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Japan-Update

Drugmaker Otsuka touches 2017 low as new hits prove elusive

Loss of patent on mainstay antipsychotic has left gaping hole in profit

TOKYO -- Investors are harboring doubts about Japanese drugmaker Otsuka Holdings' growth strategy as new products fail to compensate for declining sales of a former blockbuster.

The company's Tokyo-listed shares fell as much as 4% or so to a year-to-date low of 4,646 yen Tuesday afternoon, with the sell-off quickening after the release of January-June earnings that showed a double-digit net profit decline.

Group sales rose 1% on the year to 595.3 billion yen ($5.38 billion). Such new drugs as the Rexulti antidepressant and the Lonsurf cancer treatment sold well. This put the brakes on a sales decline associated with Abilify, the blockbuster antipsychotic that lost U.S. patent protection in 2015. The company has overcome the impact of Abilify's patent expiration and is on the track to growth, CEO Tatsuo Higuchi stressed in a news conference.

But "new drugs have not compensated for the drop in profit from Abilify," an analyst pointed out. Net profit fell 14% to 42.4 billion yen. The pharmaceuticals segment's operating profit plunged 46%. Although a roughly 23 billion yen impairment loss for a product from U.S. subsidiary Avanir Pharmaceuticals had a big impact, profit sank 12% even without the write-down.

Abilify was Otsuka's mainstay, with annual sales of 654.2 billion yen accounting for more than 40% of the company's total at its peak. Having fallen off the patent cliff, sales of the drug dropped 38% on the year in the first half of 2017.

A five-year business plan starting in 2014 envisions covering Abilify's decline with new cancer and central nervous system drugs. But market watchers are less optimistic. Reaching a goal of a 155 billion yen operating profit by the plan's final year of 2018 has become a stretch, according to Fumiyoshi Sakai, an analyst at Credit Suisse.

The stock price reflects such sentiment, retreating about 8% since the end of last year. Top Japanese drugmaker Takeda Pharmaceutical has risen more than 20% over the same period, while Roche unit Chugai Pharmaceutical has climbed around 30%. Although disappointing clinical trials to expand Rexulti's indications contributed to Otsuka's decline, the contrast is still significant.

Nutrition-related operations, which offer such products as Pocari Sweat sports drinks and Calorie Mate fortified biscuits, have emerged as a stable profit source. But Otsuka's mainstay business is undoubtedly medicine. The drugmaker trades at about 30 times forward earnings, below the roughly 34 of Takeda and the 38 or so of Chugai. This discount mirrors the market's low expectations for its growth.

"Otsuka could obtain several drug candidates if it used its ample cash," an analyst argued. Seeing no surefire replacement for Abilify in the pipeline, investors want Otsuka to show how it intends to meet the needs of the present, including the possibility of acquisitions. The question is whether the message will get through.

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