A merger between two of Japan's Top 10 drug companies may signal that the long-awaited consolidation of the fragmented Japanese pharmaceutical industry is finally taking off.

Japanese drug makers Sankyo Co. and Daiichi Pharmaceutical Co. will merge in October under a holding company with annual sales of more than 900 billion yen ($8.53 billion).  The merger creates Japan's second largest drug company (by sales) to trail only Takeda.

Japan's pharmaceutical industry has been considered ripe for consolidation for years. Companies have come under pressure to defend themselves from possible takeovers by foreign rivals that are eager to get more of the lucrative Japanese drug market - the second largest after the U.S.  The Japanese market is composed of relatively small companies that have strong research and development activities.  With well established sales channels and knowledge in the Japanese regulatory environment these companies are attractive acquisition targets.

Already, foreign companies are expanding their presence in Japan. Switzerland's Roche has bought Chugai, while Merck of the U.S. has taken full control of Banyu. Others, such as U.S. giant Pfizer and Britain's Astra-Zeneca have significantly increased staff in Japan.

At the same time, Japanese drug makers are eager to join forces as they brace for increased competition from foreign rivals on their home market. Last year Yamanouchi bought the smaller Fujisawa in a $7.7b deal that will create a new company called Astellas in April. And Dainippon announced to buy the drug unit of Sumitomo for $2.2b. Despite these recent cases of consolidation, Japanese drug companies are still small compared with the global giants. Sankyo's and Daiichi's combined revenue projections for the fiscal year ending March 31 st total $8.53b. Pfizer, the world's largest drug company gets slightly more in revenue per year just from one drug, Lipitor.

Many analysts remain cautious about the benefits of this merger. Both companies have different strengths and product portfolios. So while there is little overlap this also means there is little opportunity for major cost cutting. It is too early to gauge whether they would end up as winners within the industry or simply survivors. Only history will tell.

Bernhard Thurnbauer, Factorytalk Thailand, Jan 7, 2005
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