takeda- a sumo wrestles into the west

TakedaA Sumo wrestles into the West

Amit Rangnekar PhD-NMIMS-2004

Takeda- A Sumo wrestles into the West 1

AMIT RANGNEKAR PhD-NMIMS-2004

Executive Summary Without a crisis there is no action, but without action there will be a crisis. This reality

stares Takeda as its organic growth model comes under the scanner in the face of

increased competition and consolidation worldwide. The spectre of key patent expiries,

poor late stage pipeline and R&D productivity issues threaten Takeda.

Takeda, the world’s biggest Japanese pharma player was among the Top 5 pharma

companies in the world in the 1980s but has now slipped to 16th in the world and 2nd in

Japan, a position threatened by the heightened mergers and acquisitions (M&A) action

in Japan.

US and Europe are major growth opportunities that need to be nurtured well to attain

critical mass. Co-marketing has helped spread Takeda further into crucial markets but

the urge to go it alone lingers. In-licensing molecules from smaller Japanese players, a

strategy successfully adopted by Takeda for long, is now drying up as even the smaller

players spread their tentacles far and wide.

The Japanese pharma market, dominated by local Sumos, has seen MNCs emerging

strongly as regulatory changes stimulate increased competition but cost containment

measures restrict growth.

Takeda’s ‘divest and focus model’ has yielded cash reserves of $10 Billion that can help

realize their global ambitions. But, Takeda’s urge, ‘not to merge’ can cost dear. Takeda

has to seriously consider strategic acquisitions in key therapy areas and markets to

ensure critical mass, spread and reach.

As the 224 year old Sumo, Takeda wrestles its way into the west, can it grapple with the

existing key issues to climb back into the higher echelons of the world pharma market

as a Yokozuna (highest ranked wrestler) or will it remain a Sumotori (an ordinary

wrestler)?



Important Guidelines:

• This article covers Takeda’s pharma business in detail. Wherever group turnover is mentioned, it

has been specified.

• In some cases, figures for a prior year appear higher than for the succeeding year and ideally

degrowth should be reflected, but growth is mentioned, it is because of fluctuations in exchange

rates. Eg Takeda’s Pharma business turnover is growing in yen terms but degrowing in US$

terms.

• Individual brand sales figures are not available on Takeda’s official website. These have been

culled from various reputed pharma magazines and period has been mentioned accordingly. In

many cases, figures either in US Dollars or Japanese yen are available, which have been clearly

specified.

• The Yen rose from around Yen112 against US$1 in May04 to Yenl06 in November04. If the yen

goes above Yen105 - the projected rate for H2 - every Y1 appreciation would lead to a Yen1.25

Billion loss in net income.

• Exports from Takeda to its consolidated group companies and unconsolidated affiliates are included in net sales and operating income of the Japan segment.

• This case was written in January, 2005



Takeda Timeline (Culled from the Takeda website- http://www.takeda.co.jp/index-e.html)

• 1781- Chobei Takeda I starts a Japanese and Chinese medicines trading business in Osaka.

• 1871- Chobei Takeda IV forms a cooperative union for purchasing Western medicines.

• 1895- Pharmaceutical plant in Osaka manufacturing antidiarrhoeal and antimalarial drugs.

• 1907- Exclusive sales rights in Japan for products from German company Bayer.

• 1925- Incorporated as Chobei Takeda & Co. Ltd. integrating R&D, manufacturing and marketing.

• 1945- Post-war research includes

antibiotics and synthetic research of

folic acid and vaccines.

• 1949- Takeda's shares list on the

Tokyo and Osaka stock exchanges.

• 1950- Panvitan, the first multivitamin in

Japan launched.

• 1953- Lederle (Japan), a 50:50 JV with

American Cyanamid launched, still

operational.

• 1961- Name changes to Takeda

Chemical Industries.

• 1962- Manufacturing and marketing

company in Taiwan.

• 1963- Issues US$-denominated

convertible bonds in Europe- first by a

Japanese company.

• 1978- JV in France, operating bases in Germany and Italy.

• 1985- TAP Pharmaceuticals a 50:50 JV with Abbott, Lupron launched.

• 1987- Ranked 5th in the world pharma market, No1 in Japan.

• 1991- Prevacid (Lansoprazole) launched, currently their No 1 product.

• 1997- Takeda UK and Takeda Ireland established, Blopress (Candesartan) launched.

• 1998- Insulin sensitizer Actos (Pioglitazone) launched, US co-promotion with Eli Lilly.

• 1999- Takeda Pharmaceuticals North America operational.

• 2000- Right to access and utilize the databases of Celera Genomics obtained.

• 2001- Still the No 1 Japanese pharma company.

• 2004- Loses No1 rank in Japan to Pfizer.



Takeda Snapshot 2003 Established in 1781, Takeda Pharmaceutical Company Limited (Takeda),

headquartered in Osaka was Japan’s No 1 pharmaceutical company till 2003. Takeda

discovers, develops, manufactures and markets a broad range of pharmaceutical

products. Takeda’s sales from all businesses grew at 4 % crossing $ 10.25 Billion in

2004. Net profit for 2004 was $ 2.69 Billion, a growth of 5% over 2003. Table 1- Takeda’s Track Record, 2001-2003 Year World

Rank Japan Rank

Pharma Sales $ Bn

R&D Spend $ Bn

Japan Sales

%

Top Therapeutic Categories

2003

Top Brands 2003

2001

15 1 7.77 0.721 (9%)

65

2002

17 1 7.15 0.843 (11%)

62

2003 16 1 7.37 1.061 (12%)

57

Digestive $ 1.6 Bn @ 22% Metabolic $1.1 Bn @ 7% Cardiovascular $1.1 Bn @ 39%

• Prevacid Lansoprazole

• Actos Pioglitazone • Lupron

(Leuprorelin)

Takeda’s core therapeutic areas are diabetes, cancer, urological and digestive system

diseases, circulatory and central nervous system diseases, bone and joint disorders and

allergies.

Takeda has 14900 employees worldwide and an international marketing network

including 67 subsidiaries. Takeda products are sold in over 100 countries including

Japan, US, Europe and rest of Asia. Takeda is also No 2 in the Japanese OTC market. Table 2- Takeda Therapeutics 2001-2003

New Drug Approval / Launch Pipeline (Late Stage) Focus Segments • ACTOS, combination • BANSEN dosage form • BLOPRESS in CHF

TAP (JV with Abbott) • PREVACID dosage form • UPRIMA dosage form

Cancer pain drug in Phase III in Japan Ramelteon, for the treatment of insomnia in Phase III in EU and US

• Cardiovascular • CNS • Genito-urinary • Gastrointestinal • Diabetes • Overactive bladder • Cancer

The Pfizer-Pharmacia merger may see Pfizer ascend to the No 1 slot in Japan in 2004,

overtaking Takeda. Takeda announced a record tenth straight year of growth but over

the last 4 years their growth rates in Japan are dwindling.



Key Issues

• No 1 Rank in Japan threatened due to Pfizer-Pharmacia merger

• Increased domestic competition

• Lack of growth in Japan

• Imminent patent expiries of major brands

• Limited US and European pharma presence

• Reduced flow of In-licensed molecules

• R&D productivity

Growth Drivers

• Overseas expansion in Europe and US Overseas sales contributed 43% in 2003, importantly US and Europe drove

growth for Takeda.

• Strong sales of key drugs Actos, Lupron, Blopress and Prevacid continued to grow.

• Presence in key therapy areas Diabetes, urinary incontinence and gastrointestinals are promising segments

Growth Resistors

• Degrowing domestic market Japan's economy receded over the last decade resulting in stricter regulatory

measures and reduced government healthcare spend, affecting the Japanese

pharma market.

• Biennial price cuts Compulsory biennial price cuts enforced for established drugs.

• Weak late-stage pipeline Takeda’s weak late-stage pipeline is a major setback for future growth.

• Increased MNC competition

Implications of the International Conference on Harmonization and the removal of

the need to carry out separate clinical trials in the Japanese market have made it

Takeda- A Sumo wrestles into the West - 6 -


easier for MNCs to enter the market independently, without partnering with a

Japanese company or out-licensing products.

• Consolidation among major pharma players The reverberations of consolidation among the Top 10 companies of the world is

also felt in the Japanese pharma market. The Pfizer-Pharmacia merger in US

resulted in Pfizer toppling Takeda from the No 1 position in Japan in 2004. The

Yamanouchi-Fujisawa merger (Astellas) is also snapping at Takeda’s heels as

the biggest Japanese pharma company.

• Patent expiries Four of Takeda’s Top 5 brands contributing 60% of sales, face patent expiries

over next 5 years.

Therapeutic Profile Takeda, although not placed among the Top 10 pharma companies in the world, has a

significant presence in important therapeutic areas, especially the metabolism segment.

Lifestyle management drugs, which are slated to be the major growth area of the future

is where Takeda is focusing on. These are upsides for Takeda, which they need to

attain critical mass.

Chart 1- Takeda Therapeutic Profile 2003

0

0.5

1

1.5

2

-10-5051015202530354045

Sales $ Billion 1.592 1.151 1.146 0.881 0.423 0.402

Grw % 22 7 39 9 -5 0

Digestive Metabolic Circulatory / Respiratory

Hormones CNS / Sensory

Antibiotics / Biologics



Takeda’s significant rankings in the 2004 World pharma market in major therapeutic

areas are as under:

• Takeda stands a distant 2nd in the gastrointestinals (GI) market after AstraZeneca

• Prevacid is the 3rd largest selling brand in the GI market.

• Takeda ranks 5th in the metabolism market

• Actos is among the Top 3 drugs in the booming diabetes market.

• Lupron is the 2nd largest selling cancer drug in the world.

• Blopress is among the world’s Top 7 anti-hypertensive drugs in 2004.

Lack of major presence in the crucial cardiovascular, central nervous system, anti-

infective and respiratory segments can be a hindrance for future growth. A varied and

diverse portfolio without over dependence on any segment is an advantage but a poor

late-stage pipeline and the threat of patent expiries of leading brands is a grave reality.

To replace the expected loss of revenue from these four products, which face patent

expiry, Takeda has been increasing its R&D expenditure. Among the most promising

therapeutic areas the company focuses on in its product pipeline are oncology and

CNS. Pharma Portfolio & Pipeline Takeda's sales are dominated by 4 major products which combined, accounted for 54%

of total sales. However Actos, Prevacid and Leuplin will lose part of their patent

protection over the next five years, increasing the risk of generic competition to Takeda

sales. Table 3- Portfolio of Key Brands (Sales ¥Bn) (Source- Takeda Annual Reports)

Brand Generic Therapy 2003 2002 2001 2000

Actos Pioglitazone Diabetes 178 155 120 70

Prevacid Lansoprazole Gastrointestinal 156 133 114 94

Lupron Leuprorelin Oncology 109 105 98 84

Blopress Candesartan Hypertension 141 105 77 48



Actos (pioglitazone), with sales of ¥178 Billion, growing at 15%, is Takeda's best-selling

drug. Research suggests that Actos offers significant benefits over other diabetic drugs

in terms of improved glycemic control of type II diabetes and also by lowering the

cholesterol levels. Actos was first launched in Japan in December 1999 and received

fast-track approval from the USFDA in July 1999 and marketing access in the EU in

October 2000.

Prevacid/Takepron (lansoprazole) recorded sales of ¥ 156 Billion, an increase of 17%.

Prevacid/Takepron is a proton pump inhibitor used in the treatment of peptic ulcers. The

drug, initially launched in 1992, is a second generation proton pump inhibitor indicated

for the short-term treatment of duodenal and gastric ulcers, and for the long-term

treatment of hypersecretory conditions. Prevacid is sold in all major pharmaceutical

markets, including the EU, South Africa, Latin America, North America and Asia.

Leuplin (leuprorelin) recorded sales of ¥109 billion, an increase of 4%. Leuplin is

Takeda's treatment for prostate cancer. The drug was first approved in the US in 1985

and has since received approval for this indication around the world. Approvals have

also been extended for 2 further indications: endometriosis and precocious puberty.

Blopress (candesartan) recorded sales of ¥ 141 Billion, an increase of 34%. Blopress,

a long- acting angiotensin II receptor antagonist, is a treatment for hypertension. Since

its launch in Japan in 1999, the drug has been approved in 28 different countries.

Takeda is seeking further approvals for other indications, including chronic

glomerulonephritis and diabetic nephropathy to enhance sales.

R&D Productivity

Japanese companies traditionally did not see much need to innovate. Under the old

system the government set the highest price for new drugs, even if they were only slight

modifications of existing medicines. Therefore, instead of high spending on developing

new treatments, Japanese companies, including Takeda, tended to focus on improving

existing products. The major contribution of the Japanese R&D has traditionally been in

extensions of anti-infectives and lately in cardiovascular and cancer drugs.



Table 4- Takeda Pipeline (Source: Takeda Financial Results Data Book)

This is now changing as the Ministry of Health, Labour and Welfare have introduced

reforms aimed at improving competition in the domestic pharma market since 1998. The

impact of these reforms has been to increase competition in the domestic market,

threatening the dominant position of companies like Takeda in the Japanese market.

Takeda has responded to this challenge by expanding its presence abroad and by

increasing its R&D spend. Takeda spends 12% of its sales on R&D, putting in more

than $ 1 Billion per year but with only 1 product in Phase III trials to show for,

productivity is a serious issue. Takeda has many promising compounds in Phase II

clinical trials but a relatively weak, late-stage pipeline is a cause for concern.

Phase III drugs include

TAK-453-SR (morphine hydrochloride) - a small-sized, sustained release capsule used

for the treatment of various types of cancers pain. The drug is currently in Phase III

trials in Japan.

TAK-375 - (Ramelteon) - for the treatment of primary insomnia, is a novel ML-1

selective melatonin receptor agonist. The drug has less clinically relevant adverse

reactions - such as movement disorder, disturbance of memory and drug dependence -

than existing benzodiazepine hypnotic drugs. As well as being in Phase III trials in the

Region Indications of Drugs in Phase II Indications of Drugs in Phase III

US • Urinary Incontinence

• CHF

• Depression

• IBS, GERD

• Endometriosis, Diabetes

• Obesity

• Insomnia

EU • Urinary Incontinence

• CHF

• Cholesterol

• Insomnia

Japan • Rhinitis • Cancer pain



US and EU for primary insomnia, the drug is also in Phase II trials in the US for

circadian rhythm sleep disorder. The insomnia market has considerable potential, but is

set to become highly competitive with the launch of Pfizer’s Indiplon in 2005.

To compensate for a poor late-stage pipeline, Takeda has a number of marketed drugs

that are currently undergoing late-stage testing for additional indications:

• Leiplin/Lupron, launched in Japan in August 2002 as a treatment for prostate

cancer, is currently undergoing Phase III trials for breast cancer in Japan.

• Prevacid/Takepron, which has already received approval for peptic ulcers in Japan,

is now undergoing Phase III trials as a treatment for symptomatic GERD.

Takeda’s focus is in the key lifestyle segment with an impressive array of drugs across

key indications, in Phase II. This early stage pipeline seems attractive but the time taken

to introduce these drugs and the uncertainty whether they would be approved at all,

would determine Takeda’s future success. Takeda’s research is carried out solely in Japan, whereas its development operations

are located in Japan as well as in Europe and the US. This would have to change in

future as Takeda prepares for a major US and European thrust.

Inspite of a history of R&D products across various therapeutic classes over the last

decade, the current pipeline constitutes a major growth impediment. There is only 1

product on Insomnia is in Phase III trials in US and Europe for which the company

hopes to get USFDA approval by 2006. Post approval, peak sales are estimated to be

around $ 300 million in 2008, which would only constitute 3% of Takeda’s pharma

turnover in 2008.

Takeda's response has been to significantly boost its R&D spend (12% in 2003) which

may hold back operating profit for the next few years, but will benefit the company in the

long term. Geographical Spread and Reach



Chart 2- Takeda Sales by Region (Bn Yen)

0

200

400

600

800

1000

1200

Japan US Europe Other Total

2000 2001 2002 2003

(Note: Exports from Takeda to its consolidated group companies and unconsolidated affiliates are included in net sales and operating income of the Japan segment.) Japan remains Takeda's dominant market, accounting for 57% sales, down from 65% in

2002. This is a positive sign as it shows the growing sales contribution from US and

Europe which are bigger and faster growing markets. Like other top Japanese

pharmaceutical companies, Takeda too has benefited from a protected but profitable

domestic market.

Takeda is increasing its US and European focus with major investments in own

subsidiaries. Takeda’s overseas sales contribute 43% of total sales. Europe contributes

14%, US 27% and other Asian markets contribute 2%. The US and European

operations are extremely people intensive but promising. At this stage, they contribute

poorly to the profits but are thrust areas and growth for the last three years has accrued

from these areas. Like most European companies, whose US sales are much bigger

than their European sales, Takeda’s overseas sales contribution too may soon exceed

that from Japan.



Table 5- Takeda’s Sales Spread and Profitability- 2004 (Source: Takeda Annual Reports)

However, 90% profits still accrue from Japanese operations. Overseas operations

account for 66% of employees but contribute only 10% of profits and 24% of sales in

2004. As overseas markets start yielding better, contribution and margins will improve.

Takeda’s increased spread will ensure that it is not harmed by a sudden fall in sales in

any one market or for any one product.

Takeda has to their credit innovative molecules in the market in key therapeutic areas

but have to co-market major molecules for better reach in US and European markets,

with local giants. Takeda markets Prevacid with Abbott but Takeda’s ambition to go it

alone in the US market through its subsidiary Takeda Pharma North America may prove

beneficial in the long run. Takeda also co-markets Actos with Lilly in the US and

Prevacid with Wyeth in UK.

Takeda has strengthened its presence in Europe by taking 100 % control of the JV

sales company it owns with Grunenthal in Germany. This deal brings all Takeda's 6

sales subsidiaries in Europe under its control and gives the company 70 % coverage of

the European market.

Following the acquisition of the remainder of Takeda Pharma GmbH, Takeda will also

take 100 % control of its subsidiaries in Switzerland and Austria. The move is in line

with Takeda's strategy to become a global pharma group by 2005 with sales of at least

yen1000 Billion (euro8.6 Billion, $ 9.6 Billion) and R&D investment of 20 % of sales.

Region Sales

$ Bn

Sales

Contribution %

Net Profit

$ Bn

Margin

%

Net Profit

Contribution %

Japan 7.81 76 2.42 31 90

North America 1.51 15 0.20 13 7

Europe & Asia 0.93 9 0.08 9 3

Total 10.25 2.69 26



Business Spread Chart 3- Takeda Business Spread-2003 (Bn Yen)

2002 810.3 83.9 15.6 16.2 140.1

2003 877.1 58.2 11 14 126.1

Ethical OTC Bulk Vitamins Life Environment Others

Ethical Drugs Ethical drugs constitute Takeda's core business. Two research centers in Japan

conduct basic and applied research to create new breakthrough drugs. Development

operations in Japan, US and Europe move these drugs through to delivery. Takeda’s

international marketing network includes overseas bases in US, Europe and Asia.

Takeda’s production network includes plants at Hikari, Osaka and Shonan in Japan, as

well as Takeda Ireland, established in 1997 manufacturing drugs for the European and

U.S. markets. In addition, Takeda has 3 Asian production facilities in China, Taiwan and

Indonesia.

OTC

In Japan, Takeda has built a strong presence in the OTC drug market, holding the No 2

rank. The increasing emphasis on self-medication among Japanese consumers should

help drive further growth in major OTC brands- Alinamin¨ (vitamin), Benza¨ (cold),

Hicee¨ (vitamin C) and That's¨ (gastrointestinal).



The Japanese Pharma Market Chart 4- Regional Pharma Market % Chart 5- Japan Pharma Market ($ Bn)

(Source IMS) (Source-Datamonitor)

4232

20

44

2818

48

2416

49

28

11

North America Europe Japan

1990 1995 2000 2003

6058

5755 54 56

5860

6264

1999

2000

2001

2002

2003

2004

*

2005

*

2006

*

2007

*

2008

*

The Japanese pharma market is the second largest in the world, behind only the US,

with sales of $54 Billion in 2003. Japan accounts for 12% of the World and 64% of the

Asian pharma market. Japanese pharma companies market 4 out of the world’s Top 30

brands. Market size makes it attractive for MNC expansion plans but the negative

market growth makes the operating environment increasingly difficult for domestic

players who have token presence outside Japan.

MNCs are keen to build their presence in Japan, with many buying out former JV

partners in Japan to increase brand recognition. Ongoing regulatory reforms

encouraging increased MNC presence and cost containment measures are forcing

Japanese companies to seek growth in lucrative US / European markets. Consolidation

among big pharma worldwide as well as MNC acquisitions of Japanese firms is further

complicating matters for big Japanese companies.

High per capita drug spend, very high old age population and low generic penetration

are attractions for MNCs. But a fragmented market, foreign language, different

corporate culture and stringent regulatory measures pose a serious challenge. To

increase competition in the pharma sector, the government has introduced incentives

aimed at encouraging MNCs to enter the market. These factors make the Japanese

market an increasingly difficult operating environment, especially for Japanese

companies. Takeda has so far successfully managed increased sales growth despite



the government-mandated cuts in drug prices, thanks in part to already being

significantly diversified.

Regulatory Brighteners The enactment of the Pharmaceutical Affairs Law (PAL) in July 2003 saw a number of

changes to the drug approval process. Earlier, in 1999 the use of foreign clinical trial

data in Japanese marketing applications was made easier.

Effective 2005, the PAL will now see:

• Switch from manufacturer/import based approval to product-specific marketing

authorizations.

• New FDA-like regulatory body.

• Introduction of fast-track priority reviews.

These changes will make it easier for MNCs to market products directly in Japan even if

they have been manufactured elsewhere and ensure faster clearances.

The new Pharmaceutical and Medical Devices Agency (PMDA) was launched on April

1, 2004 and combines all the 3 organisations that previously covered consultation,

product reviews and side-effect monitoring. The PDMA aims to review 80% of drugs

within 12 months by 2009, up from the current 50%. Competitive Landscape Table 6- Top 10 Pharma Companies in Japan- 2003 (Source: IMS) Japan Rank Company Country World Rank

1 Takeda Japan 15 2 Pfizer USA 1 3 Sankyo Japan 26 4 Roche Switzerland 9 5 Otsuka Japan 24 6 Novartis Switzerland 5 7 Daiichi Japan 36 8 Eisai Japan 20 9 Yamanouchi Japan 33 10 Merck & Co USA 3



The MNC Sumos In early 2004, the top five MNCs had a combined sales force of 9030 in Japan,

compared with 6500 for the top 5 domestic manufacturers. Their market share has also

grown from 32% in 2000 to 40% in 2004.

Pfizer Emerged No 1 in Japan in 2004, following the merger with Pharmacia, up from seventh

in 2000. In 2003, Pfizer was the 8th fastest growing company in Japan. It is currently in

talks with the Japanese regulatory authorities regarding approval of its combination

hypertension product, Caduet (atorvastatin/amlodipine). In 2004, Pfizer hopes to grow

its Japanese sales by 34% to ¥413 billion, and is adding 200 representatives to boost its

force to 3400.

Merck Hiked its holding in its subsidiary, Banyu from 51% to 99%.Continues to feature in the

Top 10 in Japan. Banyu is Merck’s largest, wholly owned subsidiary outside the US.

Johnson & Johnson

The subsidiary, Janssen Pharmaceutical KK hopes to raise sales from ¥61 billion in

2003, to ¥100 billion in 2006, thanks to strong demand for its core products and the

release of new line extensions. Janssen was the second fastest growing pharma

company in Japan, with sales up an impressive 35% in $ terms.

Sanofi-Synthelabo Intends to buy 49% of earlier JV partner Taisho to emerge on its own. But wants to

maintain its 5 remaining Japanese JVs with firms such as Daiichi and Fujisawa. Will

receive a tremendous boost from its global merger with Aventis as Aventis has 1200

reps in Japan and an enviable portfolio.

AstraZeneca

Aiming to enter the Japanese Top 10 in 2005. Witnessed 14% growth in 2003 to

achieve sales of $ 1.2 Billion. AstraZeneca was the 4th fastest growing pharma company



in Japan in 2003. The launch of cancer drug Iressa was hampered by safety concerns,

but products such as antipsychotic Seroquel (quetiapine) and ulcer drug

Omepral/Omeprazon (omeprazole) have performed well. Crestor (rosuvastatin) launch

in Japan, under licence from local developer Shionogi. Second largest sales force in the

country behind Pfizer, with 1565 representatives.

Bayer Ranked 24th in Japan in 2003, partly due to the recall of statin Lipobay/Baycol, co-

marketed locally with Takeda, in 2001. In 2004 Bayer expects a significant rise in its

Japanese market share over the next few years, thanks to the launch of new products

such as erectile dysfunction treatment Levitra. Over 2004, Bayer-Yakuhin’s sales force

will increase from 700 reps to 755, with further growth planned.

Boehringer Ingelheim

Significantly increased its Japanese presence from 3% in 2001 to 15% in 2003. Brands

include Micardis (telmisartan), Mobic (meloxicam) and Alesion (epinastine), co-

promoted with Yamanouchi, Daiichi and Sankyo respectively. Launching Spiriva

(tiotropium) for COPD with Pfizer. Sales force has touched 860 reps. Also owns 51% in

SSP, a Japanese OTC specialist.

The Japanese Sumos Japanese companies have always dominated the Japanese market but MNCs are

making a concerted bid for the top ranks. Upsides for Japanese companies include

profitability, cash and little or no debt. Table 7- Top 3 Ranks in Japan- The changing order (Source: IMS)

Rank Company 1987

Company 1994

Company 2002

Company 2003

Company 2004

Company 2005

1 Takeda Sankyo Takeda Takeda Pfizer Pfizer 2 Sankyo Takeda Sankyo Sankyo Takeda Takeda 3 Shionogi Eisai Yamanouchi Pfizer Sankyo Astellas

Sankyo Sankyo, Japan’s second largest pharma company employees 5400 people and has an

extensive independent network of companies across Europe, South America, Asia and



the US. They also make OTC medications, veterinary drugs and food ingredients and

agricultural chemicals.

Sankyo, based in Tokyo is one of Japan's largest R&D based pharma companies. It

markets cancer, diabetes, cardiovascular, rheumatism and allergy related treatments

with revenues of $ 5.64 Billion in March 2004. Its cholesterol treatment Mevalotin

accounts for more than 40% of sales. It is in a strong position to launch its new statin,

Livalo (Pitavastatin) in US and Japan. Generic competition to Mevalotin in 2003 is a

negative factor, but Sankyo will put its might behind Livalo.

Sankyo's strategy is therapeutic expansion with in-house development and in-licensing,

broadening the company's focus into new areas, like diabetes and respiratory disorders.

Yamanouchi Yamanouchi, based in Tokyo is Japan’s 3rd largest pharma company employing 9300

people. In 2004, Yamanouchi sales were $4.7 Billion, an increase of 1% over 2003.

Operating income in 2004 was $ 928 Million, a decrease of 5% over 2003. Net Profits in

2004 were $ 552 million. Yamanouchi started in 1923, has 11 branches throughout

Japan, and operations in US, Canada, Mexico, Malaysia, Europe and the US. Its

prescription business contributes 80% to sales, although its subsidiaries also deal in

gourmet food gifts. Plans to merge with Fujisawa Pharmaceutical in 2005.

Yamanouchi uses its strong product portfolio to attract corporate relationships and has

been able to in-license key products, most notably Lipitor from Pfizer. In-licensing

appears to be a key part of its long-term strategy to gain access to products with high

potential for the domestic market. The company has also used out-licensing to market

its products abroad, although its new US subsidiary will eventually reduce such activity.

Fujisawa Fujisawa based in Osaka, also has a presence in US and Europe. Fujisawa employs

8000 people worldwide and recorded revenues of $ 3.7 Billion during 2004, an increase

of 4% over 2003. Fujisawa produces antibiotics, metabolic, cardiovascular, respiratory

and anti-allergy drugs. Fujisawa OTC products include cold medications, dietary



supplements and gastrointestinals. Fujisawa is also into chemicals, medical equipment

and home medical care products distribution. In 2004, Fujisawa’s 90% sales were from

ethical drugs. Fujisawa is forecast to be the best performing Japanese company, thanks

to its extensive alliance network.

Daiichi Tokyo based Daiichi makes prescription drugs, diagnostics, radiopharmaceuticals and

OTC drugs. Daiichi has 7400 employees. In 2004, Daiichi generated revenues of $3

billion, an increase of 0.2% over 2003. Profit before tax in 2004 was approximately $430

million, a decrease of 13% from 2003. Daiichi's Cravit (Levofloxacin), is patent protected

in Japan until 2006 and in the US until 2010. Sales could rise to over $ 600 Million in

2005 but will decline thereafter as generic competition penetrates the domestic market.

Chugai Switzerland’s Roche completed a strategic transaction in 2002 when Japanese Chugai,

merged with Roche’s local subsidiary, Nippon Roche to propel Roche back into the

global top 10 rankings, thanks to its 50.1% share in Chugai, and also made Chugai the

fourth ranking company in Japan.

Eisai Restructured its management to resemble that of Western companies. In another break

with Japanese tradition, Eisai has introduced a worldwide incentive system for R&D

contributors, which aims to boost R&D productivity and thus increase the number of

available products to drive Eisai's success in global markets. Eisai's sales of Aricept will

reach $1.3 Billion in 2005. Aricept is regarded as the gold standard Alzheimer's disease

treatment worldwide and currently the only such therapy available in Japan.

Mitsubishi Japan’s largest chemical company. Cardiovascular franchise accounted for nearly half

of all sales in 2003. Although sales of this franchise will be static in the period to 2008, it

will remain a key revenue generator.



MNCs wrestle into the Japanese Pharma Market

Japanese companies face a harsh reality today. They are losing relative competitive

power and no longer dominate the domestic market. Dominance did not disappear

overnight, but now the signs are so obvious they cannot be denied. This new paradigm

may come as a surprise to those who believe foreign companies are shut out of Japan

but the reality is very different.

Some ominous signs in the Japanese pharma market

• Four MNCs out of Top 10 pharma firms in Japan in 2003 against only 1 in 1994.

• Top 10 MNC share swelled to 30% in 2004, but declined for the Japanese Top10.

• In 2003, 7 of the Top 10 Japanese firms degrew, while 7 of Top 10 MNCs grew.

• Total field force of the Top 10 Japanese and Top 10 MNC firms were almost equal

at 12000 MRs each, denoting the growing clout and reach of MNCs.

• The global Top 10 companies account for 47% share denoting consolidation, but

the Top 10 pharmas in Japan account for 36% share conveying fragmentation.

• Japanese companies failed to merge and consolidate, opening up a window of

opportunity for foreign firms to capture market share in Japan while Japanese

companies, content with their position in Japan, failed to establish a US presence

and lost worldwide competitiveness.

• From 1990 to 2000 the US market grew @ 12% per annum while the Japanese

market grew only @ 1% making a competitive presence in the US far more

important than a strong position in Japan in terms of global growth.

• Pharma prices in Japan decreased @ 5% per year from 1990 to 2000 while

prices in the US increased @ 4% per year.

• Operating margins were lowest in Japan as compared to US and Europe.

• Pfizer’s market cap was 6 times that of Takeda in 2003.

• 71% sales of the Top 10 Japanese companies came from drugs more than 10

years old.



M&A in the Japanese Pharma Market

In 1982, Merck acquired Banyu and later in 2002 hiked its stake to 99%. This move was

heralded as a harbinger of M&A to follow, but in the next 22 years till 2004, there have

only been 13 acquisitions of domestic pharma companies by foreign firms, and most

involved small companies or JV partners. There has been no major Intra-Japanese

M&A in pharma but the number of M&A deals across all industries in Japan increased

almost 5 times between 1997-2003. Table 8- Foreign Ownership in Japanese pharma companies- 2002 (Source: Nippon Pharma Promotion)

Foreign ownership averages 30% among the Top Japanese pharma companies.

However unlike the US and European stake holders who have a major say in affairs of

the company, Japanese shareholders do not enforce their powers to the same extent at

present.

As Japanese pharma companies are cash rich and shareholder pressure is not yet as

strong as in the US or Europe, a strategic transaction cannot be driven by only price or

cash. A JV is often the preferred entry or transitional step to an eventual M&A. In the

past many Intra-Japanese pharma deals have been cancelled even after public

announcements due to disagreements over valuation, management control and

unrealistic or irrational expectations

Pharma M&A activity would increase in future in Japan as already the intra-company

restructuring is on in full swing. OTC is a non-core area but substantial divestment has

not yet been initiated is this segment. Takeda is the only pharma not losing money in

the OTC business. But as MNCs replace local companies in the Top 10, the local

laggards will have to consolidate to survive and grow.

Most MNCs do not have a ranking in Japan commensurate with their global position and

Company Foreign Stake % Company Foreign Stake % Yamanouchi 40 Sankyo 30 Shionogi 40 Ono 28 Daiichi 32 Eisai 26 Takeda 30 Fujisawa 23



need to build or buy to attain critical mass. Considering their financial muscle buying

would ensure faster growth.

From over 1000 pharmaceutical wholesalers in Japan in 1970, today only 4 wholesalers

control over 90 % of the market. This consolidation trend could well be repeated in the

domestic pharma market.

Table 9- Major Pharma M&A activity in Japan from 1983 – 2005 (Source: Nippon Pharma Promotion)

1983 Merck acquires Torii & Banyu 1986, 1989 Boehringer Mannheim acquires San-a & Yamaguchi, buys Toho

1992 Solvay acquires Kowa Yakuhin 1996 Boehringer Ingelheim takes 9% stake in SS Pharma (Now owns over 50%) 1999 N.V. Organon acquires Kanebo pharmaceutical division 2000 Schering AG acquires Mitsui Pharmaceutical 2002 Roche acquires Chugai, Abbott buys Hokuriku Seiyaku, Merck acquires 99% in Banyu 2003 Pfizer acquires Pharmacia in USA, becomes No 1 in Japan 2005 Astellas formed by the merger of Yamanouchi and Fujisawa

Impact of Astellas Pharma – The merged entity of Yamanouchi and Fujisawa

Astellas (meaning ‘shine on tomorrow’ in Japanese), the company created by the

merger of third ranked Yamanouchi and fifth ranked Fujisawa effective April 2005 will

emerge as the third-biggest pharma in Japan after Pfizer-Pharmacia and Takeda.

Astellas, marks the first major consolidation in Japan's fragmented and highly

competitive pharmaceutical market. Yamanouchi paid Y800 Billion (€5.89 Billion) to

acquire Fujisawa.

Astellas will start with global sales of around $7.6 Billion (€6 Billion) compared to

Takeda's $ 10 Billion for 2004. If Takeda’s pharma business only is compared, Astellas

is almost equal in sales and a slightly higher growth rate in 2005 can dislodge Takeda’s

position as the biggest Japanese pharma company in the world.

Astellas, based in Tokyo will be the 17th biggest pharmaceutical firm in the world

compared to Takeda’s 16th rank. The merger was necessitated in a bid to survive

intensifying global and local competition. The union could trigger a consolidation trend in



Japan. Significantly Astellas will have 2400 reps, the largest number for a domestic

company as MNC market penetration was one of the key factors for the merger and a

formidable challenge for domestic players.

The major brands for Yamanouchi are the urinary disorder drug Harnel, peptic ulcer

treatment Gaster, and Fujisawa’s immunosuppressant Prograf. The therapeutic

portfolios are complimentary and R&D synergy should be significant with minimum

overlaps. The combined R&D budget of 145 Billion yen is 20% that of Pfizer but

significant. Yamanouchi co-markets the world’s biggest drug Lipitor, with Pfizer in

Japan. Astellas’ penetration is already the best among local players. Astellas needs to

improve their standing outside Japan where Takeda and Sankyo are the best

performing Japanese companies.

Astellas’ OTC JV will be called Zepharma and will market major brands like

gastrointestinal Gaster (famotidine), cold remedies Precol and Cakonal, dermatological

products Malciron, Eurax and PyroAce and anti-allergics AG Eyes and AG Nose.

A diverse portfolio, large R&D budget and a strong late-pipeline augurs well for Astellas

but the merger should be able to prove the synergy with matching results.

Astellas hopes to create a unique corporate culture with enhanced efficiency and

transparency of management, but with combined 39 directors today and place for only 8

directors on the new board including 2 from outside, commencement of operations will

be a major challenge in corporate governance.

Takeda’s Initiatives As part of its growth strategy, Takeda is on the lookout for collaborations and

alliances to keep its costs down. Focus on in-licensing and alliance activities as a

measure to enhance the R&D pipeline, in addition to in-house R&D.

• Alliance with Wyeth for co-promotion rheumatoid arthritis treatment, Enbrel.

• Co-marketing Zoton (Lansoprazole) with Wyeth in UK.



• Alliance with Lilly for development and co-marketing of compound for diabetic

microvascular complications, in addition to co-promotion agreement for Actos.

• Alliance with UK based Alizyme for development and marketing of a treatment

for obesity and obesity-related diabetes.

• Facility for gene and protein functional analysis in Tsukuba, Japan to identify

drug discovery targets using genomic information.

• Research collaboration for Alzheimer’s disease with Evotec Neurosciences,

Germany.

• Takeda Global R&D Center in the US, as a subsidiary of Takeda

Pharmaceuticals North America.

• Approval in Japan for an orally disintegrating tablet formulation of Basen

(Voglibose).

• In April 2004, Takeda filed an application in Europe for Candesartan cilexetil for

the additional indication of chronic heart failure.

Restructuring

Takeda has led the way in restructuring by exiting non-core businesses. Their divest

and focus model is in tune with Japanese sensibilities. Takeda spins out an unwanted

business into a JV with the acquiring firm and takes a 40 % stake that is quietly hived off

within 3-5 years. Takeda has entered into JVs over the past 2 years with major MNCs

and Japanese companies in its non focus but allied businesses.

• Life-Environment business-Takeda establishes a fully owned subsidiary Japan

EnviroChem.

• Agro business-Takeda and Sumitomo establish an agrochemical JV.

• Food business-Takeda and Kirin Brewery establish a JV, Takeda Kirin Foods

Corporation

• Urethane chemicals- Takeda and Mitsui Chemicals establish a JV.

• Bulk vitamin business-Takeda and BASF, Japan establish a JV- BASF Takeda

Vitamins KK. Takeda transferred all the shares of Takeda Vitamin & Food USA,



Takeda Canada Vitamin and Food, Takeda Europe and Takeda Vitamin & Food

Asia to BASF.

• Animal health business- Takeda transferred its animal health business to a

new JV, Takeda Schering-Plough Animal Health KK.

During the last 3 years Takeda hived off its animal health, agrochemical and food

businesses and controls a cash horde of over $10 Billion. Takeda recently announced

an aggressive share buy-back program. Could this be the platform for strategic

acquisitions in the future?

Taking a cue from Takeda’s ‘Divest and Focus’ model, other companies have divested

their non-core businesses like veterinary, diagnostics and chemicals like Fujisawa to

Schering Plough, Shionogi to Boehringer Ingelheim, Tanabe to Dainippon, Eisai to Meiji

Seika, Chugai to Fujirebio, and Nikken’s subsidiary to Mitsui.

Takeda expects its sales for the fiscal year ending March 2005 to grow despite the

appreciation of the yen against the US $. The company expects a 2% growth in sales to

Yen ll00 Billion (US$10.7bn), despite the stronger yen. The reason for growth is the

strong growth in the sales of core products such as Blopress and Takepron in Japan-

and Europe, and Actos in the US.

Challenges for the Sumo

A study of the Top 5 pharma companies of 1987 and their rankings today elucidates the

importance of M&A as a growth strategy. Takeda ranked 5th in the world in 1987, with

sales of $ 2.8 Billion but stands 16th today with pharma sales touching $ 7.5 Billion,

through organic growth. Other US and European companies have crossed $ 15 Billion

in sales through M&A and Global expansion in the same period.

Merck, which also followed the organic growth model was 2nd in 1987 and 4th in 2004

but currently faces a plethora of problems. Bayer lost focus on pharma, faced product

recalls and is on the verge of moving out of the Top 20.



On the other hand Hoechst acquired Marrion and RPR to become Aventis, was itself

acquired by Sanofi, to form SanofiAventis propelling them to No 3 in the world. Ciba

merged with Sandoz to form Novartis and has steadily grown since.

Pfizer, not in the Top 10 till 1995, acquired Warner-Lambert, Parke-Davis and

Pharmacia to emerge No 1 in the World, US and Japan. In 2004 it is on a strong wicket

with 9 blockbusters, leadership in 4 critical therapeutic areas and a lead of more than

33% ($ 10 Bn) over second placed GSK. Takeda failed to merge and consolidate, opening a window of opportunity for foreign

firms to capture their market share in Japan. Conversely, the global market in the 1980s

and 1990s was wide open for a move by Takeda due to their size and resources but

achieving a Top 10 world position and regaining its No 1 position in Japan today is a big

ask, especially based on its recent track record.

Table 10- World’s Top 5 Pharma companies of 1987; Status in 2004 Rank 1987

(2004)

Company Sales $ Bn 1987

(2004)

M&A status Status 2004

1

(3)

Hoechst 3.4

(28.01) • 1995, acquired Marrion,

formed HMR

• 1999, acquired RPR,

formed Aventis

• 2004, Sanofi acquired

Aventis, SanofiAventis

formed

• No 1 in Europe

• 7th in US

• Strong pipeline

2

(4)

Merck 3.2

(22.48) • Organic growth

model under pressure

• No 3 in US

• Japan Top 10

3

(7)

Ciba 3.1

(16.02) • Merged with Sandoz,

formed Novartis

• Hold 33% in Roche

• Top 10 in US, Europe,

Japan

• Strong pipeline

4

(19)

Bayer 3.1

(5.37) • Organic model, drug

recall setbacks

• Not in any Top 10 list,

Pharma future uncertain

5

(16)

Takeda 2.8

(7.37) • Organic growth model

needs to change to

M&A

• Ousted from Japan’s No 1

• Not in US /Europe Top 10

• Weak pipeline



Takeda has to look at strategic acquisitions in Japan, Europe or US for size, spread and

reach which can help regain the No 1 rank in Japan, catapult them to within the Top 10

in the World and ensure a major presence in US and Europe. Such strategic moves can

propel Takeda to being a premier world player as in the 1980s, but will it take the

plunge?

Since 1985, 22 out of 24 major M&A pharma deals have been intra-country or intra-

continent. The ideal acquisition can be a company that can provide R&D synergy, a

strong pipeline, major presence in key therapeutic areas and markets where Takeda is

not strong. Companies that fit these requirements are present, but are they willing to

court, and is Takeda willing to propose?

Conclusion As the 224 year old Sumo, Takeda wrestles its way into the west, can it grapple with the

existing key issues to climb back into the higher echelons of the world pharma market

as a Yokozuna (highest ranked wrestler) or will it be a sumotori (ordinary wrestler)?



Amit Rangnekar is pursuing a PhD in Business Strategy from NMIMS- Mumbai, where he is also

a visiting faculty in marketing. Equipped with a Masters in Marketing Management from

Mumbai University and 15 years of progressively responsible pharmaceutical industry

experience, his research interests revolve around the key dynamics and demographics, affecting

pharmaceutical strategy and performance. Email- [email protected]



List of Tables and Charts List of Tables

Table 1- Takeda’s Track Record, 2001-2003

Table 2- Therapeutics 2001-2003

Table 3- Portfolio of Key Brands

Table 4- Takeda Pipeline

Table 5- Takeda’s Sales Spread and Profitability- 2004

Table 6- Top 10 Pharma Companies in Japan- 2003

Table 7- Top 3 Ranks in Japan- The changing order

Table 8- Foreign Ownership in Japanese pharma companies- 2002

Table 9- Major Pharma M&A activity in Japan from 1983 – 2005

Table 10- World’s Top 5 Pharma companies of 1987; Status in 2004

List of Charts Chart 1- Takeda Therapeutic Profile 2003

Chart 2- Takeda Sales by Region (Bn Yen)

Chart 3- Takeda Business Spread-2003 (Bn Yen)

Chart 4- Regional Pharma Market

Chart 5- Japan Pharma Market



Bibliography and References

• Takeda website-

www.takeda.com

• Takeda Annual review- 2001 to

2004

• Contract Pharma

• IMS Annual Review- 1999 to

2004

• Scrip

• Datamonitor

• PhRMA

• Forbes

• Fortune

• The Economist

• Pharmaceutical Field

• Pharmaceutical Executive

• WoodMac

• MedAdNews

• Medical, Marketing and Media

• PharmaWatch

• Pharma Monitor

• Chiltern

References

• Takeda snapshot- pharmaceutical executive- annual review, 2001 (pp64), 2002

(pp47), 2003 (pp 64),

http://www.datamonitor.com/29cc106ac2434b4faef64b7006c5ad5b/products/free

/company report/cshc1191/020cshc1191.htm

• Pharmaceutical executive-annual review, 2003 (pp64)

• www.contractpharma.com contractpharma.july/august,2004 (pp93)

• Maurer Reed P., Nippon pharma promotion, Shiltern Intl, 2003

• http://www.worldmarketanalysis.com/wma_sample_pages/site_pages/WMHSam

pCompReportSO.htm

• Western sumos wrestle into japan, http//www.ims-

global.com//insight/news_story/0404/news_story_040430.htm

• Tong A., Asian chemical news, 11/29/2004 vol11, issue 470, pp6, 1p,

http://202.221.217.59/print/business/nb02-2004/nb20040225a1.htm

• The Japan times: Feb.25,2004,

http://www.drugresearcher.com/news/news/ng.asp?id=52369/yamanouchi-

fujisawa

takeda- a sumo wrestles into the west

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