New ITIF Report Warns U.S. Policymakers Not to Repeat Japan’s Mistakes on Drug Prices and Other Biopharmaceutical Policies
WASHINGTON—Biopharmaceuticals represent a high-value-added industry that, in addition to producing life-saving drugs, also supports good-paying jobs, robust economic output, tax revenues, and often high levels of exports. But a new report from the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy, warns that nations can easily squander their biopharmaceutical competitiveness with policies that reduce the industry’s incentives and capacity to innovate.
ITIF’s report examines Japan’s recent history of achieving a global leadership position in biopharmaceuticals only to fall behind after adopting stringent drug price controls and failing to maintain a supportive policy environment for investment in research and innovation. The analysis serves as a warning to U.S. policymakers aiming to overhaul America’s drug pricing system.
“America can’t take its leadership position in biopharmaceuticals for granted,” said Stephen Ezell, ITIF’s vice president of global innovation policy and director of its Center for Life Sciences Innovation. “Japan’s experience serves as a cautionary real-world warning for U.S. policymakers who are contemplating similarly aggressive drug price controls. The innovative potential of America’s life sciences industry is at stake.”
The report provides an overview of Japan’s biopharmaceutical industry across several time frames—beginning with the period from 1945 to 1990, then examining the period from 1990 to the present. After World War II, Japan’s pharmaceutical industry suffered significant losses, but during the post-war era, it rapidly recovered. By 1963, Japan became the world’s second-largest producer of pharmaceuticals, following just behind the United States. By the 1980s, Japan’s pharmaceutical industry was at its peak, introducing 29 percent of the world’s new chemical entities. But in the following decades, Japan’s shares started to decline.
From 1995 to 2018, Japan’s share of global value added in the pharmaceutical industry declined by 70 percent, from 18.5 to 5.5 percent. One major contributor to this fall was Japan’s introduction of stringent drug price controls in the 1980s, which continued through the 1990s and beyond. These strict price controls limited revenue and profits from biopharmaceutical innovation, decreasing the industry’s ability to invest in new cycles of research and innovation. Japan’s competitiveness in the biopharmaceutical sector has also been hindered by faltering government investments in basic scientific research, weak industry-university relations, and a slowly evolving regulatory system in the face of rising challenges from China and other competitors.
Some Japanese leaders have now recognized the severity of the industry’s decline and are attempting to take steps to reverse the trend by introducing stable and reliable pricing mechanisms. But without appropriate science-based evaluations of new medicines, Japan’s capacity to appraise the value of innovative medications has significantly eroded, according to ITIF’s analysis. Japanese policymakers must achieve greater regulatory coherence in balancing the competing interests of supporting a competitive biopharmaceutical industry and managing overall health system costs for an aging population.
“Japan provides a cautionary example of a country that once stood at the leading global edge of a critical industry, but that has allowed its lead to erode through a combination of poor policy choices and underinvestment in basic scientific research,” said Ezell. “For Japan to regain its capacity as a key biopharmaceutical innovator, it needs comprehensive policy reforms, especially if it’s going to keep pace in the future with the United States, Europe, and China.”
The Information Technology and Innovation Foundation (ITIF) is an independent, nonprofit, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy. Recognized by its peers in the think tank community as the global center of excellence for science and technology policy, ITIF’s mission is to formulate and promote policy solutions that accelerate innovation and boost productivity to spur growth, opportunity, and progress.