[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 is cause for concern. The reform plan aims to reduce the prices of domestically produced prescription drugs (generics) by up to 25.3%. Lowering drug prices may immediately improve the finances of the national health insurance system and reduce the burden on citizens. However, if we look deeper, this policy could halt the growth engine of the pharmaceutical and bio-pharma industry and undermine the very foundation that ensures timely and stable access to essential medicines for the public. Therefore, it requires careful consideration.

Drug pricing policy is not simply a matter of “how much to set the price of medicine.” 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 will inevitably depend on foreign pharmaceutical companies. Ultimately, the public’s access to medicines can only be secured on the foundation of a robust domestic pharmaceutical industry.

Domestic 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 pouring more resources into R&D than they are earning from their pharmaceutical business. As a result, they have developed 41 new drugs, and the number of drug candidates under development ranks third in the world after the United States and China.

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

Now that these achievements are becoming visible in both domestic and international 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 about 25% is implemented, it is clear that it will weaken the industry’s overall growth drivers, including R&D and facility investment, as well as reduce employment.

Since 1999, Korea has implemented drug price reductions more than ten times, and once drug prices fall, they are never raised again, so the effect is 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 total health insurance medical expenses fell from 29.5% in 2007 to 23.9% in 2023.

In contrast, in Taiwan, which the Korean government set as a benchmark for drug cost ratios in 2007, the proportion increased from 24.0% to 27.3% over the same period. This demonstrates that the government has successfully achieved insurance budget savings. The pharmaceutical industry has endured and contributed during this process, but its capacity is now extremely limited. The operating profit margin of the top 100 traditional pharmaceutical companies is only 4.8%, and their net profit is just 3%.

Questioning Whether the Policy’s Impact Has Been Properly Analyzed and Evaluated

A comprehensive evaluation of how such policies have affected the industrial structure, R&D capabilities, and stability of medicine supply has not been sufficiently conducted. Pursuing yet another drug price reduction without a long-term roadmap or a thorough review of the policy’s effects and side effects is undesirable in terms of policy credibility and sustainability.

According to overseas studies, a 1% decrease in pharmaceutical companies’ profits leads to a 1.5% decrease in R&D investment. This suggests that drug price reductions are not simply a matter of reduced corporate profits but are directly linked to the weakening of future treatment technologies and new drug development capabilities. Today’s drug pricing policy could limit public health options tomorrow.

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

Low Drug Prices Could Lead to Medicine Shortages

Korea is also experiencing growing instability in the supply of medicines. Over 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 of 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 essential medicines will inevitably cause supply chain instability and medicine shortages. The purpose of government policy is to serve the public interest, which is why drug price reductions aimed solely at fiscal savings cannot be the highest priority.

A paradigm shift in drug pricing policy is needed. We must move beyond viewing drug prices solely 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 energizes the economy.

The soundness of health insurance finances and industrial competitiveness are not conflicting goals. The industry must be healthy for public health to be protected. What is needed now is not a uniform price reduction 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 will redesign its drug pricing policy from a broader, more macro perspective.

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