Overview
After the no-growth 1990s, the Japanese economy is beginning to grow again. Real GDP growth jumped to 2.41% in the first quarter of 2000 versus 1.53% in 1999’s first quarter and similar growth in the second quarter of 2000 versus .96% in 1999’s second quarter. Recovering corporate profits, rising stock prices, increasing activity in IT-related industries and greater incentive for investment in the corporate sector are some of the factors that helped the economy grow. Efforts to remedy the economic woes surrounding the banking system, the corporate structure (“keiretsu”) and rigidities in the labor markets are also well underway. U.S. medical device companies doing business or wanting to do business in Japan should keep the following in mind: 1) the Japanese market for medical equipment is one of the few sectors where the U.S. has a trade surplus with Japan; 2) this market is also one of the few that demonstrated continual growth throughout the Asian financial crisis and its aftermath; 3) Japan’s $23.4 billion market for medical devices is second in the world only to the U.S. market, with expected U.S. import growth of 5-10% over the next few years; and 4) there is high import demand for such products as specialty catheters, pacemakers, artificial joints, laser surgical equipment, cardiac valve prosthesis, etc.
Japan’s Healthcare Market
Japan ’s healthcare system has enormous market potential given the country’s aging population and growing demand for cost effective medical treatments. Demand for high quality medical treatment in Japan is being fueled by the proliferation of diseases, such as cancer, cerebrovascular and heart disease and pneumonia. Japan, as is the case for many western industrialized countries, is also aging rapidly. According to Japan’s Ministry of Health and Welfare (MHW), by the year 2020, about twenty-six percent of Japan will be 65 or older, whereas in 1985, only 10.3% of the population was 65 or older. The proportion of social security expenditures and medical expenditures spent on the elderly are accelerating as well (see Figure 1).
Figure 1
| Fiscal Year | Ratio of Old-Age Benefits to Social Security Benefit Expenditures | Ratio of National Medical Care Expenditures of Elders in Total | Medical Car Expenditures for the Elderly, per Person |
| 1985 | 52.8% | 25.4% | 498,637 Yen |
| 1990 | 59.1% | 28.8% | 608,983 Yen |
| 1996 | 63.8% | 34.1% | 781,643 Yen |
(Source: Annual Statistical Report on Social Security. Prime Minister’s Office of Japan, 1999)
Device manufacturers must understand that the Japanese healthcare structure is different than that in the U.S. The Japanese insurance system covers all Japanese citizens, guaranteeing medical assistance for Japan’s 130 million citizens. Japan also has more hospitals and clinics per capita than any other country in the world, one for every 12,000 people. The U.S. only has one hospital/clinic for every 47,000 people and the average dollar amount spent on prescriptions in Japan per year is about three times as much as the U.S. Although all Japanese citizens enjoy decent healthcare, they are often plagued with understaffed facilities, rampant profit seeking in the healthcare system and a relative lack of access to advanced foreign medical technologies.
The Japanese government implemented a new, long-term national insurance system in April 2000 that provides for nursing costs, home care, and encourages private companies to enter the healthcare system as providers. As the government encourages patient treatment at home, the new insurance program opens opportunities for medical device companies to develop and market high quality home care equipment. While distribution and reimbursement of home care equipment must go through the hospitals, eldercare represent a large potential market for medical device companies with products like dialysis equipment for kidney patients, oxygen generators for lung patients, hearing aids, pacemakers, and home healthcare services.
For example, a patient who requires an oxygen concentrator at home needs to be “qualified” by a hospital physician. Only when the physician authorizes it can an order be sent to a medical equipment supplier, who in turn, delivers the oxygen concentrator to the patient’s home. Each month thereafter, the patient must re-qualify for coverage and pay a deductible, and the hospital will file the equipment supplier’s bill and the doctor’s examination fee with the Health Insurance Agency.
Furthermore, in 1999, the Japanese government attempted to reform the healthcare system even more. Local governments were authorized to use the overall greatest value methodology (OGVM) to procure medical products on the basis of the best overall value for performance and specification requirements. This replaced the practice of using the initial price as the primary factor when procuring medical devices. Coupled with improvements in reimbursement, shorter time frames for approval, and a more transparent process, these deregulation measures will provide greater access with less risk for foreign medical companies.
Medical Device Market
Despite Japan’s real GDP annual growth of only .5% in 1999, the medical device and diagnostic market grew at a healthy 4%. As Japan deregulates and implements liberalized procurement policies like OGVM, U.S. manufacturers expect procurement of their medical products to increase by more than $100 million annually for the next few years.
In the past, foreign participation in Japan’s medical device market has been limited (vis-à-vis other western markets) due to restrictive policies that created barriers against medical technology imports. Even so, U.S. companies still hold a significant share of Japan’s import market with 67%. Germany has the next largest share, followed by Ireland, Finland, the United Kingdom, Switzerland, Belgium, and the Netherlands.
| Figure 3: Import Shares in Japan’s medical device market, 1998 | |
| Country | Import Share |
| United States | 67% |
| Germany | 6.3% |
| Ireland | 3.4% |
| Finland , U.K., Switzerland,
Belgium , Netherlands |
Less than 15%
Less than 3% each |
| Other | About 9% |
Source: Japan: Medical Device Market. ITA Industry Sector Analysis. U.S.
Department of Commerce, 1999
U.S. medical equipment manufacturers reap the largest sales in Japan in the following categories from largest to smallest: surgical and medical instrument, electrochemical and electrothermal, X-ray and related irradiation apparatus, ophthalmic goods, and dental equipment and supplies as is demonstrated in Figure 4. More specifically, the best sales prospects include: contact lenses, patient monitoring systems, disposable tube and catheters for blood vessels, laser surgical equipment, oxygen therapy, artificial joints, orthopedic appliances other than artificial joints, artificial cardiac pacemakers and cardiac valve prosthesis.
Figure 4: U.S. Medical Device Exports 199 in 1,000 Dollars
| Canada | Latin America | European Union | Japan | |
| Total Medical & Ophthalmic | 1,476,693 | 1,510,949 | 6,287,468 | 2,251,667 |
| Total Medical | 1,344,080 | 1,420,854 | 5,988,328 | 2,114,863 |
| Surgical & Medical Instruments | 511,848 | 573,109 | 2,170,712 | 750,604 |
| Dental Equipment & Supplies | 99,835 | 72,389 | 253,199 | 59,379 |
| X-Ray & Related Irradiation Apparatus | 95,739 | 133,775 | 599,162 | 249,977 |
| Electromedical & Electrothermal | 258,965 | 394,459 | 1,880,989 | 718,108 |
| Ophthalmic Goods | 132,613 | 90,095 | 299,140 | 136,804 |
Source: SIC 384 U.S. Import & Export Statistics—Medical and Dental, U.S. Department of Commerce
Product Registration and Reimbursement Approval
The Ministry of Health and Welfare (MHW), the Japanese equivalent of the United States’ FDA, requires all medical products in the country to be registered. The government also requires foreign manufacturers to maintain a physical presence, either directly or indirectly in Japan, to guarantee a quick response to safety problems related to their medical device. Before a medical device can be distributed in Japan, the most important registration requirements are: 1) a kyoka (“license”), which essentially grants a medical device manufacturer or distributor permission to market its products in Japan and is required for each manufacturing plant and representative office in Japan; and 2) a shonin (“approval”), which is granted for each separate product once the MHW is satisfied with the dependability and efficacy of a medical device.
Although a product can technically be “introduced” to the market with a shonin and a kyoka, a product’s sales prospects clearly rely upon reimbursement under the National Health Insurance System. The MHW consults the Central Social Insurance Council (or Chui-kyou) to determine the medical insurance remuneration. This separate insurance price listing process is critical because the cost of newly purchased medical equipment will not be reimbursed until an appropriate price listing is set.
For example, Aspect Medical Systems, Inc. ( Natick, MA) developed its Bispectral Index® (BIS®) Monitor via grass roots support from numerous Japanese anesthesiologists due to their early involvement during the regulatory and approval process. Clinicians worked in collaboration with Aspect’s exclusive distributor, Nihon Kohden Corporation (NK), to gather and analyze data and present their findings to the MHW. The BIS monitor enables clinicians to access and manage the effect of drug dosing in the operating room and during intensive care. It utilizes a sensor placed on the forehead to capture EEG signals that become translated into a number that helps clinicians determine the level of brain consciousness.
Market Entry Strategies
The size and growth rate of a foreign medical device product in the Japanese market are pivotal in deciding the best market entry strategy. Thus, extensive market research regarding the size and growth rate of a product’s potential in Japan is imperative. Marketing through a qualified distributor works best if the market is small to medium sized and if the company is only interested in exporting. The registration options are—1) indirect registration via your Japanese distributor where the registration is in your distributor’s name or 2) direct registration via an In-Country Caretaker (ICC) where the registration is in the manufacturer’s name. An ICC is a group in Japan who 1) acts as the foreign medical company’s local representative in Japan, 2) helps a foreign company register its products in the manufacturer’s name with the MHW and 3) acts as a “watchdog” during the post-approval period. Direct registration via an ICC allows the manufacturer more control over its marketing strategy, multiple primary product distributors to be appointed and greater ease in changing distributors. Companies forecasting larger market potential should consider establishing an office or establishing some type of joint venture to market or manufacture their products in Japan. Companies with a presence in Japan can register their products directly with the MHW in their own name.
Distributors
Finding distributors in Japan is a complicated and tricky process. If a medical device manufacturer does not do its homework, the distributor selection can easily be less than optimal, thus hurting your sales in Japan. Because the Japanese view business relationships as long term investments, potential Japanese distributors will scrutinize the foreign medical device company thoroughly; similarly, foreign medical device companies need to evaluate the Japanese distributor before signing an agreement. The extensive background research makes the process of finding a distributor quite lengthy; it can easily take 6-18 months to sign up the right distributor. Cultural misconceptions often make the process more difficult; negotiations are more likely to falter and trust between the entities may not be established. The U.S. medical device company needs to assess whether the Japanese distributor wants to foster a long-term relationship or is the distributor simply seeking to copy the manufacturer’s products? If you sign up the wrong distributor and allow that distributor to register your products indirectly in the distributor’s name, changing distributors in the future will likely be difficult and costly. Thus, distribution agreements need to have clear buy-back formulas for product registration.
For example, the ArthroCare Corporation ( Sunnyvale, CA) has an exclusive distributor, Kobayashi Pharmaceutical (KP). KP is a market leader in Japan in the fields of ENT and spinal surgery, distributing a broad, complementary set of leading high technology products. Kobayashi is responsible for obtaining marketing approval for ArthroCare’s ENT and spinal surgery systems. Kobayashi has long-term relationships with the Japanese clinical and academic communities and has over 200 sales representatives. ArthroCare manufactures Coblation based technologies (with applications for arthroscopic, spinal and ENT surgeries). Their products allow surgeons to operate with a high level of precision and control, limiting damage to nearby tissue and thereby potentially reducing pain levels and accelerating recovery. Kobayashi is already the exclusive distributor for ArthroCare’s Coblation-based Arthroscopic System. They have been working together since 1997 and hope to achieve similar success with the ENT and spinal surgery equipment in 2000.
Another example is Palomar Medical Technologies, Incorporated ( Burlington, MA), who manufactures the Palomar SLP1000 super long-pulse laser system for hair removal. The Palomar SLP1000 is significantly smaller and lighter than most current hair removal systems, which is especially desirable for mobile or small physician offices. On April 13 2000, Palomar signed an agreement with M&M CO., LTD/Mutoh Company, whereby Mutoh will exclusively support the Palomar SLP1000 system. Mutoh is responsible for customer service, maintaining a vigorous program of education and communication, display and demonstration, and assisting physicians with order placement. Mutoh and Palomar have been working together since 1989, with Mutoh being the exclusive distributor for the Palomar RD-1200 Q-switched Ruby Laser System for the treatment of age spots and tattoos.
The complexity of the distribution system goes much further than simply finding a qualified and trustworthy distributor. Japan’s “old” distribution system was virtually an insurmountable obstacle for foreign medical companies. The “old” system is characterized by: 1) approximately twice the retail outlets per capita than the United States, 2) excess distribution channels or 2.2 distribution layers in comparison to only 1 in the U.S. and .73 in France, 3) “control” of distribution systems by the Japanese manufacturers through the use of recommended retail prices, company stores, and “discounts” to offset unnaturally high prices, and 4) cross fertilization of stick ownership between Japanese manufacturers, suppliers and distributors often known as a keiretsu. Japan’s Fair Trade Commission (JFTC), the United States Health Industry Manufacturers’ Association, and the U.S. government are promoting the deregulation of the distribution sector (i.e. eliminating many unnecessary layers). As a result, the pricing and efficiency of medical product distribution is improving. Previously, Japan’s complex distribution system led to excessive markups, making Japanese products some of the highest priced in the world. By making the distribution process more transparent through deregulation, some hidden costs are surfacing and, in several cases, being cut out.
Joint Ventures
After a trial run to be sure that the manufacturer and distributor are in sync, the “distributor” relationship can progress into a joint venture. Ideally, the U.S. companies should set up a partnership with its existing distributor to secure a direct presence in Japan. To cut down on copying and conflicts of interest, the partner should offer dissimilar products to the manufacturer’s products, but should desire to represent the firm’s products and expertise in order to gain a stronger position in the marketplace.
Piggy-backing Via Another Foreign Company
Small U.S. medical companies that do not have the resources to manage distributors or set up a marketing joint venture independently can sometimes utilize the resources of a foreign company that is already in Japan. For example, the Positron Corporation ( Houston, TX) produces the Posicam Ô – HZL Positron Emission Tomography (PET) scanner . The Posicam PET scanner has the capability to evaluate physical characteristics, clinical efficacy and develop advanced measurements techniques for cardiac perfusion as well as oncology. Positron has an exclusive marketing and distribution agreement with Imatron-Japan. Imatron is an American medical manufacturing company located in San Francisco, CA. Japan’s first Positron Posicam HZL system was installed in Japan’s National Institute of Radiological Sciences (“NIRS”—Inage-ku, Chiba) in May 2000. NIRS is the leading research center for nuclear medicine in Japan and Posicam HZL system will be used for research in oncology and cardiology. The market for the Posicam PET scanner should significantly expand once reimbursement by the Japanese National Insurance Coverage system is listed.
Direct Marketing
Rather than marketing via distributors, a few foreign medical companies can avoid Japan’s convoluted distribution system completely by marketing their products directly. Direct marketing through mail order catalogues may be possible in some cases. While foreign companies may be able to circumvent certain complexities regarding registration, almost all medical devices cannot be legally advertised, sold, transferred, or leased through direct marketing without approval and licensing by the MHW. The use of the Internet, while still less prevalent in Japan than in the U.S., may create yet another direct marketing option in some niche areas. For example, some foreign dental products can be sold directly to dentists (“for their personal use”) in Japanwithout local registration in Japan.
Manufacturing in Japan
Manufacturers who foresee a large potential market for their product should consider setting up a manufacturing joint venture or independent facility in Japan. The benefits of such a strategy include: 1) 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, 2) gaining a permanent presence in the country and developing stronger relationships with local distributors and consumers and 3) shortening the timeframe to bring medical products to the end users.
Setting Up an Office
There are three different types of offices that a foreign device company can set up to help facilitate penetration of the Japanese market. First, a representative office is a straightforward way to assist promoting a company’s business. Only a few registration documents are necessary and expenses are minimal. Representative offices, however, are severely limited because they cannot technically perform any type of business transaction, such as sales, importing, shipping, or invoicing. Second, the business functions denied a representative office can be performed by a branch office in Japan. The set-up costs for a branch office, however, are significantly higher. For example, a branch office must be registered, fees must be paid and the government must approve certain procedures and paperwork. Third, a subsidiary corporation offers advantages over a representative or branch office—it has the ability to lease office space, attract local employees, and provide faster arrangement of local financing. Subsidiaries, however, must make a minimum capital investment of $100,000.
For example, Diagnostic Ultrasound Corporation ( Redmond, WA) used to be represented in the Japanese market exclusively by the Sumitomo Corporation, a trading company that is part of the larger Sumitomo Group. On January 1, 2000, Diagnostic Ultrasound opened its new wholly-owned Japanese subsidiary (Touchmetrics K.K.). The Sumitomo Corp. will continue to work with Touchmetrics, but on a non-exclusive basis. By having its own subsidiary, the distribution process will become more efficient, thus making this technology available at a more affordable price. Diagnostic Ultrasound produces 3D Ultrasound products, including the BVI 3000 system, which yield all digital, 12-plane high performance ultrasounds with exceptional quality.
Bibliography
Annual Statistical Report on Social Security (1999). Japanese Government, Prime Minister’s Office.
Hanawa, Hiroyuki. (1999) Japan: Medical Device Market ITA Industry Sector Analysis, U.S. Department of Commerce.
Reg 02/23/99 Japan Implements Liberalized Procurement Policy for Medical Products . ( February 23, 1999) International Health Services Health Information.