Yamanouchi Pharmaceutical Co. and Fujisawa Pharmaceutical Co. may integrate their business operations by 2005, company sources said Tuesday.

The alliance would create the nation's second-largest drug maker, overtaking Sankyo Co. and closing in on Takeda Chemical Industries Ltd.

Yamanouchi, currently Japan's third-largest drug maker, and Fujisawa, ranked fifth, recorded combined group sales of nearly 900 billion yen in fiscal 2002.

Company sources cautioned that the integration process is still in the planning stage and that the two firms have yet to make a formal decision to enter into negotiations.

The two companies said Tuesday in separate statements that nothing has been decided as yet.

The proposed marriage is apparently aimed at helping both firms survive intensifying international competition within the pharmaceutical industry, where global mergers and acquisitions are on the rise.

Should the firms integrate, it would probably spur a shakeup within the Japanese pharmaceutical industry.

Last month, the two firms said they would integrate their over-the-counter drug operations by setting up a joint company in October.

This maneuver alone may not be enough to keep the firms competitive in the tough domestic business environment, which has been characterized in recent years by declining drug prices and the entry of major foreign drugmakers, company sources said.

The companies believe they must boost their international competitiveness by securing essential research and development capacity through a comprehensive integration plan that includes the prescription drug business, the sources said.

Yamanouchi is known for developing medicines used to treat urinary disorders and high blood pressure, as well as for its efforts to develop new drugs. The company has operations in Asia and Europe. Fujisawa specializes in developing antibiotics. Its operations are concentrated in the United States.