Intellectual Property Protection

There are three major aspects to the issue of data protection in Japan that the research-based industry believes need to be rectified. First, according to a notice of the Director-General of the Pharmaceutical Affairs Bureau (Notice No. 698, dated 30 May 1980), major original test data such as clinical data, to prove efficacy and safety in the application document for a new drug should be published in medical or scientific journals in Japan prior to, or immediately following, the submission of the application to the Ministry. The owner of the test data thus relinquishes the confidentiality of such data submitted to the Ministry, and the qualification for legal protection of the data is placed at risk.

Second, the manufacturer of a generic drug whose approval is sought after the lapse of a certain period of time (i.e., the re-examination period of the approved new drug) is not required to submit clinical data, and is permitted to submit only a list of published literature concerning the test data of the first-approved new drug. This means that the generic manufacturer is allowed to use, without consent of the data originator, the test data of the new drug in applying for approval for its own generic drug to the health authorities in Japan.

In Japan, a re-examination procedure has been established to confirm the efficacy and safety in the actual market of the approved new drug. During this period prior to commencement of the formal re-examination procedure, even when there is no patent protection for the originator drug, a generic drug is restricted from entering the market without extensive independent clinical and in vivo/in vitro tests to prove its efficacy and safety.

However, after the re-examination period has elapsed, a generic product can be approved substantially on the basis of the data demonstrating biological equivalence, stability and testing specification and method. This means that the clinical and in vivo and in vitro test data submitted to prove the efficacy and safety of the originator's drug, as part of the original drug application, are used to support a generic drug application, thereby allowing the generic manufacturer to "free-ride" on the application data of the original drug. In the United States and Europe, this data would be considered proprietary information, and not made available to other companies without the consent of the originator company.

Article 39 of the TRIPs Agreement covers two types of undisclosed information: "trade secrets" and "test data." Article 39.3 of the TRIPs Agreement, which applies to test data, generally requires that test data submitted to regulatory authorities of a WTO member for the purpose of obtaining marketing approval be protected against unfair commercial use. More specifically, our understanding is that Article 39.3 provides that if a WTO member mandates the submission of test data to obtain marketing approval for pharmaceutical or agricultural chemical products, it must protect such data against (1) disclosure and (2) unfair commercial use. With regard to the first requirement, test data must be protected against disclosure to the public (or even within the government) unless such disclosure is necessary for public safety or unless steps are taken to ensure that the data are protected against unfair commercial use.

PhRMA believes that Administrative Notice No. 698, which requests publication of major original data of a new drug, thus allowing a generic manufacturer to use the data for his own application without the consent of the data originator, violates Article 39.3 of TRIPs.

In addition, the administrative practices which allow a generic drug manufacturer to obtain his approval by relying on the application data of an original drug, and which allow the administrative authority to use the application data of an originator drug for examination of a generic drug also violate Article 39.1 and 39.2 of TRIPs. This again grants a "free-ride" on the original application data to the generic manufacturer, and violates the intellectual property rights of companies as provided by TRIPs.

PhRMA believes, therefore, that Japan's compliance with Article 39 of TRIPs requires the repeal of Administrative Notice No. 698. We also believe that the administrative authority, should require the prior consent of a data originator. Finally, we seek an adequate period of protection for this data of ten years in Japan, in accordance with TRIPs principles. This is in line with best practices in Europe. We already have asked that the Ministry of Health and Welfare make the necessary adjustments to ensure the appropriate level of proprietary data protection in Japan. We have not yet received a satisfactory response from MHW.


Deregulation Initiative and Valuation of Intellectual Property

Barriers to market access for U.S. patented pharmaceuticals in Japan are the result of both regulatory and pricing systems that fail to recognize the value of innovation and intellectual property inherent in the new drug development process. Over the last decade, significant barriers to new product approval have developed in Japan, leading to an extensive drug lag in which 120 global, patented products launched worldwide since 1985 remained unavailable in Japan in 1998. For the most part, the Japanese Government seems to be working in good faith to simplify and harmonize the regulatory approval system, but there are a number of areas where continued vigilance is required.

Currently, the most significant issue facing the pharmaceutical industry in Japan is the Ministry of Health and Welfare's (MHW) intention to reform the pricing and reimbursement system with a reference pricing mechanism that would adversely affect U.S. patented, innovative medicines. Reference pricing devalues pharmaceutical intellectual property and expands government regulation and control on product pricing and reimbursement levels. Reference pricing has been proven to be a disincentive for innovation, as well as an ineffective mechanism to contain pharmaceutical and health care expenditures.

Recognizing that Japan is the second largest single market for pharmaceuticals worldwide, in 1997, the U.S. Government agreed to include the pharmaceutical sector in the U.S. - Japan Enhanced Initiative for Deregulation and Competition. In May 1998 at the Birmingham Summit of G-8 countries, the U.S. received a landmark commitment from the Government of Japan on four specific points to facilitate deregulation of the pharmaceuticals sector for both regulatory and pricing mechanisms:

  1. Recognition of the value of innovation of pharmaceuticals and medical devices, so as not to impede the introduction of innovative products which bring more effective cost-effective treatments to patients.

  2. In order to ensure the transparency in the consideration of health care policies, the Government of Japan also committed to allowing foreign pharmaceutical and medical device manufacturers meaningful opportunities to state their opinions in the relevant councils on an equal basis with Japanese manufacturers ("yuigi-na iken hyomei-no kikai"), and providing them on their request with opportunities to exchange views with MHW officials at all levels.

  3. A shortening of the approval processing period for new drug applications to 12 months by April 2000, with steady and continuous improvement between now and then, and to further speed the introduction of innovative new pharmaceuticals, significantly shorten times, particularly for priority drugs.

  4. An expansion of the acceptance of foreign clinical test data for pharmaceuticals through the incorporation of International Conference on Harmonization guidelines into Japanese regulations by August 1998, and adoption of an acceptance process that is transparent and avoids inappropriate delays.

Notable progress is underway by MHW to re-engineer and modernize the regulatory approval process, as well as harmonize its regulatory requirements with those of the U.S. and EU. However, in Japan, there are serious problems in the recognition of the value of innovation within the current pricing and reimbursement system, as well as in the reference pricing proposal drafted by MHW. For the pharmaceuticals sector, recognition of innovation is exercised through the provision of appropriate rewards for innovative quality in the pricing and reimbursement system.

First, the current premium pricing system undervalues products by using inappropriate comparators and mandating regular price reductions. The policy of "repricing" downward "successful" new innovative drugs whose volumes have exceeded MHW's projections is a clear disrespect for the value and cost-savings that innovation brings to the health care system. The result is that only 1 of 450 products has received a premium for innovative quality since the system was implemented in 1993.

Second, reference pricing is damaging to the industry's ability to continue investments in costly R&D to develop the next generation of new medicines. Reference pricing takes the rewards due to drugs that offer significant advances over existing medicines, drugs that required an enormous effort and cost to develop and disproportionately provides them to non-innovative me-too products and generics. (Me-too products are minor variations of existing medicines, and not truly innovative.)

Japan's ongoing lack of recognition of innovation does not meet global standards and has contributed to the unprecedented number of these non-innovative "me-too" products on the market in Japan. Not incidentally, Japanese companies produce the majority of "me-too products" on the Japanese market. Reference pricing of any form does not respect or reward innovation, nor does it honor commitments toward deregulation and use of market forces.

Third, the purpose of the reform of the pricing and reimbursement system is to control rising health care expenditures. In Germany, where reference pricing was introduced in 1994, it did not have the anticipated effects of controlling pharmaceutical expenditures, but resulted in rises both in total health care expenditures, as well as in the other components of the system. It has been also well documented that, after the first year of implementation in Germany, pharmaceutical expenditures rose to previous levels once again.

PhRMA has been very active in the development of an alternative proposal to reference pricing that supports deregulation of the pharmaceutical sector through the adoption of an incentive-based market-driven pricing and reimbursement system. PhRMA's proposal would provide appropriate rewards for innovation, ensure access for Japanese patients to innovative medicines in the future and assist the Japanese Government in providing cost-effective solutions to some of their most daunting cost containment problems for their rapidly aging society.

MHW officials have stated directly that deregulation of the pricing mechanism with a market-based system is not a practical alternative for Japan. Such statements suggest that Japanese officials view the Birmingham agreement as a procedural mechanism without requirements for tangible results in the context of policy submissions to the legislature.

Accordingly, industry requests continued strong engagement by the U.S. Government in support of Japan's full compliance with commitments under the U.S. - Japan Enhanced Initiative on Deregulation and Competition on both regulatory reform and pricing and reimbursement reform. Adoption of a reference pricing system by the Japanese Government would directly violate Japan's Birmingham commitments to deregulate market forces and enhance market-driven competition.

While the U.S. overall trade deficit with Japan has expanded during the past year, the U.S. pharmaceutical industry traditionally has maintained a significant trade surplus with Japan that reflects the international strengths and competitiveness of its research. PhRMA believes that this positive industry trade balance with Japan could deteriorate significantly, if a system of reference pricing governing the reimbursement of pharmaceuticals is adopted in Japan.


Potential Exports/Foreign Sales

Recognition of foreign clinical data would result in significant cost savings and reduced development time. Combined with NDA review times, these changes could result in new drugs reaching the market sooner. Depending on the product, this could result in increased sales on the order of $75 million to $125 million per product, in addition to savings in development costs. MHW may be able to approve 30 new, innovative products in an average year (including European and Japanese innovative drugs); this value change could range between $2.5 billion and $3.75 billion.

The adoption of a market-driven system would further increase opportunities for trade and investment by the U.S. research-based pharmaceutical industry in Japan.

For all the aforementioned reasons, PhRMA believes that Japan should be listed as a Priority Watch Country under Special 301 in 1999.