Strategies for growth in South Koreas pharma market
*Rajesh Chhabara reports on the challenges and opportunities in the South Korean pharma market*
By on Feb 14, 2011Rajesh Chhabara reports on the challenges and opportunities in the South Korean pharma market
Together with China, India, Malaysia and Indonesia, South Korea is among the five fastest growing pharma markets in the Asia Pacific region.
South Korea is the second largest pharma market in Asia Pacific after China and ranks 13th in the world pharmaceutical market.
Even though pharma sales in South Korea dipped in 2009, the market is poised for a sustained growth in the coming years.
In 2009, the total audited pharmaceutical market for South Korea fell by 3%, to $9.28 billion, according to research firm IMS Health.
The hospital sector accounted for $2.55 billion, a drop of 5%.
The South Korean pharmaceutical market enjoyed good double-digit growth at the start of the five-year period beginning in 2004, but growth fell steadily and the market began contracting sharply in 2008.
However, the total pharmaceutical market is expected to grow at a compound annual growth rate of 10.2% in the period between 2009 and 2014, estimates David Campbell, senior principal at IMS Health.
Emerging no more
IMS Health does not classify South Korea as an emerging market anymore, as the nation now exhibits the characteristics of developed countries.
Increases in healthcare spending are expected to be a key driver of growth.
Government spending through the national health insurance system is set to grow over the next five years as coverage expands.
South Koreas current expenditure on healthcare is comparably modest at 6.1% of GDP.
The hospitals-per-thousand of the population rate is low. Government spending is likely to continue to grow, particularly in view South Koreas ageing population.
To address the healthcare needs of the elderly, the government introduced a separate insurance system in 2008 covering nursing care at home and expenses at long-term care institutions.
In spite of initial difficulties, this system, too, is expected to grow.
However, increased pressure on the national health insurance system is prompting the government to take cost containment measures.
The national health insurance budget will remain under pressure, says Campbell.
The government is introducing new incentives to cut drug costs and prices, while trying to eliminate illegal rebates through strong punishments. The two objectives of cutting prices and ending unethical practices are becoming closely linked.
Potential risks
The government program to increase private sector involvement in healthcare could be another driver of growth.
According to Campbell, progress is being made in encouraging medical tourism and attracting foreign and for-profit hospital investment.
But Campbell cautions that the pace of private sector involvement may remain modest.
Progress has been slower in allowing private investment in hospitals in the rest of the country and in expanding the role of private health insurance, due to differences of opinion within the government as well as strong opposition from outside bodies.
Despite the opportunities, risks remain.
The government sees cutting prices and ending illegal rebates as part of its vision for an industry restructuring that will allow it to compete globally on quality and innovation.
Perhaps the biggest negative for multinationals at present is low reimbursement prices for new products, says Campbell.
Companies are involved in protracted negotiations with the Health Insurance Review and Assessment Service and the National Health Insurance Corporation and, in many cases, are offered a price that is well below their international floor price.
Price pressure from the government is resulting in delayed launches.
In some cases, the product is not marketed at all, since the price is not acceptable.
Multinational companies will suffer from low new product prices and price cuts, but will benefit from growing market transparency and better intellectual property protection, according to Campbell.
He adds that in the local industry, consolidation is likely, through bankruptcies rather than mergers and acquisitions, with most casualties being small and medium-sized companies.
Diversification
Though local companies will continue to get most revenue from generics, they are also diversifying to boost exports and investing in research and development.
The local generics industry is also likely to come under increased pressure as a result of the US-Korea Free Trade Agreement.
A free trade agreement with the European Union will see further pressure on local generics manufacturers.
South Korean pharma companies already export to over 20 countries.
Total pharma and cosmetics exports from South Korea grew from $1.47 billion in 2007 to $1.92 billion in 2009, according to the Korea Pharmaceutical Traders Association.
Raw medicines and finished medicines respectively accounted for 32% and 40% of the total figures.
Japan, China, the US, and Vietnam are the four largest markets for South Korean pharma exports.
The government encourages R&D investment through tax breaks, pricing incentives, and the creation of research complexes.
Some of the incentives will also benefit multinationals, several of which are investing considerable sums in R&D in Korea, Campbell explains.
Larger South Korean companies, such as SK Chemicals and Chon Kun Dang, both of which manufacture generic versions of Roches Tamiflu, have invested heavily in research and development, too.
Growth strategies
The next few years will see the domestic industry become increasingly polarized, with the leading companies capturing a growing share of the market and the small and medium-sized companies struggling.
Manufacturing in South Korea is increasingly becoming unattractive for multinational companies due to increases in operating costs.
Most multinational pharma companies have already closed or sold their manufacturing plants in South Korea, including Boehringer Ingelheim, Merck Sharp and Dohme, and GlaxoSmithKline.
Co-promoting or co-marketing original products with multinationals is a popular option, but opportunities are limited, according to Campbell.
Licensing new products is another favoured strategy, but the leading domestic companies are facing the same problems as multinationals in obtaining an acceptable reimbursement price.
The governments scheme to provide tax breaks for merger and acquisitions may trigger activity in the pharma space.
However, few local companies will see synergies in M&As as most have similar ranges of generic products.
Despite these limitations, the large family-run industrial groups known as chaebols may increase their presence in the pharma market and invest in new drug delivery.
It is possible that the introduction of fines and jail sentences to punish the receivers of illegal rebates will provoke a change in prescribing habits, with doctors favoring original brands in order to avoid suspicion of
having taken rebates to prescribe local products, says Campbell.
Multinational companies may also benefit from the disruption in the local industry due to expected restructuring.
Check out other articles in eyeforpharmas pharmerging markets series:
For more on the Middle East, see The Middle East: A pharma market in the making.
For more on Russia, see Reassessing Russia's pharma market.
For more on Brazil, see Breaking into the Brazilian pharma market.
For more on China, see Cracking the Chinese pharma market.
For more on the pharmerging markets as a whole, see How to get ahead in 'pharmerging' markets.