The Journal The Authority on Global Business in Japan

The Japanese generic drugs market is likely to see a shakeout, expanded plant investment by industry winners, and possibly closer tie-ups among existing makers of brand-name drugs and generics, according to lobbyists, analysts, and market participants.

Further, because Japan is one of the most rapidly aging societies, global drug makers are watching to see how it boosts the use of generics and keeps the lid on burgeoning health budgets.

Drugs accounted for 21.7 percent of the nation’s ¥39.2 trillion (about $318 billion) total medical costs of as of March 31, 2013, according to figures released June 10 by the Central Social Insurance Medical Council, an advisory panel to the Ministry of Health, Labour and Welfare.

Medical costs are rising at the rate of about ¥1 trillion per year. Thus, the expanded use of generics, which are often 50 percent cheaper than brand-name pharmaceuticals, is key to keeping the Japanese population active and healthy, while curbing medical costs, which accounted for 10.3 percent of GDP in fiscal 2012 (ended March 31, 2013).

Japan is ahead of schedule in replacing brand drugs with generic equivalents, and the 2018 target of 60 percent replacement levels is likely to be achieved this calendar year. That should bring Japan into line with generics levels in Spain and France, although lagging behind the US, which has achieved replacement levels of about 90 percent.

According to a June 10 report by Nikkan Yakugyo, a pharmaceutical industry journal, Minister for Health, Labour and Welfare Yasuhisa Shiozaki told the Council on Economic and Fiscal Policy that he had no intention of surrendering the 2020 targets of 80 percent generics replacement, and may even consider bringing forward the target date.

Yet the ambitious target may place too much pressure on the generics industry, according to Shuhei Hosokawa, secretary general of the Tokyo-based Japan Society of Generic Medicines.

“If this target is implemented immediately, then the generics business model could buckle,” Hosokawa says. “Some thinking needs to be done, to prevent the target getting ahead of itself.”

The basic test Japanese makers face is guaranteeing stable generics supplies for use in healthcare. The concept is important, since most doubts about generics concern stable supplies. Quality is also an issue.

According to Toshitaka Obu, of the healthcare management consulting group at Mitsubishi Research Institute, Inc. (MRI), Japanese physicians maintain an inordinately strong fixation with quality compared with doctors overseas.

It is a credit to generics makers that they have guided Japanese physicians from a position of not even considering the use of generics some 10 years ago, to one of trusting generics, based on positive patient feedback.

The balance between brand-name drugs and generics is set to change.

The balance between brand-name drugs and generics is set to change.

Shakeout
While in the past, generics were protected by high National Health Insurance listed drug prices, these decline every two years in line with mandated price reviews. Thus, if producers cannot develop cost structures able to withstand the price cuts, they will find it difficult to survive, Hosokawa says.

In Japan, generics are sold by about 200 companies, of which some 40 are dedicated generics makers. Of these, Hosokawa believes only five or six will emerge as winners. What the likely winners have in common is not size, but a vertical structure that allows them independently to both manufacture bulk drug materials for end products, and sell them, according to Hosokawa.

Doubts and challenges
Not many dedicated generics makers fulfill all those requirements. One that does appear to do so, however, is Towa Pharmaceutical Co., Ltd. Consistently one of the top three Japanese generics makers, the Osaka-based company is investing ¥50.6 billion mainly in two of its three factories, in Okayama Prefecture and Yamagata Prefecture.

By March 2018, it plans to boost tablet production to 12.5 billion units from the present 7.5 billion. That should help push up sales to ¥105,000 million by March 2018 from ¥71,470 million in March 2015.

Like other major generics makers, Towa has a broad-based lineup of products, currently offering about 661 different drug types. The company differs from its competitors by not going through national wholesalers but, instead, relying on direct marketing through its own sales offices and agents.

Although costs have risen as a result, direct marketing has helped Towa maintain closer relationships with physicians and pharmacists than has been possible for makers that rely on wholesalers.

The company has also developed a number of production techniques to maintain the value added quotient of its products. Among these are RACTAB, a technology that makes it easier for patients to take drugs, including pills that rapidly dissolve in the mouth and require no water.

Referred to as orally disintegrating tablets, the firm is looking to boost production of such products to 90 lines by 2018, from 53 at present.

And, by developing an in-house logistics network, Towa was able to supply affected areas of the Tohoku region following the Great East Japan Earthquake of 2011.

“Many [companies] were having problems delivering to Tohoku, for such reasons as their trucks not being able to get through, or running out of gasoline. But we managed to use our logistics, representatives, and sales network to get supplies through,” says Shigehiro Kubo, general manager in the president’s office at Towa.

The company aims to ensure a stable supply of generics to the medical profession and, in a recent development, the focus of activities has switched to ensuring a supply of bulk materials used to make generics. To that end, in October 2010, Towa purchased a company that specializes in the production of bulk materials.

“We are the only company in the top three with our own bulk material subsidiary, and aim to develop know-how in production and quality control,” Kubo says. “Keeping everything under the control of a single company will help us maintain a stable supply.”

Source: Ministry of Health, Labour and Welfare survey

Source: Ministry of Health, Labour and Welfare survey

Authorized generics
Obu at MRI notes that, as part of the necessary industry shakeout, “strong firms are likely to get even stronger.” One area where this is likely to happen is authorized generics (AGs).

These allow a brand name drug producer to maintain some control over the quality and availability of generic replacements, by contracting production of generic replacements to specific subsidiaries or joint venture companies ahead of patent expiries.

In May 2014, Takeda Pharmaceutical Co., Ltd. signed an agreement with ASKA Pharmaceutical Co. Ltd. to distribute Candesartan ASKA, a generic hypertension treatment based on Blopress from Takeda.

This is an area where non-Japanese pharmaceutical makers—with bigger research and development budgets—are likely to have an advantage.

French company Sanofi S. A., meanwhile, contracted in 2010 with Toyama-based Nichi-iko Pharmaceutical Co., Ltd., to duplicate the Sanofi formula for Allegra as Fexofenadine SANIK in a joint venture.

Use of such affiliates by brand-name pharmaceutical companies may work to further boost confidence by Japanese physicians in the level of stable supply and quality control, Obu says.

The combination of likely market shakeouts, increased plant investment, or non-Japanese pharmaceutical companies leveraging their brand name expertise in the generics market can only help to support the spread of generics, and keep the lid on Japanese medical expenses.

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Martin Foster is a bilingual writer who has lived in Tokyo since 1977. Martin spent much of his career in financial journalism, and now focuses on various aspects of business and the economy.

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The expanded use of generics . . . is key to keeping the Japanese population active and healthy, while curbing medical costs . . .