Based on the strength of its top-selling Alzheimer's disease treatment Aricept, Japanese pharmaceutical company Eisai (OTC BB: ESALY) reported a sixth consecutive year of record sales and profits, even as its home-country competitors saw earnings that were relatively flat or even declined.
Aricept has been a blockbuster for Eisai, and the company said it expects the current year to see similar gains. But there are chinks in the company's armor: It faces the loss of patent protection on some of its drugs like Aricept and AcipHex. For that reason, the company is trying to expand the uses for its Alzheimer's treatment, along with licensing new drugs to other pharmaceuticals. For example, it will license its vaccine booster E6020 to Sanofi-Aventis (NYSE:SFY), who will test its effectiveness.
Currently, Aricept is only indicated for use in mild to moderate forms of the Alzheimer's. Here in the U.S., the only approved treatment for moderate to severe symptoms of the disease is Namenda, marketed by Forest Labs (NYSE:FRX), which regulates the activity of glutamate in the brain, an important chemical for learning and memory. Eisai has submitted an application to have Aricept used for these expanded conditions, and while initial results have been mixed, it's unknown what the ultimate outcome will be. It also submitted an application to have Aricept used for severe cases in Europe. Of note, Forest Labs' application to have Namenda used for mild to moderate symptoms was rejected last year.
Aricept is an acetylcholinesterase inhibitor, which means that it blocks the breakdown of acetylcholine, a chemical messenger considered to be critical to memory, thought, and judgment. This is important, since patients with Alzheimer's disease have low levels of acetylcholine. Aricept increases the amount of acetylcholine in the brain, and improves nerve cells' response to it. Of course, it's not a cure for Alzheimer's --Aricept can only improve patients' cognitive functions for a limited time.
The market for Alzheimer's treatment is huge, totaling more than $3 billion in sales worldwide and expected to grow to $5.5 billion by 2009, according to the Millennium Research Group. Sales of Aricept grew 17% in 2005, to $1.7 billion at current exchange rates, while accounting for some 47% of Eisai's total sales for the year. The pharmaceutical's profits were also helped by strong 17% growth from Aciphex, a proton pump inhibitor used to treat acid reflux disease.
Eisai's results and expectations for the future, however, are at odds with those of the other major pharmaceuticals in Japan. The largest pharmaceutical in the country is Takeda; neither it nor No. 2 pharma Daiichi Sankyo expect to see any growth for the year. The third-largest pharmaceutical in Japan, Astellas, reported a 9% decline in its profits.
All four companies will be affected by a government-mandated 6% decrease in drug prices, imposed in an effort to control health-care costs in the country. Eisai apparently will be less affected by these price cuts, since most of the sales for Aricept, AcipHex, and its epileptic drug Zonegran are sold in the U.S. The improving situation allowed Eisai to increase free cash flow (operating cash flow minus capital expenditures) by 33%, or $395 million at current rates.
With new formulations for its current drugs planned for release, expansion of its blockbuster drug Aricept possible, and with a few new drugs in the pipeline, Eisai is poised to continue churning out record revenues and earnings that investors won't soon forget.
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Fool contributor Rich Duprey owns shares of Eisai but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
