Special Report: Biotech A-Brewin'

Back to Contents of Issue: January 2001


After dominating in the '60s, Japan's biotech players lost their way. Does the mapping of the human genome offer a route back to respectability?

by Augie Tam

biotech
Illustration by Eiko Nishida
WHEN BIOTECH STARTUP Celera Genomics (NYSE: CRA) and the research consortium Human Genome Project announced in June 2000 that they had completed a rough draft of the human genome map -- an accomplishment of historic proportions -- Japanese biotech companies were noticeably absent from the spotlight. Indeed, "absent" has been a fitting description of Japan's biotech industry over the past few decades. Blame it on inadequate government and VC funding, among other things. Instead of hundreds of hot startups competing for investor attention, the scene consists mainly of old-economy brewers, foodmakers, and pharmaceutical companies entering biotech as a way to diversify. Nevertheless, thanks to the recent breakthroughs in gene research, these companies have enjoyed run-ups on their share prices. Are investors being blindly enthusiastic, or does this new era present new opportunities for Japan's phlegmatic biotech sector?

GENOMICS
DNA consists of a sequence of molecules that govern the cellular chemical activity of higher organisms and takes the form of a twisting ladder, with rungs comprising matched pairs of amino acids, or "base pairs." The human genome refers to the over 3 billion base pairs of DNA in every human cell and is considered to be the genetic blueprint for humans. Genes are found in various sections of the DNA sequence and instruct the body to produce specific proteins. There are at least 100,000 genes in the human genome.

Genomics is the study of all the genes that comprise the genome. Now that the human genome has been roughly sequenced, the next steps for scientists are to search for the genes in the blueprint, identify their functions (functional genomics), and determine the structure of the proteins they encode (proteomics). Whereas the genome is seen as the blueprint, proteins are seen as the building blocks, knowledge of which could improve and accelerate the development of new drugs and therapies.

Here Japan can still gain an edge. Among the government's national biotech projects is a human full cDNA (complementary DNA) sequencing project. cDNA consists of DNA that contains the coding for proteins. The study of cDNA is one area within genomics in which Japan leads and can compete with foreign rivals. Research on cDNA has been tackled primarily by Helix Research Institute, the University of Tokyo's Institute of Medical Sciences, and Kazusa DNA Research Institute, with participation from private businesses as well.

Another new frontier in genomics is the study of single nucleotide polymorphisms (SNPs), variations in the genomic sequence that make individuals genetically unique. With SNP maps of the human genome, pharmaceutical companies could better understand a person's genetic predisposition to certain diseases or to adverse drug reactions. In the area of "pharmacogenomics," pharmaceutical companies could narrow their focus on potential drug targets or create custom drugs based on one's genetic make-up. As SNPs differ according to a population's genetic background, Japanese firms will have to identify SNPs useful for the Japanese. A Japanese SNP project is under way to examine 150,000 SNPs over a two-year period, focused on Japanese people.

BIOTECH FUNDS
Last year saw a number of biotech funds being offered to Japanese investors hungry for high growth potential but afraid of the dot-com dangers. The "genome fund" from Pictet Asset Management (Japan) -- sold through Cosmo Securities -- focuses on emerging companies engaged in cutting-edge research, while the "G-Open" fund from Nomura Asset Management -- marketed by World Nichiei Securities -- invests in a wide range of companies with a presence in biotechnology. Both funds saw rapid growth in investor interest last year, especially after the preliminary sequencing of the human genome in June.

SHOW ME THE MONEY
The Japanese government plans to increase spending on biotech research nearly 25% next year, and double the budget for biotech development over the next five years, selecting genetic research as one of eight Millennium Projects. In October it opened the Genomic Sciences Center in Yokohama. The center will study protein structures using nuclear magnetic resonance.

While much of Japan's genome research has come out of universities and publicly funded research labs, many new biotech ventures are cropping up as well. According to the Japan Bioindustry Association, there are only about 150 biotech-related ventures in Japan, versus 1,500 in the US.

The recent BioJapan 2000 industry fair in September was descended upon by venture capitalists and securities analysts alike, and had a noticeably more business and less academic feel than the previous fair four years ago. Financial firms have begun offering a number of new biotech equity funds, with an emphasis on genomics (see sidebar.)

BIOTECH BREWERS
Japan's biotech industry derives ultimately from the nation's ancient traditions of fermentation, and Japanese biotech firms led the sector in the 1960s thanks to well-developed fermentation technologies. Even today, "the brewers" are still considered the nation's most visible biotech players. Analysts warn, however, that such companies have a limited exposure in the biotech area and have seen stock run-ups mainly for lack of better options for investors.

Takara Shuzo (2531)
Japan's No. 1 maker of shochu (distilled spirits), Takara Shuzo applied its expertise in fermentation techniques to biotechnology decades ago. Takara Shuzo first established a biotechnology research institute in 1970. In 1979, the company produced its first restriction enzyme and today maintains a 40% domestic market share of restriction enzymes. Restriction enzymes are proteins that can identify specific DNA sequences and cut them out of the original strand as a kind of DNA scalpel. While its traditional liquor products are showing flat or declining sales, biomedical products are becoming a key profit driver. For the fiscal year ended March 2000, biomedical sales represented only 5% of total revenue but 25% of total operating profit. Biomedical sales grew 22% from the previous year and are expected to reach 13% of total revenue in the next three years.

Takara's transformation into a significant biotech player is largely credited to biologist and executive vice president Kato Ikunoshin (63), who joined Takara in 1986 from the US pharmaceutical company Centocor. Under Kato's tutelage, Takara refined the PCR (polymerase chain reaction) method licensed by Swiss drug giant Hoffman-La Roche for amplifying DNA. Amplifying DNA is a technique of cloning thousands of copies of DNA fragments used to produce genetic maps. Called the ICAN method (for "isothermal and chimeric primer-initiated amplification of nucleic acids"), Takara's way of amplifying DNA can, the company says, cut in half the cost of making biochips using the conventional PCR method. The company has applied for several overseas patents for ICAN and aims to begin sales of licensing rights in April 2001. It's an important strategic technology for the company's biotech efforts.

Takara also mass produces biochips (also known as gene chips, DNA chips, or microarrays), an important tool in gene testing. Biochips are wafers of glass or silicon covered with known short sequences of DNA that are washed over with tissue sample. The DNA of the tissue sample binds with the biochip's probe DNA and can then be compared with it. Takara's biochips cost half of and differ from those made by leading US biochip maker Affymetrix (Nasdaq: AFFX), although Takara must obtain a license from Affymetrix, which holds patents on many of the steps involved in biochip manufacture. Takara also holds exclusive rights to market Affymetrix's biochips in Japan, as well as non-exclusive rights to market worldwide. Takara recently won exclusive rights in Japan, China, Taiwan, and South Korea to manufacture biochips and sell services based on biochip technology created by US-based Lynx Therapeutics (Nasdaq: LYNX), which uses mobile microbeads rather than glass to attach DNA. Takara has gone beyond all-purpose biochips to produce specialized biochips, such as those used to help detect genes that cause some cancers.

Takara's most ambitious commitment to the burgeoning field of genomics is Dragon Genomics, a world-class center for high-speed genome analysis scheduled to begin operation in Mie prefecture in early 2001. Established in July 2000 as a wholly owned subsidiary of Takara, Dragon Genomics aims to offer at least 60% more genome analysis capacity than Celera within two years. But unlike Celera, whose business model relies on collecting royalties on human genome research data protected by intellectual property rights, Takara is looking at income from genome analytical services. The center will service pharmaceutical makers and research institutes worldwide, with 80% of the facilities utilized for contract-based business and 20% for the subsidiary's own research on genomes (which includes, fittingly for Japan, research into marine life genetics). Takara will likely take Dragon Genomics public in order to finance the costly construction of the center.

Another area that Takara is focusing on is gene therapy, which involves injecting humans with DNA material to increase resistance to illness or to kill cancer cells. Under a joint research agreement with the Indiana University School of Medicine, Takara has exclusive rights worldwide to manufacture and market the recombinant protein RetroNectin used in gene therapy.

Takara has also acquired a 50% equity stake in Korean biotech venture Viromed, which it hopes to turn into a major gene therapy company in Asia. Korea is an attractive gene therapy base for Takara because of the small number of patents taken out on related technologies in the country. Patients with intractable diseases would probably seek out effective gene therapy worldwide if it were not available in their own country, making geographic borders less of an issue than in the regular drug business. Takara plans to start commercial production of gene-therapy drugs in April 2001. With its focus on DNA sequencing, genome function analysis, and gene therapy, Takara expects ¥25 billion in consolidated biotech sales by the end of FY2003.

Kyowa Hakko Kogyo (4151)
Another brewer diversifying into biotech is Kyowa Hakko Kogyo, a pioneer in fermentation. With an emphasis on research and development, the firm is Japan's largest manufacturer of fermented chemicals. Biochemicals represent 11% of sales, with pharmaceuticals representing 40%, liquor and foodstuffs 29%, and chemicals 20%.

Kyowa Hakko Kogyo is Japan's leading supplier of reagents for DNA research. (A reagent is any chemical used in laboratory experiments). In September 1999, the company formed the joint venture Gencom with Mitsubishi Chemical (4010) to analyze the functions of various human genes. Kyowa has also used gene technology to develop a cost-effective system for manufacturing oligo-saccharide, a material used in the making of drugs for cancer, hepatitis, and influenza. The system can manufacture the material at a hundredth the cost of existing methods.

Kyowa and Mitsui Knowledge Industry, a subsidiary of Mitsui & Co. (8031 or MITSY), recently established a fifty-fifty joint venture to decode the genomes of micro-organisms. The new company, Xanagen, will provide genome data to clients and focus on developing new products. It hopes to apply the knowledge it gains from gene research to a wide range of fields, including the environment, chemicals, food, and medicine.

BIG PHARMA
One of the ultimate goals of genomics is the development of new treatments for diseases. As has been widely noted, the sequencing of the human genome was a milestone, but just the tip of the iceberg. It may be years or decades before the deciphering of the sequencing data manifests itself in new genetic treatments.

Because clinical trials and regulatory approval are so time consuming, it typically takes a decade or longer for pharmaceutical companies to get a drug to market. What's more, only 5% of drug development projects ever reach the market. Investors bullish on the benefits of genomics to pharmaceutical companies' drug development efforts will have to take a leap of faith and adopt a long-term perspective.

Big drug companies with healthy financial resources, R&D, partnerships, and products in the pipeline will likely be the benefactors in applying genome research to new drug products. Japan's pharmaceutical market returned to growth in the fiscal year ending March 2000, expanding by around 5%. However, the situation for Japanese pharmaceutical companies has tightened since April, when the government began reducing National Health Insurance drug prices on average by 7%, in an effort to reform a reimbursement system that has traditionally encouraged over-prescription of drugs. On the other hand, with the graying of Japanese society, the government is keen on seeing the nation lead with an innovative health care system and an advanced pharmaceutical industry supported by genome research.

Takeda Chemical (4502)
With Japan's breweries shying away from the development of end-product drugs, only the largest pharmaceutical companies will likely succeed in using genetic data to develop new drugs. The nation's top pharmaceutical manufacturer, Takeda Chemical Industries, has been investing in genetic research for a decade, and began using genetic data to develop new medicines back in 1995.

In March 2000, Takeda signed a five-year subscription to Celera's genome database, which it will use to confirm the genetic functions of compounds it has already discovered over the course of its gene research. Takeda expects the genome information to shorten drug development time by five years. It hopes to start clinical testing of the compounds within three years and bring products to market in about eight years.

New treatments for diabetes and cancer will be the main targets of the company's gene research. Thought by many analysts to be Japan's best long-term biotech bet, Takeda has mobilized a quarter of its researchers and earmarked ¥77.2 billion for the development of genetic treatments.

Company Exch Code Share Price
()
(Nov 6, 2000)
PER
(X)
ROE
(%)
ROA
(%)
Revenue
( bn)
Operating Income
( bn)
Net Income
( bn)
EPS
()
Market
(mn)Cap
Shares
Outstanding
Takara Shuzo TSE 2531 2,000 84.82 6.8 3.3 192,318 11,941 5,066 23.6 435,292 217,645,768
Kyowa Hakko
Kogyo
TSE 4151 906 34.90 5.8 2.6 374,910 21,655 11,274 26.0 393,425 434,243,555
Takeda
Chemical
TSE 4502 7,280 53.71 11.9 8.2 923,132 171,443 119,625 135.6 6,473,903 889,272,395
Chugai
Pharmaceutical
TSE 4519 1,930 54.32 5.1 2.7 195,506 29,977 8,760 35.5 486,359 251,999,247
Yamanouchi
Pharmaceutical
TSE 4503 5,370 33.08 9.2 6.9 433,653 96,068 57,174 162.4 1,937,506 360,801,794
Hitachi TSE 6501 1,241 244.77 0.6 0.2 8,001,203 174,364 16,922 5.1 4,142,373 3,337,931,857
Shimadzu TSE 7701 394 42.55 2.4 0.9 196,290 5,681 2,474 9.3 105,234 267,090,952

* All figures based on consolidated FY1999 financials ended March 2000.

Chugai Pharmaceutical (4519)
A major manufacturer of prescription drugs, Chugai Pharmaceutical is using genetic information to identify possible new drug targets, with three potential biodrugs in the pipeline. Two of the company's mainstay drugs -- Epogin, which boosts red blood cells, and Neutrogin, which boosts white -- are biodrugs of sorts, although they were not developed using genome research. Furthermore, the patented DNA amplification technology being developed by Chugai's highly regarded US unit Gen-Probe has wide applications in the field of genomics.

Yamanouchi Pharmaceutical (4503)
Another leading manufacturer of prescription drugs, Yamanouchi Pharmaceutical has established a Genome Unit, which is building its own internal genetic database with data selected from public and commercial genetic databases that may prove useful in drug discovery research. Yamanouchi has tied up with several partners to remain up to date on the developments of genomic research. In February 2000, it inked an agreement with New York University Medical Center's Hospital for Joint Diseases to cooperate on research involving the identification of genes related to osteoarthritis. In June 2000, the company commenced collaborative studies with UK-based Glaxo Wellcome (NYSE: GLX) to identify drug target genes to find new treatments for certain diseases. The UK-based Yamanouchi Research Institute hosts the Oxford BioBusiness Centre, a biotechnology incubator, to foster the development of biotech ventures, giving Yamanouchi the opportunity to interact with companies pursuing the latest ideas.

BIOINFORMATICS
Analyzing the amount of data in genome research requires massive computing power. To get a sense of the amount of data that must be analyzed, consider this: It would take 95 years to read aloud the 3 billion-plus DNA base pairs of a human genome. Because of the sheer volume of the data to be processed, opportunities for genome-research toolmakers lie wherever analysis speed can be improved.

"Bioinformatics" refers to the use of advanced computing and database techniques to manage and analyze the complex data pouring out of biological research such as genomics. Celera was able to steal the spotlight for being the first to sequence the entire human genome thanks to its expediting techniques and supercomputing capacity. Japanese IT companies can still use their technological expertise to compete in this area by providing the sophisticated software and equipment needed for high-speed gene analysis. Recognizing the market potential, major systems providers like Fujitsu (6702 or FJTSY) and NEC (6701 or NIPNY) have begun to develop teams of specialists in the biotech field.

RANDOM SEEDS
There are a few promising biotech startups in Japan, though not enough to make up a vibrant community. A warning to potential foreign partners: some of these startups are rather inaccessible. We suggest a go-between.

Precision System Science
Invented an automatic DNA and protein-extraction machine and sells it to pharmaceutical companies and research institutes. See www.pss.co.jp.

Pharma Design
Specializes in protein analysis for the creation of customized drugs. Uses bioinformatics software cocreated with Meiz. See www.pharmadesign.co.jp for more.

DNA Chip Research
Sells DNA chips to research institutes and pharmaceutical companies. See www.dna-chip.co.jp for more.

World Fusion
Sells DNA research software (Japanese) that automatically manages gene analysis results. Target clients include pharmaceutical companies and research institutes. See www.w-fusion.co.jp for more.

Sawady Technologies
Manufactures order-made DNA and peptide samples for researchers. Developed a DNA sequence analysis system. See www.sawady.com for more.

Hitachi (6501 or HIT)
Electronics giant Hitachi established a Life Science Group in 1999, offering genetic analysis and other services to Japanese pharmaceutical and biotech companies. It began development of DNA analyzers in 1982 and holds patents on some DNA analyzing hardware. The company is shoring up its weakness in gene analysis software through subsidiary Hitachi Software Engineering (9694). In 1999, Hitachi commercialized biochips that were between a third and a quarter less expensive than those made by Affymetrix. Hitachi has agreements with US biotech ventures Molsoft and DoubleTwist to sell their genetic analysis software packages with exclusive rights in, respectively, Japan and the Asia-Pacific region. In July 2000, Hitachi set up a new center to analyze genetic information on a commission basis for drug companies and research laboratories.

Shimadzu (7701)
Major precision-equipment maker Shimadzu, a Mitsubishi group member, first began offering biotech research instruments to the market in 1984 and set up a Life Science division in 1999. That same year the company introduced a DNA sequencer system called the RISA Sequencer, with four times the decoding speed of existing products. Dragon Genomics will be employing Shimadzu's sequencers in its new genome analysis facility. In March 2000, Shimadzu teamed up with Australian bioventure Proteom Systems to jointly develop technology and equipment for a high-speed protein analyzer. In April 2000, the company established its Genomic Research Center to perform genetic analysis on a consignment basis.

BIOTECH BOOM AND BUST
In the 1980s and early '90s, investors gobbled up stocks of biotech ventures, which promised a range of beneficial products, from cancer treatments to more nutritious genetically modified food. However, these investors were let down when many biotech ventures burned through their cash, bled deep red, and saw their bubble share prices burst. While the mapping of the human genome has re-ignited fascination with biotech, investments in biotech plays in Japan or elsewhere at this early stage of genomics should be considered speculative at best.



Augie Tam is the founder of GaijinInvestor.com. He can be reached at augietam@gaijininvestor.com.

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