Fujifilm's Flight of Pharmacy
Most people think of Fujifilm (FUJI) as the brand name that appears on the back of photos and at the end of the credits of Hollywood films. But the company's film business has been in rapid decline for years. That's why executives are eager to diversify into things as far-ranging as cosmetics, endoscopes, and digital imaging tools for doctors to use in diagnosing diseases. In February, Tokyo-based Fujifilm acquired Japanese pharmaceutical company Toyama Chemical for $1.5 billion (BusinessWeek.com, 3/17/08).
Fujifilm's latest results show why executives are keen to find alternatives to film. While operating profits almost doubled to $2 billion and consolidated sales edged up 2.3%, to a record $27.4 billion in the year through Mar. 31, sales in its imaging solutions division, which includes the film and camera business, slumped 9.6%, to $5.2 billion. As a proportion of sales, that meant they accounted for less than 20% of sales for the first time in the company's history.
With the purchase of Toyama Chemical, Fujifilm executives say they're now serious about developing new drugs. Over the past three years, the company has tossed small change at a few pharmas, including $1 million split between Houston's Agennix—which specializes in drugs for cancer and diabetic ulcers—and Gaithersburg (Md.)-based Panacea Pharmaceuticals, which specializes in screening for cancers.
In early 2006, Fujifilm added Japan's Perseus Proteomics to its portfolio, buying a 22% stake in the maker of antibody-based treatments and diagnostics for nearly $10 million. Critics think spending on pharmaceuticals research could drain the company's resources. BusinessWeek Tokyo correspondent Kenji Hall recently spoke with Chief Financial Officer Toshio Takahashi and Life Sciences Division Vice-President Yuzo Toda about their plans.
When did you first approach Toyama Chemical about the possibility of an acquisition?
Toda: Last year. We were looking for a pharmaceutical company that we could work with to fill what we saw as a gap in our business. We weren't thinking of [mergers and acquisitions] at the time. We short-listed five or six companies, both in Japan and overseas. We then asked members of our brain trust if they were familiar with these companies. One of these advisers happened to know a lot about Toyama Chemical. Among the Japanese companies we were considering, Toyama Chemical seemed to have an innovation-centric approach that was similar to Fujifilm's. Last spring, we met with them, and a year later we had reached a deal.
Takahashi: Initially, the discussions were mainly about collaborating on technology. But there was a lot we agreed on and so we decided to study a business tieup. What attracted us to Toyama Chemical was its success rate in developing new drugs, which is higher than most other pharmaceutical companies. But the company is small and has limited funds, so that could delay drug testing. We thought we could help.
Many financial analysts seem to think this is a bad idea for several reasons. They say it could be years before Fujifilm's investment pays off—if it ever does. Last year, PricewaterhouseCoopers issued a report that criticized pharmaceutical companies for a "paucity of innovative medicines reaching the market" despite increased research and development spending.
Toda: We don't think of this as a short-term investment that we can recoup in a couple of years. Analysts tend to focus mainly on short-term gains.
Our commitment is to create a health-care business that can grow over the longer term.
Why make the leap from photo film to pharmaceuticals?
Takahashi: In the past few years, Fujifilm's photo division has been hit hard. Two years ago, we realized that we would be in trouble unless we shifted away from film. We wanted to use our cutting-edge technology to raise people's quality of life. We thought about X-ray films, which we've been doing since nearly the founding of this company. We also specialize in endoscopes and radioisotopes. We thought we could combine these diagnostics with targeted treatment methods. Endoscopes might be used in concert with a new type of drug delivery method, for instance. The global pharmaceutical industry is a 77 trillion yen ($750 billion) industry. In the next couple of years, we're likely to see a lot of expiring patents on drug compounds and we think this offers an opportunity for us.
Toda: The film in your camera is about 15 microns (one-thousandth of a millimeter) thick. Our color film has 17 different layers, each with a different function, and it contains nearly 100 different chemicals. Controlling the chemical reaction to develop these photos is extremely difficult. You have to start and stop the various chemicals at exactly the right time to make it all work. The trick is all in the conversion of chemicals. Drugs targeting a specific [organ or receptor in the body] work the same way. We have a chemical library of 200,000 compounds, which we think will help us with creating new compounds, and we have an expertise in nanotechnology. From our viewpoint, it's more a question of why not pharmaceuticals?
Toyama Chemical's influenza treatment, T-705, has attracted attention as a potential alternative to Tamiflu, which is marketed by Swiss company Roche (RO.F) and Foster City (Calif.)-based Gilead Sciences (GILD). How does Fujifilm specifically think it can help here?
Toda: With T-705, we thought we could help Toyama Chemical speed the commercialization process. Think about the preparation involved for an influenza treatment. A small company like Toyama Chemical doesn't have the resources for a massive new-product rollout. We can offer business and marketing support.
Takahashi: Many drugs are made in higher dosages than we need. That's because they can't be fully absorbed by our bodies. It's a waste of resources, and it can have an adverse effect on organs such as the stomach and liver. We're researching compounds that will work in smaller doses because they will target a specific part of the body.
According to Roche's Web site, Tamiflu is manufactured through a complex 10-step process, and one batch can take six to eight months. Won't T-705 be similar?
Toda: Our expertise is in mass production of materials and chemical compounds. Our films are made in a complex seven- or eight-step process. We want to apply the same principles we have used in making film to making drugs. It's not easy. With each step your yield goes down. Let's say your yield from the first of seven steps is 90%. By the time you're finished with all seven steps it's probably 10%. But we have decades of experience in maintaining high yields.
How soon do you expect T-705 to be on the market?
Toda: Overseas we have finished Phase 1 clinical testing. [Phase 1 marks the first time a new drug is tested on human subjects. The small-scale testing determines whether a drug is safe, how it works inside the body, and what the side effects are.] In Japan it's in Phase 2 [to test the drug's effectiveness] and will go into Phase 3 [large-scale clinical testing before being reviewed by the government]. If all goes as planned, testing will finish next year and we'll start building stocks of the drug.
Any other areas on which you plan to concentrate?
Takahashi: Anti-aging. Aging is linked to oxidation and the release of free radicals. How you curb this process is an important part of preserving a person's health.
Toda: To prevent film and photo prints from degrading, we have created new chemical compounds that act as antioxidants so they slow the release of free radicals. We can apply this know-how to anti-aging drugs.
Doing that on film or paper and inside the human body seem different, though.
Toda: The chemical process is exactly the same. In our library of 200,000 chemical compounds, about 3,000 curb the release of free radicals. We also have the technology to make cancer treatments in the form of skin creams. These creams contain a drug in nano-sized particles that are designed to be absorbed by the skin over a long period of time.
What are your targets for the health-care and pharmaceuticals division?
Takahashi: Our health-care division now accounts for revenues of about 300 billion yen ($3 billion). Total annual revenues were almost 2.8 trillion yen ($28 billion) last fiscal year. In 10 years, we're targeting annual revenues of 1 trillion yen ($10 bilion). Assuming that our other divisions grow, health care could become one-fifth of our overall revenues.