Japan’s Expanding Market for Pharmaceuticals and Healthcare
By David Hodgson
A feature of Japan’s demographics is the aging of the population. The number of people in Japan who are 65 years old or over is forecast to grow from 26 million in 2005, to 35 million by 2020. Currently, 11.5 million Japanese are over 75 years old, close to 10% of the population. By 2030, there will be 23 million over 75-year-olds. By 2050, there will be more than 1 million Japanese over 100 years old.
People of 75 years or older consume 28% of drugs in Japan. So, demographic trends are likely to drive growth in consumption of pharmaceuticals. The Japanese drugs market is ¥6 trillion, growing by ¥500 billion each year. The current ¥33 trillion total medical market in Japan is set to increase to ¥69 trillion by 2025 without cost reduction measures.
Toho Pharmaceutical Co Ltd (8129), a leading pharmaceuticals wholesaler, seems well-placed. Reflecting the expansion in the market with the aging of the population, sales growth is good, despite drug reimbursement price cuts by the government to control the expansion in spending on healthcare. M&A and alliances in pharmaceuticals wholesaling are leading to increasing concentration in a fragmented market, scale benefits, more efficient distribution systems and customer support, such as hand-held barcode terminals for pharmacists to enable automatic re-ordering with next day delivery.
Towa Pharmaceutical Co Ltd (4553) is one of the largest generics drug companies in Japan. The Ministry of Health, Labour and Welfare (MHLW) wishes to expand the generics market to reduce rising healthcare costs. The generics market in Japan is low compared with other major economies, 17% by volume, much lower than the USA (63%) and European countries such as Germany (56%) and the UK (59%). The MHLW is taking measures to expand the generics market and aims for 30% by 2012. From April 2006, a box was introduced on the prescription form for the doctor to tick if a generic is appropriate. More recently, to further catalyse the generics drug market, the MHLW announced a change to the opposite—unless the doctor specifies an original drug, the pharmacy can prescribe a generic. Further changes under consideration include changing the copayment by the patient from 30% to 10% for a generic and a higher level for the original drug.
Another key driver is expansion of socalled DPC, diagnostic procedure combination, or fixed-rate payment hospitals. Many of these DPC hospitals treat acute conditions and use of generics is more economic. Payment fixed-in-advance removes an economic incentive to use higher priced original drugs and creates an incentive to use lower cost generics. There are currently 730 DPC hospitals in Japan and the number is targeted to increase to 1,400 in the long-term. Market forces in private health insurance are driving an increase in fixed in advance payments. Additionally, to change public attitudes in Japan about generics, a recent nationwide TV public education advert raised awareness.
Beyond generics, there are also opportunities in new original patent-protected drugs. Kyowa Hakko Kogyo Ltd (4151) has promising long term potential from new drugs in clinical trials including a Parkinson’s disease treatment, an anti-cancer compound licensed to Eli Lilly and a urinary incontinence drug. But Kyowa Hakko’s greatest potential seems to be in its unique and patented antibody technology, which makes drugs 10–1,000 times more effective. Kyowa Hakko has licensed its antibody technology to companies including Genentech and Biogen and is likely to see several new antibody-based pharmaceuticals beginning clinical trials each year. Recently, successful clinical trial results were announced, including treatments for asthma, allergies and Tcell lymphoma. By increasing the effectiveness of drugs by up to 1,000 times, less dosage is required, so that drugs have less side-effects. Recently, Kyowa Hakko received a tender offer from Kirin Holdings. Kyowa Hakko appears to be a good catch for Kirin, although a risk factor for Kyowa Hakko shareholders is dilution from the increase in the number of shares issued to finance the takeover.
With Japan’s aging population, incontinence is also an increasing problem. Unicharm Corp (8113) is a leader in adult-use diapers for incontinence, in addition to having a strongly growing disposable nappies business in Asia and a strong pet care business in Japan. The adult-use diaper market in Japan is already worth ¥100 billion and is growing at 4% per year. Unicharm has a 35% market share.