Korea’s Pharmaceutical Market: New Developments Helpful for Foreign Firms

Less than two years ago, the Korean government significantly revamped rules governing the prescription and sale of pharmaceuticals in that country. Prior to the reform, distinct roles between those who prescribed and sold drugs were not clearly defined. Doctors and pharmacists could perform both duties. As a result, the industry was plagued by over-medication and other inefficiencies. The August 2000 policy change set distinct roles for doctors and pharmacists — doctors prescribe drugs, and pharmacists sell them.

While many applauded the separation of prescribing and dispensing drugs, doctors, realizing the income loss they would bear, went on strike to protest. In order to help compensate for the doctors’ lost incomes, the government increased the amount doctors could charge in prescribing fees. The result? Korea’s national health insurance system experienced a significant deficit in 2001 that nearly doubled earlier predictions.

But increased doctors’ fees are not the only reason for rising national insurance costs in Korea. Corrupt marketing practices have also contributed to the deficit. Pharmaceutical wholesalers often sell drugs to pharmacies, hospitals, or other medical institutions at a discount. However, institutions receiving the discounted prices often report the original price to the state-operated insurance system, making illegal profits off the government.

To help combat both the deficit and illegal marketing practices, the Korean Ministry of Health and Welfare cut the reimbursement prices of 5,575 insurance-covered drugs by an average of 7.63% at the end of 2001. Prices on an additional 400 drugs were cut during the first quarter in 2002. The government is also gradually prohibiting the reimbursement of certain OTC products. A total of 6,000 OTC drugs, including cold remedies, ointments, and digestives, will no longer be reimbursed by the national health insurance system.

Since the separation of prescribing and dispensing functions, foreign manufacturers have seen a significant increase in Korean sales of their products. This is at least partially attributable to the fact that doctors no longer have a profit incentive to prescribe generics. When doctors had both prescribing and dispensing powers, reimbursement rates were such that it was more profitable to prescribe generics. This is no longer the case. According to the Health Insurance Review Agency in Korea, sales of original drugs rose from 43% of the market in May 2000 (pre-separation) to 62% in November 2000 (post-separation). MSD Korea (a subsidiary of Merck & Co. Inc.) reported doubled sales for 2000, while Glaxo-Wellcome Korea’s sales rose 59% and Pfizer’s were up 38%. Although local Korean companies are trying to develop original drugs, it will take years before these drugs hit the market. On average, Korean pharmaceutical companies only put forth 4% of sales into R&D, as opposed to large foreign firms that invest 15-20% in developing new drugs.