Foreign drug makers vie for slice of Japan market

Pharmaceutical industry observers say success will depend on better addressing clients' needs

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Once considered immune to international competition, the country’s pharmaceutical industry can sense the ominous presence of foreign drug makers these days.

Global giants are mounting aggressive marketing campaigns in an effort to dominate the world’s second-largest prescription drug market, worth some 6 trillion yen annually.

The government’s shift to a more Westernized process of approving new drugs has prompted these huge pharmaceutical companies to make bullish projections for their Japanese operations, buttressed by a staggering financial advantage over domestic competitors.

Yet industry observers doubt the foreign giants will soon claim the market stature they enjoy overseas, saying their marketing strategies are out of sync with local clients and have often failed to deliver results in proportion to investments.

Pfizer Pharmaceuticals Inc., the Japanese subsidiary of the world’s largest drug maker, with global pharmaceutical revenues of $25.5 billion in 2001, is optimistic about the sales outlook in Japan.

Boosted by strong sales of its hypertension treatment and cholesterol-lowering drugs, the U.S.-based firm more than doubled its annual sales of prescription drugs in Japan to 206 billion yen over five years through the business year ending Nov. 30, 2001.

This figure compares with prescription drug sales of 265.6 billion yen logged by Yamanouchi Pharmaceutical Co., the nation’s third-largest drug maker, for the year to March 31.

Pfizer hopes to boost its revenues by 180 billion yen over the next three years by canvassing the market with its huge sales team. From last November to August, it increased its number of medical representatives here by 600 to around 2,400, surpassing domestic leader Takeda Chemical Industries Ltd. by more than 1,000.

MRs are field officers with pharmaceutical expertise who make calls to medical doctors to promote their prescription products.

Pfizer has a long history in Japan, dating back to the mid-1950s. Its presence has long been negligible, however, with domestic drug makers having traditionally enjoyed dominance.

Pfizer and other global titans now expect a steep trajectory in revenue.

“I don’t think it matters whether you are a foreign company or not today. Strength should be measured by how many innovative drugs you can develop,” said Toshihiro Ishikiriyama, director of the corporate planning division at GlaxoSmithKline K.K., a subsidiary of the U.K. giant.

GlaxoSmithKline, the world’s second-largest pharmaceutical firm with global sales of $25 billion in 2001, posted revenues of 140 billion yen in Japan, equivalent to some 4 percent of its global total. Ishikiriyama said he hopes to see double-digit growth in the coming years.

Thanks to the Japanese government’s moves to harmonize its drug-approval process with U.S. and European standards, a greater amount of clinical data gathered overseas are being accepted here, helping to reduce the lapse in introducing products that were popular overseas, Ishikiriyama said.

“There used to be regulatory approval conditions unique to Japan, such as clinical tests not required in other countries,” he said

Handicapped by these country-specific procedures, foreign firms have traditionally experienced a so-called “Japan Gap” — the product-release time lag between Western markets and here. In some cases, this lag has been as long as 10 years, resulting in massive opportunity losses.

But the more stringent conditions government regulators have set for approving new drugs have resulted in competition based more on the therapeutic merits of products, which will be to the foreign giants’ favor, he added. Critics have claimed that in Japan, pharmaceutical products offering little innovation or new quality have often been approved as new drugs, and have generated large prescription orders.

Still, many industry observers remain doubtful that the domestic market will soon be awash with foreign brand names.

While acknowledging the recent growth of foreign drug makers in Japan, Masatake Miyoshi, a senior analyst at Merrill Lynch Japan Securities Co., said their presence in the Japanese market is often more hype than substance.

“Many firms declare that they will be in the top tier in the next five years, but if you take a closer look at their operation, you will realize that, except for a few, it is not the case,” he said.

The massive marketing operations deployed by the foreign firms may be intimidating, but Miyoshi pointed out that play-by-numbers strategies of this kind have often failed to deliver results. According to Miyoshi, the annual sales generated by an average MR stands at 100 million yen for foreign companies in Japan, compared with 150 million yen to 200 million yen for leading Japanese firms.

Miyoshi stated that Japanese firms have the upper hand in this sphere because they leave marketing strategies to local subsidiaries, thus staying in sync with local clientele, unlike their foreign counterparts.

Yoshihisa Yatsuda, president and CEO of pharmaceutical consulting firm Uto Brain Co., agrees with this view.

“The world’s top-selling drugs often perform poorly in Japan. I think if they are handled by Takeda, they can be top drugs here, too,” he said.

He said the uniform marketing approach seen at many foreign firms, often modeled on successful operations overseas, will not win over Japanese doctors, many of whom have been motivated to prescribe certain drugs by reasons other than the products’ merits.

For instance, some doctors prescribe certain drugs out of gratitude for a drug maker’s financial and other support during the early days of their careers “as long as they are not poisonous,” he said. Drugs with little therapeutic merit are even better as they can be prescribed for a wide array of clinical cases.

“The fact that a drug has been widely used overseas alone cannot persuade doctors to prescribe it,” Yatsuda said. “If foreign firms want to expand their share in Japan, they should let Japanese do all the marketing.”

For these reasons, the recent merger between Chugai Pharmaceutical Co. and Nippon Roche K.K. attracted attention as a potential business model for foreign firms in Japan.

Under a virtual acquisition, in which Roche Group, headed by F. Hoffmann-La Roche Ltd. of Switzerland, acquired more than 50 percent of Chugai’s shares, the Japanese company retained most of the operational independence under Roche’s “When in Japan, do as the Japanese do” strategy.

“It is vital that Chugai remains a Japanese company that operates autonomously in order to achieve maximum success in the home market,” said Franz Humer, Roche’s chief executive officer, who repeatedly described the relationship with Chugai as an “arms’ length” affair.

Meanwhile, industry observers’ harsh evaluations of foreign competitors should not be cause for complacency among domestic competitors, which are faced with the challenge of skyrocketing costs to sustain product competitiveness and development.

Developing a new drug has traditionally been a very costly process, estimated to take between nine and 17 years on average at a cost of around 30 billion yen. These costs are likely to spiral as drug makers explore new scientific territories such as the genome.

The research-and-development budget gap between Japanese firms and the global giants has been widening.

Foreign drug makers have been in a phase of repeated massive mergers and acquisitions to survive the high-risk-high-return race. The success ratio of developing new drugs is said to be worse than one in 12,000.

Data complied by Uto Brain show that the R&D budgets of the top five Japanese firms combined equal only about three-quarters of that of the world’s No. 3 firm.

According to the health ministry, nearly 70 percent of the new drugs approved in Japan in the six years through fiscal 2001 were developed overseas.

While large R&D budgets do not necessarily guarantee results, Japanese drug makers are definitely too small to survive the market, said Yatsuda of Uto Brain. If they want to avert mergers and acquisitions, they must carve out niches in special treatment areas and expand their overseas operations, he said.

“I think only a few domestic drug makers will be able to survive,” he said. “But with their so-so profit status, they totally lack a sense of crisis.”

However, he added, companies with a high ratio of foreign stockholders such as Takeda and Yamanouchi may be feeling the pressure more acutely.

Yamanouchi, which posted annual pharmaceutical revenues of 352 billion yen in the 2001 business year, recently announced it will concentrate its resources on priority fields in which the firm has an advantage, saying specialization is the key to survival. Yamanouchi’s R&D budget stood at 64 billion yen in 2001.

Among its priority fields, the firm is betting heavily on urology, where it hopes to crack the U.S. market with the release of a drug to treat overactive bladders. Yamanouchi will apply for U.S regulatory approval of the drug in the first quarter of 2003.

“I think we can compete at a certain level by specializing in particular areas,” said Toichi Takenaka, president and CEO of Yamanouchi. “We aim to become a specialty firm; we cannot compete in every field.”

Miyoshi of Merrill Lynch said: “I think the survival test for Japanese firms, which face difficulty in developing new drugs one after another, is how they can maximize profit from one product by marketing globally.

“On the other hand, the task for foreign firms is whether they can introduce global products here in a way that fits the local market.”