Topics Drug Lag: The Impact of Business Investment Priorities
-Results of a Survey of Pharmaceutical Companies on Business Investment Priorities in Japan

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Shinichiro Iida, Senior Researcher, Pharmaceutical and Industrial Policy Research Institute
Hiroshi Azuma, Senior Researcher, Pharmaceutical and Industrial Policy Research Institute

SUMMARY

1. Introduction

In the late 2010s, the number of unapproved drugs in Japan increased and a new drug lag is ^emerging1-5). Many of these items were developed by emerging biopharmaceutical companies, and many of them are of high clinical importance. The US FDA has not included Japan in the pivotal trials (the major studies to evaluate the efficacy of a drug) at the time of its ^{approval2, 3, 5)}, and the unapproval rate is higher in Japan than in Europe, as well as in emerging ^{companies4, 5)}. The reasons for this are assumed to include issues related to the supply of new drugs for R&D, such as the environment for global clinical trials and pharmaceutical regulations in the Japanese market, as well as a decline in the attractiveness of the Japanese market, which may lead to a lower priority for investment in Japanese operations. Since many of the products developed by emerging companies have also been introduced in Japan through acquisitions or product introductions by major global and Japanese pharmaceutical companies after FDA approval, the status of investment priorities of these major companies may have an impact on the overall drug lag expansion.

In the late 2010s, the Japanese pharmaceutical market showed negative growth, with its share of the global market dropping to 6.0% (in 2021). ⁶ According to the IQVIA Institute, ⁷⁾ while market growth in the 10 developed countries will be between 2% and 5% by 2026, the Japanese market will have a CAGR of - 0.6% (-2% to 1%), the only negative growth rate projected. In general, aggressive business investment activities are unlikely to be expected in a shrinking market, and there are concerns that the attractiveness of the Japanese business and drug market within the global context will decline, and that the penetration of new drugs in the Japanese market will decrease.

While this report does not cover investment decisions of emerging companies, it focuses on the results of a survey of major global and Japanese pharmaceutical companies regarding their investment priorities in their Japanese operations, the introduction of products from overseas, and the status of unapproved and off-label drugs, as well as the impact of the business environment on the increase in unapproved drugs on their business activities and individual products. We would also like to provide insight into the impact of the business environment on the increase in unapproved drugs from the perspective of business activities and corporate decision-making for individual products.

2. research methods

The survey was conducted from June 30 to August 23, 2022 at the Pharmaceutical Manufacturers Association of Japan (JPMA), the Pharmaceutical Research and Manufacturers of America (PhRMA), and the European Federation of Pharmaceutical Industries and Associations (EFPIA Japan), with 86 member companies in Japan. Questionnaires were sent to company representatives via e-mail, collected by the Pharmaceutical Industry Policy Institute (PIPI), anonymized, tabulated, and analyzed.

The questions were structured into the following categories: 1) priority of investment in Japanese business, 2) domestic in-licensing from overseas third parties, 3) status of off-label drugs, and 4) status of unapproved drugs, each of which was requested for each company attribute shown in Figure 1. For unapproved drugs, the National Institute of Biomedical Innovation conducted a survey of each individual company for each of the relevant items selected by the National Institute of Biomedical Innovation.

Valid responses were obtained from 59 (69%) and 43 (73%) of the 86 companies and 59 unapproved drugs (25 companies), respectively, for tabulation and analysis.

For the detailed analysis of "major global companies," we selected domestic companies with consolidated sales of 300 billion yen or more and overseas sales of 10% or more, and global pharma group companies with pharmaceutical business sales of 10 billion dollars or more (24 of 37 companies).

The term "off-label drugs" used in this report refers to drugs (new active ingredients) launched in Japan after 2010 that do not have an indication in Japan as of the end of 2021 for the indications for which they are approved in the United States. Unapproved drugs" are drugs (new active ingredients) approved by the FDA between 2016 and 2021 that are not approved in Japan as of the end of 2021. Please refer to our previous ^{reports1, 4)} for detailed survey targets and methods.

Results

3-1. investment priority in japanese pharmaceutical business

While the global pharmaceutical market is growing at a CAGR of 5.1%, the Japanese market has been growing at a CAGR of -0.5% since 2016. The share of the Japanese market in the global market has declined from 8% to ^6%6). Under these market conditions, we asked pharmaceutical companies with business portfolios in Japan and abroad, "Under the Japanese pharmaceutical market environment, has the priority for investment in the Japanese pharmaceutical business segment within the global total declined compared to before 2015?" The question was asked.

Of the 37 companies included in the tally, the total number of companies that lowered their business priority since 2016 was 10 (27%), while 27 (73%) did not lower their priority (Figure 2).

Of the 10 companies that lowered their business priorities, seven were in domestic sales in Japan, followed by four in clinical development/regulatory affairs (Figure 3).

When the same 10 companies were asked why their Japanese operations were not a priority for investment, 9 companies answered that the economic rationale/business feasibility/profitability of their Japanese operations was low, while none answered that there was no medical need (Figure 4). When asked about the reasons for low economic rationality/business potential, 8 companies answered that the NHI price/expected NHI price was low, followed by 5 companies that the cost/investment was too large compared to the revenue/expected profit (Figure 5). The other two responses were due to the NHI price revisions, both of which reduced the predictability of revenues.

In an environment of negative growth in the Japanese pharmaceutical market, about 30% of the companies lowered the priority of investment in their Japanese operations after 2016, citing low economic rationale. This was due to low NHI and assumed NHI prices, as well as lower earnings predictability resulting from NHI price revisions. For some pharmaceutical companies, the growth potential of the Japanese market, especially the low NHI price and the low predictability of NHI prices, influenced their management and business policy reviews, which in reality resulted in a change in investment priorities.

Furthermore, given that the Japanese market is expected to be the only market with a negative growth ^rate6) among the 10 developed countries with a market growth rate of 2% to 5% by 2026, we asked the respondents about their investment priorities for the Japanese business (Figure 6). (Figure 6) Assuming negative growth, 11 (31%) of the 36 firms that responded expected their investment priorities to decline in 2022 and beyond.

Similar to Figure 3, sales in Japan (9 companies) and clinical development/regulatory affairs (7 companies) were the most frequently cited value chains where investment priority is expected to decline after 2022 (Figure 7).

When we asked the 10 firms that have decreased or expect to decrease their investment priorities (11 firms) how their business decisions will change after 2022, assuming that the Japanese market will grow at the same rate as the 10 developed countries, 5 (50%) or 7 (63%) firms, respectively, indicated that their investment priorities will remain the same as in other countries, while 5 (50%) or 7 (63%) firms indicated that their investment priorities will decrease. The total number of companies that have decreased or will decrease after 2016 was 13. Of these 13 companies, 7 (54%) are expected to increase their priority level (data omitted).

For large pharmaceutical companies with global operations, the economic rationale for their pharmaceutical business may be viewed in terms of the overall global pharmaceutical market. In doing so, they are expected to be more sensitive to investment priorities in their regional territories. Therefore, we focused on a group of companies with high scale and degree of business development in overseas markets and analyzed them as major global companies.

Among the 24 largest global companies, 10 (42%) have lowered or will lower their investment priorities in Japan. Of these, seven (70%) have revised their priorities and expect to raise them to the same level or higher than in other countries, assuming positive market growth (Figure 8). The results suggest that major global pharmaceutical companies tend to make decisions on investment priorities based on the growth potential of the Japanese market.

3-2. in-licensing from foreign third parties

The number of new drugs approved overseas is increasing, and the number of drugs unapproved in Japan is also ^increasing1). Under these circumstances, we asked whether there had been any change in the frequency of in-licensing of developments and products for the Japanese market compared to before 2015. Figure 9 shows the responses from 42 domestic companies.

Seven firms (17%) expect that the introduction of products developed for the Japanese market will increase between 2016 and 2021 compared to 2015, and 11 firms (26%) expect that it will increase in the future, for a total of 18 firms (43%). On the other hand, the largest number of companies (16 (38%)) indicated that there would be no change, while five and three companies (19%) indicated that there would be a decrease and a decrease between 2016 and 2021, respectively, for a total of eight companies (19%).

Since the number of domestic introductions is expected to increase in contrast to the increase in the number of foreign new drug approvals, we asked 24 companies (57%), the sum of those that have decreased or will decrease and those that expect no change in introductions, about the situation of no increase (Figure 10).

The majority of the respondents, 8 companies (38%), answered that their needs were not being met but that the return on investment was poor. The free answers were categorized as follows: low priority given to domestic implementation within the business (5 companies) due to the business strategy and resource allocation of each company, and lack of opportunities for implementation (4 companies) due to the external environment.

When the eight companies that cited poor return on investment as the reason for not increasing adoption were asked about the reasons (Figure 11), most cited low profitability due to low prices (five companies), followed by low profitability due to the small number of patients (four companies).

As for the status of domestic introduction, more than half of the companies expected no change or a decrease or decrease. As reasons for not increasing the number of companies, they cited unmet medical needs but poor return on investment, which was attributed to low profitability due to small price and volume (number of target patients). Other responses cited low priority for introduction and lack of opportunities for introduction as reasons for not increasing introduction. The low priority for adoption can be attributed to the fact that Japanese companies place a high priority on development of their own origin or overseas development. The low number of in-licensing opportunities may be due to a lack of matching opportunities with overseas startups, as well as a difference between the strategic disease areas of individual companies and the increasing number of overseas-approved drugs, but this is beyond the realm of imagination.

3-3. status of off-label drugs

Among new drugs (new active ingredients) approved both overseas and in Japan, "off-label drugs," i.e., new drugs for which indications have not been obtained in Japan, even though they are indicated for use in various diseases overseas, are also an issue of drug lag1) . In other words, "off-label drugs" are also an issue of drug ^lag1). 1) We asked whether 20 of 59 companies (34%) had off-label drugs as of the end of 2021 for new products launched in 2010 or later. Of these, 15 companies listed 32 indications for which there are no plans for development, filing, or approval in Japan.

When asked why there were no plans to develop, file, or obtain approval for these 32 indications (Figure 12), the majority of the responses, 24 (75%), indicated that the needs were not being met, but the return on investment was poor. The most common reason for this poor return on investment was high additional investment (due to high additional development and other costs) (9 responses), followed by low profitability (due to small number of patients) (7 responses) (Figure 13). Since the drug price is determined at the time of initial approval, it is recognized as a factor that cannot be changed when additional indications are added, and it is possible that the drug price was not considered as an issue of low profitability for additional indications.

3-4. status of unapproved drugs

The "unapproved drugs" in this paper refer to drugs (new active ingredients) approved by the FDA from 2016 to 2021 that were not approved in Japan as of the end of 2021, and were extracted in the same way as previously ^reported4). (4) Between 2016 and 2021, a total of 278 drugs were approved by the FDA, of which 183 (171 excluding diagnostics) were unapproved in Japan as of the end of 2021. Of these, 59 had been submitted to the FDA by JPMA/PhRMA/EFPIA member group companies. A survey was conducted on each of these 59 items, and responses were received for 43 items.

Of the 43 products, 5 (12%) had Japan included in the pivotal trials at the time of FDA approval and were scheduled to be submitted in Japan. 18 (42%) did not have Japan included in the pivotal trials at the time of FDA approval, but were scheduled to be submitted due to additional domestic trials, etc., suggesting that they will be delivered to Japan, although there will be a lag. Although there will be a lag, it was indicated that the products will be delivered to Japan. Fifteen items (35%) were not planned to be developed or filed in Japan (Fig. 14), and there was concern that they would not be delivered to Japan.

When asked about the reasons for the 15 items that were not scheduled for development or submission, 6 were because the drug needs were being met in Japan, and 6 were because the needs were not being met but the return on investment was poor (Figure 15).

Factors contributing to the poor return on investment (Fig. 16) for the six products were large additional investment and small expected number of patients. No responses cited low expected drug price in Japan as a reason for poor return on investment.

As for unapproved drugs, the low inclusion of Japan in pivotal trials at the time of FDA approval is a factor for the increase in unapproved ^drugs3). 3) Therefore, we asked the development staff at that time to retrospectively answer why Japan was not included in the pivotal trials. Of the 37 valid responses, the most common reason among the response options was that the expected business value of the Japanese business was small for 14 products (38%) (Figure 17). Other responses were the most common answer in the responses, and the main reasons given in their free descriptions were that the relevant items had low priority (6 items) and were planned to be incorporated from Phase 3 (3 items). In addition, 8 items were not yet obtained from the development staff at that time, which was a limitation of the retrospective survey.

The main factors cited for the 14 products with small expected business value (Figure 18) were small number of expected patients and low profitability (10 products) and large additional costs and low profitability (8 products).

4. summary and discussion

A questionnaire survey was conducted on the status of pharmaceutical companies at the management and individual product levels to investigate the reasons behind the stagnation of the Japanese pharmaceutical market and the increase in the number of unapproved drugs since the late 2010s. The results are summarized in Table 1 and their impact on the increase in unapproved drugs is discussed.

Business and In-licensing Strategy

In terms of management/business strategy and in-licensing strategy, it was found that about 40% of the global giants have decreased the priority of investment in their Japanese operations. In addition, the study indicated that approximately 80% of the companies expect to revise their investment priorities when assuming positive growth of the Japanese pharmaceutical market in the future. This suggests that the growth potential of the Japanese pharmaceutical market influences the decision-making process of major global pharmaceutical companies in terms of their investment priorities. Among the factors that may reduce investment priorities are low drug prices, indicating that drug prices are an issue in ensuring the profitability of Japanese operations. It was also inferred that the shrinkage of the clinical development and regulatory value chain indicates a reduction in R&D activities for the latest drugs for Japan, which may represent one aspect of the increase in off-label and unapproved drugs. The increase in the number of off-label and unapproved drugs was a concern due to the decline in business priorities against the backdrop of stagnant and negative market growth.

Since the actual situation is that access to drugs in Japan for overseas-approved products by emerging companies is carried by global pharmaceutical companies and Japanese companies through M&A and ^{in-licensing3)}, the in-licensing strategies of these companies play an important role in drug access. For more than half of the Japanese firms, the frequency of in-licensing from overseas third parties has not increased, and the main reasons for this lack of increase were poor economic rationale and return on investment, and the low expected price of the product. The reality that it is difficult to secure profitability by introducing products only for the Japanese domestic market was expressed, suggesting that the Japanese market is not very attractive for business. It is also considered that drug development and markets have become globally centralized, and the value of innovation is being evaluated on a global basis. In other words, when introducing a developed product or products to the Japanese market, it would be important for the market to be an investment market that is competitive from the global level, even if it is a business-to-business transaction with introduction economic conditions based on profitability in Japan and the return on investment that occurs uniquely in Japan.

Narukawa et al. reported the results of a survey of pharmaceutical company drug price managers in their "Research on the Actual Conditions of the Drug Development and Distribution Environments in Relation to the Fundamental Reform of the NHI Drug Price System" ⁽⁸⁾. In the survey, 80% of the companies reported that the recent NHI overhaul had affected their business operations, and the most common system change that had an impact was the review of the additional payment for new drug creation, etc. The results of this survey were similar to those of the current survey, indicating that NHI drug price system reform is a factor that influences business priorities for Japan, and the actual state of corporate behavior in the business environment of the Japanese drug market.

Individual Product Strategy

Fifteen companies listed 32 indications for which they had no development plans, and 15 unapproved drugs (35% of the 43 drugs surveyed) were identified as having no development plans. In both cases, the majority of the reasons for not planning development were poor return on investment. For unapproved drugs, the small expected business value in Japan was often cited as the reason for not incorporating Japan in pivotal studies at the time of FDA approval.

For companies with global operations (surveyed as foreign companies and domestic companies with overseas sales ratio of 10% or more), it was clear that return on investment had a significant impact on development decisions for individual products and indications. Factors that were cited as the reason why unapproved drugs were not planned for development in Japan were low expected patient numbers, along with large additional investment, but low expected drug prices were rarely cited. Since the issues faced by development staff in drug development are development costs and target patient segments, we assume that additional costs and the expected number of patients were recalled from the perspective of daily operations, rather than from an awareness of pricing. In any case, it goes without saying that the setting of the assumed drug price is important to ensure profitability, since expected revenue is composed of the assumed number of patients and the assumed price.

Since low expected number of patients was cited as a factor for low profitability, we reviewed the status of the number of approved new drugs for rare diseases in the U.S. and Japan. The number of FDA approvals for orphan-designated products (including new drugs and indication extensions) had increased rapidly from 50-60 products/3 years until 2012 to 135, 218, and 258 products/3 years. The number of FDA approvals of orphan drug-designated products in Japan also increased from 30-40 products/3 years to 78, 94, and 113 products/3 years, respectively, indicating that approvals of drugs for rare diseases have increased since the mid-2010s (Figure 19). Yoshida et al. also reported that the ratio of U.S. orphan designations increased for drugs not approved in Japan, exceeding 50% in the late ^2010s2). Considering this from the perspective of business profitability, it is analogous to the fact that for new drugs with a small number of expected patients per new product, the scale of revenue will be compressed, and thus securing profitability through price is becoming more important. A study by Imai et al. ⁹⁾ showed that one of the reasons for the delay in obtaining approval in Japan is the small projected sales value of new drugs for items approved in Japan, and the results are similar in that profitability issues are behind the drug lag.

The increase in the number of drugs for rare diseases is probably due to the trend in drug development based on the progress in understanding the molecular mechanisms of diseases. Therapeutic drugs are shifting to rare diseases such as intractable and genetic diseases, rare cancers, and other diseases that are subdivided by genetic mutations and other biomarkers. The innovation value of personalized medicine, which increases the predictability of efficacy scientifically suited to each individual, is high, and its widespread use is desirable. On the other hand, it is undoubtedly important to set prices that are commensurate with this innovation value in order to ensure profitability as a business. Given that policies in the U.S. have promoted the development of rare disease ^drugs10), it is hoped that policies that both ensure access to the latest drugs and ensure profitability will be considered, including improved designation requirements for Japan's orphan drug designation system and pull- and push-type incentives.

This survey was conducted for so-called pharmaceutical companies belonging to JPMA/PhRMA/EFPIA, and no survey was conducted for emerging biotech companies. since the increase in unapproved drugs in the late 2010s was the items of emerging biotech companies, we would like to know how these companies view their Japanese business and its profitability, pharmaceutical It is also important to understand how these companies view their Japanese business and its profitability, and how it relates to their exit strategies for pharmaceutical companies, which is one of the issues that should be considered in the future.

Diseases are becoming more segmented due to innovation, and the pharmaceutical market is becoming global. As the industry is responsible for maintaining and ensuring access to the latest pharmaceuticals in Japan, we cannot stop expecting that the Japanese market will grow, that business profitability can be secured, and that the market structure is comparable to global market trends.

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