Sankyo & Daiichi to merge?

Business information company, Datamonitor are reporting that Sankyo Co. and Daiichi Pharmaceutical are considering merging in October 2005 to become Japan's number two drug-maker as competition in this market intensifies. This follows the announcement of mergers between Yamanouchi and Fujisawa, and Dainippon and Sumitomo.

Datamonitor says that Sankyo is expected to take the lead in the planned integration by putting up more than half the capital of the resulting holding company, although neither company has yet confirmed their intention to merge. Although there is some speculation on the resulting company maintaining Sankyo's number two position after Takeda in the short to medium terms, Datamonitor believes that operations from Astellas will steadily move up to top position by 2010, with the resulting merger between Sankyo and Daiichi gaining third place after Takeda, as Astellas becomes the leading Japanese global operator.

Driving factors

Some of the key factors driving the potential merger and thus further consolidation among Japanese players, such as Sankyo and Daiichi, are that they are coming under increasing competitive pressure from large western pharmas operating in their domestic market and the high level of maturity among domestic players unable to overcome the effect of reimbursement price cuts.

As a result, companies are adapting their strategies to tackle these issues. Sankyo and Daiichi are thus turning to consolidation in the hope that they can fortify their international position by optimising the use of their global sales force to maximise the scope of their product offering in the AIID (arthritis, inflammatory and immune disorders), cardiovascular and infectious disease areas by capitalising production, r&d and marketing resources. The proposed merger gives Daiichi a better international reach as Sankyo has increased the number of sales staff in the US to more than 600, adding to Daiichi's 180 US representatives. However, the sales force will still be smaller than a number of companies, including Takeda, which has 4,000 US sales representatives, while Fujisawa has a total workforce of 800 people in this market alone.

Being 34%-owned by foreign investors might already be seen as an additional opportunity to establish strong alliances with foreign players and best exploit global growth opportunities for both companies. However, Sankyo's development pipeline potential, liquid resources, and key sources of high-value revenues, such as the hypertension treatment Benicar (olmesartan), forecast to generate revenues of $1,263m in 2010, make it an attractive target for a foreign pharmaceutical giant, potentially throwing overboard Daiichi's growth prospects through consolidation.

Over the last few years, Sankyo's and Daiichi's growth has relied heavily on in-house products to achieve sales growth, with over 77% of 2003 ethical sales for both companies derived from proprietary products. With declining licensing opportunities from top western pharmas entering Japan alone with most innovative products, maintaining an organic-growth-based strategy is the best choice to maximise revenues, further driven by new regulations on outsourcing manufacturing that come into force in April 2005 helping minimise operating costs to achieve higher profit margins.

The merger presents the opportunity for Sankyo and Daiichi to boost r&d productivity, with current joint pipelines providing 13.5% of companies' revenues in 2010, despite having only one high potential pipeline product, Daiichi's compound Plavix (clopidrogel). Plavix is currently in registration in Japan and sold elsewhere by Sanofi-Aventis, the originator. It is forecast to generate over $250m in 2010. The result of the merger will be to broaden the companies' therapeutic expertise in high-profit margin areas such as Alzheimer's disease and urology, where Daiichi is focusing its pipeline as potential fields of innovation and high-revenues. It will also provide the resulting company with three late-stage r&d products in the cardiovascular field to add to Sankyo's expertise and product offering.

Nevertheless, following the merger, the companies will still need to look to further licensing opportunities to maximise the return of currently marketed drugs at a global level, moving away from the dependence on Sankyo's bulk US presence alone. Further m&a activity to achieve technological innovation, successful direct western penetration, future growth and therefore long-term sustainability among the leading Japanese players and global companies is also an option available for the resulting company in the short to medium terms.

symbiotic relationship

The overall result of this merger will position the resulting company in third position among the Japanese players in 2010, just behind Takeda, with revenues of $9,008m, overtaken by Astellas Pharma, expected to record $9,243m.

Prior to the announcement of the merger, Datamonitor had forecast Sankyo's ethical sales to increase at a low seven-year CAGR of 0.6% from $3,852m in 2003 to $4,007m in 2010. Daiichi had a far worst outlook, with sales expected to grow at a CAGR of 0.2% from $2,239m in 2003 to $2,269m. However if the merger goes ahead, Datamonitor forecasts the new company to grow at a CAGR of 0.4% from the two companies' combined sales of $6,091m in 2003 to $6,276m in 2010. As such, the merger presents a quick answer to Sankyo's bleak future and weak pipeline prospects by broadening its product portfolio in the common areas of infectious disease and cardiovascular conditions, while accelerating Daiichi's US market penetration through an extended sales force in comparison.