The pressure from Japanese government to reduce drug prices had resulted in lower growth rates and overall generic market size in that country, according to Indian and Japanese analysts.

The Japanese pharma market size is USD 47 bn (around JPY 6tr) and is growing at 4 per cent annually. This 4 per cent growth is lacklustre as against 14 per cent of US and 8 per cent in Europe due to pressure by government to reduce drug prices. It is difficult to calculate the average product price differentials between US and Japan as some products (diagnostics, imaging products are much more expensive in Japan, while oncology products are much cheaper). However, pharma prices in Japan are on an average cheaper than those in the US while expensive as compared to those in Europe.

The Japanese generic market, unlike that in the US and Europe, is very small (11 per cent by volumes and 5 per cent of value) as compared to 45 per cent by volume and around 10 per cent by value in US.

The reasons for the poor penetration are that generally doctors dispense drugs and margins to distribution is ad valorem, resulting in the doctor over prescribing the expensive drugs; and companies generally distribute directly to chemists in small packs.

As generic companies are small, they do not have the size to undertake this activity across the entire country. Analysts believe that there are 45 generic players in this USD 2.4bn market resulting in over competition.

Due to aggressive competition, profitability of generic companies is quite low - gross and operating margins of 35 per cent and 8 per cent respectively. No US or European generic company is present in Japan. Hexal of Germany has a small set-up.

It will take at least 2 years for Ranbaxy to launch a basket of products in this difficult market through an alliance with a small local player, which has recently been struck. While the short term (2 years) view for the Japanese generic market is lacklustre the longer term potential is good as the government will be forced to promote generics (aging population requiring more drugs, poor fiscal deficits, etc).

While the absence of global generic companies in Japan is positive, a Japanese analyst says that consolidation within Japanese generic companies is essential for them to do well. Ranbaxy has always been an early entrant in any market (US, Brazil, Germany, etc) and is now doing well in these markets and hence the entry into Japan.

For the first time, the Japanese government is promoting generics by a subsidy of 20 JPY per generic prescription. However, this sop is too low to be of any benefit.
Japanese government closely monitors product prices. Earlier (till 1 April''2002), generic companies were allowed to price their products at a 20 per cent discount to patent holders price incase of products that had just gone generic.

Over a period of time, the pricing was at a 50 per cent discount to that of the patent holders. Post 1 Apr''2002, the lower limit of 60 per cent discount of the patent holder''s price has been removed. This will allow generic companies to lower their prices and capture market shares faster.

While the approvals required are standardized (stability test and bioequivalence), these are to be carried out by in Japan. This takes 1.5-2 years. The cost of filing is not much different from that in US or other European markets.

Marketing approvals take around a year as against an average of three quarters in the US and companies take around 2 quarters to commence distribution. Analysts say that manufacturing and purity standards in Japan are much higher than that in the US. Hence, Indian companies may have to modify their manufacturing plants.

Distribution of drugs and inventory management is quite difficult and expensive. Consumers tend to believe that generic products do not have good quality. Considering that the large Indian companies have sizeable exposure to the US and some of the European markets for quite some time, it may not be difficult for them to target Japan. However, the gestation period to enter Japan and make profits is around 3-4 years.

The Japanese government can be expected to promote generics more aggressively in the future - more subsidy per prescription or through other ways. While this will boost the market for generics, the consolidation will enable the companies to boost product basket and improve the distribution capabilities. Analysts believe that over the longer term (i.e., greater than four years) the potential for generics is quite good.