Recherche FFJ Research Statement Maki UMEMURA


Japanese innovation at the technological frontier: The case of regenerative medicine

Japan has recently attracted substantial international interest with regards to its engagement in biomedical innovation. Until the mid 2000s, the country had attracted limited interest, but several developments have prompted changes to the landscape of biomedical innovation in Japan. First, Shinya Yamanaka’s discovery of iPS cells in 2007, led to an award for the Nobel prize in medicine and substantial public support for stem cell research. Second, the Japanese government has been trying to support the development of knowledge intensive industries – to nurture capabilities in radical innovation – and has identified the health care sector, as a means to rejuvenate its long stagnant economy. Third, the Liberal Democratic Party (LDP), newly elected into power in December 2012, has strongly supported stem cell research as part of a stimulus package aimed to lift the Japanese economy out of recession, with a commitment of 21.4 billion yen (over 220 million US dollars) for research in this field. 
Within this context, my research looks at recent efforts in Japan to develop an industry at the technological frontier: in regenerative medicine. Numerous scholars have suggested that differences in institutional arrangements shape innovative behavior.
[1] Japan offers a good case study to evaluate how institutional environments shape innovation in this sector, given substantial efforts made by Japanese government, industry and academia to alter existing institutional arrangements to advance this field. The regenerative medicines industry also offers a good forum to evaluate firms’ innovative capacities, because firms in this sector must innovate to survive. As the industry requires collaboration from a range of actors – from therapy providers, government regulators, to financial organisations – it also allows us to examine, holistically, how various institutional components shape innovation. Furthermore, regenerative medicine marks a paradigm shift in technology for therapeutic products, from biologics to cells. The pressure to change the prevailing institutional infrastructure to support industrial development offers a forum to investigate the malleability of institutions and comparative institutional advantages.
The Japanese regenerative medicines industry
Regenerative medicine focuses on the repair, replacement or regeneration of cells, tissues and organs to restore impaired function.[2] In 2012, the market for regenerative medicine in Japan was estimated at 12 billion yen (approximately 116 million US dollars). However, there are still only two products currently approved for reimbursement under Japan’s universal health insurance system (engineered tissue, Jace, and engineered cartilage, Jacc, both by Japan Tissue Engineering, Co.). The market is dominated by a range of self-pay treatments not covered by insurance, such as cancer immunotherapy, regenerative dentistry, and cosmetic medicine.[3] There has been a notable increase in the number of new companies entering this field, diversifying from sectors such as pharmaceuticals, food, and machinery. Most firms in Japan are engaged in the manufacture and sale of products that support research in regenerative medicine, such as culture media, reagents, and raw materials – rather than therapies. [4]
 Observers see the development of these related/supportive industries as an essential process of developing commercial therapies in regenerative medicine.

Winning in research and losing in business?
A much discussed concern for Japan, is that whilst the country has very high levels of endogenous technological capacity in medical science, the country’s capacity to commercialise this capacity is weak. For example, Japan has the second largest markets in the world for pharmaceuticals and medical devices. Yet it is a massive net importer of both, and exports much fewer products compared to other developed countries such as the United States or Britain. Japan’s relative weakness in translating its research capabilities to the clinic or to business is often associated with enduring institutional constraints in the domestic environment. The following discussion focuses on the financial system, the research and education system, and the role of government, in turn, in shaping this sector.
Research and education system
For decades, Japanese universities had supplied a steady number of science and engineering graduates, well above the OECD average. In the case of regenerative medicine, the country is equipped with leading research centres such as the Institute for Frontier Medical Sciences and the Center for iPS Cell Research and Application at Kyoto University (CiRA) at Kyoto Univerity, as well as the RIKEN Center for Developmental Biology in Kobe. While Japan was well-equipped with world-class scientific researchers, some experts have noted that the research environment often featured hierarchical research teams comprised of associate and assistant professors as well as postdoctoral researchers.[5] The vertical rigidities of these research groups prevented, not only interdisciplinary research, but also hindered the commercialization of independent research from early-career researchers. Innovation in Japanese universities was also influenced by low mobility among its researchers, and fewer collaboration with industry compared to their North American and Western European counterparts. Highly complex industries such as regenerative medicine, require not only greater collaboration between academia and industry, but also require continuous interaction between engineers, physicians, and other academics specializing in various fields of medicine. Such demands to pursue R&D have required the transition to a more network-based system of innovation.
Financing innovation
Financing is an oft-cited problem in advancing industries at the technological frontier. As Hall and Soskice have argued, market-based economies support more radical innovations, as a range of financial organizations can undertake risk and fund projects based on market selection. By comparison, bank-based economies – such as Japan – support incremental innovations, as banks acquire the experience and capacity to assess risk in projects for funding.[6] Compared to the United States and Europe, the scarcity of venture capital further in Japan limited potential entrepreneurs of therapeutic products from pursuing their business ideas.[7] The internationalization of capital, however, suggests that Japanese firms could have secured financing outside Japan, and that the greater bottlenecks to substantial innovation likely lay elsewhere.
Recent partnerships between pharmaceutical firms and smaller therapeutics firms have also supported the development of this sector. For example, the Kobe-based Healios (who is developing iPS cell therapy for macular degeneration) has formed an alliance with Dainippon Sumitomo Pharma, and Kyoto University start-up I Heart (who is developing iPS cell therapy for severe heart defects) has formed an alliance with Boehringer Ingelheim this year. In the meanwhile, the venture arm of Japan’s leading pharmaceutical company, Takeda, has invested in cell therapy companies abroad such as the American firms Fate Therapeutics and Juventas Therapeutics. As Mazzucato emphasizes in her recent book,
[8] it may also be worthwhile to note that the state also plays a crucial role in financing innovation in emerging industries at the technological frontier. While much smaller in scale compared to the US National Institutes of Health (NIH), the newly formed Japanese NIH is similarly intended to allocate funds more strategically as well as efficiently to translational research.

Role of government
Indeed, the role of government has an important role in other respects for advancing this field – and has been particularly pronounced in the Japanese context. For example, government regulatory reforms to develop a globally competitive Japanese healthcare industry are hoped to improve the infrastructure to pursue innovation. While scientists had previously complained that excessive bureaucracy in Japan seriously undermined stem cell research in the country[9one the most transformative changes were the two laws governing regenerative medicines that were passed in November 2014. The two new laws governing regenerative medicine that have attracted international attention are the New Regenerative Medicines Law and the revised Pharmaceutical Affairs Law.[10] 
The first of the two laws, the New Regenerative Medicines Law, requires all medical practitioners to gain consent for regenerative medicine treatments prior to administration. In addition, the New Regenerative Medicine Law will allow medical institutions to outsource their in-house cell processing centers to private firms. The second law refers to the revised Pharmaceutical Affairs Law, and allows for the conditional approval of potential therapies after initial safety tests. This idea is to deliver potential therapies that are deemed safe but perhaps ineffective, as quickly as possible to patients who do not otherwise have viable therapies. The products are required to establish safety and efficacy within a designated time, and up to a maximum of 7 years, after which their marketing approval will be further extended or withdrawn.
[11] It should be mentioned that, in the past, one of the greatest impediments to biomedical innovation in Japan – whether pharmaceutical, medical devices, or regenerative medicine – had remained the high cost and lengthy time involved in the clinical trial process. Japan historically had a substantial device lag (time elapsed since first approval in another regulatory) and device gap (devices used in other markets that are not introduced in Japan). The truly transformative nature of recent changes is this reformulation of regulation tailored to the characteristics of regenerative medicine products that disrupts most conventional commercialization models for therapeutics in the developed world.

The h
ealthcare system and the role of demand

It should be remembered that the government also plays an important role in ensuring demand through the domestic health care system. The US biotechnology (cancer immunotherapy) firm Dendreon’s bankruptcy in November last year highlighted the import of securing demand for path-breaking therapies. For the most part, biomedical R&D cannot be isolated from the local organization of medical practice. Features of local healthcare systems such as universal health care; number of hospitals and clinics; and physician networks have also shaped innovation. As in many healthcare regimes, Japan’s health care system faces acute challenges of an ageing and declining population – especially in relation to cost containment. Japan’s universal health insurance, effective since 1961, has helped support a large domestic market for medical products, whether pharmaceuticals or medical devices. Under this system, Japanese citizens have paid up to 30 percent of total medical care expenditures. It might be noted that Japan could support a larger market for regenerative medicine if the government expanded the coverage of treatments for which mixed billing is allowed. Japan has a small market for private health insurance coverage that runs parallel to statutory insurance, but this coverage is generally limited to cash benefits for hospitalization or lump sum payment for surgeries. Until recently, Japanese patients who have opted to purchase non-covered treatments paid for their entire regenerative medicine therapy out of pocket – often as uninsured treatments at their own risk. With little demand for non-covered treatments, Japanese firms face significant barriers and limited incentives to develop breakthrough therapies in the domestic market.
The collaborative drive to develop a regenerative medicine industry in Japan has involved considerable institutional change. Yet measuring these changes on innovative activity will be a challenge. Assessing innovative capacity on the basis of patents, for example, can be problematic because regulatory regimes differ with regard to their willingness to patent stem cell research for cultural, ethical or legal reasons. For instance, Japanese inventors have been less likely to patent their medical innovations abroad compared to American or European inventors.[12 
There are two further complicating, contradictory factors with regard to patents: patent thickets and patent value. One issue in industries featuring complex, cumulative, and convergent technologies – has been the dilemma of patent thickets, in which the concentration of numerous or strong intellectual property protection hindered innovation.
[13] As well, some researchers argue that patents have limited value in this field, because the extraordinary complexity – tacit knowledge involved in large-scale cell production, for example – are not fully encapsulated in patents.
By many measures, from R&D investment, patent counts, to publications, Japan demonstrates remarkable research competences. Yet, as mentioned earlier, commercialization has sometimes remained a challenge, and robust research capabilities have not necessarily translated into strong performance in knowledge intensive industries, such as biotechnology. My upcoming project under the Michelin Fellowship aims to examine the extent to which government policies have impacted the commercialization of innovation at technological frontier. As Japanese firms transition from firm-based to network-based innovation, it also investigates the relationship between government policies and the evolving networks of collaboration between research organisations (universities and national laboratories) and the private sector. In so doing, the project hopes to contribute to a broader understanding between particular institutional environments and innovative capacity; the role of the state as an enabler of innovation within those settings; and the possibility of change in comparative institutional advantages.

[1] Peter Hall and David Soskice, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: Oxford University Press, 2001); Steven Casper, Mark Lehrer, and David Soskice. "Can High-Technology Industries Prosper in Germany? Institutional Frameworks and the Evoution of the German Software and Biotechnology Industries." edited by Bob Hancké, 200-20: OUP Oxford, 2009; Matthew Allen, "Comparative Capitalisms and the Institutional Embeddedness of Innovative Capabilities." [In en]. Socio-Economic Review 11 (2013-10-01 2013): 771-94.
[2] Heather Greenwood, Peter Singer, Gregory Downey, Douglas Martin, Halla Thorsteinsdóttir, Abdallah Daar, “Regenerative Medicine and the Developing World,” PLoS Med 3, no. 9 (2006): e381.
[3] Ministry of Economy, Trade and Industry (METI), Final Report on the Commercialization and Industrialization of Regenerative Medicine (Tokyo: METI, 2013).
[4] Shigemi Takeuchi and Nobihisa Asano,”Saisei Iryõ no Genba kara [From the Field of Regenerative Medicine,” Right Now! February (2007), 16-20.
[5] Yoshinori Kumazawa, “Need for Change in Japan's Universities,” Nature 388, no. 6639 (1997): 223; Cyranoski, David, and I-han Chou, “Winds of Change Blow Away the Cobwebs on Campus,” Nature 429, no. 6988 (2004): 211-212.
[6] Peter Hall and David Soskice, 35
[7] European Private Equity and Venture Capital Association, EVCA Yearbook (Brussels: EVCA, 2014), table 9; National Venture Capital Association, Yearbook 2013 (New York: Thomson Reuters, 2013), 29; Venture Enterprise Center, Survey on Trends in Venture Capital Investment FY 2012 (Tokyo: Venture Enterprise Center, 2013), 7.
[8] Mariana Mazzucato, The Entrepreneurial State : Debunking Public Vs. Private Sector Myths (London: Anthem Press, 2013).
[9] Norio Nakatsuji, “Irrational Japanese Regulations Hinder Human Embryonic Stem Cell Research. Nature Reports Stem Cells, August 2007.
[10] METI, “On the New Regenerative Medicines Law,” (accessed 6 March 2014).
[11] Ibid.
[12] Japan Patent Office, Tokkyo Shutsugan Dōkō Chōsa: Saisei Iryō [Report on the Situation regarding Patent Applications: Regenerative Medicine] (Tokyo: Japan Patent Office, 2009), 7.
[13] Murray, Fiona and Scott Stern. "Do Formal Intellectual Property Rights Hinder the Free Flow of Scientific Knowledge? An Empirical Test of the Anti-Commons Hypothesis." National Bureau of Economic Research Working Paper Series No. 11465, (2005). Michael Heller, The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives (New York: Basic Books, 2008). Karl Bergman and Gregory D. Graff. "The Global Stem Cell Patent Landscape: Implications for Efficient Technology Transfer and Commercial Development." Nature Biotechnology 25, no. 4 (2007): 419-424.