Japanese Earnings Roundup: Shionogi Rebounds From U.S. Acquisition Woes With C&O Pharmaceutical For China; Astellas Ponders Mirabegron's Reproductive Warning

TOKYO - Shionogi & Co. Ltd. will expand its operations in China with the acquisition of C&O Pharmaceutical Technology Ltd., following through on a promise from its midterm plan to push into Asia to mitigate the 2016 patent loss of blockbuster Crestor (rosuvastatin).

Shionogi announced Aug. 1, the same day it announced first quarter earnings for FY2011, it would acquire 24.17% of Singapore-listed C&O from shareholder Leo Star Development Ltd. and then make a general offer of SGD50 cents per share for 277,506,000 shares - equaling a 39% premium over the three-month average closing price. In total, Shionogi expects to contribute SGD219 million ($182.2 million) for the acquisition. Shionogi has available cash of ¥174.9 billion - nearly $2.3 billion with the current strong yen - according to Jeffries analyst Naomi Kumagai.

Interestingly, Shionogi said it will run C&O as a joint venture with massive Japanese holding company Sumitomo Corporation. Sumitomo acquired a 29% stake in C&O in December and has three members on C&O's board of directors, including Sumitomo Life Sciences Department Deputy Manager Tatsuya Suto as chairman. C&O founder and current Executive Director Gao Bin will retain 5% of C&O shares and will remain in his management position with the company.

Shionogi told PharmAsia News it will "play the main role in C&O management" while Sumitomo will "cooperate on business development."

Deal Gives Shionogi Nationwide Distribution Network In China

Shionogi says the deal gives the company "a nationwide pharmaceutical distribution network in China" as well as an inroad for development in China thanks to C&O's experience with development and interaction with regulatory authorities in China. According to C&O, it has access to more than 2,000 distributors and 300,000 hospitals, clinics and pharmacies throughout China. C&O is the distributor for a number of antibiotics, including amoxicillin, ambroxol, cefradine and Meiact (cefditoren), and already markets Shionogi's antibiotic for Gram-positive/Gram-negative and anaerobic bacteria Flumarin (flomoxef) on a deal signed in April.

A map of C&O's sales offices and head offices shows the company is well-distributed, not just on the east coast, but into more central parts of China. The company lists a head office in Chengdu in addition to head offices in Southern China in Shenzhen, Macau, Hong Kong, as well as Nanjing and Shanghai. C&O also operates sales offices in China's tier-two and tier-three cities, including far Western extremities Urumqi and Kashgar.

Of note is the fact that C&O is listed in Singapore even though its operations are in and for China. Dealmakers from companies like Sanofi have targeted Chinese companies with listings in Hong Kong, Singapore and the U.S. with the idea that valuations in these countries may be more reasonable and acquisitions may close more quickly (Also see "How Much Risk Should Big Pharma Accept To Close Deals In China? (Part 1 of 2)" - Scrip, 17 Jan, 2011.).

Chinese companies listed in Singapore and Hong Kong are also attractive to foreign companies because of a perception of greater transparency. Chinese companies that have pursued IPOs recently have favored Hong Kong, hoping to attract global interest.

Shionogi said it was "interested in the corporate culture of C&O. As C&O has a complete function as a pharmaceutical company with research, development, manufacturing and sales, they are different from venture companies."

Any variables that contribute to a smooth acquisition process will be welcome relief for Shionogi. In May 2010, the company attempted to purchase the U.S. pain specialty company Victory Pharma for $150 million. But three months later, Shionogi pulled out of the deal, citing an "unforeseen development that occurred after the agreement was signed." Shionogi announced July 18 that instead of acquisition, it would acquire all of Victory's currently marketed products, seven pain treatments and two antibiotics, for an upfront of $118 million with an additional $9 million in potential milestone payments.

Shionogi has also had disappointing results from its U.S. acquisition Sciele Pharma. The company announced in its Aug. 1 earnings report that it lowered the FY2011 first half forecast for its U.S. operations from $128 million down to $91 million due to "underperformance of new products and generic competition" for products like hypertension treatment Sular (nisoldipine). The company expects to make back some of the unexpected sales declines from its Victory acquisitions.

Shionogi pushed into the U.S., and now China, as it said it would as part of its Third Midterm Plan for 2010-2014. Shionogi will lose a steady stream of royalties from AstraZeneca PLC in 2016 when blockbuster Crestor (rosuvastatin) loses patent protection in the U.S. The company reported first quarter royalties of ¥15.2 billion ($196.3 million).

To prepare, Shionogi said it needed to expand into new markets, and to do that on its own instead of relying on licensing partners. After establishing a presence in the U.S. with Sciele in 2009, the company said it would target Asia, and not Europe, for its next wave of expansion (Also see "Shionogi Spurns Europe, Places Bets On Asia For Global Expansion - Bio Expo Japan" - Scrip, 1 Jul, 2010.).

Shionogi identified China as "the most important market to enter" given the population size, rising incomes, aging society and increased access to insurance.

Astellas' Mirabegron Reproductive Warning

Astellas Pharma Inc. received approval for overactive bladder treatment Betanis (mirabegron) in Japan July 1. But the drug's first market approval also came with a label that warned patients of reproductive age to not use the drug, and analysts wanted to know how the labeling would affect the drug's global market.

Asked about "the atrophy of reproductive organs" in a mirabegron rat study and the warning label, Astellas CFO Yasumasa Masuda declined to comment on why the company received the label.

"This drug has a new mechanism and the mechanism reaction is not very clear. So we had communication with the regulatory authority and we decided to accept this label. ... We will take a cautious approach to elucidate the mechanism," Masuda said.

The company is currently waiting on analysis from a completed long-term Phase III safety study for mirabegron, mostly to assess cardiovascular risk. Astellas believes it can file an NDA for mirabegron in the U.S. in the second quarter (Also see "Astellas Awaiting Safety Data For Mirabegron; Expects To File NDA In U.S. In Q2" - Scrip, 25 May, 2011.).

Astellas expects to receive a National Health Insurance price listing in Japan in September or October. "We intend to launch the product as quickly as possible and we are getting ready for it," Astellas said.

The company also announced Aug. 1 prostate cancer treatment MDV3100 entered Phase III trials in Japan and Asia, joining the PREVAIL study to target chemotherapy-naïve prostate cancer patients. Astellas acquired global rights for the drug from Medivation Inc. for an upfront $110 million with $335 million in potential development milestones and $320 million in potential commercial milestones.

- Daniel Poppy ([email protected])