TOKYO – Japan's declining sales of long-listed drugs will force some pharmaceutical companies to shift their business models. Sales of most of these drugs fell short of forecasts between April and September, and led drug companies to cut their full-year forecasts for sales by more than 70 percent.

The country's pharmaceutical industry, comprised of half a dozen major makers, and approximately 300 smaller companies, is now facing a rough ride, according to Alan Thomas, a director of Pharma Segmentation and Global Account Management for the International Monetary Fund in Tokyo.

Pharmaceutical and biotechnology companies that have already invested in developing new drugs and new technologies will be better positioned to continue growing, but investment is typically concentrated among the larger companies.

Smaller Japanese companies have generally failed to invest, either in R&D in growth areas such as oncology or in acquisitions. This failure shows itself as a weakness in several areas, said Thomas.

One area is a shift in Japan away from long-listed drugs – original brand products with a strong reputation and a long market history – toward lower-priced generics as part of an attempt to keep costs down in a market that is rapidly aging and has ever-increasing demands for health care services and products.

A few years ago, the Japanese government targeted a 30 percent increase in the market share of generic drugs and doubled that last year to 60 percent by 2018. Pharmacists who fill prescriptions often recommend patients use generics rather than branded drugs and there are even TV ads advising viewers to ask for generics at their pharmacies, pointing out that the generics are as good as the original long-listed products.

There is little patient resistance to generics in Japan, so smaller companies – which have coasted along on the strength of one long-listed product – are vulnerable to the threat of a generic substitute.

"These companies are now in a difficult position," Thomas said. "Health care, social security and drugs costs are increasing, and the government wants to rein in these costs," Thomas said. "So for the last few years there has been a number of generic-related initiatives to reduce costs, and we foresaw that the long-listed products would be impacted as a result of generic expansion."

But even without the effect of generics, a change is coming as the result of new products, from overseas, and from the larger Japanese makers.

"If you have a product that is 15 years old and a product that is 1 year old, the 1-year-old product is in most instances a better product," Thomas said.

Japan is a dynamic market for launches of new products, but these new products, bringing innovation to patients, are prevailing over established brands, owned by those companies, which have failed to invest for the future.

Thomas added that the traditional incremental innovation model on which pharmaceuticals around the world relied five years ago is not paying off today. Companies that historically were able to produce follow-on products to maintain strength in a particular therapy area are now unable to make the transformative leap to produce a new follow-on compound. This places anything up to 60 percent of their existing portfolios at risk from competitors' innovations, if not from generics so, Thomas said, "they need to drive that other 40 percent much harder."

Though the top six or seven Japanese pharmaceutical and biotechnology companies have diversified globally, with up to 50 percent of their global sales coming from outside Japan, this is not the case with the smaller companies, which may only have 5 percent or 6 percent of their sales revenue from overseas sources. They therefore cannot expect to make up their falling sales in new markets.

OUTSIDE THREATS LOOM

The threat also comes from foreign companies operating in Japan, which see this as a growth market, where patients can benefit from their innovations, and are marketing their global products in this lucrative field.

It is now more attractive for them to do so. Recent changes in regulation ensure faster and easier approval, and there are partial price protection and price premiums.

This, Thomas predicted, will lead to better opportunities for all players in the market.

"It will be an interesting dynamic as we see foreign pharmas increase their footprint in Japan," he said.

For research-based pharmaceutical and biotech companies, Japan remains an attractive and dynamic market.

"Facts are facts. To me and our member companies, the most important thing is the development of new innovative drugs in Japan," said Ira Wolf, Japan representative for the Pharmaceutical Research and Manufacturers of America. "The great improvements in recent years in the PMDA regulatory process and the drug price premium introduced four years ago have changed the whole landscape for new drug development in Japan."

Companies that have not invested in innovation and are currently relying on long-listed products will suffer.

"Though there is a place for companies that provide very strong portfolios in key primary care areas," Thomas said, "many of them without innovation or investment will need to consolidate."

He predicted that "the number of companies in the midsize space will decrease and the focus may shift, and not be as reliant on innovation, as the larger pharma companies have adjusted their business model."

There will, however, be a better opportunity, not just for global, but for all players, thereby bringing many much-needed newer therapies to the market.