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How Osamu Nagayama led Chugai Pharma to become a global business

Interview with Osamu Nagayama, Chairman, Chugai Pharmaceutical Co Ltd

Founded in 1925, today Chugai Pharmaceutical Co. is one of Japan’s largest pharmaceutical companies and a top global biotech research company. And the global vision of Osamu Nagayama, its current chairman and former CEO, is credited for much of that success. A business school graduate, Nagayama joined the company in 1978 and in his first years, observed how the company shifted its focus from chemical compounds to the use of biotechnologies in its drug discovery. With an astute sense for industry trends and management, Nagayama quickly moved up the ranks, moving from manager to director, then, in 1992 he was named CEO, a position he held until 2018.

As a leader, Nagayama stressed the importance of globalization and transforming the company from a national leader into an influential global player that works for the benefit of health worldwide. Yet, being a pragmatist, he saw the approximately $6 billion price tag on developing just one global product and decided to carefully consider how the company can best succeed on the global market. And it was during a summer holiday meeting with the former CEO of Swiss multinational healthcare company Roche that Nagayama saw an opportunity for the company to continue focusing on its strengths in research, while also gaining access to the global market. Thus began the next major transformation of Chugai, which strategically merged with Roche in 2002. In the context of Japanese corporate culture that esteemed companies that went international while remaining independent, this was a pioneering move.

Through this alliance, Chugai was able to focus on its strengths in research while growing its international market share through Roche Group’s global network. Today, it has more than 500 people engaged in clinical development and holds the dominant position in Japan in oncology, the nation’s fastest-growing sector. Several of its innovative drugs are also growing on the international market, including medications to treat arthritis, gastritis and the side effects of chemotherapy. Chugai is also one of the industry’s most profitable companies, with its share price nearly tripling over the last five years.

In this interview, Nagayama, who is also chairman of Sony, explains the strengths behind the Chugai’s research and why forming win-win relationships is critical for success in the global marketplace.

What are the competitive advantages of the company in terms of business processes?

Pharmaceutical companies can only survive with a successful research and development procedure and good results. You can negotiate with the government on the pricing of some old drugs, but there is little to be gained there. For Chugai, it has been very important to build a platform to develop innovative medicine, and in order to develop innovative medicine and build a platform, I personally believe that the company really has to possess at least three modalities: small, middle-sized and large molecules.

The first one is the small molecule, which is the traditional drug that we saw in the 20th century. We’ve seen so much innovative medicine developed out of a chemical compound. The H2 receptor antagonists, which are used to treat peptic ulcers, are good examples. Before their introduction of the tablet, patients often had to be operated on. That was a phenomenal success. Blood pressure medicine is another example, and toward the end of the 20th century, statins were the most meaningful product in treating high cholesterol, which became a huge market.

The second one came around the year 2000 when former U.S. President Bill Clinton and the then-prime minister of the United Kingdom Tony Blair declared that the 21st century would be the century of life science. A few years later, the human genome was completely decoded. During that period, many companies which operated on the small molecule modality shifted their research resources from chemistry into large molecules, high molecular weight products. They moved from small to large molecules, albeit not completely, as the small molecule modality probably will continue to offer interesting opportunities in the future.

Having said that, at the same time, many of the successful products had already been developed and marketed in the 20th century and become generic products already. To discover any small molecule medicine that exceeds existing products in terms of efficacy and safety is a very high hurdle for any company to overcome, and it would cost a fortune to develop. This, when the healthcare economy would like to see lower-cost medicine.

In the 21st century, therefore, the time for biotech products began, and most Japanese companies turned their eyes to biotechnology. In America, bio ventures emerged, which were small start-up companies, and when it came to the commercial development of their findings, they could find big partners like Pfizer. But in Japan, the same thing didn’t happen. Japanese companies had very strong chemists, but to enter the new world, forming a team of biologists and molecular biologists costs a fortune, and it could take easily five to 10 years to reach a result. Many companies in the U.S. were buying the existing start-up companies or bio ventures, but in Japan, this didn’t happen due to limited financial resources.

“In the last several years we have been the most productive research company, and we will continue to be so”

Doe this continue to be the main problem in Japan?

I believe so. There are only two companies in Japan that have a platform of biotechnology, and one of them is us.  Compared with the U.S., Japan’s entry into biotech was very late.

What has been your approach to maximizing value for your customer base?

Traditionally, any company, including Chugai, when they start a research operation, always identifies what is the medical need of the patients and what is the need that is not met by the current therapy. We are very patient-oriented from the very, very beginning.

In the 20th century, because the targets are limited resources if one target like the H2 receptor antagonist appears, then many companies rush in to develop the new drugs and change the chemical structure so that they can patent their products, although they are very similar to the original one. And so, marketing power was still very essential for a company to succeed.

One change in the United States is that the Obama Administration started to focus on precision medicine, and now you really have to create personalized medicine there. Therefore, nowadays we are developing products that would hit, for example, a particular mutation in lung cancer, rather than developing a lung cancer product which could be prescribed for all lung cancer patients.

“We are taking a lead in the area of middle-sized molecules, mainly because of our strength in small molecules and large molecules”

You led the company 16 years ago to a strategic alliance with Roche, which was unheard of in Japan at that time. What led you to pursue this partnership, and how has it impacted the company 16 years on?

In the year 2000, I visited Basel and met with Dr. Franz Humer who was then the CEO of Roche, during the summer vacation. He and I held regular meetings, but company-wise there was no relation. We just knew each other personally and exchanged views about the pharma industry. We agreed that it was probably high time for each company to really consider future strategies.

Everybody wants to succeed globally and to make products and market them through a network of your own across the world. That was the typical dream of CEOs of large pharmaceutical companies. But for Chugai, which was a leader in biotech research and development to manufacturing, I knew that this may not be feasible given our size. Many researchers had started moving into and presenting a lot of investment opportunities, but each one was so expensive, and for Chugai to take all the opportunities was financially impossible. And Roche couldn’t do it. They had Genentech in the U.S., and this was one of the biggest biopharma companies. Still, the three companies together would probably be a critical mass, but never large enough. So, we started a discussion that in order to meet the challenges of the coming biotech environment, we should merge our operations in such a way that each company remained independently managed.

It would not be easy for Chugai to develop its innovative medications, eventually launch into the biggest markets like America and Europe and build a sales network. It is not possible for a Japanese company of this size to overcome that on its own. But Roche has a sales network as well as manufacturing facilities and research centers. So, I thought that rather than marketing our own products, which may come in every three or four years, Roche has already developed a platform of developing three or four products per year and develop several products clinically, which is very expensive at the same time.

According to Tufts University in Boston, to develop one global product for the world market would cost you nearly $6 billion. That was a statistic from about eight years ago. Who can afford to do this? It is impossible. Not only that, but the patents expire on average every 10 years, so, theoretically, you lose all the products within 10 years. So, companies have to fill the gap to create new drugs next year and the year after next.

"In 2000, I met with the former CEO of Roche in Basel during the summer vacation. Company-wise there was no relation but we knew each other personally and regularly exchanged views about the pharma industry. We agreed that it was high time for each company to really consider future strategies"

Is this the gap that Chugai fills?

Yes. We agreed that it was important that the three parties contributed to each other to create new medicine. Roche, combined with Genentech, has a very extensive marketing sales network outside of Japan. So, although we are represented in a few countries in Europe – Great Britain, France, Germany, and also China and Taiwan, we are not a global company in terms of the marketing and sales. However, we develop new products that are for large global development and this is taken care of jointly by Roche and Genentech. They are our window to the global market.

Have the predictions that you made about the industry with the CEO of Roche come true? Do you think that you made a good judgment of the market?

We are lucky that we have achieved probably 150 percent of our target. We are one of the most profitable companies right now. Although we are not physically globally represented, we are seeing an upward trend in income from the products that are sold through the Roche network in the U.S. and Europe in the form of royalties. That has become a source for further R&D. Dr. Humer and I anticipated that within several years Chugai’s research would be much stronger because of the alliance and that Roche could rely on the products inflow from Chugai, which has happened.

“In oncology, we have around a 21-percent market share, which is almost double that of our nearest competitor”

You said in 2009 that you wanted the company to become a top pharmaceutical company. How has the progress been, and has the company become what you envisaged it to be?

In terms of innovation, I think in the last several years we have been the most productive research company, and we will continue to be so. That is because we possess the three modalities I mentioned: the small molecule, the large molecule, and the new one which has not yet produced any product – the middle-sized molecules. We started a research project called Apollo 10 years ago on the middle-sized molecules, and this is an area where we are taking the lead, mainly because of our strength in small molecules and large molecules.

We have become one of the top pharmaceutical companies. With good strong medicines and products in our hands, it has not been so difficult to develop a very strong marketing and sales team. We have had so many products licensed in from Roche, and we develop them clinically for the Japanese authority’s approval. In 2009, we had 80 or 90 people engaged in clinical development, and we have now more than 500 people.

Oncology is now the fastest-growing sector and almost every major company is rushing into it. In this area, we have around a 21-percent market share, which is almost double that of our nearest competitor.

Given your partnership with Roche, does that mean that the company is not aiming to continue expanding its global business?

Roche has a right of first refusal to any products or projects. They have said no a couple of times – it is sometimes difficult for a company to judge a product or project developed by another company. They have to assess what is the commercial opportunity, and what is the possible success rate in the market. When they decline, theoretically we can do marketing and sales for the U.S. market, but again, it comes back to what are the expectations for a mid-sized Japanese company to achieve in the U.S. with only 1 or 2 products? You may have a nice 10 years, but as soon as the patents expire, you have to do a lot of restructuring. Many Japanese companies have done this. They opened up their commercial operations in the U.S. with just a few products around the year 2000, and then many of them came to the end of the patent, and now they are restructuring. Meanwhile, a large company like Pfizer, Roche or Novartis has at least 10 world selling products which account for only 50 to 70 percent of their entire sales, and they have many projects in the pipeline. This is the base that you really need in order to keep going as a global player.

What role are new technologies like AI playing at Chugai?

We are applying AI and IT to research and development as well as marketing. Our objective remains to bring solutions to the patients. In order to develop and commercialize this medicine, it is quite likely that AI and IT will play a significant role in the way that they can lower the cost of operations significantly. Our team is now looking for new areas where these technologies can be applied.

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