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Cablegate: Japan's Generic Drug Market - Small Now but With

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
RUEHFK/AMCONSUL FUKUOKA PRIORITY 8639
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

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