Analysts Skeptical About Ability Of Korean Government To Draw Investors To Risky R&D Fund

SEOUL - Investors and analysts are voicing skepticism about the Korean government's ability to successfully draw enough investors into a KRW2 trillion ($1.7 billion) R&D fund to help local companies develop innovative new drugs.

Announced earlier this month, the fund is seen as an incentive for Korean pharmaceutical companies to shift their focus from making generics to engaging in innovative drug research and development, which the government says is desperately needed to launch globally competitive products (Also see "Korean Government Announces Joint Fund To Beef Up Local Pharma Industry" - Scrip, 10 Feb, 2010.).

Details remain to be hammered out, but the fund is expected to be invested in by the government, government-funded corporations, local pharmaceutical companies and local and foreign venture capital firms, the Korean government said.

"It remains to be seen whether the government successfully secures the funds," Chung Bo-Ra, healthcare analyst at Daishin Securities, told PharmAsia News. "The government hopes to draw investment from both local and multinational companies, but creating such a big KRW2 trillion fund from both local and foreign investors will not be easy."

The idea for the creation of the fund was triggered by mounting calls from the public and economists that local generic-dependent pharmaceutical companies should build up their own product pipelines to be able to compete in global markets, much like the country's big conglomerates such as Samsung, Hyundai and LG Life Sciences.

The government is moving to use the fund for mergers and licensing technologies of local pharmaceutical and medical device companies in the coming decade.

Chung's pessimistic view on the creation of the fund was shared by Korea Pharmaceutical Manufacturers Association spokesman Lee Jin-Seung, who said that many potential investors will be reluctant to join the fund because of the high risk.

"Generally, you invest your money into something you expect to draw a profit from, but I wonder how many investors will join the fund that will be invested into the high-risk pharmaceutical sector," Lee said while referring to the current weak base of the local pharmaceutical industry.

Most of the 870-plus Korean pharmaceutical companies are small and are not in a hurry to change, analysts said.

And, if businesses are growing by offering only generics and rebates to hospitals, "who would feel the need to invest in R&D to develop new globally competitive products?" an industry watcher said. "They don't want to take the risk of developing new drugs because they know development of new products takes a long time and requires a lot of money."

That risk aversion has kept the local industry humming along by selling generics.

Korean Pharmaceutical Companies Invest Only 5 Percent Of Annual Sales Into R&D

Korean pharmaceutical companies invest a scant 5 percent of annual sales into research and development; hence, the Korean pharmaceutical market only accounts for 1.5 percent of the global market, according to government reports.

This business practice is triggering a bigger problem for the Korean economy - a widening deficit in the country's trade balance.

As Korea is increasingly dependent on imported drugs and medical devices, the country's trade deficit in biomedical products has been on an upward trajectory in recent years, rising to $2.28 billion in 2008 from $1.54 billion in 2005.

In 2007, South Korea's top 10 pharmaceutical companies spent an average 5.1 percent of sales on R&D investment, compared with 17.6 percent by the top 10 global companies including Pfizer and GSK, the government said.

The government said the annual production volume of 74 percent of the country's 250 leading local pharmaceutical companies fell below KRW50 billion ($43.72 million) as of 2007.

Local pharmaceutical R&D investment has resulted in only 16 new products so far, or roughly 1.6 new products each year, compared with 11 new products in the U.S., 17 in Europe, and nine in Japan.

About 70 percent of medicines that are covered by the country's medical insurance are "generics," said the government, which added that local pharmaceutical companies spend significant funds on "rebates" to boost sales of generics.

Health Ministry to Implement New Drug-Pricing System; Bad News for Locals

As part of an effort to root out illegal rebates, the Ministry for Health, Welfare and Family Affairs said it would launch a new "drug-pricing system" in October aimed at compensating hospitals and drug stores when they buy drugs at lower prices than their government-set maximum prices (Also see "New Pricing System Could Deal A Blow To South Korea's Generic-Dependent Companies" - Scrip, 19 Feb, 2010.).

The Korea Pharmaceutical Manufacturers Association has been calling for doctors to be criminally punished for receiving illegal kickbacks, and on Feb. 19 South Korea's Minister of Health, Welfare and Family Affairs Jeon Jae-hee warned that the ministry might enlist a special state prosecutor to fight kickbacks offered to doctors (Also see "Korean Health Minister Could Enlist Special Prosecutor To Fight Kickbacks By Drug Makers" - Scrip, 22 Feb, 2010.).

- Peter Chang ([email protected])