IN PERSON
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Mark A. Colby is the president of CGIKK (Tokyo). He was responsible for the importation and implementation of the College of American Pathologists’ standard in Japanese laboratories. His books include Negotiating the Gray Maze: the Business of Medicine in Japan, The Japan Healthcare Debate: Diverse Perspectives, and The Boxer Gate. He can be reached at mcolby@cgikk.com.
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To get an insider’s view of the challenging Japanese market, IVD Technology editor Richard Park spoke with Mark Colby, a lecturer and writer on Japanese healthcare issues now teaching at Chiba (Japan) National University. In the interview, Colby talks about his experiences marketing and selling IVDs in Japan and acting as a liaison figure between that nation and American healthcare product companies. He provides some historical context and discusses how a large aging population may define the future market for diagnostics in a unique country. The key to unlocking Japan, he suggests, is being there.
IVD Technology: How big is the IVD market in Japan?
Mark Colby: It’s a couple of billion dollars. Japan is the second-largest healthcare market in the world in terms of countries. Regionally, it’s third, after the United States and the European Union. I hope the IVD market is still ranked up there, but we’ve suffered pretty big hits over the last few years. I’m not sure if we’re slipping in that ranking or not. Nevertheless, Japan is one of the top IVD markets in the world.
At what rate is the IVD market in Japan growing, and what factors drive that growth?
Healthcare expenditure in the country is certainly growing. That’s being driven by the demographics, the aging of the population.
But the IVD market specifically is experiencing some pretty heavy downward pricing pressure from reimbursement decreases. This year is something like the fourth or fifth year that we are seeing double-digit decreases in reimbursement across the board, with very few exceptions. The Japanese government has a formulary that is essentially based on market prices.
But at the end of the year the government is rationalizing the ratcheting down of any prices in the healthcare system. IVD is getting hit harder than other segments right now. The reimbursement situation is just one point. It reverberates through the system.
Japan has extremely large reference laboratories that compete with each other for hospital business, typically on lower and lower pricing. And because so much of the volume of IVD testing in Japan—variously estimated at 40 to 60%—consists of tests run not in hospital labs but in reference labs, the pricing that those reference labs offer disproportionately affects the reimbursement cuts.
This is contrary to what the market used to be. In the 1980s and 1990s, Japan was by far the most lucrative IVD market in the world. For example, we had therapeutic drugs reimbursed at $40 and $50 per patient result. That price is now about $7 per patient result. That gives you an idea of the kind of massive cuts we’ve had.
How did such a dramatic change in the market come about?
I think certainly the biggest issue is one not specific to IVDs, but specific to healthcare: Japan has a universal healthcare system.
Virtually everybody in the country is insured. And by the year 2025, fully a third of the Japanese population is going to be over 65 years old. People are thought to use about 85% of their lifetime allotment of healthcare from age 65 through death. Those numbers are pretty daunting. So the government is looking at everything in order to find places to cut.
Every sector is feeling the pain. However, because IVD procedures have historically been considered fairly low-risk—you weren’t giving something to the patient; it wasn’t going to hurt anybody—IVD was a likely area for cost cutting.
When Japan was trying to build healthcare-related industries, it offered very high reimbursement rates in order to promote those industries. And it was very successful at that. But then the government’s priorities changed to cost containment.
Market Prospects
So, given that situation, how do you see the IVD market in Japan doing over the next 5–10 years? Which IVD product areas are doing well, and which do you think will experience growth?
I think that the unit volume is certainly going to grow, just because of the number of people participating in the healthcare system. We certainly hope that we’re going to also see some growth in the pricing, or the revenue per unit.
But we don’t know if that’s going to happen. There is some silver lining in the clouds going overhead right now in that we saw a few reimbursement categories actually increase last year. The hospitals and even the reference labs were looking at the pricing being offered and simply said to the government, “At this pricing, we cannot perform these tests.”
One area that needs it desperately is microbiology, where susceptibility testing used to be performed fairly routinely before administering heavy-duty antibiotics. The economics used to be such that the hospitals would do it. Now they simply give the most expensive antibiotic there is, which is really, in some ways, the government cutting off its nose to spite its face.
Another point worth mentioning is that Japan is trying to transition from a fee-for-service system similar to that in the United States in the 1970s to more of a system it calls DPC [for diagnostic procedure combination], where they’ll pay so much per diagnosis rather than per procedure. The laboratory in the largest hospitals in Japan used to be a profit center. Now it is a cost center, similar to the way it is in the United States.
The money is certainly not in clinical chemistry, hematology, urinalysis, and coagulation, the typical commodity IVD products. The higher reimbursements, and the money, are available on the immunoassay side, and especially now in molecular diagnostics. Japan is transitioning its blood banks from enzyme immunoassay–based systems into molecular for the infectious diseases. And that’s obviously a very big segment.
Molecular diagnostics is a market area that’s growing. All of the reference laboratories are equipped to do molecular diagnostics, of course. Japan has about 9000 hospitals and 90,000 clinics. Of the 9000 hospitals, roughly 300–500 of the largest ones are operating molecular diagnostics. That’s up from zero, five years ago.
The reimbursement for this relatively new high-priority assay is high enough to offer pretty good rewards for companies involved in that market.
Generally, a source of the problem is that IVDs once were sold in Japan on almost strictly monetary terms, and that the manufacturers did not do a very good job of demonstrating the real value that our technology brings to the patient and to the healthcare system. We’re paying for that now.
What is the domestic IVD industry like in Japan? Are there a lot of homegrown companies developing their own diagnostic technologies?
Several years ago, 100, 120 reagents-manufacturing specialists sold products that had no associated instrumentation. They would sell onto analyzers from companies like Hitachi and Toshiba and Olympus, which didn’t have their own reagent trails. But take a look now. Those small companies are still there, but they’re literally fighting for survival.
Related to this is the fact that Japan has a lot of IVDs that have been approved and reimbursed, with the majority of approvals going to products from domestic manufacturers in order to build the industry. So, for example, the Ministry of Health, Labor, and Welfare has approved more than 100 cancer markers. In the U.S. market, I think at last count five had passed FDA scrutiny.
Those markers are there. Doctors can use them. In the old days, they could use them on as many patients as they wanted, and just bill the government and make money. Obviously, those tests are getting hit particularly hard now, which hurts the domestic market.
Another thing that’s hurting the domestic market is that, while historically they had to compete only domestically—and there were enough spoils for them all to be comfortable—now the companies that don’t have an international presence are competing against large companies that are increasingly consolidating, making the economies for the smaller firms very, very difficult.
There are some big multinational corporations based in Japan, of course, but a ton of IVD companies there are small. Among the larger companies is Sysmex Corp. (Kobe, Japan). It’s very strong on the hematology side, holding a 70% market share and growing. Sysmex is challenging companies like Abbott and Beckman Coulter in their home market. That’s simply because Sysmex seems willing to maintain that market share at any cost. I think the multinationals look at that as, long term, not a very promising strategy in that market. The revenues available off of the reagent streams in hematology are very, very limited. You have to make the money off of the instrument sales and service.
Larger Players
How do the major Japanese companies—maybe even some of the medium-sized companies—approach the challenge of marketing their products outside Japan, particularly in the United States and Europe?
Japanese companies, in my view, tend to be very good at putting together highly complex robotic systems. The Western companies, however, seem to be much better at putting together the wet stuff. And frankly, looking at the IVD industry and its business models from a macro level, what made it such a good industry from the very beginning was its ability to create annuity-producing business.
The Japanese companies see that, and they want to do it. But because they’re so hardware-focused, many of them are businesses centered on capital sales. From a business perspective, that means they are chasing their tail all the time. They sell an instrument and, as soon as it’s sold, they’ve got to look around to see where they’re going to sell their next instrument.
Though some of these are the biggest companies in the world, they think they’re in trouble right now. They’re very concerned with what comes next. They have to deal with Western companies increasingly dominating their home market. And they have no international market to fall back on. Plus, when we have Bayer merging with Siemens those great big companies that were scaring them already are just becoming bigger and bigger and bigger.
How do they react to the megablockbuster deals you just mentioned, and to their possible impact on the IVD industry in Japan?
Most people don’t get it. Most people don’t see—and I’m still having trouble seeing—a link between medical imaging and IVD. The science is different, the departments in the hospitals are different.
But this brings to mind one thing the Japanese have done to protect their domestic market. U.S. manufacturers—Abbott, actually—launched the reagent rental programs in the mid-1980s. Because U.S. and European companies had the wet stuff down so well and had relatively inexpensive and uncomplicated hardware, we were able to go into Japan and offer instant systems at no charge, looking for that long-term annuity business.
However, Japan passed a law two-and-a-half years ago under the auspices of fair trade that largely prohibits reagent rental programs in the country. This has offered a lot of the domestic manufacturers a bit of breathing room. Japanese clinical labs now have to buy capital equipment, which plays to the Japanese manufacturers’ strengths. Now under the FTC ruling, all aspects of the business transaction must be laid out in a formal agreement, itself needing to pass the scrutinity of the regulators.
That’s a huge issue, by the way. It has really hurt some of the multinational IVD companies. And it has hurt the hospital labs, because they’re not used to having to have capital budgets for most forms of lab instrumentation. They used to get a lot of instruments for free. Of course, Japan has not changed all that much, and new ways of achieving past ends are being engineered all the time. For example, Olympus released its cost per result program last year to all competitors scratching their heads wondering how they got the program past the regulators.
Building Asian Business
What are the keys to success for foreign IVD companies doing business in Japan?
The number-one thing is, you’ve got to be there. Japan is a very complex market, and the companies that just hand their technologies off to trading companies and what have you typically don’t see, I would say, their fair share of success, if they see any success at all.
The problem for smaller IVD companies is that the cost of being there is high. Just because our pricing has been going down, the notorious high cost of doing business in Japan has not decreased. It’s a tough situation now.
But companies have to get in there. A lot of them look at other markets and end up prioritizing Australia, which doesn’t even have the market size of Yokohama. Japan scares them.
For the companies we’ve worked with, the ways to enter Japan run all the way from setting up a wholly owned subsidiary, hiring all their own regulatory people, doing their own clinical work, and getting to know the physicians and the key market leaders, all the way down to having just one person in the head office whose only job is to be responsible for Japan and to parachute in and out of there once a month or so. Japan is not a market that you can just license in and cross your fingers, because you typically get what you put into it.
You need to do research. Japan is a large market with aspects that don’t exist anywhere else. One example is something called ningin-doku, which basically means human dry dock. This refers to physical examinations that about 11 million people a year undergo as a proactive healthcare measure. They are generally paid for by employers, but increasingly by individuals. They’re one- to two-day events where you go in and have virtually every test known done on you. It’s completely outside the healthcare system. And if an IVD company doesn’t really dig, it will probably never even know it’s there. Yet that’s one area where in vitro diagnostics and other diagnostic procedures have a tremendous market in Japan.
What are some of the promising areas you see now and emerging in, perhaps, the next five years?
The government is key. It does manipulate the system by controlling the purse strings. Certainly we’re looking at anything that has any impact on elder care. That’s a Japanese government priority. And conversely, it is willing to put money into perinatal and neonatal care, as well. Those are the priorities of the government right now. Also cancer, whether the technology be diagnostic or therapeutic.
Japan is experiencing a technology lag because of the artificial regulatory barriers the country put up in 2002. A lot of companies and a lot of drugs are two and three generations behind as a result. This has gotten into the media, and the people have gotten angry about it. I think we’re going to see the ministries doing things now to try to solve this lag.
Would you recommend forming alliances or joint ventures with Japanese companies? Are there companies in Japan interested in such alliances with IVD companies?
Until about 10 years ago, the answer would have been absolutely yes. Those companies were hungry for new technologies. It’s getting harder now, though. For a lot of the trading companies, the profits aren’t there anymore, so they’re bowing out. The small and medium-sized domestic players are probably not even aware that their market presence, and their ability to get things done, is diminished. The large Japanese companies will always listen, but they are much more careful because of the high cost of entry and their learned understanding that once they are successful, the business will be taken away for them.
Then there are the multinationals. What I’m seeing more and more is that a lot of these products are being taken in by Western multinational companies, not just Japanese companies.
I’ve been doing this for a long time. It used to be that you’d call up your Japanese business friends and tell them what you’ve got, and they would just line up. It was fairly easy for an outside company to find a home for a product in Japan. I think it’s a lot more challenging now.
The cost of overcoming regulatory hurdles has probably gone up three to five times, depending on the category. Where once every company could get away with having one regulatory person or could delegate the responsibility to outside agents, even a small company has to have a minimum of three full-time people with very specific skill sets in order to bring the company into the Japanese market.
Japanese companies, whether domestic or international, are backing up in their regulatory departments trying to get their own products approved. So an outside manufacturer trying to get a smaller new product into the Japanese marketplace has got to really wow them for them to bring it up in front of their own products on the priority list for approvals.
Can doing business in Japan lead to opportunities to do business in other parts of Asia?
An IVD manufacturer needs to be very careful when trying to use a Japanese company to go into a country like China. It could backfire, because Japan and the rest of Asia tend not to like each other very much.
Cracking a Challenging Market
Besides the decrease in reimbursement and the downward pricing pressures discussed earlier, what other distinct challenges do IVD companies encounter in trying to do business in Japan?
To me, the greatest challenge is that we’re getting less and less money. Also, Japanese customers have an extremely high expectation for service, so the cost of servicing them tends to be high.
Building value is important. Manufacturers, simply because of their perception of Japanese customers, tend to train their customers poorly. I’ve seen training programs in the United States where there’ll be three days of intensive training. In Japan, it’s literally 45 minutes. They say, ‘put your reagent kit on here, load your patient samples here, press this button.’ Try it one time; try it twice; okay. And that’s it. Manufacturers think that Japanese customers don’t want to deal with that. But I do a lot of quality work in those labs, and it’s my feeling that customers are frustrated by the lack of information from IVD makers, both domestic and international companies.
The issue is that Japanese laboratories, and the medical technologists, see themselves as generating numbers more than generating key indicators for the diagnosis and treatment of patients. I think that’s why the government can rationalize ratcheting down these prices so much. We need to emphasize that core-value proposition that we bring to the caregivers.
Manufacturers should also try to increase the communication link between the lab and the physicians. The only way physicians are going to learn how to utilize and interpret new laboratory technologies is from the lab. But that’s not going to happen overnight.
What is the future outlook for the IVD market in Japan?
Despite what I’ve said about the reimbursement cuts, I think the future really is less in the hands of the government and more in those of the manufacturers. And the manufacturers need to collaborate, in my view. They need to figure out a way to increase the value proposition that they bring to the marketplace.
The good news is that we are fairly well organized. Probably the most active group in Japan right now, believe it or not, is the American Chamber of Commerce. And we’ve got a Medical Device and Diagnostics Committee that is very well funded by its members and meets regularly.
The reference laboratories are a larger and larger part of the equation. They’re important because of the volumes they bring. If a company closes with one reference laboratory, all of a sudden it has 15-percentage-point market share increases.
Things have gotten a bit harder in many ways, but what we complained about before was lack of transparency, lack of accountability—Japan being this black box that’s controlled by a couple of big trading companies and government bureaucrats—and it’s no longer that way. Japan is a fairly mature market. There certainly is a lot of transparency. It’s more highly regulated now. On the whole, in terms of Western businesspeople being able to navigate Japan, there’s never been a better time.
