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Japan Pharmaceuticals and Healthcare Report Q1 2012

Japans pharmaceutical market is proving to be a welcome refuge for the leading multinational drugmakers, which are experiencing austerity-induced revenue contractions in Western Europe and healthcare reform costs in the US. Despite numerous operating challenges in Japan, most notably delays to the introduction of innovative medicines, known as the drug lag, pharmaceutical sales are forecast to remain robust over the medium term.

Headline Expenditure Projections

- Pharmaceuticals: JPY9,525bn (US$109.3bn) in 2010 to JPY9,961bn (US$126.9bn) in 2011; +4.6% in local currency terms and +16.1% in US dollar terms. Our forecast has been revised up from Q411 due to macroeconomic factors, new historic data and additional analyst intervention.

- Healthcare: JPY39,432bn (US$452.3bn) in 2010 to JPY39,718bn (US$506.0bn) in 2011; +0.7% in local currency terms and +11.9% in US dollar terms. Our forecast has been revised up from Q411 due to macroeconomic factors.

- Medical Devices: JPY2,755bn (US$31.6bn) in 2010 to JPY2,827bn (US$36.0bn) in 2011; +2.6% in local currency terms and +14.0% in US dollar terms. Our forecast has been revised up from Q411 due to macroeconomic factors.

Business Environment Rating

Japans Pharmaceutical and Healthcare Business Environment Rating (BER) score increased from 68.9 in Q411 to 72.4 in Q112, underlining its status as the most attractive market in the Asia Pacific region. The upgrade was primarily due to a revision in the pharmaceutical market forecast, which was caused by increased US dollar growth due to the strengthening yen. We expect another upgrade in Q112 as we have reappraised the countrys pharmaceutical regulatory regime.

Key Trends And Developments

- In September 2011, Santen Pharmaceutical was set to purchase French pharmaceutical ophthalmic company Novagali Pharma for EUR100mn (US$136mn). Santen will acquire a 50.55% stake in Novagali from investment funds and other major shareholders for EUR50.7mn (US$69.0mn) and then launch a tender offer to purchase the remaining shares by the end of 2011 after receiving approval from French authorities. According to Santens chairman and CEO, Akira Kurokawa, the acquisition will allow the company to expand its global footprint, which is one of Santens major strategic objectives through to 2020.

- Also in September, Swiss pharmaceutical company Acino signed an exclusive license agreement with Sawai Pharmaceutical for the development and distribution of one of its key oncology products in the Japanese market. The product will be developed by Acino at its manufacturing site in Miesbach, Germany, while Sawai will develop and distribute it in Japan. Acino CEO Peter Burema said the agreement will enhance both companies mid-term growth opportunities and strengthen Acinos geographical expansion drive.

- In July 2011, Fujifilm and Dr Reddys Laboratories formed a joint venture (JV) to penetrate Japans highly promising but increasingly competitive generic drug market. The Indian firm will bring expertise in cost-competitive production technologies for active pharmaceutical ingredients (APIs) and finished medicines, while Fujifilm will contribute experience in advanced quality control and considerable knowledge of the local business environment. Tokyo-based Fujifilm will have a 51% stake in the JV and Dr Reddys will own the rest. The first products will be launched in the next three to four years, the companies said.

Economic View

The Japanese economy registered its third consecutive quarter of decline, coming in at 0.5% quarter-on-quarter (q-o-q) in Q211 from 0.9% q-o-q in the preceding quarter as the country continued to suffer from the after-effects of the March 2011 earthquake and tsunami. As a result, we maintain our view that the economy will contract by 0.7% for the whole of 2011. While reconstruction efforts will lead to a growth boom in late 2011 and 2012, the rebound should be relatively weak at 1.8% in 2012.

Political View

Japans political scene will be more unpredictable in the 2010s now that the country has moved beyond sole rule by the Liberal Democratic Party (LDP). However, it is far from clear whether Japan will develop a competitive two-party system, or whether one-party rule will re-emerge with one of the major parties. It is questionable whether any political force can address Japans colossal economic woes, which have been exacerbated by the Tohoku earthquake, tsunami and nuclear disaster.

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