largest potential threat to the selexipag franchise, especially if partnered with a formidable competitor. Interestingly, this drug is not using the prodrug approach seen in selexipag. Ralinepag boasts longer half-life than selexipag (25 hours vs. eight hours) and is currently in Phase 2 trials. Top-line data from this study is expected in 2Q 2017. Even if this comes with positive results, we expect that Phase 3 studies will follow, and earliest launch to be in late 2020. However, we do not believe ralinepag will have major impact on selexipag since we expect a trial in the scale of GRIPHON to is hard to replicate and recruit, and selexipag will already have an almost five years of first-mover advantage.
Figure 15: Three other compounds compete with selexipag in the oral prostacyclin receptor agonist space
Drug class Product (generic name) Market Company
Orenitram (treprostinil) US United Therapeutics Prostacyclin Careload LA (beraprost) JP only Toray/Astellas analog Berasus LA (beraprost) JP only Kaken
Uptravi (selexipag) US/EU/JP Nippon Shinyaku, Non-prostanoid IP Actelion receptor agonist ranilepag US (phase 2) Arena Pharmaceuticals
Source: Company data, Credit Suisse
Nippon Shinyaku (4516 / 4516 JP) 10 01 September 2016
Pipeline features two other products to drive growth after FY3/19 launch In addition to the new indications for selexipag, Nippon Shinyaku's pipeline also features two other products in the pipeline that we believe can become significant drivers in the near future.
Figure 16: Nippon Shinyaku's current pipeline Launch Success Peak sales Peak sales Product Mechanism Indication Market Partner Status year rate (%) year (¥ mn)
Pulmonary arterial hypertension Japan Actelion Filed 2016 100% 2023 17,300
Non-prostanoid IP Chronic thromboembolic selexipag Japan Actelion Phase 3 2020 51% 2025 2,400 receptor agonist pulmonary hypertension (CTEPH)
Atherosclerosis obliterans (ASO) Japan Unpartnered Phase 2 2021 18% >2025 2,700
Anti-CD20 monoclonal GA101 Indolent Non-Hodgkin's lymphoma Japan Chugai Phase 3 2018 82% >2025 3,900 antibody
Japan Unpartnered Phase 1/2 2018 51% 2022 4,900 Exon 53-skipping NS-065 Duchenne's muscular dystrophy antisense US Unpartnered Phase 2 2019 24% 2023 9,000
NS-018 JAK-2 inhibitor Myelofibrosis US Unpartnered Phase 1/2 2020 18% >2025 1,500
Prulifloxacin Fluoroquinolone Bacterial infections China Lee's Pharma Filed 2016 100% n/a -
Microsomal prostaglandin NS-580 Endometriosis Japan Unpartnered Phase 1 - 12% n/a - E synthase-1 inhibitor Source: Company data, Credit Suisse estimates (1) NS-065 Duchenne's muscular dystrophy (DMD) is a disorder found in 1/3,500 boys and caused by a mutation in the gene for dystrophin, a large protein involved in maintaining muscle strength. The mutations lead to improper dystrophin production, resulting in deteriorating muscles over time. NS-065 is an antisense oligonucleotide analog for the treatment of DMD. It is designed to skip the exon, or gene segment, that was deleted by the mutation, enabling a shorter form, but functional version of the dystrophin to be produced. NS-065 targets exon 53 of the dystrophin gene, which affects 8% of DMD patients and is different from the population targeted by Biomarin and Sarepta's drugs. The structure of NS-065 is based on a morpholino scaffold, which we believe is similar to Sarepta, but the company does not expect issues with patent infringement. The oligonucleotide-based drug class has historically been underrepresented due to difficulty in development and identifying the appropriate indication for use. However, for a genetic disorder such as DMD, we believe oligonucleotides, which interact directly with patient DNA, can provide a unique treatment option which other modalities cannot achieve. The Japanese government and industry experts continue to high hopes for this class so that Japan can become leaders in the field after missing out on the recombinant protein race. NS-065 is one of the six drugs selected by Sakigake designation, the Japanese equivalent to the Breakthrough Therapy Designation in the US. As a benefit, NS-065 receives close attention and consultation services from regulators on the development process, expedited review, and a pricing premium. With two DMD drugs rejected and a third drug delayed, the path to NS-065 approval will not be easy (Figure 17). However, with no viable treatments available aside from steroids, regulators have shown interest in collaborating in approval if evidence is convincing enough. If successful, and barring patent lawsuits from Sarepta, NS-065 can provide ¥47bn peak potential and hope for oligonucleotide therapy development in the future for the company as well. Our risk-adjusted forecast for FY3/21 is ¥5bn.
Nippon Shinyaku (4516 / 4516 JP) 11 01 September 2016
Figure 17: Sarepta, Biomarin and PTC struggled to gain FDA approval Treatable DMD FDA decision Drug Company Mechanism population (%) Regulatory status Nonsense Refuse to file letter from FDA due to Translarna PTC Rejected mutation read- 13% insufficient application (ataluren) Therapeutics through Conditional approval by EMA
Rejected in Jan 2016 due to lack of Kyndrisa Exon 51 skipping Rejected Biomarin 13% efficacy (drisapersen) antisense EMA filing withdrawn
FDA delays decision and requests Exon 51 skipping Delayed eteplirsen Sarepta 13% additional data to confirm dystrophin antisense production
Development Nippon Exon 53 skipping Currently in phase II studies in Japan NS-065 8% in progress Shinyaku antisense and US
Source: Company data, Credit Suisse estimates (2) Obinutuzumab, a lower risk project expected to launch in FY2018 Obinutuzumab is a glycoengineered, humanized, type II anti-CD20 monoclonal antibody designed as a successor to rituximab (brand name: Rituxan in Japan). The glycoengineering part is designed to increase anti-cancer properties by increasing antibody-dependent cellular toxicity (ADCC) and higher cell death induction compared to rituximab. Obinutuzumab is developed and commercialized outside of Japan by Roche. In Japan, Nippon Shinyaku is jointly developing with Chugai for indolent and aggressive non- Hodgkin's lymphoma (NHL) (specifically, diffuse large B-cell lymphoma) as part of the global GALLIUM and GOYA studies, respectively. Obinutuzumab is currently approved in the US and EU as Gazyva and Gazyvaro, respectively, for previously untreated chronic lymphocytic leukemia (CLL) and more recently, relapsed or refractory follicular lymphoma (FL), the most common form of indolent NHL), but these indications are not being pursued by Nippon Shinyaku or Chugai in Japan. Nippon Shinyaku plans to file for approval for both indications in development around 2Q FY2017 and we think the odds of approval, at least for previously untreated FL patients, are high, based on the recent (May 2016) announcement by Roche on positive results in these patients in the GALLIUM study. Although numbers were not yet disclosed, the announcement mentioned that the obinutuzumab-based treatment significantly improved progression-free survival (PFS) compared to the rituximab-based arm, with consistent adverse event profiles. The data is schedule to be presented at an upcoming medical meeting and by our estimates submitted for approval outside of Japan by the end of this calendar year.
Figure 18: Obinutuzumab development status by phase Figure 19: Obinutuzumab clinical trials with Nippon and indication Shinyaku involvement
Current status JAPIC Number Partner Phase Size Study design Description Indication Key trial US EU JP • Evaluate efficacy of obinutuzumab + Multi-center, CHOP therapy vs rituximab + CHOP 1400 JapicCTI-111659 Chugai 3 open label, therapy in untreated patients with CD20- (global) Previously untreated chronic Approved Approved randomized positive DLBCL CLL11 - lymphocytic leukemia (CLL) 11/2013 7/2014 • Part of GOYA study
• Evaluate efficacy of obinutuzumab + chemotherapy followed by obinutuzumab Previously treated follicular Approved Approved Multi-center, GADOLIN - 1400 maintence compared to rituximab in JapicCTI-111660 Chugai 3 open label, lymphoma (FL) 2/2016 4/2016 (global) untreated patients with CD20-positive randomized advanced indolent NHL Previously untreated FL or • Part of GALLIUM study indolent Non-Hodgkin's GALLIUM Phase 3 Phase 3 Phase 3 • Evaluate tolerability of shorter duration Lymphoma (iNHL) Open label, JapicCTI-152848 Chugai 2 36 infusion (SDI) of obinutuzumab in single arm Previously untreated diffuse untreated, CD20-positive NHL patients large B-Cell lymphoma GOYA Phase 3 Phase 3 Phase 3 (DLBCL) Source: Company data, clinicaltrials.gov, Credit Suisse estimates Source: JAPIC, clinicaltrials.gov, Credit Suisse estimates
Nippon Shinyaku (4516 / 4516 JP) 12 01 September 2016
Other products in the pipeline: The pipeline is admittedly rather thin after the aforementioned products. Other noteworthy products include in-house products NS-018 a JAK inhibitor for myelofibrosis likely for second line setting, and NS-580, currently in Phase 1 in Japan for endometriosis. We expect the company to use the cash flow generated from selexipag to increase in-licensing activities.
Nippon Shinyaku (4516 / 4516 JP) 13 01 September 2016
Valuation Our ¥6,300 target price is derived from a 10-year DCF analysis using a 5.1% WACC and 0% terminal growth rate. Our assumptions for WACC include cost of equity of 5.20% (derived from ERP of 6.75%, risk-free rate of 0%, and beta of 0.77) and cost of debt of 3.00%. Our target price implies 44x FY3/17E EPS, which is in line with Nippon Shinyaku's average P/E of 47x over the last two years. We believe a premium is appropriate due to a five year-EPS CAGR from FY3/16 to FY3/21 of 29% compared to 10% over the last five years. We also expect an increase in ROE from 6.2% currently to 15.4% over this span.
Figure 20: 10-year DCF model for Nippon Shinyaku (¥ mn) FY3/15A FY3/16A FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E FY3/22E FY3/23E FY3/24E FY3/25E FY3/26E EBIT 8,546 8,540 13,500 12,300 17,700 23,700 32,200 38,600 41,500 45,600 47,400 49,600 tax 3,038 2,605 4,100 3,700 5,300 7,200 9,700 11,700 12,500 13,800 14,300 15,000 NOPAT 5,508 5,935 9,400 8,600 12,400 16,500 22,500 26,900 29,000 31,800 33,100 34,600
Depreciation 2,665 2,452 2,700 2,700 2,800 2,900 2,900 2,800 2,700 2,600 2,500 2,500 Capex (1,156) (1,517) (1,700) (1,800) (1,800) (1,900) (2,100) (2,100) (2,100) (2,100) (2,100) (2,100) Change in working capital (3,779) 246 (5,300) (1,300) (3,000) (4,500) (4,800) (3,500) 2,000 (600) 1,100 200
Free Cash Flow 3,238 7,116 5,100 8,200 10,400 13,000 18,500 24,100 31,600 31,700 34,600 35,200 YoY growth rate (%) -28% 61% 27% 25% 42% 30% 31% 0% 9% 1.7%
Discounted FCF 4,852 7,423 8,958 10,654 14,426 17,881 22,307 21,292 22,112 21,404 Terminal Value 419,633 Discounted Terminal value 255,163
Enterprise Value (JPY MM) 406,473 WACC Calculation Add: Excess Cash + equivalent 28,061 Less: Debt 10,410 Risk-free rate 0.00% Less: Minority interest 6 Expected market return 6.75% Less: Preferred shares β 0.77 Equity value 424,118 Cost of equity 5.20% Cost of debt 3.00% Fully diluted shares O/S (mn) 67.4 D/E ratio 3.22% Intrinsic Value of Shares (in JPY) 6,296 WACC 5.10% Terminal Growth Rate 0.0% Source: Company data, Credit Suisse estimates
Figure 21: Sensitivity of Nippon Shinyaku stock price to WACC and terminal value
WACC 6,293 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 0.0% 6,461 5,708 5,100 4,601 4,187 3,838 3,541 3,287 3,068 0.5% 6,921 6,052 5,362 4,804 4,345 3,964 3,642 3,369 3,134 1.0% 7,495 6,472 5,676 5,043 4,531 4,109 3,758 3,461 3,209 1.5% 8,234 6,997 6,060 5,330 4,750 4,279 3,891 3,567 3,293 2.0% 9,218 7,671 6,539 5,681 5,012 4,479 4,046 3,689 3,390 2.5% 10,597 8,571 7,156 6,120 5,333 4,719 4,229 3,831 3,502 3.0% 12,665 9,831 7,979 6,684 5,735 5,013 4,450 3,999 3,632 3.5% 16,111 11,720 9,130 7,436 6,251 5,381 4,719 4,201 3,786
Terminal GrowthTerminal Rate 4.0% 23,004 14,869 10,857 8,489 6,939 5,853 5,055 4,447 3,971
Source: Company data, Credit Suisse estimates The forward P/E is high for Japanese pharma companies, but we believe this premium is supported by a forecast EPS CAGR of 26% over the next three years, which is the second largest growth (after Ono) expected among Japanese pharma companies. The level of influence of new drugs on stock price is no different from peers, and we expect selexipag's impact on earnings to be the main driver. In addition, although baking in the value of the DMD drug, NS-065, may seem premature, there is no doubt that the drug will contribute greatly to earnings and stock price upon successful approval. In the short term, revenues will be influenced by milestone payments and export of API (active pharmaceutical ingredient) of selexipag to Actelion. In FY3/17, we expect major contribution from milestone payments and royalties. However, in FY3/18, we expect a decrease in earnings due to completion of milestone payments and adjustments in API inventory. In FY3/19, we do not expect further exceptional events and forecast strong earnings subsequently.
Nippon Shinyaku (4516 / 4516 JP) 14 01 September 2016
Figure 22: Nippon Shinyaku has outperformed peers Figure 23: Historic P/E rarely goes below 40x and peaked since November 2015 out at 62x
Nippon Shinyaku market cap trend vs index P/E trend of Nippon Shinyaku & top performers Index (Market cap on 7/4/2014 = 100) P/E ratio (x) 160 200 140 180 120 160 100
140 80
60 120 40 100 20 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 80 Nippon Shinyaku Ono Kyowa Hakko Kirin Chugai
Nippon Shinyaku TOPIX TOPIX Pharma Index
Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse
Nippon Shinyaku (4516 / 4516 JP) 15 01 September 2016
Risks We have identified several potential risks that could affect the share price and earnings as follows: Currency risk
■ Nippon Shinyaku will be more exposed to currency risk than in the past, most notably the JPY/US exchange rate, which transactions with Actelion are based on. Hurdles in selexipag launch performance Several factors can impact sales of selexipag in various regions such as:
■ Decelerating sales in the US due to pressure from current or new competitors
■ Market access pressure by HTA (health technology assessment), especially in Europe with regard to cost-effectiveness and price pressure in Japan
■ Pricing setting in Japan. There is risk that selexipag receives comparator pricing to a cheaper drug even though it will likely receive foreign price adjustment and premiums in the event it occurs. Generics erosion of current pharmaceutical portfolio
■ With the government-mandated generics penetration rate of 70% by end-2017 and 80% by 2020 getting closer, generics erosion of the patent expired drugs may accelerate faster than anticipated Development risks
■ Pharmaceutical R&D is inherently a high-risk process, and this risk is even greater for hard-to-treat indications and areas which require innovative technologies.
■ Delays in development progress and in regulatory approval, which will impact timing of revenue and losing out to competitors
Nippon Shinyaku (4516 / 4516 JP) 16 01 September 2016
Earnings forecasts
Figure 24: Nippon Shinyaku (4516) – Earnings forecasts summary Sales Operating profit Recurring profit Net profit EPS DPS P/E ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) ¥ (x) 3/16 A 84,209 5.3 8,549 -0.2 8,952 0.3 6,340 7.8 94.1 7.8 28.0 46.8 3/17 CS E (New) 95,600 13.5 13,500 57.9 13,800 54.2 9,600 51.4 142.5 51.4 35.0 33.7 CoE 93,000 10.4 11,500 34.5 11,900 32.9 8,500 34.1 126.2 34.1 35.0 38.0 IBES E 93,933 11.5 13,180 54.2 - - 9,500 49.8 143.6 52.6 37.0 33.4 3/18 CS E (New) 97,600 2.1 12,300 -8.9 12,600 -8.7 8,800 -8.3 130.6 -8.3 35.0 36.7 IBES E 99,975 6.4 16,680 26.6 - - 11,635 22.5 178.8 24.5 49.6 26.8 3/19 CS E (New) 104,500 7.1 17,700 43.9 18,000 42.9 12,600 43.2 187.0 43.2 45.9 25.6 IBES E 108,933 9.0 22,950 37.6 - - 14,933 28.3 242.6 35.7 68.0 19.8 Source: Company data, I/B/ES, Credit Suisse estimates We expect FY3/17 OP to reach ¥13.5bn, a 58% increase from the previous year. Key factors include selexipag royalties (which we estimate as 15% of overseas sales and basing market uptake trend on examples of earlier PAH drugs), estimated ¥2.4bn milestone payments for selexipag approval in Europe, and ¥6bn in API manufacturing which also includes revenue from selexipag inventory overstock. In FY3/18, we forecast a 2% increase in revenues but an 8% fall in OP mainly due to completion of milestone payments and inventory adjustments. However, we expect Nippon Shinyaku to return to its growth trajectory due to increasing royalties, and launch of new high-margin orphan drugs, reaching ¥32bn by FY3/21, or CAGR of 38% from FY3/18. We expect key products to lose patent protection such as Cialis in FY3/17 and Adcirca in FY3/20, and this is already accounted for in our forecasts. Biannual price adjustments are also incorporated into our models assuming current intervals.
Figure 25: Operating profit and margin trend for Nippon Shinyaku
Operating profit (¥bn) OP margin (%) 40 40%
30 26% 30% 21% 20 17% 20% 14% 13% 32 11% 11% 10% 24 10 10% 18 14 12 8 9 9 0 0% FY3/14A FY3/15A FY3/16A FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E
Source: Company data, Credit Suisse estimates
Nippon Shinyaku (4516 / 4516 JP) 17 01 September 2016
Figure 26: Nippon Shinyaku (4516) – Product portfolio Revenues (¥ mn) Product Generic name Indication Market Phase First Launch FY3/14A FY3/15A FY3/16A FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E Marketed products
Vidaza azacitidine Myelodysplastic syndrome Japan Marketed 3/11/2011 9,691 10,814 12,360 13,200 13,900 13,900 13,900 13,900 ethinyl estradiol; Lunabell Dysmenorrhea Japan Marketed 7/1/2008 6,216 6,553 6,658 6,700 6,300 5,400 4,800 4,100 norethindrone Zalutia tadalafil Urinary disorder caused by BPH Japan Marketed 4/17/2014 0 1,613 5,638 8,800 10,600 11,900 12,500 12,500 tramadol Tramal Cancer and chronic pain Japan Marketed 9/17/2010 1,313 2,803 4,306 5,800 6,900 7,600 8,000 8,000 hydrochloride Eviprostat herbal extract Prostatic hypertrophy Japan Marketed 4/20/1967 5,058 5,573 4,224 3,700 3,500 3,100 2,900 2,600
Cialis tadalafil Erectile dysfunction Japan Marketed 9/12/2007 4,217 3,682 3,508 3,200 2,600 2,100 1,700 1,400
Adcirca tadalafil Pulmonary arterial hypertension Japan Marketed 12/11/2009 2,882 3,204 3,529 4,000 4,400 4,600 4,600 3,500 irsogladine Gaslon N Gastric ulcer; gastricitis Japan Marketed 4/4/1989 4,760 3,668 2,992 2,100 1,700 1,300 1,000 1,000 maleate azulene sulfonate Azunol Gargle Pharyngitis, tonsilitis Japan Marketed 8/19/2002 2,681 2,522 2,525 2,400 2,400 2,300 2,300 2,200 sodium dexamethasone Erizas Allergic rhinitis Japan Marketed 12/11/2009 1,732 2,192 2,289 2,400 2,500 2,500 2,500 2,200 cipecilate Baynas ramatroban Allergic rhinitis Japan Marketed 5/23/2000 1,955 1,774 1,597 1,300 1,200 1,100 1,000 900
Cylocide cytarabine Acute leukemia Japan Marketed 4/30/1971 2,356 1,764 1,409 1,100 900 700 600 500
Other pharmaceutical products 19,573 17,012 15,007 13,200 12,200 10,800 10,000 9,000
Marketed pharmaceuticals subtotal 62,434 63,174 66,042 67,900 69,100 67,300 65,800 61,800
Pipeline products
Uptravi selexipag Pulmonary arterial hypertension Japan Filed Q3 FY2016 0 0 0 100 2,600 5,200 8,600 11,700 Chronic thromboembolic pulmonary Uptravi selexipag Japan Phase 2 2020 0 0 0 0 0 0 50 700 hypertension (CTEPH) Uptravi selexipag Atherosclerosis obliterans (ASO) Japan Phase 2 2021 0 0 0 0 0 0 0 50
GA101 obinutuzumab Diffuse large B-cell lymphoma Japan Phase 3 2018 0 0 0 0 0 0 0 0
GA101 obinutuzumab Indolent Non-Hodgkin's lymphoma Japan Phase 3 2018 0 0 0 0 0 100 800 1,200
NS-065 NS-065 Duchenne's muscular dystrophy Japan Phase 1/2 2018 0 0 0 0 0 200 1,200 2,900
NS-065 NS-065 Duchenne's muscular dystrophy US Phase 2 2019 0 0 0 0 0 0 450 2,200
NS-580 NS-0580 Endometriosis Japan Phase 1 - 0 0 0 0 0 0 0 0
NS-018 NS-018 Myelofibrosis US Phase 1/2 - 0 0 0 0 0 0 0 50
Pipeline products subtotal 0 0 0 100 2,600 5,500 11,100 18,800
Marketed + Pipeline Products Subtotal 62,434 63,174 66,042 68,000 71,700 72,800 76,900 80,600
Raw materials 861 656 846 6,800 4,000 5,900 7,800 10,300 Co-commercialization revenues 0 0 393 2,000 2,000 2,000 2,000 2,000 Royalties 50 2,510 3,208 4,900 5,800 9,500 13,000 17,700
Pharmaceuticals 63,345 66,340 70,489 81,700 83,500 90,200 99,700 110,600 Functional foods 13,172 13,651 13,720 13,900 14,100 14,300 14,500 14,700
TOTAL consolidated sales 76,517 79,991 84,209 95,600 97,600 104,500 114,200 125,300
[YoY Growth] Pharmaceuticals - 4.7% 6.3% 15.9% 2.2% 8.0% 10.5% 10.9% Functional foods - 3.6% 0.5% 1.3% 1.4% 1.4% 1.4% 1.4% TOTAL Consolidated Sales - 4.5% 5.3% 13.5% 2.1% 7.1% 9.3% 9.7% Source: Company data, Credit Suisse estimates
Nippon Shinyaku (4516 / 4516 JP) 18 01 September 2016
Figure 27: Nippon Shinyaku (4516) – Profit and loss statement FY3/14A FY3/15A FY3/16A FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E P/L sheet (¥ mn) Sales 76,517 79,991 84,209 95,600 97,600 104,500 114,200 125,300 COGS 39,034 41,227 44,017 45,500 47,300 47,900 49,300 49,900
Gross Profit 37,483 38,764 40,192 50,100 50,300 56,600 64,900 75,400
SG&A expenditure 19,915 21,234 21,904 22,700 24,000 24,800 26,500 28,300 R&D expenditure 9,530 8,968 9,739 13,900 14,000 14,100 14,700 14,900
Operating profit 8,038 8,562 8,549 13,500 12,300 17,700 23,700 32,200
Non-operating income 1,019 939 1,246 950 950 950 950 950 Interest income 323 385 415 350 350 350 350 350 Non-operating loss 460 573 842 650 650 650 650 650 Interest expense 4 3 3 3 3 3 3 3
Recurring profit 8,598 8,928 8,952 13,800 12,600 18,000 24,000 32,500
Net extraordinary income/expense 0 0 0 0 0 0 0 0
Profit before tax 8,598 8,928 8,952 13,800 12,600 18,000 24,000 32,500 Tax 2,837 3,038 2,605 4,200 3,800 5,400 7,200 9,800 Minorities 9 7 6 0 0 0 0 0
Net Profit 5,750 5,882 6,340 9,600 8,800 12,600 16,800 22,700
YoY Growth (%) Total revenues 9.4% 4.5% 5.3% 13.5% 2.1% 7.1% 9.3% 9.7% Gross profit 6.6% 3.4% 3.7% 24.7% 0.4% 12.5% 14.7% 16.2% Operating profit 16.5% 6.5% -0.2% 57.9% -8.9% 43.9% 33.9% 35.9% Recurring profit 19.3% 3.8% 0.3% 54.2% -8.7% 42.9% 33.3% 35.4% Pre-tax profit 18.0% 3.8% 0.3% 54.2% -8.7% 42.9% 33.3% 35.4% Net income 23.7% 2.3% 7.8% 51.4% -8.3% 43.2% 33.3% 35.1%
Expenses (%) COGS 51.0% 51.5% 52.3% 47.6% 48.5% 45.8% 43.2% 39.8% SG&A 26.0% 26.5% 26.0% 23.7% 24.6% 23.7% 23.2% 22.6% R&D 12.5% 11.2% 11.6% 14.5% 14.3% 13.5% 12.9% 11.9% Tax rate 33.0% 34.0% 29.1% 30.2% 30.2% 30.2% 30.2% 30.2% Margins (%) Gross margin 49.0% 48.5% 47.7% 52.4% 51.5% 54.2% 56.8% 60.2% Operating margin 10.5% 10.7% 10.2% 14.1% 12.6% 16.9% 20.8% 25.7% Ordinary margin 11.2% 11.2% 10.6% 14.4% 12.9% 17.2% 21.0% 25.9% Net profit margin 7.51% 7.35% 7.53% 10.04% 9.02% 12.1% 14.7% 18.1%
Dividends paid 1484.0 1618.0 1819.0 2256.6 2256.6 2961.8 3949.1 5336.0 Dividends per share (¥) 23.0 25.0 28.0 35.0 35.0 45.9 61.3 82.8 EPS (¥) 85.3 87.3 94.1 142.5 130.6 187.0 249.4 336.9 EPS growth rate (%) 23.8% 2.4% 7.8% 51.4% -8.3% 43.2% 33.3% 35.1% Dividend payout ratio (%) 27.0% 28.7% 29.8% 24.6% 26.8% 24.6% 24.6% 24.6% BPS (¥) 1,379 1,499 1,522 1,632 1,729 1,872 2,063 2,320 Source: Company data, Credit Suisse estimates
Nippon Shinyaku (4516 / 4516 JP) 19 01 September 2016
Figure 28: Nippon Shinyaku (4516) – Balance sheet FY3/14A FY3/15A FY3/16A FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E B/S sheet (¥ mn) Assets Cash and cash equivalents 11,097 11,841 20,435 21,300 26,270 32,740 40,920 53,110 Accounts receivables 34,137 35,010 35,135 39,820 40,650 43,520 47,560 52,190 Inventories 15,732 19,657 18,927 19,940 20,730 20,990 21,610 21,870 Marketable securities 10,399 10,799 7,626 9,910 11,090 12,230 13,440 14,620 Other current assets 3,318 3,115 3,278 3,280 3,280 3,280 3,280 3,280
Current assets 74,683 80,422 85,401 94,250 102,020 112,760 126,810 145,070
PP&E 15,670 15,393 17,624 16,600 15,700 14,700 13,700 12,900 Intangibles 561 458 501 500 500 500 500 500 Goodwill 0 0 0 0 0 0 0 0 Other other non-current assets 27,273 33,483 31,843 31,800 31,800 31,800 31,800 31,800
Fixed assets 43,504 49,334 49,968 48,900 48,000 47,000 46,000 45,200
Total assets 118,188 129,757 135,370 143,150 150,020 159,760 172,810 190,270
Liabilities Accounts payable 6,099 7,118 6,759 7,170 7,500 7,600 7,800 7,900 Short term borrowings 0 7 0 0 0 0 0 0 Other current liabilities 9,158 10,645 13,810 13,810 13,810 13,810 13,810 13,810
Current liabilities 15,257 17,770 20,569 20,980 21,310 21,410 21,610 21,710
Long term borrowings 1 19 0 0 0 0 0 0 Pension liabilities 8,857 7,997 10,410 10,410 10,410 10,410 10,410 10,410 Other fixed liablities 886 2,763 1,627 1,630 1,630 1,630 1,630 1,630
Fixed liabilities 9,744 10,779 12,037 12,040 12,040 12,040 12,040 12,040
Total liabilities 25,002 28,550 32,607 33,020 33,350 33,450 33,650 33,750
Equity Capital 5,174 5,174 5,174 5,180 5,180 5,180 5,180 5,180 Capital surplus 4,445 4,445 4,445 4,450 4,450 4,450 4,450 4,450 Accumulated earnings 81,105 85,137 89,658 97,000 103,540 113,180 126,030 143,390 Treasury stock -2,175 -2,327 -2,413 -2,400 -2,400 -2,400 -2,400 -2,400
Shareholder's equity 88,549 92,429 96,864 104,230 110,770 120,410 133,260 150,620
Valuation and translation adjustments 4,432 8,569 5,684 5,700 5,700 5,700 5,700 5,700 Subscription rights to share 0 0 0 0 0 0 0 0 Minority interests 204 208 213 200 200 200 200 200
Total equity 93,186 101,207 102,762 110,130 116,670 126,310 139,160 156,520
Liabilities and equity 118,188 129,757 135,369 143,150 150,020 159,760 172,810 190,270
Source: Company data, Credit Suisse estimates
Nippon Shinyaku (4516 / 4516 JP) 20 01 September 2016
Figure 29: Nippon Shinyaku (4516) – Cash flow statement FY3/14A FY3/15A FY3/16A FY3/17E FY3/18E FY3/19E FY3/20E FY3/21E
Operating cash flow 6,015 6,113 8,915 6,900 10,100 12,300 15,100 20,700
[Investing cash flow] Capex -1,121 -1,156 -1,517 -1,700 -1,800 -1,800 -1,900 -2,100 Other investing cash flow -2,236 -2,562 -2,461 -2,000 -1,000 -1,000 -1,000 -1,000
Investing cash flow -3,357 -3,718 -3,978 -3,700 -2,800 -2,800 -2,900 -3,100
[Financing cash flow] Change in short term debt 0 0 0 0 0 0 0 0 Increase in long term debt 0 0 0 0 0 0 0 0 Decrease in long term debt 0 0 0 0 0 0 0 0 Change in debt 0 0 0 0 0 0 0 0 Change in equity -82 -152 -85 -20 -20 -20 -20 -20 Dividends paid -1,484 -1,618 -1,819 -2,260 -2,260 -2,960 -3,950 -5,340 Other financing cash flow -40 -3 -3 0 0 0 0 0
Financing cash flow -1,606 -1,773 -1,907 -2,280 -2,280 -2,980 -3,970 -5,360
Foreign Currency Translation Adjustments 133 63 -194 -55 -50 -50 -50 -50 Change in Cash and Cash Equivalents 1,185 684 2,833 865 4,970 6,470 8,180 12,190
Previous cash balance 20,044 21,229 21,914 24,748 25,613 30,583 37,053 45,233 Ending cash balance 21,229 21,914 24,748 25,613 30,583 37,053 45,233 57,423 Source: Company data, Credit Suisse estimates
Nippon Shinyaku (4516 / 4516 JP) 21 01 September 2016
HOLT analysis Nippon Shinyaku’s CFROI® has averaged just more than 3% over the last ten years, less than half of the average Japanese pharmaceutical company, and well short of cost of capital. This largely reflects margins that are well short of industry averages. With the contribution from milestone payments and other one-off selexipag-related factors resulting in a quick pickup in margins this year, CFROI is expected to surge to almost 7% and approach 9% by FY3/22 at which point we expect CFROI to gradually regress toward average levels. The realization of this scenario suggests 10% potential downside on the HOLT model. However, we would point to optionality on NS-065 as well as licensing activities as potential catalysts to the stock price.
Figure 30: Credit Suisse's HOLT analysis suggests 10% potential downside
NIPPON SHINYAKU CO., LTD.(C) (4516) Current Price: JPY 4,900 Warranted Price: JPY 4,423 Valuation date: 30-Aug-16
Sales Growth (parallel % point change to forecasts) Mar 15A Mar 16A Mar 17E Mar 18E Mar 19E JPY -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 4.5 5.3 13.5 2.1 6.9
EBITDA Margin, % 14.0 13.1 16.9 15.4 19.6 -2.0% -35% -27% -19% -8% 3% Asset Turns, x 0.34 0.3 0.4 0.4 0.4
-1.0% -32% -23% -14% -3% 9% CFROI®, % 2.7 2.9 6.7 5.3 6.3
Discount Rate, % 5.1 4.8 5.1 5.1 5.1 0.0% -28% -19% -10% 1% 14% Asset Growth, % 4.4 0.4 4.2 3.7 4.7
1.0% -24% -15% -5% 6% 20% change to forecasts) to change HOLT P/B, x 1.5 1.7 1.8 1.7 1.6
EBITDA Margin (parallel % point % Margin EBITDA (parallel HOLT P/E, x 57.1 58.7 26.3 31.8 24.7 2.0% -20% -11% -1% 11% 25% Leverage, % 0.3 0.1 0.6 0.8 0.9
More than More than 10% Within 10% 10% upside Sales Growth (%) downside 16 14 12 10 CFROI & Discount Rate (in %) 8 6 10 4 9 2 0 8 -2 7 -4 6 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 5 4 EBITDA Margin 3 45 2 40 1 35 0 30 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 25
HOLT - CreditHOLT Suisse Analyst ScenarioData CFROI Forecast CFROI Discount Rate 20 15 10 Asset Growth (in %) 5 0 8 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 7 6 5 Asset Turns (x) 0.4 4 0.4 3 0.3 2 1 0.3 0 0.2 -1 0.2 2011 2013 2015 2017 2019 0.1 0.1 Real Asset Growth Rate Forecast Growth Normalised Growth Rate 0.0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries. Source: Company data, HOLT, Credit Suisse estimates
Nippon Shinyaku (4516 / 4516 JP) 22 01 September 2016
Appendix: Brief background on pulmonary arterial hypertension (PAH) Pulmonary arterial hypertension (PAH) is a rare, progressive disorder which involves high blood pressure in the pulmonary arteries, the blood vessels that carry blood from the right side of the heart through the lungs. PAH occurs when the pulmonary arteries thicken, become constricted, or blocked, which leads to increased resistance to blood flow. As this resistance builds, the heart needs to pump blood harder, eventually leading to weakening and heart failure. Symptoms include shortness of breath during exertion, fatigue, chest pain, and dizziness. The estimated prevalence of PAH is 15–50 cases per million worldwide. In Japan, the latest national survey reports 2,946 patients receiving treatment and the number of patients have been rising every year, possibly due to greater awareness of the disease. There is also higher prevalence among women by a 2.6:1 ratio although the reason for this is not yet identified. Over the last few years, several new therapeutic agents for PAH have been introduced into the market, however, there is still an unmet need, due to high mortality rate of patients. PAH is classified by severity of symptoms into four functional classes as defined by the NYHA and WHO.
Figure 31: NYHA functional assessment of pulmonary arterial hypertension
Functional class Description
I • PAH patients but with no limitation of physical activity • Ordinary physical activity do not cause fatigue or any other symptoms
II • Slight limitation of physical activity and comfortable at rest • Ordinary physical activity causes some symptoms
III • Marked limitation of physical activity and comfortable at rest • Less-than-ordinary activity causes symptoms • Unable to carry out physical activity without symptoms IV • Manifest signs of right heart failure • Symptoms may be present even at rest
Source: Company data, Credit Suisse The most common therapeutic agents for PAH are vasodilators, but function differently by targeting one of three different biological pathways. The three pathways are prostacyclin
(PGI2) receptor agonists, endothelin receptor agonists (ERA), and nitric oxide. Phosphodiesterase type 5 (PDE5) inhibitors, and soluble guanylate cyclase (sGC) stimulators have different mechanisms but targets different parts of the same pathway. How the classes are used depends on severity of the disease. Usually physicians start treatment for Class II or III patients with oral agents, such as ERAs and PDE5 inhibitors. If symptoms do not improve, of the disease progresses, a second agent is typically added. Patients with class IV PAH symptoms are not suitable for oral therapy and are prescribed injectable prostacyclin therapy.
Nippon Shinyaku (4516 / 4516 JP) 23 01 September 2016
Figure 32: Drugs for pulmonary arterial hypertension approved in Japan
Pathway Drug class Product (generic name) Company Dosage form
Prostacyclin Flolan (epoprostenol sodium) GlaxoSmithKline Continuous IV infusion
Treprost (treprostinil) Mochida Continuous SQ or IV infusion Ventavis (iloprost) Bayer Inhaled Prostacyclin Prostacyclin analog Careload LA (beraprost) Toray/Astellas Oral, 2x per day (PGI2) Berasus LA (beraprost) Kaken Oral; 2x per day Nippon Shinyaku Non-prostanoid IP Uptravi (selexipag) Nippon Shinyaku Oral; 2x per day receptor agonist
Volibris (ambrisentan) GlaxoSmithKline Oral; once daily Selective ETA receptor antagonist Endothelin Tracleer (bosentan hydrate) Actelion Oral 2x per day Dual ET /ET A B Opsumit (macitentan) Actelion/Nippon Shinyaku Oral; once daily antagonist
Phosphodiesterase Adcirca (tadalafil) Eli Lilly/Nippon Shinyaku Oral; once daily type 5 (PDE5) Revatio (sildenafil citrate) Pfizer Oral; 3x per day inhibitor Nitric oxide Soluble guanylate Adempas (riociguat) Bayer Oral; 3x per day cyclase (sGC) stimulator
Source: Company data, Credit Suisse
Figure 33: Treatment flow for pulmonary arterial hypertension
Diagnosis of PAH
General treatment or supportive care
Recommendation Functional Class II Functional Class III Functional Class IV
I (recommended) • ERA • ERA • epoprostenol (iv) • PDE5 inhibitors • PDE-5 inhibitors • riociguat • epoprostenol (iv) • selexipag • riociguat • Treprostinil (sc, inhaled) • selexipag
IIa (should be • iloprost (iv) • ambrisentan considered) • treprostinil (iv) • macitentan • Iloprost (inhaled, iv) • riociguat • PDE-5 inhibitors • treprostinil (sc, iv, inhaled)
IIb (may be • beraprost • 1st line combination considered) • 1st line combination therapy therapy
Combination therapy
Surgery or lung transplant
Source: Company data, Credit Suisse
Nippon Shinyaku (4516 / 4516 JP) 24 01 September 2016
Companies Mentioned (Price as of 31-Aug-2016) ALK-Abello (ALKb.CO, Dkr915.0) Actelion (ATLN.S, SFr163.7) Alnylam Pharmaceuticals, Incorporated (ALNY.OQ, $69.85) Arena Pharmaceuticals Inc (ARNA.OQ, $1.55) Astellas Pharma (4503.T, ¥1,580) BTG (BTG.L, 601.0p) Bayer (BAYGn.DE, €95.97) BioMarin Pharmaceuticals, Inc. (BMRN.OQ, $93.89) Chugai Pharmaceutical (4519.T, ¥3,245) Eisai (4523.T, ¥6,030) Eli Lilly & Co. (LLY.N, $77.75) GlaxoSmithKline plc (GSK.L, 1639.0p) Hanmi Pharm (128940.KS, W594,000) KAKEN PHARM (4521.T, ¥5,840) Kissei Pharm (4547.T, ¥2,490) Kyowa Hakko Kirin (4151.T, ¥1,468) Lee's (0950.HK, HK$6.4) Nippon Shinyaku (4516.T, ¥4,795, OUTPERFORM, TP ¥6,300) Ono Pharmaceutical (4528.T, ¥2,697) Otsuka Holdings (4578.T, ¥4,483) PTC Therapeutics, Inc. (PTCT.OQ, $8.21) Pfizer (PFE.N, $34.8) Roche (ROG.S, SFr239.8) Sarepta Therapeutics, Inc. (SRPT.OQ, $26.07) Shionogi (4507.T, ¥4,619) Takeda Pharmaceutical (4502.T, ¥4,560) Toray Industries (3402.T, ¥996) UltraGenyx Pharmaceutical, Inc (RARE.OQ, $65.92) United Therapeutics Corp. (UTHR.OQ, $122.28)
Disclosure Appendix
Important Global Disclosures Fumiyoshi Sakai and Yen Ting Chen, PhD, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s to tal return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Nippon Shinyaku (4516 / 4516 JP) 25 01 September 2016
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
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Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 54% (51% banking clients) Neutral/Hold* 29% (24% banking clients) Underperform/Sell* 17% (53% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Nippon Shinyaku (4516.T)
Method: Our ¥6,300 target price for Nippon Shinyaku is based on DCF model using 5.1% WACC and 0% terminal growth rate. Our assumptions for WACC include cost of equity of 5.20% (derived from ERP of 6.75%, risk-free rate of 0%, and beta of 0.77) and cost of debt of 3.00%. We value Nippon Shinyaku for its strong partnership and the global launch of selexipag/Uptravi, an internally-discovered drug of blockbuster caliber. Our OUTPERFORM rating is based on a comparison of the company's potential 12-month total return versus our coverage universe.
Risk: Risks to our ¥6,300 target price and OUTPERFORM rating for Nippon Shinyaku include weak global penetration of selexipag, faster than expected generics erosion in Japan, pricing, and setbacks in clinical development.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (ATLN.S, BAYGn.DE, BMRN.OQ, 4519.T, PTCT.OQ, PFE.N, ROG.S, SRPT.OQ, UTHR.OQ, GSK.L, LLY.N, ALNY.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (ATLN.S, BAYGn.DE, 4519.T, PTCT.OQ, PFE.N, ROG.S, SRPT.OQ, GSK.L, LLY.N, ALNY.OQ) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (BAYGn.DE, PFE.N, SRPT.OQ, LLY.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (ATLN.S, BAYGn.DE, 4519.T, PTCT.OQ, PFE.N, ROG.S, SRPT.OQ, GSK.L, LLY.N, ALNY.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ATLN.S, 4503.T, BAYGn.DE, BMRN.OQ, 4519.T, 4523.T, 4151.T, 4528.T, 4578.T, PTCT.OQ, PFE.N, ROG.S, SRPT.OQ, 4507.T, 4502.T, UTHR.OQ, GSK.L, LLY.N, 3402.T, ALNY.OQ) within the next 3 months.
Nippon Shinyaku (4516 / 4516 JP) 26 01 September 2016
As of the date of this report, Credit Suisse makes a market in the following subject companies (BMRN.OQ, PFE.N, SRPT.OQ, 4502.T, UTHR.OQ, LLY.N, ALNY.OQ). As of the end of the preceding month, Credit Suisse beneficially own between 1-3% of a class of common equity securities of (ATLN.S). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (BAYGn.DE). Credit Suisse has a material conflict of interest with the subject company (BAYGn.DE) . Credit Suisse is acting as joint lead financial advisor to Bayer in relation to the proposed offer for Monsanto. Credit Suisse has a material conflict of interest with the subject company (PTCT.OQ) . Credit Suisse Asset Management maintains a Board seat and a seat on the Investment Committee through Martin Schmertzler. Credit Suisse has a material conflict of interest with the subject company (GSK.L) . An Officer or Director of Credit Suisse is a Director of GlaxoSmithKline plc (LSE:GSK) As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PFE.N). As of the date of this report, an analyst involved in the preparation of this report, Vamil Divan, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in the common stock Pfizer (PFE.N). A member of the analyst's household is an employee of Pfizer (PFE.N).
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. For a history of recommendations for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to https://rave.credit-suisse.com/disclosures/view/report?i=245800&v=-538gh8xsysn8a86c007alpcra . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (ATLN.S). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (PFE.N, SRPT.OQ, LLY.N) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (Japan) Limited ...... Fumiyoshi Sakai ; Yen Ting Chen, PhD To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Fumiyoshi Sakai ; Yen Ting Chen, PhD Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national
Nippon Shinyaku (4516 / 4516 JP) 27 01 September 2016 borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
Nippon Shinyaku (4516 / 4516 JP) 28 01 September 2016
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4516_090116_Nippon Nippon Shinyaku (4516 / 4516 JP) Shinyaku_E_initiation_final.doc29