Kirin to buy drug maker, sees money in medicine

TOKYO (Reuters) - Japanese brewer Kirin Holdings Co (2503.T) confirmed on Monday a $2.6 billion bid for control of drug maker Kyowa Hakko Kogyo Co (4151.T) and said the two companies would aim to double pharmaceutical profits by 2011.

Kirin said it would use a combination of stock and cash to take a 50.1 percent stake in Kyowa Hakko, offering a 25 percent premium to its closing price last Thursday, before media reports of the deal sent the stock sharply higher.

Kirin, which is running neck-and-neck with Asahi Breweries Ltd (2502.T) for the title of Japan's top brewer, has made a string of acquisitions in the past few years as it seeks to cut its reliance on the country's sluggish beer market.

It has earmarked 300 billion yen ($2.63 billion) for strategic investments, mainly to bolster non-beer areas such as soft drinks and drugs.

"We need to speed up growth in the drug business," Kirin President Kazuyasu Kato told a news conference, adding that drugs would be positioned as a new growth driver for Kirin, which relies on the Japanese beer market for over half its sales.

Kirin is a relatively smaller player in the pharmaceutical market with medications targeting kidney disease, cancer and immunodeficiency. The acquisition will give it access to Kyowa Hakko's allergy agent Allelock and a Parkinson's disease agent submitted for approval in the United States.

Kirin said it will aim to generate 80 billion yen in operating profit from the merged drug business by 2011, compared with 42.6 billion yen in combined profits of Kyowa Hakko and its drug unit Kirin Pharma last year.

Pressure to merge is high in Japan's pharmaceutical sector as the government is pushing for lower drug costs for an ageing population, while research and development costs balloon and competition from foreign firms grows.

The combination of Kirin Pharma and Kyowa Hakko will create an entity with drug sales of about 200 billion yen, roughly the same as the Japan's 10th-largest player, Shionogi & Co (4507.T).

"We could both survive on our own, but now we lack speed and efficiency," said Kyowa Hakko President Yuzuru Matsuda.

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Kirin said it would offer 1,500 yen per Kyowa Hakko share to acquire a 27.95 percent stake, or 111.58 million shares, in a tender offer from October 31 to December 6.

Kirin Pharma will then conduct a share swap with Kyowa to take 177.24 million new shares in Kyowa, boosting Kirin Holdings' stake in the drug maker to 50.1 percent and bringing the value of the entire deal to about 300 billion yen.

The deal will be completed on October 1, 2008, and Kyowa Hakko will remain listed on the Tokyo Stock Exchange.

Chugai Pharmaceutical Co Ltd (4519.T), Kyowa Hakko and Kirin Pharma are among the leading players in the promising field of antibody drugs, which tend to have fewer side effects than regular medications.

Kyowa Hakko had been winning more and more attention from investors due to its antibody-enhancement technologies, in particular its Potelligent technology, which is expected to deliver more potent antibodies and cut production costs.

It has been seen as a likely takeover target as consolidation sweeps through the biotech industry.

Biogen Idec Inc (BIIB.O), for example, has put itself up for sale and is expected to attract bids of $25-30 billion, while AstraZeneca Plc (AZN.L) acquired U.S. biotech firm MedImmune earlier this year for $15.6 billion.

Kirin, meanwhile, has taken steps to diversify away from beer and expand overseas.

It has bought stakes in Australian brewer Lion Nathan LNN.AX and food beverage group San Miguel (SMC.PS) of the Philippines, acquired Japanese wine maker Mercian Corp (2536.T) and forged ties with medical equipment maker Terumo Corp

(4543.T).

Following Monday's announcement, Kirin shares fell 2.8 percent to close at 1,541 yen while Kyowa Hakko fell 1.7 percent to end at 1,378 yen. The benchmark Nikkei average .N225 closed 2.2 percent lower.

Kirin had jumped 1.2 percent jump and Kyowa Hakko surged 16.6 percent on Friday on media reports of the deal.

($1=113.94 Yen)

(Additional reporting by Nathan Layne)