Pharm Exec Q&A: Japanese Wedding

May 1, 2006

Pharmaceutical Executive

Volume 0, Issue 0

Just how traditional marriages join a couple together from a common culture, Daiichi and Sankyo are merging based on a sense of having come from the same place, and facing the same future. But the art of integration lies in creating new ways of working that make the marriage bigger than the sum of its parts. Officiating the marriage is John Alexander, MD, head of pharma development for Daiichi Sankyo.

Spring is one of the most beautiful times of the year in Japan. All along the country, the cherry blossoms are in full bloom—pink flowers so beautiful that throughout the country, viewing parties and festivals sprout up, drawing national attention and crowds of tourists.

John Alexander, MD, writes about this colorful scene from his hotel room. He retains his outsider's appreciation for it, having never lived in Japan. But he certainly spends enough time there: He's worked at Sankyo Pharma for seven years, and each month, he takes the day-long journey from New Jersey to the company's headquarters in Tokyo.

But Alexander came to know Japan—and Sankyo, for that matter—long before he joined the company. It was 1985, and Alexander was working for Bristol-Myers Squibb. He had traveled to Japan to meet with Sankyo and secure a license to Pravachol (pravastatin), one of the first statins, which would later become BMS' biggest seller.

Fast Stats

Back then, Alexander saw this as a major success for BMS. But today, working as the president of Daiichi Sankyo pharma development, he sees that licensing deal as symptomatic of the scale of Sankyo—it was simply too small to sponsor the major clinical development and marketing programs needed to realize the potential of that blockbuster. By licensing out drugs like Pravachol, and now prasugrel—a very promising Phase III compound co-developed with Lilly—Sankyo loses much of the value of its pipeline.

It couldn't continue to compete that way. So in September 2005, Sankyo announced its intent to merge with another Japanese company to form a new company, Daiichi Sankyo. On April 1, 2006, at the height of cherry blossom season—which has become synonymous with new beginnings—the new entity of Daiichi Sankyo was born in the United States. By next April, the companies expect the integration in Japan to be completed.

Critics have voiced their concerns. They say Sankyo had a more promising pipeline than Daiichi, particularly because of the anti-platelet agent prasugrel. They also say the combined portfolio can't justify the company's plans for growth. The two companies are just following on the heels of the Fujisawa/Yamanouchi merger to form Astellas, some critics say, without carefully considering the consequences.

"On paper, looking at the merger and the way the two management teams talked it up, it looked like a reasonable plan," says Alex Grosvenor, a senior life sciences analyst with Wood Mackenzie. "Daiichi is a company that was very strong in anti-infectives and also had a growing cardiovascular portfolio, whereas Sankyo is Japan's leading cardiovascular company, and has some anti-infective products as well. So combining the two, you have a company with greater critical mass with more money to spend on R&D. But it soon became apparent that there are quite a lot of products in these two portfolios, and others, that are overlapping."

The Language of Consensus Building

But John Alexander, with nearly 30 years of drug development experience, doesn't pay heed to the critics. Instead, he sees Daiichi Sankyo as a cardiovascular and anti-infective powerhouse, and is staying focused on what may be the most important task of a merger: the delicate art of integrating the research operations of two companies. Here, Alexander talks about the goals of the merger, the progress thus far, and shares insight into the development plans for prasugel.

Pharm Exec: What were the main drivers behind the merger?

Alexander: We think the merger was a lot about research and having sufficient scale to be competitive in the global marketplace. Both Daiichi and Sankyo had modest R&D budgets, but not large enough to be extremely competitive in the therapeutic areas they were in.

The other problem was that both companies had to license a lot of their products to other Big Pharma companies because the cost of development was just too high. We thought that retaining the value of our pipeline was really a critical issue, and that having larger-scale R&D could help us keep the key projects in-house and develop them ourselves.

What integration activities have taken place so far?

We began working right after the merger was announced at the end of September [2005]. Of course, it was a great concern to our investors that the R&D organizations combine certain aspects of those groups as quickly as possible. But it's like redesigning the plane as you're flying it. We had to combine the decision-making process as quickly as possible and prioritize the combined pipelines to determine the most important products (see "Priority Compounds").

Priority Compounds

But I think the secret to the success of the integration was forming teams from both companies. It is a true statement that most integrations are failures. The reason, I think, is that there is a lack of true blending of the organizations. After I was appointed to head the integration, we quickly set up a four-person leadership board, with two people from each company—two in Japan and two in the United States. That became like the executive committee for the integration.

The second step was to create a lower-level team. So we picked a senior R&D person from both organizations to be the team leaders, and then they organized a team to start discussing integration. And now there's many, many teams, and of course, many, many people.

On John Alexander´s bookshelf

What model did executives follow for the integration?

We looked at the reorganization that we did in Sankyo several years ago. After I joined, it was clear we weren't functioning as a global company, and our decision-making processes were quite difficult and cumbersome. What we learned with our reorganization teams is that a bottom-up process seems to work best. We try to reach consensus at lower levels. Management needs to set the broader vision and goals and then let the teams find the best answers. I recently read a book by Carlos Ghosn, who led Nissan out of near bankruptcy. What surprised me in the book was that the process he used was similar to what we did in the past with our R&D reorganization. And, of course, the outcome at Nissan was terrific.

When some people come to Japanese companies, they're concerned that this is going to be some kind of crazy nemawashi—the process of trying to reach consensus. It's quite a different process than the West, where it's more top down.

But this process of building consensus is very important. Our project teams don't come to management and ask, "Should we do A, B, or C? What indication should we pursue? What do we do about some toxicity problem? What kind of dosage form should we have?" They say, "We've reached a consensus. This is what our global team recommends." Once that decision is made, there's not a lot of reworking. Teams don't come back the next month and say, "Oops, there's a new problem we didn't think about." It's hard for those teams to do that, but there's rarely any disconnect with management. Very few things are turned down at that level.

Those teams also are able to reach a consensus that the product isn't worth developing anymore—I haven't really seen any team in Western companies be able to do that.

What is the key to integrating the companies' research functions?

Building global development teams. That isn't unique by any means. But at Western companies, they usually don't have members from Japan because of the difference in language, time zones, etc.

But Japanese companies have to be truly global, with representatives from Japan, Europe, and the United States. That means, at least initially, there has to be a lot of face to face in order to build the relationships. After that, we can use e-mail, videoconferences, and teleconferences. But the relationships must come first. I know when I started, the language and the time differences made the video conferences and teleconferences ineffective. One of my bosses said one face to face was equal to ten video conferences, which was equal to 100 teleconferences.

So the US executives visit Japan. But how can employees bond in such a short timeframe?

In the Japanese business culture, dinners are a very important bonding opportunity. While business issues are not usually discussed directly, they can lead to trust and understanding. I often say the quality of our business dinners is the secret of the success of our integration.

Companies often merge to gain products. But some analysts say Sankyo's pipeline overlaps with Daiichi's and will cannibalize sales.

From the R&D perspective, we think that the overlap of therapeutic areas is a strength. It makes our core areas truly competitive. We do have several compounds approaching development in the same class. We will be charging our teams with the task of selecting the best one to recommend to the management for continued development, based on the attributes on the compound and not its origin. I actually proposed renaming all of the codes to "DS-" so we could forget the origin of the compound. And as the research groups are consolidated, we will be able to reduce further conflicts within the same therapeutic areas.

What do you see as the biggest synergy between the companies?

Daiichi was a smaller company, and commercially, it had few products in the US market. It had no presence in the European market on the commercial side. But I think the company brings a similar heritage—a 100-year-old history in the pharmaceutical business. It's a very similar history as Sankyo.

Our president, Mr. [Takashi] Shoda, wanted to merge with a Tokyo-based company because he thought some of the cultural differences could be minimized with a company in the same town. That turned out to be quite true.

Look at Astellas. Fujisawa was an Osaka-based company, and Yamanouchi is in Tokyo. In the United States, Fujisawa was in Chicago, and Yamanouchi was in New Jersey. When they integrated, they expected that a lot of people from New Jersey would move to Chicago. And that didn't happen. I used to work at Searle in Chicago, and I knew it wouldn't happen because people from New York aren't moving to Chicago, and Chicago people aren't moving to New York. And it's much the same way between Osaka and Tokyo. They lost a lot of people they thought they wouldn't have.

We didn't have that challenge because both companies are based in Tokyo. And both US sites are in New Jersey. Now, we lost some people because the sites were an hour away—and in traffic, that's not easy. But 65 percent of the Daiichi people joined Daiichi Sankyo—and we're pretty happy with that.

As Daiichi and Sankyo integrate, all eyes remain focused on prasugrel. When did you first realize the drug's effectiveness?

Shortly after I joined Sankyo, the research group asked me to review a compound that they were considering for licensing, CS-747. The preclinical development work was truly impressive. The team had completely described the metabolism of CS-747 and also of Plavix (clopidogrel) —which wasn't published—and outlined the potential differences. They also described the results of a Phase I study where they found volunteers that didn't respond to clopidogrel while all of the volunteers responded to CS-747 in terms of platelet aggregation. At this point in time, the variability of response to clopidogrel was not widely recognized in the cardiology community. This study showed the potential.

We're now co-developing prasugrel with Lilly, which is in Phase III in the midst of a 13,000 patient trial. We hope to file that by the end of next year. Plavix is about $6 billion in sales. We certainly believe [prasugrel] will be a strong competitor to Plavix.

What were some of the issues you considered in developing a head-to-head study with prasugrel and Plavix?

We didn't have much choice. It was clear that for the most important indications, Plavix was already approved. We thought that a head-to-head comparison would be the best way to show the potential superiority of prasugrel.

We conducted comparative cross-over studies, which suggested that prasugrel provided higher, faster, and more consistent effects than clopidogrel. Also in a Phase II study that we conducted, there was a trend in the reduction of the incidence of major cardiovascular adverse events in favor of prasugrel.

Daiichi developed Plavix in Japan. Can it be part of prasugrel development?

No. We must maintain a "firewall" so potentially critical information is not exchanged between the companies. Sankyo in Japan is in charge of the prasugrel development.

Looking forward, what are your biggest challenges?

We're now combining the organizations in the United States and Europe. That's all gone extremely well. The R&D integration in Japan will be completed next April and that's where a lot of our focus is now.

Growing Big, Staying Small

For the last decade, Joseph Pieroni has presided over Sankyo's commercial operations. Recently, he was named president of the newly formed entity, Daiichi Sankyo. Here, Pieroni offers his perspective on the merger, and the challenges of managing during an integration.

On Building Scale

When Yamanouchi and Fujisawa came together, it was definitely eye-opening. It led to the natural question, "Is this a good thing?"

Joseph Pieroni, President of Daiichi Sankyo

In the case of Daiichi Sankyo, the answer was yes—particularly to be able to match the scale of companies in Japan, and multinationals outside of Japan. Whether this is the perfect match or not is debatable, but the critical mass is absolutely essential for Sankyo and Daiichi to be able to compete on a global scale.

Both Daiichi and Sankyo were kind of losing momentum—they were becoming smallish compared with some of the big companies coming into Japan, like Pfizer. Together, their sales force ranks second in that country in terms of size.

But now, we face the prospect of doubling the size of our company and infrastructure to accommodate the launch of new products in the next two years. Currently, we have 1,000 people in the United States, most of them in our sales force. But we need more effort here. In a five-year period, we could be looking at 3,000 people.

That's still pretty small, and it's clear to us that there is an advantage to that in terms of culture, intimacy, and flexibility. As we become larger, we cannot lose that focus. We have many people who come from Big Pharma and they like the small company atmosphere. The challenge is to be able to maintain that attractive culture, but yet be able to compete with the bigger companies, and to be able to grow and triple our size.

On Leading Change

The key to leadership is to be able to construct a vision of what the company could be realistically—and to articulate that vision to the whole organization, and then live through that strategic planning vision. If you don't know or can't articulate where you're going to be in five years, it's impossible to lead.

We did that from day one. We put together a five-year strategic plan, and we continue to live and evolve that plan. We will now spend this year reaching a steady state as an integrated company and creating a platform to launch three products in the not-too-distant future.

The biggest challenge for a leader during a merger is to not be distracted from the everyday job of running the business. It definitely changes your life for a full year. There's a huge challenge in that large chunks of time must be devoted to the integration. We worked with an outside consulting firm, Deloitte, to carefully design the process to take some of the workload off of the managers. But you still find yourself in double gear, trying to run the business and conducting a fair process for the integration. There's no magic to it. It is a lot of work. Fortunately, we had a very good year in the United States last year, so we were able to exceed our targets for sales and profit, and at the same time, every single manager throughout the company was involved in the integration.