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 Change? 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 5.2% on long-listed drugs will decrease the current ‘Yakka-sa’ of 6.9% and hence increase attractiveness of generic drugs,
  2. Reversal in check box meaning will give freedom to pharmacist to substitute Rx with available generics,
  3. Increased co-payment for senior citizens will encourage them to buy generics,
  4. Increased number of ‘DPC hospitals’ to over 700 will 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 consolidation.

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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