A man walks past the headquarters of Kobayashi Pharmaceutical in Osaka on April 2, 2024.
Yuichi Yamazaki | AFP | Getty Images
Company: Kobayashi Pharmaceutical (4967.T)
Business: Kobayashi Pharmaceutical manufactures and sells pharmaceuticals and consumer products in Japan and internationally. The company operates in three segments: The Domestic Business and Overseas Business segments offer healthcare, household and skin care products, and other products. The company recently combined its mail order segment with its Domestic Business segment, which is engaged in mail order sales of nutritional supplements, skin care products, and other products. The Others segment is engaged in transportation, plastic container manufacturing, property management, and advertising planning and production.
Market value: ~440 billion Japanese yen (5,635 yen per share)
Activist: Oasis Management Company
Percentage ownership: 5.20%
Average costs: n/a
Comment from an activist: Oasis Management is a global hedge fund management firm headquartered in Hong Kong with additional offices in Tokyo and Austin, Texas, and the Cayman Islands. Oasis was founded in 2002 by Seth Fischer, who leads the firm as Chief Investment Officer. Oasis is a genuine international activist investor, active primarily in Asia (and occasionally in Europe). The firm seeks to identify undervalued investment opportunities with great value creation potential. The firm has an impressive track record of prolific and successful international activism. Oasis has as many arrows in its quiver as any activist and has been successful in winning seats on boards, opposing strategic transactions, advocating for strategic actions, improving corporate governance, and holding management accountable.
What happens
Oasis recently reported a 5.20% stake in Kobayashi. Amid a scandal involving Kobayashi's red koji-related products, Oasis said it might engage the company if there were no improvements of its own, and suggested three paths to value creation: (i) Kobayashi could improve its operating performance itself; (ii) be taken private through a management buyout; or (iii) work with Oasis to improve operating performance, corporate governance and board composition.
Behind the scenes
Kobayashi Pharmaceutical is a Japan-based pharmaceutical and consumer goods company. It owns over 150 brands in the categories of pharmaceuticals, oral care, food, skin care, air fresheners, mail order, and more. The company generated revenue of 173.45 billion yen in 2023, of which 75% came from domestic sales, 24% from international sales, and less than 1% from its other businesses. Although the company posted record revenue in 2023, it came from a declining base, narrowly surpassing its 2018 revenue of 167 million yen. In addition, since 2019, return on assets fell from 12% to 10.4%, return on equity fell from 11.3% to 10.1%, and operating margins fell from 16.2% to 14.9%. As a result, the company's shares fell over 45% from their peak in December 2020 to the end of 2023.
Things got even worse in early 2024 when reports emerged of health issues apparently related to products containing Kobayashi's red koji. In March, the company recalled three products. Kobayashi subsequently launched an investigation into the matter and formed an investigative committee to assess the situation and the board's response. Last month, the company released the results of the investigation. While the committee concluded that the company had not committed any malicious acts to cover up the matter, it also found that Kobayashi was unaware of the safety of health foods and failed to report and consult with the board, auditors, government, and consumers in a timely manner. The committee also found that the company was not adequately prepared for health damage and did not invest enough resources in quality control. The red koji supplement scandal has caused the stock to fall nearly 20% since the end of 2023.
In May, Oasis management flagged the opportunity at Kobayashi. At the time, Oasis stressed that it was not an extraordinary or unimaginable crisis. Oasis said at the time that they could intervene if there was no “self-improvement” and that the company would benefit from implementing improved crisis management protocols and improved corporate governance to better hold management accountable and stamp out nepotism. Oasis proposed three paths to value creation: (i) improving operating performance on its own; (ii) privatizing through a management buyout; or (iii) working with Oasis to improve operating performance, corporate governance and board composition.
In July, President and CEO Akihiro Kobayashi and Chairman Kazumasa Kobayashi resigned from their posts. However, Akihiro Kobayashi remained on the board to continue managing compensation for victims, and Kazumasa Kobayashi was appointed as a special advisor to the company. Both individuals announced that they would return about half of their compensation for the past six months. Managing Director and Head of Sustainability Management Satoshi Yamane took over as President and CEO.
Now, Oasis reported a 5.20% stake in the company, likely a sign that the activist is willing to engage management more aggressively. It's clear to us that Kobayashi needs a fresh start and that Oasis is a willing and able partner to do that, but it remains to be seen whether the newly appointed CEO and shaken board will play ball. The company's annual general meeting was held in March 2024, before the investigative committee's findings were released, so we'll have to wait nearly a year before Oasis can submit shareholder proposals unless an extraordinary meeting is requested. This is a board that has overseen several product recalls and has proven ineffective in its oversight role in terms of quality assurance and crisis management. While accepting the resignations of Akihiro and Kazumasa Kobayashi is a step in the right direction, the fact that they remain involved with the company says more about how this board balances shareholder concerns against management's interests.
Kobayashi would be wise to overhaul much of his board and auditors and invite at least one Oasis representative to the board. This would give the company a sense of urgency to improve operating performance, corporate governance and maximize shareholder value. Moreover, Oasis has a long history of working to improve corporate governance at its Japanese portfolio companies, and has averaged 31.7% returns on its Japanese campaigns with a corporate governance thesis versus 1.9% for the MSCI EAFE index. Even so, inviting an activist to the board is something that rarely happens at Japanese companies today. If Oasis wants to create value for shareholders at the board level, it would likely have to do so through a proxy fight. But again, that's an unlikely proposition, even at a company with corporate governance problems like this one. Oasis has recently encountered difficulties in campaigns centered around poor corporate governance, taking losses at the 2024 annual general meetings of Hokuetsu and Ain Holdings. The recent loss at Ain was particularly troubling, as the pharmaceutical company exhibited problematic corporate governance and yet Oasis failed to gain enough shareholder support to gain a seat on the board.
This is not meant to be a criticism of Oasis. The company is a first-class shareholder activist in Japan and if anyone in Japan can get board seats it is Oasis. Rather, it is a reality of Japanese corporate governance, which has made great strides in recent years but still has a long way to go. Oasis is not the kind of activist that will be deterred by a defeat or two: Japanese activists are used to losing proxy battles. We hope the company pursues this in the interests of Kobayashi shareholders and continues the upward trend towards better corporate governance in Japan.
If the company gets a seat on the board, Oasis could help explore strategic alternatives, including a management buyout at Kobayashi's currently low share price or a takeover by a strategic buyer that could improve quality assurance and integrate it into a better-managed structure. Oasis has been very active in Japanese pharmaceutical companies and drugstores in recent years. The company has cited consolidation as a key structural theme and has advocated for changes at Tsuruha Holdings, Kao Corp and Ain Holdings, as well as opposing a management buyout at Taisho Pharmaceutical Holdings.
Ken Squire is founder and president of 13D Monitor, an institutional research service on shareholder activism, and founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.