[Desk View] Generic bias influencing drug pricing policy

The government decided to lower the price calculation standard for generic drugs from the current 53.55% of the price of the original drug before the patent expiration to 45%. Despite strong opposition from the pharmaceutical industry, the final decision is reportedly similar to the initial draft proposed last year.

In November 2023, the Ministry of Health and Welfare (MOHW) reported to the Health Insurance Policy Review Committee a plan to reduce generic pricing to approximately 40%. At that time, the MOHW suggested a plan to adjust drug prices to current levels, ranging from 45-50% to 40%. As products with prices above 45% are classified as targets of adjustment, the government intended that the prices of generic drugs should not exceed that threshold. The original plan was reflected in the final decision.

The pharmaceutical industry proposed 48.20% (a 10% reduction from 53.55%) as the figure that they can endure. However, at a Health Insurance Policy Review Committee meeting on the 11th, the MOHW presented a calculation rate in the low-to-mid 40%. Ultimately, while the MOHW secured an alibi of communication over the past five months, the outcome remains largely unchanged from the draft presented nearly half a year ago.

While this means that a 45% generic price standard would be reduced by 16.0%, the actual reduction rate grows exponentially when the government's complex price-cutting measures are applied.

Under the drug-pricing reform system, the price-cut rate for failing to meet the "highest price requirement" will expand from 15% to 20%. Since July 2020, generic products must meet two conditions to receive the highest price: conducting bioequivalence (BE) studies and using Registered Drug Substances (DMF). For each unmet requirement, the ceiling price drops by a set percentage. Failing both requirements currently results in a 27.75% reduction from the maximum.

When applying the new 45% base and the 20% penalty for unmet requirements, generics failing one requirement drop to 36% (a 20.9% drop), and generics failing both requirements drop to 28.8% (a 25.6% drop). 

By applying a reinforced tiered-pricing system to the drug pricing reform system, entry for late-mover generics would be completely blocked.

According to the guidelines following the drug pricing reform in 2020, even if a product meets both standard requirements, if there are already 20 or more identical formulations listed, the 21st product is listed at 85% of the lowest price of the existing formulations or 38.69%, whichever is lower). Currently, the 21st generic drug is set at 32.86%. Compared to the 53.55% maximum, this represents a 38.6% drop for the first product subject to tiered pricing. Prices for the 22nd and 23rd generics drop even further.

Under the new reform plan, the 13th generic drug (failing both requirements) would drop to 24.48%. Comparing the same 13th-entry generic, the ratio drops from 53.55% under the old system to less than half under the new reform. By the 13th and 14th entries, prices could drop to as low as KRW 14.98 and KRW 9.20, respectively.

Additional mechanisms have been added for price cuts even if a drug was listed at the highest price. To prevent market overheating upon the entry of the first generic, the MOHW intends to apply tiered price cuts to any generic that causes the number of identical formulations to exceed 13. ​Even if a company is among the first 12 and receives the 45% maximum, if subsequent entries push the total past 13, that product's price will be cut by 15% after one year. This means even the very first generic could see its price drop to 38.25% within 12 months, a 28.58% reduction from the current industry maximum.

The pharmaceutical industry argues that the government has meticulously designed to drop drug price over 20% while inhibiting genetic entry of generics.

The government's prejudice against generics surfaced amid the drug price reform process. It was based on the prejudice that the increase in generic use could be problematic. 

Health authorities repeatedly cite rising generic drug expenditures as a threat to the stability of the National Health Insurance (NHI). In 2024, generic drug spending reached KRW 12.44 trillion, a 36.8% increase from KRW 9.09 trillion in 2020. 

However, the government's argument is that the increased use of generics, which are cheaper than originals, actually saves the NHI budget.

Data show that for 14 of 16 dosages among the five most frequently prescribed active ingredients (including atorvastatin, clopidogrel, and rosuvastatin), the weighted-average price is lower than the price of the original drug. This structure demonstrates that as clinical sites prescribe more affordable generics, the overall weighted-average price falls below that of the originals, thereby contributing to fiscal savings. Critics argue the government has focused on statistics on total spending to justify price cuts while ignoring the per-unit savings generics provide.

The industry also points out that the government is ignoring existing approvals and regulations.

Since July 2020, the number of consigned generics has plummeted because companies must perform their own bioequivalence studies to secure higher prices. Since July 2021, the number of generics that can be approved using a single clinical trial is limited (so called '1+3'). 

In the past, it was common for dozens of pharmaceutical companies to obtain approval for consigned generics using the same data once a specific company received approval through its own BE testing. However, with the implementation of joint development regulations, 'unlimited replication of generics' is no longer possible.

In fact, these regulations have already stifled the entry generics. The number of prescription drug approvals dropped 38% from 4,195 in 2019 to 2,616 in 2020. Last year, only 747 prescription drugs were approved, an 82% drop in six years.

The MOHW rationalized the reform by pointing to excessive competition and significant increased number of small-scale firms. The MOHW noted that companies with annual production under KRW 1 billion grew from 54 in 2012 (18.9%). Then, the figure more than doubled to 121 in 2024 (39.3%).  ​

However, data details shows that the number of these small-scale firms is declining. The number of firms with an annual finished drug production value of less than KRW 1 billion increased from 51 in 2014 to 124 within just one year. While the growth of these firms slowed starting in 2016, it spiked again to 137 in 2020. Since then, the numbers have declined: down to 133 in 2021 (a decrease of 4 from the previous year) and to 121 in 2024, which is a reduction of 16 companies compared to 4 years prior.

​The government ignored the impact of the recent regulatory change and overestimated the entry of generics by comparing it with a figure from 10 years prior. Throughout the reform process, the pharmaceutical industry appealed for a policy compromise, citing concerns over reduced R&D investment and job losses.

While the government introduced the term "New Innovative Pharmaceutical Company" to offer price incentives for R&D-Intensive firms, the industry remains skeptical of its effectiveness. The industry views the government as having failed to communicate and as having made the system more complex. Ultimately, the industry's distrust of the government has grown.