Roche to merge Japanese subsidiary with Chugai
By Michiyo Nakamoto in Tokyo
Published: December 10 2001 07:55 | Last Updated: December 10 2001 14:16

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Roche is acquiring a controlling stake in Chugai, a leading Japanese pharmaceuticals company, in one of the biggest mergers between a foreign and Japanese company.

The deal, which follows on the heels of Vodafone's takeover of Japan Telecom and news that NKK is in talks to sell its US subsidiary to US Steel, reflects a growing willingness among Japanese companies to participate in the global restructuring that is transforming many industries.

The Swiss group will win a controlling stake in Japan's fifth largest pharmaceuticals company, with pro forma sales of Y253bn ($2bn) and the fourth largest sales force in Japan of 1,400 medical representatives.

In a complicated deal that reflects Japanese sensitivities towards mergers and acquisitions, Roche will first merge its Japanese subsidiary into Chugai, which will be the surviving company.

Roche will acquire a 50.1 per cent stake in the newly formed Chugai through a tender offer and share subscription that is expected to cost the Swiss group between Y155bn and Y198bn in cash payment, depending on the outcome of the tender offer.

Both Roche and Chugai were careful to characterise the deal as an alliance in which Chugai "invited" Roche to take a controlling stake in itself.

"This is a completely new business model," said Osamu Nagayama, Chugai chief executive, who will remain CEO. It will enable Chugai to become "a leading Japanese integrated pharmaceutical company with global access," he said.

The deal, which is likely to shake up the Japanese pharmaceutical industry, greatly expands the Swiss group's presence in the world's second largest market, valued at about $50bn and also places it back among the top ten pharma groups in the world.

"The merger is an unprecedented transaction," Franz Humer, Roche chief executive, said.

Foreign pharmaceuticals groups have been slowly building up their presence in the Japanese market for years, but have largely found it difficult to attract willing partners in any M&A deal.

Roche has been in the Japanese market for nearly 70 years but is relatively small in terms of sales and ranks about number 18th in that market.

As a result of the acquisition, its target of boosting pharmaceutical operating margins to 20 to 25 per cent within three years will be delayed by about a year. But sales in Japan of the combined groups are expected to reach Y300bn in the third year.

Japanese pharma groups have recognised the need to form global alliances in order to survive but their relatively strong financial health and reluctance to lose independence have prevented most companies from seeking foreign equity partners.

The deal, which gives Chugai a large degree of autonomy, despite Roche's controlling stake, was welcomed as a model of the kind of consolidation that could transform the Japanese pharmaceuticals industry.

"This is the first big deal between an overseas pharmaceuticals company and a Japanese company. There isn't a lot of overlap and there are a lot of synergies," Stephen Barker, pharmaceuticals analyst at UBS Warburg, said. For foreign drug groups, a strong position in Japan offers potentially huge profits at little additional cost.

Chugai, however, has a relatively weak R&D pipeline, leaving Roche with a need to find future growth products.

Roche was advised by Goldman Sachs and Chugai by JP Morgan Chase.


jonathan.miller@orange.net
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