Japanese Drug Firms’ U.S. Dilemma

In the last two years, Japanese firms have quietly acquired four U.S. pharmaceutical concerns. Having won large shares of our automotive, electronic and machine tool markets, are the Japanese turning pharmaceuticals into their next U.S. playing field? And if so, should we assume that their players are in good enough shape to give the home team a run for its money?

The answer to both questions is an equivocal “yes.”

For a variety of reasons, Japanese pharmaceutical firms in recent years have begun to look beyond their borders for new markets. The barriers they have faced--and continue to face--in the United States are significant. Any market share they are able to acquire will take considerable time, money and effort. In the end, however, their impact on the U.S. market could prove significant.

Although Japan is the world’s second-largest market for pharmaceuticals, it exports less of those products than almost any major producer. Until recently, it has had little need to. Only 20 years ago, foreign companies were prohibited from operating independently in Japan, and it was not until 1984 that foreign drug companies could go directly to the Konseisho (the Japanese equivalent of the U.S. Food and Drug Administration) for drug approval.

However, Japan’s economic and health policies are beginning to change. Faced with health-care costs that are rising even faster than in the United States, the government has drastically reduced reimbursement levels for drugs, has shifted more responsibility to consumers in the form of a co-payment and is considering separating prescribing and dispensing.

As Japan has eased its restrictions on foreign drug companies, well-established U.S. and Western European pharmaceutical firms have entered the market. With their large research budgets, the international giants pose a significant long-term threat to Japanese control of its domestic market.

Given the economic and competitive pressures of their local market, the mandate for Japanese pharmaceutical companies to look abroad for new opportunities becomes both clear and compelling. The view toward the United States, however, has not been an unobstructed one.

The chief obstacles are research and development and the U.S. regulatory environment.

Medical practice is different in Japan and has led to different research priorities. Japan has aggressively developed antibiotics in response to strong local demand but has not developed potent cancer therapies. U.S. oncologists are prepared to use very strong drugs with serious side effects; Japanese physicians use much less potent agents. Also, Japanese companies have lately been investing more in cardiovascular disease and other conditions in an effort to compete beyond their borders. But because drug development takes as long as 10 years, rewards of the cardiovascular research will not be fully realized until late in this decade.

As for the U.S. Food and Drug Administration, its regulations are generally more stringent than in Japan. In addition, it can take years to learn the intricacies of steering a drug through the FDA’s new-drug application process. Most Japanese companies do not have that experience.

These two challenges have been made even more daunting by the fact that Japanese companies have strong cultures dictated by leaders whose entire careers have been focused on the domestic market. Middle managers, however, often have educational and operating experience outside Japan. As they move into leadership positions, they will use their greater appreciation and understanding of the foreign marketplace to move aggressively into the United States and Europe.

At the same time, other challenges--such as manufacturing, distribution and marketing--will become less onerous. Wholesalers--not drugstores--now distribute the bulk of pharmaceutical products in the United States, and the need for huge sales forces is declining as the number of health management organizations and large physician groups increases.

The long-term health of Japanese ventures in the United States will depend on the companies’ ability to commercialize a sufficient number of attractive, high-sales-volume products, an effort that will require extensive research and development and an ability to shepherd new drugs through the FDA approval process.

Such an effort will require more than licensing agreements and joint ventures with U.S. firms. In order to compete fully in the U.S. market, Japanese companies must establish a wholly owned American subsidiary, one engaged in everything from product development to manufacturing and sales. Several Japanese firms have begun to move in that direction by acquiring U.S. firms; others, however, will be frustrated by a lack of U.S. companies available for acquisition.