Tsuruha faces a proxy battle with Hong Kong's Oasis Management which seeks to reshuffle the board with its own outside director nominees, arguing that the current one dominated by founding family members could impede the drugs distributor from fairly evaluating consolidation opportunities.

"We have been very proactive in industry consolidation and produced results," Jun Tsuruha told Reuters in an interview on Wednesday.

"Our M&A strategy should be best carried out by someone with deep networks in this industry, where many players are owned by founding families by large percentages," he said.

Tsuruha's stance could offer a pathway for the management of Japan's fragmented drug sector to try and counter potential demands from activist investors as the industry gears up for consolidation.

Deep expertise and connections in the local market are especially important, the president said.

Tsuruha, himself from the founding family, also dismissed Oasis' proposal that the new board of directors, if elected, set up a strategic committee consisting of outside directors to consider mergers and acquisitions (M&As).

The idea of letting new outside directors with little knowledge about the company and industry situation lead M&As is "unrealistic", he said.

Oasis, which owns 12.8% of Tsuruha, says the search for a consolidation partner is "an urgent management issue for Tsuruha". The fund made specific proposals on who the company should merge with, giving three rivals' names, according to Tsuruha.

Tsuruha will hold its annual general meeting on Aug. 10.

Jun Kawahara, senior analyst at Daiwa Securities, said consolidation of the Japanese drug sector would proceed regardless of the outcome of Oasis' campaign against Tsuruha.

"Consolidation among big players is increasingly inevitable as top 10 players now control 80% of the market, compared to about 30% around 2000," he said.

Investors say retail giant Aeon, Tsuruha's largest shareholder with a 13% stake, is crucial to the proxy fight. Placing the drugstore business as one of key growth drivers, Aeon also owns 51% of Welcia Holdings and 10% of Kusuri No Aoki Holdings.

It has been quiet about Oasis' proposals.

(Reporting by Makiko Yamazaki and Ritsuko Shimizu; Editing by Muralikumar Anantharaman)

By Makiko Yamazaki and Ritsuko Shimizu