R&D: needs to be big in Japan again

A strong R&D base should provide more reliable opportunities to drive Japanese pharmaceutical companies' future sales growth and reduce reliance on licensing drugs from western companies. More importantly, says Datamonitor, 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 drugmakers' expansion plans, but the low level of 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 health care bill is increasing the need for Japanese drugmakers to change their operating strategy, says Datamonitor.

Over-reliance on mature drugs - whereby 89.4 per cent of sales are from drugs which are 10 years or more old - leaves Japanese companies 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 health care bill.

The average impact of the last (2002) reductions was 6.3 per cent. 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 (natural interferon alpha), which was subject to a 25 per cent reimbursement price cut.

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, according to Datamonitor.

The average ratio of R&D as a proportion of total sales was 12.8 per cent for the leading Japanese companies in 2002, compared to an average for 34 of the leading western companies of 17.2 per cent. However, there are positive signs for the domestic industry; Japanese firms have latterly boosted their in-house R&D and such expenditure rose an average of 9.2 per cent between 2001 and 2002, compared to a median increase in domestic prescription drug sales of only 4.4 per cent.

While most of the Japanese pharmaceutical companies are increasing their R&D expenditure, some are also reorganising their entire research structure. For example, Daiichi announced in August 2003 that it is shifting control of its global drug development operations to the US. The company aims to achieve this by setting up a new subsidiary in the USA, headed by a non-Japanese president, who has responsibility for therapeutic strategy and clinical trial design across the company, as well as authority over which drug candidates have the greatest commercial potential for the group.

A key reason for this geographic shift, says Datamonitor, is the higher cost associated with completing clinical trials in Japan, where the expense of late-stage trials has 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, it concludes.

The report, entitled Japanese Pharma to 2008, is priced at $6,400. For more information, visit Datamonitor's website​.