Korea's Booming Health Care Sector

While many consumers are now familiar with global Korean leaders in manufacturing industries such as semiconductors or automobiles, there are still few blue chip firms among South Korea’s health care and life science-related industries.

Korea’s health care companies have faced challenges competing with global players that have secured patents and intellectual property for products. The vast financial resources and research and development (R&D) capacity of many multinationals also poses tough barriers to entry for others in the health care industry. Breakthroughs in medical products also, understandably, can take quite some time to develop and have to overcome many hurdles. Therefore, like their peers in markets with less developed pharmaceutical industries, Korean drug and health care companies have tended to focus more on manufacturing generic drugs to turn profits rather than investing in research and development that can lead to innovation.

Recently, however, we have been seeing some encouraging developments in this sector, including more symbiotic relationships between Korean companies and multinational drug firms researching or developing new drugs and treatment technologies. These relationships typically involve a "licensing out" structure, in which smaller drug developers would contract with more resourceful multinationals to pursue clinical trials and obtain approvals from the different health authorities, and distribute products in global markets. In this setting, the multinational companies would more effectively replenish their R&D pipelines to stay competitive, while drug developers receive funding in order to continue their R&D and make their products available in global markets, which would not otherwise be accessible to them.

Part of this shift has come about since Korea’s central government began to take a more supportive role in health care industries. In March, the government revealed plans to spend 340 billion won (about US$300 million) within the year to support R&D activity in select scientific areas, such as stem cells and biologic medical products. This may not be a massive investment, but the market is expecting some catalysts to come from a further relaxing of regulatory burdens.

Over the long term, we believe that industry should benefit and grow as a result of such recent changes. In 2009, health care companies comprised just 1.8% of the shares on the Korean stock market. But now they account for 3.4% of the market, having grown more than 100% in terms of market capitalization. Of course, of this surge, a certain contribution came from share performance of companies long focused on R&D that have made notable progress in new technology.

When we discuss the fundamental strengths of Korean industry in general, we often cite well-educated industrious workers, and corporate versatility and nimbleness. I believe that the health care sector's development also reflects these fundamentals. Industry firms have shown such flexibility to capture niche opportunities in the global marketplace, and the manpower to turn initiatives into reality with its aptitude and perseverance.

The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.

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