[Viewpoint]A pharmaceutical rip-off

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[Viewpoint]A pharmaceutical rip-off

The most common form of wrongdoing committed by politicians or public servants when it comes to business is protecting the interests of a particular group under the justification that it is promoting an industry’s development. It is easy to find examples of this.

Are politicians providing unconditional protection to a company or are they truly trying to encourage competition by supporting the strongest companies? These are the obvious questions.

Creating an environment in which competitive companies thrive and incompetent ones disappear effectively fosters and supports a consumer-friendly industry. Therefore, policies that protect companies from going bankrupt actually undermine an industry’s development.

Earlier this month, a bill for a special law to support the pharmaceutical industry was proposed. The bill aims at rejuvenating the industry, but it contains no provisions for giving selective support to excellent companies and promoting healthy competition.

The bill is about writing off company debt from research and development projects that have failed. It is about allowing pharmaceutical companies to build factories outside existing zoning regulations and exempting them from paying various fees. The bill even includes exemptions for corporate, income and property taxes.

Those to be supported under the bill are limited to companies certified by the Ministry for Health and Welfare. The certification is given to companies that invest in new drug development, but the standard is ambiguous. A public servant may arbitrarily decide whether or not a company qualifies.

The amount a company has invested in research and development is key to receiving government support. Whether it has succeeded in the market or whether its investment plan is appropriate do not matter. There is also no clear-cut standard to measure the potential outcomes of proposed investments or their effectiveness and innovation.

If a company fails to win ministry certification, there is no other government support, no matter how good their ideas are. That is discrimination.

In other words, the bill aims at giving certain pharmaceutical giants lump sum payments of taxpayer money, regardless of their achievements. On the surface, the bill aims at stimulating research and development. Have Korean pharmaceutical companies been lazy in this field because they had received no government support? The answer is no. They have been lazy because the government protected the industry’s high profits although they don’t try hard enough.

Research and development are a matter of life and death for global pharmaceutical giants. They spend 30 percent of their sales in research and development. In contrast, 240 Korean pharmaceutical firms only focus on copying already existing drugs. They only spend 5 percent of their sales on research and development.

They do so because the nation has maintained a system guaranteeing their profits by allowing sales of copied drugs at high prices - equivalent to about 86 percent of original drug prices. Over the past decade, prices for prescribed drugs have been at 99 percent of the highest price limit because of such a pricing system.

As a result, listed pharmaceutical companies recorded over 10 percent profit ratios even during the financial crisis, when other industries recorded just above 0 percent.

The pharmaceutical firms have shown no efforts to change. Their competition was nothing more than negotiation for rebates.

Throughout the nation’s history, Korea’s pharmaceutical industry has developed just a handful of new drugs. No Korean company is on the list of global pharmaceutical giants. And yet, their tremendous lobbying power has stopped all reform attempts and continues the opaque policy protecting the industry.

The Korea Development Institute and the Board of Audit and Inspection said this year that the prices of copycat drugs should be reduced and the pricing system revised in order to enhance the competitiveness of the pharmaceutical industry and to lower spending on state-run health insurance.

The Health and Welfare Ministry, however, is reluctant to overhaul the system.

A group of 26 lawmakers even proposed a bill to give special benefits to the industry earlier this month, and the ministry and the industry welcome it.

Koreans pay the highest prices for copied drugs in the world. Now, they are about to supply additional tax money to pharmaceutical companies that earn easy profits by selling drugs at rip-off prices.


*The writer is a research fellow at the Korea Development Institute. Translation by the JoongAng Daily staff.

by Yun Hee-suk

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