"Do we really need BE testing for already-listed generics?"

The Ministry of Health and Welfare (MOHW) finalized the "Measures to Improve the National Health Insurance Drug Pricing System"

The top-tier generic revenues evaporate by 16%...generics that have not undergone BE testing 21%↓

Companies are considering minimizing price cuts for drugs that meet requirements

There will be numerous instances of BE testing for already-listed generics

The pharmaceutical industry is assessing potential losses from price cuts for already-listed generic drugs. Substantial losses are expected as the government has officially announced that the new, lower price calculation rates will apply to already-listed generic drugs.

With the standardized price calculation rate lowered and the highest price requirements expanded, generics without direct bioequivalence (BE) testing are expected to see their prices drop by more than 20%. There may be instances where companies rush to conduct bioequivalence studies on already approved products to avoid price reductions.

On the 26th, the Ministry of Health and Welfare (MOHW) finalized the "Measures to Improve the National Health Insurance Drug Pricing System" during a meeting of the Health Insurance Policy Review Committee, confirming that existing drugs will be adjusted based on the revised calculation standards.

Under the reformed system, the price for both off-patent original drugs and generics will decrease from 53.55% to 45% of the new drug's pre-patent-expiry price. The MOHW plans to categorize already-listed drugs into groups based on whether they were listed before or after 2012 and gradually adjust them to the 45% level. Both generics and the off-patent originals with listed generics are subject to these cuts.

To maintain drive for new drug development, the MOHW will grant temporary exceptions for "Innovative" and "New Innovative" pharmaceutical companies. Under this scenario, Innovative companies will have their generic price calculation rate set at 49% for four years, while "New Innovative" companies will receive a rate of 47% for three years before eventually reaching the 45% criteria. Companies that do not fall into these categories will also face price cuts over a four-year period, likely dropping to 49% next year, 47% in 2028, and finally 45% in 2029.

Under the reformed system, the price for both off-patent original drugs and generics will decrease from 53.55% to 45% of the new drug's pre-patent-expiry price; a generic failing one requirement will drop to 36%, and one failing both will drop to 28.8%.

Pharmaceutical companies are primarily concerned about the loss resulting from these price adjustments on existing products. For instance, if a product with annual sales of KRW 10 billion has its price reduced from 53.55% to 45%, it mathematically results in an annual revenue decrease of KRW 1.6 billion. Effectively, KRW 1.6 billion in operating profit per product would evaporate. 

The price cut range is even greater if the top-tier price requirements, such as performing direct BE studies and using registered drug substances (DMF), are applied to these already-listed generics.

Under the reformed system, the penalty for failing to meet top-tier price requirements will expand from 15% to 20%. Since July 2020, a system was introduced where generics could only receive the 53.55% maximum price if they met both the direct BE study and DMF requirements. For every requirement not met, the ceiling price dropped by 15%; failing both resulted in a 27.75% reduction. Currently, under the 15% penalty rule, a generic failing one requirement drops to 45.52%, and failing both drops to 38.69%.

However, applying the new 45% requirement and the increased 20% penalty means that a generic failing one requirement will drop to 36%, and one failing both will drop to 28.8%. The price for a generic failing one requirement will be 20.9% lower than current levels, while those failing both will see a 25.6% decrease. 

Pharmaceutical companies with generics that have not undergone BE studies would have to endure a 20.9% price cut.

An industry official stated, "For consigned generics, the price cut could be mitigated by performing a BE study, forcing companies to calculate whether the cost of the study outweighs the benefit of maintaining a higher price."

Consequently, companies have begun reviewing the profitability of their generic portfolios. For products where profitability would be significantly damaged by the 20.9% cut, they may seek strategies to minimize losses, such as initiating late-stage BE studies.

The industry is concerned that the confusion seen during the two rounds of price re-evaluations for approximately 8,000 generic items in September 2023 and March last year may recur.

On September 5, 2023, the prices of 7,355 generic items were reduced by up to 28.6%, which was the first result of the generic price re-evaluation project launched in 2020. At that time, the MOHW announced that generics failing top-tier requirements could maintain their previous prices if they submitted proof of BE studies and DMF use by the end of February 2023. This policy was intended to apply the new 2020 pricing system to previously listed generics.

At that time, most of the 7,355 items were hit with a 15% reduction, largely because they lacked BE studies. A total of 145 items saw cuts exceeding 20%, and 125 items saw cuts exceeding 27% because they failed both requirements, resulting in price drops approaching 30%. 

A total of 179 companies suffered losses from the first round of price cut. Korea Huons had 154 items affected, while Hana Pharm and Daewoong Bio saw cuts to 122 and 104 items, respectively.

In March 2024, the second round of re-evaluations resulted in price cuts of up to 27.9% for 948 items. These additional cuts targeted sterile preparations like injections that were newly classified as subjects for equivalence testing.

At that time, 125 items containing Artemisia ethanol soft extract saw prices drop by an average of 14.5% and a maximum of 27.4%. Artemisia extract is a natural product-based medicine used for gastric lesions. Stillen is the original product. Because it is difficult to prove equivalence for herbal medicines via traditional blood concentration levels, most of these generics could not fulfill the BE study requirement and were forced to accept the cuts.

Drug prices were reduced for 94 generic items of Stillen and 31 generic Stillen 2X. These generic products of Stillen and Stillen 2X had been authorized based on comparative dissolution and comparative disintegration tests rather than bioequivalence (BE) studies. Because they failed to conduct BE studies (one of the requirements for the highest generic drug price) the prices of all these generic products were lowered. Among the 125 items subject to the price reduction, 108 saw their prices decrease by 15% due to failure to meet the BE study requirement

Pharmaceutical companies gave up conducting BE studies and were forced to accept price cuts, arguing that it is difficult to prove equivalence through BE studies, which compare blood concentrations of active ingredients, because of the specific nature of herbal preparations.

There are concerns among pharmaceutical companies that efforts to conduct BE studies for price maintenance may resurface, as generic drug prices will drop even further following the reform of the drug pricing system.

While companies previously gave up on BE studies for low-volume products and accepted the 15% cut, the higher 20.9% penalty and lower base price may trigger a vicious cycle of wasteful spending to protect revenue.

In fact, during the previous re-evaluation, the rush to conduct BE studies for the sake of price maintenance led to significant social costs.

According to the Ministry of Food and Drug Safety (MFDS), BE study approvals rose from 178 in 2018 to 323 in 2020, an 81.4% increase in two years, and reached 505 in 2021, nearly triple the number from three years prior. 

This phenomenon involved companies conducting new BE studies on products already on the market, then switching from "consigned manufacturing" to "in-house manufacturing" via permit changes to satisfy the "direct BE" requirement and evade price cuts.

Once the re-evaluation ended, BE approvals returned to a downward trend, dropping to 296 in 2022, 229 in 2023, and 197 in 2024, returning to levels seen six years ago.

Pharmaceutical companies have criticized these mandatory BE studies for already-listed drugs as a "waste of money."

They argued that it is exhausting to spend upwards of KRW 500 million per BE study on drugs whose safety and efficacy have already been proven to meet a pricing requirement. Some companies have collectively spent billions of won on these efforts.

An industry representative commented, "We are currently calculating the revenue impact and price reduction rates for products undergone price cuts during the last re-evaluation because BE studies were not conducted. We are devising strategies to minimize losses as the new pricing system is implemented."