Choices for Japan Presence

The choice of the most suitable mode of entering the Japanese market for a company is usually driven by market size and how well the company is funded.

Direct Sales Affiliate
If the Japanese market for the product or therapy is hundreds of millions of dollars and the company expects to own a major share of it, it may be a natural conclusion that the organization should invest in a wholly owned direct affiliate and capture all the available value.  Typically, a company in a business of that size will be adequately funded to execute such a strategy.

In many healthcare fields the issue for the typical company entering Japan is not so straightforward.  For many venture capital funded early stage companies, the market is smaller, and financial resources are a constraint.

In-Country Sole Distributors
If expected revenue from Japan over the 5-10 year time-frame is no more than several million dollars, there may be little debate - finding a sole distributor for the Japan market is the only practical way to exploit the asset.

Distributor or Direct - The Middle Category
Many Japan market entry efforts however fall into a middle category.  The market in the relevant time-frame may be, say, $200 Mil. and the company hopes to garner 20% market share over time.  A $40 Mil. business is quite big to entrust to a distributor, but if you go direct can you really generate an acceptable contribution result on $40 Mil. in sales given the high fixed costs of operating in Japan?

There are countless tales of woe from making either of those choices. 

The Distributor Model - Challenges
The distributor stories of sorrow usually centre around disagreements over allocation of sales and marketing resources.  In a hypothetical example, US venture company "Cardio Gizmo" expects Japan sales of $25 Mil. in its market of $125 Mil. within  5 years from launch, and signs up with "Sellitall Medical Japan" a sole in-country distributor for a range of other foreign medical products from principals A through F.  Sellitall conducts clinical trials and obtains regulatory approval for Cardio G's product after 4 years, and then places the product with its cardiovascular sales force along with products from principals C and E, which are also cardiovascular products.  Sellitall also has two other sales forces: one for principals A and B's products which are orthopedic implants, and one for principals D & F's products which are surgical products. 

A year and half after launch Cardio G's sales in Japan are tracking at $3 Mil. and on nowhere near the trajectory to achieve $25 Mil. in five years.  Disagreements between the parties begin to gather intensity, with Cardio G's management demanding Sellitall allocate more sales person time and better sales people to Cardio G's product, while Sellitall places the blame on the product's orientation to US and European markets, and urges Cardio G to develop a version more suitable to Japan market needs.  At the Year 2 mark Sellitall launches Cardio G's next version of the product.  Cardio G is hoping for a significant investment from Sellitall in increased sales force resources and a major marketing campaign, but just at that time Sellitall is also launching an exciting, high value new orthopedic implant product from another one of its suppliers, Principal A, and elects to move some of its best sales people from the cardiovascular sales force to the orthopedics sales force, to the dismay of Cardio G's management.  By the Year 3 mark, Cardio G is fed up and ready to look at other alternatives. The choices are not attractive.  Sellitall holds the regulatory approval, has all the Key Opinion Leader and customer relationships associated with the product, and has a large stock of inventory which Cardio G has forced on it, and which would either need to be returned to Cardio G or transferred to a new distributor.  If Cardio G is to make a change, what are it's choices?  Another distributor may simply reprise the Sellitall experience.  A wholly owned direct sales affiliate?  Even if $25 Mil. in sales is a realistic goal, making the big investment and setting up a direct sales affiliate is unlikely to generate an acceptable level of contribution at the $25 Mil. sales level, given the high costs of operating in Japan.

Going Direct - A Major Investment
Some companies in that middle ground do decide to make the investment and build a direct sales affiliate.  It is a very significant investment.  Initially a strong general manager seems necessary to craft the business and regulatory strategy.  Then one or more regulatory & clinical managers are hired to conduct negotiations with the regulatory body, engage Key Opinion Leaders, contract with a CRO to conduct the clinical trial, and write the submissions.  Along the 4-5 year path to approval, all these costs, plus costs for a finance department, Human Resources, perhaps a marketing person, continue to be incurred even though product sales have not yet commenced.  The clinical trial itself, for an implant requiring 100 cases, might cost $5 Mil., separate from the cost of the office and staff.  A year or so before approval it becomes necessary to hire sales management and sales staff, begin training, begin to establish regional sales offices, obtain operating licences for each office, organize fleet management etc.  In addition to more marketing staff, operations, quality assurance, vigilance etc. all need to be addressed and funded.

Quite often the logic in deciding to go direct flows along the following lines.  "The market in Japan will be $300 Mil. eight years from now.  We have market share of 30% in the US and Europe.  We should be able to achieve the same in Japan with competent execution.  That translates into a business with revenue of $9o Mil.  We can definitely make money at that level."  So the decision is made and the company hires a general manager and begins to make the investment.

Ten years and six general managers later, the Japan affiliate is still at $25 Mil., is chronically skimping on marketing and sales resources which might help it to get to the next level, and despite this parsimony is forever making a small loss.  Japan is considered an incorrigible problem child.  What went wrong?  Often the assumptions underlying the $90 Mil. were flawed to start with.  The market is $300 Mil., but it features local Japanese competitors who aren't active in the US and European markets but who hold significant market share in Japan, or the company's products are designed to meet US and European market needs, and aren't squarely aimed at Japanese market needs, i.e. they are really only addressing a third of that $300 Mil. market, etc., etc.

The bottom line for the company is that making the investment in a full direct subsidiary for a $25 Mil. business can't make acceptable money.  What is the alternative?  Go to a distributor model?  In the medical device business at least, $25 Mil. is a large business to entrust to the distributor model, with all the challenges that modality entails.  And if there were another way to make a $25 Mil. business profitable, the distributor model may leave a lot of value on the table.  Are there other options?

Alternative Options

In fact there are other options. 

Strategic Partner
One option is a strategic partner.  Sometimes a Japanese manufacturer in the space, which lacks a competitive new product can be a motivated and effective partner.  Sometimes it is a manufacturer in an adjacent field which hopes to enter the therapy or technology area and is prepared to invest in a sales force and management to get itself established.  Each case is unique, and requires careful consideration of the potential partner's motivation, commitment, honesty/integrity, resourcing and human resource capability.  There are examples of great successes, and plenty of examples of miserable failures as well.

Regulatory Approval Only Models
Many companies contemplating a Japan market entry are venture capital funded early stage companies.  The plan for the venture is for the VCs and other early investors to exit at some point once value created has reached a certain level and plateaued.  The exit is more often via sale to a growth-hungry healthcare major these days, than via an IPO.  Exit typically occurs once a pathway to FDA approval becomes clear and acquires a certain level of probability, a point in time that is often well before Japan regulatory approval is obtained.

Asking a distributor to take this on can be difficult and expensive in terms of value ceded.  Potential distributors know the likelihood is high that they will do all the clinical and regulatory work with its associated financial investment and opportunity cost in deployment of skilled clinical and regulatory personnel, only to find they have to hand it all over to a healthcare major a year or two before regulatory approval.  Of course the agreement between the venture company and the Japan distributor will provide for ample compensation to the distributor, but making money from regulatory submissions is not the distributor's preferred business model.  It would rather spend its time and effort on products it can ultimately provide to its sales force to sell; that is the primary goal of taking on products in the first place.  Accordingly, in negotiating the distribution agreement the distributor will often insist on rich compensation if the product is taken away from it after it has done all the clinical and regulatory submission work but before approval.

Working Directly with Contract Research Organizations & Consultants
An alternative is for the early stage company to try to obtain approval by itself without going to a distributor and without setting up an expensive wholly owned sales affiliate. This can be done using CROs and consultants.  One practical issue is the need for a designated Marketing Authorization Holder in Japan.  The Ministry of Health Labour & Welfare requires a foreign manufacturer to have a local company act as its representative in Japan to ensure a point of contact and responsibility in dealing with the regulatory body and complying with regulations across a range of issues.  CROs and some consulting organizations will perform this task for a fee.  CROs of course are also equipped to conduct clinical trials.

There are some risks and pitfalls with this model however too.  CROs' livelihoods depend on their relationship with the regulatory approval body, the Pharmaceutical and Medical Devices Agency (PMDA) and its overlord the Ministry of Health Labour & Welfare (MHLW).  This means they will sometimes not be overly aggressive in their negotiation over clinical requirements etc. with the regulatory bodies on behalf of a small, perhaps one-time client.  They also tend to be less motivated to provide a competitive price on clinical trial contracts for smaller and non-repeat clients than for large pharma companies who provide their bread and butter business.  In the bad scenario the company can end up with a conservative regulatory strategy doing larger clinicals than necessary, at greater cost and taking more time to approval.

The other risk is that a CRO may simply not be equipped to help develop a thoughtful, well-researched strategy for the principal that accurately reflects the company's objectives and time frame.

In summary, the risk with working directly with CROs is that the early stage company leaves out the vitally important general manager function.

Defining an Appropriate Strategy Before Spending Significant Money or Committing the Technology to a Particular Pathway
To achieve the best possible result in commercializing a therapy or product in a given market, the principal needs someone who will manage the process with the company's interest as first priority:
  • Define a market distribution strategy that meets the company's objectives and best matches its time horizon
  • Engage industry participants and Key Opinion Leaders (physicians) to understand the market and pressure test the strategy
  • Identify and negotiate with partners (CROs, distributors etc.) to secure optimal resources at competitive compensation rates
  • Manage the process throughout to ensure purposeful execution and respond promptly to issues, developments and changes in the environment
It may not be practical to make the investment in a wholly owned sales affiliate and hire a permanent general manager, but an effective alternative can be to retain someone who can perform the general manager function on contractual terms that reflect the actual time commitment required and the company's time horizon for Japan market activities.

To discuss further, please contact Geoff Hasemer at the contact address on this website (Contact Details).