Japan Biotech Firms Jump as Abenomics Cash Spurs Speculation

Japanese biotech ventures promising to make jet fuel from algae and to produce synthetic cartilage are soaring in Tokyo trading as cash pumped into the economy by the central bank cascades into speculative investments.

Five of the 10 best-performing stocks this year traded on JASDAQ, which has lower minimum profit requirements than Japan’s main bourse, are biotech firms.

The companies have surged as the Bank of Japan last month voted to double debt-buying to more than 7 trillion yen ($68 billion) a month to achieve 2 percent inflation in two years. Prime Minister Shinzo Abe’s proposal this month to provide 110 billion yen in support to stem cell research over the next 10 years is also helping the shares.

“The market expects quantitative and qualitative easing to continue long term, boosting liquidity and drawing investors to speculative shares like biotech,” said Kazuyuki Terao, chief investment officer at Allianz Global Investors Japan, in an interview. “Abe raised health-care reform as a part of his growth plan and that’s also supporting the buy.”

Japan’s regenerative medicine market will probably increase by 62 times to 1.6 trillion yen by 2030 from 26 billion yen in 2012, the economy ministry estimates.

D. Western Therapeutics Institute Inc., a maker of medicines for glaucoma and blood clots, surged 23 percent today as of the close of Tokyo trading, making it the best performer on the JASDAQ Index this year, soaring 19-fold. The company has formed a partnership with Tokyo-based Wakamoto Pharmaceutical Co. to develop eye treatments.

Algae Fuel

The JASDAQ index has climbed 83 percent this year, while the benchmark Nikkei 225 Stock Average has advanced 48 percent as Abe vowed to do whatever is necessary to end deflation, and as the yen’s 20 percent plunge boosts exporters.

Euglena, a venture formed by the University of Tokyo, has soared 10-fold this year for the second-best performance on the Tokyo Stock Exchange Mothers Index. The company is developing single-cell algae based products including jet fuel, which it expects to supply steadily by 2018, President Mitsuru Izumo, 33, said in an interview.

The venture is valued at about 157 billion yen and its technology was cited in discussions by a panel set up by Abe to discuss government stimulus measures in the biotech and energy industries.

Japan Tissue Engineering Co. has surged 10-fold this year after winning insurance-reimbursement approval from Japan’s Health Ministry for two types of manmade cartilage and skin, Mayumi Miura of the company’s corporate control division, said in an interview.

Abe’s Push

“Abe’s push on health care is the underlying reason for the health-care stock rise,” Kiyokazu Yamazaki, an analyst at Ichiyoshi Research Institute Inc., said in an interview.

Abe has pledged to reform the Pharmaceutical Affairs Law to facilitate research and development in biotechnology, including stem cells that can be genetically reprogrammed for use in tissue engineering and regenerative medicine.

The health ministry intends to submit an amendment for that law to the current session of parliament on June 27, said Hidekazu Kinugasa, a Health Ministry deputy director, in an interview.

The prime minister also said last month he would set up a Japanese version of the National Institutes of Health, a U.S. government-funded medical research center, and ease regulations for stem cell research to accelerate development of treatments for incurable diseases. He plans to unveil the details of his health-care plans next month, he said.

Speculative Plays

Still, Japan’s fastest-rising biotech companies have yet to produce steady profit, so the investors’ bets are speculative, said Terao of Allianz Global.

Euglena trades at about 335 times forecast earnings, while D. Western Therapeutics, which began trading on JASDAQ in 2009, is projecting a 203 million yen loss this fiscal year and hasn’t reported a profit since at least 2006, according to data compiled by Bloomberg. Japan Tissue Engineering has reported annual losses since at least 2005, the data show.

The JASDAQ index had an average price earnings ratio of about 22, based on analyst estimates for the year, while the Tokyo Stock Exchange Mother’s Index, which includes Euglena, averaged about 74 times earnings estimated by analysts, according to data compiled by Bloomberg.

The multiples for many of the companies aren’t prohibitively high, said Tomohiko Ikeno, an analyst at Ace Research Institute.

“It is still a good time to invest in some Japanese biotech ventures to hold long term,” Ikeno said. “The stocks will be volatile in the short term, but still have great potential for gains.”

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