Korea 2014 Outlook: Not Much Positive News On Pharma

Because of continuing pressure on drug prices for the country’s National Health Insurance and on illegal rebates, the outlook for the year ahead is not positive for both Korean pharma and multinational companies.

SEOUL – Most industry watchers do not expect much change in Korea’s ongoing negative business environment in 2014 because of the government’s continued stance to remain tough on illegal business practices and to further cut drug prices to strengthen the financial status of the country’s National Health Insurance.

“Like in 2013, I don’t see any positive factors for pharmaceutical companies this year,” Jung Cheol-won of the Korea Pharmaceutical Manufacturers Association told PharmAsia News. “The tightened stance of the government toward lower drug prices and [illegal] rebates will remain the same as it was in the years 2012 and 2013.”

Following the drastic drug price cuts in April 2012, the Ministry of Health and Welfare is reinstituting the country’s market-based actual transaction price (M-ATP) system, which allows medical institutions to receive up to 70% of the price gap between reimbursement ceilings on NHI drugs and their actual purchase prices. The ministry is restarting the program to help remove illegal rebates used as sales incentives as well as to reduce costs for the country’s National Health Insurance (NHI) program (Also see "South Korea Health Minister Nominee Hints Of M-ATP System Review" - Scrip, 14 Nov, 2013.).

The expected restart of the M-ATP system in February will add more pressure on both local Korean pharma and multinational companies struggling to survive continued pricing pressure as well as a tightened government grip on irregular business practices, Jung said.

Both local companies and multinational companies operating in Korea expressed opposition to restarting the M-ATP system because it favored large hospitals with more purchasing power (Also see "South Korea Considers Restarting Market-based Actual Transaction Price System" - Scrip, 6 Nov, 2013.).

Declining Sales From Harsh Policies

Because of the harsh business environment, IMS Health Korea sales data showed that both local companies and global firms suffered from declining sales during the first nine months of 2013. Sales of most of the top 10 multinational pharma including the Korean unit of Pfizer Inc. were down during the January to September period while only the units of Boehringer Ingelheim GMBH, AstraZeneca PLC and Bristol-Myers Squibb Co. reported increased sales compared with the same period in 2012 (Also see "No Good News For Pharma In Korea As Most Companies See Sales Decline" - Scrip, 27 Nov, 2013.).

In addition to the price cuts in April 2012, the Ministry of Health and Welfare is now implementing a revised formula, known as the price-volume agreement (PVA) for 2015, which could potentially bring another blow to blockbuster drugs. The revised formula could trigger cuts on reimbursed drugs if sales increase by more than 10%, or by more than KRW 5 billion ($4.65 million) from the previous year (Also see "Korea Health Ministry Committee Approves New Price-Volume Formula For Drugs Over Industry Opposition" - Scrip, 18 Dec, 2013.).

Still, global companies can breathe a sigh of relief that the program was deferred until 2015 so that prices from 2013-14 can be compared.

“The implementation of a new drug price-volume agreement, in which drugs with health insurance claim growth of over 10% and claim amount growth of over KRW 5 billion year-over-year will be subject to price negotiations, [and] will be deferred for a year,” wrote Shinhan Invetment Corp. analysts in a Jan. 6 research note. “Drug-price reduction under the new system will likely be made in [the first half of FY2015] based on the comparison of health insurance claims in 2013 and 2014.”

The reimplementation of the policy will be a key policy variable, the Shinhuan analysts said, noting that the government had expected the policy to boost NHI finances and offer lower prices to patients, but it did not lead to such expected savings when it was introduced in 2010.

KRPIA Opposition

The Korean Research-based Pharmaceutical Industry Association (KRPIA), which represents multinational companies operating in Korea, said the revised PVA is expected to affect major drugs, which are core growth engines of pharma companies.

“Sanctions against these mainstream drugs in their major growth period will go counter to the principle of market economy and significantly affect future of the pharma industry,” KRPIA said. “A considerable number of drugs developed in Korea will also be included in these products, and the number of drugs subject to price negotiation is expected to further increase when the 10%-increase rule is applied to prospective new drugs that are anticipated to rapidly grow and to products with identical ingredients.”

The lobby group said the revised PVA arouses concerns that it may eventually increase social costs and aggravate the NHI financial burden by discouraging companies from developing new drugs due to serious loss in sales and by declining patients’ accessibility to new drugs.

Analysts Remain Cautious

Although most industry watchers do not expect a turn-around in the government’s stance against pharma and drug prices, some stock analysts predict the pressure on drug price reductions might be eased.

Shinhan Investment analysts said that “the risk related to drug price reduction has eased.”

Woori Investment & Securities’ analyst Brian Lee, meanwhile, said he remains neutral toward pharma this year, “as a number of negative events are expected to surface in the not-too-distant future, including: 1) the tightening of the price-volume control system (January 2014); 2) the possible reactivation of redemptions at market price (decision to be made in Feb.ruary2014); and 3) the start of stricter regulation pertaining to drug prices (early 2014).”

“We suggest adopting a selective approach towards Korean pharmas, focusing on the firms which are positioned to benefit from exports sales, strong R&D, and inorganic growth (based on M&A deals),” Lee wrote in a Jan. 9 research note.

“Backed by diabetes drug Trajenta [linagliptin] and hepatitis B treatment Viread [tenofovir], Yuhan Corp. should post the strongest top-line growth among top-tier pharmas,” Shinhuan Investment analysts said.

Yuhan began marketing Gilead Sciences Inc.’s Viread in 2012, and it is covered by Korea’s National Health Insurance as a first-line treatment for hepatitis B. It was listed at a price of KRW 5,285 ($4.88), compared to Baraclude’s (entecavir) KRW 5,878 price tag (Also see "Korea’s Yuhan Corp. Has No Plans To Pursue Gilead’s Hep C Drug For Korea" - Scrip, 5 Dec, 2012.).

Tighter Scrutiny Over Rebates

The government will also continue to clamp down on rebates and business irregularities in the pharma sector, in part to help boost local companies to focus on R&D instead of generics to be more globally competitive.

South Korean government prosecution investigators raided the offices of the Korea Pharmaceutical Information Center and IMS Health Korea in December 2013 on reported suspicion that KPIC illegally collected and distributed patients’ private medical information such as drug use, and shared it with IMS Health Korea (Also see "Korean Investigators Raid IMS Health, KPIC Offices For Alleged Misuse Of Patient Information" - Scrip, 12 Dec, 2013.).

Bright Spots For Celltrion, Hanmi Overseas

Although Korean pharma generally are struggling in the market, one bright spot is that a few companies such as Hanmi Pharmaceutical Co. Ltd. and Celltrion Inc. are doing well in overseas markets, analysts said.

Celltrion surprised the industry last year when CEO Seo Jung-jin said in April 2013 that he would sell his controlling stake in Celltrion to a multinational drug company (Also see "Korea’s Financial Regulator To Investigate Celltrion CEO On Alleged Insider Trading, Stock Manipulation" - Scrip, 8 Oct, 2013.).

Although no potential buyer is on the horizon, AstraZeneca PLC, Roche and Teva Pharmaceutical Industries Ltd. are rumored to be among suitors showing an interest in Celltrion (Also see "AstraZeneca, Roche, Teva Reported As Suitors For South Korea's Biosimilar Front-runner Celltrion" - Scrip, 8 Jan, 2014.).

Celltrion also appears to be moving smoothly toward launches of its biosimilar products. The company received approval from the Ministry of Food and Drug Safety for sales in Korea of Herzuma (trastuzumab), a biosimilar of Roche’s blockbuster Herceptin (trastuzumab) Jan. 15. In November, it unveiled positive results from a Phase I study of 150 patients for a biosimilar of Roche’s rheumatoid arthritis drug Rituxan/MabThera (rituximab), setting the stage to pursue earlier announced plans for a new Phase III design to meet European and U.S. regulations, possibly ahead of rival Samsung Bioepis Co. Ltd. (Also see "Celltrion Wins Korea Approval For Roche Herceptin Biosimilar" - Scrip, 15 Jan, 2014.).

The Health Ministry has been offering assistance to local Korean pharma to expand to global markets as seen in Hanmi’s bid to launch its modified version of AstraZeneca’s blockbuster Nexium (esomeprazole) in the U.S. (Also see "Korea’s Hanmi Hopes U.S. Esomeprazole Launch Will Counter Disappointing China Results" - Scrip, 8 Aug, 2013.).