Seeking the Path to Full Deregulation of Online OTC Drug Sales

Interest is high in deregulation at the moment, as part of the growth strategy that comprises the “third arrow” of the prime minister’s “Abenomics” program for economic revival. But the challenges to making it happen are many. Online drug sales are a case in point. Deregulation in this area, which has profound implications for our daily lives, has been bumpy at best.

Pharmaceutical drugs in Japan are broadly classified into two groups. The first is prescription drugs. The second are the treatments readily available at drugstores and pharmacies, or over-the-counter (OTC) drugs. This article focuses primarily on deregulation of the online sale of OTC drugs.

 Pharmaceutical Affairs Law Revised in Extraordinary Diet Session

An amendment to the Pharmaceutical Affairs Law was passed in the extraordinary session of the Diet convened at the end of 2013. The revisions mainly consisted of laying out rules for the online sale of OTC drugs, based on the principle that rules were required to regulate online drug sales in an appropriate manner.

The revised law basically allows OTC drugs to be sold online. There are a few exceptions: online sales are prohibited for 23 items that have only recently been switched from prescription to OTC status, making their risk levels as OTC drugs unclear, and for a further 5 items that have been designated as powerful drugs. These drugs can only be sold behind the counter. Online sales will also be prohibited for prescription drugs, as the revised law mandates that they must be sold face-to-face.

With the latest revisions, over 99 percent of OTC drugs can now legally be sold online. Moreover, a new classification of “drugs requiring guidance” has been created for switch-OTC drugs and designated “powerful” drugs. Switch-OTC drugs cannot be sold online until safety assessments are completed, which will take around three years, after which the ban will be lifted for items that have been confirmed to be low risk. Online sales of designated powerful drugs will be permanently banned.

The three-year restriction regarding switch-OTC drugs met with opposition from proponents of online drug sales. Mikitani Hiroshi, chairman and CEO of Rakuten Inc. and an advisory member of the government’s Industrial Competitiveness Council, released a statement opposing the regulation. The three-year rule was created in response to concerns that it is difficult to guarantee that important information will be conveyed to the consumer in an online sale. The debate between retailers opposing the regulation and those who think it is necessary, such as the Ministry of Health, Labor, and Welfare and the Japan Pharmaceutical Association, is sure to intensify in the coming months.

The Twists and Turns of Drug Sale Deregulation

The developments leading up to the latest amendment go back about a decade. It was in September 2004 that the MHLW, the regulatory agency for pharmaceutical drugs, first took concrete action regarding online sales of drugs.

The ministry had previously issued notices about acceptable ways in which drugs might be sold, limiting online sales to products like mouthwash, antacids, antiseptics, and contact lens solutions. In truth, though, it had no legal grounds for banning online sales of other drugs.

When online businesses began selling drugs beyond those indicated in the notices, the ministry responded by monitoring and issuing instructions. Again, though, these were no more than administrative guidance; online drug sales were simply beyond the scope of the law.

At the time, administrators had another serious issue to deal with. This concerned the requirement to have a pharmacist present at all times when selling drugs. As a rule, businesses must ensure that consumers are adequately informed by staffing their stores with properly trained pharmacists. But in practice, it was common for drugstores not to have supervising pharmacists on hand on the sales floor at all times, although this is required by law. The regulations under the Pharmaceutical Affairs Law had become a dead letter.

Given this situation, the Pharmaceutical Affairs Law was revised in June 2006 and took full effect in June 2009. The gist of this amendment was to ensure that specialists were able to provide customers with the appropriate information about any potential side effects. The aim was to improve the entire sales structure of OTC drugs by placing the right people in the right place.

Convenience Stores Left Out of the Picture

OTC drugs are classified into three risk categories, as shown in the chart below.

Classification of OTC Drugs

The revised law requires that pharmacists give written explanations of possible side effects to anyone buying first-class OTC drugs. For second-class drugs, the retailer is required to make appropriate efforts to provide the customer with information through a pharmacist or registered salesperson. When a purchaser asks for advice, a licensed individual must respond—a pharmacist in the case of a first-class drug, a pharmacist or registered salesperson in the case of a second- or third-class drug.

When the Pharmaceutical Affairs Law came up for review in 2006, there was speculation in the media that convenience stores might become licensed to sell OTC drugs. But the requirement to have a pharmacist or registered salesperson on hand was more than convenience stores could handle, and this requirement effectively barred convenience stores from selling drugs.

But preventing drug sales in convenience stores was not the only effect of this ruling; the requirement also served to strengthen restrictions against online sales. Is it possible that tightening the noose on convenience store and online sales was the true motive of the MHLW and the vested interests behind it in making these revisions? Some of the remarks by government officials and members of the Council for Regulatory Reform at the time made me suspicious.

Tug-of-War over Online Sales Regulations

Lawmakers provided for a good three-year window for enforcement of the revised law from its enactment in June 2006. The three years until the amendment came into force in June 2009 were spent defining how to approach risk level classification, developing the registered salesperson system, and overhauling the sales structure based on retail through pharmacies, stores, and household distribution (whereby drugs are sold by door-to-door vendors).

The length of this preparatory period suggests that a great deal of coordination was required before the new regime for OTC drug sales could be put in place. What was unexpected, though, was how much time and effort were required to get agreement on lifting the ban on online sales exclusively for third-class OTC products. In fact, the final six months or so before the enforcement of the revised law in June 2009 were rife with controversy about exactly what products would be allowed to be sold online.

By September 2008, the MHLW had a draft ministerial ordinance ready for the enforcement of the revised Pharmaceutical Affairs Law. This set down the details of the OTC drug sales system, including regulations on online sales. The draft ordinance recommended permitting mail-order sales for third-class OTC drugs only—the lowest-risk category, for which there were no rules requiring pharmacists to provide consumers with safety information at the time of purchase.

In November 2008 the Council for Regulatory Reform proposed scrapping those parts of the draft ordinance that amounted to restrictions against online sales. The suggestion was that new rules for online sales should be introduced at an early date after the law came into effect. The reasoning was that the ordinance would limit online sales, which was permitted under the old law. In effect, the council took a position opposing the MHLW’s policing of online drug sales. But the MHLW did not budge.

Supreme Court Decision Leads to De Facto Deregulation

Investigations by the MHLW and in the media around this time reported several incidents involving people who had bought drugs over the Internet.(*1) The suggestion was that there were many other obstacles to the deregulation of online drug sales. Ultimately, in June 2009, the MHLW enforced an ordinance limiting online sales to third-class OTC drugs, which have a relatively low risk of adverse side effects.

Online retailers and others objected to the ordinance and took legal action to protest the ban on online drug sales. In May 2009 online retailers Kenko.com Inc., which has a capital tie-up with Rakuten, and Wellnet Corp. filed a lawsuit against the government seeking confirmation of the right to sell OTC drugs online. In January 2013 the Supreme Court ruled that the MHLW’s ordinance banning online sales of first- and second-class OTC drugs does not conform to the law’s intent and is illegal and void.

This ruling spelled an effective end to the ban, and online retailers rushed to put OTC drugs back on their cybershelves. Meanwhile the MHLW, fearing that online sales of drugs of every sort would go unchecked, hurried to formulate a new set of rules for selling drugs online. The result was the latest amendment to the law.

Rethinking Liberalization Based on Consumer Benefit

In a sense, then, it is fair to say that the government has act to set new rules that essentially lift the ban on online sales of OTC drugs, except for specific items that have been recently switched to OTC or designated as powerful drugs. However, this does not mean there will not be further deregulation in the future. We need to think carefully now about precisely what we mean when we talk about liberalization.

A common view is that all regulations should be removed, liberalizing the market completely. This would, of course, be ideal in some domains. But complete liberalization may not be suitable for some markets. In many cases, partial liberalization with certain conditions is more likely to result in healthy growth. Permitting unrestricted entry to the market could actually endanger it.

A survey conducted by the MHLW in fiscal 2012 found that retailers failed to provide appropriate explanations as called for by law in approximately 40 percent of cases where first-class OTC drugs were purchased in-store. For online sales, over 40 percent of email inquiries went unanswered. This is a far cry from what the 2009 amendment to the law envisioned: promoting self-medication by upgrading the OTC drug sales regime.

Considered from this perspective, complete deregulation of online drug sales is surely inadvisable. A single incident or accident involving serious side effects would be enough to trigger an instant clampdown, whether online sales were implicated in the case or not. A full lifting of the ban might well work against the very online retailers pressing for it now.

Preparing for a Full Lifting of the Ban

So what should we do? Rather than a laissez-faire approach, I believe that the best interests of consumers would be served by keeping certain rules in place. This would help to create a market open only to dependable drug vendors that stick to the rules.

New switch-OTC drugs will be banned from online sales for three years, and online sales of prescription drugs have been banned completely. But it would be a mistake to assume that the latest amendment has settled the matter once and for all.

The information technology revolution is making the Internet a normal part of people’s everyday lives. This process will only continue, just as Japan’s population will continue to age. In the years to come, an even wider range of products and services will be bought and sold online. It seems all but inevitable that one day we will have no choice but to open up online drug sales fully—not just for OTC drugs but for prescription drugs as well.

If these changes are inevitable, we should be planning for them now. We need to look ahead from a medium- to long-term perspective and start discussing what qualifications online retailers will need to have after the ban on online drug sales has been lifted completely.

(Originally written in Japanese)