Japanese drugmakers Tanabe Seiyaku and Mitsubishi Pharma Corp have responded to recent media speculation and confirmed that they have been holding talks over a possible link-up that would create the sixth-largest pharmaceutical group in the country.

Tanabe issued a statement saying that it has been discussing a potential merger with Mitsubishi Pharma as a response “to the competitive environment surrounding the pharmaceutical market” so that they can “survive intensifying global competition.”

Although “no concrete decision has been made in this regard,” stated Tanabe (and Mitsubishi also said that “nothing has been decided”) a deal would appear to make sense as Japanese 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 Japan Times newspaper notes that Mitsubishi, which is owned by Mitsubishi Chemical Holdings, has a strong position in neurological drugs but has recently produced few profitable products and has lagged behind in efforts to push into overseas markets, and claims that Tanabe, despite having a reputation for innovative R&D, has recently grown dependent on drugs developed by other companies to generate sales.

A new entity would have turnover of around 400 billion yen ($3.3 billion), enjoy a bigger R&D budget and likely improve profits as costs were cut. Mitsubishi, currently ninth in terms of sales in Japan and itself the product of the 2001 merger of Mitsubishi-Tokyo Pharmaceuticals and Welfide Corp, posted net income of 20.6 billion yen on sales of 236.2 billion yen in the year ended March 2006. Tanabe, which was close to merging with Taisho Pharmaceutical Co in 2001 before talks broke down, is in 11th spot, and had net profits of 15.4 billion yen and revenues of 171.5 billion yen last year.

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 sales of around 31.5 billion yen this business year.

New wave of consolidation on the horizon

A wave of consolidation last hit the Japanese pharmaceutical industry 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 and the Tanabe-Mitsubishi link-up could lead to another round.

Two firms mentioned as potential targets include Shionogi, which developed AstraZeneca's cholesterol-lowering drug Crestor, and is seen as attractive for its royalties, while Ono is cash-rich and has a well-stocked pipeline. Megumi Hori, an analyst at Yasuda Asset Management, told Reuters that "Shionogi keeps asserting it wants to grow on its own, so a merger is less likely, but I do think Ono could be a candidate for M&A."