Fujifilm's Flight of Pharmacy

Execs wanted to use Fujifilm technology to help others. With film sales slowing, the move into pharma is helping to generate big revenues

by Kenji Hall

Most people think of Fujifilm (FUJI) as the brand name that appears on the back of photos and at the end of the credits of Hollywood films. But the company's film business has been in rapid decline for years. That's why executives are eager to diversify into things as far-ranging as cosmetics, endoscopes, and digital imaging tools for doctors to use in diagnosing diseases. In February, Tokyo-based Fujifilm acquired Japanese pharmaceutical company Toyama Chemical for $1.5 billion (BusinessWeek.com, 3/17/08).

Fujifilm's latest results show why executives are keen to find alternatives to film. While operating profits almost doubled to $2 billion and consolidated sales edged up 2.3%, to a record $27.4 billion in the year through Mar. 31, sales in its imaging solutions division, which includes the film and camera business, slumped 9.6%, to $5.2 billion. As a proportion of sales, that meant they accounted for less than 20% of sales for the first time in the company's history.

With the purchase of Toyama Chemical, Fujifilm executives say they're now serious about developing new drugs. Over the past three years, the company has tossed small change at a few pharmas, including $1 million split between Houston's Agennix—which specializes in drugs for cancer and diabetic ulcers—and Gaithersburg (Md.)-based Panacea Pharmaceuticals, which specializes in screening for cancers.

In early 2006, Fujifilm added Japan's Perseus Proteomics to its portfolio, buying a 22% stake in the maker of antibody-based treatments and diagnostics for nearly $10 million. Critics think spending on pharmaceuticals research could drain the company's resources. BusinessWeek Tokyo correspondent Kenji Hall recently spoke with Chief Financial Officer Toshio Takahashi and Life Sciences Division Vice-President Yuzo Toda about their plans.

When did you first approach Toyama Chemical about the possibility of an acquisition?

Toda: Last year. We were looking for a pharmaceutical company that we could work with to fill what we saw as a gap in our business. We weren't thinking of [mergers and acquisitions] at the time. We short-listed five or six companies, both in Japan and overseas. We then asked members of our brain trust if they were familiar with these companies. One of these advisers happened to know a lot about Toyama Chemical. Among the Japanese companies we were considering, Toyama Chemical seemed to have an innovation-centric approach that was similar to Fujifilm's. Last spring, we met with them, and a year later we had reached a deal.

Takahashi: Initially, the discussions were mainly about collaborating on technology. But there was a lot we agreed on and so we decided to study a business tieup. What attracted us to Toyama Chemical was its success rate in developing new drugs, which is higher than most other pharmaceutical companies. But the company is small and has limited funds, so that could delay drug testing. We thought we could help.

Many financial analysts seem to think this is a bad idea for several reasons. They say it could be years before Fujifilm's investment pays off—if it ever does. Last year, PricewaterhouseCoopers issued a report that criticized pharmaceutical companies for a "paucity of innovative medicines reaching the market" despite increased research and development spending.

Toda: We don't think of this as a short-term investment that we can recoup in a couple of years. Analysts tend to focus mainly on short-term gains.