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Yamanouchi Pharmaceutical Co. and Fujisawa Pharmaceutical Co. said Tuesday they have agreed to merge in a bid to survive intensifying global competition.

The merger, scheduled to take place on April 1, 2005, will create the country’s second-largest drugmaker after Takeda Chemical Industries Ltd. in terms of worldwide sales.

Yamanouchi is currently Japan’s third-largest drugmaker, and Fujisawa is fifth.

The announcement comes at a time when the U.S. and European pharmaceutical giants have been globally expanding their scale of operations through mergers and acquisitions.

The union could trigger a consolidation trend in Japan, where a number of relatively small companies vie for a market whose growth has been sluggish.

The merger will be carried out by Yamanouchi allocating to Fujisawa’s stockholders 0.71 of one of its shares for each Fujisawa share.

“(The purpose of the merger) is to remain in a winning camp as a global player,” Yamanouchi President Toichi Takenaka told a news conference. “It is the best choice for us to continue growing in the severe business conditions.”

The new company, whose name has yet to be decided, will be headquartered in Tokyo, where Yamanouchi is based. Fujisawa is one of the Osaka-based drugmakers, which include Takeda.

Fujisawa President Hatsuo Aoki will assume the post of chairman in the new company, and Yamanouchi’s Takenaka will become president and chief executive officer.

Combined sales of the two companies stood at 889 billion yen for the year ended in March last year, positioning it behind industry leader Takeda, which had 1.05 trillion yen in sales.

Officials of the two firms said the new company will have No. 1 spot in the domestic prescription drug market, with a 7.7 percent market share.

The two firms announced in October that they would merge their over-the-counter drug business by setting up a joint venture this October.

But they decided to take a step further to unite their entire operations, officials of the two firms said.

Yamanouchi’s Takenaka explained that it is imperative to become “a global mega player” to survive the current business environment.

Faced with skyrocketing medical expenses, governments of industrialized nations have been curbing prescription drug prices.

At the same time, drugmakers are under increasing pressure to spend more on research and development to produce new drugs.

The two companies said the merger will result in the 17th-biggest pharmaceutical firm in the world, and the new company will aim for annual sales of 1 trillion yen for the year ending in March 2008.

Fujisawa’s Aoki said they will eventually take aim at the top 10, and he did not rule out M&As in achieving that goal.

The officials said the merger of Yamanouchi, maker of urinary disorder drug Harnal and peptic ulcer treatment Gaster, and Fujisawa, maker of immunosuppressant Prograf, is complementary in therapeutic product areas and synergy effects can be expected.

Yet, even the combined operation pales in comparison with the world’s top drugmakers, which have expanded their presence by aggressive M&As.

At No. 1, Pfizer Inc. of the U.S., had global sales of $45.19 billion, and No. 2 GlaxoSmithKline PLC of the U.K. had sales of $35.16 billion for 2003.

In terms of the research and development budget, the combined figure of Yamanouchi and Fujisawa of 145 billion yen earmarked for the year through March is less than one-fifth that of Pfizer.

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