Opinion Profitability of New Drugs Discovered in Japan from the Perspective of Technology Export

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Shinichiro Iida, Senior Researcher, Pharmaceutical Industry Policy Institute

Introduction

While Japan's balance of trade in pharmaceuticals is in the red, the technology import/export balance of the pharmaceutical industry is in the ^black1). Technology exports by the pharmaceutical industry have one aspect that contributes to Japan's economy from an import/export perspective. The pharmaceutical industry is a knowledge- and technology-intensive industry, and since patents and technologies for products are the source of business profits, the service industry aspect of licensing patents and technologies and earning profits is considered to be reflected in technology exports.

In order for domestically created pharmaceuticals to generate business profits, the primary focus must remain on product sales in the global market as well as in the domestic pharmaceutical market, where market growth has been flat. On the other hand, due to the global infrastructure, business scale, and business efficiency, the business of earning profits through the licensing of patents and technologies has become an option for domestic pharmaceutical companies.

In this study, we investigated and analyzed the breakdown of technology exports by the pharmaceutical industry, focusing on overseas sales of new drugs created in Japan and revenues from licensing of those drugs as an output of Japan's ability to create new drugs in the global market.

Research Methods

Technology exports (i.e., the amount received by domestic companies from the provision of patents, know-how, and other technologies) were broken down by industry and analyzed for annual trends using the "Science and Technology Indicators 2021" published by the National Institute of Science and Technology Policy, Ministry of Education, Culture, Sports, Science and Technology (MEXT).

The top 12 ^companies2) in terms of consolidated sales and R&D ratio were selected as R&D-oriented domestic pharmaceutical companies, and their financial indicators were analyzed. Financial indicators for consolidated financial results (e.g., consolidated sales of prescription pharmaceuticals business, revenue from sales of products, etc.) were collected from segment information in annual securities reports, and if not listed, were supplemented by publicly available information such as financial results announcement materials. The presence or absence of new drug discoveries in Japan was confirmed using each company's press releases and other publicly available materials, as well as interview forms.

The compound annual growth rate (CAGR) was calculated for the period 2010-2019 for technology exports and 2015-2020 for the global market.

Technology Export of the Pharmaceutical Industry

For the domestic pharmaceutical industry, technology exports, apart from exports of pharmaceutical products, can be viewed as transactions in which a license to a patent related to a pharmaceutical product is licensed to a foreign company and compensation is received. The main type of transaction is expected to be the licensing of a new pharmaceutical product created in Japan to a parent-subsidiary company or a third party for the manufacture and sale of the product in an overseas location.

Figure 1 shows the transition of Japan's technology export value by industry. The value of technology exports from the pharmaceutical industry in FY 2019 was 625.8 billion yen, increasing at a CAGR of 8.0%.

The pharmaceutical industry accounted for 17.1% of Japan's total export value of 3,662.6 billion yen, and was the second largest industry after the transportation machinery and equipment manufacturing industry and the so-called automobile industry (1,953.7 billion yen, 53.3%). While the CAGR for Japan as a whole grew at 4.6%, 7.3% for the electrical machinery and equipment manufacturing industry, and 4.7% for the automobile industry, the pharmaceutical industry showed the highest growth rate among the industries.

Figures 2A and 2B show a comparison between industries by dividing technology exporters into parent-subsidiary companies or third parties.

Of the 625.8 billion yen in technology exports by the pharmaceutical industry, 283.2 billion yen (45%) was exported to parent-subsidiary ^companies3) and 342.7 billion yen (55%) to third parties other than parent-subsidiary companies, with high growth rates of 9.6% and 6.8% CAGR, respectively.

The largest share of technology exports to parent and subsidiary companies was in the automotive industry (62.9%). The pharmaceutical industry was the second most common industry category, accounting for 10.4% of exports. The pharmaceutical industry accounted for 36.1% of technology exports to industries other than parent-subsidiary companies (third parties), the highest percentage.

Similar industries were the information and communication machinery and equipment manufacturing industry and the information and communication communications industry. The information and communication machinery and equipment manufacturing industry had the highest percentage of technology exports to third parties (77%), accounting for 19.9% of the total, with a CAGR of 5.2%. The information and telecommunications industry, a non-manufacturing industry, also exported a high percentage of technology to third parties (82%), and although not large (2.2% of the total), its CAGR was 9.8%, showing growth faster than that of the pharmaceutical industry.

The large size and high growth rate of technology exports indicate that the pharmaceutical industry is a growing industry in technology exports. The large and growing exports of technology to third parties compared to parent-subsidiary companies suggests that the pharmaceutical industry is an industry whose business is the provision of intangible information such as patents and technologies to third parties abroad.

Technology revenues of R&D-based domestic pharmaceutical companies

In order to get a closer look at the actual status of technology exports by domestic pharmaceutical companies, we examined the amount of revenue from licensing and its ratio in the ethical pharmaceutical business segment in the annual securities reports.

The revenue (consolidated sales) of R&D-oriented domestic pharmaceutical companies is reported by business segment, broken down into product sales and licensing ^revenue4). Looking at the revenue of the ethical pharmaceuticals business segment (Table 1), the total revenue of the 12 companies in the ethical pharmaceuticals business amounted to 9.3 trillion yen, of which 8.6 trillion yen came from the sale of products. It was clear that the main business was the sale of pharmaceutical products. On the other hand, licensing revenues from the 12 companies totaled in the 600 billion yen range, and the ratio of licensing revenues to consolidated sales was in the 7% range. This indicates that R&D-oriented Japanese pharmaceutical companies have a certain amount of "service business," a business that generates revenue through licensing.

Although some of these licensees have Japanese customers, most of them are in Europe and the U.S. Therefore, a certain scale of licensing is considered to be equivalent to the export of technology to third parties overseas.

In addition to royalties, some companies include service revenues based on contracts with customers (e.g., revenues from joint sales, etc.) in "licensing revenues," so the total amount of revenues is likely to be higher than the 625.8 billion yen of total technology exports in the pharmaceutical industry shown in Figure 1. Although the analysis is based on limited publicly available information, it shows that the pharmaceutical industry is characterized as a "service industry," or at least a business that earns revenues from licensing, which is an aspect of technology exports.

Table 1 shows the total of 12 companies, but since the ratio of licensing revenue depends largely on the strategy and overseas infrastructure of each company, Figure 3 shows the distribution by individual company.

For the 12 R&D-oriented Japanese companies surveyed, the maximum licensing revenue was 144.6 billion yen, the minimum 7.9 billion yen, and the median 29.1 billion yen; the maximum licensing revenue ratio was 62%, the minimum 2%, and the median 5.7%. The revenue ratios tended to be higher for the group of companies with relatively small consolidated sales (smaller bubbles in the figure).

The difference in overseas self-sales or overseas out-licensing of domestically discovered drugs affects the ratio of licensing to third parties, but the implications of this ratio would require a business segment analysis based on various individual company strategies and realities, such as overseas manufacturing and sales infrastructure, business scale including R&D investment, and strategic disease areas.

Output of Japan's New Drug Creation Capability

In order to analyze the growth factors of technology exports once again, we conducted a survey of new drugs discovered in Japan, focusing on their revenue trends (growth potential and scale as of 2020) in overseas markets. The new drugs surveyed were drugs discovered in Japan by R&D-oriented Japanese companies and licensed out to overseas companies (licensed products), and were defined as new drugs launched in the past 10 years. The survey also focused on new drugs with overseas sales of approximately 100 billion yen in FY2020, and 10 new ^drugs5) were selected from 6 companies.

Figure 4 shows the transition of overseas sales (excluding domestic sales) of overseas companies that licensed new drugs discovered in Japan, indicating that the combined overseas sales will form a market exceeding 2.2 trillion yen in FY2020 and growing remarkably at a CAGR of 21.1% over the last five years. All of the overseas sales of OPDIVO exceeded ¥100 billion, indicating a certain presence in the global market.

Revenue of Japanese domestic pharmaceutical companies through licensing

In the case of the licensed out domestic drugs, the revenues earned in the global market are disclosed as licensing revenues in the annual securities reports and other documents. Based on publicly available ^{information6)}, we investigated revenues corresponding to technology exports and summarized the trends in revenues of domestic pharmaceutical companies from licensing of the 10 licensed drugs in Figure 5.

Revenue from licensing of domestically discovered new drugs totaled 385.7 billion yen (in FY2020) in total for the 10 products. The CAGR for the last five years was 20.7%, showing remarkable growth in line with the growth of overseas sales. Among them, there were some cases in which the company earned licensing revenue from companies other than product licensing (data omitted), which contributed to the growth.

The ratio of licensing revenue to overseas sales of out-licensed companies was approximately 20%.

Of the 10 licensed products, 7 were technology exports to third parties, with total revenues of 252 billion yen (FY2019), more than 70% of the total 342.7 billion yen in technology exports to third parties by the pharmaceutical industry (Figure 2). The value of the pharmaceutical industry's technology exports was shown to be revenues from licensing Japanese new drugs to overseas firms and from their overseas sales.

Summary and Discussion

The results of the survey and analysis are summarized above.

The pharmaceutical industry was the major Japanese exporter of technology, with a value of over 600 billion yen and a growth rate of 8.0%. Licensing revenues from major domestically discovered new drugs were just under ¥400 billion, representing growth of more than 21%, confirming that domestically discovered new drugs are contributing significantly to the growth of technology exports. In the value chain of drug discovery, development, manufacturing, and marketing, drug discovery (intellectual property) is one of the cornerstones of the business, and it is expected that efforts and policies will be made to ensure the domestic discovery of new drugs and global intellectual property rights as a direction for corporate growth through technology exports and for Japan's economic growth. This is expected to be the direction of corporate growth through technology exports and Japan's economic growth.

It should not be overlooked that licensing revenues are almost directly related to the operating income of domestic companies and thus contribute to the tax-bearing aspect of Japan. Since the operating income and tax-bearing income of the domestic parent company tends to increase in proportion to the increase in royalties and other revenues (data omitted), revenues from technology exports by the pharmaceutical industry were considered to be an important business segment in terms of fiscal revenue sources as well as a part of Japan's economic growth.

In order to examine the output of domestically developed new drugs from the perspective of technology exports, it was necessary to analyze out-licensed products as well as the return of profits to the domestic parent company in the case of domestically developed new drugs sold through overseas outlets. However, the profit structure and profit return from overseas vending are not disclosed in securities reports, etc., and were beyond the scope of this study and analysis. In order to analogize the scale of profit return to Japan from the limited publicly available information, we summarized the overseas sales of domestically discovered new drugs (overseas vending products) (Figure 6).

We identified 18 ^products7) that were launched after around 2010, were listed as major products by each company, and had large sales in FY2020. Four of the 18 products had sales of 100 billion yen or more (in FY2020).

In addition, 13 major domestically discovered new ^drugs8) launched before 2010 were selected and their overseas sales trends were investigated and analyzed. Although some products, such as PROGRAF, had a long shelf life of more than 100 billion yen, the growth of domestically discovered new drugs launched in 2010 and beyond has resulted in a market size of 1.5 trillion yen over the past 10 years. However, the market has remained at 1.5 trillion yen for the past 10 years due to the growth of domestically developed new drugs launched after 2010. Since approximately 20% of the profits from the licensing of domestically developed new drugs were returned to the Japanese market, it is expected that the same or more profits will be returned to the Japanese market for overseas vending products with sales of 1.5 trillion yen. In order to estimate the level of contribution to the Japanese economy, a comprehensive detailed analysis of profit returns to domestic companies would be necessary, including not only licensing, but also provision of services such as drug manufacturing and sales, and transactions between parent and subsidiary companies such as dividends and interest.

Looking at overseas profit data from the perspective of the output of domestically discovered new drugs over the past 10 years, 18 major overseas self-marketed products have created a new overseas market worth approximately 1.1 trillion yen, and 10 major out-licensed products have created a new overseas market worth approximately 2.2 trillion yen. The new drugs developed in Japan were considered to have a certain presence in the global pharmaceutical market and their contribution to the global medical community.

On the other hand, the productivity of the out-licensed products was different: 10 out-licensed products had sales of ¥2.2 trillion, while 18 products sold through self-distribution had sales of ¥1.1 trillion. Based on the discussion by ^Shibuguchi9) and ^Nakao10) regarding the country of origin of the top-selling products, it was suggested that there are issues in increasing the size of product sales for overseas self-sold products of domestically discovered products.

In order to achieve both the growth of the pharmaceutical industry through the overseas expansion of individual companies and the economic growth of Japan, it is no doubt of paramount importance to enhance the research and new drug creation capabilities of domestic drug discovery. In addition to this, the report suggested the need to optimize the way value is added and profit returns in the value chain of development, manufacturing, and sales. In addition to the acceleration of product innovation in drug discovery research through the "Innovative Drug Discovery" initiatives of the Pharmaceutical Industry Vision 2021, we hope that efforts to maximize the market value and output of domestically developed new drugs in the overseas expansion of the domestic pharmaceutical industry will make progress.

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