Strong in Asia, Await Recovery in Japan Market Cap

28 August 2014 Asia Pacific/Japan Equity Research Personal Products (Personal Products (Japan)) / MARKET WEIGHT

Rohto Pharma (4527 / 4527 JP) Rating NEUTRAL* Price (27 Aug 14, ¥) 1,479 INITIATION

Target price (¥) 1,520¹ Chg to TP (%) 2.8 Strong in Asia, await recovery in Japan Market cap. (¥ bn) 168.48 (US$ 1.62) Enterprise value (¥ bn) 149.85 ■ Initiate coverage: We initiate coverage of Rohto Pharmaceutical with a Number of shares (mn) 113.91 NEUTRAL rating and ¥1,520 target price (potential return 2.8%). Rohto has Free float (%) 60.0 52-week price range 1,846 - 1,320 investment appeal because of the potential for strong growth by four categories

*Stock ratings are relative to the coverage universe in each of household and personal care (HPC) products in Asia. The company reported analyst's or each team's respective sector. record-breaking OP in FY3/14, but earnings may slow in FY3/15 as Japanese ¹Target price is for 12 months. costs rise. We see good growth potential in Asia and await an earnings recovery Research Analysts in Japan. Masashi Mori ■ Investment themes: The Asian business generates 30% of total profits. In 81 3 4550 9695 China, the mainstay Mentholatum brand is penetrating the market due to its [email protected] positioning as a value-added product amongst younger customer segments. Rohto is steadily generating demand in new fields, such as men’s skincare. In Southeast Asia, Rohto supplies value-added products in the eye drops, sunblock, and lipcare categories. In regions where eye drops are not commonly used, Rohto is organizing a grass-roots movement to raise awareness of eyecare, running educational programs at elementary/middle schools. Rohto has already captured the top market share in some regions. Over the past few years, Rohto has developed the Hada Labo range of functional skin lotions that have become a hit in Japan and are now expanding in Asia. The company focuses on niche areas where there is little competition and it can capture high market shares. ■ Catalysts/Risks: Rohto lowered its full-FY3/15 guidance at the 1Q results announcement. Japanese sales may slump in 2Q because of weather- related factors in some areas. The shares appear undervalued, but catalysts are lacking until the 2Q results. We await an earnings recovery in Japan. Downside risks include increasing competition in Japan, while upside risks include strong sales momentum in Asia (incl. China and Southeast Asia) ■ Valuation: We calculated our TP using an average EV/EBITDA for the past ten years (6.9x) applied to our FY3/16 forecast. We apply the company average because Rohto is less profitable than sector peers.

Share price performance Financial and valuation metrics

Year 3/14A 3/15E 3/16E 3/17E Price (LHS) Rebased Rel (RHS) Revenue (¥ bn) 143.8 151.0 157.0 163.5 120 1800 Operating profit (¥ bn) 16.8 15.8 16.9 18.0 100 Recurring profit (¥ bn) 17.1 16.3 17.4 18.5 1300 80 Net income (¥ bn) 8.9 10.0 10.6 11.3 EPS (¥) 77.1 88.2 93.5 99.7 800 60 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 92.2 98.0 102.3 The price relative chart measures performance against the EPS growth (%) 12.2 14.3 6.0 6.6 TOPIX which closed at 1285.92 on 27/08/14 P/E (x) 23.6 16.8 15.8 14.8 On 27/08/14 the spot exchange rate was ¥103.91/US$1 Dividend yield (%) 1.0 1.2 1.3 1.4 EV/EBITDA(x) 8.6 7.0 6.4 5.9 Performance Over 1M 3M 12M P/B (x) 2.1 1.6 1.5 1.4 Absolute (%) -7.4 -4.8 6.8 ROE(%) 9.4 9.8 9.6 9.5 Relative (%) -7.4 -11.9 -6.6 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

28 August 2014

(1) Investment themes Initiate coverage with NEUTRAL rating and ¥1,520 TP We initiate coverage of Rohto Pharmaceutical with a NEUTRAL rating and ¥1,520 TP. Rohto has investment appeal because of the potential for strong growth by four categories of HPC products in Asia. The company reported record-breaking OP in FY3/14, but earnings may slow in FY3/15 as Japanese costs rise. We see good growth potential in Asia and await an earnings recovery in Japan. Rohto has expanded its skincare business across Asia, such that it now generates 30% of total profits. Rohto moved into China in 1991 by establishing the joint venture Mentholatum (China) Pharmaceuticals. The mainstay Mentholatum brand is penetrating the market due to its positioning as a value-added product amongst younger customer segments. Rohto is also generating demand in new fields, such as men’s skincare. Sales territories have expanded from coastal regions into the interior, and we see significant growth potential over the longer term. In Southeast Asia, Rohto began local manufacturing in Indonesia and Vietnam in the late 1990s. The company supplies value-added products in the eye drop and lipcare categories. In regions where eye drops are not commonly used, Rohto is organizing a grass-roots movement to raise awareness of eyecare, running educational programs at elementary/middle schools. The company has already captured the top market share in some regions. Rohto is focusing on the men’s skincare, sunblock, and eye-drop markets where there is relatively little competition and its products can capture high market shares. Over the past few years, Rohto has developed the Hada Labo range of functional skin lotions that have become a hit in Japan and are now expanding in Asia. We expect stable growth in China and Southeast Asia.

Figure 1: OP hit a record-high in FY3/14, but may slow in Figure 2: Profit contributions from Asia steadily FY3/15 increasing (Y mn) 100% 20,000

80% 15,000 Other 60% Asia Asia 10,000 Europe Europe 40% USA 5,000 USA 20% Japan Japan 0 0%

-5,000 -20%

Note: OP percentage breakdown by region Note: OP percentage breakdown by region Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse Catalysts: See growth potential in Asia, await recovery in domestic earnings In 2H 2013, Rohto announced a share buyback and raised its full-year guidance, so the shares outperformed the market. Growing profit momentum in Asia also gave a positive impression. The shares have since underperformed due to market disappointment in FY3/15 guidance, outlining only slight earnings growth, released in May 2014 and the reduced full-year guidance announced at the 1Q results. We see growth potential in Asia and think the share price could rally once the market recognizes the prospects for an improvement in domestic profit momentum. We await the best entry timing for investment, due to the various uncertainties at present.

Rohto Pharma (4527 / 4527 JP) 2 28 August 2014

Figure 3: Rohto Pharmaceutical – share price and catalysts (Index) FY3/14 OP +17%, (Yen) Versus TOPIX (LHS) 120 FY3/15 CoF OP +1% 1,900 Share price (RHS) 115 1,800 1,700 110 1,600 105 1,500 100 1,400 announced 1,300 95 share buy back announced 1,200 upward revision 90 1Q OP -76%, of full-yr NP made downward 1,100 FY3/13 OP +6%、 announced upward forecast 85 revision on full-yr 1,000 FY3/14 CoF OP +11% revision of full-yr OP forecast 80 OP forecast 900 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14

Source: Bloomberg, Credit Suisse Valuation We base our TP on average EV/EBITDA for the past ten years (6.9x), using FY3/16 as the base year. While Rohto exhibits high growth potential in Asia, we apply the company historical average rather than the Japanese industry average (10x) to reflect the fact that (1) earnings from the domestic business are susceptible to changes in SG&A expenses and (2) Rohto compares unfavorably with HPC sector peers in terms of expectations for medium-term profit growth, profitability, shareholder returns, and ROE. In FY3/14, Rohto had good earnings momentum and OP rose 17%, so the multiple approached +1 standard deviation from the mean. We expect earnings to decline in FY3/15 and then rise by around 7%. We use the company’s average multiple to reflect this profit momentum over the next two years.

Figure 4: P/E (12-month forward basis) Figure 5: EV/EBITDA (12-month forward basis)

(x) (x) 27 12 +2σ 25.7 +2σ 10.9 24 11 10 21 +1σ 21.0 9 +1σ 8.9 18 8 Ave. 16.3 15 7 Ave. 6.9

12 -1σ 11.6 6 -1σ 4.9 5 9 4 6 -2σ 6.8 3 -2σ 2.9 3 2 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1 12/1 13/1 14/1 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1 12/1 13/1 14/1

Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates Risks (1) Accelerating sales momentum in Asia Rohto is developing its businesses in China and Southeast Asia. We see potential for both earnings and share-price upside if sales grow more than expected. (2) Increasing competition in Japan For some everyday products, manufacturers are battling for market share and tend to compete on price. Rohto’s sales momentum slows as a direct consequence of declining consumption and the shift to cheaper products, resulting in a risk from deteriorating earnings.

Rohto Pharma (4527 / 4527 JP) 3 28 August 2014

(2) Earnings outlook

Figure 6: Earnings forecast summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated 14/3 Actual 143,822 11.4 16,821 17.0 17,100 16.1 8,947 10.6 77.1 12.2 15/3 CS E 151,000 5.0 15,800 -6.1 16,300 -4.7 10,000 11.8 88.2 14.3 CoE 152,000 5.7 16,000 -4.9 16,500 -3.5 10,100 12.9 89.0 15.4 IBES E 152,150 5.8 16,886 0.4 17,133 0.2 10,470 17.0 92.2 19.5 16/3 CS E 157,000 4.0 16,900 7.0 17,400 6.7 10,600 6.0 93.5 6.0 IBES E 159,683 5.0 17,921 6.1 18,208 6.3 11,218 7.1 98.0 6.3 17/3 CS E 163,500 4.1 18,000 6.5 18,500 6.3 11,300 6.6 99.7 6.6 IBES E 167,140 4.7 18,600 3.8 18,940 4.0 11,746 4.7 102.3 4.4 Source: Company data, I/B/E/S, Credit Suisse estimates FY3/15 forecasts: OP to drop 6%, as rising Japanese costs weigh on earnings We expect OP to drop 6% YoY to ¥15.8bn (guidance ¥16bn). Strong sales in Asia may drive OP up 20%, but the overall result may be dragged down by a 15% decline in Japan. We estimate sales of mainstay products in Asia as follows: Hada Labo up 17% YoY to ¥7.5bn, Mentholatum for Men skincare products up 18% to ¥7.3bn, Sunplay sunblock up 14% to ¥3.3bn, and eye drops up 9% to ¥4.7bn. We assume that sales will remain strong as they did in FY3/14. In the key Asian countries of China, Indonesia, and Vietnam, we expect earnings to remain steady, unaffected by the economic slowdown. In Japan, we expect sales of beauty products to decline 1%, slightly less than outlined in the company’s current guidance revised in 1Q. New products like Deou and Sugao may track above the initial forecast, but existing mainstay products may be affected by poor weather in some regions and weaker sales momentum, so we expect sales below the initial guidance. We expect earnings to decline due to higher sales promotion costs accompanying new product launches. Medium-term earnings outlook: Asian business to continue growing We expect OP to continue growing 7% YoY in both FY3/15 and FY3/16. In Asia, we expect sales of the four mainstay products to continue growing at around 10% in Greater China and Southeast Asia. In China, Rohto is expanding sales with a focus on major drugstore channels where there is growth potential. In Vietnam, Indonesia and other Southeast Asian countries, sales are growing because of growing consumer interest in fair complexions and increasing recognition of the importance of eyecare. Rohto has moved into India, Cambodia, and Myanmar in recent years and is growing sales with a focus on eye drops and the Acnes brand. In Myanmar, Rohto has already captured the top share of the eye drops market, so it is already generating results and we expect greater earnings contributions from new emerging markets. In Japan, we expect new products like Deou to grow, but think growth momentum for existing hit products may continue to slow. We expect beauty sales to continue growing at around 2%. Weakening expectations for greater shareholder returns, despite healthy finances Rohto is in a healthy financial position with net cash and 60% of equity capital ratio. Basically, we expect growth through increased sales of in-house products in emerging markets. Major M&A deals and capex appear unlikely and cash reserves are rising steadily. The company is investing more in regenerative medicine and other new areas, but not at a level that could threaten the company’s financial position. Rohto implemented a share buyback last FY, but the dividend payout ratio has remained at around 20% for the past ten years and management does not seem to recognize the need for greater shareholder returns. We expect the dividend payout ratio to remain at this level.

Rohto Pharma (4527 / 4527 JP) 4 28 August 2014

Figure 7: Sales and OP forecasts by segment FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Sales (JPYm) Japan 64,960 74,429 78,936 80,586 83,994 85,387 89,641 91,772 91,400 92,300 94,000 (Parent company) Eyecare products 22,425 23,255 23,392 22,781 23,089 22,116 23,583 23,254 23,000 23,200 23,400 Skincare products 27,503 31,050 35,111 38,015 42,279 44,359 47,161 49,562 49,400 50,100 51,300 Internal Medicines 7,280 8,459 8,637 8,668 8,417 8,029 8,470 8,992 9,000 9,000 9,100 Other 5,514 4,661 3,804 3,455 3,429 3,003 3,538 2,624 2,700 2,700 2,900 (Beauty related products) 12,000 14,700 19,000 21,300 25,000 26,000 27,000 26,700 26,400 27,000 27,700 HadaLabo 4,000 5,800 8,700 10,600 13,600 14,300 13,600 12,200 12,000 12,000 12,000 Obaji 3,500 4,400 3,700 3,900 4,000 3,100 4,400 5,200 5,200 5,000 5,000 OXY 2,000 1,700 2,400 2,600 2,700 3,100 3,100 2,500 2,000 2,000 2,000 50 Megumi 0 900 2,100 2,800 2,900 3,200 3,000 3,000 2,000 2,000 2,000 Deow 0 0 0 0 0 0 0 600 1,600 2,100 2,500 Other 2,500 1,900 2,100 1,400 1,800 2,300 2,900 3,200 3,600 3,900 4,200

USA 9,526 9,385 8,055 7,816 6,077 5,574 5,619 6,288 6,800 7,000 7,200 Europe 5,044 5,565 4,536 4,662 4,015 3,914 3,962 4,801 6,800 7,700 8,000 Asia 15,016 17,381 17,934 19,078 20,121 24,014 28,179 39,109 44,000 48,000 52,300 Other 1,071 1,369 1,148 1,285 1,262 1,402 1,742 1,850 2,000 2,000 2,000 Total 95,619 108,131 110,611 113,429 115,472 120,292 129,146 143,822 151,000 157,000 163,500 Sales (y-y,%) Japan 6.0 14.6 6.1 2.1 4.2 1.7 5.0 2.4 -0.4 1.0 1.8 Eyecare products 5.9 3.7 0.6 -2.6 1.4 -4.2 6.6 -1.4 -1.1 0.9 0.9 Skincare products 9.3 12.9 13.1 8.3 11.2 4.9 6.3 5.1 -0.3 1.4 2.4 Internal Medicines 4.6 16.2 2.1 0.4 -2.9 -4.6 5.5 6.2 0.1 0.0 1.1 Other 4.1 -15.5 -18.4 -9.2 -0.8 -12.4 17.8 -25.8 2.9 0.0 7.4 USA -8.0 -1.5 -14.2 -3.0 -22.2 -8.3 0.8 11.9 8.1 2.9 2.9 Europe 20.8 10.3 -18.5 2.8 -13.9 -2.5 1.2 21.2 41.6 13.2 3.9 Asia 9.4 15.7 3.2 6.4 5.5 19.3 17.3 38.8 12.5 9.1 9.0 Other 8.8 27.8 -16.1 11.9 -1.8 11.1 24.3 6.2 8.1 0.0 0.0 Total 11.4 13.1 2.3 2.5 1.8 4.2 7.4 11.4 5.0 4.0 4.1 OP (JPY m) Japan 7,920 9,288 10,292 10,394 10,338 10,384 10,697 11,235 9,600 10,000 10,300 USA 501 441 -1,015 -399 39 550 454 56 100 100 100 Europe 643 643 383 383 326 164 371 494 400 400 400 Asia 2,342 2,403 1,975 2,189 2,171 2,302 2,595 4,581 5,500 6,100 6,900 Other 119 136 100 59 63 84 109 144 100 200 200 Adjustments 126 -97 -82 166 137 152 311 100 100 100 Total 11,382 13,037 11,638 12,544 13,105 13,624 14,380 16,821 15,800 16,900 18,000 OP (y-y,%) Japan 3.5 17.3 10.8 1.0 -0.5 0.4 3.0 5.0 -14.6 4.2 3.0 USA -42.7 -12.0 - - - 1,310.3 -17.5 -87.7 78.6 0.0 0.0 Europe 35.4 0.0 -40.4 0.0 -14.9 -49.7 126.2 33.2 -19.0 0.0 0.0 Asia 53.7 2.6 -17.8 10.8 -0.8 6.0 12.7 76.5 20.1 10.9 13.1 Other -17.9 14.3 -26.5 -41.0 6.8 33.3 29.8 32.1 -30.6 100.0 0.0 Total 8.3 14.5 -10.7 7.8 4.5 4.0 5.5 17.0 -6.1 7.0 6.5 OPM (%) Japan 12.2 12.5 13.0 12.9 12.3 12.2 11.9 12.2 10.5 10.8 11.0 USA 5.3 4.7 -12.6 -5.1 0.6 9.9 8.1 0.9 1.5 1.4 1.4 Europe 12.7 11.6 8.4 8.2 8.1 4.2 9.4 10.3 5.9 5.2 5.0 Asia 15.6 13.8 11.0 11.5 10.8 9.6 9.2 11.7 12.5 12.7 13.2 Other 11.1 9.9 8.7 4.6 5.0 6.0 6.3 7.8 5.0 10.0 10.0 Total 11.9 12.1 10.5 11.1 11.3 11.3 11.1 11.7 10.5 10.8 11.0 Sales breakdown (%) Japan 67.9 68.8 71.4 71.0 72.7 71.0 69.4 63.8 60.5 58.8 57.5 USA 10.0 8.7 7.3 6.9 5.3 4.6 4.4 4.4 4.5 4.5 4.4 Europe 5.3 5.1 4.1 4.1 3.5 3.3 3.1 3.3 4.5 4.9 4.9 Asia 15.7 16.1 16.2 16.8 17.4 20.0 21.8 27.2 29.1 30.6 32.0 Other 1.1 1.3 1.0 1.1 1.1 1.2 1.3 1.3 1.3 1.3 1.2 OP breakdown (%) Japan 69.6 71.9 87.7 82.3 79.9 77.0 75.2 68.0 61.1 59.5 57.5 USA 4.4 3.4 -8.6 -3.2 0.3 4.1 3.2 0.3 0.6 0.6 0.6 Europe 5.6 5.0 3.3 3.0 2.5 1.2 2.6 3.0 2.5 2.4 2.2 Asia 20.6 18.6 16.8 17.3 16.8 17.1 18.2 27.7 35.0 36.3 38.5 Source: Company data, Credit Suisse estimates

Rohto Pharma (4527 / 4527 JP) 5 28 August 2014

(3) Company overview Sustained customer focus in health and beauty Rohto Pharmaceutical was founded in 1899. Today, the company’s core businesses are eyecare, skincare, and over-the-counter (OTC) medicines, especially for gastrointestinal disorders. In the past few years, Rohto has launched a number of unique beauty products and has established a presence in this field. The company is developing skincare and other products by leveraging its technical capabilities developed in the pharmaceutical field since the company was founded, with the goal of differentiating its offering from major cosmetics players. Rohto is also making aggressive moves into niche fields, for example through the acquisition of the men’s skincare brand OXY. Rohto has a long history of business in China, Vietnam, and other developing countries in Asia, but has recently moved into Myanmar and Bangladesh. The company is characterized by its ability to make decisions and act quickly. Rohto’s CEO is Kunio Yamada, the great-grandson of Rohto’s founder. Yamada started working at Rohto in 1980 immediately after graduating from university and was appointed CEO in 1999. Under his management, the company has moved aggressively into new non-pharmaceutical businesses. Rohto has had a major hit in Japan with the Hada Labo range of skin lotions, which are priced competitively for sale via drugstore channels due to reduced packaging and other costs, and which are high quality products because of Rohto’s pharmaceutical manufacturing heritage. More than just a pharmaceutical company, Rohto Pharmaceutical aims to maintain a supply of value-added health and beauty products to suit customer needs.

Figure 8: OP breakdown by region (FY3/14) Figure 9: OP by region

Other USA Europe (JPY mn) (JPY mn) 1% 8,000 Asia Japan (RHS) 12,000 7,000 Asia 10,000 28% 6,000 5,000 8,000 4,000 3,000 6,000 2,000 4,000 Europe 1,000 3% 0 2,000 -1,000 USA Japan -2,000 0 0% 68%

Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates Asian business entering a growth phase Rohto supplies a wide range of products to the domestic market, including OTC drugs, cosmetics, and supplements, and Japan currently generates 70% of profits. Rohto commands a 30% share of the OTC eye drops market in the eyecare segment (eye drops, eyewash) and is developing its skincare business (topical skin creams, lip balm, sunblock, functional cosmetics) via the growth channel of drugstores. Rohto has expanded its skincare business across Asia, such that it now accounts for 30% of total profits. Rohto moved into China in 1991 by establishing the joint venture Mentholatum (China) Pharmaceuticals. The mainstay Mentholatum brand is penetrating the market due to its positioning as a value-added product amongst younger customer segments. Rohto is also generating demand in new fields, such as men’s skincare. Sales territories have expanded from coastal regions into the interior and we see significant growth potential over the longer term.

Rohto Pharma (4527 / 4527 JP) 6 28 August 2014

In Southeast Asia, Rohto began local manufacturing in Indonesia and Vietnam in the late 1990s. The company supplies value-added products in the eye drop and lipcare categories. In regions where eye drops are not in common use, Rohto has run educational programs at elementary and middle schools and is planting the seeds for greater awareness of eyecare. The company has already captured the top market share in some regions. Rohto is focusing on the men’s skincare, sunblock, and eye-drop markets where there is relatively little competition and its products can capture high market shares. Over the past few years, Rohto has developed the Hada Labo range of functional skin lotions that have become a hit in Japan and are now expanding in Asia.

Figure 10: Company history 1899 Shintendo, Yasutami Yamada Pharmaceutical Company is established 1975 acquired the trademark rights to Mentholatum from The Mentholatum Company Inc (US) 1988 acquired the management rights to The Mentholatum Company Inc 1991 established JV in Guangdong, China 1996 established JV in Indonesia 1997 established JV in Vietnam 2001 released a range of functional skin care products "Obagi" 2004 released Hada Labo Mentholatum acquired anti-acne medication OXY brand 2006 released men's skincare brand "OXY" 2007 released anti-aging skincare product for women over 50, "50-no-Megumi" 2010 established Rohto Pharma India and Rohto-Mentholatum (Bangladesh) Source: Company data

Rohto Pharma (4527 / 4527 JP) 7 28 August 2014

(4) Business trends Mentholatum for Men ranks third for market share in China The men’s skincare brand Mentholatum for Men accounts for just under 20% of Asian sales and we expect this to be an earnings driver moving forward. The men’s skincare market is growing in China, expanding at 35% per annum over the past five years; we estimate that it is growing faster than the 25% growth seen in the men’s grooming market. Annual per capita spending on skincare is around $3 in China, compared with $8 in Singapore and $9 in Japan; we think Chinese spending could roughly triple over the longer term. Per capita spending on skincare is extremely high in South Korea at $53. Cosmetic usage is relatively similar in China and South Korea, so it is possible that the Chinese market could grow much larger. Mentholatum for Men ranks third for market share, behind L’Oréal Paris from L’Oréal and Nivea from Beiersdorf, so there is good consumer awareness of premium brands. Unlike the women’s skincare market, there are relatively few players in the men’s skincare market and, once the competitive environment settles down, we expect Rohto to achieve sustained and stable growth in this segment.

Figure 11: Per capita spending on men’s skincare Figure 12: Share of the men’s skincare market in China products by country (US$/person per annum) (%) China Indonesia Singapore 35 12 Thailand Japan USA 60 S.Korea (RHS) 30 2011 2012 2013 10 50 25 20 8 40 15 6 30 10 5 4 20 0 2 10

0 0 2008 2009 2010 2011 2012 2013

Note: Market size divided by the male population aged 20–49 years Source: Euromonitor, JETRO, Credit Suisse Source: UN, Euromonitor, Credit Suisse estimates

Figure 13: Chinese market for men’s skincare products is Figure 14: Mentholatum for Men ranks third for market growing share

Source: Credit Suisse (photo taken in Bejing) Source: Credit Suisse (photo taken in Beijing)

Rohto Pharma (4527 / 4527 JP) 8 28 August 2014

Double-digit growth in the Asian suncare market The market for sunblock products across Asia (ex Japan) has returned double-digit growth for the past five years, as consumers demand products to promote fairer complexions. Rohto product sales have grown steadily over the past few years and lip balm sales are also returning double-digit growth in regions with drier climates. Rohto is also expanding its sales territories and countries for the Hada Labo functional cosmetics range. Hada Labo products have been branded as a high-performance skincare range, which is an effective positioning in Japan, and brand recognition is steadily improving. Based on a visit in June to around 20 stores in shopping malls in Jakarta, Surabaya, and other suburban cities in Indonesia, most drugstore chains are selling Hada Labo products and Rohto appears to be expanding its sales network with a focus on modern channels.

Figure 15: Suncare market size across Asia (10% CAGR) Figure 16: Good brand recognition of Mentholatum in Southeast Asia

(USD mn) 1,600

1,400 Thailand 1,200 Taiwan 1,000 South Korea 800 Singapore 600 Malaysia

400 Indonesia China 200

0 2008 2009 2010 2011 2012 2013

Source: Euromonitor, Credit Suisse Source: Credit Suisse (photo taken in Singapore) Japanese market growth starting to slow The Hada Labo range of skincare lotions contain moisture-retaining hyaluronic acid. This range has been a hit in Japan since 2004, driving Rohto earnings. Over the past few years, the market has grown for all-in-one gel products for use after cleansing to replace separate skin lotions, milky lotions, serums, creams, and face packs. The all-in-one products in the Hada Labo range have also grown. Sales of the Hada Labo range as a whole have recently started to slow, so market expansion is tailing off, but the all-in-one products are driving growth and we see little risk of a sharp contraction in sales.

Figure 17: Sales by the Japanese skincare business Figure 18: Hada Labo all-in-one products (JPY, bn） 35 Other

30 Deow 27.7 26 27 26.7 26.4 27 50 Megumi 25 25 OXY 21.3 19 20 HADALABO 14.7 15 Obagi 12 8.9 10 5.8 4.2 5 3.3 1.3 0

Source: Company data, Credit Suisse estimates Source: Company data

Rohto Pharma (4527 / 4527 JP) 9 28 August 2014

Figure 19: Consolidated balance sheet and change in net assets (¥mn) FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E (Assets) Cash,cash equivalents & securities 7,108 9,830 6,151 13,373 14,111 15,381 19,868 23,028 25,116 27,253 29,502 Account receivable 26,187 27,707 27,891 28,111 29,859 31,898 31,896 32,927 34,029 34,808 35,844 Inventories 11,926 12,475 14,345 15,284 16,336 18,005 19,456 21,381 21,438 22,260 22,753 Other 3,023 3,402 3,977 3,715 4,796 5,996 6,247 5,645 5,645 5,645 5,645 Total current assets 48,244 53,414 52,364 60,483 65,102 71,280 77,467 82,981 86,228 89,966 93,744 Tangible fixed assets 34,457 33,908 35,649 35,269 39,427 42,628 44,758 48,563 47,563 46,563 45,563 Depreciable PP&E 25,172 23,910 24,716 23,583 25,248 29,626 32,044 33,973 - - - Land 8,819 9,323 9,305 9,318 9,770 10,217 10,613 12,340 - - - Construction in progress 464 673 1,624 2,365 4,406 2,782 2,097 2,250 - - - Intangible fixed assets 15,242 13,286 3,726 2,802 2,492 2,273 2,008 2,828 2,828 2,828 2,828 Investments & other assets 27,376 19,574 20,345 22,214 19,449 19,826 26,408 27,876 27,876 27,876 27,876 Investment securities 26,407 18,347 16,691 18,448 15,345 14,945 18,537 22,724 22,724 22,724 22,724 Other 969 1,227 3,654 3,766 4,104 4,881 7,871 5,152 5,152 5,152 5,152 Total fixed assets 77,075 66,768 59,720 60,285 61,368 64,727 73,174 79,268 78,267 77,267 76,267 Total assets 125,320 120,183 112,086 120,770 126,472 136,008 150,643 162,249 164,495 167,233 170,011 (Liabilities) Account payable 6,561 8,015 8,383 8,685 9,121 10,525 10,151 11,753 11,499 11,088 9,261 Short-term debt 8,095 3,997 4,252 3,527 3,199 5,103 5,611 8,216 4,903 1,427 670 Other 22,668 25,563 23,086 24,975 29,423 29,307 33,792 36,674 34,840 33,098 30,781 Total current liabilities 37,324 37,575 35,721 37,187 41,743 44,935 49,554 56,643 51,242 45,614 40,713 Long-term debt 7,960 6,603 4,679 4,621 2,716 3,335 1,578 1,666 1,583 1,504 150 Other 10,080 6,587 4,568 5,289 4,101 4,110 5,738 5,313 5,047 5,047 5,047 Total fixed liabilities 18,040 13,190 9,247 9,910 6,817 7,445 7,316 6,979 6,630 6,551 5,198 Total liabilities 55,365 50,765 44,969 47,097 48,561 52,380 56,871 63,622 57,872 52,164 45,910 (Net assets) Capital stock 5,743 5,860 6,398 6,398 6,398 6,405 6,408 6,411 6,411 6,411 6,411 Capital surplus 4,862 4,980 5,517 5,517 5,517 5,524 5,527 5,738 5,738 5,738 5,738 Retained earnings 49,374 55,645 54,695 60,822 67,511 73,814 79,677 86,505 94,464 102,910 111,942 Treasury stock -173 -203 -234 -261 -268 -270 -273 -5,785 -5,671 -5,671 -5,671 Total shareholders' equity 59,806 66,282 66,376 72,476 79,158 85,473 91,339 92,869 100,942 109,388 118,420 Valuation and translation adjustments 10,057 3,087 100 545 (2,083) (2,701) 1,537 4,809 4,742 4,742 4,742 Total equity capital 69,863 69,369 66,476 73,021 77,075 82,772 92,876 97,678 105,684 114,130 123,162 Share warrant - - 593 593 593 579 573 568 568 568 568 Minority interests 92 47 46 55 241 273 320 379 371 371 371 Total net assets 69,956 69,417 67,116 73,670 77,910 83,625 93,769 98,627 106,623 115,069 124,101 Total liabilities & net assets 125,320 120,183 112,086 120,770 126,472 136,008 150,643 162,249 164,495 167,233 170,011

FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E (Changes in net assets) Beginning balance 62,789 69,956 69,417 67,116 73,670 77,910 83,625 93,769 98,627 106,623 115,069 Capital stock 334 117 538 0 0 7 3 3 0 0 0 Capital surplus 332 118 537 0 0 7 3 211 0 0 0 Net profits 6,617 7,525 6,139 7,768 7,966 8,184 8,087 8,947 10,000 10,600 11,300 Dividends from surplus -1,145 -1,386 -1,400 -1,646 -1,646 -1,881 -1,881 -2,116 -2,041 -2,154 -2,268 Treasury stock -38 -30 -31 -27 -7 -2 -3 -5,512 114 0 0 Valuation and translation adjustments 1,102 -6,970 -2,987 445 -2,628 -618 4,238 3,272 -67 0 0 Minority interests 21 -45 -1 9 186 32 47 59 -8 0 0 Other -56 132 -5,096 5 369 -14 -350 -6 -2 0 0 Final balance 69,956 69,417 67,116 73,670 77,910 83,625 93,769 98,627 106,623 115,069 124,101 Source: Company data, Credit Suisse estimates

Rohto Pharma (4527 / 4527 JP) 10 28 August 2014

Figure 20: Consolidated profit loss and cash flow statements (¥mn) FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Sales revenue 95,619 108,131 110,611 113,429 115,472 120,292 129,146 143,822 151,000 157,000 163,500 COGS 36,449 43,446 45,410 46,648 47,534 49,797 53,273 57,664 61,900 64,400 67,000 Gross profit 59,170 64,685 65,201 66,781 67,938 70,495 75,873 86,157 89,100 92,600 96,500 SG&A 47,788 51,648 53,563 54,237 54,833 56,871 61,493 69,336 73,300 75,700 78,500 OP 11,382 13,037 11,638 12,544 13,105 13,624 14,380 16,821 15,800 16,900 18,000 Interest and dividend income 369 453 421 350 462 474 484 567 600 600 600 Interest expense 628 587 473 359 353 223 180 165 100 100 100 Other -822 -565 -237 235 79 -191 46 -123 0 0 0 RP 10,301 12,338 11,349 12,770 13,293 13,684 14,730 17,100 16,300 17,400 18,500 Extraordinary gains 854 1,284 53 59 702 484 319 1,482 500 500 500 Etrtraordinary losses 392 1,253 2,158 416 566 80 1,420 3,983 1,000 1,000 1,000 Pretax profit 10,764 12,368 9,244 12,412 13,430 14,088 13,630 14,599 15,800 16,900 18,000 Income taxes 4,126 4,848 3,098 4,639 5,493 5,944 5,528 5,651 5,800 6,300 6,700 Minority interests 19 -4 7 4 -29 -39 14 1 0 0 0 NP 6,617 7,525 6,139 7,768 7,966 8,184 8,087 8,947 10,000 10,600 11,300 Tax rate 38.3% 39.2% 33.5% 37.4% 40.9% 42.2% 40.6% 38.7% 36.7% 37.3% 37.2% Depreciation expense 3,479 4,169 4,232 4,412 4,117 4,744 5,080 5,580 5,500 5,500 5,500 Capital expenditure 4,349 4,112 6,507 4,526 8,671 8,412 6,007 7,870 4,500 4,500 4,500 R&D expense 3,750 3,797 3,735 3,733 3,697 3,717 4,062 4,547 5,000 5,500 5,500

To sales ratio (%) CGS 38.1 40.2 41.1 41.1 41.2 41.4 41.3 40.1 41.0 41.0 41.0 Gross profit 61.9 59.8 58.9 58.9 58.8 58.6 58.7 59.9 59.0 59.0 59.0 Depreciation expense 3.6 3.9 3.8 3.9 3.6 3.9 3.9 3.9 3.6 3.5 3.4 R&D expense 3.9 3.5 3.4 3.3 3.2 3.1 3.1 3.2 3.3 3.5 3.4 SG&A 50.0 47.8 48.4 47.8 47.5 47.3 47.6 48.2 48.5 48.2 48.0 OP 11.9 12.1 10.5 11.1 11.3 11.3 11.1 11.7 10.5 10.8 11.0 RP 10.8 11.4 10.3 11.3 11.5 11.4 11.4 11.9 10.8 11.1 11.3 Pretax profit 11.3 11.4 8.4 10.9 11.6 11.7 10.6 10.2 10.5 10.8 11.0 NP 6.9 7.0 5.6 6.8 6.9 6.8 6.3 6.2 6.6 6.8 6.9 YoY (%) Sales revenue 11.4 13.1 2.3 2.5 1.8 4.2 7.4 11.4 5.0 4.0 4.1 Gross profit 9.1 9.3 0.8 2.4 1.7 3.8 7.6 13.6 3.4 3.9 4.2 OP 8.3 14.5 -10.7 7.8 4.5 4.0 5.5 17.0 -6.1 7.0 6.5 RP 5.5 19.8 -8.0 12.5 4.1 2.9 7.6 16.1 -4.7 6.7 6.3 Pretax profit 9.8 14.9 -25.3 34.3 8.2 4.9 -3.3 7.1 8.2 7.0 6.5 NP 1.4 13.7 -18.4 26.5 2.5 2.7 -1.2 10.6 11.8 6.0 6.6

FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E (Operating activities) NP 6,617 7,525 6,139 7,768 7,966 8,184 8,087 8,947 10,000 10,600 11,300 Depreciation(+) 3,479 4,169 4,232 4,412 4,117 4,744 5,080 5,580 5,500 5,500 5,500 Account receivable(-) -3,164 -1,520 -184 -220 -1,748 -2,039 2 -1,031 -1,102 -779 -1,035 Inventories(-) 234 -549 -1,870 -939 -1,052 -1,669 -1,451 -1,925 -57 -822 -493 Account payable(+) -139 1,454 368 302 436 1,404 -374 1,602 -254 -411 -1,827 Minority interests(+) 19 -4 7 4 -29 -39 14 1 0 0 0 Other 2,312 1,535 -1,328 3,767 3,234 -194 5,344 5,487 0 0 0 Operating cashflow 9,358 12,610 7,364 15,094 12,924 10,391 16,702 18,661 14,087 14,088 13,444 (Investing activities) Capital expenditures(-) -4,249 -3,743 -6,372 -4,815 -8,784 -8,682 -5,403 -9,385 -4,500 -4,500 -4,500 Other -3,277 -238 -2,624 -901 197 -923 -5,192 -3,235 0 0 0 Investing cashflow -7,526 -3,981 -8,996 -5,716 -8,587 -9,605 -10,595 -12,620 -4,500 -4,500 -4,500 (Financing activities) Debt (+) 1,571 -5,455 -1,669 -783 -2,233 2,523 -1,249 2,693 -3,396 -3,555 -2,110 Dividends (-) -1,145 -1,386 -1,400 -1,646 -1,646 -1,881 -1,881 -2,116 -2,041 -2,154 -2,268 Other -1,930 1,181 1,696 489 578 158 -278 -5,788 0 0 0 Financing cashflow -1,504 -5,660 -1,373 -1,940 -3,301 800 -3,408 -5,211 -5,437 -5,709 -4,378 (Cash & cash equivalents) Increases 328 2,969 -3,005 7,438 1,036 1,586 2,699 830 4,150 3,879 4,566 Beginning balance 6,657 7,108 9,830 6,151 13,373 14,111 15,381 19,868 23,028 25,116 27,253 Final balance 6,985 10,077 6,825 13,589 14,409 15,697 18,080 20,698 27,178 28,995 31,819 Adjustments 123 -247 -674 -216 -298 -316 1,788 2,330 -2,061 -1,742 -2,317 Source: Company data, Credit Suisse estimates

Rohto Pharma (4527 / 4527 JP) 11 28 August 2014

Figure 21: Financial indicators FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E (Safety) Current ratio (%) 129.3 142.2 146.6 162.6 156.0 158.6 156.3 146.5 168.3 197.2 230.3 Quick ratio (%) 89.2 99.9 95.3 111.6 105.3 105.2 104.5 98.8 115.4 136.1 160.5 Adjusted quick ratio (%) 87.8 245.9 144.7 379.2 441.1 301.4 354.1 280.3 512.3 1,909.2 4,400.5 Fixed ratio (%) 110.3 96.3 89.8 82.6 79.6 78.2 78.8 81.2 74.1 67.7 61.9 Interest-bearing debt (¥mn) 16,055 10,600 8,931 8,148 5,915 8,438 7,189 9,882 6,486 2,931 821 Average debt interest rate (%) 4.1 4.4 4.8 4.2 5.0 3.1 2.3 1.9 1.2 2.1 5.3 Dependence on debt (%) 12.8 8.8 8.0 6.7 4.7 6.2 4.8 6.1 3.9 1.8 0.5 Net debt (¥mn) 8,947 770 2,780 -5,225 -8,196 -6,943 -12,679 -13,146 -18,631 -24,322 -28,682 Equity capital ratio (%) 55.7 57.7 59.3 60.5 60.9 60.9 61.7 60.2 64.2 68.2 72.4 D/E ratio (%) 23.0 15.3 13.4 11.2 7.7 10.2 7.7 10.1 6.1 2.6 0.7 Long-term debt ratio (%) 49.6 62.3 52.4 56.7 45.9 39.5 22.0 16.9 24.4 51.3 18.3 Working capital (¥mn) 10,920 15,839 16,643 23,296 23,359 26,345 27,913 26,338 34,986 44,353 53,032 Net interest expense (¥mn) -259 -134 -52 -9 109 251 304 402 500 500 500 Cash plus marketable securities (¥mn) 7,108 9,830 6,151 13,373 14,111 15,381 19,868 23,028 25,116 27,253 29,502 Interest coverage ratio (x) 18.71 22.98 25.49 35.92 38.43 63.22 82.58 105.38 164.00 175.00 186.00 Financial leverage (x) 1.79 1.73 1.69 1.65 1.64 1.64 1.62 1.66 1.56 1.47 1.38 A/R to A/P ratio (%) 399.1 345.7 332.7 323.7 327.4 303.1 314.2 280.2 295.9 313.9 387.1 Dividend on equity (%) 1.7 2.0 2.1 2.4 2.2 2.4 2.1 2.2 2.0 2.0 1.9 (Profitability) ROE (%) 10.0 10.8 9.0 11.1 10.6 10.2 9.2 9.4 9.8 9.6 9.5 ROA (%) 9.6 10.6 10.0 10.8 10.6 10.4 10.0 10.8 9.7 10.2 10.7 Inventory turnover ratio (x) 7.9 8.9 8.2 7.7 7.3 7.0 6.9 7.0 7.1 7.2 7.3 A/R turnover ratio (x) 3.9 4.0 4.0 4.1 4.0 3.9 4.0 4.4 4.5 4.6 4.6 A/P turnover ratio (x) 14.4 14.8 13.5 13.3 13.0 12.2 12.5 13.1 13.0 13.9 16.1 Inventory turnover days (days) 46.0 41.2 44.3 47.7 50.0 52.1 52.9 51.8 51.8 50.8 50.2 A/R turnover days (days) 93.9 91.0 91.7 90.1 91.6 93.7 90.1 82.3 80.9 80.0 78.9 A/P turnover days (days) 25.3 24.6 27.1 27.5 28.1 29.8 29.2 27.8 28.1 26.3 22.7 Sales per employee (¥mn) 36.2 31.0 25.8 23.9 22.9 22.8 23.8 25.3 25.8 26.9 28.0 OP per employee (¥mn) 4.3 3.7 2.7 2.6 2.6 2.6 2.6 3.0 2.7 2.9 3.1 (Per share data) EPS (¥) 57.6 65.1 52.4 66.1 67.7 69.6 68.8 77.1 88.2 93.5 99.7 BPS (¥) 605.1 598.9 565.2 621.0 655.5 703.9 789.8 861.5 932.1 1,006.6 1,086.2 Sales per share (¥) 832.6 935.4 944.4 964.5 982.1 1,023.0 1,098.3 1,240.1 1,331.8 1,384.7 1,442.0 Operating cashflow per share (¥) 81.5 109.1 62.9 128.3 109.9 88.4 142.0 160.9 124.2 124.2 118.6 DPS (¥) 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 18.0 19.0 20.0 Dividend ratio (%) 19.1 18.4 24.8 21.2 22.1 23.0 24.7 23.3 20.4 20.3 20.1 (Growth) EPS growth (%) -2.4 13.0 -19.5 26.0 2.6 2.7 -1.2 12.2 14.3 6.0 6.6 BPS growth (%) 10.3 -1.0 -5.6 9.9 5.6 7.4 12.2 9.1 8.2 8.0 7.9 Total assets growth (%) 11.1 -4.1 -6.7 7.7 4.7 7.5 10.8 7.7 1.4 1.7 1.7 Sustainable growth rate (%) 8.1 8.8 6.8 8.8 8.3 7.9 6.9 7.2 7.8 7.7 7.6 (Investment profitability) Capital invested (¥ mn) 87,903 82,559 75,723 82,931 83,892 90,217 100,192 104,657 112,314 120,681 128,360 NOPAT (¥ mn) 6,512 7,583 7,580 8,003 7,792 7,765 8,575 10,235 10,000 10,600 11,300 ROIC (%) 7.4 9.2 10.0 9.6 9.3 8.6 8.6 9.8 8.9 8.8 8.8 WACC (%) 3.6 3.7 3.8 3.7 3.8 3.7 3.7 3.6 3.7 3.8 3.9 EVA (¥ mn) 3,359 4,518 4,728 4,898 4,588 4,429 4,873 6,450 5,860 6,005 6,331 EVA spread (%) 3.8 5.5 6.2 5.9 5.5 4.9 4.9 6.2 5.2 5.0 4.9 (Cashflow) EBITDA (¥mn) 14,861 17,206 15,870 16,956 17,222 18,368 19,460 22,401 21,300 22,400 23,500 EBITDA margin (%) 15.5 15.9 14.3 14.9 14.9 15.3 15.1 15.6 14.1 14.3 14.4 FCF (¥mn) 1,832 8,629 -1,632 9,378 4,337 786 6,107 6,041 9,587 9,588 8,944 Operating C/F to Investment C/F rate (%) 124.3 316.8 81.9 264.1 150.5 108.2 157.6 147.9 313.0 313.1 298.8 (Other) Employees numbers 3,017 3,964 4,617 4,878 5,201 5,347 5,518 5,845 5,845 5,845 5,845 Consolidated subsidiaries numbers 20 20 20 21 24 25 27 30 30 30 30 Average shares outstanding (mn) 114.8 115.6 117.1 117.6 117.6 117.6 117.6 116.0 113.4 113.4 113.4 End-of-period shares outstanding (mn) 115.5 115.8 117.6 117.6 117.6 117.6 117.6 113.4 113.4 113.4 113.4 Source: Company data, Credit Suisse estimates

Rohto Pharma (4527 / 4527 JP) 12 28 August 2014

HOLT analysis Using our growth assumptions for FY14 to FY16, and thereafter assuming HOLT’s long- run mean reversion assumptions, the HOLT discounted cash flow model suggests Rohto has 7% potential upside.

Figure 22: HOLT analysis

Source: Company data, Credit Suisse estimates, HOLT estimates

Rohto Pharma (4527 / 4527 JP) 13 28 August 2014

Companies Mentioned (Price as of 27-Aug-2014) Beiersdorf (BEIG.DE, €67.63) L'Oreal (OREP.PA, €127.5) ROHTO Pharmaceutical (4527.T, ¥1,479, NEUTRAL, TP ¥1,520)

Disclosure Appendix

Important Global Disclosures I, Masashi Mori, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (53% banking clients) Neutral/Hold* 40% (51% banking clients) Underperform/Sell* 13% (44% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Rohto Pharma (4527 / 4527 JP) 14 28 August 2014

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Price Target: (12 months) for ROHTO Pharmaceutical (4527.T)

Method: We calculate our ¥1,520 target price for Rohto Pharmaceuticals using an average EV/EBITDA for the past ten years (6.9x) applied to our FY3/16 forecast. We apply the company average because Rohto is less profitable than sector peers. Risk: Risks to our ¥1,520 target price for Rohto Pharmaceuticals include: Downside - increasing competition in Japan and the shift to cheaper products; Upside - strong sales momentum in Asia such as China and Southeast Asia.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (4527.T) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Masashi Mori Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request.

Rohto Pharma (4527 / 4527 JP) 15 28 August 2014

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Rohto Pharma (4527 / 4527 JP) 16 28 August 2014

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