After decades of stagnation, is Japan’s biopharma industry set for an upswing?

Back in the 1980s, Japan was a global biopharma leader, responsible for almost 30% of all newly approved chemical entities (NCEs) approved by the U.S. Food and Drug Administration (FDA). Unfortunately, this is in stark contrast to how the country’s industry has performed in recent times; between 2011 and 2020, Japanese companies introduced just 7% of NCEs approved by the FDA. But what exactly is behind this decline, and could the country be set for an upswing to take it back to its golden days? 

Biopharma in Japan: Once a leading industry, before a gradual decline in the 1990s

As touched upon, a few decades ago, Japan was a global powerhouse when it came to biopharma innovation, as companies in the country invested heavily in research and development (R&D), aided at the time by a strong yen and strong economic growth. 

“Japan has a long tradition of R&D and after the Second World War, there was a significant need to improve healthcare and many new players joined the industry,” commented Johan Westblad, managing director of Aurora Partners, a life science business development consultancy in Japan. “The focus was then for many years on the Japan market. In the 1980s, several companies started to internationalize. This was due to the very strong Japanese economy and yen exchange rate that allowed for overseas investments combined with rich pipelines of compounds.” 

However, in the 1990s, Japan’s economic bubble burst. This is referred to as “The Lost Decade”, during which economic stagnation in the country became one of the longest-running economic crises in recorded history. 

As it became apparent that the bubble was about to burst, in the early 1990s, the Japanese Financial Ministry raised interest rates, ultimately leading to the crash of the stock market and a debt crisis, halting economic growth. During this decade, Japan’s gross domestic product (GDP) averaged 1.3% and, although household savings increased, it did not translate into demand, resulting in deflation for the economy.

The economic situation in Japan did not improve much in the decades to come, either. In fact, in some definitions of The Lost Decade, later decades are also included under this bracket, covering the period from 1991 all the way up to 2011. In the early 2000s, Japan’s GDP growth averaged only 0.5% per year, as sustained slow growth carried over until the global financial crisis and the 2008 Great Recession. Meanwhile, from 2011 to 2019, Japan’s GDP grew an average of just under 1% per year.

Naturally, this economic decline had a negative impact on every industry, including the country’s biopharma sector, as between 1995 and 2018, Japan’s contribution to the global pharmaceutical industry’s value-added output declined by 70%, from 18.5% to 5.5%, presenting significant challenges within the sector. 

A closer look: Contributing factors to the biopharma decline in Japan

When the economic slump began, the Japanese industry was quite fragmented with many small players, and to compete globally, it was necessary to consolidate. Consequently, a wave of mergers took place in the late 1990s to early 2000s. 

“At the same time, with the dotcom bubble bursting in the early 2000s, the Japanese startup biotech industry struggled to take off,” said Westblad. “It was seen as very risky and had difficulty in attracting experienced personnel who favored employment at large established companies. There was also a lack of risk capital.”

Even recently, Japan has ranked relatively low in innovation, startups, and entrepreneurship compared to its pre-1990s rankings, with the World Intellectual Property Organization (WIPO)’s 2022 Global Innovation Index placing Japan 13th globally, marking a significant drop from its 7th place finish in the 1970s. 

In terms of large and mid-sized Japanese biopharma companies, Westblad said that, since the 2000s, the ambition for many companies of this size has been to internationalize sales, either through green-field expansions and/or M&A. This is due to the Japanese market’s global share diminishing and competition with foreign global pharma companies in the home market increasing. 

“Still, many companies have not been aggressive enough to change as the Japanese market has remained rather sizable,” commented Westblad. “Price reductions that have always been a part of managing costs in the Japanese universal health care system, has however been significantly increased in the past decade, to the extent that it is increasingly difficult to rely on just the Japanese market for most companies.”

Additionally, factors such as reduced government investment in basic research, weak collaboration between industry and universities, and a slow regulatory process also contributed to the decline in Japan’s biopharma leadership, as stated in a 2022 paper by the Centre for Life Sciences Innovation, part of the Information Technology and Innovation Foundation in the U.S.  

It is also worth noting that, in the 1990s and 2000s, while the biotech world moved from small molecule development to biologics, Japan, with some exceptions, delayed in making that transition, leaving it lagging behind other countries in terms of innovation. 

Another important event that negatively affected Japan’s biopharma industry came at the end of the 1990s when Japan, together with the U.S. and European Union (EU), implemented the World Health Organization (WHO) ICH GCP guidelines, which meant that clinical development requirements became standardized across the three major regions. 

However, there was a section that covered ethnic factors in the acceptability of foreign clinical data, and Japan used this to require additional studies in Japanese. “This made it complicated for both Japanese and foreign companies to plan for and include Japan in their global clinical development programs, which in turn led first to drug lag and later drug loss, as drugs were either launched much later or not at all in Japan,” said Westblad.

To combat the drug lag, the Pharmaceuticals and Medical Devices Agency (PMDA) has increased staff dramatically from 250 in 2004 to more than 1,000. NDA review times are now as quick as the European Medicines Agency (EMA) and FDA, making global simultaneous launches including Japan a reality. Even so, drug lag is still a big concern. According to the PMDA, as of March 2023, there were 86 drugs that had been approved in Europe or the U.S. between 2016 and 2020, but had not even started development in Japan. Of these, 72, or 86%, were either originated by venture companies, for orphan and/or pediatric indications.

Back to the present: Is Japan’s biopharma industry set for an upswing?

But, after the doom and gloom of the past few decades, there have been some recent indications that Japan’s biopharma industry could finally be set for an upswing again. 

“The Japanese economy has seen growth, inflation, and a strong stock market in recent years,” said Westblad. “There is also recognition among the government and political parties that a strong innovation system is needed, including rewarding innovative medicines with better pricing.”

In 2019, the Japanese government established its Bioeconomy Strategy, which laid out a goal of “realizing the world’s most advanced bioeconomy society by 2030.” Under this strategy, Japan has promoted efforts to expand bio-related markets in the health and medical fields, such as biomanufacturing and primary production, toward continuous economic growth and solving climate change and social challenges.

The Japanese government then made another important change in 2023. Regulators have historically required trial sponsors to conduct a standalone Japanese phase 1 study to ensure there are no significant differences in safety/pharmacokinetics between Japanese and non-Japanese participants. This requirement was long considered an obstacle for non-Japanese companies conducting multi-regional clinical trials in Japan, contributing to drug lag and drug loss in the country. However, the Japanese Ministry of Health, Labour and Welfare relaxed this requirement last year with the aim of attracting more bioventure-oriented products into the Japanese market.

Another promising initiative was that the government, in the first half of 2024, relaxed the criteria for orphan drug designation and established the Consultation Center for Pediatrics and Orphan Drugs Development (CCPODD) in expectation of increased consultations and applications.

Most recently, in July 2024, the government laid out a five-year roadmap for boosting drug development in the country to further overcome the drug lag problem. The main goals of the project include starting clinical trials on much-needed drugs by 2026 and creating at least 10 drug discovery startups by 2028. As for drugs for children, the government aims to create 50 new drug development plans over the five years through 2028. Plus, requirements are set to ease drug approval, aiming to encourage biopharma companies to develop new drugs that they can bring to the market more quickly. 

Japan now has excellent basic research, too. As an example, a particular area of focus for Japan has been regenerative medicine, after Japanese stem cell researcher Shinya Yamanaka received the 2012 Nobel Prize for his research on induced pluripotent stem (iPS) cells.

Last but not least, the startup scene in Japan is also starting to improve, and easy access to established biopharma companies, which is important for young startups to be able to collaborate with, is a competitive advantage for Japan.

In a promise to strengthen the country’s startup ecosystem, at the 2023 BIO International Convention in Boston, where The Ministry of Economy, Trade and Industry of Japan (METI) and the Japan Bioindustry Association (JBA) held a presentation on the Japanese government’s initiatives and the biotech ecosystem in Japan, the former Prime Minister, Fumio Kishida, announced a $7 billion budget to support Japanese startups, with 30% of the funds specifically designated for drug discovery.

“The key players haven’t changed much in the past couple of decades and it is only in the last five years or so that we are seeing a strong upswing in the number of startup biotech companies,” said Westbland. “This is due to a number of different factors, including maturity of tech-transfer offices, strong innovation at Japanese universities, significant staff reductions in larger companies, and strong stock market. Still, it will take time before the companies reach maturity.”

Pharma companies leading the charge for change in Japan

The Japanese biopharma industry is dominated by a couple of dozen or so large and mid-sized pharmaceutical companies, many of which have a significant impact on Japan’s biopharma industry. Westblad pointed to several examples and explained their particular effect on the industry:

• Daiichi-Sankyo: The company has been very successful in building a strong innovative oncology portfolio and forming global partnerships with the likes of AstraZeneca and Merck. This know-how and experience of building will have trickle-down effects on the Japanese innovation system.
• Chugai Pharmaceutical: Although majority owned by Roche, it has had a very independent role, similar to Genentech, combining a very strong commercial presence in Japan with funding going into innovative R&D that they have then developed for global markets.
• Takeda Pharmaceutical: The well-known company has expanded globally through M&A. At the same time, they have restructured and spun out clinical development and research functions in Japan, while renting out research space for startups at their R&D center, allowing for synergies to be created.
• Astellas Pharma: Another well-known giant of the pharma world, the company has seen very strong growth over the years and has been very active in open innovation collaborations with Japanese academia and startups. 
• Ono Pharmaceutical: The company has had strong success with developing and commercializing Opdivo (nivolumab) in Japan, Korea, and Taiwan together with BMS. The compound was originally discovered by Tasuku Honjo at Kyoto University, who received the Nobel Prize in 2018. Furthermore, Ono set aside 23 billion yen (ca. $150 million) for a research foundation to support young researchers.

Alongside these pharma companies, biotech Nxera – which recently changed its name from Sosei-Heptares – has also made a successful contribution to the industry. “While focusing on R&D collaborations with pharma companies, they have through acquisitions built a strong pipeline and recently established commercial presence through the acquisition of Idorsia’s Japan and Korean business. They are one of few examples of successful Japanese biotech companies,” said Westblad. 

Despite the feeling that Japan’s biopharma industry is beginning to get back on track, there are still a number of hurdles that need to be overcome after so many years of stagnation. One stand-out example is that there is still a lack of venture capital (VC) investment in Japanese startups. According to an article in Citeline, in 2023, Japanese VC and corporate VC investments in biotech companies were 3% of what they were in the U.S., at $913 million and $28 billion, respectively. 

Fujimoto, a former Takeda employee, said in the same Citeline article: “The scale is so small, and it’s reflected in the slow speed of drug development in Japan. Biotechs here cannot take risks with small investments. Most innovations in Japan come from big pharma, whereas in the U.S., they are from startups.”

A recently launched joint venture between Astellas, Takeda, and Sumitomo Mitsui Banking Corporation (SMBC) is intended to help startups conducting early drug discovery work, but even the size of that initiative is modest, totaling $3.9 million. 

Nevertheless, it seems that slowly but surely is the way for the rebuilding of Japan’s biopharma industry. Although it is by no means out of the woods yet, the future of the industry does look promising given all of the initiatives introduced just in the last few years, and there is a feeling that the sector could once again soon reach the high levels of success achieved in its golden years.