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Western invasion threatens Japanese pharma's survival After the US, the Japanese market is the second largest pharmaceutical market in the world, with estimated sales of $54 billion in 2003. While the size of the Japanese market makes it an attractive target for western companies' expansion plans, domestic players are finding it increasingly difficult to survive. Collectively, Japanese pharma companies are staring down the barrel of maturing portfolios, weak development pipelines that lack innovative products with high sales potential, governmental reimbursement price cuts and a gradual increase of generic market penetration. In the past year, a handful of Japanese pharma companies have announced plans to merge to combat these threats. While this is not the only option available, it is certainly a very viable one. In 2003, 60.4% of the leading Japanese pharmaceutical companies' revenues came from drugs that are more than 10 years old. To survive the relentless incursion of western pharma companies into their own back yard, domestic firms must focus on R&D due to the weaknesses of their mature portfolios. An over-reliance on older drugs leaves companies operating in any market exposed to greater competition from both generic and innovative products. However, in Japan, it also increases the impact of reimbursement price cuts, as 'long-listed' products are subject to additional price reductions, limiting overall revenues. Therefore, not only does reliance on older products provide less potential for future growth, it also increases the risk of declining sales. Greater R&D spend Japanese pharmaceutical companies must strengthen their in-house R&D to ensure survival among their peers, both domestic and foreign. Strategies available range from increasing their R&D spend to more far-reaching strategic reorganization of their business focus and collaborations with other members of the industry in an attempt to bolster market penetration and find new sources of income. Historically, Japanese pharmaceutical companies have had lower average R&D spends than their western counterparts, due partly to their heavy reliance on in-licensing. The average ratio of R&D as a proportion of total sales was 12.3% for the leading Japanese companies in 2003; the average of 43 of the leading western companies was 25.2%. That said, Japanese companies have begun to recognize the need to boost their portfolios through in-house R&D, and R&D expenditure rose by an average of 4.7% between 2002 and 2003, compared to an average increase in ethical sales of only 1.1%. In order to gain access to innovative products to offset decreasing sales of mature portfolios, Japanese players are turning to the biotechnology sector. This tactic has boosted western pharmaceutical companies' revenues in recent years, taking Roche's alliance with Genentech as an example. Since 2000, the Japanese government has been encouraging the development of a domestic biotechnology industry by encouraging collaborations between academic entities and commercial companies, outlining strategies to develop the Japanese biotech market and providing tax incentives for investors in R&D. Threat of regulatory reform Because of the Japanese market's high level of maturity, it is vulnerable to increasing generic penetration, which is further boosted by the government's initiatives to contain healthcare costs. In 2003 almost 40% of the top 15 Japanese pharmaceutical companies' revenues were at generic risk. By 2010, the average level of generic risk among all players is expected to increase to almost 50% as new launches will not generate enough revenues to offset generic competition. While the generics industry was responsible for only 10-12% of pharmaceutical revenues in Japan in 2003, they target the pharma companies' highest-margin and most profitable products. Furthermore, government incentives to promote the use of generic products to help trim national healthcare costs are likely to have a stronger effect in the medium term, further limiting revenues of products relying on brand loyalty to offset the effects of patent expiry. The continued pace of this regulatory reform, aimed largely at reducing the government's healthcare bill, is forcing Japanese companies to change their operating strategy and expand the potential scope of their products. Japanese companies need to renovate their product offerings in order to offset both reimbursement price cuts to mature drugs and the impact of generic penetration. Their best bet would be to in-license late-stage compounds and products already available in western markets from companies in need of a domestic partner to help them break into the Japanese market. In the short term, this would offset weak pipelines, while providing a source of sustainable growth in the long term. Consolidation likely Japanese pharmaceutical companies see consolidation and geographical expansion as key elements of their strategy for survival. With a stagnant domestic market saturated by mature products and exposed to increasing independent competition from western companies, geographical expansion is long overdue. For many companies, merger and acquisition activities are finding favor, as they strive to keep pace with the larger western players. Consolidation enables companies to rapidly increase the size of their sales force, as well as bringing new drugs and additional R&D strength, both in the domestic market and overseas. Two major consolidation agreements have been reached among the top 15 Japanese pharmaceutical companies, between Dainippon and Sumitomo, and Fujisawa and Yamanouchi. The result of the latter merger, Astellas Pharma, is expected to compete head-to-head with current market leader Takeda. On top of that, Sankyo and Daiichi Pharmaceutical are considering merging in October 2005. This would allow them to become Japan's third largest pharmaceutical company by 2010, with combined revenue of $6,276 million. Astellas Pharma and current leader Takeda will hold the top two positions by 2010, with annual revenues of $9,243 million and $9,008 million respectively. Whether more Japanese pharma companies go down the M&A path remains to be seen. However, it is clear that changes need to be made to ensure their long-term profitability and survival. Related research:
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