[The Editors' Verdict] How Pharmaceutical Companies Fail in Overseas Business

Many overseas operations of pharmaceutical companies are hollow shells.

Eighty-five domestic pharmaceutical companies have 169 overseas subsidiaries (2022 Pharmaceutical Bio Industry Data Book). Since 2002, when 15 companies had 25 overseas subsidiaries, the number of companies expanding abroad has increased nearly sixfold, and overseas subsidiaries have increased sevenfold. Over the course of two decades, press releases about these expanded overseas subsidiaries have been filled with rosy phrases like "local establishment" and "sales growth." However, when Asia Economy examined the overseas subsidiary performance of the top 10 domestic pharmaceutical companies by sales last year, more than half reported net losses ranging from several billion to hundreds of billions of won. Some poorly performing overseas subsidiaries even dragged their parent companies into losses. Numerous other pharmaceutical companies have closed their overseas subsidiaries worldwide over the past four to five years.

Most overseas subsidiaries are not subject to disclosure, so aside from finding and reading the recent fiscal year financial status briefly noted under investment status in other companies’ business reports, individual investors have no way of knowing how these subsidiaries are operating locally.

By global standards, domestic pharmaceutical companies are small shops. According to consolidated financial statements, the total sales of 87 listed pharmaceutical and bio companies last year amounted to 33 trillion won, with a net profit of 2.27 trillion won. Combined, all listed companies are about the size of LG Energy Solution alone (sales of 33.75 trillion won and net profit of 1.64 trillion won). It is less than half of the US pharmaceutical company MSD’s sales last year, which were $60.1 billion (approximately 82 trillion won).

Targeting developing countries rather than the heavyweight Goliath markets, many overseas subsidiaries are struggling. Looking at Vietnam, the first overseas market for the domestic pharmaceutical industry, it becomes clear that developing countries are challenging markets. A consultant who has closely observed Korean pharmaceutical companies’ operations in this country explained: "Similar-sized companies bring drugs they sold in Korea. Their corporate level is second-tier, inferior to Japanese and Singaporean pharmaceutical companies (which are first-tier in generic drug public bidding), and their prices are higher than second-tier Chinese products, so they are not chosen. They try to pivot to health functional foods or mask packs, but locally, these are unknown brands priced several times higher than Chinese or Indian products, so distribution channels do not open. They helplessly burn through their capital."

South Korea’s annual pharmaceutical production is 29 trillion won, accounting for only 1.2% of the country’s gross domestic product. Three hundred eighty-one pharmaceutical companies (based on finished drug production) compete for market share here. Companies satisfied with staying in this small market inside a well are not guaranteed survival. Despite difficulties, global challenges are essential. There are also success stories.

Beijing Hanmi Pharmaceutical has set itself up as a "Chinese company" with the owner residing locally, developing and selling medicines for the local market unrelated to Korea. Last year, Beijing Hanmi Pharmaceutical accounted for one-quarter of Hanmi Pharmaceutical Group’s total sales and nearly half of its operating profit. Celltrion’s chairman and vice chairman divide responsibilities between the US and Europe, personally visiting hospitals to conduct sales. The company has established sales subsidiaries in 32 countries worldwide. Shinpoong Pharmaceutical’s Vietnam subsidiary, based on 28 years of grassroots operations, now produces over 100 types of medicines and health functional foods, placing them on local pharmacy shelves and even exporting to other Southeast Asian countries, establishing itself as a small but solid company.

Although company sizes and characteristics differ, these companies share the commonality of betting their company’s fate on overseas business and dedicating long-term efforts. Pharmaceutical companies considering overseas business should refer to both Vietnam’s difficult case and the success stories of these three companies.