Sankyo and Daiichi plans show Japanese consolidation goes on
Summary
Sankyo and Daiichi Pharmaceutical are considering merging in October 2005 to become Japan's number two drugmaker, as competition in the market continues to intensify. Following the announcement of mergers between Yamanouchi and Fujisawa, and Dainippon and Sumitomo, will continuous domestic consolidation ensure a place for global integration in the face of western pressure?Following the announcement of a possible merger with Daiichi, Sankyo is expected to take the lead in the planned integration by putting up more than half the capital of the resulting holding company, although neither company has yet confirmed its intention to merge. There is some speculation as to whether or not the resulting company would maintain Sankyo's number two position after Takeda in the short to medium terms - operations from Astellas will steadily move up to top position by 2010, with any resulting merger between Sankyo and Daiichi expected to gain third place after Takeda.
Western competition
Some of the key factors driving the further consolidation among Japanese players include increasing competitive pressure from large western pharmas operating in the Japanese market and the high level of maturity among domestic players unable to overcome the effect of reimbursement price cuts.
As a result, companies are adapting their strategies to tackle these issues. Sankyo and Daiichi are turning to consolidation in the hope that they can fortify their international position by optimizing the use of their global sales force to maximize scope in their arthritis, inflammatory and immune disorder product offerings, cardiovascular and infectious disease areas, R&D and marketing resources.
The proposed merger would give Daiichi a better international reach as Sankyo has increased the number of its sales staff in the to more than 600, adding to Daiichi's 180 representatives. However, the sales team would still be smaller than those of a number of its rivals, including Takeda, which has 4,000 sales representatives, while has a total workforce of 800 people in the market alone.
A 34% ownership by foreign investors might already be seen as an additional opportunity to establish strong alliances with foreign players to exploit global growth opportunities for both companies. However, Sankyo's development pipeline potential, liquid resources, and key sources of high-value revenues, such as the hypertension treatment Benicar (olmesartan) that is forecast to generate revenues of $1,263 million in 2010, make it an attractive target for a foreign pharmaceutical giant, potentially throwing overboard Daiichi's growth prospects through consolidation.
Broadening the therapeutic focus
Over the last few years, Sankyo's and Daiichi's growth has relied heavily on in-house products to achieve sales growth, with over 77% of 2003 ethical sales for both companies derived from proprietary products. With declining licensing opportunities from top western pharmas that are increasingly entering alone with their most innovative products, maintaining an organic-growth-based strategy is the best choice for Japanese firms to maximize revenues. This is further driven by new regulations on outsourced manufacturing that come into force in April 2005, which will help to minimize operating costs and thus achieve higher profit margins.
A merger presents the opportunity for Sankyo and Daiichi to boost R&D productivity, with current joint pipelines providing an estimated 13.5% of the companies' revenues in 2010, despite having only one high potential pipeline product in Daiichi's compound Plavix (clopidrogel). Plavix is currently being registered in and is sold elsewhere by Sanofi-Aventis, its originator. It is forecast to generate over $250 million in 2010.
The result of a merger would be a broadening of the companies' therapeutic expertise in high profit margin areas such as Alzheimer's disease and urology, into which Daiichi is already focusing its pipeline. It would also provide the resulting company with three late-stage R&D products in the cardiovascular field to add to Sankyo's expertise and product offering.
Nevertheless, following a merger, the companies would still need to look to for further licensing opportunities to maximize the return of currently marketed drugs at a global level, moving away from the dependence on Sankyo's bulk US presence. Further M&A activity to achieve technological innovation, successful direct western penetration, future growth and therefore long-term sustainability among the leading Japanese players and global companies would also be an option available for the resulting company in the short to medium terms.
A symbiotic relationship
The overall result of this merger would position the resulting company in third position among the Japanese players by 2010, with estimated revenues of $9,008 million. Prior to the announcement of the possible merger, Sankyo's ethical sales were expected to increase at a low seven-year CAGR of 0.6% from $3,852 million in 2003 to $4,007 million in 2010.
Daiichi had a far worse outlook, with sales expected to grow at a CAGR of 0.2% from $2,239 million in 2003 to $2,269 million. However, if the merger goes ahead, the new company is expected to grow at an average annual rate of 0.4% from the two companies' combined sales over the same period. As such, the merger presents a quick answer to Sankyo's bleak future and weak pipeline prospects by broadening its product portfolio in the common areas of infectious disease and cardiovascular conditions, while accelerating Daiichi's market penetration through an extended sales force.
Related research:
· Japanese Pharma to 2010 - Imminent Transition Towards Globalization Necessary for Survival
