[Gangnam Perspective] A smart solution is needed for drug price cuts

For several months now, tensions have been running high, as if a conflict could erupt at any moment. This time, however, it is not about the Middle East. It is about the pharmaceutical industry.
A conflict between the government and the pharmaceutical sector, sparked by a reform initiative launched by the government, has yet to subside.
It began late last year when the Ministry of Health and Welfare announced its "drug pricing system improvement plan." The core idea is to cut the price of generic drugs, which currently stand at 53.55% of the original drug price, by 25 percentage points to the 40% range, in order to ease excessive competition among domestic generics and reduce the financial burden on the national health insurance system. The percentages may feel abstract, but the government estimates that this change would save about 250 billion won per year, or 1 trillion won over four years, in health insurance spending.
With these savings, the government plans to expand reimbursement for innovative new drugs and stabilize the supply of essential medicines. Seen from this angle alone, it appears to be an important policy with no obvious reason to oppose it. The government also believes that lowering generic prices, which are higher than those in the Organisation for Economic Co-operation and Development (OECD), will help reform an industry structure that is overly focused on copycat drugs. In the United States of America (U.S.), generics are typically priced at 10–20% of the original, in Europe at 20–30%, and in Japan at 30–40%, which means Korean generics are relatively expensive.
Even so, the pharmaceutical industry has fiercely opposed the plan from the moment it was announced, calling it a "wrong decision" that could undermine the sector. Industry voices argue that instead of delivering the positive outcomes the government expects, the price cuts will trigger a decline in sales, job losses, and deteriorating management across the industry.
In fact, unlike the U.S. or Europe, where the pharmaceutical sector is centered on innovative drugs, Korea’s industry is largely built around generics. Unlike Japan, which has around 200 pharmaceutical companies, or Germany with just over 100, Korea has some 400 to 500 firms competing. Industry officials warn that if generic prices are slashed too quickly, small and mid-sized companies will be hit directly in their top line.
Above all, companies contend that if profits from generics shrink, it will become even harder to invest in new drugs, which is exactly what the government says it wants to encourage. According to industry estimates, a 25% cut in generic prices would reduce annual sales by more than 3 trillion won and could eliminate over 10,000 jobs. On top of that, lower profits would inevitably lead to reduced research and development (R&D) spending, making it much more difficult to develop new medicines. There is also concern that if domestic firms are weakened in this way, it could open the door for global pharmaceutical companies to further encroach on the Korean market.
The one encouraging sign is that both sides, which had been on a collision course, are now showing some signs of movement. The government is reportedly considering phasing in the price cuts from early next year, instead of implementing them all at once this July as originally planned. The pharmaceutical industry, for its part, has stepped back from its stance of absolute opposition and is signaling that it could accept a reduction to around 48%, or roughly a 10% cut from current levels.
The global bio industry continues to post remarkable growth every year, driven by innovative new drugs, despite risks stemming from the U.S. and ongoing supply chain instability. For Korea not to fall behind this global trend, it is more important than ever to secure new drugs through continuous R&D and technology acquisition. Strengthening the social safety net with a stable health insurance system, while supporting companies’ new drug development so that the domestic pharmaceutical sector can move up to the next level, is crucial.
There are times when a bold, all-or-nothing decision—like burning one’s boats, a strategy of breaking the cauldrons and sinking the ships to eliminate any retreat—is the right approach. But in issues where stakeholders are sharply divided, as they are now, it may be wiser to seek improvements through compromise and negotiation, even when views differ. One hopes the government and the pharmaceutical industry will put their heads together and find a smart solution that strengthens Korea’s competitiveness in the global market and enables the domestic sector to take a major step forward.
kim091@fnnews.com Reporter