Earthquake Rattles Life Sciences Companies Across Sectors; MHLW Response Could Impact Pricing And Inspections

TOKYO - The recent natural disasters in Japan create much uncertainty around various sectors in Japan's healthcare industry, but analysts are cautiously optimistic about most companies in the pharma, biotech, device and diagnostic industries ability to recover quickly. But these companies rely on Japan's Pharmaceuticals and Medical Devices Agency to operate in the country, and the agency's recovery and response to the crisis may have implications for price revisions and compliance inspections.

PMDA announced that some inspections for GLP, GCP, and GMP have been canceled or temporarily suspended, particularly in the Tohoku region. PMDA's main offices in Tokyo sustained little damage, and the agency stated, "product application reviews, product safety monitoring, and relief services have hardly been affected," beyond rescheduling meetings with external parties.

A note by analysts from Leerink Swann speculated that in 2012, the disaster might temporarily impact Japan's Ministry of Health, Labor and Welfare's biennial price revisions as the ministry tries to bring relief to affected areas in Northern Honshu. The analysts believe the ministry may cut prices at or above the 6-7% averages in 2010.

In addition, MHLW has tried in recent years to increase the country's use of generic medicine to curb healthcare costs, and the March 11 earthquake may drive the ministry to try and accelerate generic penetration to meet demand.

But as with the recovery timetables for companies, it is still early for PMDA and MHLW to determine how long disaster-related efforts will consume their schedules.

Japanese Exposure

The magnitude of the disaster took analysts off-guard, and the first step to be taken is to assess damage to facilities. While company reports continue to roll in, it seems as though most companies - Japanese pharma and multinational pharma with Japanese operations - escaped with minimal damage considering the extent of the destruction.

Companies like Daiichi Sankyo Co. Ltd., Astellas Pharma Inc. and Boehringer Ingelheim GMBH reported damages to facilities in the north, but analyst consensus seems to point to relatively quick recoveries - in terms of facilities - for most companies (Also see "Southwest Japan-heavy Takeda And Dainippon Sumitomo Spared Earthquake Damage, Others May Rebound, But Tokyo Headquarters' Quieted By Rail Disruptions" - Scrip, 15 Mar, 2011.).

Eyes are now turning to the market implications in Japan. Some delays are expected for new drug launches in Japan as companies evaluate distribution and production capabilities in the affected areas of Japan. A report from analysts at Bernstein Research estimated the earthquake and tsunami affects roughly 4% of Japan's population, particularly in Miyagi, Fukushima and Iwate prefectures.

Until more can be understood about the extent of the damage, analysts are looking at companies' market exposure in Japan and the market's share of total sales for life sciences companies.

On the device side, analysts at Deutsche Bank estimate that Japan represents 8% of total sales for major device companies, including Edwards Lifesciences, Boston Scientific, St. Jude Medical and Styker. Edwards Lifesciences is particularly exposed, generating 17% of its sales in Japan, followed by Boston Scientific (12%), and St. Jude Medical (11%). Last year, St. Jude's Japan sales increased by 15%, according to Deutsche Bank.

Deutsche Bank estimates Medtronic (6%) and Becton Dickinson (5-6%) are less exposed than other device firms for Japanese sales impact, and CareFusion is estimated to have minimal sales in the country.

Among major diagnostic firms, Waters Corporation and Life Technologies Corp. have some of the highest exposure to Japan, according to another UBS analysis. Waters Corporation generates 10% of sales in Japan, but expects the impact to be limited. Life Technologies also generates about 10% of its sales in Japan, but it also sources some of its DNA sequencing products from Hitachi Ltd.

Among Big Pharma that Leerink Swann covers, Bristol-Myers Squibb has the least exposure - generating only 3% of 2010 sales in Japan - while Novartis AG has the most with 10.9% of 2010 pharma sales coming from Japan. The investment firm noted that any pricing or generic utilization programs generated by the disaster will be offset for Western pharma by volume increases and new product approvals, particularly for "counter-cyclical approvals" for products with expired patents in the U.S. that are just now entering the Japanese market.

GlaxoSmith Kline PLC, which had to temporarily suspend operations at a facility less than 200 miles from Sendai, posted 14% sales growth in Japan last year on the success of Advair (fluticasone/salmeterol) and the launches of Cervarix, Avodart (dutasteride) and Xyzal (levocetirizine).

Japanese pharma are obviously more likely to be impacted, generating a majority of sales in-country, as well as having more research and manufacturing facilities in the Northern region than Western pharma. Daiichi Sankyo postponed the March 18 launch of memantine - branded as Memary in Japan - due to the risk of running out of stock soon after launch. USB analyst Shigeru Mishima revised his sales forecast for the drug by ¥2 billion each year for the next four years.

In general, Japanese pharma are expected to return to production before product stocks run out.

Additional delays for industry events also may be expected; Astellas, for instance, postponed its R&D day, which had been scheduled for March 24, and Pfizer Japan spinoff RaQualia Pharma Inc. will delay its initial public offering on the Osaka Stock Exchange.

None of the largest biotech companies - such as Alexion, Amgen, Celgene and Genzyme - source raw materials, intermediaries or finished product from Japan, according to Bernstein Research. Even their market exposure is limited, in most cases to no more than 1-2% of total sales due to disease prevalence, lack of market access and legacy licensing agreements.

However, Celgene and Alexion both have launched their leading products in Japan, Revlimid (lenalidomide) and Soliris (eculizumab), respectively. Celgene had expected to generate more than ¥21 billion with Revlimid's peak in 2020, and Alexion forecast more than ¥19 billion for Soliris by 2019.

While the drugs may see some impact from the disaster in the near term, Bernstein believes the products will be protected by their infancy in the market. "Both products and companies are at a very early stage of the adoption curve for their products in the market, and since [more than] 90% of the expected revenue growth still seems likely to accrue, the real financial impact is likely to be very small."

- Daniel Poppy ([email protected])