Low profitability is cited as a key reason South Korea depends heavily on overseas sources for the raw materials used in state-designated essential medicines. These drugs — ranging from intravenous fluids to emergency antidotes — are indispensable, but margins are thin, so pharmaceutical companies buy ingredients from China and India rather than at home. Because prices set under the national health insurance system are low, using domestic ingredients would mean selling below cost. Industry officials point to this as a fatal weakness: any disruption in overseas supply of raw materials could trigger a public health crisis.
Pharmaceutical companies routinely replace domestic ingredients with imports, using cheaper materials from abroad to meet low selling prices, according to industry sources on the 26th.
The problem is that the greater the reliance on foreign sources, the more fragile the supply chain for these ingredients becomes. Last year, 68.9% of finished essential medicines could be supplied domestically, but only 22.1% of the raw materials used in those domestically produced drugs could be sourced at home. Even when the finished drug is made in Korea, dependence on foreign suppliers for key ingredients means that production problems, quality issues or export restrictions abroad translate immediately into production disruptions at home.
The government has been rolling out measures to support domestic production. A leading example is preferential pricing for essential medicines that are made with domestically produced ingredients or whose ingredients are manufactured in-house. The Ministry of Food and Drug Safety is also seeking a budget for the second phase of its essential medicines research program, which begins in 2027, to support not only the development of manufacturing and quality-control technology but also the commercialization of both ingredients and finished drugs.
Industry officials say pricing preferences are largely focused on finished drugs, which limits their effectiveness in covering the cost for ingredient makers of building and maintaining production facilities. Ingredient plants require heavy upfront investment, and companies are reluctant to commit to such spending without a guarantee of sustained sales volumes.
Major economies intervene more directly at this stage. The United States has committed federal money to building domestic capacity for active pharmaceutical ingredients, or APIs, led by health authorities. In 2020, the U.S. Department of Health and Human Services signed a $354 million (about 469.7 billion won) contract with Phlow, a contract development and manufacturing organization that produces essential medicines and APIs in the United States, to help build domestic capacity for key starting materials, APIs and finished drugs.
Stockpiling is another pillar of supply chain policy. Through an executive order last year, the U.S. strengthened its Strategic Active Pharmaceutical Ingredient Reserve, or SAPIR, requiring a six-month supply of APIs for about 26 critical drugs. Where possible, APIs made in the United States are given priority in procurement, turning government stockpiles into a tool for creating demand for domestic production.
The European Union is changing the rules of public procurement itself. The Critical Medicines Act, provisionally agreed by the EU Council and the European Parliament in May this year, requires that purchases of critical medicines be assessed not only on price but also on supply chain resilience. The core of the measure is to link European manufacturing to procurement, strengthening the bloc's capacity to produce critical medicines and APIs and reducing dependence on specific countries outside it.
"If we rely on overseas sources for the drug supply chain, the entire domestic health care system could be shaken by shortages of essential medicines, so the Ministry of Health and Welfare must come up with extraordinary measures," an industry official said. "For state-designated essential medicines at the very least, ingredient production should be treated as health security infrastructure, and the ministry needs to step in directly on facility investment and demand guarantees."