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Why Japan’s chemical firms still make drugs

They persist in the pharma business, even as chemical companies in the West have mostly exited

by Katsumori Matsuoka, special to C&EN
March 22, 2020 | A version of this story appeared in Volume 98, Issue 11

A photo of a researcher at Mitsubishi Tanabe Pharma.
Credit: Mitsubishi Tanabe Pharma
A researcher at Mitsubishi Tanabe Pharma's labs in Yokohama, Japan

In November, the Japanese chemical producer Asahi Kasei agreed to buy the biotech firm Veloxis Pharmaceuticals for $1.3 billion. It was an unusual move by the standards of the international chemical industry. But not for Japan.

Throughout the 1990s and the first decade of the new millennium, Western chemical companies spent much energy on restructuring. A common move was to sell off pharmaceutical operations. This is what Dow, DuPont, and BASF did, as well as now-defunct firms like Rhône-Poulenc and Hoechst. The moves led to the creation of new drug giants, including Aventis (later absorbed by Sanofi) and Novartis.

Japan went the other way. By and large, major Japanese chemical firms never stopped building up their drug operations. And it doesn’t seem they’re going to. In recent months, several big Japanese chemical producers have made large acquisitions to boost the size of their pharmaceutical businesses.

Japan’s largest chemical producer, Mitsubishi Chemical Holdings, announced its own deal in November, saying it would spend $4.5 billion to buy the 44% of Mitsubishi Tanabe Pharma that it did not already own. Mitsubishi said the move would enable it to improve Tanabe’s R&D capabilities.

And a month earlier, Sumitomo Dainippon Pharma, which is 50.2% owned by Sumitomo Chemical, agreed to pay $3 billion for an 11% stake in Roivant Sciences, a transnational drug developer that operates through a series of subsidiaries with “vant” in their names.

Leaders of Japanese chemical firms are convinced that pharmaceuticals, and health care more broadly, make their companies stronger, even if they make business management more complex.

Asahi Kasei is an unusually diverse firm, with businesses in basic and specialty chemicals, engineering plastics, pharmaceuticals, and residential homes. “Our materials, housing, and health-care businesses at present have limited synergies, but diversity is the strength of Asahi Kasei,” says Shuichi Sakamoto, a director and primary executive officer for health careat the firm. What matters, he says, is that each of the major businesses are internally cohesive.

Second tier
The drug operations of Japan's top five pharmaceutical companies are all larger than those of leading Japanese chemical makers.
Sources: Companies. Note: All figures are for the most recent financial year, converted at the March 13, 2020, exchange rate of $1.00 = 108 yen.
A graph of top Japanese drug companies.

Stock analysts in Japan aren’t as sold on the idea of mixing chemicals and drugs. “Chemical and pharmaceutical operations are quite different from each other, like oil and water,” says Fumiyoshi Sakai, a director of equity research at Credit Suisse Securities in Tokyo.

Mikiya Yamada, a senior analyst in the Equity Research Department of Mizuho Securities, is also skeptical. “Strong synergies are required to put different types of business operations under a single umbrella,” he says. The recent acquisitions by three of Japan’s largest chemical firms may provide high returns, Yamada concedes, but they are also very risky.

The star product of Veloxis, the company Asahi bought, is Envarsus XR, an immunosuppressant used in kidney transplants that Veloxis developed using its own drug delivery technology. The main market for Envarsus is the US, where about 20,000 kidney transplants take place annually, Veloxis says. The medication’s main selling point is that it requires only one dose a day and remains in stable concentration in the blood for a long period of time.

Veloxis isn’t profitable currently, but this fact will change when the firm is part of Asahi, Sakamoto says. He also expects the business to grow its sales by nearly 10 times by 2028, primarily owing to increased Envarsus sales as Asahi increases the drug’s share of the renal transplant market, at 20% currently.

Asahi selected Veloxis as an acquisition target because it wants to focus on therapeutics for immune and neurological diseases. Its existing health-care business harmonizes well with Veloxis, Sakamoto says, and the acquisition provides a stepping stone for expansion in the US.

At Mitsubishi Chemical Holdings, the decision to spend $4.5 billion to buy the rest of Mitsubishi Tanabe Pharma was motivated by a desire to instill a stronger sense of direction in the drug firm and more closely integrate it with the larger Mitsubishi family.

At the same time, Mitsubishi managers view the acquisition as vital to the future of the whole of Mitsubishi Chemical Holdings. “Because of rapid changes in technology and social trends, we felt it was critical not to leave our chemical and pharmaceutical operations as they were if they were to survive competition,” says Hitoshi Ochi, CEO of Mitsubishi Chemical Holdings. “We were afraid both businesses would go through a difficult period unless we took appropriate actions.”

Mitsubishi Tanabe’s sales were $3.8 billion in the fiscal year that ended in March 2019. Although the drug firm has several candidates in its pipeline, it has lagged in commercialization of antibody drugs and gene therapies, which it earlier flagged as priorities. As a wholly owned subsidiary, Tanabe will reach its objectives more easily, managers at Mitsubishi Chemical Holdings argue.

Tanabe isn’t a drug giant, they acknowledge. “We won’t seek blockbusters,” Ochi says. “Instead, we intend to focus on niche therapies in immunology, neurological diseases, and vaccines.”

One such niche is the reparative pluripotent stem cells known as Muse cells. Life Science Institute, a Mitsubishi Chemical Holdings subsidiary, has been conducting clinical trials of Muse cells to treat acute cardiac infarction, brain infarction, and epidermolysis bullosa. If Mitsubishi wins approvals in fiscal 2021, as it hopes, Tanabe will be involved in producing and marketing the new treatments.

Mizuho Securities’ Yamada sees bright prospects for Muse cell treatments. “Mitsubishi Chemical Holdings’ sales of this treatment will amount to more than some $180 million per year in the market for patients with level 6 subacute phase brain infarction,” he says. Yamada bases his estimate on the projected cost of the treatment—$35,000 per patient—and an expected 50% market share.

At Sumitomo Chemical, one reason to acquire the stake in Roivant was the looming 2023 patent expiration on Latuda, a Sumitomo Dainippon psychotropic agent with North American sales of about $1.6 billion. Sumitomo Dainippon has conducted clinical trials of an anticancer agent regarded as a potential blockbuster, but attempts to develop it for pancreas and stomach cancers failed. The firm is now soldiering on with trials for the treatment of colorectal cancer.

The deal with Roivant moved five Roivant-controlled firms under ownership of a new Sumitomo Dainippon subsidiary called Sumitovant Biopharma. Those companies include Myovant Sciences, which Roivant and Takeda Pharmaceutical created in 2016. Myovant is conducting Phase III clinical trials of the compound relugolix as a treatment for uterine fibroids, endometriosis, and prostate cancer.

Roivant’s remaining subsidiaries manage a pipeline of 25 candidates at varying stages of development. Sumitomo’s stake gives it a privileged position to acquire some of those subsidiaries and their drug candidates.

In addition, Roivant has refined a technology that automates the review of data in research papers and US Food and Drug Administration documents to help speed up the identification of new drug candidates. Sumitomo Chemical hopes that Roivant’s know-how will help it “develop digital technology and related human resources and beef up capability to pioneer innovative new drugs,” says Keiichi Iwata, president of Sumitomo Chemical.

Pharmaceuticals, Iwata argues, are one of the foundations of Sumitomo; the others are basic chemicals and electronic materials. “Diversified business operations produce significant synergistic effects, because our new business fields overlap with each other,” he says. “Multiple business operations help keep a corporation resistant to economic fluctuations.” Like Asahi and Mitsubishi, Sumitomo has made expansion of its pharmaceutical operations a strategic company priority.

Stock analysts, however, contend that Japanese chemical firms’ enthusiasm for the drug business is not so much about synergy as it is about escaping the grind of the chemical business in Japan—“the grass always being greener on the other side of the fence,” Credit Suisse’s Sakai quips.

Market prospects in the drug business are good, but succeeding in it is tough. Even pure-play Japanese drug firms struggle, he notes. The prospects of success at companies where the managers have to operate in multiple sectors are even more distant, Sakai contends.

Moreover, Mizuho Securities’ Yamada says, chemicals and pharmaceuticals require fundamentally different financial strategies. “The chemical industry invests in fixed assets, while the pharmaceutical industry focuses on intangible assets,” he says.

And the two businesses vary in other ways. In chemicals, the payback on investment is relatively short. But in pharma, managers must consider payback horizons of 10–15 years. Such differences argue against combining the two businesses, Yamada says.

Japanese chemical firms are able to hold on to their substantial drug operations partly because of differences in how investors in Japan and the West look at chemical companies, Asahi’s Sakamoto argues. “In Japan, there is more emphasis on middle- and long-term business results than in the US and Europe,” he says.

But foreign investors own substantial stakes in many Japanese companies, and they are pushing for more focus and less diversification. For example, Independent Franchise Partners, a British investment fund, is pressuring the Japanese brewer Kirin Holdings to divest its pharmaceutical operations and focus on the beer business. It could be that, even in Japan, the days of keeping chemicals and pharmaceuticals under one roof will not last forever.

Katsumori Matsuoka is a freelance writer based in Japan.


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