RSS twitter

Aug 15, 2013 COLUMN

ABENOMICS AND THE GENERIC THREAT

The challenge for Japanese pharmaceutical companies, by King del Rosario

ABENOMICS AND THE GENERIC THREAT

Japan is known to have one of the most efficient Universal Healthcare Systems in the world in terms of monetary spending. But behind this admirable system is a burgeoning debt which could break this picture-perfect scenario. In fact, there are now cracks all over, and having been given the opportunity to work with a multinational pharmaceutical company as part of GLOBIS' internship program, I was able to learn more not just about Japan's healthcare but as well as that of the entire world. One of the popular buzzwords foreshadowing the future of Japan's healthcare is the mystery called "Abenomics." The current Prime Minister Shinzo Abe's bold economic reforms supposedly have three arrows, the third of which is a pledge to deregulate important foundations of the economy such as the pharmaceutical industry.

Although one of the most glaring changes in Japan's healthcare system these days is the rapid push for generics, the corresponding market share is still floating around 25%. I see two reasons there is so much hindrance to the adaptation of generics from a business standpoint. In distribution and retail, two classic moves to make your products sell are either to encourage end-consumer-pull or push-to-distributors. Unfortunately, the end-consumers of the healthcare services do not have the incentive to avail of the lower-priced generics. This is because the actual economic burden of healthcare expenses at the moment is shouldered by the current workforce via the healthcare system, and, potentially, additional subsidies from tax or other financial instruments like bonds secured by the government. What escalates the pressure even more is that Japan's senior citizens account for almost 30% of the population today and are primarily the main beneficiary of the current healthcare system. It is calculated that 2.8 working people support one senior citizen today, but by 2050, only 1.3 will support one senior citizen amidst rising healthcare costs, a low birth rate, and an aging population.

As for the distributor push, given a high percentage of healthcare coverage among Japan's population approaching almost 100%, playing the numbers game of sacrificing lower margins for higher sales volume ala Wal-Mart does not make any financial sense. Thus, from a distributor's view, there is no financial incentive to support generics in lieu of branded medicines. And then again, simply eliminating the highly entrenched and culturally validated middlemen does not guarantee an increase in revenues or profitability. In fact, doing so poses a lot of risk, not only in Japan but in most economies – even in my country, the Philippines.

This is also why generics are slowly but surely making more impact in emerging markets. In the Philippines, the slow implementation of the Generics Act of 1988 led to the implementation of "The Generics Pharmacy," which promoted generics' accessibility to the poor especially in far-flung areas. Notwithstanding the fact that we do not have an enviable healthcare system just like Japan's, Filipinos, as a basic rule of thumb, are very price-conscious. Even though 81% are now covered by our Philippine healthcare system, more than 95% of the medical expenditures of every Filipino based on value is actually out-of-pocket expenses, which is why the Philippines has a competitive landscape conducive for generics wherein an intricate balance of quality and price are the ultimate key success factors. In Japan, right now, however, the two primary key success factors are quality and availability.

Interestingly enough, Japan's government is setting up tactical efforts to reduce medical costs to the point of peculiarly subsidizing the loss of income for pharmacists who opt to fill a prescription with generics rather than the more expensive branded products. I believe such sales incentives should have been the concern of the actual companies supplying generics in the market like Sawai or Teva, and not the government itself. But of course, we cannot second-guess Abe-san's move and it is actually understandable to mix and match both broad strategies with "quick wins" to successfully reorganize Japan's healthcare. I do believe that Abe-san realized that his deregulation efforts at least in pharmaceuticals will be met with a lot of bottlenecks, even if legislation is in place if the healthcare system is not revamped.

I believe the best way for Japan to increase generics' acceptance is to increase price sensitivity via out-of-pocket expenses even if that means collecting lesser health insurance from its citizens as a trade-off. With this, people would think twice about doing things that would inevitably harm them such as excessive smoking or drinking (prevention) and would opt for the lower-priced generics if the difference of quality from the branded ones is not really quantifiable (end-consumer pull). If consumers demand it, eventually, wholesaler acceptance would follow (distributor push).

The main contention that generics will destroy pharmaceutical R&D is also not entirely accurate. I do believe that as soon as new blockbuster drugs are successfully developed, these breakthroughs would still enjoy the same length of time of market exclusivity, albeit commanding lower prices. It is just a bitter twist of fate that while Japan is struggling to revive its economy like the United States, the loss of exclusivity of these big blockbuster drugs from the likes of Pfizer to Chugai are also happening within this timeframe. This is why correlation of the threat of generics and the plight of the pharmaceutical industry might be a great underlying assumption that deserves a closer look.

One thing that will surely destroy any enterprise is a lack of real competition. If pharmaceutical companies do not see the need to become better, faster, stronger, or leaner, then R&D will just be for the basic pursuit of what is cool in the name of science, in step with the allegorical "Devil's River" of managing technology-driven businesses. While global pharmaceutical markets have been integrating through mergers and acquisitions, integrating horizontally and vertically, over the last twenty years, Japanese pharmaceutical companies only started following suit in 2005 simply because of the lucrative profit they enjoyed within Japan's healthcare system.

The time has come to change mindsets and implement reforms that will transform Japan from a purely welfare state to more of a market-driven economy particularly in the healthcare segment. What the government was doing in the past may have been effective to support Japan as a rising economic power, but in a globalized world, change is inevitable. Personally, I have high confidence that Abe-san is on the right track and hope he will continue to receive support from all stakeholders, especially the people.

The generic threat to the world's healthcare systems and any type of industry therefore is not just generics, or maybe interventionist policies like Abenomics but absolute complacency especially from the key decision makers. Inaction, after all, is the voluntary decision to do nothing even with glaring warning signs, and that, I believe, is more dangerous than an aggressive competition that comes like a thief in the night. The healthcare industry undeniably has a tough road ahead in the very near future, to overcome not only political pressure, but also changes in economics, social behaviors and technology. However, to survive amidst the challenges is not impossible. As Charles Darwin is believed to have said, "It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change."


Author

King del Rosario

MBA Candidate, Graduate School of Management, GLOBIS University

King del Rosario is a marketing and business development professional, and current full-time MBA candidate from the Graduate School of Management, GLOBIS University. He hails from Tagum, Davao del Norte in the Philippines but spent most of his college and professional life in Manila. He graduated with a degree of Marketing Management from De La Salle-College of Saint Benilde. He dabbles in technology and programming and is spearheading the Social Media Exposition Philippines in Manila this November 2013.

Personal Blog: http://kingdelrosario.wordpress.com
Twitter: http://www.twitter.com/kingdelrosario
Facebook: http://www.facebook.com/delrosarioking
LinkedIn: http://jp.linkedin.com/in/kingdelrosario

Ki and Management
Ki - Vol.8: Who Becomes Top Management, Who Doesn't?
Ki - Vol.7: Position Power and Knowledge Power
Ki - Vol.6: The Implications of the Katsuma (3D) Mandala
Marginalia
Marginalia Vol.8: Will Innovation Fail Us?
Marginalia Vol.7: So Hard to Save and Invest
Marginalia Vol.6: Japan and Expectations for Growth
Occam's Razor
Occam’s Razor 11: More is not better, but less is more
Occam’s Razor 10: Go Ahead and Laugh
Occam’s Razor 9: Driving on the Sidewalk
Books
Selfless Management, Japanese-Style
Beacon Reports
Talking (or not talking) about the hard issues of fiscal sustainability
How a New Generation of Entrepreneur is Forging the Face of New Japan
MBA Buzz
Japan and Belgium: Gourmet nations exporting their food and drink culture as a concept
Taking time off work and life to get an MBA degree, is it really worth it?
Japan and Belgium: Spinning around ideas on finding inspiration in bicycling.
Beyond 3/11
Beyond 3/11: My newly revised personal mission
Beyond 3/11: When there is a will, there is a way
Beyond 3/11: Four lessons for sustainable business
Of Place and Wind
Of Place and Wind 13: High above the clouds on my way back from Europe
Of Place and Wind 12: Of shrines, temples and churches
Of Place and Wind 11: The most beautiful toilet
Views from an Entrepreneur
Economy of Speed: How to Make Your Organization Move Faster
Fly Smart to Work Smart: 5 Tips
3 Techniques for Powerful Presentations — Anywhere on Earth!