The policy of the Japanese Government to cut down health insurance bills resulting in increased generic sales, mounting Research and Development costs and declining returns in the domestic market, is forcing the Japanese pharma majors to aggressively foray into the US and European markets to stay in business.

As per an analysis published a few days ago by the Japanese Pharmaceutical Manufacturers Association (JPMA), net income of its leading 30 members are likely to decrease by 5.7 per cent in 2006 compared to year 2005. Ordinary income is prospected to decline by 6.6 per cent on a year-on-year basis, due to increased R&D expenses. Overall sales are estimated to stay flat in 2006 at the nearly same level as the last year (up by 0.1 per cent). However, overseas sales are predicted to grow marginally. JPMA warns that the Japanese pharmaceutical industry is expected to face severe market conditions, including a reduction in drug prices by 6.7 per cent on an industry average basis, expansion of the number of hospitals subject to diagnosis procedure combination (DPC- a policy introduced by the Japanese Government in April 2003 to cut down medical insurance expenses by boosting generic drug sales), and further progress in the use of generic products.

Sources say that the stagnation in the domestic market is forcing the Japanese pharma to either go for the M&A route or to exit from business. If there were 1646 pharma companies in Japan in 1993, this has decreased to just over 1000 by 2004. Inability to bring out new medicines despite heavy R&D investment, mounting development cost coupled with inability to focus on other markets, are cited as some main reasons for the Japanese pharma firms exiting from business. Of the Japanese companies, about 40% of the firms are pure prescription drug makers and most other makes OTC drugs. Only less than 180 firms make both OTC and prescription drugs and only 70 odd companies mainly produce and sell generic drugs.

Sources said the nature of Japan's pharmaceutical market, the second largest in the world, is changing and the demand for generic drugs in Japan has been expanding in recent years. Major Japanese pharmaceutical companies have undertaken mergers and restructuring, and an increasing number of foreign pharmaceutical companies are entering the Japanese market through JV route or in licensing their drugs. In 2005, some of the major mergers happened in the Japanese pharma field were the merger of Yamanouchi Pharmaceutical and Fujisawa Pharmaceutical to create Astellas Pharma, Dainippon Pharmaceutical and Sumitomo Pharmaceuticals, and Daiichi Pharmaceutical and Sankyo.

The introduction of universal health insurance coverage in April 1961 triggered a soaring increase in domestic demand for medicines. However, the mounting financial burden on the Government for insurance cover and the increase in aged population is forcing the Government to cut down medical costs and to promote cheap generic products. As a result, in fiscal 2003 alone (ended March 31, 2004), the sales share of generic drugs in the pharmaceutical market increased 5.2 per cent in terms of value and 16.4 per cent in terms of sales volume.

According to JPMA, overall sales of its 30-member companies rose by 5.7 per cent in 2006 to 63716 billion yen, compared with the previous year. Despite the price revision by the Government, the domestic sales rose by 3.3 per cent on a year-on-year basis, assisted by special positive factors, including large-scale corporate mergers and M&As and sharp growth in the sales of medicines for lifestyle-related diseases as well as specific drugs due to the effect of the prevalence of influenza. There were also negative factors, such as the turning over of business and the transfer of distributorships for some medicines as a result of business restructuring as well as intensified inter-corporate competition.

Overseas sales, in-house products for mass sale continued to grow mainly in the USA and Europe, and, in particular, those of the top ranking companies expanded sharply. The overall overseas sales increased 196.4 billion yen in 2005 (up by 12.1 per cent) compared with the same period last year to 1,816.7 billion yen. The overseas sales ratio was 28.5 per cent, up by 1.6 points over the previous year. However, selling, general and administrative expenses expanded by 8.2 per cent in 2005 compared with the previous term due to an increase in R&D, foreign selling and other expenses, which were 935.6 billion yen, an increase by 12.3 per cent on a year-on-year basis.