Shareholder value creation in Japanese pharmaceuticals

Shareholder Value Creation in Japanese Pharmaceuticals

1. THE BUSINESS ENVIRONMENT

External environmental factors causing a "triple whammy" are creating challenges for Japanese

pharmaceutical companies:

The business environment surrounding Japanese pharmaceutical companies has significantly increased in complexity and

difficulty over the past 20 years. Particularly, three external factors-1. Rising difficulty of new drug discovery (can't produce

drugs), 2. Widespread use of generic medicines (even if drugs are produced, they won't sell), and 3. Reduction of drug prices

(even if they sell, they won't profit)-have been complicating the management of businesses in the pharmaceutical industry.

Worsening performance of Japanese

pharmaceutical companies:

Looking at past financial performance trends over the

long term, the performance of Japanese pharmaceutical

companies as a whole has been deteriorating. For

example, when comparing the average operating profit

margins of pharmaceutical companies listed on the

Japanese market in 2000 and 2021, they are 13.2% and

12.6% respectively. While the difference may seem minor

at first glance, if we compare the proportion of companies

with operating profit margins below 5%, we see that

it increased significantly from 14.8% (4 companies) in

2000 to 33.3% (11 companies) in 2021 (for reference, the

average from 2017 to 2021 is 13 companies), suggesting a

widening gap in performance (Figure 2).

Additionally, the performance of top-selling pharmaceutical

companies in Japan is greatly lagging behind global

pharmaceutical companies. When comparing the average

sales growth rate and operating profit margin between

Japanese pharmaceutical companies and the top 10

global pharmaceutical companies (excluding Japanese

companies) for FY21 (hereinafter referred to as "Global

Top"), the Global Top has experienced an average sales

growth of about 7% over the past 10 years, whereas

the majority of Japanese pharmaceutical companies

significantly lag behind this growth rate. Most of these

low-sales-growth companies also significantly lag behind

the Global Top in terms of operating profit margin. There

are a few Japanese pharmaceutical companies that

have achieved growth exceeding the Global Top through

proactive overseas M&A and external alliances, but many

of these companies' operating profit margins are well

below those of the Global Top.

Sales growth rate (FY12-21) operating margin (average of FY12-21) the size of bubble represents

the size of sales (FY21)

FIGURE 2: COMPARISON OF OPERATING PROFIT MARGIN AND SALES GROWTH RATE OF JAPANESE

PHARMACEUTICAL COMPANIES AND GLOBAL TOP

Source: Annual reports, IR materials,

SPEEDA

*1: weighted average

Operating margin(%)

Sales growth rate(%)

Weighted average of Global Top

-1 2

-2 5

10 8

3 76 9 10 11 12

Global Top

Japanese

RISING DIFFICULTY OF NEW DRUG DISCOVERY:

In major therapeutic areas such as lifestyle-related

diseases, medicines with a certain degree of efficacy

already exist, leaving only room for the development

of new drugs for diseases with unknown treatment

mechanisms and areas of high unmet medical needs

where the effectiveness of existing drugs is insufficient.

The main battlefields for research and development in

these areas are shifting from low-molecular compounds

to biological preparations, and further to new modalities

such as nucleic acid medicines and cell therapy. The

difficulty of development is high, and the success rate

of new drug development has fallen from one in 13,000

twenty years ago to one in 23,000.

WIDESPREAD USE OF GENERIC MEDICINES:

Due to the promotion of the "Roadmap for Further

Encouraging the Use of Generic Medicines (Ministry of

Health, Labour and Welfare)" aimed at reducing patient

burden and improving medical insurance finances, the

volume share of generic drugs in Japan has already

reached 79% as of 2022. This penetration of generic

drugs is irreversible worldwide, not just in Japan, and is a

factor in restraining the sales volume of pharmaceutical

companies that deal mainly with new drugs.

REDUCTION OF DRUG PRICES: In Japan, the Ministry

of Health, Labour and Welfare has been carrying out

annual drug price revisions to reduce the financial burden

on patients and fiscal burdens, posing headwinds for

sales growth of Japanese pharmaceutical companies.

This "triple whammy" business environment is expected

to become more severe in the future.