Daiichi makes surprise move into Japanese generics

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One the one hand Daiichi Sankyo’s decision to establish a generics business - Daiichi Sankyo Espha – in Japan is a logical extension of its major strategic relationship with Indian generics group Ranbaxy Laboratories. On the other it is surprising given some pretty fundamental issues the Japanese generics sector currently faces (EP Vantage Interview – Japan to miss generics target, January 29, 2010).

With Daiichi predicting revenues from this generics business at ¥50bn ($560m) by 2015, representing about 4% of total pharmaceutical sales, the move is hardly a game-changing event for the group. However, following Teva’s acquisition of private generics group Taisho Pharmaceutical Industries in December and Pfizer’s intentions to form alliances with Japanese generics firms next year, Daiichi’s move confirms the Japanese generics sector is undergoing the dramatic changes that many have predicted are required if ambitious generics targets stand any chance of being met.

Lack of economic logic

In 2007 the Japanese government set a target for generic products to make up 30% of the overall drugs market in Japan by 2012. However, with only two years to go the generics share remains stuck at around 17%, almost unchanged from when the scheme was launched.

A fundamental lack of economic logic in favour of generics, whereby it remains more profitable for wholesalers and pharmacies to dispense off-patent branded drugs than generics, despite increasing financial incentives for generics, means there is little ‘push’ for generic products.

Meanwhile the ‘pull’ for generics is also lacking given that the difference in cost to the consumer between an off-patent brand and a generic is minimal, less than 30%, while Japan’s national psyche of ‘brand is best’ remains an important factor in purchasing decisions.

Despite this, Teva is currently predicting the Japanese generics market will grow significantly to ¥1 trillion by 2015, from where it currently sits at around ¥400bn.

Stirring it up

The recent strategic moves and intentions by the likes of Teva, Pfizer and now Daiichi suggests we may be rapidly approaching a point where the critical mass of the generics market is in the hands of these big pharma players, who can then get the market moving in the right direction.

Until now the Japanese generics market has been fairly stagnant and too fragmented, with an estimated 120 generics companies, mostly small, private, family-owned and -run businesses.

It is these companies that will start to feel the pressure, if they aren’t already, from the big pharma players, as well as some of the larger Japanese generics groups like Sawai Pharmaceuticals and Towa Pharmaceutical.

Indeed, Sawai and Towa seem to be profiting from the increased attention the sector is currently receiving. Sawai’s shares reached a record high of ¥6,380 earlier this month, while Towa stock is currently trading at €4,780, not a lot lower than its record high of €5,810 achieved in August 2007.

Shares in both companies have significantly out-performed the Japanese Topix Pharmaceutical Index in the last 12 months.

1yr share price performance
Sawai Pharmaceuticals +35%
Towa Pharmaceutical +23%
TOPIX Pharmaceutical Index +4%

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