Japanese drug makers, sitting on piles of cash, have been one of the most aggressive industries turning to costly acquisitions in order to combat the earnings blow of patent losses and lower drug prices. So how have they done? Bloomberg NewsIf the latest earnings figures released this week are any indication, Astellas Pharma Inc., the No. 2 drug maker by market capitalization, is clearly ahead of the pack, beating the industry-wide downturn with a bullish projection of a 26% gain in full-year net profit.
In 2010, Astellas bought U.S. drug maker OSI Pharmaceuticals for $4 billion, raising its initial offer by more than 10% to gain long-sought access to the U.S. market and cancer treatment. The sweetened deal may have been worth it: For the latest nine-month period through December, Astellas saw the sales of OSI’s Tarceva cancer drug jump 55%. To be fair, M&A strategy is only part of Astellas’s success story. The company has also been aggressively controlling costs to fend off lost revenue from expired patents. But as Chief Financial Officer Yasumasa Masuda says, “The growth drivers are starting to come to life.” On the other end of the spectrum is No. 3 drug maker Daiichi Sankyo Co., whose M&A has been a grim lesson in the perils of poor due diligence, analysts say. Just three months after Daiichi Sankyo bought a majority stake in Indian generic drug maker Ranbaxy Laboratories Ltd. in 2008, the U.S. government slapped an export ban on more than 30 of Ranbaxy’s generic drugs for alleged manufacturing violations at two of its plants. More than three years after Daiichi Sankyo’s purchase, the costs continue to outweigh the benefits. The company expects a 79% plunge in full-year net profit due to the $500 million provision Ranbaxy set aside to settle any liabilities resulting from a probe by the U.S. Department of Justice into whether the firm manufactured substandard generic drugs. Ranbaxy finally reached a settlement with the U.S. government, only after agreeing to stringent requirements, including the loss of exclusivity on three pending drug applications. Analysts have pointed out that the $4.6 billion Daiichi Sankyo paid for the stake in the Indian firm seems expensive, particularly considering all the troubles it’s had. Investors are certainly disgruntled with Daiichi Sankyo’s share price, which has fallen more than 50% since the 2008 purchase. The fact that Daiichi Sankyo missed warning signs on Ranbaxy is also ironic, since Japanese firms have long been known for being extra careful about how they use their large stock of cash.
All eyes are now turning to the Japanese pharma giant Takeda Pharmaceutical Co., which grabbed headlines last year with a $13.7 billion mega-deal to buy Swiss drug maker Nycomed. For now, the initial costs are large, as Takeda pushes through streamlining efforts in Europe and the U.S. to integrate Nycomed. Those costs are expected to nearly halve its full-year net profit. But as an early positive sign, Takeda saw emerging market sales more than quadruple following the integration of Nycomed’s earnings from the October-December quarter.