In the past decade, Japan’s economy has experienced very slow growth or actual recession. Despite this, opportunities in Japan’s medical device market—currently valued at $21 billion, the second largest in the world—have grown for foreign medical companies. This growth is a product of several factors, such as an increased desire to find cost-effective treatments to reduce burgeoning healthcare expenditures, a more favorable regulatory and registration environment for foreign medical companies, and a rapidly aging population whose healthcare needs are soaring.
One of the main changes spurring growth in the Japanese market is increased deregulation of the distribution sector. In the past, Japan’s distribution system has been a tremendous obstacle to foreign companies.
This system had four main features. The first was the high number of retailers per capita: one retail outlet for every 69 persons in Japan, compared to one for every 126 in the United States. The second feature was the surplus of distribution channels. In the early 1990s, Japan had an average of 2.2 distribution layers between producer and retailer, compared to only 1 layer in the United States and 0.73 in France. The third feature was that Japanese manufacturers were in control of the distribution system via suggested retail prices, company stores, and large rebates, which were awarded to secure customer loyalty to their products regardless of price. Finally, the Japanese manufacturers, suppliers, and distributors often conspired with each other.
Recently, Japan’s Fair Trade Commission has started to enforce deregulation of the distribution sector to improve the pricing and effectiveness of medical product distribution. As a result, the number of layers in Japan’s distribution system has been reduced, thereby ensuring lower retail prices. There will be a clear transition to the new Japanese distribution system over the next few years, and its streamlined structure will be a significant advantage to foreign medical device companies.
The demand for medical devices in Japan, which is projected to grow about 6% annually over the next three to five years, will be driven by such innovative products as high-power laser equipment and ultrasonic surgical equipment. The question for foreign medical device companies is not whether but how to best penetrate and optimize their efforts in the Japanese market.
Marketing: Choosing a Market Entry Strategy
To choose the best strategy for entering Japan’s medical device market, a manufacturer must analyze the size and growth rate of its products’ market segment. If the company is only interested in exporting and the size of the market is not large, it should consider using the services of a skilled distributor. If the size of the market is large, the company should probably consider establishing an office or setting up some sort of joint venture to manufacture and market the products in Japan. Extensive market research should be done in Japan to determine the size and growth rate of the market.
Marketing through a Distributor. The unique characteristics of the Japanese market make distributor searches in Japan differ significantly from those that might be performed anywhere else in the world. Because Japan’s market is very large and strategically important for foreign companies, extra time and effort will be needed to find a distributor that will be appropriate for a long-term relationship. And because the Japanese always think of business relationships as being long term, potential distributors will also carefully evaluate the device company before signing an agreement.
With such careful research being performed by both parties, finding a distributor in Japan usually takes from 6 to 18 months. Often, what a foreign firm’s executives believe about a Japanese distributor is clouded by misconceptions of the Japanese language and culture, and thus a thorough investigation is essential for dispelling any false notions that might cripple their future relationship.
And, of course, concern over unscrupulous behavior is an issue, as it is in every country. One of the most important questions for a manufacturer to consider is: does the Japanese distributor want a principal it can represent on a long-term basis, or does the distributor just want to copy the manufacturer’s products?
Marketing through a Joint Venture. After a testing period to be sure that the objectives and operational philosophies of the manufacturer and distributor are synergistic, the next step in the distributor relationship is the formation of a direct presence in Japan as a joint venture. A recommended strategy for a manufacturer taking this step is to set up an alliance or partnership with its existing distributor or a marketing company in the firm’s sector. Ideally, the partner should be a company that offers different products than the manufacturer, but wants to represent the firm’s products and expertise in order to gain a stronger position in the marketplace. This type of exposure will allow a foreign medical company to assess the market more directly and accurately, and obtain firsthand experience with local distribution channels.
Using the Resources of Another Foreign Company. Small medical companies that do not have the resources to manage distributors or set up a marketing joint venture on their own can consider using the resources of a foreign company that is already in Japan.
For example, PLC Systems Inc. (Franklin, MA) announced in 1999 that it had renewed its distribution agreement in Japan with Imatron Japan Inc. (Tokyo), which distributes medical products in Japan for the U.S.-based diagnostic equipment manufacturer Imatron Inc. (San Francisco).
Using Direct Marketing. Direct marketing by foreign medical companies through mail order catalogs and the Internet is gaining popularity in Japan. However, companies that decide to market their medical products directly need to follow specific government regulations.
For example, medical products listed in mail order catalogs must be approved and licensed by the Japanese Ministry of Health and Welfare (MHW), and the catalog must include approval numbers and license dates. Medical equipment cannot be legally advertised, sold, transferred, or leased through direct marketing without such approval. Regardless, many unauthorized products are still marketed directly in Japan. In principle, those publishing such unlicensed medical product catalogs face consequences from the government if their actions are discovered.
Catalogs should be professionally translated into Japanese or have a Japanese-language insert that clearly explains every product. Also, because the mail order list industry in Japan is not as advanced as those in the West, a foreign medical company should work with an international or Japanese list expert who can clearly understand the U.S. and European list systems to make sure that the correct list is purchased. To speed up mail delivery, labels should be printed in Japanese characters with the word Japan written in English.
Foreign manufacturers who choose direct marketing might want to consider setting up a call center that provides ordering and customer information in Japanese to support direct marketing of medical products. This call center should also be able to process payments in yen, accept credit cards, handle COD transactions, and process refunds and returns. To avoid conflict with Japanese regulations, such call centers should be located outside Japan.
Manufacturing: Setting Up a Facility in Japan
If a manufacturer predicts that there will be a large Japanese market for its product, the firm should consider setting up a manufacturing facility or a manufacturing joint venture in Japan.
Manufacturing in Japan has several benefits over simply exporting medical products or setting up a marketing joint venture. If a company manufactures locally, its products can be modified easily to meet the needs of the Japanese market, with appropriate input from the pertinent members of the medical community. For example, U.S.-based Starkey Laboratories (Eden Prairie, MN), a manufacturer of hearing aids, decided after many years of exporting its products to Japan to set up a manufacturing facility, Starkey Japan (Yokohama), in 1991. By manufacturing its products in Japan, Starkey immediately gained a permanent presence in the country and developed stronger relationships with local distributors and consumers. As a result, the company was able to adjust its operations easily to work with the peculiarities of the Japanese distribution system, and the company currently holds the largest share of the Japanese market for customized hearing aids designed to be worn inside the ear.
Companies manufacturing locally can also shorten the time to market for their products. An example is Boston Scientific (Natick, MA), which recently switched from exporting to actually manufacturing its cardiac catheters in Japan. The company’s Japanese factory now produces in two weeks what would have taken the company three months to export.
Administration: Setting Up an Office
Representative Offices. The easiest type of office to set up is a representative office for promoting the company’s business. In order to do this, only a few registration documents are necessary, and expenses are minimal. However, at least theoretically, representative offices are not permitted to move past promotional activities to perform any type of business transaction, including sales, importing, shipping, or invoicing.
Branch Offices. A branch office is allowed to perform the business duties denied to a representative office; however, there are higher costs associated with setting up a branch office. For the company to begin operating, for example, the branch office must be registered, certain fees must be paid, and certain procedures and paperwork must be approved by the government. Specific procedures involve filing the company’s representative seal, registering tax and related expense items, and submitting proxy notifications. Branch offices in Japan are usually subject to corporate income tax.
Subsidiary Corporations. A subsidiary corporation offers advantages over representative or branch offices, such as faster arrangement of local financing, attraction of local employees, and leasing of office space. Subsidiaries, however, demand a minimum capital investment of about $100,000. The Japanese government also requires subsidiaries to have a full-time director in the country.
The Japanese MHW requires that all medical products sold in the country be registered. Ensuring that Japanese citizens will have access to the newest technology in medical devices and that devices will be safe and effective are the goals of this agency. The Japanese expect the manufacturers and importers of medical devices to be socially responsible. MHW, therefore, maintains stringent quality standards for medical products as well as for device manufacturing or importing facilities. Consistent with these MHW regulations, the Japanese government demands that foreign medical manufacturers maintain either a direct or an indirect physical presence in Japan to ensure an immediate response to safety problems related to the use of a medical device.
Kyoka and Shonin. A medical device manufacturer, whether domestic or foreign, must first obtain two types of consent from MHW: a kyoka (license) and a shonin (approval). A kyoka provides the medical device manufacturer or distributor with authorization to market its products in Japan. Every manufacturing plant and representative office in Japan is required to have a kyoka, which must be renewed every five years. A manufacturer must meet the conditions of Articles 6 and 18 of the Pharmaceutical Affairs Law and must employ a technical director at every plant in Japan in order to obtain a kyoka. In the case of foreign medical device manufacturers, the kyoka will be given to an in-country branch or a subsidiary office or to the Japanese distributor responsible for importing the manufactured product.
A shonin, another type of consent, is obligatory for every product that the medical device manufacturer markets in Japan. The shonin is granted once MHW is content with the safety and effectiveness of the medical device. Unique products may require clinical trials in Japan, whether or not the products have undergone testing in the United States or Europe.
Direct versus Indirect Registration. Should a foreign medical manufacturer decide to set up an office in Japan, the company can establish a representative office, a branch office, or a joint venture or subsidiary corporation. In this scenario, the foreign manufacturer can then directly register its products with MHW in its own name.
If a foreign medical company decides instead to export its products to Japan through a Japanese distributor, the manufacturer must decide whether to register its products directly in its own name via an in-country caretaker (ICC) or to allow the local Japanese distributor to register the company’s products indirectly in the name of the distributor.
The initial costs of direct registration are high—as are the costs for reregistering to obtain direct registration in the manufacturer’s name or via an ICC—but there are major advantages to this type of registration. The most important benefit is that the manufacturer retains control of its Japanese distributor and the product’s marketing. Also, the manufacturer can appoint multiple distributors.
If the device is registered indirectly (i.e., in the name of a Japanese distributor, not in the U.S. manufacturer’s name) and the U.S. manufacturer wishes to transfer device registration to a new distributor or gain direct registration, there are two ways, both expensive. The first way is an “unfriendly” transfer and reregistration of the product with new documentation. The second is a “friendly” transfer and reregistration using the old documentation.
Unfriendly transfers have several costs, including lost sales during reregistration. In Japan, sales cannot be started without a valid registration. Sales following reregistration may also be lower because of lost credibility during reregistration. Unique products may take two years to reregister, sometimes requiring clinical trials.
A friendly transfer is also expensive. The major cost is paying the previous distributor for work already done, including initial registration, and for future income loss and the distributor’s inventory. The previous distributor, for negotiating purposes, will probably calculate the higher cost of an unfriendly transfer and use that figure to start the “friendly” negotiations.
For both friendly and unfriendly transfers, modifying an existing registration means buying the distributor’s interest, and valuing a Japanese company is complex. Japanese mergers and acquisitions are uncommon, Japan uses different accounting practices, and there are cultural differences.
If the previous distributor is retained after direct reregistration, there are dangers, including continuation of the inadequate performance that may have triggered the transfer. However, such arrangements may turn out to be unavoidable due to high costs, marketing considerations, and timing issues.
Getting Insurance Reimbursement
Foreign medical device companies, once registered, will need to obtain reimbursement for their products. Future sales of a product depend upon compensation under the National Health Insurance system, which covers nearly all of Japan’s population.
The Japanese reimbursement system, known as a piecework payment system, assigns points (with one point equal to one yen) to every medical examination or treatment. The payments are established for the entire country, regardless of medical institution or doctor. Subsequently, the insurer compensates the medical institution through a screening and payment agency.
In order to determine the type of compensation, MHW’s Health Insurance Bureau classifies medical products into the following three categories: technical fees, special treatment materials (STMs), and highly advanced medical technology systems (HAMTS).
Technical fees are reimbursed on a per-procedure, not a per-product, basis. This category, therefore, acknowledges only the price of the procedure, not the price of the products used, posing certain problems for foreign device manufacturers.
STM reimbursement is handled on a per-product basis according to device function, but the quick rate of technological innovation makes it difficult to classify each medical device according to its function.
HAMTS reimbursement categories include breakthrough technologies noted for their safety, effectiveness, and high degree of social acceptance. Once again, reimbursement under this category is per procedure, not per product, and the main problem in setting prices for HAMTS products is the lengthy amount of time that clinical trials take during product approval.
Setting a Price
In the typical Japanese medical distribution system, the markup from the manufacturer to the first line of distribution is about 30 to 40% of the list price, with an extra 20% markup for each additional level of distribution. Therefore, when setting prices in Japan, the list price is the starting point for calculation.
Japan’s complicated distribution system has led to large increases in product prices, making many Japanese products (medical devices in particular) among the most expensive in the world. For example, pacemakers and balloon catheters are respectively 1.7 to 6.9 and 1.7 to 7.6 times more expensive in Japan than in the United States and Europe.
By changing the way suppliers, wholesalers, and hospitals do business with each other, MHW and Japanese medical equipment manufacturers are trying to lower medical equipment costs. Today, for example, the Japanese medical equipment industry operates primarily through verbal contracts, which do not reveal hidden costs, such as charges for extra services not requested by the customer. MHW is suggesting a system of written contracts that would disclose such hidden costs.
While the Japanese economic slowdown, shrinking budgets, and increased price competition have leveled off growth for some medical device sectors, a rapidly aging population and cost-cutting initiatives have increased demand for technologically innovative products. The demand for high-power semiconductor-controlled laser equipment, ultrasonic surgical equipment, incision and congelation equipment, and new cerebral radiotherapy and navigation systems is expected to continue to increase and drive the Japanese medical device market over the next several years. Foreign medical companies will therefore continue to find growth opportunities in Japan’s medical product market, but they should choose their entry strategies carefully to maximize their success.