Are Mergers the Right Medicine for Japan's Pharmaceutical Industry?
20 October 2002
By Dr. Richard Rapp
In an October speech in Tokyo, NERA Special Consultant Dr. Richard Rapp told members of the Japanese pharmaceutical industry that mergers among multinational drug companies have met with mixed success. Dr. Rapp offered his insights in response to the Japanese government's recent prodding of the domestic industry to think of M&A as a means to achieving world-class competitive scale. As multinationals have diminished in number and grown in size over the past decade, Japanese drug companies, to date, have prospered by staying small and focusing on the home market. Although there are hundreds of Japanese drug-makers today, few are world-scale players; in fact, the largest among them ranks just 15th in the overall industry by revenue size. With the multinationals making substantial incursions into what is the world's second largest market for prescription drugs, can domestic prosperity continue without a shift in strategy?
Dr. Rapp noted that many mergers disappoint because managements underestimate up-front costs in their optimism over a deal. A hefty premium in an acquisition price and unexpectedly large integration costs bury many a merger in a deep financial hole before the new, combined firm makes its first pill. For an acquisition to create shareholder value, cost saving and revenue gains must outweigh the initial costs of the deal. Managements know this - they have made a habit of paying for mergers partly by one-time staff cuts equaling between 10 and 20 percent of the acquired firm's work force.
Revenue gains, Dr. Rapp observed, are far less certain than one-shot reductions in force. Research synergies are hard to document. Mega-scale hardly seems necessary for successful R&D - relatively small Japanese firms have made important strides by successful R&D combined with marketing partnerships to reach foreign markets. Multiple mergers in the drug business may best be explained by the need for mega-scale to buffer the swings of fortune in giant drug development projects and patent expirations, but market data does not clearly support that view. So while there may be drug company mergers in Japan's future, it's hard to see a clear path for the industry that does not involve high risk and staff cut backs, which would be most unusual in that country.
