Cuts in drug prices slashed Q2 profits

After the government forced down prices of medicines, local drug makers posted deficits in the first half of the year.

No. 1 Dong-A Pharmaceutical said it saw a 46 percent drop in operating profit to 16.2 billion won ($14 million) in the second quarter compared to last year, although its 246.5 billion won in sales were up 9.8 percent from a year earlier.

“Rises in production costs and the impact of the drug price cuts made operating profits fall despite increased sales of some major products,” said a spokesman of the company.

Predicting an impact on profits, Dong-A had planned to increase exports of key products such as the energy drink Bacchus.

The Korean pharmaceutical company joined hands with foreign drug makers Glaxo SmithKline and Bayer to ramp up sales, too. As a result, sales in the second quarter rose 12.8 percent from a quarter earlier.

The Ministry of Health and Welfare lowered prices of 6,506 different drugs by 14 percent from April 1 as part of its plan to cut spending on national health insurance.

Despite strong opposition from the drug industry, the ministry wanted national health insurance premiums down, and it said drug companies would be able to weather the storm by cutting unnecessary spending.

Smaller companies suffered more. Ildong Pharmaceutical said it experienced a whopping 91 percent fall in its first half earnings on-year down to 2.4 billion won.

LG Life Sciences posted a 3.4 billion won loss in the first half. Yuhan and Handok pharmaceuticals also witnessed 60 and 43 percent falls in earnings this year, respectively.

To find new sources of profit, the pharmaceutical companies are turning to the market for health supplements.

The market for health foods and supplements grew to 1.3 trillion won as of last year, up 28 percent from a year earlier, according to the Food and Drug Administration.

LG Life Sciences, Il-Yang Pharmaceutical and Samjin Pharmaceutical are jumping into the market.

Il-Yang has launched a product for kids to sell at 80 Lotte Mart stores across the nation. LG Life Sciences plans to launch vitamins and nutritional supplements in the second half of the year after introducing a diet product last year.

The company reportedly hired more employees to strengthen the unit for functional health products. Samjin is on track to expand distribution channels for immunity boosters this year.

“Consumers tend to trust functional food products developed by pharmaceutical companies because of safety and technology,” said an industry insider.

By Song Su-hyun [ssh@joongang.co.kr]