“Korean pharmaceutical industry is in need of a restructuring, including a wave of large-scale mergers and acquisitions.” Pharmaceutical experts here have said so for quite a while. Even a minister of health and welfare once joined the calls.
According to the 2017 Pharmaceutical Industry Data Book, issued by the Pharmaceutical and Bio-Pharma Manufacturers Association, the number of companies with pharmaceutical manufacturing license totaled 740 as of 2016, with 529 of them reporting actual output (end products or ingredients). Also, there were 2,036 wholesalers of pharmaceutical products, 288 manufacturers, and 211 importers.
Voices calling for industrial restructuring are being raised because the number of pharmaceutical manufacturers and wholesalers far exceeds the domestic pharmaceutical market size, which accounts for just 2 percent of the global medicine market.
The succession of the government policies to lower drug prices in recent years is another factor that carries weight to the calls for industrial restructuring.
The government has made continued efforts to reduce the share of the drug cost in the medical expense, which accounted for up to 30 percent of the total medical cost covered by medical insurance in the mid-2000s. As the government readjusted the category of insurance–covered medicines while implementing the across-the-board price cuts of prescription drugs and generic drugs in the 2010s, the proportion of drug costs fell to 25 percent of the total medical expense.
As the prescription medicines account for more than 80 percent of the Korean drug market, and the insurance payment system sets most of their prices, the government policies to lower drug prices have led to the declines in the revenues of the pharmaceutical companies.
In fact, the size of medicine market -- total sales of domestic drug products plus imported medicines minus exported medications -- which continued to post growth even during the financial crisis in 1997, remained stagnant, hovering barely above the 19 trillion-won range for five consecutive years since 2010.
The pharmaceutical industry, represented by the Pharmaceutical and Bio-Pharma Manufacturers Association, has called for paying more attention to the adverse situations of the pharmaceutical companies and wholesalers as well as possible shrinkage of the industry.
However, the government responded in part with a hardline policy by cracking down on the kickbacks and payoffs given on condition of prescriptions of certain drugs, a prevalent practice between physicians, i.e., hospitals, and pharmaceutical companies. Of course, the government did not resort to sticks only. As carrot, it introduced incentives for the prescription of generic medicine and the system called the “certification for innovative pharmaceutical companies,” in 2012.
“Innovative pharmaceutical companies” refer to those which contributed to improving the global competitiveness of domestic pharmaceutical industry thanks in part to outstanding results of their investment in R&D. If designated as such, the companies are subject to preferential treatment in drug pricing, R&D investment, taxation, deregulation, government subsidies, and workforce assistance.
These government policies were designed to pursue fiscal sustainability of medical insurance by lowering drug prices while encouraging the spontaneous restructuring of the industry by assisting companies investing in R&D.
In spite of these policies, there has been little change in the number of pharmaceutical companies and wholesalers. The licensed pharmaceutical producers numbered 462 in 2011, 530 in 2012, 491 in 2013, 484 in 2014, 493 in 2015 and 529 in 2016, waxing and waning over the past six years.
The lack of change is ascribable to the lowered barrier for new entrants to the pharmaceutical market, accompanied by the policies to lower drug prices. For the last five years, the government drastically eased regulations on commissioned production of new medicines. The Ministry of Food and Drug Safety introduced the Good Manufacturing Practice (GMP) Compliance system, a measure to improve the quality of medical products, under which the factories of pharmaceutical products are subject to pass the ministry’s criteria for medical production facilities every three years.
However, the ministry eased the requirement of compulsory production of medicines for approval. It permitted the production facilities which met the requirement for GMP Compliance to produce the same line of products in new names and new packages without undergoing the separate step of authorization, simplifying procedure for commissioned production. It paved the way for the firms without manufacturing facilities to produce and sell generic medicines after passing bioequivalence tests and paying the commission fee of 900,000 won ($840) for authorization.
The Korean pharmaceutical industry now faces a wind of change.
The size of the pharmaceutical market which used to hover around 19 trillion won showed a steep increase to 21.7 trillion won in 2016, the year when the exports of domestic bio-medical products started to make significant growth.
Remsima of Celltrion Inc., deemed to be the first biosimilar product in the world, made successful entries into the European market and the U.S., exponentially raising the sales of Celltrion. Exports of biosimilar products were followed by those of medical technologies of domestic firms. Hanmi Pharm transferred its pharmaceutical technology on GLP-1 antidiabetics, Efpeglenatide, to Sanofi S.A., with other firms also reporting their technology transfer overseas.
Also, Daewoong Pharmaceutical is making active inroads into the U.S. market with its botulinum toxin Nabota and other firms followed its suit soon.
In addition, Kolmar Korea struck a 1-trillion-won deal to acquire CJ Healthcare in a significant M&A case.
Against this background, the experts expect a gradual change in the landscape of the pharmaceutical industry of Korea. The number of the pharmaceutical firms would not decline in a short period, but major firms and biomedical companies are likely to dominate the market. To do so, however, they would have to strengthen further their capacity to develop new medicines with greater investment in R&D, the experts point out.
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