Small and mid-sized drugmakers that have grown by relying on sales muscle rather than their own product strength are expected to take a direct hit as the government tightens oversight of contract sales organizations (CSOs), which handle pharmaceutical sales on an outsourced basis. Falling generic drug prices have already squeezed profitability, and now restrictions on outside sales through CSOs threaten to weaken both margins and sales competitiveness at the same time.
According to the Ministry of Health and Welfare on the 25th, there were about 400 domestic drugmakers based on finished-drug production as of 2024, of which an estimated 350 or so are small and mid-sized firms. Most of these smaller companies depend on generic sales as their main source of revenue, without developing new drugs of their own or holding blockbuster products. When the patent on an original drug expires, they launch a generic with the same active ingredient and then use their sales force to secure prescriptions at hospitals and clinics. In the generic market, where many products share the same ingredient and differ little from one another, revenue ultimately comes down to how many medical institutions a company can reach through sales activity.
Smaller firms that lack their own sales organizations have made active use of CSOs in this process. Rather than hiring a large in-house sales force, they pay a set commission to a CSO to handle promotion, securing a nationwide sales network at a relatively low fixed cost.
This sales structure has come under pressure on two fronts at once, as generic price cuts have coincided with tighter CSO regulation. Effective the 1st of this month, the government overhauled its drug pricing system, lowering the base price ceiling for generics to 45% of the original drug's price, down from 53.55%. On top of that, if entry requirements for CSOs are tightened and multi-tiered subcontracting is restricted, expanding sales through outside networks also becomes more difficult. Building up an in-house sales force raises labor and administrative costs, leaving smaller firms with more limited room to respond.
Lee Jae-kook, vice chairman of the Korea Pharmaceutical and Bio-Pharma Manufacturers Association, explained the policy this way: "The direction of government policy is that it will not leave in place a structure in which companies maintain or grow their market position by relying on generics and CSOs, without any separate research and development (R&D) effort or investment in manufacturing facilities." He added, "I see the intent as reducing the money spent on excessive sales-promotion competition so that more resources can be channeled into R&D and innovation."
