Kyuoko's stock price soared 38% in two days! Funds flock to undervalued pharmaceutical companies in Japan, betting on the wave of privatization.

Pharmaceutical giant Hisamitsu Pharmaceutical Co., headquartered in Japan, plans to carry out a major privatization plan worth 457 billion yen (approximately 29 billion dollars), which is seen as the most typical case of a Japanese star-level pharmaceutical company "escaping the public market". Analysts in the Japanese stock market predict that more companies will follow suit, and a unprecedented wave of privatization acquisitions in the Japanese pharmaceutical field may soon emerge. This is why undervalued pharmaceutical companies in the Japanese stock market have seen a significant increase in their stock prices recently, as investors are betting that the wave of privatization will sweep through Japanese pharmaceutical companies. Amidst the dual pressure of short-term investors scrutinizing and government-mandated price reductions, some medium and small pharmaceutical companies, and even some larger Japanese top-tier pharmaceutical companies, are choosing to delist in order to seek greater management flexibility, cut costs significantly, reshape their product portfolios, and actively engage in long-term investments. In the past two years, one of Japan's long-established pharmaceutical giants, Mitsubishi Tanabe Pharma Corp., as well as Taisho Pharmaceutical Holdings Co., have successfully been privatized; meanwhile, the activist investor Dalton Investments LLC has urged Aska Pharmaceutical Holdings Co. to consider similar privatization measures. Hisamitsu's plan is spearheaded by CEO Kazuhiko Nakatomi - a key member of the founding family of Hisamitsu Pharmaceutical. This privatization deal is one of the largest in the history of the pharmaceutical industry in Japan, and has led to a 38% surge in the company's stock price within two days. Senior analysts Stephen Barker and Miyabi Yamakita from Jefferies Japan Ltd., a financial powerhouse on Wall Street, noted that investors will be paying closer attention to Japanese healthcare stocks trading at low valuation multiples. "The significant move made by Hisamitsu may not be an isolated case, but rather part of a broader trend of privatization in the Japanese pharmaceutical industry," they wrote in a recent disclosure report to clients. These analysts found that among the major pharmaceutical companies headquartered in Japan that they studied, there are currently 12 listed Japanese companies with price-to-book ratios lower than 1, accounting for about one-third, indicating that some companies in the industry are significantly undervalued by investors, making it a very opportune time for companies seeking privatization funds. They emphasized that potential acquisition targets include the attractively valued Kissei Pharmaceutical Co., as well as Kyowa Kirin Co. Ltd. and Sumitomo Pharma Co., which have privatization potential due to their parent company shareholding structure. It is worth noting that the number of companies listed on the Tokyo Stock Exchange has decreased for the first time in over a decade, mainly due to the record number of delistings related to privatization acquisitions and restructurings under pressure for exchange reform. On Thursday, the market also seemed to be betting on an upcoming wave of privatization in the Japanese pharmaceutical industry, as Hisamitsu Pharmaceutical's stock price surged by as much as 8% at one point, and experienced a cumulative increase of 38% over the two trading days following the privatization news. Similarly on Thursday, Sumitomo Pharma's stock price surged by as much as 12% at one point, hitting its largest intraday increase since November. Kyowa Kirin surged by about 1.8%, and Kissei's stock price rose by as much as 2.8%, reaching a seven-week high. Earlier is Better With the Bank of Japan embarking on a tightening cycle and benchmark interest rates expected to continue rising, driving up borrowing costs significantly, investors and pharmaceutical companies are likely to face higher costs in the future if they continue to delay making decisions to provide funds for transactions through financing, according to Hiroshi Nakamura, the Dean of the Graduate School of Management at Keio University, in an interview. "In terms of timing, the earlier the privatization, the better," Nakamura said. "But privatization acquisitions are a means, not a final solution; if they don't have a clear strategy for the next steps, they are likely to fail eventually." The Japanese pharmaceutical industry is currently under particular scrutiny by investors, largely due to significant pressures brought about by policy changes. The Japanese government has been urging the reduction of prescription drug prices and promoting a cheaper generic drug system to control costs and maintain its universal healthcare system against the backdrop of an aging population, which has been impacting the profits of the entire pharmaceutical industry. According to documents from the Japanese Ministry of Health, Labour and Welfare, starting from the new fiscal year in April, patients will bear higher out-of-pocket costs for certain branded drugs and drugs equivalent to non-prescription drugs. To revitalize performance and market share growth, in the face of intensified competition domestically, Hisamitsu is accelerating its overseas expansion. The company stated that its strategic focus is on maximizing the value of prescription drugs, while also developing new products using microneedle technology - a technology that allows for a faster, more efficient, and user-friendly exclusive delivery method. At the same time, Hisamitsu is restructuring its over-the-counter drug business and e-commerce sales business, as stated in a disclosure on Tuesday. A Wave of Privatization is set to Sweep Through Japan's Pharmaceutical Sector Patrick Branch, a partner at L.E.K. Consulting, stated, "Privatization will certainly continue to occur in some small and medium-sized companies, but it is also likely to occur in larger pharmaceutical companies with greater market value." However, he also noted, "Privatization is not the ultimate solution to the problem. Some publicly traded companies are not on the right track in terms of operations, do not have appropriate management, or lack the massive capital needed to fundamentally reverse the situation." Amid the backdrop of policy squeezing pharmaceutical companies' profits - the Japanese government is pushing for drug price reductions and promoting generic drugs, the "short-term performance pressure" of the public market, and the ongoing conflict between transformation demands, Japan's pharmaceutical industry is facing ongoing challenges. In the face of changes in drug prices and demand structure, companies often need to make more aggressive cost restructuring, asset/pipeline sacrifices, overseas expansion, and investment in new technologies; these actions may harm profits and return on equity in the short term and are more likely to clash with quarterly assessments in the public market, increasing the attractiveness of "going private to undergo a long cycle transformation". Under Japan's medical cost control framework, government agencies have systematic mechanisms for reducing drug prices (shifting NHI drug prices), combined with policy orientations towards generic drugs/cheaper alternatives, the industry's profit margins naturally come under pressure, especially for companies that mainly focus on domestic prescription drugs/OTC and do not have efficient research and development. In addition, Hisamitsu's MBO offer was at a premium of about 35% above the previous closing price, sending a very clear positive signal to the market: those undervalued well-known Japanese pharmaceutical companies have a grand narrative path for achieving value reappraisal through mergers/acquisitions/privatization, thus naturally stimulating global funds and merger and acquisition advisors to screen the next batch of "replicable pharmaceutical targets" in the Japanese stock market. There has been a significant increase in privatization/delisting transactions in Japan in recent years, with private equity and industrial capital more willing to intervene in a "restructuring + operational improvement" manner; for example, Mitsubishi Tanabe's acquisition by Bain is a classic case. Meanwhile, some listed subsidiaries/parent company holding structures smooth the execution of "parent company repurchase, group internal integration". In terms of monetary policy expectations, as Japan moves towards a new round of interest rate hikes and rising financing costs (the Bank of Japan has already raised the policy rate to 0.75% and signaled a continued inclination to raise rates), this will make companies and financial investors more inclined to complete financing and transaction arrangements before costs increase further, thereby accelerating the pace of privatization transactions in the pharmaceutical industry.