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South
Korea has become an increasingly attractive market for multinational
pharmaceutical companies. The dramatic shift from a dispensing
doctor to a retail pharmacy market since the separation
of prescribing and dispensing in August 2000 has benefited
manufacturers of original brands. Despite short-term cost-containment
measures to address the growing National Health Insurance
budget deficit, which will target pharmaceutical prices,
multinationals are upbeat about the prospects for doing
business in this Asian
market.
The
separation of prescribing and dispensing (SPD) formed a
key plank of the government's health reform program, but
implementing the policy has been beset with problems. Korean
doctors have traditionally derived a large proportion of
their income from pharmaceuticals and strongly resisted
any attempt to remove their dispensing rights. The government's
plan to eliminate the profit motive in prescribing decisions
- by requiring out-patients to receive their drugs from
retail pharmacies instead of hospitals and GP clinics -
provoked strong opposition from doctors.
Major
unrest among the medical profession delayed introduction
of SPD and it was not until major concessions had been made
to doctors, including a 72% increase in consultation fees
for out-patients and a five-fold increase in prescribing
fees, that the controversial policy was finally introduced
in August 2000.
Further
information on the South Korea pharmaceutical market is
available in the IMS
Market Prognosis Asia report, which covers ten Asian
markets: China, Hong Kong, India, Indonesia, Malaysia, Philippines,
Singapore, South Korea, Taiwan, and Thailand.
Drug
spend rises
The
government's expectation that SPD would contribute to lower
costs by removing the profit motive from prescribing decisions
failed to be fulfilled. Conversely, according to the Ministry
of Health and Welfare (MoHW), spending on reimbursed drugs
rose approximately 25% to Won4,500 billion (approximately
$3.7 billion) in 2001, while increased doctors' fees and
huge dispensing fees for pharmacies (which were formerly
included in the doctor's margin) further exacerbated the
financial crisis of the health insurance system, which has
been in deficit since 1995.
The
impact of SPD on the operating environment for pharmaceutical
companies has been dramatic. Retail pharmacies' share of
pharmaceutical sales more than doubled from 31% in 1999
to over 66% in 2001, at the expense of clinics and hospital
out-patient departments. Sales through GP clinics have virtually
disappeared, while the shift of out-patients from hospital
departments to get their prescriptions filled at retail
pharmacies has seen the hospital market share erode from
almost 42% to less than 27%.
Pharmaceutical
Market Structure by % Share of Value
1999-2001
Note:
Unaudited sales account for the remaining 4% of the market
each year
Source: IMS HEALTH
Prescribing practices have changed
radically in the last two years, with a significant swing
away from cheaper generics, which offered attractive margins
to dispensing doctors, towards original brands. Not only
are doctors prescribing the drug they consider the best
available product, but patients are also more aware of the
identity of the product being prescribed and doctors are
keen to keep patients happy with multinational
brands.
Reflecting the preference for
foreign brands, seven of the top ten products in 2001 were
produced by multinationals. The switch in prescribing habits
in favour of original brands is eroding the local industry’s
dominance of the South Korean pharmaceutical market. Just
two multinationals featured among the top ten companies
in 2001 – Pfizer
and GlaxoSmithKline
– but with sales by multinationals
outpacing those of the majority of local companies, more
foreign companies are expected to usurp local concerns among
the major players.
Reimbursement prices cut
With drugs accounting for around
25% of NHI spending, cost-containment measures are likely,
including further price controls. The introduction of actual
transaction pricing (ATP) in 1999 had some, limited, success
in reducing discounts and price levels in the hospital sector.
By reimbursing hospitals at the actual price they paid for
the drug, ATP removed the profit motive whereby hospitals
retained the difference between the discounted price from
suppliers and the official reimbursement list price. Reimbursement
prices were cut by an average of 30.7% with ATP, and the
MoHW has subsequently reduced prices according to discounting
levels revealed in regular market surveys.
Price cuts have affected local
companies more than multinationals, whose margins to wholesalers
(which have a monopoly over the supply of hospitals with
more than 100 beds), are kept in close check. ATP has, however,
failed to halt discounting, which has been driven under
the table, and the system does little to encourage price
competition as hospitals have no incentive to choose lower
prices.
New initiatives planned
Recognising that ATP by itself
cannot contain the rise in pharmaceutical costs, the MoHW
is looking at new initiatives that will influence pricing
across the board. A new competitive bidding system for hospital
drug purchases, announced in December 2001, is intended
to encourage hospitals to purchase cheaper drugs by providing
incentives such as a share in the savings. Of greater significance
to multinationals, however, is the emphasis being placed
on more direct controls on pharmaceutical prices.
Obtaining reimbursement prices
for new products is becoming more complex as witnessed by
Novartis’ experience with leukemia drug, Gleevec
(imatinib), which failed to achieve the price Novartis was
seeking. Lengthy and tougher negotiations for reimbursement
prices could impede prompt introduction of new products
on the market.
Other direct controls on original
brand prices are under consideration, including:
- the revision of brand prices
as they come off patent
- cost analyses of expensive
products
- price audits on frequently-prescribed
drugs
- reference pricing
Implementation could, however,
be thwarted by international opposition, particularly to
reference pricing, which the MoHW intends to run along the
lines of the German system. Of particular concern is the
proposed inclusion of patented as well as off-patent drugs,
which would have significant repercussions for multinationals.
Despite the increasingly tough
pricing environment for pharmaceuticals, the shift in market
dynamics and prescribing preferences has paved the way for
a more favorable operating environment for multinationals
in South Korea. Although the market cannot sustain the 12.7%
growth to Won 4,872.6 billion ($4 billion) registered in
2001 over the next five years, multinationals can expect
their share of sales to increase at the local industry’s
expense.
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