Shuli Ren is a Bloomberg Opinion columnist covering the Asian markets. Previously, she wrote on the markets for Barron, after a career as a banker and holds a CFA.

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Just what the doctor prescribed.

Photographer: Kiyoshi Ota / Bloomberg

Photographer: Kiyoshi Ota / Bloomberg

Japan's health care stocks are back. Short sellers have packed their bags and profitable investors are looking for opportunities.

The sector grew 7% this year, surpassing the 5% gain in the overall Topix index. Takeda Pharmaceutical Co., which accounts for nearly one-fifth of the MSCI Japan health care index, grew by 18%. The Japanese drug manufacturer has dropped more than 40% in 2018.

Hedge funds in the area of ​​merger arbitrage can be very successful with Takeda's takeover of Shire Plc, worth $ 62 billion. The Osaka-based company offered $ 30.33 in cash and 0.839 new shares for each Shire share. Last June, more than two months after the announcement of the transaction, Takeda's offer still exceeded by almost 20% the market price of the British company. The referees would have gained a lot of money through short – term trading in the shire and short – term trading in the Takeda area.

Merger arbitrage

Takeda's takeover bid for Shire offered a 20% premium as recently as June, allowing hedge funds to make profits by buying UK stocks and selling Japanese stocks short.

Source: Bloomberg Opinion estimates

Even long-only funds that liked the vision of Takeda CEO Christophe Weber had no reason to buy back the shares last year, as Shire offered a cheaper way to take a stake in the drug maker. Japanese. The more agile investors who also short-circuited Takeda were doing a disservice to the CEO by lowering their acquisition cost, even though the decline in the stock added to the pressure exerted by credit downgrades. and investor revolts.

Party for a long time

The short sale of Takeda shares has evaporated after the conclusion of the transaction with Shire

Now that Shire is a done deal and the short sellers have returned home (the short term interest for Takeda has fallen to 35% since 1.6% of the outstanding shares), the logic of the company has been reduced. acquisition begins to shine.

Japan is not a good market for health care. The government of Shinzo Abe has reduced the reimbursement costs of drugs covered by health insurance to limit spending, usually between 4 and 7% every two years. According to Nikkei, cuts could reach 10% to 15% in April, when another revision is due.

The Shire agreement was a way for Takeda to come out of Japan, as my colleague Nisha Gopalan pointed out. The lucrative United States market accounts for two-thirds of Shire's sales, compared to one-third for its Japanese buyer. In addition, we can expect cost savings of $ 2 billion, well above the $ 1.4 billion estimated by Takeda, according to Stephen Barker, an analyst at CLSA Ltd. Mergers of two similar size pharmaceutical companies generally generate cost synergies equivalent to 6.5% of combined sales.

Bigger, better, cheaper

Takeda's takeover of Shire could generate savings of $ 2 billion, increasing the results of the new company by 30%.

Source: Bloomberg Opinion estimates

Olympus Corp. is another medical domain name where investors see value. Its stock rose more than 30% this year after the arrival of the US-based activist hedge fund ValueAct, which led to a turnaround in management and the board of directors. Having foreign administrators could at least strengthen the image of the medical equipment manufacturer as it moved away from a stagnant Japanese market. The United States accounts for one-third of Olympus sales.

It does not take much to improve the company's operations. Consider this: Olympus has an operating margin of 10.3%, compared to 25% for its counterpart Japan Lifeline Co. – although both medical equipment manufacturers have similar gross margins.

In 2015, Japan's health sector shares traded 43 times earnings; now they are 25 times. As the sector emerges from a delicate phase, much remains to be done.

This column does not necessarily reflect the opinion of the Editorial Board or Bloomberg LP and its owners.

To contact the author of this story:
Shuli Ren at

To contact the editor responsible for this story:
Matthew Brooker at

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