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Korea is rapidly emerging as a global hub of clinical trials for multinational pharmaceutical companies thanks to its excellent infrastructure for clinical research, foreign and Korean experts said at a roundtable organized by The Korea Herald.

“These clinical trials provide enormous benefits to Korea,” said Friedrich Gause, president of Bayer Korea and chairman of the Pharmaceuticals Committee of the European Union Chamber of Commerce in Korea. The EUCCK was a co-sponsor of the meeting.

“They benefit Korean patients, Korean medical institutions and clinical experts, and the Korean economy in general,” Gause said. “These benefits illustrate the need for the Korean government to further promote pharmaceutical R&D.”

Yu Kun-ha (center), editorial writer of The Korea Herald, speaks at the Pharma CEOs Roundtable Meeting with the Ministry of Health and Welfare on May 20 in Seoul. Park Hae-mook/The Korea Herald
Participants in the roundtable included CEOs of foreign and domestic pharmaceutical companies and officials from the Ministry of Health and Welfare. The health care executives shared a common view on the importance of maintaining Korea’s position in the global and regional competition for phase I-III clinical trials.

According to the Biotechnology White Paper for 2007 and data compiled by the Korea Food and Drug Agency, the number of global clinical trials undertaken in Korea under the sponsorship of multinational companies surged during the last five years.

“This sharp increase is a testament to the high degree of professionalism and efficiency at Korea’s leading hospitals, where most of the clinical trials are undertaken,” Gause said. “These hospitals are very competitive at the international scale.”

Another important feature about the MNC trials is a significant shift to earlier phase trials. Korea’s involvement in MNC trials from an earlier phase of global development programs indicates that its infrastructure for R&D is very competent and efficient.

Korea’s excellent infrastructure for clinical trials is partly the result of the government’s conscious efforts to cultivate the health care industry.

“One key goal of the Health and Welfare Ministry’s R&D program is to make Korea the hub of clinical development in Northeast Asia,” said Maeng Ho-young, director of health care research and development at the ministry.

“We have been focusing R&D investment on beefing up infrastructure for advanced clinical trials because this is the best way to develop new drugs and medical devices,” he said. “We hope the improved infrastructure for clinical trials will attract more multinational trials in Korea.”

The ministry has also sought to cultivate the research capabilities of Korea’s top hospitals. “Clinical trials and clinical research should go hand in hand because they offset the shortcomings of each other,” Maeng said. “Hospitals should play a central role in developing original medical technologies and candidate compounds for new drugs.”

“In the first place, they offer immediate access to innovative treatments to patients involved in phase II and III global trial programs,” Gause said.

Clinical trials on new chemical and medical entities also benefit Korean medical institutions and clinical experts by offering them opportunities to research and publish at the forefront of medical science.

These trials, if successfully completed, can result in earlier KFDA approval of new drugs, making innovative treatments available earlier to benefit all Korean patients.

Commercial benefits of such clinical trials also include a reduced burden on the Korean health insurance fund, since the cost of treatment and medication is usually covered by study sponsors. At the same time, more trials lead to the creation of high-paying jobs within the R&D sector in Korea.

To further stimulate R&D in the pharmaceutical industry, the government should enhance certainty in pricing and reimbursement and adequately reward the developers of drugs with proven clinical benefits, the CEOs of foreign and domestic companies said.

In recent years, uncertainty has tended to increase in Korea’s pharmaceutical industry as a result of the government’s campaign to lower drug prices and due to the rampant use of illegal rebates.

To lower drug prices, the government has implemented a series of measures, including the “positive list system,” which offers health insurance benefits only to low-price, high-efficacy drugs; the “price reduction system,” which lowers the prices of drugs from companies found to have offered kickbacks; the “renewal of drug lists” covered by the national health insurance, which cancels the listing of less effective drugs; and the latest “market-based actual transaction price system,” which guarantees financial incentives for medical institutions that purchase drugs cheaply.

One of the reasons for the government’s efforts to lower drug prices is the rapid increase in health care expenses and spending on drugs in Korea. Due to the rapid population aging in Korea -- Korea is predicted to become an “aged society” by 2018 -- the nation’s per capita health care expenditure is growing faster than any other OECD member state.

“If the elderly population continues to use medical services and drugs as they do now, medical expenditure in Korea could surpass that of Japan in 2050,” said Yang Bong-min, a professor of the School of Public Health at Seoul National University.

According to the National Health Insurance Corp., the nation’s spending on drugs totaled 11.7 trillion won last year, accounting for 29.6 percent of its total expenditure of 39.4 trillion won. The OECD average stands at 17.6 percent.

In order to gradually lower drug prices and induce drug companies to spend more on R&D, the Ministry of Health and Welfare announced a new drug-pricing formula in February.

Currently, when medical institutions buy drugs, the NHIC reimburses them the price of the transaction. In order to maximize their profit margins, drug companies have tried to sell their products at the highest possible prices -- the government-set reimbursement ceilings.

Under the new plan, to be implemented in October, however, medical institutions are given financial incentives when they purchase drugs from drug makers as cheaply as possible.

For instance, when a hospital buys a drug, whose reimbursement ceiling is 1,000 won, at 900 won, the NHIC pays back 70 percent of the price difference 100 won. An outpatient who takes the drug also pays less as much as it is sold cheaply.

To make the Korean pharmaceutical market more transparent and predictable, the government has recently been stepping up efforts to eliminate the rebate practices.

Back in the 1970s, Japan suffered from shady deals between drug companies and hospitals. Some improvements were achieved after the Japanese government started giving jail terms to doctors who received kickbacks from drug companies in return for prescribing their products.

In Korea, a revised medical law stipulates “dual punishment” of doctors as well as pharmaceutical companies involved in kickbacks. The law passed through the National Assembly in April, amid fierce resistance from doctors and hospitals.

From November this year, doctors will be subject to imprisonment for up to two years or face fines of up to 30 million won when found to have taken financial or nonfinancial benefits from drug companies. Their license also could be suspended for one year.

Some people still raise concerns that the dual punishment can push illegal drug transactions further underground. But others expect that the Japanese experience could be replicated here with the new measure.

“We hope the revised law will discourage doctors and pharmaceutical companies from engaging in illegal business practices,” said Kim Chung-hwan, director of pharmaceutical policy at the Health and Welfare Ministry.

The main reason why companies want the pharmaceutical market and the pricing and reimbursement system to be predictable and transparent is that pharma R&D investment is very long-term and carries a significant risk of failure.

“It may take 10-12 years and $1.2 billion on average to develop a new drug,” said Bayer Korea CEO Gause. “If the market and achievable prices are not predictable and transparent, the developer of a new drug cannot be certain whether or not his investment can be recouped.”

“The government’s crackdown on illegal rebates will address the transparency problem in the market. However, it may lead to other unacceptable business practices, which we as an industry should reject by all means,” Peter Jager, president of Novartis Korea, said.

Jager also expressed concern about the downward trend in drug pricing in Korea. “To encourage innovations, you have to reward development of new drugs. If Korea does not reward innovations, multinational companies will have no incentives to invest in Korea and to stay in the Korea market.”

About the concerns raised by Jager and other CEOs, Baek Young-ha, deputy director of pharmaceutical benefits at the ministry, explained that the government would review existing price-lowering measures when the new drug-pricing system goes into effect in October.

Other than that, she said, the government will mandate all pharmacists and medical institutions to report their drug transactions. Retailers will also be required to submit a list of the drugs provided.

“After the new system is implemented, all the transactions in the market will be tracked. The reported transaction prices will be reflected in determining the weighted average of drug prices. We hope this will ensure more transparency,” Baek said.

The ministry’s new drug pricing policy and crackdown on rebates is ultimately designed to encourage domestic drug manufacturers to invest in R&D for the development of new drugs.

According to ministry data, 14,900 medical entities were registered for health insurance coverage as of December 2008. Of them, generics account for 79.1 percent. A generic drug refers to a drug which contains the same ingredients as the patented original drug. It can only be distributed and promoted once the patent protection of the original drug expires.

In 2007, 33 domestic companies invested about 400 billion won in R&D, or 6.5 percent of their sales. During the same period, the world’s top five pharmaceutical firms -- Pfizer, GlaxoSmithKline, Sanofi-Aventis, Roche and Novartis -- spent 41.3 trillion won, or 16.5 percent of their sales, on R&D.

Due to their limited R&D capacity, domestic drug companies have been focused on the development and production of generics. Since the current drug pricing system does not offer incentives for marketers of generic drugs to compete on price, generic drugs have often been promoted through illegal rebates to doctors and pharmacists.

The planned new pricing formula is designed to change the incentive structure. To encourage domestic firms to invest in R&D, the Korean government announced a new R&D investment plan in February. The plan is part of the government’s efforts to strengthen the global competitiveness of the bio-medical industry and foster it as one of its new growth engines.

One of the key benefits is tax deduction. So far, drug makers received 3 to 6 percent of tax deductions on R&D investments. Under the new investment plan, the rate of tax deductions will be expanded to 20 percent, the highest level in the world.

The government will form an R&D fund to finance the development of new drugs. In the next five years, the government plans to raise a “Bio-Medical Fund” to 2 trillion won.

The Health and Welfare Ministry’s R&D program is focused on basic research and clinical study infrastructure. In the clinical study field, significant progress has already been achieved in the form of increased multinational clinical trials in Korea.

Other than the clinical study, the ministry is witnessing achievements in vaccine development and creating research-based hospitals. The ministry plans to give each of the big five hospitals a budget of 4.5 billion won annually for the next five years to help support their research capabilities.