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The Japanese market is the second largest pharmaceutical market globally, after the US, with estimated sales of $52 billion in 2002. The market is therefore an attractive target for western companies’ expansion plans. The building of strong in-house R&D capabilities will be central to Japanese Pharma companies’ strategies for survival. However, improving R&D capabilities will not be achieved by increasing spending alone; strategic and organizational change is also needed. The report "Japanese Pharma to 2008: Innovation and Expansion Will Counter the Western Threat" benchmarks 17 of the leading Japanese pharmaceutical companies according to strategic, portfolio and financial measures, enabling Datamonitor to evaluate the most successful operating strategies. It assesses the strategic implications for the Japanese companies as well as the most successful strategies used by western companies seeking to expand their presence in this market. A strong R&D base needed The advantages to building a strong R&D base are considerable for Japanese companies. At a basic level, this should provide more reliable opportunities to drive future sales growth; reducing the reliance on licensing drugs from Western companies. More importantly, it could provide the strategic opportunities necessary to ensure Japanese companies’ survival in the face of increasing competition, even enabling them to secure a position among the global pharmaceutical leaders in international markets. The size of the Japanese pharmaceutical market makes it an attractive target for Western companies’ expansion plans, but the low level of market growth is contributing to an increasingly difficult operating environment for domestic players. The continued pace of regulatory reform, aimed largely at reducing the government’s healthcare bill is increasing the need for Japanese companies to change their operating strategy. Over reliance on mature drugs Most of the leading Japanese pharmaceutical companies have mature product portfolios, with a heavy reliance on products over 10 years old. An over-reliance on older drugs leaves companies in any market exposed to a greater risk of declining sales as a result of competition from both new products and generics. However, in Japan it also has a major effect on the impact of reimbursement price cuts. The Japanese government imposes biennial reductions in the level at which hospitals and pharmacies are reimbursed in order to restrain the rapid rise in the country’s healthcare bill. The average impact of the 2002 reductions was 6.3%, however the reduction for each drug varies according to a number of factors, and “long-listed” products are subject to additional price reductions. An example of a drug that suffered a large impact in 2002 is Sumitomo’s Sumiferon, which was subject to a 25% reimbursement price cut. Therefore, not only does a reliance on older products provide less potential for future growth, but it also increases the risk of declining sales. The next price cuts are expected in 2004. Increased spending In the past, Japanese pharmaceutical companies have had a lower average R&D spend in comparison to their Western counterparts, partly due to their heavy reliance on in-licensing and the lack of reward for innovation in the country’s drug pricing system. The average ratio of R&D as a proportion of total sales was 12.8% for the leading Japanese companies in 2002, compared to an average for 34 of the leading Western companies at 17.2%. 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 9.2% between 2001 and 2002, compared to an average increase in ethical sales of only 4.4%. Strategic changes While most of the Japanese pharmaceutical companies are increasing their R&D expenditure, many are also reorganizing their entire R&D. Daiichi is a key example of a company that has changed the structure of its R&D operations, announcing in August 2003 that it is shifting control of its global drug development operations to the US. Daiichi aims to achieve this by setting up a new company in the US, headed by a non-Japanese president, with responsibility for therapeutic strategy and clinical trial design on the macro level, as well as authority over which drug candidates have the greatest commercial potential. A key reason for this geographic shift is the higher cost associated with completing clinical trials in Japan, where the cost of late stage trials have been reported as two to four times higher than those in the US or Europe. This trend is also motivated by the recognition that getting drugs onto the larger US market earlier can reap considerable rewards. Japan's other leading drug makers may now follow suit. If you found this week's Expert View useful,
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