Overview

The growth of the U.S. pharmaceutical market is trending downward during the first half of the fiscal year ending March 2008 by the patent expirations of major pharmaceuticals, although branded pharmaceuticals enjoyed solid growth, with the market benefiting additionally from the expansion of the bio-pharmaceutical sector alongside the launch of new products. Offsetting this, the market in Japan grew in the absence of an NHI (National Health Insurance) price revision. Emerging markets such as China and Russia provided an additional boost to growth. As a result, the global pharmaceutical market saw steady growth.

Under these business conditions, the DAIICHI SANKYO Group (the “Group”) recorded consolidated net sales of ¥443.7 billion for the interim period ended September 30,2007, a year-on-year decline of 8.7%. In particular, certain exceptional factors were behind the dip in revenue, including moves to establish non-pharmaceutical businesses on an independent footing as part of the business integration process and changes in fiscal year-end at some overseas subsidiaries. The Group continued to make steady progress in terms of maximizing the sales potential of existing mainstay products and cultivating new products. By these developments, progress was also made in terms of developing in-house sales at global four key markets leveraging our global products. After excluding exceptional factors, real revenue grew in year-on-year terms. Moreover, both operating income and ordinary income rose substantially on a year-on-year basis, reflecting a mixture of newly realized business integration-derived cost synergies, further efficient resource allocation due to greater selectivity and focus, and the shifting of certain expenses into the second half of the fiscal year. Operating income increased 19.9% to ¥93.9 billion and ordinary income rose 14.2% to ¥100.6 billion. However, net income fell 9.9% to ¥60.2 billion in year-on-year terms due to the absence of exceptional factors that arose in the first half of the fiscal year ended March 2007, when profits from the sale of non-pharmaceutical businesses created an extraordinary gain of ¥20.5 billion.

In terms of the impact of changes in fiscal year-end at overseas subsidiaries, the aggregate contributions of Group subsidiaries based in the United States to operating performance for the interim period ended September 30,2006, were net sales of ¥31.5 billion, operating income of ¥9.0 billion, ordinary income of ¥10.5 billion and net income of ¥5.8 billion, while the aggregate contributions of Group subsidiaries based in Europe for the interim period ended September 30,2007, were net sales of ¥14.1 billion, operating income of ¥1.8 billion, ordinary income of ¥2.1 billion and net income of ¥2.0 billion, because respective amount corresponding to extra three months were added.

Geographical Segment Information

■ Japan

In August 2007, the Ministry of Health, Labor and Welfare announced a new vision for the Japanese pharmaceutical industry aimed at raising international competitiveness and eliminating the so-called “drug lag” (the situation in which a substantial number of drugs have not received regulatory approval in Japan despite common adoption across markets worldwide). This vision aims at encouraging closer collaboration among industry, government, and academy, and further development of the domestic industry, in part by placing a proper value on innovation and its promotion.

The Group has pressed on with a range of measures aimed at realizing the core vision of attaining “Global Pharma Innovator” status, with pride of being a life-related industry and with a sense of tension within an ordered yet competitive market environment. While contributing to enhance medical standards through the significant improvement of international development and drug-discovery capabilities, the Group also aspires to help the pharmaceutical industry in boosting the economic growth of Japan, a country that advocates being highly committed to intellectual property and related rights.

Net sales in Japan decreased 13.6% in year-on-year terms to ¥295.3 billion.The Group recorded sales of prescription drugs of ¥214.5 billion, a decrease of 0.3% in year-on-year terms. Although the Group achieved sales growth in excess of that of the corresponding market segment with a number of products, including the antihypertensive agents Olmetec®, Artist® and Calblock®, the analgesic, anti-inflammatory and anti-febrile preparation Loxonin®, and synthetic antibacterial agent Cravit®, it was offset by a decline in sales of the antihyperlipidemic agent Mevalotin® and the contrast medium Omnipaque® due to influences including fiercer competition, in addition, to the absence of a lump-sum compensation accompanied with the return of the sales right of anti-platelet agent Plavix® accounted for in the same period last fiscal year.

Sales in regard to exports and royalty income to/from overseas licensees amounted to ¥39.7 billion, a year-on-year decrease of 13.5%. In overseas markets, the sales of the synthetic antibacterial levofloxacin has continued to expand reflecting the robust prescription growth, but export of antihyperlipidemic agent pravastatin bulk decreased due to the expiry of its patent in major countries.

In the OTC (over-the-counter) drugs market in Japan, the framework has been fundamentally revised in line with various amendments to the Pharmaceutical Affairs Law that aim to establish a system better suited to meeting the needs of consumers with a greater attention to self-medication.

The Group posted sales of OTC drugs of ¥24.4 billion in the interim ended Sep.30, 2007 period under review, a year-on-year decrease of 0.6%. Overall sales in this segment were almost flat in year-on-year terms. New products included were Patecs Felbinac as a new addition to the series of external anti-inflammatory analgesics introduced in April 2007 and Transino, a product for the amelioration of skin blemishes (chloasma) that launched in September 2007 and is expected to become a leading seller. Although new product sales contributed to growth, the December 2006 return of the sales right of Lamisil AT, a treatment for athlete�fs foot, and other factors exerted a negative effect on sales in year-on-year terms.

In addition, the Group is in the process of making non-pharmaceutical operations independent of the Group in order to focus resources on the pharmaceutical business. These various moves resulted in a significant decline in net sales in this segment in year-on-year terms, which came to ¥16.6 billion, down 70.3%.

■ North America

The growth movement of the U.S. pharmaceutical market, the world largest market, is slowing down. Furthermore, the ranks of the uninsured are expanding, and the aging society is accelerating. Those are some of factors that bring general uncertainty regarding future prospects.

Under these business conditions, our net sales in North America came to ¥89.7 billion, down 17.4% in year-on-year terms. This decline occurred due to the changes in fiscal year-end at certain U.S. subsidiaries. The Group virtually posted increased net sales thanks to the sales growth of the antihypertensive agent Benicar®, the antihyperlipidemic agent Welchol®, and the anemia treatment Venofer®.

■ Others

Net sales in other regions amounted to ¥58.6 billion, up 66.1% in year-on-year terms. Businesses in Europe expanded thanks to the sales growth of the antihypertensive agent Olmetec®. The sales growth of the antihypertensive agent olmesartan and the synthetic antibacterial levofloxacin drove the business in Asian countries. Additional factors boosting net sales by ¥17.0 billion were changes in fiscal year-end at European subsidiaries, and inclusion of two subsidiaries in Latin America within the scope of consolidation in the interim period ended September 30,2007.

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■ Full Year

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Financial Indicators

■ Interim Period

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