Ageing Japan draws investors to pharmaceuticals

Safe haven assets remain topical and today we focus on Japanese pharmaceutical companies. With 25% of Japan’s population over 65 years old and a life expectancy of 82 years, it would seem wise to own their drugs companies. If you add their high dividend yield into the mix then you have a sound investment case. We will look at what investors are doing with a particular focus on Yamada Denki (TYO:9831), Astellas Pharma (TYO:4503), Sawai Pharmaceutical (TYO:4555), Eisai Co (TYO:4523), Dainippon Sumitomo Pharma (TYO:4506), Ranbaxy Lab (LSE:RBXD) and Teva Pharma (NASDAQ:TEVA).

Just as it is well known that China’s Shenzen is a city of young people, so do we know that Japan has seen a rapid ageing of its population such that pensioners will be a third of its population by 2020. As ailing health affects older people the Government is trying to lower the cost of drugs by promoting generics and this may have a negative impact on various firms. In other words, it is not all plain sailing for the pharmaceutical firms.

Institutional Ownership

Over the last month, funds who lend have reduced their holdings of Japanese pharmaceutical companies by 4.39%. However, the big asset managers still own more of these firms than they do other types of Japanese firm. Across the TOPIX 1000 Index, we can see that 8.57% of Japan’s pharmaceutical companies are held in the lending programmes of institutional investors against an average for the Index of 6.75%.
The two firms with the most institutional ownership are electrical appliance retailer, Yamada Denki (TYO:9831), followed by Astellas Pharma (TYO:4503). The latter is trading on a P/E of 19 at present.

Short Selling

The average short interest for this sector is a very low 0.85% of all shares according to our data. Of those with a degree of short interest, Japan’s major generic drug company being one of the most shorted – Sawai Pharma. With such an ageing population the government are trying to help their retired people through lowering the cost of medicine in a policy aimed at getting generic drugs to be 30% of volume by March 2013. With analysts expecting this date not to be met, the short sellers are merely betting that it will take longer and be harder for non generic drugs to lose their grip. Demand to borrow Sawai has gone from 4% to 6% since June.

Broker recommendations

Eisai is tipped by some brokers to be the pick of the pharmaceutical sector and the short sellers are beginning to agree since we see short interest continue to decline. Yet it remains high at just under 6% of all shares but did peak at 12% at the beginning of the year. Two of Eisai’s newest drugs are already performing better than expected (Halaven and Lyrica) and funds who lend are steadily increasing their stake to 11% of the company. Another broker recommendation is Dainippon Sumitomo Pharma and, like Eisai, institutions are in agreement having been buying more shares all year.

Generics in general

While on the subject of generics we can look at investor sentiment towards major players in India and Israel. We see rising institutional ownership and low short interest in Ranbaxy Laboratories’s London listed GDR while Teva Pharmaceuticals sees falling ownership in their ADR.