Tokyo — The prospect of more consolidation among Japan’s fragmented pharmacy industry is likely to boost the longer-term value of the country’s big players, Orbis Investment Management’s Japan chief says.
The comments from Orbis’ Tsukasa Tokikuni show how the $63bn industry has become increasingly attractive to investors, even as Japan’s population ages and shrinks, and store rollouts slow down.
“The Japanese drugstore market is still fragmented with various players compared to the US and UK,” Tokikuni said in an interview. “Further market consolidation would help them expand sales and cut costs through synergies.”
Market expectations for more mergers in the sector have grown since Hong Kong-based activist investor Oasis Management launched a campaign against Tsuruha Holdings, calling for a board reshuffle at one of the largest chains.
Bermuda-based Orbis, with $33bn in assets under management, has invested in the Japanese pharmacy sector for more than two decades including Tsuruha, where it now has a 5.6% stake.
Its holdings in Tsuruha and some other drugstore chains including Sundrug and Kusuri No Aoki Holdings account for more than 10% of Orbis’ ¥400bn ($2.9bn) Japan portfolio, according to Tokikuni.
He pointed out that Tsuruha, which has grown through multiple acquisitions, is particularly in a position to benefit from possible consolidation because its track record of successful mergers makes the company seen as a feasible suitor.
He declined to comment on Oasis’ argument that the Tsuruha board is dominated by the founding families, lacks independence and needs an overhaul.
Oasis, which owns 12.8% of Tsuruha, has said it “believes this suboptimal governance structure ... could impede Tsuruha from fairly evaluating consolidation opportunities crucial for the company’s growth”
“We think that consolidation in the sector is happening and they should be a leader of that,” Seth Fischer, founder of Oasis, said on Tuesday.
Tsuruha has denied any issues with governance and opposed Oasis’ proposals. “Having carried out mergers and acquisitions in the past, we see ourselves as a leader in industry consolidation and there’s no change in our policy,” the company said in a statement.
So far this year, shares of Tsuruha have returned 8%, including dividends, underperforming a 20% return by the broad Topix index. Over the past three years, Tsuruha shares have returned a negative 21%, underperforming a 53% rise in the Topix index, when dividends are factored in.
Tsuruha will hold its AGM on August 10.
Reuters
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