The confirmation that Mitsubishi Chemical Holding’s pharmaceutical unit is to acquire Tanabe Seiyaku is being seen as the first step in a wave of consolidation that is expected to sweep through Japan’s drugs industry.

The all-stock deal, which is valued at 523 billion yen ($4.3 million), will create a new company, Mitsubishi Tanabe Pharma Corp, which is going to be the fifth largest drugmaker in terms of sales (407.8 billion yen) and operating profit (63.8 billion yen). The merger is expected to be completed by October 1.

Explaining the rationale behind the deal, the two firms issued a statement saying “pharmaceutical companies that lag behind in terms of global competitiveness’ face being driven out of the industry altogether, and while most of the group’s R&D efforts will come from Tanabe, Mitsubishi will be looking to “reinforce overseas business infrastructure.” The company’s headcount is expected to fall to 6,500 from 7,500 by the end of March 2011.

Tanabe's best-selling drug is Remicade (infliximab) for rheumatoid arthritis, licensed from Johnson & Johnson, and sales for the year ending March 2007 are forecast at 23 billion yen in the current year to end-March. Other big sellers include the spinocerebellar degeneration treatment Ceredist (taltirelin) and the blood pressure drugs Herbesser (diltiazem) and Tanatril (imidapril). Mitsubishi Pharma's top drug is Radicut (edaravone), a brain-protecting agent used to treat acute ischemic stroke, which the company says will have sales of around 31.5 billion yen this fiscal year.

The importance of expanding beyond the shores of Japan has become a pressing issue as the country’s firms are under pressure to grow in order to stay competitive in the face of government-ordered price cuts and the growing presence of overseas companies.

The combined new entity will still need to attract partners from outside to make much of a major impact but the fact that the deal is being done will concentrate the minds of the other players in the Japanese pharmaceutical industry. The last wave of consolidation to hit the sector was in 2005 with the creation of Astellas Pharma through the merger in April of that year of Fujisawa and Yamanouchi, a deal which was followed five months later by Sankyo's acquisition of Daiichi Pharmaceutical.

Price cuts at home hurt Astellas financials

Meantime, Astellas says that sales for the nine months ended December 31 rose 3.5% to 702.6 billion yen, while net income slipped 1.2% to 106.3 billion yen.

Turnover from the domestic market slipped 1.9% to 396.8 billion yen, as a result of price cuts from the country's Ministry of Health and Welfare's National Health Insurance system, although Astellas reported strong sales of the blood pressure lowerer Micardis (telmisartan) and the immunosuppressant Prograf (tacrolimus). Vesicare (solifenacin) for overactive bladder also put in a good showing, but Harnal (tamsulosin) for benign prostatic hyperplasia failed to impress after struggling to overcome price cuts as well as generic competition.

North American sales were up 1.6% to 128.5 thanks to Prograf, Vesicare, the antifungal agent Mycamine (micafungin) and Amevive (alefacept) for psoriasis, which was acquired from Biogen Idec in April.

Astellas also announced that it is offering early retirement to staff in a move that could see at least 500 jobs cut, or 6% of its Japanese workforce. Most of the cost of this move will be reported as an extraordinary loss of 20 billion yen in the year ending March 2008, the firm added.