Japan’s Pharma Industry Seen Swallowing Tax Pill In Q2 And Then Getting Better

The healthy prospects for pharmaceutical sales in Japan are unlikely to be severely dented in the second quarter by a rate increase in the country’s consumption tax. Instead further steady growth is anticipated after record figures were posted last year.

HONG KONG - If history is anything to go by Japan’s pharmaceuticals market is unlikely to spoil as a result of the consumption tax rate increase in April, rather it will be mostly be business as usual in the second quarter and beyond.

Drug price-based sales exceeded JPY 10 trillion ($98 billion) for the first time in fiscal 2013 and the calendar year, according to an IMS Japan survey, and the information, services and technology provider suggested last-minute demand before imposition of the tax had been a sales stimulus as wholesalers stocked up on medicines. This led to speculation that sales may flatten in the near future.

Japan’s national consumption tax jumped from 5% to 8% on April 1, in an effort to reduce a crippling debt to gross domestic product ratio, the world’s highest at more than two to one. The government agreed to legislation in 2012 to increase the rate for the first time in 17 years and it is scheduled to rise again in October 2015, to 10%.

In Japan, Sanofi, GlaxoSmithKline PLC, Eli Lilly & Co. and Novartis AG among others reported increased buying ahead of the sales tax by distributors (Also see "Emerging Markets Earnings Roundup: Sanofi (Part 10)" - HBW Insight, 9 May, 2014.)

The tax was first introduced in 1989 at the rate of 3% and stepped up to 5% in 1997, so this isn’t a new situation for pharmaceutical companies, who benefitted from hoarding in February and March. In fact, the surge plus growing anti-thrombosis and cancer drug demand, saw total sales increase 4.8% to JPY 10.164 trillion, with OTC sales growing 7.2% to JPY 3.84 trillion (Also see "IMS Survey: Japan Pharma Market Topped ¥10T For First Time In 2013" - Scrip, 12 May, 2014.).

”March shipments grew double-digit year-on-year, while April shipments were flat-to-negative year-on-year – but combined the two-month shipments were in line with expected growth in the same period historically,” Alan Thomas, Director, Client Relations, IMS Japan, told PharmAsia News in an email on Thursday (May 22).

“Also historically, there was some marginal impact on patient visits and subsequent marginal impact on pharmaceutical sales when the sales tax was first introduced, but less of an impact when the tax went from 3% to 5% – probably due to consumers being used to the sales tax as it had been in place for some time by that point, and there was no major sensitivity to this increase in terms of health care needs.

“Therefore, with the increase from 5% to 8% from April 2014, I do not think we will see a noticeable decrease in patient visits and no major impact on pharmaceutical sales. We may see some shift from ethical to OTC in some areas but nothing major.”

“Therefore, with the increase from 5% to 8% from April 2014, I do not think we will see a noticeable decrease in patient visits and no major impact on pharmaceutical sales. We may see some shift from ethical to OTC in some areas but nothing major.”

On Thursday, Japan reported that retail sales for April fell 4.4%, the first decline in nine months, and a sharper drop than the 3.3% decline year-on-year expected.

The Big Picture Looks Good

KPMG Healthcare Japan CEO Keiichi Ohwari told PharmAsia News in a telephone call from Tokyo on Friday (May 16) that while the consumption tax had some effect on the industry due to buying drugs for future use, “naturally there should be some rebound or a dip in the near future but this would level out.”

Though this was much the same as for other industries, Ohwari noted, Japan’s health care providers, such as hospitals and clinics, are in a unique position since unlike other countries only medical services are exempt from the tax, while drugs, medical equipment, nursing-care goods and so on are taxable.

He said hospitals are therefore unable to offset costs arising from the tax on these items since the government sets health care fees across the board and most of their revenue comes from national medical insurance reimbursement.

”In other industries they are entitled to receive the consumption tax direct from the customer. So this is different.”

Next year, when the tax is scheduled to ramp up to 10% the same situation would apply and medicines would once again be hoarded in anticipation, Ohwari predicted.

”But this is a temporary situation, the big picture is that the Japanese government is trying to rein in medical expenses and deal with the challenges of meeting quality healthcare costs and a long-lived, aging population.”

According to the latest (Census) figures of May 1, Japan’s population of just over 127 million constituted about 25.6% who were 65 years old or more, and 12.4% more than 75 years old, with conservative estimates suggesting the latter figure will rise to 15.3% by 2022.

In response, Ohwari said, the government was trying to lower the volume of branded drugs relative to generic drugs and intended to reverse the proportion so that hospitals and clinics were dispensing 60% generic and 40% branded drugs by 2018. There would also be enhanced “accountability” for branded drugs, meaning their reimbursement price would only remain high if they were cost effective and innovative (Also see "Japan’s Pharma Spending Hinges On Generic Promotion Plan’s Success" - Scrip, 6 Jan, 2014.).

Oversupply Requires Correction

As for medical equipment, he said there was an oversupply of diagnostic machines in the Japanese market, citing figures of 47 MRI (magnetic resonance imaging) units per million people in Japan, but just six to 10 in Europe; 100 CT (computed tomography) scanners per million in Japan, just nine in the United Kingdom and 40 in the United States.

Since such high-end machines require a lot of investment the profitability is low and that is why many domestic companies are now focusing on exports, particularly to Asian or emerging markets, Ohwari said, though Japan is investing in cutting-edge research to spur the broad biomedical industry (Also see "Regenerative Medicine Policy In Japan Could Serve As Global Breeding Ground For New Technologies" - Scrip, 13 Dec, 2013.).

“There will be growth in the market, even if it is slow and steady, to fund innovation. The consumption tax increase is designed to compensate for future social security benefit, so as businesspeople we do not anticipate such a big impact in the long-term situation, especially if the overall economy improves and there is an increase in liquidity.

“Foreign investors are very worried about the fiscal condition, so this will contribute to improved financial confidence and wellbeing. We need to take the medicine now even if it is unpleasant to improve our long term prospects.”

Such an outlook is largely in line with the wider picture painted by Bank of Japan Governor Haruhiko Kuroda, who noted this month that though the consumption had soared before the tax hike and then declined, the effects were within expectations and economic recovery would resume in the third quarter.

“Just before the consumption tax hike, consumption on expenditures on non-deliverables like automobiles soared,” Kuroda said to CNBC. “Now they are declining quite sharply. But on balance, the decline after the tax hike had been as we expected or even less than we expected."