"Japanese pipelines have done a decent job with small-molecule drugs, but the industry has almost entirely missed the biotech revolution," says Toshiaki Iituka, a Japanese economist and professor at Aoyama Gakuin University's business school.

Discussing Astellas' recent $387 million up-front purchase of Agensys, a Santa Monica–based biotech with an oncology-focused monoclonal antibody platform, Hatanaka is candid about the need to play catch-up. "Oncology is highly competitive, the evolution of the science is so quick, and we don't have enough antibody technology within our company," he says.

Can Astellas and its compatriots catch up? Many observers would pose the question less politely: Is the company's way of doing business too "Japanese"—too painstaking and traditional, too risk-averse and consensus-oriented—to make the leap into a new age of innovation?

"The culture doesn't allow you to be a cowboy. It encourages conformity," says Miller Tabak's Les Funtleyder. "If they want to move into high-stakes R&D, they need a whole new approach to how they do things."

As if anticipating the "too 'Japanese'" issue, Hatanaka is accompanied by two American members of his management team: William Fitzsimmons, head of R&D, and Patrick Shea, head of marketing and sales. They sit on either side of Hatanaka and respectfully wait for him to defer to them, with a gesture of his hand, before elaborating on his own answers to my questions. The three form a tableau that illustrates the culture Hatanaka wants to create. "This is not just a Japanese company," he says. "It is not a US pharmaceutical. We are not a Big Pharma, we are not a start-up. We have selected our area and our strengths, and based on that we are building our strategy."

No Hope at Home

The global ambitions of Japanese pharma have been forced on the industry by economics. According to IMS Health, the Japanese domestic drug market grew last year by 3.8 percent, compared to a worldwide average of 6.4 percent. And although Japan's $59 billion market is second in size only to the US, it accounts for just 10 percent of the global total—half of the amount a decade ago.

At 11 of Japan's top 16 drug firms, sales are growing faster outside Japan than in the country. Astellas, a $9 billion company, reports that its domestic sales rose by all of 0.8 percent last year, compared to sales increases of 14.8 percent in the US and 11.4 percent in Europe.

Domestic hurdles have long hampered Japanese pharma's profitability and productivity. Government policies can be blamed for almost every aspect of the market's stagnation except one: demographics. These days, Japanese people are living longer (and require more meds), but have fewer children (future taxpayers). This imbalance has squeezed a national healthcare system that pays 90 percent of senior citizens' medical costs. In an effort to control ballooning expenditures, the government clings to its drug pricing controls—which have proved to be a drag on innovation.

Every two years, the government announces an across-the-board reduction in drug prices, typically 4 to 6 percent. This year, the cut was 5.2 percent, with an additional one-off 10 percent price slash for certain drugs, including Prograf, an immunosuppressant used by transplant patients—and Astellas' longtime cash cow.

"These mandatory price cuts have a neutralizing effect on any drug company's ability to grow," says AVOS Life Sciences' Jim Wahl. "They discourage investment in R&D, which discourages innovation, which discourages profits. It's a vicious cycle."

"The drug market in Japan is dying," says Toshiaki Iituka. "Many firms haven't produced a new drug for 10 years."

Japan's own health ministry has called this a "crisis" situation. According to a 2007 policy statement, "Since 2000, no major-league new drug has emerged from Japan." Yet among the proposed reforms, including a big push to popularize generics, the draconian price cuts went unmentioned.

And as Western giants like Pfizer and GlaxoSmithKline make incursions into the Japanese market, the writing is on the wall. Says IMS Consulting's Ray Hill, "The Japanese companies finally woke up to the fact that they have to defend their market at home and go global."