Japan biotech sector to benefit from delay in consumption tax hike

TOKYO – Biopharmaceutical companies look to benefit, at least in the short term, after Japan's Prime Minister Shinzo Abe put off a planned 2 percent consumption tax hike scheduled for 2017. The increase now will not be introduced until at least October 2019.

For biopharma companies, the move is likely to eliminate some uncertainty going forward.

"Ultimately, the pharmaceutical industry wants to avoid its annual price revisions," Ang Wei Zheng, Asia-Pacific pharmaceutical and health care analyst at BMI Research, told BioWorld Asia. "The industry is undergoing shifts and changes in terms of pricing, not just because of revisions. There are also initiatives such as cost-effectiveness assessments to decide the price of pharmaceuticals."

He said he believes the tax hike delay make it less likely there would be cuts to the prices of drugs in the short term.

Jonathan Stuart-Smith, international tax services leader at EY Japan, said that over the short term, the main benefactors of the tax hike delay will be hospitals.

"Around pharmaceuticals and medicine in general there is a different treatment with regard to consumption tax," he said. "With a car or an iPhone, they are subject to consumption tax so the price is passed on to the end user. With pharmaceuticals, the purchase is not subject to consumption tax.

"As this is charged at every part of the pharmaceuticals supply chain, a manufacturer is charged and so they will charge their price plus consumption tax," Stuart-Smith added. "The distributor is also charged and so they will charge the percentage, but they will get a credit. So nobody pays net; it is a flow through. When it is finally sold on to the hospital, it will have to pay the tax to the distributors and others, but they cannot pass on the cost to the consumer. So the hospital is what really gets affected. So the delay puts them in a better situation for now."

"But," he warned, "when tax hikes eventually come in, it will be worse for the hospitals, particularly if the raises are higher."

Stuart-Smith said, however, that any benefit to industry would likely be short term, as Japan still faces a need to shore up its finances over the longer term, and the most likely way of achieving financial stability would be to bring consumption tax in line with European nations, where the average rate is about 20 percent.

Fitch Ratings responded to the decision to delay the tax hike by cutting Japan's outlook for long-term foreign- and local-currency issuer default ratings to negative.

"The outlook revision primarily reflects Fitch's decreased confidence in the Japanese authorities' commitment to fiscal consolidation," the ratings agency wrote June 13. "When announcing the delay, the government said it remains committed to its target of primary balance by FY20, although it did not set out any further specific measures to achieve this goal."

Japan's situation after the tax hike delay and outlook downgrade may also not be as bad as it looks on the surface, said Stuart Allsopp, head of country risk and financial markets strategy at BMI. BMI Research is a part of the Fitch Group.

"The Fitch move was more of a token move in a sense," he said. "It does reflect a deteriorating willingness to address fiscal problems, but in terms of an actual default, the risks are negligible. They are relying too much on printing their own currency rather than trying to increase taxes and cut spending."

PROBLEMS AHEAD

Both Allsopp and Stuart-Smith said that problems await down the road, and that the debt pile, if left unaddressed, could trigger a currency crisis or leave the government unable to control inflation. According to Ang, that has deep implications for the biopharmaceutical industry.

"Japan's government is so deeply involved in the provision of health care and subsidizing pharmaceutical spending, the country's macro position means there is a strong link between the tax hike and the industry," he said.

The previous hike, which happened in 2014 when consumption tax was raised from 5 percent to 8 percent, occurred at the same time as cuts in prices for pharmaceuticals, which Ang said caused multiple challenges for the industry. However, he said he believes the biopharma industry has much more to worry about than enforced price cuts and consumption tax hikes.

"The government will try to move toward a situation where generics account for a larger share of the market and then use the savings to invest in innovative pharmaceuticals," he said. "The introduction of the sakigake system is a very positive step. And more importantly, the pharmaceutical industry is a part of the 'third arrow' that Prime Minister Shinzo Abe is talking about to revitalize the economy."

Under the sakigake system, Japan puts drugs in trial on a fast track to get them to the market faster. The third arrow in Abe's terminology is structural reform of the economy; the first two are monetary policy and fiscal spending. (See BioWorld Today, April 20, 2016.)

Ang said he believes if the government is to invest cost savings from generics and biosimilars back into the industry, Japan could see healthy growth in the coming years.

"Biopharmaceuticals can really be a strong growth platform for the country, especially if Japan leverages its strengths in research and development before moving overseas," he said.

Source