Uncertain Outlook Remains Despite No Recent Price Cuts
BMI View: Although medicine prices have remained stable for now, the South Korean pharmaceutical market remains in a state of uncertainty as companies recorded negative financial growth in Q312. BMI believes the government will continue to seek to lower drug prices in bid to narrow the deficit between income and health insurance payouts.
Despite attractive fundamentals, we expect the South Korean pharmaceutical industry to suffer from the government's erratic price cuts. In Q312, domestic drugmakers continued to record negative revenue growth: Handok Pharma's sales fell by 10.2%, followed by Bukwang Pharma (8.6% fall), LG Life Sciences (8.0% fall) and Daewoong Pharma (6.2% fall). That said, some firms saw positive revenue growth, with Hanmi recording a strong of 12.2% in Q312. In addition to negative growth, pharmaceutical firms have also withdrawn unprofitable products off market. Prime Pharmaceutical has withdrawn 121 items, while United Pharmaceutical, RP Corp and Choongwae have withdrawn 110, 70 and 36 drugs respectively.
|Mostly Negative Growth|
|South Korea - Revenues Generated By Selected Pharmaceutical Firms, KRWmn|
Since the medicine price cut in April 2012, there has not been any significant nation-wide price cuts and we have maintained our expenditure forecast for 2012. In 2011, the South Korean pharmaceutical market reached a value of KRW16,392bn (US$14.8bn). We expect the market to grow by 3% (falling by 2.9% in US dollars term) to KRW16,877bn (US$14.4bn) in 2012. Over the long term (to 2021), the market will grow at local compound annual growth rate of 4.4% to KRW25,158bn (US$25.2bn).
|South Korea - Pharmaceutical Sales, KRWbn|
However, despite the absence of a nationwide price cut, there has yet to be a resolution between the government and drugmakers. The government is continuing to use price cuts as a tool to stem illegal rebates; in October 2012, the Ministry of Health and Welfare (MOHW) announced its intention to cut the drug prices of Otsuka Korea's and Jinyang's products after a hearing in January 2013. It expects to save approximately KRW900mn (US$0.82mn) should the prices of these 12 drugs be reduced. In the same month, the South Korea Food and Drug Administration (KFDA) planned to suspend the sales of drugs from 32 pharmaceutical companies that have been accused of illegal rebates.
Pricing pressure will continue, given that both the consumers and the government are seeking to cut drug expenditure. In November 2012, it was reported that consumer advocacy groups are considering filing a petition to lower the prices of three drugs after the national audit revealed these prices were set in favour of drugmakers. In October 2012, a report submitted to Congress by the MOHW showed government reimbursement to healthcare providers may have to be delayed as there is an outstanding balance of KRW700bn (US$$643mn), a 62.2% increase from 2011. Data from the National Health Insurance Corporation (NHIC) showed it has been in deficit since 2007, where the income collected from the premiums was lower than that paid out reimbursement. Given the ageing population, we expect the deficit to widen due to higher drug consumption, forcing the government to increase premiums and implement more drug price cuts.
|South Korea - National Health Insurance Corporation's Income Statement, KRWbn|
It Is Not All Gloom And Doom
We maintain our view that the government's policies will force some firms to change their strategy from commercialising generic drugs to developing more innovative products such as biopharmaceuticals. For example, Hanmi has been a strong outperformer, and this was attributed to the firm's strategy in research and development (R&D). In a July 2012 survey by the Korea Health Industry Development Institute, Hanmi plans to spend KRW2.15trn (US$19.8bn) by 2020 on R&D. It spent 14.3% (KRW47.3bn (US$43.5mn)) of its sales on R&D in H112. In addition to R&D it has also expanded into China where it recorded CNY207mn (US$33.2mn) sales, which was a 38.4% increase from Q311.
Increasing Foreign Interest
According to local media outlet Korea JoonAng Daily, Israel-based Teva Pharmaceutical Industries is interested in acquiring a South Korean pharmaceutical firm, with Handok Pharmaceutical being a possible target. Handok Pharmaceutical had previously answered the question from Korea Stock Exchange on November 6 2012 stating that it is in talks with Teva regarding the establishment of a joint venture.
Teva's interest in South Korea is unsurprising given that the country has an affluent and increasingly ageing population. Its strong portfolio and marketing experience in generic drugs is also an appropriate fit as generic drug sales as a percentage of total pharmaceutical sales was 31.8% in 2011. In BMI's Q113 Asia Pacific Pharmaceutical Risk/Reward Ratings, South Korea ranked third out of the 18 key markets in the region, highlighting its attractiveness as a pharmaceutical market. Should Teva successfully expand in South Korea, it will be a threat to the South Korean domestic firms which develop mostly generic drugs.