Japan is comprised of four major islands, spanning from the island of Hokkaido at the northern end down to the southwestern island of Kyushu. Honshu, the largest and main island, lies in between next to Shikoku. These islands are connected by an extensive network of roads, trains and air routes including undersea tunnels and bridges. Honshu is divided into 47 prefectures (or states) including Tokyo, which is similar to the District of Columbia in the U.S. Japan can be divided into 9 different cultural regions, which plays a significant role in determining geographic sales territories. Although Japan is homogenous, there are some distinct cultural differences from region to region that could affect marketing strategies. The total population of Japan is about 126.7 million and the major cities in order of population can be seen in Figure 1.
Figure 1: 2000 Major Population Centers
|Tokyo (including Yokohama, Kawasaki)||12.7 million|
|Osaka (including Kyoto, Kobe)||5.5 million|
|Sendai||Less than 1 million|
|Niigata||Less than 1 million|
Source: Japanese Government, Monthly Statistics of Japan 2000
The status of the physician in Japan is omnipotent, somewhat like the position of the U.S. doctor 40 or 50 years ago. The physician’s diagnosis is usually infallible. Furthermore, because physicians are in charge (or sometimes are the owner) of the hospitals, they are the key decision makers for most major hospital purchases. Because they control what gets purchased, it is imperative that a manufacturer’s medical product appeals to the doctor during the pre-approval and marketing phases. Since doctors are not required to submit any justification for major capital purchases to local health authorities, they tend to acquire the most advanced and modern medical equipment. It is not uncommon to see two small hospitals (200 beds or fewer) located near each other with the latest MRI model as well as CAT scanning equipment.
Only within the last five years has the general public become more aware of healthcare and people are just beginning to scrutinize the medical community and hold them accountable for their actions. While still very rare, medical malpractice lawsuits, criminal accountability and out-of-court settlements are now challenging the physician’s “infallibility.” Even though the concept of informed consent has been around for the last five years, people are still reluctant to question the authority of the doctor. If a patient researched his disease and found up-to-date information regarding the treatment of it, he would run the risk of crossing his doctor if he were to offer such information to the doctor.
Another important issue within the medical community is the loyalty Japanese doctors maintain to their former professors and medical schools throughout their careers. Hence, purchasing decisions, as well as their selection of new medical techniques, are oftentimes governed by the direction advocated by their school and their professors, rather than their own judgment. This type of influence can work either for or against a medical device company. For example, acceptance of a medical device by the professor would basically guarantee that the graduates of that school would follow suit when purchasing decisions arise. On the other hand, rejection would also be complete and across the board. Another delicate situation is the interschool rivalry between the leading schools of medicines. If one school accepts a medical device, the other school, by sheer virtue of being a rival, may reject it. Thus, professors from the rival school may have a difficult time accepting and using the medical device.
The Japanese medical device market is one of the most conservative markets in the world. As mentioned above, influence from the universities plays a large role in the purchasing process. Modern or new medical technology is not implemented until it has been thoroughly tested overseas and tried by key doctors in Japan. Choosing an inappropriate school/physician to approve a medical device could also eliminate its chances for use before it is even approved by the government or introduced to the market.
Figure 2: Leading Causes of Death
|Leading Causes of Death, 1997 (Men)
Leading Causes of Death, 1997 (Women)
|Cancers (33.6%), Heart Diseases (14%), Cerebrovascular Diseases (13.2%), Pneumonia (8.5%), Accidents (5.1%), Other (26.1%)
Cancers (26.1%), Cerebrovascular Diseases (17.5), Heart Diseases (16.9%), Pneumonia (8.8%), Senility (3.6%), Other (27.1%)
Source: Ministry of Health and Welfare, 1997
Figure 3: Surgeons by Specialty
|Practicing Surgical Specialty||Number of Practitioners|
|Plastic and Cosmetic Surgery||2,470|
Source: Ministry of Health and Welfare, 1996
The Japanese economy is rebounding from the no-growth 1990s. The first quarter of 2000 yielded real GDP growth of 2.41% versus 1.53% in 1999’s first quarter. An estimated 3.1% growth was seen in 2000’s second quarter versus .96% in the second quarter of 1999. The corporate sector is growing more confident as profits rise, stock prices stabilize and information technology (IT) related industries take off. Deregulation measures are also underway, creating a better business climate in Japan for U.S. medical device companies.
Figure 4: Economic Statistics 1999
|GDP purchasing power parity||$3.1 trillion|
|GDP per capita||$23,600|
|Total Imports||$322 billion|
Source: CIA World Factbook
Medical Device Market
Japan’s $23.4 billion market (1999) for medical devices is second only to the U.S. market and it is steadily growing. Even though Japan’s real GDP growth in 1999 was only .5%, the medical device and diagnostic market grew at a steady 4%. U.S. medical device exports over the next few years are expected to grow 5-10%, which means Japan’s procurement of U.S. medical devices is expected to increase by more than $100 million annually. U.S. medical device companies’ revenue from medical devices exported to Japan in 1999 was almost $5 billion. U.S. medical device companies account for 67% of Japan’s import market. The breakdown of U.S. medical device exports can be seen in Figure 5.
Figure 5: 1999 U.S. Medical Device Exports in 1,000 Dollars
|Latin America||European Union||Japan|
|Surgical & Medical Instruments||573,109||2,170,712||750,604|
|Dental Equipment & Supplies||72,389||253,199||59,379|
|X-Ray & Related Irradiation Apparatus||133,775||599,162||249,977|
|Electromedical & Electrothermal||394,459||1,880,989||718,108|
|Total Medical & Ophthalmic||1,510,949||6,287,468||2,251,667|
Source: International Trade Administration, U.S. Department of Commerce
Demand for medical devices is being driven by the proliferation of diseases, such as cancer, strokes and heart disease. In addition, Japan is aging about twice as fast as most western industrialized countries. According to Japan’s Ministry of Health and Welfare (MHW), about 31% of Japan will be 65 or older in 2040, whereas only 17% of the population is 65 or older today. The ratio of national medical care expenditures on the elderly to total healthcare expenditures is also growing. In 1985 the ratio was 25.4%. In 1996, the ratio was 34.1% and it is expected to continue growing as Japan ages. Such demand is fueling significant sales of contact lenses, specialty catheters for blood vessels, patient monitoring systems, oxygen therapy, laser surgical equipment, artificial joints, artificial cardiac pacemakers and cardiac valve prosthesis.
Deregulation Issues Become More Prominent but Actual Implementation is Slow
As a result of the May 1999 U.S. – Japan Enhanced Deregulation Initiative, Japan agreed to more actively pursue a policy of deregulation. For example, a soft contact lenses grouping system was introduced that categorizes contact lenses by the chemical disinfectant solutions they use. Before, each different brand of contact lenses had to be approved separately, with separate clinical trials. The new grouping system allows manufacturers to obtain MHW approvals for the use of all brands of contact lenses in a group by testing one representative in the group.
Further measures are also in progress, albeit at a slow pace. The MHW intends to improve the approval process for medical devices by (1) clarifying the criteria that distinguishes “me too” devices from new devices and (2) encouraging and helping increase the contact between Japanese regulatory bodies and foreign medical device companies. The Pharmaceutical and Medical Devices Evaluation Center (PMDEC) and the Japan Association for the Advancement for Medical Equipment (JAAME) will now help the Japanese government review applications in the approval process instead of just the Japanese government handling them by itself. The PMDEC and JAAME are already helping the government to review applications for pacemakers and orthopedic implants. In addition, foreign clinical test data that meets Japan Good Clinical Practice (GCP) standards or ICH GCP will be more widely accepted (at least in theory) by the MHW in the future.
In February 1999, the Health Industry Manufacturers Association (HIMA) proposed a series of more specific changes, in hopes that it could motivate Japan to keep pace with its commitment to deregulate the medical device sector. These measures included the following recommendations:
- The Ministry of Health and Welfare should establish the appropriate functional classification for reimbursement for a medical device product within 45 days of the issuance of shonin (the registration approval document). Currently, this timeframe is “undefined,” thus oftentimes delaying reimbursement listings for months. To effectively adhere to this shortened timeframe and promote efficiency, the MHW should reimburse the product at twice the price requested if it does not establish function classification within the specified timeframe.
- In conjunction with the shortened functional classification timeframe for reimbursement, the MHW should eliminate the Highly Advanced Medical Technology (HAMT) program. Currently, the HAMT program is basically a classification category where new and unique products and technology are put into for further “evaluation.” Unfortunately, such evaluation is oftentimes very slow and delays the entry of new competing products into the marketplace. In addition, the HAMT program requires companies to basically give away their products without reimbursement to hospitals for “training” purposes, even after shonin has been issued.
- The MHW should have a faster approval system for products that have been available in the U.S. or Europe for more than two years.
- The MHW should treat in-vitro diagnostic (IVD) products as medical devices rather than pharmaceuticals. This would shorten approval times since drugs are generally more difficult to register in Japan than medical devices.
Despite the proposed improvements discussed above, Japan has yet to follow up on the majority of its deregulation promises from the Birmingham Summit of G-8 countries in 1998 or the HIMA recommendations in 1999. For example, measures such as recognizing and giving appropriate reimbursement for the value of innovated medical devices and shortening the approval process timeframe have not been implemented. Thus, despite some progress in the regulatory area, U.S. and European medical device manufacturers still face delays, inefficiency and barriers to market entry.
Pricing and Reimbursement
With respect to pricing and reimbursement, there have been some improvements, but also some problems which still linger. In 1999, the MHW indicated that medical technology prices might be cut an average of 10%. However, on April 1, 2000, price adjustments from the bi-annual market survey and re-pricing process for medical devices were favorable. After extensive discussions regarding “equity” issues and the “value of medical technology” with U.S. medical industry organizations like HIMA, the proposed cuts were reduced. The average price cut was 5%, or half the level (10%) anticipated. This preserved about $400 million in U.S. revenues. A sample of the new average cuts can be seen below in Figure 6.
Figure 6: Official Reimbursement Price Adjustments – April 1, 2000
|Medical Device||Price Cut (%)|
|PTCA heart catheters||5.2%|
Source: HIMA, 2000
As discussed earlier, even though provincial governments are able to purchase medical devices with high reimbursements listings through the implementation of the OGVM, the actual reimbursement process is still plagued by other inherent inefficiencies. For example, a technical fee is how much a doctor can legally charge the patient for a treatment that involves the use of the medical device, and a technical fee approval is needed before the insurance approval of the medical devices is granted. The committee approving technical fees, however, meets only once or twice a year. The medical device company must wait until the committee meets, regardless of when their application was approved. Thus, it can take 1-2 years from the time regulatory approval is granted to the time that reimbursement is approved. With universal healthcare in Japan, if an approved product is not reimbursable, it will simply not sell.
The Eldercare Market
Japan’s eldercare market took off in April 2000 when private organizations and government agencies began providing services to senior citizens under the government’s new long-term-care insurance program. The national insurance program gives seniors, aged 65 and older, new access to services ranging from nursing care to funding for home medical equipment. All Japanese citizens, aged 40 and older, must pay into the plan, and beneficiaries must pay 10% of the costs of the care they receive. So far, over 2 million of the 21 million seniors residing in Japan have applied for benefits under the new system. If aging trends continue as projected, then the long-term-care insurance program will be inundated.
Figure 7: Aging Demographics Forecast (x 1,000)
|Age 65 and older||21,870||28,126||33,335||32,768||33,726||32,454|
|Percent of Total Population||17.24%||22.04%||26.85%||27.97%||30.95%||32.29%|
Source: Ministry of Health and Welfare, Demographic Statistics, 1999
In the past, Japanese families typically took care of their elderly at home. If no family member was available to care for their elderly, then they had to pay a caretaker for services and medical equipment that were not reimbursed by the national health insurance system. Sometimes the elderly had to resort to long-term, “unnecessary” hospitalization to receive treatment (i.e. a typical hospital stay in Japan is 40 days versus 2-3 days in the U.S.). With money now available from the government insurance program, there is a new demand for eldercare services and home care equipment that did not exist before. Seniors who want or need services must apply for them through the local government office, where a trained care manager assesses and evaluates the level of care needed. Before, the elderly had to utilize government-supplied services and medical devices for homecare. Under the new system, private companies can provide services or equipment and then bill the government. Because 90% of the cost is subsidized by the government, regardless whether the services and equipment are provided by a private company or government agency, there is a increased incentive to utilize private companies.
Furthermore, the shortage of beds in long-term care hospitals will drive families to use the new long-term health insurance program. Today, there are over 21 million seniors in comparison to only 99,171 beds intended for long-term care, and the number of seniors will only continue to grow (see Figure 8). As hospital bed shortages and government policy encourage patient treatment at home, the new insurance program opens opportunities for medical device companies to develop and market high quality home care equipment. Thus, eldercare represents a large potential market for medical device companies with products like dialysis equipment for kidney patients, oxygen generators for lung patients, hearing aids and pacemakers.
Figure 8: Institution Types and Bed Counts, 1998
|Institution Type||Number||Number of Beds|
|Long-Term Care Hospitals||1,269||99,171|
Source: Ministry of Health and Welfare
*Note: The average size of Japanese medical institutions is substantially smaller than in the U.S.
The main problem that has surfaced since the launch of the new long-term-care insurance program is resource shortages. The MHW is depending on local governments to meet the increasing demand for services and home care equipment. Unfortunately, these smaller government agencies are oftentimes not well equipped to handle the new levels of demand. Seniors sometimes cannot get the services they require or when they do get the services it is often rushed and of poor quality. In addition, there is still reluctance to take back elderly relatives who were previously hospitalized under the former health insurance system. In order to reap the benefits of the long-term-care insurance system, the beneficiary or the family must pay 10% of the cost, whereas before, the total hospitalization costs were covered by the health insurance system.
Market Entry Strategies: Company Experience in Japan
Foreign companies should study the size and growth rate of their medical device product in the Japanese market before determining an entry strategy. If the market size for a medical device is large, the foreign medical device manufacturer should consider establishing an office in Japan or setting up a joint venture to market or manufacture its products in Japan. If the medical device has less market potential, the company may only want to export via a qualified distributor.
Distribution and Marketing Strategies: ArthroCare, Palomar Medical Technologies, AngioDynamics and Positron
Finding qualified distributors in Japan is oftentimes “tricky” and complicated. Foreign medical device companies should scrutinize the Japanese distributor thoroughly before signing an agreement. Similarly, Japanese distributors will evaluate the foreign medical device company before signing an agreement because the Japanese see business relationships as long term investments. The foreign medical device company should also assess whether the Japanese distributor wants to form a long-term relationship or is the distributor looking to copy the manufacturer’s products? Signing up the wrong distributor who does not perform can make changing distributors in the future an expensive and difficult process.
Many Japanese importer and distributors claim to have nationwide coverage, with sales offices in each of the major cities. Effective nationwide coverage, however, is limited to a few distributors. Oftentimes, hospitals and local distributors will have long term relationships, making it difficult to sell to the hospital through anyone but the specified local distributor. Usually, these small local distributors also serve as a financing company, offering the hospitals payments plans, thus deferring payment six to eight months. In addition, distributors rarely promote a foreign medical device. Instead, they simply deliver the medical device and invoices, do inventory shelf counts at the hospital and collect payments. If there is any promotional effort, it is usually limited to pamphlets or exhibitions at medical meetings. Simply put, “selling” in Japan has a different connotation than “selling” in the U.S.
In addition, it is important to understand the position of the foreign medical device company and its distributor in the Japanese marketplace. In Japan, the customer is in a higher position (this is supposed to be the case in the U.S., but it does not always happen). The Japanese medical field is a delicate marketplace because the customer is king, the doctor is infallible and the professor is even higher. The main principle behind selling in the medical device market in Japan is: “You never sell anything to a doctor and he never buys from you. Instead, he will test your product, and if it is acceptable, you may deliver the medical device and he will allow you to bill his hospital.” The major implication is that doctors do not like the idea that they are being taught by a non-doctor and want to remove themselves from “business practices” as much as possible.
For example, ArthroCare Corporation ( Sunnyvale, CA) has set up a distributor agreement with Kobayashi Pharmaceutical (KP) — its exclusive distributor. ArthroCare manufactures Coblation based technologies that have applications for arthroscopic, spinal and ENT surgeries. Because Arthrocare’s products limit the damage to nearby tissue during surgeries, surgeons can operate with a high level of precision and thus, reduce pain and accelerate recovery. KP has been and still is responsible for acquiring marketing approval for ArthroCare’s products. KP is already the exclusive distributor for ArthroCare’s arthroscopic system. They have been working together since 1997 and are achieving similar success in 2000 with the ENT and spinal surgery equipment. With over 200 sales representatives, long-term relationships with the Japanese clinical and academic communities and complementary products, KP is well positioned to effectively market and distribute ArthroCare’s ENT and spinal surgery systems.
Second, Palomar Medical Technologies, Inc. ( Burlington, MA) and the Mutoh Company also have a long-term business relationship. Palomar manufactures the Palomar SLP1000super long-pulse laser system for hair removal, a smaller and lighter hair removal system that is ideal for mobile or small physician offices. On April 3, 2000, Palomar signed a distributor/marketing agreement with Mutoh for the Palomar SLP1000 system. Mutoh is responsible for assisting physicians with order placement, customer service, education on the product and providing displays and demonstrations. Mutoh and Palomar have been working together since 1988, when Mutoh became the exclusive distributor for the Palomar RD-1200 Switched Ruby Laser System for the treatment of age spots and tattoos.
Third, in July 2000, AngioDynamics Inc. ( Queensbury, NY) split its product offerings into two major categories, dialysis access and maintenance, and angiographic. Utilizing a dual-distributor approach, AngioDynamics signed on Toray Medical, a stand-alone operating company that focuses on the renal dialysis market, and Medikit, a company specializing in the vascular sheath and dilator business. Rather than signing one distributor for a broad range of products, AngoDynamics is using Toray and Medikit to penetrate separate specialized distribution channels. Neither distributor has much product overlap and both offer other complementary medical products. AngioDynamics product line includes thrombolytic delivery systems, vascular access for dialysis, products for dialysis fistulas, PTA balloon catheters, peripheral stents, drainage catheters and fluid management systems.
Fourth, small U.S. medical companies that do not have the resources to set up their own Japanese distributor can sometimes take advantage of the resources of a foreign company that is already in Japan. For example, the Positron Corporation ( Houston, TX) produces the Posicam HZL Positron Emission Tomography (PET) Scanner. The PET scanner can evaluate physical characterstics, clinical efficacy and develop advanced measurement techniques for cardiac perfusion. There are also applications for oncology. Positron has an exclusive marketing and distribution agreement with Imatron-Japan. Imatron is a San Francisco, CA based medical manufacturing company. In May 2000, Japan’s first Positron Posicam HZL system was installed in Japan’s National Institute of Radiological Sciences (“NIRS” – Inage-Ku, Chiba) and it will be used for research in oncology and cardiology.
Manufacturing in Japan: Diagnostic Ultrasound
Manufacturers who predict a large market for their products should contemplate setting up a manufacturing joint venture of independent facility in Japan. For example, the Sumitomo Corporation used to represent Diagnostic Ultrasound Corporation ( Redmond, WA). On January 1, 2000, Diagnostic Ultrasound opened its new wholly-owned Japanese subsidiary (Touchmetrics K.K.). The Sumitomo Corporation is still working with Touchmetrics K.K. on a non-exclusive basis. By having its own subsidiary, Diagnostic Ultrasound’s products can be easily modified to meet the needs of the local Japanese market by integrating market research and input from members of the medical community. Furthermore, it now has a permanent presence in the country, sending a strong message to its clients and developing stronger relationships with local distributors. Having a subsidiary also shortens the timeframe to bring medical products to consumers. Diagnostic Ultrasound produces 3D Ultrasound products that give all digital, 12-plane high performance ultrasounds.
Foreign medical device companies may be able to circumvent Japan’s convoluted distribution system by marketing their products directly. Direct marketing through mail order catalogues or the Internet may be possible. While some registration difficulties may be avoided by direct marketing, almost all medical devices cannot be advertised, sold, transferred or leased legally though direct marketing without approval and licensing by the MHW. One of the only exceptions is foreign dental products, which can be sold directly to dentists “for their personal use” in Japanwithout local registration.
For example, given the high cost of dental products in Japan, dentists with private clinics oftentimes opt to purchase dental supplies and equipment via the Internet or catalogues via gateway cities (i.e. Honolulu, Los Angelos, San Francisco, etc.). The only stipulation is that these products cannot be reimbursed by health insurance and do not require customer service or complex instructions. Furthermore, the mail order catalogues with products requiring registration cannot actually be distributed in Japan — they must be obtained overseas (i.e. at a medical conference, etc.). Because such a small number of medical devices can actually be sold via catalogues, it is difficult to justify the use of a direct sales force in Japan unless the product is approved and registered with the MHW.
Although the Japanese market is changing slowly, the future looks brighter for foreign medical device companies in Japan. With concrete deregulation measures pending, a new emerging eldercare market and a keen desire to purchase advanced, cost-effective medical devices, U.S. medical device companies’ opportunities will increase in Japan.