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Is this region a hot cake for Indian Pharma?

Oct 19, 2012

It is rare when we come across a nation which has 100% health insurance cover for its citizens. Yes - this is the unique feature of the Japanese pharma market. It is the world's second largest pharma market of around US$ 100 bn and has generic penetration of 10% by value and 23% by volume. On the other hand in markets such as the US, UK and Germany, generics account for around 60%-70% by volume. This gap highlights opportunity for generics. But why there is such a wide gap?

Overview of the Japanese market

In Japan, life expectancy is highest among the top three countries in the world. In 1961, the government passed a law for compulsory insurance cover either through employees health insurance programs or through NHI (National health insurance). Under the insurance schemes, the patients have to bear only 30% of the total treatment cost.

The population in Japan is quite conscious about the quality of medicines and the brand, and has in the past been wary of the ones which are manufactured in the Asian region. Further, the disease pattern in Japan has veered towards chronic diseases.

These aspects have raised the overall government expenditure. Further, the catastrophic impact of the calamities viz., tsunami, earthquake and nuclear disaster has further added on to the government expenditure. Thus, in the past few years, the government has taken various measures to promote the use of generics with the aim of bringing expenditure down. It has laid down a goal of 30% generic penetration (by volume) by the end of March 2013. Few of the following measures are taken by government in order to encourage generics are:

  1. The state grants US$ 0.45 per prescription to pharmacist, if generic drugs account for at least 30% of the dispensed drugs over a three-month period.

  2. The pharmacists are paid additional incentives for educating the consumers about generic substitution.

  3. Earlier, the acceptability of drugs manufactured in Asia or its ingredient was very low. However since the last few years, the drug approving body, MHLW (Ministry of health, labor and welfare) has increased acceptance of Asian medicines if the drug meets the requirements.

  4. MHLW is also working hard to educate people with respect to the price difference between the generic and branded drug, and addressing the generic drug queries on various fronts.
An, appealing factor in the Japanese generics market is that the price erosion is not as high as in the US market (which sees prices fall by as much as 95%). However, generic companies can charge maximum up to 60% of the branded drug price.

The hospital segment in Japan

The hospital segment accounts for around 50% of the total pharma market in Japan. With a view to reduce overall healthcare expenditure, in 2002 MHLW notified hospitals to curtail patient hospitalization costs through various means. The hospitals under this scheme are known as DPC hospitals. The organization will be paying a lump-sum amount to the hospitals for cutting down the overall costs. One of the proposals was to promote use of generics in the hospital segment in order to reduce costs. Till date as only non generic local big players, govern the large share, generic drugs have played a very small role. However, hospitals have used most of the means to reduce the costs; except taking the generics advantage. Thus, the next best option to reduce costs is to rely on generics usage. With the incoming of generics in the hospital segment, the doors will soon open up for global generic companies also. The DPC hospitals have been increasing over a period of time, from 359 in 2006 to 1449 in 2011. Even Lupin's I'Rom acquisition was done with the intention to enter the DPC market.

Generic Scenario in Japan

Sawai, Nichiko, Towa, Taiyo and Fuji are the top 5 generic players in Japan. These five players account for around 30% of the total generics market. Teva too has a notably strong position in Japan. In order to further strengthen its position, the company acquired 57% stake in Taiyo Pharma.

Presence of Indian pharma companies in this market

As on date India's share is around 1% of the total Japanese pharma market. The Government of India is making efforts to push Indian drugs in Japan through CEPA (Comprehensive Economic Partnership Agreement - it is a type of free trade agreement which eliminates tariffs, quotas). Four Indian companies notably Lupin, Cadila, Torrent and Ranbaxy entered the Japanese generics market. Further, Dr. Reddy's has entered into a JV (with 49% being Dr. Reddy's share) with Fujifilm Corporation. The company expects to launch its first products in the next 3-4 years.

Table 1 - Indian Cos. Presence in Japan
Company % Revenue from Japan Deal
Lupin 12% 2007- Acquired Kyowa. 2011- Acquired I'rom in order to tap the injectable segment.
Cadila 1% 2006- Acquired Nippon Universal.
Ranbaxy 0% 2002 - Entered into 50:50 JV with Nihon Pharmaceuticals. This deal was terminated owing to Ranbaxy's plant issues. However, later after Daiichi Sankyo's acquisition, Ranbaxy entered into development and supply agreement with Daiichi Sankyo Espha for co-development and supply of potential generics in Japan.
Torrent 0% 2006- Opened a fully owned subsidiary in Japan. However, in two years, the company had shut down its operations.
Source: Company reports
From the above table, we infer:
  1. Among the Indian companies, Lupin has been successful so far in Japan.

  2. Torrent closed its operations because of entering solo in the market.

  3. Cadila also looks a potential candidate to tap this opportunity.
What are the challenges?
  1. A company intending to enter Japan mostly needs to acquire a local company there. Establishing a brand that too for a new company is a challenge owing to strong doctor and channel relationships required. Thus various acquisitions have taken place in the last few years in Japan. We believe this trend to continue.

    Table 2 Major Acquisitions and Deals in past few years
    Year Global company Domestic company Type of deal
    2006 Cadila Nippon Universal Acquisition
    2007 Lupin Kyowa Acquisition
    2007 Mylan Merck's generic business Acquisition
    2008 Teva Kowa Joint Venture. Later acquired majority stake
    2008 Teva Taisho Acquisition
    2009 Actavis ASKA pharmaceuticals Joint Venture
    2010 Sanofi Nichi-ko Joint Venture
    2011 Lupin I rom Acquisition
    2011 Teva Taiyo Acquisition -57% stake acquired
    2011 Dr. Reddy Fujifilm Corporation Joint Venture
    2012 Mylan Pfizer Alliance
    Source: Company reports

  2. The population approach for using branded medicines also acts a hurdle for generic companies who want to enter the market especially if the drugs are manufactured in Asian regions.

  3. The strict compliance for quality and regulatory standards increases the chances of batch rejection if the authorities find even a minor discrepancy.
Our View

In our view we believe that Japan is undoubtedly one of the best destinations for Indian companies to look into. However, they will have to do away with the perception of "inferior quality drugs" by supplying quality medicines. Further, considering the historical trends, we believe entry into the Japanese market will prove to be much more fruitful through alliances. Over a period of time companies can shift their manufacturing base to Indian facilities in order to take the advantage of low cost labor.


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1 Responses to "Is this region a hot cake for Indian Pharma?"

Borkar M.R.

Oct 26, 2012

I wud not term it as a Hot Cake. At best I wud say a slowly rising
segment. Moreover, Indian Pharma cos have to prove about strict
quality standards and must give up (for that matter the entire
national quality of "Chalta Hai and Jugad attitude). Pharma
companies that have their own advance research unit/subsidiary
will, in my opinion, gain over a period. - Borkar

Like (1)
  
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