Upcoming Challenges for the Japanese Pharmaceutical Industry

The Japanese pharmaceutical industry accounts for more than 1,000 firms, of which approximately 20 have annual sales of more than $500m. It is a widespread view in the West that the Japanese market is too large to let them fail and too small to generate sufficient profits for global expansion. As a result, many Western observers think that the Japanese industry as a whole is not competitive enough given the small scale of its companies, a strictly home-grown management culture unfit for global markets and a lack of innovativeness highlighted by the belated investment in biologics. To make matters worse, Japan lacks the vibrant venture capital and biotech scene required to bottom-feed the pharmaceutical industry.

Yet for the last five years, the environment has been changing at an accelerated pace. In 2002, the Ministry of Health and Labour published a draft vision for the Japanese pharmaceutical industry for strengthening international competitiveness. The report defined four types of companies: ‘mega pharmas’, ‘specialty pharmas’, ‘generic pharmas’ and ‘OTC pharmas’, and stated that the formation of two to three mega pharmas would be ‘most appropriate’ in light of the size of the Japanese market.

Since the publication of this report, the government has initiated a number of reforms, which are aimed at creating a more supportive environment for the industry. Measures have included R&D tax credits, the uncoupling of marketing and manufacturing licenses, regulatory harmonisation with the EU and the US, including the shortening of the historic approval lag between Japan and Western markets through bridging studies, and the negotiation of a new pricing scheme rewarding innovation.

Beyond differing scopes for long-term strategic positioning, all Japanese companies face the underlying challenge and opportunity of achieving a step-change in innovativeness and risk management. In fact, our review of company websites and publications has produced two unexpected findings:

  • Most leading Japanese pharmaceutical companies have so far not followed the Western example of the uniquely focused, non-diversified, public firm
  • Surprising examples of Japanese companies applying elements of a novel approach to innovation management

Catenion is a relative newcomer on the Japanese market with its players. Our long experience with Western companies, however, has trained us to spot some of the fundamental short-comings of the established approaches to innovation management and risk management. We are also naturally sensitive to differences in the Japanese approach to management. Top-down, short-term strategies and decision-making as practiced in the West are fundamentally at odds with the requirements of breakthrough innovation. Could it be that the principles of nemawashi (consensus building) and ringi-seido (shared decision-making) might serve as a basis to a specific Japanese culture of innovation management embedded in collaborative community?

Skeptics will argue that breakthrough innovation always has to go against the established consensus. We leave it to our Japanese readers to judge whether there might be a grain of truth to this intuition or whether this is just another misperception of Western observers about the Japanese culture.

Whatever the answer, simply copying the business models of the West will not do for Japanese companies to fulfill the Ministry’s vision, except through sheer luck. To many observers, the country’s industrial genius lies in imitating and improving on Western models, as exemplified by the success stories of the Japanese electronics, ship-building, machine tool and car industries. We hope that establishing sustainable positions of competitiveness in the global pharmaceutical industry will require more than incremental innovation.

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