Japan is the world's second-largest pharmaceuticals market after the US with revenues touching $65.5 billion, representing 13 per cent in the world market. Japan leads the Asia Pacific pharmaceutical market with more than 67 per cent market share.

Market revenues have grown quite sluggishly for the past few years. But in 2007, the Japanese market achieved a Y-o-Y growth of 3.6 per cent, higher than CAGR of 1.8 per cent for the period 2001-07.

Japanese pharmaceutical industry constitutes around 1400 manufacturing units with 400 manufacturers & marketers of prescription drugs. Domestic pharma companies dominate the market with 2/3rd share. Major domestic players are Daiichi Sankyo, Chugai Pharmaceuticals, Takeda Pharmaceuticals, Astellas Pharma, Eizai etc. Key pharma MNCs having presence in the Japanese market are Pfizer, Novartis, AstraZeneca, Merck, Eli Lilly, J&J. Three pharma MNCs features in the Top 10 Pharmacos list.

Generics Opportunity
The Japanese Government first time recognized generics in 1975 when they drafted policies for new drug approval, which for the first time differentiated between new drugs and generics. Insipte of that generics penetration in the Japanese pharma market is low compared to developed markets like the US, UK and Germany. The Japanese generics market is valued at $3 billion accounting just 5 per cent of the total pharmaceuticals market in Japan in value terms and 17 per cent by volume.

Many Japanese doctors believe that generics are inferior to branded products; and wholesalers have little incentive to sell cheaper generics as they receive rebates that are based on the prices of the drugs they distribute. Moreover, government biannual branded drug price cut, making them cheaper and more affordable. Thus uptake of generics is very low.

Rapidly growing population and spiralling healthcare costs, the government have started initiating promoting the use of generic drugs. Japan's generics market is expected to reach 30 per cent in volumes in the next five years.

Policy Reforms
Pharmaceutical regulatory reform began since 2001 with formation of the Ministry of Health, Labor, and Welfare (MHLW), merging Ministry of Health and Welfare and Ministry of Labor for over-viewing the pharmaceutical and medical devices regulatory system and harmonizing regulations and other safety measures with those in the EU, Australia, Canada, and the United States. Subsequently, the Pharmaceutical Affairs Law (PAL) was revised in 2002.

The Japanese regulatory authority, Japanese Pharmaceuticals and Medical Devices Agency (PMDA), takes more time in approval of new chemical entity compared to the US and Europe. PDMA in order to expedite the approval process, reducing the drug review time as per regulated market standard and also increasing the drug reviewer count in phase wise manner. This is expected to help multinational companies bring their products faster into the market, and maximize their sales profit before the expiry of the patent.

MHLW implemented Bungyo, the practice of separating drug prescription and dispensing between physicians and hospitals to ensure that the physicians do not over prescribe drugs to increase their sales. However, the country has not fully implemented separation of drug prescribing and dispensing in contrast with developed markets, leading to the problem of over prescription. But the country target to expand the practice for which they increasing the number of pharmacies to make the drugs accessible to the people and prepare trained manpower to handle them.

The Japanese Government resort to compulsory drug price cuts to control healthcare expenditure. MHLW conduct biennial pricing review, annually revises prices.

Prior to 2005, was mandatory for some manufacturing procedures to be conducted in-house but The Pharmaceutical Affairs Law of 2005, allows Japanese companies to sub contract the 'complete' manufacturing of their products.

Intellectual property law is different from those in many other developed countries. The data exclusivity period for protecting the information companies submit to the regulatory authorities is only six years - compared with eight years in the European Union (EU) and US. The legal system for dealing with patent infringements is very cumbersome and time-consuming. Average lead time for dispute settlement is more that of the developed markets.

The Japanese Opportunity
Foraying global pharma majors in the Japanese market raised the competition for domestic companies and increasing penetration of generic drugs with government support are keeping margins of Japanese companies under tremendous pressure. Thus Japanese pharmacos are more and more looking cheaper destinations to drive growth. Indian companies who have already positioned them as outsourcing hub for APIs and other intermediates has the opportunity to become the favoured destination for outsourced manufacturing supplying cost-efficient high quality formulations.

India becoming an integral part of the Japanese pharma value chain, as the Japanese pharma companies continue to increase their sourcing of APIs and formulations, offshoring of clinical development and partnering for new product development.

With rising competition and pricing pressure in the US and Europe markets, Indian pharmcos are left with only virgin regulated market of Japan to explore newer avenues of growth. Indian pharmacos with generic expertise looks for huge untapped potential in the Japanese market.

Japan is lucrative market for investment. Though not an emerging market in conventional sense but regarded as comparatively new ground for foreign companies. Liberalization of the pharma sector with policy and regulatory reforms made the Japanese pharma market more attractive for investment destination. The removal of the obligation to manufacture locally, introduction of a faster system for approving new drug applications, the promise of better prices for truly innovative drugs, government's pro-generics reforms - all these changes herald increasing opportunities for foreign companies.

Indian Early Birds
Indian pharmacos have been supplying bulk drugs and intermediates to Japan for quite some time. The first Indian company to forge an alliance with Japanese partner SORM, to supply of generic drugs, OTC and nutraceutical products to the Japanese market, was Strides Arcolab. The alliance gave Strides entry into strictly regulated Japanese market in generics and OTC, segments that stores huge potential for growth.

In 2005, Ranbaxy and Nippon Chemiphar entered into a joint venture to form Nihon Pharmaceuticals Industry Co. Ltd. Torrent Pharma Japan Co. Ltd., was incorporated in April 2006 as a wholly owned subsidiary in Japan, to cover the generic market in Japan. In 2007, Zydus Cadila established a wholly owned new subsidiary Zydus Pharmaceuticals Inc., Japan and acquired Nippon Universal Pharmaceutical Ltd., a small privately held company headquartered at Tokyo, Japan; and Lupin acquired Kyowa Pharmaceutical Industry to market its finished formulations in Japan. In 2008, Orchid formed wholly owned subsidiary in Japan called Orchid Pharma Japan to foray into the high potential and growing Japanese generics market.

The year 2008 also witnessed the 'reverse wave' - acquisition of Ranbaxy by Japanese pharmaco Daiichi Sankyo.

Indian pharmacos already ventured in the Japanese market in generics space have established them as leading players, some of them featuring in the top 10 generic players list. Indian contract manufacturers have been gradually establishing their credentials as outsourcing partners for high quality and safe along with cost efficient.

We expect both Japanese and Indian pharmacos to explore collaborations and alliances in areas such as collaborative research, marketing alliances, contract manufacturing.

(The author is an Industry Analyst, South Asia & Middle East, Healthcare, Frost & Sullivan)