Sandoz’ Generic Drug Push in Japan: Good Timing; Interesting Challenges

Sandoz AG CEO Jeff George’s announcement of a new push into Japan’s generic drug market is blessed with excellent timing. How is the time to overcome the formidable challenges that attempts to increase generic pharmaceutical market share will encounter.

 

Seismic forces at work conspire to make the Japanese market ripe for a strong generic market thrust. The first is that relatively subterranean reports suggest that the Japanese health system, while succeeding in providing almost universal coverage and low-cost even by world standards, is, like the system in France, headed for bankruptcy. The second, and related force at work, is the spiraling average age of Japanese residents. The Japanese elderly are particularly heavy consumers of pharmaceuticals: almost 50% of outlays for medical expenses for the elderly are for pharmaceuticals. A third force in Sandoz’ favor is that almost a third of medical costs are paid by patients out-of-pocket. This means that patients see the costs of the pharmaceuticals they consume. So lower-cost generic drugs should be a welcome option.

 

However,  these silver clouds comes with a dark lining in the form of  challenge to Mr. George. One challenge is embedded in the very reason Japan seems an excellent target of a generic drug push. As the Bloomberg report states, generic drugs account for only 18% of the market versus over 60% in the U.S. But the reason for this low penetration lies in the prestige factor behind the Japanese society’s choice of medical care. Hospitals compete for patients against higher prestige private medical practices and clinics by investing in high-technology diagnostic and imaging equipment. This helps account for the over-abundance (by world standards) of MRI and CT scanning machines and their very low per-use reimbursement rates. What this means for generic drugs is that to penetrate the hospital market, Sandoz must convince them that they won’t lose any prestige by putting patients on generics.

 

That leaves the private practice and private clinic markets. However, in Japan, physicians not only prescribe but dispense drugs. This means of course that they have every incentive to insist on higher priced branded pharmaceuticals. Sandoz challenge for this sector will be to communicate to physicians that margins for drugs they prescribe match in total yen terms, what they’re accustomed to getting for the branded version—if that’s possible.

 

Sandoz.’ big ally here will be the Ministry of Health which sets prices for procedures and drugs annually. Faced with insolvency, they will be looking for help—or bargaining tooth and nail—with pharmaceutical companies. To obtain the needed political clout, it will be interesting to see what Japanese companies Sandoz allies with.  Likewise, patients should be allies since in Japan consuming patients pay about 30% of medical costs, including prescription drugs, out of pocket. Sandoz’ challenge will be to convince patients on a drug by drug basis that the generic brand is as high-quality—and prestigious—as the branded version, thus making it “OK” for the physician and hospital to recommend their product.