Bank of America: Japanese healthcare services stocks attract investor interest: BofA favors drug wholesalers as generics makers bet on new products

Why are healthcare services stocks attracting renewed attention?

Of the 21 Japanese healthcare services stocks covered by BofA, 18 underperformed the TOPIX over the past 52 weeks, but most outperformed in the past four weeks. BofA believes industry fundamentals have changed little and the reversal mainly reflects a shift in investor preferences.
Healthcare demand is relatively less sensitive to economic cycles, and the profit pressure from policy reforms and inflation was largely reflected in share prices at the start of the fiscal year. Meanwhile, major shareholders at some companies have called for higher shareholder returns and changes to business portfolios, providing a new impetus for valuations.
Defensive demand does not mean every company’s performance is stable: healthcare service providers can be affected by pharmaceutical clients’ marketing budgets and fluctuations in large contracts, while generics makers, pharmacies and wholesalers are also exposed to policy changes.

BofA assesses quality across three dimensions: earnings resilience, financial health and free cash flow, and volatility. The three drug wholesalers in its coverage stand out for their net debt-to-operating profit ratios and free cash flow yields, and their share prices have historically been relatively less volatile. Generics makers and some pharmacies have weaker financial performance.
BofA is particularly positive on Medipal, rating it Buy with a price target of 3600 yen. Its largest shareholder, Silchester, has requested an extraordinary shareholders’ meeting and proposed a special dividend of 122 yen per share for the fiscal year ending in March 2027, along with a 95 billion yen share buyback.
BofA believes that, more important than the amount returned that year, is whether the company can clearly explain an appropriate capital structure and establish governance mechanisms to maintain it. The next medium-term plan is expected in May 2027. However, the wholesale business still faces margin pressure from healthcare institutions seeking lower prices, while rising logistics costs are affecting daily necessities wholesaling.

BofA expects Towa and Sawai to enter a phase of profit growth after launching new products in December 2026. Towa’s new products include the diabetes drug sitagliptin. BofA believes that, with the competitive threat from authorized generics removed, the new products could achieve higher margins than in the past; greater demand visibility could also help production efficiency and inventory management.
Near-term earnings expectations differ: BofA forecasts Towa’s operating profit for the first half ending in September at 13.8 billion yen, up 32% year on year and 5% above market consensus. It forecasts 11.2 billion yen for Sawai over the same period, up 32% year on year but below market consensus and company guidance.
Although Sawai increased production in the first quarter, it incurred unexpected inventory disposal and impairment losses. BofA believes a cut to its full-year guidance could remove uncertainty around its results, but restoring market confidence in management’s ability to execute remains key. Towa faces pressure from relatively high financial leverage and rising interest rates.

BofA generally expects cumulative operating profit at most covered companies to be close to market consensus, but sees potential for Medley to raise its full-year guidance. The bank forecasts Medley’s operating profit for the first three quarters ending in September at 2.8 billion yen, up 74% year on year and equivalent to 95% of its full-year guidance.
Drug wholesalers’ financial strengths do not necessarily translate into simultaneous short-term profit growth. BofA forecasts Alfresa’s operating profit for the first half ending in September at 13.8 billion yen, down 15% year on year and 6% below market consensus. Stronger performance in pharmaceutical wholesaling is expected to be partly offset by daily necessities wholesaling and manufacturing.
BofA forecasts Suzuken’s operating profit for the same period at 12.6 billion yen, down 26% year on year and 7% below market consensus, but 6% above company guidance. The bank is watching whether its business portfolio reforms can both improve capital returns and release excess capital.