Japanese companies emerge as a growing source of capital for foreign medical device companies

May 2012

March was an important month for Japanese overseas investment in the medical device sector. On March 12, Asahi Kasei announced its intention to acquire Zoll, a US manufacturer of Automated External Defibrillators (AEDs) for $2.2BN USD. Asahi Kasei, like many other Japanese medical device companies, has significant domestic resources and infrastructure but is aggressively looking for opportunities to expand beyond Japan and build a stronger global product portfolio.

"In the medical devices business, the U.S. market leads the world, not only in size and scope, but also in technological innovation, so establishing a strong infrastructure in the U.S. is an important step for Asahi Kasei." (NY Times, March 12, 2012).

Asahi Kasei is not alone in its desire to invest in foreign medical device companies. Though not as widely reported, Sony is also believed to be actively looking at major investments in medical device start-ups.

"Sony Corporation is actively seeking to invest hundreds of millions of dollars in Israeli medical technologies. The company has established a team to review the Israeli market to seek out companies for investment or acquisition." (Globes, March 18, 2012)

The news that well-capitalized Japanese companies are aggressively looking for overseas investment opportunities is music to the ears of non-Japanese SMEs and venture companies. According to a 2011 National Venture Capital Association, 39% of VCs have indicated that they plan to reduce investments in the medical device sector because of increasing concern over regulatory delays by the FDA (Inc., October 7, 2011). Japanese companies represent an attractive way to fill the void left by a vacuum in funding from venture capitalists and the traditional debt and equity markets.

How can smaller companies best position themselves for success attracting Japanese capital?

Japanese companies tend to be relatively risk-averse. In addition, many Japanese firms have strong domestic capabilities but have struggled to establish a significant footprint overseas. To be successful in obtaining Japanese capital, SMEs and venture companies should seek out ways to de-risk their businesses, specifically they should:

1. Invest in understanding the Japanese opportunity for their portfolios
   
   Japanese companies are likely to be more confident about their ability to commercialize products in their home market. Value that can be created in Japan is more tangible and provides a hedge to overseas risk. Being able to communicate the value of a technology in the Japanese market will help to win comfort and confidence in an investment.


2. Identify synergies with the Japanese investor
   
   Potential partners may not always appreciate the synergies that a new technology has with their existing portfolio. The vast majority of SMEs and venture companies focus their pitch materials on describing their own technology without taking time to understand the Japanese company's needs. It is important to brainstorm and highlight the high-level strategic benefits represented by a potential investment. These may not always be clear from a technology-oriented pitch presentation.


3. Generate human data
   
   Having human data de-risks earlier stage investments by providing tangible evidence of safety and efficacy. For many therapies, this data can be obtained relatively easily via small studies in Europe or developing markets. Human data is extremely valuable to investors and will help Japanese companies overcome their conservative tendencies.


4. Have patience and be prepared
   
   Lastly, Japanese companies tend to invest a great deal of time up-front in a thorough due diligence. This due diligence extends beyond the technology and includes the culture and capabilities of potential partners. Haste and impatience tend to undermine confidence. Japanese companies tend to make decisions by consensus. As a result, decision-making is often slower. Patience and preparedness are critical. Expect detailed questions and a longer time frame for deal making.
   
   The wave of recent announcements is likely to be part of an ongoing trend. With preparation and patience, the challenges of the current economic environment represent an opportunity for foreign SMEs to benefit from increased collaboration with Japan.

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