South Korea Pharmaceuticals and Healthcare Report Q3 2012

BMI View: A key theme in the South Korean pharmaceutical market is the government's incessant pharmaceutical price cuts that have created a cloud of uncertainty over the sector. In addition, a price cut announced in August 2011 is set to be effective later in 2012, which will mean an average 17% price reduction. Consequently, we expect subdued pharmaceutical sales growth in 2012 to be subdued. Despite this, we believe the country will continue to attract pharmaceutical companies given the population's higher per capita pharmaceutical and healthcare expenditure of US$260 and US$1,557 respectively, as well as the highly innovative pharmaceutical research and development environment.
Headline Expenditure Projections ?? Pharmaceuticals: KRW16,392bn (US$14.8bn) in 2011 to KRW16,905bn (US14.2$bn) in 2012; +3.1% in local currency terms and -4.0% in US dollar terms. Local currency forecast down slightly from Q212.
?? Healthcare: KRW83,450bn (US$75.3bn) in 2011 to KRW88,209bn (US$74.1bn) in 2012; +5.7% in local currency terms and -1.6% in US dollar terms. Local currency forecast up slightly from Q212.
?? Medical devices: KRW4,432bn (US$4.0bn) in 2011 to KRW4,898bn (US$4.1bn) in 2012; +10.5% in local currency terms and +4.1% in US dollar terms. Local currency forecast up slightly from Q212. Risk/Reward Ratings: South Korea’s Pharmaceutical RRR score for Q312 stands at an unchanged 64.9, placing it in third place in the 18-country Asia Pacific ratings system. The country scores considerably above regional averages for both rewards and risks, underpinned by ageing population, a large pharmaceutical market and a largely predictable operating environment. However, downward pressure on prices and other cost-containment measures will increasingly represent a challenge to pharmaceutical companies, although the free trade agreement (FTA) with the US is seen as a welcome development by multinational companies.
Key Trends & Developments ?? Four drugmakers in South Korea filed an injunction and annulment suit against the government's price cuts in March 2012. The ministry said the discount will provide savings that are crucial for the national health insurance fund and others. The drugmakers said the discount, effective from April 1 2012, will cause excessive harm, primarily to small and medium-sized firms that depend on sales of generic drugs.
?? In March 2012, South Korean tobacco and ginseng product manufacturer KT&G announced that it would establish a pharmaceuticals business to diversify its offering. The company set up KT&G Life Sciences, formerly called Mazence, which it purchased at the end of 2011. KT&G will develop treatments for cancer and osteoporosis, as well as medicines for atopic diseases, diabetes and obesity.
BMI Economic View: We expect South Korea's shrinking current account surplus to persist. Sustained higher oil prices through 2012, coupled with inventory restocking in H212, are likely to keep the country's imports bill elevated, while a gradual global recovery should prevent a sharp turnaround in exports. Consequently, import outperformance should see the current account surplus narrow to US$14.7bn in 2012 from US$26.5bn in 2011, or from 2.3% to 1.5% of GDP.
BMI Political View: Both the governing Saenuri Party and the main opposition, the Democratic Unified Party (DUP), are calling for greater welfare and chaebol reforms to bolster their chances in the April 2012 legislative election. However, the former appears to be adopting a far less aggressive, more pragmatic policymaking approach. Regardless of the outcome, we believe that the South Korea-US Free Trade Agreement will stand and the DUP is unlikely to carry out its threat to renege on the agreement. We also believe the measures proposed by both parties to rein in the chaebol will be in vain, unless there are genuine efforts to curtail further government involvement with the conglomerates.