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S Korean pharma laid low by global retreat and Samsung scandal

Scandal compounds grim mood as international partnerships flop

Samsung Bioepis had high hopes for a diabetes biosimilar project with Merck, until the U.S. side canceled the deal. 

SEOUL -- South Korea's pharmaceutical companies are being frozen out of partnerships by major European and U.S. partners, hitting an industry already rocked by the Samsung BioLogics accounting scandal.

The country's drugmakers have faced a string of failed product development attempts. This has lessened their attraction for global pharma companies who are increasingly looking to startups or universities for partnerships. Failures are par for the course in a business where the success rate is estimated at 1 in 30,000, yet South Korean players' shares are falling across the board. 

The companies' struggles darken the outlook not only for the Samsung group, which saw pharmaceuticals as a promising growth field, but for a whole industry that was once considered a strategic priority under former President Park Geun-hye.

Samsung Bioepis, the research arm of Samsung BioLogics, received a jolt in October in the form of a letter from U.S. giant Merck. The companies had partnered in 2014 to develop a biosimilar -- a drug with nearly identical properties as another drug produced by a different company -- of a diabetes treatment. But Merck informed Bioepis that it was canceling the deal.

Merck had reviewed the business prospects for the biosimilar and decided to terminate the project.

Under the arrangement, Bioepis, a relative latecomer to the drug industry, had shouldered some of the development costs in anticipation of strong demand for diabetes drugs. The company expected to hold the sales rights in South Korea and earn royalties from Merck's sales of the drug elsewhere.

Bioepis said it would receive 175.5 billion won ($157.6 million) from Merck in compensation, and that the negative impact would be minimal. But the relatively large compensatory figure suggests Bioepis spent a hefty sum on the endeavor.

This leaves Bioepis in the lurch and casts doubt on its future. The company has started a clinical trial of a drug for acute pancreatitis in the U.S. with cooperation from Japan's Takeda Pharmaceutical, but it is still in an early stage.

So the Samsung BioLogics scandal could not have come at a worse time. BioLogics allegedly inflated Bioepis' value artificially, ahead of the former company's initial public offering in 2016.

Other players have encountered setbacks, too.

Hanmi Pharmaceutical in February announced it was suspending a clinical trial of a rheumatism drug, which it had been conducting with American counterpart Eli Lilly. In the trial, Hanmi said, it had become clear that the drug would not have the expected effects. The company still hopes the drug might be effective for other ailments.

The failure followed Hanmi's disappointment over a 2015 licensing deal with companies including France's Sanofi.

The South Korean company was tasked with developing diabetes drugs, the successful introduction of which would have brought it a total of 3.9 billion euros ($4.43 billion). News of the megadeal drew investor attention to South Korean drugmakers. But the next year, Sanofi notified Hanmi that it wanted to scale down the deal.

Not so long ago pharmaceuticals were supposed to be South Korea's next big thing. The government in 2013 launched a five-year program to support the industry. It set goals of backing research and development worth 500 billion won over that period, and of producing companies that would rank among the world's top 10 drugmakers.

Now, as that dream fades, investors are retreating. Hanmi's share price is languishing above 400,000 won, down sharply from over 700,000 won in 2015.

Celltrion, another player, saw its shares plunge about 12% on Nov. 12 after the company's July-September earnings disappointed the market. South Korean media called the fall an "earnings shock."

In an industry dominated by European, U.S. and Japanese drugs -- with a few exceptions like Indian generics -- the only way for South Korean makers to compete is to team up with larger rivals. But the big players are more inclined to work with prominent university labs and cutting-edge startups to identify promising candidate drugs.

Collaborations with South Korean partners are simply not a priority.

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