March 14, 2021

Japan’s HealthTech Market: Entry Strategies For German Startups

Written by Ananya Deshpande

In our latest German Accelerator “Pass The Mic” series, we chatted with industry experts to learn more about Japan’s HealthTech market and its opportunities for German startups. Christian Palme (CP Medical Consulting), Dr. Fumiaki Ikeno (Stanford University), Prof. John Kojiro Moriwaka (Startup Grind Fukuoka), Masahide Azuma (Foundation of Biomedical Research and Innovation at Kobe), and Marc Filerman (German Accelerator Life Sciences) shared their expert insights on the attractive sectors, potential pitfalls to avoid, and how to navigate the world’s second-largest healthcare market.

To get started, could you give us an overview of the startup ecosystem in Japan?

Prof. John Kojiro Moriwaka: Startup ecosystems around the world are developing at a rapid pace, and Japan is catching up fast. The Japanese government understands its importance and last year announced eight different acceleration ecosystems in the country. Although most companies looking to enter the country plan only for Tokyo, the overall ecosystem is more diverse.

Among the eight startup ecosystems in Japan, public and private sector players are coming together to help grow new businesses. This approach boosts each local ecosystem’s existing strengths, for instance, Kobe being prolific in research and Life Sciences while Kyoto is known for AI and machine learning. When planning to expand to Japan, choosing a relevant ecosystem depends on your startup’s industry, product, business stage, and fundraising level.

What are the market trends right now in Japan? Are there specific technologies or products, especially in MedTech or digital health, that are attractive for German startups in the Japanese markets?

Masahide Azuma: Japan’s Ministry of Economy, Trade and Industry (METI) estimates that the country’s growing aging population (25% of the country is already 65 years and above) will cause large scale medical resource risks by 2040 due to:

  • Increased public spending on medical and nursing care negatively impacting fiscal and economic conditions
  • Exploding demand for medical and nursing care in urban areas, in contrast, shutting down of similar care systems in the rural areas
  • A labor shortage in the medical and nursing care

These trends hint at an abundant opportunity for new entrants in the medical products sector.

Christian Palme: Digital health is currently an area Japan is behind compared to countries like Germany, but it will have a real impact on the country’s future. There are at least two to three times more pharmacies and hospitals in Japan than in Germany, so digital health solutions will significantly impact these sectors in the long run. Solutions like treating a chronic patient through telemedicine, e-prescriptions, and reimbursement for digital health apps will be game-changers.

Dr. Fumiaki Ikeno: German solutions that provide new technology to support the advanced aging society will no doubt benefit. However, it is important to remember that the elderly don’t have an active income source, and the current nursing reimbursement system is unattractive; hence, solution monetization is difficult. This situation requires business model innovation and also opens up opportunities in the reimbursement space. For example, involving life insurance companies to create a special plan that buys and provides new tech solutions to the elderly community. Having a good solution isn’t enough to succeed in Japan; an innovative, profitable business model is also essential.

Marc Filerman: Ikeno-san made such an important point. We see this a lot with companies that we help at German Accelerator, the importance of balancing a tech push and patient pull.

What is the reimbursement system like in Japan?

Dr. Fumiaki Ikeno: Japan’s healthcare system provides universal coverage, with the national and local governments required by law to ensure that medical care is available to everyone, regardless of social class. While this is an ideal system compared to other healthcare systems worldwide, it also has its struggles. Due to various factors, the country’s medical expenditure has drastically increased while the tax income has decreased, causing an imbalance in the system. This is a key reason preventive medicine is now becoming more critical than ever.

Another unique aspect is the long-term care insurance system focused on the nursing and care of the elderly. Japan is the only country in the world with a specific reimbursement insurance system for the senior community. However, this system can be problematic as it offers inadequate reimbursement, forcing the elderly to rely on their family to pay for the expenditure.

Christian Palme: Reimbursement is a vital topic in Japan. While one might feel product prices in Japan are not that attractive, it heavily depends on the segment. Medical devices are better priced and reimbursed in Japan than in Germany; for example, a cardiological stent that sells for 100EUR in Germany sells for 1,000EUR in Japan! The significant differences arise in reimbursement from the insurance side because Japan has a very social system in which insurance covers a substantial share of the medical treatment expenditure, but the patient will also have to contribute to the treatment. This aspect widely varies from other countries.

What is the regulatory path German startups should take? How leverageable are MDD, MDR, or FDA approvals in Japan?

Masahide Azuma: Government approval is required to market any medical device or pharmaceutical drug in Japan. If your product is unique to the market, the process is lengthier. The correct product classification is crucial, so startups require consultation service from organizations like Germany’s TÜV SÜD to correct the classification and submit the application in Japanese, the compulsory language of communication.

Christian Palme: The approval process has improved over the years, with Japan opening up its market for medical devices. Several approval harmonizations between the U.S. and Japan are currently in place, and startups can take advantage by applying for both the FDA and Japan approvals together. Having a Japanese partner to support is crucial from various aspects, including language.

What is the willingness of Japanese venture capitalists to invest in German GmbH companies? Does it matter where the Intellectual Property resides?

Dr. Fumiaki Ikeno: Currently, Japanese venture capitalists can’t invest more than 50% outside of Japan, but the regulations are fast changing to allow more investment outside the country. Familiarity and trust are crucial elements for Japanese VCs, as they prefer syndicate investments in markets where a local team presence ensures hands-on involvement in the company’s setup. When you are thinking about entering the Japanese market and subsequently scaling up, having IP is most important, regardless of which market it is from.

Prof. John Kojiro Moriwaka: A foreign startup wishing to establish itself in Japan needs to have a long-term outlook. While there are many growth opportunities, the startup needs to show its market commitment by setting up a local office and hiring a local team. With the pandemic, businesses are compelled to meet virtually, creating opportunities to meet more people beyond the founding team and connect with numerous Japanese VCs and stakeholders to build rapport. Once trust is established, the ecosystem will be more supportive in fundraising and business development across local investors and partners.

Let’s also add his point about now that with Covid-19 and everyone “forced” to have meetings virtually, there are new opportunities that exist now like the ability to meet more people and having their team, not just the founders but also the rest of the team to meet with VCs / other Japanese stakeholders to build rapport.

Christian Palme: Apart from looking for venture capital, a startup should look for the right strategic or distribution partner in Japan. The support from such partners in terms of financing and distribution is critical in a specialized market like Japan and determines a product/solution’s success. This is a better angle than only looking for venture capital, which is hard to get when you don’t transfer assets to Japan.

How best can German startups find the right partners in Japan?

Masahide Azuma: This is the real challenge, not just in Japan but anywhere outside your country. Finding the right partner is critical and challenging, as a good distributor needs to know not only how to sell but also to create a market for your products. To get started on finding the right partner, getting into the network of the startup ecosystem may help to find the right distributor. German Accelerator’s Market Discovery program in Japan could be the first step of your study of the Japanese market.

Christian Palme: There are strong business partners available in Japan, with an excellent network. They can even help with your product registration! Hence, I recommend a German startup to first find a suitable partner and then apply for the relevant registrations and reimbursements together. Direct sales in Japan would be far too costly and risky, so instead, enter the market with your business partner.

Dr. Fumiaki Ikeno: First step, pick a small CRO (contract research organization) as a temporary DMAH (Designated Marketing Authorization Holder) to process the PMDA consultation. If you initiate PMDA registration, it signals to the market that you’re serious to enter the market. Potential primary distributors may signal interest to you. Don’t just select one distributor straightaway, gather interest from at least 5 or 6 potential distributors. If the distributors compete with each other, your valuation increases.

Let’s talk about the state of digital health and its specific payer models.

Dr. Fumiaki Ikeno: With the COVID-19 pandemic, digital health went from being a nice-to-have to a must-have and is undergoing an immense transformation. The Japanese government now allows digital consultations and telemedicine previously only available in remote, rural areas. While this opens up vast opportunities for supporting medical products/services such as telemonitoring patients at home, companies are still wary of entering the market due to the immature reimbursement system.

This situation requires re-thinking their business models and looking for a workaround that is in demand and profitable. While not covered by national health insurance, the wellness and preventive medicine segments are highly attractive and low-hanging fruit; people are keen to buy solutions that improve their health and are willing to pay for it themselves. Companies are also purchasing such medical solutions for their employees without insurance reimbursement.

Another opportunity lies with Japanese life insurers, who are among the world’s largest and most profitable. Their consumers also have some of the highest rates of insurance ownership in the world! These companies are going one step ahead and investing in cutting-edge digital health solutions and even conducting mergers and acquisitions.

What are the cultural differences and challenges a German company should be prepared for when considering Japan?

Prof. John Kojiro Moriwaka: Germans and Japanese are similar in most aspects like diligence, punctuality, and trust. However, the biggest hurdle is language. Generally, knowing Japanese is vital for any company conducting business in Japan as most people don’t speak English. While this trend is slowly changing with businesses globalizing, doctors still have a language barrier. The Japanese culture and philosophy play a big part in how people think and behave, so it’s best to spend time understanding this before starting your expansion journey.

Marc Filerman: Integrating the themes and comments of the panelists:

  • Think beyond your technology; Immerse yourself in Japan’s culture to understand the problem you’re solving and the value your solution brings to the local market. Keep in mind that your solution’s value in Japan might be different from what it is in Germany.
  • Understanding your solution’s value in Japan helps you identify the right payers and optimize your business model to suit the market.
  • A vital aspect of expanding to Japan is finding a local partner beforehand and entering the market jointly. The partner is a valuable resource who can support you in various aspects of the business: market research, distribution, promotion, and network amplification. Not to mention the immense cost savings that come with a partner versus setting up on your own.

Christian Palme: You might be considering a European expansion over Japan because the CE mark allows you to sell in 31 countries instead of just one. However, it’s more complicated as you still have to understand each European country’s reimbursement regulations and register in the local language. Instead, if you consider Japan, it is the second-largest pharma and medical market. Market entry has become much easier with, for example, Japan is one of the first countries to establish the orphan drug approval process for pharmaceutical products that can help fast-track your product to the market. Similarly, the U.S. regulation harmonization makes it much easier to gain approval for medical devices in Japan. Hence, strongly consider Japan in your expansion plans and reap the benefits of being the first mover.

Watch the full webinar recording here.

If you’d like to get started on your expansion journey into Japan, check out our Next Step market discovery program or speak to Edgar, our company scout!