U.S. drug giants to benefit, while Korean generic production suffers


The country’s pharmaceutical companies face tough times ahead with the new Korea-U.S. Free Trade Agreement poised to strengthen patent rights for U.S. drug giants, heaping strain on the generic-focused Korean industry.

Skyrocketing demand for beauty and health products catapulted Korea to the world’s 12th-largest pharmaceutical market valued at about $10 billion. Medicine takes up about 30 percent of the nation’s entire health care spending, far above the OECD’s average of 16 percent.

Its rising scale, coupled with the rapidly aging population, has made Asia’s fourth-largest economy attractive for foreign corporations. But the government’s control over drug pricing and reimbursement policies under the national heath insurance regime posed a challenge.

Under the agreement, the two countries will eliminate 8 percent tariffs on medical products over 10 years. Nearly 77 percent of related items will become duty-free upon effectuation, while another 20 percent on the list are given three years before implementation.

In addition, they agreed to upgrade intellectual property protection, tackle the lack of transparency in Korea’s health care system and combat unethical business practices.

“Tearing down market access barriers and improving protection and enforcement of intellectual property rights in Korea will have significant, positive effects for patients in both countries,” the Pharmaceutical Research and Manufacturers of America said.

Koreans will benefit from more diverse pipelines and a transparent system that rewards and provides incentives for innovation, U.S. officials said.

“Currently, the Korean pharmaceutical reimbursement system -- in which the National Health Insurance Corp. is effectively a single purchaser -- lacks transparency and clear and fair criteria to determine the value of patented medicines, thus systematically undervalues them,” the U.S. Chamber of Commerce said in a 2007 report.

Korean firms, however, remained jittery over how to sustain generic drug manufacturing.

“Given that most Korean firms rely on developing generic drugs, they would inevitably be battered by delays of new products or exacerbating financial instability if the business environment gets tricky,” Ko Eun-ji, a researcher at the LG Economic Research Institute, said in a report.

Patent rights have been a longstanding hurdle for the passage of the trade pact. U.S. firms complained that weak IP safeguards dampen sales of patented medicines here, whereas Korean drug makers called the deal a “kill plot” for the local industry.

The upshot of the controversy is a so-called “patent linkage” scheme, a measure to avert the marketing approval of generic drugs while the patents on the original products remain effective.

During a renegotiation last year, the two sides agreed to put off the system for three years after the pact goes into effect. Nonetheless, the clause is expected to provide a fresh growth driver for big players such as Johnson & Johnson, Pfizer and Bristol-Myers Squibb.

With their patents expiring on an unprecedented scale, multinational drug giants face one of the toughest times in their history.

New drug development options are depleting at a rapid clip. Research and development is deemed too costly in the wake of stiff generic competition and stoking political pressure on their margins.

The sea change has brought new opportunities for smaller life-science firms and biotech startups across the globe. However, Korea has a long way to catch up, industry observers said.

“The agreement’s IP and data protection mechanism is virtually meant to extend patents for U.S. companies,” a local industry official said.

“We are standing at an absolute disadvantage accordingly. It may thrust Korea’s pharmaceutical industry to the brink of collapse even before coming into full bloom.”

According to the government, the production of local generic drugs is projected to shrink by as much as 120 billion won ($104.4 million) annually for a decade. Trade deficits are expected to widen by around $16 million during the period. Officials estimate job losses at about 100,000.

Rep. Choi Young-hee, one of the hardliners at the Democratic Party, claimed the deal will do little to cut drug prices, citing precedent following the Korea-EU FTA.

“Though the trade deal abolished tariffs on some medicine, the impact has not been reflected in retail prices,” she told a parliamentary session, adding that that will be the case again.

In efforts to shore up the local industry, the government last year mapped out a five-year program worth 170 billion won, involving building infrastructure, regulation reforms and R&D support for small and medium-size firms.

However, Ko added that the FTA would establish grounds to reinforce fundamentals of the Korean drug sector and to shift from generic manufacturing to novel pharmaceutical innovation.

“Large companies are reluctant to embark on drug development because it costs enormous amounts of time and money with no assurance of success. This triggered a crisis among Korean drug makers who have no experience and will to take risks,” said Cho Joong-myung, chief executive of CrystalGenomics, one of the emerging Korean biotech ventures.

By Shin Hyon-hee (heeshin@heraldcorp.com)