Teva’s second major incursion into Japan last month with a majority stake investment in private generics group Taisho Pharmaceutical Industries, Japan’s seventh largest generics manufacturer, could be just what the sector requires if it is to get anywhere close to meeting the government’s target for generics to make up 30% of the overall drugs market by 2012.
The Japanese government set this ambitious goal in 2007, yet with just two years to go the current generics share remains stuck at around 17%, making it “extremely unlikely” the target will be met, according to Reed Maurer, a director of Teva-KOWA Pharma and chairman of aRigen Pharmaceuticals. Mr Maurer believes major cultural and policy hurdles still need to be cleared, combined with significant sector consolidation, before the Japanese generics market can thrive.
A fundamental lack of economic logic combined with Japan’s national psyche of ‘brand is best’ and desire to be at the forefront of technology, appears to be at the heart of the issue.
No push, little pull
Although the Japanese government has installed a number of financial incentives to try and encourage wholesalers and pharmacies to dispense generics, often the economic reality means it is still better to push off-patent branded drugs than generic versions.
Meanwhile there is limited pull from patients for cheaper medicines because in Japan the price of a branded drug gradually comes down over time, such that by the time it loses patent protection it is already relatively cheap with the generic equivalent only 30% cheaper.
In contrast drug prices in the US, for example, tend to rise over the patent life cycle, causing a major price cliff which generics can aggressively cut into. In addition there are no managed care organisations or pharmacy groups in Japan telling doctors what to prescribe, meaning the “doctor is king” in the decision making process.
With a very high healthcare insurance coverage in Japan, in reality patients do not have to pay that much more to stay on the branded drug, which Mr Maurer believes they prefer to do given the brand culture that exists in Japan. After all, generics are regarded as old technology.
Follow the money
Aside from the weak economic logic for dispensing generics in Japan, Mr Maurer also believes the government is still paying lip service to meeting its own objectives and that its heart is not really in it.
The government’s own healthcare programme only covers about one-third of the Japanese population so it simply does not have the influence on the overall market that many Western governments do.
In addition, according to Mr Maurer the latest budget for Japan’s Ministry of Health, Labour and Welfare includes a paltry $4m commitment to promoting generics, a tiny amount compared to the billions of Yen the ministry spends on research into novel drugs. “$4m is going to buy a few seminars or a poster campaign encouraging patients to purchase generics,” says Mr Maurer, hardly indicative of a government serious about meeting its generics target.
The facts speak for themselves. In 2006, generics accounted for approximately 6% in value, or 17% in volume, of the Japanese pharmaceutical market, yet four years on these figures have hardly changed.
Indicators of change?
It appears there are two areas from which gradual pressure could be applied to erode the current resistance to generics in Japan.
One is from the increasing number of so-called DPC (diagnosis procedure combination) hospitals, similar to the DRG (diagnosis-related group) system in the US, whereby hospitals are reimbursed in terms of the classification of the disease requiring treatment. Under this system the hospital is motivated to use the cheapest drugs available and as such generics have made much greater in-roads in these hospitals in Japan.
However the proportion of DPC hospitals in Japan remains relatively low, Mr Maurer estimates they account for 1,200 out of 9,000 hospitals in Japan.
The other area is the pricing of so-called “long-listed drugs”, off-patent branded products, which Mr Maurer believes could still be reduced significantly and potentially save a lot more money than current efforts to promote generics.
Apparently Japan’s finance ministry wanted a very sharp arbitrary price cut on these long-listed drugs but the health ministry refused to implement such a scheme because they knew it would immediately put a lot of companies out of business, mainly those that do not have much of a pipeline or new products to sell.
Mr Maurer believes Teva’s move on Taisho, executed via its joint venture with Kowa, is a sign of things to come in terms of consolidation within the generics sector in Japan.
There are estimated to be 120 generics companies in Japan, a lot of them private, family-owned and run businesses, which will be squeezed by both the big domestic generics players, like Sawai Pharmaceuticals and Towa Pharmaceutical, and also multi-national companies like Teva.
Alongside this major competitive threat, new regulations to be introduced next year will also turn up the heat. Currently a generics company will normally only develop, manufacture and sell the most popular doses and formulations of a given drug, however the new rules will require that all versions of the drug must be offered, significantly increasing development costs and eroding profits, which many companies simply cannot afford.
These pressures appear to have got the better of Taisho and Mr Maurer expects other companies will eventually raise their hand and say, ‘hey, take me’.
As such there is a sense that the Japanese generics market is on the verge of some pretty dramatic changes over the next couple of years, especially if the government converts its words into action, while the increasing presence of the likes of Teva should get things moving in the right direction.