The Japanese are coming

Japanese drug companies are taking unprecedented steps to make a home in the U.S., and if he were alive, Jokichi Takamine would probably be thrilled.

Takamine, a chemist and Japanese national hero known as his country's Thomas Edison, spent much of his life, which straddled the 19th and 20th centuries, in the U.S. In the 1890s, his work with a fungus to create a fermentation process for an Illinois brewery led instead to a digestive aid that helped launch one of Japan's oldest drug firms, which Takamine would later lead, and also lifted the early fortunes of an American pharmaceutical icon, Parke, Davis & Co.

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But his coup came a few years later. With help from Parke Davis, Takamine established in 1898 his own laboratory on East 103rd Street in New York, where he and a Japanese assistant extracted pure hormone from the adrenal gland: adrenaline. It became a medical sensation, and Takamine and Parke Davis reaped the rewards. Attacks on the patents over the next decade were eventually rebuffed, which also set a famous precedent in patent law.

You don't need to be a chemist or patent expert to recognize another of his contributions: Takamine was instrumental in helping bring the now-famous cherry trees to Washington. One hundred years later, with Washington's cherry blossom festival as American as supermarket sushi, Japanese companies are scouting for deals, hiring scientists and hoping to take root in the United States just as deeply.

Some Japanese drug firms have surely been here a long time. But the past two years have brought a wave of expansion through acquisitions, licensing deals and organic growth as top firms, determined to find markets more lucrative than their stagnant domestic situation, look to the West and in particular the U.S., the world's largest prescription drug market, with $286 billion in sales last year, according to IMS Health Inc.

It all starts with Takeda Pharmaceutical Co. Ltd., Japan's largest drug firm. With ¥1.4 trillion ($14 billion) in 2007 annual sales, it claims a top 20 spot worldwide as well, putting it roughly on par with Schering-Plough Corp. and Amgen Inc., and slightly behind Bristol-Myers Squibb Co. and Eli Lilly and Co. In May, it closed the largest deal ever by a Japanese drug firm when it swallowed Cambridge, Mass., biotech Millennium Pharmaceuticals Inc. for $8.8 billion.

Last December, rival Eisai Co. Ltd. made a big splash when it bought Bloomington, Minn., firm MGI Pharma Inc. The $3.9 billion takeout, fueled by considerable debt, showed "an extra level of aggressive intent," says one banker who has worked on deals with Japanese pharmaceutical companies.

According to research firm Dealogic, Japanese life sciences firms spent nearly $4.5 billion on U.S. deals in 2007, up from $1.3 billion in 2006 and $375 million in 2005. Thanks to Takeda, the total has already topped $10 billion this year.

That's only part of the story: The figures don't include licensing deals, topped by Astellas Pharma Inc.'s record-breaking $350 million up-front payment in 2006 to FibroGen Inc. for the rights to two experimental oral-dose anemia drugs.

And some firms are expanding in the U.S. without dealflow. Daiichi Sankyo Co. Ltd., Japan's third-largest by sales, is the product of a 2005 megamerger of two century-old firms (Sankyo was founded in 1894 with Takamine's digestive aid as its main product). Integration took two years and kept the firm out of the recent frenzy until now. It made its first purchase outside Japan, German biotech U3 Pharma AG, in May for $235 million, and on June 11 it said it would buy a controlling stake of India's largest drug firm, generics maker Ranbaxy laboratories Ltd., from its founding family for at least $3.4 billion.

Is it a prelude to a stateside deal? Officials demur, saying they have focused on boosting New Jersey-based commercial staff by 50% in the past year, to 2,200, partly to prepare for possible Food and Drug Administration approval of prasugrel, a blood-clot dissolver that's shown promising head-to-head results against market leader Plavix. Daiichi Sankyo shares rights to prasugrel and splits costs and profits in the U.S. with Eli Lilly.

As with any cross-border business, there are differences in culture and business philosophy. With Japanese-American relations, the differences tend to be mythical, sometimes important, often subtle and frequently overblown. It's still good form to lovingly inspect a business card, and people still address each other with the "-san" honorific. (How many American workers still call each other by "Mr." and "Ms."?) And protocol can sometimes be puzzling. One executive of a North Carolina biotech remembers when a Japanese company, paying for his firm's services including rights to the intellectual property the work generated, insisted the biotech's lab data be bound into the Japanese company's notebook. It wasn't a big deal, but it was unusual protocol.

Such differences start to add up, however, and raise a larger question: As Japanese companies base more of their crucial functions abroad and seek global revenue streams, when do they cease to be Japanese? For better or worse, capitalism moves faster in the U.S.

Can the Japanese way of business -- diligence, deliberation, consensus -- make it here? What happens when turbocapitalism meets "ringi-sho," the inclusive and -- to Western minds -- painstaking Japanese decision-making process?

During the auto wars a generation ago, Japanese rumination about opening plants in the U.S. was driving Henry Ford II up the wall. In 1980, he told Time magazine, "You can study something to death. At some point, they must make up their minds." Such complaints, given what has happened in the auto industry, are comical in retrospect.

In her description of negotiations with Takeda, Millennium corporate development chief Anna Protopapas says such a style has its value. "They deliberate more than others might and really like to think through decisions, but once they make a decision," she says, things move quickly.

The drug industry as a whole is facing huge problems, and the Japanese are not immune. With Western behemoths in retrenchment mode -- at least 50,000 layoffs since early 2007, according to the Newark, N.J., Star-Ledger's Pharmalot blog -- one would think the Japanese would soon bump up against reality, American-style.

But in Japan, layoffs are rare, and loyalty across the corporate structure is prized. Takeda global research chief Shigenori Ohkawa has spent four years building a network of research labs, two in California, one in England and one in Singapore. By thinking long term and avoiding rapid growth for its own sake, he says Takeda doesn't worry about layoffs in the U.S. either. "We like to keep the quality of the science and good talent, and we'd like to keep it for a long time. That's our concept."

Joseph Pieroni, who runs Daiichi Sankyo's U.S. commercial operations, has worked with and for the Japanese for more than a decade. Other than two now-retired employees, he says every direct report under him has been with him since 1998 when he joined a joint venture formed by Parke Davis and Sankyo. The joint venture, which Sankyo bought in 2001, was the latest chapter in a relationship that stretched back to Jochiki Takamine. After World War II, Parke Davis helped Sankyo get off the ground with a license to the antibiotic Chloromycetin. "There's a different sense of loyalty, accountability and responsibility," Pieroni says. "There's a lot of trust. It's the philosophy of [CEO Takashi] Shoda-san to let locals run the business and not have ex-pats at the top."

There are exceptions to the hands-off approach. Eisai is shuttering MGI facilities in Baltimore, Bloomington, Minn., and Lexington, Mass., the latter with 80 employees. "Japanese companies aren't shy about laying off people in the U.S.," says Reed Maurer, a Big Pharma veteran who has lived in Japan since 1970 and is now a consultant. "But they're shy about it in Japan."

For now the argument to expand is stronger. First, there's the situation in Japan. It's the second-largest national drug market behind the U.S. at $58 billion last year, but the government mandates price cuts every two years. In April, the latest round slashed reimbursement an average of 5.2%, which hit some drugs and companies far worse than others. Adding to the pressure, recent regulatory shifts allow foreign firms to operate more freely on Japanese soil. Those with the wherewithal are spreading their bets. Takeda already pulls in more than half its revenue from abroad. Others want to follow suit, and the weak dollar makes it easier. Research firm Windhover Information Inc. estimated Takeda would have paid 15% more for Millennium a year earlier. Personnel are not only cheap (or cheaper) but plentiful. "It's easier to build in the United States than in Japan," says Maurer. "It's hard to get people in Japan, but you put an ad in the San Francisco Chronicle for positions and you're swamped the next day."

Japanese firms are in the same bind as their Western counterparts. Their old products face generic competition, and they'll pay dearly for new ones.

In this, strategy trumps finance. "To Europeans buying real estate in Manhattan, that 10% [currency] advantage can be huge," says Alex Scott, an American who runs Eisai's U.S. business development. "But with us, it doesn't tip the scales toward a deal we would or wouldn't have done."

Eisai's biggest product, the Alzheimer's drug Aricept, loses its U.S. patent in 2010. With revenue from MGI's cancer drugs, Eisai thinks it can recover quickly and has set its 2011 revenue target at $4 billion, Scott says. Last year the firm booked more than $7 billion in sales.

Takeda's two biggest sellers, the ulcer drug Prevacid and the diabetes treatment Actos, face generic competition in 2009 and 2011, respectively. They tallied more than $5 billion in sales last year. More than half Takeda's current sales are at risk before 2012, according to Lehman Brothers Inc. research.

Not all Japanese firms are equally strapped. Daiichi Sankyo, with only 25% of sales at risk from generics through 2012, is far from "the edge of the patent cliff," says Pieroni. "We're not desperate to make a move."

In particular, the Japanese are playing catchup in two areas. The first is cancer. Spurred in part by a governmental program akin to the Nixon administration's 1971 "War on Cancer," several companies are redirecting their resources. Takeda paid dearly for Millennium not only to capture the revenue from its blood-borne cancer treatment Velcade, but also for its clinical and regulatory expertise. Millennium is now officially Takeda's global oncology center.

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Second, the Japanese are keen on monoclonal antibodies and other protein therapeutics that in the past decade have become the foundation for a rising group of companies, led by Genentech Inc. Patents also play a role, since proteins are harder to copy and mainly unexposed to generic competition, or "biosimilars" in drug-speak.

Eisai and Astellas have paid hundreds of millions of dollars for low-profile companies. Daiichi Sankyo's German acquisition specializes in cancer-related antibody therapeutics.

At Takeda, the situation is more intriguing. Now its U.S. crown jewel, Millennium has antibody R&D in-house, but Takeda research chief Ohkawa says he doesn't know much about it, despite at least a year of discussions that preceded their merger.

If that's true, Millennium's antibody program must not have been high on Takeda's list of reasons to buy the firm. Millennium's Web site describes the program as mainly focused on payload-related antibodies, which deliver a radioactive or chemotherapeutic charge to tumor cells. Only a few such antibodies have come to market, and with limited success.

Takeda's new center for antibody research instead will be in South San Francisco, Calif., in a nondescript facility within walking distance of Genentech's sprawling campus. Despite the billions of dollars in acquisition and licensing Takeda has deployed the past two years, this research site, called Takeda San Francisco, could become the most interesting bellwether of its U.S. expansion.

Of all the Japanese companies, Takeda is the oldest, founded more than 225 years ago. It has the most cash and plans to spend it. "They've also got a certain chutzpah that the others don't," says Alastair Riddell, the CEO of Stem Cell Sciences plc in Cambridge, England. Riddell sold his previous firm, Paradigm Therapeutics Ltd., to Takeda in March 2007 for an undisclosed sum. "They're trying to be an international company, and they need to acquire an international workforce."

That brings to mind Japanese firms who vaulted the Pacific a generation ago. Despite American xenophobia, when U.S. autoworkers smashed Japanese cars and embattled TV maker Sylvania aired derogatory ads, some soon excelled and enmeshed themselves into the American way of life.

The recent expansion starts from a different baseline. Today's consumers -- of TVs, cars, drugs -- have grown up in a global marketplace, and the objects of American worry have changed. There has been political hand-wringing about sovereign wealth funds, legitimate worries about overseas sources of food and drugs and arguably xenophobic applications of foreign investment rules on acquisitions by Chinese and Middle Eastern buyers. But the Rising Sun paranoia of the 1980s now seems a strange relic.

Takeda first arrived 30 years ago to set up a recently ended joint venture with Abbott Laboratories, near Chicago. (The companies dissolved the JV, known as TAP Pharmaceuticals Products Inc., earlier this year after long-running rumors that Takeda would buy it out. Terms weren't disclosed.) Current president Yasuchika Hasegawa ran TAP for several years before returning to take charge in Tokyo.

Such time spent in the West is becoming less of a strategic advantage as English-speaking executives rise elsewhere, too. Riddell says Hasegawa, when he finally came to England to discuss the Paradigm acquisition, was comfortable enough to crack jokes in English.

Eisai CEO and company scion Haruo Naito went to business school at Northwestern University near Chicago, and many of his employees do the same. Another faction at Eisai prefers Duke University.

There are still the linguistic clunkers -- the English version of Takeda's 2007 annual report has a section called "The Special Feature in the U.S. Business Operation" -- but dealmakers in the West insist the top Japanese pharmaceuticals have closed the language gap. And by expanding their footprint, they've also made less necessary a former fixture: the middlemen or agents who take clients, often small biotechs, on meet-and-greet tours of Japanese firms.

However, not all firms have such extensive U.S. experience, and their moves are more tentative. Ono Pharmaceutical Co. Ltd., respected for strong science and novel drugs, recorded $1.46 billion in annual sales last year, nearly all in Japan. It has no sales force in the U.S., but it has moved its global offices for clinical development and discovery research alliances to Princeton, N.J. To oversee the operation -- dubbed Ono Pharma USA Inc. -- headquarters in Osaka recently sent Shozo Matsuoka, the first Ono executive ever to live outside Japan. Matsuoka joins about 40 employees including U.S. business development chief David Richey, a pharma veteran old enough to remember meeting Eisai's Naito on a flight when Naito was studying at Northwestern. "It's a big gulp for Japanese companies to have functional decisions made in the West," says Richey.

Ono is also loath to do M&A with its domestic counterparts, but it's a tack observers say is necessary for the smaller firms such as Ono, Shionogi & Co. Ltd., Otsuka Pharmaceutical Co. Ltd. and others to make a big push beyond Japan. The most recent domestic merger has Kirin Holdings Co., parent to the brewer as well as a drug unit with biotech experience, buying a slight majority of Kyowa Hakko Kogyo Co. Ltd. for ¥1,500 a share. Their combined biotech expertise could prove interesting beyond Japan. As for foreigners buying Japanese firms, it doesn't happen, for cultural reasons. The only two of note were structured to appear more like partnerships.

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Takeda doesn't need domestic mergers thanks to the cash flow from its blockbuster sales. But as those drugs head into the sunset, much of Takeda's recent expansion is aimed at building long-term research. Its first research facility outside Japan came though the $270 million purchase of Syrrx Inc., a San Diego biotech with expertise in three-dimensional protein structures. (The more you know about a protein's structure, the easier it is to design a drug to fit the target it displays.) A drug discovered at Syrrx has shown promise as a type 2 diabetes treatment.

Last year, Takeda bought Paradigm, which specialized in "knock-out" mice that have specific genetic traits removed. One of Paradigm's mouse research projects was so compelling the New England Journal of Medicine in 2003 set aside its policy of publishing only clinical (i.e., human) research.

Takeda also has established two research centers from scratch, one in Singapore, the other the San Francisco antibody lab that within a couple of years will house 100 employees, mostly scientists.

Ohkawa calls the antibody lab and the other research sites IND engines, using industry shorthand for the government approval -- the "investigational new drug" application -- required before a drug can be tested in humans.

When the researchers work up a molecule to where they think it's ready for testing in humans, they will hand it off to the clinical development team at Takeda's North American headquarters near Chicago.

In an interview at Takeda S.F., where a month before workers were installing the revolving front door and much of the site required hard hats, Ohkawa says the antibody team will have the flexibility to license or acquire technology. They'll likely need to. At first the team, run by former Xoma Ltd. chief science officer Mary Haak-Frendscho, will work on full antibodies and fragments, a field well staked out.

Takeda has already cut license deals with Xoma (that's how it got to know Haak-Frendscho) to gain access to necessary patents, but the "stack" of patents in the field is high. The license fees and royalties companies pay is one reason many firms have looked beyond antibodies to new proteins. Such firms, if the science is judged promising, have become hot properties. One example is Adnexus Therapeutics Inc., a Massachusetts firm that Bristol-Myers bought last year for some $430 million.

"That's part of the rationale of being right here in the center of it," says Haak-Frendscho. "We're all pretty well networked, we know the emerging companies and technologies. We can check things out early and have the opportunity to get involved." Asked how much autonomy she has to "get involved," Haak-Frendscho and Ohkawa exchange a glance and laugh, as if they had just been discussing the very topic.

"That's difficult to answer," says Ohkawa. It would depend on the "priority" of the matter.

As the Japanese build more satellites abroad, autonomy is a key question. Takeda took pains to promise the Millennium leadership autonomy and dangled generous bonuses to keep them on board. Those are strong reasons to stay. If they leave, it will speak volumes. "We don't foresee any changes at Millennium," says Protopapas, who is in charge of the transition and integration. "We will be leading the oncology strategy and business development."

Daiichi Sankyo's Pieroni says his business development team can scout for licensing deals and partnerships, but M&A directives still come from Tokyo. "We're not out trolling around [for M&A]," he says.

The promise of autonomy counters the traditional emphasis on consensus, and though slow and steady has won other global races, the competition for breakthrough technology and products in the drug world is fierce. "I've been doing deals with them for 20 years," says Riddell. "Nothing happens fast with the Japanese."

Eisai's Scott disagrees. He says they closed last year's $325 million acquisition of antibody firm Morphotek Inc. in four months from initial discussions.

Arguments about deal speed aside, Japanese studiousness -- as Henry Ford II found out -- could play a pivotal role as the industry continues its shift toward drugs based on proteins, so-called large molecules. "As we move into the large-molecule era, there will be increasing emphasis on manufacturing," says Iain Cockburn, a Boston University economist who specializes in pharmaceuticals and healthcare. "It's as much about manufacturing as designing [the molecule], so to the extent you need to be heavily invested and have huge manufacturing skills, these are things the Japanese excel at. They have the patience and the organizational skills to master the complex manufacturing problems."

Patience. Organization. Plenty of cash doesn't hurt, either. When Jokichi Takamine heard in 1909 that First Lady Helen Taft wanted to beautify Washington's tidal basin with cherry trees, the chemist, enriched from his discoveries and grateful to his adopted country, offered to pitch in. He ordered 2,000 trees, but when they arrived the next January they were infested with insects and nematodes, according to National Park Service historians.

President Taft ordered the trees burned, and his secretary of state, finding himself in a delicate diplomatic moment, had to express his country's "deep regret." Undeterred, Takamine gave it another go, this time selecting hardier stock from a famous grove in Japan and putting it through special graft procedures. Two years later, 3,020 more trees arrived and were planted around the nation's capital.

Some are still there, nearly a century later.

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