Shionogi & Co., Ltd. History

Company History:

Shionogi & Co., Ltd., ranks among Japan's leading developers, producers, and exporters of pharmaceuticals. From its inception in the late 1870s until World War II, Shionogi developed a reputation as an all-around manufacturer of over-the-counter drugs, pharmaceuticals, and other health-care-related products. But in the radically-changed postwar Japan, Shionogi began to acquire the state-of-the-art technology necessary to compete with overseas suppliers of the then-new "wonder drugs," primarily by licensing products from prominent American pharmaceutical manufacturers such as Eli Lilly and Merck.

Despite the sudden focus on antibiotics, however, the company did not stop developing and producing its broad lines of pharmaceutical products. While Shionogi has continued to invest in new technology and technical expertise in order to remain on the cutting edge of antibiotic development and production, the company has also continued to expand its facilities for the manufacture of other products and for laboratory research. Development of new products and services and improvement of production methods have been important parts of the company's operations since its early years.

Following a sharp downturn in the antibiotics market, Shionogi strove mightily to diversify into diagnostics, clinical testing services, veterinary products, and agricultural and industrial chemicals in the early 1990s. To that end, the drug manufacturer has established new research and development operations and boosted research staff. A new facility--the Institute for Medical Science--opened in 1988 and extended Shionogi's thrust into basic research. Its current emphasis is on exploring the cause of disease and linking those findings to the development of products to combat those causes. One especially exciting outcome of this program, guided by Shionogi President Yoshihiko Shiono, was an anti-AIDS drug which was expected to be in clinical trials until 2000. The company hoped that internal drug development would be productive enough to allow it to phase out its handling of other manufacturers' wares by 1996.

Late-19th-Century Origins

In 1878 Osaka was already a center of commercial activity, a logical place for a wholesaler of traditional Japanese and Chinese medicines and herbal remedies to open a business. Gisaburo Shiono began supplying local distributors with the herbal and folk remedies that had been in popular use in Japan and China for more than 1,000 years. Eventually he introduced something new: medicines and drugs manufactured in the United States and Europe. This development was a more radical step than simply importing pharmaceutical products for wholesale distribution. The decision required confidence on Shiono's part in his countrymen's willingness to accept a Western-style approach to the treatment of illness.

His confidence turned out to be well placed. In the quarter-century since their government's barriers to trade with those countries had been lifted, Japanese consumers' initial resistance to the infiltration of Western ways into their culture had waned. Some groups still tried to stem the tide of curiosity and interest in Occidental lifestyles and products, but consumers were ready for the Western nations' innovations, which also had the blessing of the newly restored imperial government.

The Shiono family business found a ready clientele in Osaka-area merchants. Within his first two decades of wholesaling both Oriental and Western-style medications, Gisaburo Shiono began to develop new products in-house. By the turn of the century, his reputation for quality and dependability had brought sufficient profits to the company to enable him to build his own research laboratory. Difficulties with transportation and supply lines cropped up as a result of the nation's brief wars with China and Russia, but Shionogi retained a hard-won reputation of quality and service. Early in the 20th century, the company added a new dimension to its wholesale medication business: drug manufacture.

The drug trade proved both profitable and brisk, and the company grew even faster than before. Not even Japan's entry into World War I slowed it down. On the contrary, the demand for pharmaceutical products increased as battlefields became impromptu testing grounds for improvised treatment of injuries under emergency conditions. That situation held true not only during both world wars, but also through far-ranging flu epidemics and disasters such as the Great Kanto Earthquake of 1923.

As Western-style medical practice spread throughout Japan, the company increasingly enhanced its reputation as a reliable supplier to hospitals and pharmacies. However, it was the discovery and development of antibiotics during World War II that was pivotal in Shionogi's business.

Post-World War II Foray into Antibiotics

Like many other Japanese companies whose premises and personnel were devastated during the country's defeat in World War II, Shionogi began working immediately to reorganize and restore its product lines and rekindle the interest of a civilian market for its goods and services. Unlike some companies, Shionogi had the advantage of consistent management. Shiono had looked ahead to groom successors from within the family circle to take over responsibility as needed. President Yoshihiko Shiono and Senior Managing Director Motozo Shionogi, both direct descendants of the founder, continued to guide the company into the mid-1990s.

After an unprecedented military defeat during World War II, Japan still had many businesses that had survived the war and were determined to thrive under peacetime occupation by the invading forces. Those business and industrial leaders encountered no opposition from the occupation authorities or the new government based on the revised constitution that took effect in 1948. Instead, they received help, encouragement, and guidance--the latter in the form of principles of efficient, far-sighted business practices such as those recorded in the writings of W. Edwards Deming. Those principles had been all but ignored when offered to already-prosperous Western businesses.

Shionogi's management decided to specialize in antibiotics at a time when worldwide attention was drawn to the dramatic role they had played in combating diseases formerly considered incurable and in reducing the incidence of fatal infection from battlefield injuries. With the resumption of Japanese self-governance in the early 1950s, Shionogi already had plans underway for expansion into worldwide markets. The company's research laboratories took their first steps toward the successful synthesis of a sulfanilamide at that time. Launched in 1958 under the name of Sinomin, Shionogi's first sulfa drug was popular from the start, encouraging the company to increase its focus on development of original products.

In addition to originating products, Shionogi also formed relationships with overseas manufacturers to handle their products for other Far Eastern markets as well as Japan. A notable example was the line of cephalosporin antibiotics developed by Eli Lilly.

Astute management, especially financial management, has helped keep the company profitable overall despite recurrent problems. Because of the elaborate bureaucracy that new products intended for public use in Japan must face, much time has been lost in introducing new products; this condition has been true since before the turn of the century. Changes in the system to shorten the waiting period were reportedly planned in 1990, but there were no plans to abolish the system altogether.

The Japanese national health system was the source of another set of roadblocks; it periodically lowered drug-reimbursement prices, thus limiting the profits Shionogi could make on sales made within the country. This policy provided strong motivation to further build up the company's international business. However, other factors such as fluctuations in the value of the yen and the effectiveness of competitors marketing campaigns also affected profits on overseas sales from time to time.

Licensure to market other manufacturers' products continued to be profitable overall. Examples include dilevalol, an antihypertensive, a long-acting sulphate preparation, and an ultrasound contrast imaging agent from Molecular Biosystems. Shionogi also handled Molecular Genetics's drugs for veterinary practice. In 1988 Schering-Plough began marketing a new oral antibiotic developed by Shionogi.

Renewed Emphasis on Basic Research Highlights 1980s

Shionogi emphasized expanding its internal operations in basic research as well as in development of new products and product applications rather than building up business by acquiring overseas companies or participating with them in joint ventures to any great extent in the 1980s. The company expanded geographically through the creation of wholly owned subsidiaries in several countries, including the United States, Germany, and Taiwan. This emphasis on company control enabled Shionogi to keep a close rein on the policies and procedures associated with its products and to safeguard the reputation it has long held for top-quality production and service.

Achievement through basic research has long been a major goal for Shionogi, which has also used its findings to develop a number of innovative products. In 1986, for example, Shionogi became the first of Japan's pharmaceutical companies to place biotechnology-based drugs on the market. Two years later, in order to expand its activities in antibiotics research and to examine the nature and causation of certain diseases, the company established a new laboratory and technical resource center, the Institute for Medical Science, in Osaka near its other laboratories. An eminent virologist headed the research teams exploring three basic areas: immunology and the causes of diseases such as cancer and viral ailments; cells, proteins, and genes; and instrumentation. About one-fourth of the company's employees were engaged in some aspect of research and development by the dawn of the new decade.

This new emphasis seemed to be bearing fruit in the late 1980s, as sales increased 22 percent from ¥177 billion in 1984 to ¥216.1 billion in 1989. Growth of net income during this period was just off the pace, at 18.9 percent. But as Shionogi and its president, Yoshihiko Shiono, soon realized, a pharmaceutical company's financial outlook hinges on the development of proprietary drugs and diagnostics.

Difficult Trading Environment In 1990s

Although Shionogi had worked hard to boost its research and development operations, top executives failed to recognize a distinct decline in demand for and prices of antibiotics, which had remained the company's primary product focus. Launched in 1989, the internally developed antibiotic Flumarin quickly soared to a top position among the world's antibiotics. Sales of Flumarin buffered the impact of the downturn in the antibiotics market on Shionogi but weren't enough to prevent revenues from flattening in the early years of the decade. Sales increased by less than 12 percent from 1990 to 1995, and perhaps more tellingly, net income declined from ¥11.8 billion in 1990 to ¥7.3 billion, recovering to ¥11.5 billion in 1995. Shionogi's stagnant finances meant that the company had less money to invest research and development, thereby reducing its potential for new products.

This is not to say that the drug company made no significant moves. In 1992, it acquired full ownership of Japan Elanco Company, Ltd. from former joint venture partner Eli Lilly and Co., including the latter company's multinational hard-gelatin capsule production. And in 1996, the company formed a joint venture with Bristol-Myers Squibb to bring a treatment for hypertension to market. In spite of its difficult financial position, Shionogi has also made valiant attempts to expand its research focus from antibiotics to treatments for heart and neurological diseases, cancer, and viral diseases. Its most promising new development was a Human Immunodeficiency Virus (HIV) inhibitor along the lines of AZT. A new gene therapy laboratory focused on treatments for AIDS as well as cancer. It would be 1999 or later before the medical and fiscal efficacy of the drug would become known. Citing Shionogi's dearth of so-called "blockbuster" new drug developments and its scant penetration of global markets, analysts at Lehman Brothers and Merrill Lynch forecast that the company's sales would remain flat and its net income would actually decline through 1998.

Principal Subsidiaries: Taiwan Shionogi & Co., Ltd.; Shionogi U.S.A., Inc.; Shionogi & Co. GmbH (Germany); Shionogi Qualicaps, Inc. (United States); Shionogi Europe B.V. (Netherlands); Shionogi Qualicaps, S.A. (Spain).

Further Reading:

• 100th Anniversary of Shionogi, Osaka: Shionogi Seiyaku Kabushiki Kaisha, 1978.
• "Cut and Bruised; Japanese Drug Houses," The Economist, September 1985, p. 82.
  Fujisawa and Shionogi, Tokyo: DIA Research Institute, 1985.
• Shigeru, Endo, "Shionogi Beefs Up Drug R&D To Cure Ailing Performance," Nikkei Weekly, August 3, 1995, p. 10.
• "Successful Drugs A Major Factor Behind Winners And Losers in R&D Spending Increases," Nikkei English News, August 19, 1996.
  Takeda and Shionogi, Tokyo: DIA Research Institute, 1990.
• Tanaka, Kentaro, "Biotechnology in the R&D Activities of Shionogi Today," Business Japan, July 1988, pp. 92-93.

Source: International Directory of Company Histories, Vol. 17. St. James Press, 1997.

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