Drug Manufacturers in South Korea Take Legal Action to Prevent Price Cuts
Four local drug manufacturers have initiated legal proceedings in South Korea in a bid to prevent the Ministry of Health and Welfare (MHLW) from imposing its planned average drug price cuts of 14%, which are due to come into effect from 1 April.
IHS Global Insight Perspective
Four small-to-medium sized South Korean drug manufacturers have initiated legal proceedings against South Korea's Ministry of Health, Labour and Welfare (MHLW) in a bid to prevent it from imposing average price cuts of 14% from 1 April.
The antipathy towards the planned price cuts stems from the fact that the price of long-listed drugs is set to drop to the same level as their generic equivalents. This will remove incentives for doctors to prescribe generics, most of which are manufactured by local South Korean companies.
With the MHLW showing no signs of backing down, South Korea's drug industry looks set for a period of heavy consolidation and market growth is set to slow. However, the government has pledged to provide major incentives to companies which are willing to embrace innovation.
According to the Korea Herald newspaper, the four companies in question are Ilsung Pharmaceuticals, Elyson Pharmaceuticals, Dalim BioTech, and KMS Pharmaceutical, which have filed and injunction and annulment suit at the Seoul Administrative Court.
The four companies allege that the MHLW's planned price cuts are unreasonable and that they will inflict severe damage on the local drug industry. Their concerns stem from the fact that the price cuts are due to be applied to 6,506 drugs, which corresponds to 47.1% of all products covered by the country's National Health Insurance (NHI) programme. Among the drugs that will be subjected to cuts are long-listed drugs (i.e. originator drugs whose patents have expired), whose prices will drop to the same level—or even below the level—of their generic equivalents.
In practice, this will be especially damaging to small-to-medium sized companies, which are heavily reliant on generics. The Korea Herald quoted a spokesperson from one small firm who complained: "In that case, doctors and patients will be more likely to choose the original [drugs] over ours." The company's fears were given credence by a doctor quoted by the newspaper, who stated: "Treatment for chronic illnesses such as hypertension requires a large sum of money, so we usually prescribe generics though we personally prefer the original. Once the price becomes equal, we may switch to originals."
In view of the above, the Korean Chamber of Commerce has given its support to the country's drug industry, and has appealed to the MHLW to modify its price-cutting policy. However, the MHLW's position is deeply entrenched, and the Health and Welfare minister, Rim Chai-min, has steadfastly defended the reforms: "The plan is not a scheme to impoverish drug firms. Koreans' medical expenses on drugs have been excessive. It needs to change. The National Health Insurance fund is at risk of depletion. If it depletes, the firms will be in danger too. The change is essential for the long run of the industry, too."
Outlook and Implications
Despite coming under considerable pressure from small and medium-sized companies, the MHLW remains committed to its price-cutting reforms, and it has been able to deflect a certain degree of criticism by pledging to offer incentives to 50 companies that are prepared to prioritise the development of innovative medicines. These incentives—which are aimed at helping to create 12 globally competitive drug companies by 2012—include tax deductions, price increases, financial aid, and development support (see South Korea: 9 January 2012: South Korea's MHW Reveals Plans to Create 12 Globally Competitive Drug Companies).
However, although these measures have—to some extent—served to appease the larger companies, many of these companies are nevertheless faced with a need to make radical cutbacks. For example, one of the country's largest drug manufacturers, Samil, has recently dispensed with the services of 100 executives, although other companies have been considering implementing wage freezes and redundancies. Local sources are suggesting that the price cuts may result in up to 136,000 redundancies, and that companies' profits will be slashed. Moreover, it's almost inevitable that market growth will slow.
For its part, the MHLW has repeated its previous insistence that companies would be able to withstand the impact of the price cuts if they put a stop to the still-widespread practice of offering illegal rebates to doctors or hospitals (see South Korea: 3 November 2011: New Drug Price Cut Proposals Announced by South Korea's MHW). Further pressure to eradicate these rebates was brought to bear last month, when the Seoul High Court ruled that drug companies should be liable to pay taxes on them, and that they could not be presented as legitimate "sales expenses" (see South Korea: 15 February 2012: Court in South Korea Rules Taxes Should Be Imposed on Rebates). IHS Global Insight expects the planned price cuts to adversely affect growth in drug sales and health spending going forward.
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