23 Oct Japan on the rebound: Implications for Midwest
A favorite topic of mine over the years is Japan. In this column, I have covered different aspects of the Japanese pharmaceutical industry and biotech markets (3/10/03, 8/18/03, 3/28/05). I had the good fortune to return to Japan for the Bio-Jan 2006 Conference in September after a three-year hiatus.
My last visit there was to participate in the 30th anniversary celebration of the Osaka-Chicago sister city relationship, which had started in Chicago and culminated in a series of events in Osaka, including the Chicago Blues Festival in Osaka (featuring a number of outstanding Japanese blues bands).
During that particular visit I was surprised by:
• A Japan still deeply in recession.
• The number of Japanese homeless.
• The growth in new architecture and urban renewal.
• The emergence of Japanese biotech, medical devices, tissue engineering, and venture capital.
Many interesting topics comparing Chicago and Osaka came up during that last trip (Osaka, afterall, is the Chicago of Japan in many ways). The Japanese were amazed at how Chicago’s Mayor Daley had totally re-engineered Chicago’s waterfront, creating beautiful, clean parks up and down the coast. Osaka citizens could learn a lot from this lesson because the nearby sea-coastal regions are mostly industrialized and polluted.
Chicagoans, on the other hand, learned important lessons about mass transit, starting with a new rapid train system from the new Kansai region airport that whisks you into downtown Osaka in no time. The airport, itself, is a marvel: given the high costs of land, and the lack of available space, the ingenious Japanese have created a new man-made island, replete with hotels, off the coast for this futuristic, humongous airport, with both excellent highways and train ways to get to Osaka and nearby cities such as Kobe.
Mayor Daley’s head of transportation accompanied us on this trip to Japan and came away wowed by the Japanese approach to mass transit. Many more people in Japan use mass transit, a combination of an extensive network of easy-to-use subways and trains, including the high-speed bullet trains – the Shinkansen – than in Chicago.
Upon arriving to Osaka for the Bio-Japan Conference, attended by over 8,000 people from 18 countries, and featuring numerous American state pavilions, I was struck by:
• A sense of a Japan on the rebound.
• Even more startling Japanese architecture and urban renewal.
• A reduction of the number of homeless (although there was still evidence of this).
In spite of having been in Japan over 20 times, and having spent long living stints there during my Searle days, it became very clear to me why companies like Toyota and Honda are overtaking American car manufacturers: outstanding customer service in all kinds of ways.
When you arrive in Japan, there is a national ethos of courtesy, politeness, and helpfulness that puts our American culture to shame. Arriving at a hotel (in this case the relatively new Imperial Hotel in Osaka, which in part is a tribute to the architectural design of Midwesterner Frank Lloyd Wright, the level of customer attention is amazing.
Prescription for success
Since the focus of this column is about the life-science industry, let’s get to the driving reason for my trip to Japan. The Japanese pharmaceutical market is the second largest country market in the world: $59.2 billion in 2005, growing at four percent over the prior year, and representing 11 percent of the world market of $550.2 billion, which grew six percent. Note that this is the prescription segment of the market and does not include over-the-counter (OTC) drugs.
This level compares with the U.S. market, which had pharmaceutical sales of $240.3 billion in 2005, represented 44 percent of the total market, and grew three percent. So the U.S. market is about four times as large as the Japanese market, but remember that the U.S. population is about three times that of Japan (the Japanese population, at about 127 million people, is actually declining), and Japan is physically about the size of California.
Japanese pharma companies have taken a big hit over the last 10 to 15 years due to the slowness to globalize (particularly in entering the U.S. and European markets). Additionally, the mega-mergers of American and European Pharma companies, which also included acquisition of Japanese companies (Pfizer acquired Taito, Merck acquired Banyu, and more recently, Roche acquired Chugai), had a sharp impact on the Japanese home pharma market.
Japanese pharma companies had never really engaged in M&A, but to survive in both the home and international market they began their own M&A two or three years ago and have accelerated the pace. Moreover, the leading Japanese companies have accelerated investments in not only sales and marketing organizations in the U.S. and Europe, but increasingly in R&D. They also have become more aggressive about licensing products from U.S. biotech companies.
A driving force behind this movement in Japan is the rapidly aging Japanese population, which will have more than one million people over age 100 in the next few years, and the high cost of healthcare for this segment of the population. The Japanese Ministry of Health, Labor, and Welfare has for several years imposed not only price caps on drugs, but bi-annual price reductions of eight to 12 percent (although there is talk of reducing prices on an annual basis.) This is another factor driving Japanese companies to merge for greater critical mass (particularly in R&D) and expand their presence in the United States.
The Japanese pharma industry has been slow to embrace the successful pathway used by its automotive counterparts. Nevertheless, both Japan and the Japanese pharma industry are on the rebound! Let’s take a look at how the leading Japanese pharma companies fared during 2005. Note that the sales/revenues reflected here are only for the drug part of the business – Takeda has significant non-pharmaceutical sales as a chemical company.
Leading Japanese Pharma Companies – 2005
|World Ranking||Company||U.S. HQ||2005 Pharma Sales ($ B)||% Growth||Net Income($B)||% Growth|
|18||Takeda Pharmaceutical Co. (Osaka)||Illinois||$9.2||+11%||$2.7||+13%|
|20||Astellas Pharma** Inc. (Tokyo)||Illinois||$7.4||+3%||$0.9||+80%|
|21||Daiichi Sankyo** (Tokyo)||New Jersey||$6.7||+2%||$0.8||+3%|
|39||Taisho Pharmaceutical Co. (Tokyo)||$2.3||<4%>||$0.3||0%|
|43||Mitsubishi Pharmaceutical Corp. (Osaka)||$2.0||0%||$0.2||+57%|
|46||Kyowa Hakko Kogyo Co. (Tokyo)||New Jersey||$1.8||<3%>||$0.1||<9%>|
|47||Shionogi & Co. (Osaka)||$1.7||<1%>||$0.2||+20%|
|49||Dainippon Sumitomo Pharma Co. ** (Osaka)||New Jersey||$1.6||+30%||$0.1||122%|
Source: MedAd News, Sept. 2006
*now owned by Hoffman LaRoche
**represents merger during last 2 years
Note: sales number vary slightly from the numbers used in a previous article from Pharmaceutical Executive magazine
A few observations
Japanese companies in the top 50 world pharma organizations now number 10. This number hasn’t really increased much over the years in spite of the Japanese mergers, and that’s largely due to mergers by other American and European companies. If anything, it has at least helped the Japanese companies hold ground.
Japanese profitability is much lower than European and American company profit levels. This is due in part to Japanese accounting methodology, but also to a lack of sales in the very profitable U.S. market. Only Takeda seems to have U.S.-like profitability due to high sales in the U.S. from its own quickly growing subsidiary and 50/50 joint venture with Abbott Labs: TAP Pharmaceuticals. Most Japanese revenue in Europe and the U.S. is from out-licensing its drugs, which brings in a lower level of income and market risk. Even the companies with annual sales of $2 billion or more are undersized.
There is probably plenty of room for other Japanese mergers to come because there are many Japanese companies with sales in the home market of between $500 million and $1 billion that have not globalized.
Japanese Pharma R&D Investment – 2005
|World Rank||Company||R&D Level ($ B)||% Growth||% Sales|
|45||Dainippon Sumitomo Pharma||$0.3||+70%||18.8%|
|46||Kyowa Hakko Kogyo||$0.2||+15%||11.1%|
Source: MedAd News, September 2006
Japanese R&D investment has increased substantially, in part due to the realization that it was falling behind its Western counterparts. Almost all of the leading companies have increased R&D expense significantly more than the top line sales growth level, and they are at comparable levels to the large western pharma companies.
During my recent visit to Japan, the explosion of the Japanese biotech sector was manifested in the participation in Bio-Japan (http://expo.nikkeibp.co.jp/biojapan/2006/eng/kaisaigaiyou.html). When I was in Japan three years ago, it had seemed that the main clusters were Tokyo and the Kansai region (Osaka for drugs, and Kobe and Kyoto for medical devices, diagnostics, and tissue engineering). Some of the changes I observed:
• Many more new biotech clusters have emerged.
• Japanese venture capital has grown, as has the number of venture groups.
• The Nikkei, the Japanese stock market, has even recognized the value of the sector, and the first Japanese Initial Public Offerings (IPO’s) have take place.
• Japanese universities have gotten on the biotech bandwagon. University professors now are allowed to spend time with start-up companies and share in revenue from out-licensed technologies.
What struck me at the Bio-Japan meeting was the lack of Japanese “Big Pharma” presence at the meeting (very few were there). They seem to be missing out on the growth of their own home-grown market as a source of innovation and technology.
Having a presence
A number of countries vied for Japanese attention at this event including: the U.S., Australia, New Zealand, Hong Kong/China, South Korea, Taiwan, Canada, the U.K., Singapore, Cuba, Germany, and France.
The U.S. presence included state exhibits (and in a number of cases presentations) from Illinois, Ohio, North Carolina, South Carolina, Hawaii, New Mexico, Maryland, and Minnesota.
Illinois, in particular, had a strong presence at this event and one of the largest exhibits. Baxter had an even larger booth/exhibit next to the Illinois booth, underscoring the Illinois presence.
Illinois has had a Trade Office in Japan (Tokyo) for over 20 years, staffed with Japanese professionals who work diligently to promote the benefits of locating in Illinois, and help Illinois companies looking to break into Japan. As it turns out, Illinois has one of the largest hubs of Japanese companies in the U.S., over 600 companies according to the Illinois Office of Trade and Investment, of which over 400 are in the Chicago metropolitan area. Life science companies make up only a small but important and growing segment of these companies, including companies such as Takeda Pharmaceutical, Astellas Pharma, Sunstar (which acquired Butler Medical Products), Ajinomoto (food ingredients), and a number of others.
Additionally, the Japanese External Trade Office has a large regional presence in the Midwest with its Chicago office. JETRO played a major role at the Bio-Japan event, fostering partnering sessions and receptions.
I think the time is right for Illinois and the Midwest to build further ties to both the Japanese biotech industry and the second and third tier Japanese Pharma companies, which have been reluctant to the stick their toes in the proverbial American pharma market. JETRO and the Illinois Trade Office in Japan seem to be willing partners to help companies foster these relationships.
See you soon!
Recent articles by Michael Rosen
• NIH ’05 funding: Midwest has two states in Top 10
• Michael Rosen: Doing the pharmaceutical tango
• Michael Rosen: Chinese pharma-biotech dragon rears its head
• Michael Rosen: The flattening world and its impact on U.S. biotech
• Michael Rosen: Midwest shines among best hospitals in U.S.
The opinions expressed herein or statements made in the above column are solely those of the author and do not necessarily reflect the views of The Wisconsin Technology Network, LLC. (WTN). WTN, LLC, accepts no legal liability or responsibility for any claims made or opinions expressed herein.