President Lee Jae-myung announced a policy pledge during the election campaign to actively foster the pharmaceutical and bio industry as a future growth engine. One of the pledges attracting industry attention is "price compensation linked to research and development (R&D) investment." This means that the price of medicines from companies that invest heavily in R&D will be set higher than the current pricing structure.
On the 4th, there was a forecast in the pharmaceutical and bio industries that if the government accelerates the reform of the price-setting system, corporations that invest heavily in R&D and achieve results in innovative drug development could benefit. Conversely, there are views that it could pose a crisis for corporations that primarily operate in generic drug manufacturing.
◇Will the introduction of a performance-based pricing system accelerate?
The price-setting system linked to R&D investment was proposed by the pharmaceutical and bio industries ahead of the presidential election and included in the Democratic Party of Korea's second pledge document. Given that this policy has been consistently raised by the industry, the Ministry of Health and Welfare and the Health Insurance Review and Assessment Service (HIRA) have also been reviewing its feasibility.
The domestic industry has pointed to the price-setting system as one of the factors for low R&D investment. Currently, the price-setting system determines prices based on similar components or formulations, which the industry argues is an unfavorable structure for new drug development.
In the market, expectations are increasing among companies with significant R&D investment ratios. An analysis of the business reports released by each corporation indicates that Celltrion and Samsung Biologics are among the top pharmaceutical and bio corporations with large R&D investments. Celltrion invested 434.6 billion won in R&D last year, accounting for about 12.2% of the company's revenue. Samsung Biologics spent 392.9 billion won, which corresponds to 8.6% of its revenue last year.
Among traditional pharmaceutical companies, the largest R&D investor is Yuhan Corporation, which invested 268.7 billion won last year, representing 13% of its annual revenue. Daewoong Pharmaceutical invested about 234.6 billion won, which is approximately 18.5% of its revenue, while Hanmi Pharmaceutical invested 209.8 billion won, or 14%. Chong Kun Dang's annual R&D costs last year were 157.4 billion won, and GC Biopharma spent 131.7 billion won.
Those with a high ratio of R&D investment to revenue include Dong-A ST, HANALL BIOPHARMA, Hanmi Pharmaceutical, Yuhan Corporation, JW Pharmaceutical, and Daewoong Pharmaceutical. JW Pharmaceutical invested 83.2 billion won, which represented 30% of its annual revenue last year. Dong-A ST and HANALL BIOPHARMA also invested about 19% of their revenues in R&D last year, indicating a high ratio of R&D investment. Domestic companies generally invest about 10% of their revenue in R&D.
While domestic pharmaceutical and bio corporations are investing more actively in R&D than in the past, their level of investment remains low compared to global pharmaceutical companies. Major global pharmaceutical companies spend hundreds of billions annually on R&D. For example, Merck (MSD) invested $17.9 billion (approximately 24 trillion won) in R&D last year, Johnson & Johnson (J&J) invested $17.2 billion (approximately 23 trillion won), and Roche invested 13.04 billion Swiss francs (approximately 21 trillion won) in R&D.
◇Changes are expected for generics... re-evaluation targets may be impacted
If drug prices are set based on R&D investment, it is natural that companies with low R&D investment and those primarily focused on generic drugs may be disadvantaged.
In particular, the Democratic Party of Korea's plan includes implementing more frequent re-evaluations of reimbursement for generics to secure health insurance funds. If generics that have been on the market for a long time and are subject to reimbursement reviews fail to demonstrate efficacy, they may exit the market more quickly.
The current generic reimbursement re-evaluation system was implemented after reforms on July 2020. Generic products included in the Health Insurance Review and Assessment Service's re-evaluation must directly conduct bioequivalence tests for efficacy verification and meet all registration requirements for raw medicinal products to receive a maximum pricing limit of 53.55% compared to original drugs before patent expiration.
Currently, for each requirement that is not met in the re-evaluation of generics, the maximum price is reduced by 15%. Due to the influence of this reimbursement re-evaluation system, the number of generic medicines has decreased from 4,545 items in 2019 to 802 items in 2023.
Although the new government's specific plans for the re-evaluation of generic reimbursements have not yet been presented, the criteria for price setting may become more detailed, or the extent of price reductions may be expanded. In any case, there could be a crisis for companies focused solely on generics.
The industry hopes that the government will strengthen direct R&D support measures, considering the limitations of business structures and resource acquisition of domestic pharmaceutical and bio corporations. Recently, several corporations have reduced their R&D investment ratios due to the tightening investment market and increased burdens of selling and administrative expenses. This indicates that both a carrot and a stick are necessary.
The industry argues that it is necessary to increase funds aimed at bio venture companies developing new drugs and reform the national R&D budget structure focused on early-stage research to strengthen support for late-stage development to achieve tangible results. While the government's investment scale in the biohealth sector reaches 1.7 trillion won annually, the proportion allocated to new drug development is less than 20%.
Lee Kwan-soo, CEO of GID Partners and former vice chairman of Hanmi Pharmaceutical, said, "The public and private sectors must work together to execute strategies and establish institutional frameworks to enhance new drug development competitiveness."