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Feature Articles : Jan 15, 2009 (Vol. 29, No. 2)

Japanese BioAlliance Strategies Evolving

Changes Are Necessary as Collaborations with U.S. Firms Often Run into Cultural Roadblocks
  • Tom Burger
  • ,
  • James Foley

Significant transformations are occurring within Japan’s leading pharmaceutical companies as they consider strategic alternatives to doing business in the U.S. Traditionally, Japanese companies, other than the four largest—Takeda, Daiichi Sankyo, Astellas, and Eisai, have focused on two major types of strategic transactions: in-licensing or acquiring a compound for the purpose of developing and marketing it in Japan and Asia with perhaps some type of copromotion right in the U.S., which is almost never exercised, and out-licensing in-house developed compounds after completing Phase II trials in Japan.

The in-licensing of U.S.-developed compounds to Japan is unlikely to change in any meaningful way as Japanese pipelines continue to weaken in spite of significant increases in domestic R&D investment. Japanese companies tend to lack critical mass and mainly focus on two or three therapeutic areas. They have always found it politically difficult to drop programs that have been championed by members of top management or influential community thought leaders. Loss of face is a greater consideration than loss of cash. In short, U.S. innovation is, and will continue to be, needed and valued.

Japan’s track record of out-licensing developed compounds to U.S. or global companies has been spotty at best.  Alliances with larger pharmaceutical companies have far too often resulted in the Japanese company getting the short end of the stick. 

One example is Shionogi’s 1998 license deal with AstraZeneca for Crestor®. Shionogi would be better off today if it owned 100% of an $8 billion drug in the U.S. alone. Partnering with a smaller specialty pharma is difficult given the tremendous cultural differences in addition to the conflicting short and long term objectives—U.S. companies typically dream of getting taken out at an enormous premium. Whereas Japanese companies  dream of building a large global company that will be respected within society. These two wildly differing views of the world seldom result in a harmonious relationship. Faced with this “damned if we do, dammed if we don’t” scenario, a new model has begun to emerge.

Strategic Alternatives

Two recently announced deals, Shionogi/ Sciele Pharmaceuticals and Kowa/ProEthic Pharmaceuticals, demonstrate that the strategic path for maximizing the value of the U.S. market is changing. This trend will fundamentally change the way small- and mid-sized U.S. firms think and may well make it more difficult for Big Pharma to complete traditional transactions with Japanese counterparts.

Shionogi currently has several strategic partnerships in the U.S. Its interest in globalization commenced in 1997 with the initiation of a U.S.-based R&D center near Boston. The company reversed course in 2002 and announced that it planned to cease R&D operations in the U.S. After quickly selling off pieces of its business, it returned to the traditional model of doing R&D in Japan and out-licensing after Phase II data was available.

In 2001–2002, Shionogi restarted independent U.S. operations intending to market products developed in Japan directly in the U.S. rather than through “less than optimal” partnering deals. The acquisition of Sciele Pharmaceuticals represents a pattern that we believe will be repeated by more and more Japanese companies in the next few years.

Why would Shionogi pay $1.4 billion for Sciele Pharmaceuticals? Sciele has a collection of marketed compounds that are losing market share and seeing falling revenues. So why, then, did Shionogi pay a 57% premium over the previous day’s closing price? Two words: sales force.

“It’s easier to buy these assets than to build them. Sciele’s current drugs will be used as a bridge, providing Shionogi with U.S. revenue as it develops its own drugs, which have greater commercial potential but are several years away from reaching the market,” said Ken Trbovich, analyst at RBC.

Additionally, it has become even easier to justify these hefty prices given the 30% increase in the value of the Japanese Yen during the past 18 months. Simultaneous to the dramatic change in the relative value of the dollar vs. Yen, U.S. companies have found it nearly impossible to finance growth. Day after day we have all read the barrage of Wall Street Journal articles telling us that the IPO market is completely shut; banks aren’t lending; and VC funds are being inundated with requests for withdrawals. Meanwhile, Japanese pharmaceutical companies have been hording cash at levels that we would never see in the U.S.

These three events (strong Yen, closed financial windows in the U.S., and cash- heavy companies in Japan) have made for the perfect storm and will continue to create tremendous opportunities for strategic collaborations that play off of both parties’ relative strengths and weaknesses.

In the past when a Japanese company has tried to build a sales presence on its own, it has quickly found that adapting to the motivation methods that work in the U.S. are simply too difficult to get passed by a Japanese board of directors. Almost without exception, each of these efforts has failed.

Of late, though, dramatic changes are being seen in the backgrounds of Japanese pharmaceutical executives. Isao Teshirogi, Ph.D., president of Shionogi, has spent considerable time in the U.S., speaks fluent English and worked at McKinsey & Co. rather than traditionally working his way through positions at Shionogi.

The acquisition of ProEthic Pharmaceuticals by Kowa Pharmaceuticals similarly focuses on sales presence. Among Kowa’s pipeline of products, pitavastatin will play a key focus in its U.S. growth plans.

What do these changes mean for U.S.-based specialty pharmas? As we see it, developing one’s own sales force will become as important, if not more important, than successful development of lead compounds in terms of building value in the enterprise—particularly if M&A is the preferred exit. These changes will make it more difficult for large pharma and specialty pharma to in-license attractive candidates from Japan as Japanese firms now have a cleaner, more attractive alternative. Transactions among Big Pharma for attractive late-stage opportunities will clearly become more competitive as the number of deals decreases.

It remains to be seen, however, whether a Japanese company can successfully recruit, manage, and motivate a U.S.-based sales organization. For this reason, the next step in this on-going evolution will involve strategic partnerships resembling a JV structure rather than full acquisitions.  Hiring and retaining top talent, whether sales or management, has always been a significant problem—a situation unlikely to change anytime soon. Japanese companies would be wise to carefully consider the value of an acquisition when the assets have the ability to walk out the door every night.