Contents:

1. Organisation & Funding of Healthcare System 1.1 Key Actors 1.2 Health Insurance 1.2.1 Schemes Managed by the Government 1.2.2 Schemes Managed by Large Companies 1.2.3 Schemes Managed by the Municipalities 1.2.4 Health Insurance for the Elderly 1.2.5 Nursing Care Insurance 1.2.6 Health Insurance for Late Stage Seniors 1.3 Private Insurance 1.4 Healthcare Providers 1.5 Healthcare Benefits 1.6 Remuneration of Providers 1.7 Mixed Medical Care 1.8 Healthcare Expenditure 1.9 Pharmaceutical Costs 2. Regulatory Environment 2.1 Intellectual Property Protection 2.2 Regulatory Approval 2.3 Delays in Accessing the Japanese Market 2.3.1 Drug Lag 2.3.2 Vaccine Lag 2.4 Orphan Drugs 2.5 National Health Insurance Reimbursement 3. Pharmaceutical Business Environment 3.1 Market Components 3.2 Pharmaceutical Industry 3.3 Leading Companies 3.4 Leading Products 3.5 Sales and Marketing 3.6 Formulary Access 3.7 Consumption Tax 3.8 Exchange Rates 4. Launch Price Setting 4.1 Outline of Procedure 4.2 Data Requirements 4.3 Summary of Methodology 4.4 Similar Efficacy Comparison Method I 4.4.1 Price Comparator 4.4.2 Price Premiums 4.5 Similar Efficacy Comparison Method II 4.6 Inter Specification Adjustment 4.7 Inter Formulation Adjustment 4.8 Line Extensions 4.9 Cost Calculation 4.10 Foreign Price Adjustment 4.11 Role of Pharmacoeconomics 4.12 Further Case Studies 4.13 Sources of Price Information 5. Price Revision Process 5.1 Drug Price Margin 5.2 Biennial Revision 5.2.1 Price Survey 5.2.2 Calculation of New Tariff Price 5.2.3 Results 5.3 Repricing 5.4 Long-term Listed Brands 6. Other Cost Containment Methods 6.1 Adjustment of Medical Fees 6.2 Separation of Prescribing and Dispensing 6.3 Diagnosis Procedure Combinations 6.4 Denial of Reimbursement/Delisting 6.5 Prescription Limitation 6.6 Patient Copayment 7. Other Market Segments 7.1 Generics 7.1.1 Market Size and Evolution 7.1.2 Generic Encouragement Measures by Government 7.1.3 Generic Companies 7.1.4 Introductory Pricing 7.1.5 Price Revision 7.1.6 Distribution 7.1.7 Generic Company Strategy 7.1.8 Impact on Innovative Manufacturers 7.1.9 Biosimilars 7.2 Over-the-counter Medicines 7.2.1 Distribution 7.2.2 Pricing 7.2.3 Rx-to-OTC Switching 7.3 Vaccines 7.4 Quasi Drugs 8. Distribution 8.1 Wholesaling 8.1.1 Wholesaler Customers 8.1.2 Leading Companies 8.1.3 Relationship with Manufacturers 8.1.4 Economics of Wholesale Distribution 8.1.5 Payment Terms 8.1.6 Hospital Bidding System 8.2 Pharmacies and Drugstores 8.2.1 Dispensing Fees 8.3 Mail Order/Internet Pharmacies 9. Future Prospects 9.1 Registration 9.2 Pricing 9.2.1 Industry Proposals 9.2.2. Reference Pricing 9.3 Diagnosis Procedure Combinations 9.4 Generics 9.5 Vaccines 9.6 Distribution List of tables 1.1 Japan’s healthcare in perspective 1.2 Main health insurance schemes 1.3 Numbers of medical institutions 1.4 Main disease classifications of patients attending hospitals 1.5 Growth in national medical care expenditure 1.6 Distribution of medical care expenditure burden 1.7 Number and share of people older than 65 years by country 1.8 Evolution of drug cost and its share of total medical expenditure 1.9 Per capita expenditure growth in drug costs by country 2.1 Japan’s drug lag with specimen products 2.2 Share of Japan-origin drugs under development by patent date 2.3 Average time to launch foreign-origin new drugs 2.4 Numbers of orphan drug and medical device designations 2.5 Regulatory approval dates with specimen orphan drugs 2.6 Numbers of drugs listed in NHI tariff 3.1 Share of global prescription drug sales by region 3.2 Breakdown of prescription drug market by customer group 3.3 Top-20 pharmaceutical companies in Japan 3.4 Leading companies in Japan by sales through wholesalers 3.5 Share of global sales of Japanese majors by region 3.6 Percent of company sales by portfolio age 3.7 Key franchise sales in Japan 3.8 Top-15 therapeutic classes in Japan 3.9 Top-10 best-selling products in Japan 3.10 Trends with yen exchange rate against other major currencies 4.1 Evolution of introductory price premiums 4.2 Numbers of new products awarded price premiums 4.3 Examples of formulation categories for pricing purposes 5.1 Change in drug price margin 5.2 NHI drug price revisions since 1981 5.3 Introductory pricing of statins 5.4 Examples of major originator brands affected by above-average cuts 5.5 Breakdown of price revisions by numbers of affected products 5.6 Examples of repricing, 1996-2006 5.7 Drugs repriced in 2008 6.1 Growth in prescription numbers 6.2 Share of wholesaler sales by customer group, 2006 vs 1992 6.3 Diseases attracting a ceiling on copayment 7.1 Growth in generic penetration 7.2 Generic sales through wholesalers 7.3 Consolidated sales of leading generic manufacturers 7.4 Recent NHI price erosion with Mevalotin and generic pravastatin 7.5 Numbers of newly listed generics 7.6 Examples of generics newly listed in tariff 7.7 Average OTC price build up 7.8 International comparison of OTC prices 7.9 International comparison of ingredient numbers in OTC brands 7.10 Examples of ingredients recently switched to OTC 8.1 Financial situation of wholesalers 8.2 Bar code requirements 8.3 Evolution and breakdown of sales by wholesalers 8.4 Wholesaler sales by customer group 8.5 Change in numbers of FJPWA members 8.6 Consolidated sales of top-10 wholesalers, 2007 8.7 Consolidated sales of top-10 wholesalers, 2000 8.8 Manufacturer shareholdings in leading wholesalers 8.9 Debt and credit of wholesalers 8.10 Leading drugstore chains List of figures 4.1 NHI pricing process for new drugs

Summary:

1. Sales of prescription medicines in 2007 amounted to ¥8,048 billion (+4.6%). Hospitals accounted for 40%, dispensing pharmacies for 34% and clinics for 26%. There were nine foreign-affiliates among the top-20 pharmaceutical companies. 2. The entire population is covered by health insurance schemes, managed either by employers or by the government, offering a common package of care. There is no family doctor system; patients can self-select any GP clinic or hospital outpatient department they like. Regardless of the setting a single fee schedule for providers under National Health Insurance (NHI) based on fee-for-service principles applies. Only medicines listed in the NHI tariff can be prescribed, with reimbursement limited to tariff rates. NHI does not pay for preventive care (e.g. oral contraceptives, vaccines), OTCs or lifestyle drugs. 3. Additions to the NHI drug tariff are made four-times a year. The aim is to gazette the NHI price within 60 days of regulatory approval. Decisions are taken by an independent expert body, the Drug Pricing Organisation (DPO), after a submission by the Health Insurance Bureau of the Ministry of Health, Labor and Welfare (MHLW; Korosho) and a hearing with the applicant. The company first files supporting data with the MHLW’s Health Policy Bureau and has two meetings to support its case. If the company does not accept DPO’s offered price, then it can launch an appeal to be heard by DPO in the same month. If agreement is still not reached, the application has to be withdrawn for later resubmission. 4. New drugs which represent the first, second or third entry in the class and are within three years of first entry to the class are priced by similar efficacy comparison method I. In principle, such products receive the same NHI price per day, at the maximum approved dose, as a similar marketed product, with the possibility of additional premiums. However, if the new drug is a fourth or later entrant to its class or arrives on the Japanese market more than three years after the first class entrant it may be considered to lack novelty and be classified a zoro-shin or ‘me-too’ product. These are priced by similar efficacy comparison method II, receiving the class average price with no possibility of added premiums. 5. Supplementary price premiums (as a percentage of the daily cost of the comparator and on a sliding scale) are given to ‘breakthrough’ new drugs (+70-120%), ‘useful’ new drugs (+35- 60% for ‘usefulness I’ and +5-30% for ‘usefulness II’), those with a limited market potential (+10-20% for ‘marketability I’ and +5% for ‘marketability II’), for paediatric use (+5-20%), and for kit products (+5%). Different types of premiums can be additive. The higher premiums are awarded very rarely – there have only ever been three recipients of the ‘breakthrough’ premium – but ‘usefulness’ premiums averaging 15% are increasing. 6. In cases where a comparable product does not exist, the new drug price is arrived at by cost calculation. Traditionally, this has occurred in about 15% of cases - mainly orphan drugs and biologics – but there is evidence of more frequent application recently. Premiums are not given to drugs priced by cost calculation. 7. Prices arrived at by either cost comparison or cost calculation may be adjusted upwards if they are 75% or less the average of public prices for the product in France, Germany, the UK and the US. Prices can also be subject to downwards adjustment if they are 150% or more the average in these same four reference countries. 8. Dispensing is done within hospitals, clinics and increasingly community pharmacies. As a result of the government’s long-standing policy of encouraging the separation of prescribing from dispensing (bungyo), pharmacies accounted for 56% of prescriptions by volume in 2007. 9. The drug price margin (yakka-sa) – the difference between tariff and market prices – can be retained by purchasers. Most medicines are purchased below tariff rates. Discounts averaged 6.9% in autumn 2007. Unless in niche markets, it is difficult to do business in Japan without discounting. 10. MHLW attempts, in biennial price revisions, to bring tariff prices closer to market levels, both to achieve savings and to squeeze the yakka-sa. A new reimbursement price is obtained by adding a discount allowance (known as the adjustment zone) - currently 2% of the prerevision NHI price - to the weighted average market price. Regular across-the-board price cuts have been a feature of the Japanese market for over 50 years. 11. Under the repricing rule, prices within the first 10 years of tariff listing can be reduced by up to 25% if sales exceed double the original peak forecast and are, on an NHI price basis, greater than ¥15 billion/year. For the first time in 2008, MHLW did not limit repricing to individual high-selling brands but also included products from their same therapeutic class regardless of sales. Original products, after expiry of the patent and re-examination periods, with marketed generic versions are known as long-term listed brands. These also have been subject to additional price cuts at revision time. 12. MHLW has enacted a series of measures designed to promote greater generic usage. It would like to see their volume share reach 30% by 2012 (up from 16.9% in 2006). Doctors now have to specifically mark prescription forms if they want to block generic substitution by the pharmacist, pharmacists receive higher fees for dispensing generics and counselling on their use, and new generics are listed in the tariff twice a year. 13. First generics are priced at 70% of the tariff price of the originator brand. Subsequent generics receive the lowest tariff price for that ingredient up to 20 copies, after which they receive 90% of the lowest tariff price. Price erosion with generics is very rapid, but originator products have so far retained much of their pre-patent expiry market share. OTC medicines may be freely priced. 14. Almost all prescription medicines are distributed by wholesalers, as are 50% of OTCs. Manufacturers set an invoice price at which they sell and are banned from interfering in the wholesaler’s selling price to its customers. Wholesalers’ earnings are composed of a primary margin, and a number of post-transaction rebates and fees. Though weakening, some business affiliations between wholesalers and manufacturers remain. Four wholesaling groups dominate, with a combined 88% market share, and the capability to distribute nationwide. The sector employs a large number of salesmen, known as marketing specialists (MSs), who work closely with manufacturers’ medical representatives (MRs). 15. Japanese doctors enjoy substantial clinical autonomy and never have to get prior approval for any procedure or medication. Demand-side controls consist largely of medical fee adjustments and strict surveillance of reimbursement claims, as well as patient copayments. All patients are required to contribute to the cost of their care, including drug treatment. Those aged 6-69 years pay 30% of the total medical cost with a monthly maximum outlay. The impact of a DRG-type prospective payment system (on a per patient, per day basis), known as diagnosis procedure combinations, is limited to acute, inpatient care in selected hospitals only. 16. Ageing of the population, new technology, and rising patient expectations are the main healthcare cost drivers, producing a growing imbalance between medical expenditure and economic growth. Because of the power of the doctor lobby, the pharmaceutical industry is expected to continue to feel the brunt of cost containment pressures, though proposals to better reflect the therapeutic and economic value of new medicines and retain the launch price during the patent term are under discussion.

Companies Mentioned

Astellas AstraZeneca Banyu Bayer-Schering Boehringer Ingelheim BMS Chugai Daiichi-Sankyo Dainippon Sumitomo Eisai GSK Hisamitsu Hospira Janssen Kyowa Hakko Kirin Meiji Seika Mitsubishi-Tanabe Mylan Nichi-Iko Novartis Ono Otsuka Pfizer Roche Sanofi-Aventis Sandoz Sato Sawai Servier Shionogi SolvaySuntory SSP Taiho Taisho Taiyo Yakuhin Takeda Teva Towa Yakult Honsha Yoshitomi Zeria Products covered Abilify Aldurazyme Amlodin Aricept Avastin Blopress Campto Clarith Claritin Coversyl Crestor Depromel Diovan Doral Enbrel Epogin Evista Exjade Fabrazyme Farom Funguard Gaster Glivec Harnal Iressa J-Zoloft Lantus Leuplin Lipitor Luvox Maxalt Mevalotin Micardis Mohrus Tape Myozyme Naglazyme Nexavar Nicotinell TTS Norvasc Nu-Lotan Olmetec Omepral Pariet Paxil Pegasys Preminent Prograf Radicut Relenza Remicade Renivace Revatio Risperdal Somavert Sutent Takepron Taxol Topotecin Tracleer Valtrex Vesicare Viagra Zetia Zoloft Zovirax.