[Editorial] New drug pricing policy

The government’s plan to cut drug prices by an average of 17 percent starting next year has triggered vehement protests from the domestic pharmaceutical community. On Thursday, an alliance of 10 pharmaceutical-related organizations issued a joint statement, declaring an all-out struggle against the government’s scheme, which was announced on Aug. 12.

Represented in the group were virtually all members of the pharmaceutical community ― pharmacists, local and multinational drug manufacturers, pharmaceutical scientists, drug wholesalers and exporters, as well as other professionals.

Asserting that the government’s “ill-conceived” plan would shake the pharmaceutical industry to its roots, they pledged joint efforts to block it from being implemented. They plan to hold a large-scale rally in the middle of this month to step up their protests.

The pharmaceutical industry’s anger is understandable, given the imminent large price cuts. A report released by the Korea Pharmaceutical Manufacturers Association forecast that the scheme would reduce the industry’s annual sales revenue by 2.1 trillion won.

On top of that, the report said the industry would suffer additional revenue reduction amounting to 890 billion won a year due to a set of measures the Ministry of Health and Welfare has introduced since last year. When combined, these steps will knock some 3 trillion won off the industry’s total annual revenue, which reached 12.8 trillion won last year.

The report says a revenue cut of this size is too large for pharmaceutical companies to digest through belt-tightening measures. As a result, many firms would be forced to fold. The report claimed that some 20,000 of the industry’s 81,200 workers would lose their jobs.

The Ministry of Health and Welfare, however, has a different story. It says its plan will boost the competitiveness of the domestic pharmaceutical industry by encouraging investment in R&D. Moreover, it says, the scheme will lower the share of drug expenses in the nation’s total health care expenditure from the current 29.3 percent to around 24 percent by 2013.

The ministry says that domestic pharmaceutical companies have thus far had an easy life thanks to the government’s misguided drug pricing formula introduced more than a decade ago. It allows domestic companies to earn profits easily by producing generics, which refer to drugs that have the same ingredients and effects as the original brand name drugs.

The rationale behind this pricing scheme was that it would enable domestic firms to make money necessary to invest in R&D on new products. But many companies used their profits for other purposes, including provision of kickbacks to doctors and pharmacists in return for prescribing their products.

The ministry’s new pricing policy is designed to squeeze the profits from generics. This approach makes sense as it would create incentives for pharmaceutical companies to develop new products. It will also help curb drug costs and make the state-run health insurance program sustainable.

The ministry’s plan may force some companies to shut down. But this is not a cause for concern, given the large number of players ― more than 260 ― crowding the small domestic market. It is rather necessary to weed out nonviable companies to create the room for growth for healthy players.

The KPMA argues that a drastic price cut would make domestic drug producers unable to invest in R&D. This argument is not persuasive, given that they did not invest much in R&D when they had the resources. Rather than stir up protests, pharmaceutical companies should search for ways to adjust to the new reality.