Over the past years, I have had the fortune of participating in negotiations and ultimate deals between Western and Japanese biopharmaceutical companies. Doing deals is never easy, no matter the geography. However, it does seem that negotiating with Japanese companies tends to bring out conflicting emotions in Western executives: at one moment optimistic after a seemingly productive meeting and dinner, followed almost immediately by bouts of frustration about the nuances of the Japanese deal-making process. Despite the challenges and unique cultural dynamics, many lucrative deals in Japan are being successfully consummated, such as Daiichi Sankyo’s recent deal with Kite Pharmaceutical for Japan rights to Kite’s novel chimeric antigen receptor therapy (CAR-T) therapy for $50M upfront and a total deal value of $250M. In this article, I have summarized some key trends that I have observed that are either helping to advance or hinder Japan deal making.

First two of the most prominent positive trends:

Changes in the regulatory environment: I have been in Japan long enough to remember holding meetings with what was then the regulatory body known as “KIKOH”. Back in the late 1990’s and early 2000’s, the theme of the day was the “drug lag” in Japan and how to speed access to established international drugs in Japan. It did not help that there were only about 200 staff working at the KIKOH on meetings and new drug submissions. Fast forward to the present day, and the Pharmaceutical and Medical Devices Agency (PMDA) is now by nearly all metrics one of the most efficient regulatory agencies in the western world. They employ well nearly 900 staff, with a plan to employ over 1000 staff in 2018. The PMDA has significantly shortened the time from early development to approval, and have increased the quality and volume of their review and consultation services. There are many reasons for this transformation, including the lobbying efforts of industry, the introduction of the “user fee” system whereby sponsors (pharmaceutical companies) pay significant fees directly to the PMDA for meetings and filings, and the simple dedication of the leadership of the PMDA to become a world-class agency. These improvements have led to faster approvals in Japan, which may positively impact valuations of new assets western companies are looking to partner into Japan.

With its increased personnel, the PMDA can now conduct, in a timely manner, both preliminary (free) and formal (fee-based) meetings with Western companies interested in getting clarity on the pathway to Japan approval. A few Locust Walk’s clients have gone to the PMDA to get clarity (documented by official minutes) around what will be required – both preclinically and clinically – for Japan approval. The companies that have taken this step have often learned valuable information and gained regulatory clarity that has proven to be helpful in strategic partnering discussions with potential Japanese partners.

Elimination of bi-annual NHI price reductions: I used to participate in the late 1990’s as an observer on the Japan-based PhRMA Technical Committee, a sub-committee of the US pharmaceutical industry lobbying agency, which addressed key structural issues in the Japanese market impacting the availability of novel pharmaceuticals in Japan. Back in those days, prices of most pharmaceuticals in Japan were subject to bi-annual “price revisions” (note: prices in Japan are never revised upwards). Thanks to the efforts of many across industry, a new policy was adopted in 2010 that essentially protects the reimbursement prices of new drugs throughout the patent period or data exclusivity period (6 years for most drugs in Japan). With respect to partnering, the valuation of the asset increases if its price is not being significantly cut every two years, which has a positive impact on the actual deal value.
Although the environment in Japan has experienced positive changes, things are not totally rosy. There remain structural challenges that often result in hurdles to getting deals done in Japan. Below are a couple of the key challenges we see when discussing potential licensing opportunities with Japanese companies:

Lack of 505(b)(2) pathway in Japan: In the US, there are three pathways to drug approval: a) 505(b)(1) – a full application for novel new drugs; b) 505(b)(2) – a route that typically allows expedited development of a drug in a new dosage form or route of administration that patients and physicians typically prefer over previous versions; and c) 505(j) ANDA – a development pathway for generics. There have been numerous novel formulations approved in the US under the 505(b)(2) pathway. In general, to get approval under this pathway, the pharmaceutical company sponsor simply needs to create a bridge between the current drug and the new formulation, usually with a study designed to show that the new formulation results in similar levels of drug in the blood steam compared to the currently marketed product. The result is a much faster, less costly pathway to approval.

In Japan, however, there is no equivalent to the 505(b)(2) pathway. Often, manufacturers of new formulations will attempt to get buy-in from the PMDA on an expedited Japan development pathway for well-established drugs in a novel formulation or delivery system that would provide significant benefit to patients. In my experience, these proposals are usually rejected by the PMDA who require a full Japan development for even novel formulations of long-used drugs. This factor results in challenges to licensing novel formulations of older drugs in Japan, even those having a significant market opportunity. That said, some companies are working with the PMDA on a development pathway that may not be as expedited as the US 505(b)(2) pathway, but also is not a full development program.

NHI pricing challenges: Japan has a “single-payer” system and the government (facing a debt burden higher than 200% of GDP) is eager to find ways to control healthcare costs. Although the bi-annual price reductions have (for the time being) been shelved, the government has taken other measures to ensure reimbursement prices are kept in check. This is especially true for the blockbuster products such as OPDIVO® (nivolumab), the fast-growing immune oncology drug sold by Ono Pharmaceuticals. Earlier this year, the Japanese government decided to slash the NHI price of OPDIVO® by over 30% only because of its success. OPDIVO® has potential to be a multi-billion dollar selling drug in Japan and the government is concerned of the potential impact of such sales on the government’s finances. These “ad hoc” price adjustments are concerning and often deal economics reflect this pricing uncertainty.

Another example of recent challenges pertaining to NHI drug pricing pertains to the “average foreign price adjustment”. NHI prices of drugs in Japan are finally set by the government after adjusting – often upwards – based on the average foreign price in four countries: the US, UK, France and Germany. Recently, I have seen where this foreign price adjustment (which, if adopted, would have had a significant positive impact on the drug price) was not employed due to a relatively unknown pricing rule: the government does not use such adjustment for new drugs when another drug with a similar mechanism of action is already on the Japanese market. This results in a lower NHI price which influences the economics of a deal being discussed by the parties.

In sum, the trends in Japan are favorable for continued and increasing biopharmaceutical deal making. The pricing rules which now tend to support innovation, but hammer the prices of long-listed drugs, are forcing Japanese companies to to bolster their pipeline, often through partnerships. Finalizing a deal in Japan is difficult, and understanding the Japanese regulatory environment prior to initiating meetings with potential Japanese partners could dramatically increase the probability of consummating a successful collaboration. Locust Walk would love to help your Japan partnering initiatives- please feel free to visit us in Tokyo or contact us at: steve@locustwalk.com.