Korean fine chems work in the shadows

Beyond the limelight

03 February 2009 00:00  [Source: ICB]

A modest domestic market constrains the ambitions of Korea's pharmaceutical fine chemical manufacturers

The Republic of Korea, with its large, affluent population of 40m, has a sizeable pharmaceutical market, a large chemical industry and a technically sophisticated workforce, but the number of fine chemical companies capable of manufacturing active pharmaceutical ingredients (APIs) is relatively small.

Demand for drugs in Korea is high and growing. The market for prescription drugs, which has expanded at a combined annual growth rate (CAGR) of 10.4% since 2004, totaled a respectable $9.8bn in 2008 according to market research firm Datamonitor.

By comparison, the booming Chinese market, which boasted a CAGR of 21.1% during the same period, totaled $20.7bn in 2008. The relatively moribund Japanese market grew at a CAGR of only 2.4%, reaching $65.3bn. Although market growth in Korea will slow to a CAGR of 5.3% over the next few years, sales will total $12.7bn by the end of 2013, says Datamonitor.

There is, moreover, a potential customer base of roughly 781 Korean drug companies, about 570 of which actually manufacture finished drugs, according to Invest Korea, a governmental agency for the promotion of investment. Few of these companies do drug discovery, however, instead licensing innovative products from Western and Japanese companies or focusing on generic drugs, whose APIs could largely be imported from low-cost producers in countries such as India and China.

IN THE SHADOW OF GIANTS

The competition from those two countries has had an important impact on the development of Korea's own API industry, says Jaeyon Yoon, marketing director at SK Life Science, a division of Seoul-based conglomerate SK.

"Usually Korean custom chemical manufacturers are small and not technology-based, so they cannot compete with Chinese and Indian producers," he explains. Most producers make standard intermediates and export - the domestic market for the pharmaceutical chemical sector being relatively small. Few companies export APIs or advanced intermediates.

SK Life Science, the pharmaceutical arm of SK, Korea's third-largest conglomerate (or chaebol), is one of the exceptions.

"We are a technology-based company, with cutting-edge technology such as continuous processing and enzyme processing," says Yoon. "Most of our products - 95% - are pharmaceutical-related, and we are exporting all of the products. We are one of the largest custom chemical manufacturers in Korea."

The firm makes intermediates, advanced intermediates and APIs for clinical materials, says Yoon. "We manufacture under cGMP. Our site has not been audited by FDA and EMEA yet, [but] we are expecting an audit in 2010 from the FDA."

Other notable Korean firms manufacturing pharmaceutical fine chemicals include Daelim Chemical, Daesang, Dong Bang Future Chemical, Dongwoo Fine Chem, Doosan, Estech Pharma, Hansol Chemience, Kolon Chemical, Kyung Dong Pharmacuetical, LG Bio Sciences, Samchully Pharmaceutical, Samsung Fine Chemicals and Yuhan.

A relative newcomer, Seoul-based Celltrion has quickly emerged as a global leader in the contract manufacturing of protein-based drugs, or biologics.

The company has 50,000 liters of cell culture capacity in place and another 90,000 liters on the way. Customers include Bristol-Myers Squibb, which awarded Celltrion a long-term supply contract for Orencia (abatacept), a treatment for rheumatoid arthritis.

Biotech-based Celltrion, like the country's giant electronics industry, reflects the enthusiasm of Korean investors for emerging high-tech markets. By comparison, fine chemical production by chemical synthesis is a mature market with relatively slim margins and many entrenched players. The situation affects the availability not only of investment, but also of manpower.

"It is very hard to find good chemists," says SK's Yoon. "Many of them want to participate in other hot areas."

A combination of differentiating technologies, better market knowledge and customer relationships are necessary for Korea's fine chemical companies to succeed on the global scene, says Yoon. "This industry needs reliability and a track record," he observes. "However, not many companies have this."

CHANGING THE PREMISE

It is possible that the business case for Korean pharmaceutical fine chemicals could become more appealing in the wake of recent moves to liberalize trade, such as the Korea-US Free Trade Agreement (KORUS FTA), which would lift tariffs and provide additional protections for intellectual property.

The Korea Pharmaceutical Manufacturers Association has called the KORUS FTA, which has not yet been ratified, a "major threat" to domestic producers, in part because many of them will be prevented from selling drugs currently treated as generics. Korea's Health Ministry counters that the new environment will improve the competitiveness of domestic firms and encourage greater innovation.

"I am sure that in the long run, small losses will lead Korean medical firms to seek a larger market share," one senior ministry official has been quoted saying.

Indeed, after 1995, when Korea adopted IP protections consistent with TRIPS (the agreement on Trade-Related Aspects of Intellectual Property Rights), leading Korean drug firms began to focus on the potential for greater returns offered by novel, patent-protected drugs, and they placed new emphasis on drug discovery, according to Rob Bryant, director of the UK-based fine chemical consultancy Brychem.

Well-resourced chaebol such as SK and LG also recognized the opportunity and made moves into the market. Several drugs discovered in Korea have since been licensed to Western firms. SK, for example, licensed carisbamate, an experimental anticonvulsant, to Johnson & Johnson in 1998. Only last month, Dong-A PharmTech licensed udenafil, a treatment for erectile dysfunction, to US drug company Warner Chilcott.

At the same time, Korea's generics market could become less comfortable for established domestic players as foreign generics firms target it more aggressively. The Swiss firm Sandoz, for example, recently broke ties with local partner Dong Wha in order to focus greater attention on the Korean market, while Israel-based generics leader Teva Pharmaceuticals and Indian majors Ranbaxy Laboratories and Dr. Reddy's Laboratories have expressed interest in entering the Korean market.

Non-Korean innovators are penetrating the market more deeply as well. Korea's Health Insurance Review Agency reportedly found that the market share of foreign firms increased from 22.2% in 2000 to nearly 28% in 2006. Pfizer's interest in Korea has extended to plans to invest $300m in the country on R&D by 2012.

Korea's drugmakers can look for hope in a government plan, announced in 2007, that will plow Korean won 1 trillion ($7bn) into the industry over a period of ten years. Whether the fine chemical industry will also benefit is an open question.

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By: Clay Boswell
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