Korean Drugmakers at a Crossroads
Continue to Focus on Generics or Start Stepping Up Game With New Drugs?
By Jane Han
Staff Reporter
The pharmaceutical industry has never really had a good reputation, either here or elsewhere. Behind the life-curing business are heavy lobbying, dirty politics and giant rebates for favorite buyers, all of which is reflected in today's public distrust.
Despite the industry's dark side, however, cutthroat competition continues for a bigger piece of the $730 billion global market. And this figure is expected to more than double to $1.3 trillion by 2020, according to a PricewaterhouseCoopers' (PWC) estimate.
It says that the increase will mainly be driven by soaring demand for medication as the population grows, ages and becomes more obese.
In Korea, considered one of Asia's top pharmacy markets, the size is expected to go up 9 percent to almost 12 trillion won this year.
Along with the sizeable jump, the competition between local and global makers will heat up even more. Korea's complete market liberalization in the late 1990s exposed the domestic pharmaceutical industry to direct competition from multinational firms that have better R&D technology and a larger scale of investment.
Many experts say that the country's medicine business is standing at a crossroads. Is it going take a leap with new, innovative drugs or continue chasing global leaders with copied pills?
The Korea Pharmaceutical Manufacturers Association (KPMA) says generic drugs take up 40 percent of the market in terms of revenue. Moreover, investment to create new drugs remains minimal, as a combined total of local companies' R&D investment is less than the amount poured in by one global drug maker, according to the Hyundai Economic Research Institute.
``Korea wants to become a biotechnology hub, but the figures don't back up the plan,'' said Kim Chul-soo, professor of medicine and director at the Comprehensive Cancer Center at Inha University Hospital and School of Medicine.
With multinationals taking up three-quarters of the local drug market, he said Korean makers are standing on the verge of a crisis if proper measures aren't taken to step up their game.
He said Korean makers have in the past put out popular drugs like Stillen and Zydena, but none of them sold more than $50 million.
Developing a new drug, on average, takes 15 years from initial research, testing to marketing, totaling costs over $10 million, Kim explained, adding that such high expenses and long-term investment convince local firms to copy drugs rather than create a fresh product.
A Generic Battle
With many global makers' blockbuster products coming off patent, the race for the generic drug market is set to be in full force in the second half of this year.
Hana Daetoo Securities forecasted that the industry's top players, including Dong A, Hanmi, Yuhan and Greencross, may see a steep hike in sales on the back of their latest generic releases.
``Competitive firms equipped with capital, brand power and technology will increase their market share, while smaller firms will end up falling further behind,'' said Cho Yoon-jung, an analyst.
Cho Eun-ah, an analyst of Samsung Securities, also forecasted that drug makers' revenue will edge up 10 percent in the second quarter thanks to sales of new generics.
She said, however, that their operating profit will slide due to increasing marketing campaigns for new products.
The drug recently at the center of attention is the best-selling Lipitor, a cholesterol-lowering pill that has generated $12.7 billion in sales for pharmaceutical giant Pfizer.
Domestic firms put out Lipitor generics in June, already taking up almost 40 percent of the popular drug market, according to market figures. And this quick response handed strong returns to makers.
Yuhan Corporation recorded 2.2 billion from July sales of Lipitor, followed by Dong A Pharmaceutical with 1 billion won and Hanmi Pharmaceutical raking in 700 million won.
Industry sources expect sales will rise consistently, and Korean drug firms will make a soft landing into the generic Lipitor market, as they did with Plavix, another blockbuster drug co-marketed by Sanofi-Aventis and Bristol-Myers.
Plavix generics were first released in January 2006, going on to take almost 50 percent of the blood-thinning drug market just 19 months later.
One official of Yuhan, who asked not to be named, said, ``Korea's production of generics is highly advanced, which makes the copied products have a near-identical effect as the originals.''
Although this may be true, critics still say that domestic players need to look beyond generics and start focusing on hardcore R&D investment at a time when the global pharmaceutical market is shifting to Asia.
The PWC report said that the pendulum of the pharmaceutical industry is shifting from the West to the East, and Asia is set to become the largest drug market in the world.
``It's going to get tougher to live off of copied drugs because patent periods are getting longer and security on drug information is growing tighter,'' said one unnamed executive of a multinational pharmaceutical operation.
Sharing the Pie
Over the years, Korean firms had to give up the home market to powerful global companies coming in with good medicine and better marketing strategies.
According to the Health Insurance Review Agency, non-Korean firms' market share moderately rose from 22.2 percent in 2000 to almost 28 percent in 2006. Considering there are only about 30 multinational enterprises here, their presence is significant.
The figure sharply dropped to the 26-percent level last year, but observers say that this is a temporary slip attributed to slow new drug developments and other situations dogging the global giants.
A KPMA spokeswoman said the impact of local generics is slowly setting in because blockbuster drugs like Plavix took up such a huge portion of sales here.
She said, however, that market situations will change again once new products are released.
For Survival
To seek new growth amid tight competition, more and more local drug makers are teaming up with bioventure firms for joint tech development. For pharmaceutical companies that lack knowledge and skills, cooperating with innovative and experienced bio firms is their best bet.
One recent example of such tie-up is the strategic alliance between Hanmi and CrystalGenomics, a drug discovery and development firm. Under the agreement, Hanmi will invest 30 billion won in exchange for new substance development.
Industry watchers say that such large scale cooperation will be more common in the future, even for multinational firms operating here.
Kim Jin-ho, CEO of GSK Korea, told local media in June that the global drug maker is interested in working with Korean bioventures.
Such cross-border alliance is widespread as even the top pharmaceutical companies are pressed with the competition of creating new drugs quickly and effectively.
Pricing and Rebates
One of the things drug makers are famous for is their world of rebates, money given to hospitals and other medical institutions in exchange for a secure distribution channel.
Last year, the Fair Trade Commission slapped a 19.9 billion won ($22 million) fine on the country's 10 pharmaceutical companies for providing hospitals and wholesales with a huge amount of rebates to illegally promote sales of their products.
Consumers and civic groups were furious that such illegal practice was commonplace in the industry, which impedes their right to access quality drugs for treatment.
Since then, the controversy over rebates, and the ``right'' price for drugs have been ongoing topics of debate.
The Korea Development Institute claimed that domestic generic drugs are priced four times more than those in the U.S., but the KPMA fired back, saying that each country has its unique pricing system that cannot be equally comparable.
``The local drug industry is governed by a very complicated set of rules,'' said one official of KPMA. ``There is still not one agreed system that parties of different interest can agree on, which ultimately leads to consumer distrust.''