Japan: The Real Emerging Market?

As healthcare markets adjust to a global mindset, Big Pharma has no shortage of options on where to place its considerable resources in pursuit of more predictable, top-line earnings growth. Today's restorative tonic is centered on building a bigger stake in the "pharmerging" markets—those 17 countries of the middle-income world where many analysts say the opportunities are as plentiful as finding good beer in Belgium. The risk is that as every competitor seeks to inhabit the same "open" space, that same rich brew of opportunity can become tomorrow's empty vessel—a market of all "head" and no "body."

Hence it may be time for the industry to tap some more mature draughts—and a good place to start is Japan. Although it continues to rank as the world's second-largest drug market after the US, Japan appears to be suffering from an analytical case of benign neglect. Many observers simply extrapolate to the biopharma industry the overall vision of a fading country, slow to re-emerge from a "lost decade" of impaired policymaking and limited growth. This is evident even though close observation shows a much more dynamic environment in healthcare, where local drug companies, pressed by a strong multinational segment, have little choice but to restructure to address government-orchestrated changes to make them more internationally competitive.

After a decade of limited growth, a much more dynamic healthcare environment in Japan is brewing up strength for the world's No. 2 drug market to re-emerge as a global pharma player over the next five years. (GETTY IMAGES / CW HANLEY)

Sifting the Data

As attention and resources flock to the pharmerging bloc, Japan also finds itself compared unfavorably to China, whose skyrocketing rate of growth is skewed by the fact that it starts from such a low base. Latest IMS forecasts indicate Japan will retain its No. 2 position in the global market through 2014 and perhaps beyond, with the local market growing by upwards of 7 percent in 2011 alone—to well over $80 billion in total sales. This is likely to be by far the best performance among the so-called mature markets that include the US, Europe, Canada, and Australia.

Viewed in the specific framework of the emerging markets, it means that Japan can expect to post revenue growth of at least $4 billion to $5 billion for each of the next few years, a figure equivalent to the combined sales of the three countries in the IMS pharmerging Tier Two segment after China: Russia, India, and Brazil. And China, which is estimated to reach the $50 billion threshold in annual sales next year, has some distance to go before it overtakes Japan. Again, context counts: In Japan, much of the growth—some 30 percent to 40 percent—will accrue to the non-Japanese multinational players with active investments in the country; in China, where the foreign presence is much lower, growth will yield a consequently larger payoff to the domestic industry.

Is Japan the Real Emerging Market?

There are also insights beyond the numbers that highlight Japan's continuing importance in a changing global marketplace. "Many of the CEOs here in Japan refer to it as the true emerging market," says Ira Wolf, PhRMA's Japan Representative. "There are significant therapeutic opportunities linked to unmet medical needs, which is a factor in emerging markets, but in Japan you also have the resources of a rich country to pay for them." Wolf notes that Japan has been slow to approve numerous cancer therapies available in other industrialized country markets, but this is changing as the disease burden grows—malignant neoplasms now account for about one-third of all deaths annually. Recent regulatory reforms are likely to increase the pace of new drug approvals, not just in oncology but in other under-represented therapeutic areas like CNS disorders as well.

Another growth segment is vaccines, where observers say Japan is poised to reverse two decades of policies designed to discourage their reimbursement. Denial of "mandatory" status for the administration of vaccines was a highly effective tactic to limit uptake, since it signified non-reimbursement: Japanese patients are historically resistant to paying out of pocket for any medication. Since the H1N1 outbreak, however, attitudes within the Ministry of Health Labor and Welfare (MHLW) have changed. Earlier this year, decisions were taken to list vaccinations covering hepatitis, cervical cancer, and pneumococcal virus as mandatory. In addition, an allocation equivalent to $175 million has been recommended in the FY2011 budget to expand vaccination as a public health priority.

Advocacy pressure may have also played a role, with some female members of the Diet (Japanese parliament) caucusing to demand vaccination as a preventive against cervical cancer, the incidence of which is growing in Japan. "It also indicates Japan is becoming more like other industrial country markets in spawning a more articulate patient movement able to move the needle on access to drug innovations," Wolf says.

All told, vaccines present a big opportunity for foreign-based manufacturers with scale and expertise in the segment. At present, foreign-based manufacturers control only 2 percent of the domestic market, but due to their global reach possess a far more sophisticated set of capabilities and resources compared to the four local firms that account for the remaining 98 percent. "The potential to build your market share in a more welcoming domestic environment is there for the taking," Wolf tells Pharm Exec.

Predictability—At Least

Like other mature markets, Japan is not without its downside. Pricing for innovation remains a contentious issue, though the system is at least predictable: companies know they will not have to gird for any mandated price reduction until at least 2012. Likewise, MHLW has publicly acknowledged the need to pay more for innovation. Special price premiums for new drugs classified as a breakthrough have been increased, though the number of drugs granted eligibility for the premiums has stayed low.

On the other side of the coin, there is now a clear domestic strategy on generics, where the goal is to increase volume to 30 percent of the market by 2012; currently, generic penetration is just under 20 percent. Reaching the target depends on MHLW attracting greater investment interest from foreign-based generics players. The many companies moving into that space as part of a diversification model should set Japan in their sights—again, domestic generic firms suffer from comparisons against the foreign houses whose global presence and diverse portfolio offerings make them far more efficient.

Finally, there is now a government consensus—in place since Prime Minister Koizumi left office five years ago—that biopharmaceuticals is a "strategic" sector deserving the sustained attention of the country's vaunted planning bureaucracy. On balance, it's a positive, if one believes the adage that Japan takes a long time to act, but once it does it moves with a strategic focus, good execution, and much common sense. Turbulence in the markets aside, and acknowledging the allure of the emerging countries, it's still hard to be a global pharma player without maintaining a strong front-line presence in a market as richly diverse as Japan.