Japan's pharma mergers will trickle to the Midwest
After word leaked out last week, Mondays 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
isnt 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.
Its 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). Lets 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, lets 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!
