Introduction
Japan, an island nation of over 126 million people, has the third largest economy in the world, at nearly 3 trillion dollars. Japan is also one of the world’s wealthiest nations, with per person GDP of roughly $23,400, adjusted for purchasing power (cost of living) discrepancies.
Table 1: Economic Indicators of Selected Countries
| Country | Total GDP | GDP per capita |
| USA | $9.255 trillion | $33, 900 |
| China | $4.8 trillion | $3,800 |
| Japan | $2.95 trillion | $23,400 |
| Germany | $1.864 trillion | $22,700 |
| India | $1.805 trillion | $1,800 |
Source: CIA World Factbook 2000. Based on 1999 figures.
Despite the size of Japan’s economy, the country has been mired in recession for over ten years. Though Japan showed some signs of recovery in the late 1990s and growth rates are generally no longer negative, consumer spending is still sluggish. All of this would mean bad news for medical device companies interested in entering the Japanese market, except for two key factors: Japan’s rapidly aging population, and Japan’s overall healthcare system, which is causing the Japanese government to lose millions of dollars each year.
A low birth rate, estimated at 1.4 children per woman, coupled with ever-increasing life expectancy (a Japanese born today has an estimated life expectancy of 80.7 years, the longest in the world) continues to severely alter Japan’s demographic makeup. In 1950, 4.9% of Japanese were over the age of 65. In 2000, that figure had grown to 17.2%, and by 2050, is expected to reach 32.3%.
Japan ’s elderly population as a percentage of the total population is the largest of any nation except Italy. This means that even without economic recovery, medical device manufacturers, especially those with products used for the care of the elderly population, will continue to see steady growth in the demand for their products in the Japanese market.
Table 2: Total Population and Aging Demographics Forecast (in millions)
| 2000 | 2010 | 2020 | 2030 | 2040 | 2050 | |
|
TOTAL |
126.9 m | 127.6 m | 124.1 m | 117.1 m | 108.9 m | 100.5 m |
| Age 65 & over | 21.9 m17.24% | 28.1 m22.04% | 33.3 m26.85% | 32.8 m27.97% | 33.7 m30.95% | 32.3 m32.29% |
| Age 15 to 64 | 86.4 m68.10% | 81.2 m63.61% | 73.8 m59.46% | 69.5 m59.33% | 61.2 m56.14% | 54.9 m54.63% |
| Age 0 to 14 | 18.6 m14.66% | 18.3 m14.35% | 17.0 m13.69% | 14.9 m12.70% | 14.1 m12.91% | 13.1 m13.07% |
Source: Ministry of Health & Welfare, Demographic Statistics, 1999
The Japanese government is losing millions of dollars a year on healthcare. The health care system in Japan is such that average hospital stays are 35 days, and the average Japanese person consumes 3 times the amount of prescription drugs as a U.S. citizen. This, coupled with Japan’s universal healthcare system, means that every citizen receives a basic level of care, which can be quite costly. Thus, Western device manufacturers with more cost-effective solutions may find their products to be especially competitive in the Japanese marketplace.
The Japanese and Healthcare
Consistent with Japan’s status as a high-income, developed country, the leading causes of death in Japan are malignant neoplasms, heart disease, cerebrovascular diseases, pneumonia, and accidents. The typical Japanese citizen visits the doctor 15 times a year, often waiting as long as three hours for a three-minute visit. Part of the reasoning in the patient is that the doctor is almighty and will cure anything wrong in the patient’s body. Doctors are held in extremely high regard in Japan and, although there is slow movement towards demands for accountability and informed consent, generally doctors’ decisions are unquestioned.
Japan’s universal healthcare system, under which almost all Japanese have only a 15% to 30% deductible, encourages Japanese to visit the doctor or even the hospital for every ailment, including treatment of a common cold and free “Tylenol.” Finally, the vast majority of Japanese still consider health services as a “given” and expect such services to be essentially “free.” However, Japanese citizens have become more aware and informed about healthcare issues in recent years, and are realizing that their “free” services are being paid for out of their taxes.
Regulatory Environment
The Japanese government, through the Ministry of Health, Labor, and Welfare (MHLW), regulates all medical devices, whether manufactured in Japan or imported. Japan’s regulatory environment attempts to ensure that only safe and effective medical devices are approved. In Japan, the term “medical device” is used for any instrument, apparatus, or material as designated by the Japanese government that is used in diagnosing, treating, and/or preventing diseases in humans or animals and which can be used to affect the structure of functions of humans or animals.
The Pharmaceutical Affairs Law (PAL) is the primary governing law for medical devices in Japan. Established in 1943, the law was expanded to apply to medical devices (and cosmetics) in 1948. It thoroughly covers all details of registration for medical devices.
Medical devices must undergo thorough safety examinations and demonstrate medical efficacy before they are granted approval, or “shonin,” to be sold in Japan. Further PAL regulations spell out in minute detail requirements for companies that manufacture or import and sell medical devices, ranging from building and structural standards to personnel education and work experience. In short, the Japanese environment is very restrictive, very conservative, and highly regulated.
Types of submissions to the MHLW are as follows. First, “notification” is necessary if there is only a slight change to an already approved medical device. Such a change can have no effect on the safety and effectiveness of the device. Notification entails sending a letter to MHLW.
Next, for medical devices for which there are comparable products already approved for sale in Japan (so-called “me-too” products), companies can obtain shonin without any clinical trials. However, once shonin is obtained, it is valid for use only by the entity that applied for and received it. Because of this, any entity wishing to obtain approval for the same device must go through the entire process themselves and will be awarded separate and unique approval numbers. There is no all-encompassing approval procedure, however, if the shonin is obtained through an In-Country Caretaker (ICC), an entity that obtains approvals on behalf of overseas manufacturers, then that same shonin can be assigned to multiple distribution channels simultaneously and can be transferred or assigned with relative ease.
Finally, for new medical devices for which there are no equivalent products already approved in Japan, clinical trials are required. This rule also applies to “improved” products where there has been a modification important enough to potentially affect the safety, efficacy, etc. of the product. Clinical trials must be held under strict Good Clinical Practice (GCP) standards, and must be followed by standard Post Marketing Assessment (PMA) reporting and a follow-up program.
Japanese GCP standards are very similar to those in the U.S. All aspects are covered in great detail, and typically a minimum of two clinical trial sites with at least 30 test subjects at each location is required. The exact number of test subjects and trial sites is subject to the interpretation of the examining officer of the MHLW, and varies with product and examiner. However, there is no set standard and the process requires some negotiation.
With regard to approval (shonin) issues, MHLW has added wound dressings to the list of medical devices that do not require clinical trials prior to approval. In addition, in March 2001, MHLW issued an official publication that clearly outlines, by use of flowcharts, the process for the approval of “improved” and “new” medical devices. The document is extremely helpful in establishing a “roadmap” to the process, and allows for direct communication between applicants and MHLW reviewers.
Deregulation
Despite U.S. companies’ relative success in the Japanese medical device market, over-regulation has continued to hamper U.S. cutting edge products’ access to Japan’s market. This hurts both U.S. manufacturers and Japanese citizens, who are denied access to innovative, cost-effective, life-saving U.S. developed equipment and treatments.
The Japanese government has come to realize the detrimental effects over-regulation has had on its economy, both in the medical equipment sector and elsewhere. In fact, the Japanese Government estimates that if its deregulation plans are fully implemented, by 2003 GDP growth will increase by 0.9 percent annually, a significant amount in a mature, otherwise slow-growing economy.
The U.S. and Japan have been working together on deregulation issues since 1989. Through the Enhanced Initiative on Deregulation and Policy (“Enhanced Initiative”), the U.S. and Japan have negotiated more expedient device approval processes and greater acceptance of foreign clinical data, among other things.
As a result of work under the Enhanced Initiative, in October 2000, the MHLW revised the reimbursement pricing procedures to increase transparency and create more appropriate valuations that recognize increased innovation. Previously, reimbursement levels were often based on those set for previous generation, less sophisticated products. MHLW has also indicated that it will review the timing of granting reimbursement to encourage faster introduction and greater availability of innovative new products.
Other deregulation efforts have also shown results. Acceptance of foreign clinical data for product review is rising. However, in other ways, regulations are getting stricter and more cumbersome. For example, the Japanese government will soon announce stricter package insert and labeling requirements. Despite this, overall the regulatory environment in Japan is become less burdensome on medical device manufacturers.
On June 30, 2001, the U.S. and Japan announced the establishment of the Japan-U.S. Economic Partnership for Growth, the fourth bilateral forum to focus on important bilateral issues such as regulatory reform. The Regulatory Reform and Competition Policy Initiative replaces the Enhanced Initiative.
Medical Device Market
Though the U.S. trade surplus with Japan is large and growing, the medical equipment and devices sector is one of the few in which the U.S. has a large surplus with Japan, i.e., the U.S. exports much more to Japan than vice versa. The U.S. accounts for two-thirds of all Japanese medical device imports and the U.S. share of the total Japanese device market is about 28 percent.
U.S. firms dominate in categories such as pacemakers, advanced interventional cardiology products such as stents, artificial joints and implants, and other advanced device categories. These are also high-growth (or at least potentially high-growth) segments, given the aging population. Foreign companies with MRI, CT, or image reading software equipment also see high demand for their products. Demand also remains strong for devices and equipment used in providing home health care services, nursing home facilities, and assisted living situations.
The total market for medical devices is difficult to measure — different sources offer widely differing figures. Exchange rate fluctuations and different methods of estimating market size contribute to the disparity in estimates. The following is an estimate put out by the U.S. government; it should be noted that these figures are somewhat lower than previous government estimates and those put out by private firms, which generally estimate the total Japanese medical market at between $19 and $23 billion.
Table 3: Japan’s Medical Device Market (in billions of dollars)
| 1997 | 1998 | 1999 | |
| Total Market Size | 16.15 billion | 16.5 billion | 16.8 billion |
| Total Local ( Japan) Production | 12.75 billion | 13 billion | 13.25 billion |
| Total Exports (from Japan) | 2.95 billion | 3.1 billion | 3.25 billion |
| Total Imports (to Japan) | 6.35 billion | 6.6 billion | 6.8 billion |
| U.S. Exports to Japan | 4.15 billion | 4.35 billion | 4.6 billion |
Source: International Trade Administration, Japan Country Commercial Guide 2000
Between 1996 and 1999, the number of Japanese medical facilities with sophisticated medical equipment installed has increased significantly. Likewise, the total number of installed units of such equipment has risen dramatically. For example, there was a 20.6% increase in the total number of hospitals in which NMR-CT (MRI) units were installed between 1996 and 1999, and a 24.5% increase in total units installed. In general clinics, there was a 41.4% increase in the number of facilities in which bone salt quantity measuring apparatuses were installed.
Advertising and Promotion
Given Japan’s conservative regulatory environment, it should come at no surprise that advertising and promotion of medical devices (and pharmaceuticals) in Japan is highly regulated and very restrictive. Without shonin, or “approval” of a product, advertising the name, manufacturing process, indications, effects, or properties of medical devices or pharmaceuticals is prohibited by law. While products awaiting shonin may be exhibited at trade shows, a sign indicating that the product is unapproved must be prominently displayed, and the exhibitor is restricted from speaking about features, benefits, pricing, distribution, and the like. No literature about the product, including leaflets, pamphlets, catalogues, etc. may be distributed.
With respect to Internet advertising of medical devices (or pharmaceuticals), at present there are no specific regulations. However, a number of websites exist that promote unapproved medical products to the Japanese market. In fact, many of these websites are for the sale of such devices. Such sites utilize a loophole that allows doctors to import unapproved medical devices into Japan under a “for personal use” designation. However, doctors who use personal imports in their practice to make money risk losing their license and/or receiving government penalties.
The Japanese government is still contemplating its official stance with regard to advertising on the Internet. However, government officials have stated that if such a website is physically located in Japan, and if the advertising is blatantly false or misleading, than the government would try to reason with the advertiser, using “administrative guidance” or a “soft” approach. If the company were to resist government pressure or if the company was attempting to sell its unapproved products directly to a Japanese audience, the government might take a more proactive stance. For websites physically located outside of Japan, the government has admitted that there is little they can do, though if the violation is considered particularly flagrant, indirect pressure through a local Japanese subsidiary or through diplomatic channels could be used.
Market Entry Strategies
Foreign companies trying to crack the Japanese medical market can use a number of market entry strategies. Depending on the company and the market for its product, establishing a relationship with a distributor or distributors, establishing a direct sales force, setting up a joint venture in Japan, or setting up a branch or subsidiary office may be best.
For companies with no experience working in Japan, some sort of partnership with a Japanese company may be the best way to get started. However, finding the right Japanese partner and negotiating and implementing the deal can be difficult and fraught with pitfalls. Establishing an independent, foreign presence in Japan may also be an attractive option and may sometimes be easier to set-up than a joint venture. However, recruiting conservative Japanese to a new foreign company can be difficult.
That said, FDI in Japan is an option for some larger companies. This year, Japan’s Ministry of Economy, Trade, and Industry (METI, formerly MITI) reported that FDI has grown significantly since 1999, with more and more of Japan’s large companies establishing affiliate relationships with foreign companies. However, total FDI in Japan in 1999 equaled just 5% of the United States’ FDI total, meaning that although FDI is growing in Japan, it still lags far behind other countries. Moreover, this figure is for FDI overall; it is not medical industry specific. Nonetheless, the FDI environment is significantly more inviting than it was just a few years ago. With regulatory changes and an exchange rate of about 124 yen to the dollar, FDI can be an attractive option.
Finally, medical device companies may choose to enter the Asian market through acquisition of a local Japanese company. Despite being relatively unheard of in the 1980s and 1990s, this practice is growing in Japan. For example, there were 80 instances of foreign firms acquiring Japanese firms in 1997, compared to only 31 in 1993.
Acquiring a Japanese firm can be very tricky, for both economic and cultural reasons. A good strategy may be gradual acquisition (acquiring more and more of the company over an extended period), as opposed to purchasing a company outright. This strategy allows employees at the Japanese acquired company time to adjust and “get to know you,” while also allowing your company more time to evaluate and value the worth of the acquisition target.
Examples of Foreign Medical Companies’ Strategies in Japan
Western medical companies should be aware that just because strong demand exists for a product in the West, the same demand may not materialize in Japan. Japan is far behind the U.S. in the adoption of “technology” in the medical profession. For example, while medical software is commonplace in the U.S., software manufacturers may be surprised to find that the same demand doesn’t exist in Japan. While localization (translation) issues contribute to this problem, a major factor is reluctance to replace time-tested techniques with new-age gadgetry. Also, oftentimes doctors want to keep key medical data to themselves, without others having easy access to such information.
Following is a listing of examples of market entry strategies used by foreign medical companies entering Japan.
MEDRAD . The company has been selling its products in Japan for years through a local distributor. However, the company plans to open a direct sales and service facility in Japan this year, as it has found market penetration internationally to be quicker through direct sales rather than distributors. In addition, Medrad has been in Japan long enough (working through its former distributor) to know the market well. Medrad’s products include injection systems and syringes and technologies that help doctors obtain better MRIs.
BIOMERICA . This company’s product is a prostate cancer test that was recently approved by Japanese regulators. The company signed a marketing agreement in March 2001 with Nihon Schering, a unit of Schering AG. The product will be marketed to hospitals and physicians in Japan.
ZYMETX . ZymeTx announced in July 2001 the sale of 100,000 of influenza test kits to its distributor, Nichirei Corporation.
GENEFORMATICS . In July 2001 GeneFormatics Inc. signed a marketing agreement with Japan’s Takara Shuzo Company to commercialize its technology for determining protein structure. The agreement gives Takara exclusive rights to market GeneFormatics’ technology in Japan, China, South Korea, and Taiwan. Takara also has licensing agreements with Lynx Therapeutics and Affymetrix.
SYMYX TECHNOLOGIES . In June 2001, Symyx signed a sales agreement with CTC Laboratory Systems of Japan to represent its products. CTCLS will provide sales, support, training, and consulting services for Symyx customers.
ISCHEMIA TECHNOLOGIES, INC . Ischemia, which is developing diagnostic products that help in the early diagnosis of cardiac ischemia, announce in July 2001 that it has accepted a $2.5 million equity investment from Goodman Co. Ltd., Japan. The companies have also entered into a six-year exclusive distribution agreement for Goodman Co. to send Ischemia’s products in Japan and several other Asian countries. Clinical trials of the product are on going in the U.S. and Europe and are scheduled to being in Japan later this year.
ORIDION SYSTEMS LTD . Oridion, an Israeli company that develops and manufacturers monitoring and diagnostic devices, has established a direct presence in Japan. Its office in Tokyo will direct efforts to sell and market the company’s diagnostic breath tests, for which it has already won approval.
As illustrated above, a number of device companies, especially those new to the Japanese market, have used sales and marketing agreements with local Japanese distributors to enter the Japanese market. However, some companies, such as Oridion, have established a direct presence in Japan. The strategy chosen depends heavily on the company, its product, and its experience and market potential in Japan. For example, Medrad originally entered the Japanese market through distributors, but recently has moved towards using its own direct sales force.
Conclusion
The regulatory regime for medical devices in Japan is very strict, however, efforts at deregulation, in both the medical device arena and economy-wide continue. With regard to market entry, a variety of strategies can be used, depending on the company, its product, its experience in Japan and the projected demand for its product. Overall, while growth in Japan’s medical device market has slowed, there are still opportunities in Japan for medical device manufacturers, particularly those with products aimed at Japan’s rapidly aging population or with products that provide cost effective solutions.