Innovators Bemoan Changes to Japan's Pricing System for Leading Drugs

In a move that attracted little attention at the time, Ministry of Health officials in December changed the Japanese National Health Insurance (NHI) system's methodology for calculating price changes for medicines that exceed their manufacturer's initial sales projections. Innovative drug companies have now commented that the policy change will have important consequences for firms that manufacture commercially successful medicines, as well as for those firms that market compounds that are only similar to top-selling drugs. The December changes to pricing methodology coincided with first-time listings for nine new compounds in 16 presentations, as well as the renaming of some 647 compounds that were already on the reimbursement list (see Japan: 28 December 2007: Japan's NHI Lists Prices for 16 Products).

Success to Attract Collective Punishment

Some background is useful here. When a new drug is listed in Japan, the manufacturer must provide officials with projections for future sales, on the assumption that higher-than-expected volumes will compensate for a price cut. Such reductions in the price at which the NHI system reimburses drugs affect all compounds that have sales of more than double their initial projections, or any compound that has annual revenues exceeding ¥15 billion (US$139 million).

Typically, the reduction takes the new price to 90% of the original price, but the cut can be deeper, depending on how the drug was priced in the first place. The NHI system uses two separate methodologies for calculating the price of new drugs: either the Cost Accounting Method or the Pricing Methodology by Comparable Drug. The first is usually used for first-in-class compounds, and uses foreign prices as one of its references; the second is mainly used for medicines that represent an incremental innovation over a molecule that is already marketed in Japan. Assuming that manufacturers are unable to argue that their drug is innovative enough to merit a less ruthless cut, if the Cost Accounting Method was used to price a new drug, the reduction can be as much as 25%; if the Comparable Drug system is used, the maximum cut will be 15%.

To date, this system has only applied to individual molecules, but under the changes in December, cuts will effectively cascade down from the top-selling molecule, affecting every member of the same therapeutic class. However, according to Inside U.S. Trade, the government intends to "mitigate" the potentially serious impact of this change to the NHI reimbursement system. Officials are quoted as saying that the maximum cut under the Comparable Drug system will be lowered from 15% to 10%, but there is a lack of clarity over how this will be achieved. Other sources say that such cuts will be achieved using the average of the market price and the cut as calculated on the basis of the Comparable Drug methodology.

Another important change made in December is that—ostensibly in an effort to reward innovation—the minimum NHI premiums awarded to first-in-class molecules that represent a therapeutic advance were raised from 50% of the base price to 70%; meanwhile, the upper threshold was raised from 100% to 120% of the base price. So-called "usefulness" premiums were also raised, although it should be noted that only a couple of molecules have ever received this premium since it was launched in 1991. In the most recent revision in December, for example, Chugai’s breakthrough lung cancer drug, Tarceva (erlotinib), was awarded an innovation premium of just 5%.

Outlook and Implications

The practical upshot of the changes is difficult to determine. However, it is likely that less innovative and less successful prescription drugs will no longer obtain perversely favourable treatment at the expense of molecules whose clinical and commercial superiority is well established. The impact on each individual company will depend on a complex variety of factors that account for the performance of the leading molecule in each therapeutic class. For its part, the Office of the U.S. Trade Representative (USTR) has declined to take any specific action.

Find out more about Same-day Analysis