Know Your Market Price in Japan

Japan should be the second largest national market for your medical device after the United States and maximizing sales performance in Japan should be critical to your overall corporate success. Yet, many manufacturers are frustrated by their results in Japan or struggle to attract the interest of leading distributors. Follow these steps to create a winning market strategy in Japan that will wow investors and leapfrog the competition.

STEP #1: Diagram the Sales Channel

The sales channel in Japan is arguably the most expensive and complex in the world due to unique regulatory requirements and the high level of customer service demanded by end users. The first step to designing a winning strategy is to understand the functional responsibilities and costs in the sales process. To do this, diagram all the entities that touch your product from your factory to the Japanese hospital.

Most foreign manufacturers use a traditional approach to the Japanese market by engaging with a master distributor to cover links B-C-D-E in the distribution chain outlined above. However, as reimbursement rates are systematically reduced every two years by the Japanese government, the traditional distribution channel becomes rationalized. New distribution options may be necessary to get your devices to market more efficiently. It is critical for you to understand the links in your Japanese sales channel so that you can adjust your strategy as needed over time.

STEP #2: Determine the Prevailing Market Price for Your Device Type

Market price in Japan is highly correlated to reimbursement rates. After determining the Japan Medical Device Nomenclature (JMDN) code for a device, the associated reimbursement rate/s can be identified. This research is fairly straight-forward and provides a good starting estimate. For more accurate market price information, all competitive devices registered under the JMDN code should be identified and model specific sale prices should be researched. For new products that do not have JMDN codes, there is more latitude in pricing, and your pricing strategy becomes very important.

STEP #3: Calculate the Projected Market Price for Your Device

Plug the target international transfer price (typically based on a discount from US list pricing) into your sales channel diagram and apply all mark-ups to arrive at the projected hospital sales price. This price is compared to the prevailing market price.

STEP #4: Formulate Your Market Launch Strategy

The relationship of “projected sales price” to “prevailing market price” is a key determinant of market launch strategy design in Japan.

Projected Sales Price > Prevailing Market Price

  1. Forge Ahead (without adjustments) – Companies that have a projected or actual market price higher than prevailing market price and/or reimbursement rates are swimming upstream. It is possible to get sales and distributor interest, but difficult to maintain. This can be the largest contributor to poor sales performance and lack of distributor interest.
  2. Lower Your Transfer Price – The fastest way to achieve a market price at or below prevailing market price is to lower your international transfer price. However, this may be at odds with expectations that Japan should be a high-profit market, certainly the highest in Asia.
  3. Squeeze Your Distributor’s Margin – Often a common first consideration is to request distribution partners to decrease their mark-up in order to achieve a more desirable market price. While this approach can be successful, in the long run, it will tend to decrease distributor focus, which is an important factor to sustained success.
  4. Remove Links from Your Distribution Chain – One of the most effective ways to lower sales price without adjusting transfer price or demotivating the distribution channel is to eliminate the national distributor and their mark-up, which is typically 100%. To do this, distributor responsibilities must be redistributed to other parties. For example, the foreign manufacturer can contract market authorization holder, packaging manufacturing and even Importing responsibilities to independent providers and then sell products directly to regional distributors. In this case, demand creation and possibly service support would be absorbed by regional distributors, who would increase their mark-up to account for these responsibilities.
  5. Apply for Higher Reimbursement – Manufacturers of medical devices with new technology or new applications may apply for a new reimbursement code. By design, rates established for new codes are to be “generous” relative to the current reimbursement levels for similar products or treatments, the manufacturer’s cost for bringing the therapy to market, or the price of the product in foreign markets. It should be noted that the application processes for a new reimbursement code can be onerous and time-consuming, but well worth it in many circumstances.

Depending on the gap between projected sales price and prevailing market price, manufacturers may pursue more than one of the options above at the same time.

Projected Sales Price < Prevailing Market Price

A more attractive set of options is available if your projected market price is lower than the prevailing market price.

  1. Keep Low Market Price – In situations where there is high price elasticity in demand and the goal is to achieve high market share or sales volume, you may decide to keep your market price as low as possible.
  2. Increase Distributor Margin – In situations where distributor focus and effort are critical to sales success, you may consider lowering your transfer price (and raising your market price slightly) to increase distributor margin, or fund programs to incentivize the distribution network.
  3. Increase Transfer Price – A third option is to increase your transfer price to your distributor to increase your profit margin in Japan. This option is particularly attractive in situations where price elasticity for demand is low and distributor focus is assured.

Manufacturers that make the effort understand the distribution chain for their device in Japan will have a variety of market launch options to consider and will have a significant advantage over competitors that are locked into traditional distributor search.

Contact Asia Actual with questions for assistance to determine you market price and sales channel strategy assistance.

In future posts we will address non-price related influencers on distributor interest and market demand such as clinical efficacy, novelty, etc.