The government has overhauled the pricing system for generic drugs for the first time in 14 years. The aim is to shift the industry structure from a focus on generics to one driven by innovation. The revamp signals significant changes not only for domestic drugmakers' survival strategies, but also for patients' drug costs and the supply system for essential medicines. We examined the impact on industry and medical settings. [Editor's note]
Starting Aug. 1, National Health Insurance prices applied to generics will be cut under new standards. To curb a glut of generics, the government tightened pricing criteria, while giving preferential prices to corporations that invest in research and development (R&D), quality control, and supply stability.
According to the Ministry of Health and Welfare on the 1st, the core of the overhaul is lowering the base pricing rate for generics from 53.55% to 45%. For listed drugs subject to cuts under the National Health Insurance, prices will be reduced sequentially over 10 years through 2036. In tandem, preferential pricing will be granted to innovative and quasi-innovative drug corporations and to products that contribute to supply stability.
Some say the reform will change the growth formula for domestic drugmakers. The industry sees this as an opportunity to streamline a structure flooded with generics, while expecting it to be a watershed for small and midsize drugmakers with heavy reliance on generics, potentially determining their survival.
Lee Jong-hyuk, a professor at Chung-Ang University College of Pharmacy, said, "The government appears to be seeking to spur domestic firms to develop new drugs while also strengthening the introduction of new drugs from foreign pharmaceutical companies."
Lee said, "Because Korea offers patients relatively limited access to new drugs compared with other countries, the savings from price cuts could be channeled into bringing in foreign new drugs," adding, "Domestic firms are facing deteriorating profitability and a mood of having to find their own ways to survive."
◇ Tackling the glut of generics… prices cut further if more than 13
Many domestic drugmakers have focused on generic businesses that copy off-patent medicines, because they require less development cost than new drugs and are easier to bring to market. In the industry, people used to say they could "make a living on generics alone."
In reality, dozens to hundreds of products have crowded into a single ingredient. For example, for the hyperlipidemia treatment ingredient "atorvastatin," 137 companies currently hold approvals for 356 generic products with the same ingredient.
But with the government's pricing overhaul, there is growing talk that "innovate or die." The industry anticipates potential restructuring such as closures of small drugmakers focused on generics or mergers and acquisitions among companies.
Because of this structure, corporations have focused on sales competition rather than product differentiation, while entrenching a trend of tepid investment in research and development (R&D) for new drugs that is directly tied to mid- to long-term growth engines, critics have said.
The government also put forward the aim of spurring innovation among domestic drugmakers and strengthening fiscal soundness of the National Health Insurance by overhauling the pricing system. Starting today, if there are more than 13 generics with the same ingredient, a stepwise price-cut scheme will apply to newly entering products.
In the industry, views both for and against the overhaul emerged. Still, there is consensus that the excessive glut of generics needs to be addressed.
An executive at a pharmaceutical distribution corporation noted, "There is a glut of domestically oriented generics far beyond the size of the patient population," adding, "If, like in Germany and other countries, generics are approved on a limited basis and managed at the source, challenges such as enhancing companies' global new drug development capacity and easing oversight of medicines will be addressed in sequence."
◇ A "carrot" for new drug development… nurturing innovative companies
In exchange for lowering generic prices, the government strengthened differential rewards for corporations that invest in research and development (R&D). Generics newly listed under the National Health Insurance by innovative drug corporations will be priced at up to 60% of the original drug's price, while those by quasi-innovative corporations will be recognized at around 50%.
Existing listed products will also receive a higher pricing rate than ordinary drugmakers for a set period, and the burden of price cuts tied to increased usage will be partially eased. Separate pricing preferences will apply to national essential medicines using domestically produced active pharmaceutical ingredients and to products that contribute to supply stability.
By introducing this differential reward system, the government aims to foster corporations with new drug development and R&D capabilities rather than high generic sales volumes. The intent is to use pricing not merely to lower prices but as a policy tool to induce corporations to invest in research and development.
The industry expects the "innovative drug corporation certification" to become a core competitive edge that determines corporations' profitability, going beyond a simple government designation. Even for the same generic, the applicable price level may vary depending on whether the company holds the innovative certification.
Notably, Hanmi Pharmaceutical(128940), Yuhan(000100), Daewoong Pharmaceutical(069620), JW Pharmaceutical(001060), and HK inno.N(195940) are fostering their own new drugs and improved new drugs as growth pillars. These corporations have steadily increased the share of sales from new drugs, technology exports, and overseas business compared with domestic generic sales, leaving them relatively better positioned to absorb the shock from the pricing overhaul.
Celltrion(068270), Samsung Bioepis, and other biosimilar corporations, as well as 알테오젠, LigaChem Biosciences(141080), and ABL Bio(298380), which are bio firms focused on technology exports, will see limited direct impact from the new system. That is because their core revenue sources are overseas biosimilar sales and technology licensing deals, not domestic generic insurance prices.
The government carried out a full overhaul of the innovative drug corporation certification system for the first time in 14 years. It raised the standard for the ratio of R&D investment to pharmaceutical sales and newly factored in contributions to supply chain stabilization, tightening certification criteria. By linking preferential pricing with the revamped certification, the government plans to pivot the industry structure toward research and development investment and new drug development.
◇ Generic-focused companies on alert… a survival test
Small and midsize domestic drugmakers with a high proportion of generics are on high alert. Companies say they have no immediate alternatives.
In particular, SMEs had boosted sales through generics, but now see cost cuts as unavoidable due to price reductions. A mid-tier drugmaker official said, "Even if we sell the same volume as last year, our results will inevitably fall, which is a deep concern." A Korea Pharmaceutical and Bio-Pharma Manufacturers Association (KPBMA) official said, "There could be pressure for internal restructuring of personnel or product portfolios."
According to the Korea Pharmaceutical and Bio-Pharma Manufacturers Association (KPBMA), the 2024 operating margin for 83 traditional domestic drugmakers is only 5.1%. This figure excludes corporations engaged in contract development and manufacturing (CDMO) for biologics, which are not affected by price cuts, and those with a high share of non-reimbursed items. With only slim profits even from drug sales, it is not easy to expand investment for new drug development.
Some drugmakers are turning to diversification. Shin Poong Pharm added the manufacturing of veterinary medicines and medical devices to its articles of incorporation in March this year, signaling a move into the companion animal market.
Some also see this as a chance to weed out so-called "paper pharmaceutical companies." An industry official said, "Some companies obtain generic approvals through joint bioequivalence studies, then outsource production and sales, muddying the waters," adding, "Quite a few corporations hold cash but do not invest in research and development; paradoxically, price cuts could serve as a starting point for shaping a healthier industry environment."
Joint bioequivalence means multiple drugmakers jointly conduct bioequivalence tests and obtain approvals for generic products. After launching products, some scrape by by outsourcing sales and taking a commission based on prescriptions. There is also an outlook that companies will concentrate on higher-profit medicines and lower contract sales organization (CSO) fees for less profitable products.
Some say this is a chance to root out illegal rebate practices stemming from the glut of generics. Because generics are similar in efficacy and price, sales efforts ultimately determine revenue. Fierce sales competition has often led to offering money or valuables to doctors and pharmacists to steer them to choose certain medicines. This inflates drug prices and shifts the burden onto the public.
An industry official said, "In the end, the government is signaling that rebates for generics can no longer continue," adding, "This could serve as a turning point to reduce such practices in the field."
Kwon Hye-young, a professor in the Department of Health Care Administration at Mokwon University, said, "From the companies' perspective, because prices have fallen, there is also the possibility they will expand rebate practices to increase usage," adding, "Even with price cuts, National Health Insurance cost savings may not materialize."