(Bloomberg) — When two of the world's biggest pharmaceutical companies announced a tie-up in Japan, the country's $78 billion drug industry took note.
In November, the country's largest drugmaker, Takeda Pharmaceutical Co., said it had separate its off-patent products and share its extensive Japanese distribution network with Israel's Teva Pharmaceutical Industries Ltd. (NYSE:TEVA), the world's largest seller of generic medicines. Their goal: to gain an edge as Japan's government seeks to lower costs for its national health care program by encouraging the use of generics, which are cheaper.
The government's push is reshaping what was once one of the world's most lucrative drug markets, where favorable policies have for years aided the sales of international pharmaceutical brands such as AstraZeneca PLC (NYSE:AG), Roche Holding Ag and Novartis AG (NYSE:NVS). But an aging population and a massive government debt burden now has Prime Minister Shinzo Abe's government insisting on price cuts on branded drugs and pushing for a speedier transition to generics. The shift began about two years ago, and recently the government has been targeting price reductions with more frequency.
"Nobody imagined that this radical change could happen here," said Masato Iwasaki, who heads up Takeda's domestic business unit, in a Tokyo interview. "Everybody had believed the market would continue growing, but now government pressure is changing the focus."
Huge opportunity
The government has said that in the next few years it would like to see generics make up about 80 percent of prescriptions in Japan from about 50 percent now. That's bad news for makers of branded pharmaceuticals, especially those that are off-patent. Meanwhile, the generics industry — forecast to grow at 10 percent annually by some estimates — is turning into a rare bright spot.
Sanjeev Kumar, a consultant at market research firm Frost & Sullivan predicts more consolidation in Japan as small and mid-size companies seek to become more competitive and big international firms make deals to get a better foothold in generics.
"The Takeda-Teva deal took people by surprise, and is one that could be a trendsetter in gaining more acceptability for similar deals," Kumar said. "I don't think any companies — including domestic players — can ignore this in any way."
For example, Indian generics companies like Sun Pharmaceutical Industries Ltd., Dr. Reddy's Laboratories Ltd. (NYSE:RDY) and Lupin Ltd. – long known for being cost competitive – could seek to acquire mid-sized Japanese companies to gain a foothold, Kumar said. Several international companies, including AstraZeneca, Roche and Novartis derive between 6 to 9 percent of their total revenue from the Japanese market, according to recent earnings reports.
Drug spending in Japan, where the population is declining, is likely to rise by 3 to 4 percent over the next five years – the lowest increase of any developed market, according to a November report from the IMS Institute of Healthcare Informatics. In addition, sales tax increases that are expected in the next few years could offset the expected expansion and result in a "zero growth scenario" in those years, it said.
Health efficiency
