Differentiated R&D investment ratio applied to innovative pharma

Using an annual revenue benchmark of KRW 100 billion

Amendment to the “Enforcement Decree of the Pharmaceutical Industry”…5% will be applied to companies that have secured international GMP

Transparency has been enhanced by evaluating based on the average pharmaceutical sales over the "immediately preceding three fiscal years"

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The Ministry of Health and Welfare (MOHW) is implementing the amendment to the "Enforcement Decree of the Special Act on Designation and Support of Pharmaceutical Industry," establishing differentiated annual research and development (R&D) investment thresholds for "Innovative Pharmaceutical Company" certification based on corporate revenue scale and global manufacturing capabilities.

​Under the revision, variable R&D investment ratios ranging from 7% to 9% will be applied using an annual revenue benchmark of KRW 100 billion. Notably, companies that have secured advanced Good Manufacturing Practice (GMP) certifications from the United States or Europe will be eligible for a lowered threshold of 5%, which is expected to ease the certification burden for drugmakers expanding into international markets. 

On July 24, according to biopharmaceutical industry sources, the amended Enforcement Decree, which took effect on the 21st, codifies the specific R&D expenditure requirements into three distinct categories under Article 2-2 ("Annual Research and Development Expenditure Requirements").  

​Differentiated 7–9% R&D sizes based on KRW 100 billion criterion…5% threshold for global GMP holders

First, small and medium-sized enterprises (SMEs) and mid-tier pharmaceutical companies with annual pharmaceutical revenues under KRW 100 billion must invest either at least KRW 7 billion annually or at least 9% of their annual pharmaceutical sales in R&D to meet the certification criteria.

In contrast, large-scale pharmaceutical enterprises with annual pharmaceutical revenues of KRW 100 billion or more must allocate at least 7% of their annual sales to R&D to qualify for the Innovative Pharmaceutical Company designation.  

​A notable feature of the amendment lies in the relaxed benchmark for companies equipped with global manufacturing capabilities. Pharmaceutical enterprises holding Good Manufacturing Practice approvals (such as US cGMP or EU-GMP) from regulatory authorities in the United States (FDA) or the European Union (EMA) will see their required R&D investment threshold lowered to 5% of annual pharmaceutical revenue.  

​This provision effectively recognizes extensive investments in world-class manufacturing infrastructure as an innovative activity equivalent to direct R&D.  

Averaged sales from three previous fiscal year…emphasizing accounting transparency

The amendment also clarifies the specific accounting principles and calculation methods for R&D expenditures and sales. Only revenues and expenses directly tied to "pharmaceutical products" as defined under the Pharmaceutical Affairs Act will be recognized, explicitly excluding performance metrics from non-pharmaceutical business divisions such as health functional foods or cosmetics.

​To prevent administrative confusion arising from short-term financial volatility, compliance will be evaluated based on the average pharmaceutical R&D expenditure and average pharmaceutical sales over the "immediately preceding three fiscal years," counting back from the fiscal year in which the company submits its certification application. For newly established companies operating for less than three years, metrics will be annualized based on performance generated up to the date of application.

​To enhance financial transparency, the amendment mandates that accounting for qualifying R&D expenses must strictly adhere to statutory accounting standards established under the Act on External Audit of Stock Companies. Details regarding specific expense items eligible for inclusion under pharmaceutical R&D costs will be outlined in a separate administrative notification issued by the Minister of Health and Welfare.

​Following the enforcement of this decree, the MOHW is expected to finalize the broader structural amendment of the Innovative Pharmaceutical Company certification system.