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17 Feb 1997
MOVES TO REDUCE JAPAN'S HEALTHCARE BILLS MAY PRESSURE WEAKER JAPANESE PHARMACEUTICAL COMPANIES, REPORTS MOODY'S
TOKYO, February 17, 1997 -- Japanese government plans to contain the country's burgeoning healthcare bills through drastic reductions in drug expenditures are likely to have a negative impact on the credit quality of Japan's weaker pharmaceutical companies, reports Moody's Investors Service in a recently published study on Japanese pharmaceutical makers. On the other hand, Moody's expects the credit quality of stronger and highly rated pharmaceutical companies will be supported over the intermediate term by the steady launch of new pharmaceuticals and by expansion of international operations.
Moody's currently rates nine Japanese pharmaceutical companies. These are (in alphabetical order) Chugai Pharmaceutical Co., Ltd., rated A3; Daiichi Pharmaceutical Co., Ltd., rated A1; Eisai Co., Ltd., rated A1; Fujisawa Pharmaceutical Co., Ltd., rated A3; Sankyo Co., Ltd., rated Aa3; Shionogi & Co., Ltd., rated A2; Takeda Chemical Industries, rated P-1; Tanabe Seiyaku Co., Ltd., rated A3; and Yamanouchi Pharmaceutical Co., Ltd., rated Aa3.
Of the nine rated pharmaceutical companies, "Takeda and Sankyo are best positioned to deal successfully with the forthcoming changes in the pharmaceutical industry," states Moody's. These two companies and Eisai "should benefit from strong upcoming products and sound financial fundamentals," the rating agency comments. The credit quality of Japan's weaker pharmaceutical companies will be impacted to varying degrees by the highly competitive environment that will eventually emerge as the government undertakes a series of budgetary constraint measures. "Only those companies that successfully undertake the steady launch of new products and direct their resources outside Japan will remain competitive," the rating agency says, adding that "if domestic drug sales are insufficient to pay for their R&D, some weaker companies may not survive or may be merged with stronger players."
Japan is one of the largest pharmaceutical markets in the world, second only to the U.S. Drug expenditures account for 28%, or ¥7.6 trillion (approximately US$65.5 billion) of Japan's healthcare costs. The country's healthcare bill is soaring, driven by increased costs for the elderly and access to low-cost healthcare through the national health insurance system. To control the nation's healthcare costs, Japan's Ministry of Health and Welfare (MHW) has been cutting sharply official drug prices to reduce drug reimbursement expenses. As a result, competition for survival among pharmaceutical makers, wholesalers, and hospitals is likely to intensify. For pharmaceutical companies, sales volume is likely to drop, but their profitability will not change dramatically, because pharmaceutical companies sell their products to wholesalers at market prices, which are negotiated between makers and wholesalers. Nevertheless, once official prices are cut, drugs are rarely sold at prices desirable for pharmaceutical makers. As a result, pharmaceutical makers must launch new high-priced drugs to compensate for a decline in revenue from existing drugs.
Other measures implemented by MHW to cut drug costs include repricing of high-volume drugs, use of a fixed treatment and drug reimbursement scheme for the elderly, and efforts to separate drug prescription from drug sales by hospitals. Proposed measures include listing drugs by generic names, increasing patient contributions and/or premiums under the national health insurance scheme, and tightening standards for new drug approvals.
"R&D is a critical factor in determining the pharmaceutical companies' future performance," says Moody's, adding that "if MHW continues to limit drug reimbursement expenditures by lowering official prices and volume, pharmaceutical companies will face difficulties covering their R&D expenses with domestic sales." Moody's believes the companies' inability to secure sufficient R&D funds may place downward pressure on their ratings.
The report, "Japan's Pharmaceutical Industry Faces Long-Term Challenges," was written by Senior Analyst Junichi Yamaki and Managing Director Yoshio Takizawa in Tokyo, and by Vice President - Senior Credit Officer James Lee and Managing Director John Diaz in New York.
* * *
NOTE TO JOURNALISTS: For a copy of this report please contact Donna Gee in New York (212) 553-0376, Andrew Chmaj in London (171) 772-5454, Michael Buneman in Madrid (341) 522 2812, Katrina Braund in Sydney (02) 241 4693, Mauricette Salque in Paris (331) 53 30 10 20, Juergen Berblinger in Frankfurt (4969) 242 840, Velvet Yoshinami in Tokyo (813) 3593 0734, Hilary Parkes in Toronto (416) 214-1635, Edward Young in Hong Kong (8522) 509 0200, or Patrick Winsbury in Singapore (65) 320 8330.
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