Korea

Although the Korean Government made a commitment to deregulation and structural reform in 1997 in response the country's financial crisis, there has been little progress in the follow-through on implementation of the promised reforms. The Korean Government's resistance to deregulation, trade liberalization and harmonization with the international community is particularly evident in the pharmaceutical regulatory and pricing systems under the control of the Ministry of Health and Welfare (MOHW). As a result, discriminatory policies and barriers to market access for imported pharmaceuticals remain, leaving Korea a relatively closed market for the industry compared to other major pharmaceutical markets in the world.

The industry has been working collaboratively with the American Chamber of Commerce (AmCham) and the U.S. Embassy in efforts to resolve the industry's issues over the past several years, but given the Korean Government's resistance to deregulation, the U.S. industry (as well as the Europeans) now believe that significant progress cannot be achieved in Korea without WTO level trade action. In fact, the European Federation of Pharmaceutical Industry Associations (EFPIA) recently drafted a request for consideration under the WTO dispute resolution procedures. The U.S. industry is considering similar action and has designated February 1999 as the target date for the realization of substantial progress by the MOHW.

Equal Treatment for Imported Products

The lack of equal treatment of imported finished products has been a major trade issue for over five years. Korea's health insurance reimbursement policies blatantly discriminate against foreign manufactured and imported medicines, violating WTO/GATT regulations on discrimination and national treatment (Part II, Article III Paragraph IV of 1947 text). Discrimination is applied through the: (1) inability of foreign manufacturers to have their products listed on the reimbursement schedule; (2) inability of foreign manufacturers to receive equal hospital margins; and (3) requirement that hospitals, clinics and pharmacies provide additional administrative measures when dispensing imported drugs. The combination of these factors provides clear incentives for medical institutions to prescribe and dispense local products, acting as a de facto import substitution policy that effectively discriminates against imported medicines.

The Korean Government quietly acknowledged the "difference in treatment" of local and imported products, and in October 1997, MOHW issued Ordinance No. 98-67 which announced its intention to provide for imported products' reimbursement on an equal basis with local products through the medical insurance scheme effective from July 1999. Although PhRMA acknowledges the Korean Government's issuance of the Ordinance for national treatment on imported pharmaceuticals, PhRMA remains concerned that the other aspects of discrimination in pricing and reimbursement have not been addressed: specifically, discounting to hospitals, profit margins, administrative procedures, and calculation of pharmaceutical reimbursement prices.)

Under the existing system, local manufacturers can provide hospitals a 3.46% to 5.16% "discount" on their purchasing orders. This "discount" acts as a profit margin for hospitals as well as an incentive to purchase those medicines which provide such a profit. The Health Insurance Bureau (HIB) of MHW provides reimbursement for the "discount" to local manufacturers. For imported products, hospitals are denied reimbursement for discounts and must be reimbursed at the hospital's acquisition price.

Currently, MHW provides reimbursement for discounts to hospitals of up to 3.46% to 5.16%, but according to the Korean Fair Trade Commission, local manufacturers can give hospitals a "discount" of up to 24.17%. Hospitals generally expect this discount, whether a local product or imported product is offered. The discrimination occurs in two ways: (1) producers of imported products are not allowed to receive the reimbursable portion of the "discount"; and (2) those that do offer a "discount" are barred from receiving reimbursement altogether. Additionally, for foreign products manufactured in Korea, the practice of discounting to hospitals at 24.17% with reimbursement at only 3.46% to 5.16% would result in "forcing" international companies to set product prices that are 30% below world prices for these innovative medicines.

On the other hand, older multi-source products (generics), marketed mostly by the local companies, are officially priced at a relatively high level compared to the world price. With the practice of discounting to hospitals, the Korean system has the ironic effect of encouraging excessive dispensing of older, less effective products, versus new, innovative, more cost-efficient (albeit foreign) medicines. To date, there is no indication that imported products will be treated fully equally with respect to these concerns.

Under the future Ordinance, Korea's commitment to list imported products on the National Reimbursement Schedule, and the existing discrimination on discounting and profit margins, raises another concern for the industry: how will the HIB determine the reimbursement price for imported products. Because of the unofficial hospital margin of 24.17% that effectively has been built into the pricing system for locally manufactured products, current proposals for imported drug pricing effectively sets the MIP price at a level that is 30% below the average of G7 member prices. (The prices of pharmaceuticals in G-7 countries most accurately and reliably reflect world prices.)

Industry requests the support of the U.S. Government to ensure that the new pricing system for imported products ensures that the actual supply price in Korea is equivalent to the ex-manufacture price in G-7 countries, particularly for innovative and all patented products. The MIP should also include a mechanism to address foreign exchange fluctuations to counter the negative effects of major currency devaluations.

To remedy concerns regarding the pricing and reimbursement, industry seeks several specific measures: (1) Improved transparency between hospital and manufacturer through fixed ex-manufacturer price and wholesaler margin; (2) Ability of manufacturers to sell directly to hospitals, (3) Market-based pricing for patented products, (4) Separation of prescribing from dispensing.

Elimination of Generic Substitution Policies

Although detailed arrangements proposed for the separation in Korea have not been officially released, there are indications that the MOHW intends to permit pharmacists, within certain limits, to substitute alternate drugs to those prescribed by the doctor. Industry is concerned that, if implemented, this practice is a clear effort to promote the use of domestic generic drugs over branded foreign products.

Data Protection

In order to develop new products for marketing, our industry invests substantial sums of money - about US$500 million on average, for each successfully developed drug. These data are used by the KFDA for regulatory review to determine the safety and efficacy of a drug and, hence, as a basis for issue of a product license.

Under Article 39.3 of the TRIPs protocol to the Uruguay World Trade Agreement, signatory governments are obligated to provide a 'reasonable' period of exclusivity to the data generated in development of original medicines (the OECD norm is 5-10 years minimum from initial product license). Where regulatory approval is delayed for any reason and there is no patent property is available, (e.g. second indications etc.), a period of 'data protection' following expiry of the relevant patent property is applied.

Korea, being a signatory to the WTO, is obligated to provide data protection. Its intention to do so is clearly indicated in the 1993 Record of understanding (ROU) with the European Commission related to the "Pipeline" Agreement, which also adds the provision for additional 4-6 years of protection in respect of the sponsor's effort to provide the data required by the Korean Drug Re-examination procedure. It is clear is that the EU relied on these undertakings to provide the TRIPS protection. It appears that no one has probed the details of how the two elements of protection described above were supposed to be related. It is therefore unclear whether the latter was intended to be additional - or whether it was the Korean Government's proposed method of TRIPS Compliance - the latter interpretation seems highly likely.

Apart from the protection related to Drug Re-examination, the Korean Government never made any regulatory provision to honor the TRIPS protocol. Even the indirect protection provided via the Re-Examination route, has now been rendered ineffective by the elimination of the appropriate Enforcement Provisions of the Pharmaceutical Affairs Law. Furthermore, this obligation has been ignored by the Korean Food and Drug Administration (KFDA) in the recent licensing of generic products related to patented medicines from a U.S. companies raising concern in the industry that Korea may be reneging on its treaty obligations with regard to intellectual property.

The KFDA has a clear obligation to ensure that data provided to it in pursuit of Regulatory Review are held secure from misuse by third parties. Unfortunately, there have been a number of instances in which technical data from the originator's regulatory dossier have apparently been made available to competitors of the file sponsor. The injured party is in a weak position to pursue legal proceedings against the guilty parties, relying as he does, on the KFDA officials for the issuance of other product licenses. Enforcement of the KFDA responsibility in this critical area needs strengthening, perhaps by appointment of an independent ombudsman to receive confidential complaints and to conduct inquiries.

Our industry, therefore, has two serious issues to raise with the Korean Government in this area - the implementation of the TRIPS protocol per se and the recent cancellation of the provision for 'Drug Re-examination' protection, in contravention of its obligations under the European Union - Korea 1993 ROU (although it could be strictly argued that this related to pipeline products only).

In addition to clear problems with the provision of data protection, there is a lack of assured integrity in the Korean regulatory system. A manufacturer can present for review a product which is represented by physical samples and data obtained under special conditions (e.g., laboratory manufacture by highly qualified scientists using specially purified chemicals) or from the public domain (journal publications relating to the originator's brand) and which do not necessarily relate one to the other. Furthermore, they rarely bear any relation to the product which the manufacturer will eventually manufacture on a large scale. The KFDA's approval of a product is thus obtained with respect to materials/data that may not be representative of the product made later on a manufacturing scale and distributed generally to the public.

Re-examination of New Pharmaceuticals

In 1994, the MOHW introduced regulations requiring that the licenses of new pharmaceutical products be subject to 're-examination' for up to six years, to confirm the safety of the related drugs in general circulation. In return for the effort involved in collection of the required safety data by the sponsors, MOHW undertook to provide administrative protection (for up to six years) for products which were registered after the effective date of 1st January 1995.

During the past year, the MOHW has ceased enforcement of this undertaking, thus compounding its default on the Korean government's treaty obligations regarding data protection, described above. This provision for limited protection must be reinstated and the licenses of any second entry products which have been granted within the scope of its provisions, since enforcement ceased, must be canceled.

Harmonization of New Drug Registration Requirements

Unlike U.S. and European regulators, MOHW requires duplication of clinical trials already completed outside of Korea for products that have been developed within the last three years. This increases costs and causes delays. MOHW has indicated that the current Korean requirements may be changed to be in line with ICH guidelines in the near future. However, as industry attempts to press forward with measurable results in this area, the MHW is becoming more resistant to actually following through with the harmonization process in the near term.

Certificate of Free Sale

Pharmaceutical companies face delays when requesting registration for new products developed outside of Korea. MOHW does not accept a registration request or allow Phase III clinical trials until the source country Free Sales Certificate (FSC) is submitted, even though all other required information is available much earlier. An FSC is not required when a drug is developed in Korea. MOHW has stated that any company can avoid the FSC process by doing all Phase I, II and III trials in Korea; however, this is impractical and extremely expensive. Given the Korean government's "intention" to harmonize regulatory requirements in the future, the requirement for FSCs should be nullified immediately as a token of good faith by the Korean Government.

Border Testing

Despite earlier commitments to the contrary, MOHW requires testing of each shipment of imported drugs. This is expensive, inefficient and has no scientific basis as the products are made to approved and accepted standards and are accompanied by the manufacturer's Certification of Quality Assurance.

Submission of Test Results of Biological Products by Local Importer

When examining the specification and test methods of vaccine preparations, health authorities require results from the local tests performed 3 or more time by the local importer as well as results from overseas testing by the foreign manufacturing company. This obligation for local importers to submit local test results on every batch should be abolished if an importer has demonstrated KGMP compliance for the manufacturing process used.

Toll Manufacturing

Under the regulations, only companies having manufacturing facilities satisfying "KGMP" are allowed to hold the local product registration for a drug. As a result, "toll manufacturing", the contractual relationship allowing another firm to manufacture the registration holder's product, is permitted only between existing manufacturers in Korea. Toll manufacturing is presently allowed for only 11 manufacturing processes, including the process for production of penicillin preparations. Combined with the restrictions on the promotion of imported finished products, this is a barrier to entry for international companies and their products into Korea, who have historical concerns over the transfer of registration rights to Korean companies. It has also led to tremendous over-capacity in the manufacturing sector of the industry. The continued reluctance to reform this measure can only be seen as artificial protection of the local industry that is out of step with developed practices.

Potential Exports/ Foreign Sales

The aforementioned trade barriers in Korea cost the U.S. industry over US $ 500 million per annum.