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Generics in Japan

Evolving pricing, regulatory, and business environments

Reference Code: BI00050-008

Publication Date: January 2012

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About the author

Donald Macarthur is an independent pharmaceutical industry consultant and analytical writer with over 70

major report titles to his name. Covering most of the major ex-US countries, his focus is pricing,

reimbursement, and market access of prescription medicines, life cycle management, and distribution. He

has been visiting Japan regularly for the past 25 years and is recognized as one of the west‟s leading

commentators on its market and industry.

Disclaimer

Copyright © 2012 Business Insights Ltd

This report is published by Business Insights (the Publisher). This report contains information from reputable

sources and although reasonable efforts have been made to publish accurate information, you assume sole

responsibility for the selection, suitability and use of this report and acknowledge that the Publisher makes no

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purpose of the information or advice contained herein. The Publisher wishes to make it clear that any views

or opinions expressed in this report by individual authors or contributors are their personal views and

opinions and do not necessarily reflect the views/opinions of the Publisher.

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Table of Contents

About the author 2

Disclaimer 2

Executive summary 11

Organization and funding of Japan’s healthcare system 11

Regulatory environment 11

Pharmaceutical business environment 12

Generics market 13

Attitudes toward generics 14

Generics industry 15

Generics company strategies and generics defense 15

Market prospects 16

Chapter 1 Organization and funding of Japan’s healthcare system 18

Summary 18

Introduction 19

Key actors 20

Health insurance 21

Schemes managed by the government 21

Schemes managed by large companies 22

Schemes managed by the municipalities 22

Health insurance for the elderly 22

Private insurance 23

Healthcare providers 23

Healthcare benefits 24

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Remuneration of providers 24

Fee-for-service 24

DPC hospital funding 26

Dispensing fees 28

Patient co-payment 29

Healthcare expenditure 31

Chapter 2 Regulatory environment 34

Summary 34

Intellectual property protection 35

Marketing approval 37

NHI drug tariff 41

NHI price setting 42

NHI price revision processes 44

Biennial revision 44

Repricing 46

Long-listed brands 46

Correction premiums 49

Overall impact 52

Generic encouragement measures by government 53

Inconsistent government policies 57

Chapter 3 Pharmaceutical business environment 59

Summary 59

Pharmaceutical market 60

Research-based pharmaceutical industry 62

Generic industry 64

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Wholesalers 66

Pharmacies 68

Foreign exchange rates 70

Chapter 4 Generics market 71

Summary 71

Introduction to generics 72

Market size 76

Generic inclusion in NHI drug tariff 78

Introductory pricing of generics 82

Price revision of generics 83

Distribution of generics 85

Chapter 5 Attitudes toward generics 87

Summary 87

Insurers 88

Physicians 88

Hospitals 91

Pharmacists 92

Wholesalers 95

Patients 96

Chapter 6 Generics industry 99

Summary 99

Traditional domestic generic companies 100

Domestic R&D company presence 102

Distributor presence 103

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Multinational presence 104

Indian companies 106

Company profiles 108

Fujifilm 108

Nichi-Iko 109

Sandoz 109

Sawai 110

Teva 112

Towa 113

Exports 113

Chapter 7 Generics company strategies and generics defense 114

Summary 114

By generic sector 115

Generic companies 115

Generic industry associations 117

Counterstrategies by innovative manufacturers 118

Molecule case studies 120

Amlodipine 120

Clarithromycin 122

Donepezil 122

Famotidine 123

Lopamidol 124

Pioglitizone 125

Pravastatin 127

Risperidone 128

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Chapter 8 Market prospects 129

Summary 129

Introduction 130

Generic opportunities 131

Further incentives needed 131

Likely changes affecting generics from April 2012 133

Long-listed brands 136

Reference pricing 136

Fixed-dose combinations 137

Premium for new drug creation 138

Other reform measures 139

Other factors influencing generic prospects 140

Conclusions 141

Appendix 143

Scope 143

Methodology 143

Primary research 143

Secondary research 143

Currency exchanges rates 144

Glossary/Abbreviations 144

Bibliography/References 145

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Table of figures

Figure 1: NHI drug list by route of administration, 2010 41

Figure 2: JGA member companies 65

Figure 3: Breakdown of generic listing in the NHI tariff by product nomenclature, 2010 74

Figure 4: Generic volume penetration by country, 2009 77

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Table of tables

Table 1: Japan‟s healthcare in perspective, 2009 (or latest available year) 19

Table 2: Main health insurance schemes 21

Table 3: Penetration of DPC in hospitals, 2008 27

Table 4: DPC hospitals by bed numbers, 2008 27

Table 5: Specimen outpatient hospital bill 30

Table 6: Growth in national medical costs, 1990–2008 32

Table 7: Number (million) and share (%) of population older than 65 years, 2012-22 33

Table 8: Specifications required for generics by type of formulation 39

Table 9: PMDA review times for new generic applications, 2005–09 40

Table 10: Share of product portfolio of Japanese R&D companies accounted for by long-listed brands

47

Table 11: Additional price cuts for long-listed brands, 2002–10 48

Table 12: NHI drug price revisions since 1981 52

Table 13: Market share evolution (%) by customer type, 1992–2009 60

Table 17: Forecast sales of leading wholesalers, FY2011 67

Table 18: Top 10 chain pharmacies, 2008 69

Table 19: Breakdown of the NHI drug tariff by product type, 2007 72

Table 20: Specimen brand names of popular generics 75

Table 21: Generic penetration in Japan, 2002–10 76

Table 22: Numbers of new tariff-listed generics, 2003–11 78

Table 23: Examples of new generics first listed in NHI tariff, 1999–2007 80

Table 24: Examples of new generics first listed in NHI tariff, 2008–2011 81

Table 25: Calculation of initial NHI prices for generics, 1992–2010 82

Table 26: Results of biennial NHI price revisions: Overall average price cuts versus those for generics

84

Table 27: Japan Generics Association companies by size, 2007 100

Table 28: Consolidated results of leading listed domestic generic manufacturers, forecast for FY2011

101

Table 29: Other data on leading listed domestic generic manufacturers, forecast for FY2011 101

Table 30: Generic sales of innovative Japanese manufacturers, FY2010 103

Table 31: Generic market entrants from overseas: evolution and current status 105

Table 32: Generic market entrants from overseas: evolution and current status (continued) 106

Table 33: Representative value-added innovations from Sawai 116

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Table 34: Examples of combination products launched around the time of patent expiry of one

component 120

Table 35: Change in NHI prices of selected first wave generics of amlodopine 5mg tablets, 2008–10

122

Table 36: Change in NHI prices of selected first wave generics of famotidine 20mg tablets, 2002–10

123

Table 37: Change in NHI prices (¥) of Iopamiron (150 strength, 50ml) and leading generic version,

Oipamiron, 1996-2010 125

Table 38: Recent NHI price erosion with Mevalotin and generic pravastatin, 10mg tablet 128

Table 39: Examples of major molecules expected soon to go off-patent in Japan, 2012–2013 131

Table 40: Average exchange rates, 2007–11 144

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Executive summary

Organization and funding of Japan’s healthcare system

Healthcare comes under the Ministry of Health, Labor and Welfare (MHLW; Korosho). The main

advisory body to its minister is the Central Social Insurance Medical Council (Chuikyo).

The entire population is covered by health insurance schemes, managed by large employers,

municipalities or the government. They offer a common package of care, known as benefits under

National Health Insurance (NHI). There is no family doctor system; patients can select any GP clinic or

hospital outpatient department.

Healthcare providers are mainly paid on a fee-for-service basis, with a points-based fee schedule.

However, a growing number of hospitals are paid for inpatient care through a prospective diagnostic

procedure combination (DPC) system. Under DPC, the payment a hospital receives for treating a

patient with a particular diagnosis is the same regardless of the interventions applied or the cost of

drugs administered.

As in other countries, healthcare expenditure is rising fast in Japan, reaching a record ¥36,007bn

($388bn) in FY2009, the equivalent of 10.61% of GDP. One main cost driver is ageing; Japan has the

fastest-ageing society in the world.

Regardless of setting, and with relatively few exceptions other than welfare recipients, patients are

required to pay an age-dependent fixed percentage of their medical costs as a co-insurance under NHI.

For most, the co-insurance rate is 30%.

Regulatory environment

New drugs benefit from 20 years‟ patent protection. There is a maximum five-year patent term

extension to compensate for the period needed for clinical development and regulatory review. There is

no limit to the number of patent extensions for new indications or changes to the manufacturing

process.

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Examination for marketing approval is performed by the Pharmaceuticals and Medical Devices Agency

(PMDA). Generics are subject to an abbreviated process with a target review time of 10 months.

For inpatients and outpatients alike, only medicines (brand or generic) listed in the NHI drug tariff can

be prescribed, with reimbursement limited to tariff rates.

Additions to the NHI drug tariff for new drugs are made four-times a year. The aim is to publish the NHI

price within 60 days of regulatory approval.

New drugs which represent the first, second or third entry in the class and are within three years of first

entry to the class are priced by similar efficacy comparison. This method sets the price by reference to

the NHI cost of an existing product. There are additional premiums for innovativeness, usefulness,

pediatric use or small market size.

If a new drug is the fourth or later entrant to its class it may be considered to lack novelty and be

classified as a “me-too”. These are priced according to the class average price with no possibility of

added premiums or foreign adjustment.

MHLW attempts, through biennial price revisions, to bring tariff prices closer to market levels. A new

reimbursement price is obtained by adding the discount allowance (known as the adjustment zone) –

2% of the pre-revision NHI price – to the weighted average market price as measured in biennial

surveys. Regular across-the-board NHI price cuts on April 1st have been a feature of the market for

over 50 years.

Pharmaceutical business environment

Sales of all prescription medicines in 2010 amounted to ¥8,873.6bn ($101bn) at NHI prices.

Community pharmacies accounted for 50% of the 2009 total, large hospitals for 22.4%, self-dispensing

GP clinics for 20%, and medium-small hospitals for 7.6%.

Ten of the top-20 pharmaceutical companies by sales in 2010 were of foreign origin. Combined they

held a 32.7% market share, almost the same as the top-10 Japanese-origin companies.

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Over 80 of the 378 firms with products listed in the NHI drug tariff are generic companies. Forty four of

these are members of the Japan Generic Medicines Association (JGA). The Japan Society of Generic

Medicines (JSGM), though funded by some generic companies, is an academic body independent of

the sector.

Almost all distribution of prescription medicines (except some generics) goes via wholesalers.

Pharmacies, especially chain pharmacies, are of increasing importance as the volume of in-house

dispensing by hospitals and by GP clinics declines due to the success of the government‟s long term

policy of bungyo (the separation of the functions of prescribing and dispensing).

Generics market

Generics account for nearly half the drugs in the NHI list. Despite their large numbers, they held market

shares of only 9.4% by value and 23.1% by volume in FY2010 – among the lowest shares of any

OECD country – with sales on an NHI price basis of about ¥834bn ($9.7bn).

Dispensing by community pharmacies probably accounts for 50% of total generic use. The balance is

made up by GP clinics (25%), DPC hospitals (12-15%), and non-DPC hospitals (12-15%).

Generic companies in Japan have a long-standing reputation for poor product quality, bio-

inequivalence, questionable business practices, erratic supply, for making available only a limited

number of formulations, strengths and pack sizes, and offering inadequate distribution and information

services.

First generics are priced at 70% of the tariff price of the originator brand. Subsequent generics receive

the lowest tariff price for that ingredient up to 20 copies, after which they receive 90% of the lowest tariff

price of an existing generic .

More than 200 new generic products and in excess of 600 presentations are tariff-listed each year, with

the numbers having increased since the process became a biannual event in 2007. Patent-expiring

blockbusters can attract attention from 30 or more generic companies.

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Due to price erosion and competition, new generics often have a commercially viable lifespan of less

than five years, or two/three NHI price revisions. Manufacturers can only stay in business through

aggressive marketing of new generics and by introducing a steady stream of replacement products.

Local sales agents (hansha), traditionally the main route to market for generics, are being replaced by

wholesalers. Wholesalers aim to prioritize stockholding from five generic suppliers. The average

pharmacy uses generics from 5–10 companies, with purchases made as part of a basket deal.

Attitudes toward generics

Some health insurance societies now provide their members with written information on how much they

could save by switching to generics. Only a small proportion of the population has received such

mailings, but the results have been impressive.

Physicians employed by hospitals are salaried and have no economic incentive from prescribing one

drug rather than another. Self-dispensing clinic doctors are active users of generics, though their

numbers are declining.

The 2008 change from doctors being required to authorize substitution to them being required to

specifically block it greatly increased generic substitution opportunities, though one-third of prescription

forms had the “do not switch” column signed, sometimes routinely.

No incentives are currently given to doctors through NHI to prescribe generics.

DPC funding for hospitals has stimulated low-cost drug purchasing and given a boost in particular to

the use of injectable antibiotics and anticancer drugs in generic form. Non-DPC hospitals have little

incentive to use generics, apart from lessening the patient‟s co-payment burden. Originator brands, with

their higher prices than generics, offer greater margins.

Though pharmacies earn additional fees for high generic usage, many independents believe it is not

worth the effort, especially after patients may be reluctant to follow their recommendation and defer

instead to the doctor‟s choice. Multiple pharmacies are more enthusiastic users of generics.

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Other issues facing pharmacists with generics are reduction in revenue, the large stock inventory

needed, and the burden of explanation to patients.

A high proportion of decisions not to use generics comes from the patient, who are often suspicious of

them. The typical saving in co-payment from accepting a generic in place of the prescribed brand is

insufficient to override this.

Generics industry

Four domestic companies – Nichi-Iko, Sawai, Taiyo (an unlisted company), and Towa – dominated

generic sales for many years. Most other companies were very small.

Lured by expectations of market expansion, newcomers both from Japan and from overseas, entered

the business in the 1990s, only later to disinvest. More recently, several R&D majors set up or acquired

divisions dedicated to generics or to generics and long-listed brands. Such companies included Daiichi-

Sankyo, Eisai, Meiji Seika, Mitsubishi Tanabe, Nippon Chemiphar, Nippon Kayaku, and Pfizer.

Most of the leading multinational generic companies – including Actavis, Hospira, Mylan, Sandoz,

Sanofi and Teva – now have Japanese operations, independently or as joint ventures and alliances.

The most important recent move has been Teva‟s acquisition of Taiyo. Investment has not only been

one-way; Daiichi-Sankyo acquired Ranbaxy in 2008.

There is also a strong presence in Japan of Indian generic companies including Aurobindo, Lupin, Dr

Reddy‟s and Zydus Cadila. Lupin has purchased two local companies, Kyowa Pharmaceutical and

I‟Rom.

Generics company strategies and generics defense

The leading generic companies are expanding their production capabilities, collaborating to ensure

portfolio gaps are filled, and working towards the aim of a zero out-of-stock situation. Medical

representative numbers are being increased to detail both doctors and pharmacists. Product portfolios

now include added-value generics and long-listed brands.

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Many firms are trying to get their brands stocked by the big nationwide wholesalers, knowing this is the

key to access DPC hospitals and dispensing pharmacies. Chain pharmacies are a particular target.

Others are keen to support their business in the traditional market for generics, self-dispensing GP

clinics.

Generic awareness campaigns have been run by the industry association for many years and in 2007

the JGA initiated its “Reliability Improvement Project” for members focused on continuous supply,

ensured quality and appropriate provision of information.

Generic companies classify generic defense strategies by innovators into four groups: patent litigation;

extending the patent life with new indications; line extensions, in particular fixed-dose combinations;

and misinformation campaigns run by medical representatives.

Market prospects

2012–2013 presents fewer big new generic opportunities than 2010–2011 did.

The MHLW‟s target for volume share of generics is behind schedule. To achieve 30% penetration by

end-March 2013, usage should have been 27% when the biennial survey was last conducted in

September 2010. In fact, it was less than 23% and is forecast to fall short of the 2013 target by more

than five percent.

The gains achieved after fee restructuring in FY2010 were short-lived, and new, stronger incentives are

needed.

The generic industry is divided as to which party – the doctor for recommending their use or the patient

through a lower co-payment burden - should be the beneficiary of new financial incentives

A number of changes are likely to be implemented at the time of the April 1st 2012 biennial revision,

though they do not consistently favor generics.

To encourage generic usage, when more than 10 applications for the same generic are made (oral

forms only) the NHI price will be 60% of that of the originator product, instead of 70% at present.

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To reduce price variation between generics, grouping in price bands is planned with reimbursement

based on the weighted average market price of the group.

From April 2012 it is likely that if prescribers wish to block substitution they will need to do this on a

product-by-product basis.

Changes to the generic dispensation preparedness increments for pharmacies are to be made. Only

pharmacies that dispense more than 22% of generics will obtain additional fees, though there will be a

new fee for providing patients with written information on the savings they can make from generics.

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Chapter 1 Organization and funding of Japan’s

healthcare system

Summary

Healthcare comes under the Ministry of Health, Labor and Welfare (MHLW; Korosho). The main

advisory body to its minister is the Central Social Insurance Medical Council (Chuikyo).

The entire population is covered by health insurance schemes, managed by large employers,

municipalities or the government. They offer a common package of care, known as benefits under

National Health Insurance (NHI). There is no family doctor system; patients can select any GP clinic or

hospital outpatient department.

Healthcare providers are mainly paid on a fee-for-service basis, with a points-based fee schedule.

However, a growing number of hospitals are paid for inpatient care through a prospective diagnostic

procedure combination (DPC) system. Under DPC, the payment a hospital receives for treating a

patient with a particular diagnosis is the same regardless of the interventions applied or the cost of

drugs administered.

As in other countries, healthcare expenditure is rising fast in Japan, reaching a record ¥36,007bn

($388bn) in FY2009, the equivalent of 10.61% of GDP. One main cost driver is ageing; Japan has the

fastest-ageing society in the world.

Regardless of setting, and with relatively few exceptions other than welfare recipients, patients are

required to pay an age-dependent fixed percentage of their medical costs as a co-insurance under NHI.

For most, the co-insurance rate is 30%.

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Introduction

The Japanese are amongst the healthiest people in the world at a cost that appears modest compared to the

national income (Table 1).

Table 1: Japan’s healthcare in perspective, 2009 (or latest available year)

Country Health spending

as % of GDP

Heath expenditur

e per capita

(USD PPP)

Practicing physicians

per 1000 population

Infant mortality rate (per 1000 live

births)

Adult obesity

(%)

Life expectancy

(years)

Japan 8.6 2878 2.2 2.4 3.9 83

US 17.4 7960 2.4 6.5 33.8 78.2

Germany 11.6 4218 3.6 3.5 NA 80.3

France 11.8 3978 3.3 3.7 20.2 81.5

UK 9.8 3487 2.7 4.6 23 80.4

OECD average

9.5 3223 3.1 5.4 21 78.6

Note: PPP = purchasing power parity

Source: OECD BUSINESS INSIGHTS

Lower healthcare costs, in particular by comparison with the US, can be explained by:

a lower incidence of disease

a lower incidence of risk factors, especially obesity (but not male smoking)

less aggressive treatment

lower hospital staffing levels

smaller administrative burdens

a lower income of the majority of Japanese doctors (who are paid on a salaried basis).

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Key actors

The Ministry of Health, Labor & Welfare (MHLW, Korosho) is responsible for promoting and improving social

welfare, public health, and social security. Prior to 2001, the Ministry (then known as Koseisho) was

responsible for health and welfare only; MHLW is used throughout this report to describe both the former

Koseisho and the present Korosho.

Along with the Ministry of Finance, the MHLW and the Japan Medical Association (JMA, Nihon Ishikai) have

dominated the struggle for reform. The lead on the side of the payers is taken by the National Federation of

Health Insurance Societies (Kemporen), representing all individual societies that cover employees in large

firms. Other actors are the Japanese Business Federation (Keidanren) and the labor unions (Rengo).

The political party that had been the dominant force in the post-war years, the Liberal Democratic Party

(LDP), was by tradition heavily influenced on healthcare matters by the JMA. Through different categories of

membership, the JMA purports to speak for all physicians, as specialty organizations are not well developed

in Japan. It is a major provider of political donations to the LDP and its candidates for parliament (Diet).

Other players, including the pharmaceutical industry, have always been somewhat marginalized in any big

debate. However, the Democratic Party of Japan won the most seats at the 2009 election, so its leader

became prime minister. As a consequence the LDP‟s powers have lessened and so has those political

influence of the JMA.

The main advisory body to the Minister on matters relating to health insurance, including medical fees and

drug reimbursement pricing, is the Central Social Insurance Medical Council (Chuikyo). It provides the

decision-making forum for health policy, and is naturally dominated by the JMA. The providers‟ side has eight

of the 20 members (five doctors, two dentists and one pharmacist). There are also eight on the payer side

(four insurers and two each from employee unions and management), plus four ”public interest”

representatives.

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Health insurance

Since 1961, it has been obligatory for all Japanese people to be affiliated to one of several types of health

insurance programs in accordance with their occupation (Table 2). All schemes are subject to governmental

oversight and regulation through MHLW. By contributing to the various plans, the government levels the

playing field between the different schemes, and ensures that coverage is available to all.

Table 2: Main health insurance schemes

Type Subscribers & dependents

covered (million)

Proportion of aged (%)

Typical premium (%

of income)

Typical cost-sharing

Government-managed health insurance

37 6 8.5 employer 50%: employee 50%

Employees health insurance

32 3 8.3 (average) employer 50%: employee 50%

National Health Insurance

48 24 variable by region

government/prefecture 50%: insured person 50%

Source: Business Insights BUSINESS INSIGHTS

The public cannot select their insurer and the insurer cannot select the treatment provider. The range of

services to be provided is fixed, as are insurance premiums and co-payments.

Schemes managed by the government

Health insurance programs for employees of small to medium-sized firms and their dependents, known as

seifu kansho, are managed by the state through a quasi-government body, the Japan Health Insurance

Association. There is a single insurance pool and one rate contribution for all. The schemes are run by

MHLW which estimates overall expenditure and negotiates a fee schedule with providers. This schedule also

applies to the other types of health insurance.

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Mutual aid associations provide coverage for national and local government employees and teachers. A

small specialized group of people who work as crews of ships are covered by Seaman‟s Insurance, and

workers hired by the day, such as construction workers, are covered by Day Laborer‟s Insurance.

Health insurance for the poor and the mentally disabled is not financed from the health insurance system but

from the welfare system.

Schemes managed by large companies

Employee‟s health insurance (shakai hoken), managed at the company level by a total of about 1,780 health

insurance societies (kenpo kumiai), covers employees of any single company with more than 700 workers or

any group of companies with 3,000+, and their dependents. The schemes are administered by joint

management/union committees. Contributions are deducted at source.

Schemes managed by the municipalities

National Health Insurance (NHI, kokumin kenko hoken) covers persons not covered elsewhere, for example

the self-employed, shopkeepers, farmers, the retired and the unemployed. The insurer is usually the

municipality of residence but some professions can also form national health insurance societies. There are

166 such societies for specific occupations, including those for doctors, dentists, and pharmacists. Including

the municipal governments, there are over 3,300 societies in total.

Contributions are determined by each municipality, depending on assets and the cost of care in that region.

They are paid for each family by the head of the household in the form of tax, based on income and the

family size, up to a certain ceiling. A central government subsidy is needed as about one-fifth of all those

covered by NHI are in households without any income.

Health insurance for the elderly

The Health Program for the Elderly (rojin hoken seido) started in 1983. It covers those over 70 years, or

those over 65 who are bedridden – a total of about 16m people. Members are affiliated to other health

insurance organizations that contribute on the basis of their number of elderly members and the share of

actual expenditure incurred.

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Private insurance

Private health insurance is very limited. Among companies offering health plans are Aflic and AIG. Some

policies pay out for cancers and other critical illnesses, or for drugs which do not have regulatory approval in

Japan. Others cover non-medical related expenses like hospital room charges. There is no private gap

insurance (i.e covering co-payments under NHI) and “mixed medical care” (kongo shinryo) – mixing health

insurance approved and unapproved care – is highly problematic (i.e. the patient usually has to bear the

entire cost out of pocket).

Healthcare providers

Healthcare providers fall into two groups: Office-based physicians in clinics and those in hospitals. Hospitals

can be further subdivided into privately owned ones, public hospitals run by government (mostly at the local

level), and university hospitals. An estimated 80% of hospitals and 90% of clinics are in private ownership,

though they realize almost all their income from public funds. Around two-thirds of physicians are full-time

salaried employees of hospitals, with the remainder owning or running clinics.

The hospital/clinic differentiation is not clear-cut. Hospitals depend on outpatient care for much of their

business and clinics can retain this definition and have up to 20 beds. In urban areas, with the exception of

obstetrics practice, clinic beds have low occupancy rates, whereas in rural areas clinics function as mini

hospitals. By the end of 2010, the number of hospitals (20 or more beds) was 8,665, providing a total of 1.73

million beds, and the number of clinics (0-19 beds) was 99,836, providing a total of 88,563 beds.

Since clinics compete with hospitals for patients primarily on the basis of the perceived quality of care, there

tends to be much duplication of diagnostic equipment. For example, the number of computed tomography

(CT) scanners per million population at 97.3 is four-times the OECD average, and the number of magnetic

resonance imaging (MRI) scanners is 43.1/million population compared to the OECD average of 12.0/million.

At 36 days, the average length of hospital stay is high by international standards. With relatively few long-

stay facilities, some of the bed-blocking in acute hospitals is blamed on “social hospitalization” (shakaiteki

nyuin).

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Healthcare benefits

There is no family doctor or referral system; patients can select any clinic or hospital outpatient department

they like. Many people prefer to receive treatment, even for a relatively trivial condition, from an outpatient

department of a hospital, where they believe they will receive better care than from a clinic GP. Patients are

generally seen without appointment, on a first-come-first-served basis, but there are often lengthy delays,

especially at university hospitals. A three-hour wait for a three-minute consultation is a frequent complaint.

A common minimum package is offered under all schemes, confusingly also known as benefits under NHI

(though it applies to schemes managed by the national government, by large companies and by the

municipalities alike). Medical care is provided without limit on presentation of the patient‟s insurance

certificate to any healthcare facility designated by the governor of each prefecture. Government-managed

health insurance covers only those benefits specified in law, whereas health insurance societies tend to

provide additional benefits, such as vaccination and reimbursement of patient co-payments.

Beside medical and dental benefits covering inpatient and outpatient care, sickness or injury, allowances are

paid in cash to insured persons to compensate for the loss of income due to temporary incapacitation. Health

checks for persons under 40, cosmetic surgery, over-the-counter (OTC) medicines, normal

pregnancy/delivery, and abortions are not covered, though there are lump sum allowances paid for childbirth

and burial expenses.

Remuneration of providers

Fee-for-service

Healthcare providers are mainly paid under NHI on a fee-for-service (retrospective) basis. The fee schedule

(shinryo hoshu) uses points for all listed activities (1 point or tensu = ¥10), determined and adjusted by the

Minister on the advice of Chuikyo. The fee schedule is divided into two parts: a basic section on doctors‟

consultations and hospitalization; and specific sections on homecare visits, diagnostic tests, imaging,

prescribing and dispensing, injections, rehabilitation, psychotherapy, treatment, surgery, anesthesia, and

nuclear therapy. Reimbursement for medicines supplied can also be claimed at the fixed drug tariff rates.

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The schedule promotes equality among physicians. It does not recognize differences between private or

public practice, in experience or qualifications of providers, the type of facility or its geographical location.

Billing beyond the fixed price is not allowed.

In general, the fee schedule makes expensive, high-tech medical care relatively unprofitable, and cheap

outpatient primary care relatively profitable. The schedule is revised biennially, at the same time as NHI drug

price revisions, for the very good reason that savings with the latter are used to pay for increases with the

former.

Though public hospitals receive some government subsidy and preferential tax treatment, apart from acute

care hospitals enrolled in the diagnosis procedure combination (DPC; see below) system, all clinic and

hospital income under NHI is derived from a simple equation: Volume x listed price of each service or

product delivered to patients

As a consequence of binding limits on fees, it is inevitable that many physicians “game the system” by

increasing the volume of services, ordering more tests that carry a higher points value, prescribing more

medicines, resisting the implementation of protocols or treatment guidelines, or by keeping consultations

brief so as to necessitate repeated office visits.

Overall, the Japanese system is characterized by excessive medication and testing that is ridiculed in the

popular expression kusurizuke, literally “pickled in drugs and tests”.

Medical and pharmaceutical fees under NHI are not paid directly by the insurers, but by two bodies that are

entrusted to examine doctors‟ and pharmacists‟ monthly bills and to reimburse the appropriate amount. The

Social Insurance Medical Care Fee Payment Fund (Shiharai Rengokai) acts on a commission basis on

behalf of employees‟ insurances and the Prefectural Federation of National Health Insurance Associations

(Kokuho Rengokai) for the NHI schemes.

Reimbursement claims (reseputo) by medical institutions, less the co-payment received directly from

patients, are normally honored at the end of the month following that in which the service was provided. The

claim for each patient lists the diagnosis, and the name and volume of all drugs and services provided. In

26

general, only approved indications are reimbursed. Drug names have to be given individually, except when

these are administered at the same dosing frequency and cost less than ¥205 ($2.57, at average 2011 rate)

on an NHI price basis (considered as ”one type of drug”). More detailed disclosure of the patient‟s condition

and symptoms are required in cases were certain high cost products, like human immunoglobulins or

thrombolytics, are prescribed and claims for more than one million points are being sought.

There are inevitably false or exaggerated claims, but considerable efforts are made to screen these out by

review (shinsa). This involves peer reviews boards with about 8,000 physicians. Nevertheless, Japanese

doctors enjoy substantial clinical autonomy and never have to get pre-approval for any procedure or

medication.

DPC hospital funding

Schemes for prospective payment of hospitals, modeled on the diagnosis-related group (DRG) concept first

adopted in the US, began being piloted in Japan in the late 1980s. At the insistence of the JMA, adoption of

what was known locally as flat-sum reimbursement remained optional. It had little impact.

The latest DRG variant, diagnosis procedure combination (DPC) was first introduced in 2003 for routine,

acute inpatient care in 82 university and other large public and private specialized function (tokutei kinou)

hospitals. These hospitals, which for Japan had remarkably short bed stays averaging 14 days, were

carefully selected. The principal stated objective was not cost containment, but to compare performance by

different hospitals. Previously there had been no common system for data collection nationwide. There were

also hopes the system would result in a spillover reduction in the length of hospital stay.

MHLW‟s target was for 1,000 acute care hospitals to voluntarily adopt DPC payment by FY2012. In fact, as

of April 1st 2011, DPC was already applied in 1,449 hospitals with a number of others in the preparatory

phase (pre-DPC). Hospitals are also allowed to opt-out of DPC, and some have done so as they felt

financially disadvantaged under it. The breakdown for 2008 is shown in Table 3.

27

Table 3: Penetration of DPC in hospitals, 2008

Hospital type Count/%

No. of DPC hospitals 718

No. of hospitals preparing for the introduction of DPC 710

DPC + pre-DPC hospitals 1,428

Total number of acute care hospitals 8,943

2008 share of DPC hospitals 8%

2008 share of DPC/pre-DPC hospitals 16%

Source: Author‟s analysis BUSINESS INSIGHTS

DPC hospitals, however, tend to be the larger ones, so the impact of DPC is much greater in terms of the

number of affected beds (Table 4).

Table 4: DPC hospitals by bed numbers, 2008

Beds/hospital 0-99 100-199

200-299

300-399

400-499

>500 Total

No. of DPC beds 2,978 16,523 30,521 47,482 37,455 153,651 288,610

No. of pre-DPC beds 9,027 30,122 34,488 36,094 24,627 34,333 168,691

DPC + pre-DPC beds 12,005 46,645 65,009 83,576 65,082 187,984 457,301

No. of acute beds 121,445 185,292 116,010 143,577 98465 246225 911014

Share of DPC beds 2.5% 8.9% 26.3% 33.1% 38.0% 62.4% 31.7%

Share of DPC + pre-DPC beds

9.9% 25.2% 56.0% 58.2% 63.0% 76.3% 50.2%

Source: MHLW BUSINESS INSIGHTS

Flat rate payment means the payment the hospital receives for treating a patient with a particular diagnosis is

the same regardless of the drugs administered or laboratory tests applied. Whereas a flat fee per case or

patient admission is paid under a DRG in the US or Europe, in Japan under a DPC this fee is on a per

patient, per day basis. The cost is not entirely fixed. It is scaled in three stages, with the first phase of

hospitalization at a 15% higher rate than the standard rate and stays beyond the average length of stay for

the disorder at a 15% lower rate than the standard to discourage prolonged hospitalization.

28

Fees are linked to a particular DPC code – to cover the cost of the basic inpatient charge, laboratory tests,

imaging diagnosis, drug dispensing, injection fees, and treatment fees of less than 1,000 points (¥10,000,

$125 at 2011 average rate), irrespective of the actual expenditure on the patient. There were over 1,880

DPC codes as of March 2010. DPC tariffs are revised every two years based on actual historical costs.

Hospitals bill NHI monthly using the following formula: Number of points per day for each DPC x hospital

coefficient x number of admissions x ¥10

The hospital coefficient is set according to the function and past performance records of the hospital. The

number of points per day is set higher in cases of earlier discharge than the mean number of hospitalization

days of the DPC.

Payment to DPC hospitals has retained a fee-for-service component (covering surgical procedures,

anesthesia, specific high cost drugs and devices, radiation therapy, and procedures of more than 1,000

points), as well as doctors‟ fees and outpatient services.

Which high-cost drugs can be temporarily “carved out” of DPC payments is specified by Chuikyo at the time

their introductory NHI prices are set. The criterion applied used to be when their cost was more than one

standard deviation above the standard cost of treatment for the relevant DPC code. A new rule lowers the

upper limit to the 84 percentile (i.e. the 84th cost assuming there are 100 different costs) so more products

should be able to kept out of DPC. Excluded drugs for inpatients are reimbursed to hospitals fully at their

drug tariff rate, though consideration is made to include them into DPC reimbursement at the next revision.

Dispensing fees

The dispensing margin is not part of a medicine‟s NHI price. Fees for pharmacies depend on the prescription

volume per month, the share originating from any one individual medical institution, the length of treatment,

frequency of administration, dosage form, whether generic substitution has been undertaken or not, and the

type of cognitive services provided (e.g. counseling patients, providing written drug information, medicines

use review, home visits, etc).

29

The total fee is made up of a number of components, based on a long series of scales and, as with other

providers, is quantified as health insurance points.

Patient co-payment

Ambulatory and hospitalized patients alike are required to pay an age-dependent fixed percentage of their

medical costs as a co-insurance under NHI. There are no deductibles. Copayment levels are as follows:

infants under two years of age – 20% of the cost

those aged 3-69 years – 30% of the cost

those of 70 years and older –10% of the cost (but 30% if income is near that of the working population).

The prescription drug component of the bill is not especially prominent as the total includes fees for

physicians, hospitals, diagnostic tests, surgery, and other treatments. Table 5 shows a specimen monthly bill

for a 78-year old patient receiving an antihypertensive (in generic form) who visits the outpatient clinic of a

hospital twice a month (fees relate to the NHI tariff applying in 2004).

30

Table 5: Specimen outpatient hospital bill

Cost in ¥ Cost in $

Medical care

Evaluation and management fee for patients over 75 years of age

6,000 58.00

Follow-up visit 720 x 2 13.92

Other 520 5.03

Prescription fee 680 x 2 13.15

Total medical care 9,300 89.90

Patient co-payment (10%) 930 8.99

Pharmaceutical care

Pharmacist management fee 400 x 2 7.73

Add-on for generic dispensing 40 x 2 0.77

Compliance management 350 x 2 6.77

Information on generic drugs 100 0.97

Dispensing fee 650 x 2 12.57

Drug charge (NHI tariff rate) 420 x 2 8.12

Total pharmaceutical care 3,820 36.93

Patient co-payment (10%) 382 3.69

Note: 2008 average exchange rate, 1$ = ¥103.4 (OandA.com)

Source: Social Insurance Daily, 2008 (cited in Health Systems in Transition,

Japan, WHO, 2009)

BUSINESS INSIGHTS

Catastrophic care support puts a cap of ¥80,100/month ($1,004) on co-payment liability – any demands in

excess of this are reimbursed to the patient in full. After three months incurring out-of-pocket expenses that

meet or exceed this ceiling, the ceiling itself is lowered to ¥44,400 ($557). There is also a maximum outlay

per month, depending on age and income, for patients suffering from any of 45 named intractable diseases,

including Crohn‟s disease, lysosomal storage disorders, multiple sclerosis, Parkinson‟s disease, psoriasis

and ulcerative colitis. Co-payment is waived entirely for patients with specified psychiatric and neurological

disorders (including bipolar disorder, epilepsy and schizophrenia).

31

Always a politically sensitive issue, changes in co-payment have been announced (and sometimes

postponed) with some frequency since 1997, when the doubling of the rate for salaried workers from 10% to

20% helped to produce the first decline in outpatient visits since records began in 1953. The employee‟s rate

was increased again to its present level of 30% in 2003. Employees of some big companies will often have

the co-payment liability paid as an employment benefit, but the rise in out-of-pocket demands has especially

hit elderly patients with chronic illnesses. Prior to 2002, seniors‟ co-payments were capped at ¥530 ($6.65)

for each of the first four consultations per month, after which all additional consultations were free.

Healthcare expenditure

Japan does not have a formal global budget for healthcare spending set by the Diet, but the effect is the

same. State subsidies to government managed health insurance and NHI programs are calculated as a fixed

percentage of outlays as established by law, and come from the general account budget. The Ministry of

Finance must approve the amount of subsidy at each fee revision.

In 1955, national medical expenditure was ¥238.8bn, or 3.8% of national income. Between 1961, when

universal health insurance began, and 1965 expenditure doubled to ¥1,000bn, and doubled again to

¥2,000bn just four years later. Even faster growth has occurred since (Table 6), consistently exceeding the

growth in national income.

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Table 6: Growth in national medical costs, 1990–2008

Fiscal year Expenditure (¥bn) Share of national income (%)

1990 20,607 5.9

1992 23,478 6.4

1994 25,791 7.0

1996 28,454 7.5

1998 29,582 8.0

2000 30,142 8.1

2002 30,951 8.7

2004 32,111 8.8

2006 33,128 8.8

2008 34,808 9.9

Source: MHLW BUSINESS INSIGHTS

The latest figure, for FY2009, was estimated at a record ¥36,007bn ($388bn), the equivalent of 10.61% of

national income.

One main driver for the healthcare cost explosion is ageing. Japan has the fastest-ageing society in the

world (Table 7), and the average elderly person (65+) accounted for ¥687,700 ($7,401) of medical

expenditure in FY2009, compared to ¥163,000 ($1,741) for the average a non elderly person. Elderly

persons medical expenses now account for 55% of total medical expenses compared to 35% in FY2005.

33

Table 7: Number (million) and share (%) of population older than 65 years, 2012-

22

2012 2017 2022

Japan 30 (24) 35 (28) 37 (30)

US 42 (14) 50 (15) 58 (17)

5EU 59 (19) 64 (20) 69 (21)

Note: 5EU = France, Germany, Italy, Spain, UK

Source: US Census Bureau BUSINESS INSIGHTS

The birth rate is declining and in 2001 the population total fell for the first ever time. Over one-fifth of

inhabitants in 2005, or 26m people, were aged over 65 (compared to just 5% at the time of the first census in

1920), and the proportion of the elderly is seen to rise to a peak of 40.5% by 2055 when the total population

is expected to be just 90m compared with 127.5m today.

Japan also has a record number of the very elderly; there were 2.25m females and 850,000 males aged 85

and over by end 2006. By mid-2011, a record number of 48,000 centanarians were recorded as living in

Japan, compared to just 310 in 1970.

Chronic diseases for the elderly are replacing the acute ones the NHI was set up to deal with. A more

western diet and lifestyle is producing new diseases and smoking remains common.

34

Chapter 2 Regulatory environment

Summary

New drugs benefit from 20 years‟ patent protection. There is a maximum five-year patent term

extension to compensate for the period needed for clinical development and regulatory review. There is

no limit to the number of patent extensions for new indications or changes to the manufacturing

process.

Examination for marketing approval is performed by the Pharmaceuticals and Medical Devices Agency

(PMDA). Generics are subject to an abbreviated process with a target review time of 10 months.

For inpatients and outpatients alike, only medicines (brand or generic) listed in the NHI drug tariff can

be prescribed, with reimbursement limited to tariff rates.

Additions to the NHI drug tariff for new drugs are made four-times a year. The aim is to publish the NHI

price within 60 days of regulatory approval.

New drugs which represent the first, second or third entry in the class and are within three years of first

entry to the class are priced by similar efficacy comparison. This method sets the price by reference to

the NHI cost of an existing product. There are additional premiums for innovativeness, usefulness,

pediatric use or small market size.

If a new drug is the fourth or later entrant to its class it may be considered to lack novelty and be

classified as a “me-too”. These are priced according to the class average price with no possibility of

added premiums or foreign adjustment.

MHLW attempts, through biennial price revisions, to bring tariff prices closer to market levels. A new

reimbursement price is obtained by adding the discount allowance (known as the adjustment zone) –

2% of the pre-revision NHI price – to the weighted average market price as measured in biennial

surveys. Regular across-the-board NHI price cuts on April 1st have been a feature of the market for

over 50 years.

35

Intellectual property protection

Product patents of 20 years‟ duration from date of filing were introduced in 1976 and cover medicines. The

responsible body is the Japan Patent Office (JPO).

Generics will not be approved for marketing until the substance patent has expired. If some of the indications

or dosage forms of a product were patented, marketing approval as a generic was originally not granted to

unprotected indications or dosage forms of the same product. However, with Notification No. 0605014 of

MHLW‟s Evaluation and Licensing Division dated 5 June 2009, partial approvals of indications or dosage and

administration not covered by the patent became permitted.

A maximum five-year patent term extension was added in 1988 to compensate for “the period which the

patented invention could not be worked” (i.e. the sum of clinical study and regulatory review time). The

extension period commences on the day when clinical trials start or the day when the patent is registered,

whichever is later, and ends on the day before marketing approval. The period of the patent term lost to

patent examination delays or devoted to pre-clinical testing is not considered. Applications by patentees,

giving the length of extension period required, should be made to the Patent Office before the patent

becomes invalid and within three months from marketing approval.

Following a case brought by Takeda, the Supreme Court ruled in April 2011 that the patent term of a drug

delivery system preparation containing existing active ingredients for existing indications could be extended.

The JPO is now working out a rule for this.

There is no limit to the number of patent extensions. Generic manufacturers complain about patent

“evergreening” (i.e. the patent holder obtains separate 20-year patents on multiple attributes of a single

product). Also, multiple related patents can be extended multiple times. Repeatedly adding a new indication

or manufacturing method effectively prolongs the patent life as no generic application can be filed until the

last patent extension term ends.

The situation with levofloxacin has been cited by the generic industry as an example of the problem it faces.

The drug‟s basic patent, filed in 1990 citing use against staphylococci and 30 other bacteria, was due to

36

expire in June 2006, but a series of applications for use against anthrax, typhoid/paratyphoid and legionella

extended the patent life to June 2011. Cravit, the original levofloxacin brand, was launched in November

1993. The company received marketing approval for 500mg/100ml IV bags and 500mg/20ml IV injection

forms of Cravit in October 2010.

Generic companies have lobbied the Patent Office to limit patent extensions to only one patent and a single

extension, akin to the situation in the US and the EU.

There is provision in law for the grant of a compulsory license, by the Commissioner of the Patent Office or

by the Minister of Economy, Trade and Industry, if a patent has not been worked by its holder which then

refuses to discuss granting a non-exclusive license. However, there are no cases of a grant of an award to

date because all cases have been withdrawn before decision on an award could be reached.

While there is no “Bolar provision”, the Japanese Supreme Court in 1999 ruled that bioequivalence testing of

generics during the life of a patent was an experimental use exception provided by Section 69(1) of the

Patent Act.

There is no data exclusivity period either, but abbreviated applications for generic versions of brands under

regulatory re-examination for efficacy and safety are not allowed. While in theory, a competitor could at any

time submit its own set of safety and efficacy studies and request approval, this would be prohibitively

expensive for generic firms and hence the re-examination period also becomes a period of data exclusivity.

In accordance with Article 14-4 of the Pharmaceutical Affairs Law, the re-examination period is:

10 years for Japan-designated orphan drugs, for drugs requiring a comprehensive evaluation utilizing

pharmaco-epidemiological methods, and for drugs for which clinical studies to set pediatric doses, etc.

continue after approval

Eight years for other drugs containing new molecular entities (NMEs)

Six years for new prescription combination drugs, and for drugs with new routes of administration

4–6 years for drugs with new indications or new dosage schemes.

37

The standard re-examination period for NMEs, other than orphan drugs, was extended from six to eight

years in April 2007 on safety grounds (MHLW Notification No. 041001 of 1 April 2007). Analysis had

revealed most prescribing revisions to a drug‟s label were made 5–8 years after first approval. As a trade-off

to the generics sector for this extension, the frequency of tariff listings for new generics was doubled from

once to twice per year.

If an original brand is subject to post-marketing surveillance demands by the regulatory agency then the

molecule and hence any generic version of it are too. This happened with simvastatin, paclitaxel and

itraconazole, for example.

In the case of 80% of originator brands, the determining factor for generic entry is the length of the patent not

its re-examination period. A survey of the effective patent life (EPL) enjoyed by 224 new drugs approved

since 1998 (345 patent rights and 553 extension registrations) found a mean EPL of 11.74 years, with a

range of 5.33 to 19.31 years (Masuda S, Journal of Generic Medicines, 2008, vol. 5, no. 2: 121-130). More

than half (125 drugs) had an EPL between 10 and 14 years, while in the case of 14 drugs (6%) the EPL was

less than eight years. The mean patent extension period was 4.13 years.

Marketing approval

Under a 2005 revision to the Pharmaceutical Affairs Law ”manufacturing approval” was switched to ”license

for manufacturing/marketing” and “license for manufacturing only”, more akin to marketing authorization for

the product and manufacturing authorization for the producer found in the west. The change made it much

easier to contract out part or the entire manufacturing process, leading to a spate of plant rationalizations by

pharmaceutical companies and fierce competition between contract manufacturers.

Regulatory review for all medicines, including generics, has been carried out by the Pharmaceuticals and

Medical Devices Agency (PMDA; Iyakuhin Iryoukiki Sogo Kiko) since 2004. Its organization and procedures

are summarized in Pharmaceutical Administration and Regulations in Japan published by the Japan

Pharmaceutical Manufacturers Association (see references). In the case of generics, application is made to

the Group Responsible for Generic Drugs within the PMDA‟s Office of OTC and Generic Drugs.

38

As well as approving all drugs and medical devices, PMDA deals with re-examination, re-evaluation of drugs

approved before 1967, clinical trial approval, Good Laboratory Practice (GLP), Good Manufacturing Practice

(GMP), Good Clinical Practice (GCP), and manages the fund for adverse drug reaction relief.

As in other countries, an abbreviated data package is accepted in an application to market a new generic

medicine. Assuming the active pharmaceutical ingredient (API) has a registered drug master file, the aim of

the assessment is to assure the equivalence of the generic to the originator brand in terms of quality, efficacy

and safety, applying the following tests:

Specification and test methods

API and impurities must be equivalent to the originator

3 different batches tested

Results of validation of testing methods

Stability

Samples from 3 batches subject to 40oC(±1o)/75% relative humidity (±5%) storage for 6 months

Bioequivalence

Crossover trial in healthy adults

If pharmacokinetic profile of the drug cannot be measured, clinical equivalence should be confirmed

by other means (e.g. pharmacological action)

Guidelines for bioequivalence testing of oral generic products and topical generic products are

published by the NIHS (see references)

Dissolution testing for oral tablets and capsules

The curves must be within the limits shown by the originator

39

Table 8: Specifications required for generics by type of formulation

Type of formulation Tests required

Tablets, pills, capsules, troches Uniformity of dosage units. Dissolution test or disintegration test.

Powders, granules Uniformity of dosage units. Particle size distribution test. Dissolution test or disintegration test.

Injections Foreign insoluble matter test. Test for extractable volume. Uniformity of dosage units. Sterility test. Insoluble particulate matter test. Bacterial endotoxins test or pyrogen test. Release test. Particle size test.

Aerosols (requiring quantitative accuracy) Relationship between spray time and spray amount. Particle size test (suspensions only).

Elixirs, spirits, tinctures, fluid extracts Alcohol determination.

Ophthalmic ointments Test for metal particles. Sterility test, Release test. Particle size test. Ductility test.

Transdermal systems Adhesiveness test. Release test.

Suppositories Melting point test, Release test. Softening point.

Ophthalmic solutions Foreign insoluble matter test. Sterility test. Release test. Particle size test

Source: PMDA BUSINESS INSIGHTS

Pre-approval and periodic post-approval GMP inspection of the manufacturing site are required, as well as a

GCP audit of bioequivalence facilities, methods and results. Application fees are not returned if an

application is withdrawn.

The target regulatory review time for new generics of 10 months has, on average, been comfortably met over

recent years (table 8). Prior consultation with the PMDA reviewers is also available for a supplementary fee.

40

Table 9: PMDA review times for new generic applications, 2005–09

2005 2006 2007 2008 2009

No. of applications approved 1782 2029 3228 1960 3245

Median review time (months) 7.3 4 4.5 5.3 7.5

Note: covers applications filed after April 2004 only

Source: PMDA BUSINESS INSIGHTS

Regulatory approval will not be granted during patent validity, even though the generic launch is not

scheduled until after patent expiry. Unlike the US, no marketing exclusivity is granted to a generic company

that is first to file a patent challenge.

Though PMDA has often been criticized for taking an overly bureaucratic approach, it has fast-tracked

generic applications when faced with real medical need. After the massive March 11th, 2011 earthquake and

tsunami in north-eastern Japan damaged a production plant of generic company Aska, continuation of

supplies of levothyroxine tablets to the market was jeopardized. Knowing its joint venture partner in Japan,

Actavis, produced both tablet strengths (50mcg and 100mcg) of levothyroxine that were needed at its UK

facility in Barnstaple, Aska asked Actavis on March 14th if it could help. By March 16th, the first parts of the

dossier were filed with PMDA in order to obtain emergency registration, with product samples and further

documents following over the next few days. By March 31st, the combined efforts of both companies resulted

in the accreditation of the Barnstaple site and the product‟s emergency approval. Ten million tablets in UK

packs were dispatched from the UK and arrived in Tokyo on April 4th, just 20 days after the initial request

was received.

41

NHI drug tariff

Under the Health Insurance Law, medical benefits include the supply of medicines

For any drug – original brand or generic - to be prescribed by a doctor in a GP clinic or hospital under a

company-affiliated health insurance scheme or the NHI system, that product and its reimbursement price has

to be listed in the NHI drug list or tariff (yakka kijun). As one of the terms of service under NHI for medical

institutions and physicians it is specified they “shall not use any drugs other than those designated by the

Minister of Health, Labor and Welfare”. Published by MHLW, the drug tariff is a list of those drugs. As of 1

April 2010, it contained 15,455 presentations, with a breakdown by route of administration shown in Figure 1.

Figure 1: NHI drug list by route of administration, 2010

Oral, 8676

Injectable , 4010

External, 2733

Dental, 36

Oral, 8676

Injectable , 4010

External, 2733

Dental, 36

Source: MHLW BUSINESS INSIGHTS

Products are generally listed under the brand name under which they receive their marketing approval.

However, some drugs with monographs in the Japanese Pharmacopoeia as well as biological products may

be listed at uniform prices by their active ingredients, formulation or specification. These include some low-

price generics listed as “[active ingredient name]-GE”.

42

Listed prices include a form of value-added or sales tax. Known as consumption tax (shoi zei), it is levied on

all medicines at the standard rate of 5%. This rate is scheduled to be doubled to 10% in steps by 2015.

There is no negative list as such, and exclusion from reimbursement is done on a case-by-case basis. NHI

does not cover preventive care (thus ruling out the likes of oral contraceptives), over-the-counter medicines

for self medication (OTC-yaku) or lifestyle drugs (seikatsu kaisen yaku). Some vaccines are covered, but not

through the Health Insurance Law.

In August 2010, MHLW introduced a system to grant NHI coverage prior to regulatory approval in the case of

marketed drugs used off label, when there was information in the public domain to support important new

indications.

NHI price setting

For innovator products, the launch price is set by negotiation between the marketing company, MHLW and

an independent expert body, the Drug Pricing Organization (DPO). The company first files supporting data

with the MHLW‟s Health Policy Bureau. This liaises with the payer body, MHLW‟s Health Insurance Bureau,

and a recommended price is sent to the DPO which makes the final decision after a hearing with the

applicant.

Most new drugs are priced by similar efficacy comparison (ruiji yakko hikaku hoshiki), by reference to the

usual maximum daily NHI cost of an existing similar product. The price comparator has to be:

currently marketed in Japan and reimbursed under NHI

similar to the new drug

included for the first time in the NHI tariff during the previous 10 years and without generic versions.

Similarity is judged relative to:

indications

mode of action

43

other pharmacological effects

therapeutic class

chemical structure

route of administration

dosage form

outcomes.

Additional price premiums are possible on top of the comparator‟s daily cost if the new products shows

innovativeness, clinical usefulness, has a small potential market or is indicated for pediatric use.

“Me-toos” (zoro-shin) – when the new drug is a fourth or later entrant to its class and comes more than three

years after first entry to the class - receive the class average price with no possibility of price premiums. Truly

innovative new drugs without comparators are priced by cost calculation (genka keisan hoshiki).

In the final step of the pricing process, the calculated price may be increased or decreased with reference to

the average foreign price (subject to a number of conditions, the simple average of the public prices of the

same presentation in France, Germany, UK and US). Prices may be adjusted upwards if they are less than

75% of the average public price for the product in France, Germany, UK and the US. Prices can also be

subject to downwards adjustment if they are 150% or more of the average in the same four reference

countries. It is noteworthy that results of any health economic evaluation are not considered in the Japanese

process.

Turning to combination drugs, new fixed dose combinations receive 80% of the sum of the daily costs of the

individual ingredients as monodrugs.

Additions to the tariff with originator brands are made in batches four times a year (in March, June,

September and December, or in April instead of March if price revision year), normally within 60–90 days of

regulatory approval. Line extensions of existing products, known as “reported product” are listed in May and

November each year.

44

The NHI price per dosage unit (derived from the maximum daily dose) and the basis for this is published on

the MHLW‟s website on the second Friday of the month following review by DPO. Launch is required to be

made within 90 days of tariff listing

NHI price revision processes

Biennial revision

An important aspect of the pricing system is that the MHLW regulates only the NHI or reimbursement price,

with the wholesale price set freely by market participants. Hospitals, clinics and pharmacies always try to

purchase prescription medicines at prices lower than the tariff rate. The more severe the price competition in

the therapeutic class, the larger the margin between the wholesale price (jisseika) and the reimbursement

price (yakka). This “drug price margin” (yakka-sa), sometimes referred to as the “doctor margin”, can be

retained by the purchaser as there is no “clawback”. The margin is an important part of provider income, and

many hospitals claim they would run financial deficits without it.

As has become the norm on April 1st every second year, reimbursement prices in the NHI tariff are brought

closer to actual market prices by means of a price revision process (yakka kaitai). This follows a

comprehensive market price survey the previous autumn. MHLW‟s objective is both to achieve direct savings

on the drugs bill and to squeeze the yakka-sa. From a peak of more than 23% in 1989, the average yakka-sa

fell to a low of 6.3% in 2003 before rising to 8.4% when it was last measured in September 2009.

If the survey reveals a product‟s weighted average selling price to be below the acceptable discount

allowance of 2% of its pre-revision NHI price, the price will be cut by the difference. The discount allowance

was originally known as the R-(or reasonable) zone, it is now known as the A-(or adjustment) zone. It is

supposed to cover technical fees and inventory costs for distributors.

The new reimbursement price is calculated by adding the A-zone allowance to the weighted average market

price obtained in the survey and allowing for the effect of consumption tax, i.e.: New NHI price = (weighted

average value of market price in survey before tax) x (1 + consumption tax rate) + discount allowance.

45

With an average yakka-sa of 8.4% and a 2% A-zone, NHI drug prices were cut across-the-board by an

average of 6.4% on April 1st 2010. Of the 15,455 listed presentations, 13,514 or 87% were subject to price

decreases, the prices of 1,895 had prices unchanged, and 46 had price increases. Increases are awarded to

low-priced products if it can be demonstrated that rising costs make continued production and supply

otherwise unsustainable.

Prices of basic, essential medicines, such as those listed in the Japanese Pharmacopoeia, are set at a

minimum level (e.g. one tablet/capsule cannot be lower than ¥9.6, one injection vial ¥92, 5ml eye drops

¥85.6, etc.) and are therefore artificially supported, otherwise the revision is based on market prices.

Sometimes, because of the inter-strength formula that is used to price supplementary strengths by reference

to the standard one, it is possible for some products to fall below minimum price levels. These are brought up

the minimum level at the next price revision.

MHLW uses the savings from the price cut to pay for increases in medical fees, which are adjusted at the

same time as drug prices.

Yakka-sa demands can only reasonably be resisted with truly unique products. Once a new -invariably

reduced - price is listed in the tariff, further discount negotiations lay the basis for the next round of tariff cuts

in a seemingly endless cycle that has been regularly repeated for more than 50 years, most damagingly

since 1981. The next across-the-board revision is due on April 1st 2012.

The biennial price revision process has also been a factor in limiting market penetration by generics. By the

time of patent expiry, an originator‟s price has fallen so far that generics have little room for competition on

price. Long after patent expiration, original brands can be useful cash cows for their manufacturers. Japan is

unusual in that almost half of total lifespan sales of a brand come in its post-patent expiry period. Sales of

brands no longer protected by patent in Japan in 2007 recorded a 43% market share of the molecule (the

equivalent share in the US was 10%), according to IMS.

46

Repricing

A second potential component of the biennial reduction process is repricing. This can happen in two

circumstances:

For products initially priced by cost calculation when there is a significant increase in sales volume

compared to original estimates, defined as double or more the sales forecast at the time of initial listing

– which was within the previous 10 years – and exceeding ¥15bn/year on an NHI basis. The maximum

reduction is capped at 25%.

When there are changes in the original conditions for pricing by comparison with a reference product,

including usage and the target patient group, and the similarity with the drug selected for comparison

(which was within the previous 10 years) has disappeared, so that there is a considerable increase in

market size as defined above. The maximum reduction is capped at 15%.

Upwards repricing (price increases) may apply to a few low-priced products considered necessary for

medical care if it can be shown that rising costs make supply otherwise unsustainable. If supply of generics

is jeopardized by unprofitability, upwards repricing can apply only to generics regardless of the profitability

situation with the corresponding originator product.

Long-listed brands

Originator products, after expiry of the patent and/or the regulatory re-examination period, with marketed

generic versions are known as long-listed brands. These accounted for 36.3% of the total volume of

prescription drug use, according to MHLW‟s September 2009 drug price survey (compared to 34.9% in

September 2008), with several major domestic companies highly reliant on their sales (table 9). By way of

contrast the same 2009 survey recorded the volume of patent-protected, single source drugs at just 18.8%.

47

Table 10: Share of product portfolio of Japanese R&D companies accounted for

by long-listed brands

Company % long listed brands Leading examples

Hisamitsu 94 Mohrus (ketoprofen)

Ono 85 Onon (pranlukasy), Kinedak (epalrestat)

Taisho 70 Clarith (clarithromycin), Palux (alprostadil)

Dainippon Sumitomo 69 Amlodin (amlodopine)

Santen 66 Hyalein (sodium hyaluronate), Flumetholon (flurometholone)

Nippon Shinyaku 58 Hypen (etodolac), Selectol (celiprolol)

Kissei 55 Utemerin (ritadrine), Bezatol (bezafibrate)

Daiichi Sankyo 54 Mevalotin (pravastatin), Omnipaque (iohexal)

Mitsubishi Tanabe 40 Anplug (sarpogrelate), Tanatril (imidapril)

Shionogi 37 Flomox (cefcapen), Vancomycin (vancomycin)

Kyowa Hakko Kirin 34 Depakene (sodium valproate), Coniel (bendipine)

Takeda 32 Takepron (lansoprazole), Basen (nicorandil)

Astellas 21 Harnal (tamsulosin), Gaster (famotidine)

Eisai 16 Selbex (teprenone)

Chugai (Roche) 16 Alfarol (alfacalcidol), Sigmart (voglibose)

Source: Inoue BUSINESS INSIGHTS

MHLW views market price competition to original brands from generics as ineffective and, since 2002, it has

targeted long-listed brands approved on or after October 1st 1967 with special price reductions on top of the

regular biennial revision “as correction for the effect of replacement by generic product” (Table 11).

48

Table 11: Additional price cuts for long-listed brands, 2002–10

Year Range of additional price cut for originator (%) after first generic

launched

Further additional price cut for originator (%) with established

generics

2002 4 – 6 0

2004 4 – 6 0

2006 6 – 8 2

2008 4 – 6 0

2010 4 – 6 2.2

Source: Author‟s research BUSINESS INSIGHTS

The initial reduction takes place at the first biennial revision after the first generic has been added to the

tariff. The exact reduction depends on the originator brand‟s regulatory approval date:

(i) October 1st 1967 to September 30th 1980: 4%

(ii) from October 1st 1980 onwards when the discount allowance was set at 8% in the 1997 price

revision or at 2% in the 1998 price revision: 5%

(iii) from October 1st 1980 onwards in cases other than in (ii) above: 6%.

In two of the revisions since 2002 further additional price cuts have been levied on long-listed brands that

have faced generic competition for several years. The 2.2% reduction in 2010 was specifically applied to

fund the new premium for new drugs/new indications (see below).

Excluded from either the first generic or established generic cuts are originator products in the following

groups:

drugs listed in the Japanese Pharmacopoeia by Japan Accepted Name

biological preparations (including blood preparations)

49

Chinese herbal medicines (kampo yaku)

Japan-designated orphan drugs

products fulfilling the criteria for unprofitable drugs

brands priced lower than their generic equivalents.

The reduction penalty is halved for products listed in the Japanese Pharmacopoeia by brand name.

Originator fixed dose combination products, in which one of the ingredients has gone generic but the other

hasn‟t, are not currently considered as long-listed drugs, though this is expected to change (see chapter 10).

113 original branded products (42 active ingredients), including Campto (irinotecan), Cravit (levofloxacin),

Fosamac/Bonalon (alendronate) and Norvasc/Amlodin (amlodipine), facing generic competition for the first

time, were subject to a 4–6% reduction in April 2010 on top of the normal revision rate based on market

prices. 1,472 long listed products (513 active ingredients), facing established generic competition, received

an additional 2.2% price penalty (resulting in an average 8.5% cut), the highest to date.

Correction premiums

Biennial market price revision or repricing cuts may be offset in part or full by “correction premiums” in the

following situations:

when a pediatric indication has been newly added since April 2008

when an orphan drug indication has been newly added since April 2008

if the drug‟s clinical usefulness has been objectively verified by data accumulated in post-marketing

studies and published in a well-known academic journal.

For originator products less than 15 years from first tariff listing, with no marketed generics and with a yakka-

sa below the weighted average yakka-sa of all listed drugs. Drugs repriced at the same revision following

market expansion as well as oral fixed-dose combinations were excluded

This last named was newly added in April 2010, initially on a trial basis. It was designed as a trade-off for

MHLW requiring companies to develop new drugs and new indications of existing drugs for Japan. The

50

formal title to the premium was “premium for promotion of new drug creation and resolution and resolution of

unapproved drugs/indications”. It is referred to as “premium for new drug creation” hereafter

The pharmaceutical industry has lobbied since 2006 for the introduction of a price maintenance system

under which prices of innovative medicines would be sustainable during their patent life/regulatory re-

examination period, with prices thereafter reflecting market competition. The new premium goes some way

to achieving this. Its effect, however, will be to delay - not prevent - the price cut an originator brand receives

during its commercial lifespan in Japan. At the biennial revision following launch of the first generic version,

the originator‟s NHI price would be reduced in a single step by the total premium received during the

protected period in addition to the ordinary biennial price cut. Nevertheless, the innovative industry being

able to retain higher early sales revenue is hoped to result in more and earlier reinvestment into innovative

R&D.

For budgetary reasons, the premium for new drug creation at the April 2010 revision was fixed at 80% of the

weighted average market variation in September 2009 (8.4%) minus the A-zone, or 5.1%. As the premium

was applied to the post-revision price rather than the pre-revision price, it meant that only qualifying products

with a yakka-sa of 6.8% or less would see NHI prices retained in full. Furthermore, the process was not

allowed to result in any product getting a higher post-revision price than its pre-revision one.

A total of 624 products (337 active ingredients) marketed by 89 companies received the premium, equivalent

to one-third of all originator brands in the tariff not facing generic competition at the time. Almost half (303) of

qualifying products had their pre-revision price fully maintained. The total first-year value to companies of

retaining higher NHI prices was estimated as ¥60–70bn ($750–880m, a sum that was clawed back from the

industry through the price cut on established long-listed drugs.

Premiums offsetting the April 2010 downwards revision came without preconditions, but MHLW soon started

discussions with certain companies on R&D commitment going forward, regardless of whether or not these

companies had been in receipt of premiums for new drug creation. MHLW had received much criticism over

the years from industry about Japan‟s “drug lag”. Whilst the authorities had made improvements to the

51

clinical trial and regulatory review processes they felt that companies should also share some

responsibilities.

Individual requests were made by MHLW to manufacturers to develop their “off-label” products/indications for

Japan comparable to their status in western countries. The list originated from requests made by academic

societies and patient groups. Confirmation of therapeutic necessity was made by the Review Conference on

Unapproved or Off-label Use Drugs of High Therapeutic Needs, and MHLW refined the list to 108 needed

items. It asked specific companies to develop 91 of these, and sought sponsors for the remaining 17. No

company to date, even those who failed to benefit from the new premium, is known to have refused. As a

first step, companies were asked to review data on file to see if any product/new indication could be made

approvable without the need for new clinical trials.

Failure to respond in an adequate and timely manner to MHLW requests would result in none of that

company‟s products receiving a premium for new drug creation at the subsequent NHI price revision (April

2012), MHLW warned. In addition, a special price cut would be applied to return any increase in the sales of

the product(s) receiving a premium plus 5% annual interest.

52

Overall impact

Table 12: NHI drug price revisions since 1981

Year Average change in NHI prices (%)

Discount allowance (%)

1981 -18.6 -

1983 -4.9 -

1984 -16.6 -

1985 -6 -

1986 -5.1 -

1988 -10.2 -

1989 +2.4a -

1990 -9.2 -

1992 -8.1 15

1994 -6.6 (-7.4b) 13

1996 -6.8 (-8.5b) 11

1997 -4.4a 10 (8

e)

1998 -9.5 (-9.7b) 5 (2

e)

2000 -7 2

2002 -4.6 (-6.3c) 2

2004 -3.8 (-4.2d) 2

2006 -6.0 (-6.7c) 2

2008 -4.9 (-5.2c) 2

2010 -5.75 (-6.5f) 2

a - includes extra 1.4% reduction due to increase in consumption tax

b - includes effect of repricing high-selling drugs

c - includes special adjustment of long-listed drugs and repricing

d - includes special adjustment of long-listed drugs

e – for “long-listed drugs”

f – includes repricing, long-listed adjustment and premium for new drug creation

Source: Author‟s analysis BUSINESS INSIGHTS

53

Generic encouragement measures by government

The following section sets out the progression of generic encouragement measures from 1994 to 2010.

1994

GMP became a requirement for manufacturing approval

out-of-hospital prescriptions allowed to be written by INN.

1997

quality re-evaluation based on dissolution test results instigated.

1999

guideline on bioequivalence testing of generics introduced.

2001

elderly patients required to pay 10% of medical costs, including drug costs, up from a small fixed co-

payment.

2002

A “prescription fee increment” of two points or ¥20 ($0.25) was paid to doctors if they wrote a

prescription for a generic brand or by INN (provided that a generic existed for that active ingredient).

Pharmacists obtained supplementary fees for dispensing generics (2 points or ¥20) and for counseling

patients on generic use (10 points or ¥100). This latter “information provision increment” was provided

each time a pharmacist provided information on the existence, quality and cost reduction benefit of

generics to a patient as long as this action led to a generic product being dispensed. Notification of

substitution to the prescriber was required. The top-10 original brands to be substituted, according to

the Ueda Pharmaceutical Association, were: Gastar, Loxonin, Mevalotin, Renivace, Baysen, Selbex,

Methycobol, Myonal, Panaldin, and Alfarol.

National hospitals (i.e. those directly administered by the government) were instructed to use generics.

2003

54

2003 marked the introduction of a prospective payment system, diagnosis procedure combinations

(DPCs), for funding 82 major teaching hospitals under NHI meant replacing fee-for-service

remuneration with fixed payments for inpatient care.

2006

“tick in” generic substitution introduced, whereby the prescriber specifically authorized generic

substitution by signing and applying his/her personal hanko stamp in a box on the prescription form

extra two points (¥20, $0.25) for doctor if he/she allows substitution.

A requirement for stable supply was introduced (with ban on new NHI price listings as penalty). As a result,

generic companies must:

manufacture and supply continuously generics for at least five years

assure sufficient stock to quickly respond to orders

establish nationwide sales networks

supply adequate information to doctors and pharmacists

establish a system to handle complaints on supply problems

prepare regular reports to MHLW on supply status.

Additional data requirements for package inserts include:

results of bioequivalence study

reference product

results of dissolution testing

summary of stability test results.

Applications for new generics should use as nomenclature the Japan Accepted Name + company name +

dosage form + strength.

55

In order to ensure that substitution can be achieved, every generic manufacturer that markets a particular

dosage form of all strengths marketed by originator, must supply that product (mandatory from 2008 for new

generics and mandatory for NHI listing by July 2011 for all generics, irrespective of the market share or

profitability of a particular strength).

2007

“Basic Policies for Economic and Fiscal Reform”, a government report, called for generic volume share to

increase from the then present level of 18.7% to at least 30% by end 2012 (i.e. March 31st 2013). Achieving

this target, which amounted to a two-thirds increase, would save ¥500bn ($4bn at 2007 average rate) over

those five years, it was hoped.

A subsequent MHLW Action Program required:

manufacturers to deliver orders to wholesalers within one day and the latter to hold as a minimum one

month‟s stock

training of generic company medical representatives to be improved

provision of quality test and stability test results to medical professionals

improvement in package inserts

public education on the benefits of generics to be stepped up

when the item “precaution in use” is revised, the revised text shall promptly be sent to the PMDA so

that it is shown on its website

all customers to be supplied with complete listing of generic suppliers

injection forms added to tablets in ongoing generic re-evaluation program

all professional use medicines, including generics, required to carry RSS barcodes by September

2008.

56

New generics tariff-listed twice a year - in July and in November in 2008, but in May and November from

2009 - compared to four-times-a-year for innovative brands. From 1994 to 2006, generic listing was an

annual event (every July), with new additions only made every two years prior to 1994.

2008

“Tick out” substitution replaced “tick in”. If the doctor did not sign/apply personal seal to the “no

substitution” column of the form, the pharmacist may select any generic equivalent for the prescribed

product(s), subject to getting the patient‟s permission.

As a “generic dispensation preparedness increment”, pharmacists gained an additional four point fee

(¥40, $0.50) for each item dispensed as long as they used generics to fill 30% of prescriptions received

over the previous three months. (If just one dispensed item on a prescription form was a generic, this

counted towards total generic prescriptions, though if there is more than one no extra credit was given).

The ¥40 fee applied also to prescriptions filled that contained no generics.

A Task Force for Generic Quality Information within the National Institute of Health Sciences was

created as a MHLW initiative to boost confidence in generic medicines among healthcare professionals

and the public. Consisting of 10 members (academics, pharmacists, industry) it selects test targets,

commissions testing by municipal laboratories, evaluates and disseminates the results to health

professionals. As of November 2011, the Task Force had examined about 360 samples and detected

only one quality failure.

Poster and pamphlet campaign by MHLW to increase generic awareness by the public and dispel

myths and misinformation.

MHLW notified local governments that the then 1.5m welfare recipients who were entitled to free

medical care must only use generic medicines. The wording of the directive was modified after

complaints in the media that the government was treating poor people like second-class citizens.

2010

The additional “generic preparedness” pharmacy fee was considerably increased and at the same time

modified to reward pharmacies which have less than 30% historical generic dispensing rate:

57

17 point (¥170, $2.13) extra fee per item if 30% of dispensing volume with generics

13 points (¥130, $1.63) extra fee per item if 25–29% of dispensing volume with generics

six points (¥60, $0.75) extra fee per item if 20–24% of dispensing volume with generics.

Note the new rule requires the generic dispensing rate to be calculated on the basis of dispensing volume in

terms of pricing units (tablets, capsules, vials, etc.), whereas the 2008 rule it replaced was calculated on the

basis of the number of prescription forms filled with at least one generic. In order to be eligible for the fee,

pharmacies are required to have posters in and outside their premises informing customers that they are

promoting the use of generics.

Substitution of generics with different strengths (e.g. 2 x 5mg tablets instead of 10mg) and formulations

(e.g. capsules instead of tablets) was allowed providing the drug cost is the same or less than the

substituted product, (b) the patient consents to the switch after an explanation is provided, and (c) there

is a pre-existing agreement on substitution between the prescriber and the pharmacy concerned.

Municipal governments, in their capacity as insurers under NHI, urged “health insurance doctors to

strive to use and allow the patient to choose in an easy manner generic medicines when it comes to

prescribing and administering medicinal products.”

A 30 point (¥300, $3.76) premium per admitted patient was added to the basic fee for inpatient care

under the fee-for-service system for the first day of hospitalization, providing at least 20% of products

on the hospital formulary were generics and the formulary committee could select their appropriate use

through a system of gathering information on generic quality, safety, stable supply, etc. Posters should

be prominently displayed at such hospitals declaring the active use of generics. A total of only 1,520

hospitals qualified to receive this premium in FY2010.

Inconsistent government policies

Some other changes by the government went against generics:

In 2002, MHLW abolished the so-called “2.5 rule” first introduced at the time of the 1990 NHI revision.

This rule supported a minimum price for generics listed by their non-proprietary names; for products

58

with a price difference of at least 250% between the most expensive and cheapest synonyms, the

lowest reimbursement prices were reset at a level 1/2.5 (or 40%) below that of the highest-priced

version. Because of the change, many generics suffered much heavier NHI price cuts at the 2004

revision, some falling to as little as 15% of the originator‟s price.

The data exclusivity period for most new drugs was extended in 2007 from six to eight years (with

biannual NHI listing of new generics as a trade-off).

At the same time in 2008 that pharmacists first gained their generic dispensation preparedness fee, doctors

lost their 2 point payment (¥20, $0.50) on each occasion they allowed substitution with generics to take

place.

59

Chapter 3 Pharmaceutical business environment

Summary

Sales of all prescription medicines in 2010 amounted to ¥8,873.6bn ($101bn) at NHI prices.

Community pharmacies accounted for 50% of the 2009 total, large hospitals for 22.4%, self-dispensing

GP clinics for 20%, and medium-small hospitals for 7.6%.

Ten of the top-20 pharmaceutical companies by sales in 2010 were of foreign origin. Combined they

held a 32.7% market share, almost the same as the top-10 Japanese-origin companies.

Over 80 of the 378 firms with products listed in the NHI drug tariff are generic companies. Forty four of

these are members of the Japan Generic Medicines Association (JGA). The Japan Society of Generic

Medicines (JSGM), though funded by some generic companies, is an academic body independent of

the sector.

Almost all distribution of prescription medicines (except some generics) goes via wholesalers.

Pharmacies, especially chain pharmacies, are of increasing importance as the volume of in-house

dispensing by hospitals and by GP clinics declines due to the success of the government‟s long term

policy of bungyo (the separation of the functions of prescribing and dispensing).

60

Pharmaceutical market

Valued in calendar 2010 at ¥8,873.6bn (at NHI prices), the approximate equivalent of $101bn, the Japanese

market for prescription medicines is the second-largest in the world. Reflecting the population density in

major urban areas, the Kanto region (greater Tokyo) accounts for 31% of total sales, Kinki (greater Osaka)

for 16%, and Tokai (greater Nagoya) for 11%.

Per capita consumption of medicines is high, driven by a number of factors including universal health

insurance, fee-for-service remuneration of providers, a large R&D-based industry presence, ageing of the

population, and a demand by consumers for access to the latest technology.

Following the steady implementation of bungyo (the separation of the functions of prescribing and

dispensing), community pharmacies now account for the largest share of total sales, showing a tenfold

increase in market share over 17 years (Table 13)

Table 13: Market share evolution (%) by customer type, 1992–2009

Market sector 1992 2004 2005 2006 2007 2008 2009

Large hospitals (>200 beds)

40.9 25.9 24.8 24.4 23.4 22.4 22.4

Medium/small hospitals (<199 beds)

21 9.6 9 8.8 8.3 7.9 7.6

Self-dispensing clinics 32.9 21.8 21.6 21.3 20.6 20.2 20

Community pharmacies 5.2 41.8 43.8 44.8 47.1 48.7 50

Source: Takeda BUSINESS INSIGHTS

The leading therapy classes and best-selling individual brands in 2010 are shown in Figure 2 and Figure 3.

61

Figure 2: Top 10 therapeutic classes in Japan by 2010 sales

7.0%6.6%

4.8% 4.8%4.4%

3.7% 3.7%3.3% 3.2% 3.1%

0

100

200

300

400

500

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Re

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430 430390

330 329293 288 279

Sa

les $

m

Source: IMS Japan website BUSINESS INSIGHTS

62

Figure 3: Top 10 best selling prescription brands in Japan by 2010 sales

142134

126

110

90 88 87

77 76 76

0

20

40

60

80

100

120

140

160

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Source: Business Insights BUSINESS INSIGHTS

Research-based pharmaceutical industry

The Japan Pharmaceutical Manufacturers Association (JPMA), with 67 member companies, represents the

interests of the innovative sector. The JPMA is itself a member of the Federation of Pharmaceutical

Manufacturers‟ Associations of Japan, the umbrella industry body.

A total of 378 companies have products listed in the NHI drug tariff. Many of these companies are small (only

126 of the 378 have more than 300 employees). Industry employment totals about 160,000 with the number

of medical representatives (MRs) at over 61,000 dwarfing numbers employed in R&D (26,000).

63

“Foreign pressure” (gaiatsu), especially from the US government, has brought about a number of

improvements to the regulatory and pricing systems that have benefited domestic and multinational

research-based companies alike. PhRMA Japan speaks for US-origin companies and the Japan Executive

Committee of EFPIA for European-origin companies.

It is generally agreed there is no longer any bias against companies from overseas. Many have built up their

Japanese activities to encompass regulatory affairs, formulation development, production, sales promotion

and distribution, and several are entirely Japanese-staffed. Ten of the top-20 biggest-selling companies are

now of foreign origin (Figure 4), and they held a combined 32.7% market share in 2010, almost as much as

the top-10 Japanese-origin firms. In a historical context this is a remarkable shift as it was not until Merck &

Co purchased Banyu in 1983 that any overseas multinational ranked in the top 10.

64

Figure 4: Top 20 pharmaceutical companies in Japan by 2010 sales to wholesalers

684

627

496

405390

375360

340318

255 247 240227

216 208185 180

144 138 137

0

100

200

300

400

500

600

700

Ta

ke

da

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(4.2)(4.1)

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(2.9)(2.8)(2.7)(2.6)

(2.4)(2.3)(2.1)(2.0)

(1.6)(1.5)(1.6)

* Includes consolidated businesses of Banyu and Schering Plough prior to October 2010 merger

Sa

les $

m

Source: IMS Japan website BUSINESS INSIGHTS

Generic industry

There are 44 member companies (Figure 5) of the generic industry grouping, the Japan Generic Medicines

Association (JGA) which collectively account for more than 80% of generic sales.

65

Founded in 1968, the JGA was known as the Japan Generic Pharmaceutical Manufacturers Association

(JGPMA) prior to April 2008. It is a member of the FPMAJ and the global generics group, the International

Generic Pharmaceutical Alliance. In December 2012, the IGPA will hold its 15th annual conference in Kyoto,

Japan.

Figure 5: JGA member companies

Nissin Pharmaceutical

Zydus Pharma Japan Nipro Pharma Corporation

Zensei Pharmaceutical Industries Nippon Chemiphar

YoshindoNihon Generic

Yoshida Pharmaceutical Nichi-Iko Pharmaceutical

Tsuruhara Pharmaceutical Mylan Seiyaku

Toyo Capsule Medisa Shinyaku

Towa Pharmaceutical Maeda Pharmaceutical Industry

Teva-Kowa Pharma Kyowa Pharmaceutical Industry

Teika Pharmaceutical Kyorin Rimedio

Tatsumi Kagaku Kotobuki Pharmaceutical

Takata Seiyaku Kobayashi Kako

Taiyo YakuhinIwaki Seiyaku

Taisho Pharmaceutical Industries Isei

Showa Yakuhin KakoI‟rom Pharmaceutical

Sawai Pharmaceutical Hospira

Sanwa Kagaku KenkyushoHikari Pharmaceutical

Sandoz KKFuji Pharmaceutical

Pola-Pharma Doijin Iyaku-kako

Okhura Pharmaceutical Daito Pharmaceutical

Ohara Pharmaceutical Daiko Pharmaceutical

Nitto Medic CorporationChoseido Pharmaceutical

Nissin Pharmaceutical

Zydus Pharma Japan Nipro Pharma Corporation

Zensei Pharmaceutical Industries Nippon Chemiphar

YoshindoNihon Generic

Yoshida Pharmaceutical Nichi-Iko Pharmaceutical

Tsuruhara Pharmaceutical Mylan Seiyaku

Toyo Capsule Medisa Shinyaku

Towa Pharmaceutical Maeda Pharmaceutical Industry

Teva-Kowa Pharma Kyowa Pharmaceutical Industry

Teika Pharmaceutical Kyorin Rimedio

Tatsumi Kagaku Kotobuki Pharmaceutical

Takata Seiyaku Kobayashi Kako

Taiyo YakuhinIwaki Seiyaku

Taisho Pharmaceutical Industries Isei

Showa Yakuhin KakoI‟rom Pharmaceutical

Sawai Pharmaceutical Hospira

Sanwa Kagaku KenkyushoHikari Pharmaceutical

Sandoz KKFuji Pharmaceutical

Pola-Pharma Doijin Iyaku-kako

Okhura Pharmaceutical Daito Pharmaceutical

Ohara Pharmaceutical Daiko Pharmaceutical

Nitto Medic CorporationChoseido Pharmaceutical

Source: JGA BUSINESS INSIGHTS

66

Until recently, four main domestic producers dominated: Sawai, Nichi-Iko, Towa, and TaiyoYakuhin (an

unlisted company). Taiyo was also a contract manufacturer.

The market has changed completely over the past five years with the entry of some Japanese R&D majors

and from overseas several of the leading multinational generic firms. The evolution and the current situation

are detailed in chapter seven.

Though funded by some generic companies, the Japan Society of Generic Medicines is an academic body

independent of the industry. Though it promotes greater usage of generics its views are not always in line

with those of the JGA.

Wholesalers

Almost all (98% by value with prescription drugs) of pharmaceutical distribution to hospitals, self-dispensing

medical and dental clinics, and pharmacies goes via wholesalers (oroshi). In total, the number of customers

to which wholesalers deliver products is 156,728 in Japan, more than double the number in the US (71,320)

and Europe (62,420), according to the Federation of Japan Pharmaceutical Wholesalers Association.

The FJPWA currently has 98 member companies (headquarters) but the business is increasingly dominated

by four groups (including around 20 affiliates), with a combined 90% market share (Table 14). Consolidation

through M&A has been ongoing for many years. FJPWA membership was 206 in 2000 and over 400 in 1990.

67

Table 14: Forecast sales of leading wholesalers, FY2011

Company Total sales (¥ bn)

Total sales ($ bn)

Sales of prescription drugs ($ bn)

Sales of prescription drugs (¥ bn)

Share of prescription drug market(%)

MedipalHD 2,663 33 1,888 24 22.9

AlfresaHD 2,183 27 2,167 27 24.1

Suzuken 1,752 22 1,667 21 20.2

TohoHD 1,060 13 1,024 13 12.7

Source: Supply Chain Logistics Community, author communication BUSINESS INSIGHTS

On average, wholesaling accounts for 83% of turnover of these companies (wholesaling of prescription drugs

alone for 79%), with the balance arising from manufacturing (Alfresa, Suzuken), healthcare-related services

(Suzuken, Toho) and dispensing pharmacies (Toho). All wholesalers are Japanese-owned; there have been

no entries to date by wholesalers from other countries.

Most large manufacturers will use 30–50 different wholesalers, 10–15 will be considered core, with which

they share IT systems and market intelligence. Though no longer tightly tied to particular manufacturers,

wholesalers remain “colored” by them, and this dictates their stockholding (e.g. Medipal and Alfresa are the

prime suppliers of Takeda products, while Toho is not supplied at all by the manufacturer). Large

wholesalers deal with 150–200 manufacturers.

A differentiating feature of the Japanese market is the presence of a large number (almost 20,000) of

wholesaler representatives, known as marketing specialists or MSs. This helps explain why sales and

administration for the average Japanese wholesaler account for 7.1% of its costs compared to 2.1% in the

US.

Support to manufacturers‟ own medical representatives (MRs) is a major part of wholesaler operations. MSs

will visit hospitals, clinics and pharmacies every day. FJPWA estimates 5.3 million calls annually by MSs to

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prescribers alone. MSs check inventory, take orders, promote products, exchange information with MRs and

customers, conduct any necessary recalls, and collect payment. The last named is sometimes made in the

form of promissory notes (yakusoku tegata), issued by banks with a date of payment three to five months

ahead. Delivery frequency in urban areas is three to four times a day.

Sales promotion in large hospitals is mainly conducted by MRs alone, in small/medium-sized hospitals MRs

and MSs will work together, while both clinics and health insurance pharmacies are the primary domain of

the MS. In accordance with the Anti-monopoly Act, wholesalers, through MSs, have the sole right to conduct

selling price negotiations with all types of purchasers.

The gross profit of Japanese wholesalers, as a share of NHI prices, is 6.3%, the FJPWA estimates. This is

comparable to figures in the US and Europe, especially after taking into account differences in the number of

customers to which products are delivered.

Pharmacies

Japan had about 81,900 community pharmacies (yakkyokku) at the end of 2010. Under the control of a

pharmacist, and usually with another pharmacist among the assistants, pharmacies are allowed to sell any

OTC medicine and those with a contract with NHI can also dispense health insurance prescriptions.

Dispensing pharmacies, known as chozai yakkyoku, number 55,700. Pharmacies without dispensaries,

better known as drugstores (yakuten), number 26,200. Sixty-five percent of pharmacists are female.

As elsewhere in Asia, the link between prescribing and dispensing in Japan has traditionally been closer than

in western countries. Until relatively recently, the majority of dispensing has been done by pharmacists on

the payroll of physician-run hospitals or clinics and not by independent pharmacies in the community.

Government policy over the past 50 years has been two split the two roles, a practice known as bungyo

(literally “separation of business”).

A voluntary “carrot and stick” approach has been employed, in particular by progressively increasing the

prescription-issuing fee (syohosen ryo) for doctors while lowering the dispensing fee if prescriptions

69

originated from a single medical facility. The number of so-called legal prescriptions (ingai shohosen) – those

valid for dispensing outside a medical facility – have steadily grown.

From 1999 to 2009, legal prescriptions increased from 450m to 680m and the proportion of all NHI

prescriptions dispensed by community pharmacies (the bungyo ratio) reached 61.3% in August 2010. By

prefecture, bungyo is most complete in Akita (bungyo rate 79.1%), Kanagawa and Saga, and least

developed in Kyoto, Wakayama and especially Fukui (bungyo rate 32.1%).

With the growth in bungyo, the community pharmacist has replaced the clinic doctor as the main recipient of

the yakka-sa. Chains are of growing importance. Outlets of the 10 leading multiple groups (Table 15)

represented fewer than 4% of all pharmacy premises in 2008 but dispensed 7% of the country‟s NHI

prescriptions and accounted for 9.6% of total pharmacy sales.

Table 15: Top 10 chain pharmacies, 2008

Company Number of premises % of total market sales

% of total prescriptions

Ain 358 2.03 1.38

Nihon Chouzai 253 1.78 1.06

Kraft 283 1.38 0.99

Quol 217 0.87 0.77

Sogo Medical 254 0.78 0.79

Hanshin 124 0.62 0.4

Pharma HD 163 0.56 0.49

Tanpopo 87 0.51 0.3

Trontia 136 0.49 0.36

Yakuju 128 0.45 0.44

Total 2003 9.49 6.96

Source: Takeda BUSINESS INSIGHTS

70

Toho HD, one of the leading wholesalers, has also acquired about 30 small chains, totaling about 300

pharmacies. Trading as Pharma Cluster, these pharmacies account for 5% of Toho‟s turnover but for 21% of

its operating profit.

Foreign exchange rates

The yen used to be one of the most volatile of major currencies, but it has greatly strengthened against the

US dollar ($), euro and pound sterling (GBP) in recent years.

From a low against the US dollar of ¥360 in the 1970s, the yen rose through the symbolic ¥100 level with

much attendant publicity to reach a high of just under ¥80 in the early 1990s. Japan‟s export-orientated

industries forecast doom and gloom, but adapted – cutting costs and switching production overseas - and

survived. Multinationals, earning yen-denominated sales, were delighted. Defying expectations, following the

Great East Japan earthquake the yen rose further, to a record post-war high of ¥76 to the dollar in August

2011, and to a 10-year high against the euro the following month.

71

Chapter 4 Generics market

Summary

Generics account for nearly half the drugs in the NHI list. Despite their large numbers, they held market

shares of only 9.4% by value and 23.1% by volume in FY2010 – among the lowest shares of any

OECD country – with sales on an NHI price basis of about ¥834bn ($9.7bn).

Dispensing by community pharmacies probably accounts for 50% of total generic use. The balance is

made up by GP clinics (25%), DPC hospitals (12-15%), and non-DPC hospitals (12-15%).

Generic companies in Japan have a long-standing reputation for poor product quality, bio-

inequivalence, questionable business practices, erratic supply, for making available only a limited

number of formulations, strengths and pack sizes, and offering inadequate distribution and information

services.

First generics are priced at 70% of the tariff price of the originator brand. Subsequent generics receive

the lowest tariff price for that ingredient up to 20 copies, after which they receive 90% of the lowest tariff

price of an existing generic .

More than 200 new generic products and in excess of 600 presentations are tariff-listed each year, with

the numbers having increased since the process became a biannual event in 2007. Patent-expiring

blockbusters can attract attention from 30 or more generic companies.

Due to price erosion and competition, new generics often have a commercially viable lifespan of less

than five years, or two/three NHI price revisions. Manufacturers can only stay in business through

aggressive marketing of new generics and by introducing a steady stream of replacement products.

Local sales agents (hansha), traditionally the main route to market for generics, are being replaced by

wholesalers. Wholesalers aim to prioritize stockholding from five generic suppliers. The average

pharmacy uses generics from 5–10 companies, with purchases made as part of a basket deal.

72

Introduction to generics

Generic medicines (kohatsuhin) are very much an enigma in Japan. Everything from the NHI pricing system

to the country‟s relentless drive for new technology and the strong sense of brand consciousness seems to

count against them, yet the business supports over 80 domestic manufacturers and a growing number of

foreign entrants that together supply 6,700 presentations, or nearly half the total number listed in the drug

tariff (Table 16).

Table 16: Breakdown of the NHI drug tariff by product type, 2007

Category Presentations Market share by volume (%)

Market share by value (%)

Originator brand, patented 1,893 21.6 49

Originator brand, off-patent 1,528 34.9 35.1

Generics 6,700 18.7 6.6

Others (crude drugs, JP products, blood products, kampo herbal products)

4,238 24.8 9.3

Source: MHLW data cited by JGA BUSINESS INSIGHTS

Compared to government healthcare departments in other countries, MHLW has been slow to recognize the

potential of generics to provide savings that allow headroom to pay for innovative medicines, but it has now

enacted several pro-generic measures and set a target for generic use. Other generic drivers include the co-

payment burden, especially on elderly patients, and the expansion of the diagnosis procedure combination

(DPC) fixed reimbursement system in hospitals. Each measure is discussed later in this report.

Though the generics sector is threatened by the very much bigger marketing muscle of brand name

companies, has been subject to frequent patent litigation, and has endured a recent extension in the

regulatory re-examination period, the major problem faced is one of image. Generic companies have a long-

standing reputation for poor product quality, bio-inequivalence, questionable business practices, erratic

73

supply, for making available only a limited number of formulations, strengths and pack sizes, and for offering

inadequate distribution and information services.

Because the quantity of information that can be included in a package insert is limited, doctors rely on

information sheets (known as “interview forms”) prepared by manufacturers to supplement this. With

originator brands these forms are usually 10-page brochures, but the quality and quantity of information

provision by generic manufacturers has been much less. As a result, generics have been looked down upon

by MHLW, R&D-based companies and health professionals alike, and until recently patients were unaware

of generic possibilities.

Unstable supply is mainly a result of the NHI pricing system but also arises from the patent system.

Patentees alleging infringement are forced to delay injunction applications until after an NHI listing of new

generics has taken place. The result has been embarrassment for MHLW and confusion for the customer as

up to 15% of listed generics became unavailable each year because of actual or threatened litigation

proceedings.

MHLW now asks generic manufacturers to provide assurances of stable supply for at least five years from

launch, and to provide a copy of an agreement with the innovator or legal opinion that the relevant patents

have expired, are invalid or would otherwise not be infringed (Notification No. 0315001 of MHLW‟s Health

Policy Bureau dated 15 March 2005). Generics which fail to be launched within three months of tariff

inclusion risk delisting. MHLW will also take such failure into account (as it does with companies whose

marketing policy has been „problematic‟) when it considers listing the following year.

Though the industry often uses the term “GE product”, in colloquial Japanese generics are described as

zoro-zoro products. Literally, this means “coming endlessly”, an appropriate description in that many leading

off-patent original brands spawn well over 30 copies. Following mass media advertising, the public has

become familiar with the English term “generic”, though familiarity rarely equates with behavioral change to

choose generics.

Among the current list of top-selling generics would be amlodopine besylate and tamsulosin.

74

Most but not all generics are themselves branded or with nomenclature that is manufacturer-specific (Figure

6). Due to the large numbers of synonyms for each originator brand, MHLW sometimes requires companies

to switch to use non-proprietary names to avoid confusion and medical error. Such generics, known as

“substitute products”, have to undergo the formality of resubmission for tariff listing under their Japan

Accepted Name (JAN).

Figure 6: Breakdown of generic listing in the NHI tariff by product nomenclature,

2010

Brand names,

3835

JAN (non-

proprietary

name), 2946

Unified name

(JAN + company), 404

Combination

product, 530

Brand names,

3835

JAN (non-

proprietary

name), 2946

Unified name

(JAN + company), 404

Combination

product, 530

Source: JGA BUSINESS INSIGHTS

75

Table 17: Specimen brand names of popular generics

Original product (JAN, innovator) Generic versions (company)

Diflucan lotion (fluconazole, Pfizer) Fluconazole (Kissei)

Fluonazon (Nichi-Iko)

Fluconarl (Sawai)

Fluzole (Towa)

Fulkazil (Choseido)

Fluconamerck (Merck Hoei)

Furuzonar (Hexal)

Pepcid tablets (famotidine, Yamanouchi) Famogast (Nippon Chemiphar)

Gasmet (Fuso)

Famostagine (Towa)

Blostar (Elmed Eisai)

Tiostar (Merck Hoei)

Famotidine (Sawai)

Progogue (Nichi-Iko)

Gamofa (Maruko)

Pravachol tablets (pravastatin, Sankyo) Myevastan (Towa)

Liduc (Elmed Eisai)

Pravestan (Nippon Chemiphar)

Mevastan (Kyowa Hakko Kirin)

Pravastan (Sawai)

Pravalon (Teikoku Medix)

Mevarich (Kaken)

Mevan (Nichi-Iko)

Zocor (simvastatin, Banyu) Sinstatin (Nippon Chemiphar)

Simvastatin (Meiji Seika)

Ramian (Teikoku Hormone)

Lipoblock (Towa)

Lipo-Off (Nichi-Iko)

Lipodown (Sawai)

Source: Crecon Research & Consulting BUSINESS INSIGHTS

76

Market size

As shown in Table 18, despite their large numbers, generics in Japan had market shares of only 9.4% by

value and 23.1% by volume in the year to 31 March 2010 – one of the lowest shares of any OECD country –

with sales on an NHI price basis of about ¥834bn ($9.7bn at average 2010 rate). For the main category of

oral generic forms, their market shares over the same period were 9.6% by value and 23.4% by volume, JGA

reports. Comparable overall generic penetration figures for the US, UK and Germany that year were 14%,

30% and 24% by value, and 72%, 67%, and 63% by volume respectively, for example.

Table 18: Generic penetration in Japan, 2002–10

Fiscal year By value (%) By value (¥bn) By volume (%)

2002 4.8 331 12.2

2003 5.2 376 16.4

2004 5.2 375 16.8

2005 5.1 305 17.1

2006 5.7 439 16.9

2007 6.2 499 17.2

2008 6.8 561 17.6

2009* 8.5 752 20.3

2010 9.4 834 23.1

Note: *survey method changed

Source: JGA BUSINESS INSIGHTS

International comparison has the potential to mislead though as while IMS MIDAS market segmentation data

are used in most other developed countries (i.e. the generic share of the patent-expired or unprotected

market – originator brands and their generics), Japan calculates generic volume share as the ratio of the

quantity of generic products sold and the quantity of all prescription drugs sold, where both are measured in

terms of NHI pricing units (e.g a single tablet, capsule or injection vial). Nevertheless, Japan still sits bottom

of the markets surveyed in terms of generic penetration (Figure 7).

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Figure 7: Generic volume penetration by country, 2009

0

10

20

30

40

50

60

70

80

Japan* Italy France Spain Mexico UK Brazil US Germany Canada

%

* Japan data from MHLW

0

10

20

30

40

50

60

70

80

Japan* Italy France Spain Mexico UK Brazil US Germany Canada

%

* Japan data from MHLW

Source: Danzon & Furukawa, 2011 BUSINESS INSIGHTS

A MHLW survey based on health insurance claims released in June 2011, revealed that the generic volume

share rose from 20.7% in 2008 to 23.5% in 2009, a higher increase than it had anticipated. Generics

represented 20.9% of products dispensed by hospital pharmacies to inpatients, 28.2% of products dispensed

by hospital pharmacies to outpatients, and 21.6% of products dispensed against “legal prescriptions” by

community pharmacies. There were also geographical variations, from highs of 36% in Okinawa prefecture

and 28% in Kagoshima prefecture, to a low of 18% in Akita prefecture.

According to a preliminary analysis by the JGA, generics accounted for 23.1% of sales volume and 9.5% of

sales value from April through June 2011.

Dispensing by community pharmacies – both independents and chains – probably now accounts for almost

50% of total generic sales. The balance is made up by self-dispensing GP clinics (25%), DPC hospitals (12-

15%) and non-DPC hospitals (12-15%).

78

Generic inclusion in NHI drug tariff

In excess of 600 new generic presentations, representing more than 200 individual generic brands, are now

tariff-listed each year (Table 19), with numbers having increased since the process became a biannual event

in 2007 (in accordance with MHLW Health Policy Bureau Notification No. 0515003 of 15 May 2007). The

numbers of applications for listing are even higher, with a number withdrawn due to lack of time to prepare

for launch, for legal or commercial reasons, or in cases when the product did not require listing in the Official

Gazette due to its inclusion in the Japanese Pharmacopoeia.

Table 19: Numbers of new tariff-listed generics, 2003–11

Year Number generic presentations added to tariff

(number different APIs)

Number of different APIs

2003 415 19

2004 380 18

2005 432 26

2006 402 21

2007 July 439 20

November 19 1

2008 July 463 18

November 99 2

2009 May 318 13

November 394 11

2010 May 197 6

November 414 7

2011 June 330 6

November 521 12

Source: MHLW BUSINESS INSIGHTS

79

Patent-expiring blockbuster brands invariably attract widespread interest from large numbers of generic

companies for example:

70 generic presentations of the antihypertensive amlodopine from 34 generic companies were added to

the NHI tariff for the first time in July 2008.

50 versions of the antidiabetic pioglitizone from 18 generic companies were price listed in June 2011.

28 companies entered the generic tablet market for another antidiabetic, glimepiride, when its first

listing took place in November 2010.

A record 101 generic presentations of the Alzheimer‟s disease treatment donepezil from 30 companies

were listed in November 2011.

The scheduled May 2011 listing was delayed one month due to the widespread disruption caused by the

earthquake and tsunami that struck north-eastern Japan the previous March.

The November 2011 listing was notable for adding 521 generic presentations to the tariff, the highest number

included at the same time since 1998, though at 69 the number of substitute product listings (included in the

total) was also unusually high. No fewer than 101 new listings, from 30 generic companies, were for 3mg and

5mg generic tablet forms of Eisai‟s blockbuster brand Aricept (donepezil). Three of these companies also

obtained listing for donepezil fine granules 0.5%.

In contrast, only five generic firms (i.e. Elmed Eisai, Kobayashi Kako, Sandoz, Sawai and Towa) obtained

listings for 5mg and 10mg tablets of atorvastatin, the world‟s largest selling drug, marketed in Japan by Pfizer

as Lipitor, when generic forms were listed for the first time in November 2011. Towa also listed

orodispersible tablet forms of the molecule, a form not available from Pfizer. There is no lack of interest in

genericizing atorvastatin from other generic companies, it is just that supplies of API are limited due to Pfizer

still holding a Japanese patent for the crystalline form of the active ingredient and fears of litigation.

80

The number of applications for listing in November 2011 was actually 563, but after withdrawals the total

number of different generic presentations entering the tariff was 521 (369 oral forms, 115 injectable forms

and 37 topical forms) from 72 companies. The additions brought the total number of presentations listed in

the NHI tariff to 17,793.

Additions to the tariff invariably include several products with active ingredients new to the generic market

(Table 20 and Table 21). As well as donepezil and atorvastatin, first generics of epoprostenol, exemestane.

levofloxacin (ophthalmic use), loratidine, nateglinide, and perospirone were listed in November 2011. The

corresponding originator versions – Aricept tablets (Eisai), Lipovas tablets (Astellas), Flolan injection (GSK),

Aromasin tablets (Pfizer), Cravit eye drops (Santen), Claritin tablets and dry syrup (MSD), Fastic/Starsis

tablets (Ahjinomoto/Astellas) and Lillan tablets (Dainippon Sumitomo) respectively – will now become long

listed brands at the time of April 2012 NHI price revision.

Table 20: Examples of new generics first listed in NHI tariff, 1999–2007

Year INN Original brand

1999 alacepril Cetapril (Dainippon)

amezinium Risumic (Dainippon)

2000 enalapril Renivace (Banyu)

cilostazol Pletaal (Otsuka)

2005 voglibose Basen (Takeda)

lansoprazole Takepron (Takeda)

tamsulosin Harnal (Astellas)

epalrestat Kinedak (Ono)

terbinafine Lamisil (Novartis)

ozagrel Xanbon (Kissei)/Cataclot (Ono)

2007 risperidone Risperdal (Janssen)

pranlukast Onon (Ono)

cetrizine Zyrtec (UCB)

acarbose Glucobay (Bayer-Schering)

Source: MHLW BUSINESS INSIGHTS

81

Table 21: Examples of new generics first listed in NHI tariff, 2008–2011

Year INN Original brand

2008 amlodopine Norvasc (Pfizer)/Amlodin (Dainippon Sumitomo)

ebastine Ebastel (Dainippon Sumitomo)

meloxicam Mobic (Boehringer Ingelheim)

pimobendon Acardi (Boehringer Ingelheim)

cefdimir Cefzon (Astellas)

2009 temocapril Acecol (Daiichi Sankyo)

levofloxacin Cravit (Daiichi Sankyo)

bicalutamide Casodex (AstraZeneca)

rebamipide Mucosta (Otsuka)

fluvastatin Lochol (Novartis)

gadodiamide Omniscan (GE Healthcare)

2010 latanoprost Xalatan (Pfizer)

gemcitabine Gemzar (Lilly)

doxorubicin Adriacin (Kyowa Hakko Kirin)

rabeprazole Pariet (Eisai)

glimepiride Amaryl (Sanofi-Aventis)

fluvoxamine Luvox (Astellas)

2011 pioglitazone Actos (Takeda)

edaravone Radicut (Mitsubishi Tanabe)

risedronate Benet (Takeda)/Actonel (Eisai)

meropenem Meropen (Dainippon Sumitomo)

atorvastatin Lipitor (Pfizer)

loratadine Claritin (MSD)

donepezil Aricept (Eisai)

perospirone Lullan (Dainippon Sumitomo)

exemestane Aromasin (Pfizer)

epoprostenol Flolan (GSK)

Source: MHLW BUSINESS INSIGHTS

82

From 2012, generics will be tariff-listed in June and December each year, MHLW announced. This reflects

an accelerated marketing approval process.

Introductory pricing of generics

Pricing rules for generic entries to the tariff have been unchanged since 2004. The first copies (hatsu-zoro or

“A band”) get the current NHI price of the original brand multiplied by a factor of 0.7 (N.B. the price is set at

70% of the originator‟s NHI price without any applicable premiums for new drug creation).

Generic entries in the second and subsequent waves of tariff entries („B, C… band‟) receive the lowest of

existing generic prices until the total excluding the original brand exceeds 20, when later generic entrants

receive the lowest generic price multiplied 0.9.

Up to the 1992 revision, the price of the first generic was set at 100% of that of the originator brand (Table

22). The price calculation coefficient for “A band” generics was reduced to 0.9 in 1994, to 0.8 in 1996, and to

0.7 in 2004. MHLW‟s justification for the cuts has always been that market prices of new generics dropped

rapidly after initial listing anyway.

Table 22: Calculation of initial NHI prices for generics, 1992–2010

Price revision year % of originator drug price

Before 1992 100

1994 90

1996–2002 80

2004 to date 70

Source: MHLW BUSINESS INSIGHTS

Generics with “added value” features (e.g. more convenient or better tolerated dosage forms) are supposed

to receive a price commensurate with these features, but such premiums are rare. Essential products (i.e.

those listed in the Japanese Pharmacopoeia) should receive adequate prices to ensure their stable supply.

83

Biosimilars, based on a regulatory pathway published in 2009 and defined as “a biotechnological product

produced by a subsequent entry manufacturer and claimed to be comparable to a biopharmaceutical product

already approved in Japan”, are viewed by MHLW as a subcategory of generics. Their introductory price is

arrived at by multiplying the originator price by 0.7 with the addition of a premium (dependent on the

perceived quality of clinical studies on patients) of up to 10%. This would result in biosimilars being priced at

up to 77% the price of the originator.

Price revision of generics

Since there is a strong tendency, for competitive reasons, for generic makers to discount heavily when first

entering the market, it is not uncommon for NHI generic prices after the first revision to fall to less than half

the price of the equivalent original brand. If the price is halved, double the percentage yakka-sa must be

offered for the customer to realize the same discount in cash terms.

In any event, all generics have to be offered at very heavy discounts to attract business away from the

innovator with its much stronger marketing power and better reputation. Large discounts are penalized by

large price cuts at the following NHI revision (Table 23), and tariff rates for generics risk almost a free fall.

84

Table 23: Results of biennial NHI price revisions: Overall average price cuts

versus those for generics

Revision year Average price reduction (%) of total market

Average price reduction of generics only

2002 4.6 29

2004 3.8 24.5

2006 6 14.3

2008 4.9 11.8

2010 5.8 12.2

Source: Sawai (author communication) BUSINESS INSIGHTS

Because of the pricing system, generic companies are forced to adopt “hit and run” tactics. New

opportunities are exploited through aggressive marketing and then discontinued when the inevitable NHI

price cuts catch up. New generics have a commercially viable lifespan of less than five years, or two-three

NHI revisions. Not only do they become uneconomic to manufacture but the yakka-sa becomes non-existent.

Manufacturers can only stay in business by introducing a steady stream of new products.

A mission of MHLW is to ensure continuous availability of essential but low volume generic lines, especially

those with monographs in the Japanese Pharmacopoeia. As a result, it is not unusual to find these products

have received the largest price increases (e.g. water for injection 500ml +10.7%; phenytoin 100mg tablets

+3.8%, both at the 2010 revision) while other generics receive the largest price cuts as a result of massive

discounting in very competitive classes.

MHLW has a second mechanism to support very low-priced generics, the uniform pricing rule. Products with

prices less than 20% of that of the originator are grouped together and listed by INN with a common NHI

price, the weighted average market price of the group.

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Distribution of generics

Generics traditionally found their greatest usage in the clinic market, especially in urban areas. Morgan

Stanley Research estimates for 2000 suggested 78% of generics were dispensed by GPs, 19% in hospitals

and only 3% in dispensing pharmacies. Self-dispensing clinics, especially those run by single-handed GPs,

are now in decline and marketing efforts for generics have been increasingly switched to both hospitals

(because of DPC payment) and community pharmacies (because of the growth in bungyo). Sawai‟s sales in

2003 by customer group were: 57% to clinics, 23% to hospitals and 20% to dispensing pharmacies. By 2010,

the pharmacy share had risen to 52% and the clinic share had fallen to 21%.

With better service levels from wholesalers, large hospitals and dispensing pharmacies almost entirely rely

on them for supply. Wholesalers originally did not handle generics, but with a change in the market several of

the larger generic suppliers have been urging them to take their products into stock. Today each of the four

nationwide wholesalers and all the main 94 regional wholesalers deal with generics. While direct delivery still

accounts for 85% of Towa sales (GP clinics and smaller hospitals make up 40% of its business), direct

shares for Sawai and especially Nichi-Iko, at 50% and 20% respectively, are much less.

Though accounting for 40% of their stockholding by numbers, generics still make up a small component of

turnover for the average wholesaler, just over 6%. General wholesalers stock generics from a range of

suppliers, but aim to prioritize around five different generic manufacturers. Selection is based on continuity of

supply, the level of collaboration with manufacturers‟ MRs, and the amount of rebate and promotional

incentives offered. The inventory level for generics at wholesalers is short, under one month.

Those generics that are distributed direct go mainly via small regional selling agents (known as hansha) on a

sole agency basis. Hansha, which total about 75, have good personal relations with local GP clinics and

smaller hospitals. They also demanded very high discounts which was another factor behind generic

companies switching to general wholesalers.

In 2008, the country‟s leading door-to-door courier, Yamato Transport, whose lion logo on its many small

vans is a familiar sight to the Japanese public, commenced direct to pharmacy deliveries with Taiyo

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generics. This initiative did not last long following a negative campaign run by wholesalers and their MSs,

and problems with collecting debt.

The average pharmacy would use generics from 5–10 different generic companies with purchases made as

part of a basket deal. Selection is mainly made on the basis of the manufacturer‟s reputation and reliability,

not price. As each pharmacy deals with up to five wholesalers, with twice daily weekday deliveries from each

in cities (three deliveries on Fridays), there is little delay before particular generic needs can be met. But

patients are impatient and pharmacies prefer to dispense from the stock on their shelves, especially as most

pack sizes are large.

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Chapter 5 Attitudes toward generics

Summary

Some health insurance societies now provide their members with written information on how much they

could save by switching to generics. Only a small proportion of the population has received such

mailings, but the results have been impressive.

Physicians employed by hospitals are salaried and have no economic incentive from prescribing one

drug rather than another. Self-dispensing clinic doctors are active users of generics, though their

numbers are declining.

The 2008 change from doctors being required to authorize substitution to them being required to

specifically block it greatly increased generic substitution opportunities, though one-third of prescription

forms had the “do not switch” column signed, sometimes routinely.

No incentives are currently given to doctors through NHI to prescribe generics.

DPC funding for hospitals has stimulated low-cost drug purchasing and given a boost in particular to

the use of injectable antibiotics and anticancer drugs in generic form. Non-DPC hospitals have little

incentive to use generics, apart from lessening the patient‟s co-payment burden. Originator brands, with

their higher prices than generics, offer greater margins.

Though pharmacies earn additional fees for high generic usage, many independents believe it is not

worth the effort, especially after patients may be reluctant to follow their recommendation and defer

instead to the doctor‟s choice. Multiple pharmacies are more enthusiastic users of generics.

Other issues facing pharmacists with generics are reduction in revenue, the large stock inventory

needed, and the burden of explanation to patients.

A high proportion of decisions not to use generics comes from the patient, who are often suspicious of

them. The typical saving in co-payment from accepting a generic in place of the prescribed brand is

insufficient to override this.

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Insurers

The different insurers that operate under NHI – municipal governments, health insurance societies for

employees of large corporations, the National Federation of Health Insurance Societies (covering employees

of small- and medium-sized firms) and other occupation-based insurance societies – traditionally had no role

in the choice of prescribed item, except in the rare case a patient visited a provider under the insurer‟s direct

control. As insurers couldn‟t limit a patient‟s choice of provider, the impact of prescribing controls even at

affiliated facilities was limited. Insurers merely paid whatever bill was presented to them. There is also a

moral hazard on the part of the insurer – it knows the government will come to its rescue in the case of

serious financial difficulties.

Since 2006, however, some insurers have been regularly providing their members with written information on

how much they could save by switching to generics. As of mid-2009, 40 out of the total of about 1,500 health

insurance societies were distributing such information and Kemporen reported in August 2011 that almost

60% of its member societies were already informing or planning to inform their insured persons of the

savings they could make by switching to generics, more than triple the proportion recorded two years

previously.

The results have been impressive; 48% of patients in receipt of such information have reported to have

changed to using generics because of it. However, only 10.4% of the population have so far received these

mailings.

Physicians

Physicians views of generics are in part likely to depend on (a) whether they are the owner of a hospital or

clinic, or its employee, and (b) whether their clinic or hospital both prescribes and dispenses medicines, or

engages only in the former practice. In July 2006, 48.6% of prescriptions from self-dispensing doctors

included at least one generic, whereas only 41.4% of prescriptions from non-dispensing physicians did so

(Survey of National Medical Care Insurance Services, MHLW, 2006)

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Physicians employed by hospitals are salaried and have no economic incentive from prescribing one drug

rather than another. However, hospitals themselves have always claimed the income they receive from

purely medical services under NHI is inadequate and they only kept solvent by the yakka-sa, the difference

between the purchase price of a medicine and its reimbursement rate. An equivalent yakka-sa in yen terms

is much more difficult to realise from generics than from original brands, because of the lower prices of the

former. Therefore, hospitals have by tradition been hostile towards generics.

Small clinics without beds are likely to be operated by single-handed doctors, many of whom still also

dispense. A 2008 survey (Iizuka T, 2009) found small clinics to be most active in generic use (36.1% of the

products they prescribe) while generic use declined as hospital size (measured by numbers of beds)

increased. Clinics that self-dispensed filled up to 50.1% of prescriptions with generics, while clinics that only

issued “legal prescriptions” for dispensing by an outside pharmacy prescribed generics only 18.5% of the

time. The largest hospitals (>500 beds) were least active in using generics (1.7% of prescriptions).

The practice of in-house dispensing has been gradually decreasing nationwide due to MHLW‟s bungyo

policies, which include making prescribing more financially rewarding than dispensing for clinics and

hospitals. The hospital environment is also proving more professionally and financially attractive to work in

for young doctors than clinics, whose numbers are declining. Even if the hospital‟s own pharmacy does its

own dispensing for outpatients, physicians increasingly prefer to select products on their therapeutic merit

and not on their potential for an attractive yakka-sa for their employer‟s business. With the economic

recession, physicians are also more conscious of patients‟ out-of-pocket costs.

Set against this are the “human wave” tactics by MRs from research-based companies, which results in very

heavy promotion of originator brands. MRs work hard to form close bonds with influential doctors, advising

them against prescribing generics or encouraging completion of the “do not substitute” column.

A JGA survey of almost 1m prescriptions received by 1,000 community pharmacies in October 2006 – six

months after “tick-in” substitution was first allowed - showed that only in 17% of cases had the prescriber

written his/her name and applied their personal seal to the part of the form authorizing substitution by the

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pharmacist. Of these 165,402 “substitution allowed” prescriptions a mere 9,452 (6%) were in fact switched to

generics. Overall, therefore, less than 1% of prescriptions (9,452 out of 960,000) were substituted.

According to a survey by MHLW of health insurance claims conducted in the second half of 2007, 11% of

medical facilities had routinely prescribed generic products, 69% had done so some of the time, while a

further 18% had stayed with original brands as a general rule. While the study also found that 66% of clinic

doctors and 60% of those in charge of outpatient departments in hospitals claimed to have personally

endorsed prescription forms to allow generic substitution, the end result was little different from the JGA

survey above, however. “Substitution allowed” prescriptions merely accounted for 17.4% of all prescriptions

issued, and of those just 8.2% (or 1.4% of the total number) were actually substituted by the pharmacy.

Interestingly, generics were prescribed by their own brand name in 22% of prescriptions, but substitution was

not authorized in most of these cases.

A redesigned form, introduced from April 2008, contained a column the prescriber had to sign to block

substitution. Though a JMA survey showed that 30% of doctors were against the idea, the share of

prescriptions where generic substitution for one or more prescribed item was permitted rose dramatically to

65.5% in 2009. This seemed to have represented a peak, however. One third of prescriptions in July-August

2010 still had the “do not switch” column signed, according to a Chuikyo survey of pharmacies.

Also after the April 2008 changeover to “tick out” substitution a survey by pharmacy chain Nihon Chouzai

revealed that 38.8% of prescriptions were marked “do not substitute”. Of the 61.2% that did allow

substitution, 42.7% were in fact substituted in the pharmacy with a generic. This meant that 26.1% of all

prescriptions were substituted.

The reasons given why some doctors are reluctant to either prescribe generics or have these dispensed

instead of the prescribed brand invariably include a concern over the quality of generics. Such concerns

might arise from reports of generic batch recalls or bio-inequivalence, and are also inevitably fuelled by scare

campaigns conducted by or on behalf of innovator companies. But it is also due to lack of knowledge. As

recently as 2008, a survey of physicians revealed that 38% had almost no knowledge regarding the data

required for regulatory approval of generics and an additional 40% admitted to knowing only a little.

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Another commonly cited reason for doctors avoiding generics is their instability in supply. Many generic

products have a short commercial life, being discontinued by their manufacturers either because of low sales

or an uneconomic NHI price. Even new generics that are promised sometimes fail to materialize due to a

legal challenge by the patent holder.

MedPeer, an online physician community platform that runs online surveys amongst its 36,000+ physician

and medical student panel members, posted findings of a survey it conducted May 2011 on attitudes to

generics. From 2,568 respondents:

85% reported some anxiety about prescribing generics

66% expressed concern about generic quality

50% doubted the efficacy of generics

30% worried about side effects with generics

46% had concerns on whether generic companies could provide adequate drug information

25% were unsure whether stable supply of generics was possible.

Hospitals

The adoption of diagnosis procedure combination (DPC) funding has brought about a change in position by

those acute care hospitals which have signed up to use it. DPC has the potential to change the hospital

pharmacy from a profit centre to a cost centre, and to stimulate the use of low cost alternatives, including

generics. DPC is increasingly applied. MHLW‟s original target was for 1,000 DPC hospitals by 2012 but as of

April 1st 2011 there were already 1,449.

Under fee-for-service, everything is reimbursed at tariff rates and brands, which command higher prices than

generics, offer the highest procurement gain as the yakka-sa. NHI reimbursement under DPC is based on a

prospective amount regardless of what products and services are actually provided to the patient, and any

cost savings add to the hospital income. The lower prices of generics outweigh their lower yakka-sa in this

situation. Favoring generic usage is not entirely clear-cut, however, as hospitals that make savings with use

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of low-cost drugs risk having payments in subsequent years cut. DPC tariffs are revised every two years

based on actual historical expenditure.

At a time when there were fewer than 800 DPC hospitals, a survey by the Japan Society of Generic

Medicines conducted in 216 of these found that generics accounted for an average 7% of the hospital drug

bill in FY2006. In FY2005, when these same hospitals had been in the pre-DPC phase and still under fee-for-

service the generic share was 4%. With regards to their policy for injectable products, 42% of DPC hospitals

said that injection frequency had reduced, 15% said original brand generics had been replaced with

generics, and 42% reported no change. The previous year, under pre-DPC conditions, 95% said their

previous usage of injectable products was unaltered by gaining pre-DPC status.

Generic injectables are easier to adopt for hospitals than generic oral forms as the patient has little

knowledge or say over their use. Strongest changeover to generics under DPC funding conditions has been

seen with intravenous antibiotics for prophylactic use in surgery and with certain injectable anticancer drugs

(e.g. cisplatin and carboplatin). The safety of generic contrast media has been an issue, but the steady

spread of DPC has resulted in a gradual but so far small conversion to generic use also there.

One DPC pioneer, St Marianna University Hospital in Kawasaki, became in 2004 the first teaching hospital in

Japan to switch to using INNs rather than brand names on prescriptions. The hospital and its five affiliated

facilities saved a total of about ¥624m ($7.3m) by replacing original brands with generics in FY2010, it was

claimed.

There is little incentive for non-DPC hospitals, still the majority, apart from lowering patient co-pays, to use

generics

Pharmacists

Though pharmacists earn additional NHI points for high generic usage, some may have calculated it isn‟t

worth the time and effort. If they dispense what the doctor ordered they will have no problem with the doctor

or patient. Patients can visit any doctor or health insurance pharmacy of their choosing, so both parties are

keen not to be seen as providing “second class” medicines in an attempt to ensure patient loyalty.

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If a pharmacist substitutes the prescribed brand with a generic, not only do they have to explain to patients

the benefits of switching (and counter any concerns about higher risks), they have to advise on why they

have chosen that particular manufacturer‟s generic for that patient. Trade estimates show it takes on average

six minutes per patient to provide information and counseling on switching to a generic for the first time –

after which the patient may still choose to take the prescribed brand. Furthermore, as the additional fees the

pharmacist receives go towards the total pharmaceutical care bill, of which the most patients pay 30% as co-

insurance, pharmacists fear that next time the patient would chose to go instead to a neighbouring pharmacy

that doesn‟t advocate substitution.

While the basic ¥20 generic dispensing fee hasn‟t changed over time, the introduction of the generic

dispensation preparedness increment in 2008 and especially its increase on a graduated scale in 2010 was

seen as a greater financial stimulus to pharmacists to use generics. Iizuka and Kubo (2011) analyzed the

impact of these “hurdle policies”:

The proportion of pharmacies whose generic dispensing rates were below 30% decreased after 2008, while

the share of pharmacies whose generic dispensing rates were either between 20–40% or 40–50% increased

(the proportion whose rates were already above 50% changed relatively little). This suggested to the authors

that for pharmacies close to the target of 30%, introduction of the target encouraged them to meet it and

obtain higher dispensing fees. However, as additional generic substitution was not rewarded after passing

the 30% threshold already high-performing pharmacies (83.4% of the total as of December 2008) were

unaffected by the new target.

The volume-based compensation scheme introduced in April 2010 produced a larger shift in behavior as the

majority of pharmacies (69.4% as of June 2009) were below the lower 20% threshold. The share of

pharmacies having a volume-based generic dispensing rate of 30% or higher was only 10.1%.

The number of pharmacies overall that claimed the “generic preparedness” fee actually fell from 34,941 in

2008 to 23,864 in 2010, in spite of a change to a more generous fee structure (though the years are not

comparable as MHLW switched to a volume-based system in FY2010). Between August and September

2011, MHLW estimated that 16.8% of community pharmacies received the 6-point premium, 16.2% the 13-

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point premium, and 24.0% the 17-point premium; 42.4% did not receive any premium, indicating that their

historical generic dispensing rate in volume terms was below 20%.

Multiple pharmacies are thought to be more enthusiastic about using generics than independents. Reflecting

its especially strong pro-generic policy, no fewer than 92.7% of outlets of one of the leading pharmacy

chains, Nihon Chouzai, received a generic preparedness the fee in September 2011; 71.3% got the

maximum 17-point fee for dispensing 30%+ generics, 11.7% the 13-point fee for dispensing 25%+ generics,

and 9.7% the 6-point fee for dispensing 20%+.

In addition to dispensing fees, pharmacy income arises from the yakka-sa. When a generic is newly added to

the NHI tariff its price is set at 70% of that of the originator. The need for suppliers to offer high discounts

with generics results in above-average biennial NHI price cuts. The resultant NHI price freefall inevitably

leads to the demise of that generic, it being unprofitable to manufacture and market. Consequently, generics

offer attractive margins to pharmacies only for a short period of time after their launch. This is in marked

contrast to the situation in the US, where pharmacy profits on generics are consistently higher than for

brands.

Pharmacists recognize the short commercial life span of many generics and knowing a version is going to be

discontinued in the very near future is a strong disincentive for using it. Such concerns may be greatest in

the treatment of chronic diseases, where ironically the cost savings from generics to patients can be the

largest.

Pharmacies also fear that growth in generics means them having to stock a very wide range of synonym

products (700 or more), especially when they dispense for patients who have attended several different

hospitals and clinics. Many prescriptions specify a particular originator or generic brand – each prescriber will

have their own favorite – and do not authorize its substitution. Few prescriptions are written by INN, giving

pharmacists the freedom to dispense any version in stock. In some regions, local pharmacists‟ associations

(yakuzaishi-kai) have begun to co-ordinate their inventory management in order to increase their collective

ability to satisfy generic substitution opportunities.

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According to a September 2011 report to Chuikyo on the impact of the medical fee revision in FY2010, even

though 67% of prescriptions showed the prescriber had not blocked generic substitution, switch by the

pharmacist with at least one product on the form only occurred in 44.7% of cases. Generic dispensing is still

not being promoted by pharmacies, it was concluded.

An even lower level of substitution was revealed in a MHLW survey conducted over one week in August

2011. Sixty nine percent of prescriptions filled by pharmacies allowed substitution (up slightly from the 67%

recorded in the same survey the previous year). Yet in just 8.3% of prescriptions that permitted substitution

did substitution with generics take place with at least one item on the prescription form (8.6% in August

2010). The most common reason (30.2% of responses) that led to patients refusing substitution after it had

been explained by the pharmacist was that they did not want something not prescribed by their doctor.

However, two-thirds of pharmacists reported that patients carrying “I want generic” cards had helped the

substitution process. Pharmacists were also asked what changes might stimulate substitution in cases that

allowed this. The most popular answer (46% of responses) was INN prescribing, followed by smaller pack

sizes for generics and fewer generic versions.

Pharmacists future views on generics were also sought in an August 2011 survey conducted by the Japan

Pharmaceutical Association (2,619 of those 7,000 pharmacists invited responded). One-third expected

generic usage to increase if incentives to pharmacies via the fee structure were improved, a further 31%

expected little change, and 30% said generics would grow regardless of new incentives. When asked what

percentage increase in the GE dispensing fee at the April 2012 revision would encourage greater generic

use, 40% said 5%, 11% wanted fees to rise by 10%, while a surprising 45% did not see the need for any

increase.

Wholesalers

Wholesalers have no incentive to promote generics as they lower revenue and profit margins. They must

satisfy the demand of their customers, however, so all the larger wholesalers distribute generics. The

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potential number of different stock keeping units with generics is 40,000, so it is impossible for wholesalers to

handle the full range. Instead they prioritize their inventory around five different generic manufacturers.

Patients

Japanese consumers have a number of characteristics that differ from consumers in the west:

They are very image conscious, tending to favor the perception of quality over price. Being well known

and highly evaluated leads to a gain of the consumer‟s trust and confidence. They feel uneasy when

they consider buying a product with which they are not familiar and aspire instead towards well-known

brands. Even the firm specializing in “no brand name” consumer goods has a well known brand, Muji.

Projecting a good, clear corporate image by a company is also vital for uptake of its products. A

“company without a face” was second only to “poor product/service” for holding a company in low

regard by the public.

Quality consciousness is so ingrained that it is almost taken for granted. Attention to detail, the

invariable inclusion of a warranty with goods of any price, perfect packaging and scrupulous after-sales

service are expressions of the responsibility companies take for their products. Similarly, courteous and

attentive employees are essential for winning consumer trust and business.

Japanese have a passion for information, both qualitative and quantitative. People are eager to know

something about everything, and frequently digest detailed tabulated and graphical data offered by the

lay media on highly technical subjects. The most powerful medium is television, but all major daily

newspapers are nationals and, despite the explosion in social media, have the highest circulations in

the world.

The co-payment burden with healthcare, especially the elderly on fixed incomes and the highest users

of medicines, might be high in comparison with other countries with social health insurance systems,

but these same attitudes prevail with patients as with the general population

In addition, there are widespread concerns about safety and many believe that adverse drug reactions

should be at a zero level. Japan has had more than its share of well-publicized “drug disasters” over the

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years, e.g. “aspirin shock” with a cold drink, SMON with clioquinol, HIV-infected blood transfusions, 16

deaths within week of launch of sorivudine. As a result, the public has developed a fear of drugs of any type,

especially systemic ones, but their respect for doctors and centuries old tradition overrides this

“pharmacophobia” somewhat where ethical products and herbal medicines (kampo yaku), respectively, are

concerned. Pharmacists are seen as traders, motivated by profit, an image reinforced by frequent heavy

discounting.

In the OTC sector, consumers tend to stay loyal to those brands they have tried before and are more familiar

with. Manufacturers have to implant in the minds of consumers the elements of trustworthiness and

impeccable quality for new products before these too can enjoy high brand loyalty. Health scares over

imported food – especially from China - have reinforced loyalty to Japanese-made brands, so if there is a

chance that an unfamiliar brand has been produced under less than perfect conditions sales will meet strong

consumer resistance.

While more doctors are willing to prescribe or authorize use of generics, a high proportion of decisions not to

use generics comes from the patient. Concerns have been aired in the lay media that differences between

excipients in brands and generics may affect health outcomes (Nihon Keizei Shinbun, 2008). Topical

products, like patches, are a particular problem as patients can easily spot the difference between

adhesives.

There is only one reason from the patient‟s perspective why a generic would be chosen over a prescribed

brand – if the cost saving from switching made it worthwhile. The trigger for accepting a substitute by the

average patient is thought to be a saving in excess of ¥500 ($6.27) per prescription item.

A 2007 survey for the Chuikyo involving 588 pharmacies, 688 clinics and 408 hospitals (MHLW, 2007)

revealed:

In 92.2% of cases where generic substitution was authorized by the prescriber, the patient chose to

receive the original brand.

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31.7% of patients said the reduction in out-of-pocket expenses from use of a generic was not

sufficiently high to justify a switch away from the brand (the drug co-insurance from use of a generic

instead of a brand was reduced by 27.6% on average).

30% of patients expressed concern over the quality of generics.

Despite increased awareness of generics, only 14% of patients have asked doctors to prescribe them.

Respondent physicians were asked how many prescriptions they authorized for substitution; 60.5% of

hospital physicians and 66.4% of clinic doctors said they had done this at least once. They were then asked

what proportion of “substitution allowed” prescriptions had been instigated by the patient. About 60% of

physicians said this happened in fewer than 10% of cases, while only a minority of physicians (20%) believed

substitution was initiated by the patient on more than 90% of occasions.

Doctors are referred to as sensei (teacher) by Japanese patients. Patients are often shy about asking for

generics even if they know about them, as if doing so might be interpreted by physicians as a challenge to

their godlike authority. TV celebrity Tetsuko Kurroyanagi, in his 70s, appeared in TV commercials and print

advertisements for Towa urging consumers to “show courage” and ask their doctors to prescribe generics.

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Chapter 6 Generics industry

Summary

Four domestic companies – Nichi-Iko, Sawai, Taiyo (an unlisted company), and Towa – dominated

generic sales for many years. Most other companies were very small.

Lured by expectations of market expansion, newcomers both from Japan and from overseas, entered

the business in the 1990s, only later to disinvest. More recently, several R&D majors set up or acquired

divisions dedicated to generics or to generics and long-listed brands. Such companies included Daiichi-

Sankyo, Eisai, Meiji Seika, Mitsubishi Tanabe, Nippon Chemiphar, Nippon Kayaku, and Pfizer.

Most of the leading multinational generic companies – including Actavis, Hospira, Mylan, Sandoz,

Sanofi and Teva – now have Japanese operations, independently or as joint ventures and alliances.

The most important recent move has been Teva‟s acquisition of Taiyo. Investment has not only been

one-way; Daiichi-Sankyo acquired Ranbaxy in 2008.

There is also a strong presence in Japan of Indian generic companies including Aurobindo, Lupin, Dr

Reddy‟s and Zydus Cadila. Lupin has purchased two local companies, Kyowa Pharmaceutical and

I‟Rom.

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Traditional domestic generic companies

For many years, four domestic companies – Sawai, Taiyo, Towa, and Nichi-Iko – dominated the generic

market. Many of the remaining firms were small, family-owned ones (Table 24). Often localized in the

prefectures of Toyama and Yamagata, these were primarily manufacturers who owned generic product

registrations, and were dependent on the larger firms for their marketing.

Table 24: Japan Generics Association companies by size, 2007

Annual sales Number

>¥30bn 4

¥10-30bn 7

¥6-10bn 12

¥2-6bn 14

<¥2bn 5

Capital

> ¥2bn 5

¥0.5-50m 3

< ¥0.5bn 30

Source: JGA BUSINESS INSIGHTS

The leading firms grew further through M&A. Nichi-Iko acquired Maruko (in 2004), and Nippon Galen and

Oriental (both in 2005); Towa bought J-Dolph to enter the hospital market (in 2003); JAFCO (domestic

venture capital) bought Showa Yakuhin (in 2004); Kyorin bought Toyo; and Sawai acquired some capital in

Zensei (in 2004). An offer to merge with Sawai was turned down by Kyorin in 2010.

Taiyo – now owned by Teva – was an unlisted company; Sawai and Towa have financial year-ends in

March, while Nichi-Iko‟s year ends in November. The three leading listed domestic companies reported a

10.4% increase in their combined sales for the first half of FY 2011. Combined operating profits increased

4.3%. Both rates were down on the corresponding period in the previous year, suggesting that generic

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growth has begun to flatten out. Taiyo‟s FY2010 consolidated sales of ¥51.5bn ($0.6bn) would put it in third

place ahead of Towa. Much of the growth with Nichi-Iko was with long-listed brands not generics.

Table 25: Consolidated results of leading listed domestic generic manufacturers,

forecast for FY2011

Company 2011 sales (¥bn)

Yea-on-year growth ( %)

Net profits (¥m) Year-on-year profit growth

(%)

Nichi-Iko 78 21.2 4,000 3.5

Sawai 69 8.1 8,300 15.5

Towa 48 4 5,100 -12.8

total 195 11.8 17,400 3

Source: Pharma Japan BUSINESSINSIGHTS

Table 26: Other data on leading listed domestic generic manufacturers, forecast

for FY2011

Company No. employees

No. MRs

R&D spend (¥m)

R&D as % of sales

Total no. products

(APIs)

No. new products

(APIs) listed

Nichi-Iko 625 266 1033 2.8 750 (NA) 46 (31)

Sawai 912 392 2015 6.3 554 (259) 39 (23)

Towa NA 506 1741 7.6 537 (287) 46(25)

MR = medical representative

Source: Author‟s analysis BUSINESS INSIGHTS

Another part of the market was made up of companies which at one time had their own original brands;

these long since had become off-patent long-listed brands. To generate revenue growth they turned to

generics, hoping their reputation for quality and access to distribution channels would give them a

competitive advantage.

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More important new entrants were some of the Japanese R&D majors, multinational generic firms who

entered Japan for the first time, and several Indian companies with a primary presence originally to sell

active pharmaceutical ingredients (APIs).

Domestic R&D company presence

Several Japanese brand name firms entered the mainstream generics business in the late 1990s, only later

to scale down or completely disinvest (e.g. Yamanouchi in 2003, Welfide in 2000, Taisho in 2001, Kyowa

Hakko in 2001).

More recently there has been a resurgence of interest in the sector, with the setting up or acquisition of entire

divisions dedicated either to generics, or to generics and long-listed brands. Such hybrid companies include:

Meiji Seika, Nippon Chemiphar, Kaken and Mochida were among medium-sized research-oriented

firms to create generic offshoots.

Eisai set up an Elmed (short for „elderly medicine‟) subsidiary in 1996 to focus on added-value or

“super” generics (i.e. off-patent ingredients in more elegant, convenient, bioavailable, more easily

titrated or better tolerated formulations with superior packaging than the molecule‟s original brand)

targeting the ageing population.

Mitsubishi Tanabe formed its own 85%-owned generic/long listed brand division, Tanabeseiyaku

Hanbai, in 2008. Generic sales in FY2010 were ¥14bn ($160m).

Oncology specialist Nippon Kayaku introduced a range of generic anticancers.

Daiichi Sankyo set up a new, wholly-owned mature products division, Daiichi Sankyo Espha, to focus

on long-listed brands and generics, As part of its mid-term plan, the company is expecting ¥50bn

($630m) sales of generics among a ¥200bn turnover from Espha, backed by promotion through 500

medical representatives.

Nipro, a manufacturer of medical supplies and devices, acquired Takeshima, Hishiyama, and Zensei.

Poultice-specialist company Teikoku Seiyaku created a Teikoku Medix subsidiary.

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Kyorin set up Kyorin Rimedio.

Dainippon Sumitomo, one of the R&D majors, launched generic donepezil in November 2011.

Table 27: Generic sales of innovative Japanese manufacturers, FY2010

Company Sales (¥bn) Year-on-year growth (%)

Number of generic registrations

Meiji Seika 18.9 29 37 APIs

Nippon Chemiphar 18 23.8 166 lines

Nippon Kayaku 15.6 58.7 11 APIs, 11 lines

Aska Pharmaceutical 14.1 34.1 44 lines

Tanabeseiyaku Hanbai 14 64.8 135 APIs, 279 lines

Elmed Eisai 12.4 52.8 42 APIs, 72 lines

Kyorin Rimedio 8.9 2.7 200 lines

Kaken Pharmaceutical 7.9 16.7 37 APIs, 68 lines

Fuso Pharmaceutical 5.6 12.1 58 APIs,105 lines

Daiichi Sankyo Espha 4.6 - 25 APIs, 45 lines

Mochida 3 - 16 APIs, 27 lines

Wakamoto 2.7 11.7 30 APIs, 50 lines

Source: Nikkan Yakugyo, June 7th, 2011 (cited by JGA) BUSINESS INSIGHTS

Notable amongst its leading Japanese company peers, Astellas, has publicly declared its continued

disinterest in entering the generics market in Japan.

Distributor presence

Alfresa HD, one of the leading wholesalers, has as one of its subsidiary companies Alfresa Pharmaceutical

Corporation which manufacturers and markets generics.

Nihon Chouzai, a leading dispensing pharmacy chain operator with over 300 existing outlets, a presence in

all Japan‟s prefectures and a plan to open 150–200 new pharmacies per year over the coming years, set up

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a marketing subsidiary, Nihon Generic. This reported a 9.7% increase in sales in the first half of FY2011 but

posted an operating loss of ¥282m ($3.54m). Nihon Generic sells to pharmacies outside its own chain as

well.

The Ain pharmacy chain has its own wholesaler WSS which sells generics to non-affiliated pharmacies. A

consortium of 37 wholesalers created their own generic manufacturing subsidiary, Nihon Galen Union. In

contrast, wholesaler Sanseido dissolved its generics subsidiary, Sanmedith, formed in 1996.

Multinational presence

Several research-based companies from Europe and the US – including AstraZeneca (with Hoei),

Boehringer Ingelheim (Yamaguchi), Boehringer Mannheim (Toho), Merrell Dow (Funai), Rorer (Kyoritsu),

and UCB (Choseido) – bought into Japanese generic firms several decades ago, but this was primarily to

acquire local production capacity (prior to the change in the law to allow contract manufacturing).

Since then there have been several “false dawns” (i.e. premature expectations that the Japanese generics

market would take off) and these triggered M&A activity. Solvay acquired Kowa, only to sell it on to Taiyo

four years later. The 1994 acquisition by Hoechst of RPR Rorer Japan‟s Berk generic division and its

transformation into Cox Japan was supposed to mark a turning point, but in turn Cox Japan was resold to

Hexal in 1999 and restructured as Hexal Japan. AstraZeneca sold Hoei to Merck KGaA in 1998, which also

acquired the Mohan Medicine Research Institute from Kyowa Hakko in 2002. This last move doubled

medical representative numbers for Merck Hoei, expanded production capacity and provided a local

development unit.

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Table 28: Generic market entrants from overseas: evolution and current status

Company Primary Location

Details

Actavis Iceland 45:55 joint venture with Aska, Actavis Aska (2009). Importing, marketing. Plan to integrate Aska‟s generic business into joint venture.

Aurobindo India Subsidiary established in 2008.

Fresenius Kabi

Germany Alliance with Meiji Seika to market generic anticancers.

Glenmark US Deal signed with Teijin

Hospira US Entered Japan in 2006. Tie-up with Taiyo, now part of Teva.

Lupin India Acquired 100% of its former partner, a privately-owned company, Kyowa Pharmaceutical Industry (2007). Made second foray with ¥3.1bn acquisition of I‟Rom (2011).

Mylan US Acquired Merck Seiyaku from Merck KGaA (2007) rebranded as Mylan Seiyaku. Covers manufacturing, importing, marketing.

Orchid India Japanese subsidiary established (2008).

Pfizer US Pfizer Japan created an Established Products Division in 2009. Launched a generic presence in June 2011 with a copy of Dainippon Sumitomo‟s injectable broad spectrum antibiotic Meropen (meropenem). Covers importing, marketing.

Ranbaxy India Nihon Pharmaceutical Industry created as 50:50 joint venture with Nippon Chemiphar (2002) – terminated in 2009 when Nippon Chemiphar acquired Ranbaxy‟s share. Ranbaxy itself acquired in 2008 by Japanese R&D major, Daiichi-Sankyo, leading to the creation of Daiichi-Sankyo Espha. Covers marketing.

Dr Reddy‟s Laboratories

India Tokyo representative office opened in 2008. Joint venture with Fujifilm in 2011.

Sandoz Switzerland First entered Japan 2006. Launched Japan‟s first biosimilar (2009). Manufacturing, importing, marketing. Strategic alliance with Nipro Corporation for cross-licensing and co-development (2011) though each company announced it would continue to operate independently in Japan.

Source: Author‟s analysis BUSINESS INSIGHTS

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Table 29: Generic market entrants from overseas: evolution and current status

(continued)

Company Primary Location

Details

Sanofi France Joint venture 51:49 with Nichi-Iko (2010). Covers importing, marketing

Teva Israel Opened Japanese subsidiary in 2005. Teva-Kowa, 50:50 joint venture with Kowa (2008), shares in Taisho (2010). Further acquired 100% of Taiyo (May 2011) and obtained the remaining 50% share in Teva-Kowa (September 2011).

Zydus Cadila India Tokyo office opened (2006). Acquired 100% of Nippon Universal Pharmaceutical (2007), rebranded as Zydus Pharma (2010). Covers importing and marketing.

Source: Business Insights BUSINESS INSIGHTS

Of the global top-10 generic company players it appears that only Watson and Stada have no direct

presence in Japan, though some have yet to fulfill their potential. Hospira, the world‟s leading generic

injectables company, which markets 138 generic APIs in the US, offers a mere 11 molecules in Japan, for

example.

Mainland Chinese companies have as yet not entered the market, though Taiwanese firms like ScinoPharm

and Yung Shin have passed a GMP inspection by Japan‟s PMDA with the aim of supplying APIs. Yung Shin

has also signed a memorandum of understanding with Japan‟s Wakomoto designed to strengthen their

collaboration in entering the Japanese generic market and have expressed their intent of forming a joint

venture there.

Indian companies

With some exceptions (e.g. Cipla, Sun), Indian generic companies are well represented in Japan, and indeed

six such firms have set up the India-Japan Pharmaceutical Alliance as a local association in Tokyo. This

followed the February 2011 signing of an Indo-Japan trade pact, the Comprehensive Economic Partnership

Agreement, which is designed to boost bilateral trade between the two countries and specifically targets

pharmaceutical trade.

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The aims of the Alliance, supported by the Indian Embassy, are to expand the overall market for generics in

Japan, and increase co-operation between its members and Japanese companies in the field of contract

manufacturing and supply of APIs and intermediates.

There are plans to invite senior figures in the Japanese pharmaceutical industry to India for inspection tours

of production facilities

Aurobindo, Orchi, Lupin, Ranbaxy, Dr Reddy‟s Laboratories, Strides Arcolab, and Zydus Cadila each has a

direct presence. Ind-Swift has received PMDA approval for two products, and both Nectar Lifesciences and

Elder have obtained Japanese accreditation for their API plants.

Torrent Pharmaceuticals marks the only known exit by a company from the subcontinent. It opened a

subsidiary in Yokohama in 2006, only to close two years later. Critics point to the fact that Torrent did not

choose to partner with a Japanese company.

Ranbaxy - with 2010 consolidated sales of $1.87bn, 125 export markets, ground operations in 49 countries

and production facilities in 11 - was originally formed 50 years ago to act as an Indian distributor for Japan‟s

Shionogi. Since June 2008, Ranbaxy has been majority owned by another Japanese major, Daiichi Sankyo,

after the latter obtained a 63.9% stake for ¥490bn ($4.2bn) in cash.

Culture clashes were to be expected after the takeover as Daiichi Sankyo was highly conservative, even by

Japanese standards, and unused to the very different ways that generic companies did business. In fact,

problems surfaced in the acquisition almost immediately, which analysts put down to a lack of proper due

diligence by Daiichi Sankyo (Wall Street Journal, 2011). Within three weeks of the deal, the FDA banned

imports of 30 Ranbaxy generics into the US due to GMP violations at two of its Indian plants, and later

determined that it was falsifying reports. Commercial production of liquid formulations ceased at a US plant

after the FDA found evidence of lapses in quality control and the manufacture of unapproved drugs. The

plant was later closed permanently. Ranbaxy CEO Malvinder Singh, of the founding family, resigned in 2009

and CFO Omesh Shah left in January 2011.

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Ranbaxy‟s woes impacted on the consolidated profits of Daiichi Sankyo, but there are signs of an

improvement. R&D operations have been integrated, several new regulatory inspections have been

performed without issue, new US launches undertaken, and co-operation on product development for Daiichi

Sankyo‟s new Espha division in Japan is planned. Ranbaxy was notably also first to file for generic

atorvastatin in the US, gaining 180 days‟ exclusivity in the process. Marketing approval was gained at the

end of November 2011, with production to be undertaken by the company‟s Ohm Laboratories unit in New

Jersey, US.

With two local generic company acquisitions, Kyowa Pharmaceutical Industry in 2007 and I‟Rom in 2011,

modified release dosage form specialist Lupin is definitely an Indian company looking to make its mark on

Japan. Kyowa, which focuses on oral CNS drugs, now accounts for 11% of Lupin‟s total sales. Ten new

product launches are planned for FY2011. I‟Rom is an injectable generic specialist. Merger with Kyowa

would expand the latter‟s product line-up for DPC hospitals and triple the number of its medical

representatives targeting these facilities. Through Kyowa, Lupin donated ¥10m ($0.13m) to help victims of

the March 2011 Great East Japan Earthquake.

The Indian business daily, the Economic Times, reported in summer 2011 that Takeda was planning to

follow Daiichi Sankyo with an acquisition of a generic pharmaceutical business on the subcontinent. The

targets named were Cipla (India‟s leading pharmaceutical company) or Lupin (ranked 5th). Both companies

subsequently denied that talks were taking place, and Takeda declined to comment.

Company profiles

Fujifilm

Fujifilm, the leading Japanese photography and imaging company, took another step into the pharmaceutical

business in 2011 with a joint venture with Dr Reddy‟s Laboratories, in which the Indian company has a 49%

stake. The two firms are planning to collaborate on the development, manufacture and marketing of generics

in Japan, with the first products from the joint venture expected to be launched within three years.

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Fujifilm, which has targeted healthcare sales of ¥1 trillion ($12.5bn) by 2019, first bought into the

pharmaceutical API business via the purchase of Toyama Chemical in 2008. It set up a generic joint venture

with Mitsubishi Corporation in 2010, extending this the following year to include biopharmaceutical contract

manufacturing. Just prior to the Dr Reddy‟s deal it acquired Merck/MSD Biomanufacturing Network (UK, US)

and RTP (US), and a joint venture with Kyowa Hakko Kirin to develop and manufacturer biosimilars has been

announced.

Nichi-Iko

Nichi-Iko is forecasting FY2011 sales of ¥78bn ($1bn) and net profit of ¥4bn ($50m). It has five production

facilities in Japan, 625 employees and offers 555 generic presentations plus a range of long-listed originator

brands acquired from both Sanofi (e.g. furosemide, ifenprodil) and Merck & Co (e.g. amitriptyline,

dexamethasone).

A joint venture in Japan, Sanofi-Aventis Nichi-Iko, was created in the first half of 2010, in which Sanofi has a

51% stake. The French company also agreed to pay ¥4.41bn ($48.7m) for more than 1.5 million shares in

Nichi-Iko, giving it a 4.66% holding. One of the first tasks of the joint venture was to take over Japanese

marketing rights to Sanofi‟s Amoban (zopiclone) and use Nichi-Iko‟s network to promote and distribute it. The

hypnotic had sales of ¥5.1bn ($58m) in 2009. Sanofi-Aventis Nichi-Iko is also co-promoting Nichi-Iko‟s

generics, initially edaravone and donepezil. It is not know how many of Sanofi‟s 1,500 medical

representatives are involved.

Recognising the importance of distribution, Nichi-Iko seems determined to cement relationships with

wholesalers as part of its strategy to target hospital groups and head offices of pharmacy chains. The

creation of a new subsidiary, the Nichi-Iko Medical Business Management Research Institute, was

announced for this specific purpose in 2011.

Sandoz

Sandoz, the generics division of the Novartis group, began operations in Japan in 2006 and markets over

150 products, including the country‟s first biosimilar, the recombinant human growth hormone Somatropin BS

(somatropin), approved in 2009 with Pfizer‟s Genotropin as reference product. Both products had the same

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therapeutic indications, i.e. child growth hormone deficiency and growth disorders linked to Turner‟s

syndrome or chronic renal insufficiency. Sales of Somatropin BS, whilst not disclosed by the company, were

estimated by the JGA as only ¥100m ($1.1m) in 2010, which would probably be viewed as disappointing.

Sandoz‟ generics business in Japan has been largely built on the former operations of Nihon Hexal

(originally Kyoritsu Yakuhin), whose parent was acquired globally by Novartis in 2005. As well as its position

within the Novartis group, experience in both the commodity and branded generics sectors, Sandoz KK now

emphasizes to customers an ability to draw upon a development and production network spread across five

continents, plus extensive post-marketing surveillance data on its products from overseas. It has about 260

employees.

On a US dollar basis, sales in Japan rose 39% in 2009, 38% in 2010, and 30% in January-September 2011

(attributed in part to the successful launch of pioglitazone), exceeding the market growth rate by more than

three-fold, a press conference was told. The company expects to enter the top-10 rankings of generic

companies there within three to five years.

A strategic alliance for development and promotion of generics in Japan with Osaka-based Nipro Corporation

was announced in 2011. The two companies have pre-existing ties in that Sandoz Japan markets a fast

dissolving version of the antihistamine ebastin, which is produced by Nipro‟s manufacturing subsidiary, Nipro

Genepha. Secondly Sandoz Japan and Nipro co-promote Cilosinamin (cilostazol), a generic version of

Otsuka‟s Pletaal.

Sawai

Osaka-based Sawai, recorded sales in FY2010 (12 months ending March 31, 2011) of ¥63.9bn ($0.75m,

+27.5% on prior year) and operating profit of ¥13.6bn ($160m, +59.5%). It had 912 employees, including 392

medical representatives, eight branches and 11 sales offices nationwide, a generic portfolio of 550

presentations, and 44 new products gained regulatory approval in the year.

By therapeutic category the largest turnover came from cardiovascular drugs (¥17.3bn) and from

gastrointestinal drugs (¥10.9bn), though at ¥2.5bn (+49%) anti-allergics showed the strongest growth.

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“Generic Drug of the Year Award 2011” from the JGA came in recognition of Sawai developing and

launching in May 2010 an oral dispersible tablet form of the anti-allergic cetirizine hydrochloride. The award

was in recognition of the formulation technology and new dosage form unavailable with the originator brand.

Customers numbered 7,389 hospitals (of which 1,309 were DPC hospitals), 32,426 self-dispensing clinics

and 48,459 dispensing pharmacies. Pharmacies, the fastest growing part of the generic market, accounted

for 60% of total sales, clinics for 20% and DPC hospitals for 8%. Sales through wholesalers have grown

steadily in recent years and in FY2010 amounted to ¥30.9bn (+40%) with ¥28.4bn (+16.1%) going through

hansha (sales agents).

Sawai manufacturers most dosage forms itself (including tablets, capsules, granules, injections and

ointments) but contracts out production of eye ointments, transdermal patches and inhalers. The Kyushu

plant of subsidiary Medisa Shinyaku is to be transferred to Sawai in April 2012. The company also

announced that is to invest ¥10bn ($125m) building a new solid dosage form plant at its existing Kanto

facility in Mobara city, Chiba prefecture. This is expected to come on stream by Spring 2013 and have a

production capability of 2bn tablets annually. Sawai Group‟s current production capacity is 6bn tablets/year.

The company is forecasting sales of ¥72.5bn (+13.5%), operating income of ¥14.5bn (+6.7%) and net

income of ¥8.3bn (+15.5%) in FY2011, and expects by then to have 425 medical representatives of which up

to 100 will be dedicated hospital medical representatives. Sawai is only one of five generic companies so far

to have introduced atorvastatin 5mg and 10mg tablets, and it targeting a 6% volume market share of the

molecule by March 2012 and eventually sales of ¥10bn/year.

Sawai has set itself the aim of achieving consolidated net sales of ¥100bn by FY2013. Thereafter,

prerequisites for further growth, according to the company, are involvement with anticancer drugs, a

biosimilars strategy, and an alliance strategy. It is considering the last-named from three perspectives: To

enter overseas markets, for new business including biosimilars, and the realization of a hybrid company

involved in both new drugs and generics.

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Teva

Teva, now the world‟s largest generics company, first entered Japan through a joint venture with Kowa in

September 2008. With just seven employees at the beginning it announced a headcount rise to 200 when full

operations commenced in January 2010. The joint venture posted sales of ¥18bn ($210m) in its first fiscal

year.

Teva‟s initial strategy was to capture as much of the domestic generic market as possible through Teva-

Kowa. The joint venture then bought a stake in the leading Japanese OTC company Taisho. The decision by

Kowa to integrate Taisho‟s sales and marketing division into Teva-Kowa reportedly led to a rift between the

partners, and in May 2010 the Israeli company effectively announced that it had a new strategy for Japan by

acquiring a 57% stake in No. 3 generic company Taiyo for $460m in cash. Teva then purchased all

outstanding Taiyo stock from the founding family and other shareholders by July 2011for a total investment

of $934m. In September 2011, just three years after Teva-Kowa was formed, Teva announced it was paying

out $150m to acquire the 50% interest held in it by Kowa. By then Kowa also had started to look for a new

partner for its generic business to complement its interests in new drug development and OTCs.

Taiyo had FY2011 sales of ¥51.4bn ($645m) and two manufacturing facilities in Japan, including the

Kasukabe (Saitama prefecture) plant acquired from Schering-Plough in 2009. It lists over 550 presentations

across a wide range of therapeutic areas and dosage forms, and is especially strong in hospitals due to

several injectable product offerings. Teva-Kowa achieved sales of ¥18bn in its latest fiscal year ending

December 2010. The two companies will be merged and restructured as Teva Pharma Japan Inc in mid-

2012.

The move for Taiyo, which came only days after Teva spent $6.8bn in purchasing Cephalon, will allow Teva

Japan to reach its 2015 target of ¥100bn ($1.25bn) in sales and doubling its market share to 20% ahead of

schedule, CEO Shimo Yanai said. Local observers, however, are more cautious, pointing out that almost all

sales will initially come from products of Taiyo and Taisho, as Teva itself - despite its world No.1 ranking - is

not well known in Japan.

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Towa

Just under half of sales currently result from distribution through 41 branch offices and over 80 hansha or

sales agents to the dispensing doctor and small hospital market. The rise in direct sales has resulted from

the conversion of sales agents to sales offices and the opening of new offices. There are plans for a 24

hour/seven day drug information center and supply service to core hospitals.

The company offers 537 generic lines (including orodispersible tablets of amlodipine, lansoprazole and

pioglitazone) and already employs the largest number of medical representatives amongst generic

companies, 506, with a plan to grow this number further to 600 in FY2013.

Production of oral dose forms is spread across three plants (Osaka, Okayama and Yamagata) to provide

flexibility in case of disasters while a new earthquake-proof plant for injectables is being completed at the

Yamagata site.

Towa is forecasting sales of ¥48bn (+4%) and operating profit of ¥8.40bn (-13%) for the year ending March

31st 2012.

Exports

Apart from Daiichi Sankyo‟s Ranbaxy and overseas sales by Sawai – through a subsidiary company

Pharmex - limited to Taiwan only, export earnings by domestic companies are virtually nil.

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Chapter 7 Generics company strategies and

generics defense

Summary

The leading generic companies are expanding their production capabilities, collaborating to ensure

portfolio gaps are filled, and working towards the aim of a zero out-of-stock situation. Medical

representative numbers are being increased to detail both doctors and pharmacists. Product portfolios

now include added-value generics and long-listed brands.

Many firms are trying to get their brands stocked by the big nationwide wholesalers, knowing this is the

key to access DPC hospitals and dispensing pharmacies. Chain pharmacies are a particular target.

Others are keen to support their business in the traditional market for generics, self-dispensing GP

clinics.

Generic awareness campaigns have been run by the industry association for many years and in 2007

the JGA initiated its “Reliability Improvement Project” for members focused on continuous supply,

ensured quality and appropriate provision of information.

Generic companies classify generic defense strategies by innovators into four groups: patent litigation;

extending the patent life with new indications; line extensions, in particular fixed-dose combinations;

and misinformation campaigns run by medical representatives.

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By generic sector

Generic companies

The major domestic generic companies are certainly showing confidence in the future by greatly expanding

their production capabilities. This is primarily to meet the needs of the domestic market; exports remain a low

priority.

Competition has increased greatly over the past five years following a move into generics by several R&D

firms and more especially by a move into Japan by most of the world‟s major generic firms. The race is on to

see which company can first break through the symbolic annual generic sales target of ¥100bn ($1.28bn).

All companies are making great efforts to assure users of the quality of their products and to dispel the poor

reputation that generics have had in Japan for years. Several firms are striving hard to get wholesalers to

stock them, knowing this is the key to access DPC hospitals and dispensing pharmacies. Towa‟s focus in

contrast remains the self-dispensing clinic market served by hansha (sales agents).

The biggest growth area in the market is chain pharmacies, and the likes of Nichi-Iko and Mylan have set up

dedicated sales teams to tackle this sector, with its reputation for tough price negotiations. The result is a

large price spread with some products, low in chain pharmacies and DPC hospitals, and high in independent

pharmacies. Grey market trade is growing and has to be monitored closely.

Most companies have boosted their MR numbers, in many cases to 200+ and in a few cases to 400+, so as

to detail both doctors and pharmacies. MRs in Japan are also required for data collection in post-marketing

surveillance.

The size of a product portfolio is important. Smaller generic companies need a minimum of 200 lines and

larger companies 500. Following the 2005 revision to the Pharmaceutical Affairs Law, others are putting

greater emphasis on provision of contract manufacturing services, especially Taiyo, Nipro/Hishiyama (for

injectables), Sanwa and Tatsumi Kagaku.

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Generic firms no longer just market generics. Several have acquired under license off-patent original

products (long-listed brands) from their innovators. Additionally, rather than just producing copies, they are

developing value-added generics (Table 30), often with features not found in the originator brand.

Table 30: Representative value-added innovations from Sawai

Objective Result

Easier administration Large, hard-to-swallow capsules made into tablet form

Miniaturization of large, hard-to-swallow tablets

Sugar and film coating to mask bitter taste

Easier prescription and dispensing Tablets with break lines that make them easier to split

Improved resistance against humidity, temperature, sunlight and other conditions

Safety improvements New containers that protect against product breakage

Switch to syringes with solution filled in advance

Clear displays of drug names and standards on the packaging

Source: Sawai annual report BUSINESS INSIGHTS

Generics are no longer limited to products listed on the NHI tariff. Fuji Pharma has introduced a combined

oral contraceptive and Aska a levonorgestrel-containing emergency contraceptive (“morning after pill‟),

neither of which is eligible for reimbursement.

Should a generic company choose to compete against a particular dosage form of an originator brand then it

will be required by the MHLW deadline of end March 2013 to market all strengths of that dosage form which

are already available from the innovator, regardless of their sales potential. This demand has put

considerable pressure on the production capacity of companies and many looked to expand their product

lines through partnership. Nichi-Iko, Sawai and Towa, for example, announced they would collaborate on

development to ensure all gaps in their portfolios were filled.

A few generic companies, including Nichi-Iko, have made regulatory applications for additional indications for

their products based on information in the public domain. This was in response to a February 2011 MHLW

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notification to file such applications in the case of drugs used off-label for unapproved but medically

important indications. Until recently, public domain applications could only be filed by originator companies,

creating a one-year “insurance lag” for generics (six month delay for PMDA approval and another six month

delay for NHI price listing vis-à-vis originator brands). Getting NHI coverage at the same time as originator

companies for new indications of major established molecules like cisplatin (annual sales ¥4.5bn), where

generics account for about two-thirds of sales volume, is seen as important despite the higher review fees

levied by the PMDA for this approach.

Generic industry associations

Industry-wide initiatives were pioneered by the former JGPMA. It urged its members to achieve within a

certain time frame stable supply, information provision and quality standards. The Association also wanted to

see prescribing amendments listed on PMDA‟s information system within three weeks of any change, next

day deliveries to wholesalers by the end of fiscal 2007 (with 75% achieving same day delivery a year later),

and a zero out-of-stock situation by the end of fiscal 2009. The JGPMA conducted its own independent

testing of member company products, and planned to disseminate the results to medical institutions.

A generic awareness campaign for the public by JGPMA included “I want generic” cards for patients to carry

to ask the pharmacy to dispense a generic substitute, as patients were often too shy to voice such a request.

A few years later the Japan Society of Generic Medicines created a new insurance card cover containing the

words “I prefer generic medicines”. Patients must present their insurance card when seeking treatment under

NHI.

In response to MHLW‟s Action Program, JGPMA‟s successor - the Japan Generic Medicines Association

(JGA) - initiated its own “Reliability Improvement Project” in August 2007. Focusing on three targets – steady

supplies, ensured quality, and appropriate provision of information – actions taken included:

posters and educational DVD for the general public

advertisements in wide circulation newspapers and medical journals

generic request card to show to doctors and pharmacists

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creation of members‟ quick reference table for placing orders

co-operation with local governments

investigation of supply capability of members

support to member companies for stable supply

literature review on the quality and clinical evaluation of generics by health professionals

investigation of timeliness and adequacy of statutory reports and data provision

creation of a training program for medical representatives on better provision of information specific to

generic medicines.

While goals were achieved in terms of stable supply, quality assurance and information provision, JGA

member companies failed to achieve the no-shortage target of MHLW‟s Action Program in FY2010, the

association announced.

A new electronic network linking JGA‟s website with that of each member company was launched in April

2010 to provide basic information on generics to healthcare professionals and patients alike. When a visitor

to JGA‟s website asks about a product by non-proprietary or brand name, the system shows a list of

preparations with the same active ingredient, the marketer or manufacturer‟s names, and current

reimbursement prices to allow comparison between the originator and its generics. Healthcare professionals

have access to more detailed information, to request and search capabilities, plus direct links to company

websites.

The latest JGA initiative, in July 2011, was to issue model guidelines for behavioral standards of its member

companies. This came in response to the suspension of operations at Taiyo‟s Takayama (Gifu prefecture)

plant for violations of the Pharmaceutical Affairs Law that came to light in 2010.

Counterstrategies by innovative manufacturers

Generic companies classify generic defense strategies by innovators into four groups:

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patent litigation

extending the patent life with new indications

line extensions, in particular fixed-dose combinations

misinformation campaigns.

These four strategies have been effective. Despite the tide of generics innovator companies have rarely felt

threatened by them, at least not until now. Even when there were large numbers of heavily-discounted

alternative options to choose from, the original brand has seldom seen volume sales erosion by more than

5–10% in the first few years.

Major factors in low generic uptake have been distrust in them by doctors and patients, lack of enthusiasm

shown by pharmacists, and prescriber loyalty to brand name firms regularly reinforced by visits from reps

and by publication of new clinical trial results.

Every medical representative promoting an originator product facing generic substitutes will ask the doctor to

routinely sign the column on the prescription form to prohibit substitution.

Due to its policies of aggressively seeking high discounts from suppliers on generics and encouraging

patients to switch to generics whenever their prescription permit it, major pharmacy chain Nihon Chouzai

complains of being targeted by innovative manufacturers. The share of prescriptions received by its

pharmacies that specify “no substitution permitted” is almost half and rising, according to President Hiroshi

Mitsuhara, higher than for other pharmacy chain operators. This, he alleged, was due to some manufacturers

making research funding to hospitals conditional on marking prescriptions in this way.

Oral fixed-dose combinations have become one of the most popular line extension strategies (Table 31). As

well as any new formulation patents, combinations benefit from the six-year monopoly period for regulatory

re-examination.

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Table 31: Examples of combination products launched around the time of patent

expiry of one component

Brand Company Ingredients

Caduet Pfizer amlodipine + atorvastatin

Exforge Novartis valsartan + amlodopine

Liovel Takeda pioglitazone + alogliptin

Metact Takeda pioglitazone + metformin

Micamio Astellas/Nippon Boehringer Ingelheim telmisartan+ amlodopine

Rezaltas Daiichi Sankyo olmesartan + azelnidipine

Sonias Pfizer ioglitazone +glimepiride

Unisia Takeda canesartan+ amlodopine

Xalacom Pfizer latanoprost + timolol maleate

Source: Pharma Japan BUSINESS INSIGHTS

A survey of hospital usage in January 2011, published in the trade magazine MIX, found several

combinations amongst the products most subject to new prescriptions. Usage had been boosted by a mid-

December 2010 decision that the limit of prescribing no more than 14-days supply of any new oral treatment

during its first year of marketing did not apply to combination products.

As patent life on the active ingredient nears its end, switching prescription brands to allow OTC sale (suicchi

OTC-yaku) is a strategy less frequently employed by originator companies in Japan compared with most

western countries. This is a reflection of the ultra cautious stance on drug safety taken by both the authorities

and patients. The JMA is invariably hostile and even pharmacists are lukewarm to the idea. All switch OTCs

are pharmacy only.

Molecule case studies

Amlodipine

The first generics of the blockbuster anti-hypertensive amlodipine were included in the NHI tariff in July 2008.

The co-marketed originator brands – Pfizer‟s Norvasc and Dainippon Sumitomo‟s Amlodin – recorded sales

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(NHI price basis) totaling ¥200bn ($1.7bn) in the previous year, making it Japan‟s second largest-selling

molecule at the time.

Among 34 companies entering the market with generic forms of the drug in 2008 were two research-based

Japanese firms – Mitsubishi Tanabe and Meiji Seika – and two foreign-affiliated generic firms, Sandoz and

Ranbaxy. While there were 34 separate generic versions, though these represented 18 distinct products

(Japan Generics Journal, 2009). Finished production of the Sandoz and Ranbaxy generics was undertaken

in Turkey and India respectively. Amlodipine‟s approval, according to Ranbaxy, meant it became the first

non-Japanese company to develop a generic independently outside Japan and receive marketing approval

from the MHLW. The company decided to commercialize the product through I‟rom Pharmaceuticals rather

than with the joint venture it had at the time with Nihon Pharmaceutical.

Prior to generic entry, Pfizer had received regulatory approval for Norvasc OD (orodispersible tablets) and all

the company‟s 2,400 medical representatives were mobilized to promote it. Pharmacists were not allowed to

substitute this with a conventional tablet of generic amlodipine. The orodispersible form had a formulation

patent which was challenged unsuccessfully by some generic companies. Pfizer‟s co-marketing partner for

Norvasc, Dainippon Sumitomo, had its own orodispersible amlodipine, Amlodin OD.

The line extension strategy by the originators appeared successful, at least in the short term. A February

2009 report estimated total generic penetration of the molecule at that time at only 20% (Japan Generics

Journal, 2009). Meanwhile, competition between generic versions led to their swift NHI price erosion, as

shown in Table 32.

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Table 32: Change in NHI prices of selected first wave generics of amlodopine 5mg

tablets, 2008–10

Generic supplier Per tablet launch price (July 2008), ¥

Per tablet April 2010 price, ¥

2008–10 change, %

Nipro 52.9 37.7 -29

Taiyo 52.9 41.8 -21

Nichi-Iko 52.9 44.2 -16

Medisa Shinyaku 52.9 45.2 -15

Sawai 52.9 45.2 -15

Towa 52.9 47.7 -10

Tatsumi Kagaku 52.9 29.9 -43

Source: Nomura Japan BUSINESS INSIGHTS

Clarithromycin

Taisho‟s strategy of providing doctors with data on the safety and efficacy of its originator brand, Clarith,

gathered over many years, together with a new line extension (dry syrup for pediatric use) paid off, as the

volume share of other clarithromycin versions between July and December 2006 was only 10% (and this

share included sales of Abbott‟s Klaricid as well as generics).

Donepezil

The originator company, Eisai, has obtained marketing authorizations with Aricept 3mg and 5mg tablets for

mild, moderate and severe Alzheimer‟s disease, and with 10mg Aricept tablets for severe forms of the

disease only. By July 2011, following expiry of the basic patent, 115 generic versions of various strengths of

donepezil tablets from 33 companies had received regulatory approval with listing in the November 2011

tariff expected.

The Supreme Court ruled in September 2011 against eight generic manufacturers, including Sawai and

Nichi-Iko, in their appeal of a previous ruling by the Intellectual Property Court that recognized the validity of

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a patent extension for Aricept for an additional indication of severe Alzheimer‟s disease. The Japanese

patent will therefore remain valid for this indication until June 22nd 2013, Eisai announced. NHI price

applications for the10mg strength of donepezil were cancelled.

Not only does Eisai expect to maintain domestic sales of its leading brand – ¥105.5bn in FY2010 (+12.8%) -

until 2013, it is forecasting growth to ¥140bn in FY2011 from the wider indication. Results in the US, where

the basic product patent for donepezil has also expired, are very different. Aricept sales in the first half of

FY2011 were $92m compared to $1.19bn in the same period the previous year.

As part of its generic defense strategy in Japan the company is stepping up provision of information on the

product‟s patent situation to pharmacists. Many health insurance pharmacies are expected to be fearful of

litigation if they dispense 3mg or 5mg generic donepezil tablets in cases where the patient has severe

Alzheimer‟s disease.

Famotidine

Yamanouchi‟s Gaster (famotidine) faced competition from 27 generic companies when the first copy versions

were all tariff-listed in July 2002, but Gaster sales in 2002 and 2003 declined just 5.2% and 4.4%

respectively. Even by 2006, with an additional 11 new generic versions introduced in that year alone, Gaster

retained its top-four ranking in the Japanese market and held a 97% share of sales of the molecule. Prices of

generics from the leading suppliers have fallen by up to 84% since.

Table 33: Change in NHI prices of selected first wave generics of famotidine 20mg

tablets, 2002–10

Generic supplier Per tablet launch price (July 2002), ¥

Per tablet April 2010 price, ¥

2008–10 change, %

Nipro 58.7 9.6 -84

Taiyo 58.7 15.8 -81

Sawai 58.7 18.5 -68

Toho 58.7 34.2 -42

Source: Nomura Japan BUSINESS INSIGHTS

Gaster was first launched in Japan in 1985.

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Lopamidol

The originator brand of the non-ionic contrast medium, iopamidol (Iopamiron; Schering AG), was launched in

Japan in June 1986. The first generics appeared in July 1996 and soon there were eight copy versions

marketed by Fuji Seiyaku, Hikari, Hospira, Mylan, Nichi-Iko, Sawai, Taiyo and Towa. The generic pricing rule

at the time required the first generics to be 20% below that of Iopamiron‟s prevailing NHI price.

Despite the competition, Iopamiron‟s sales and market share of the molecule by value held up well, at ¥27bn

($290m, at NHI prices) and 81% respectively in 2009. The only generic to make serious inroads into

Iopamiron‟s domination was Fuji‟s Oipamiron (¥5.3bn sales and 16% molecule market share in 2009).

Defying forecasts about the impact of DPC hospital reimbursement, many radiologists did not make the shift

to generics. This was partly because they valued the information and support offered by the originator

manufacturer, and partly because of safety concerns with high volumes of contrast media infused. Several

admitted to “gaming the system”, using the original brand for outpatients (remuneration based on fee-for-

service) and keeping generics for inpatients (DPC remuneration), or even reclassifying inpatients as

outpatients

One reason for Fuji‟s relative success was that it had a tie-up with Konica Minolta, a manufacturer of X-ray

films, and well known to Japanese radiologists. Further advantages over other generics were that Oipamiron

offered the fullest range of specifications and had published results of a usage survey demonstrating the

safety of its brand. By 2009, the company was thought to have achieved Oipamiron usage in most DPC

hospitals.

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Table 34: Change in NHI prices (¥) of Iopamiron (150 strength, 50ml) and leading

generic version, Oipamiron, 1996-2010

Lopamiron Oipamiron

Year Price, ¥ Y-o-y change, %

Price, ¥ Y-o-y change, %

1996 5,538 -12.8* 4,430 -

1997 5,300 -4.3 3,359 -24.2

1998 4,709 -11.2 2,664 -20.7

2000 4,392 -6.6 2,079 -22

2002 3,946 -10.2 1,843 -11.4

2004 3,741 -5.2 1,770 -4

2006 3,452 -7.7 1,663 -6

2008 3,258 -5.6 1,603 -3.6

2010 2,928 -10.1

* all non-ionic contrast media were subject to a -12.8.% repricing this year as a result of expanded sales volume.

Source: Maurer (author communication) BUSINESS INSIGHTS

Cumulative NHI price reductions over this period are almost double with generic versions compared to the

innovative brand. Given that generics start from a lower price base, it is not surprising that several would

appear to have exited the market.

Pioglitizone

Among the four active ingredients included in the June 2011 tariff listing for the first time as generics were 50

presentations from 18 companies of pioglitizone. The originator product, Actos, marketed by Japan‟s leading

pharmaceutical company Takeda had FY2009 sales of ¥52.7bn ($570m), making it the second-largest

selling oral antidiabetic in Japan after Basen (voglibose), also from Takeda.

Pioglitazone‟s substance patent expired on January 9th, 2011. Originally, more generic companies were

planning to compete with versions of their own as soon as possible, but there are reports that after

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discussions with Takeda they agreed to delay their generic launches for one year. In return, Takeda agreed

not to take any legal action against the firms concerned. If confirmed, this type of arrangement would not be

illegal under local antitrust rules, observers comment, as unlike “pay for delay” in the US no money changed

hands.

Sawai was one company that went ahead with its planned launch of pioglitazone after the June 2011 tariff

listing. Confidence over the patent situation with Actos, allied to high stock levels of its own generics, and

concerns over the numbers of competitors that would enter the market later were the deciding factors, a

company spokesman explained.

As well as Sawai, pioglitazone generics were approved from Kyowa Pharmaceutical, Mylan, Nippon

Chemiphar, Nissin Pharmaceutical, and Sandoz, amongst others. All received an NHI price for both the

15mg and 30mg tablet strengths, and several – including Nippon Chemiphar and Nissin Pharmaceutical – for

the orodispersible tablet form also. A survey of 205 pharmacists in community and hospital pharmacies by

Nextit Research Institute found that more than 10% had made the switch to using generic pioglitazone in the

first week of its availability.

To complement Actos, Takeda has a range of products containing combinations of pioglitazone with other

antidiabetic drugs. Patents on these combinations are difficult to interpret, according to local press reports,

and a number of generic companies, including Sawai, applied to have them invalidated by the Japan Patent

Office on the grounds of obviousness. The Office reportedly determined in 2010 that whilst patents for

pioglitizone combinations with glimepiride, voglibose and acarbose were valid, that for the combination with

metformin was not.

Takeda challenged this ruling and in the first half of 2011 the company filed lawsuits with the Tokyo and

Osaka district courts against companies planning to sell generic versions of its fixed dose combination

pioglitizone brands, Metact (pioglitizone + metformin) and Sonias (pioglitizone + glimepiride) claiming patents

valid until late in 2017. In any event, no pioglitazone fixed dose combinations were price listed in June 2011.

It is not known whether the patents Takeda was claiming covered both fixed dose combinations and

combinational use of monodrugs.

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European reports of a small increased risk of bladder cancer associated with use of pioglitizone led to the

French regulatory authority to pull Actos from the local market in 2011, with modifications to the product

labeling required in other countries, including Japan.

Takeda launched a further combination product Lioval (pioglitazone + alogliptin) in September 2011, to be

promoted through its 2,000-strong force of medical representatives.

Pravastatin

Launched in 1989, Sankyo‟s Mevalotin (pravastatin), Japan‟s top-selling brand in 2002, saw only a 1.5%

decline in sales despite facing competition from 23 new generic versions in July 2003. Even by 2006, with

about 30 competing generics, Mevalotin accounted for 95% of total pravastatin sales, and the originator

brand retained its top-10 sales ranking in 2007.

At the first price revision after generics appeared (April 2004), the various generics received cuts ranging

from 14.4% to 47.7%, while Mevalotin‟s reduction was 11.0% (5% on the basis of the market price survey

plus an additional 6% from being a long-listed brand). By the time of the April 2006 revision, a total of around

30 pravastatin generics were listed. Mevalotin received a 9.4% price cut, while the generics averaged 23.1%.

Thereafter, 15 generic versions remained. By 2010, NHI prices per 10mg tablet for generics had fallen by up

to 82% compared to the time of their introduction, whereas Mevalotin‟s price was down by 31%.

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Table 35: Recent NHI price erosion with Mevalotin and generic pravastatin, 10mg

tablet

Year Mevalotin NHI price (¥) Pravastatin NHI price (¥)

2002 163.5 -

2003 163.5 130.8

2004 145.5 68.4 – 111.9

2006 131.4 43.4 – 83.5

2010 112.2 23.2 – 75.4

Source: MHLW BUSINESS INSIGHTS

Risperidone

Janssen‟s Risperdal entered the NHI tariff in July 1995 and was first subject to generic competition in July

2007 when more than 50 copy versions were priced. Sales of the originator brand – supported by new

presentations – actually increased by around 4% at NHI prices that year. Reflecting high discounting in the

face of competition from generics and the launch of a rival new antipsychotic – Otsuka‟s Abilify (aripiprazole).

Risperdal 2mg did however suffer an 11% NHI price reduction at the April 2008 revision. The tariff price of

the 112.5mg capsule form of Abilify was also cut by nearly 10% at the same time.

Risperdal was used as price comparator in 2001 when three new antipsychotics entered the market:

Seroquel (quetiapine; Astellas), Lullan (perospirone; Dainippon Sumitomo) and Zyprexa (olanzapine; Lilly).

The NHI price of Risperdal 3mg was ¥152.40 in 2000, at the 2006 and 2010 revisions it had been reduced to

¥124.00 and ¥98.5 respectively.

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Chapter 8 Market prospects

Summary

2012–2013 presents fewer big new generic opportunities than 2010–2011 did.

The MHLW‟s target for volume share of generics is behind schedule. To achieve 30% penetration by

end-March 2013, usage should have been 27% when the biennial survey was last conducted in

September 2010. In fact, it was less than 23% and is forecast to fall short of the 2013 target by more

than five percent.

The gains achieved after fee restructuring in FY2010 were short-lived, and new, stronger incentives are

needed.

The generic industry is divided as to which party – the doctor for recommending their use or the patient

through a lower co-payment burden - should be the beneficiary of new financial incentives

A number of changes are likely to be implemented at the time of the April 1st 2012 biennial revision,

though they do not consistently favor generics.

To encourage generic usage, when more than 10 applications for the same generic are made (oral

forms only) the NHI price will be 60% of that of the originator product, instead of 70% at present.

To reduce price variation between generics, grouping in price bands is planned with reimbursement

based on the weighted average market price of the group.

From April 2012 it is likely that if prescribers wish to block substitution they will need to do this on a

product-by-product basis.

Changes to the generic dispensation preparedness increments for pharmacies are to be made. Only

pharmacies that dispense more than 22% of generics will obtain additional fees, though there will be a

new fee for providing patients with written information on the savings they can make from generics.

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Introduction

In an international context, generics have underperformed in Japan, and it is not difficult to see why:

In a brand conscious country, generics have a poor reputation in the eyes of prescribers, pharmacists

and patients alike, and are perceived as second-class medicines.

After just two years on the market, at the time of the first NHI price revision, a generic can fall to about

half the originator‟s price. A further two-four years later, the price has become so low that the product is

uneconomic to manufacture.

Lower prices means lower yakka-sa opportunities for purchasers compared to the originator version.

At the level of the individual generic, its market share from any individual supplier is very low.

Companies that market originator products aggressively protect (i) their prices by keeping generics off

the market as long as possible, and (ii) their sales of long-listed brands after generics appear.

Doctors (often influenced by brand manufacturers) block many attempts at substitution. Most

pharmacists are not enthusiastic about substitution anyway. Patients tend not to accept a different

product from the one prescribed.

Prescribing by non-proprietary name, whilst allowed, is at a low level.

Financial incentives for greater generic use for the doctor, pharmacist or patient are either very limited

or absent.

Healthcare professionals and patients demand high quality products, despite low prices.

Hospital pharmacists and pharmacy academics keep a close eye on generics and if any fault is found

they are quick to publicize such cases at meetings or in medical journals.

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Generic opportunities

The engine of growth of the generics sector in Japan is the same as elsewhere, patent expiries. It appears

that after the boom years, when many major blockbuster brands went off-patent, fewer big generic

opportunities lie in the immediate years ahead (Table 36).

Table 36: Examples of major molecules expected soon to go off-patent in Japan,

2012–2013

Year INN Originator version

2012 Anastrozole Arimidex

losaratan potassium Nu-Lotan

Mosapide Gasmotin

Olopatadine Allelock

quetiapine fumarate Seroquel

Paroxetine Paxil

rabeprazole sodium Aciphex

raloxifene hydrochloride Evista

Telmisartan Micardis

zoledronic acid Zometa

Zolpidem Myslee

2013 Pitavastatin Livalo

Valaciclovir Valtrex

Source: Business Insights BUSINESS INSIGHTS

Further incentives needed

The Japanese government has been slow to recognize the savings to NHI that would result from greater

generic use. It has put in place – and invariably soon revised – a series of measures in an attempt to achieve

this, and set a volume target for their use. In reality, it has limited options to force doctors to prescribe

generically or permit generic substitution, to force pharmacists to substitute generics, and to force patients to

request or accept generics. While there have been fee revisions, which have resulted in short-term gains,

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guidance, education and evaluation of progress are seen as important measures to achieve long-term

reform.

The growth in volume share of generics to date is behind schedule. To meet the target of “at least 30%” by

end-March 2012, usage should have been around the 27% level when the biennial price survey was last

conducted in September 2010. In fact, it was less than 23% at that time.

There has been a significant increase since 2002, when the share of generics was only 12.2%. However, a

large part of the gain occurred between 2002 and 2003, and the CAGR increase from 2003–2009 was only

0.63% (Iizuka & Kubo , 2011). A 1.8% increase between 2006 and 2007 was seen, but this was largely

attributable to a change in data source. (The estimates up to 2006 were from the JGPMA and count only the

products of the Association‟s member firms as generics, while the figures for 2007–2009 were based on

surveys by the MHLW that take into account generics marketed by all firms.)

If the 30% goal is to be attained during FY2012, generic volume share must rise by about 50% between

September 2009 and March 2013, which does not seem realizable. The latest forecast, from the Ministry of

Finance, is for generic volume to reach less than 25% by March 2013.

Supporters of generics urge the government to put in place more fundamental reforms, especially to the NHI

pricing system. Iizuka and Kubo (2011) made policy recommendations which they said would not only

increase usage of generics but better reflect the interests of patients:

Introduce more threshold points for the generic dispensation preparedness fee, decrease the size of

the increments.

Base the target generic dispensing rate on products which have generic equivalents and not on all

products, many of which will be patent-protected.

Change the measure of generic dispensing rate from pricing units (e.g. tablets) to a more reasonable

volume measure, such as defined daily doses. Pharmacists currently have an incentive to preferentially

substitute products where a single dose consists of a large number of pricing units.

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Create a new pricing rule for generics, such as a floor price, allowing them to offer an attractive yakka-

sa for a longer period of time.

Introduce more stringent equivalence criteria between generics and their originator brands.

Require originator companies to disclose details of excipients used so that generic firms may more

closely produce copies.

The JSGM is already looking beyond FY2012. It is proposing MHLW adopts further targets: 40%

generic volume share by FY2014 and 50% by FY2016.

Likely changes affecting generics from April 2012

The April 2012 NHI price revision, when pricing rules and medical/dispensing fees can also be revised, is the

government‟s last chance to take additional measures to move closer to its target of achieving 30% generic

volume usage by end-March 2013.

At the time of writing (December 2011), the Expert Subcommittee on NHI Drug Pricing Affairs of Chuikyo

seems to have accepted a number of measures impacting generics to introduce in 2012. These measures

were originally proposed by MHLW.

Further promotion of non-proprietary name prescribing. Wider adoption by medical institutions of prescribing

software, used in countries like the UK, which automatically offers generic name equivalents when the brand

name is typed in by the doctor, was cited as one means of achieving this aim.

Discussion on which party/parties would pay for the necessary system modifications was deferred to future

meetings.

The current rule for pricing new generics at 70% of the originator‟s price is expected to change to become

60% of the originator‟s price (in the case of oral generics only) when more than 10 applications for NHI listing

of generics are made. Oral generics were targeted as they generally receive larger reductions than injectable

and topical products at their first NHI price revision, and are also listed in greater numbers.

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The threshold of 10 could either be reached at a single biannual listing or when the combined number of new

entrants and existing generics exceed 10, providing the existing generics had not undergone their first price

revision. When the total of new generics and already-listed generics which have already been through a

biennial price revision exceeds 10, new generics will be priced at 90% of the NHI price of the lowest-priced

existing generic.

To reduce price variation between generics expanded application of the existing uniform pricing rule is

planned. Generics priced at less than 20% of the originator drug are currently listed by INN and receive a

common NHI price, the weighted average market price of the group. This rule will be expanded to include all

generics priced at less than 30% of the originator. However, those priced between 20–30% will be listed by

their brand not generic name.

In addition, generics priced at 30% of the originator version or higher will be put into groups with prices

varying within a certain range (3%), and products in each group will be reimbursed at their weighted average

market price. It is not yet clear how many price bands there will be.

Generics whose initially calculated NHI price falls below the statutory minimum for that dosage form, through

application of the inter strength adjustment formula, for example, will be listed immediately at the statutory

minimum price and not have to wait until the following revision for correction to take place.

One probable measure surrounds prescription forms. It is possible that the current prescription form will be

replaced with a redesigned one, similar to that used in Germany, which requires the prescriber to block

substitution, should he/she so wish, on a product-by-product rather than on a blanket basis. With an

estimated 35–40% of multi-item prescriptions (the average form includes 3–4 different items) the prescriber

has blocked all substitution by the pharmacist. This applies also to prescriptions for specific generic brands.

Some medical institutions even have the “no substitution permitted” column printed in advance. This column

lets doctors, with a single step, block generic substitution for all drugs listed on the prescription form. Doctors

have already complained that the change will involve them in more work.

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The generic dispensing rates over the previous three months required for pharmacies to receive the

additional generic dispensation preparedness increments (¥6, 13 or 17) will be increased from their current

levels of 20–24%, 25–29%, and 30% or more to 22–29%, 30-34%+ and >35% respectively. By raising the

lowest target figure only slightly, from 20% to 22%, it is hoped to encourage those pharmacies – mostly

independents - that currently do not receive the supplementary fee to make the effort to do so in future. The

percentage of pharmacies receiving the premium for the lowest (20%+) generic share has remained virtually

unchanged over time. The five percent increase in the higher targets is designed to further motivate those

pharmacies which already dispense reasonable numbers of generics to dispense even more. It is not yet

known if the fees themselves will change, but increases are likely.

Only health insurance pharmacies that dispense more than 22% volume as generics will receive any fee

incentives from generics after April 2012. This is because MHLW wants to remove both the two-point fee for

generic dispensing (¥20 for each dispensing) and the 10-point/¥100 fee awarded when pharmacists get

patients to switch to a generic based on a verbal or written explanation.

To offset this there will be a new fee for pharmacies that give patients written information on the availability of

a generic option in place of the prescribed brand, the cost saving from the price differential, and the generics

they carry as stock. Following the success of health insurer efforts to notify patients in their medical bills of

the additional savings they could make by switching to generics, there have been calls for pharmacists to

receive a new fee to provide the same information.

The 30-point (¥300) premium that hospitals can earn per admitted patient on the first day of hospitalization if

generics account for more than 20% of products on the hospital formulary is expected to be revised. A

second, as yet unspecified, premium would be paid to hospitals with more than 30% of formulary lines as

generics.

The 30% volume generic usage target nationwide will get a little nearer after MHLW decided that crude drug

and traditional Kampo herbal medicines will be removed from the denominator in the usage calculation on

the basis that neither group has generic equivalents.

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A preliminary assessment, based on medical bills processed for a recent month, suggests the move would

result in an increase in the average generic dispensing rate from 22.7% to 24.3%. It should help more

pharmacies achieve the new baseline 22% generic volume dispensing target, with the impact most felt in

areas where there is extensive dispensing of kampo products, which are especially favored by the elderly.

Long-listed brands

At the NHI revision following a first generic launch, the originator version receives a price cut as a long-listed

brand. Originator brands with established generics received an additional NHI price reduction in April 2010

(-2.2%) and there is every expectation that the same principle will be re-applied in April 2012, though the

amount of the additional cut isn‟t yet known.

While the Ministry of Finance is calling for the additional reduction to be 10%, MHLW argues for nearer 1%

as it is conscious of the importance of long-listed drugs to many leading Japanese pharmaceutical

companies. In any event, the rationale for the reduction will be the same as in 2010, i.e. slower than

expected growth in generics taking market share from long-listed brands.

Any large reduction of the gap between NHI prices of long-listed brands and generics is unlikely to favor

greater use of the latter.

Reference pricing

There have been calls for Japan to adopt one of the commonest cost containment tools used in Europe,

multisource reference pricing. All off-patent products – originator long listed brands and generics – containing

the same amount of the same active ingredient in the same dosage form would be put into groups and

deemed interchangeable. Reimbursement under NHI would be capped for all products in a group at some

preset amount below the group‟s maximum price. Patients would be required to pay out-of-pocket any

amount over the limit if a product that costs more than the reference ceiling is prescribed and dispensed.

The topic has been raised on previous occasions, most notably in 1997 when introduction from April 2000 of

a Japanese version of reference pricing (known as the “standard benefit amount system”) had been planned.

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MHLW believed this would eliminate the yakka-sa, encourage the use of less expensive equivalents,

improve the transparency of the price-setting process, provide equity in terms of terms of patients‟ benefits

and burdens, and foster truly innovative R&D.

Introduction was blocked by separate lobbying efforts of the Japan Medical Association and the US

pharmaceutical industry. The JMA presented a petition, with almost 6m signatories, offered as “a cry of pain

from patients and citizens”. There were clinical concerns about the interchangeability of products within

groups, that prices of cheaper products might rise to the reference ceiling, and the difficulty of assessing

actual transaction prices. However, it is interesting that the reason given publicly was a fear of adding to

patients‟ cost burden. With 2000 an election year in Japan and co-payments a highly sensitive political

matter, the government was not prepared to take political risks.

Reference pricing resurfaced for discussion in 2007, but MHLW said at the time it was “impossible for now to

reimbursed generics at the same price as original drugs”. Asking patients to pay any reference price excess

would require changes to the Health Insurance Law.

Given the importance of long-listed brands to major Japanese companies, prospects of these being

reimbursed at generic prices are certainly most unlikely. For now reference pricing seems off the discussion

agenda. Nevertheless, the Ministry of Finance has prepared a preliminary estimate showing potential

savings of ¥1,760bn ($22bn).

Fixed-dose combinations

MHLW‟s proposal to bring combination drugs in line with monodrugs as long-listed products if one of their

ingredients has undergone a forced price reduction following the introduction of a generic version has now

been accepted. Previously, new combination drugs that contain the APIs of these drugs were exempt from

special NHI price reductions. Chuikyo has been highly critical of the growing trend towards new fixed-dose

combination products, arguing that many bring little additional benefit to patients and are only developed as

part of a brand‟s life cycle strategy to block generic entry.

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From April 2012, a combination product will have its NHI price reduced either i) in proportion to the reduction

in NHI prices of monodrugs based on the pricing method used at the time of listing , or (ii) by the amount

calculated on actual market prices, whichever is lower. Among the first products to be affected will be

combinations with pioglitazone (as generics were launched in June 2011) and atorvastatin (as generics were

launched in November 2011).

A number of big-selling originator brands, including Takeda‟s Actos (pioglitazone) and Pfizer‟s Lipitor

(atorvastatin), are expected to receive the special reduction for long-listed drugs in the April 2012 NHI price

revision. If the special reduction is applied to combination versions also, affected brands would include

Metact (pioglitazone + metformin), Sonias (pioglitazone + glimepiride), Liovel (pioglitazone + alogliptin) and

Caduet (amlodipine + atorvastatin).

Premium for new drug creation

The implementation of the premium for new drug creation and resolution of unapproved drugs/indications in

April 2010 was on a trial basis, and the R&D industry very much hopes the scheme will be made permanent.

A decision on this should be made by January 2012 based on a review of the development of unapproved

drugs/indications, industry‟s business performance and the usage of generics. It is likely to continue on a trial

basis.

At the biennial revision following launch of the first generic version, the originator‟s NHI price would be

reduced in a single step by the sum of all premiums received during the protected period in addition to the

ordinary biennial price cut. If the originator brand has not been given a premium at the price revision before

generic entry, its price is reduced by the regular biennial cut. The originator product, in either case, would in

addition receive the one-off long-listed brand price penalty (currently -4% to -6%). Eisai‟s Aricept (donepezil)

is one product that will see its 2010 premium returned in April 2012, first generics being listed in November

2011.

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If several biennial revisions occur during the protected period, the price cut with the originator after generic

entry could be as high as 40%. Despite this, the generic industry seems unconcerned whether the premium

is made permanent or not.

Other reform measures

Clearly more needs to be done if more generics are to be used, and some would argue that radical change is

needed rather than minor tinkering with existing rules. In Japan, however, changes are always evolutionary,

never revolutionary.

Even within the generic sector itself, opinion is divided as to where any new incentives should be targeted.

Some believe that doctors form the main block to wider generic use. Fearful of upsetting prescribers and of

litigation should they substitute and a medical problem emerges, pharmacists take their lead from doctors, as

do patients to an even greater extent. Patients prefer to have information given to them by their doctor rather

than by the pharmacist, so a generic explanation fee for physicians has been proposed. Only when doctors

recommend generics will their patients accept them, it is thought. No generic incentive is currently offered to

prescribers.

Others believe the biggest hindrance to generics arises from their high NHI prices. They would like to see

prices lowered to benefit patients much more by allowing a lower co-insurance, especially with new generics

that are currently priced just 30% below the innovator‟s level.

MHLW has pointed out that since the introduction of the rule for pricing new generics at 70% of the

innovator‟s price in 2004 the average NHI price reduction rate for generics at their first price revision has

been 15.1% (the reduction rate was previously 39.8% in 2000 and 42.6% in 2001). This suggests, it argues,

there is still scope to reduce generic introductory prices, hence the new 60% rule for oral generics when

there are many generic versions of the same originator brand.

There is some discord amongst the generic industry on this point. JGA‟s view is that the 70% rule should be

retained for new generics, but some individual companies and the JSGM see 60% or even 50% as

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preferable for all generics as either would offer real savings to patients and also promote industry

consolidation.

The JGA argues against the common belief that a flood of near identical copies follows each patent expiry.

Of all active ingredients which have had a first generic marketed since 2002, only 3.6% (as of August 2011)

had 20 or more generic versions, it says.

Some other matters have been in discussion without any apparent resolution on:

whether to increase the frequency of new generic tariff listings from twice-a-year to the same four-

times-a-year listing that applies to originator brands

what to do about generics that have higher NHI prices than their off-patent originals.

It would be impossible to refuse NHI listing for newly-approved generics and NHI purchasing via tender is

considered far too radical a change.

Other factors influencing generic prospects

The obligatory use of generics for welfare recipients has resurfaced as a discussion item. All medical

treatment costs under welfare are paid out of general tax revenue, not NHI. A record number of 2.05 million

welfare recipients were recorded in July 2011. Generic usage rates are currently lower among this group

than among the general population.

Greater opportunities for generics might also come from the planned reform of the medical care system for

the elderly in FY2013.

Despite considerable domestic controversy Japan has decided to join the Trans-Pacific Partnership (TPP)

and aims to become its 10th signatory nation after Australia, Brunei, Chile, Malaysia, New Zealand, Peru,

Singapore, US and Vietnam. The TPP initiative is seen as a US-led one. In pharmaceuticals the focus is on

strengthening intellectual property. Japan‟s generic industry is fearful of a subsequent move towards patent

linkage – linking marketing approval to the patent status of the originator reference product – which would

delay generic entry.

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Conclusions

Generic usage will continue to grow but it is unlikely to reach in the foreseeable future the levels of

penetration found in the likes of the US, Germany or the UK. Japan will remain an attractive market for

generic companies, however, because of the size of its generic opportunity and high prices.

Market entry by several of the world‟s leading generic players from overseas will increase the competitive

pressure in the sector, in particular smaller Japanese generic companies will not be able to compete with the

multinationals in terms of cost. In five years time, even the bigger Japanese firms like Nichi-Iko, Sawai and

Towa will be threatened by the long pipelines of the likes of Teva, Sandoz and Hospira, who will have also

gained good familiarity with Japanese business and distribution practices by then.

More Japanese R&D majors will have to accept there is no future in long-listed brands and convert these into

generics. A few might follow Daiichi Sankyo and enter the local generics business indirectly after acquiring

generics companies overseas and benefit from relatively cheap imports back to Japan if these are

denominated in yen. Whatever cultural problems Japanese firms have faced from this in the past, overseas

M&A is looking attractive to cash rich firms with the strong yen. In general, though, the large differences in

business practices between research-based and generic firms will act to keep the two parts of the industry

apart.

One advantage that so-called hybrid firms – those with a mixed portfolio of originator brands and generics –

will have over pure play generic firms is an ability to do bundle deals with wholesalers, highly discounting

generics to protect the NHI prices of their innovative lines.

Strongest market growth prospects are seen with inpatient care in DPC hospitals and with dispensing to

outpatients by community pharmacies, especially the multiple groups, and MR numbers are being boosted

and distribution improvements are being made to tackle both areas. Other factors contributing to success will

include attractive discounts, good customer relationships, and differentiating product/pack features that are

seen as user friendly (e.g. blister packaging, special containers to protect health professionals from cytotoxic

drugs, tablet imprints).

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The single most important key to success in Japan for a generic company new to Japan from overseas

would be to align with (and maybe later acquire) a Japanese partner experienced in the sector. Local firms

point to the necessity of manufacturing in Japan, both to achieve the high quality standards demanded by

healthcare professionals and patients alike, and because of Japan-specific dosage forms like fine granules

and dry syrups. However, this might not turn out to be the case, as Indian generic companies in particular

are keen to prove.

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Appendix

Scope

The reports covers Japan‟s healthcare environment, pricing and reimbursement systems, and regulatory

environment. The generics industry is examined in detail along with expected developments shaping the

future market.

Methodology

Primary research

The author conducted 10 face-to-face interviews with industry experts to gather source material for the

report. Interviewees included senior MHLW staff, and executives at trade bodies, pharma companies and

generics companies.

Secondary research

Secondary sources included the Japan Pharma Times, the Wall St Journal, the Japan Generics Journal,

among other industry publications.

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Currency exchanges rates

Average annual exchange rates were drawn from OandA.com for calendar and fiscal years 2007–11. For

deals, currency conversion was calculated at the deal date. For NHI incentives, a 2011 calendar rate was

used. In other cases, the rate reflects the relevant time period. I.e. FY2010 numbers use average FY2010

rate and so on. The rates used as shown in Table 37.

Table 37: Average exchange rates, 2007–11

Calendar year Fiscal year

2007 117.81 -

2008 103.45 100.5

2009 93.65 92.92

2010 87.81 85.71

2011 79.72 -

Note: Japanese fiscal year runs 1st April to 31

st March. FY2011 ends 31

st March 2012

Source: OandA.com BUSINESS INSIGHTS

Glossary/Abbreviations

Bungyo: (Policy) The separation of the functions of prescribing and dispensing

Chuikyo: Central Social Insurance Medical Council

DPC: Diagnostic procedure combination

JMA: Japan Medical Association

Korosho: Ministry of Health, Labor & Welfare

MHLW: Ministry of Health, Labor & Welfare

NHI: National Health Insurance

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NME: New molecular entity

Yakka-sa: Drug price margin gained by hospitals

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