[Edaily Reporter KIM SUNG-JIN ] The government has expanded price premium benefits to encourage the use of domestically produced active pharmaceutical ingredients (APIs), but the pharmaceutical industry continues to voice opposition after the government finalized criteria that do not recognize APIs produced by subsidiaries or affiliates. Since major domestic pharmaceutical companies have subsidiaries that produce APIs, the industry argues that the system is effectively ineffective. Some in the industry are also calling for “preference with virtually no conditions” to ensure the stability of the API supply chain.

Pharmaceutical Companies with API-Producing Subsidiaries… Left Out of Drug Price Incentives

According to the pharmaceutical and biotech industry on the 15th, the government decided last August, as part of a reform of the drug pricing system, to implement a preferential treatment system for the direct production of active pharmaceutical ingredients (APIs). The core of the policy is to grant a 68% price discount for essential medicines produced using APIs manufactured in-house or domestically sourced, and to extend the preferential period for such medicines from the previous one year to 5+5 years.

This preferential system was established with the intent of providing benefits to companies that contribute to stabilizing the domestic pharmaceutical supply chain, in exchange for lowering the price calculation rate for generic drugs. The government decided to ultimately lower the price of generic drugs—which had been set at 53.55% of the original drug’s price—to 45% through the drug pricing system reform, and this measure serves as a complementary measure to that decision.

The industry has been voicing significant opposition to this policy since its introduction. The concern is that a considerable number of pharmaceutical companies currently receiving price premium benefits for the direct production of active pharmaceutical ingredients (APIs) may be excluded. While the government has decided to grant benefits to companies that “directly produce” APIs, those that produce APIs through subsidiaries or affiliates are unlikely to be included.

Domestic pharmaceutical companies have developed their industry by separating the production of active pharmaceutical ingredients (APIs) from that of finished pharmaceutical products. This is because API production—which requires specialized manufacturing technologies, facilities, and quality control capabilities such as chemical synthesis and purification—differs in nature from finished drug manufacturing, which involves blending raw materials to produce final products like tablets and capsules, followed by approval and sale. There are also numerous examples of companies specializing in APIs that have established independent business foundations by supplying raw materials not only to affiliates but also to external pharmaceutical companies and overseas firms.

Yuhan(000100)A prime example is #HanmiPharm, which secured API production capabilities through its subsidiary Hanmi Precision Chemical. #CHONGKUNDANG owns KYONGBO PHARMACEUTICAL CO., LTD. and CHONGKUNDANG BioCorporation, while #DaewoongPHARMACEUTICAL also produces APIs through Daewoong Bio. Industry experts estimate that, under the current restructuring plan, only a very small number of companies would actually be eligible for the drug price premium benefit.

A pharmaceutical industry official pointed out, “If the policy’s purpose is to expand domestic production of active pharmaceutical ingredients and reduce reliance on overseas sources, it is not reasonable to limit benefits solely based on whether a company is part of the same legal entity.”

While acknowledging

the intent to prevent abuse… “The determination should be based on whether production is domestic”

The government is not limiting the scope of companies eligible for the API price premium benefit to “direct producers” without any justification. An official from the Health Insurance Review and Assessment Service explained, “For essential medicines designated by the state, preferential treatment is granted when domestically produced APIs are used,” adding, “Since it is difficult to fully ascertain a company’s corporate governance structure, it is hard to recognize cases where a subsidiary produces APIs.”

It is also reported that this restriction was imposed because there have been cases in the past where pharmaceutical companies abused the system. A source familiar with the matter said, “There were cases where companies acquired shares in firms producing active pharmaceutical ingredients solely to receive price preferential treatment, and then divested those shares after receiving the benefit.” The source added, “There were also cases where companies used domestically produced active pharmaceutical ingredients while receiving preferential treatment but later replaced them with Chinese-made active pharmaceutical ingredients.”

However, industry insiders argue that rather than unconditionally recognizing or excluding production by subsidiaries and affiliates, criteria should be established to verify whether production actually takes place domestically. Proposals include expanding the scope of recognition to cover entities with clear control relationships—such as wholly-owned subsidiaries—or cases where manufacturing facilities and API information are verified through Drug Master Files (DMFs).

Some also argue that monitoring and oversight should be strengthened rather than narrowing the scope of benefits. They contend that the effectiveness of this system should not be undermined simply because there have been cases of abuse in the past. Another industry official stated, “First, in line with the purpose of stabilizing the supply of active pharmaceutical ingredients, we should provide preferential drug pricing benefits while monitoring for companies that abuse the system; if cases of abuse are detected, it is necessary to impose appropriate sanctions.”

There are also calls for bold and flexible policy changes to stabilize the API supply chain. The argument is that if the goal is to increase the self-sufficiency rate for APIs, rather than setting a standard requiring in-house production, the government should consider providing additional incentives to companies that use domestically produced APIs without any conditions.

Some observers believe the government is pushing ahead with its drug price reduction policy and maintaining strict standards out of concern for the health insurance budget. An industry official said, “Since the government’s stance is focused on lowering drug prices, it appears they are trying to avoid expanding preferential pricing benefits by creating a justification for doing so.”