With price cuts for generic drugs looming, small and midsize drugmakers are knocking on law firms' doors. If they earn certification as "innovative" or "quasi-innovative" pharmaceutical corporations, they can delay for several years the point at which prices fall to a final 45%. Because the paperwork is complex and the evaluation criteria are strict, drugmakers are willing to pay legal advisory fees running into tens of millions of won.
In March this year, the government finalized a drug price reform plan to lower the pricing rate for generics and patent-expired medicines from 53.55% to 45%. Starting in Apr. next year, prices will step down to 51%→49%→47%→45%. This is a significant blow to small and midsize drugmakers that have built their prescription drug (ETC) businesses around generics.
That is why attention is turning to innovative and quasi-innovative certifications. The government applies special provisions allowing innovative corporations to keep prices at about 49% for four years and quasi-innovative ones at 47% for three years. The higher the share of generics, the more profitability differences can accumulate.
The Ministry of Health and Welfare issued a new certification notice for innovative pharmaceutical corporations on the 18th of last month and began accepting applications. The deadline is on the 18th. The Ministry of Health and Welfare expects around 100 companies to apply. According to the Korea Health Industry Development Institute (KHIDI), there are 296 domestic drugmakers classified under related sectors such as pharmaceutical manufacturing.
But preparing the documents is no small task. At least eight types must be submitted, including the application form; certificates verifying drug sales, research and development expenses, and exports; statements on social responsibility and ethics; and clinical research status.
The qualitative assessment is a particular hurdle. As the point-deduction criteria for rebate violations have been tightened, management systems for contract sales organizations (CSOs) are expected to face scrutiny. A representative at a drugmaker that previously earned innovative certification said, "For quantitative evaluations you can meet the benchmarks, but qualitative items ultimately come down to argumentation, which is hard."
The quantitative assessment is not easy either. If the average drug sales over the past three years are under 100 billion won, research and development spending must be at least 9% of sales; if 100 billion won or more, at least 7%. The minimum research and development expense threshold also rose from 5 billion won to 7 billion won.
Even if research and development spending increases, if sales rise faster, the ratio of research and development to sales falls. This can be a particular burden for midsize drugmakers with strong sales growth. According to KHIDI, last year the 106 midsize drugmakers posted 31 trillion won in sales, up 6.3% from the prior year. The increase outpaced the 15 large drugmakers (4.9%) and the 175 small drugmakers (5.3%).
The way research and development spending is calculated is also strict. Based on the applicant corporation's separate financial statements, research and development carried out by subsidiaries is not recognized as the parent's performance. Research spending on medical devices, health functional foods, and veterinary drugs is also excluded. Only research and development expense for human pharmaceuticals is recognized.
For small and midsize drugmakers attempting certification for the first time, the burden is considerable. Many lack specialized personnel.
Recently, interest has been growing in certification as quasi-innovative pharmaceutical corporations, which have a lower bar than innovative status. For quasi-innovative, if drug sales are 100 billion won or more, the research and development-to-sales ratio must be at least 5%, and if under 100 billion won, at least 7%. HLB Pharmaceutical(047920), which recorded separate sales in the 150 billion won range last year, is also said to be pursuing quasi-innovative pharmaceutical corporation certification.
Law firms are doing more than just reviewing documents. They assess research and development, clinical, and export performance to gauge certification prospects, and help build supporting materials and proof systems. They also analyze how price preferences tied to certification would affect revenue. Advisory fees at large law firms reportedly start from tens of millions of won.
An attorney at a large law firm said, "There has been a clear increase in corporations preparing to apply for innovative pharmaceutical corporation certification," citing interpretation of the scoring table as the area corporations find most difficult.
The attorney said, "They ask various questions, such as how to make up for a slight shortfall against the criteria and whether only disclosed research and development is recognized," adding, "Corporations preparing certification on their own also ask what materials would help their application."
It is also reported that some corporations are making early contact regarding quasi-innovative pharmaceutical corporation certification to prepare for the system's implementation. The related notice has not yet been issued.
Industry voices say the price reform aimed at boosting research and development investment is instead inflating "price defense" expenses. Another industry representative said, "We understand the policy's intent, but for small and midsize drugmakers, we have no choice but to spend on certification preparation to protect prices right now," adding, "A policy meant to spur innovation has created yet another regulatory compliance expense."