The Japanese market for medical devices has grown steadily since the mid-1990s, despite the general economic slowdown experienced in other sectors of the Japanese economy. The medical device market grew by 15.8% in 1992, by 19.2% in 1993, and by 12.4% in 1995 — larger than all other Asian markets combined. Although local production is expected to level off over the next few years, medical device imports are estimated to grow between 5 and 8% a year as the Japanese market opens up in the next few years.
U.S. medical device suppliers have seen their share of the Japanese market increase in the last few years — from 13% of the total market in 1990 to 20.3% in 1994. U.S. manufacturers also enjoy a favorable position relative to other foreign suppliers. In 1994, the United States accounted for 62.3% of the medical device import market to Japan; Germany and the United Kingdom accounted for 9.8% and 3.2%, respectively. This strong showing by the United States is expected to continue into the near future with exports expected to grow at an annual rate of 5 to 10%. That such an optimistic prediction can be made is based on a number of factors:
– The 1994 United States-Japanese agreement on the Japanese government procurement of medical technologies.
– A relatively weak dollar against the yen.
– Improvements in the regulatory reimbursement environment for foreign medical device manufacturers.
– Japan’s plans to introduce social security insurance for long-term care in 1997.
U.S. medical device companies can take advantage of these improved market conditions and penetrate Japan’s medical market by adopting one of three marketing strategies. Companies that expect to find a small- to medium-sized market for their products should consider using a Japanese distributor or importer. Companies that expect to find a large market for their medical products should set up their own local offices. Some companies can use direct marketing techniques, such as mail-order catalogs or the Internet, bypassing the Japanese distribution system altogether.
To determine which is the right strategy to use, companies must do market research that focuses on the current size of the specific market and its potential for growth. Market researchers should speak with key Japanese government officials who are involved in medical care, as well as leading doctors and hospital administrators in Japan, to learn about current practices and new medical trends. U.S. medical manufacturers should also consider changes in the general business environment and how these changes will affect their overall strategy in Japan.
Japanese Regulatory Agencies
U.S. medical manufacturers must keep abreast of the actions of the Japanese Ministry of Health and Welfare (MHW), the organization that implements most of the medical and pharmaceutical regulations in Japan. The MHW has many important duties, which include conducting product testing to register pharmaceuticals for sale in Japan, overseeing research for new drugs, promoting high-technology pharmaceuticals, protecting intellectual property, and setting overall safety standards for medical products.
Two scandals plagued the MHW in 1996 — the HIV-tainted blood affair, which resulted in more than 400 deaths, and the nursing home bribery case. The MHW is currently undergoing reorganization due to these scandals. Perhaps the most important change ensuing from this reorganization is the phasing out of the MHW’s Pharmaceutical Affairs Bureau (PAB), which will be replaced with the temporarily named “Pharmaceuticals Safety Bureau.” This change will give emphasis to the organization’s efforts to promote safety and efficiency in product approval and post-market surveillance of drugs, cosmetics, and medical devices. The reorganization will also result in a three-fold increase in the size of the MHW’s pharmaceutical examinations staff by 1999, bringing the ministry’s examination system up to Western standards.
U.S. medical manufacturers must also understand and keep informed of changes in the Japanese national health insurance system to formulate a market-entry strategy. Japanese citizens receive healthcare through the National Health Insurance System. The MHW’s insurance bureau sets prices for medical services and prescription drugs, but hospitals make their own purchasing decisions and Japanese doctors are given more say in the purchasing process than their counterparts in the United States. Medical-device manufacturers need to consider whether their products will be eligible for reimbursement under Japan’s insurance program. If not, they are unlikely to have much success marketing these products in Japan.
Direct Product Registration in Japan: The In-Country Caretaker System
One of the most important regulatory changes to occur in Japan is the In-Country Caretaker (ICC) system. This law was enacted in the 1980s, but only recently have medical manufacturers begun to take advantage of it.
In Japan, as in many advanced nations, all medical products must be registered with the local health authorities and the MHW. When registering a medical product in Japan, foreign manufacturers must decide if a product will be directly or indirectly registered. Direct product registration via an ICC has many advantages over indirect registration in a Japanese distributor’s name: more control of a company’s marketing strategy, since it is easier to switch distributors; and the ability to appoint multiple primary distributors from the start. The decision is ultimately a function of the size and growth rate of the Japanese market for the company’s product(s) and the foreign medical company’s commitment and ability to devote resources and money toward their goals. Consider the following direct registration scenario, in which an ICC is used.
A Medical Products Example – Using an ICC
In this example, a fictitious foreign medical manufacturer is seeking to obtain direct shonin (approval) for its products via an ICC. The services and fees described provide a realistic picture of the procedures and costs involved in using an ICC. Note that the ICC receives both one-time services and fees for registering the products and annual services and fees after the products are registered. The terms used for different types of shonin in this example are “approval for import” for the distributor’s shonin (indirect shonin) and “approval for foreign manufacture” for direct shonin.
For several years, Company XYZ, an American medical device company manufacturing medical products, has marketed its medical products in Japan, registering them indirectly in its Japanese distributor’s name. In 1996, XYZ decided to change its Japanese marketing strategy and to register its products directly via an ICC. Recently, the company and its former Japanese distributor completed a friendly transfer and a buy-out has taken place at an acceptable price.
Company XYZ will now need the help of an ICC to register its four products:
1. Disposable Medical Product #2 (DP #2). An upgrade of Disposable Medical Product #1 (DP#1) currently registered in the name of the former distributor.
2. Medical Equipment #1 (ME#1). Currently registered in the name of the former distributor.
3. Medical Equipment #2 (ME#2). An upgrade of ME#1.
4. Product N. A complex new product with new electrical features and components.
Once the products are registered, the ICC also proposes to act as the mediator between XYZ and the Japanese regulatory authorities on an annual basis.
In most situations, a slightly altered or upgraded product will meet official Japanese registration requirements upon the filing of a partial change application. Since DP #2 and ME #2 are upgrades of existing products, filing a partial change application for them to obtain direct shonin is the most desirable scenario. However, as will be shown, when an old model of a product is registered under the name of a distributor, complications can arise.
Company XYZ’s new product, Product N, has not been previously registered in Japan. In such cases, the foreign manufacturer must decide where it will first conduct clinical trials and get approval. It can obtain Shonin from the MHW in Japan, obtain FDA approval in the United States, or have the product certified (CD Marked) in Europe. In addition to the original clinical study, nuances in product requirements between countries often result in partial trials being conducted in other countries. A clinical study began in one country, however, must be completed before the resulting data can be evaluated by another country.
Disposable Medical Product #2
Because DP #2 is an upgrade and the old model will no longer be marketed in Japan, the ICC must register this product in XYZ’s name. The ICC assumes that only the DP #2 model must be reregistered in XYZ’s name — not the DP #1 model. Since XYZ states it will begin the registration process during the next few months with the FDA, a Japanese shonin for foreign manufacturers can be requested at a later date. The results of the U.S. clinical trials can be used in Japan, but they will have to be translated into Japanese. Furthermore, Japan could also request clinical trials regarding the product’s configuration and size; chemical, biological, and nonbacterial trials; or trials for physical strength and function. As for the biological category of clinical trials, if DP #2 uses the same material as the earlier model, which had already been approved, a copy of its trial results can be attached with an appropriate explanation. In this scenario, a partial change application should be submitted; new clinical trials may not be needed, unless the upgraded products is composed of new materials or has a new function. We project that no new clinical trials will be required.
Medical Equipment #1 and #2
Although an upgrade is available, ME #1 will continue to be marketed in Japan. The product has not been changed, so the ICC will simply reregister it in the manufacturer’s name. Because it was previously registered under the name of its distributor, ME #1 already has an “approval to import” designation. ME #2 will also need a new registration, but XYZ has already completed the following tests/paperwork for the product: UIS/IEC601, electrical safety, block diagrams of electrical and pinnate, quality control process, and manufacturing process. Although ME #2 is an upgraded model, the ICC says it is uncertain whether it will need new clinical trials in Japan. (In this example, we will assume that no extra clinical trials are required.) Not only does XYZ want to obtain approval for import for ME #2, but it also wants “approval for foreign manufacture” as well.
Let us consider these two approvals individually. As for approval to import, if there are only small changes in ME #2, a partial change application may be used, which means that ME #2 would be registered as a “series” of ME #1. Japan still has the right to request partial trials in such a case. For example, if the partial changes include changes in electrical measurements, only extra electrical trails may be required. If the changes in the upgrade are functional, however, new clinical trials for the entire device, including its function and components, will definitely be requested by the MHW. If the changes are even more substantial, a new registration application will need to be prepared, rather than a partial change application.
However, because it already has approval to import ME #1, it would make sense for XYZ to obtain approval for foreign manufacture for ME #1 as well. Once obtained, it will be less complicated to achieve the same approval for ME #2, as a series of ME #1. Even if new trials or measurements are requested, they will not be difficult to provide. If XYZ requests such approval for ME #2 alone, a partial change application may not be possible. Therefore, if the differences between these products are small, registering ME #2 through a partial change application may avoid expensive and time-consuming clinical trials. The process may be simplified further if XYZ obtains FDA approval for ME #2 before it registers the product in Japan.
Because this is a new product, the ICC must complete a full registration. The ICC has received limited information regarding Product N; the need for clinical trials will depend on whether the new product has received similar approval somewhere else and whether the products may pose any dangers to patients.
For all medical devices that require clinical studies for approval, the MHW also requires that data on product safety be collected after the devices are brought to market since certain safety problems may not be uncovered during those trials. Therefore all such devices also require Post Market Safety (PMS) Assurance. Under PMS, the MHW requires that a product report be submitted to the ministry each year for three years following the introduction of a new or unique medical device. Once the final report is submitted, the medical device manufacturer must submit an application for reevaluation of the original approval, which takes into account the new data that have been acquired.
– How do the services that each ICC offers differ? Be careful to make equivalent comparisons, since some ICCs may “lump” services together and other may offer and bill for them individually.
– How do their fees differ? Are the ICC’s fees fixed or are there likely to be future fees for future services? It is wise to negotiate a ceiling fee for each service, document submission, and so forth.
– Do any of the ICCs perform other activities? For instance, does an ICC also act as a CRO, handling clinical trials?
– Do any of the ICCs do consulting work for domestic Japanese and foreign medical companies? If so, how do they separate their operations to avoid conflicts of interest?
– Which of the ICCs is best suited for the foreign medical manufacturer’s specialized needs in Japan? For instance, some ICCs have more experience with certain medical products or pharmaceutical products.
– Do any of the ICCs have previous experience that would be beneficial? Perhaps one of the ICCs has direct experience in your particular sub sector, such as orthopedics or urology.
– Do any of the ICCs conduct unnecessary clinical trials, using their own testing facilities as a profit center? Based on the proposals, which ICC seems likely to recommend the most cost-efficient approval procedure?
Confidentiality and the ICC
Foreign medical device manufacturers usually share proprietary information with an ICC during the Shonin application process. Although confidentiality issues are not unique to the ICC system (and perhaps are an even bigger problem for manufacturers registering their products indirectly), it is advisable that manufacturers sign a confidentiality agreement with an ICC in addition to the standard contractual agreement.
In particular, a manufacturer should beware of these pitfalls:
– The possibility that a corrupt ICC may share proprietary information with competing Japanese medical companies before or after products have been approved.
– Delays and/or preference for approvals that enable an ICC to give registration preference to a competing Japanese firm.
– Almost anybody or any organization can meet the very basic requirements to become an ICC; although the MHW regulates ICCs, make sure you are dealing with a qualified and reputable group.
– The actual enforcement of laws, regulations, and procedures governing ICCs with respect to confidentiality conflicts is extremely uncommon.
The changes taking place in Japan’s medical industry can be complicated and confusing. U.S. firms must be patient and committed in their Japanese manufacturing efforts in order to identify and benefit from the many opportunities available to them. By adopting a long-term approach, taking an active interest in their Japanese operations, and paying close attention to the advantages offered by changing medical regulations. U.S. firms can experience great success in the Japanese medical market.