European Players Wake Up to Japanese Opportunities

European biotech companies have historically shied away from regional transactions in Japan, instead lumping Japanese rights into global deals with more familiar Western counterparts. But some recent deals indicate that they're beginning to recognize the significant value in separating out Japanese rights. Particularly since nowadays, licensing in Japan needn't be any more challenging than it is anywhere else.

Historically, European biotechs have concluded few regional licensing deals for Japan. Despite being the second largest pharmaceutical market in the world with sales in excess of $50 billion, the time, distance, language and cultural barriers were considered too challenging. Moreover, companies perceived it was only possible to get decent value if they were licensing potential blockbusters. And they also feared that signing away Japanese rights might jeopardize their chances of attracting Big Pharma, who would want global rights.

But things appear to be changing. While the number of deals is still small—Windhover's Strategic Intelligence Systems Database has tracked only ten Japan-only product licensing deals by European biotechs since 2000, compared with over 30 by US companies—2003 witnessed a dramatic increase in activity. Phytopharm PLC , Alizyme PLC and Astex Therapeutics Ltd. all signed Japanese deals [See Deal] [See Deal]. Shire PLC concluded one of the largest ever regional deals in December 2003 when Bayer Yakuhin Ltd., the Japanese subsidiary of Bayer AG , licensed rights to lanthanum carbonate (Fosrenol) (to combat hyperphosphatemia in patients with renal failure) agreeing to pay a $12.5 million licensing fee, up to $57.5 million in development and sales milestones, and high double-digit sales royalties [See Deal]. In the same month, Shire signed a second Japan-only deal, licensing rights to anegrelide hydrochloride (Agrylin), a treatment for bone marrow disorder essential thrombocythaemia, to the pharmaceutical division of Kirin Brewery Company Ltd. for in excess of $40 million [See Deal]. (See Exhibit 1.)

The increase in activity, to a certain extent, reflects the European biotech sector's increasing maturity. "They are starting to get more products into later stage development and these are typically easier to license," suggests Robert Rech, managing director at health care-focused investment bank Ferghana Partners, responsible for the company's Japanese practice.

But there's more to this increase than the maturation of European biotech. For one thing, the Japanese partnering culture has changed in recent years, with companies becoming much more open to in-licensing opportunities. Steven Engen, president and representative director at Mundipharma K.K., the Japanese affiliate of the mid-sized European company, explains that increasing competition from multinationals building their presence in Japan, coupled with declining internal R&D productivity is forcing Japanese companies—like their peers in the rest of the world—to look to in-licensing.

Regional licensing: realizing additional value

Perhaps the main driver however is that European biotechs are rapidly waking up to the opportunities Japanese deals can present. In doing Japan-only deals, companies can potentially realize more value than by including Japanese rights in global licenses. Michael Devlin, a partner in McKinsey & Co.'s Tokyo office, points out that many of the multinationals, although they claim to do proper analysis of every major market, seldom focus on Japan at all, and even where they do, they often don't get the numbers right. "So from the biotech companies' standpoint, to maximize the value of their compound, it's probably in their interest to pursue a Japan-only deal with a Japanese player, or with a global player with a very strong presence in Japan, who can prepare a specific valuation around the Japanese market potential. If they're not doing that by at least talking to Japanese companies, then they're potentially surrendering value they don't fully understand," he suggests. William Kridel, managing director at Ferghana's London office, goes further: "If they just strip out [Japanese] rights [from global arrangements] and do a separate Japan-only deal, they'll get more money from doing the two deals," he contends.

Yes and no. Multinationals are more likely to insist on global rights to primary care products; many such companies already have a major presence in the Japanese market: six of the top 11 companies, measured by sales force size, are controlled by Western multinationals.

How much they'll insist is a matter of debate. Few companies, contend a number of observers, would say no to US and European rights to a potentially valuable product simply because Japanese rights are not on the table, too—after all, Pfizer Inc. licensed both atorvastatin (Lipitor) and celecoxib (Celebrex) without Japanese rights (both of which went to Astellas Pharma Inc. [See Deal] [See Deal]). And for niche products, the multinationals are less likely to bargain intensively for Japanese rights—in particular for highly specialized products, the expertise and market-savvy of a Japanese company's sales force is a distinct advantage.

Moreover, companies can realize good value in Japan with niche products. Since there are a number of smaller companies in Japan with annual revenues of less than $500 million, for these companies, niche and specialist products—even those with peak sales of as little as $50 million—can prove very attractive.

Shire's recent deals confirm this. While there are only around 4000 patients in Japan who can benefit from Shire's thrombocytemia drug Agrylin, and peak annual sales in the region are only estimated at around $30-50 million, Kirin was still prepared to pay up to $40 million, including an $8 million upfront payment, as well as development and sales milestones.

Ferghana's Rech, who advised Shire on both its Japanese deals, explains that while the market for Agrylin in Japan is small, the competition to license the product was nonetheless fierce. Much of the interest, he claims, stemmed from the fact that as an already marketed product in the US and Canada, with EU approval expected in 2004, the clinical risk associated with Agrylin is low. What's more, for a company attempting to establish or maintain a presence in the hematology arena in Japan, being able to present an innovative new product for an orphan indication would be invaluable in building relationships with specialists in the market. Giancarlo Mennella, MD, director of business development at Shire, explains that as the leading hematology player in Japan, with strong development and marketing experience and excellent contacts with the specialist physicians in the hematology space, Kirin was deemed the most attractive partner for the product.

Competition for Fosrenol was also intense. Rech maintains that 20 companies were interested in licensing the drug because hyperphosphatemia represents a particularly attractive niche market. In Japan, about 200,000 patients with end stage renal disease could benefit from the drug, a number comparable to the US and Europe, both of which have larger populations. According to Rech, there are two key reasons: kidney transplantation—indeed any organ transplantation—is rare in Japan. Thus, in the US, the average patient remains on dialysis for five years before receiving a transplant; in Japan, patients stay on dialysis for their entire lives—as long as 20-25 years. Moreover, as the standard of care improves, patients live longer and hence the market continues to grow. Analysts estimate Fosrenol could generate peak sales in excess of $100 million.

Moreover Fosrenol, like Agrylin, looked like a comparatively low-risk opportunity: it has been granted an approvable letter by the FDA and recently gained its first EU approval in Sweden. According to Horst-Eberhard Harenberg, PhD, operating officer, head of international cooperation and licensing at Bayer, the drug also fit soundly into the company's existing portfolio. "Patients on dialysis with end stage renal disease often have a history of diabetes and hypertension. We already offer treatments for both these conditions; our sales reps regularly visit most institutions offering dialysis. Thus Fosrenol is an important addition to our offering to these dialysis centers to meet the unmet medical need of controlling patients' phosphate levels without undesirable side-effects."

Alizyme's recent deal with Takeda Pharmaceutical Co. Ltd. for Japanese rights to its Phase II obesity treatment ATL-962 also has the potential to generate handsome revenues for the biotech. Alizyme received $2 million upfront and could earn up to $40 million more in development and commercialization milestones plus double-digit royalties on sales. (See Alizyme/Takeda: Japan Deals Gather Steam, In Vivo Europe Rx, September 2003 (Also see "Alizyme/Takeda: Japan Deals Gather Steam" - In Vivo, 1 Sep, 2003.).)

With these sorts of revenues available in Japanese licensing deals, the returns on investment for European biotechs appear very favorable. As Mundipharm's Engen points out, "Even if you have to make four or five trips a year for a couple of years to get a deal done, with each trip costing around $15,000, the return on investment looks very healthy."

Signing regional deals can also prove beneficial in a number of other ways besides just generating additional cash. For the numerous earlier-stage companies in Europe, signing Japanese deals can provide valuable validation of a technology or new therapeutic approach. It can also make sense to license products at an earlier stage of development in Japan since it generally takes longer to get a drug through development and onto the market (notwithstanding the use of the bridging approach whereby Phase III data from non-Japanese studies can be used, with data from Phase I safety studies conducted in Japanese patients, in regulatory submissions in Japan).

Engen suggests that "companies have to realize they're probably going to be behind in clinical development in Japan anyway so if you can license earlier that might help shorten the delay to market." He cautions however that Japanese companies, like their Western peers, generally won't pay big money for very early-stage products, "so companies have to balance getting into Japan early with their overall strategy." For Phytopharm for example, licensing Yamanouchi Asian rights to its Phase I Alzheimer's disease compound PYM50028 meant the product would be developed concurrently in Japan and in the West, while at the same time providing Phytopharm with the cash to develop the product through proof-of principle for later-stage, and thus higher-value, licensing in the Western market once the product had proven its utility. (See "Phytopharm's Early Stage Licensing Approach: Retaining upside and Control," In Vivo Europe Rx, June 2003 (Also see "Phytopharm's Early Stage Licensing Approach: Retaining Upside and Control" - In Vivo, 1 Jun, 2003.).)

Debunking the Japan Myths

Not only does it often make sense both strategically and commercially for many European biotechs, licensing in Japan is becoming far easier. The increasing openness of Japanese companies has helped, as has their increasingly international outlook. "Many of the prominent Japanese companies have set up regional offices in London or on the Continent which brings them into closer contact with the local biotech community and the opportunities they have to offer," points out Engen.

Not that this new openness doesn't still require time in Japan. Says Nigel Crockett, PhD, commercial director for Astex, who's concluded three deals with Japanese partners over the last three years: "Biopartnering meetings have their place, but they just cannot be as effective as a trip to Japan with 10 meetings in a week, where I've got all the right people from each company around the table to discuss an opportunity. I can't beat that by going to a conference where I'm just going to meet one person who has to go back and tell everyone else what I said."

If travel, however, is still a prerequisite, the account is balanced by what appears to be shorter deal-making times. On the whole, the European companies that have signed the recent deals in Japan have been pleasantly surprised by how little time they took. Astex's first transaction with Mitsubishi Tanabe Pharma Corp. took only 10 months and its second four months, while its first deal with Fujisawa Pharmaceutical Co. Ltd. took only 12 months. Shire concluded two deals, which were run concurrently, in less than 10 months; all a far cry from the perception that it's impossible to conclude a deal in Japan in less than two years. Feghana's Rech insists that if you have an interesting product that's relevant to the market deals shouldn't take any longer than 12 months with no more than a three or four face-to-face meetings (not all of which will be in Japan since the Japanese partner will likely be invited to the European biotech's premises to present to management, to conduct due diligence and to conclude negotiations).

All in all, while it may still take a bit more effort doing a deal in Japan, doing so will likely prove worthwhile not only for the immediate return on that deal, as a number of European companies have already shown, but also in the longer run. Once a company has established a reputation and track record in Japan, it clearly opens up the market for further deal-making. Shire's Mennella sums up, "Doing deals in Japan is not easy, but doing deals anywhere is not easy. Shire has done many deals around the world and we've found that Japan's actually no more difficult than anywhere else." And if the recent deals are any indication, Japanese deal-making may be getting easier than ever.

--by Hazel Dawson

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