OTC shopping destination: Japan

Boehringer Ingelheim’s buyout of the remaining stake in Japanese over-the-counter drugs maker SSP Co Ltd. is a bet on a recovery in Japan’s (OTC) sector. That may mean more buying opportunities.
The liberalization in 2009 of OTC drug sales in Japan may prove to be the turning point for a return to health. Pharma companies with an established interest in consumer brands - Novartis, for example, which is pushing Japanese growth - should take a close look.
Relatively unchallenging current valuations of two local players, Taisho Pharmaceutical Co and Lion Corp., could spur bite-sized M&A if acquirers take as bullish a view as Boehringer.
Sanofi-Aventis, which last year bought Chattem Inc. in the U.S., and GlaxoSmithKline, an established consumer health player with a strong focus beyond its traditional markets, might also be looking to buy. Outside big pharma, interest could come from cash-rich Reckitt Benckiser.
Taisho is Japan’s largest OTC player, and last year bought Bristol-Myers Squibb’s Asia-Pacific OTC business. It expects its self-medication division, which includes energy drinks as well as OTC cold remedies, to post full-year 2009/10 sales of Y159 billion, down 2% on the year, with operating margins squeezed well below the 18% seen the previous year.
Okay, that’s not bullish, but it isn’t worse than most other Japanese OTC firms. Acquirers could follow the example of Boehringer, which has hinted at cutting costs out of SSP and using the group to sell additional switch-OTC products.
Although Taisho’s EV multiple of 8.6x reported Ebitda is at the top of the OTC sector, this likely reflects its smaller, but growing, prescription pharma unit. This business could be integrated into a pharma firm’s operations or, for a non-pharma player like Reckitt, divested.
As a comparison, Boehringer is buying the 40% SSP stake at an 8.8x multiple, but that puts a 34% premium on SSP’s share price.
Meanwhile, Lion trades at a more modest multiple, and an 18% premium to the current price would see an acquirer pay Y143 billion, an EV of 8.8x Ebitda. Lion’s healthcare business, including cosmetics as well as OTCs, accounted for 42% of Y228 billion nine-month group sales, which feature its struggling household and chemical products divisions.
Turning around these non-healthcare assets might be of particular interest to Reckitt, a major player in household detergents, which needs more OTC drugs to plug the gap left by patent expiry for its heroin addiction treatment Suboxone.
Another strategy for an acquirer could be a buyout of an OTC business of one of Japan’s larger pharma groups, say Takeda Pharmaceutical or Daiichi Sankyo, if these companies see more sense in focusing on their higher-margin prescription drug operations.
Takeda had nine-month OTC sales of Y47 billion, while Daiichi Sankyo’s were Y35 billion, roughly on a par with SSP. Sales at both firm’s OTC businesses were down by 6% year on year, and the divisions comprised 4-5% of each group’s revenue.
Japan’s OTC drug sector is worth a little over $1 billion a year in sales, and lack of growth has spurred internal consolidation, such as Lion’s purchase of the local OTC businesses of Bristol-Myers Squibb and Chugai, and Astellas Pharma Inc.’s divestment of OTCs to Daiichi Sankyo.
The change last year to Japan’s Pharmaceutical Affairs Act, which allowed general retailers to start selling many non-prescription drugs, may mean increased competition for pharmacies from supermarkets but could stimulate overall growth in OTC sales.
That’s what Boehringer is banking on.

Source: The Wall Street Journal