28 Feb Japan's pharma mergers will trickle to the Midwest
After word leaked out last week, Monday’s Wall Street Journal detailed the news of another Japanese pharma merger.
In past columns, we have talked about the consolidation of the Japanese pharma industry. The Japanese are actually arriving late to the consolidation party as both American and European companies have been consolidating for years and continue to consolidate.
Note that the only company above that did not acquire other major pharmaceutical companies (except for a piece of Banyu in Japan a number of years ago as Merck finally completed the Banyu acquisition last year) was Merck.
Merck has paid the price by slipping from its longtime position as the No. 1 Big Pharma company to seventh place during 2003. With the Vioxx debacle and several drugs going off patent in the next few years, Merck will most likely slip even further in the rankings. All the other leading Big Pharma companies bought at least one major company.
Last week, another merger of Japanese companies took place: Sankyo, which is ranked No. 23 in the world and third in Japan, announced its planned $7.8 billion acquisition of Daiichi Pharmaceuticals, which is ranked No. 32 in the world and sixth in Japan.
While this in itself isn’t a huge merger in the pharma world, it marks only the third merger of Japanese pharma companies as well as an increasing realization by the Japanese government that its pharma business failed to globalize (unlike its colleagues in the automobile and electronics industries). It is now paying the price in terms of world leadership of this industry.
It’s also a signal by the Japanese government that it will let more of this activity take place in the future (i.e. a Japanese company acquiring a Japanese company and a foreign company acquiring a Japanese company). Let’s take a look at some of the acquisitions by foreign companies of Japanese foreign companies as well as mergers within Japan:
So why is all this Japanese merger mania happening now? Well, let’s start with the Japanese pharma market itself in relationship with the rest of the world.
The Japanese pharma market achieved sales of $50.7 billion in 2003. It grew only 2 percent versus the world pharmaceutical market growth of 9 percent, U.S. market growth of 11 percent and European market growth of 8 percent. The Japanese market is clearly lagging behind.
While Europe is the second-largest market area (with $124.2 billion) after U.S. annual sales of $207.5 billion in 2003, Japan is clearly the No. 2 country market. Japan more than doubled the next-largest European country market, Germany, which had $24.5 billion in annual sales. There are obviously big stakes in this market.
As Japan has a number of large pharma companies that never globalized, its pharma industry has fallen behind particularly in the U.S. and Europe (with the exception of the No. 1 Japanese company, Takeda, which ranked No. 15 in the world with annual sales of $8.7 billion, partnered early on with Abbott in the U.S. and made a large investment to create a significant U.S. presence).
Sankyo, the subject of the Wall Street Journal article, also made a similar investment in the U.S. via a joint venture with Warner-Lambert in the U.S. The company more recently took control of its own destiny in the U.S. by creating a separate organization. On the contrary, Daiichi never really built up a U.S. organization (except for licensing drugs early on to Marion Labs) but was still an important force in Japan.
Part of the Japanese merger activity is a reaction to foreign companies acquiring Japanese pharma companies as well as the growth of foreign companies in Japan due to consolidation on a world scale. Japanese pharma companies were not achieving critical mass in Japan and around the world and were failing to innovate with differentiated products.
Almost 90 percent of Japanese pharma sales are from drugs that have existed for 10 years or longer.
Japanese pharma companies have not invested the R&D money that their American and European counterparts have (12.8 percent of sales versus 17.2 percent). Additionally, the Japanese government cuts the price of pharmaceuticals between 8 percent and 10 percent every two years, which cuts into the profitability of drug margins.
There are still a number of Japanese companies that could be the target of a foreign acquisition or merger with other Japanese pharma companies in Japan. These include the following:
Though Taisho and Tanabe attempted to merge, merger discussions fell apart on pricing. Likewise, second-tier Japanese pharma companies Kyorin and Teijin also attempted to merge but had a similar outcome. Not all merger discussions are successful.
There are still large numbers of Japanese pharma companies with annual sales of $500 million to $1.5 billion that need to decide on their futures. These include companies like Nippon Kayuku, Nippon Shinyaku, Ono Pharmaceutical, Japan Tobacco and Otsuka.
How will all of this affect the Midwest? A couple thoughts come to mind.
Most Japanese pharma companies are either located in Tokyo or Osaka (the New York and Chicago of Japan). Likewise, most Japanese pharma companies in the U.S. have set up shop in the New York area (New Jersey) and Chicago (though some have followed the biotech trend of opening R&D groups in California to be near top centers of science and technology).
Chicago already has Takeda, the No. 1 Japanese pharma company, and Astellas (the new name for Yamanouchi-Fujisawa), which is the No. 2 Japanese pharma company.
As Japanese companies usually like to cluster, the trend will be to locate in these three geographic regions in the future. Ajinomoto, a Japanese food ingredients company with growing pharmaceutical interests, has for a long time had investments and a presence in Illinois and previously had joint ventures with Searle and NutraSweet.
With the large JETRO Chicago presence in the Midwest, other Japanese pharma companies are looking at the Midwest as a base of operations. Bank on the fact that there will be more Japanese M&A in the cards this year and beyond. See you next week!
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