Brett Moffat's  Instablog

2009 was a bumper year for global pharmaceutical M&A, with drug makers’ deals amounting to U$147.2 billion, including Pfizer’s U$68 billion deal for Wyeth and Merck’s U$41 billion deal with Schering-Plough, with most predicting M&A activity is set to continue throughout 2010 and beyond, buoyed in particular by emerging market deals.

Which was the case earlier this month, when GlaxoSmithKline (GSK) announced a strategic alliance with Korea’s Dong-A Pharmaceuticals Co., Ltd. (000640:KS), acquiring a 9.9 percent minority equity shareholding in Dong-A for KRW 142.9bn (U$115 million).

It is “a significant opportunity for GSK to extend its commercial footprint and build operational scale in this fast growing Asian market,” said Christophe Weber, GSK’s senior vice president & regional director of Asia Pacific, in a press release regarding the alliance.

Another pharma giant, Novartis, is also seeking local partnerships in Korea, recently pledging U$20 million for the Novartis venture fund to provide financial support and technical counseling for local small-sized bio companies with innovative ideas.

The fund has so far invested U$1 million each in, Neomics Inc., a local oncology bioscience startup, and PharmAbcine, a therapeutic antibody treatments provider.

Pfizer Korea, have also stated their will to seek more opportunities for partnerships in Korea as they try to develop treatments for Asia-prevalent diseases.

Last month, it was also reported that Bayer (NYSE:BAY) was rumored to be assessing acquisition targets in Korea, however, no deals have been announced so far.

Whilst Novartis and Sanofi-Aventis are both participating in the Korea Trade-Investment Promotion Agency’s ‘Global Alliance Partnership Series’, an initiative created to facilitate R&D cooperation, investment, and strategic alliances between Korean companies, universities and research institutes, and leading global corporations.

Korea’s pharmaceutical industry has also caught the eye of financial investors, with Singaporean sovereign wealth fund Temasek Holdings acquiring a 10-per-cent stake in Celltrion (068270:KS), a biosmiliar company, for U$187.5 million, in April of this year.

According to Korea’s Ministry of Education, Science & Technology’s Biotechnology White Paper for 2007 and data compiled by the Korea Food and Drug Agency, the number of global clinical trials undertaken in Korea under the sponsorship of multinational companies surged from only 5 in the year 2000 to 216 in 2008, with an estimated 60,000 Korean patients enrolled in these clinical programs in 2008 and 2009.

“This sharp increase is a testament to the high degree of professionalism and efficiency at Korea’s leading hospitals, where most of the clinical trials are undertaken,” Friedrich Gause, Bayer Korea CEO stated at the ‘Pharma CEOs Round-table Meeting with the Ministry of Health and Welfare’, in Seoul, May 20, 2010, reported the Korea Herald.

Whilst in an interview with the JoongAng Daily in October last year, Guenter Reinke, CEO of Boehringer Ingelheim Korea Ltd (BIK) commented that “Korea has great potential as a market for clinical trials, particularly because of the country’s solid hospital infrastructure, ample research data and strong government support.”

In fact, Korea’s infrastructure for clinical trials is partly the result of the government’s conscious efforts to cultivate the health care industry.

“One key goal of the Health and Welfare Ministry’s R&D program is to make Korea the hub of clinical development in Northeast Asia,” Maeng Ho-young, the Ministry’s Director of Healthcare R&D, was quoted as saying at the Round-table meeting.

The Korean government impetus seems already to be bearing fruit, with the world’s third largest drug maker, by sales, Novartis, planning to increase their number of clinical trials from 63 this year to 83 in 2011, according to Novartis Korea’s CEO Peter Jager.

This comes after Novartis announced last October that they will invest US$100 million in South Korea over the next five years to bolster research activities aimed at developing new drugs while increasing cooperation in the domestic bio industry.

“Korea has clear strengths in its excellent medical infrastructure, its world-class researchers and medical professionals, showing high expertise and passion to advance medical sciences in Korea.” Jager said in a statement at the time.

And in June 2009, Sanofi-Aventis, the fourth-largest pharmaceutical company in the world, signed a memorandum of understanding to invest KRW 70 billion (U$56 million) in Korea’s medical R&D sector over the next five years.

Another major global player, Pfizer (NYSE:PFE), currently conducting around 90 multinational clinical trials in Korea, across a range of therapeutic areas, is also looking to add to this number, according to a PharmAsia News report, citing, Pfizer Korea Medical Director Lee Won-Sik.

Global Pharmaceutical Companies’ Emerging Market Push

Korea’s R&D infrastructure is not the only thing attracting global pharma interest.

Slow growth in developed markets, combined with an increase in income levels, and the related lifestyle-related diseases, along with aging populations, in the Asia region, is prompting global pharmaceutical giants, such as GSK, Sanofi-Aventis, Pfizer, and Novartis to expand their business to emerging markets in Asia.

Taking a look at the situation in Korea, the percentage of people over the age of 65 is likely to surge from 11.0% in 2010 to 15.6% by 2020, and shoot up as high as 38.2% in 2050, as South Korea has one of the lowest birth rates among the OECD countries (1.19 children born per woman in 2008), according to a report released by the OECD on May 27, 2010.

According to the same OECD report, the nation’s per capita Gross Domestic Product (GDP) and Gross National Income (GNI) have been steadily rising, with the per capita GDP on a purchasing power parity basis (PPP) reaching U$27,658 in 2008.

These reasons prompted Peter Jager, president of Novartis Korea to state that Korea one of the key emerging pharmaceutical markets in the world, in an interview with a local news outlet.

As well as offering, high-class infrastructure, another advantage of conducting clinical trials in Korea for Asia-focused drugs is genetics. Obviously, as being part of Asia, Koreans are a closer biological make-up to neighboring populations, but according to Gause, the key factor is body size, a crucial part of drug dosage testing. With Asian people in general less robust than their European and North American counterparts.

Additionally, Korea represents a perfect test-bed for diseases more prevalent in Asia than elsewhere, in particular stomach and liver cancer.

Stomach cancer (or gastric cancer) is the most common cancer in Korea, with a recent study by Korea’s National Cancer Center Research Institute pointing the finger at the nation’s salty diet for the high incidence,  stemming from the high amount of pickled food consumed in Korea, such as the national dish – kimchi (fermented cabbage).

“As an R&D-based global pharmaceutical company, Pfizer has realized that it is critical to develop innovative drugs treating liver and stomach cancer, two cancer types more prevalent in Asians and, therefore, [Pfizer] has been leading investments and R&D efforts to provide innovative drugs and medicines in these areas,” Pfizer Korea’s Lee Won-Sik told PharmAsia News, in April 2010.

Domestic Market Size 
According to Invest KOREA, the national investment promotion agency, the Korean pharmaceutical market has shown a 13.9% CAGR from 2006-08, and was valued as the 13th largest pharmaceutical market in the world, in 2008.

With the CAGR of healthcare expenditure to GDP in Korea about twice higher (2.98%) than the OECD average (1.62%), and also, the percentage of drug expenditure in total healthcare expenditure (25.8%) is higher than the OECD average (17.6%).

Korean market size for over the counter (OTC) and ETC (Prescription) drugs - Source: Invest Korea

Strong Government Support

Realizing these factors, and the need to address the rising costs of present and future healthcare, the Korean government identified “Biopharmaceutical and medical equipment” as one of the future engines for economic growth. Creating the KRW 2 trillion (U$1.6 billion) “Bio-Medical Fund” to be used for R&D in order to help accelerate the launch of new drugs, along with tax breaks for companies researching new drugs.

Under the new plan, the rate of tax deductions will be expanded from 6 percent on R&D investments to 20 percent, one of the highest levels worldwide.

In efforts to address these problems Korea’s National Assembly recently passed a revised law to eliminate “kickbacks” and illegal rebate practices, which included stiffer penalties for infringement. The new law is set to come into force from November this year.

In the second-half of 2010 and beyond, interest from global companies and investors in the Korean pharmaceutical market looks set to continue, as strong government support, high-class infrastructure, and emerging market drug gateway, make Korea a competitive investment destination.

Story by Brett Moffat, Investment Partnership Support Team, Invest KOREA.

Sources:
Korea emerging as global drug trial hub – Korea Herald, May. 26, 2010
Korean Bio industry looks for transformation in 2010 – Bio Spectrum Asia, Jan. 18, 2010
Pfizer Will Seek Out More R&D Opportunities in Korea- BioPharma Today (reprinted from PharmAsia News), Apr. 14, 2010
GSK extends presence in Asia with new strategic alliance in South Korea – GSK Website, May 11, 2010
New $1.7B fund aimed at bolstering drug R&D- JoongAng Daily, Feb. 08, 2010
Korea can excel in clinical trials- JoongAng Daily, Oct. 29, 2009
Pharma exec praises support for new drug research- JoongAng Daily, Mar. 09, 2010
OECD: S. Korea, One of Lowest Birth Rate Country -  Maeil Business Newspaper, May. 28, 2010
Salty diet tied to stomach cancer in Korean study – Reuters, Mar. 24, 2010
Investment Opportunity – Biotech & Pharmaceutical Industry – Invest KOREA, Sep. 2009
Novartis – Knowledge Investor – Invest KOREA Journal, Jan. 2009
Pharmaceutical giant Novartis to invest US$100 Mil in S. Korea – Novartis press release, Oct. 2009
Pharma M&A: 10 years, 1,345 deals, $694B- Fierce Pharma Website, Mar. 26, 2010