Drug pricing re-evaluation lawsuit reverses the situation

Medica Korea wins the Supreme Court final ruling…warning against the government's 'administrative convenience'

"Pharmaceutical companies must receive recognition if demonstrated full efforts"…highlighted "Violation of administrative procedures·Abuse of Discretion"

Drug price reduction rate Increased from 15% to 20%...concerns about ‘Defensive bioequivalence tests·lawsuits'

The lawsuit Medica Korea filed to cancel the price reductions on its existing drugs, challenging the government's re-evaluation of maximum prices, has concluded in the pharmaceutical company's favor. This ruling is expected to have a significant impact beyond the relief to an individual company, influencing the implementation of future government drug price reduction measures.

In particular, the significance of this ruling has grown as the government announced a reform plan last month that strengthens the drug price reduction rate from the current 15% to 20% when generic standard requirements are not met. Analysis suggests that pharmaceutical companies facing price cuts due to administrative delays now have a clear justification for pursuing legal action.

3-Year Legal Battle Concludes... A Litigation Started by 'Re-evaluation of Listed Drugs'

The origin of this case was the "Generic drug price system reform" implemented in July 2020. The government decided to apply differential drug prices based on whether two standard requirements were met: ▲ conducting independent bioequivalence tests and ▲ using registered drug master files (DMF). Additionally, the government conducted a re-evaluation by applying these standards to drugs already listed on the reimbursement list.

In September 2023, following the re-evaluation, the Ministry of Health and Welfare (MOHW) announced a price reduction for five items, including Medica Korea's 'Telmisartan Tab,' citing noncompliance with standard requirements.

Medica Korea responded immediately by filing a lawsuit to cancel the disposition and an application for a stay of execution. Both the first and second-instance courts ruled in favor of the pharmaceutical company. Subsequently, on the 2nd, the Supreme Court finalized the original verdict by dismissing the government's appeal through a "discontinuation of proceedings." The three-year legal dispute ended in a complete victory for the pharmaceutical company. This is considered unusual, given that cases in which pharmaceutical companies win drug price lawsuits against the government have been very rare.

​“Violation of Administrative Procedures + Abuse of Discretion”... The Court Highlights Three Illegalities in the Government's Measure

According to the Article 8(2) issued by the Seoul High Court's ruling, confirmed by the Supreme Court, the court found that the MOHW's disposition not only violated administrative procedural principles but also constituted a deviation and abuse of discretionary power.

◆“Administration Cannot Change Its Word” = The court pointed out the "unauthorized change of grounds for disposition" applied by the government to some items. The MOHW initially issued a price reduction for Medica Korea's five items because they failed to meet 'Standard Requirement 1' (independent bioequivalence testing). However, during the lawsuit, they argued that the items also failed to meet 'Standard Requirement 2' (the use of a registered DMF).

Regarding this, the court stated that it is unacceptable to present separate facts that lack identity with the original grounds at the time of disposition. This is interpreted as a reaffirmation of the principle that the executive branch must not infringe upon a party's right to defense by arbitrarily changing the basis for a disposition.

◆“Substantial Fulfillment is More Important Than Paperwork” = The court ruled that 'substantial fulfillment of requirements' should take precedence over the 'formal completeness of documents.' Medica Korea was unable to submit the final "DMF Change Authorization Certificate" within the government-set deadline. However, they had already submitted an 'Application for change authorization' before this, clearly indicating their intent to use registered drug master files. Despite this, the government issued the price reduction citing 'failure to submit documents within the deadline.'

The court judged that “submitting the authorization certificate is merely one means of proving fulfillment, not the sole evidentiary material,” and that “if a pharmaceutical company has made its best efforts, it should be recognized.”

◆A Warning Against ‘Administrative Convenience’ = The court clarified that the situation where the Ministry of Food and Drug Safety's (MFDS) review was delayed due to an explosion of change authorization applications following the drug price reform 'cannot be viewed as the responsibility of the plaintiff (pharmaceutical company).'

The court ruled that it is unreasonable to hold a company responsible for document-submission delays caused by external factors beyond its control, to reduce drug prices. This is interpreted as a court warning against the government's drug price reductions driven by administrative convenience.

​Will 'Second Medica' Cases Follow Amid Concerns of Recurring ‘Administrative Bottlenecks’?

This ruling is expected to have a greater ripple effect, as it coincides with the government's last month's drug-pricing reform plan. Under the reform, the basic calculation rate for generic drug prices will be reduced from 53.55% to 45%. Concurrently, the reduction rate for failing to meet standard requirements will be raised from 15% to 20%.

Under the existing system, if one standard requirement was not met, the generic drug price was applied at 45.52% (53.55 x 0.85); if two were not met, at 38.69% (45.52 x 0.85). Under the new system, it will drop significantly to 36.00% (45.00 x 0.8) for one failure and 28.8% (36.00 x 0.8) for two failures.

Upcoming drug-pricing reform plan. Under the reform, the basic calculation rate for generic drug prices will be reduced from 53.55% to 45%. Concurrently, the reduction rate for failing to meet standard requirements will be raised from 15% to 20%.

These standards also apply to already-listed generics. Industry concerns are that the chaos of 2023 will repeat itself. In September 2023, the government simultaneously lowered the prices of 7,355 items. This was a measure that applied the drug price system, reformed in 2020, to existing items en masse. However, during the large-scale price reduction process, delays in data submission and review bottlenecks occurred, leading to continuous confusion and administrative conflicts regarding the interpretation of standards.

The Medica Korea lawsuit is also analyzed to have occurred against this backdrop. Analysts believe that, in the process of evaluating and disposing of numerous items in a short period, the government failed to adequately review individual cases, leading to 'formalistic judgments' taking precedence.

There is a possibility that even more listed items will be subject to price reductions in this reform. In this case, the administrative burden on the government will inevitably increase. It is noted that this process could create a vicious cycle of administrative errors, leading to more lawsuits.

Reduction Rate Increased from 15% to 20%... Potential for Mass Recurrence of ‘Defensive Bioequivalence’ Tests

The measures taken by the pharmaceutical industry for 'price defense' are also factors fueling market confusion. Specifically, there is a high possibility that so-called 'defensive bioequivalence' tests to meet standard requirements will flood the market again.

After the 2020 system reform, pharmaceutical companies rushed to conduct bioequivalence tests to defend prices. Companies developed generics themselves through internal formulation research and then conducted bioequivalence tests. Based on the equivalence results, they adopted a strategy of shifting from outsourced to in-house manufacturing to meet the 'conducting bioequivalence tests' requirement and maintain drug prices. In fact, the annual number of bioequivalence test approvals, which was 178 in 2018, surged to 323 in 2020 and 505 in 2021.

The number of bioequivalence test approvals by month (unit: case, source: MFDS)

The cost per bioequivalence test is estimated at KRW 300-500 million. Criticisms have been raised that spending hundreds of millions of won on bioequivalence tests to maintain drug prices, when the drugs are already being sold without issue after the government has recognized their safety and efficacy, is a waste of resources. Nevertheless, because the scale of price reductions has increased, the structure forces companies to increase additional bioequivalence tests to prevent losses.

​"Litigation is Profitable"... The 'Learning Effect' Presented by the Medica Korea Precedent

Concerns are rising in the pharmaceutical industry that the litigation wars that followed the simultaneous reduction of 7,300 items in September 2023 will be repeated.

With the Supreme Court's ruling now established, pharmaceutical companies' response is expected to become more aggressive. From a company's perspective, rather than accepting a 20% reduction, it is a rational choice to file a lawsuit to cancel the price reduction and seek a stay of execution under the Medica Korea precedent. Voices are high that unnecessary litigation will proliferate socially.

Consequently, the government has a significant administrative burden during the large-scale drug price adjustment process. Following this Supreme Court ruling, the government's mechanical administrative convenience will find it difficult to gain legal legitimacy. Moving forward, the government faces the task of establishing flexible administrative guidelines that take into account realistic factors, such as the MFDS's review status, rather than insisting solely on the 'formal completeness of documents' during the price adjustment process for listed generics.

A pharmaceutical industry official stated, "This ruling clearly established that substantial efforts by companies should not be ignored for administrative convenience. This case is expected to serve as an important legal reference for pharmaceutical companies to respond to the government's administration in the upcoming large-scale drug price reductions."