11, 01. 2004
The Domestic Market Heading towards Saturation
According to a Japan Pharmaceutical Manufacturers Association survey of 29 pharmaceutical companies listed on the Tokyo Stock Exchange, the pharmaceutical industry has been able to maintain relatively high growth over the past 10 years after the bursting of the economic bubble, while other industries have recorded large negative growth in sales and profits. The rate of growth in sales reported for the pharmaceutical industry during this period was 2 percent, while the operating earnings average saw a growth rate of 5 percent.
However, if we look at just the Japanese domestic market, it can be said that the pharmaceutical market is gradually moving towards saturation. The country's dwindling birthrate and aging population has placed Japan's national health insurance system to the jeopardy of collapse. The government is therefore trying to curb related healthcare costs, or expenditures for pharmaceutical drugs to be more exact, by implementing such measures as a National Health Insurance (NHI) price revision to be made once every two years.
A Brake on the Administration of Large Doses of Pharmaceutical Drugs
The Diagnosis Procedure Combination (DPC) system was implemented in April 2003 at 82 hospitals in Japan that are certified as a "special function hospital" (hospitals that perform difficult surgery or provide cutting-edge treatment). Under this system, patients hospitalized in general wards are charged a fixed sum for a day's worth of treatment. In the case of the traditional fee-for-service system, patients were charged a predetermined amount per medical action, and there was no ceiling to the charges to be paid for the pharmaceutical drugs used in the course of treatment. However, a predetermined limit to the amount charged has been imposed on medical facilities under the DPC system. Hospitals, therefore, need to keep their spending within that limit, resulting in a brake on their use of pharmaceutical products.
Major Pharmaceutical Companies Revving Up Exports
National Cancer Center: Tsukiji Campus
Meanwhile, some major Japanese pharmaceutical companies have been making moves to expand their exports since the late 1990s as a measure against the stalemate in the domestic market. There are six Japanese companies, such as Takeda Pharmaceutical Company Limited and Eisai Co., Ltd., whose export ratios exceed 10 percent. The export ratios of these six companies (i.e. export of pharmaceuticals from Japan) have risen from 70 percent to 90 percent over the past 10 years. While the domestic market continues to remain sluggish, a gap between Japanese majors - with sales networks and R&D capabilities that allow them to develop business overseas - and leading medium-sized firms is gradually beginning to expand.
The Second Largest Market Following the United States
The Japanese pharmaceutical market is the second largest in the world following the United States. While high growth (over 11 percent) is anticipated up to 2005 in the U.S., the forecast for the Japanese market is that there will be continued sluggish growth of slightly over 2 percent. While there are two types of pharmaceutical drugs, - prescription drugs that must be prescribed by a physician, and over-the-counter (OTC) medication which can be freely purchased at a pharmacy -.prescription drugs account for 90 percent of the pharmaceutical drugs in the Japanese pharmaceutical market. Many major Japanese pharmaceutical companies, such as Takeda, Sankyo Co., Ltd, and Yamanouchi Pharmaceutical Co., Ltd., are involved in manufacture and sales that center on prescription drugs, with a portion of their manufacturing and sales devoted to OTC drugs. However, while the market for OTC drugs is relatively small, it requires huge advertising expenditures. Profitability is therefore low, and it is thought that much of such sales result in deficits.
Although there are major pharmaceutical companies like Taisho Pharmaceutical Co., Ltd., who are recording high profitability while unfolding their business around OTC drugs, the majority of pharmaceutical companies whose business is focused on OTC are midsize firms or smaller. Taisho Pharmaceutical is the undisputed leader in terms of OTC pharmaceuticals, with SSP Co., Ltd. in second place. Taisho Pharmaceutical has a 40 percent share of the health drink market, and its combination cold remedies have a share that is just under 30 percent. As in the case of Taisho Pharmaceutical, there are many OTC pharmaceutical majors that are exhibiting high performance through health drinks and combination cold remedies.
The Pillars of System Reform: Revision of the Price of Medicine and Separation of Dispensing and Prescribing Functions
There has been stagnant growth of the Japanese pharmaceutical market since 1990 caused by the promotion of healthcare reforms by the Japanese government. Reforms are being advanced by the government in order to curtail increasing national healthcare expenditures. There are two pillars to the government's reform: NHI price revision and the separation of dispensing and prescribing functions. The NHI price revision aims to bring the price of pharmaceuticals closer to actual market prices by revising officially-fixed prices for medicinal drugs.
In the past, hospitals made a profit through the difference in the officially-fixed and actual price of pharmaceutical drugs. The difference was a result of the fact that such drugs were sold to hospitals, etc. at a price under the officially-fixed price (hospitals billed the government for NHI reimbursements according to the officially-fixed price). What this means is that underwriting organizations and the government were paying excess fees for medical treatments.
With today's massive government budget deficits, there is no room to continue to allow such wasteful spending. The government therefore came out with two measures. One was to make, as a fundamental rule, a revision (lowering) of NHI pharmaceutical prices once every two years, so that the officially-fixed prices of pharmaceutical drugs would become as close as possible to actual prices. The second was to advance the separation of the dispending and prescribing functions at medical facilities in order to eliminate the over-prescription of medication.
Reorganization, Centering on Prescription Drug Manufacturing, Becoming Active
Film packing of medicine for colds at the plant of Zenyaku Kogyo
The separation of dispensing and prescribing functions is a move towards advancing a "division of labor" in which hospitals will handle the treatment of patients and the prescription of pharmaceuticals, while pharmacies will handle sale to patients. It aims to place a brake on the administration of large amounts of drugs by cutting pharmaceutical drug earnings from hospital finances.
As a result, a reorganization of domestic pharmaceutical companies, centering on those that handle prescription drugs, is becoming active.Mitsubishi-Tokyo Pharmaceuticals, Inc. merged with Welfide Corporation in October 2001 and became Mitsubishi Pharma Corporation. Chugai Pharmaceutical Co., Ltd. merged with Nippon Roche K.K, a subsidiary of Roche (Switzerland), in October 2002, while Daiichi Pharmaceutical Company acquired the pharmaceutical business of Suntory Limited, a major liquor and beverage manufacturer.
Taisho Pharmaceutical, the largest OTC pharmaceutical company in Japan, announced a business merger with Tanabe Seiyaku Co., Ltd in 2001 that was later retracted. However, it tied a comprehensive alliance with Toyama Chemical Co., Ltd. in August 2002, and integrated the sale of prescription pharmaceuticals in April 2003.
Three Key Points towards the Future
Major Risks in the Development of New Drugs
There are three key points for forecasting the future of the pharmaceutical industry: reorganization, division of labor and acquisition of foreign affiliates.
First of all, an acceleration of reorganizations within the industry is expected. The reform of the Japanese healthcare insurance system is exhibiting a major effect on the pharmaceutical industry. Government policy measures to curb medical expenses (pharmaceutical fees) is leading directly to the stagnation of the pharmaceutical market
The separation of dispensing and prescribing functions is established. Pharmacies, not hospitals, handle sales to patients.
This is why, as mentioned earlier, major Japanese pharmaceutical companies are focusing their strength on the development of new drugs, and the aggressive advancement into American and other overseas markets has become an issue.
It has already been explained here that the continued revision of officially-fixed drug prices is a cause of major declines in the earnings of pharmaceutical companies. There is a pressing need among pharmaceutical companies to advance the development of innovative new drugs because the price of such new drugs is higher than that of products that have been on the market for some time.
The development of a new drug, however, requires vast R&D expenses, while it is uncertain whether such investments will lead to the development of a promising new drug. In this sense, this is a business that contains major risks. According to one estimate, the odds of a new drug development reaching actual commercialization are 6,000 to 1. It is also said that it take more than 10 years as well as expenses of between 15 billion and 20 billion yen before a new drug can be placed on the market.
Entry into an Age of Two Major Pharmaceutical Companies through Major Mergers?
Even if, after the injection of a massive amount of funds, the development of a new drug reaches the point where it can be sold on the market, proprietary patent rights to manufacture and sell the new drug will expire after 20 years. This means that there is a possibility of major declines in the drug's profitability.
For this reason, reorganization is taking place on a global scale in the industry, and Japanese pharmaceutical companies cannot consider themselves exempt from such tides. This is because mergers between major pharmaceutical companies expand the scale of operations and lessen the burden of developing a new drug.
Turnover in 2003 for prescription pharmaceutical products at Pfizer Inc. of the United States after its acquisition of Pharmacia was more than 40 billion dollars. This is almost six times greater than related sales at Takeda Pharmaceutical, which has the leading position in Japan.
Yamanouchi, which is in third place in terms of sales, and Fujisawa Pharmaceutical Co., Ltd., in fifth place, have announced a business merger effective April 2005. If this major merger takes place as planned, it will result in the birth of a Japanese pharmaceutical company that will be in close second place after Takeda Pharmaceutical. There is a possibility that the reorganization of Japan's pharmaceutical industry, which has fallen behind similar moves elsewhere, will accelerate in a spurt upon such major mergers between leading companies.
A Division of Labor between R&D and Manufacturing
A division of labor within the industry will also probably occur triggered by reorganizations within the industry. An amendment to the Pharmaceutical Affairs Law made in July 2002 resulted in a review of the system for approving the manufacture of pharmaceutical products. In the past, companies that conducted R&D for a new drug were obliged to manufacture the drug (handle at least one of the production processes) at an in-house plant. Since the amendment, companies have been allowed to consign all manufacturing processes to outside firms, including the production of new drugs developed by the company.
As a result, we are beginning to see moves by leading pharmaceutical companies to focus their financial resources to the R&D of new drugs and commission the whole production process to outside firms. Meanwhile, there are some moves by mid-ranked pharmaceutical companies to not conduct any R&D for new drugs but rather specialize in commissioned production. We are beginning to see a division of labor between R&D and manufacturing.
Offensives into Japan by European Firms
Many major European pharmaceutical companies are beginning to launch new drug offensives in the Japanese market. They include companies such as Aventis (France), GlaxoSmithKline (U.K.) and Boehringer Ingelheim (Germany). They are increasing their product lineup with a focus on lifestyle and central nervous system related diseases. These are fields that show potential for market expansion.
Japan is the second largest market in the world after the United States, but the market share of European affiliates are still low. There is much room for expansion. In addition to intensified business in Japan by Pfizer, the biggest pharmaceutical company in America, Roche has brought Chugai Pharmaceutical under its umbrella. As a result, the market share of foreign affiliates in Japan is now over 30 percent. Competition between American, European and Japanese firms over the Japanese market is sure to spur a further reorganization of the Japanese pharmaceutical industry.