Japan has the world’s third largest pharma industry. Yet, for many international companies the market has not proved easy to access. Very high barriers to entry have combined with a historically insular domestic market to limit opportunities. According to UBM’s latest CPhI Pharma Insights report this is now changing. Japan’s domestic market is looking increasingly at exports, and international companies are seeking opportunities to invest in and access the large, well-funded healthcare system.

Japan is enjoying its longest sustained period of growth in over a decade. According to a GlobalData survey, the pharmaceutical sector is forecast to reach $72 billion by 2021, representing 17% growth between 2011–2020. An aging population and broad access to healthcare are the driving factors. With over 100 domestic pharma companies, such a fragmented market is likely to develop into an acquisitional environment, particularly with internationals looking to enter.

Demographics are shaping the Japanese pharma industry. The population has declined and aged over the last few decades due to low birth and migration rates. Life expectancy, as stated by CIA World Fact book, is now 85 years. The result is a rising dependency ratio coupled with a shrinking tax base placing ever-greater financial strain on the system. Without change, insurance premiums and healthcare spending will inevitably increase.

There are a number of challenges ahead as many patents expire and annual price cuts and generics take hold. Another problem – as Deallus Consulting pointed out – is a growing funding gap, which, if unchecked, will rise to around $160 billion by 2020 and $370 billion by 2035. Simply increasing the country’s insurance premiums is a suboptimal response as it will damage sectors beyond pharma by increasing labor costs and reducing competiveness. Also, co-payment rates are already high at around 30%; there is little scope for further expansion. An alternative strategy is needed and increasing generics consumption is an obvious option.

Total annual pharmaceutical spend is $93 billion. Government is central, accounting for around 40% of health spending via the national insurance scheme. According to a cited Bloomberg article, it now reviews prices annually for all therapies and quarterly for the newest and most expensive. Industry commentators speculate that this could see revenues fall some 30% by 2025. Recent cuts to Opdivo from Ono Pharmaceutical and Gilead’s Sovaldi, along with a voluntary reduction in Merck’s cancer therapy, Keytruda, are just a few of recent examples of the impact of these changes.

As pharma firms, large and small, begin to reposition themselves in response they will face key challenges. In particular, branded products have seen a gradual reduction in use; they are less resilient to brand erosion and government is targeting 80% generic penetration by 2020. The Japanese government has gone as far as to identify growth of the nation’s generic drug market as “imperative to Japan’s long-term economic health.”

Japan has long been a bastion of patented drug consumption, with a strong innovative pharma industry, but as an impending patent cliff has loomed, many companies are now forced to reconsider their long- and medium-term strategies.

UBM’s report highlights that in spite of the challenges, a number of opportunities are present. Through diverging strategies there is clearly room for innovative big pharma to invest in its pipeline and grow exports. Opportunities for both Japanese and international generic companies are clear, especially with public attitudes shifting away from cultural skepticism of generic medicines. Active Pharmaceutical Ingredient (API) and generic finished dosage suppliers who recognize this potential and understand the unique needs and challenges of the Japanese market are well set for significant growth over the coming years.

Japan has already made many attempts to transform its pharmaceutical landscape from an internally-facing market to a global one. For example, Ole Moelskov Bech, chairman of EFPIA Japan, recently spoke in favor for the current pro-innovation policy as it has been a significant driver for foreign investments since its pilot introduction in 2010. Critically, Japanese pharmaceutical companies are now seeking professionals that have diverse experiences and global outlooks. There is a move away from long-held inward attitudes as companies look to take the next steps internationally. Even Japan’s generics market is growing and changing with transfers of generic drugs from big pharma to local generic companies – for instance, the off-patent migraine treatment Zomig (zolmitriptan) moving from AstraZeneca Japan to Japanese generic major Sawai Pharmaceutical.