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European Pharmaceutical Contractor

The New Far East

Japan is the second largest pharmaceutical market in the world after the US, having accounted for an 11 per cent share of the global pharmaceutical industry in 2011. The Japanese market was valued at $102 billion in 2011, and is expected to reach a value of $117 billion in 2015, growing at a compound annual growth rate (CAGR) of 3.5 per cent (see Figure 1). There are certain characteristics that make it unique and attractive for international companies, key among them being a secure supply chain and low parallel imports.

The pharmaceutical market is divided into two major segments: prescription drugs and over-the-counter (OTC) drugs. Of these segments, prescription drugs account for approximately 96 per cent of total market revenues. However, the Japanese government is introducing various initiatives to make OTC drugs more easily available; for example, allowing a direct distribution channel between manufacturers and retailers. In spite of the initiatives taken by the Japanese government and the recent expiring of the patents of a number of leading products, the market share of generics in terms of volume remains at 25 per cent. This is less than the estimated 30 per cent provided by the Ministry of Health, Labor and Welfare (MHLW) in 2007, when the action programme for the promotion of the safe use of generics was implemented.

Key Players: Domestic and International

Takeda was the largest domestic pharmaceutical company in terms of revenue in 2011 (see Table 1). Some other leading domestic companies include Astellas, Daiichi Sankyo and Eisai. Over the past five years, the fastest growing pharmaceutical companies have been Mitsubishi Tanabe Pharma, Dainippon Sumitomo Pharma, Kyowa Hakko Kirin Company, Shionogi & Co, and Otsuka.

Until recently, international companies were not well represented in Japan and were also not allowed to be majority shareholders in Japanese companies. They are increasingly developing their presence in Japan, mostly in the fields of R&D and marketing. In terms of the sales of prescription drugs, international companies have boosted their market share in Japan, with Pfizer, Roche, Novartis and GlaxoSmithKline making it into the leading 10 positions in the market. This expansion into the Japanese pharmaceutical market has suffered occasional setbacks, such as Pfizer and Merck & Co’s decision to close research facilities in 2006. Additionally, in 2008, US biotech giant Amgen, in a $1.2 billion deal with Takeda, handed over the distribution rights for 13 drugs. More recently, however, international companies have been seeking to expand their presence in Japan by retaining the rights that formerly would have gone to domestic firms.

Both domestic and international pharmaceutical companies in Japan are focusing on key therapeutic areas such as cardiovascular system (CVS), oncology, diabetes, anti-hypertensives, gastrointestinal (GI), and central nervous system (CNS).

Drug Pricing and Reimbursement

Drug prices are fixed and controlled by the government, with the premium for the drugs decided based on the degree of innovation, usefulness, and marketability under programmes such as ‘innovative’, ‘useful I’, ‘useful II’, ‘paediatric use’, ‘marketability I’ and ‘marketability II’. The government follows a pricing system whereby drug prices are revised every two years. Moreover, the Japanese government also follows foreign price adjustment rules in order to ensure that drug prices are low compared to prices in the US, UK, Germany and France. The drug price revision in 2010 lowered the average price by 6.5 per cent, significantly more than the usual two per cent decrease that was previously adhered to since 1994. Due to this price revision, purchase and sale price negotiations have become more challenging, which has reduced the profit margins for all participants. Another revision is expected in late 2012 and industry leaders fear further negative impact.

Healthcare in Japan is primarily paid for by the National Health Service (NHS) and administered by the MHLW. Services covered by the NHS include inpatient care, outpatient care, home care, dental care, prescription drugs, long-term care, and prosthetics. Herbal medications were also added recently. The earlier concept of 100 per cent coverage by NHS to patients was replaced by 30 per cent co-payment by the patient in 2006. This co-payment increased out-of-pocket (OOP) expenditure, although drug price revisions in 2008 and 2010 helped to reduce OOP and government expenditure in the area of healthcare to 9.3 per cent of GDP in 2009.

Regulatory Trends

The Pharmaceutical Affairs Law (PAL), Pharmacists Law, Law Concerning the Establishment for Pharmaceuticals and Medical Devices Organization, and Law Concerning Securing Stable Supply of Blood Products, are some of the important controls that have been established by the MHLW. PAL regulates the manufacture, marketing and distribution of pharmaceutical drugs and medical devices in Japan. In 1997, Japan, Europe and the US adopted good clinical practice guidelines within the framework of the International Conference on Harmonization (ICH). These guidelines played a key role in defining the uniformity of the drug approval process. Prior to the agreement, the Japanese Ministry of Health and Welfare (‘koseisho’, which in 2001 became the MHLW’s ‘korosho’) accepted clinical data only if drug tests were carried out on Japanese subjects. Under such conditions, international pharmaceutical companies were required to redo most of their clinical trials in Japan. These regulations entailed higher expenses for pharmaceutical companies and delayed the release of the drugs on the Japanese market, decreasing incremental revenue opportunities.

Under the new guidelines, clinical trials up to mid-stage must be done with Japanese subjects in order to account for difference in body type. The new guidelines allow international pharmaceutical companies to make use of data from Phase 3 clinical trials performed outside of Japan. The adoption of ICH guidelines in Japan has decreased the time needed for the new drug application (NDA) review process to be carried out. The application review time for new drugs has decreased from approximately three years in the 1990s to one and a half years since 2005.

Additionally, in April 2005, the accreditation of drug manufacturing was simplified. Previously, a pharmaceutical manufacturer was obligated to apply for two licenses: a manufacturer’s permission, or Shonin; and a manufacturer’s license, or Kyoka. Currently, only one license for marketing is required.

Strategic Consolidation The pharmaceutical industry has undergone a number of consolidations, both inbound and outbound. Takeda’s acquisition of Nycomed in 2011 was one of the major deals accomplished by a Japanese pharmaceutical company recently. Valued at $1.1 billion, the deal will develop Takeda’s presence in Europe and emerging markets. This acquisition enabled Takeda to expand its presence in the area of GI disorders, respiratory disease and inflammatory disorders.

Key Issues

An ageing population, drug price revisions, patent expiries and drug lags have compelled industry leaders to realign their business strategies. The following are some of the key challenges the industry faces:

  • Members of the Japanese Pharmaceutical Manufacturers Association (JPMA) have proposed the exclusion of innovator drugs from National Health Insurance (NHI) biennial drug price revisions. MHLW has not yet accepted the proposal and issues such as radical reform of the healthcare system, review of the medical service fee system, and review of the drug pricing system, including evaluation of innovative drugs, are to be discussed. It is anticipated that a drug pricing system promoting R&D will be achieved
  • Currently, generic products have limited market share in Japan. However, an increasing awareness of generics is being driven by a changing perception of doctors and favourable government reforms, and is expected to increase the market share held by generics
  • The clinical development and regulatory environment in Japan is unfavourable compared to the US and Europe. All drugs approved by foreign companies for marketing in different countries must perform clinical trials in Japan using Japanese subjects in order to be approved in the country, which has meant that a number of global blockbuster drugs have not been launched in Japan

Future Perspectives

With increasing pressure on the Japanese government to cut down on healthcare costs, MHLW is focusing on increasing the generic share above the current benchmark of 30 per cent. This increase, coupled with upcoming patent expiries, is expected to create opportunities for generic drug manufacturers. On the other hand, pharmaceutical companies are increasing their R&D investments in order to tap into underserved disease areas. Regulatory reforms, including an improved drug approval process, are expected to attract further investment.

With the US and European pharmaceutical markets reaching maturity, and emerging markets showing greater growth rates, Japanese pharmaceutical companies are developing their global presence by entering new markets and adopting innovative strategies. It is expected that these companies will continue their consolidation activities in different countries, with an increased focus on proper valuations for target companies. Partnership agreements with academia, as well as biotech and pharmaceutical companies, are also expected to shape the future of the Japanese

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Geetika Munjal works as an analyst with GBI Research in the pharmaceuticals division. She holds a Postgraduate Diploma in Business Management, specialising in International Business, from the Institute of Management Technology, Ghaziabad, as well as a BSc in Biotechnology from Kurukshetra University. Before joining GBI Research, she worked as a Management Associate at TCS eServe, and completed an internship at Neptune Life Sciences Pvt Ltd as a microbiologist.
Geetika Munjal
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