2000 Regulatory Update: South Korea’s Pharmaceutical Market


Korea’s economic recovery from the Asian financial crisis is well underway. Driven by investment and exports, the Korean economy is projected to grow 9% in the year 2000. The recent economic boom triggered a 50% surge in imports in the beginning of 2000. Business investment is expected to have an annual growth of 37.8% as well. Consumer confidence in mid-2000 is back to the same level it was pre-crisis. While sustainable growth is anticipated, the economy still faces a host a daunting challenges including inflationary pressures, a volatile financial market and corporate liquidity issues.


Currently the 10th largest in the world, the Korean pharmaceutical market was over $8 billion and growing about 7%-10% annually before the Asian financial crisis. During the crisis, the market volume decreased by about 30%, and drug imports, which were growing at about 13% annually before the crisis, slowed down. Post-crisis, these lower figures have already begun to increase. The Korean government has made special efforts to assure the growth and recovery of the pharmaceutical sector. For example, it is sometimes willing to increase reimbursement prices depending on the change of exchange rates on a product-by-product basis.

The domestic industry’s lack of R&D capabilities will continue to keep domestic pharmaceutical firms producing mostly generics. Foreign companies with unique products, however, have faced several disadvantages in Korea’s pharmaceutical market, including different import requirements, “unequal” registration treatment and oftentimes a lack of coverage by the Korean national medical insurance system. Regardless of such hurdles, the growth rate of imported pharmaceuticals has been a healthy 8% for the last few years.

Figure 1: South Korean Pharmaceutical Market (in Millions of U.S.$)

  1997 1998 1999
Total Market Size 8213 5341 6522
Total Local Production 7765 5000 5500
Total Exports 509 861 948
Total Imports 957 861 945
Total From the U.S. 138 120 132
Exchange Rates (Won/US) 951 1400 1150

Source: U.S. FCS, U.S. Department of Commerce (modified)


Reimbursement Pricing System

In the past, the reimbursement system legally permitted medical institutions to demand up to a 24% profit margin on the reimbursement prices paid by the Korean government for drugs. Often, local pharmaceutical companies gave the hospitals larger profit margins than legally permitted. These kickbacks formed a huge trade barrier as foreign pharmaceutical companies were forced to reduce their prices as well as profit margins.

In response to the above, on November 15, 1999, the Korean Ministry of Health and Welfare (MHW) introduced the Actual Transaction Price (ATP) reimbursement system on November 15, 1999. The ATP system set reimbursement levels for drugs at the actual acquisition prices paid by the medical institutions under the national health care insurance program (note that healthcare insurance coverage is monopolized by the MHW). The new system is designed to remove excessive profit margins that medical institutions have typically demanded from drug suppliers. In theory, hospitals will be penalized for demanding under-the-table margins from drug suppliers. In order to compensate medical institutions for profit margins that they lost under the new ATP system, the Korean government increased service fees for doctors and hospitals by about 9%.

Also, upon implementation of the ATP system, the Korean government reduced reimbursement prices for most local drugs by 30.7%. Imported drugs, which were already listed or newly listed on the national reimbursement schedule, were not included in the November 15, 1999 price cuts but such reductions were included in the next round of price cuts in January 2000.

Attempting to remove financial incentives for doctors or hospitals to favor more expensive drugs over cheaper ones, the ATP system instituted “drug-handling” fees as compensation to doctors or hospitals. Before the ATP system, a doctor would reap greater profits by prescribing drugs with high profit margins. Now, there is no additional profit for prescribing an expensive drug because the ATP system eliminates excessive profit margins and kickbacks. In addition, the “drug-handling” fee is the same no matter which drug(s) the doctor or hospital prescribes and is based on the patient’s frequency of visits or length of hospital stay. The MHW will also give hospitals or doctors a 5%-10% special fee on top of the drug-handling fee for low-priced but essential drugs to ensure that they stay on the market. The MHW prepares a list of these drugs once per year and the list is based on the recommendations of the World Health Organizations and local health industry groups.

The ATP system requires medical institutions to report to the National Federation of Medical Insurance (NFMI) their acquisition price for each drug on a quarterly basis. Medical institutions that falsify drug pricing data, or are otherwise engaged in illegally taking profit margins on drugs, are subject to sanctions, including forfeiture of property, criminal charges and the de-listing of such involved drugs from the national reimbursement list.

Amendments to Pharmaceutical Affairs Law

The National Assembly approved an amendment bill to the Pharmaceuticals Affairs Law on December 7, 1999. A new system of separating, dispensing and prescribing functions (SDP) was formally implemented on July 1, 2000. In the past, a Korean patient could freely buy and take antibiotics or other drugs at pharmacies without obtaining a doctor’s prescription and pharmacists could dispense drugs.

Similarly, though the old Korean law formally separated the different roles of the pharmacist and the doctor, in reality, separation was not established until the SDP system was implemented. The SDP system bans medical institutions from establishing dispensaries within their premises. It also forbids pharmacists from unilaterally dispensing drugs unless otherwise stipulated by the revised law. In some instances, pharmacists are allowed to substitute generic drugs for those prescribed by doctors.

For importers, the following measures were also effective on July 1, 2000:

  • Data submitted to support applications for manufacturing/importing drugs will not be unilaterally made public;
  • Manufacturers/importers of drugs will be managed by the authorities of the drug category of the items involved;
  • Manufacturers/importers of quasi-drugs and sanitary aids will only need to file reports with the authorities concerned instead of securing drug licenses from multiple agencies;
  • Manufacturing/importing licenses may be assigned to other license manufacturers/importers if required for such purposes as plant renovation, etc.

Bridging Study System

On December 22, 1999, the KFDA implemented a new law — the Screening Regulations for Safety and Efficacy of Drugs. The Bridging Study System was formally introduced to facilitate the development and sale of new drugs. The new system is in line with the international ICH standards. It removes the requirement for new drugs to undertake Phase III clinical trials in Korea. Furthermore, if it is necessary to facilitate the importation of orphan drugs that are urgently needed, data concerning Phase III clinical trials may be submitted after their import. In the case of generic drugs covered under the PDR of the United States or other equivalent parties in other foreign countries recognized by the Korea Food and Drug Administration (KFDA), the submission of data concerning their safety and efficacy may be waived.

Drug Master File System

Consumers have been at high risk because of the manufacture and import of harmful pharmaceutical raw materials. According to the KFDA, the Drug Master File System, a new system of registering pharmaceutical raw materials, is being promoted in the year 2000 in order to protect consumers. As a part of the Drug Master File System, the Raw Materials GMP system will be formally implemented in 2001 to cover the entire process of manufacturing drugs — from manufacture of raw materials and finished products as well as their distribution. These measures are incorporated into a long-term plan (2000-2004) in hopes of upgrading the KFDA functions to the level of the U.S. FDA. In addition, mutual recognition agreements with foreign countries covering GMP systems will be promoted to facilitate foreign trade in pharmaceuticals.

Over-the-Counter Products

Prior to July 1, 2000, over-the-counter products could not be sold outside pharmacies. After July 1, 2000, the KFDA allowed the sales of simple OTC products outside the pharmacy. This is expected to lead to a boom in OTC product sales, an increase in the importance of brand awareness as well as the simultaneous development of OTC products for pharmacies, supermarkets and other retail outlets.

Side Effects

The KFDA implemented revisions to the Standards for Re-evaluation of New Drugs on December 15, 1999. Previously, serious side effects of new drugs discovered by their manufacturers or other regulatory agencies, in the course of post marketing surveillance, had to be reported “immediately.” No specific time limit was set. The KFDA now requires side effects to be reported within seven days from the discovery.

Furthermore, with respect to post marketing drug re-evaluation, there must be clinical tests of at least 600 patients for re-screening, regardless of the drug’s different dosage forms. Drugs requiring at least 3,000 patients for re-screening include:

  • Drugs developed locally for the first time
  • New drugs being developed in a foreign country that have not been formally approved for marketing in their home country
  • New drugs developed in a foreign country that have been launched for less than three years in the country where it was developed
  • New drugs developed in a foreign country that have not been launched in other foreign countries.

Guidelines for Drug Quality Equivalence Tests

Guidelines for drug quality equivalence tests used to determine generic substitutes for doctor-prescribed drugs were established on January 3, 2000. These guidelines were designed to help facilitate the implementation of the SDP system. As a result, many manufacturers of generics were required to undertake quality equivalency tests, comparative dissolution tests, etc. These tests are screened by the Central Drug Deliberation Committee and are due by December 31, 2000.

Toll Manufacturing Restrictions Withdrawn

All restrictions on toll-manufacturing of drugs and foodstuff were withdrawn on December 11, 1999. This means that as long as there is no cross contamination, manufacturing facilities for drugs may now be used for the manufacture of health food and other related products. The scope of drugs eligible for toll-manufacturing has also been greatly expanded. In addition, drug wholesalers will now be able to conduct business without having their own storage facilities. This is possible providing that they are affiliated with the joint drug-distribution centers to be set up by the Drug Distribution Association.

Vitamin Preparations

The KFDA says the standards for the manufacture of vitamins will be revised to clear the way for the production of vitamin preparations combined with other mineral substances and ginseng. These revisions have been long sought by pharmaceutical manufacturers who want to add zinc, iron, calcium carbonate, inorganic substances plus ginseng and organic substances plus ginseng. Under the revised standards, pharmaceutical manufacturers will be able to combine vitamins with a variety of other medical substances without requiring authorization for adding specific substances to vitamins.

Drug Ads Online

The MHW revised the Enforcement Regulations of the Pharmaceutical Affairs Law on March 2, 2000. Its salient points regarding drug advertisement include: 1) In most cases, drug advertisements through the Internet and PC communications will be allowed; and 2) Prizes and bonuses may now be offered and tied to the advertisements of drugs.

Quality Control

The KFDA is sampling 3000 pharmaceutical products in the market for re-evaluation in 2000. The quality inspection of these items is in accordance with an agreement with customer protection organizations in conjunction with the implementation of the SDP system. Furthermore, 80 pharmaceutical firms with KGMP plants have been investigated to check their compliance with the Pharmaceutical Affairs Law and related regulations. These quality inspections will continue through the end of 2000.


Until recently, lengthy testing requirements governing imported cosmetics represented a major impediment to entering the Korean marketplace — especially the introduction of new products in Korea. Further problems arose with business confidentiality since product information was often leaked to competitors. In the past, importers of cosmetic products had to obtain an Approval Notice for Custom Clearance from the Institute of Health and Environment (IHE) and apply for quality tests to the IHE within 3 days of customs clearance of their products. This timeframe proved to be cumbersome and hard to meet, so in January 2000, the KFDA stopped requiring the Approval Notice for Custom Clearance as well as the 3-day timeframe for the quality test.

There have been two stages of reforms regarding the KFDA’s testing requirements for cosmetics. The first reform went into effect in January 1998 and it abolished the annual KFDA quality testing requirement for imported cosmetics. It also began authorizing importers to perform the quality tests themselves (rather than a government agency), provided that they maintained records of the self-quality test results for each shipment. The second stage became effective in January 2000 advocating that once foreign cosmetics manufacturers have passed facility inspections by the KFDA, their Korean importers are no longer required to test each batch upon its arrival at the port of entry.

Public Health Issues

The following public health measures have also been identified as key issues for 2000:

  • Reckless competition between hospitals needs to be organized within an established framework to ensure that patients receive the best medical services at a reasonable cost;
  • Illegal/irrational sales activities of pharmaceutical manufacturing/wholesale firms should be thoroughly checked;
  • “Healer Shopping Practice” on the part of citizens must also be corrected; and
  • The current medical insurance system needs to be expanded to provide life-long healthcare management.

Figure 2: Timeline of New Korean Pharmaceutical Regulations

Effective Date Regulation
November 1999
  • Actual Transition Price reimbursement system
December 1999
  • Bridging Study System
  • Standards for Re-evaluation of New Drugs (Side Effects)
  • Toll-manufacturing
January 2000
  • Drug Quality Equivalence Tests
  • Cosmetics reform
March 2000
  • Enforcement Regulations of the Pharmaceutical Affairs Law (Drug Ads Online)
July 2000
  • Separating, dispensing and prescribing functions system (SDP)
  • Misc. amendments to Pharmaceutical Affairs Law
  • Over-the-Counter Drugs
  • Drug Master File System/Raw Materials GMP
To be determined
  • Vitamin Preparations


The KFDA is making great strides towards liberalizing and deregulating its pharmaceutical market as well as improving transparency and efficiency to its regulatory processes. Demand for imported pharmaceutical products should increase, especially as imported drugs are reimbursed under the national insurance system and as the healthcare system is overhauled. While these reforms are not infallible or are often put on a shelf and postponed, the KFDA is getting its act together. Over the next few years, the KFDA will attempt to bring more consistency to the healthcare sector. In the meantime, foreign pharmaceutical companies must keep abreast of Korea’s rapidly changing regulatory structure in order to overcome the challenges to market entry and increased market penetration.


Pharma Koreana. 2000.

U.S. Foreign Commercial Service and Department of State. 1999-2000.