VZCZCXRO6044
PP RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #1782/01 1820533
ZNR UUUUU ZZH
P 300533Z JUN 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC PRIORITY 5469
INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 4152
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 8545
RUEHFR/AMEMBASSY PARIS PRIORITY 6177
RUEHTV/AMEMBASSY TEL AVIV PRIORITY 0764
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RUEHNAG/AMCONSUL NAGOYA PRIORITY 6871
RUEHNH/AMCONSUL NAHA PRIORITY 1015
RUEHOK/AMCONSUL OSAKA KOBE PRIORITY 2368
RUEHKSO/AMCONSUL SAPPORO PRIORITY 9224
RUEHBS/USEU BRUSSELS PRIORITY
RUEHGV/USMISSION GENEVA PRIORITY 3361
RUCNDT/USMISSION USUN NEW YORK PRIORITY 0558
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEAUSA/DEPT OF HHS WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 TOKYO 001782 
 
SENSITIVE 
SIPDIS 
 
USTR FOR CUTLER, BEEMAN, HALLOWAY 
HHS FOR OHGA, STEIGER, AND BHAT 
USDOC FOR 4410/ITA/MAC/OJ/ROTH 
PARIS FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD JA PGOV SOCI
SUBJECT: JAPAN'S GENERIC DRUG MARKET - SMALL NOW BUT WITH 
HUGE POTENTIAL 
 
REF: 07 TOKYO 5080 
 
¶1. (SBU) Summary.  With public debt nearly double GDP and 
upward pressure on national health insurance expenditures due 
to Japan's aging society, the Ministry of Health, Labor and 
Welfare (MHLW) hopes to increase generic drugs' market share 
from 17% to 30% by 2012, saving the healthcare system an 
estimated $25 billion per year.  Consumer and physician 
resistance to generics, along with the GOJ's desire to 
protect the domestic branded pharmaceutical industry however, 
will make realizing this goal an uphill battle.  With a 
market potential of $65 billion in annual sales, foreign and 
domestic pharmaceutical manufacturers are starting to take 
notice of generics' potential in Japan, as evidenced by the 
June 15 takeover of Indian generic drugmaker Ranbaxy 
Laboratories by Japan's second largest pharmaceutical 
company, Daiichi Sankyo.  End Summary. 
 
¶2. (SBU) Japan's healthcare system is feeling the pressure of 
demographic and economic challenges (ref).  The country's 
society is aging rapidly with the over 65 demographic 
projected to grow from 20 percent of the population today to 
30 percent by 2025.  Moreover, the decline in overall 
population adds to the burden of those still working to 
support the growing number of seniors.  At the same time, the 
national health insurance (NHI) system encourages doctors to 
over-prescribe tests and drugs and allows hospital stays that 
are six times longer than the OECD average.  As a result, 
Japan's 2006 healthcare expenditures reached JPY32.4 trillion 
($324 billion), exceeding nine percent of national income in 
2006 for the second year in a row.  The National Federation 
of Health Insurance Societies (Kenporen), comprised of 1,502 
organizations insuring 30 million company employees and their 
dependents, projects its deficit will grow to a record 
JPY632.2 billion ($6.3 billion) in 2008. 
 
Generic Market Underdeveloped 
------------------------------ 
¶3. (SBU)  One factor driving spiraling healthcare costs is 
Japanese consumers' and doctors' preference for brand name 
drugs over generics.  Currently, generics have a 17% share of 
the Japanese market, compared to a 63% share in the U.S, and 
the generics market is dominated by domestic manufacturers. 
Israel's Teva Pharmaceutical, the world's leading generic 
manufacturer which holds an 11.4% share of the total U.S. 
pharmaceutical market, does virtually no business in Japan. 
 
Profits, Mistrust Dampening Adoption 
------------------------------------ 
¶4. (SBU) Several factors drive the preference for branded 
drugs.  The first is profit.  Many medical institutions in 
Japan dispense pharmaceuticals, earning substantial revenues 
doing so.  Even physicians in private practice often have 
profit-sharing arrangements with nearby independent "mom and 
pop" pharmacies and thus are reluctant to substitute generics 
for the more lucrative brand name drug.  The four drug 
wholesalers that dominate Japan's distribution system refuse 
to stock many generics for the same profit reasons. 
Consequently, medical institutions or pharmacies that would 
like to offer generics are often unclear as to where to 
source the drugs. 
 
¶5. (SBU) The second factor is the Japanese generic 
manufacturers themselves.  Most are small, unsophisticated 
companies with poor inventory management systems that produce 
frequent stock outages.  Doctors and pharmacists hesitate to 
prescribe generics for fear the product will not be 
available.  The third factor is Japanese consumers' 
skepticism of the quality and efficacy of generic drugs 
versus their branded counterparts.  Finally, MHLW regulations 
mandate a "floor" for generic drug prices so that generics 
 
TOKYO 00001782  002 OF 003 
 
 
can only be priced at a 30% discount to branded products.  As 
a result, the "co-pay" differential is minimal causing most 
consumers to stick with their trusted brand. 
 
MHLW's Five-year Plan 
--------------------- 
¶6. (SBU)  Nonetheless, the GOJ recognizes the need to 
encourage adoption of generics in the face of spiraling 
healthcare costs.  The MHLW has developed a five-year plan to 
increase generics' market share to 30% by 2012 which, by some 
estimates, could save the national healthcare system as much 
as $25 billion per year.  The plan seeks to address many of 
the concerns outlined above.  It requires generic 
manufacturers to eliminate in-house stock outages by 2009 so 
that all prescriptions can be promptly filled.  It mandates 
quality testing of each batch of drugs produced and compels 
manufacturers to make the information available upon request, 
both over the Internet and through brochures distributed to 
doctors and pharmacists. 
 
¶7. (SBU) The MHLW has also implemented changes affecting how 
generics are prescribed and how those prescriptions are 
filled.  The Ministry changed the format of doctors' 
prescription pads in April 2008 so the doctor must check a 
box specifying the patient may only be given branded product. 
 If the box is not checked, the pharmacist may give the 
consumer the option of generic or branded medications.  In 
addition, MHLW instituted a system in which pharmacists are 
awarded points based on the percentage of prescriptions they 
fill using generics.  The more points earned, the higher the 
reimbursement.  The Ministry also issued guidelines to 
doctors and hospitals "encouraging" them to promote the use 
of generics or risk losing insurance reimbursements. Finally, 
MHLW issued an ordinance requiring all prescriptions for 
welfare recipients be filled with generic drugs. 
 
A $65 billion market? 
--------------------- 
¶8. (SBU) Still, many feel the GOJ's efforts fall short. 
Despite the healthcare system's perilous fiscal situation, 
MHLW wants to proceed cautiously in promoting generics, 
according to Hiroshi Mitsuhara, President and CEO of Nihon 
Chouzai Company, one of Japan's largest drugstore chains. 
The Ministry fears more aggressive measures may imperil 
domestic branded pharmaceutical manufacturers, he said. 
Regardless of MHLW's and the Japanese public's reticence, 
generics will inevitably play an increasingly important role 
in the Japanese healthcare system and could eventually top 
JPY7 trillion ($65 billion) in sales per year, Mitsuhara 
predicted.  He noted Nihon Chouzai currently stocks over 500 
generic products, more than twice the average of other 
drugstores. 
 
Daiichi Sankyo Buys India's Ranbaxy 
----------------------------------- 
¶9. (SBU) Recognizing this market potential, Daiichi Sankyo, 
Japan's second largest pharmaceutical manufacturer, announced 
the purchase of India's Ranbaxy Laboratories June 15.  The 
eighth largest pharmaceutical company in the world, Ranbaxy 
has annual gross sales of JPY180 billion ($1.7 billion) and 
operates in 49 countries, according to Japanese press 
reports.  Ranbaxy entered the Japanese market in 2002, 
forming a joint venture with Japanese generic manufacturer 
Nippon Chemiphai.  The company's strategic advantage lies in 
its ability to use India's low-cost manufacturing base to 
generate higher profits than its competitors who produce in 
Japan, according to Satyesh Varhadkar, Ranbaxy's head 
representative in Japan. The joint venture currently has four 
products that have been approved by the pharmaceutical and 
medical devices agency and are currently in market, Varhadkar 
stated.  Nevertheless, Varhadkar believes it will be many 
 
TOKYO 00001782  003 OF 003 
 
 
years before generics command a substantial Japanese market 
share.  He lamented the difficulty his and other foreign 
firms face competing in the Japanese pharmaceutical market 
and suggested the only way to overcome the significant 
consumer and structural barriers is to form a joint venture 
with a domestic entity. 
 
Comment 
------- 
¶10. (SBU) Persuading brand-obsessed Japanese consumers who 
will queue up for hours to get the "real thing", whether it 
be Gucci handbags or Krispy Kreme doughnuts, to switch to 
generic drugs will likely be an uphill battle.  With public 
debt running about double GDP and upward pressure on medical 
expenditures due to an aging society, however, the GOJ may be 
forced to take more aggressive steps to push the use of 
generics.  The MHLW goal to raise generics' share to 30% in 
the world's second largest pharmaceutical market could be a 
huge opportunity for U.S. and other generic manufacturers 
willing to take on the coterie of vested interests that 
control the prescription drug market in Japan.  End comment. 
 
SCHIEFFER