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Pharmaceutical Manufacturing and Packing Sourcer

Made in Japan

In this internationalised business world, many producers of pharmaceutical devices are trying to expand their market overseas. Japan, the world's fastest-ageing society, is seen as one of the most promising markets for medical device manufacturers (MDMs).

Generally speaking, this is a heavily regulated area of the pharma industry, given the intended use of the products on the human body. In addition, legislation may be driven, in part, by each country's social norms regarding physical health and medical technology. As such, laws and regulations governing pharmaceutical and medical device manufacturing are usually very localised – and Japan is no exception.

This article provides a brief overview of the country’s Pharmaceutical Affairs Act and how this works in merger and acquisition (M&A) transactions, or the transferability of a target company's licences. It also addresses how the amendments to the Act – scheduled to take effect on 25 November 2014 – may impact Japanese M&A practice.

Registration Requirements

Like other jurisdictions, Japan regulates the manufacture and distribution of medical devices in order to ensure patient safety. In the context of structuring the acquisition of an MDM, an acquirer should consider the regulations that apply to both the target company and the medical device products made by that company.

Under the current Act, MDMs, marketing authorisation holders (MAHs), and medical device sellers or rental service providers (MDS/RSPs) must obtain prior approval from the Japanese Ministry of Health, Labour and Welfare before starting business operations. However, under the amended Act, the regulations for MDMs will be simplified: an MDM will only have to register specified information with the Ministry to conduct its business, and will no longer be required to obtain prior approval from the Ministry before starting business operations.

As a result, the time and cost of registering an MDM’s business will be reduced – although to what extent MDM applicants can enjoy such savings is subject to the governmental practice after the amendments to the Act take effect.

While the new registration requirements will help simplify one aspect of the regulatory approval process, there are other factors to consider before an individual or company enters the medical device manufacturing market or acquires another manufacturer's business.

Roles of the Parties

In Japan, the roles of the parties involved in this sector are broadly divided into three groups, each with its own separate licensing requirements:
  • MDMs are manufacturers which produce specified medical devices
  • MAHs are primary distributors, and are responsible for the effectiveness, safety and quality of medical devices they distribute
  • MDS/RSPs sell or lease specified medical devices
Sales Regulations

In order to sell medical devices, an MAH must comply with the Ministry's notification and registration requirements for each device. Medical devices are broadly classified into four categories (Classes 1-4) based on the medical device's potential risk of harm to the patient. Table 1 provides examples of medical devices in each Class and the necessary actions an MAH must take to sell such products.

Under the amended Act, certain Class 3 medical devices (such as contact lenses and dental implants) will require certification from a registered third-party certifier, instead of approval from the Ministry. This amendment to the Act is intended to allow the Ministry to more efficiently use its limited resources to focus on reviewing important devices in a shorter time.

M&A Structures

An acquisition structure may impact the licences (or registrations for MDMs, under the amended Act) held by a target company that permits it to manufacture, market or distribute medical devices in Japan (the medical device company licence) and the approvals issued in relation to the medical device products (the product licence).

There are four basic M&A structures commonly used in Japan:
  •  Share purchase
  • Merger 
  • Company split 
  • Business transfer
The following summary details how a medical device company licence and product licence may be affected by each of the M&A structures. For the purposes of this article, ‘Company A’ is a Japanese medical device target business (with a medical device company licence for itself and medical device licences for its products) and ‘Company B’ is a Japanese business that intends to acquire Company A. Please note that the changes to the regulations on MDMs mentioned above will not affect this.

Share Purchase
A share purchase acquisition under Japanese law does not have any unique features, compared to those in most other jurisdictions. In a share purchase transaction, the medical device company licence and the product licence held by Company A will not be affected by Company B’s acquisition of Company A’s shares. Therefore, even after the change of control, Company A will not have to obtain new licences and Company B, as parent company, will not be required to obtain any licences in connection with the acquisition.

There are two types of mergers available under Japanese law:

Merger by Absorption
This involves two or more companies where one or more merge into (and are ‘absorbed’ by) the surviving business. Absorbed companies cease to exist legally on the effective date of the merger. The treatment of any medical device licences depends on whether or not the licence holder is the surviving company.

If Company A is the surviving business after the merger between Companies A and B, the medical device company licence and product licence held by Company A will continue to be effective after the merger.

If Company B is the surviving organisation, it cannot succeed to Company A’s medical device company licence, and therefore Company B must obtain a new licence for itself. If Company B is an MDM, the amendments to the Act may simplify the application process.

With regard to the product licences, if Company B makes filings with the relevant regulators prior to the merger, those held by Company A will survive the merger. However, Company B cannot hold these product licences unless it obtains the relevant medical device company licence prior to the effective date of the merger. Company B must also make new notification filings after the merger for Class 1 medical devices’ product licences, if applicable.

Merger by Incorporation

This is where two or more companies merge into a newly incorporated business, where only the newly incorporated company survives and all others cease to exist legally on the effective date of the merger.

In a scenario where both Companies A and B merge into a new company (Newco) and cease to exist as legal entities after the merger, the Newco cannot succeed to the medical device company licence that Company A held before merging. For product licences, if the Newco makes filings with the relevant regulators prior to the merger, those that Company A obtained will survive the merger into the Newco. However, the Newco cannot hold the product licences unless the relevant medical device company licence is gained prior to the effective date of the merger. The Newco must also make new notification filings after the merger for any Class 1 medical devices’ product licences, if applicable.

Company Split
A company split involves the assets and liabilities constituting a particular business being transferred to an acquirer, in whole or in part. The acquirer may be a newly incorporated entity under the company split procedures, or it may be an existing company which receives the business assets and liabilities in accordance with the proceedings (an absorption-type company split).

The treatment of the medical device licences in a company split is the same as in a business transfer, and is detailed below.

Business Transfer

In a business transfer, the seller of the target company sells the individual assets and liabilities constituting the business to a purchaser pursuant to an asset transfer agreement. The purchaser will assume only those rights and obligations provided in the asset transfer agreement.

Both a company split and a business transfer involve the handover of the medical device businesses from Company A to Company B (assuming an absorption-type proceeding if the company has split). However, the medical device company licence held by Company A cannot be transferred to Company B. The medical device licences can be transferred to Company B, provided it makes the required advance notice filings with the regulators. However, in order for Company B to hold such medical device licences, it must obtain a medical device company licence prior to the effective date of transfer of the business and medical device licences.

Smooth Transition

In order to ensure a smooth transition following an M&A transaction involving a medical device company in Japan, it is important to anticipate the Ministry’s requirements, particularly if prior approval or new licences are required to facilitate business operations. Furthermore, under the amended Act, certain compliance regulations are to be enhanced, and existing licensed companies will be required to follow the new regulations. Therefore, if a transaction closes after the amendments to the Act take effect, an acquirer should follow the registration and licensing requirements carefully, in order to comply with the new regulations, and operate the business from day one after the closing.

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Ryo Takizawa is an Associate at the DLA Piper Partnership Tokyo Office. He graduated from Hitotsubashi University in 2008 and from the University of Tokyo Law School in 2010, and has been qualified in Japan since 2012. Ryo has advised on a wide range of transactions, including the acquisition of a medical device manufacturer, and has written widely on international legal affairs. 

Masahiko Ishida is a Senior Associate at the DLA Piper Partnership Tokyo Office. His practice focuses on M&As, regulatory issues and international dispute resolution. He also advises on commercial contracts, negotiations, strategic alliances and joint ventures for life sciences companies and research institutions. Masahiko graduated from Columbia Law School and the graduate school of the University of Tokyo. He is qualified in New York State and Japan.
Ryo Takizawa
Masahiko Ishida
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