[Reporter's View] Cut drug prices, expand R&D…SMEs 'exit pressure'

The government's recently announced "Drug Pricing System Improvement Plan" appears adequate in terms of its direction. The intent is to improve the market structure, which is currently centered on generics, to provide incentives for pharmaceutical companies to invest in R&D, and to promote self-sufficiency in raw materials. Furthermore, shifting the industrial constitution away from the simple, repetitive manufacturing of off-patent drugs is agreeable.

However, the general opinion from the clinical settings is different. There is significant concern that the policy's incentives may actually act as a double burden for many pharmaceutical companies.

The core value of this reform is a structure that guarantees relatively higher drug prices for companies with a high R&D investment ratio, in exchange for lower generic drug prices. The higher the ratio of R&D relative to sales, the more a company's generic prices are recognized, which directly correlates to corporate profitability.

The problem is that this structure does not operate identically for all companies. While it may serve as a reward for top-tier pharmaceutical companies that have already secured a certain level of R&D capability and capital, it is highly likely to act as a barrier to entry for small and medium-sized enterprises (SMEs).

This is because revenue is shrinking as the generic price calculation rate is lowered from 53.55% to 45%, and the timing of "tiered price reductions" for follow-on products applies to the 13th entry. If these tiered price cuts are applied to existing listed products as well, it will be difficult for many SMEs to avoid an immediate drop in cash flow.

Of course, the government explains that it will provide incentives through 'Innovative' and 'New Innovative' pharmaceutical company designations. The plan is to guarantee drug prices at a maximum level of 60% for companies with high R&D ratios and apply preferential additions even to companies with a certain level of investment.

However, pre-investment is required to meet these standards. A structure where one must increase R&D investment to receive benefits while revenues are decreasing is likely to become a selective incentive that is difficult for companies lacking financial flexibility to access.

While the prices of generics, the immediate main source of revenue, are being cut, companies must conversely raise their R&D proportions, which requires pouring tens or hundreds of billions of won, to preserve their lowered profitability. It is a structure where companies are forced into natural extinction in the market if they fail to win the title of a 'New Innovative pharmaceutical company.'

A bigger issue is that such a structure could deepen industrial polarization. While top-tier pharmaceutical companies with capital power maximize benefits by expanding R&D investment, SMEs may be pushed out of the market due to limited investment capacity.

The government has stated that it will save approximately KRW 2.4 trillion in health insurance costs over the next 11 years through this move, but the price could be the collapse of the ecosystem for smaller pharmaceutical companies that have not yet built up R&D capacity. Some critics argue that this drug pricing reform is essentially a forced restructuring of the domestic pharmaceutical industry.

One industry official stated, "While we agree with the direction, the current structure only allows companies with existing capacity to grow further," adding, "Unless realistic support measures that allow SMEs to participate in R&D are implemented as well, the policy effects will inevitably be limited."

Pharmaceutical R&D is a long-distance race. It is difficult to evaluate based on short-term results, and the fruits only appear after investing enormous time and effort. In that sense, this drug pricing reform is like placing companies with different levels of physical fitness on the same track from the starting line and demanding they run faster.

Furthermore, R&D investment carries the possibility of failure. It is not easy for a company with a weakened profit base to continue bold investments in an area where performance relative to investment is not guaranteed. Consequently, some companies may be driven to focus on securing short-term profits rather than on R&D, or even to downsize their businesses altogether for survival.

There is no disagreement with the direction of reducing the overabundance of generics and advancing the industrial structure. However, speed and method are the problem. An approach that induces structural shift solely through uniform price cuts and selective incentives may result in side effects.

Unless an environment is established where SMEs can gradually build R&D capabilities while maintaining a minimum investment capacity, this reform is likely to result in industrial contraction rather than promoting innovation. Ultimately, additional incentives must be planned so that policies aimed at lowering drug prices and increasing R&D do not contradict.