|Originally appeared in The Journal
of the American Chamber of Commerce in Japan.
As the global pharmaceutical business picks up speed in Japan, Kansai remains at its center.
By Catherine Pawasarat
Flashback to 1724, when the ruling Tokugawa shogunate sanctioned an Osaka-based monopolistic trade association of 124 herbal medicine brokers. The shogun leader's blessing ensured that every medicine in the country passed through Doshomachi, Osaka's pharma district, before going on to their final destination.
Times have changed, but you'll still find a powerful concentration of Japanese pharmaceutical companies in Doshomachi. Consequently, many foreign pharma companies (especially those with a long history in Japan) have their main presence in the Kansai region.
That said, up until two or three decades ago, there were still bureaucratic and cultural obstacles making it difficult for a foreign pharmaceutical company to operate independently in Japan.
"So many chose to work with a Japanese company. We'd work on the clinical trials and government approvals needed to bring a product to market," says Mark Torii, president and representative director of the Osaka-based Schering-Plough K.K. "And they'd take care of marketing, sales, and the distribution network."
Simply put, many pharma companies are in Kansai because their Japanese joint venture partners were headquartered in Osaka, and it made sense to be close to them. Yet, now that most of these joint ventures have dissolved or morphed into looser alliances, what keeps people in the region?
"There are definitely lower operating costs in Kansai than in Tokyo, in terms of rents and general expenses for employees," notes Dr. Anthony Wynn, president of Bayer Yakuhin, Ltd. in Osaka.
Some pegged Kansai operating costs as 30% less than it Tokyo, which, Wynn points out, could make increasing profitability easier. Quality of life wins high marks in Kansai. What it lacks in cosmopolitanism, it more than makes up for with the rich culture of Kyoto, Nara and Himeji. With far shorter commuting distances, employees have more time available for balancing their lives between work and leisure.
"From Kobe, getting to the countryside takes only 15 or 30 minutes," remarks Wynn. "After several years in Tokyo, the kids miss being in the country." Though a megalopolis like Tokyo has a lot to offer, greater intimacy can also be a good thing. "The small community here is definitely a plus, it makes communication easier," explains Schering-Plough's Torii. "Among the pharmaceutical companies there's a close information network."
Though Tokyo is the center of Japanese bureaucracy and many businesses, that's not the be-all and end-all of business. "People forget that foreign companies in the United States don't all locate in Washington D.C.," asserts Bill Bishop, head of corporate communications at the Kobe-based Eli Lilly Japan K.K. "I see no logic in locating in Tokyo if it is merely because the government is there."
Nippon Organon K.K (Japan) actually relocated from the capital to Kansai, after acquiring the ethical pharmaceutical business of the larger, Osaka-based Kanebo Ltd. in 1999. "Our customers are all over Japan, so it doesn't make much difference if we're in Tokyo or Osaka," explains Frederik J. Hendriksen, president and representative director. "We cover the rest of the country through our eight regional branches."
Granted, it is not as though Kansai is ShangriLa. The region does have its inevitable drawbacks.
"One challenge is trying to attract high-caliber staff down from the Kanto region [such as from Tokyo, Yokohama, Kawasaki and Chiba], because there are people who believe that coming to Kansai is coming to 'the sticks,'" says Bayer Yakuhin's Wynn.
Yet, according to several sources, once staff settles in Kansai, more often than not they're happy with the decision.
Nonetheless, most application processes and other official procedures must be done with government ministries in Tokyo, for Kansai-based companies, a smaller Tokyo office plays an important role for liaising with the ministries and facilitating access to both information and Tokyo-based clients.
"Most of the information we need is available, even on websites. It's all public. We have people in the Tokyo office, so I don't see the need to intensify this," asserts Dr. Mary Bareilles, managing director and corporate senior vice president of the Kobe-based PAREXEL International Inc., a contract research organization (CRO) that opened its Kobe office in 1995.
"We have to go out to visit our clients as well as clinical sites, whether we are in Tokyo or Kobe," she adds, noting that most of Japan's traditional pharmaceutical companies are still in Kansai.
"Japan represents about 15 percent of the world's pharmaceutical market, second only to the U.S.," points out Nippon Organon's Hendriksen. "So any pharmaceutical maker that's operating globally wants to be in Japan."
In addition, the nation's aging population is going to need a lot of high-quality pharmaceuticals in the near future -- on an ongoing basis. "The population in Japan is aging faster than in Western countries," says Wynn. "So the adverse health conditions that happen with aging are happening here first." To help meet growing demand and opportunities here, Bayer Yakuhin opened up a new research center in Kyoto in 1995, adding a new chemistry building last year.
With the ongoing International Conference on Harmonization (ICH) of pharmaceutical regulations, started in the early 1990s, major improvements have been made for expediting the introduction of new drugs here. "The major obstacle used to be the requirement for full development studies here in Japan," explains Wynn. "Even if they'd already been done elsewhere in the world, the government said, 'Yes, but Japanese people are different; please do them again.'"
At any rate, the harmonization between regulations for the U.S., Europe and Japan has picked up speed over the last two to three years. Pharmas once had to do prove safety and efficacy with three similar sets of clinical trials for the three markets. This is no longer the case. "The Japanese government says they will accept 'bridging studies.' If we have done the big clinical trials abroad, we just need to do smaller ones here that show the same results," according to Wynn. "So you're going to see a lot of products new to Japan."
This is a major relief for not only foreign pharmaceutical companies, but also Japanese pharmas that have a presence in foreign markets. "What this means is [that] the drug development time in Japan is much shorter than before. It used to require five to seven years to generate data on Japanese patients, and now it takes maybe three years," maintains Schering-Plough's Torii. "That means a lot."
But clinical trials remain a weak link in Japan's pharma chain for Japan. "It is more difficult to do clinical trials in Japan than elsewhere in the world. Clinical centers in Japan don't have the necessary infrastructure. They need to be monitored, and [they] find it harder to enroll patients," says Wynn. "Often, they just don't have the facilities as readily available here as they do in the West. And it costs a lot more," says Wynn.
More availability of high-quality clinical trials is key for the rapidly changing pharmaceutical market here. "Traditionally Japan's former Ministry of Health and Welfare [now Ministry of Health, Labor and Welfare] took the attitude that the pharmaceutical companies should be responsible for everything, including the clinical research--meaning it shouldn't be outsourced," explains PAREXEL's Bareilles, noting that CROs have a 20-year history in the U.S. "But in 1995, as part of the ICH guidelines, the ministry recognized contract research organizations."
These days, pharmaceutical companies put big ads in the newspapers for patients to come forward and try a new medicine. "Until recently, the companies were dependent on the good will of the physician," she continues. "Often the patients did not even know what was going on, because informed consent is also new with the ICH."
Last year, Bayer Yakuhin advertised on subways for clinical trial volunteers. "We wanted to appeal directly to end customers, to let them know there was a way to enroll in the trials," comments Wynn. "We hit our enrollment numbers in record time."
Japan has also made progress in the ministry review process required once a company files an application for drug approval. Previously, transparency was not a popular bureaucratic tool, one anonymous source points out, and ministry directives were not necessarily consistent. "I can't say it's perfect now, but it's much more transparent, which helps us, because now we know what we need to do," the source adds.
The reviews are also transpiring much more quickly.
"It used to take as long as three years or even more, but [a review] now averages about two years. Again that means the time to market is shorter," according to Torii at Schering-Plough. "Nowadays it takes about five years to get a product to market in Japan, making Japan similar to the U.S. and Europe."
Bareilles of PAREXEL points out that through these expedited processes, the Japanese government is demonstrating its eagerness to make drugs available faster, especially for difficult-to-treat diseases. "With the Internet and better information exchange between patients, in the last two or three years Japanese patients are starting to talk about their rights to access," she adds. "This is totally new."
In the quest for globalization, naturally there are still some obstacles to be overcome before pharmaceutical operations in Japan are on a level comparable with those in Europe and North America. "The health structure here is very traditional, and the service level is very high," comments Wynn of Bayer Yakuhin. "Doctors expect frequent interaction with medical representatives--and associated with that is a higher cost."
Timing is everything. According to Hendriksen of Nippon Organon, Japan is far behind in introducing products already well established in other countries. "The time lag is definitely between two to five years," he says. "We'd, of course, prefer it to be faster, and patients in Japan would also benefit from newer and better medical options."
Eli Lilly's Bishop observes that with more international companies keen to launch products in the Japanese market, there's heated competition for the nation's limited number of clinical trial facilities and clinical trial patients.
But for all the tumult, multinational pharmaceutical interests tantalizingly are now coming tantalizingly close to an industry Holy Grail: to be able to make submissions for drug approvals simultaneously in North America, Europe and Japan. Industry leaders are hoping for such by 2005. Non-Japanese pharmaceutical companies are well poised for this next step in the industry's evolution.
"Foreign companies are usually multinational, so they larger-size facilities, staff and budgets," explains Torii of Schering-Plough. "From this standpoint, they have advantages in coming up with new products. The Japanese market is big, and with improvements in development and market time, it makes sense for foreign companies to be here, bringing new products in from abroad."
Healthcare Reform: The Pricing Predicament
While health-conscious Japanese may be keen to have access to cutting edge drugs, lower drug prices demanded by healthcare reform make for a perplexing dilemma.
"The mandatory price cuts taking place every two years are eroding profit margins of course, so as a result the total pharmaceutical market is fairly stagnant," relates Frederik Hendriksen, president and representative director of Nippon Organon K.K. (Japan). "Any growth from new products sales is offset by cuts in prices for older products. New products are being priced at international levels, but operating costs in Japan are very high."
Hendriksen adds that this quandary encourages the flurry of mergers and acquisitions, as well as other tie-ups so common in the Japanese pharma scene recently.
"In the long term, companies cannot survive being on their own or being active only in the Japanese market," he contends.
Bill Bishop, head of corporate communications at Eli Lilly Japan K.K., proposes that the solution lies in nothing less than a paradigm shift. "The Japanese government needs to think of health care not as an expense, but as an investment," he notes. "With an aging society and low birthrate, they're going to have to look at their traditional elderly as part of the productive population."
Bishop argues that quality drugs could keep Japanese healthier longer and help prevent more costly medical treatments like hospital stays or radical surgery, thereby actually reducing health care costs overall.