Who says beer and drugs don't mix?
Kirin, Japan's #1 brewer, announced a major acquisition this week. But it's not another beer company (as with the Miller Coors deal), rather a further move into the pharmaceutical industry. For $2.6 billion, Kirin is buying a controlling stake in Japanese drugmaker Kyowa Hakiko.
Kirin already ha a pharmaceutical division called Kirin Pharma, and it reportedly plans to combine the two. Both companies are specialists in antibody drugs; in fact, Kyowa Hakiko has patents on a unique process for developing antibody drugs that it licenses to other companies. While Kyowa Hakiko develops allergy and cancer drugs, Kirin Pharma makes drugs that treat anemia. Kyowa Hakiko has about twice the revenue of Kirin Pharma.
Horizontal expansion is always a tricky maneuver, even though Japanese companies have long been motivated in that direction. The reason for the move now, according to a Financial Times article ("Kirin in $2.6bn deal to control pharma group", 10/23/07) is the decline in beer consumption in Japan.
Japan's beer market is stagnant and brewers are looking for new sources of growth. Kirin, Asahi and other brewers shipped 363.5m cases of beer and low-malt beer substitutes in the first nine months of this year, down 1.3 per cent and the lowest total since industry-wide counting began in 1992.
Of course, pharmaceuticals is an inherently risky business, with quite different business and product cycles as well as investment requirements than brewing.
As Bloomberg News ("Kirin in Talks to Buy Japan Drugmaker Kyowa Hakko", 10/19/07) points out, these moves are also part of pattern of consolidation in the Japanese pharmaceutical industry.
Japan's drugmakers have been merging as government price controls squeeze profit margins. Mitsubishi Chemical Holdings Corp. agreed to buy Tanabe Seiyaku Co. in February. Astellas Inc., Japan's second-largest drugmaker, was formed by the 2005 merger of Yamanouchi Pharmaceutical Co. and Fujisawa Pharmaceutical Co.
Kirin made another non-beer move recently, the 2006 purchase of Japan's leading winemaker Mercian Corp (for $211 million). According to a Wall Street Journal article ("Japan's Brewers Taste Other Sectors", 10/22/07), other top Japanese beer makers - Asahi, Sapporo, and Suntory - have shown an unwillingness to merge or, with a few small exceptions, to acquire foreign beermakers. What they have done is expand into areas like nutritional supplements, to flowers, from soft drinks to baby food.
The article sums up the problems with this approach of expanding horizontally into unrelated or weakly related industries:
Diversification can be tricky. When executed well, a diversified business line can insulate a company from downturns in its other operations. But companies can also stray into businesses in which they have little expertise and have difficulty managing, diverting attention from core operations.
While the numbers and trends would seem to indicate more beer company mergers in Japan as in the Miller Coors deal in the US, big mergers between established Japanese companies are still rare.
