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Health Care & Pharmaceuticals
8 December 2008
Pharmaceuticals
Revised Pharmaceutical Affairs
Law could rejuvenate the OTC
Kenji Masuzoe, CMA
Research Analyst
(+81) 3 5156 6764
kenji.masuzoe@db.com
Osamu Iwata
Research Associate
(+81) 03 5156-6319
osamu.iwata@db.com
Fundamental, Industry, Thematic, Thought leading
Our stock selection committee has deemed this work F.I.T.T. for our clients
seeking original ideas. Steps to promote OTC drugs are one way Japan can lower
healthcare costs. We think the full implementation of the Revised Pharmaceutical
Affairs Law may rejuvenate the OTC drug market and could affect drugmakers.
Deutsche Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
FITT Research
Companies featured
Taisho Pharmaceutical (4535.T),¥1,826 Buy
2008A 2009E 2010E
EPS (¥) 78 34 80
P/E (x) 28.6 53.8 22.9
EV/EBITDA (x) 11.5 8.7 8.1
Fundamental: OTC drugs as one path to lower healthcare costs
The Ministry of Health, Labour, and Welfare is promoting using generic drugs as
one way to control rising healthcare costs. The OTC market could also play a role
in lowering medical fees, assuming frequent, proactive approvals for switch OTC
drugs and efforts to promote self-medication. We believe products beyond new
prescription drugs are becoming important for investors to consider. We offer an
overview of the OTC drug landscape, and the prospects for switch OTC drugs.
Industry: OTC market has bottomed, partly thanks to switch OTC drugs
OTC production value has declined from ¥800bn in the mid-1990s, when the term
“self-medication” started being used, to ¥600bn in 2006. We attribute this to
lower prices due to changes in sales channels, and the industry’s failure to
create/promote products in tune with consumers’ growing health & fitness
awareness (where the FOSHU market has grown). With the recent launch of quitsmoking
products, herpes drugs, and other switch OTC drugs, however, we feel
the OTC market has bottomed. We believe the OTC market could see further
growth with more new switch OTC drugs, and a re-evaluation of the importance of
self-medication to the medical system and efforts to lower healthcare costs.
Thematic: Revised Pharmaceutical Affairs Law to reinvigorate OTC market
The revised law took effect in FY3/07, and it will be fully implemented in FY3/10,
the first overhaul of the pharma business in 48 years. To reflect changes in the
social landscape and attendant trends toward deregulation, the revisions give the
OTC industry a major overhaul. OTC drugs will be grouped by risk classifications,
with different sales methods for each group. We believe this could spur growth in
the overall OTC market, with greater penetration for OTC products following
further switch OTC development, detailed information for consumers on products’
risks and benefits, and expanded sales channels.
Thought Leading: Spotlighting firms responsive to change in OTC market
To date, OTC has centered on tonic drinks, cold remedies, hay fever treatments,
and other products subject to weather-related volatility. We believe the ability to
develop and launch switch OTC drugs will be increasingly key for growth. Two
types of firms should benefit from OTC market growth: 1) hybrid firms that can
pursue switch OTC development alongside prescription drug work; and 2) larger
firms that can cover mounting costs for development, sales, advertising, and
promotions. We believe Taisho Pharmaceutical will be in the spotlight.
Valuation and risks
Our target prices are based on our FY3/13 EPS forecasts and an average P/E of
15x, or BPS. Share price risks include more intense competition because of
expanded sales channels for OTC drugs, and lower sales of OTC products
because of problems with side effects, or adverse weather conditions.
Table of Contents
Demographic aging and national healthcare expenditures ..................................3
Uptrends continue for national healthcare expenditures, public costs ....................................................... 3
Weighting for oldest group poised to grow............................................................................................... 4
Economic and financial reforms and cuts to healthcare spending ............................................................. 5
Possibilities for self-medication................................................................................................................. 6
The positioning of OTC drugs ..................................................................................7
Drug types ............................................................................................................................................... 7
Product brand strength is critical............................................................................................................... 8
New Drug Industry Vision ........................................................................................9
Future types of pharmaceutical firms ........................................................................................................ 9
Trends in the OTC market.......................................................................................10
Trends in production value for pharmaceuticals ...................................................................................... 10
OTC drug production value in decline: FY3/98–FY3/07............................................................................. 10
The rise of the FOSHU market ................................................................................................................ 11
A bottom for OTC production value in FY3/07 ......................................................................................... 11
No correlation between trends for the OTC market and the economy..................................................... 12
Full implementation of the revised Pharmaceutical Affairs Law .......................14
Risk classifications for OTC drugs ........................................................................................................... 14
Birth of new qualified sales persons........................................................................................................ 15
Pharmacists and new qualified sales persons ......................................................................................... 16
The start of in-store sales........................................................................................................................ 16
Moving into OTC drug sales.................................................................................................................... 17
Pros and cons with the revised Pharmaceutical Affairs Law.................................................................... 17
Switch OTC drugs ...................................................................................................19
Switch OTC drugs are only switch OTC drugs for three years................................................................. 19
Growth drivers for the OTC market ......................................................................................................... 19
Development and review periods for switch OTC drugs ......................................................................... 20
An increasing number of approved active ingredients ............................................................................. 21
Publishing lists of active ingredients as candidates for switch OTC use.................................................. 24
Promising areas within the switch OTC corner........................................................................................ 25
Recognition of brand names the key....................................................................................................... 26
Lifestyle-related diseases and potential for OTC drugs ......................................27
Lifestyle-related diseases and metabolic syndrome ................................................................................ 27
Targets to lower healthcare spending ..................................................................................................... 27
Looking ahead—The goal........................................................................................................................ 28
Obesity .................................................................................................................................................. 29
Japan’s pre-diabetes population.............................................................................................................. 29
Hypertension.......................................................................................................................................... 31
Lipid abnormalities ................................................................................................................................. 31
Industry realignment...............................................................................................32
Revisions to the pharmaceutical affairs law the trigger ........................................................................... 32
Risks for OTC drug businesses...............................................................................33
Side effects............................................................................................................................................ 33
Pricing.................................................................................................................................................... 33
Rising development costs....................................................................................................................... 33
The candidate active ingredient list for switch OTC development ........................................................... 34
Weather conditions................................................................................................................................ 34
Domestic OTC drugmakers ....................................................................................35
Healthcare business............................................................................................................................... 35
OP margins of drugmakers ..................................................................................................................... 35
Taisho Pharmaceutical............................................................................................................................ 37
Rohto Pharmaceutical ............................................................................................................................. 40
Takeda Pharmaceutical........................................................................................................................... 42
Daiichi Sankyo Healthcare...................................................................................................................... 44
Lion........................................................................................................................................................ 46
SSP ........................................................................................................................................................ 47
Hisamitsu Pharmaceutical ....................................................................................................................... 49
Kobayashi Pharmaceutical...................................................................................................................... 50
Eisai ....................................................................................................................................................... 52
Taisho Pharmaceutical (This bulletin was pulished on 1 December 2008) .......54
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