Round-Up of Japan's H1 Highlights Sluggish Domestic Growth and Cost-Cutting

As the Japanese pharmaceutical industry recovers and repositions itself from the April 2006 price cuts, which averaged at 6.7%, Global Insight takes this opportunity to review the main top-line and bottom-line results. In overall terms, Takeda is unthreatened at the top of the industry, with 7.1% net sales growth to ¥642 billion (US$5.4 billion). It is followed by the two newly merged entities in Japan, Daiichi Sankyo and Astellas, which both recorded similar mid-to-high single-digit growth patterns to reach sales of ¥486 billion and ¥448 billion. There is a significant jump after the “Big Three” down to Eisai, whose globalised profile from Aricept (donepezil; Alzheimer’s) and Aciphex/Pariet (rabeprazole; gastric ulcer) ensure double-digit growth to ¥319 billion. Elsewhere, Dainippon Sumitomo continues to build critical mass, and the newly merged entity is now the eighth largest drug firm in Japan by pharmaceutical sales.

Japan’s first half of FY2006/07 was marked by a significant decline in revenues from the domestic market, as almost all of the country’s big pharma companies (Daiichi Sankyo, Takeda, Chugai, Taisho, Shionogi and Ono) recorded year-on-year (y/y) decreases (8%, 2%, 4%, 9%, 5% and 6%, respectively). Indeed, those companies displaying significant domestic growth, particularly Dainippon Sumitomo, are doing so because of merger-related comparisons. Only companies with significant overseas sales, such as Daiichi Sankyo, Astellas, Takeda and Eisai, maintained significant growth patterns.

In terms of operating profits, only Takeda records a critical mass and operating margins similar to those seen in the pharmaceutical industry in the United States and Europe. Significant merger-related cost-cutting at Daiichi Sankyo, which is consolidating its prescriptions business in April next year, Astellas, Dainippon Sumitomo and Takeda held up growth in operating profits, but for the most part the industry maintains relatively low margin operations. This is largely due to the continued reliance on old portfolios in the domestic market, where most drug firms have been able to see growth from long-term listed and off-patent pharmaceuticals for many years. Now that the generics industry is gaining shape in Japan, this is no longer the case, and the loss in revenues from drugs such as Gaster (famotidine; Astellas) and Mevalotin (pravastatin; Daiichi Sankyo) indicates that losing patent protection now represents a major milestone.

In terms of R&D budgets, Astellas held both the biggest spend and percentage of net sales, at ¥98 billion and 22% respectively, though this was largely due to one-off licensing fees. Takeda has thus been knocked off the top spot in its R&D budget, which currently stands at ¥96 billion (15% of sales). Daiichi Sankyo’s merged budget stands at ¥85 billion, but at a relatively high 17% of net sales. Japan’s drug industry has been tainted by a number of pipeline terminations in recent months, most notably at Takeda, but also at Shionogi, Daiichi Sankyo and Astellas. This has been a bad year in the R&D department in Japan so far, and few new drugs are reaching the market.

In terms of product sales, there was no change at the top despite the price cuts, with Takeda hypertension drug Blopress (candesartan) maintaining its leadership position on the back of 5% growth. Astellas’ and Pfizer’s (U.S.) Lipitor (atorvastatin) is showing stronger growth, at 9%, and has long overtaken Daiichi Sankyo’s off-patent Mevalotin in second position. Overall, however, cardiovascular drugs remain in strong demand, and growth from pharmaceuticals such as Astellas’ Micardis (telmisartan) indicates that there is still room for more.

Outlook and Implications

Japan’s first half tells of an industry that continues to reposition itself both from the external price cuts, but also from internal developments from the consolidation of 2004 and 2005. It has been quiet on the mergers and acquisitions (M&A) front over the past few months, but several companies are looking to rebrand themselves as generics companies, or have indicated their strong desire for takeover bids. The exception here remains Takeda, although recent pipeline setbacks make it look more fragile then before. A takeover, particularly in the United States, may be on the cards to fill the holes left by these discontinued candidates. Among mid-sized firms, there is little choice but to consolidate or move fully into generics, given the sluggish domestic market, and we expect to see more activity here in the second half.