GSK Expands In Korea With Purchase Of 9.9 Percent Equity Stake In Dong-A Pharma

SEOUL - GlaxoSmithKline is paying KRW142.9 billion ($128.7 million) to acquire a 9.9 percent stake in South Korea's leading Dong-A pharmaceutical and OTC company. The strategic alliance should help GSK gain market share in the rapidly growing Korean pharmaceutical market.

After the transaction is completed, GSK will be the second-largest shareholder in Dong-A following the 10.59 percent share owned by its Chairman Kang Shin-Ho.

The initial focus of the collaboration will be to co-promote products from both companies in the primary care market in Korea, GSK announced May 11.

A new business unit will be created within Dong-A to manage the collaboration to best capture additional synergies, which could include partnerships on select Dong-A new chemical entities leveraging GSK's global commercial infrastructure and expertise as well as co-development of branded generics, GSK said.

"It is an innovative partnership to support GSK's growth and diversification strategy," said GSK Korea General Manager Kim Jin-Ho, who noted that the two firms will move together to establish a market-leading primary care organization that will increase accessibility to their products.

Dong-A spokesman Yeom Sang-hyuk told PharmAsia News that the deal should help Dong-A to accelerate its transformation into a "true global player" by taking advantage of GSK's product pipeline and global marketing network. In exchange, he said, Dong-A will help GSK grow its franchise in Korea.

"Even though it uses GSK's global sales network, Dong-A will need some amount of time to actually enter foreign markets," Chung Bo-Ra, a healthcare analyst at Daishin Securities, told PharmAsia News, while adding that GSK should "be able to build up its market share taking advantage of Dong-A's strong domestic sales network in Korea."

"It's fair to say that GSK and Dong-A are forming a united front against potential setbacks," said Bae Ki-Dal, a medical analyst at Shinhan Investment Corp. "Since some of the patent rights of GSK's main products are to expire during the second half of this year, GSK wants to make up for the potential loss through partnering with Dong-A."

GSK, like other Western pharmaceutical giants, has had few options other than to diversify, as there has been little growth in established pharmaceutical markets (Also see "GlaxoSmithKline's Witty Plays Down Impact Of U.S. Health Care Reform" - Pink Sheet, 3 May, 2010.).

The company's consumer healthcare sales grew 9 percent to $1.87 billion in its fiscal 2010 first quarter, while the overall market grew an estimated 1 percent in the period, according to GSK's April 28 earnings release. Growth also came from OTC drugs, which increased 11 percent to $962.5 million (The Tan Sheet, May 3, 2010).

GSK Korea reported sales of KRW 434 billion in 2009 and is ranked the number 5 pharmaceutical player in the Korean market.

The Korean pharmaceutical market has seen double-digit growth from 2006 to 2008, and is the 13th largest drug market in the world, according to IMS Health.

Dong-A is the leading pharma in Korea, with a wide range of proprietary and generic products. Its sales in 2009 rose 13 percent compared to 2008 to KRW 800 billion ($720.7 million). Its shares have been listed on the Korean Stock Exchange since 1970. Although KOSPI suffered a modest loss due to global financial concerns in Europe, Dong-A stocks rose 1.22 percent to KRW123,500 on Wednesday.

The deal with GSK comes at a time when Dong-A is fiercely fighting to maintain its No.1 position, which is often challenged by local vaccine company Green Cross.

Dong-A recently acquired Korea's Samchully Pharmaceutical amid some concerns that rival Hanmi Pharma might engage in a hostile takeover of Dong-A. Through its own holdings and others, Hanmi Pharma owns more than 9.6 percent of Dong-A now.

Marriage Of Necessity?

Meanwhile, analysts also noted that multinational pharmaceutical companies might have exhausted their ability to expand market share of branded products in Korea, and might seek strategic alliances like the GSK-Dong-A partnership to expand their reach in the country.

Daishin's Chung also said the Korean government's tougher stance on generic drug makers in an effort to be more globally competitive could have prompted Dong-A to seek a foreign partner.

For example, Korea's FDA is now requiring local generic makers to pass bioequivalence tests when producing copies of branded originals with more than two active ingredients (Also see "Generics of Complex Drugs Must Pass Korea FDA's Bioequivalence Test; Another Positive Development for MNCs" - Scrip, 7 May, 2010.).

Last year, South Korea's state-run health insurance corporation said it would sue 104 pharmaceutical companies - mostly local producers of generic drugs - for selling medicines that failed bioequivalence tests (Also see "Korea Moving To Sue 104 Drug Firms, Including Some MNCs, For Selling Substandard Generics" - Scrip, 23 Jun, 2009.).

Compounding the bioequivalence issue is the recent passage of "anti-rebate laws" that enable courts to punish both contributors and receivers of kickbacks, which could also hurt local companies because doctors will be more inclined to prescribe branded products rather than risk the perception of having accepted local rebates for generics (Also see "Korea's Anti-Rebate Laws Seen Sparking More Demand For MNC Products" - Scrip, 3 May, 2010.).

- Peter Chang ([email protected])