By Nuala Moran

BioWorld International Correspondent

VANCOUVER, British Columbia - The rules for doing deals in Japan are changing as Japanese pharmaceutical companies emerging from the long recession of the 1990s recognize they need international collaborations to fill aging pipelines.

"While North American companies recognize the greater weight that needs to be given to cultural differences, on the Japanese side there are more concessions because they now need a more international focus to survive," Kevin Mullane, senior vice president of R&D at Inflazyme Pharmaceuticals Inc., told the Seventh Pacific Rim Biotechnology Conference.

But although Japanese companies are taking steps to become multinational, "Still many differences exist in perceptions on how to make collaborations work," he said.

Brad Gordon, senior vice president and chief financial officer at Signal Pharmaceuticals Ltd., said it is very important to understand what has happened to the pharma industry in Japan in the past five years. "It has been an extraordinary period of change," he said. The market in Japan has remained static, and most companies have thin pipelines with many aging and me-too products.

Despite these pressures, Japan lags the rest of the world in the consolidation of the pharmaceutical industry. Now the pressure to restructure is irresistible, and, Gordon forecast, "Perhaps only the top seven to 10 companies will survive."

But, he added, "The Japanese pharmaceutical industry is not sitting on its hands." It is going for global growth, setting up beachhead research or marketing operations on the East and West coasts of the U.S. and Europe. "They have got the message they need to invest in more novel NCEs [new chemical entities]."

Roy Wu, vice president of Kissei USA, a subsidiary of Kissei Pharmaceutical Japan, noted that large Japanese companies such as Takeda, Yamanouchi and Eisai are establishing overseas drug discovery and development operations. "They are looking for discovery partnering. For example, they are good at medicinal chemistry, but are behind in genomics. They are interested in licensing in compounds if they can get worldwide rights."

Mid-size companies, including Kissei, have set up liaison offices to look for co-development opportunities. "They want to in-license to fill the pipeline, but are not interested in discovery collaborations, as they want to be in clinical development quickly," Wu said.

Because of Japanese government pricing constraints, companies favor small molecules with a low cost of manufacture, rather than proteins or peptides.

But despite the increased appetite to forge alliances, cultural differences still must be respected. Biotechnology companies must expect deals to take longer to negotiate and to involve repeat trips to Japan. It also is important to probe the financial status of potential partners, as many smaller Japanese pharmaceutical companies are in a fragile economic condition.

Masakazu Kobayashi, senior vice president and director of research at Fujisawa's Research Institute in Evanston, Ill., told the conference that North American biotechs tend to overvalue projects that are at the idea stage. "Drug discovery is not the main money-eating process. Japanese pharma wants biotechs to prove their worth in research before expecting big-money deals."

The pressure to do deals is growing, but issues such as having to understand the separate legal systems in 50 states, the imperative to write deals in English, and differing views of value remain as barriers and disincentives.

Fujisawa has set up three research collaborations with U.S. companies in the past two years. But Kobayashi pointed out that this pales into insignificance next to the deal-making activities of a company such as Hoffmann-La Roche, which has entered 14 deals since 1996. Fujisawa has also recently established a US$5 million fund for equity investments in North American companies and is looking for approaches.