Japanese pharma looks west for growth

Eisai’s acquisition of MGI Pharma is yet another indication that some Japanese pharmaceutical companies have not only woken up to the prospect of western companies eating their lunch, but are taking steps to close the canteen.

The Tokyo-based company has agreed to splash out $3.9bn for MGI Pharma barely two weeks after the US biotechnology group hoisted the for sale sign above the door.

The indecent haste in which Eisai has conducted the acquisition is an indication of the growing recognition among Japanese pharmaceutical companies that the industry needs a fix and quick.

Maturity spells trouble

Many Japanese companies are staring down the barrel of maturing drug portfolios, thin pipelines and increasing generic competition. Over 50% of the treatments of the leading Japanese companies are more than 10 years old.

This maturity leaves the industry wide open to generic competition, a situation that is set to intensify, as the increasingly cost-conscious government encourages the use of more generics.

Additional pain is already supplied by the government - which discounts the price it will pay for drugs annually. It also imposes extra cuts on so called long-listed products.

All this has meant that Japanese companies rather than continuing to rely on in-licensing, are starting to turn to western companies to make up for their R&D shortfalls.

Practical measures

Eisai’s move is recognition of its best selling drug, Aricept, succumbing to generic competition in 2010. Aricept accounted for 63% of group sales in 2006 and is 37% of the group’s net present value, according to EvaluatePharma’s NPV Analyzer.

By paying $3.9bn for MGI, Eisai will be hoping that the purchase, which gives it a larger cancer franchise and route into the US, goes someway to making up for this loss.

The price tag for MGI is substantially above the group’s NPV value at $2.1bn. The multiple of 11.4 times 2006 sales, however, does compare favourably with what AstraZeneca paid for MedImmune at 12.2 times.

But with sales of Aloxi, MGI’s biggest product, forecast to peak at $578m in 2014 and the majority of current growth coming from in-licensed products, only time will tell if Eisai has made the right choice in picking MGI.

No shrinking violets

Eisai has so far been the boldest of the Japanese pharma companies in shaking off traditional conservatism and targeting overseas assets. In April it paid $325m for Morphotek and also snapped up the exclusive rights to four cancer drugs from Ligand for $205m in September 2006.

But while Eisai has conducted the most deals, it was Takeda that led the way, acquiring private US biotechnology group Syrrx for $270m in February 2005.

Other overseas deals by Japanese companies have included Kyorin buying ActivX Biosciences for $21m in 2005 and Sosei bagging Arakis in August 2005 for $188m.

Shin-Ichi Tamura, chief executive of Sosei, believes firmly that the only way that Japanese companies will be able to compete effectively on the changing global stage is to emulate western companies.

“Japanese companies need to stop being so conservative in their thinking and get a little bit more crazy. If we don’t change the way we think we won’t compete globally,” he says.

Keeping it in the family

The move to cross border deals foreshadowed, if not outright crazy thinking, a flurry of consolidation that has seen 12 companies join forces to in the last two years.

Spurring hitherto inactive companies was last year’s legislation change that allowed mergers and acquisitions based on share swops with foreign companies, making it easier for other companies to buy Japanese pharma groups.

As such, consolidation was a conscious strategy of protection. The lack of any pharma giants had made the sector look cheap and easily digestible.

To avoid being snapped up by the likes of Pfizer or Glaxo, several companies joined forces. The biggest tie ups included, Yamanouchi and Fujisawa combining to form Astellas, Daiichi and Sankyo merging and Dainippon and Sumitomo merging.

The next challenge

Having seen off foreign acquirers, the industry is once again facing up to the threat of generic competition. A total of 19 drugs, including some of Japan’s biggest sellers, are set to lose patent protection by 2011. The drugs, which include Takeda’s Actos, are estimated to have sales of $11bn this year.

This looming patent cliff is leading many industry observers to predict that more Japanese companies will be looking to cross border M&A not only as a means of keeping their lunch off the table, but one of long-term survival.

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