How can global pharmaceutical companies address the unique business challenges faced by their Japanese subsidiaries?

Global and Japanese pharmaceutical companies are both committed to improve health in Japan. However, the Japanese subsidiaries of global pharmaceutical companies face unique challenges tied to their distinct nature as the Japanese operations of global corporations.

In brief

• Japanese subsidiaries of global pharmaceutical companies operate in a highly complex environment. This is characterized by an advanced healthcare system, stringent pricing regulations, diverse needs of healthcare providers, and the need to align with global headquarters strategies.
• Multifaceted business challenges include drug lag and loss,, global budget allocation constraints, the difficulty of compliance with local regulations, implementation of digital technologies, and human resource management.
• We believe that global pharmaceutical companies may be able to manage both the provision of patient value with business growth in the Japanese market while working with global headquarters in implementing measures to address the distinctive business challenges of Japanese subsidiaries.

The Japanese subsidiaries of global pharmaceutical companies operate in a distinctive environment characterized by an advanced healthcare system, stringent pricing regulations, and the diverse needs of healthcare stakeholders. This is complicated by the requirement to act in compliance with the characteristics of the Japanese market while remaining aligned with the uniform frameworks that global headquarters establish for all subsidiaries.

The specific issues of drug lag, which refers to delays in the approval of new drugs, and drug loss, which refers to stalled development preventing the launch of new drugs, have a direct impact on patient access to new products. This situation is further compounded by significant operational challenges, such as contending with allocation of global project budgets to Japanese subsidiaries and establishing mutual understanding with headquarters about Japanese market conditions. Further challenges include the obligation to comply with the stringent Japanese regulatory environment and the difficulty of implementing digital technology, as well as talent management initiatives and employee engagement at the Japanese subsidiary.

We examine these challenges while exploring the potential means to overcome them, and consider available options for the Japanese subsidiaries of global pharmaceutical companies to take actions. Furthermore, outline possible paths for sustainable growth in the Japanese pharmaceuticals market.

1. Drug lag and drug loss

Issues relating to drug approval and delays in launching new drugs have serious consequences for both the healthcare sector and patients. The term “drug lag,” which remains a much-debated topic in Japanese industry, refers to delays in the approval process and Japanese market entry of new drugs which have previously been approved and are on the market in other countries. A specific problem of drug lag is that delayed entry to the Japanese market prevents early access to these new drugs for patients. Drug lag is attributable, among other factors, to the delayed start of clinical trials and overly long Japanese approval process following the approval of the same drugs in Europe and the US.

The issue of “drug loss” has even greater implications. Drug loss indicates drugs which have been approved overseas but for which the development application process itself has yet to be undertaken in Japan. The result is that these drugs fail to enter the development pipeline. This leads to lost opportunities for the treatment of patients and compromises the quality of healthcare, with pronounced impacts for orphan drugs, pediatric medications, and innovative modalities. A survey by the Japan Pharmaceutical Manufacturers Association (JPMA)^*1 has indicated that development in Japan has yet to start for around 60% of drugs approved in Europe and the US between 2016 and 2020.

There are two main categories of drug lag. The first is “development lag,” which points to the disparity in timing between the start of clinical trials in other countries compared to their start in Japan. Major reasons for development lag include difficulties in patient recruitment and a lack of clinical testing environments. The second category, “approval lag,” points to the length of approval periods following submission of drug approval application. However, in Japan, the Pharmaceuticals and Medical Devices Agency (PMDA) have proposed remedial measures to improve approval speeds, with approval lag now shortening.

Given these circumstances, the Japanese subsidiaries of global pharmaceutical companies should streamline all processes from new drug development to market launch with a strategy to leverage all PMDA incentive systems and enhance their clinical testing infrastructure. They should also emphasize the ways in which they are contributing and marketability from a Japanese as opposed to a global strategy vantagepoint in mitigating drug loss while also offering suggestions and strategic proposals to global headquarters from the earliest stages of drug development.

2. Allocation of global budgets to Japan

The Japanese subsidiaries of global pharmaceutical companies must often contend with comparatively constrained allocations of resources for the Japanese market in the context of wider budget allocation strategies set by their global headquarters. This is because budget allocation is influenced by diverse factors, encompassing market size, global priorities, strategic focus of product portfolios and earnings evaluations.

As a result, Japanese subsidiaries cannot secure sufficient investment in marketing and R&D for their market, leading to structural disadvantages which limit their ability to conduct product development and promotional campaigns tailored to the Japanese regulatory environment as well as patient needs.

In addition, they often find it difficult to guarantee and communicate the accuracy of ROI and market analysis, which is essential to convince headquarters. This results in sales forecasts which reflect neither the distinctive nature of the Japanese market nor the actual revenue potential, and is reinforced by the re-use of models designed for other regions, leading to failed attempts to justify increased resources.

To counter this, Japanese subsidiaries should enhance cost-effectiveness analysis leveraging health economics and outcomes research (HEOR) from the International Society for Pharmacoeconomics and Outcomes Research (ISPOR), promote evidence collection using real-world data (RWD), and maintain dialogues with headquarters using compelling evidence-based reports. They will also need to implement flexible scenario analysis that captures market trends and regulatory changes in real-time and enhance the feasibility of their business plans.

3. Global decision-making processes

Within the industry, the decision-making process at global pharmaceutical companies is often criticized as “slow.” However, EY discussions with both the headquarters of global corporations and with stakeholders in Japanese subsidiaries suggest that the issue is not confined to speed: there are also fundamental challenges such as “the quality of decision-making” and “misalignments in decision-making direction.”

Global headquarters emphasize risk management and compliance, using transparent decision-making as part of a multi-layered approval process and unilateral governance systems. However, this inflexible framework does not reflect the distinctive needs and urgency which characterize the Japanese market, meaning that headquarters decisions are sometimes misalign with local realities.

There are also occasional challenges in communication between headquarters and their Japan subsidiaries. Failing to share all decision-making criteria and the rationale behind judgments has an impact on Japanese subsidiaries’ confidence in implementing measures, making it difficult for speedy delivery and targeted responses.

Consequently, global pharmaceutical companies and their Japanese subsidiaries should not only accelerate decision-making processes but also clarify decision-making criteria and enhance regular strategic dialogues. This will require further alignment aimed at increasing the autonomy of Japanese subsidiaries and strengthening their competitiveness.

4. Compliance with Japanese regulatory frameworks

The regulatory environment of the Japanese pharmaceutical industry is demanding and complex, requiring high-quality evidence and detailed data submissions at each stage of drug approval, pricing and insurance coverage. In particular, unpredictable drug prices, which are revised approximately every 1 to 2 years, lead to significant fluctuations in market prices and revenues, translating to material business risk.

To navigate this complex regulatory system, the Japanese subsidiaries of global pharmaceutical companies allocate significant resources to talent acquisition, data management and report preparation. They must additionally model how to diversify risks in the formulation of mid- to long-term plans in light of increasing revenue pressures attributable to price changes and the market penetration of generic drugs and biosimilars.

Developing adequate IT infrastructure and specialized talent remain a challenge, despite recent progress in providing evidence to support cost-effectiveness via RWD and HEOR. They also will be obliged to address the growing demand for advances in regulatory science, including the promotion of international regulatory harmonization and adapting to new medical technology and software-based medical devices.

5. Digitalization and technology responses

While digital transformation (DX) in the pharmaceutical and healthcare industry is accelerating around the world, Japanese subsidiaries face challenges in terms of the speed and fluidity of local responses in comparison to similar initiatives at headquarters in Europe and the US. The main reasons for this are the difficulties inherent in developing strategies that address the distinctive healthcare culture and regulatory environment of the Japanese market, as well as wide variations in the digital literacy of both healthcare professionals and patients.

Additionally, areas such as localization of digital marketing methods (including increasing Japanese-language content), utilization of social media and online channels, and support for electronic prescriptions and online medical representatives are all challenging, as attempts to replicate standard practices from Europe and the US have often been ineffective.

Japanese subsidiaries should continue to share accounts of the Japanese market’s distinctive nature with global headquarters to foster understanding thereof. They should also prioritize collaborating with physicians, patient representatives, and academic societies to conduct proof of concept (PoC) trials based on unique usage cases from Japan to establish a framework which demonstrates the market potential to global headquarters. They will also need to prioritize the creation of frameworks for the timely, targeted sharing of information by establishing Japan offices for content management systems (CMS) that support multilingual capabilities and targeted distribution. They must furthermore increase both the number and efficiency of customer touchpoints by promoting a hybrid medical representative model which integrates in-person and online interactions.

6. Talent management and employee engagement

Employees of Japanese subsidiaries find it challenging to envision a global career path within global pharmaceutical companies. Added to this, cultural and communication gaps within multinational management teams can diminish employee motivation and engagement.

Japanese subsidiaries should establish a “dual-axis career development system” combining overseas assignments with local leadership roles as ways to reduce employee turnover and promote the retention and development of talented employees. This approach will increase local employee motivation to work at a global company and clarify visions for their future careers. Additional measures involve bilingual mentoring systems and enhancing on-the-job training (OJT) that transcends language and cultural barriers.

Conclusion

The Japanese subsidiaries of global pharmaceutical companies manage their operations while navigating the dual imperatives of aligning with global strategies while contending with the distinctive market and regulatory frameworks of Japan.

We have identified the following elements as essential in creating sustainable competitive advantages:

1. Undertaking actions to solve the issues of drug lag and drug loss;
2. Strengthening cost-effectiveness-based budget negotiations;
3. Establishing a bidirectional global decision making process;
4. Enhancing regulatory compliance capabilities;
5. Promoting the localization of digital strategies for the Japanese market; and
6. Linking employee career development to employee engagement

Our analysis shows that integrated implementation of these initiatives would enable the Japanese subsidiaries of global pharmaceutical companies to manage the delivery of patient value with business growth in the Japanese market, and lead to genuine success.