Earthquake is expected to have limited impact on...

...Japanese medical device market opportunities and creates near-term growth opportunities in some sectors

May 2011

Although the Great East Japan Earthquake of March 11th is a significant human tragedy, the earthquake's impact on the medical device sector is expected to be limited over the long term.

The earthquake occurred far from Japan's major population centers. Japan's most significant population centers are far from both the earthquake's epicenter and the Fukushima Daiichi nuclear facility. As a result of distance from the epicenter and the quality of Japanese construction, the major markets of Japan sustained minimal damage and limited disruption to healthcare services.

Top 5 Cities Ranked by Population

* Special wards of Tokyo: Twenty-three wards of Tokyo
Japan's total population: 128,056,026
Source: 2010 National Census, Google maps

To put the geographic scale in a North American context, Japan's largest urban areas are no closer to Fukushima Daiichi than New York City is to Rhode Island.

Because the majority of Japan was not directly affected by the earthquake, Larry Biegelsen, Senior Analyst, Medical Supplies and Devices for Wells Fargo Securities estimates that the annualized impact on the Japanese market for medical devices will be only -7.3%; however, he expects the market to stabilize in the most affected regions within 12 months and in the rest of Japan, including Tokyo, within 1 month of the event.

Near-term, this is not to say that there won't be some impact on the market. Discussions with Japanese physicians participating in the rescue effort indicate there is increased demand for products used in rescue efforts, including wound care, critical care, and respiratory therapies (used to treat those who have inhaled saltwater). In addition, there are strong anecdotal indications that there will be a softening of demand for medical devices targeting treatment of an elective nature. According to one retailer interviewed for this article "because of the uncertainty, people are hanging onto their money and are afraid to spend." In addition, one medical device manufacturer noted that "due to power outages, hospitals and patients are hesitant to schedule elective surgeries."

Over the longer term, these short term effects are likely to normalize as pent-up demand for elective procedures unwinds and increases in infrastructure spending occur as hospitals are rebuilt in the affected region. In addition, according to one industry consultant, a heightening of awareness of the potential for disaster and increased concerns about cancer are likely to create new demand in some medical device categories. The high profile death of a patient on oxygen therapy will likely contribute to a greater interest in products with disaster-ready features (e.g., the ability to operate without power). In addition, physicians and patients are likely to be more proactive in monitoring and treating cancer due to an increased awareness and concern of the potential risks.

Key Opportunities and Risks to Medical Device Companies

From a long term perspective, the risks to the market are relatively limited. From a demand perspective, the fundamentals for the Japanese market remain attractive due to a growing elderly population and high reimbursement. Although efforts to rebuild will place pressure on government coffers, the Cabinet Office estimated 16 - 25TN JPY ($198-309BN USD) cost of rebuilding represents less than 6% of GDP.

In reality, the biggest threats to the market are likely to be on the supply side. Exaggerated fears may unnecessarily deter medical device companies from entering Japan, leaving a relatively uncontested market to their counterparts already in Japan.

JETRO North America Medical Device Advisor
Harold Smith