Bulking Up: Japan's Drugmakers

JAPAN - Big Western drugmakers sometimes duke it out over a tasty acquisition target, but they don't usually worry that a much smaller rival will run off with the prize. Few lesser players have the multibillion-dollar cash hoards needed to compete—except in Japan.

On June 11 midsize Japanese drugmaker Daiichi Sankyo announced it would pay $4.6 billion for control of Ranbaxy Laboratories, India's largest maker of generic drugs. In doing so, Daiichi seems to have beat Pfizer (PFE) and GlaxoSmithKline (GSK) to the punch, gaining instant access to double-digit growth in India, China, Russia, Brazil, and Mexico. If the deal goes forward, it will be a coup for the little-known Japanese company. "All the big pharmaceutical companies are talking about emerging markets as the next growth opportunities," says Stewart Adkins, head of London-based consultancy Stewart Adkins Advisors.

It looks like they'll have to get used to a more competitive field. The Ranbaxy deal is the third multibillion-dollar overseas acquisition by a Japanese drugmaker in the past seven months. Eisai (ESALY) paid $3.9 billion in December for MGI Pharma of Bloomington, Minn. And Takeda shelled out a hefty $8.8 billion for Cambridge (Mass.)-based biotech Millennium Pharmaceuticals (MLNM) in early April.

Until this year, there were hardly any such tieups. Why? Because, strange as it seems in the land of Sony (SNE), Toyota (TM), and Mitsubishi, Japan's drugmakers weren't that keen on being huge.

Now, analysts say other cash-rich Japanese pharmaceutical companies could follow Daiichi Sankyo. The top seven have billions of dollars in reserve. Rather than holding on to the cash and becoming takeover targets, they could use it to purchase generic drugmakers or buy their way into diagnostics or biotech.

Coming regulatory changes in Japan's universal health-care system may further fuel the trend. For years, policymakers have protected the domestic drug industry. By setting medication prices relatively high and erecting clinical trial hurdles for foreign drug products, the government set the stage for one of the world's most crowded, least international markets. At last count, there were 1,200 drugmakers.

LIGHTER REGULATION

The government also has failed to encourage patients to enroll in clinical trials or to increase its number of drug reviewers. Getting a new drug approved often takes up to 22 months, vs. an average of 10 months in the U.S.

Regulatory reforms would allow more low-cost generic drugs into the market and make it easier for foreign drugmakers to get their products cleared. But that means Japan's domestic companies will have to work a lot harder—and for that, they will need some bulk. Takeda, the biggest in the group, ranked 17th in global sales last year, according to researcher IMS Health. Each of the world's Big Three—Pfizer, Glaxo, and Novartis—posted revenues that were more than double Takeda's. And all the Japanese drug companies combined account for just 10% of the $700 billion global industry. Ranbaxy won't level the field. But it won't be the last deal.

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