Korean pharmaceutical companies suffering falling profitability

"Doesn`t our company have plans to develop new drugs? We won`t have to live so pitifully selling drugs if an effective drug comes out."

This is what a sales representative in the movie "Yeongasi (Parasite)" released this summer. He had to take the family of his hospital client to amusement parks over the whole weekend.

A real life sales representative at a leading Korean pharmaceutical company in his fourth year said, "The movie might have slightly exaggerated things, but selling medicine has indeed grown tougher these days." The reason is tightened rebate regulations and across-the-board cuts in prices. Those who offer rebates face punishment, making it difficult for sales representatives to offer rewards to doctors or pharmacists. Worse, pharmaceuticals prices have fallen an average of 14 percent.

A salesperson with experience of dealing with both pharmacies and private hospitals said, "It is normal to visit the homes of hospital directors to help them repair computers or greet guests at airports. What is more discouraging is that many clients still pay just 90 percent of the drug prices upon delivery. With intensifying competition among pharmaceutical companies, I have no choice but to keep silent on these immoral acts."

○ Price cuts hit operating profit to sales

Pharmaceutical companies are facing plunging profitability after the government moved to cut drug prices. Operating profit of major industry leaders plunged in the third quarter this year from the previous year, including at Dong-A Pharmaceutical (down 30.4 percent), Daewoong Pharmaceutical (54 percent), Yuhan Corp. (45.9 percent) and Ildong Pharmaceutical (85.6 percent). LG Life Sciences finished in the red.

Industry sources say that amid the plunge in profits of Korean drug companies, multinational rivals are seeing their market shares rise on the back of their original drugs. Due to the government`s price reduction policy, the prices of original drugs with expired patents have sharply declined to the level of generic drugs sold by domestic drug companies. If the prices are the same, more doctors will prescribe original drugs.

According to a report submitted by the Heath Review and Assessment Service to parliament in an audit, prescriptions for Korean drugs fell from 75 percent to 73.7 percent between April and June, whereas those of multinational drug companies rose from 25 percent to 26.3 percent.

baron@donga.com