Japan’s rising healthcare costs are becoming an untenable strain on the country’s economy. In fiscal year 2015-16, spending on medicines in Japan rose 9.4% to approximately US$77 billion. This rapid increase lead the Ministry of Health, Labour and Welfare (MHLW) to roll- out a series of cost-containment strategies, including repricing scheme changes, more frequent price reviews, and a new cost effectiveness analysis (CEA). The changes reflect the broader goals of the 2015 report from MHLW entitled Japan 2035: Leading the World through Health, which cites an aging population and increasing demand for healthcare as drivers for change, and observes that previous cost-cutting initiatives are insufficient to support a future system that embraces developing technology and globalization.

The cost-cutting strategies are projected to save the country roughly 190 billion yen (US$1.6 billion) per year in healthcare costs, though they are concerning for some pharmaceutical companies who fear the changes will limit sales potential and thwart innovation in the lucrative Asia market.

What’s going to change?

Currently, pharmaceutical products in Japan are priced using one of two formulas established by Chuikyo (The Central Social Medical Insurance Council).  Where there is no similar product available, a price is set through a formula, based on cost to the manufacturer of providing the drugs. When a new drug comes to market with similar efficacy to existing products, manufacturers can secure a premium by demonstrating innovation, usefulness, marketability, or that the drug is pioneering. A premium could also be applicable to products based on a cost-plus pricing method.

Once on the market, medicines with annual sales of more than 15 billion Yen (US$135 million) that exceed sales projections by 100% are subject to a re-pricing process conducted every two years by the MHLW. However, in 2016, MHLW added a new category for products deemed “huge sellers,” in which products with annual sales of 100-150 billion Yen (US$880 million-US$1.3 billion) that exceed sales projections by more than 30%, and products with annual sales over 150 billion Yen (US$1.3 billion) that exceed sales projections by more than 50%, are also subject to mandatory price cuts. 

Along with price adjustments, Japan is introducing a new cost-effectiveness analysis to the drug appraisal process in 2018 for new and existing products that will further link value to cost in the drug pricing market. Chuikyo is currently piloting the program with selected products from both pricing methodologies in advance of full roll-out. The pilot includes the hepatitis C drug sofosbuvir from the group of products priced under the similar efficacy formula, and the oncology drug nivolumab on the basis that it has the highest profit to premium rate. Following the pilot period, methodologies will be finalized and selected products will be subject to CEA. Re-pricing scheduled for FY2018 will then be based on the results of this review.  

It is not clear what data manufacturers will be required to submit to facilitate this assessment, although methodologies are expected to be formed based on a 2013 report commissioned by the MHLW on setting-out guidelines for economic evaluation of healthcare technologies in Japan. For new products becoming available in Japan, manufacturers are being asked to provide relevant economic data when applying for National Health Insurance (NHI) listing.  However, for the time-being at least, CEA results will not be used in pricing, rather they will be used to refine methods in advance of formal introduction.

Greater focus is being paid to restricting the projections of high-cost drugs being prescribed, through the introduction of optimal use guidelines to ensure certain drugs are available only to those patients who will benefit most. Two anti-PD-1 antibodies, nivolumab and pembrolizumab, and two PCSK9 inhibitors, evolocumab and alirocumab have already been earmarked for guidelines to be put in place. Draft versions of the guidelines defining patient selection criteria for the products to be prescribed are expected from the MHLW by the end of 2016. 

The new normal

These changes are going to shift the value proposition of the Japanese pharmaceutical market, and biopharma companies need to pay attention. Given the speed and force with which the MHLW is seeking to reign-in spending, budget impact will be a key consideration for any manufacturer preparing to launch a product in Japan going forward. In the coming months, manufacturers should pay close attention to the new pricing rules and how they are applied. As we have seen with other newly established Health Technology Assessment (HTA) bodies, we can expect the processes of MHLW to evolve as they learn from their initial assessments. 

Whilst the exact details of the process may change, they will be based on the manufacturer’s ability to demonstrate value through supporting evidence, and to present detailed justifications for methodologies used. Incorporating these expectations into the drug development plan will help manufacturers be better prepared for the cost scrutiny they will face going forward.