Country Analysis Report - South Korea

Country Analysis Report

In the fiscal period from year 2000 to 2004, Allergan Inc. has seen a continuous rise in sales and profits. In the year ended 2004, net income reached a high of $377 million and there is certainly no reason to believe that number won't continue to grow . Although most of our company's sales comes from our line of eye care pharmaceuticals, It is the BOTOX/neuromodulators line that sees the most promise in growth.

With 80% of our BOTOX products being used for cosmetic purposes, a great market potential is seen in South Korea where the demand for skincare and cosmetic products is soaring. With sales capabilities in over 100 countries, direct sales offices have only been established in a little over 20 countries1. The goal of this report is to provide an analysis on the feasibility of establishing a direct sales office in South Korea. Feasibility will be determined through a three part analysis in the following areas:

* South Korea's business climate as depicted by political, legal, and economic environments

* Suitability of infrastructure in terms of South Korea's tangible resources

* Cultural and managerial challenges of conducting business in South Korea

South Korean Business Climate

Political conditions:

Incumbent president Roh Moo-Hyun was elected in December 2002 to a 5-year office term. South Korean democracy has been firmly established since 1987 with presidential elections free of any controversy . With much thanks to former President Kim Dae-Jung, sweeping political reform has largely opened up the South Korean market, making investment in the country very viable. Although the many reforms have improved the business environment for foreign investors, there is still room for more improvement. President Roh Moo-Hyun has promised to pursue more reform concerning the large conglomerates in the country that present market barriers for foreign investment.

There has been bumps in Roh Moo-Hyun's presidency that threatened the political stability of the country. In March of 2004, the National Assembly controlled by the opposing party voted to impeach the president but shortly after, the Constitutional Court reinstated him. As a result of the rife between the two parties, other parties were able to gain more parliamentary presence .

Although there are internal conflicts with the government, the general political environment in South Korea is favorable to foreign investment, particularly with the U.S., due to long established ties with each other. What this means for Allergan is political risk is pretty low but barriers to entry is high due to little reform regarding large domestic conglomerates.

Economic Conditions: Slowing economy?

Economic growth in South Korea has been phenomenal in the past 20 years. From a per capita GNP of only $100 in 1963 to over $14,000 in 2004 , South Korea has established itself as one of the largest economies in the world. There are many concerns now by economists that the growth potential of South Korea's economy is falling due to structctural problems along with an aging population.

In 2002, the economy was sustained by consumerism. Korean credit card users were rampant and were plagued by "overshopping". As a result, this large group of the Korean population are steeped in $9.5 billion of debt. Growth rates of the economy has fallen to around 3-4% from over 7% in 2002 . However, the purchasing power of the Korean population remains, with PPP Gross National Income at almost $17,000 in 20024.

Normally, these numbers would mean that there isn't much market potential but due to the nature of Allergan's products, there is actually many opportunities for profit in South Korea. The cosmetic industry is booming in the country, even during the past few years of economic slowdown. The aging population would serve as a great target market for many of Allergan's age-defying products.

Economic Conditions: Investment Climate

FDI has steadily declined in South Korea for the past few years, with the U.S. and the EU cutting investments by 71% and 24% respectively in 2003 . Many companies in Korea had high debt and weak profits, many of which were caused by very stringent labor laws. Many of those companies, even the successful ones could not pay the large interest payments on those debt.

South Korea had experienced their own accounting scandals which led to the market being on edge. From these events, it was clear that there was not enough transparency in the financials of many firms. Many economists agree that the financial market in South Korea is underdeveloped because of these reasons6.

What these things mean to our company is that financing this expansion may be difficult as many foreign banks are reluctant to loan to companies operating in South Korea. If Allergan is to proceed with this plan, a secure means of obtaining financing is needed.

Legal Conditions:

Marketing pharmaceuticals in any country can always be difficult depending on the laws and regulations of those countries on drugs. Currently, South Korea has one of the largest pharmaceutical markets in Asia valued at over $5 billion2. Recent reforms such as the Actual Transaction Pricing (ATP) and A-7 policies have required many drugs to be priced at the level of advanced countries, creating a level playing field for foreign drugs to compete with domestic onces.

Foreign companies must be aware of intellectual property laws in Korea. Unlike the U.S. where intellectual property rights are usually granted based on "first commercial use" or "first intent to use", Korean laws grant rights to whoever is "first-to-file"2. It is important to register products in every applicable product class possible because Korean laws will not be upheld if the product was not registered under the correct product class.

For Allergan, the current legal environment in Korea is favorable for marketing many of its products. With pricing regulations, Allergan won't have to worry about tough price competition from domestic companies. Although intellectual property laws are more complex in Korea, there is little worry for the BOTOX line which currently doesn't even have a patent in the U.S. The process of making BOTOX is complicated and only known to Allergan. Even without a patent, there is little chance of other companies cultivating their own process of making similar products.