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BUSINESS
Japan’s Bio-Tech Venture: Tsunami or Just a Bubble?
By
Andrew H. Thorson, Partner of Dorsey & Whitney LLP
in Tokyo
 In
the wake of an anemic economy and a short-lived boom in
e-commerce before the collapse of the global Internet bubble,
Japan’s national and local governments struggle to
retrofit the economy for the 21st century. While closing
companies outpace the number of new companies, national
and local governments are taking steps to encourage entrepreneurs
to develop new businesses. There are hopes that “bio-tech” or “BT” can
help to revitalize the Japanese economy.
Regional Development of BT Industry
Japan’s Kansai region is hoping that BT can do just that. At the heart
of Kansai, Japan’s second city of Osaka has been burdened by the national
downsizing and the hollowing-out of manufacturing industries. Kansai’s
unemployment rate outpaces Tokyo’s and as the region struggles to redefine
itself amidst vanishing jobs and businesses, Kansai hopes BT ventures will
spawn growth. At the center of Kansai’s BT movement are projects such
as the Kobe Medical Industry Development Project (regenerative medicines and
medical devices), the Saito Life Science Park (new drugs by genome and protein
analysis), and the Wakayama Bio Strategy (agriculture related BT). Kansai aims
to be Japan’s international life science hub.
It can be said that Kansai’s BT projects are not out of character given
the region’s existing pharmaceutical interests. Roughly thirty percent
of Japan’s pharmaceutical industry locates there, including firms such
as Takeda Chemical Industries, Fujisawa Pharmaceuticals, Tanabe Seiyaku, Sumitomo
Pharmaceuticals, Dainippon Pharmaceuticals, to name a few. Foreign interests
have also established a foothold in the region (i.e., Eli Lilly Japan, Nippon
Becton Dickinson, Bayer Yakuhin).
The Kansai BT base is supported by research seeds such as Kyoto University,
Osaka University, Kobe University and The National Cardiovascular Center. Notable
research facilities located in the region include the Kobe Medical Industry
City, the Center for Advanced Genome Medical Research Development, the Institute
of Biomedical Research and Innovation (IBRI), the RIKEN Center for Development
Biology (CDB) and the Tissue Engineering Research Center.
Opportunities for Growth and Investments
According to one survey, sixty-six percent of Kansai’s BT firms and institutions
seek a partnership with foreign firms. Reasons for tying-up include joint research
(both commercialization and basic), technological alliances (licenses), joint
marketing and funding.
Private equity hopes BT ventures will crystallize into real businesses and
IPOs. One Osaka venture, AnGes MG Inc., receives much attention as an early
IPO success. AnGes MG listed on the Tokyo Stock Exchange’s Mother Index
last year.
While success stories remain few, Japan’s private equity still anticipates
successful BT ventures in Japan. According to one source, the Kobe Biomedical
Venture Fund has already invested in at least 18 companies. The fund was established
in January 2001 to specialize in medical industries.
Biofrontier Partners, headquartered in Tokyo, also placed bets on Japan’s
BT industries. That firm, established in 1999, was reported to be the first
Japanese venture capital firm to focus on life sciences.
It is hoped that BT will have spill-over effects in the economy. For example,
budding BT ventures may increase the demand for support services such as drug
design platforms, BT-related devices and support services.
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New
Tools for Private Equity
Outdated commercial laws and a shortage of legal and business consultants familiar
with high technology and Western-style venture financing strategies plagued
foreign investment during the recent e-commerce venture boom. Japan’s
rigid legal system also failed to support flexible venture tools such as certain
types of employee stock option plans, non-voting preferred stock, other creative
stock classes, granting of third party options, etc. Venture capitalists found
that their fast-paced business practices were stifled by other incomprehensibly
rigid formalities such as the prohibition on board meetings by conference call.In
the wake of an anemic economy and a short-lived boom in e-commerce before the
collapse of the global Internet bubble, Japan’s national and local governments
struggle to retrofit the economy for the 21st century. While closing companies
outpace the number of new companies, national and local governments are taking
steps to encourage entrepreneurs to develop new businesses. There are hopes
that “bio-tech” or “BT” can help to revitalize the Japanese
economy.
Regional Development of BT Industry
Japan’s Kansai region is hoping that BT can do just that. At the heart
of Kansai, Japan’s second city of Osaka has been burdened by the national
downsizing and the hollowing-out of manufacturing industries. Kansai’s
unemployment rate outpaces Tokyo’s and as the region struggles to redefine
itself amidst vanishing jobs and businesses, Kansai hopes BT ventures will
spawn growth. At the center of Kansai’s BT movement are projects such
as the Kobe Medical Industry Development Project (regenerative medicines and
medical devices), the Saito Life Science Park (new drugs by genome and protein
analysis), and the Wakayama Bio Strategy (agriculture related BT). Kansai aims
to be Japan’s international life science hub.
It can be said that Kansai’s BT projects are not out of character given
the region’s existing pharmaceutical interests. Roughly thirty percent
of Japan’s pharmaceutical industry locates there, including firms such
as Takeda Chemical Industries, Fujisawa Pharmaceuticals, Tanabe Seiyaku, Sumitomo
Pharmaceuticals, Dainippon Pharmaceuticals, to name a few. Foreign interests
have also established a foothold in the region (i.e., Eli Lilly Japan, Nippon
Becton Dickinson, Bayer Yakuhin).
The Kansai BT base is supported by research seeds such as Kyoto University,
Osaka University, Kobe University and The National Cardiovascular Center. Notable
research facilities located in the region include the Kobe Medical Industry
City, the Center for Advanced Genome Medical Research Development, the Institute
of Biomedical Research and Innovation (IBRI), the RIKEN Center for Development
Biology (CDB) and the Tissue Engineering Research Center.
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Opportunities for Growth and Investments
According to one survey, sixty-six percent of Kansai’s BT firms and institutions
seek a partnership with foreign firms. Reasons for tying-up include joint research
(both commercialization and basic), technological alliances (licenses), joint
marketing and funding.
Private equity hopes BT ventures will crystallize into real businesses and
IPOs. One Osaka venture, AnGes MG Inc., receives much attention as an early
IPO success. AnGes MG listed on the Tokyo Stock Exchange’s Mother Index
last year.
While success stories remain few, Japan’s private equity still anticipates
successful BT ventures in Japan. According to one source, the Kobe Biomedical
Venture Fund has already invested in at least 18 companies. The fund was established
in January 2001 to specialize in medical industries.
Biofrontier Partners, headquartered in Tokyo, also placed bets on Japan’s
BT industries. That firm, established in 1999, was reported to be the first
Japanese venture capital firm to focus on life sciences.
It is hoped that BT will have spill-over effects in the economy. For example,
budding BT ventures may increase the demand for support services such as drug
design platforms, BT-related devices and support services.
New Tools for Private Equity
Outdated commercial laws and a shortage of legal and business consultants familiar
with high technology and Western-style venture financing strategies plagued
foreign investment during the recent e-commerce venture boom. Japan’s
rigid legal system also failed to support flexible venture tools such as certain
types of employee stock option plans, non-voting preferred stock, other creative
stock classes, granting of third party options, etc. Venture capitalists found
that their fast-paced business practices were stifled by other incomprehensibly
rigid formalities such as the prohibition on board meetings by conference call.
Japan revised many aspects of the Commercial Code, such as by recognizing a
new stock reservation right (yoyaku) which provides new opportunities for stock
options in connection with private equity investments and other transactions
supporting venture companies. For example, now companies can grant stock options
to directors, employees of subsidiaries and to third parties such as lawyers,
accountants and other service providers.
Commercial Code amendments have also facilitated the issuance of share classes
having voting rights which differ from those provided to a company’s common
stockholders. A company can issue non-voting or limited voting shares without
the previously required dividend preferences. Companies can now issue limited
and non-voting shares for up to one-half of total issued and outstanding shares,
whereas the previous limitation was one-third.
Commercial Code rules also facilitate corporate split-offs of divisions which
can be reorganized into venture companies and MBO vehicles. The number of and
familiarity with split-offs and MBO’s in Japan has increased in recent
years.
Certain of the Commercial Code revisions have also reduced transaction costs
for venture capitalists. For example, clear limitations on the liability of
corporate directors may now be established in a corporation’s articles.
In addition, in Tokyo director meetings may take place by telephone conference,
whereas it was previously necessary for such meetings to take place in person
or via video conference. These changes can facilitate the holding of director
positions by representatives of foreign venture funds.
Japan’s Venture Spirit
In the late 90’s, Tokyo boldly compared itself to Silicon Valley as a
venture spirit took hold of Tokyo. In those days Japan seemed poised on the
edge of a venture capital boom. The Shibuya Ward of Tokyo dubbed itself “Byte
Valley”. Salaried business persons questioned their sunset careers at
struggling trading companies, banks and electronics manufacturers while friends
moved to venture companies, foreign PE and consulting firms, to ride Tokyo’s
new wave of VC activities.
Although “Byte Valley” died a young death it provided precedent for
a belief that Japan can embrace venture capitalism. These days venture capital
firms are not rare. There is even a Nippon Angels Forum, which has held numerous
sessions in Japan attended by hundreds of investors. The forum has opened in
fourteen Japanese cities.
Perhaps the new wave of BT-venture is only a bubble right now, but it could
be a tsumani. Japan’s BT industry is supported by a market said to be
worth 1.33 trillion yen in 2001, and second only to a U.S. market of 3 trillion
yen. By comparison, the combined European market has been estimated at less
than 2 trillion yen. Even under current deflation, it has been estimated that
Japan’s market could grow at a rate of over 7% annually.
Andrew
H. Thorson is a partner at Dorsey & Whitney LLP in
Tokyo. His opinions may not necessarily reflect those of
KWR International.
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