Smaller Players Fear Japan's Merger Wave

With the merger of Japanese drugmakers Yamanouchi and Fujisawa now complete, and with Sankyo and Daiichi also announcing moves to combine operations, smaller domestic players fear that the new outlook will see them falling behind local leaders and foreign multinationals. As domestic conditions remain tight, smaller Japanese firms could miss out on moves to expand into lucrative overseas markets.

The Japanese government has actively sought consolidation in Japan's drug industry, amid foreign takeover fears and growing competition for domestic players, in a market where imports are unlikely to continue to account for just 5% of sales for much longer. Although Japan is the second largest market for prescription drugs in the world, no domestic manufacturers feature among the top 10 in terms of global sales. Current domestic leader Takeda was ranked fourteenth on the world market in 2003.

Even before the current wave of mergers, Japan's manufacturing industry had undergone a marked consolidation in recent years as a result of market contraction. In 2000, there were 1,145 registered drug manufacturers in Japan, compared with 1,468 in 1999 and 1,512 in 1996.

Clearly, as Japanese companies remain comparatively small-scale in global terms, and R&D budgets are dwarfed by those of the multinationals, the key challenge will be to build market share abroad, particularly in the lucrative US market. Indeed, smaller player Mitsubishi Pharma has recently conceded that its currently limited pipeline and existing out-licensing arrangements for the US do not favour aggressive overseas moves in the short term. Nevertheless, the fortunes of the larger Japanese drug companies should be better, in view of their stronger pipelines and newly acquired financial strength.