Shareholder value creation in Japanese pharmaceuticals

Shareholder Value Creation in Japanese Pharmaceuticals

Mid-term Measures: Selection and Concentration of Business Domains

In parallel with improving near-term profitability, it is necessary to select and concentrate on areas of focus as midterm

measures. The selection and concentration referred to here means selecting a business domain on the three

axes of "therapeutic area," "value chain," and "deployment region," and pouring management resources into it. All these

discussions relate to capital profitability, so we first compared ROIC (Return on Invested Capital), which indicates

capital profitability, with the corresponding capital cost, WACC (Weighted Average Cost of Capital) (Figure 11). From this

analysis, it is clear that many Japanese pharmaceutical companies are not exceeding the level of return expected by

investors in terms of their ROIC.

Break even point

for EVA spread

WACC (%)

Source: Prepared by AlixPartners based on FactSet, analyst reports issued by securities companies, and various databases (discounted to present value)

*1: Risk-free rate is estimated using 10-year U.S. Treasury note and assumes mainly foreign investors.

ROIC(%)

-4

-2

26 0 1 2 3 4 5 6 7 8 9 10 11 12

Companies that are not

generating profits at

the level of investor

expectations of return

Companies that are

able to generate profits

in excess of investor

expectations of return

EVA = NOPALT - Cost of

capital = (NOPALT /

Invested capital - Cost

of capital / Invested capital)

x Invested capital =

(ROIC - WACC) x Invested

capital = EVA spread x

Invested capital

The difference between

ROIC and WACC, known as

the EVA spread, is the

amount of value created by

the company.

Japanese

EVA spread (FY21)

FIGURE 11: EVA SPREAD ANALYSIS OF JAPANESE PHARMACEUTICAL COMPANIES Sales growth rate (%)

Source: Annual reports and IR materials, SPEEDA

*1: weighted average

-3 4

-2 -1 10 9

2 5 6 7 8

10 12

R&D spending growth rate (%)

Weighted average of Global Top

Global Top

Japanese

Sales growth rate (FY12-21), R&D spending growth rate (FY12-21)

FIGURE 10: RETURN ON INVESTMENT ANALYSIS OF R&D SPENDING