[Market Pulse] Drug Pricing Policy Must Be Redesigned from the Perspective of Public Health and the Industry's Future

Drug Pricing Policy Is Not Simply About Setting Prices
We Must Move Beyond Viewing It Solely as a Means of Fiscal Savings

Noh Yeonhong, President of the Korea Pharmaceutical and Bio-Pharma Manufacturers Association

The government's proposed drug pricing reform plan is concerning. The plan aims to lower the prices of domestically produced prescription drugs (generic drugs) by up to 25.3%. While lowering drug prices may immediately improve the finances of the national health insurance system and reduce the burden on citizens, a closer look reveals that this policy could halt the growth engine of the pharmaceutical and bio-pharma industry and undermine the very foundation that allows citizens to access the medicines they need in a timely and stable manner. Therefore, caution is needed.

Drug pricing policy is not simply a matter of "how much to set the price of a drug." It is directly linked to the supply of medicines and, consequently, to public health. If domestic pharmaceutical companies falter, the development, production, and supply of medicines would ultimately have to rely on foreign pharmaceutical companies. In the end, citizens' access to medicines is secured only on the foundation of a robust domestic pharmaceutical industry.

Domestic publicly listed pharmaceutical companies invest 12% of their sales in research and development (R&D). Considering that their operating profit margin is around 10%, these companies are investing more resources into R&D than they earn from their pharmaceutical business. As a result, they have developed 41 new drugs, and the number of drug candidates for new drug development is the third highest in the world, following the United States and China.

Drug Price Cuts Undermine Growth Drivers of the Pharmaceutical and Bio-Pharma Industry

With these achievements now becoming visible in both domestic and global markets, we believe that Korea is at a golden time to become a powerhouse in the pharmaceutical and bio-pharma sector. However, if a large-scale drug price cut of around 25% is implemented, it is clear that it will weaken the industry's overall growth drivers, including reduced investment in research and development, decreased facility investment, and job losses.

Since 1999, Korea has implemented drug price cuts more than ten times, and once prices fall, they are never raised again, so the effects are long-lasting. According to one study, the cumulative fiscal savings since 1999 amount to about 63 trillion won, which is 2.46 times the annual drug expenditure. The proportion of drug costs in the total national health insurance benefit payments fell from 29.5% in 2007 to 23.9% in 2023.

In contrast, the proportion of drug expenditures in Taiwan, which the government used as a benchmark when establishing its drug pricing policy in 2007, increased from 24.0% to 27.3% over the same period. This proves that the government has successfully achieved fiscal savings in health insurance. The pharmaceutical industry has also contributed patiently throughout this process, but now its remaining capacity is extremely limited. The operating profit margin of the top 100 traditional pharmaceutical companies is only 4.8%, and their net profit is just 3%.

Questionable Whether Policy Impact Has Been Properly Analyzed and Assessed

A comprehensive assessment of how such policies have affected the industry structure, R&D capabilities, and the stability of medicine supply has not been sufficiently conducted. Pursuing another round of drug price cuts without checking the effects and side effects of previous policies, and without a long-term roadmap, is undesirable in terms of policy reliability and sustainability.

Foreign studies estimate that if a pharmaceutical company's profit decreases by 1%, its R&D investment decreases by 1.5%. This suggests that drug price cuts do not simply reduce company profits, but directly weaken the capabilities for future therapeutic technologies and new drug development. In other words, today's drug pricing policy could limit the healthcare choices available to citizens tomorrow.

Since the COVID-19 pandemic, the pharmaceutical and bio-pharma industry has become a core foundation of national health security. There are few countries with a self-sufficiency rate for medicines as high as 70%, and Korea is one of them. Thanks to this, we were able to successfully overcome the global public health crisis of COVID-19. I want to emphasize that at the center of this achievement was the robust pharmaceutical production system of Korean pharmaceutical companies.

Low Drug Prices Could Lead to Medicine Shortages

Korea is also experiencing growing instability in the supply of medicines. In the past six years, there have been 147 cases of medicine supply disruptions. The main reason is deteriorating profitability due to low drug prices. The self-sufficiency rate for active pharmaceutical ingredients remains around 30%. In particular, the self-sufficiency rate for penicillin ingredients is 0%, and for cephalosporin antibiotics, it is less than 30%. In this situation, further price cuts for low-profit prescription drugs or nationally essential medicines will inevitably lead to supply chain instability and medicine shortages. The purpose of government policy is to serve the public interest, and this is why drug price cuts aimed solely at fiscal savings cannot be the highest value.

A paradigm shift in drug pricing policy is needed. We must move beyond viewing drug prices merely as a means of fiscal savings and, instead, consider the sustainable development of the pharmaceutical and bio-pharma industry as a future strategic industry that supports public health and invigorates the economy.

The soundness of the national health insurance finances and the competitiveness of the industry are not conflicting goals. The industry must remain healthy to protect public health. What is needed now is not a uniform price cut for medicines, but a balanced drug pricing policy that protects both public health and the future of the industry. I sincerely hope that the government's drug pricing policy will be redesigned from a more macro perspective.

Noh Yeonhong, President of the Korea Pharmaceutical and Bio-Pharma Manufacturers Association