April 14 2023
Japan has long been seen as an innovation-rewarding market, with a mostly “predictable” pricing potential making it an attractive, key market for pharma. However, with recent pressures to lower healthcare and drug expenditure, a number of new policies and reforms have been put into place to reduce drug prices. This paper outlines the pricing and re-pricing mechanisms in Japan, highlighting which considerations and reforms pharma weigh critically when assessing the opportunities and challenges of launching innovative medicines in Japan.
For decades, Japan has been considered a key market for pharma companies – historically, 99% of approved drugs are reimbursed  and a rule-based pricing and reimbursement system has made it a predictable market in which pharma’s can enter and leverage the opportunities of a large patient population and accessible physicians. However, as has been seen across Europe, a wave of reforms has led to increased pricing pressure on pharmaceuticals . The continuously evolving policy environment in Japan has become more unpredictable and therefore more challenging for pharma to assess the attractiveness of the market when considering the launch of innovative medicines.
In this paper, we provide an overview of the pricing and re-pricing mechanisms currently in place which may apply to a therapeutic throughout it’s life cycle on the market in Japan. Knowing how and when these pricing & re-pricing mechanisms can be applied to a therapeutic allows pharma to better assess the opportunities and challenges when considering product launch in Japan.
When aiming to launch a novel drug in Japan, pharma prepares to undergo the rigorous pricing assessment done by the Central Social Insurance Medical Council (Chuikyo) . During this process, the drug is priced by either Similar Efficacy Comparison Method I/II—if there is a clinical comparator, or the Cost Accounting Method—if no clinical comparator exists on the market (see Figure 1) .
The Similar Efficacy Comparison Method (SECM) is the pricing process that applies to pharmaceutical products which are deemed to have suitable clinical comparator(s) on the market. Whether your novel product is considered innovative or not, distinguishes Similar Efficacy Comparator Method I from Similar Efficacy Comparator Method II (see Figure 1). Through SECM I, the daily drug price of a new drug is matched to that of most comparable existing drugs. Then a corrective premium can be applied from perspectives of innovation, usefulness, marketability, paediatric, Sakigaki, and most recently “specific use” (see Figure 2). The “specific use” premium was a recent addition to the corrective premiums as part of the April 2022 reforms (MHLW’s Vision Plan ) and applies to drugs that target a small therapeutic area with a high unmet need, but are not eligible for the marketability or paediatric premium. On the other hand, products with low innovation value go through the SECM II Method. These drugs do receive a corrective premium and have an insurance drug price set at the lowest level compared to the prices of the recent comparators that have recently entered the market.
For manufacturers, the Cost Accounting Method is typically the desired pricing mechanism as it historically has led to a more favourable pricing outcome. With no comparator on the market, the novel drug is priced based on a variety of factors including its manufacturing costs, R&D costs, sales cost, operating profits, distribution cost, and consumption tax . A corrective premium can be applied in the same way as described for SECM I. However, through the cost accounting method, there is a caveat that the corrective premium is is adjusted based on a transparency coefficient which related to the level of transparency of the costs provided by the manufacturer. subject to a transparency coefficient. If the disclosure rate is below 80%, the corrective premium is downwordly adjusted by the transparency coefficient which incentivizes manufacturers to disclose their production costs . Recent changes to the Japanese pricing system which came to effect in April 2022, made the transparency coefficient adjustment more stringent – if the disclosure rate is beneath 50%, a null transparency coefficient is applied, canceling out the corrective premium (see Figure 3). This reform not only improves pricing transparency but also may further incentivize manufacturers to forgo the Cost Accounting Method in lieu of the Cost Comparison Method I.
Drugs priced by either the cost-accounting method of the cost comparison method I/II, the premiums that can be awarded play an important role in the pricing system and has marked Japan as a marketthat rewards and will pay for innovative medicines. The result is that companies are increasingly able to enter Japan before foreign prices have been established in reference markets, enabling them to obtain premium pricing based on partial cost disclosure and limited informal presentations of health economic outcomes data.
Lalty, for either price determination method, the calculated price can be increased or decreased for items that deviate from foreign prices by more than a certain amount (foreign average price adjustment). An average foreign price is calculated based on reference pricing to the US, UK, Germany and France. Then a formula is applied for drugs whose Japan price is 1.25 times or higher than the average foreign price leading to reduction to the Japan listed drug price. Similarly a formula is applied for durgs with a Japan price of 0.75 times or lower that the average foreign price and leads to a price addition. This adjustment to foreign prices ensures that there are no large price disparities for between a drug sold in Japan and in foreign countries.
Beyond the pricing process that a novel pharmaceutical drug undergoes to enter Japan, it will also likely be subject to one or more re-pricing processes over its lifecycle on the market (figure 4)
In April 2019, after a pilot program, Japan formally implemented a Cost-Effective Analysis step to their HTA process for certain new medicines . The objective of the cost-effectiveness analysis is to reduce expenditure and increase efficiency within the healthcare system by evaluating the appropriateness of the price set by Chuikyo and, depending on the outcome of the assessment, applying an upward or downward price adjustment . Once listed on the National Health Insurance (NHI) drug standard, manufacturers of selected drugs must submit a CEA to the Center for Outcomes Research and Economic Evaluation for Health (C2H) within 9 months. Products are selected for the assessment using a five-tier classification system (Figure 4) which is principally based on predicted annual peak sales and degree of innovation (premium). The CEA is driven by incremental cost-effectiveness ratio (ICER) based on costs per quality-adjusted life year (QALY) gained. Although other markets perform cost-effective analyses based on ICER, Japan has become the first market to use stepwise ICER criteria for determining the re-pricing rates (Figure 5).
There are three main challenges for manufacturers associated with the new CEA system. Firstly, manufacturers must assess if their new drug will be selected for the CEA and then ensure that they have the investment and capabilities in place to submit the CEA analysis in line with MHLW requirements. This additional hurdle can lead to market access delays and lengthen the time its takes for patients to access new drugs entering the Japanese market. The second challenge of the CEA is that it can undermine the attractiveness of Japan as a market that rewards innovation – while successfully acquiring premiums has always been a challenge, manufacturers must now consider the risk that these premiums can be significantly reduced by the CEA system within a short period from launch. The last challenge manufacturers must consider is the domino effect the CEA system can have across a competitive set of drugs. If a novel drug is considered clinically comparable to a drug already on the market that then is repriced by the CEA adjustment rates, the new drug itself may also face similar downward pricing pressures. This has already been demonstrated by the class of CD19 CAR-Ts. Novartis’ Kymriah was selected for CEA and given an H3 classification which led t a 4.3% price reduction in 2021 . Kite’s Yescarta and BMS’ Breyanzi who were both priced by the Cost Comparison Method based on Kymriah’s price therefore received the same 4.3% price cut when added to the NHI drug list later in 2021 .
The CEA system is in its infancy, and looking forward will likely evolve and have wider impacts on the Japan P&R system. If it becomes more widespread and extends its scope to pull in more novel drugs across more therapeutic areas, pharma must carefully evaluate their strategy for launch in the Japanese market and carefully consider the investment, potential hurdles, and long-term impacts repricing may have on their drug’s success on the Japanese market.
Every two years, NHI prices are revised based on the results of a voluntary survey of actual prices paid by medical institutions and pharmacies (Figure 6) . This market price survey, aptly named the “Drug Price Survey,” is one of the General Statistics surveys approved by the Ministry of Internal Affairs and Communications based on the Statistics Act. The survey calculated the new price based on the revised price equation, and the magnitude of the resultant price reduction is dependent upon the price difference between the NHI price and the local discounted price. Typically, the survey lowers each NHI price by 5-7%, and accordingly, the market price will likely decrease in response. However, the revision will not occur if discounts are not offered at the local level. Since 2021, Japan introduced off-year price revisions, thus moving from biannual to annual repricing. The government has faced much criticism from industry stakeholders for this reform, as it will likely lead to downward pricing pressure for Pharma. With manufacturers facing such pressures, some healthcare provider representatives worry that this may decrease discounting at a local level.
In 2010, Japan introduced the Price Maintenance Premium (PMP) , which defers biannual price cuts until the end of the PMP period – often the end of the patent protection period (Figure 6). PMPs were established to reward innovation by protecting innovative products from these regular NHI price revisions, with eligible products including:
As a way to further incentivise continual product innovation and indication expansion, Japan has recently expanded the PMP criteria. Now, drugs that did not originally receive PMPs that have added new indications will be eligible if those new indications would have granted them price premiums at launch, had they been approved at first listing. The reform can be seen as highly advantageous to drug manufacturers, who are now rewarded for innovation of non-novel drugs by being allowed to circumvent regular repricing even after the initial NHI listing. With the PMP safeguard and recently widened eligibility, biannual price revisions pose little threat to manufacturers of novel, innovative medicines, particularly if they are orphan drugs.
Entirely removed from the NHI price revisions, a drug may also have its price revised by “market expansion repricing”, which was introduced in 1994 to improve the NHI’s financial performance . This repricing allows price reductions to be made based on indication expansions, or if it exceeds thresholds based on specific sales totals and/or ratios of actual sales to initially forecasted sales. The percentage and timing of the price reduction differ based on the total sales or forecast ratio triggering the repricing (Figure 8). For example, if a drug’s annual sales exceed ¥15 billion and are at least twice the original expected sales, price reductions of up to 25% may occur during the next regular price revision. For “huge-seller” drugs exceeding ¥100-150 billion, price cuts may even be up to 50%. Cancer drug Opdivo, due to increased sales from indication expansions, suffered this very fate, receiving a 50% price cut in 2017.
Manufacturers need to note, that market expansion repricing may be triggered not only by their on assets but also by similar products available in Japan. The “spillover rule,” in its current form, allows products triggering market expansion repricing to ultimately cause price cuts for all drugs deemed to be similar (e.g., in the same drug class). As a caveat to this rule, drugs may be excluded based on the scope of indications, the timing of listings, and a low degree of competition by sales. A prime example of the spillover rule is Tecentriq in 2021, which triggered repricing and caused a sweeping 11.5% price cut for Keytruda, Opdivo, and Imfinzi. Because drugs like Keytruda were forced to face repeated price revisions as a result of the rule, a modification was made to exempt products that have previously been subject to huge seller repricing directly or indirectly (i.e., due to spillover) from the spillover rule for a single four-year grade period. And while this recent reform helps to mitigate some of the damage the spillover rule causes to pharma, the existence of the rule drastically disincentivizes market expansion and innovation within Japan.
Although Japan has long been known as a key, innovation-rewarding market for pharma, pricing pressures akin to those seen in Europe are driving unfavorable reforms for drug manufacturers. With the introduction of annual repricing and the new CEA system, it is clear Japan is tightening its belt, even if that may disincentivise pharma. From potential premiums to inevitable repricing, pharma will have to think more critically earlier to carefully evaluate the value of their asset within the market. And as other drugs may influence the repricing of others, precise forecasting, and a holistic outlook will be imperative to avoid surprises post-launch. The complex Japanese system is becoming even more nuanced, and pharma must plan accordingly moving forward.
1 Takayama, Akane, and Mamoru Narukawa. Pharmaceutical pricing and reimbursement in Japan: for faster, more complete access to new drugs" Therapeutic Innovation & Regulatory Science 50.3 (2016): 361-367.
3 Masanobu Yamate, Update of Drug Pricing System in Japan, Ministry of Health, Labour and Welfare.
4 Japan at a Crossroads: Reconciling Drug Price Reform and Innovation. National Law Review, Vol. XIII, Number 86. January 19, 2022. https://www.natlawreview.com/article/japan-crossroads-reconciling-drug-price-reform-and-innovation
5 Masataka Hasegawa, Shigekazu Komoto, Takeru Shiroiwa, Takashi Fukuda, Formal Implementation of Cost-Effectiveness Evaluations in Japan: A Unique Health Technology Assessment System, Value in Health, Volume 23, Issue 1, 2020, Pages 43-51, ISSN 1098-3015, https://doi.org/10.1016/j.jval.2019.10.005.
6 Kymriah to Face 4% Price Cut in 1st CEA-Based Price Tweak, Yescarta Too, April 13th, 2021, Pharma Japan.
7 Liu, Angus. Japan sees 'drug lag' as foreign pharmas pass up the market amid pricing pressure, industry group warns. FiercePharma. November 19, 2021. https://www.fiercepharma.com/pharma-asia/japan-sees-drug-lag-as-foreign-pharmas-skip-market-amid-pricing-pressure-industry-group