Connecting Japan to 'flyover Country'

Flyover country. what sounds like a remote island actually refers to the U.S. region that busy Japanese pharmaceutical and biotech businesspeople frequently forget in their deal-making on the East and West Coasts. Flyover country is the Midwest.

The Japan External Trade Organization (Jetro), a government-affiliated trade organization, believes the Midwest can move from "flyover country" to "fly-to country" for Japanese companies seeking collaborations such as proof-of-concept partnerships or codevelopment work. One Midwest advantage: a less costly environment than other U.S. biotech hubs.

Many Japanese companies have stakes on both coasts, says Tomoharu Washio, chief executive director of Jetro's Chicago office, which covers 12 midwestern states. But Japanese pharma and biotech executives have told him frankly about the arrogance they encounter on the coasts, where companies prefer to be visited rather than travel to Japan.

Japan has its own flyover region. As Washio explains, U.S. businesspeople often focus on Tokyo and neglect regions like Kansai, home to Kyoto, Osaka, and Kobe. These cities, where many small and medium-sized companies are located, are "biotechnology zones," areas selected by the Japanese government for intensified life sciences activity. Osaka and Chicago also have been sister cities since 1973, a relationship that helps to foster bonds beyond the common sentiment of feeling a bit outshined by neighbors.

In Washio's view, region-to-region cooperation offers an "international window of opportunity" to enhance the biotechnology sectors of the Midwest and the Kansai region. The idea has led to a growing number of activities--symposia, meetings, organized visits--linking life sciences clusters in Japan and the Midwest.

Having Jetro as a mediator offers an advantage, says Masakazu Kobayashi, senior vice president and director of research at Fujisawa Research Institute of America in Evanston, Ill. The biotechs are first screened before he receives information, which he then transfers to R&D headquarters. Kobayashi is also chairman of Fujisawa Investments for Entrepreneurship, a fund that offers seed financing to start-ups.

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The View From Fujisawa

Masakazu Kobayashi is senior vice president and director of research at Fujisawa Research Institute of America in Evanston, Ill.. He is also director of Fujisawa Investments for Entrepreneurship, a $7.5 million fund with money from Fujisawa and Orix Capital, a Japanese venture-capital (VC) firm. The fund offers seed financing to biotechnology start-ups with grants up to $500,000. To date, Fujisawa has invested $5.2 million in 11 biotechs in the U.S. through this fund.

Kobayashi and his colleagues stay on the lookout for early-stage collaborations that could benefit Fujisawa’s drug discovery activities. “Regardless of the location of the headquarters, pharmas and biotechs are interdependent and boundaryless,” he says. Cross-licensing and research collaboration between pharmas and biotechs “is absolutely necessary to keep a good pipeline portfolio.” Ideas that lead to choosing a good drug target “may not come from a hierarchically well-established organization, but from a new biotech company with a free mind for research work, sponsored by future-minded VCs,” he says. “That is in the U.S., not in Japan.”

The U.S. biotech landscape, for example, offers advances that can “bring more cost-effective research work” to his company. Kobayashi evaluates biotech firms by looking for novel ideas along with proof to back up claims about a given technology or approach. “We need [to see] real fruits coming out of a technology platform for us to consider it seriously,” he says. Fujisawa has defined its areas of interest to include transplantation medicine, anti-infectives, dermatological disorders, and cardiovascular diseases.

In the past, Japanese pharmaceutical companies often chose to partner in later drug development stages. That is changing, he says, and Fujisawa has been outsourcing more than 70% of its early-stage R&D activities. Later-stage development—the clinical evaluation and optimization of a lead compound—is mainly done in-house. Entrepreneurship has not yet matured in the Japanese biotech industry, Kobayashi says. He sees much biotech hype in Japan at the moment, with companies being valued higher than their true worth.

IN 2002, Jetro launched the Kansai-Midwest Biotechnology Initiative, which brought Midwest and Japanese executives together for six biotech symposia and included a so-called BioMission to Osaka. It followed up with the Kanto Midwest Biotechnology Initiative, including a BioMission last fall of 120 biotech executives, technology transfer specialists, and researchers to companies in eastern Japan including Tokyo. For $900 excluding airfare, BioMission participants accompanied by interpreters went on lab tours and had one-on-one meetings with pharmaceutical and biotech executives.

Peter T. Kissinger, chief executive of Bioanalytical Systems, West Lafayette, Ind., was one participant. His company manufactures scientific instruments for in vivo diagnostic products and applications in electroanalytical chemistry. The firm also does contract analytical work, helping pharma and biotech companies move projects toward Food & Drug Administration approval or "often, to cancel them before too much has been invested," he says. Kissinger believes his company will benefit from the trend by pharmaceutical firms to outsource more R&D work as they face new cost realities. For the fiscal year ending on Sept. 30, 2004, contract services made up more than 65% of his company's revenues of $37.2 million.

Kissinger, who has been selling instruments in Japan for 25 years, says the BioMission was "very helpful, well planned, carefully structured, and economic." It offered insight into the general economic situation in Japan as well as the life sciences equipment market. While he could find additional Japanese contacts on his own, "Jetro conveniently opens doors," he says.

Nalini Motwani, chief executive of the Detroit-based biotech firm ApoLife, also went on a BioMission. Her previous contacts in Japan were "very minimal." Although she was looking for customers who might want to license her technology, she admits she would not have traveled there on her own. ApoLife has developed a proprietary expression system for cost-effective production of recombinant proteins and has been working with pharmaceutical companies in the U.S.

Although Motwani can't divulge its name, representatives of a large Japanese pharmaceutical company on the BioMission expressed interest in her technology. She also encountered a Japanese research group that has just formed a spin-off with a technology she is keen on. "We have offered that we will codevelop with them," Motwani says, adding that she has signed a confidential disclosure agreement with the Japanese firm. "It is great for one meeting to move things so far," she says.

The BioMission showed her that "U.S. biotech is very advanced." Just about everyone in her company has worked in biotech for about 20 years, which is a longer tradition than most Japanese biotech companies enjoy, she says.

Michigan has been actively trying to grow the life sciences industry, now more than 540 companies, through the Michigan Life Sciences Corridor Initiative, administered by the Michigan Economic Development Corp. But the Midwest is more readily known for big companies such as GM, Ford, and K-Mart, Motwani says, and "they talk in the language of billions." In the Midwest, biotechs with a value of $100 million or $200 million are not as readily grasped as on the East or West Coast, she says. "It is a different culture."

"What is still lacking in the Midwest," Kobayashi says, "is the infrastructure for biotech entrepreneurs." That means, for example, intellectual property lawyers and venture capitalists. Despite this drawback, he sees much of interest for Fujisawa in the Midwest.

Japanese life scientists are interested in expanding academic-industrial partnerships. Universities long held fast to an ivory tower identity, but the mood is changing, Washio says. The 1999 Law on Special Measures for Industrial Revitalization, the Japanese equivalent of the 1984 Bayh-Dole Act, which permits transfer of new technology from university laboratories to the private sector, is propelling change and letting Japanese academics pursue commercial ventures outside of their research institutions, including partnerships with U.S. companies.

The next BioMission will include the Japanese prefecture of Chiba, which is currently creating a biotech cluster and is Wisconsin's sister-state. A further initiative from Jetro Chicago will be "virtual missions." Company profiles collected in Chicago will be sent to other Jetro offices around the world for distribution to potential biotech business partners. Washio calls this approach "a kind of group dating."