10

Japan's Pharmaceutical Industry

Postwar Evolution

ROBERT NEIMETH

Since World War II, the emergent pharmaceutical industry in Japan has transformed and retransformed itself in response to four factors that have shaped the business environment. Broadly defined, these factors are government policy, business capacity, national economic development, and societal trends that today are driving the Japanese pharmaceutical industry at home and in external markets. By identifying opportunities and limitations within particular time phases, these factors have, in effect, provided a map of the commercial direction Japanese and non-Japanese companies have taken over the past 45 years. This “environment-to-industry” analysis provides the framework for a review of the three distinctive historical phases of pharmaceutical industry development since World War II and the evolution of a likely fourth phase in the 1990s.

PHASE I: EMERGENCE (MID 1940s TO MID 1960s)

Immediately after the war, Japan began rebuilding its shattered economic base amid widespread skepticism about its ability to recover. Edwin O. Reischauer, a member of the U.S. Occupation Administration and later Ambassador to Japan, echoed the sentiments of both nations when he observed that postwar Japan's economy “may be fundamentally so unsound that no policies . . . can save her from slow starvation.”

Mirroring this bleak business landscape was a domestic drug industry whose manufacturing facilities were virtually destroyed but whose human infrastructure—labor, management, and scientists experienced in sulpha drugs



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The Changing Economics of Medical Technology 10 Japan's Pharmaceutical Industry Postwar Evolution ROBERT NEIMETH Since World War II, the emergent pharmaceutical industry in Japan has transformed and retransformed itself in response to four factors that have shaped the business environment. Broadly defined, these factors are government policy, business capacity, national economic development, and societal trends that today are driving the Japanese pharmaceutical industry at home and in external markets. By identifying opportunities and limitations within particular time phases, these factors have, in effect, provided a map of the commercial direction Japanese and non-Japanese companies have taken over the past 45 years. This “environment-to-industry” analysis provides the framework for a review of the three distinctive historical phases of pharmaceutical industry development since World War II and the evolution of a likely fourth phase in the 1990s. PHASE I: EMERGENCE (MID 1940s TO MID 1960s) Immediately after the war, Japan began rebuilding its shattered economic base amid widespread skepticism about its ability to recover. Edwin O. Reischauer, a member of the U.S. Occupation Administration and later Ambassador to Japan, echoed the sentiments of both nations when he observed that postwar Japan's economy “may be fundamentally so unsound that no policies . . . can save her from slow starvation.” Mirroring this bleak business landscape was a domestic drug industry whose manufacturing facilities were virtually destroyed but whose human infrastructure—labor, management, and scientists experienced in sulpha drugs

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The Changing Economics of Medical Technology and penicillin—remained largely intact. The industry's revival would hinge on policies aimed at resurrecting the nation as a whole. As a first step toward recovery, the Occupation Administration and the Japanese government embraced a series of rigid economic measures, including strict curbs on imports and investment designed to revitalize domestic manufacturing and employment. At the time, early forms of protectionism were viewed not as an evil but as necessary for national survival. Other measures soon emerged that were even more directly protective of Japan's pharmaceutical industry. Imports were subjected to strict quotas, pharmaceutical licenses could not be obtained without government registration, and ceilings were clamped on royalty rates. Foreign investment was allowed only under narrowly defined conditions that normally took the form of 50-50 joint ventures. Moreover, a joint venture had to manufacture all products locally within 2 years of formation. And, finally, only manufacturing ventures were permitted to invest in Japan. Paralleling these restraints against foreign entry was a mix of regulatory and legal rules that facilitated the reemergence of a domestic pharmaceutical industry. As in most countries, Japan's system of drug regulations and controls was relatively primitive. Until 1967, when complex changes were introduced, virtually no preclinical studies were required, and only basic clinical studies were mandated. The result was an uncomplicated process biased toward quick regulatory review and approval. Pfizer's own experience in Japan underscores this point. In 1965 the company's submission for hydroxyzine injectable contained only 88 pages, whereas Pfizer's most recent post-1967 filing for doxazosin consisted of 2,430 summary pages. A related feature of the regulatory/legal universe was the absence of effective patent protection for pharmaceutical products. Without a patent law (one was in fact enacted in 1976) the Japanese could make and sell “copycat” versions of brand name medicines without permission of the proprietor company. Although a patent law protecting pharmaceutical processes existed, it simply meant that Japanese companies could use a different, unprotected process or path to reproduce the end-product medicine. Without a law protecting the drug itself, Japanese industry was legally free to exploit the inventions of American and European industry. In addition to these procedurally oriented mechanisms of patent law, regulatory control, and trade protection, the Japanese government proceeded to institute measures that gave its drug industry what it needed most: domestic supply and production capability. Immediately following the war, the Occupation Administration had established a semigovernmental organization charged with procuring and supplying raw materials to pharmaceutical producers at frozen prices on a carefully rationed basis. Moreover, the Occupation Administration encouraged the government to expedite imports of manufacturing technology for key drugs such as penicillin, thus enabling production to begin in 1946.

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The Changing Economics of Medical Technology Enhancing these early interventions was the development in 1961 of yet another substantive element in Japan's policy toward the pharmaceutical industry: government underwriting of domestic demand. In 1947 the Allied Administration had urged the government to reorganize and expand the health insurance scheme as a key welfare program. The overall weakness of the Japanese economy, however, prevented its adoption and full application. Instead, the government concentrated on policies for incremental liberalization of the pharmaceutical industry. Controls on drug prices and distribution were relaxed in 1952. This was followed in 1955 by the first of numerous in-market surveys of National Health Insurance (NHI) drug prices and, in 1960, by another round of liberalized controls on pharmaceutical imports. With the economy now stabilized, the government in 1961 delivered what was asked of it in 1947. Via legislation the government required all Japanese to become members of an insurance scheme in exchange for essentially free, high-quality medical care. One result was to escalate health care spending and, with it, the size of the pharmaceutical market. Another consequence was the creation of a new, more complex network of relationships that all but assured continued government underwriting of domestic demand. In Japan physicians play a larger role than in the United States. Influenced in part by a Chinese heritage, they have traditionally dispensed—as well as prescribed—medicines. What naturally came about over time was their ability to earn profits on the medicines they dispensed. After 1961 this took the form of pharmaceutical companies selling medicines at discounted prices to physicians who would resell them to patients—and thus to the government—at the NHI list price. The appropriateness of this practice notwithstanding, a state-sponsored “demand side” pharmaceutical market became a fixture of Japanese health care and political life. This early mix of environmental factors effectively created a two-tier pharmaceutical industry in Japan: one Japanese and the other foreign. On one level were the Japanese companies that had rapidly rebuilt their manufacturing capabilities. By 1950 Kyowa, Meiji, Toyo Jozo, Taito, and others had established new antibiotics facilities. A measure of this quick turnaround was the government's decision to abolish pharmaceuticals rationing in 1952, a mere 7 years after the end of World War II. Nevertheless, a fundamental weakness affected the Japanese drug industry. In an environment that encouraged basic rebuilding and more open regulation, the Japanese continued to rely on the licensing of offshore technology and on acquiring rights to manufacture and sell the discoveries of other companies. The emphasis on manufacturing remained and, as a result, few laboratories existed. Those that did stressed development rather than discovery— this in stark contrast to the United States and Europe, which were entering the “golden age” of drug discovery in the 1950s and 1960s. Although the Japanese missed this discovery period, they were still able

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The Changing Economics of Medical Technology to benefit because of American and European business decisions at the time. Faced with an uncertain economy and increasingly protectionist trade policies, U.S. and European firms happily licensed their drugs to the Japanese. This made available to Japan a range of important licensed products from overseas laboratories whose parent companies were underrepresented in Japan. Several foreign firms did form joint ventures with local Japanese partners in the 1950s. Among them were Schering AG, Ciba-Geigy, Lederle, Pfizer, and Roussel. In the 1960s Sandoz, Bristol Myers, Hoechst, and Merck entered Japan. Still, most American and European companies were content to remain second-tier players via licensing agreements in a country whose investment laws and economic prospects neither pleased nor welcomed them. PHASE II: TRANSFORMATION (MID 1960s TO LATE 1970s) During the first phase of the pharmaceutical industry's emergence, production rose slowly, with sales reaching only 500 billion yen in 1965. Even so, that period was significant, for it consolidated the base for an industry takeoff. Under a shell of protectionist trade policies, Japanese companies acquired manufacturing facilities, raw materials, pharmaceutical products, government-guaranteed demand, and other critical elements that positioned them for dramatic growth. The growth that followed occurred not simply in terms of linear expansion but in the shape of pulls and pushes exerted by a new set of environmental demands. The starting point for this transformation was the thalidomide tragedy of 1961, an event that radically altered the regulatory/governmental policy landscape. As a result, Japan, as well as many other nations, enacted an array of regulations governing pharmaceutical approvals. In 1965 new requirements on animal teratogenicity, double-blind clinical studies, and pharmacokinetic tests were mandated. Two years later, a monitoring system for side effects was started and, more importantly, a landmark drug development and registration guideline was implemented, “The Basic Policies for Drug Manufacturing Approval.” Abandoning what had been an open regulatory system, the government, with the adoption of the 1967 act, installed a system whose preclinical and clinical standards not only differed from those of the West but also required locally generated supporting data. Clinical trials in Japanese subjects, for example, were only one of the new requirements of the extensively revised 1967 act. This particular change may have been justified, given the problems of diiodohydroxyquinolin, a side effect disaster that appeared to affect only Japanese patients, possibly because of the way the product was used. Nevertheless, the aggregate impact of all new requirements was to erect another protectionist edifice. Whether intended or not, this new demand that lengthy and costly preclinical

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The Changing Economics of Medical Technology and clinical trials be repeated according to unfamiliar Japanese standards combined with the additional complexities of drug approval to delay the entry of foreign innovators. In truth, the 1967 act imposed a comparatively lighter burden on companies with a subsidiary presence and laboratories already in Japan. Firms so situated flourished during this period. But for the greater majority of U.S. and Europe-based companies, the 1967 act constituted a new and major impediment to entering the Japanese market. Conversely, it added another layer of insulation for the Japanese. The 1967 act contained another element that helped shape the conduct of Japanese research and development (R&D). After 1967 the regulatory system in Japan was predicated on demonstrating merit for a new chemical entity (NCE) as necessary for approval. Merit could be shown in a variety of relatively modest ways—for example, improved pharmacokinetics leading to a simplified dosage, higher potency, and the like. As a result of this low-threshold requirement, a drug discovery process emerged that remained essentially low risk and incremental in its approach. Rather than pursuing high-risk/high-cost pharmaceutical breakthroughs, the Japanese opted for modest advances on existing agents whose development was relatively quick, simple, inexpensive, and risk free—and whose registration virtually was guaranteed. Two other environmental factors reinforced this trend. First, the NHI pricing policy rewarded modest innovations on existing “me too ” compounds with virtually the same level of premium as that of true breakthrough products. There was little incentive to assume the greater costs and greater risks of bona fide discovery-focused research. Second, the social phenomenon of physician dispensing ensured a market that was receptive to “me toos.” Earning only low, government-set technical fees from their professional services, Japanese doctors depended increasingly on pharmaceutical sales to supplement their incomes. This contributed to a transformation within the pharmaceutical industry that benefitted the Japanese a great deal but did very little for the foreign sector. A steady stream of new products derived from domestic higher priced “me toos” and licensed-in new agents from abroad, intertwined with physician dispensing, government-sponsored demand via the NHI system, and expanded R&D capability created an increasingly profitable and increasingly research-competent Japanese drug industry. The 1970s saw a sustained boom in the overall health care market and a dramatic rise in pharmaceutical production and consumption. By 1970, for example, pharmaceutical sales were one trillion yen, double the 1965 figure, and by 1980 drug sales were four trillion yen, four times the 1970 total. Clearly, the leading Japanese firms had benefitted from an environment that, in just 15 years, had transformed them into large, highly successful ventures. Even more important than volume growth was the transformation in Japanese

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The Changing Economics of Medical Technology R&D. In the prior phase almost nothing new was discovered in Japan, but by 1973 Japanese R&D accounted for 10 percent of the world's research spending. Moreover, Japanese companies were credited with 10 percent of the NCE discoveries made in the decade. Although the overall quality of these discoveries can be debated, the Japanese were outstanding in one area of scientific inquiry that commanded their special attention. In 1971 Fujisawa discovered and licensed out to Lilly and others the country's initial pharmaceutical innovation, cefazolin, the first injectable cephem that became the leading cephem worldwide in the 1970s. Made possible by the isolation of the 7-ACA nucleus at Oxford and combined with Beecham's isolation of 6-APA, this breakthrough triggered Japanese antibacterial programs in the 1970s. Success was swift and spectacular as Japan delivered a flow of important antibacterial innovations that they proceeded to commercialize at home and to license throughout the world. From a discovery research perspective, Japan had achieved world-class status in antibacterials by the end of the 1970s, and was poised for greater advances in the 1980s under a new law enacted in 1976 that granted product patent protection for pharmaceuticals. This legislation was timely, for Japanese companies had acquired by 1976 the basic technology, R&D capability, and financial strength to generate major discoveries needing protection from infringement. The fact that the Japanese were then the beneficiaries of a product patent law suggests that its timing was not accidental. Despite these generally positive changes for Japanese industry, foreign-based firms continued to reside on a much lower commercial level. As mentioned earlier, there was the institutional barrier of revised regulations governing the approval process. There was also an equally restrictive pattern of business practice that was uniquely Japanese and out of step with the West. In responding to regulatory and pricing pressures, the Japanese had consciously chosen a business strategy aimed at developing numerous products requiring modest levels of innovation. By contrast, U.S. and European firms elected to discover high-impact innovative products on a limited basis. This divergent orientation, coupled with regulatory impediments, yielded a Japanese market in which products of foreign origin—which held a 38 percent market share elsewhere in the world —were underrepresented in Japan. PHASE III: RETRANSFORMATION (THE 1980s) Against a backdrop of increased scientific competence and sales growth in a protected market, Japan's pharmaceutical industry confronted in the 1980s a new alignment of forces that retransformed its business and research strategies. Exerting new and different forms of pressure, these external factors triggered a process of change that continues into the 1990s. The starting point was a regulatory shift that changed the ground rules

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The Changing Economics of Medical Technology for operating in Japan. Caught between the political pledge to provide universal, high-quality health care and the budgetary need to contain health care costs, the government tried to “fine tune” the NHI system in a way that would accomplish both. For pharmaceuticals this led to a significant adjustment of product pricing. Under the NHI system, only products on the NHI price list are reimbursable. Prior to the 1990s, the government had routinely reduced the price of NHI-listed medicines. What separated the 1980s from the earlier two periods was the aggressiveness with which the government pursued that objective. More than a matter of degree, Japan clearly sought to squeeze pharmaceutical expenditures down to what, in its view, was an acceptable percentage of the health care budget. In 1981 the government regularized reductions of the NHI price of pharmaceuticals based on the difference between the official reimbursed price and the discounted selling price to physicians and institutions. Without detailing the complexities and, from industry's perspective, the iniquities of this system, suffice it to say that the government achieved its objective in spectacular fashion. Under this system, pharmaceutical prices set at a base of 100 in 1980 fell to 53 in 1989, with an additional 8 to 10 percent reduction, depending on therapeutic class, that occurred earlier this year. In terms of the pharmaceutical portion of the total health care budget, this translated into a decline from 40 percent in 1981 to 30 percent in 1987. Two other factors compounded this difficulty. The first was the influx of new foreign pharmaceutical companies. During this period, the government dismantled numerous regulations that favored Japanese industry. Although aimed at harmonizing pharmaceutical regulations with international standards, these changes significantly eased earlier difficulties of doing business in Japan. In 1980, for example, there was a general revision of the Pharmaceutical Affairs Law to realign Japanese regulations with commonly accepted global standards. Also, in 1985 new guidelines were issued on Good Manufacturing Practices, Good Licensing Practices, and preclinical data, and action was taken to facilitate the transfer of registration approvals to foreign companies. Although many earlier problems persist, they will be addressed and possibly resolved in ongoing, bilateral, and multilateral discussions involving the United States, the European Economic Community (EEC), and Japan. With this lowering of regulatory barriers and the likelihood of continued progress, many of the leading foreign-based companies either entered the market directly or dramatically increased their presence in Japan to tap a pharmaceutical market whose size was second only to that of the United States. Included among them were Merck, Glaxo, Ciba-Geigy, and Hoffmann-La Roche. Adding to this new competitive pressure was a third factor: the entry of nonpharmaceutical Japanese companies into the domestic market. In the 1980s major breweries and textile and chemical companies diversified into pharmaceuticals for a variety of reasons. First, they judged biotechnology to be an important product source for food, nutrition, and pharmaceuticals.

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The Changing Economics of Medical Technology TABLE 10.1 Pharmaceutical R&D Spending, 1985 Country Total Spent (Billions of Dollars) Number of Researcher Per Researchers (Thousands of Dollars) Percent Sales New Products Approved United States 3.4 28,010 121.3 14.80 30 Japan 1.4 11,325 123.6 7.04 53 Second, many of them felt internally pressured to shift from increasingly expensive and inefficient smokestack industries to more profitable, technology-intensive ventures. Third, they calculated that the demographic patterns of Japan would make health care and pharmaceuticals a long-term growth industry. With this emergence of new Japanese and non-Japanese pharmaceutical players, and with policy changes that rapidly eroded prices, Japanese industry reacted with two sets of responses. One emanated from the perception that increased new-product flow and increased R&D were the only way to survive in a more crowded, less profitable domestic market. By 1985 Japanese industry was spending as much on research per employee as American industry (Table 10.1 ). It was filing as many drug patents per year as Germany by 1984 (Table 10.2 ). During the 1980s, the top 17 Japanese companies had built more new laboratories than in the 30-year span from 1950 to 1980. Between 1983 and 1987, Japan equaled the United States in the total number of NCEs discovered. Interestingly enough, because Japan was generally considered a slow and difficult drug development and registration market, the government responded to industry's predicament with 72 NCE approvals: double the NCE approvals of Italy (the second-ranked country) and nearly quintuple those of the United States. None of these statistics addresses the quality of NCEs—that is, the extent to which these NCEs were imitative products or world-class discoveries. Nevertheless, Japan has clearly diversified from imitative and antibacterial research, although both remain important. Some examples of Japan's world-class innovations include the discovery of quinolones, the first cholesterol reducers, Fujisawa's work on immunostimulants, and other companies' work on renin inhibitors and platelet activating factor antagonists. While much of this new research focus flows from Japan's aging society and the growing need for chronic therapy products, it also reflects the requirement for world-class products that will penetrate and compete effectively in overseas markets. Given the increased capital investment in new discovery facilities made by domestic companies in the 1980s as well as the fundamental shift to discovery itself, it is natural to expect leading Japanese companies to generate excellent product portfolios in the 1990s.

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The Changing Economics of Medical Technology TABLE 10.2 Number of Patents Related to Drugs, 1984 Country Total Patents Patents Related to Drugs Percent Related to Drugs United States 43,692 2,510 5.7 West Germany 24,870 739 3.0 Japan 54,040 797 1.5 The second Japanese response to increased domestic competition and decreased profitability was the buildup of business activities in global markets, particularly in the United States and Europe. These included joint ventures on a country and/or regional basis, self-development, strategic alliances, and minority shareholdings, as well as complete acquisitions. Currently, there are 26 companies with 140 international units. While that may seem a lot, consider that one U.S.-based company, Pfizer, has more than 100 international units. A pattern to these business activities clearly emerged in the 1980s. The leading expansionist Japanese companies focused first on drug development and on obtaining regulatory approval abroad. Then they moved downstream into marketing, sales, and production. As a result, leading Japanese companies are well positioned to compete in the United States and the European Economic Community. PHASE IV: THE 1990s AND BEYOND The future is, to a certain degree, wedded to present trends. Most important among external forces will be the rapid demographic shift to an increasingly aged population that, by 2020, is expected to comprise 24 percent of the total Japanese population. There will also be a shrinking pool of active workers resulting from steadily declining birth rates. These two factors will slowly erode the actuarial foundation of the present NHI system. By 2020 there will be only 2.5 workers to support one retiree versus the 6.2 workers per retiree in 1988. Over time the government will be caught between two objectives that, from its viewpoint, will be difficult to meet: the need to continue paying for universal, high-quality health care while sustaining and nurturing a profitable health care industry. The 1990s will be riddled with disagreement and debate on the wisdom and methods of achieving one or both objectives. At a minimum, there will in all likelihood be increasing copayment requirements, rising from a flat 20 percent rate for policy holders and dependents alike in the early 1990s to possibly 50 percent much later in the decade. In addition, there may be partial privatization of the health care system as well

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The Changing Economics of Medical Technology as delisting from NHI reimbursement of those products or services that the government perceives to be nonessential. How demographic change will affect pharmaceutical reimbursement is difficult to say. It is clear, however, that in an atmosphere of greater individual responsibility and decreasing government support, neither government nor private citizens will be willing to pay more and, indeed, may look for ways to pay less. In contrast to this will be a second factor that may ease the task of operating in Japan: simplification of the regulatory review system to speed drug approval. When coupled with the more rapid development of new drugs, this will cement Japan's position as a “first launch” market. A more simplified system will in all likelihood result from various bilateral discussions involving Japan, the United States, and the European Economic Community as well as from the global “harmonization” exercise that seeks, in part, to standardize the various regulatory drug approval systems. To a lesser extent the Uruguay Round will also help by reaffirming major trilateral (Japan, EEC, United States) commitment to strong intellectual property standards. One result will be to decrease the chances of government retrenchment on patent protection (via compulsory licensing) should there be future budgetary pressure on Japan to reduce its pricing-reimbursement obligations under the NHI system. The final projected factor will be the full emergence of competitors against Japan's pharmaceutical industry. U.S. and EEC-based companies can be expected to go it alone in Japan—either splitting away from existing joint ventures (Eli Lilly-Shionogi) or acquiring a complete equity stake in their joint venture partners (Merck-Banyu). The need to maximize control and hence profit in this high-risk/high-payoff market will trigger a move to operational autonomy. The second competitor group will be the nontraditional pharmaceutical firms mentioned earlier —the major breweries, for example— that will gradually begin to enter the market based on their R&D commitment in the 1980s and the formation of strategic alliances with respect to production, marketing, sales, and distribution. Within this sphere of heightened competition, a third and largely overlooked player may emerge. In Japan small and medium-size pharmaceutical companies that cannot afford major drug discovery operations will be squeezed by the interrelated dynamics of health care cost containment and new products from the leading research-based companies. Whether induced by government administrative guidance or by marketplace reality, these small and medium-size pharmaceutical companies might initiate merger activities, Japanese style, to gain the capital base required for survival. How these various environmental factors will affect Japanese industry can only be surmised. Nevertheless, what occurred during the 1980s serves as a partial guide. One response would appear to be continuation of the massive buildup in discovery research by Japanese and foreign companies. Not only will Japanese companies continue to discover, develop, and commercialize some 20 to 25 NCEs per year—with a similar number from

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The Changing Economics of Medical Technology TABLE 10.3 Leading Countries by New Product Launch Country 1983 1984 1985 1986 1987 1983-1987 Japan 8 14 11 20 19 72 Italy 4 6 10 6 7 33 West Germany 7 4 12 5 1 29 United States 2 3 1 5 4 15 Total 44 39 64 52 55 254 foreign firms—but there will be several qualitative changes regarding these NCEs themselves (Table 10.3 and Table 10.4). First, Japanese NCEs will come increasingly from Japanese discovery research occurring in the United States and Europe via diversification into offshore facilities. Second, Japanese NCEs will remain increasingly in the hands of Japanese companies. Except for strategic reasons, in-and-out licensing will evaporate as Japanese companies decide to retain their important discoveries for new overseas subsidiaries. Third, the specific direction of NCE research will aim increasingly at establishing world-class positions in biotechnology and diseases of the elderly, where market demand will accelerate. Intertwined with this research response will be an operational reorientation. The leading Japanese companies gradually will step up their globalization efforts, primarily in the United States and Europe, initially by learning how to prosecute a drug development and registration program and later through integrated manufacturing, marketing, and sales operations. Even while continuing to form strategic alliances with foreign companies, Japanese industry will, in the long term, seek to establish fully owned subsidiary operations in major pharmaceutical markets overseas. As its possibly final response, Japanese industry will use public policy as a mechanism to protect its globalization objectives. Already allied with U.S. and European industry in seeking stronger patent protection under the Uruguay Round, Japanese industry will work with its own government as well as with United States and EEC industry on other major issues. Among them are the patentability of plant varieties derived from biotechnology in the EEC; adoption of the “first-to-file” criteria in U.S. patent law; and modifications in European Community directives on registration, promotion, pricing, and the like that would negatively affect the interests of the pharmaceutical industry. This more active advocacy role will flow as much from growing self-confidence as from increased presence and exposure overseas. A FINAL WORD Japan's pharmaceutical industry can be characterized as one that has been highly successful domestically but remarkably unsuccessful overseas. By the 1980s, however, Japan emerged as a powerful domestic competitor

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The Changing Economics of Medical Technology based on newly acquired innovative skills. In the 1990s Japan may become a formidable player in the global marketplace as well. What the past suggests is that these levels of actual and potential success were achieved without an explicit industrial policy for the pharmaceutical sector. The stimulus was not provided through an open market but rather by an array of factors that protected and promoted the industry through a highly regulated market with government controlled and supported prices. Clearly, these factors created a pharmaceutical industry in Japan that can deal from a position of strength based on its considerable financial resources and research capabilities. But at the same time, it can be argued that Japan's innovative capacity would have developed sooner if governmental policies had made the domestic market more open to competition from foreign research-based companies and if adequate product patent protection had been in place earlier. Most research in Japan until the mid 1970s was aimed at exploiting a system that rewarded copiers rather than creators. Japan now, perhaps belatedly, takes its rightful place alongside the traditional four highly inventive nations: the United States, West Germany, the United Kingdom, and Switzerland. Within Japan's pharmaceutical industry, at least the top 5 or 10 companies are poised for globalization. The challenge ahead is not discovery, for that capability has already been demonstrated and put in place. The real challenge is how to build and exploit a global clinical development and registration capability and how to establish a global network of subsidiaries to commercialize their inventions. The Japanese doubtlessly have the ability to accomplish this. But it could have happened much earlier had Japanese industry not suffered from the insularity and lack of confidence in its ability to compete that were a product of the environmental factors reviewed in this paper. SELECTED BIBLIOGRAPHY English Language 1. Broida JH , Maeda N. Japan's high-cost illness insurance program, a study of its first three years , 1974-76 . Public Health Reports 1978 ; 93 : 153-160 . 2. Dibner MD. Biotechnology in pharmaceuticals: the Japanese challenge . Science 1985 ; 229 : 1230-1235 . 3. Fujii M , Reich MR. Rising medical costs and the reform of Japan's health insurance system . Health Policy 1988 ; 9 : 9-21 . 4. Maurer P. Competing in Japan (Tokyo: The Japan Times, 1989) and Yano Keizai Kenkyujo (Yano Research Institute) . Cited in Nihon Seiyaku KogyoKyokai (Japan Pharmaceutical Manufacturers Association), Data Book 1987 , Tokyo : JPMA , 1967 . 5. Reich MR. Why the Japanese don't export more pharmaceuticals . California Management Review 1990 ; 32 : 124-150 . 6. Relman AS. Doctors and the dispensing of drugs . New England Journal of Medicine 1987 ; 317 : 311-312 .

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The Changing Economics of Medical Technology 7. Shah HK , Hasebe M , Kondo K , Moroe Y , Kitagawa T , Nomura Y. Globalization of the Japanese Pharmaceutical Industry . New York : Nomura Research Institute . 8. Yoshikawa A. The other drug war: U.S.-Japan trade in pharmaceuticals . California Management Review 1989 ; 31 : 76-90 . Japanese Language 1. Hasegawa H. “Iyakuhin, Sangyo no Showa Shakaishi (Pharmaceuticals: Industry's Social History) . Tokyo : Nihon Keizai Hyoronsha , 1986 . 2. Seo T. Iyakuhin (Pharmaceuticals) Tokyo, Nihon Keizai Shinbunsha, 1986 . 3. Suguro T. Iyakuhin Sangyo (Pharmaceutical Industry) . Tokyo : Kyoikusha Shuppan , 1987 . 4. Yakuji Handobukku '89 (Pharmaceuticals Handbook '89) . Tokyo : Yakugyo Jihosha , various years .

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