Japan Special: Deal mechanic

Tokio Marine Capital built Bushu Pharmaceuticals into Japan’s number one drug contract manufacturing company and a top 10 global player.

The business of developing and manufacturing drugs is one that had captured the interest of Tokio Marine Capital (TMC) for some time.

“We had been looking at the exponential growth of the CMO [contract manufacturing organisation] market in the United States and how private equity investment in that market functioned in the country,” says Koji Sasaki, managing partner and president of the private equity arm of Japan’s Tokio Marine and Nichido Fire Insurance.

Previously, Japanese law had required local drug licence holders to conduct part or all of the drug manufacturing process in-house, but an amendment to the law in 2005 to allow full outsourcing brought Japan into line with Europe and the US, and in turn paved the way for growth in the CMO industry.

When Sionogi Group, one of Japan’s largest new drug manufacturing companies, decided to sell non-core subsidiary Bushu Pharmaceuticals, TMC’s track record as the owner of generic drugs manufacturer Showa Yakuhin Kako and healthcare insurance claim analysis business Japan Medical Data Centre meant it was perfectly positioned to triumph in a competitive process.

The firm acquired the business in a ¥20 billion ($179 million; €159 million) deal, with an equal debt and equity split, in 2010, in a country where “private equity investment in the pharmaceuticals industry is not so common”.

While Bushu was the second biggest contract manufacturing business in Japan, on acquisition it was a long way from being a global player. According to Sasaki, it was operating primarily as a “CMO factory” and suffering from being a wholly-owned subsidiary of Shionogi.

“All of the senior managers at Bushu had been seconded from the parent company. [Because of this] they were weak in the mindset of entrepreneurs, so we introduced a new mindset. We told them, ‘You are no longer one part of a bigger company – you are an independent company.’”

Being a subsidiary of a parent drug manufacturer had also reduced the incentive for the company to generate its own client leads and stifled Bushu when it came to signing up new drug developer customers, Sasaki adds.

“As a wholly-owned subsidiary Bushu didn’t need to make a pitch to new clients – it could rely on existing customers, including Shionogi customers, coming to them. And potential new drug developer customers were reluctant to contract Bushu for manufacturing because they were owned by a [rival] drug developer. And Bushu itself was reluctant to make a pitch to Japanese competitors. There were concerns regarding conflicts of interest.”

With efforts to grow its client base being stifled, TMC identified sales and marketing as critical areas to spur growth.

“When we bought Bushu there were only four people in the sales team and this is obviously too small to make worldwide pitches – it’s even too small to make pitches effectively domestically” says Sasaki.

TMC headhunted an experienced manager from Janssen Pharma and asked him to take charge of a new strategic planning division, put together a sales team and develop relationships with pharmaceuticals companies globally. “Bushu already had a relationship with the big US pharma companies like Pfizer, but we needed to strengthen this relationship and develop relationships with more big European and UK pharmaceutical companies.” By the time of TMC’s sale of Bushu, the sales team was 10 strong.

TMC also identified productivity as a stumbling block to increased growth and hired a specialist consultancy, with whom TMC had worked during its ownership of drug developer Showa Yakuhin Kako, to bolster productivity. Sasaki says that the specialist team focused on shortening production lead time, resulting in increased productivity of around 30 percent.

New clients and improved productivity put Bushu on a path to stronger growth, but the firm’s success created a new, if welcome, problem – a shortage of capacity.

“We needed a new plant and the most efficient way to do this was to acquire an existing plant,” says Sasaki.


In November 2013 TMC acquired a production plant from pharmaceutical company Eisai for a price understood to be more than $100 million, paid for through the refinancing of the original leveraged loans TMC had used to buy Bushu.

“Bushu had strong cashflow by this point, debt was decreasing and we had enough capacity to refinance the existing debt and use it to finance the acquisition,” says Sasaki.

While an acquisition was part of the original strategy, Sasaki says they could not foresee “which company would be out there” when they were ready to buy. TMC hired investment banks to scout for potential purchases and the sale of the plant proved beneficial for both parties given the broader trends playing out in Japan’s pharmaceutical industry.

“At Bushu we were running short of capacity and needed a new production plant. And from Eisai’s point of view the production of new drugs is declining and this creates over-capacity (and a willingness to sell production facilities). The whole industry is having a headache with how to utilise existing capacity.”

Because manufacturing was a new concept for management and employees of the Misato plant, Sasaki says a process of education was required to integrate the business smoothly. The deal allowed Bushu to increase tablet production from 3.5 billion to 10 billion and doubled the number of Bushu employees.

Under TMC, Bushu became Japan’s number one CMO company. Sales grew from ¥10 billion to ¥26 billion, moving the company into the top 10 drug contract manufacturers globally by sales, with the number of corporate customers growing by about 30 percent in the five years after the acquisition. EBITDA increased from ¥1.6 billion at acquisition to ¥6.5 billion at exit.

Sasaki says that by the time TMC was ready to sell, Bushu’s growth story meant it had a field of suitors, both in Japan and globally. TMC and Bushu company management “hoped to find a buyer that would help strengthen its future business and, in particular, global expansion”.

TMC hired Nomura to run a competitive auction process, with Baring Private Equity Asia paying ¥60 billion for the company, securing TMC a healthy multiple on its ¥20 billion investment.

Sasaki adds that Bushu Pharmaceuticals’ senior management are eyeing a flotation of the business in the future and this influenced the choice of Baring as the preferred bidders, given the firm’s history of successful portfolio company IPOs.

Sasaki believes that TMC’s ownership of Bushu has helped to shift the narrative around drug manufacturing in Japan, which was previously seen “as purely a cost to some pharmaceutical companies. With Bushu we showed it was possible to change a cost into a profit centre – I think that’s the key story”.