Japan is ranked at the top in the world for longevity, according to the World Health Organization (WHO). As the population in Japan continues to age, we see its healthcare sector as an attractive investment theme. The ageing society and increasing number of active senior citizens will lead to increasing demand for healthcare services and products. With healthcare expenditures (as a percentage to GDP) still lagging behind other developed nations, it is widely expected that there is room for growth in the sector. Furthermore, with a sizeable affluent population, Japan should see strong demand in quality healthcare services. Therefore, we see significant opportunities for Japan’s healthcare companies to benefit from the growing healthcare demand. After taking into considerations our strategic partner, Tokai Tokyo Research Institute (”TTRI”)’s recommendation and consensus view, our selected top picks for the healthcare sector currently are: (i) Sugi Holdings Co. Ltd, and (ii) Astellas Pharma Inc.

Japan is the third-largest spender on healthcare in the world after the United States and China, where the majority of healthcare spending is publicly-funded according to Deloitte’s 2015 Japan‘s health care outlook report. The country spent a modest amount on healthcare in 2013 at an estimated USD480.0b or 9.8% of its GDP based on data gathered from the WHO. Having one of the largest healthcare markets in the world, market growth factors include the greying population, increasing home-based care, and growing number of chronic diseases. Japan’s healthcare system is characterized by universal coverage, free choice of healthcare providers by patients and a predominant role for private hospitals. All Japanese citizens are required to participate in the National Health Insurance program. Premiums are based on income and ability to pay.

Ageing population – more healthcare spending and demand. Population ageing is very much expected to be a concern and spur government’s healthcare spending in the decades to come. In developed countries such as Japan, the use of advanced medical care services by adults rises with age and per-capita expenditure on healthcare is relatively high among older age groups. Thus, as the population of elderly people rises, there will be more upward pressure on overall healthcare spending and demand. The eldest percentile of older population would tend to lose their ability to live independently amid limited mobility, or diminishing abilities to function properly by physical or cognitive means. Many would require some form of long-term care, which includes home nursing, community care and assisted living and longterm stay hospitals.

Leveraging on Government healthcare cost containment initiative. The Japanese government is currently contemplating integration of fragmented medical corporations to realize optimal allocation of hospital beds and increase buying power through group purchasing. With Japan reportedly having too many acute hospitals (which are more costly than the typical nursing-type hospitals) that is possibly causing the escalating health care expenditure, there is a blue print for government plans to convert these acute hospitals into long-term care facilities within the next few years. Furthermore, healthcare providers may possibly need to consider restructuring their business model by expanding their services to include preventive care to nursing care coverage, which is in accordance to the government’s concept shift from hospital to community-based care delivery. The aforesaid initiatives indirectly benefit players such as Sugi Holdings Co. Ltd whom business model is to collaborate with community medical service providers to provide lower-priced OTC drugs with consulting (through bulk purchase) and home nursing care services to customers.

Healthcare business opportunities abundant. As the Japanese government struggles with higher healthcare spending and aging population, their goal to seek lower costs for its national healthcare program by encouraging the use of generics remains firm at this juncture. The initiative to promote the use of generics, which are cheaper to relieve the massive government debt burden and aging population issue have led to a tie-up between the two world’s biggest pharmaceutical companies (Takeda Pharmaceutical Co. and Israel’s Teva Pharmaceutical Industries Ltd). The government is expecting use of generics to make up c.80% of prescriptions in Japan from c.50% currently in the next few years. This shall put makers of branded pharmaceuticals, especially those that are off-patent, are at a disadvantage position, especially when the generics industry is expected to grow at c.10% annually by industry estimates. Looking at the changes in healthcare reform and the mega-merger deal recently, we foresee that there will be more consolidation in Japan as small and midsize companies seek to become more competitive and getting a better foothold in the generics drug-making. Thus, we expect notable generic drug makers and distributors such as Takeda Pharmaceutical Co. Ltd., Astellas Pharma Inc., Ono Pharmaceutical Co. Ltd and Sugi Holdings Co. Ltd to be huge beneficiaries of this changing healthcare trend.

Source: Kenanga Research - 2 Sep 2016