Pharmaceutical Industry at a Glance Trends in the Market Capitalization of the Pharmaceutical Industry

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The Office of Pharmaceutical Industry Research Shinichiro Iida, Senior Research Fellow

Introduction

The market capitalization of a company is the value of the company as seen by the stock market, and is viewed as an indicator that comprehensively reflects growth potential and future prospects in addition to profitability. While economic conditions are understood through various performance indicators such as GDP, market capitalization is often used as one indicator to look at future trends. In this study, we investigated the growth of market capitalization and its relationship to the growth of financial indices in an exploratory industry comparison to determine the expected contribution of the pharmaceutical industry to the economy.

Research Method

The market capitalization index was calculated as the product of the number of shares outstanding at the end of the period and the share price (closing price) on each year-end date, with 1990 or 2010 as the base year (base value 1.00).

The industry index is based on the industry definition by SPEEDA (Userbase, Inc.) and represents an index of market capitalization with 1990 as the base year (base value of 100). In calculating the industry index, companies that went public during the period are also included, which can be seen as an indicator not only of the growth potential of existing companies, but also of the expansion of the industry.

The analysis of the top 50 TSE First Section companies, industry classification, TSE First Section market capitalization, and TOPIX were based on information from the Japan Exchange Group, including market capitalization ranking tables.

To explore the relationship with financial indicators, companies in each industry were selected from the TOPIX 100 constituents, and U.S. pharmaceutical companies were selected from the S&P 100 constituents. Market capitalization and consolidated financial indicators (sales, overseas sales, operating income, net income, R&D expenses, total assets, and percentage of shares held by overseas corporations) for each company (listed in the appendix) were obtained from SPEEDA and added together for each industry (percentage of shares held by overseas corporations is an average) to calculate the index.

Industry Index Trends

After the collapse of the bubble economy, the Japanese economy went through a period of low growth that is often referred to as the "lost decade" or "two decades. We compared the growth trends of the manufacturing industry over the past 30 years using the industry index (index based on the combined market capitalization of the industry) (Figure 1).

The biotech/pharmaceutical manufacturing industry had an industry index of 286 in 2005 and 790 in 2020, which is high for a manufacturing industry, and the combined market capitalization of the industry in 2020 was 55 trillion yen. Growth was particularly strong after 2010, with a fourfold increase over the past 10 years. The other manufacturing industries showed growth in the range of 145 to 245 in 2005, but due to the impact of the Lehman Shock, the growth in 2010 was less than 155 in each industry. Both of these industries had growth of more than 50 trillion yen.

Within manufacturing, biotech/pharmaceutical manufacturing has shown a relatively stable and high growth trend over the past 30 years.

The companies included in the biotech/pharmaceutical manufacturing sector as defined by SPEEDA include 67 companies in the pharmaceutical manufacturing sector that research and manufacture medical and over-the-counter drugs, diagnostics, and reagents, as well as 34 biotech companies listed since 2000 that specialize in medical fields such as genomic drug discovery based on genetic analysis, gene therapy, and regenerative medicine. The 34 companies are listed since 2000 and specialize in medical fields such as genomic drug discovery, gene therapy, and regenerative medicine. In the pharmaceutical manufacturing industry, the industry index is required to include not only R&D-oriented pharmaceutical companies but also related companies such as API manufacturing, diagnostics, and sales support businesses, but we will leave the detailed analysis of these to another time. On the other hand, it was suggested that the entry of newly listed biotech firms has contributed to the development of the industry in no small measure to the progress of the industry index (see BOX).

In order to analyze the economic contribution of corporate growth, from the next section, we proceeded to analyze the growth potential of pharmaceutical companies with large market capitalization based on the TSE's corporate classification.

Market Capitalization of the Top 50 Companies on the First Section of the Tokyo Stock Exchange

We examined the market capitalization of the top 50 companies on the TSE First Section from 2012 to 2020 (Figures 2A and 2B).

In 2012, the combined market capitalization of the top 50 companies was 129.5 trillion yen, with the automobile and transportation equipment industry accounting for the largest share (28.9 trillion yen) at 22%. The pharmaceutical industry was the sixth largest industry with a 5% share (6.2 trillion yen), with three companies on the list.

In 2020, the combined market capitalization of the 50 companies was 298.4 trillion yen, a 2.3-fold increase from 2012. Electrical machinery and precision instruments increased its market share significantly, accounting for 26% (77.3 trillion yen), making it the top industry.

In 2012, eight companies were ranked in this category, but three companies dropped out, five companies remained (one in the semiconductor manufacturing industry, two in the electronic parts and device manufacturing industry, one in the information and telecommunications equipment manufacturing industry, and one in the other industry), and eight companies were newly ranked, bringing the total to 13 companies. The industry composition in 2020 is four companies each in the semiconductor manufacturing and electronic components/devices manufacturing industries, which may explain the growth of the industry index shown in Figure 1. This was considered to explain the growth of the industry index shown in Figure 1.

The second industry was information and communication services, which increased its share from 14% to 24% (71.7 trillion yen). The number of companies increased to 10.

The pharmaceutical industry was the fourth largest industry with four companies (Chugai, Daiichi Sankyo, Takeda, and Astellas) accounting for 9% of the market (25.6 trillion yen). The combined market capitalization in 2020 was more than four times greater than in 2012. Although the number of companies joining the list was not large, two companies were in the top 10, suggesting the growth potential of individual companies.

On the other hand, Automobiles/Transportation Equipment decreased from six to three, from 22% to 12% (36.0 trillion yen), Banks remained unchanged at four, from 12% to 6% (17.7 trillion yen), and Trading & Wholesale decreased from four to three, from 6% to 4% (11.7 trillion yen).

Among the top 50 companies in the TSE First Section, semiconductors, electronic equipment, and companies related to the progress of digitalization showed significant growth. These industries were followed by the pharmaceutical industry, which, along with the digital industry, showed an increasing presence among the top 50.

Market Capitalization Index

In order to explore the relationship between industry trends, market capitalization, and financial indicators through comparisons among domestic industries, we expanded our analysis to include more companies in each industry. The companies in each industry were selected from the TOPIX 100 constituents, with 2010 as the base year (base value of 1.00), and the combined market capitalization indexes for each industry (in 2015 and 2020) are shown in Figure 3 for industry comparison.

The industry classification was based on 17 industry categories, with 7 companies selected for transportation equipment, 19 for electrical machinery and precision equipment, 5 for machinery, 7 for chemicals, 8 for pharmaceuticals, and 4 for food products, for a total of 50 companies in manufacturing-related industries. Ten companies were selected for information and communication and services, and industry comparisons were made with the fixed 60 companies (Appendix).

The U.S. pharmaceutical industry was also compared together with 10 companies selected from the S&P 100 components.

Among the industry categories analyzed, the information, communications, and services industry had the largest index change, at 5.21 (in 2020). The pharmaceuticals industry showed 3.54 (as of 2020), the largest growth among the manufacturing industries, including chemicals, electrical machinery and precision instruments, machinery, and transportation equipment. The index calculated from the total market capitalization of the TSE was 2.18 (at 2020), indicating that the pharmaceutical industry had higher growth potential than the overall market.

The market capitalization index for the U.S. pharmaceutical industry was 2.59 (in 2020), indicating that the growth of the domestic pharmaceutical industry was higher than that of the U.S. pharmaceutical industry. The market capitalization index for the top five U.S. companies by market capitalization (GAFAM) was 9.46 (data omitted).

For reference, the indexes of the S&P 500 and TOPIX (2020 index based on 2010) are 2.99 and 2.01, respectively. In calculating the market capitalization indices, we did not adjust for the floating stock factor, which is incorporated in the calculation of these indices. Therefore, it is difficult to directly compare the results of the market capitalization index analysis with those of the S&P 500 or TOPIX, but it can be inferred that, relative to each market, the growth potential of the domestic pharmaceutical industry is high, while that of the major U.S. pharmaceutical companies is not so high.

Relationship between Market Capitalization Index and Financial Indices

The market capitalization index for the pharmaceutical industry was shown to be higher than that of other manufacturing industries and the U.S. pharmaceutical industry. For the purpose of exploring the background of this growth, we investigated the relationship between the indices of various financial indicators (levels at 2020 based on 2010: nominal value base). For each financial indicator, we compared sales, overseas sales, operating income, net income, R&D expenses, intangible assets, and total assets across industries, and conducted an exploratory analysis to see if there were any distinctive indicators (Figure 4). In addition, in view of the impact of the acquisition of a major pharmaceutical company, we also analyzed the combined total of seven companies, excluding the major pharmaceutical companies.

In terms of the sales index, the machinery industry had the highest index at 1.52. The pharmaceuticals industry followed with a sales index of 1.48. The pharmaceuticals industry had the highest index for overseas sales, at 2.19, which is different from other industries in that it showed a distinctive growth.

In terms of operating income and net income, the ICT/Services industry led the way with indices of 3.52 and 4.90. The pharmaceuticals industry showed growth in both operating income and net income compared to other manufacturing industries. The pharmaceutical industry did not differ from the other manufacturing industries in terms of growth, with indexes of 1.55 and 1.88.

The index for R&D expenditures, an investment in future growth, was 1.34, showing no distinctive growth compared to the other industries. The pharmaceutical industry is one of the industries with a high ratio of R&D to sales, and as of 2020, when the survey was conducted, the ratio was 18.5%, which is significantly different from the 5% to 6% of other industries (data omitted). However, the index, which indicates growth over a 10-year period, was 1.30, which was lower than that of information and communication services, machinery, and transportation equipment (1.67 to 1.52).

The pharmaceuticals industry was the standout performer in terms of intangible fixed assets, with an index of 6.92. The pharmaceutical industry also showed a significant increase in total assets (2.67), including intangible assets.

Although the comparison of industries in terms of a limited number of financial indices is presented here, the indices that suggest a relationship with the market capitalization index seem to differ among the industries. For the Information Technology & Services industry, the operating income/net income index and the R&D index, for the Electronics & Precision industry, the net income index, and for the Pharmaceutical industry, the overseas sales index and the intangible fixed assets index had analogous relationships with the market capitalization index.

In comparison with the U.S. pharmaceutical industry, the domestic pharmaceutical industry showed higher indices for all financial indices except the R&D index.

Although the relationship between the indexes of overseas sales and intangible fixed asset indexes and the market capitalization growth of the pharmaceutical industry is analogous, detailed analysis such as correlation analysis at the individual company level would be necessary to confirm the relationship with the market capitalization index because of the influence of a single major company and the diversity within the industry.

In the pharmaceuticals industry, since the large acquisitions in 2018 by the largest companies had a significant impact on each of the market capitalization and financial indexes, we examined the relevance of the seven companies, excluding the largest company in question. The market capitalization index increased from 3.54 to 4.24, the foreign sales index declined from 2.19 to 1.69, and the intangible assets index fell from 6.92 to 2.43. Despite the decline in the foreign sales index, the industry was in a high position in terms of inter-industry comparisons. In the pharmaceutical industry, the growth of foreign sales could be one of the factors that characterize the increase in market capitalization.

Figure 4 Market Capitalization Index and Financial Index

Summary of Results

Discussion

As one aspect of its contribution to the domestic economy, we examined and analyzed the market capitalization of domestic industries, and found that the prescription pharmaceutical industry has grown 3.5-fold since 2010, increasing its share among the top 50 TSE firms. While growth in the domestic manufacturing industry has slowed, the pharmaceutical industry has grown in terms of market capitalization, second only to the information and telecommunications services industry. We hope that the pharmaceutical industry will continue to contribute to the economy over the long term as a growth industry, and that industrial policy will be promoted as a driver of Japan's economic growth.

When we looked at the background to the growth of the market capitalization index in the pharmaceutical industry from the perspective of differences from other industries, we observed that the aggregate of the eight pharmaceutical companies may be related to increases in the overseas sales index and the intangible fixed assets index. However, since the effect of large acquisitions, such as increases in intangible assets and total assets, was observed, we also conducted an analysis excluding the one company in question. Although the exclusion of one company from the overseas sales index also resulted in a decrease in the index, it was inferred to be one of the factors that had a large impact on the market capitalization index.

The profit index and the R&D cost index also grew, although not to the same extent as the ICT and services industry, and this does not necessarily mean that they were not a factor in the growth of the market capitalization index.

It has been reported that 32% (in 2020) of Japan's corporate value is based on intangible assets2). Needless to mention, investors invest not only based on current earnings and financial information, but also on non-financial information, with a view to future value and social shared value, such as a company's internal intangible assets, R&D value, business direction, and corporate stance, including ESG and other factors. In order to clarify the background of the increase in the market capitalization index, it is desirable to conduct further complex analysis, including analysis of individual companies and non-financial information, as well as shareholder return propensity. In the pharmaceutical industry, which invests heavily in R&D and has intangible assets, it will be more important to evaluate the value of intangible assets.

The TSE market classification will be revised in April 2022. Many pharmaceutical companies will move to the prime market, which is a market for companies that focus on constructive dialogue with global investors, and is expected to increase corporate value through fundraising from overseas.

Looking at the involvement of global investors in the pharmaceutical industry as a supplement, the average ratio of foreign shareholders in the pharmaceutical industry as of 2020 was 38% for the eight companies, or 1.19 in the 2010-based index (Figure 5). Compared to other industries, the pharmaceutical industry is second only to the electrical machinery and precision machinery industry (index: 1.22, ratio in 2020: 42%), suggesting that the industry is increasing its presence as a global player in the stock market.

The domestic pharmaceutical industry is becoming a distinctive industry that returns profits to Japan by attracting funds from overseas and boosting overseas sales. Global circulation of funds and earnings will be important in contributing to economic growth.

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