Japan's Medical Device Industry: A Growing Market for Foreign Companies
Behind the U.S., Japan’s medical market is the largest in the world. Many foreign medical companies, however, are worrying that Japan’s struggling economy will shrink demand for their medical products in the country. Japan has been experiencing slow growth since the early 1990s, and the Asian currency crisis dealt its economy an additional blow. Nevertheless, economic reforms are underway, and Japan’s demographic changes are driving demand for better-quality medical products. Foreign medical companies are profiting from the Japanese government’s decision to deregulate its medical industry, and can expect the growth of Japan’s medical market to accelerate in the future.
Japan’s economy boomed in the 1980s, but since the early 1990s growth has stagnated due to such factors as government control of industry, an inefficient banking system, and relatively low levels of social spending. The Asian financial crisis further exposed Japan’s underlying economic weaknesses and has provided an impetus for economic reforms. In February of 1998, the Japanese government passed a ¥30 trillion (US$217 billion) package to support the banking system, and in April a ¥16 trillion (US$116 billion) fiscal stimulus package that includes ¥6 trillion (US$43 billion) in tax cuts to stimulate demand. The Japanese government also began deregulating its economy this year, with significant reforms in such areas as telecommunications, finance, and the medical industry. While unemployment and slow growth will likely continue in the short run, continued reforms will cause growth and import demand to be stronger in future years.
Japan’s Medical Device Market
U.S. companies currently hold a 25% share in Japan’s $20 billion medical equipment market, and dominate its import market with a 65% market share. Furthermore, due to new trends in Japan’s medical market, the growth of imported medical devices is expected to grow about 5-10% annually for the next few years. i
The first of these trends is growth in demand. Japan’s population is aging rapidly, and by the year 2000 about 20% of the population will be over 65. ii This will lead to enormous growth in demand for high-quality, cost effective medical equipment from abroad. Japan has traditionally looked to foreign suppliers for innovative medical products that are far less expensive than what it can produce domestically; Japan’s domestically-manufactured medical equipment is among the most expensive in the world. For example, the growth in elderly in Japan alone will cause demand for cardiac pacemakers to increase by 30-40% over the next few years, greatly expanding opportunities for foreign medical companies since the price of pacemakers in Japan is currently 1.7-6.9 times more costly than in the U.S. and Europe. iii High demand in Japan also exists for implantable devices, high resolution diagnostic imaging devices, disposable products and dental materials. iv
The second trend is Japan’s decision to deregulate its medical industry by the year 2000. Japan’s rapidly aging population and over-regulated medical market are burdening Japan’s National Health Insurance system, which is currently losing over US$7.7 billion a year in medical costs. By deregulating, Japan’s medical industry is striving to become more efficient, creating numerous opportunities for foreign medical device companies that offer state-of-the-art, cost-effective medical products.
Deregulation Measures in Brief
Japan announced in March of 1998 a plan to deregulate its medical industry over the next three years. Major reforms began in May of 1998 when Japan agreed to untangle some of its product testing and approval regulations for imported medical devices. Under this initiative, it widened the acceptance for foreign clinical trial data and emphasized the introduction of new, innovative foreign medical products to increase cost efficiency and improve the overall quality of health care. The time for medical product reimbursement, particularly for high-technology devices, was shortened and insurance coverage under the National Health Insurance system has been extended to some new state-of-the-art equipment.
Restructuring the MHW
Over the past year, the Ministry of Health and Welfare (MHW) has also been reorganizing, combining the departments for drug safety measures and general medical practices to establish a new Pharmaceutical and Medical Safety Bureau. This move separates the regulatory and industry promotion functions, thereby making the provision of medical products and services more efficient. v The MHW is also trying to increase transparency in its operations, making it easier for foreign companies to voice their concerns with MHW officials. Overall, the new deregulation measures in Japan greatly help foreign medical companies that have long suffered under the country’s complicated and inefficient regulatory framework for medical devices.
Home Care versus Hospitals
As mentioned before, Japan’s National Health Insurance system has been increasingly burdened by a greying population. All hospitals in Japan are public, and have typically been in charge of the entire health care delivery process — affecting both distribution and pricing of medical products. Physicians choose which medical technologies will be used by their hospital, often creating an inefficient use of resources by selecting the most expensive equipment. Japan’s hospital fee structure also rewards hospitals for keeping patients for a long period of time, resulting in an average hospital stay for patients of about five weeks — the highest in the world and about six times as long as the U.S. average.
Long hospital stays increase hospital expenditures and creates the need for additional medical services, which along with a general misallocation of resources have created chronic deficits for most Japanese hospitals.
As part of its reform of the medical industry, the Japanese government is looking to combine more cost-efficient medical technology with a gradual shift towards managed care. A growing number of non-acute and elderly patients are using home care equipment, for example, which by 1994 had already accounted for about 60% of Japan’s $528.5 million medical equipment market. vi The home care market in Japan also allows for more specialized and innovative products to be imported from abroad, since non-acute patients often have unique needs that cannot be met by generic medical equipment. vii Overall, sales for home care equipment are expected to grow about 10% annually for the next several years.
Since the U.S. is currently ahead of Japan with respect to home care, nursing homes, and managed care services, medical equipment and services geared towards these sectors will be in high demand in the future. These include dialyzers for kidney patients and oxygen generators for lung patients, both of which are leading products in the U.S. and Europe and are in high demand in Japan because of their quality. The hearing aid market is also very favorable for U.S. companies, who can expect increases in sales of 5% to 6% annually for the next several years. viii The markets for pacemakers and wheelchairs, which in 1994 were valued at US$306.9 million and US$121.1 million, respectively, are also expected to grow at about 10% annually for the next several years. ix
Company Experience in Japan
There have been many successful foreign entries into the Japanese medical market. U.S. medical device manufacturer Hollister is currently expanding the sale of its stoma-care products in Japan, such as its mainstay artificial anal sphincters, due to the rapid increase in demand for such products caused by Japan’s aging population and a growing incidence of colon cancer. By using web-based marketing aimed at medical professionals and patients, Hollister expects its annual sales to triple by the year 2001 to about ¥3 billion (US$21.4 million). x
Proctor & Gamble (P&G) has gained a strong foothold in Japan’s $82.7 million adult disposable diaper market by first making sure that it understands consumer needs.
Through extensive market research, for example, P&G found that nursing care workers not only placed the highest value on disposable diapers that were leak-proof, but also that Japanese consumers are very exacting with regard to packaging. xi P&G also credits its success in this area to its marketing campaigns through TV and other advertising media aimed at informing the consumer.
Minnesota-based Medtronic Inc. has been in the Japanese market since the 1970s. As a result of its long-standing experience in Japan, Medtronic is currently the top manufacturer of pacemakers in Japan, with a 30% share in the Japanese pacemaker market. Medtronic has built its reputation in Japan not only through its long-standing network of doctors and government officials, but also through a strong emphasis on quality and an aggressive marketing strategy. For example, Medtronic established an educational center last year in Tokyo that drew more than 800 customers and 1,400 employees. Along with the market for pacemakers, the company also dominates the market for pain relief equipment in Japan.
Starkey Laboratories of the U.S., a specialized manufacturer of hearing aids, decided after many years of exporting its products to Japan to further penetrate the country’s hearing aid market by establishing manufacturing operations there. It therefore created Starkey Japan in 1991 in order to be able to meet the needs of Japanese consumers more effectively. Furthermore, by manufacturing its products in Japan, Starkey has been able to adjust its operations more easily to work with the peculiarities of the Japanese distribution system. xii As a result of its aggressive strategy in Japan, Starkey currently holds the largest share of the Japanese market for custom-made, in-the-ear type hearing aids.
Finally, U.S.-based Baxter International has gained a 90% share in Japan’s home care market by focusing on the development of innovative, high-quality equipment to establish a strong reputation in Japan. And like P&G, Baxter places great emphasis on understanding the unique needs of the Japanese consumer, such as designing and providing beds to patients that are not accustomed to Western-style beds.
Doing Business in Japan
Companies like Baxter and Medtronic, however, have also attributed their success in Japan to understanding the country’s unique business environment, including its distribution and regulatory frameworks. xiii Since the rules on marketing and registering foreign medical products have also been changing in recent years, paying close attention to these systems has become increasingly important.
Distribution in Japan: A Changing Environment
Japan’s medical market suffers from a complex, multi-layered and inefficient distribution system. Long-standing business ties between hospitals and distributors in Japan have traditionally prevented direct sales between manufacturers and hospitals, leading to large “margins” extracted by distributors that are ultimately reflected in higher prices to the consumer. Generally, the markup from the manufacturer to the first line of distribution is about 30% to 40% off of the list price, and for each subsequent level of distribution, an additional 20% markup is imposed. This process has greatly affected U.S. medical companies in Japan, who have found it very difficult and costly to distribute their products in Japan.
As a result, foreign medical companies looking to market their products in Japan should make sure they understand the Japanese distribution system and the changes that are taking place. Instead of marketing through a distributor, some foreign medical companies can now market their products directly, thereby avoiding Japan’s costly distribution system altogether and selling products directly to the consumer through mail order catalogs or the Internet. Direct marketing has become very popular in Japan in recent years, and as reflected in Hollister’s experience, it can be a very profitable strategy.
Regulatory Reforms: Registration
Direct registration of foreign products through an In-Country Caretaker (ICC) has also become more common in Japan. An ICC is hired by the foreign medical manufacturer to take care of medical registration in Japan, and is responsible for the preparation of all required documents, keeping the medical company up-to-date on new regulatory developments, and negotiating on behalf of the foreign manufacturer with the MHW. Direct registration through an ICC allows a foreign medical company to 1) retain significantly more control over their product and its distribution in Japan, and 2) change distributors more easily.
Japan’s medical market has been hard for many, not all, foreign companies to penetrate in the past, but it is changing. Combined with liberalization efforts in telecommunications and finance, Japan’s deregulation of its medical industry, as well as a gradual shift to managed care, will offer enormous growth opportunities for foreign medical companies in the future. State-of-the-art medical equipment manufactured by foreign medical companies will be in high demand as Japan tries to streamline its medical industry and Japan’s aging population requires more advanced technologies and treatment for their acute medical conditions.
i “Japan to Cut Drug Approval Times By 1/3.” Marketletter, May 25, 1998
ii In-Home Health Care Goods and Services. Japan External Trade Organization (JETRO), Industry Sector Analysis, 1996.
iv S. Kimura, D. Gossack. Japan: Medical and Dental Equipment. Industry Sector Analysis, February 1996.
v“Deregulating Japan: MHW Finds It a Tough Act to Follow.” Comline Biotechnology & Pharmaceuticals, January 21, 1998.
vi In-Home Health Care Goods and Services. Japan External Trade Organization (JETRO), Industry Sector Analysis, 1996.
x “Hollister to Expand Sales of Mainstay Stoma-Care Products, Aims at 3.0 Billion Yen in Annual Sales by 2001.” Comline Biotechnology & Medical, May 14, 1998.
xi In-Home Health Care Goods and Services. Japan External Trade Organization (JETRO), Industry Sector Analysis, 1996.
Appendix 1: Japanese Hospital Statistics
Total Number of Medical Institutions, 1995 152, 082
Total Number of General Hospitals, 1995 9,606
Total Number of Hospital Beds, 1995 1,929,397
In 1995, Total Medical Institutions with Departments of:
Plastic Surgery: 794
In 1994, Total Number of Practitioners by Specialty:
Plastic Surgery: 1,154
Nurses, RN: 862,013
Public Health Nurse: 29,008
Source: MHW Health and Welfare Statistics in Japan, 1996
Appendix 2: Japan’s Home Health Care Market
The physician will continue to play a central role in the Japanese home health care environment, greatly impacting the national health insurance reimbursement scheme. Although care services and supplies may be delivered to the patient’s home, the national health insurance billing under which 80% of the population is covered must be billed through the hospital via the home care nursing station as well as Home Care Support Stations/Clinics managed by city governments.