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Japan Pharma Stock Surges 60% This Year to Reach Sony’s Size

Japan Pharma Stock with 60% Gain This Year Vaults to Sony Size

(Bloomberg) -- There’s a new king in the world of Japanese pharma after hopes for a coronavirus treatment helped to turbocharge its shares.

Chugai Pharmaceutical Co., Japan’s leading oncology company, is the best performer on the Nikkei 225 this year, up almost 56% versus the 2% drop in the broader index. The surge has brought its market value almost neck-and-neck with that of electronic giant Sony Corp. to become the seventh largest company in the country.

Having lagged larger rivals for years, it’s now the biggest drug company in Japan by market value, overtaking Daiichi Sankyo Co. late in 2019 and Takeda Pharmaceutical Co. earlier this year. Chugai is a unit of Switzerland’s Roche Holding AG, which holds an almost 60% stake.

Japan Pharma Stock Surges 60% This Year to Reach Sony’s Size

One reason behind the gain is the pandemic itself. Roche’s immune suppressor Actemra, a medication typically used to treat arthritis, is one of the treatments being eyed for critically ill Covid-19 patients. Chugai began to enroll patients for a Phase 3 trial in Japan on May 25, spokeswoman Tomoko Shimizu told Bloomberg News on Thursday. At a time when approval for Fujifilm Holdings Corp.’s Avigan is running behind schedule, that’s helping to shift investors’ hopes for a coronavirus treatment to Chugai.

Hopes are also rising for the combination therapy of Roche cancer drugs Tecentriq and Avastin, which won FDA approval for liver cancer last month.

“With all the good news about its cancer treatments and coronavirus drugs, Chugai gives off a sense of security,” said Takashi Akabane, an analyst at Tokai Tokyo Securities. “Developments in its cancer treatment could be a large contributor to earnings, which would buoy its stock price.”

Revenue and profits have surged in recent years, with growth mainly led by Chugai’s own hemlibra treatment for hemophilia. The stock trades at slightly over 40 times forward earnings, one of the highest price-to-earnings ratios on the Nikkei 225.

Chugai may also be benefiting from its unusually low float. With most of its shares in the hands of Roche, only 37% of its shares are theoretically available to trade, according to Bloomberg data. That’s among the lowest on the Nikkei 225. Chugai’s Shimizu declined to comment on the surge in its share price ahead of a three-for-one stock split effective on July 1.

‘Going-Upness’

Others point to the nature of markets themselves, with Travis Lundy, an analyst who publishes at SmartKarma, pointing to the impact of momentum trading strategies.

“There has been a lot of momentum effect in markets recently. What has outperformed has tended to continue outperforming. Lower float, and BOJ impact compound the issue,” said Lundy, referring to the Bank of Japan’s buying of exchange-traded funds, which the central bank has increased this year.

“Yes, its in the right place for earnings, the consensus forecast has gone up, yes people are more concerned about health, it’s got all the themes going for it, the BOJ doesn’t hurt but - most importantly it’s got ’going-upness’.”

Japan Pharma Stock Surges 60% This Year to Reach Sony’s Size

This year so far, health care stocks in general have been the biggest gainers in Japan. The Topix Pharmaceutical index advanced 6.6%, compared with a 5.3% drop in the Topix. But as attention shifts away from the pandemic, the sector has turned to the biggest decliner last week.

Takashi Ito, an equity strategist at Nomura Securities Co., sees a move away from the more speculative pandemic trade to one more focused on the recovering economies. The market has shifted to one where it’s not necessary to chase potential winners, he said.

©2020 Bloomberg L.P.