The Ministry of Health and Welfare said on the 25th that it will fundamentally overhaul the country's contract sales organization (CSO) system for pharmaceuticals, about two decades after the practice was introduced, because oversight has failed to keep pace with the rapid spread of CSOs in drug sales. Officials concluded that the gap in supervision has led to illegal kickbacks aimed at promoting drugs.
The domestic CSO market began in the early 2000s, when the Korean subsidiaries of global drugmakers outsourced part of their promotional work to manage sales and marketing staff more flexibly. Use of CSOs then grew quickly, in line with demand to reduce the legal risks of direct sales, after South Korea introduced a dual-punishment rule in 2010 that penalizes both the giver and the receiver of kickbacks and a two-strikes rule in 2014 that suspends insurance coverage for a drug caught twice.
Regulation of CSOs, by contrast, came late. The existing Pharmaceutical Affairs Act banned kickbacks only from drug suppliers such as manufacturers and importers, so it could not directly regulate illegal promotion by CSOs. A 2021 revision of the act created grounds for punishment, and in 2023 the concept of a "pharmaceutical sales promoter" and a reporting requirement were introduced, bringing CSOs into the regulatory framework.
But the subcontracting structure remained a blind spot in oversight. The current Pharmaceutical Affairs Act requires a CSO that hands promotional work to another CSO to notify the original client in writing within 30 days, but sets no limit on the number of times or levels this can occur. According to a report titled "Research on Strengthening the Management and Supervision System for Pharmaceutical Sales Promotion," submitted by the ministry to the office of Rep. Kim Yoon of the Democratic Party of Korea, subcontracting typically runs two or three levels deep but was found to extend to as many as seven.
Drugmakers themselves also fail to properly track subcontracting down to lower-tier CSOs. In a survey of 23 drugmakers that use CSOs, conducted by Kim & Chang on behalf of the Korea Pharmaceutical and Bio-Pharma Manufacturers Association, 43% said they cannot manage subcontracting or do not know its status.
Although contracts include a duty to report subcontracting (91%) and clauses restricting or prohibiting it (78%), these have not translated into actual management. The current system relies on notification by the CSO, and with no separate means to verify it, the client drugmaker finds it hard to grasp the existence or activities of lower-tier CSOs if the CSO does not disclose the subcontracting.
The problem is that the margin arising at each subcontracting level can serve as a source of funds for illegal kickbacks. When an upper-tier CSO passes work to a lower-tier CSO for a lower fee than it received from the drugmaker, a margin is left in the middle, and such funds accumulate as subcontracting is repeated. If this money is siphoned off through fake tax invoices or false labor and service costs, it can be used to fund illegal kickbacks. Because the funds are dispersed as they pass through multiple CSOs, it is also not easy for drugmakers or authorities to trace the final destination.
The ministry's overhaul is expected to focus on raising the entry bar for CSOs and limiting multi-layered subcontracting. At present, a firm can operate as a CSO simply by meeting registration requirements, but going forward the qualifications will be tightened so that only firms with real management capacity — such as internal control standards and compliance systems — can enter the market. For subcontracting, the ministry is likely to consider capping the number of levels or requiring the prior consent of the original client drugmaker before work is handed to a lower-tier CSO. A cap on CSO fees, by contrast, is seen as unlikely to be introduced, partly out of concern that it would distort the market.
"Both the pharmaceutical industry and the government recognize the problems that arise in the subcontracting structure," an official at the ministry said. "We will urgently pursue reforms that can effectively improve the CSO management system, including subcontracting."
