Japan continues to implement the ambitious plans for its biotech sector with the adoption of the Biotechno-logy Strategy Guidelines. The guidelines set a target market size of ¥25 trillion (US$236 billion) and the creation of 1,000 biotech companies and 80,000 employees. The government also set the goal of listing 100 university-originated IPOs by the close of the decade.
While activity in the sector is picking up, a considerable portion of Japan's biotech R&D is still conducted by pharmaceutical companies, and stand-alone Japanese biotech companies with viable products in later-stage development remain relatively rare. While the country continues to draw global attention as a stable and lucrative market, particularly in light of its large and affluent aging population, Japan remains heavily dependent on pharmaceutical and biotech imports.
Reforms spur growth
Despite Japan being an attractive end market, opportunities for conducting drug development have long been constrained by the country's regulatory environment. The good news is that the Japanese government has taken proactive steps in recent years to reform the regulatory system. In 2004, the government moved to reform the university system, introducing incentives to stimulate technology transfer and start up formation, much as the Bayh-Dole Act has stimulated those activities in the US biotech sector. In 2005, with the launch of the amended Pharmaceutical Affairs Law and the revamped Pharmaceuticals and Medical Devices Agency (PMDA), the Japanese regulatory framework has become somewhat more transparent and congruent with global industry standards.
In 2006, Japan continued to implement a broad slate of reform aimed at increasing the competitiveness of its domestic pharmaceutical and biotech industries. In particular, the PMDA set its sights on improving the speed of the drug approval process, which still lags behind that of the US and Europe by some six to nine months. In November, PMDA announced plans to establish a review system that enables the global simultaneous review of new drugs, including molecular targeted candidates, therapeutic antibodies and other biotech products.
The PMDA will now prepare a Japanese version of points to consider (PTCs) for applicants to refer when developing new drugs, as well as increase the number of reviewers from 18 to 110 by 2009. Proposals for the establishment of a two-track evaluation system, for priority and non-priority products, will be considered in 2007.
Pressure to streamline the drug approval process comes from sources inside and outside the country. In September 2006, the Pharmaceutical Research and Manufacturers of America (PhRMA) called for further deregulation to facilitate the greater participation of Japanese drug makers in global clinical trials. For Japan, a key sticking point has been the perceived need for caution in accepting protocols designed for Caucasians. In October 2006, the PMDA proposed the development of a network of Asian regulatory authorities to promote more collaborative trials in the region with protocols specific to Asians.
All in all, these developments represent promising news for biotech in Japan. Reduction of the average time for product approvals and greater transparency are integral to lowering the cost of drug development and stimulating competition in the Japanese market.
Venture funds - A critical need
Partly in response to governmental reforms to spur R&D and increasing competition, Japanese start ups are looking to spend more on R&D. According to a Nihon Keizai Shimbun survey, Japanese companies' spending on biotech and pharmaceutical R&D rose by about 5.4 percent in 2006. However, over one-third of respondents in the survey also cited the inability to secure funding for R&D investments as a major impediment to business expansion, with over one-quarter of respondents reporting that they were curtailing the number of development projects. For Japan's reforms to succeed in creating a new generation of start ups and a stronger domestic pipeline, a steady supply of venture capital will be critical.
Yet, venture capital remains challenging for Japanese biotechs, with a recent Nikkei survey reporting that VC funding in the Japanese biotech sector fell about 32 per cent in the year ended March 2006. As was true in many other countries, venture capitalists cited the lack of viable products in later-stage development in Japan as a reason for their hesitancy to make more robust investments in start ups. Investments that did take place in the Japanese biotech sector were relatively small, but product-focused, reflecting the more cautious VC mood. For example, Shizuoka-based CanBas Ltd., which has a G2 checkpoint inhibitor for the treatment of cancer in Phase I clinical development in the US, raised US$20 million in a fourth round deal.
Despite the slow market, US investors remain interested in Japan's promise and are finding creative ways to place their bets on the sector. In December 2006, US-based MPM Capital and the Japanese trading firm, Itochu, agreed to set up a joint venture in the state of Delaware, with MPM taking an 80.8 per cent stake and the Japanese trading firm owning the rest. The new company plans to purchase promising chemical compounds and develop them into new medicines. The venture is expected to move its operations to Japan in 2007 and aims to list on a Japanese stock market by 2010.
Key Japanese biotechs currently trading in the public market continued to struggle with high R&D costs. Major players such as Takara Bio, OncoTherapy, and AnGes posted operating losses for the year. As costs soar and the red ink mounts, many of these companies are restructuring. Sosei announced headcount reductions during the year, while Takara decided to relocate its Clontech manufacturing to China in a bid to lower its operating costs.
Revival signals in IPO markets
IPO markets in Japan remained cool to biotech stocks, continuing a trend that started in 2005, when there were two IPOs in the first quarter, followed by a complete dearth of listings in the remainder of the year. In 2006, that dry spell continued, with no biotech IPOs on Japanese exchanges during the year.
However, there are encouraging signs. Several companies are either planning to file with one of the exchanges or have started the paperwork for a listing. California based Acologix filed for an IPO worth up to US$115 million on the Tokyo Stock Exchange Mothers market in mid-August. Acologix, which develops drugs to treat osteorenal diseases, currently has a therapeutic candidate for dialysis patients in Phase III. Like MediciNova, which listed in 2005 and became the first US company to be listed on a Japanese exchange, Acologix is making moves to get listed in the Japanese stock exchange. The company already has substantial ties to Japan, and received substantial support from Japanese venture firms in successive private equity rounds.
In another interesting development, Singapore-based MerLion Pharmaceuticals, which recently acquired two European biotechs, also announced its intention to list on the Tokyo Exchange in 2007 or early 2008, with the timing based on receiving positive preclinical data on an antibiotic product in development. MerLion's decision to launch its IPO in Japan is based on the perceived openness of Japanese stock exchanges to smaller biotechs without proven earnings records in comparison to the more established Asian exchanges like Singapore and Hong Kong.
Meanwhile, MediciNova followed up on its 2005 Japanese IPO with a NASDAQ listing to broaden the company's investor base in the US market.
Firms look beyond borders
While 2005 had seen a significant wave of consolidation among Japan's largest pharma companies, the trend did not continue in 2006. The few M&As that did take place in the Japanese pharmaceutical sector in 2006 were strategic, such as Kowa's October acquisition of the remaining shares of Nikken Chemicals in order to integrate their pharmaceutical operations.
The May 2006 revision of the Japanese commercial code was expected to accelerate M&A activity in the biotech sector, but protectionist impulses muted its potential impact.
The implementation of the rules- which would have allowed mergers using both cash and parent company shares, instead of the existing rules allowing only the use of shares of the acquiring company-was delayed to May 2007 in response to rising concern over a sharp increase in foreign acquisitions of Japanese companies.
While M&A was dormant, Japanese companies, particularly the large pharmaceutical players, looked to alliances and licensing deals to boost their biotech portfolios, taking the view that collaborations are generally less risky than acquisitions. These companies looked beyond the domestic biotech market, particularly the US, for growth opportunities. In the pharmaceutical- biotech deal making space, there were roughly 60 collaborations signed in 2006 between Japanese pharmaceutical companies and global biotechs. The majority were discovery and development deals to help build product pipelines, such as Takeda's $230 million agreement with US-based XOMA, in which XOMA will discover therapeutic antibodies against multiple targets selected by Takeda; and Astellas' US$815 million agreement with US biotech, FibroGen, to co-develop the biotech's promising drug candidates for anaemia.
The need for Takeda to strike a promising deal was directly related to a string of pipeline product failures (at least two products in phase II and one in phase III) during 2006. Takeda's disappointments and similar recent pipeline failures at Japanese biotech, Sosei, including the failed application for Eligard, underscore the sector's continuing fragility, and the need to better navigate the regulatory environment to yield commercialized products.
Like the large Japanese pharmaceutical companies, Japanese biotechs also looked externally during the year for deals to develop new products and build revenues. BioMatrix Research, a bio-venture launched by the Tokyo University of Science, struck a licensing agreement with the UK-based Oxford Gene Technology, which gave BioMatrix the rights to Oxford's patents on the manufacture and marketing of oligonucleotide microarrays in Japan. Meanwhile, AnGes MG, the first Japanese biotech to be listed on the Tokyo Stock Exchange, signed an agreement with U.S.-based Vical to develop and market Vical's Allovectin-7 cancer immunotherapeutic, with a pivotal clinical trial in planning. Japan's EnBioTec Laboratories teamed up with Tripos Discovery Research to co-develop nuclear receptor-based lead compounds for drug discovery.
US biotechs are also looking to enter the Japanese market through tie-ups with major Japanese universities and research centres. For example, in December, U.S.- based Quark Biotech initiated a research collaboration with Osaka University on a kidney therapeutic.
Japan continues to boast considerable expertise in its growing network of bio-ventures, including significant research capabilities in key areas such as gene analysis, genetic recombination, protein engineering, sugar chain engineering, bioinformatics, and genome drug creation. The formation and nurturing of biotech hubs in the Kanto, Kinki, Hokkaido, Chubu, and North Kyushu regions, in combination with regulatory reform, are creating better conditions for the sector to flourish.
However, in the end, progress will depend on the sector's ability to successfully commercialize products. Further streamlining the approval process and bringing a more global approach to conducting clinical trials should help the process. While cautiousness in the public equity markets and on the part of venture capitalists has created a slowdown, the environment for deals remains relatively bright, as both domestic pharmaceutical companies looking to boost their sagging pipelines and foreign competitors eager to enter the Japanese market turn to the sector.
(Courtesy: Ernst & Young - Global Biotechnology Report 2007)