A Drastically Changed Pharmaceutical Regulatory Environment... What Are the Institutional Implications for Defending "Innovative Company" Status?

—Legal column by Attorney Jang Se-chang of the law firm (LLC) Daeryun

The meaning of compliance is changing in the domestic pharmaceutical industry. Whereas in the past it was a shield to avoid fines of tens of billions of won, from this year compliance has evolved into a core financial indicator that determines the government's drug-price preferences and a company's very survival. In particular, in an environment where the reference ceiling for new generic drug prices is being sharply lowered from the previous 53.55% to 45%, maintaining the Ministry of Health and Welfare's Innovative Pharmaceutical Company certification has become a key variable determining the price competitiveness of a company's product portfolio. Against this backdrop, the revised Innovative Pharmaceutical Company certification notice and the drug-price system reform are demanding new strategies from corporate executives.

The most intuitive change is the rise in the financial hurdle. The R&D investment ratio requirement for innovative-company status for pharmaceutical firms with annual sales of 100 billion won or more has been raised from the previous 5% of sales to 7%. Although a three-year grace period has been granted, a 2-percentage-point increase has a direct impact on cash flow of hundreds of billions of won. Accordingly, R&D budgeting is no longer solely the research lab's task. Executives must proactively simulate long-term R&D budgeting and pipeline diversification strategies so as to meet the statutory standard three years hence. Cutting investment to improve short-term results now could be a self-defeating move that gives up drug-price competitiveness three years later.

Along with this, the shackle of uncertainty from rebate detections, which had troubled pharmaceutical firms in the past, has also been partly resolved. Previously, when litigation dragged on, that period was not included in the disposition date, creating great instability. However, through the revision, the standard has been clarified so that acts for which five years have elapsed from the date the violation actually ended are completely excluded from review. This means that the past judicial risks pending over the long term can now be more accurately quantified. Executives can now re-examine the timeline of the potential risks the company bears and predict and cope with the impact on future maintenance of innovative-company certification.

The expansion of a company's judicial defense space is also a noteworthy change. In the past, there were unfair cases in which a company was excluded from preferential benefits at the source merely for being in litigation contesting an administrative disposition. But now, being in litigation alone does not result in exclusion from certification. The certification is maintained for the time being, and the structure has changed so that room for certification cancellation remains only within one year from the date a defeat is finally confirmed. If there is an injustice in the disposition, a company can now actively pursue administrative litigation without fear of losing certification. Accordingly, executives have secured the capacity to closely weigh the opportunity cost that would be lost between accepting the disposition and pursuing litigation, and to direct a more aggressive and strategic legal response.

On top of this, the risk of excessive cumulative demerit points from overlapping sanctions by multiple ministries can now also be reasonably controlled. This is because the system has been supplemented so that, even if a single violation results in overlapping dispositions from both the Ministry of Food and Drug Safety and the Fair Trade Commission, it is counted as a single violation in the certification review. This has opened the way for the government-relations and legal organizations to calculate the dispersion of impact by ministry and establish a more realistic response strategy when a crisis arises.

Ultimately, in the revised regulatory environment, losing the Innovative Pharmaceutical Company title means having to start market entry from a disadvantageous position. The compliance report that now lands on executives' desks is a frontline strategy for defending the company's operating profit margin. As the revision has clarified the boundaries of defense rights and shackles, only companies that accurately understand the changed rules and redesign their internal control systems will seize the upper hand in the coming upheaval.

Reporter Lee Dong-oh (canon35@mt.co.kr)

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