Blog | 3/7/2024

Reversing the Tide: Japan's Promising FY2024 Drug Pricing Reform

Executive Summary

• The proposal for FY2024 pricing reform has been released, introducing several favorable measures centered around two strategic pillars: eliminating drug lag/loss and ensuring stable supply of medicines.
• Innovative drugs are expected to benefit the most from the proposed measures, which include the establishment of "Early Introduction Premium", expansion of “Usefulness Premiums”, and improved price maintenance post-launch.
• In the case of generic drugs, the reform will introduce the "Generic Supply Corporate Indicator" to assess companies’ supply chain stability and tighten pricing for generics with a large number of manufacturers.
• Unlike previous pricing reforms implemented in the last decade, the proposal for FY2024 reform has been met with a positive perception and is seen as a promising driver for fostering product launches in Japan.
   

Introduction

Health Advances has been closely monitoring the developments of drug pricing policies in Japan. Since our publication on Drug Pricing in Japan: The Changing Landscape and Future Prospects in June 2023, significant progress has been made, leading to the release of the Proposal for FY2024 Reform.

With an implementation date set for April 2024, this proposal marks a crucial step in addressing two key concerns: eliminating drug lag/loss and ensuring stable supply of medicines. The recommended changes reflect the government’s efforts to enhance attractiveness of the Japanese market to innovative drug companies and maintain a reliable healthcare system for its citizens. In this blog post, we will delve into the suggested policy changes and their potential impact on the pharmaceutical landscape in Japan.

Eliminate Drug Lag/Loss

a. Establish “Early Introduction Premium”

The newly proposed “early introduction premium” (迅速導入加算) is designed to grant a pricing premium of 5-10% to new drugs that are launched in Japan in a timely manner. To be eligible for the Early Introduction Premium, products must meet the following criteria:

• Products that have undergone international clinical trials, or local clinical trials in Japan simultaneously or prior to other countries
• Priority review products (e.g., products targeting rare or severe diseases, products with clearly superior efficacy or safety)
• Earlier submission than the US & EU, or within 6 months of their initial submission
• Earlier approval than the US & EU, or within 6 months of their initial approval

Foreign price adjustment after the initial listing will be made possible if a foreign reference price was not available at the time of introduction in Japan. To balance patient burden, MHLW (Ministry of Health, Labour and Welfare) has proposed an upper limit of 1.2 times the original price for any price increase.

The new premium provides a strong incentive for drug developers to include Japan as one of the “Wave 1” countries. It offers greater opportunities for developers who may face challenges in meeting the stringent Sakigake designation requirements, which mandate the development and approval of a drug in Japan as the first country worldwide. With the Early Introduction Premium, these developers now have a significantly improved chance of receiving the pricing advantage.

b. Expand Usefulness Premiums

Usefulness premiums (有用性系加算) are awarded to drugs that demonstrate a “new clinically useful mechanism of action (MOA)”, “higher efficacy and safety”, and/or “improved treatment methods”. These three main criteria are evaluated based on a total of 15 items.

The 2024 reform will include 5 new items to expand the scope of evaluation:

• Significantly different discovery and manufacturing process from similar drugs (under “new clinically useful MOA”)
• Lack of new drugs with a new MOA in a disease area for a long time (under “new clinically useful MOA”)
• Higher efficacy or safety demonstrated from single-arm trials for intractable or rare diseases for which a comparative trial is difficult to conduct (under “higher efficacy and safety”)
• Indications limited to specific patient populations based on the MOA and high efficacy in those populations (under “improved treatment methods”)
• Improvement over existing treatments in important secondary endpoints, such as quality of life (QoL) endpoints (under “improved treatment methods”)

The proposed changes aim to address limitations of the existing pricing system, such as the lack of recognition for single-arm trials, secondary endpoints and QoL outcomes, by creating a more comprehensive and nuanced pricing system that acknowledges the value of innovation in today's healthcare landscape.
 

c. Facilitate R&D of Pediatric Medicines

Under the current system, a pediatric premium (小児加算) is given to drugs that are developed for pediatric use. As part of the FY2024 reform, the PMP (Price Maintenance Premium / 新薬創出加算) will be implemented to protect the drug prices of products that qualify for the pediatric premium. Additionally, the rate of the pediatric premium will be determined flexibly. If a development plan for pediatric use is formulated alongside development for adult use, and the company develops the drug according to the plan confirmed by the PMDA, a higher pediatric premium will be given.

These measures aim to facilitate and incentivize R&D efforts for pediatric patients by ensuring higher pricing and better price protection are provided for pediatric drugs./
 

d. Reassess PMP (Price Maintenance Premium)

The PMP company criteria (新薬創出加算・企業要件) is a mechanism that adjust the extent of price protection (80-100%) based on a company's efforts in new drug development in Japan. However, concerns have been raised that smaller biotech companies are at a disadvantage due to their smaller scale of R&D and clinical trial activities. Since a significant portion of innovations is coming from biotech companies today, MHLW has proposed the abolition of the company criteria, meaning PMP-designated products will basically receive full price protection.

Furthermore, the PMP product criteria (新薬創出加算・品目要件), which encompass products with “usefulness premiums”, "orphan drug designation”, and “new mechanism of action” (up to third in class), will be expanded to cover products with “early introduction premium” and “pediatric premium”.

These changes aim to address concerns about fairness for smaller biotech companies and sends a strong signal that drug price for innovative drugs will be maintained over the patent period.
 

e. Rationalize Market Expansion Repricing

While PMP is designed to protect drug prices in Japan, there is another mechanism called market expansion repricing (市場拡大再算定) that allows for ad-hoc repricing of certain products. In particular, the “spillover rule“ (共連れルール), which lowers the prices of similar products when one drug receives market expansion repricing, is something the industry has long been criticizing for. For example, when Keytruda triggered market expansion repricing, the drug price of Opdivo was reduced accordingly.

Certain drugs, such as those targeting cancers, are more susceptible to repeated spillover repricing as their indications expand. Recognizing the potential hindrance to the development of new indications, the FY2024 reform aims to exclude the application of the spillover rule in specific areas as determined by the government.

Ensure Stable Supply

a. Establish “Generic Supply Corporate Indicator”

The generic supply corporate indicator (後発品企業指標) requires generic companies to publish information on supply stability, allowing medical institutions to select generic items and reflecting the evaluation results in drug price.

The indicator will be granted based on a total of 17 items from four perspectives:

• Disclosure of information on stable supply
• Securing reserve capacity for stable supply
• Supply track record
• Market price discrepancy status

MHLW will categorize the top 20% of companies into “Category A‘’, companies with negative total scores into “Category C”, and other companies into ”Category B”. MHLW will roll out a pilot program to provide differential pricing measures based on the company category.

b. Tighten Pricing of Generics with Numerous Manufacturers

Under the current system, generic drug price (後発品薬価) is set at 50% of the originator price (for oral drugs), and if more than 10 manufacturers are present, the price is further reduced to 40% of the originator price.

To address concerns regarding over-competition and the presence of multiple low-volume manufacturers for the same product, the MHLW has proposed lowering the threshold from 10 to 7 manufacturers. This measure aims to mitigate the risks to supply stability caused by low volume production.

c. Enhance Support for “Essential Drugs” and “Unprofitable Drugs”

In Japan, the price support system for essential drugs (基礎的医薬品) plays a vital role in ensuring the availability of necessary medications. To be considered for essential drug, one of the requirements is being listed in Japan for 25 years. In order to expand the eligibility for essential drugs and ensure medically necessary drugs remain on the market, the requirement will be relaxed to 15 years.

Unprofitable drug repricing (不採算品再算定) is another system designed to increase the prices of drugs that have become financially difficult to manufacture due to extremely low pricing. In response to the challenges posed by the rapid rise in raw material costs and associated supply issues, specific products requested by companies will be allowed to undergo unprofitable drug repricing.
 

Conclusion

Overall, the FY2024 reform has been perceived positively. In particular, several favorable pricing measures for innovative medicines have been announced. In contrast to the previous decade, which primarily focused on cost containment, this year's pricing reform aims to bring back innovations and ensure Japan remains competitive in terms of pricing. Overseas biotech companies are expected to benefit the most from the new price premiums and better price protection, especially if they decide to launch the products early in Japan. While pricing pressures continue to mount globally, the Japanese government has taken a step forward to ensure Japan remains one of the most attractive pharma markets.

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Author Bios

Andrew Chen is a Consultant based in the Hong Kong office with expertise in market analysis and due diligence in Japan, China, and other APAC markets.

Gary Cheng is a Vice President based in the Hong Kong office and leads Health Advances’ APAC practice.

About Health Advances Asia Pacific Expertise

Health Advances is a healthcare-focused strategy consulting firm that has built deep global expertise in Asia Pacific countries across various sectors, including biopharma, medical devices, diagnostics, and digital health. Health Advances partners with clients to support their clinical development, business development, and go-to-market commercialization strategies.

If interested, please contact one of the members of our Asia Markets Practice Management Team at HAAsiaMarkets@healthadvances.com.