rug expenditure as a percentage of healthcare costs in Japan has been stable at approximately 22% in the past quarter-century. As Japan’s society ages, overall healthcare costs have increased and drug costs have increased in parallel, a trend observed worldwide. However, according to one industry report, Japan’s share of the global pharmaceutical market showed continuous decline in the past 20 years, from 12.0% in 2003 to 5.1% in 2022. Market share often reflects the market’s attractiveness to industry investment as well as the foundation to directly support pharmaceutical innovation. Japan is now struggling to sustain universal healthcare coverage and encourage innovation in the industry at the same time.

In Japan, the reimbursement unit price of each drug is set by the government as the official price, which is applied universally in every medical institution (hospital, clinic, etc.) and pharmacy. The standard method of calculating the price of a new drug is called “a comparator method,” in which the new drug’s price is calculated by reference to the price of a similar drug on the market. Additionally, when the drug meets prescribed criteria, premiums for innovativeness/usefulness (5%-120%), orphan drugs (5%-20%), and pediatric drugs (5%-20%) are added to the calculated price. If no comparable drug is available, “a cost accounting method” is applied, in which the price is calculated based on relevant costs including manufacturing costs, sales and general administrative costs, operating profit, and marketing and distribution costs. Premiums for innovativeness/usefulness, orphan drugs, and pediatric drugs are added in these cases as well. In either case, the price of a new drug is set within 60 days after the marketing approval, in principle. This system ensures transparency as well as predictability in drug pricing.

However, the price of every drug on the market is revised downward by the government biennially/annually based on the market price. Because of the buying powers of hospitals/clinics/pharmacies, and competition with similar drugs and generics, the wholesale price of a drug sold to the institutions keeps falling, usually lower than the price reimbursed by insurers to these institutions. The government surveys this wholesale price and aligns (lowers) the reimbursement price to it, with some margin allowed. (This percentage depends on the product because the difference between the reimbursement price and market price varies by product.) Thus, in Japan virtually all drugs undergo price cuts every year or two. In addition, for blockbuster drugs exceeding a predetermined threshold, MHLW (the Ministry of Health, Labour and Welfare) reduces prices according to the rule of market expansion repricing*. This rule is often criticized by industry as “punishment” for innovation and as an impairment of pricing predictability.

Access to innovative medicines is an important public health concern. From the late 2000s to the early 2010s, with a view to alleviating the drug lag, MHLW issued several guidelines, including Basic Principles on Global Clinical Trials, to promote multiregional clinical trials that support timely registration of new drugs in Japan. In addition, the Price Maintenance Premium (PMP), which exempts certain patented drugs from the above-mentioned price revision, was introduced in 2010. Thanks also to great efforts by industry, research has shown that the drug lag has declined substantially.

However, we again see signs that the number of drugs marketed in the US or the EU but which remain unavailable in Japan has been increasing; drugs originating from emerging biopharmaceutical companies, drugs for rare diseases, and pediatric drugs constitute the majority of the unavailable drugs. Although multiple complex factors affect this situation, the US and European drug industry are highly critical of some Japanese government pricing policies, claiming that the recent price cuts as well as repricing due to market expansion have severely decreased the predictability of the drug price system in Japan, lowered their expectations for growth of the Japanese drug market, and led to several companies’ reluctance to bring new drugs into the Japanese market in a timely manner.

In response, the MHLW set up an expert advisory panel in the summer of 2022 to discuss comprehensive measures to promote early launch of innovative medicines in Japan. The panel brought about vigorous discussion from various standpoints including the drug pricing system and compiled a report pointing out the importance of promoting the predictability of investment recovery and enhancing the attractiveness of the Japanese pharmaceutical market.

Following publication of the MHLW report* in June 2023 (Japanese only), specific issues concerning the drug price calculation method were discussed at the Central Social Insurance Medical Council (Chuikyo), another advisory body to the MHLW which mainly deals with the financial side of Japan’s health insurance. Drug expenditures hang heavy on Japan’s national insurance.

Eventually, Chuikyo agreed on several points in the report, and MHLW pricing started to reflect the innovativeness and usefulness of new drugs. Specifically:

• A new premium for early introduction of innovative drugs has been adopted. This premium (5%-10%) is applied to products for which NDA (new drug application) in Japan has been submitted within six months after the NDA was submitted in the US/EU and marketing approval in Japan is granted within six months after registration in the US/EU.*

• New criteria for the premium for clinical usefulness were established, e.g., considering evidence from single-arm trials for rare diseases and improvement in QOL, responding to changes in modality of therapy and aiming for proper evaluation of the multifaceted value of new pharmaceuticals.
• Criteria for the PMP were changed. The company index was abolished in order to create a favorable environment for venture companies and start ups, and several product criteria were added to foster pediatric drug development and early introduction of innovative drugs in the Japanese market.

Chuikyo has asked the government to analyze and evaluate in close cooperation with industry the effect of the revised drug pricing system on new drug development in Japan, including the state of the drug lag. This analysis will be reflected in the next round of discussion on pricing reform expected in April 2026. Thus, the next few years will be extremely important for Japan to determine and navigate to its future policy, either along these lines or in a different approach that values budget discipline and cost containment more highly.