Invest KOREA

Pharmaceutical companies in the country are rapidly expanding investment to develop new groundbreaking drugs

Last year, Hanmi Pharmaceutical sealed a series of large-scale new drug export deals with global pharmaceutical companies. This triggered a change of business strategies from other major pharmaceutical companies in Korea, which are now keen on developing new drugs and coming up with growth strategies. Some of these companies, including Green Cross, are increasing their investment in the global pharmaceutical market. Others, including Boryung Pharmaceutical, are making more export deals with pharmaceutical companies, especially in emerging economies.

This trend is quite different from the past, as companies had focused solely on sales performance.

Now, more Korean pharmaceutical companies are trying to develop their own capacity for the future, either by developing new drugs or by engaging in business with global pharmaceutical companies. CEOs of major pharmaceutical companies in Korea also strongly reaffirmed their will to increase R&D investment this year. Accordingly, the focus of pharmaceutical businesses will be shifted from sales performance to R&D activities. Such proactive investment strongly suggests that the future of this industry is bright.

Global drug development by Korean pharmaceutical companies

Three years after the chemical substance patent system was first introduced in 1987, Korea developed its first drug, embarking on a long journey of development. More than 25 years have passed since then and the country is developing drugs not only for its own market, but for overseas markets as well. If such trends continue on, Korea will be known as a strong global player in the pharmaceutical industry.

So far, Korean pharmaceutical companies made profits by exporting their technologies to international pharmaceutical companies. In the future, however, Korean companies will earn profits by developing their own drugs through invested funds. Over time, these pharmaceutical companies will become more capable of developing new drugs on their own.

The history of drug development in Korea dates back to 1991 when SK Chemicals’ platinumcomplex anti-cancer agent (Sunpla) was approved as the first new drug in Korea. In 2003, LG Life Sciences managed to receive the US FDA’s approval for its quinolone antibiotic Factive, and released it as a new drug. It unfortunately did not reach commercial success. In 2014, Dong-A ST’s super antibiotics Sivextro was approved by the US FDA as a new global drug through an outlicensing deal, and it is well on its way of reaching a major breakthrough. More recently, Korea’s new drug pipe lines in phase 1 through 3 are increasing in number.

The best case scenario is that Hanmi Pharmaceutical and other major pharmaceutical companies will develop blockbuster drugs and emerge as global players in the next 15 years. 

Change in profit structure of Korean pharmaceuticals

In 2015, major pharmaceutical companies spent more money on R&D, sacrificing their operating profit. This trend will continue in 2016 as more money will be spent to strengthen R&D infrastructure rather than to increase operating profit. This money will be used to form a strategic alliance with biopharmaceutical start-ups in the form of equity investment to acquire new drug pipe lines, and to conduct more clinical trials at a global scale. As many companies will boldly make R&D investment, the operating profit of major pharmaceutical companies will likely decrease for the next one or two years. 

New global drugs developed by major companies Last year, Hanmi Pharmaceutical made large-scale R&D investment and closed six out-licensing deals for its pipe line technologies. The six deals, as a whole, posted USD 605.6 million in deposits, USD 6.4 billion for milestone payments, and a double-digit royalty.

Dong-A ST released Sivextro on the global market through an out-licensing deal with Trius Therapeutics (now acquired by Cubist). This may be the first commercial hit on the global market. Its diabetic neuropathy (DA-9801) drug will also be commercially successful if it proves satisfactory in its safety and

efficacy after phase 3 clinical trials of the U.S. FDA clinical research.

Meanwhile, Green Cross is waiting for the FDA to grant a new drug license for its immunoglobulin IVIG-SN. Its drug for Hunter syndrome was approved by the U.S. FDA as a rare disease medicine in 2013, and is currently scheduled to begin phase 1 clinical trials.

SK Chemicals out-licensed its anti-hemophilic drug (NBP601) technology to an Australian company CSL, and applied for the US FDA approval. It is highly likely to become a commercial success as a global drug.

A subsidiary of SK Holdings Co., Ltd., SK Biopharmaceuticals is developing its own anti-epileptic drug (YKP3089) which already passed phase 2 clinical trials of the U.S. FDA as the first of its kind in the world. SK Biopharmaceuticals is also developing anti-narcoleptic and acute repetitive seizure treatments as

global new drugs.

Furthermore, JW Pharmaceutical Corporation’s Wnt anti-cancer agents (treatment for acute myeloid leukemia) have almost reached phase 1 completion of clinical trials in the US. 

ViroMed’s gene medicine (VM202) is going through phase 3 clinical trials as a treatment for lower limb ischemia and diabetic neuropathy. Yuhan Corporation’s degenerative disc drug (YH14618) is also going through phase 2 clinical trials. 

“Open innovation” to be actively utilized

It is estimated that many Korean pharmaceutical companies will utilize the research capabilities of foreign companies more actively when it comes to developing new drugs, although they can sometimes start from scratch by finding new chemical substances themselves. Hanmi Pharmaceutical, for example, has been emphasizing the importance of “open innovation.” In fact, Hanmi has been actively cooperating with biotechnology startups through various cooperative models. It now plans to secure a new engine of growth by developing next-generation drugs and innovative biopharmaceutical technologies. Open innovation will thus help expedite drug development and reduce development costs.

For instance, Hanmi Pharmaceutical secured the shares of Allegro by investing USD 20 million as of January 2015 and is jointly developing Luminate. In August 2015, it developed a promising drug substance Repebody, an artificial antibody platform, in collaboration with a biotechnology start-up Repugen. It is expected that Hanmi will continue to acquire shares of biotechnology start-ups. 

On this note, in March of this year, Yuhan Corporation invested USD 10 million to form a joint venture company (JVC) called ImmuneOncia Therapeutics, LLC, with biopharmaceutical company Sorrento Therapeutics in the United States. Yuhan has expanded its equity investment on other biopharmaceutical companies such as Bioneer and Theragen Etex. It is expected that Yuhan will continue to invest not only in R&D but also in acquisition of shares to expand its pipe line or secure more licenses based on its sufficient cash reserve worth KRW 557.1 billion (USD 485.2 million).

In May 2015, Green Gross Holdings invested USD 7.5 million in a US-based biopharmaceutical startup Juventas Therapeutics, jointly with POSCO Venture Capital. Ildong Pharmaceutical also signed a joint development agreement with Cellivery Therapeutics for the development of Parkinson’s treatment ICP-parkin. The agreement will allow the two companies to jointly develop a drug candidate iCP-Parkin by utilizing the macromolecule intracellular transduction technology (MITT), Cellivery’s original technology. iCP-Parkin treats the loss of dopaminergic neurons, the fatal symptom of the Parkinson’s Disease.

Government’s determination to nurture pharmaceutical industry

In its meeting with President Park Geun-hye this year, the Ministry of Health and Welfare announced its plan to push the biopharmaceutical industry as a new engine of growth for the Korean economy. The industry is expected to create 760,000 jobs and KRW 65 trillion (USD 56.7 billion) in added value in 2016. It also announced that the market size of Korea’s biohealth industry will increase to become the world’s 7th largest by 2017. To create more success stories similar to Hanmi’s, the Ministry promised to invest KRW 150 billion (USD 130.8 million) in global healthcare funds to provide subsidies for Korean new drugs going global, to strategically nurture precision and regenerative medicine industry including stem cell bank, and to provide KRW 115.5 billion (USD 100.7 milion) worth of financial support for research and development of medical devices.

It’s clear that the government is well aware of the importance of the biopharmaceutical industry and its potential for growth. Whether the government accomplishes its goals this time or not, it will continue to nurture a world-class pharmaceutical industry.

Growth of Korean pharmaceutical companies on the world stage

Korean pharmaceutical companies have significantly invested in developing new drugs over the last 25 years. As such, 2015 was a notable year for Korean companies with many of them making a mark on the global pharmaceutical market with successful out-licensing deals. It is now time for new drug pipe lines of Korean companies to take center stage on the international level.

Over the next ten to fifteen years, Hanmi Pharmaceutical and Green Cross are likely to emerge as strong global players. Other major pharmaceutical companies will also make much progress as they will focus on overseas markets. From 2020 to 2025, there is a high chance that “true Korean” drugs that are domestically tested and approved by the FDA will emerge. As Korea does not have its own distribution channel, these new drugs will be distributed through licensing agreements with global pharmaceutical companies. From 2025 to 2030, the independent distribution channels of Korean companies can be established, through which new global drugs developed in the country can be sold to customers around the world. By this time, Korean companies will most likely have accumulated sufficient funds

and global marketing know-how for establishing their own global distribution networks. If this scenario holds true, Korean pharmaceutical companies will become global players both in name and reality.

By Tae Gi Ha

Financial Analyst / SK Securities

tgha@sk.com