Rohto Pharmaceutical — Company History

A few products in enormous volume — the 40% share and its high-turnover economics

In February 1899 Yamada Yasutami (山田安民) founded Shintendo Yamada Yasutami Yakubo (信天堂山田安民薬房) at Shimizucho in Minami-ku, Osaka, and began manufacturing and selling the stomach medicine Ikatsu (胃活). The business also went abroad, setting up the subsidiary Yamada Pharmaceutical in Shanghai in 1938 and Manchuria Yamada Pharmaceutical in Hoten (奉天, present-day Shenyang) in 1941 to widen its sales channels across the Chinese mainland; the end of the Pacific War wiped out those overseas assets at a stroke, and the business base was re-concentrated at home. In September 1949 the proprietorship was reorganised into a joint-stock company, and Rohto Pharmaceutical Co., Ltd. was incorporated with capital of $27,778 (¥10m). Yamada Teruo (山田輝郎) of the founding family took the presidency, deliberately avoiding any intake of outside capital so that management control stayed with the Yamada family. Even after the company listed on the second section of the Osaka Securities Exchange in 1961, most of its large shareholders were members of the Yamada family, and family control was institutionally set. That the capital structure and management control were fused at the fifty-year mark became the foundation for the independence of the company's long-horizon business decisions.

In 1909 the company launched Rohto eye drops (ロート目薬). The product name derived from the prescription of Dr Rothmund (ロートムンド博士), a professor at the University of Munich in Germany, and the drops were a departure; when the company devised the Rohto dropper bottle in 1931, demand for eye drops surged. After the war it fielded new products in quick succession — Rohto Penimai eye drops (ロートペニマイ目薬) in 1952, the stomach medicine Shiron (シロン) in 1954 and Shin Rohto eye drops (新ロート目薬) in 1958 — followed by the general stomach remedy Pansiron (パンシロン) in 1963 and the premium ophthalmic preparation V Rohto (Vロート) in 1964. In the same year it launched Rohto-kai (ロート会), a sales network made up of leading retailers nationwide, and pushed these mainstay lines into wide distribution. Yamada Teruo narrowed the range of items and drilled into the company a policy of few products in high volume — good products delivered cheaply to the mass market. Rohto secured a 40% domestic share in stomach medicines and in eye drops alike, and built its standing as an OTC drug maker on a selling method that massed advertising spend behind a limited set of brands. Against rivals running many items in parallel, Rohto's contrarian concentration on a few mainstays compressed manufacturing cost and selling expense and stacked up high-turnover earnings.

Losing the stomach-medicine lead in 1983 — the flip side of concentration

In the late 1970s Japan's stomach-medicine market entered maturity, and makers found themselves fighting over existing demand. Pansiron held the line as the flagship general remedy, and as a result lost share among its core users to rivals with tightly targeted products. In a market structure into which symptom-specific remedies — for heartburn, for a heavy stomach, for drinking too much — were being launched with advertising behind them, Rohto, whose flagship was the general type, was slow to respond. In 1983 the company surrendered the top domestic share in stomach medicines to a competitor, and that arrangement stayed fixed thereafter. The strength of concentrating on a few products rebounded as a weakness: at the moment the market fragmented, it lacked agility of range. The high-turnover model that had worked in the expansion phase told in reverse as a constraint in maturity.

Rohto had in fact been moving since the 1970s to avoid excessive dependence on stomach medicines. In August 1975 it acquired from the American Mentholatum Company the right to use the Mentholatum trademark, left in limbo by the collapse of Omi Brotherhood (近江兄弟社), and entered the ointment market in earnest. The terms were a ten-year contract at a royalty of 7.5% of sales — a method of drawing on a known brand rather than developing one in-house. The advantage was large: it could skip the advertising investment needed to build recognition from scratch while inheriting an established user base. That losing the top share in stomach medicines did only limited damage to overall results was the work of this third earnings stream; moving early on the reshaping of the portfolio acted as a shock absorber.

The Mentholatum acquisition — from licence to ownership

In July 1988 Rohto acquired the Mentholatum Company of the United States and made it a wholly owned subsidiary. The purchase came in response to an approach from the other side. Remaining dependent on a licence carried the risk that contract revisions or a rethink of royalty terms would constrain the company's freedom of action; by acquiring the source company itself, Rohto took hold of manufacturing, sales and trademark rights as a single package and switched to a structure released from renewal risk. It was Rohto's first full-scale acquisition of an overseas company, and the starting point of its international expansion thereafter. Thirteen years after taking the licence in 1975, the company had raised its third earnings stream in ointments from a contractual footing to an ownership footing.

After the acquisition the company shifted its main effort to a global expansion built around the Mentholatum brand. Omi Brotherhood returned to the market with the Menturm (メンターム) brand, so that a three-way contest settled in at home; overseas, however, Rohto held brand sovereignty and stood at an advantage in both pricing power and the right to decide what to launch. The company did not leave Mentholatum as a domestic ointment brand but placed it at the axis of an international business centred on Asia. Once the maturity of the home market had been laid bare by the loss of the stomach-medicine lead, making overseas the next earnings stream was an unavoidable course. The trademark sovereignty won in the acquisition then served as a bargaining trump card in the joint ventures set up across Asian countries.

The China joint venture, and six Atlanta gold medals that carried the brand across Asia

In 1991 Rohto, together with the American Mentholatum Company, established a joint venture in China and entered the Asian market in earnest. At the 1996 Atlanta Olympics it became the official sponsor of the Chinese diving team, and brand recognition spread in step with the team's six gold medals. The need for overseas growth to answer the maturity of the home market had been shared inside the company as a management problem ever since the loss of the stomach-medicine lead, and the decision to make China the first foothold followed from it. Consumer exposure through sports sponsorship was a means of standing up local brand recognition quickly in an emerging market with little advertising spend. As the axis complementing a mature Japanese market, the company chose a route that accumulated local recognition in Asia without paying for advertising to get it.

It established Rohto Indonesia in Indonesia in 1996 and Rohto-Mentholatum Vietnam in Vietnam in 1997, putting manufacturing and sales bases into South-East Asia. In 1998 it set up Rohto USA in the United States, siting the base at Orchard Park, New York, where the Mentholatum Company's head office and plant stood. The Asian business built around China grew into a third operating base after Japan and the United States, and the ratio of overseas sales rose. This was the course by which the brand sovereignty won in the 1988 Mentholatum acquisition turned, ten years on, into earnings in the form of a multi-site Asian presence. An overseas expansion that had begun with a licence had become a structure combining ownership of the brand with a network of local subsidiaries.

Hada Labo — a fourth pillar opened by pharmaceutical roots

From 2001 Rohto began investing in skincare. Applying the dermatological knowledge accumulated in drug development, it developed Hada Labo (肌ラボ), a moisturising lotion formulated with a high concentration of hyaluronic acid. It was a crossing begun at a time when examples of a pharmaceutical company succeeding in cosmetics were scarce, and it took the business beyond the frame of an OTC drug maker. Hada Labo grew its sales from 2004 to 2011 and established itself as a skincare brand. Bringing development capability of pharmaceutical origin into cosmetics is what set it apart from the incumbent cosmetics houses, which leaned on brand power. As an effort to raise from nothing a fourth pillar after stomach medicines, eye drops and ointments, it committed management resources on a scale unusual inside the company at the time. In September 2003 it concluded a strategic business alliance with Morishita Jintan, drawing on encapsulation and ingredient-stabilisation technologies to broaden the range of its cosmetics development.

From 2012 the growth in Hada Labo's sales flattened out, and the slowdown of the domestic skincare market as a whole came to the surface. An earnings model that put roughly 27% of sales into advertising made the maintenance of efficiency itself the problem once the home market matured. The single-point concentration of advertising that had run since Yamada Teruo's day worked as a strength in an expanding market but turned into deteriorating investment efficiency in a mature one. The structural problem that had surfaced when the stomach-medicine lead was lost reappeared some thirty years later, in the same shape, in skincare. Even so, skincare grew from $226.5M (¥24bn) in the year to March 2001 and became the core of earnings in place of the two pharmaceutical pillars.

Side-jobs allowed, promotion spending reined in — restoring margin in a mature market

As it broadened into an integrated healthcare company with skincare at the axis, Rohto also directed resources outside its core business. In March 2014, after Yaeyama Farm (やえやまファーム), an agricultural production corporation in Okinawa Prefecture in which it held a 10% stake, fell into negative net worth, Rohto raised its shareholding to 49.9% in what amounted to a rescue acquisition. It booked $15.1M (¥2bn) of goodwill on an acquisition cost of $13.2M (¥1bn), while recording an impairment loss at the same time — the burden that stepping into agriculture placed on profitability showed up early. Turning earning power built in pharmaceuticals and cosmetics towards an unrelated industry was part of an integrated-healthcare shift that took the health-related field beyond medicines.

In personnel too it introduced arrangements unlike those of a conventional pharmaceutical company. In February 2016 it began the Outside Challenge Work (社外チャレンジワーク) scheme, permitting employees in their third year and beyond to take side-jobs outside working hours. At the time it was rare for a listed Japanese company to allow outside work, and the distinctive point was that the decision started from a proposal by employees rather than from a management policy. Applicants numbered sixty as of March that year, the aim being to feed experience gained outside back into the core business. That Rohto took in an arrangement leading the field in Japanese employment practice while continuing the family management it had kept since its founding shows the independence of a company not bound by outside capital. In advertising and in personnel alike, this was a period in which operations were reviewed to fit a mature domestic market.

The change at the top came unexpectedly. In 2018 President Yoshino Toshiaki (吉野俊昭) died suddenly of a myocardial infarction at the age of 67, and Yamada Kunio (山田邦雄) of the founding family returned as chairman and president. The return had much of the emergency about it; in June 2019 the company brought in Sugimoto Masashi (杉本雅史), formerly of Takeda Pharmaceutical, as representative director and president, with Yamada Kunio remaining as chairman holding representative authority — an executive structure under the company's first president from outside. Containing the disruption, Rohto set about rebuilding its earnings efficiency. Once the slowdown of the home market had been made plain by Hada Labo's plateau, securing margin took priority over growing sales. By the year to March 2022 it had held down sales-promotion spending in Japan and in Asia and improved the operating margin for three consecutive years. Reviewing for maturity the high-investment, advertising-concentrated model that had run since Yamada Teruo's day, and switching to operations that put margin ahead of scale, lay at the core of the management decisions of this period.