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1.18.2013

Online OTC Sales Legal Again - Japanese Supreme Court

On 11 January 2013,  Japanese Supreme Court nullified the ban on online OTC pharmaceutical sales imposed by the Ministry of Health and Welfare on the basis that the risks and side effects associated with such drugs cannot be explained thoroughly enough without face to face interaction between a pharmacist and consumers.

The historical chain of events leading to this ruling is as follows:

In June 2006, the Revised Pharmaceutical Affairs Laws were ratified by the national assembly. In September 2008, the Ministry of Health and Welfare announced the ban on nonstore retail of OTC drugs as they have a higher risk of side effects. In December the same year, Rakuten, Yahoo, and related industry bodies demanded the Ministry to revoke the ban and to enable them to continue to sell OTC drugs. They launched major signature collecting campaigns online. The Rakuten one was particularly memorable for me with Mikitani, CEO of Rakuten posting his own photograph and name on the plea: "There are people living in remote areas (among the 3,000 islands) of Japan who have challenges in getting to physical stores to get the medicine they need to better their welfare. Please do not let the ban on online sales of drugs stand for the sake of such people."

In May 2009, Kenko.com led peers in a group suit to secure rights to conduct nonstore retail of OTC drugs. The Revised Pharmaceutical Affairs Laws came into effect the following month.

In March 2010, the Tokyo District Court ruled in favour of the Ministry, agreeing that online sales cannot realize the same level of awareness of potential risks and side effects associated with such drugs.

In July 2011, while the Democratic Party of Japan was the ruling party, a Diet Directive to revise the regulation on pharmaceutical sales was approved.

April 2012 saw a 180-degree turn on the judicial decision as the Tokyo High Court overturned the District Court's ruling and ruled in favour of Kenko.com and its peers. The Ministry appealed to the Supreme Court in May.

The industry body consisting of drugstores in Japan publicly announced its new self-regulatory standards on pharmaceutical sales.

11 January 2013, the Supreme Court ruled in favour of Kenko.com and its peers.

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The Japanese OTC drugs market is estimated to be around 600 billion yen per annum with less than 1% being sold online today.

Within two hours of the ruling, Kenko.com had OTC drugs available on their site.

Kenko.com firmly believes that drugs are the utlimate long tail product, and is an ideal category for e-merchants. According to the Japan Self-Medication Industry (association of 88 OTC drugs  manufacturers and a member of the World Federation of Proprietary Medicine Manufacturers), there are currently approximately 12,000 OTC items in the market today with head ache remedies accounting for several hundreds alone.

A brick and mortar store can stock around 300 different products due to restrictions on physical space, so Kenko.com's Genri Goto, CEO says, "such stores cannot fully meet customer needs." At Kenko.com, they have over 4,500 items available on the site.

Kenko.com's annual turnover is 17.1 billion yen, of which approximately 300 million yen was "indirect" OTC drugs sales that continued after the Ministry ban. The "indirect" system was one where Kenko.com would ship their goods to a subsidiary in Singapore before delivering them to the end consumer, a system established after seeking guidance of and securing approval by the Ministry.

It seems ironic that the Ministry insists that face to face communication between a pharmacist and consumers are a prerequisite for sales of OTC drugs to ensure that the risks and side effects are explained in detail as their own mystery shopping conducted in 2011 has proved that only 55% of pharmacies actually went through what the Ministry defines as adequate explanation of the potential side effects and risks of the drugs.

If pharmacists do not even try to warn their customers face to face, wouldn't a mandatory online pop-up warning of the risks that won't disappear until the buyer has clicked "I have read this and fully understand the potential risks and side affects associated with taking this OTC drug" be at least more effective in that it _will_ be displayed to begin with?

At the same time, the government is promoting the switch to OTCs from prescription drugs as a national initiative to help reduce healthcare expenditures with major "Switch OTC drugs" in the pipeline for release this year.

Unlike the US, online drug sales are extremely low in the Japanese market today with less than 1% of overall sales being through the online channel, but this ruling will definitely impact the retail environment. Kenko.com's Goto says that "price competition may become severe if online sales reach 20% of the total market."

The ruling and the easing up of Ministry restrictions will also make the entry barrier lower for other retail channels to enter the market. Already, such major retailers are responding to such threats as Segami are undertaking e-commerce development initiatives while Tsuruha has acquired online and offline drugstore chain Wellness Kohoku of Matsue city with over 20 brick and mortar stores as well as an online business.

Kenko.com currently ships free of charge for purchases exceeding 1,980 yen while 290 yen is charged for shipping of lower transactions. They have one warehouse in Fukuoka and shipments are made on the next business day after transaction, based on the assumption that most drugs are purchased to replenish household stock and thus there is less need for same day deliveries.

However, if the likes of amazon.co.jp who offer same day delivery enter the market, it is highly likely that consumer expectations and purchasing behaviors will change.

Rakuten, parent company of Kenko.com, along with Seven and I Holdings (owner of the Seven Eleven chain of convenience stores and Itoyokado supermarkets), Familymart (convenience store chain), and Lawsons are also gearing up to jump on the band wagon. Lawsons has entered a strategic alliance with prescription pharmacies chain Qol in preparation to roll out OTC sales through the convenience store channel.

At the approximately 45 directly operated Natural Lawsons outlets and franchise stores run by Qol, already there are video phone terminals in the drugs sections whereby consumers can speak with a pharmacist 24/7 remotely to receive advice on what drugs to buy.

The pharmacists that respond to these calls are currently located in the Qol stores that operate 24 hours a day. But Qol is looking to establish a dedicated call center of pharmacists to better support this operation in the near future. If they are able to take on call center contracts for other retailers, this may result in significantly reducing the entry barrier for OTC drug store operations whereby retailers will only need to secure a pharmacy license to open such stores. As the Supreme Court ruling has overturned the basis of face to face sales, there is a high likelihood that such remote support using video phones would be accepted as sufficient for sales of OTC drugs.

The Japan Online Drug Association (JODA), an NPO with approximately 30 e-merchants of drugs as members and led by Genri Goto of Kenko.com as President, is in the process of establishing guidelines for asking for information of consumers on their health and symptoms as well as monitoring excessive purchases.

In November 2012, it came to light that supermarket chain, Seiyu falsified the applications of 80% of their employees taking the pharmaceuticals sales license exam, enabling people not qualified to take the test to do so. This highlighted how retailers may put servicing the convenience of consumers before safety. In response to the Supreme Court ruling, consumer rights advocates are calling for new strict guidelines to ensure safety.

References:
Nikkei:
大衆薬ネット通販、「未開の地」開拓狙う各社 ケンコーコム勝訴確定で号砲

厚労省を指弾した市販薬ネット販売判決  :日本経済新聞

Nikkei Marketing Journal 14 January issue

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