Death-Defying Revival

Japanese pricing scheme: a shift in course toward innovation?

With the proposal of a new Japanese pricing scheme, the R&D-based pharmaceutical industry may be able to breathe new life into a stagnant market and rejuvenate innovation in Japan.

Last year, the Federation of Pharmaceutical Manufacturer Associations of Japan (FPMAJ) presented a joint proposal to Chuikyo, Japan's central social insurance medical council, on overhauling the country's drug pricing scheme. Not only were the three associations able to form a common reform platform, they challenged the government to deliver on its longstanding promise to improve the innovation climate in Japan. It also prodded Chuikyo's Expert Subcommittee on National Health Insurance Drug Pricing Affairs to begin deliberating its own related proposal, leading to an approach that contains some key reform elements:
» Protected pricing for branded products that keep their discounts at or below an industry weighted average.
» A 30 to 40 percent price cut upon loss of patent. FPMAJ maintains that the new scheme would reduce the Japanese pharmaceutical bill by about $17 billion between 2010 and 2020.

The proposal may be endorsed by Chuikyo and enacted by 2012, along with annual price cuts on brands whose patent has expired (so-called long-listed brands) and/or mandatory generic substitution. In 2009, the Ministry of Health shifted the premium pricing range for innovative products upward, and amended its accounting method to make it easier for drugs to qualify.

THE CHANGE

Today, the Japanese government sets the price of a product upon launch, based on existing market prices. It then imposes price cuts between 4.5 and 7.5 percent every two years throughout the product's life. IMS estimates that government price cuts eroded 47.5 percent of the potential absolute growth in the Japanese market in the past five years.

The price of the first generics to reach the market is typically about 70 percent of the original brand. Yet generic usage in Japan is extraordinarily low. Forty-two percent of the market is made up of brands whose patent has expired—compared to 22 percent in Europe's five leading markets and 9 percent in the US. Among Japan's top 30 drugs in 2008, 15 were off-patent brands. Loyalty to long-listed brands remains high because:
» Generic substitution is not mandatory; dispensers need not dispense a generic if that's what the doctor prescribed.
» Brands offer dispensers higher margins than do generics.
» Physicians and patients have concerns about the quality of generics.

Despite the extended life cycle of these long-listed brands, the government's biennial price cuts have discouraged the development and introduction of innovative therapies in Japan. In fact, of the 150 global New Chemical Entities (NCEs) launched between 2004 and 2008, less than a quarter launched in Japan through 2008. An investigation conducted by PhRMA revealed that manufacturers had suspended the development of at least 23 compounds in Japan over a 10-year period because of the country's pricing structure.

THE IMPLICATIONS

The pricing changes would allow the Japanese market to function more like other mature markets. Anticipate that:

» In most cases, products will be protected from price cuts for approximately eight years, though the entry price point for branded products could actually be lower than today.
» Companies will be given more latitude in the size of discounts they can offer wholesalers. Currently, when a company discounts a product more than 2 to 3 percent, it is penalized.

If the new pricing scheme is adopted as proposed, we foresee that:
» Companies will "sacrifice" products close to patent expiry by discounting them more than the industry average. Discounts on newer products will fall into the "below average" range and will be protected from price cuts.
» Generics companies will prosper, particularly if generic substitution is mandated.
» Manufacturers whose portfolios rely heavily on long-listed products will be hit hard.

The Democratic Party administration in Japan has pledged to consider the proposal. If the industry's solidarity is rewarded with the acceptance of the proposal now on the table, it may well set a precedent for putting forth other revolutionary ideas.