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Japan poised for merger

Analysts are predicting a wave of pharma M&A activity in the Japanese market after reports suggest that Sankyo and Daiichi are set to merge.

Analysts are predicting a wave of pharmaceutical M&A activity in the fragmented Japanese market, after reports in the local media that two of its top 10 drug companies are set to merge.

Shares of Sankyo, Japan's second largest company in terms of sales, and Daiichi Pharmaceutical, the No. 6 company, rose on February 21 following speculation that they were progressing in merger negotiations. A tie-up between the two companies would form the country's second-largest pharma company by sales, following Takeda.

Pharma analyst Mitsuo Ohmi, at JP Morgan Securities Asia, said the M&A trend would continue: ìMassive consolidation in the pharmaceutical industry in Japan is unavoidable.î

Spokesmen for both companies were remaining tight-lipped, neither confirming nor denying that they are in merger talks. Each company said it is looking at its options for future growth, including partnerships, but that no decisions have been reached.

Both Japanese firms currently rely heavily on one key product ñ Sankyo's cholesterol treatment, Mevalotin, accounted for 34 per cent of annual sales to last March, while Daiichi's antibiotic agent, Cravit, represented 21 per cent of its sales.

ìThe news is positive as the merged company would be able to increase its spending and focus more on R&D,î said Tomoichi Isobe, analyst at Yasuda Asset Management

However, many analysts remained sceptical about the potential benefits of any merger, saying that the marriage of two firms with weak growth prospects was a cause for concern. Moreover, the two firms have little product overlap ñ Sankyo specialises in cardiovascular and metabolic disorder treatments while Daiichi's main franchise is in allergy treatments.

ìIt is difficult to gauge whether they would end up as winners within the industry, or simply survivors,î wrote Goldman Sachs analyst, Kenji Masuzoe, in a recent report.

The Japanese drug market is the second-largest in the world, but one that foreign companies have found a tough nut to crack as strict domestic regulation has prevented them from winning quick approval for major products.

However, an increasing multinational presence in the market coupled with deregulation is putting pressure on domestic companies to improve their competitiveness and merge.

Last year, Yamanouchi and Fujisawa announced a $7.7bn deal that will create a new company Astellas Pharma in April. A merger between Sankyo and Daiichi would leapfrog Astellas in terms of size.

30th September 2008

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