Acquiring a Pharmaceutical or Cosmetics Business in Japan

Decide what is actually being carved out

A product is not a self-contained asset

Naming the product does not, by itself, settle what has to move. Between the laboratory and the pharmacy shelf, a single product depends on trade marks, patents, formulation and process know-how, a marketing approval or notification, a manufacturing arrangement, raw material and packaging supply, quality and safety records, and a route to market. The question is the same from either side of the table, although it is asked differently: the seller needs to know what it is handing over, and the buyer needs to know what it must receive in order to keep the business running the day after closing.

It is therefore more useful to define the perimeter by function than by the seller's internal reporting lines. For each element, the test is whether the acquired business would still work without it. Where the answer is no, that element belongs in the perimeter or in a transitional arrangement, whatever the management accounts say.

The same applies to information and to people. Formulations, analytical methods, process parameters and stability data are often held by individuals and systems rather than in a document that can simply be handed across. Where the people who understand the product stay with the seller, a technology transfer and a period of cooperation are usually needed in addition to the transfer of files.

Look for what the target and the retained products share

The characteristic difficulty of a carve-out is that, before the transaction, both sides of the line sit inside one company. A brand sold as a distinct product may nevertheless rely on a patent that also covers products the seller is keeping, on a production line shared with them, on a single quality organisation, or on one set of regulatory and pharmacovigilance staff.

Where that is so, the assets cannot simply be labelled “in” or “out”. Ownership has to be decided separately from use, and the use that each party will need after closing has to be provided for. Chapters below deal with the intellectual property side of this and with manufacturing and quality.

Corporate brands raise the point in its sharpest form. Where the products carry the seller's company name, or a house mark used across several businesses, the mark will usually stay with the seller and the buyer will need a transitional right to use it, together with a date by which packaging, promotional materials and the website will have been changed.

Where only the Japanese rights change hands

A recurring pattern in this sector is that a product or brand sold in many markets changes hands in one territory only: a group withdraws from Japan and sells the Japanese business to another company, or a buyer acquires the Japanese rights to a brand that the seller continues to sell elsewhere. What has to be separated is then not a product line but a geography.

Registered rights are territorial, so the Japanese patents and trade marks can be dealt with separately from their foreign counterparts. Manufacturing, however, is often not territorial at all. If the product for Japan is made at the same site as the product for other markets, the parties have to decide whether the buyer takes over that site, has the product made for it by the seller for a period, or moves manufacturing elsewhere — and the regulatory consequences of each differ. Formulations, specifications and analytical methods used worldwide, data generated outside Japan, and the pharmacovigilance database for the product all have to be made available to the Japanese business without disturbing the seller's use of them in other markets.

A transaction of this shape also needs an agreed line on what each party may do afterwards: whether the seller may re-enter Japan with the same or a similar product, whether the buyer may export from Japan, and how each party deals with the other's territory if the product is later sold on again. These are contractual questions, but they should be settled while the perimeter is being drawn rather than afterwards.

Understand the three layers: the business, the product and the systems

Who may hold the marketing licence

The central concept is the marketing licence. A company that places medicines, quasi-drugs or cosmetics on the Japanese market in the course of business must hold a licence of the category corresponding to those products, and must have a marketing supervisor-general and the other responsible persons the legislation requires. The licence is granted to a Japanese entity with an establishment in Japan; it is not something a foreign parent holds for the group.

For a foreign buyer this has a practical consequence at the very start of the structuring discussion. Either a Japanese entity within the buyer's group holds the licence — which may mean acquiring the entity that already holds it, rather than the assets — or the products reach the Japanese market through a Japanese company that acts as licence holder. There is also a route under which a foreign manufacturer obtains the product approval itself and appoints a Japanese marketing licence holder to market the product, a role commonly referred to as the designated marketing authorisation holder. Each route has different consequences for control of the approval, for who bears the regulatory obligations, and for what happens if the relationship ends, so the choice is worth making early rather than late.

Manufacturing is a separate licence, granted site by site and by category of work. A site that only stores finished product may be covered by a registration rather than a full manufacturing licence, but that distinction has limits: a site from which product is released to the market is not within the storage-only route. Where a manufacturing site is outside Japan, the overseas manufacturer is accredited under a further regime, and that accreditation is a condition of the product approval rather than something the Japanese buyer holds.

Product approvals can be transferred; licences cannot

For products that require approval, the Act provides expressly for succession to the position of approval holder on inheritance, on a merger, on a company split under which the prescribed data and information for the product pass to the successor, and on a transfer of that data and information made for the purpose of passing on the position. Except in the case of inheritance, notification must be given before the succession takes effect. This is what makes it possible to move a product to a buyer by way of a business transfer without an approval being applied for afresh.

Two limits on that are worth stating plainly. First, a company split does not carry the approval automatically: the statutory condition is which entity takes over the data and information for the product. Second, succeeding to the approval is not the same as being able to market. Marketing in the course of business requires the licence described above, and an applicant that does not hold a licence of the relevant category cannot be granted an approval in the first place. So the question is never only whether the approval can be moved, but also who will be the licence holder once it has been.

Products that do not require approval — most cosmetics, and quasi-drugs within certain categories — are covered instead by a notification made by the marketing licence holder before it starts to market each item. There is no succession provision for notifications. Where a carve-out results in a different entity marketing the product, the working assumption is a fresh notification by that entity, with the tidying-up of the existing one, the order of the steps and the office to which the papers go confirmed against the position at the time.

The main regimes and the usual transaction structures line up broadly as follows.

Regime	Share purchase	Merger or company split	Business transfer
Marketing licence	The licence holder is the same legal entity throughout, so the existing licence continues. Changes to directors, to the marketing supervisor-general or to other notified particulars are dealt with separately.	Distinguish the case where the licence holder survives from the case where the business moves to another entity. There is no succession provision equivalent to the one for product approvals, so the entity that will market after closing must itself hold the licence.	The transferee is a different legal entity. If it is to market the products, it must hold a marketing licence of the relevant category in its own name.
Manufacturing licence and storage-only registration	Where neither the manufacturing entity nor the site changes, the existing licence or registration continues. Changes to the manufacturing supervisor or to other notified particulars are dealt with separately.	These attach to the applicant and to the site. There is again no succession provision, so whichever entity manufactures after closing must hold what is required for each site.	Where the transferee will manufacture, its own licence or registration is confirmed for each site, even if the site itself does not change.
Product approval	The approval holder is the same legal entity, so a share purchase does not of itself bring about a statutory succession. Changes to approved particulars are dealt with separately.	Succession is expressly provided for. On a company split it is the entity that takes over the prescribed data and information for the product that succeeds to the position of approval holder, and notification is required before the succession takes effect.	Where data and information for the product are transferred for the purpose of passing on the position of approval holder, the transferee succeeds to it. Notification is again required beforehand.
Product notification	The notifying entity does not change. Where particulars change within the same entity, a change notification is made.	There is no succession provision corresponding to the one for approvals. Where a different entity will market the products, the treatment of a fresh notification and of the existing one is confirmed with the competent authority.	There is likewise no statutory succession. Where the transferee will market the products, its own notification and the tidying-up of the existing one are confirmed together.
Accreditation of a foreign manufacturer	A change of shareholder does not of itself change the accredited entity. Where the name or other particulars change, the applicable procedure is confirmed.	Where the accredited foreign entity itself ceases to exist or is replaced, the published questions and answers indicate that a fresh accreditation is in principle required, as distinct from a mere change of name.	A transfer of the Japanese business does not settle the point on its own. Whether the entity operating the overseas site changes is confirmed separately.
Quality and pharmacovigilance systems	Even where the licence holder is unchanged, the systems are reviewed against the organisation and staffing that will exist after closing.	These are standards to be met, not licences to be inherited. Whichever entity markets after closing must itself have methods and an organisation that meet them.	Where the transferee becomes the marketing licence holder, it must put those systems in place itself. Handing over documents is not enough.

The table is a starting point, not a conclusion. Two company splits can look identical on paper and raise quite different questions depending on whether the licensed entity carries on the business itself or a new entity becomes the marketing or manufacturing party. And even where a product approval can be carried across, the licences, the sites and the quality and safety systems each have to be confirmed separately.

Quality and safety systems are met, not inherited

The standards for quality assurance and for post-marketing safety management are often described loosely as though they were assets. They are not. They are requirements that the marketing licence holder must satisfy through its own methods, organisation, procedures and, where work is outsourced, its arrangements with the parties doing it. Handing over standard operating procedures, safety information and complaint records is necessary but does not discharge the obligation.

This matters most where the buyer has not previously marketed products of this kind in Japan. Building the organisation, appointing the responsible persons and putting the procedures in place takes time, and that time sits on the critical path to closing rather than after it. Where the buyer intends to rely on the seller for part of the work during a transition, the scope of what may lawfully be outsourced, and the requirements applying to the party doing it, are confirmed before the arrangement is agreed.

Separate the patents, know-how and brands

One patent, two businesses

A patent used by the products being sold is rarely used only by them. A single patent may cover several medicines or cosmetics, a manufacturing process, a formulation or a platform technology, only part of which is in scope. Japanese law has no mechanism for dividing a granted patent into separate patents product by product, so the question is not how to split the right but who should own it and how the other party's use is to be secured.

Four approaches are usually considered. The patent may be assigned to the buyer with a licence back to the seller for the retained products. It may stay with the seller with a licence to the buyer for the acquired business. The parties' respective fields of use may be delimited by product, indication, technical field or territory. Or the patent may be held jointly. The first, second and fourth are choices about ownership; the third is a way of drawing the boundary once ownership has been settled.

Joint ownership deserves particular care in Japan, because the default rules are not the ones a foreign party may expect. Each co-owner may work the invention itself without the others' consent unless the parties have agreed otherwise; but a co-owner may not assign or charge its share, and may not grant an exclusive or non-exclusive licence to a third party, without the consent of the other co-owners. Joint ownership can therefore constrain a later divestment or a new manufacturing arrangement, and the consequences are better addressed in a co-ownership agreement at the outset than discovered later.

Whichever route is chosen, holding the patent or a licence under it does not resolve the position as against third parties. Freedom to operate is a separate question from the scope of what is being acquired, and is addressed on its own terms.

Trade marks can be divided; brands are harder

Trade marks work differently from patents here. Where a registration covers two or more designated goods, Japanese law permits the registration to be divided and transferred by designated goods. Where a single registration covers both the products in scope and products the seller keeps, a division along that line can sometimes be arranged, subject to the content of the registration and to the restrictions on transfer.

What is possible on the register, however, is not the same as a clean separation of a brand. The same name or device may be the subject of several registrations, the products on each side of the line may share a visual identity, and similar marks and foreign registrations may sit around the core right. Transferring part of the portfolio can leave both parties with a brand that is harder to police than before.

A brand transfer is also not complete when the register is updated. Packaging in stock, printed cartons and labels, promotional materials, the website and domain names all have to be allocated, and the parties have to agree until when the old presentation may be used and at what point the new one takes over. Where products are sold under the seller's corporate name, that date is driven by the labelling rules discussed below rather than by commercial preference.

Know-how, collaborations and employee inventions

Much of what makes a product work is not patented. Manufacturing conditions, formulations, analytical methods, in-process controls, raw material selection and stability data are frequently held as confidential information. Japanese law protects such information as a trade secret only where it is kept confidential, is useful for business activities and is not publicly known, so the way the information has actually been managed matters as much as the label put on it in the transaction documents.

Where technology is in-licensed from a university, a research institute, another manufacturer or a supplier, the scope of what the target business uses is confirmed alongside whether the agreement can be assigned, whether the counterparty's consent is needed, whether there is a change-of-control provision and whether sub-licensing is permitted. A share purchase that leaves the contracting entity unchanged may still trigger a change-of-control provision.

For collaborations, technology each party brought to the project and results generated within it are treated separately, and any restrictions in the collaboration or joint application agreement on assignment, sub-licensing and divestment are checked against what the carve-out requires. Where rights are jointly held, the contractual restrictions and the statutory consent requirements both apply.

On employee inventions, the point for a buyer is that the relevant question is not who invented but to whom the right to obtain a patent belongs under the employer's rules. Japanese law allows an employer to provide in advance, by contract or work rules, that the right vests in the employer from the moment the invention is made; where it does, the right is the employer's from the outset and the inventor's later move to the buyer does not carry existing rights with them. Improvements made after closing are assessed under the rules of the new employer. Cooperation on prosecution and maintenance of existing patents is worth securing expressly, whichever way the inventors go.

Plan manufacturing, supply and quality for the day after closing

Who will actually make the product

Where an external CMO or CDMO manufactures the product, the starting point is the parties to each agreement and the products it covers. Where a business transfer is used, moving the contractual position requires consideration of both the law and the agreement, including the counterparty's consent. Where the contracting entity is unchanged, change-of-control and notice provisions may still apply. A single manufacturing agreement covering both the products in scope and those the seller keeps has to be restructured rather than simply assigned.

Where the product is made at a site the seller is keeping, the seller or one of its affiliates will often continue to manufacture for the buyer for a period. Work that until then was internal now has to be documented as a supply relationship: specifications, volumes, pricing, raw materials, quality responsibilities, change control, audit rights and what happens if supply is interrupted.

Where the site itself moves to the buyer, transferring the building and the equipment is only part of it. Which entity holds the manufacturing licence for that site has to be settled, and the organisation, the master formulae and procedures, the batch and testing records, materials, test equipment and subcontractor arrangements have to move with it. If the site, the process or the test methods change, the relationship to the approved particulars is confirmed. Where manufacturing is to be moved to a different site after closing, who manufactures between closing and the move, and who is responsible for supply in the meantime, are settled as part of the timetable rather than left to be worked out later.

Good manufacturing practice is a state to be maintained

For the medicines and quasi-drugs to which the requirements apply, manufacturing control and quality control at the site are obligations of whichever manufacturer operates it. They are not a right or a status that passes from seller to buyer with the business. The marketing licence holder has its own duty to ensure that the manufacturers it uses carry out that control properly, so both sides of the relationship have to be in place, not just the site.

Where a site is shared with products the seller keeps, the practical work is separating the documentation without losing access to it. Product standards, procedures, batch and testing records, deviation and change control, validation and training records all have to be identifiable for the acquired products, and the buyer has to be able to reach the historical records afterwards.

Inventory, labelling and the transition period

A buyer will rarely be able to run every function on the first day. Where the seller's manufacturing, quality, logistics, systems or regulatory functions are to be used for a period, a transitional services agreement can set out the services, the duration, the charges, information handling, responsibility and how each service is handed over at the end. What it cannot do is move a statutory obligation. Outsourcing work does not leave the regulatory position with the seller; the entity that is the marketing licence holder or the manufacturer after closing bears the duties, and the scope of what may lawfully be outsourced is confirmed before the arrangement is signed.

Inventory covers more than finished goods: raw materials, packaging components and work in progress all have to be allocated, and it has to be clear who ships and sells product manufactured before closing and who completes product that is part-made. Where stock is built up ahead of the transition, the quantity is worked out from demand, the timetable for any transfer of manufacturing, expiry dating, the time until the product is used at its destination and available storage capacity. Stock is distinguished according to whether it has been released to the market, and the batch records of that decision and of shipment, the party holding the stock and the treatment after closing are set out. Where storage locations are added or changed, the need for a licence, a registration or a change procedure is confirmed individually against the products, the stage the stock has reached, the work to be done there and what the entity doing it already holds; for approved products, the relationship to the approved particulars is confirmed as well.

Labelling is usually the constraint that sets the timetable. Where the marketing licence holder shown on the product, the product name or the brand changes, the treatment of existing stock, packaging components and part-made product has to be worked out for those particular items and that particular change, rather than on an assumption that existing stock may simply continue to be sold for a period. In practice the legal closing date, the regulatory steps, the transfer of manufacturing, the changeover of packaging and labelling, and the sell-through of old stock each fall on a different date, and they are best set out as one plan against which the contractual and regulatory steps are aligned.

Recalls, safety information and where responsibility sits

Problems with product made before closing tend to surface after it. Complaints, recalls, adverse event reports and the records behind them have to be allocated: what is handed over, when, and how the parties share information afterwards. A safety signal relating to a batch the seller manufactured may arise once the buyer is the marketing licence holder, and the buyer will need access to the historical files, the investigations and the correspondence with the authorities in order to deal with it.

The transaction documents will usually allocate the cost of a recall attributable to a pre-closing cause, together with notification, cooperation and the handling of third-party claims. That allocation is an allocation of money between the parties. It does not move the regulatory duties, which follow the statutory position of each entity. The practical approach is to establish first which entity bears which duty, then the information and cooperation each needs in order to discharge it, and only then the financial allocation — keeping those three separate in the drafting, and keeping the manufacturing, quality and transitional services agreements consistent with the main agreement.

For prescription medicines there is a further point of timing. Japanese law now requires the marketing licence holder to report to the authorities where it decides on, or sees a risk of, a suspension or restriction of shipment within a defined forward period, and to notify a suspension or restriction that has actually occurred, with the authorities publishing information about it. Where a carve-out could affect supply, the need for those steps is assessed for each of the entities that is the marketing licence holder before and after closing, rather than being treated as unnecessary simply because stock is sitting in the distribution chain.

Where safety records contain personal data, the transfer of those records is considered under the Act on the Protection of Personal Information, and any movement of data to systems or affiliates outside Japan is considered under the rules on cross-border transfers as well. Those rules, and the export control and technology transfer questions that a cross-border transaction raises more generally, are dealt with in “Cross-Border M&A and Regulation”.

Points specific to medicines and cosmetics in Japan

Reimbursement and the move of sales

For medicines listed for reimbursement under the public health insurance system, succeeding to the approval does not complete the commercial transition. Where the marketing licence holder or the product name changes, the treatment of the listing has to be worked out: the steps for the listed item, any switch to a new item, and what happens to the old one. Where a carve-out makes it necessary to remove an item already listed, the marketing licence holder submits an application for its removal. The timing of these steps rarely coincides with the closing date, and the sequence is best mapped against the transaction timetable at the structuring stage.

Re-examination and post-marketing obligations

Where a product is within a re-examination period, or post-marketing surveillance or studies are under way, the approval is only part of what transfers. Study protocols, case data, agreements with contract research organisations, safety information and the correspondence with the authorities all have to be in a state in which the successor can continue the work. Material generated before the transfer may have to be produced later, so access to the historical record, the seller's cooperation and the position of any external contractors are settled at the time of the transfer rather than afterwards.

Patent term extension and generic entry

Patents relating to a medicine may have had their term extended by reference to the regulatory approval. Which patents exist, which have been extended, and the scope of protection during the extended term are confirmed for each product, alongside the rights and licences that will move with the business. The state of generic entry, and any disputes concerning the products, are confirmed in the same exercise. This page does not set out the extension or generic regimes themselves; it covers them so far as they bear on due diligence and on the separation of the intellectual property.

Cosmetics: labelling, advertising and OEM arrangements

Acquiring a cosmetics brand does not mean the same product can continue to be sold unchanged. The statutory particulars identifying the marketing licence holder, the ingredient labelling and the brand presentation all have to be reviewed against the arrangements that will exist after closing, and the changeover is planned as part of the transition described above.

Advertising and product claims are worth attention on their own account. Beyond the restrictions applying to advertising of these products and the general rules on misleading representations, the practical question in due diligence is who holds the testing and data supporting the claims made, and whether the buyer will be able to continue using them.

Where a cosmetics OEM manufacturer makes the product, the formulation, specifications, manufacturing conditions and raw materials are usually shared between the brand owner and the manufacturer under the supply arrangements. Who owns the formulation and specifications, whether the buyer can continue with the same manufacturer, and whether that manufacturer's own know-how or its work for other customers constrains the position are confirmed together. Brand, labelling, promotional materials, formulation and manufacture are reviewed as one, because it is their combination that determines whether the buyer can go on supplying the product the market recognises.

Foreign investment screening, diligence and the documents

Screening under the foreign exchange legislation

A foreign investor acquiring a Japanese business in this sector should test the screening position early. Japan's inward investment regime requires prior notification for investments in designated business sectors, and a subset of those sectors is treated as sensitive, with the consequence that the exemptions available for ordinary portfolio-style investment do not apply in the same way. Manufacturing of medicines for infectious diseases, including intermediates, and manufacturing of highly controlled medical devices were added to that subset in 2020.

Whether a particular target falls within a designated sector turns on what it actually does, not on how it describes itself, and the answer drives the timetable: a prior notification carries a waiting period, and the transaction cannot close until it has run or been shortened. Where the target manufactures, the analysis covers the products it makes for others as well as its own. The screening assessment, merger control and the regulatory steps described above should be mapped onto a single timetable rather than run separately.

Diligence that follows the dependencies

Diligence in a carve-out is less about confirming that assets exist than about following how they depend on one another. A patent that turns out to cover retained products as well changes the structure of the intellectual property arrangements. An in-licence that cannot be assigned affects whether the acquired business can operate at all. An approval held by an entity that will not hold the marketing licence after closing tells you what has to happen before completion.

On the employment side, the mechanism depends on the structure. Where a company split is used, the statutory procedure for the succession of employment contracts, including the notices to employees and the opportunity to object, applies. Where employment is to move on a business transfer, each employee's individual consent is required, which makes the sequencing and the communications part of the transaction plan. The commercial question — whether the people the business needs will in fact be there after closing — is assessed alongside the procedural one.

A seller preparing for a carve-out benefits from doing much of this work before the buyer arrives: identifying what belongs to the business, what is shared with the retained portfolio, what must be separated before closing, what will be handed over and what the seller will continue to use. Disclosure and the separation plan then tell the same story.

Making the documents consistent with each other

What diligence establishes has to be reflected not only in the share purchase or business transfer agreement but in the intellectual property assignments and licences, the manufacturing and supply agreements, the quality agreement and the transitional services agreement. Where approvals, notifications or third-party consents are needed before closing, they are dealt with as conditions or as pre-closing obligations, with a realistic view of how long each takes.

Representations, covenants, indemnities and information and cooperation obligations are drafted against the regulatory position rather than around it, and product liability and insurance are considered for product made on either side of the closing date. Where several agreements address the same subject, the perimeter, the conditions and the allocation of responsibility have to say the same thing in each of them. The test we apply is whether the documents, read together, describe what moves at closing, what stays for a period, and the end state the parties are working towards.

Working with other advisers

Transactions in this sector usually need more than transaction counsel. Patent prosecution and the technical scope of the rights are often handled with Japanese patent attorneys. The preparation of regulatory filings and dealings with the authorities, and the detailed design of quality and safety systems, sit with the company's own regulatory and quality functions or with regulatory consultants. Valuation, accounting and tax structuring sit with accountants and tax advisers. We work on the structure, the diligence, the rights, contracts and regulatory analysis, the transaction and ancillary agreements and the allocation of legal responsibility, and coordinate with your other advisers and with counsel in other jurisdictions where the transaction covers more than Japan.

Frequently Asked Questions

This page sets out general legal issues arising on pharmaceutical and cosmetics transactions in Japan and is not legal advice on any particular matter. The applicable legislation, subordinate regulations, notices, guidelines and administrative practice are subject to change. In any transaction, the law, transitional measures and administrative practice applying at each stage of the work must be confirmed for the products and the structure concerned.

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Tell us about the products or brands concerned, the territory, the structure you are considering and the stage the discussions have reached. We advise on Japanese law and can work with your in-house team, your regulatory advisers, overseas counsel and your other advisers on the structure, the carve-out of the intellectual property, the regulatory steps and the arrangements after closing.

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Related Pages

Related Pages

M&A in Japan for Foreign Acquirers and Investors

Transaction structures, foreign investment screening, merger control, due diligence, employees, the transaction documents and closing.

Litigation and Dispute Resolution

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Practice Areas

Crisis management, litigation, corporate and M&A, intellectual property, finance and international practice.

This article is provided for general informational purposes only and does not constitute legal advice on any specific matter. Please consult us regarding your specific situation. The content is based on the laws and regulations in effect as of the date of the last update.