LEQEMBI And LENVIMA Will Strengthen Market Position Despite Regulatory And Competitive Challenges

Key Takeaways

• LEQEMBI's expansion in the U.S., Japan, and China drives revenue growth, with innovations improving demand and margins through cost efficiencies.
  
• LENVIMA's revenue growth and new oncology combinations position Eisai for sustained earnings through diverse cancer treatment advancements.
  
• Eisai's reliance on partnerships and regulatory challenges may affect profitability, amid potential threats from competitors and legislative impacts on key product revenue.

Catalysts

Engages in the research and development, manufacture, sale, and import and export of pharmaceuticals in Japan.

• LEQEMBI is a significant growth driver for Eisai, with expanding infusion capacity in the U.S., steady market penetration in Japan, and growth in the Chinese self-pay market. This is expected to continue driving revenue growth significantly as the product further penetrates these markets.
  
• The company is making progress with key innovations like the subcutaneous (SC) auto-injector and blood-based biomarker (BBM) enhancements. These developments are anticipated to drive demand for LEQEMBI, potentially impacting earnings positively as they enhance ease of use and increase diagnostic capacity.
  
• Eisai is implementing comprehensive cost reduction strategies, including improvements in production efficiency and manufacturing processes for LEQEMBI. These strategies are expected to improve net margins by reducing the cost of sales and enhancing profitability.
  
• LENVIMA's revenue is on the rise, showing an 11% increase year-over-year, driven by growth in multiple cancer treatment indications. Despite competitive pressures and the effects of the U.S. Medicare Part D redesign, Eisai expects it to remain a strong revenue contributor, supporting overall earnings growth.
  
• Eisai's focus on advancing its oncology pipeline with new combination therapies, such as LENVIMA with E7386 and eribulin conjugated therapies, is poised to create future revenue streams. These pipeline advancements could drive long-term revenue and bolster earnings through potential early-market approvals and robust sales.

Eisai Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eisai's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.4% today to 6.1% in 3 years time.
• Analysts expect earnings to reach ¥53.7 billion (and earnings per share of ¥189.27) by about March 2028, down from ¥58.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥85.9 billion in earnings, and the most bearish expecting ¥-6.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.3x on those 2028 earnings, up from 20.8x today. This future PE is greater than the current PE for the JP Pharmaceuticals industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 1.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.59%, as per the Simply Wall St company report.

Eisai Future Earnings Per Share Growth

Risks

• The product LEQEMBI, although experiencing growth, could face future competitive pressures from new entrants like Kisunla, impacting its revenue generation if competitors capture market share.
  
• Eisai's reliance on partnerships, such as with Merck for LENVIMA and Biogen for LEQEMBI, may result in substantial shared profits, potentially constraining net margins.
  
• Regulatory and reviewer concerns, as seen with Europe's request for further safety information on LEQEMBI, could lead to delays or increased scrutiny, potentially impacting future revenue if products face approval challenges.
  
• The Inflation Reduction Act in the U.S. poses a risk to LENVIMA's operating profit due to the upcoming Medicare Part D redesign and the manufacturer’s share of costs, potentially affecting profits.
  
• Eisai's strategy of proactive investment in LEQEMBI may affect short-term profitability, with expectations that LEQEMBI will only become profitable by 2026, impacting earnings.

Valuation

• The analysts have a consensus price target of ¥5357.133 for Eisai based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥8500.0, and the most bearish reporting a price target of just ¥4000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥874.5 billion, earnings will come to ¥53.7 billion, and it would be trading on a PE ratio of 30.3x, assuming you use a discount rate of 4.6%.
• Given the current share price of ¥4347.0, the analyst price target of ¥5357.13 is 18.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.