New Wave of Japanese Pro-Generic Healthcare Reforms

A new ‘layer’ of
long-awaited Japanese healthcare reforms were enacted as of April 2008. They are
aimed at increasing the use of generic drugs to 12% by 2010 (from 2007 level of
5.2% by value). Japan currently lags far behind other regulated markets in
terms of generic use: 16.8% in Japan versus 54% in USA, 52% in UK, and 55% in
Germany, by volume. Key factors that contribute to poor generic uptake in Japan
are: 1) low margins received by doctors and pharmacies from generics drugs; 2)
imbalance in bargaining power of different interest groups; 3) poor management
quality of generic companies; and last but not least, 4) psychological barriers
that enforce both doctor and patient misconceptions that generics are inferior!

What Is Going To
 The changes
taking shape are broadly designed to achieve two primary goals – increase
the use of generics 
and, at the same time, foster innovation.

Immediate reforms that
will increase the use of generics:

  1. An average price cut of
    on long-listed drugs
    will decrease the current ‘Yakka-sa’ of 6.9% and hence increase attractiveness of generic
  2. Reversal in check box
     will give
    freedom to pharmacist to substitute Rx with available generics,
  3. Increased
    senior citizens will encourage them to buy generics,
  4. Increased number of ‘DPC hospitals’ to
    over 700 
    create huge demand for lower cost drugs,
  5. Higher dispensing fee
    for pharmacists
    dispensing >30% generics will fetch them extra ‘points’ or incentives.

While the above steps
will impact the market immediately, other actions under discussion may unfold
over the coming few years. These include: 1) providing exemption to pharmacies
to stock one brand of generics instead of several as of now; 2) exemption for
generic companies to provide detailing to doctors; 3) DPC benefits to
outpatients of select therapy classes; 4) free pricing system for generic
drugs; and, 5) change in pharmacy education system that aims to empower the
nation’s pharmacists to prescribe medicines.

Even if only some of
these steps are realized, they are indicative of Japanese pharma slowly moving
ahead towards the ensuring constant increase of generics in Japan, which will
eventually make it on par with its western counterparts.

Healthcare Reforms are
an Ongoing Process:
 Healthcare reforms are not something new in Japan. The
idea of generics was first proposed by MHLW in ‘The Final on
Pharmaceutical Industry in 21st Century’
 in 1993. Continuous ‘biannual
price-cuts’, revising-up number on ‘DPC-hospitals’, and Koro-Sho (MHLW)
-induced active dialogue between various interest groups over time have evolved
into the current, more meaningful set of changes.

Reducing Healthcare
Expenditure at the Cost of Innovation?
 Alleviating the healthcare burden by
means of increasing the use of generics is a real-time need, but no Japanese
government can afford to compromise on its established innovation-driven
pharma, especially when the number of employees with large pharma companies are
much higher than those with generic companies. While the use of generics is
going to certainly increase, supported by reforms, the numerous steps already under
way will help innovator pharma companies in the long run.

Key to these reforms
is an increase in the number of reviewers at PMDA, changes in the drug pricing
policy, removal of price cuts during patent period and strengthening the
country’s clinical trial infrastructure.

In general, drugs in
Japan are launched at ~70% price (to the US level). The average time taken to
launch new drugs of foreign origin in Japan is the highest among all regulated
countries — it was 3.8 years in 2004 (v. 1.4 years in US and UK, and 1.6 years
in Germany). The major reason behind this disparity is the difference in review
time or process, which is directly proportional to the number of reviewers with
different regulatory authorities of different countries. The total number of
employees in PMDA
 (equivalent of US FDA in Japan) was just 356 in 2006. The Japanese
Ministry of Health and Labour Welfare’s new mid-term plan aims to add 236
additional reviewers by 2009.

The proposed key
features for the ‘New 5-Year Clinical Trial Activation Plan’ aim to attain
specific targets in building clinical trial infrastructure, human resource
development for clinical trials, public promotion of clinical trails, and
encouraging efficient clinical research management and sponsors support. Besides these
objectives, “no price cuts during patent period” and “cost-based pricing” are
also important actions that are under debate.

Outlook For Specialty
Pharma Sub-Sector Is The Most Difficult:
Four global Japanese companies (Takeda,
Astellas, Daiichi-Sankyo and Eisai) generate a significant (30%-60%) portion of
their business from overseas business. Toughening the domestic market keeps
these companies further away from making large investments in the domestic
market, while focusing on increasing the overseas base. Nevertheless, each of
these companies is going to face significant patent expiries in the near future
and their current pipeline appears inadequate to fill the nearing gaps. Thanks
to the traditionally strong cash position of Japanese Pharma companies, the
result has been a series of overseas acquisitions to help face the challenges
in the future.

On the other hand, the
‘second-tier’ companies – Mitsubishi-Tanabe, Dainippon-Sumitomo, Ono, Kyorin,
etc. depend largely on domestic markets and heavily on long-listed drugs that
are exposed to the threat of generics. Their inability to develop drugs
overseas nor achieve sustainability in domestic markets may push them to join
hands with local companies of similar interest, or to enter into generic space themselves.
Five of the top ten Japanese companies are a result of the recent merger wave,
and among specialty pharma companies Mitsubishi-Tanabe and Dainippon-Sumitomo
represent classical examples of ‘cost-synergy’ becoming the biggest driver of

Entry into the generic
space, however, is not easy. A highly fragmented generics marketplace, distinct
capabilities and psychological barriers of existing management pose hurdles for
the specialty pharma company aspiring to become a purely generics company.
Where Mitsubishi-Tanabe and Kyorin have openly entered the generic market by
means of their generic subsidiaries, the managements of Ono and
Dainippon-Sumitomo appear reluctant to do so. While the possibility of
consolidation among these companies may not be ruled out, we expect to see a
tough environment for specialty pharma companies in Japan.

Conclusion: The latest set
of healthcare reforms took place in April 2008, and a number of others are to
be realized in the coming years. These may prove quite different from previous
reforms—both in their scale and scope. It is likely that the Japanese
Government will be able to achieve its target of tripling the use of generics
by 2013. This will surely bring drastic structural changes in Japanese pharma industry.
Pace of growth in the generic segments will be faster than generally expected.
Simultaneously, innovation will be rewarded by a number of measures, and an
altogether brighter outlook for Japanese pharmaceuticals can be anticipated
after the initial painful transition period.

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