[New Wave] A Different Clinical Perspective from the Government's Viewpoint

The government announced three major new industries in May 2019, declaring its intention to develop the biohealth industry to a world-class level. This forward-looking commitment to fostering the pharmaceutical bioindustry seems to have gained even more momentum in the era of the novel coronavirus disease (COVID-19). Such efforts appear poised to recreate the post-semiconductor myth in the pharmaceutical bio sector in the near future.

These efforts are yielding tangible results. Pharmaceutical exports in the first half of 2020 increased by 61% compared to the first half of 2019, contrasting with an 11% decrease in total exports across all domestic industries, opening a new horizon in the 120-year history of the pharmaceutical bioindustry. Cumulative export performance through the third quarter of this year has already surpassed last year's total export figures, and in May, August, and September, the trade balance turned positive for the first time in history, fully demonstrating the potential of this sector as a future growth industry for South Korea.

Only about ten countries worldwide have achieved pharmaceutical self-sufficiency. Among them, many still rely on imports of medicines developed by multinational pharmaceutical companies from the United States and Europe. A representative and core technology area of the pharmaceutical bioindustry is the clinical trial phase of new drug development. Clinical trials for new drugs require astronomical costs and time, with very low success rates. However, if successful as a global new drug, it significantly contributes to overcoming severe and intractable diseases among the nation's citizens and reducing medical expenses, and furthermore, it can enhance the country's prestige worldwide.

Due to these unique characteristics, clinical trials are extremely important in new drug development. The clinical trial phase is the most costly and has the highest failure rate, making it a critical stage to overcome in research and development (R&D). According to the U.S. Food and Drug Administration (FDA) investigation of success rates by clinical trial phase, Phase 1 has a 63.2% success rate, Phase 2 has 30.7%, Phase 3 has 58.1%, and approval has 85.3%. Excluding the candidate substance stage, the average success rate from Phase 1 clinical trials to new drug approval is 9.6%.

Considering the unique nature of new drug development clinical trials, the government revised the Restriction of Special Taxation Act to foster new industries, improving the system so that R&D costs incurred in clinical trials conducted domestically and overseas can be reduced through tax benefits. This government decision reflects recognition of the importance of R&D, which has a high failure rate but can create high added value, and its application.

However, it is problematic that contradictory systems are applied with different perspectives on clinical trials for new drug development. Representative issues include the application of value-added tax (VAT) on clinical trials, non-application of tax credits for investment in clinical trial drug manufacturing facilities, non-application of insurance benefits for comparator drugs used in clinical trials, and the application of general tariffs on imported drugs for clinical trials.

The government seems to view clinical trials for new drug development partly as the supply of research services related to new theories, methods, processes, or formulas within the scope of R&D, while on the other hand, perceiving them as commercial acts for productization within the scope of medical acts aimed at treating patients. Therefore, just as the government has applied tax benefits through R&D recognition for the critical clinical trial phase in new drug development, it is necessary to improve the system by applying consistent standards and judgments to those clinical trial activities that are currently regarded as commercial acts under some systems.

Jung Yuntaek, Director of the Pharmaceutical Industry Strategy Research Institute