Law firm interviewed: Nishimura & Asahi 

Shackled by a shrinking population and weak domestic demand, corporate Japan has been looking overseas for inorganic expansion as anaemic domestic fundamentals curtail growth prospects and investor confidence.

And pharmaceutical companies are the key players in one of the hottest dealmaking scenes in Asia’s second-largest economy. A flurry of recent deals includes Japan’s Otsuka Pharmaceutical’s $1.1 billion agreement to acquire Boston-based Jnana Therapeutics.

That followed Ono Pharma’s announcement of the acquisition of U.S.-based cancer drugmaker Deciphera for $2.4 billion, joining the likes of Takeda Pharmaceutical and Astellas Pharma in putting up bids for U.S.-based drugmakers.

Masaki Noda and Yoko Kasai, partners at Nishimura & Asahi, believe the heightened cross-border M&A activities in Japan’s pharmaceutical industry are being prompted by patent cliffs for blockbuster drugs in the near future. For these companies, M&A could prove a pragmatic strategy to strengthen their portfolios and maintain growth.

Amid the hunt for global targets, U.S. companies appeared to be the crown jewels for many Japanese investors. Noda and Kasai have observed growing interest from global contract development and manufacturing organisations (CDMOs) in pharmaceutical manufacturing sites in Japan. This momentum could be the legislative fruit bore by the U.S. Biosecure Act which aims to rein in China’s advancement in biotech services.

 “If enacted, the Act could necessitate changes in manufacturing outsourcing practices for global pharmaceutical companies, potentially limiting their ability to outsource to Chinese CDMOs or manufacturing sites located in China. As a result, global CDMOs may need to seek alternative partners in Asia, including Japan,” they add.

Another major driver to the pharma M&A momentum is unique to the Japanese market itself, namely supply system issues for generic drug manufacturers. Some generic drug manufacturers have been experiencing difficulties in maintaining a stable supply of their products following manufacturing scandals discovered amongst two major manufacturers in late 2020, includ-+ing violation of the applicable Good Manufacturing Practice (GMP).  

The series of scandals has led to shortages of the more affordable alternatives to brand-name medicines. “Faced with this situation, the Ministry of Health, Labor and Welfare has expressed concern about the current supply system for generic drugs, as we have too many small to mid-sized generic manufacturers in Japan,” note Noda and Kasai.

In a report released in May, the Japanese government emphasised the need for reorganisations, including M&As, in the Japanese generic drug industries to ensure a stable supply of generic drugs to the market.

“While the report suggests some potential means to support these reorganisations, further information is needed to understand the full extent of the drivers for M&A transactions in the generic drug sector,” say Noda and Kasai.

In addition, Japan’s subdued drug pricing environment has also contributed to the increased appetite for cross-border M&A amongst Japanese pharmaceutical companies.

“In Japan, where pressure to reduce national medical expenses is strong, the National Health Insurance’s prices for prescription drugs tend to be set very low. This drug pricing environment gives many large pharmaceuticals a strong incentive to expand their businesses outside Japan,” say Noda and Kasai.

Although the United States, being the largest market, has emerged as the primary target, there has been interests in other markets too. For example, Japan’s Asahi Kasei made a $1.1 billion offer to buy Swedish drugmaker Calliditas Therapeutics in June.

“This means that cross-border, multi-jurisdictional pharmaceutical M&A transactions often require law firms to handle a wide range of specialised aspects, including FDA regulatory matters, intellectual properties, data privacy, antitrust issues, drug pricing and reimbursement, national security, and AI-related regulations,” note Noda and Kasai.

The Blackstone-MBK Partners deal over drugmaker Alinamin Pharmaceuticals has also highlighted the important role played by global buyout firms behind the scenes.

Increasing attention from Japanese listed companies on capital efficiency has led to strategic carve-outs of various business units, giving private equity funds a good investment opportunity amidst weak performance outlook elsewhere in Asia.

“These developments present many opportunities for private equity funds, including in the pharmaceutical sector,” say Noda and Kasai. “Additionally, under the current monetary policy of the Bank of Japan, the interest rate in Japan is still quite low, which benefits private equity funds by reducing the funding costs in Japan.”

With the Bank of Japan making its first step to monetary-policy normalisation earlier this year by ending its negative interest-rate policy, and Governor Kazuo Ueda hinting at more flexibility around policy setting going forward, lawyers are cautiously optimistic about the dealmaking outlook.

“Generally speaking, monetary tightening and additional rate increases are likely to result in a stronger Japanese yen, which would benefit Japanese pharmaceutical companies by providing more favourable conditions for making outbound acquisitions and investments in markets outside Japan,” they add.