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Mergers Emerge in Japan

Posted on: 29 Nov 05


Japanese pharmaceutical companies have tended to avoid using mergers in their efforts to grow, but recent developments show that attitudes have changed.

Consolidation continues

Consolidation in the pharmaceutical industry shows no signs of slowing down as companies try to achieve the critical mass they believe necessary to help them survive. All the signs are that the globalization of the pharmaceutical market has further encouraged this trend.


It is the desire for greater market share that has been behind many of the mergers. Many of the tie-ups have had global implications as companies seek partners who will help them extend their market reach and improve dominance in key product areas. In terms of R&D, companies hope to find a partner whose pipeline will complement their own without too much of an overlap.


Japanese pharmaceutical companies have tended to avoid using mergers in their efforts to grow, but during the last year this attitude has noticeably changed. Key mergers currently underway include Sankyo and Daiichi Pharmaceutical, Yamanouchi Pharmaceutical and Fujisawa Pharmaceutical (who now operate as Astellas), and a tie-up between Dainippon Pharmaceutical and Sumitomo Pharmaceuticals.


Merger mentality

As the Japanese government struggles to maintain healthcare spending in the face of considerable demographic challenges, it has implemented a number of cost containment initiatives to reduce pharmaceutical prices (1). These have been highly unpopular with Japanese pharmaceutical companies, as many are already facing difficulties in maintaining their profits.


A number of Japanese companies were previously content to market their own products in their domestic market but seek an alliance with other companies for foreign markets. However, with the domestic market having become more crowded and difficult to operate in, Japanese companies believe that they must retain global control for their products, as the financial benefits should be greater.


Despite their enthusiasm, many Japanese companies have found it difficult to expand as the global market is fiercely competitive and considerable local knowledge and resources are required to achieve success in many of the foreign markets - and these takes time to develop (1). The globalization aspect of mergers is therefore beginning to find favor with many companies, although some always had a strong international focus to their work. For example, Yamanouchi and Fujisawa have long been involved in efforts to globalize and so their expansion strategies may be complementary. Both companies have sizeable foreign operations and have achieved considerable success in foreign markets (1).


For companies choosing a merger strategy there is hope that the new, bigger company will be able to draw upon the increased sales and boost R&D spending. For example, it has been suggested that Japanese companies need to allocate around US$955 million for R&D to compete effectively with their US rivals (2). Currently, the average R&D budget of the top ten Japanese pharmaceutical firms is about 15% to 16% of the average for the top ten Western companies (3). In recent years the gap between the R&D spending power of Japanese companies relative to Western companies has widened. Pfizer’s current R&D budget of US$7.1 billion illustrates the R&D challenge that Japanese companies face. Sankyo and Daiichi Pharmaceutical are due to merge, but even their current combined R&D spending is far behind that of Pfizer. At present, Sankyo spends about US$820 million on R&D, whereas Daiichi spends almost US$560 million (2). So far there have been no announcements as to whether and how the new company will boost R&D spending.


Merger misery

Some industry observers have often contended that there is only a limited scope for beneficial mergers in the pharmaceutical industry. There is a view that for some companies this course of action is due to an underlying weakness in R&D relative to sales growth. Companies considering this route may suspect that they will be unable to develop - or license in - sufficient new products to sustain their growth rates in the long-term. It is often the newly merged companies that predict higher rates of blockbuster introductions but there is little evidence that productivity has been dramatically enhanced in companies that have chosen this strategy.  The Japanese pharmaceutical companies currently involved in mergers face considerable challenges in convincing people that their proposed strategies can achieve more than a short-term increase in sales and pipeline size.


A major feature of merged companies is the attempt to reduce any duplication of activities. Unfortunately this usually involves reducing staff numbers and so companies end up losing talented individuals as they strive to meet short-term targets such as cost savings. In the longer-term, the loss of these individuals could be to the detriment of the company as the smooth running of projects depends on people as much as it does on finance and technology. In Japan there has often been a reluctance to lay off workers in order to cut costs. Downsizing in other Japanese industries has long been considered a controversial move and is highly unpopular with the public (4). Therefore the management teams of the newly merged Japanese pharmaceutical companies may have tough decisions to make regarding staff numbers, if their organizations fail to reach predicted growth targets.



Although mergers have occurred in the Japanese pharmaceutical sector before, the scale of the current tie-ups suggests that there will be major changes to the structure of the industry. It is also likely to prompt a further wave of consolidation in the Japanese pharmaceutical sector. A number of legal revisions, expected to take effect by 2007, will make it easier for foreign companies to acquire Japanese firms by allowing them to be purchased using stock swaps (2). Many Japanese companies may seek a merger with a domestic partner rather than accept foreign ownership. Yet interestingly, there has also been speculation that Japanese companies may seek to acquire foreign companies (2). Such moves would bring a new dimension to the globalization strategy of Japanese firms.


Whether mergers are the means by which the Japanese pharmaceutical industry can maintain its global role as a major source of drugs is as yet unclear. However, the external forces that are influencing Japanese companies to change their structures may yet bring about the new thinking that is required for the pharmaceutical industry to remain innovative.




1.            Kermani F. (2004). Japan's Biopharmaceutical Challenge. Chiltern International.


2.         Fuyuno I (2005). Mergers in Japan help firms retain own products. Nature Reviews Drug Discovery.


3.            Kermani F (2005). Japan – Land of opportunity? Scrip magazine. November issue.


4.         (1999). Great News: No More Jobs for Life. Time Magazine. Vol. 154 No. 17.





Dr Faiz Kermani

Last updated on: 27/08/2010 11:40:18

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