Korea’s pharma industry: 20 years of rebate competition

Prof. Sungmin Park of Seoul National University Graduate School of Public Health raises issue at the National Assembly forum

“Even if prices are lowered, Korea needs an environment that allows manufacturers to achieve economies of scale by focusing on specific drug substances.”

“Japan’s model, which limits suppliers of each substance to around five companies, should be reviewed for Korea as well.”

An argument has been raised that even if generic drug prices are cut, fostering generic drug companies capable of achieving economies of scale in selected therapeutic areas will increase the likelihood of the domestic pharmaceutical industry's global expansion.

The logic is that unless the industry structure, in which many pharmaceutical companies produce and sell a little bit of every ingredient's generic version in a multi-product, small-volume production model, is reformed, the repetitive, destructive rebate competition among pharmaceutical companies will inevitably continue.

There was also a suggestion that government policy must follow to prevent generic drug price reductions from leading to supply instability for certain generics.

On the 5th, Professor Sung-min Park of Seoul National University's Graduate School of Public Health expressed concern at a National Assembly forum on drug pricing policy reform, stating, “Korea’s generic price competition has been distorted for decades and has instead manifested as rebate competition.”

Professor Park's view is that the problem, where a higher market share is gained by higher generic prices, resulting in low drug expenditure savings from generic use, has persisted for 20 years. Consequently, the means of generic competition continues to be rebates to prescribing physicians rather than price reductions.

Professor Park pointed out, “As sanctions against illegal rebates intensified, the practice became more covert to evade detection. While the margin rate for general wholesalers is 6%, CSO commission rates range from 40% to 50%, and can even reach 100%. The structure requires sales practices that benefit prescribers to secure generic prescriptions.”

He stressed, “Korean generic companies have no real competitive tools besides rebates, being forced into rebate wars. Rebate competitiveness is far easier to achieve than price or quality competitiveness. This leads to an increase in small and micro pharmaceutical companies.”

Professor Park proposed that the government should focus on creating a generic industry structure where economies of scale operate as a solution to these problems.

Professor Park's solution is to transform the domestic generic industry, currently characterized by domestic-focused, multi-item, small-volume production, into an export-driven industry producing consumer goods like cosmetics and automobiles.

Professor Park explained, “In the sheltered environment without genuine price competition, Korea's generic industry has many companies producing a little of this and that for the domestic market. Generic companies may be highly competitive in terms of rebates because they work hard to win sales. However, rebate competition that drives domestic prescription is meaningless in the global market.”

Professor Park elaborated, “Even if we build competitiveness by supporting companies through methods like paying 40-50% commissions to CSOs, giving special margins to wholesalers who pay upfront, donating to hospital-related foundations, or setting up booths and paying fees at medical conferences, exporting domestic generics overseas remains a distant prospect. For the generic industry to become an export industry, it must achieve economies of scale that allow for price and quality competitiveness.”

He noted, "We should refer to Japan's Ministry of Health, Labour and Welfare's generic pharmaceutical industry policy. MHLW categorizes generic companies into two types: general trading company-type firms with high market share, numerous product lines, and overall improved productivity; and specialized domain-focused companies leading specific areas and concentrating on products where they have strengths to secure productivity. Japan concluded that limiting competition to about 5 companies per active ingredient is optimal for a stable supply.

Professor Park added, “While lowering generic drug prices, we must foster generic companies to achieve economies of scale across numerous items or in specific areas of strength, enabling global expansion. We must also be cautious that generic drug price reductions do not lead to supply instability for certain generics. We must not repeat the major disruption caused by the acetaminophen shortage during COVID-19.”