Stricter regulations set to effectively block late generic entry

MOHW presents criteria for applying stepwise pricing at the working-level consultation

15% reduction applied to the lower of the minimum price or the non-compliance price

Incorporating unmet criteria accelerates price collapse for late generics

Industry pushes back: “Price should be applied in a stepwise manner based only on lowest price”

“85% of the lower value between the previous lowest price and the price reflecting failure to meet the 2 eligibility criteria.”

The government plans to introduce a powerful price reduction mechanism for generics subject to the stepwise pricing system. Under the proposal, prices will be reduced by 15% based not only on the lowest listed price but also on prices reflecting unmet eligibility criteria. With the lower maximum generic price and stepwise reductions applied earlier, the price of the 14th generic entrant is expected to fall to less than half of the current level. The pharmaceutical industry is strongly opposing the move, arguing that reductions should be based solely on the lowest listed price.

According to industry sources on the 11th, the Ministry of Health and Welfare presented a proposal in a working-level consultative body to strengthen the stepwise pricing threshold from the current 21st identical formulation to the 14th.

The stepwise pricing system is structured so that the price ceiling decreases on a monthly basis, the later a generic drug enters the market. Under the current system, if there are more than 20 pre-listed identical products, the price of a generic drug entering the market as a latecomer is reduced by 15% each time.

The government intends to incorporate not only the lowest price but also prices reflecting unmet eligibility criteria into the calculation.

The government plans to maintain the approach implemented when the tiered pricing system was introduced in 2020, which assigns 85% of the lower of either the “immediately preceding lowest price” or the “price when two standard requirements are not met.”

If drug prices that fail to meet standard requirements are factored into the stewpise pricing system, generic drug prices will drop exponentially.

Under the eligibility criteria introduced in July 2020, generics must meet both requirements—conducting their own bioequivalence studies and using registered APIs—to receive the highest price. Failure to meet each criterion results in a 15% price reduction. From the current maximum of 53.55%, prices fall to 45.52% if one criterion is unmet, and 38.69% if both are unmet.

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For example, if all existing generics are priced at KRW 53.55, applying the lowest-price rule would result in a 15% reduction to KRW 45.52. However, applying the unmet-criteria rate of 38.69% leads to a further reduction to KRW 32.89, which is 38.6% lower than the lowest price.

With upcoming reforms further lowering the maximum ceiling price for generics and increasing penalties for unmet criteria, the stepwise pricing system will become an even stronger price suppression mechanism.

The Ministry of Health and Welfare’s revised drug pricing system, discussed at the Health Insurance Policy Deliberation Committee on March 26, includes a plan to lower the price calculation rate for generics and off-patent drugs from the current 53.55% to 45%.

Under the current drug pricing system, which has been in effect since 2012, generics are granted a price premium of up to 59.5% of the original drug’s price prior to patent expiration upon initial listing, and the price cap is lowered to 53.55% 1 year later. New drugs whose patents have expired are also reduced to 53.55% of the pre-patent expiration price, similar to generics.

Under the new system, both generics and off-patent drugs will be priced at 45% rather than 53.55%, and the uniform 59.5% premium for first generics will be abolished, replaced by differentiated incentives based on R&D investment. As a result, the long-standing ‘53.55%’ pricing benchmark introduced in 2012 will disappear after 14 years.

The penalty for failing to meet maximum price criteria will also increase from 15% to 20%. If the base rate is set at 45%, generics failing one criterion will be priced at 36%, and those failing both at 28.8%.

As a result, the 14th generic drug, to which the stepwise pricing applies, cannot exceed 24.48%—a 15% reduction from the 28.80% rate applied to generics failing to meet 2 maximum price criteria. Comparing the same 14th generic drug, if its price under the current system is KRW 53.55, whereas under the revised system, it drops to less than half that amount. The 15th and 16th generic drugs fall 38.6% from the lowest price, dropping 14.98% and 9.20%, respectively.

Under the revised drug pricing system, the earlier application of the stepwise pricing system, a 15% stepwise price reduction, and a 20% price reduction for drugs that do not meet the highest-price requirement, creates a structure that effectively prevents late-entrant generics from entering the market.

The pharmaceutical industry is strongly opposing the increasingly complex and aggressive pricing mechanism of the stepwise pricing system.

The stepwise drug pricing system was previously abolished but has since been reintroduced. The Ministry of Health and Welfare abolished the tiered system as part of a 2012 reform of the drug pricing system. This allowed pharmaceutical companies to actively launch generics even in markets where patents had expired long ago, as they could still command high prices even with late market entry. However, as the problem of excessive generic proliferation became entrenched, the stepwise drug pricing system was revived after 8 years.

Before 2012, generics could receive 54.4–68% of the original drug price, with stepwise reductions applied monthly based on the lowest existing price. While the maximum price for generics was set at 68% of the original drug’s pre-patent-expiry price, if 13 or more ‘first-to-market’ generics were listed simultaneously, the maximum price for generics was set at 54.4%. Subsequently, the maximum price for generics was reduced by 10% each time a new product was listed on a monthly basis. At that time, the price under the stepwise system was 10% lower than the lowest price of a pre-listed product.

However, since 2020, the inclusion of unmet eligibility criteria has significantly amplified the impact of the system.

An industry insider stated, “Even applying reductions based on the lowest price alone under the stepwise pricing system would discourage late entrants. By adding unmet criteria into the calculation, the government is effectively blocking late generics from entering the market.”