Korean drugmakers cut costs as lower generic prices squeeze research budgets

Korean drugmakers have a bitter pill to swallow: They are about to earn less while being asked to spend more. Generic drug price cuts are pushing pharma companies to slash costs and investments, even as the government offers better pricing to those that keep pouring money into research and development (R&D). 

Ildong Pharmaceutical declared an emergency management system and readjusted its organization, hiring plans and R&D budget for 2026, according to industry sources on Aug. 17.

Another Korean pharmaceutical giant, Chong Kun Dang, also consolidated parts of its sales organization and reassigned personnel in July.

“We took action in advance as a precaution because we expected the drug price cuts to have an impact,” a Chong Kun Dang source said.

A midsize drugmaker, which wishes to remain anonymous, is considering cutting a planned 120 billion won ($85 million) investment in production facilities in half.

“We’re all on edge and looking for ways to cut costs in every department,” said a source at another midsize pharmaceutical company with annual sales of around 100 billion won. “We’re also looking for ways to source cheaper ingredients while maintaining the same efficacy.”

Smaller drugmakers with annual sales of around 20 billion won to 30 billion won have also been put up for sale, according to industry sources.

The government lowered the reimbursement rate — the portion of the price national health insurance pays out — for generic drugs to 45 percent of the price of the original drug, down from 53.55 percent, on Aug. 1. 

The new rate applies to new generic drugs that applied for national health insurance coverage in July. The lower prices are expected to take effect in October. Prices for drugs already covered by national health insurance will be adjusted gradually over 10 years.

The industry fears the cuts could come with a hefty price tag.

Pharmaceutical and biotech industry groups estimate that the overhaul could result in as much as 3.6 trillion won in lost sales and 14,800 fewer jobs.

“The impact on sales will start to show in about three months,” an executive at a major pharmaceutical company said. “The industry could begin taking more drastic measures toward the end of this year.”

The government designed the overhaul to reduce the pharmaceutical industry’s reliance on generic drugs and encourage innovation. Innovative and quasi-innovative pharmaceutical companies that meet requirements such as R&D investment will receive preferential reimbursement rates of 60 percent and 50 percent of the original drug price, respectively.

But there is a catch: The same companies bracing for lower profits are also being pushed to spend more on innovation.

Industry officials worry that weaker profitability from the price cuts could instead leave drugmakers with less money for R&D.

R&D spending as a share of sales in 2025 stood at 15.8 percent for Daewoong Pharmaceutical, 14.8 percent for Hanmi Pharmaceutical, 11.1 percent for Yuhan and 11 percent for Chong Kun Dang.

The average among listed pharmaceutical companies was 8.4 percent. But more than 20 drugmakers with annual sales of at least 100 billion won spent less than 5 percent of their sales on R&D.

“More R&D is undoubtedly the right direction, but the reality is simple: You need money to invest in technology, talent and the future,” Jeong Chan-ung, a representative of the Korea Pharmaceutical and Bio-Pharma Manufacturers Association, said.

The belt-tightening is not confined to Korea.

Global pharmaceutical giants are also cutting costs in response to patent expirations and pressure on drug prices. Pfizer aims to cut $9.7 billion in costs by 2029.

But Big Pharma is cutting selectively, not simply cutting back.

Pfizer CEO Albert Bourla recently said the company is shifting spending from administrative functions to R&D.

Pfizer’s R&D spending rose 12 percent on year in this year’s second quarter.

R&D spending as a share of sales in 2025 stood at around 24 percent for Merck & Co. and AstraZeneca, above 20 percent for Bristol Myers Squibb and Eli Lilly and Company, and around 16 percent for Pfizer.

“Korean pharmaceutical companies need to streamline their cost structures while pursuing growth strategies such as R&D and overseas expansion,” Consulting firm Deloitte Korea said in a report it released in April.

But falling profits could leave Korean drugmakers with relatively less room to make those investments. “The market will be reorganized around companies with R&D and in-house production capabilities,” the report said. “The disparity between large and innovative pharmaceutical companies and smaller, generic-focused drugmakers will widen.”

BY CHOI EUN-KYUNG [lee.jiwon10@joongang.co.kr]