GETI/GLOCOM Platform Joint Seminar

Analyzing Restructuring and Reform in the Japanese Pharmaceutical Industry

Summary by GETI Staff

Mr. Maurer gave a stimulating discussion on the changes expected in the Japanese pharmaceutical industry, the second largest pharmaceutical market in the world outside the U.S. The Japanese market is much larger than any European market by at least two-fold (13% of the world market share compared to Germany's 7% and France's 6%). He emphasized the importance of achieving a top ranking position in Japan by foreign firms, reminding the audience that such an objective is an essential ingredient of any global strategy. Through his 35-year plus experience in the industry in Japan, he believes that those foreign companies that persisted made substantive gains and that the only barrier to foreign investment in the Japanese pharmaceutical industry can be accredited in part to the planning of the foreign firms themselves. The climate of change, he acknowledged, provides immediate incentives for companies to develop long-term planning for the Japanese market.

There are a number of factors inducing change in the Japanese pharmaceutical industry, including the globalization of the pharmaceutical industry and the need to cooperate in discovery research, development and marketing of new, innovative drugs and technologies. Healthcare reform movements throughout the globe, especially in the U.S. and Japan, also will have a direct impact on domestic industry structure. Mr. Maurer emphasized that the activities of Japanese pharmaceutical firm could not be regulated to one market and that certain firms, with the right management, such as Takeda, are moving forward in the right direction. He expects domestic and cross-border alliances to blossom in such an environment and believes that consolidation in the Japanese pharmaceutical industry is inevitable.

One important topic of Mr. Maurer's discussion related to was M&A activity in the sector. The industry is very fragmented, with the top 20 firms controlling a little over ½ of the domestic market. Japanese firm market shares are all less than 5%. There have been approximately 15 acquisitions in the past 20 years in the Japanese pharmaceutical industry. In 1983, the first transactions were Merck's deals relating to the acquisition of Banyu and with Torii. Recently, Roche acquired Chugai and the announcement of a foreign merger is making a strong impact on the market. The combined sales of Pfizer and Pharmacia in Japan will make it the largest domestic Japanese pharmaceutical company, the first time a foreign firm has been atop of the rankings. Over the past several years, the Japanese pharmaceutical wholesale distribution industry has experienced quick and extensive consolidation, and perhaps is a harbinger of things to come.

It is expected that a great deal of macro-economic change will have a strong impact on the sector. In the pharmaceutical business, the delay of clinical development programs, a stricter examination process and the need to prepare for the drastic reform of the healthcare insurance system presents strong motivations for change. Downward NHI drug price revisions have also placed a great deal of pressure on firms, leading to disappointing results. Profitability growth was actually negative in 1996, 1997 and 1998 and mostly flat for six years. Mr. Maurer sees these factors driving change in the Japanese pharmaceutical sector.

In regard to technology development, Mr. Maurer agreed that another area of activity where a great deal of change will occur is on the research side, including the development of biotechnology start-ups in Japan and methods of new drug discovery. Stronger R&D capabilities by Japanese firms are a must, since only unique, innovative products will drive revenue growth. The R&D costs in the pharmaceutical industry very high relative to other industries, with the cost of developing a new drug ranging from $150-$850m (U.S.) and development time often taking nearly 10 years. Arguably, Japanese firms have been strong innovators and actually maintained a surplus in terms of revenues regarding pharma-related intellectual property, receiving more licensor revenues than paying out licensee royalties for most of the past decade. In 1994, Japan led the world in the development of NCE, new drug compounds, by a strong margin with a total of 17. By 2001, the figure descended to 0, far behind the U.S. and Europe. The lack of an international focus also prohibited Japanese firms from capitalizing on their previous lead since few new drugs were marketed outside of Japan. At this point in time, Japanese firms must once again return to their innovative ways by producing new drugs and technologies in-house or follow the lead of the U.S. and European firms that are sourcing new drug ideas from innovative start-up companies and through a broad and growing array of alliances and joint ventures. They must also become more efficient. Mr. Maurer mentioned that it will be very important for Japanese firms to develop truly innovative drugs in order to receive timely government approval, and this will be dependant on the meeting of harmonized standards that will in turn improve the likelihood that they may enhance their market position overseas.