Report from South Korea

Four domestic companies filed a suit against the Ministry of Health and Welfare of South Korea claiming that the recent price cuts made by the ministry have affected their businesses. On April 1, 2012, drug prices were reduced by an average 17% and cuts affected the prices of 6506 drugs across the board. The first cut, announced in 2011, decreases the price of off-patented drugs 30%, with the price of the first generic drug set at 60% of the price of the off-patented drug. Originally, prices of off-patented drugs decrease by 20%, while the first generic version is set at 68% of the off-patented drug. The second cut reduces the price of drugs due to illegal rebates. The combination of the two cuts means that certain drugs will undergo double-price reduction and the final price rate can be up to 53.55%.

Pharmaceutical companies are crying foul because these cuts would have a direct impact on their business profits even though the agency claimed that this move would ensure market sustainability and eradicate the problem of illicit rebates. In fact, a Sinhan Investment & Securities source has indicated that the majority of companies experienced a 20% fall in profits since the policy took effect.

In response to their declining fortunes, some companies have opted to increase prices of their over-the-counter (OTC) drugs while others have boosted their R&D expenditure. Domestic companies such as Dong-A Pharmaceutical and LG Life Sciences have committed 22% and 19%, of net sales on R&D, respectively.

Cher Boon Piang, an analyst for Asia Pacific Pharmaceutical and Healthcare of Business Monitor International (Asia), says, "Given the price cuts, companies may withdraw drugs that are not profitable. Local companies may even move away from generics. There is also a shift towards biosmiliars that opens opportunity for companies." In October 2011, Dong-A Pharmaceutical joined hands with Tokyo-based Meiji Seika Pharma to build a biosimiliar plant in Songdo. Recently, local companies Yuhan Corp and Teregen ETEX are collaborating to commercialize the provision of individual genome services.

The recent US-Korea free-trade agreement (FTA) has also crippled domestic players as it contains provisions protecting the intellectual property rights of original drug developers. For instance, the Korean agency has to inform original manufacturers if there are companies looking to produce generic versions. Companies are denied market approval if an objection is posed by original drug manufacturers and when the claimed patent exists. It is also mandatory for the generic manufacturer to provide safety and efficacy information to ensure that the generic version does not infringe on the original one.

Perhaps a gradual price cut would have helped in alleviating pressures faced by industry players in South Korea. Cher says, "In general, companies face[d] both financial and time issues when two price cuts were introduced in 2011. If price reduction is gradual and made known to companies in a timeframe that prepares them for such reduction, these companies can draft and implement strategies to minimize the impact of price reduction. Moreover, it is easier to have short-term solutions against gradual price cuts compared to a larger one-off reduction."

Cher points out that price cuts cannot be the only solution to contain rising government expenditures and it is also unfair to shift the burden onto companies. Instead, the government should look into ways to cut expenditure by subsidizing only the necessary and/or increase premiums. These strategies may create a negative impression, but they are essential if a country is not doing well economically. In addition, the burden of healthcare costs should rest on individuals instead, he adds.

Clearly, the objectives of the government and the pharmaceutical industry players differ greatly. On one hand, the government seeks to lower healthcare costs. On the other hand, industry players are looking for ways to maximize profits. Asked if a balance can be struck between both parties, Cher says, "The level of compromise is dependent on the attractiveness of the market. Typically, an attractive market allows the government to push through its policies as companies are willing to forgo higher profit margins in exchange for sustainable growth over a time period."

The South Korean market is characterized by its aging population and an affluent population. Growth potential is limited as it has evolved to a developed market, and industry players expect it to have established regulations. Therefore, it makes sense that industry players are pre-alerted of any policies in the government's agenda. For example, industry players were informed in 2010 of the price disclosure policy to take effect in 2012. In Japan, industry players understand that it is the usual practice that price cuts occur once every two years.

Despite its fragmented market and the price-cut setback, South Korea is ranked among the world's top 12 with $8 billion annual sales. Cher adds, "In the long run, it has the necessary ingredients to continue with its successful pharmaceutical industry, strong support for innovation, the willingness of the private sector to explore these innovative technologies and the demographic profile also supports increased drug usage. The conflict between the government and industry will definitely arise again in the future, but we believe the two parties will reach a compromise. "

—Jane Wan is a freelance writer based in Singapore