Consolidation on the cards

As overseas companies set their sights on the Japanese pharmaceutical market, domestic manufacturers are likely to join forces to meet the challenge

In the global pharmaceutical industry mergers and acquisitions have become commonplace, creating giants such as GlaxoSmithKline and Pfizer with sales amounting to ¥2-3tn. The trend reflects the massive r&d costs required to bring new products to market. Progress in new technologies, including the creation of medicines using genomic data, has driven development costs even higher.

Japanese domestic drug manufacturers have long been protected by government regulation and are accustomed to operating in a fragmented and largely non-competitive market. This has created a plethora of small drug makers, and even market leader Takeda Chemical Industries struggles to reach sales of ¥1tn (US$8bn) (see table 1). Additionally, local pharmaceutical companies are far less competitive in the world market than their huge Western rivals.

Mergers in Japan first occurred among the pharmaceutical distributors and progressed to midsize drug makers; Welfide Corporation and Mitsubishi-Tokyo Pharmaceuticals merged in October.

However, consolidation in the drug sector is considerably slower than restructuring and realignment in the steel and automobile industries, which are more exposed to direct and growing international competition.

In addition, more overseas companies are entering the world's second-largest drug market at a time when the Japanese government is steadily reducing prescription drug prices, which is itself a major factor pressuring the domestic industry to realign and restructure.

rising costs

In an environment marked by deteriorating earnings and rising costs, two leading manufacturers, Taisho Pharmaceutical and Tanabe Seiyaku, have agreed to unite their operations under a new holding company, creating the third-largest domestic drug maker in terms of consolidated sales. Taisho Pharmaceutical is the leading maker of otc medicines, while Osaka-based Tanabe Seiyaku is a long-established manufacturer specialising in the development of prescription drugs for the circulatory system.

overseas competition

Under the integration plan, Taisho's prescription medicine division will be integrated into Tanabe, and Tanabe's otc drug division will be taken over by Taisho. The holding company will be established next April to consolidate their management. With group sales of some ¥500bn (US$4bn), the holding company, to be called Taisho Tanabe Pharma Group, will rank behind Takeda Chemical Industries and Sankyo. In the prescription drug business, it will rank fourth with sales of ¥230bn (US$2bn).

Industry analysts consider the merger will assist both Tanabe and Taisho to resist the attentions of overseas companies who wish to enter the market.

dubious value

The growth of pharmaceutical manufacturers depends to a great extent on the size of their pipeline ie, the number of new products coming to market. This is considered to be a major reason behind the recent huge mergers and acquisitions by Western drug companies. But a leading industry analyst writing in the Nihon Keizai Shimbun stated, 'Although consolidation will reduce the risk of both or either not surviving, a merger of two firms with poor pipelines is not likely to have any synergistic effects.

'The market will remain dubious of the value of the integration unless the two drug makers put together a convincing growth scenario, including major rationalisation measures and research and development plans.

'Pharmaceuticals is a research-intensive, high-tech industry where Japanese companies should be able to display their technological abilities to better advantage than they have,' the analyst added.

'The market potential is huge, but local companies with trillion yen sales are necessary to develop genetic drugs. The domestic pharmaceutical industry still has a long way to go before becoming truly competitive.'

Tanabe and GSK to collaborate on commercialisation

Tanabe Seiyaku and GlaxoSmithKline have signed a letter of intent to enter into a broad-ranging global collaboration on the research, development and commercialisation of a series of compounds from Tanabe. These cover a range of potential therapeutic areas, including psychiatry, neurology, urology and diabetes. GSK will gain access to preclinical compounds with the additional possibility of bringing new Tanabe compounds within the scope of the collaboration at a later date. The two companies will share rights in specific territories, and will form a steering committee to oversee the research, development and marketing of the compounds. This agreement is another example of excellent synergy between the companies," said GSK's r&d chairman, Dr Tadataka Yamada.

Nippon Chemiphar eyes up Chinese market

Japanese company Nippon Chemiphar will begin exporting drugs to Taiwan and China by 2002. It is aiming to increase its sales in the Asian region to ¥500m (US$4m) in fiscal 2003 from around ¥100m (US$0.8m) in the year ended March 2001. The Tokyo-based drug maker will export Uralyt, a medicine to lower the acidity of urine, to Taiwan, and Calvan, a cholesterol drug, to China. It currently exports pharmaceuticals only to South Korea. The two drugs are the firm's key products, with Japanese sales of Calvan totalling ¥1.2bn in 2000 and those of Uralyt reaching ¥2.4bn.