Morgan Stanley: Daiichi Sankyo is the Top Pick in Japanese Pharmaceuticals, Bullish on ADC New Drugs and Pipeline Release

Overview

Morgan Stanley released an investment introduction to the Japanese pharmaceutical industry, maintaining an "In-Line" overall industry view. The report points out that the valuation of the Japanese pharmaceutical sector is at a reasonable level compared to global peers. The investment logic mainly revolves around the commercialization progress of innovative drug pipelines, responses to patent expiration risks, and structural consolidation in the generic drug industry. The firm's top picks are Daiichi Sankyo, Takeda, Otsuka, and Chugai Pharmaceutical, with a favorable view on Kaken and Towa among mid-cap stocks.

Core views

Innovative Drug Pipelines Driving Growth: Daiichi Sankyo (OW, target price JPY 4,650) is the top pick due to the strong potential of ADC new drugs such as Enhertu and Datroway, along with stable dividends. Enhertu sales are expected to reach USD 12.8 billion by 2030 (base case). Takeda (OW, target price JPY 6,300) will see approvals for multiple new drugs (such as Oveporexton for narcolepsy and Zasocitinib for psoriasis) in 2025-26. The company resumed dividend payments in 2023 and initiated share buybacks. Otsuka's (OW, target price JPY 14,100) new drug and royalty income is expected to exceed the patent expiration risks in its US market. Chugai Pharmaceutical (OW, target price JPY 10,700) has a rich pipeline, with particular attention on its oral GLP-1 drug collaboration with Eli Lilly and its obesity pipeline. Consolidation Opportunities in the Generic Drug Industry: Due to long-term supply shortages, the Japanese government is promoting consolidation in the generic drug industry. Current industry market share is approaching 90%, and future competitiveness will depend on production capacity supply, pricing strategies, and cost management. Towa (OW, target price JPY 5,600) is expanding capacity through outsourcing collaborations and raising funds by issuing preferred shares, with improving earnings visibility. Sawai (EW, target price JPY 2,000) possesses strict cost control capabilities; although short-term earnings are in a wait-and-see period, its medium-term growth potential remains intact. Patent Cliffs and Transformation Challenges: Some companies face severe patent expiration pressure. Astellas (EW) currently has robust earnings but needs to address the patent cliff for Xtandi in 2027. Ono Pharmaceutical (UW) and Nippon Shinyaku (UW) face patent expiration risks for core products Opdivo and Uptravi between 2027 and 2031, and their new pipelines cannot fully compensate for the gap, leading to Underweight ratings.

Analysis framework

The institution primarily establishes the relative position of the Japanese sector by comparing valuations (P/E) and historical performance of the pharmaceutical industries in Japan, the US, and Europe. For individual stock analysis, it adopts a risk-adjusted sum-of-the-parts (SOTP) valuation method for pipelines, combining drug clinical progress timelines and patent expiration dates to calculate target prices. For generic drug companies, the focus is on their capacity expansion plans and margin recovery capabilities under the backdrop of industry consolidation to judge their long-term competitiveness.

Methodology notes

• Valuation MethodSOTP Sum-of-the-Parts Valuation

  Pipeline Sum-of-the-Parts Valuation

  For pharmaceutical companies, the institution breaks down their value into base business and various R&D pipelines (such as ADC drugs, rare disease drugs, etc.), setting success rates and peak sales for each before discounting and summing them up. This method clearly shows the impact of the success or failure of a single pipeline on the overall valuation.

• Industry/Sector Analysis FrameworkIndustry Concentration Analysis

  Generic Drug Industry Consolidation Logic

  The report points out that after experiencing price wars and supply shortages in the generic drug market, government policies are forcing small and medium-sized enterprises to exit or be acquired. When analyzing leading companies, the focus is on their capacity expansion and cost control capabilities, which are core to gaining pricing power and profit recovery for leaders during the stage of increasing industry concentration.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Daiichi Sankyo (4568.T)

  Top pick for Overweight, strong ADC new drug pipeline

  Strengths

  Huge potential for Enhertu and Datroway, providing stable dividends.

  Comparison

  Most certain pipeline commercialization prospects among large Japanese pharmaceutical companies

  Risks

  Clinical trial results falling short of expectations

• Takeda (4502.T)

  Overweight, new drug cycle beginning

  Strengths

  Multiple new drug launches in 2025-26, resumption of dividends and buybacks.

  Risks

  Yen appreciation affecting overseas revenue

• Towa (4553.T)

  Overweight, benefiting from generic drug industry consolidation

  Strengths

  Smooth capacity expansion, improving earnings visibility.

  Comparison

  Stronger growth momentum than Sawai

  Risks

  Changes in drug pricing policies

• Ono Pharmaceutical (4528.T)

  Underweight, facing patent cliff

  Weaknesses

  Core product Opdivo is about to face patent expiration.

  Risks

  New pipelines unable to compensate for revenue decline

• Nippon Shinyaku (4516.T)

  Underweight, patent expiration risk for core drugs

  Weaknesses

  Uptravi patent will expire in 2027, uncertainty exists for new drugs.

  Risks

  Approval hurdles for new drugs such as CAP-1002

Key data

• Daiichi Sankyo Enhertu 2030 Sales ExpectationUSD 12.8 billionBase case expectation
• Takeda Target PriceJPY 6,300Rated Overweight (OW)
• Towa Target PriceJPY 5,600Rated Overweight (OW)
• Otsuka Target PriceJPY 14,100Rated Overweight (OW)

Impact & implications

The report believes that the investment value of Japanese pharmaceutical companies is showing significant divergence. Companies with global innovative drug R&D capabilities (especially in hot sectors such as ADC and GLP-1) or those that can expand market share during generic drug consolidation will receive valuation premiums. Conversely, companies overly reliant on single older drugs with subsequent pipeline gaps face significant downside risks. Additionally, exchange rate fluctuations (such as yen appreciation) have a certain negative impact on the profits of companies with substantial overseas operations, such as Takeda and Astellas.

Risks

• Failure of new drug clinical trials or approval delays.
• Impact of yen exchange rate fluctuations on the profits of multinational pharmaceutical companies.
• Stricter domestic drug pricing and medical insurance cost-control policies in Japan.
• Intensified generic drug competition after patent expiration of core products for some pharmaceutical companies.

What to watch

• Results of Daiichi Sankyo's Dato-DXd AVANZAR trial (second half of 2026).
• US approval status of Takeda's Oveporexton and Rusfertide (August 2026).
• 24-month clinical results of Otsuka's Voyxact for treating IgA nephropathy (October 2026).
• Progress of consolidation in Japan's generic drug industry and capacity release by leading companies.