Chugai Pharmaceutical
Corporate History & Strategy

The Great Kanto Earthquake of 1923 broadly destroyed Tokyo's urban functions and industrial activity. Juzo Ueno, who was working at a trading company, witnessed the devastated cityscape and the disruption of pharmaceutical supply, and turned his attention to the pharmaceutical field where demand would continue during the reconstruction phase. In post-earthquake Tokyo, rebuilding medical institutions and improving sanitary conditions were urgent needs, and demand for pharmaceuticals was expected to be not temporary but structurally sustained.

In March 1925, Ueno founded Chugai Shinyaku Shokai as a sole proprietorship and began importing pharmaceutical products as an agent for the German pharmaceutical company Gehe. Import sales did not require owning manufacturing facilities, enabling market entry with limited capital investment. Through sales activities, Ueno gained an understanding of the demand structure in the medical field and built trust relationships with business partners.

However, import dependence inherently carried the risks of exchange rate fluctuations and changes in trade conditions. Entering the 1930s, international instability increased, and uncertainty grew regarding stable procurement from overseas. Ueno envisioned expanding into domestic manufacturing using the business base and product knowledge gained through imports. He chose injectable drugs, for which there was constant demand in the medical field, and started with a segment where there was room for entry on the supply side.

In May 1926, Ueno constructed a new factory in Ikebukuro and began manufacturing the medical injectable drug 'Zarsoblocanon.' The transition from import agency to manufacturing was a risk-taking move involving fixed asset investment, and short-term investment recovery was uncertain. Nevertheless, Ueno chose to concentrate management resources on a single product. In the prewar pharmaceutical market, where demand for individual products was limited, it was judged more rational to operate manufacturing, quality control, and sales of a single product as an integrated unit rather than pursuing a multi-product lineup.

Ueno later positioned Zarsoblocanon as 'our company's banner' and spoke of it as the core of sales. On the other hand, he reflected that 'the drugs we couldn't create were treatments for heart and liver,' indicating that constraints in R&D capability and talent limited the product range. Under these constraints, Ueno focused on market penetration and volume expansion of the existing product, intentionally maintaining a business structure dependent on a small number of products.

Subsequently, capital investment was advanced incrementally in response to increasing demand. In 1936, the Takada Plant was constructed to expand production scale, and in 1943, the organization was converted to a joint-stock company to establish a foundation for capital procurement. These decisions were incremental capacity building based on sales volume projections, and a consistent policy of allocating resources to manufacturing and distribution of existing products rather than diversification or R&D investment was maintained.

Prewar Chugai Pharmaceutical accumulated manufacturing and sales experience through concentration on the single product Zarsoblocanon. By concentrating resources on a small number of products, it was possible to improve the precision of quality control and cost management, establishing a certain supply system with limited capital. On the other hand, a business structure with high dependence on a specific product inherently carried vulnerability to demand fluctuations.

During the prewar period, the company operated by repeatedly expanding share and supply capacity for a single product, without choosing product diversification or entry into new domains. R&D investment remained limited, and the expansion into adjacent areas such as cardiac and liver drugs, which Ueno himself recognized, was not realized. The pattern of decision-making established during this period—'efficiently integrating manufacturing and sales of a small number of products'—also influenced postwar business development.

The sequence of business development established in the founding period was: market entry through import agency, transition to manufacturing, concentrated investment in a single product, and incremental capacity building through facility expansion. These were not systematically planned but rather the accumulation of sequential decisions made in response to capital constraints and market opportunities. This founding-period experience formed the preconditions for the postwar development of industrializing research results in the Guronsan development.

In postwar Japan, medical demand related to liver function expanded due to deteriorating nutritional conditions and the spread of infectious diseases. The liver drew attention in the medical field as an organ responsible for detoxification and metabolism within the body, but the stable supply of effective treatments had not progressed, and dependence on imported drugs and alternative therapies continued. In academia, Professor Morizo Ishidate of the Faculty of Pharmaceutical Sciences at the University of Tokyo was advancing research focused on glucuronic acid, and the elucidation of liver components and the possibility of their pharmaceutical application were being discussed.

Chugai Pharmaceutical had manufacturing experience with injectable drugs since before the war and had conducted production operations focused on a single product. Converting research results into products required an entire system from raw material procurement to establishment of manufacturing processes and quality control, but the company already possessed injectable drug production technology and equipment. The technical preconditions for converting academic research into industrial products were coming together within the company.

In 1950, Chugai Pharmaceutical acquired the patent rights for a liver function-enhancing agent based on glucuronic acid as its main ingredient. This was a decision to secure the legal foundation in advance for exclusively developing academic results as proprietary products, and also served as a condition for enabling recovery of research and manufacturing investment. In September 1951, the detoxifying agent 'Guronsan' was launched as an injectable solution and supply to medical institutions began.

Guronsan was initially distributed only to medical institutions as an injectable drug, but as demand expanded, manufacturing method improvements were advanced. In 1954, a synthesis method using starch and dilute nitric acid was established, alleviating constraints on raw material procurement and production volume. This made sales to general consumers possible, and Guronsan's market expanded from medical institutions to over-the-counter drugs. Patent-based competitor exclusion and in-house manufacturing technology formed barriers to entry.

Guronsan grew sales volume in the clearly defined demand area of liver function drugs and became the central product in Chugai Pharmaceutical's revenue mix. By expanding from injectable drugs to over-the-counter drugs, the customer base broadened from medical institutions to consumers, and the sales scale expanded. As a case of handling everything from industrializing academic research to patent acquisition, manufacturing, and sales in an integrated manner, it shaped the company's business operations pattern.

On the other hand, the high level of dependence on Guronsan materialized as a management risk in later years. In 1966, declining Guronsan sales caused business performance to deteriorate, leading to dividend suspension and the solicitation of 420 early retirees. While concentrated investment in a single product functioned efficiently during phases of stable demand, it was also a structure lacking resilience to changes in the market environment. This experience served as a catalyst for diversifying R&D and reconsidering the business portfolio.

From the 1970s through the 1980s, drug discovery centered on small-molecule compounds was the mainstream in the Japanese pharmaceutical industry. Development methods starting from compound libraries were common, and biopharmaceuticals with large molecular weights were difficult to select as investment targets due to high uncertainty in both development timelines and manufacturing processes. Development of preparations using recombinant DNA technology differed fundamentally from small-molecule drugs in manufacturing facilities and quality control systems, requiring long-term technology accumulation for commercialization.

Chugai Pharmaceutical had been advancing research from the mid-1970s on 'Neutrogin,' a recombinant biopharmaceutical that increases white blood cells. Its molecular weight was dozens of times that of small-molecule drugs, and the manufacturing method was not yet established. At the early 1980s stage, no contribution to sales or profits could be expected, and a management decision was needed to continue the research. The question of how long to continue investing in basic research that did not directly contribute to short-term revenue was being posed to management.

In the early 1980s, then-president Kimio Ueno and R&D director Hajime Sano made the decision to continue research on Neutrogin. The timeline for investment recovery was unclear, and additional investment in clinical trials and manufacturing facilities was needed, but discontinuation of research was not chosen. Osamu Nagayama, who later became president, reflected: 'If the management at that time had not made the decision to continue that development, today's Chugai would not exist.'

Clinical trials began in 1987, and Neutrogin was launched as a biopharmaceutical in 1991. The process from research initiation to launch took more than a decade, during which Chugai Pharmaceutical accumulated knowledge in the development and manufacturing of recombinant biopharmaceuticals. The experience of quality control systems and manufacturing process design different from small-molecule drugs became embedded within the organization.

The launch of Neutrogin not only generated revenue from a single product but also resulted in retaining the technology and talent necessary for biopharmaceutical research, development, and manufacturing within the company. Having experienced the practical application of preparations using recombinant DNA technology, the company acquired the technical prerequisites for initiating subsequent biopharmaceutical development. The development of the antibody drug 'Actemra,' which entered the clinical stage in the late 1990s, was on the extension of the knowledge accumulated through Neutrogin.

At the same time, the Neutrogin development process clarified the scale of investment and the length of time required for biopharmaceutical commercialization. Chugai Pharmaceutical's capital scale had limitations for independently handling everything from late-stage clinical trials to overseas expansion. This recognition led to the conception of the role division in the 2002 strategic alliance with Roche: concentrating internal resources on drug discovery and early development while entrusting late-stage development and overseas sales to an external partner.

In the late 1990s, the pharmaceutical industry was in a transitional period shifting from small-molecule compound-centered development to biopharmaceuticals. Biopharmaceuticals including antibody drugs required large amounts of capital and long periods for development, while post-launch sales potential was substantial and global market deployment was becoming a prerequisite. Major Western pharmaceutical companies were leveraging their scale to advance global development, but many Japanese pharmaceutical companies could not commit to independent global expansion due to the burden of development costs and lack of overseas distribution networks.

Chugai Pharmaceutical had continued bio research since the 1970s and, building on the technology accumulated through Neutrogin development, had its antibody drug 'Actemra' in the clinical stage by the late 1990s. While the company possessed leading domestic accumulation in R&D capability, late-stage clinical trials and overseas market sales required investment beyond its own capital scale. A business structure was being explored that would maintain drug discovery capability while reaching the global market.

President Osamu Nagayama and Franz Humer, CEO of Swiss-based Roche, had been exchanging views on the future of the pharmaceutical industry even before then. Their shared recognition was that 'in the 21st century, the difficulty of new drug development will increase, R&D costs will escalate, while success rates will decline.' Roche was also leading Europe in biopharmaceutical research, with its subsidiary Genentech being a major U.S. biopharmaceutical company. The idea of two companies with strengths in bio drug discovery complementing each other's resources became the starting point for alliance negotiations.

In December 2001, Chugai Pharmaceutical announced a basic agreement regarding an alliance with Roche. In September 2002, Roche acquired Chugai Pharmaceutical shares through a tender offer and third-party allotment, holding 50.13% as of the end of March 2003. While formally becoming a subsidiary of Roche, conditions were set for maintaining the stock exchange listing and management autonomy, with a 10-year restriction on additional share purchases.

The backbone of this alliance was the division of roles in R&D and sales. Chugai Pharmaceutical would concentrate management resources on drug discovery and early development, while late-stage clinical trials and overseas sales would be entrusted to Roche's global network. Meanwhile, Roche would deploy new drug candidates created by Chugai in the global market and utilize Chugai Pharmaceutical's sales capability in the Japanese market. In October 2002, Chugai merged with Roche's Japanese subsidiary, establishing a system where Chugai Pharmaceutical also handled domestic sales of Roche products.

Nagayama later said of this decision: 'I did not have certainty.' The fundamental reasoning behind the decision was a structural recognition that the manufacturing of biopharmaceuticals required massive investment in cell culture, purification technology, and dedicated facilities, and that the company could not sustain this burden independently. A capital structure with majority foreign ownership was exceptional for a Japanese company, but it was chosen as a method to connect to the global market while keeping the drug discovery function in Japan.

After the alliance, Chugai Pharmaceutical strengthened resource allocation to R&D and established a system for simultaneously developing multiple antibody drugs. With the structure where Roche bore the costs of late-stage clinical trials and overseas sales, Chugai Pharmaceutical was able to concentrate its invested capital on drug discovery and early development. In 2005, it launched Japan's first domestically developed antibody drug 'Actemra,' and global market deployment progressed under the framework of this alliance.

The foreign ownership ratio reached 73.34% as of the end of March 2003, an exceptional capital structure for a listed Japanese pharmaceutical company. However, decision-making in drug discovery and early development continued to be led by Chugai Pharmaceutical, and research facilities and research personnel were maintained domestically. This division of labor guaranteed research continuity through the sharing of development risk and sales investment, and was an alliance structure designed by separating capital composition and functional placement.

This strategic alliance presented one solution for pharmaceutical companies of inferior scale to participate in the global market. The choice to specialize in functions where the company had an advantage and entrust everything else to an external partner was a business model different from the full-integration type where all processes are completed in-house. The decision to construct a drug discovery-focused system at the cost of partially relinquishing capital autonomy defined the subsequent business direction of Chugai Pharmaceutical.