Sysmex Leads Health Care in Aging Japan: Riskless Return

As an aging Japan spends more on health care, companies making blood test devices and defibrillators are producing the best risk-adjusted returns among technology stocks while consumer electronics makers such as Sony Corp. slump.

The BLOOMBERG RISKLESS RETURN RANKING shows Sysmex Corp. (6869), the world’s biggest maker of devices to count blood cells, had a return of 27 percent over the last 10 years, adjusted for volatility, leading the 150 members of the Topix Electric Appliances Index. The Kobe, Japan-based company had the highest return, while it ranked the 17th-lowest for volatility. Nihon Kohden Corp. (6849), which makes defibrillators found in offices around Japan, was second, with adjusted returns of 22 percent.

With almost a quarter of the population aged 65 or over, according to government statistics, rising demand for medical devices in Japan has helped the two companies lift operating profits at least fourfold in the last 10 years. Consumer electronics makers like Sony and Sharp Corp. (6753) have fallen to the bottom 10 in the ranking, posting losses as sales suffered from competition with Samsung Electronics Co. With export prospects strong, both Sony and Sharp are now getting into medical technology.

“Medical equipment made in Japan still has a technology edge over overseas makers, unlike consumer electronics,” said Masamitsu Ohki, a fund manager at Stats Investment Management Co., a Tokyo-based hedge fund. “Potential for growth is very high.”

Spending Transfusion

In Japan, spending on all medical care is forecast to swell 39 percent to 52.3 trillion yen ($544 billion) by fiscal 2025 from 37.5 trillion yen in 2010, according to government estimates. The global medical device, technology and equipment business will be worth more than $348.6 billion by 2016, up from $307.7 billion last year, U.K.-based business information provider Espicom estimates.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

Sysmex’s operations are spread across developed and emerging regions that have increasing life expectancy and growing health-care needs, boosting its appeal to investors. With less than 30 percent of its sales in Japan, it gets 28 percent of revenue from Europe, 21 percent in the U.S. and 14 percent in China.

Operating Profit

President Hisashi Ietsugu wrote in a note to shareholders on the company’s website last month that the company maintains its forecast for operating profit to rise 4.1 percent to a record 20 billion yen in the current fiscal year through March despite what he called “cautious purchasing” of medical equipment in the U.S. and China.

Sysmex’s investment value exceeds its brand recognition in Japan. With a staff of 5,300, the company is little known to the general public beyond being the employer of Mizuki Noguchi, who won the women’s marathon at the 2004 Olympics in Athens.

The medical equipment maker’s business model echoes that of a printer maker in part: Like a printer and toner cartridges, once a blood testing device has been sold, further sales of chemicals used in tests, along with maintenance services, are “relatively impervious to economic downturns,” according to the company. Sales from that segment of its business account for more than half of Sysmex’s total revenue.

Overseas Tailwind

“The medical equipment industry is one of a few growing industries,” said Mitsuko Miyasako, a Tokyo-based analyst at Barclays Plc. “The developed countries are aging, and there’s a tailwind from emerging countries as they’re trying to promote health-care technology.”

The average volatility in the Topix Electric Appliances Index in the last 10 years was 42.9. For Sysmex, volatility was 33.9, while for Nihon Kohden it was 37.3.

Koji Uchida, a fund manager at Mitsubishi UFJ Asset Management Co. in Tokyo, said the low volatility reflects the fact that medical technology companies are producing and selling finished goods that generate reliable future sales.

“Doctors want to keep using what they’re used to, so once they find equipment they like, they usually keep using it,” Uchida said. “Revenue from materials and maintenance services also contribute to the stable growth of earnings and the share price.”

At the bottom of the ranking, Sharp produced the sixth- lowest risk-adjusted return among the 150 companies, Sony ranked 10th from last and Panasonic Corp. (6752) 34th from the bottom.

Brain Scanning

Buffeted by an appreciating yen over much of the last decade and competition from Apple Inc. and Samsung, the trio lost 1.6 trillion yen combined in the last fiscal year. They have now slipped outside the world’s top 500 companies by market value, according to data compiled by Bloomberg. Ten years ago, Sony led the three in 88th position.

Like Sysmex, Nihon Kohden has plans to boost sales abroad. Japan currently accounts for about four-fifths of revenue. It has customers including Johns Hopkins Hospital and Cleveland Clinic in the U.S. for its brain scanning equipment, according to its website. The company is forecasting sales of at least 200 billion yen in the 12 months ending March 2020, compared with its estimate of 130 billion yen this fiscal year, it said in February.

“Japanese medical equipment makers are expanding sales with their specialized products with advanced technology in a niche market,” Uchida said. “Share performance has been strong, as they are solidly boosting sales and profits.”

Medical Technology

Sony, Panasonic and Sharp are all now trying to expand their presence in the medical technology business.

Tokyo-based Sony completed the purchase of an 11 percent stake in Olympus Corp. (7733), the world’s biggest maker of endoscopes, for 50 billion yen in February in a move aimed at jointly developing and selling new medical devices.

Olympus’ medical technology is recovering from one of Japan’s biggest corporate accounting scandals in years. Goldman Sachs Group Inc. upgraded the company’s stock to buy from neutral in January and named it as top pick in the Japanese precision equipment sector, citing the potential for growth in endoscope sales in both China and developed nations keen to cut medical costs.

Sharp is trying to sell its most advanced liquid-crystal display panels, offering higher resolution, for applications in medical equipment. Last year Panasonic began marketing a 32-inch medical-grade 3-D monitor specifically designed for operating theaters.

To contact the reporters on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Masaaki Iwamoto in Tokyo at miwamoto4@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net; Nick Gentle at ngentle2@bloomberg.net

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