Korea's Dream Market

May 1, 2008
Junghwa Lee
Pharmaceutical Executive
Volume 0, Issue 0

Meet the Korean pharma consumer: affluent, aging, and crazy about drugs

With the big growth in drug sales coming almost entirely from the developing world, the acronym BRIC is on every drugmaker's lips. But adding a K, for South Korea, might make the shorthand more accurate. Although much smaller in size and population than Brazil, Russia, India, and China, this Asian tiger has one of the fastest growing and most affluent middle classes in the world, and its living standards are second only to Japan's in all of Asia. (See box). If its economy keeps growing at the current pace, South Korea is set to have the third highest GDP per capita ($52,000) in the world by 2017.

South Korea's Numbers

In addition, major improvements in public services and diets have led to a longer life expectancy—and as every pharma exec knows, an aging population means growing drug consumption. In fact, according to The Economist, if these trends continue, "South Korea would have the world's highest proportion of people over the age of 65 by 2050."

As with any emerging market, there are significant challenges, such as a complex healthcare landscape including limited price controls on drugs and a biased regulatory process. Yet reforms are ongoing. Pharma companies seeking to optimize opportunities in South Korea must learn the language of this unique market—from the factors driving healthcare consumption to the developments changing the sector's outlook.

The Healthcare Consumer: Worried, Well, and Wealthy

In 2007, the South Korean drug market was worth nearly (US)$16 billion, with Big Pharma products claiming a 40 percent share—plus a 13.5 percent annual increase that's expected to dip only slightly in this year's globally gray outlook. South Korea has about 700 domestic drugmakers, the largest of which are Dong-A, Hanmi, Yuhan, Green Cross, Chungwei, Cheil, and Chonggeundang. Though systematic R&D is only two decades old, it's revving up with 11 new drug launches in the past few years. The government has also invested an unprecedented $1 billion in the industry in the wake of signing a Free Trade Agreement with the US last year. Still, the vast majority of products remain generics, which claim about one third of the total market.

Synovate's research shows that South Koreans have a generally positive perception of their healthcare industry, with a strong and growing emphasis on patient empowerment and consumer influence. Having traditionally been the passive recipients of decision-makers' policies, patients are now beginning to shape policy. According to Biospectrum Asia, 1,300 patients' groups have sprung up in South Korea. Clearly, in the absence of direct-to-consumer advertising, these patient networks have major implications for pharma marketing efforts.

Even more important is the interesting observation by local doctors and industry members that South Koreans are exceptionally open to taking both over-the-counter (OTC) and prescription drugs. The nation has a high number of "worried well" (not to say hypochondriacs!) and attitudes toward healthcare tend to be markedly more preemptive than in most other markets. Hence, preventative medicines of all kinds are very popular, as are vitamins and dietary supplements. In fact, a trend has been reported in patients visiting their doctor to request treatment for conditions they do not actually have.

For example, a large proportion of the South Korean population believe themselves to be obese, even though only 30 percent actually fit that description. Coupled with patient pressure, the penetration of anti-obesity drugs in South Korea is among the highest in the world.

This is good news for diet drug sales. But the risk of incurring side effects by taking unnecessary medicines can lead to other health problems. This in turn increases the burden on the government's already-stretched purse strings.

A related consumer trend is growing expenditure on body beautiful. Traditionally, South Korea has been a very conservative society, but increasingly its people (particularly women) are focusing on—as the advertising industry emphasizes—looking good and feeling confident. As a result, there's a big market for cosmetic surgery such as implants, nose jobs, liposuction, and stomach banding—all of which are increasingly affordable.

Any commodity that is in style is generally taken up in South Korea. Consumers are savvy, have a lot of disposable income, believe in health and fitness, and are crazy about the "next big thing." With the exception of Japan, it's probably easier to launch a drug successfully in South Korea than in any other Asian market.

The Healthcare System: Review and Reform

South Korea has had a universal system of healthcare for almost two decades. Although patients must contribute toward costs in many areas, care and treatment are accessible for the majority of the population.

Moreover, the system is beset with inefficiencies. In recent years, these strains, along with the aging population, have drained government coffers and created a need for cost containment—as seen in some recent regulatory policies that every potential drug marketer must attend to.

The Positive List In 2006, in an effort to reduce drug spending, the South Korean government introduced the so-called Positive List Formulary—a comprehensive reimbursement list. The stated goal was to reduce the amount of total health insurance costs that paid for drugs from about 29 percent in 2005 to 24 percent by 2010.

The government claims to have evaluated pharmacoeconomic data on 14,000 drugs in deciding coverage, and only drugs found to be effective and lowest priced are now eligible for reimbursement. All other drugs must be paid for by the consumer entirely out of pocket. According to The Economist, this price squeeze should slash the number of drugs covered from 21,000 to some 5,000 by the end of the decade.

Not surprisingly, this move met with resistance from both local and foreign drugmakers. In addition, the South Korean government has come under pressure to achieve a more equitable distribution between local and international companies, after being criticized for favoring local manufacturers.

The pharmacoeconomic evaluation was widely criticized as well. Hampered by a shortage of both resources and data, it has been slammed as arbitrary and biased. The cheapest drug in a category was often selected as the control, with little attention to efficacy, safety, and mechanism of drugs. As for new drugs, since most have higher price tags than what's already available, few made the cut. Out of 40 new drugs in 2007, only nine drugs have been listed on the Positive List.

Finally, the entire goal of cutting spending on drugs has been called into question by the nation's demographics, especially its fast-growing elderly population and their demand for healthcare. Yet because the private market for prescription drugs is as large as the public one, the effect of these price controls and restricted access on Big Pharma's products is limited. If branded manufacturers can show positive clinical benefits and get on the list, then they will benefit from the exclusion of others.

In fact, the new rules will likely favor pharmas with stronger branding power and more distinctive products. South Korea's many "worried well" generally prefer paying out of pocket for a branded drug not on the formulary if it offers greater effectiveness, safety, or some other advantage. And they're already used to ponying up for drugs, since under the old public reimbursement system, their copay was 50 percent.

Prescribing and Dispensing Prior to 2000, doctors not only prescribed drugs, but acted as pharmacists and dispensed drugs, too—a revenue stream that sometimes led to undue commercial influence over prescribing habits. This changed when the government limited doctors' responsibility to prescribing. According to The Economist, the upshot appears to be better prescribing decisions by doctors; they've broadened the scope of what they prescribe, and the number of scrips for branded drugs made by Big Pharma is rising.

US/South Korea Free Trade Agreement Signed in April 2007 after much wrangling on both sides, the Free Trade Agreement (FTA) between South Korea and the US is expected to abolish most, if not all, of South Korea's protectionist barriers (such as discriminatory drug reimbursement pricing and the tariffs on imported drug), which favor local drugmakers, especially the nation's burgeoning generic manufacturers. As a result, the FTA is generally viewed as a boon for Big Pharma, unlocking the South Korean drug market to an influx of patented products and ending business as usual in a big way.

Local drugmakers are predictably angered by the agreement, and are contesting it in court.

The National Immunization Program There has been a lot of talk in South Korea about which and how many immunizations the National Immunization Program should fund. Currently, there are 11 key disease areas and six nationally recognized programs. But the government is under pressure to add more.

At present, there is a great deal of advertising for these vaccines targeted at both parent-consumers and physician-providers. Should the government opt to introduce free vaccinations for all disease areas, the vaccine makers will be forced to switch their marketing from DTC campaigns and traditional detailing to public tendering and contract negotiations. In turn, companies could optimize their product portfolios by freeing up sales forces to focus their efforts elsewhere.

The paradox of South Korea for drugmakers is that it offers, on the one hand, a consumer who is almost too perfect and, on the other, a government whose healthcare policies leave a lot to be desired. Still, there's little doubt that in the end this emerging market will come roaring to life. The South Korean people are too smart and too proud to settle for the cheapest when they can afford the best, especially when it comes to their healthcare.

Junghwa Lee is the head of Synovate Healthcare Korea. She can be reached at junghwa.lee@synovate.com.