A planned 6.7% cut in the price of prescription drugs is set to impact small pharmaceutical manufacturers in Japan. Under the Japanese health insurance system, drug prices are reduced every two years in order to help curb soaring health expenditure.

The cut, which will take effect on April 1 2006, is larger than some previous biannual reductions, although below some market expectations. In 2004, prices were cut 4.2%, while the level was 6.3% in 2002.

The country's larger drugmakers are not expected to suffer too drastically from the reduction, as overseas sales account for around 50% of revenues. However, small to mid-sized drug producers — which generate the majority of their revenues domestically, and have a high number of generic offerings — are expected to be more heavily hit.

Part of the problem is that the price cut includes a sharper reduction on so-called "long-listed" drugs, which have expired patents and generic competitors. The Health Ministry recently announced plans to tie prices for original drugs to generic equivalents, which could stimulate competition and lead to an overall reduction in drug prices — and generics margins — in the longer term.

Industry sources claim that the continuing reduction of drug prices will trigger more consolidation in the drug sector. It could also lead to more innovative management practices as companies struggle to find ways to survive in a tough environment.