Oct 19, 2012|
Is this region a hot cake for Indian Pharma?
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:
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 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.
- The pharmacists are paid additional incentives for educating the consumers about generic substitution.
- 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.
- 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.
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
Source: Company reports
From the above table, we infer:
||% Revenue from Japan
||2007- Acquired Kyowa. 2011- Acquired I'rom in order to tap the injectable segment.
||2006- Acquired Nippon Universal.
||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.
||2006- Opened a fully owned subsidiary in Japan. However, in two years, the company had shut down its operations.
What are the challenges?
- Among the Indian companies, Lupin has been successful so far in Japan.
- Torrent closed its operations because of entering solo in the market.
- Cadila also looks a potential candidate to tap this opportunity.
- 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
Source: Company reports
||Type of deal
||Merck's generic business
||Joint Venture. Later acquired majority stake
||Acquisition -57% stake acquired
- 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.
- The strict compliance for quality and regulatory standards increases the chances of batch rejection if the authorities find even a minor discrepancy.
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.
||Bhavita Nagrani (Research Analyst) is a Chartered Financial Analyst (ICFAI) with nearly six years of experience in the field of equity research. She has a deep understanding of the global as well as the domestic Healthcare industry and keenly tracks the developments therein. When it comes to stock investing, she is a strong advocate of the bottom-up approach to stock picking and has a remarkable ability to discern nuances in the business models of companies belonging to the same industry. Bhavita is the contributor to our large cap franchise, StockSelect.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Aug 21, 2017
PersonalFN explains the chief factor pushing gold prices up of late.
Aug 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407