Is there a separate 'drug price premium' track for companies other than innovative firms?

Attention is drawing to the ’in-house API production’ premium track (68% of the original price cap), in addition to innovative and semi-innovative companies

Variables include rates applying up to 10 years and raw material cost…targeting patent expiring blockbuster items

Following the adjustment of the generic drug price calculation rate from 53.55% to 45%, the 'drug price calculation system' is emerging as a critical exit strategy for the pharmaceutical industry to defend profitability.

The drug price bonus tracks under the revised drug pricing system are broadly divided into 'company-level premium' and 'product-level premiums.' While the pharmaceutical industry's focus was previously concentrated on company-level premiums, such as for Innovative Pharmaceutical Companies, the 'in-house API production' premium track granted to individual products is recently surfacing as a new mechanism for price defense.  

According to the pharmaceutical industry on the 4th, supplier-based company-level premiums determine the generic price caps for a given company across the board depending on whether specific eligibility criteria are met. Companies certified as Innovative Pharmaceutical Companies based on metrics such as R&D investment relative to revenue receive a premium rate of 60%, while semi-innovative pharmaceutical companies receive 50%. Additionally, pharmaceutical manufacturers maintaining a designated threshold of essential/low-profit drugs (anti-withdrawal drugs) are categorized as supply-stabilization leader companies, qualifying for a 50% price calculation rate premium.  

During discussions surrounding the reform of the drug pricing system, these company-level premiums drew significant attention from the pharmaceutical industry. Frontline drugmakers deployed exit strategies such as re-evaluating their R&D investment ratios and restructuring research and development expense line items on their financial statements.

68% Price Cap + Up to 10 Years… Why the Pharma Industry Is Focusing on "In-House API Production"

Recently, in addition to securing eligibility for company-level premiums, interest is mounting in "product-level premiums" tailored to the specific characteristics of individual drugs.

Product-level premiums are granted based on individual product attributes, such as drugs utilizing ▲in-house manufactured APIs, ▲national essential drugs using domestic APIs, ▲injectable antibiotics and essential pediatric medications, and ▲designated pharmaceuticals to resolve supply instability. The underlying objective is to provide preferential pricing benefits for products that contribute to health security and pharmaceutical supply chain stability.  

Among these, the track attracting the most focus from the pharmaceutical industry is 'in-house API production.' The government has agreed to guarantee a drug price equivalent to 68% of the original price cap for a baseline period of 5 years if a generic is produced by directly synthesizing active pharmaceutical ingredients in the manufacturer's own facility. Furthermore, if eligibility conditions are continuously met, an additional 5-year extension is granted, allowing drugmakers to maintain elevated drug prices for up to 10 years or more (5 years + 5 years + α).

AI-generated image.

Under the previous drug pricing system, the premium duration was limited to just 1 year, yielding minimal practical benefits. However, under the new pricing framework, sentiment has shifted dramatically, as the premium period has been expanded to 10 years and the premium rate is applied at the highest level (68%). Because companies can secure a price 23 percentage points higher than the baseline calculation rate (45%) over an extended timeframe, certain products can yield even higher profitability than the Innovative Pharmaceutical Company premium rate (60%).  

Of course, for companies lacking internal API manufacturing infrastructure, the in-house API production premium track is not an easy path. It requires equipping in-house manufacturing plants with chemical synthesis facilities compliant with ICH Q11 standards, and it consumes substantial time, capital, and administrative resources for manufacturing process development and marketing authorization variations. The government also strictly enforces criteria for recognizing in-house API production, limiting eligibility strictly to "production within the marketing authorization holder's (drugmaker's) own manufacturing site," while excluding facilities owned by parent companies, subsidiaries, or affiliates.

Nevertheless, analysts suggest that the ability to maintain a 68% price cap over an extended duration in an environment where the baseline generic pricing rate has dropped to 45% offsets these entry barriers.

'10-Year Rule' and 'Cost Burden' Variables… Targeting Products with Patent Expirations in 2 to 3 Years

Indeed, drug pricing managers across numerous domestic pharmaceutical companies are reportedly engaging in meticulous return-on-investment calculations regarding entry into the in-house API production track.

The single biggest variable is the 'timing of the first generic listing.' Under the regulations, the starting point for the 10-year premium period is calculated based on the 'listing date of the first generic in the market,' rather than the 'listing date of the company's own product.'

​For instance, for hypertension and hyperlipidemia active ingredients where generics were already listed en masse in the mid-2010s, the 10-year limit following the first generic listing has either already passed or is imminent. Even if a drugmaker invests billions of KRW immediately to establish an API synthesis process, there is little practical benefit, as the premium duration has already expired or has only a few months remaining.

​Conversely, the situation is different for molecules whose patents expired within the last two to three years or where the generic market has just opened. A prime example is the diabetes treatment market for DPP-4 inhibitors or SGLT-2 inhibitors, where major originator patents expired in or after 2023. Because the timing of the first generic listing in the market is recent, there remains a window of mathematically 7 to 10 years to receive the 68% drug price premium. This structure allows companies to recover facility investment costs and enhance profitability.

​Another variable is the "cost burden." Pharmaceutical companies must meticulously weigh the manufacturing cost of using lower-cost Chinese or Indian APIs against the operational and maintenance costs of running their own synthesis facilities versus the profit yielded by the 68% drug price premium.

Under this current structure, rather than indiscriminately applying the in-house API production track to all products, drugmakers are evaluating a selective-and-focused strategy—targeting API synthesis investments specifically toward major products with recently expired patents. This represents a two-track strategy: defending overall generic pricing through company-level premiums like Innovative or Semi-Innovative status, while evaluating in-house API production premiums for core flagship products.

​An official from a major pharmaceutical company explained, "If company-level premiums serve as a track to defend the baseline drug prices across the entire company, in-house API production is a targeted strategy to maximize revenue for key products," and added, "The practical benefits of the in-house API production track will be substantially greater for pharmaceutical companies with a high revenue reliance on specific products."

A drug pricing manager at another pharmaceutical company also noted, "For major chronic disease products whose patents have recently expired, we judge that defending a 68% drug price cap for several years is advantageous," and concluded, "We are currently evaluating whether to apply the in-house API production track centered around our key major products."