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Business

Astellas trumps giants with outsize development efficiency

TOKYO -- Japanese drugmaker Astellas Pharma may be far smaller than such global majors as Pfizer of the U.S. and Novartis International of Switzerland, but it is one of the most efficient companies when it comes to developing new treatments.

     The Boston Consulting Group estimates that new medicines developed by Astellas and approved in the U.S. each generated average peak sales of more than $2 billion, or nearly matching the company's average annual research and development spending for each drug.

     President and CEO Yoshihiko Hatanaka attributes this efficiency to "developing new drugs based on their odds of succeeding."

Sharp focus

Astellas has kept its focus narrow since being formed through the merger of Yamanouchi Pharmaceutical and Fujisawa Pharmaceutical in 2005. It withdrew from the over-the-counter segment in 2006 to concentrate on treatments for cancer, urological diseases and transplants.

     Astellas continues to hone its focus. On Nov. 10, the company announced it was acquiring U.S. biotech company Ocata Therapeutics for $379 million. The next day, Astellas said it was selling its dermatology business to LEO Pharma, a Danish drugmaker.

     Today, the industry is putting more effort into developing treatments for cancer and other challenging diseases than into treatments for conventional lifestyle-related diseases. Given the bigger challenges involved in creating these types of drugs, "Expertise, not R&D spending, will be the key to developing new treatments," said Makio Kitazawa of the Boston Consulting Group.

     Astellas' decision to whittle down its product line has translated well to the bottom line: Net profit is expected to jump 27% on the year to 172 billion yen ($1.45 billion) for the year through March 2016, 150% larger than that of Takeda Pharmaceutical and approaching its all-time high of 177.4 billion yen, logged in the year ended March 2008.

     Slower to respond, however, has been the company's share price. Astellas stock is trading at about where it was at the end of last year. The company's projected price-earnings ratio is 21, below the 32 for the pharmaceutical sector in the Nikkei 500 sector-by-sector index. Also, the company is lagging behind Takeda in terms of market capitalization.

     "The company can expect stable growth, but its profit level is unlikely to rise sharply," said Atsushi Seki of Barclays Securities Japan.

Bigger plans

Analysts say that if Astellas wants fatter profit ratios, it will have to grow larger. The company's projected net profit-to-sales ratio is 12% for the current fiscal year. Industry heavyweights with profits of more than 1 trillion yen boast ratios of around 20%. While being bigger carries a larger tax burden, it also improves the ability to absorb fixed costs, among other benefits.

     The management team at Astellas takes a cautious approach to takeovers. Hatanaka has said that going forward, the company will emphasize efficiency even more. As he put it, "We will aim for continued growth while constantly reviewing our development activity."

     Emerging nations, with their burgeoning demand for pharmaceuticals, are hugely attractive to drugmakers, but Astellas lacks the size needed to enter these markets on its own. The company is ready to pursue greater efficiency, but to achieve maximal growth, it will also need to aim for scale.

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