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Emerging market: South Korea

Exploring the pharmaceutical and healthcare environment in countries of increasing growth and industrialisation

KoreaSouth Korea has been an amazing success story and the origin of much cutting-edge technology. If the economy continues to grow at the present pace, the country will have the third-highest gross-domestic product (GDP) per capita in the world by 2017. Its pharmaceutical market can now also be given 'Asian tiger' status. The past four years have seen total sales growth of 15.6 per cent, 13.5 per cent, 12.4 per cent and 13.8 per cent, respectively. IMS forecasts compound annual growth rate (CAGR) of 6.5 per cent through 2015, making Korea the fastest-growing developed market for medicines anywhere.

Currently ranked fourth in the Asia-Pacific region, after Japan, China and India, but ahead of Australia, its drug sales at manufacturer selling prices are the equivalent of $11bn. Considering that foreign innovative products did not gain access to generalised reimbursement until the second half of 1999, it is remarkable that multinational companies hold half of the top 10 prescription product sales rankings today and in total enjoy a 40 per cent market share.

As elsewhere in Asia, hospitals form the key segment for prescription generation, with 48 per cent of total sales arising from prescribing in outpatient departments and 32 per cent from inpatients.

A social health insurance system covers all citizens on a compulsory basis and offers a common package of benefits to all insured persons and their dependents. It has three sources of funding: contributions from beneficiaries (80 per cent); government subsidies (14 per cent) and tobacco surcharges (6 per cent), but has consistently run at a deficit. Though there are multiple cost drivers, including population ageing and low birth rate, the lack of a GP gatekeeper system, the dominance of private for-profit providers, unrestricted adoption of new medical technology, high numbers of physician consultations and hospital beds, and fee-for-service payment for providers, the main problem is that expenditure on healthcare, at just 6.8 per cent of GDP, is more than two percentage points below the Organisation for Economic Co-operation and Development (OECD) average.

Koreans are avid consumers of medicines. Pharmaceutical expenditure under National Health Insurance (NHI) doubled from 2001 to 2006 and accounted for more than 29 per cent of the health insurance budget every year since 2005. One trigger for the high cost inflation was separation of prescribing and dispensing functions that took place in 2000. The aim was to prevent the misuse and overuse of medicines but unintended consequences caused by a backlash by the medical profession (who had made more profit from dispensing than from medical services) included a switch to more high cost medicines and to longer treatment periods. Prescribing of original brands soared and the market share held by multinationals went from 9.6 per cent in 1999 to 22.7 per cent in 2000. Japan followed the same separation path, but over decades, while Korea, typically, opted for the 'big bang' approach.

With a target of bringing the medicine share of health costs down to 24 per cent by 2011, the Drug Expenditure Rationalisation Plan of 2006 initiated a number of reforms, most notably the replacement of a system whereby all medicines were reimbursed unless placed on a negative list, with a positive list system and a price negotiation process.

Access to the positive list and a maximum reimbursement price is a three-step process:

1. Reimbursement decision and maximum cost-effective price set by the Health Insurance Review & Assessment Service (HIRA)

A comparison is made between the new drug and already marketed substitutable ones with respect to clinical and cost effectiveness.

Results of a manufacturer-generated pharmacoeconomic study – a first for Asia - and budget impact analysis are needed for new molecular entities, new indications, a new administration route, or any new medicine claiming additional efficacy. Guidelines on economic evaluation have been produced by HIRA. 

2. Price negotiation between the applicant and the payer, the National Health Insurance Corporation (NHIC)

NHIC's unofficial target is to reduce HIRA's maximum proposed price by up to 20 per cent. In addition, manufacturer selling prices cannot exceed the average of those for the same product in the 'A7 ' (France, Germany, Italy, Japan, Switzerland, UK and US), though reference countries potentially encompass all OECD ones plus Singapore and Taiwan. 

If negotiations with 'necessary' drugs fail, arbitration and refund payments are possible to maintain the manufacturer's asking NHI price.  

3. Ratification of the decision and price notification by the Ministry of Health and Welfare

The entire process should take no more than 270 days, but averages 12-18 months.

The government has also devised multiple mechanisms to lower prices of existing products:

Price-volume linkage. Maximum 10 per cent price cut, once only, if, in any of the first five years, reimbursement claims volume exceeds expected usage volume by 30 per cent.

Triennial price re-evaluation. In 2002, prices were reduced to the weighted average level found in the A7 countries. The plan was to repeat the exercise every three years but so far this has not happened.

Review of marketed products. HIRA is undertaking a review of products marketed prior to introduction of the positive list, but progress has been slow and difficult. Some delistings and price reductions have been required in the only two classes reviewed to date, lipid lowering and anti-migraine drugs.

First generic approval. An automatic, once-only 20 per cent price cut applies to an originator brand following approval of its first generic.

Market-based actual transaction pricing. If the survey of actual transaction prices claimed by medical institutions over the course of 12 months reveals the weighted average market price of a product is lower than its existing maximum NHI price, then the maximum price will be reduced once a year by 80 per cent of the price difference, up to a maximum price reduction of 10 per cent.

As a result of improper promotion. The main in-market issues that have challenged the authorities in recent years have been high rebates, free stock, entertainment and other incentives offered by suppliers to hospitals for formulary access, to physicians for prescribing particular medicines, or to pharmacists for dispensing them. These acts are said to encourage unfairly the purchase or recommendation of certain medicines and to maintain their high end prices, and are considered illegal under local antitrust rules. Price cuts of up to 20 per cent are now required from any company confirmed as having 'disturbed the distribution order by offering bribery for sales promotion'.

The environment may be tough and highly competitive, but modern-day Korea is trying hard to shake off its reputation for lack of transparency in reimbursement decisions and unfair business practices, with the Free Trade Agreements signed with the US and the EU cementing the internationalisation process. 

Strength in biotechnology
Together with a number of multinationals there are about 250 domestic manufacturers, a few conducting full-scale R&D. But, with the support of government finance, it is biotechnology that has really taken off. This sector supports almost 600 start-up players grouped into four regional clusters, so watch this space. Seoul, the capital, is already one of the world's largest clinical research centres by trial numbers. Another government target is to become the region's leading medical tourism hub serving a million foreign patients each year by 2020. Add in the increasing likelihood of reunification with the 24 million people living north of the demilitarised zone, and it is hard to disagree with the slogan used by the national tourist office: 'Dynamic Korea'. 

The Author
Donald Macarthur
is an independent industry consultant and author of a new report 'Market Access Korea'

For details see www.justpharmareports.com

15th April 2011

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