JAPAN: GOVERNMENT INFLUENCE ON THE PHARMACEUTICAL INDUSTRY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000201750001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: December 22, 2016
• Document Release Date: April 26, 2010
• Sequence Number: 1
• Publication Date: July 25, 1985
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/04/11 : CIA-RDP85T01058R000201750001-1 (9)
I7S Cil A_d
Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
25 July 1985
Japan: Government Influence on the Pharmaceutical Industry
Summary
Tokyo has not used industrial policy to target
the pharmaceutical industry, although government
actions have profoundly affected its growth potential.
In the 1960s and 1970s, Japan's medical insurance
reimbursement program encouraged excessive drug use,
and thus rapid expansion of the pharmaceutical
industry. Recent budget-dictated price cuts for drugs
covered by the insurance program have caused the
domestic industry to stagnate, however, and have
reduced corporate profits. We believe the price
reductions also have provided US pharmaceutical firms
with an opportunity to increase their business in
Japan, as Japanese firms look to joint ventures to
regain momentum. Nonetheless, problems remain for
foreign firms that seek to market their products in
Japan.
This memorandum was prepared by Office of East 25X1
Asian Analysis. Information available as o 25 July 1985 was
used in its preparation. Comments and queries are welcome and
may be directed to the Chief, Japan Branch, Northeast Asia
Division, OEA, on 25X1
Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85T01058R000201750001-1
 Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85T01058R000201750001-1
Controlled Pricing
Acting on its perceived "mandate" to ensure that Japan does
not suffer a repeat of the thalidomide disaster of the 1960s,
the Ministry of Health and Welfare has developed complex
standards and certification procedures for new pharmaceuticals
that must be met before the drugs are approved for manufacture
and sale in Japan. As part of its national medical insurance
system, initiated in 1961, Tokyo has also devised an elaborate
system for pricing prescription drugs, which some suspect
restricts overseas entry of foreign firms into Japan's
pharmaceutical market. Only 15 percent of the drugs in Japan
are sold over the counter and, hence, priced by market forces.
The costs of the remaining 85 percent--prescription drugs--are
covered by the country's socialized medical system. The Health
Ministry sets the maximum reimbursement that doctors who
prescribe these drugs can receive. The reimbursement price for
a drug is determined after comparing its effectiveness against
that of similar products.
Budget Problems...
Until recently, the reimbursement system, together with the
pharmaceutical companies' own pricing policies, encouraged
excessive use of prescription drugs. Doctors had an incentive
to prescribe as many as possible because drug firms routinely
sold their products to doctors at prices below the maximum
reimbursement rate, allowing the doctors to profit from the
difference. Such "skimming" by physicians reportedly earned
them as much as 50 percent of their income. Because the state
picked up the tab, patients did not object. Government medical
expenditures consequently skyrocketed, reaching $55 billion in
1982, quadruple the 1972 figure, with drug sales accounting for
approximately $18 billion.
With budget problems besetting Japan, the Health Ministry
has been forced to undertake several measures to curb medical
expenditures:
25X1
25X1
Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85T01058R000201750001-1
 Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85T01058R000201750001-1
o In 1983, a 1973 law providing the aged with free medical
treatment was rescinded, requiring elderly patients to bear
a small share of their medical costs.
o An October 1984 revision in the Health Insurance Law
requires patients to bear 10 percent of total medical
examination costs. The change is expected to reduce the
number of patient visits to hospitals and clinics and to
cut the demand for drugs.
o The Ministry has removed somas, including vitamins,
from insurance coverage.
The Ministry's most effective move has been to reduce the
official reimbursement price for prescription pharmaceuticals.
The price has been cut four times, most recently by 6 percent in
March, with a cumulative average reduction of 46 percent for-the
last four years. The 1981 cut of 18.6 percent slashed national
medical expenditures by 6.1 percent.
..Affecting Industry Growth Potential
Aside from reducing the growth in national medical
expenses, the reimbursement price cuts have depressed industry
growth and company performance. Total 1984 pharmaceuticals
production in Japan was approximately $15.9 billion, down 1.6
percent from 1983. Production in 1985 is expected to stagnate,
which contra sharply with the double-digit growth in the
The 1984-85 price reductions affected Japanese
pharmaceutical firms more adversely than earlier cuts. When
drug prices were initially lowered in 1981, drug firms could
protect their profits by not reflecting the full official price
reduction in the prices they charged doctors and hospitals.
Thus, doctors' incomes were pinched as the differential between
purchase and reimbursement prices narrowed. Recently, however,
cuts have forced pharmaceutical companies to engage in
competitive discounting--in terms of prices charged to
physicians--to keep their market shares. Profits, therefore,
have been reduced.
We believe the government has had only a minimal role in
guiding the industry through its current troubles and has been a
stumbling block at times. Press reports indicate that Tokyo has
done no more than recommend that the industry voluntarily
Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85T01058R000201750001-1
 Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85T01058R000201750001-1
realign its structure while raising its research and development
capability and exports. According to the US Embassy in Tokyo,
Health Ministry officials at the June MOSS talks said the
Ministry does not solicit manufacturers' views during the
decisionmakina process on price reductions. In fact,
officials of Japanese pharmaceutical
companies have complained about government regulations and have
pressed for measures to streamline the approval process for new
drugs.
Japanese drug firms have reacted to the profit squeeze and
government advice by increasing R&D outlays. This move suggests
they see greater chance of realizing profits from the new price
structure if they sell new products. Major Japanese
pharmaceutical companies--such as Takeda-Chemical Industries,
Sankyo Co., and Yamanouchi Pharmaceutical Co.--currently earmark
6 to 10 percent of annual sales for R&D. This compares with 3
percent for Japanese chemical companies and 2 percent for all
Japanese industry. Major US drug firms have spent about 15
percent of sales on R&D for decades.
As the domestic market shrinks, Japanese firms have begun
to look to international sales. Tie-ups with foreign firms,
ranging from R&D to sales, are increasing, and Japanese firms
are beginning to set out on their own in the international
market:
o Sankyo is building R&D facilities in Tokyo for gene
recombination research as a base for cooperating with Du
Pont and Celltech (UK) in the development of new drugs.
o Takeda has joined with Abbott Laboratories to market a
Takeda antibiotic preparation in the United States.
o Yamanouchi will begin producing overseas once its exports
reach $40 million a year, according to press reports. The
company, which exported about-$24 million in 1984, expects
to attain its goal in 1986 and is conducting feasibility
studies on the profitability of operating a plant in
Western Europe.
Effect on US Companies in Japan
On the basis of available evidence, we believe the Health
Ministry's pricing policy is not part of an effort to restrict
foreign pharmaceutical firms from the Japanese market. In our
view, recent price cuts could improve US prospects in Japan, as
Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85T01058R000201750001-1
 Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85TO1058R000201750001-1
Japanese firms attempt to regain their momentum through closer
links with foreign companies.
If US firms increase links with Japanese firms, however,
they may eventually encounter problems with Tokyo's
unwillingness to permit the transfer of pharmaceutical licenses
from US-Japanese joint ventures to wholly US-owned subsidiaries.
In the April and June MOSS talks, the distinction between
"friendly"--or mutually agreed on--and "unfriendly" license
transfers caused problems, according to the US Embassy in Tokyo.
Under current Japanese regulations, if a US company attempts to
transfer the license to manufacture a drug without the Japanese
partner's approval when that licensing agreement expires, the US
firm must reapply for a license. The process requires
regenerating and resubmitting testing data, which may involve a
delay of two or more years.
Even if Tokyo agrees to change such rules, US firms still
face an uphill battle to increase their share of a stagnant
market in Japan. foreign-owned 25X1
pharmaceutical firms have increased rapidly since foreign
capital participation in the industry was liberalized in 1975,
but the market share of foreign-owned firms that do their own
sales, promotion, and distribution in Japan stands only at 6
percent. 25X1
If US companies can gain a foothold now, it bodes well, in
our view, for future growth. The number of Japanese over
65--currently 10 percent of the population--will double in the
next 30 years. This increase is certain to stimulate future
demand for pharmaceuticals.
25X1
Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85TO1058R000201750001-1
 Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85T01058R000201750001-1
Subject: Japan: Government Influence on the Pharmaceutical
Industry
Original - William Barreda, Department of the Treasury
1 - Doug Mulholland, Department of the Treasury
1 - Donald Gregg, Office of the Vice President
1 - Thomas Hubbard, Department of State
1 - William Brooks, Department of State
1 - Rea Brazeal, Department of State
1 - Defense Intelligence Agency
1 - Byron Jackson, Department of Commerce
1 - Clyde Prestowitz, Department of .Commerce
1 - James Murphy, Office of the USTR
1 - Glen Fukushima, Office of the USTR
1 - National Security Agency
1 - OEA/NAD/Japan
1 - OEA/NAD/Korea
1 - OEA/NAD/STI
1 - OEA/NAD
1 - OEA/China Division
1 - OEA/Southeast Asia Division
1 - OEA Production Office
1 - D/OEA
1 - DDI
1 - Executive Director
1 - PDB Staff
1 - NIO/EA
1 - C/PES
1 - C/DO/PPS
1 - C/EA/RR
1 - OCR/ISG
1 - NIC Analytic Group
1 - CPAS/ILS
5 - CPAS/IMC/CB
1 -
DDI/OEA/NAD/JAPAN/
(25 July 1985)
Sanitized Copy Approved for Release 2011/04/11: CIA-RDP85T01058R000201750001-1