Towa: Incentives key for Japan generics

OSAKA, Japan (Reuters) - Japan's No. 2 generic drug maker Towa Pharmaceutical Co Ltd (4553.T) said on Monday that government plans to make generic drugs the default option on prescription forms was a major step forward, but incentives were also needed for pharmacies to dispense them.

Shares in Japanese generic drug makers soared on Friday after the government, eager to trim swelling healthcare costs, put its proposal to a body charged with discussing changes to the national health insurance system.

The move reflects a global trend by governments and insurers to maximize the use of generic medicines, which are becoming increasingly available for a range of drugs as patents expire or are overturned in legal cases.

Towa President Itsuro Yoshida said, however, it was still too difficult to predict how much of a boost this would be for Japan's generics market, given that incentives for pharmacies to dispense them are still under discussion.

"It's not clear how they are going to pan out," he said in an interview for the Reuters Health Summit. "Though I do expect we will get them in some form or other."

Japan, the world's second-biggest drug market, has a very low rate of generic drug use compared with the United States and Europe, and is seeking to raise the proportion of generic drugs prescribed to 30 percent in 2012 from around 17 percent now.

In value terms, generics still only account for 5 percent of drugs prescribed in Japan and the market is still only worth a very small $3 billion.

By contrast, they account for 63 percent of drugs prescribed and 13 percent in value terms in the United States, while in Britain the rate is 59 percent of prescriptions and 26 percent in value terms.

Japanese prescription forms currently have a box that can be checked by a doctor if a generic drug can be substituted, but it has little success in spurring generic use.

The proposal calls for the box to be checked only if the doctor does not think a generic drug should be substituted. The changes would take place from next April.

Yoshida said he thought 20-30 percent of Japanese doctors would still check a preference for branded drugs, but the volume of generics prescribed could rise to as high as 70 percent.

Still, the overall rate of generics dispensed is only around 1.4 percent of prescriptions, so even a five-fold increase would be equivalent to around 7 percent, he said.

Japan's pharmacies have traditionally stocked branded drugs and have had little motivation to switch to generics, as they would need to carry extra inventory.

Yoshida also said new mid-term targets unveiled earlier this month were very conservative, saying potential incentives have not been factored in at all.

Towa said it was targeting sales of 41.2 billion yen ($372.2 million) in three years, up 27 percent from the 32.4 billion yen it expects in the year to March.

It also aims to post operating profit of 20.6 billion yen, up from the 15.4 billion yen forecast for this business year.

"There is much upside potential. How much upside?... That's going to depend on incentives," Yoshida said.

Towa's shares ended up 1.3 percent at 4,750 yen on Monday, after gaining 8 percent on Friday, bucking declines in the overall market. Shares in Sawai Pharmaceutical Co Ltd (4555.T), Japan's biggest generics maker, have risen 19 percent to 3,920 yen since Friday.

Investors noted the gains were just as much a reflection of hopes that the Japanese generic drug makers would become M&A targets as they were of hopes for earnings growth.

Encouraged by the government's plans to promote generics, foreign generic drug firms have begun dipping their toes into the market.

India's Ranbaxy Laboratories Ltd (RANB.BO) has a joint venture with Nippon Chemiphar Co Ltd (4539.T) and rival Lupin Ltd (LUPN.BO) recently bought a controlling stake in unlisted Kyowa Pharmaceutical Industry Co.

Yoshida said Israel's Teva Pharmaceutical Industries Ltd (TEVA.O), which has opened an office in Tokyo, could become a fearsome rival if it bought both a Japanese generic firm and a domestic mid-size pharmaceutical firm that would give it know-how and branding power.

Yoshida, who controls a stake of about 43 percent in the company said he had no plans to engage in M&A in the near future. (Editing by Mike Miller & Ian Geoghegan)