Direct Registration Via the In-Country Caretaker is Often Best
Japan is the world’s single largest medical market outside the United States. Product registration in Japan, however, is often complicated and difficult. The direct registration of medical products in Japan via the In-Country Caretaker (ICC) System can help foreign medical companies understand the issues involved in registering products directly in Japan via the ICC system. Although the ICC laws were enacted in 1983, few foreign companies have taken advantage of this strategy due to a lack of knowledge of the law, the cost of creating an ICC, or a lack of knowledge about the distinct advantages of an ICC.
Despite Japan’s economic slowdown in the early to mid-1990s, its market for medical products has continued to grow steadily. In 1992, the medical device market grew by 15.8%, in 1993 by 19.2%, and in 1994 by 12.4%. In 1995, the total size of the market reached $21 billion, larger than all other Asian markets combined. During the past few years, foreign imports have accounted for the vast majority of the increase, while local production has leveled off and exports have declined. During the next few years, as Japan’s economy begins to grow again, imports of foreign medial devices are expected to grow by five to eight percent annually.
The United States enjoys a particularly favorable position vis-à-vis other foreign participants in the Japanese market. Between 1990 and 1994, U.S. suppliers expanded their share of the total market from 13% to 20.3%. In 1994, U.S. medical devices accounted for 62.3% of Japan’s growing medical device import market.
Despite the excellent prospects for exporting medical devices to Japan, there is an obstacle that all foreign medical manufacturers face: the legal requirement that all medical products be registered with the Japanese Ministry of Health and Welfare (MHW), Japan’s equivalent of FDA. The fundamental objective of MHW is to ensure that Japanese citizens have access to the latest technology in medical devices, and that products are safe and effective. In Japan, medical device manufacturers and importers are expected to be socially responsible. The MHW, therefore, enforces its directive by maintaining stringent quality standards for both medical device products as well as manufacturing or import facilities. Consistent with the MHW regulations, the Japanese government requires foreign medical manufacturers to maintain a physical presence in Japan in order to ensure a prompt response to safety problems relating to a medical device’s use.
To meet the Japanese government’s requirements of in-country representation, a foreign medical manufacturer has two choices when entering the Japanese market:
1. Establishing an office in Japan and selling its products through its sales force, a Japanese distributor, or a combination of the two; or
2. Exporting its products to Japan and arranging for a distributor or importer to sell them there.
If a foreign medical manufacturer chooses to set up an office in Japan, the manufacturer can establish a representative office, a branch office, a joint venture, or a subsidiary corporation. The foreign manufacturer can use its sales force or local distributors, in which case medical devices can be registered directly by a representative of the office in the foreign medical company’s name. The high start-up costs and annual budget expenses, however, should be taken into account before deciding to establish an office in Japan.
If a foreign medical company does not want to set up an office in Japan and instead decides to export its products allowing a Japanese distributor to sell them, the manufacturer must choose whether to register its products directly in its own name via an ICC, or to let the Japanese distributor register the company’s products indirectly in the Japanese distributor’s name. With indirect registration, the foreign manufacturer usually does not pay all of the registration fees (since the Japanese distributor/importer will help with such fees) and does not handle ongoing safety responsibilities. Indirect registration, however, can make it difficult to change distribution strategies.
Without direct registration, or “shonin,” changing distributors can be a difficult, time-consuming, and costly process. If the current distributor is doing a poor job or is no longer suitable as a company’s distributor, and is not willing to relinquish control over shonin, the foreign medical manufacturer may have to begin the shonin process again to obtain a new approval with a new distributor. A foreign manufacturer with a unique product also may be required to re-do expensive and time-consuming clinical trials.
The best strategy for companies registering their products indirectly via their distributors is to negotiate a buyout provision or formula before consummating the initial distribution agreement so friendly shonin transfers can be made as easily as possible if they become necessary in the future. Of course, divorce clauses in new contracts (between new “partners”) can be a sensitive issue.
In contrast, registering products directly in the foreign medical company’s name with an ICC enables a foreign medical manufacturer to retain more control over its ultimate marketing strategy in Japan. Creation of the ICC system was one of the most significant regulatory changes resulting from the 1983 Japan-U.S. trade talks promoting direct access to Japan’s markets. Acting as a foreign manufacturer’s “administrative proxy agent” in Japan, the ICC is directly responsible for the preparation of required documentation, ensures both the initial and ongoing safety and efficacy of the imported product(s), provides the foreign company’s importers and distributors with necessary information, and acts as a negotiator on the foreign manufacturer’s behalf with the MHW during the registration process.
With shonin, a foreign medical manufacturer can change Japanese distributors easily. None of the transfer complications arise when the shonin is registered in the name of the foreign medical manufacturer via the ICC. In this scenario, the foreign manufacturer should have possession of all the documents needed, such as clinical trail results, safety data, and translated applications.
A second major advantage of direct registration is that a foreign medial manufacturer can appoint multiple primary product distributors when signing its original distribution agreements or at a subsequent date. Without direct shonin, only one primary import distributor has possession of the approval.
In addition, with direct shonin the foreign manufacturer has more leverage in working with its distributors to market its products. In most situations, a Japanese distributor is likely to be more responsive to a foreign medical manufacturer in possession of its product registration approvals in its name. When the foreign medical device manufacturer has direct shonin, its Japanese distributor has significantly less control and thus may have a substantial risk of losing the foreign company’s business if the medical device company is not satisfied with the distributor’s performance or thinks a new distributor can do a better job. The additional flexibility and control that direct shonin provides for the foreign company also can lead to improved sales. A foreign medical device manufacturer also will be in a better position if it decides to increase its position in the Japanese market and establishes an office or subsidiary in Japan in the future.
Ultimately, the market entry and registration strategy chosen should be determined by the size of the product’s market, the expected growth of that market, and the size and financial capacity of the foreign medical manufacturer.