Oct. 19 (Bloomberg) -- Kirin Holdings Co., Japan's biggest brewer, is in talks to buy Kyowa Hakko Kogyo Co. to triple the size of its drug unit as beer sales stall.

The talks, reported earlier in the Nikkei newspaper, were confirmed by Kirin spokesman Hiroki Umezawa. Kyowa Hakko shares surged to a seven-year high, pushing up the Tokyo-based company's value 17 percent to 560 billion yen ($4.9 billion).

Buying Kyowa Hakko would give Kirin a maker of allergy drugs and developer of cancer treatments that more than doubled first-half profit. Beer production in Japan fell in the first half to the lowest since records began in 1992.

``It's a good move for Kirin to strengthen its drugs and biotechnology business,'' said Shunichiro Manome, an equities analyst at Cosmo Securities Co. in Tokyo. ``There's little growth in Japan's beer market.''

The Tokyo-based beermaker is seeking to purchase more than 50 percent of Kyowa Hakko to merge with its own drug unit, the Nikkei said, without saying where it obtained the information. The acquisition would cost more than 300 billion yen if a 30 percent premium was paid, the report said.

Kirin, which makes the anemia drugs Espo and Nesp, had 67.2 billion yen in sales from pharmaceuticals last year.

Kyowa Hakko, maker of the allergy medication Allelock, had 131.5 billion yen in sales, accounting for 37 percent of the business. The rest of its revenue comes from chemicals and food products.

The company also owns the rights to a process known as Potelligent that increases the effectiveness of drugs used to treat immune disorders.

Technology Rights

It has licensed the technology to nine companies including Takeda Pharmaceutical Co., Biogen Idec Inc. and Genentech Inc., the world's second-largest biotechnology company.

``The combination should be significant for Kirin's pharmaceutical business's growth story,'' Naomi Takagi, a JPMorgan analyst, said in a report to clients. ``Both companies possess relative strengths in antibody drugs.''

Kyowa Hakko shares rose 200 yen, their daily limit, to 1,402 yen on the Tokyo Stock Exchange today. The stock is the best performer on the 35-member Topix Pharmaceutical Index this year. Kirin shares rose 19 yen, or 1.2 percent, to 1,586 yen.

Kirin President Kazuyasu Kato said in February the company was looking to strengthen its drug business and acquisitions would be considered.

Japan's drugmakers have been merging as government price controls squeeze profit margins.

Mitsubishi Chemical Holdings Corp. agreed to buy Tanabe Seiyaku Co. in February. Astellas Inc., Japan's second-largest drugmaker, was formed by the 2005 merger of Yamanouchi Pharmaceutical Co. and Fujisawa Pharmaceutical Co.

Rising Costs

Kirin's first-half profit fell 12 percent on rising prices for brewing malt and aluminum beer cans. The company said today it will form an alliance with rival Suntory Ltd. to procure aluminum and cardboard packaging to reduce costs.

Revenue rose 6.8 percent to 836 billion yen in the half, bolstered by last year's purchase of a controlling stake in Japanese winemaker Mercian Corp. Sales of beer were little changed at 447 billion yen.

To contact the reporters on this story: Kanoko Matsuyama in Tokyo at kmatsuyama2@bloomberg.net; Maki Shiraki in Tokyo at mshiraki1@bloomberg.net.

Last Updated: October 19, 2007 03:25 EDT