Jiuguang's stock price soared 38% in two days! Capital is flocking to Japan's undervalued pharmaceutical companies to bet on a wave of privatization

The Zhitong Finance App learned that the Japan-based pharmaceutical giant Hisamitsu Pharmaceutical Co., Ltd. (Hisamitsu Pharmaceutical Co., Ltd.) plans to implement a major privatization plan for 457 billion yen (about 2.9 billion US dollars), which is regarded as the most typical example of a Japanese star pharmaceutical company “escaping the open market.” Analysts in the Japanese stock market expect more companies to follow suit, and there may soon be an unprecedented wave of privatization acquisitions in the Japanese pharmaceutical sector. This is why undervalued pharmaceutical companies in the Japanese stock market have recently risen sharply. Investors are generally betting that the wave of privatization will sweep through Japanese pharmaceutical listed companies.

Under the double pressure of short-term investors actively scrutinizing and forced price cuts by the government, some small and medium-sized pharmaceutical companies, and even some of the largest Japanese top pharmaceutical companies, chose to delist in order to seek deeper management flexibility, thereby reducing costs, reshaping product portfolios, and actively investing in the long term.

In the past two years, Mitsubishi Tanabe Pharma Corp. (Mitsubishi Tanabe Pharma Corp.) and Taisho Pharmaceutical Holdings Co., Ltd. (Taisho Pharmaceutical Holdings Co., Ltd.), one of Japan's established pharmaceutical giants, have been successfully privatized; at the same time, aggressive rights investor Dalton Investments LLC has urged Aska Pharmaceutical Holdings (Aska Pharmaceutical Holdings) Holdings Co.) is considering similar privatization initiatives.

Hisamitsu's plan was led by CEO Kazuhiko Nakatomi — an important member of Hisamitsu Pharmaceutical's founding family. The privatization deal was also one of the largest privatizations in the pharmaceutical industry so far in the Japanese stock market, and drove the company's stock price to rise 38% in two days.

Senior analysts Stephen Barker and Miyabi Yamakita from Wall Street financial giant Jefferies Japan Ltd., in Japan, said investors will pay closer attention to Japanese healthcare stocks traded at undervalued multiples. “Hisamitsu's major move is probably not an exception, but part of a broader privatization trend in the Japanese pharmaceutical industry,” they wrote in a recent disclosure report to customers.

The two analysts discovered that among the major pharmaceutical companies headquartered in Japan, there are currently 12 Japanese listed companies with net market ratios below 1, accounting for about one-third, indicating that some companies in this industry are seriously underestimated by investors, and the timing is perfect for seeking privatization capital. They emphasized that potential acquisition targets include Kissei Pharmaceutical Co., which has an attractive valuation. , and Kyowa Kirin Co., which has the possibility of privatization due to the parent company's shareholding structure Ltd. and Sumitomo Pharma Co., Ltd. (Sumitomo Pharma Co.).

Notably, the number of companies listed on the Tokyo Stock Exchange declined for the first time in more than 10 years, mainly due to privatization acquisitions and the number of delistings related to restructuring under heavy pressure from exchange reforms reached a record level last year.

On Thursday, the market also seemed to be betting on the impending privatization wave in the Japanese pharmaceutical industry. Hisamitsu Pharmaceutical's stock price once rose by as much as 8%, and the overall cumulative increase in the two trading days after the privatization news came out was as high as 38%. Also on Thursday, the stock price of Sumitomo Pharmaceuticals rose by as much as 12%, the biggest intraday increase since November in one fell swoop. Kyowa Kirin once rose about 1.8%, and Kissei's stock price once rose as much as 2.8%, hitting the highest point in seven weeks.

The sooner the better

As the Bank of Japan begins the interest rate hike cycle, the benchmark interest rate will continue to rise and drive up borrowing costs significantly. If investors and pharmaceutical companies continue to delay making decisions on financing to fund transactions, costs related to privatization will be higher in the future, Hiroshi Nakamura, dean of the Keio University Business School in Japan, said in an interview.

“In terms of time, the sooner the privatization, the better,” Nakamura said. “But private acquisitions are a method, not a final solution; if they don't have a clear strategy for the next step, they're also likely to fail in the end.”

Currently, the Japanese pharmaceutical industry is under special scrutiny by investors, mainly because pharmaceutical companies are facing significant pressure brought about by policy changes. The Japanese government has been urging a reduction in the price of prescription drugs and the promotion of a cheaper generic drug system to control costs and maintain its national health insurance system in an aging context, thus undermining the profits of the entire pharmaceutical industry. According to documents from Japan's Ministry of Health, Labor, and Welfare, starting in the new fiscal year starting in April, patients will bear higher out-of-pocket expenses for certain brands of drugs and drugs equivalent to non-prescription drugs.

In order to revive the trend of growth in performance and market share, Hisamitsu is speeding up the pace of overseas expansion at a time when domestic competition is intensifying. The company said its strategy focuses on maximizing the value of prescription drugs while developing new products using microneedling technology — a technology that enables faster, more efficient, and more user-friendly exclusive administration methods, while also restructuring the non-prescription drug business and e-commerce sales business, Hisamitsu said in a disclosure statement on Tuesday.

The big wave of privatization is about to sweep through the Japanese pharmaceutical sector

Patrick Branch, partner from L.E.K. Consulting, said: “Privatization will of course continue to occur in some small and medium-sized enterprise sectors, but it is also likely to happen to pharmaceutical companies with larger market capitalization.” However, he also said, “Privatization is not the ultimate solution to the problem. Some listed companies are not on the right path of operation, do not have the right management, or lack the huge capital needed to completely reverse the situation.”

In a context where the policy side continues to squeeze the profits of pharmaceutical companies — the Japanese government pushes down drug prices + promotes generic drugs, “short-term performance pressure” in the open market can be described as a continuous conflict with transformation needs. Under changes in drug prices and demand structures, companies often need to do more aggressive cost restructuring, asset/pipeline trade-offs, overseas expansion, and investment in new technology; these actions may hurt profits, ROE, and are more likely to conflict with open market quarterly assessments, thereby increasing the appeal of “long-term transformation after delisting”.

Under Japan's medical insurance fee control framework, government departments have an institutional mechanism to reduce drug prices (NHI drug prices), compounded by policy guidance on generic drugs/lower cost alternatives. The profit margin of the industry is naturally under pressure, especially for companies that mainly use Japanese prescription/OTC and do not have superior R&D efficiency.

Furthermore, Hisamitsu MBO offers a 35% premium on the previous closing price, sending a very clear positive signal to the market: those well-known Japanese pharmaceutical companies that are undervalued have a grand narrative path of using mergers/privatization to achieve value revaluation, so soon, it will naturally stimulate the global capital and M&A advisory system to go to the Japanese stock market to screen the next batch of “replicable pharmaceutical targets.”

There has been a marked increase in privatization/delisting transactions in Japan in recent years, and private equity and industrial capital are more willing to intervene in the form of “restructuring+operational improvement”; for example, the acquisition of Mitsubishi Tanabe by Bain is a typical example; at the same time, the holding structures of some listed subsidiaries/parent companies have also made “parent company buybacks and intra-group integration” run more smoothly.

In terms of monetary policy expectations, as Japan moves into a new cycle of interest rate hikes and financing costs rise (the Bank of Japan has raised the policy interest rate to 0.75% and released a trend of continuing interest rate hikes), this will make enterprises and financial investors more inclined to complete financing and transaction arrangements before costs rise further, thus speeding up the pace of privatization transactions of pharmaceutical companies.