PhRMA recommends that Korea be placed on the 2004 “Special 301” Priority Watch List due to a number of on-going concerns that are adversely affecting the U.S. research-based pharmaceutical industry. PhRMA appreciates extensive U.S. Government efforts to mitigate violations of intellectual property protection, unnecessary delays in market access through anti-competitive practices, restrictive standard requirements, and other measures that disproportionately discriminate against PhRMA member companies operating in Korea. Continuing meaningful, transparent consultation among the Korean Government, U.S. industry, and other key stakeholders is needed to promote comprehensive health care reform and attract investment in biomedical research and development.

Intellectual Property Protection

Patent Linkage

The absence of any direct linkage between the Korean Food and Drug Agency (KFDA) and the Korean Industrial Patent Office (KIPO) is an area of concern. KFDA, while assuming responsibility for safety and efficacy review, apparently has abdicated any responsibility for ensuring that competitors do not market products covered by patents that could result from linkage to KIPO. Thus, instead of taking the opportunity to prevent infringement during the marketing approval process, the Government of Korea does not actively seek to rectify intellectual property violations that result from the failure of patent linkage which forces patent owners to resort to the court system after infringement has occurred. This practice results in a significant adverse commercial impact, including at least one clear case in 2003. The Korean Government remains non-committal as to near term implementation of such a system, which could resemble the U.S. FDA’s Orange Book.

Counterfeiting

The availability of counterfeit medicines in Korea is an escalating problem. PhRMA companies have found evidence that these medicines are not only being imported, but are also being manufactured in Korea. This should be a top priority of the Korean Government and the subject of bilateral discussions. In partnership with law enforcement in Korea, PhRMA would like to play a role in eliminating this growing problem.

Market Access Barriers

The HIRA (Health Insurance Review Agency) continues to unilaterally impose reimbursement guidelines for new classes of pharmaceuticals that unduly restrict or unreasonably delay treatment with the most effective, appropriate medicine. Such reimbursement guidelines do not reflect accepted scientific or clinical guidelines, restrict market access for innovative medicines, and target U.S. research-based pharmaceutical companies. These guidelines are developed and imposed in a nontransparent manner and occur without appropriate consultation.

A number of U.S. research-based pharmaceutical companies have experienced the imposition of unduly restrictive reimbursement guidelines. These reimbursement guidelines have targeted several breakthrough drugs frequently prescribed by physicians to treat debilitating diseases. These reimbursement guidelines:

• Discriminate against innovative medicines researched and developed by U.S. and European pharmaceutical companies;

• Deny manufacturers the ability to gain market access for products evaluated under the A-7 pricing regulation agreed to by the U.S. and Korean Governments;

• Ignore KFDA evidence based on the evaluation, scientific evidence, and medical expertise on the quality, safety, efficacy, and appropriate use of medicines;

• Prevent physicians' choice in prescribing the most appropriate medicine to treat a disease; and

• Deny patients access to lifesaving, innovative medicines that improve both overall health and quality of life.

PhRMA is deeply concerned that HIRA is implementing short-term cost containment measures that disproportionately affect innovative pharmaceuticals, rather than contributing to comprehensive health care reform. Any arbitrary or restrictive reimbursement guidelines used as a short-term cost containment mechanism at the expense of market access for innovative medicines researched and developed by U.S. companies severely limits Korean patient choice for the best possible treatment.

A Ministry of Health and Welfare / Industry task force (TF) was established in 2003 under the Ministry of Health and Welfare / Industry Working Group (WG) with a view to establishing a transparent and science based reimbursement guidelines setting and amendment process. The TF and WG should be able to build an agreement to generate a new process for setting reimbursement guidelines that can promote taking advantage of advanced modern therapies by making scientific evidence a priority over short term cost containment. While the U.S. research-based industry is committed to active participation and proposal development within the TF and WG system, most of the recommendations of the TF have not been taken up as yet.

Actual Transaction Pricing

As part of its major reforms, the Korean Government introduced the Actual Transaction Pricing (ATP) System in November of 1999 with an aim of promoting drug usage based on quality, not profit, and of introducing transparency in the market. To achieve its goals, the ATP system eliminated margins imposed by hospitals on pharmaceuticals, while conducting investigations on the market price of drugs to maintain the drug price at the market level. Moreover, the ATP system applied a criterion of weighted average to drug transactions investigated for a certain period of time to cut drug prices.

Despite its merit the ATP system spawned a series of problems due to arbitrary and inconsistent enforcement. The system conducted price investigations in an arbitrary and opaque manner solely for the sake of reducing drug prices while engaging in no efforts to ensure transparency in the market.

Consequently, almost all pharmaceutical companies were subjected to the negative fallout of the ATP system. Transactions between numerous small and medium-sized distributors and clinics, hospitals, and pharmacies were not properly documented and were not as transparent as they should have been. Also, when discrepancy was found on accounting books of distributors and medical institutions in terms of the amount of total transactions in a certain period of time, the government arbitrarily and unilaterally reduced prices of entire drugs transacted and recorded on the same book by the wholesaler during the same period. Any discrepancy between two accounting books gave good excuses to HIRA/MOHW to reduce prices by the rate of the discrepancy against total transaction amount without taking into consideration the prices of individually transacted drugs or the pharmaceutical companies.

Pharmaceutical companies should not be held accountable for transactions between third parties unless they are under direct control of the pharmaceutical companies. Moreover, the transaction data formulated beyond the control of pharmaceutical companies should not be used to penalize the companies in the form of price reduction.

The Korean Government sought to maximize the benefit of cost saving through price cuts under the ATP system by unilaterally changing its criterion for drug price cuts from the weighted average to the lowest actual transaction price (LTP). The LTP system, which was adopted for a year from September 2002 to August 2003, entailed excessive regulations that were at odds with the principles of the free market economy. As such, the system, which faced strong opposition from different quarters as well as from the pharmaceutical industry, was later dropped.

Nonetheless, the drug prices based on the lowest transaction price identified through the price investigations were implemented. This, in turn, led many research- based pharmaceutical companies to file an appeal against the government over the non-transparent manner in which decisions were being made under this appeals process and the practice to clearly take into full consideration the evidence when implementing price cuts.

Even though the weighted-average (ATP) system has been restored, problems and issues will continue to exist as long as the aforementioned problems of erroneous methodology of transaction price investigation under the ATP system are left unfixed.

The research-based pharmaceutical industry has suggested how the ATP system could be implemented: details of the ATP implementation should be specified in a clear and objective manner in advance, and any party violating such regulations should be subject to stringent criminal penalty.

A-7

Based on a bilateral understanding with the U.S. Government, prices for innovative drugs are to be set at the ex-factory average price of the so-called A7 (Advanced 7) countries.

According to the current A7 guidelines, a calculation based on the ex-factory average price of A7 countries is applied only when a drug is recognized as “innovative” by the MOHW/HIRA Pricing Committee. However, as the A7 guidelines do not provide clear and objective evaluation criteria for innovation, judgment as to what is “innovative” is made arbitrarily. This leads to reliance on the subjective opinions of individual Pricing Committee members. As a result, there are some cases where even the internationally recognized innovative drugs are not fairly treated as innovative in Korea, and the operation of the agreed upon principle of the A7 guidelines is severely hampered.

If a medicine is not recognized as innovative by the MOHW/HIRA Pricing Committee, its price is determined on the basis of how the MOHW/HIRA will select 5 comparative products from the broadly-categorized drugs. The system of broadly categorizing drugs enables HIRA to pick and choose 5 drugs that best serves the main purpose of budget saving.

Even if a company could get a price based on A7, the restrictions imposed by the reimbursement guidelines serve as another stumbling block to a patient’s access to innovative medicines. If the current trend goes unchecked, international trade disputes and a drastic curtailment in the introduction of modern and advanced medicines to Korea could be a high possibility.

Triennial Repricing

In September 2002, the Ministry of Health and Welfare announced a repricing scheme for all products registered on the National Reimbursement List by the end of 1999. While the Ministry of Health and Welfare claims this new regulation is to reflect changes in A7 prices over a period of time, MOHW only reduced prices and the methodology disproportionately reduced the price of products manufactured by U.S. research-based companies compared to local generic manufacturers. Given the structure of the Korean pharmaceutical market, this regulation serves to protect domestic manufacturers at the expense of U.S. research-based companies, providing a potential market advantage for Korean generic companies. In addition, it appears that such a mechanism would be used as a one way ratchet to cut prices.

Furthermore, this new pricing regulation was implemented without full consultation with the U.S. industry or meaningful opportunity to comment. Triennial repricing was also conducted in November 2003 for all products that were registered on the national reimbursement list between September 1999 and August 2000. PhRMA requests the U.S. Government’s continued support in the effort to ensure U.S. research-based companies are not discriminated against.

PhRMA urges the current Government of Korea to abandon policy proposals that effectively violate intellectual property rights and disproportionately discriminate against the U.S. research-based pharmaceutical industry.

Damage Estimate

Korea is the second largest market in Asia for PhRMA members and so these issues, particularly those regarding discriminatory market access restrictions, cause substantial harm. PhRMA Members believe that the above barriers have had a substantial adverse commercial impact, with annual damages of between $500 million and $1 billion.