A pharmaceutical market worth $51.4 billion, second only to the American market; an aging population; a highly industrialized nation; advanced egalitarian healthcare system. These are precisely the opportunities that Japanese pharmaceutical markets offer. The increase in the demand for medicines, the large market size for prescription goods in Japan is due to the dispensing system followed by physicians and doctors which in turn yields good profit margins.

This is a unique feature of this market; doctor doubles up as both a prescriber and dispenser of medications. This has led to a system where presence of pharmacies is very minuscule. A flip-side to this is the burgeoning costs of healthcare expenditure that is to be borne by the government, which covers medical expenses for almost 100% of the population.

This was one of the reasons for initiating the process of separation of prescribing and dispensing platforms called Bungyo. Increasingly there have been concerns about excessive and unnecessary administration of medication by doctors leading to damages of adverse reactions. Separation of prescribing and dispensing functions continues to increase rapidly, and reached almost 44% in the year to March 2002. It is estimated that the penetration of this system will reach 80% in the coming four years.

Bungyo is driving major changes in the retail pharmacy sector, with chain organizations and specialist outlets dealing only in prescription drugs accounting for an increasing proportion of total pharmacy numbers. By taking away the economic incentives previously attached to prescribing, Bungyo may also mean that more doctors will focus on efficacy or pharmacoeconomic issues in their prescribing decisions. In the long run, this could benefit companies that launch new products with major improvements over existing ones, rather than 'me too' products.

A very important factor that will keep the industry growth healthy is the Health insurance coverage by the Central and local governments. The Japanese health insurance is broadly categorized into the following:
- Employee's health insurance
- Health services for the senior citizens

Market Segmentation

The Japanese pharmaceutical industry is progressing at the rate of 3.5% expected to touch a mark of 5% and above in the coming years. However, the reduction in the national healthcare expenditure and the separation of the prescribing system from the dispensing one are factors that are likely to have a negative impact on prescription goods that create market opportunities for generic drugs.
Segment-wise, the healthcare Industry comprises largely of:
1. Pharmaceuticals & Drugs worth $47.04 (61.1%)
2. Medical Device worth $18.38 (26.2%)
3. Biotechnology $12.45 (12.6%)

Pharmaceuticals & Drugs

The market share of the Pharmaceuticals & Drugs segment decreased from 79.25 % in 1996 to 71.89 % in 2001 due to the decline in production that led to the decrease in exports. The Japanese pharmaceutical companies lack the research and development resources and concentrate more on domestic markets than global markets.

Top five Pharmaceutical companies in Japan (2003)
Company - Nationality
Takeda - Japan
Pfizer - USA
Sankyo - Japan
Roche - Switzerland
Otsuka - Japan
Source: Frost & Sullivan

The entry of foreign companies in the league of top five has been facilitated through alliances and partnerships. Global merger of Pfizer with Warner-Lambert (2000) and the acquisition of Pharmacia (2003) have put Pfizer in top 5 leagues, not only in Japan but other pharmaceutical markets as well. Similarly, merger of Nippon Roche (Roche's Japanese subsidiary) with Chugai pharmaceutical was significant. Roche's acquisition of a 50.1% stake in Chugai strengthened Roche's position in the Japanese pharmaceutical market.

Approximately 10 % to 12 % of the sale of pharmaceuticals is spent on research on new molecules and formulations by pharmaceutical companies, which is very low in comparison with the research and development expenditure by US pharmaceutical companies.

The combined research and development expenditure of all Japanese pharmaceutical companies is not even on par with the research and development expenditure of a single US pharmaceutical company. Currently, a number of mergers and acquisitions are taking place in the Japanese pharmaceuticals & drugs segment, which is expected to have an impact on the market shares of the Japanese pharmaceutical companies in future.

Imports of pharmaceuticals and drugs constitute 40 per cent of the total drugs market with the local production and licensing of compounds to Japanese manufacturers constituting a major proportion. The United States constitutes 18 per cent of total imports of pharmaceuticals and drugs in Japan. The categories of drugs that are imported include gastrointestinal medicines, antibiotics, anti-cancer drugs, biological products, dermatological products and vitamins. The Japanese government's measures to control prices of prescription goods are likely to have a negative effect on the prescription goods and over the counter (OTC) drugs, which resulted in the shifting of operations by Japanese pharmaceutical companies to other Asian countries. The US pharmaceutical companies are expected to introduce new medicines and drugs catering to the needs of the increasing aging population in Japan through licensing with local manufacturers and distributors.

Medical Devices and Equipment

Imports of medical devices & equipment constitute 45 per cent of the total medical devices and equipment market. While the Japanese medical devices and equipment companies manufacture low-end medical devices, high technology medical equipment are imported from the United States, Germany, Switzerland, and Ireland. Moreover, lengthy clinical trials before the commercialization of medical devices also deter the domestic manufacturers from investing in high-technology devices.

Efforts of the Japanese government to reduce and control healthcare expenditure are expected to have a negative impact on this segment. Many US medical devices and equipment companies have their presence in Japan and contribute approximately 65 per cent of the total imports in this segment.

Huge opportunities are expected for the medical devices & equipment segment in the areas of home healthcare and medical information systems for telemedicine services. The US medical devices & equipment companies are expected to dominate the Japanese market in technologically advanced medical devices and equipment such as digital imaging equipment, pacemakers, cardiology products, and artificial implants. Imports of the medical devices & equipment segment are expected to increase by 9.15 per cent between 2005 and 2006 due to various favorable factors such as the following:
- Establishment of production operations to other Asian countries by Japanese medical devices and equipment manufacturers to benefit from cheaper manpower, production costs, and facilitate "reverse imports" into Japan.
- Negotiations on the establishment of a system for mutual certification of safety standards and specifications for medical equipment by Japan, the United States, and the European Union, which is expected to facilitate favorable trade between these countries.

Biotechnology

The biotech industry in Japan, with backing from the government, has done quite well for itself. In Japan, unlike in the US, it was the large companies in the traditional industries that took to biotechnology first. Companies such as Kirin Brewery, which have been using fermentation processes for alcohol production discovered that their processes had biotech applications and ventured into modern biotech.

Pharmaceutical companies such as Yamanouchi and Kyowa Hakka Kogyo built their skills in biotech, modeled after the US pharma companies, while large corporations such as Olympus established subsidiaries. As the biotech fever spread, many small dedicated biotech firms or 'bioventures' sprung up. Currently, there are around 334 bioventures in Japan. The biotech market size was pegged at $12.45 billion in 2002 and is expected to reach $16.47 billion by 2005.

Top five Pharmaceutical companies in Japan (2003)
Sector - 2003(%)
Biopharmaceuticals - 40
Agribiotech - 23
Chemical - 16
Food - 8
Instruments - 7
Others - 6
Source: Frost & Sullivan

Genetically modified insulin was one of the first biopharmaceutical products to be approved in Japan. Developed by Eli Lilly, the product was initially sold in Japan by Shionogi Pharmaceuticals, but is now being marketed by Lilly. Around 30 per cent of the biopharmaceuticals sold in Japan are imported. Currently, erythropoietin is the largest selling product in this market with a market size of $1 billion. Other major products include the interferon, hepatitis B vaccine, and tissue plasminogen activator (TPA). Most of these products though produced and marketed in Japan by Japanese companies such as Daiichi pharmaceutical, Sankyo, and Takeda Chemical Industries, involve technical co-operation from European and American companies.

Agribiotech is a rapidly expanding sector in Japan. Though the expanding girth of the market is mainly due to the import of genetically modified food and seeds, indigenous applications of the technology are also increasing. The most prominent genetically modified crops in Japan are herbicide-proof and insect-repellent corn, rapeseed, soybeans, and cotton. Other products include vegetables and flower seeds from cell cultures and tank-cultured ginseng. Currently, Japanese companies with agricultural biotechnology interests are focusing on genetically modified(GM) flowers, as GM foods are facing increasing resistance from consumer groups.

For example, Kirin Brewery got approval to market genetically modified tomatoes developed by Calgene, Inc. in Japan, but has put the project on the back burner, allegedly because of anticipated consumer resistance. It is now concentrating on its flower business of chrysanthemums and carnations. Suntory is a company investing in a big way in the GM lower business. It has already produced GM varieties of verbena and petunia. It also produced the world's first blue carnation and is in the process of developing blue rose through a genetic recombination along with its partner Florigene, Ltd., Australia. The main players in plant biotechnology are Sumitomo Chemical, Mitsui Toatsu Chemicals, Inc., Suntory, Mitsubishi (Plantech Research Institute), Japan Tobacco, and Kirin Brewery.

R&D in biotechnology is mainly carried out by the industry in Japan. The large chemical and pharmaceutical companies and other conglomerates invest substantial amounts into biotech research. However, following the government push for biotech and the launch of many genome-related research programs, government spending on biotech research has increased. With the government serious about supporting biotech and the industry becoming more competitive through better research and overseas collaborations, Japan is sure to emerge as Agribiotech leader in the near future. Amongst the three areas of the healthcare industry, biotechnology sector is poised to grow at a CAGR of 11.25% in the next 3-4 years.

Outlook

The aging population in Japan is expected to be the major market driver for the Japanese healthcare industry. The foreign pharmaceutical companies are expected to enter the lucrative Japanese healthcare market to introduce their products, especially catering to the needs of the aging population. The decline in the production of pharmaceutical and drugs is likely to increase imports during the forecast period.

The favorable government policies for reducing lengthy clinical trials and the standardization of the approval process with other countries are factors that are expected to increase imports of high-technology medical equipment and devices. The government's initiative for increasing the number of nursing homes and home healthcare facilities is also likely to create the demand for medicines and medical devices, especially for the old age-related diseases. The Japanese government has also allocated ¥500 million for building new healthcare facilities.

- (Rena Shukla is Research Analyst-Healthcare Practice, Frost & Sullivan. The author can be contacted through sdedhia@frost.com)