PRIORITY FOREIGN COUNTRIES
Prior to the current currency crisis in Korea, the Korean pharmaceutical market was growing at 10% to 15% per year and had become the tenth largest pharmaceutical market in the world, with 1997 sales of over US$ 4.0 billion. However, Korea is still a relatively closed market compared to other major pharmaceutical markets in the world and, in consequence of the many remaining trade barriers, the research based (mostly international) Industry has achieved only 17% market share ( by comparison, in many other major markets of the world, the international research-based industry maintains a 60% market-share).
The economic pressure generated by the currency crisis has created an urgent need for reform of the monopolistic drug buying arrangement (via the National Medical Insurance Reimbursement system) and of the entire medicine supply system, if the economic health of the existing industry is to be safeguarded and new investment encouraged.
Over the past several years, there has been much talk of reform within the Ministry of Health and Welfare (MOHW) and the drive for reform was given new urgency by the financial crisis. Reform also was facilitated by the arrival of the reform-oriented government of President Kim Dae Jung, but little to no progress has been made in addressing the key issues over the past several months/years - and there are even signs of reversal of earlier improvements in the area of Intellectual Property protection.
Advice and assistance repeatedly has been offered to the Korean Government to aid them in improvement of the health care system, but MOHW has been reluctant to accept the international Industry's suggestions or cooperation. The American Chamber of Commerce (AmCham) and the U.S. Embassy clearly have seen less progress by MOHW than other ministries in eliminating trade barriers. We strongly recommend 'constructive engagement' between the Industry and MOHW in order to devise optimal solutions to ensure that the pharmaceutical supply industry remains financially healthy, able to fulfill its mandate to supply novel high quality and cost effective pharmaceutical products to the Korean market and attractive for new international investment.
PhRMA is working with the AmCham and the U.S. Embassy to ensure substantial progress is made by early 1999. If progress is not forthcoming, PhRMA will need to consider other more serious measures, including the Dispute Resolution mechanisms of the World Trade Organization (WTO).
1. Equal and Fair Treatment for Imported Products and New Pricing and Reimbursement System
The lack of equal treatment of imported finished products has been a major trade issue for over 5 years and we welcome the MOHW announcement on the 10th October this year of Ordinance No. 98-67, which states that imported products will be reimbursed through the medical insurance scheme on an "equal basis" with local products, effective July 1999. However, we remain concerned that the Korean Government may still leave room for discriminatory pricing practices that are imbedded in the existing regime. Moreover, the Medical Insurance Reimbursement Price (MIP) listing of imported products alone will not meet the objective of fair and equal treatment of imports and local products in all aspects of the promotional process.
There are three aspects of the listing process which must also be dealt with if this barrier to trade is to be effectively removed:
A. Hospital Margin
Under the existing system, the reimbursement list-price build up for locally manufactured products includes a 3.46% to 5.16% profit margin for the hospital, whereas imported products must be handled by the hospitals on a nil margin basis, often subject to additional documentation and uncertainty. Strictly according to the regulations, both prices are subject to MOHW audit against the threat of reductions of MIP proportionate to any excess discounting which is found in the market.
MOHW in practice allows locally manufactured products to be discounted to Hospitals by up to 24.17%, without risk of their MIP reimbursement price. Imported products must now be given the same authority to provide a substantial hospital margin, until the system for hospital funding is changed to eliminate the need for these margins.
B. Pharmaceutical Reimbursement Pricing Levels
Innovative research based imported products, even when priced under the same rules as the current locally manufactured product scheme, will receive reimbursement prices which, after customary trade discounts (typically 24.17% +5%+10%VAT) would deliver to the originator or manufacturer only 70 -80% of the ex manufacturer price enjoyed in the other major (e.g. G7) countries. In addition the manufacturers are currently expected to provide an average of 280 days credit free of charge to the hospitals. Since the international price/credit terms represent the return which the originator must obtain to recover his research costs, reward his risk etc., it is impossible for him to introduce innovative products to Korea at substantially lower prices, leaving a serious de facto trade barrier in place.
In contrast to the case of research based manufacturers, the ex manufacturer list price that most locally manufactured generic products enjoy under the current price build up scheme is much higher (30% to 400%) than international norms for similar products, leaving local manufacturers with a substantial margin of income from which to provide margins to the hospital much higher than are allowed for in the official reimbursement price build up (commonly up to 50% and sometimes even higher!).
These margins provide an incentive for the hospital to use the local generic product in preference to the imported original product. (Besides presenting a serious trade barrier against imported products, these incentives also have the perverse effect of distorting the practice of medicine toward excessive use of products that generate most income for the doctor/hospital rather than focusing use on the product likely to produce the best result for the system and - especially - the patient).
C. Therapeutic Comparisons
In parallel with the above calculations of "approvable reimbursement prices" within the current scheme for locally produced products, MOHW also compares the price of an innovative, new product against other, usually older, products which claim similar therapeutic effect. This methodology of simple therapeutic comparison is seriously flawed for several reasons. First, it ignores the findings of the still developing science of health economics. Secondly, it does not take into consideration for the new vs. the older product, key factors such as the specific outcomes data demonstrated for each product, aggregate daily costs and indirect costs etc. and thus fails accurately to reflect the relative value of a new product to the Korean system.
Furthermore, since the end result of the comparison is strongly influenced by individual opinion, the MOHW's decision making process for MIP reimbursement approval is open to abuse and, at best, is non-transparent.
Recommendation: The aforementioned three factors introduce serious distortions in new pharmaceutical product pricing, making it difficult for international research based companies to introduce new products in Korea.
PhRMA believes that the most effective mechanism for achieving economic efficiency in the health care delivery system is to utilize market-driven forces to determine prices for goods and services. However, recognizing that such conditions cannot be established in a single step and pending complete review of the reimbursement system, it is essential, in order to establish equal treatment of imported products in this area, that they be accorded:
a) The same official provision as local manufacturers for a adequate and appropriate distribution margin, without risk to their approved reimbursement prices.
b) A price structure that is transparent, reflective of current trading realities in Korea and that allows the originator an economic return on his research investment. This price is best evidenced by the ex manufacturer prices in other major countries, but also should include a mechanism to address the excessive credit period and any substantial foreign exchange fluctuations.
c) Freedom from scientifically unsound therapeutic comparisons in the establishment of reimbursement prices.
While the ultimate goal of a market-based pricing system should not be obscured by the intermediate steps, we believe that the above measures would quickly remove the major barriers to imported products and also improve the quality, of the local health care system. There is as yet, no sign that MOHW intends to make provisions for imported products to be treated fully equally in these respects.
2. Integrity of the Regulatory System /Restoration of Data Protection for Innovative Products.
A. Regulatory System Integrity
There is a lack of assured integrity in the Korean drug 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 real relationship to the product which the manufacturer can manufacture on a large scale and will eventually put into circulation in Korea. KFDA's approval of a product is thus obtained by reference to materials/data that may not be representative of the product made later on a manufacturing scale and distributed generally to the public.
Regulatory authorities of other developed nations insist on a detailed physical inspection of the proprietor's manufacturing facility and records to assure the link between the samples and data presented for review and the eventual manufactured product. While such an approach would not be practical for the KFDA, until mutual recognition treaties are in place for the main exporting countries, some alternate method of assurance is required to ensure that the product actually marketed is accurately reflected by the samples and data submitted for regulatory review.
Recommendation: File Sponsors should be required to warrant that the regulatory samples provided to the authority as the basis for a marketing application are representative of the product which will eventually be placed in general circulation in Korea and that and that the data similarly provided was generated from the same said samples. KFDA should audit these warranties from time to time to deter fraudulent warranties.
B. Data Security
The KFDA has a clear obligation to ensure that data provided to it in pursuit of Regulatory Review is held secure from misuse by third parties. This obligation is in theory enforced by the Criminal Code. Unfortunately, there have been a number of instances in which technical data from the originator's regulatory dossier have apparently been made available to the originator's competitors.
The KFDA relies on complaints from its clients to enforce this responsibility, but the injured party in this case is usually in a weak position to pursue criminal proceedings against the Agency, relying concurrently as he does, on the KFDA officials for the issuance of other product licenses.
Recommendation: Enforcement of the KFDA responsibility in this critical area needs strengthening by a proactive program of enforcement or by appointment of an independent 'ombudsman' to receive confidential complaints and to conduct inquiries.
C. Data Protection
In order to develop new products for marketing, our industry invests substantial sums of money - about US$500 million on average, per successfully developed drug. This data is 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 an adequate period of exclusivity to the data generated in development of a novel medicine (the OECD norm is 5-10 years minimum from initial worldwide product license).
This obligation has been ignored by the KFDA in the recent licensing of generic products related to 'Fosamax' the novel treatment for osteoporosis, raising concern in the industry that Korea is unable to enforce its treaty obligations with regard to intellectual property.
Recommendation: Urgent action must be taken to rectify this situation by enactment of laws and regulations to give effect in Korea to the TRIPS protocol - post-hoc action cannot provide an adequate remedy for the substantial damage caused by the failure to uphold internationally agreed standards in this area.
D. 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 when placed in general circulation. In return for the effort involved in collection of the required safety data by the manufacturer/importer, MOHW undertook to provide administrative protection (for the same period of up to six years) for products which were registered after the effective date of 1st January 1995.
During 1998, the MOHW has ceased enforcement of this undertaking, thus compounding the default on the Korean government's treaty obligations regarding data protection, described in item C above.
Recommendation: The provision for limited protection for products which are within the Re-examination program (i.e. their first 4-6 years of marketing in Korea) must be reinstated immediately and the marketing licenses of any second entry products within the scope of its provisions, which have been granted since enforcement ceased, must be canceled.
3. Separation of Prescribing from Dispensing - Prohibition of Generic Substitution.
The proposed separation of prescribing and dispensing could be an important factor, in the elimination of unethical practices in the supply of pharmaceutical products. However, to ensure that the benefits of separation are received by the patients, it is important to ensure that patients actually receive the medicine which has been carefully researched by the manufacturer and then chosen and prescribed by the doctor for the patient's diagnosed medical condition.
There are some potential pitfalls here. 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. This possibility raises the following serious public health issues:
a) Different brands of modern medicines containing the same active ingredient cannot be assumed to be identical, since variations in auxiliary ingredients and manufacturing methods can cause significant differences in the way they are metabolized in the human body.
b) The science of drug equivalence is not yet well established in Korea. Only a very few testing institutions have the capability to produce reliable results and the interpretation of these is contentious.
c) The lack of assured integrity in the regulatory system (Section # 2A) increases the risks associated with substitution of generic products.
d) Given the profit-centered orientation of the local health system, the temptation will be great for pharmacists to dispense cheaper substitute pharmaceuticals, to increase their margins or to receive favors from local manufacturers. Furthermore, since these temptations will occur in over 20,000 pharmacies nationwide, post hoc monitoring/policing by the authorities is likely to be ineffective.
Recommendation: These serious public health risks can only be avoided by prohibiting any form of brand substitution at the dispensing stage and by insisting that the pharmacist dispenses exactly what is prescribed by the physician.
4. Harmonization of New Drug Registration Requirements
A. Clinical Trials for Drug Registration
Unlike U.S. and EU regulators, the Korean Food and Drug Administration (KFDA) 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. KFDA has indicated that the current Korean requirements may be changed to be in line with the guidelines of the International conference on Harmonisation in the near future.
Recommendation: KFDA should accept GCP quality international data as a sufficient basis for licensing of products for the Korean market, with additional local trials conducted only if a drug is proved, during its international development, to be "ethnically sensitive".
B. Certificate of Free Sale
Pharmaceutical companies face delays in obtaining Product Licenses for new products developed outside Korea, because KFDA does not accept a request for a product marketing license or even allow Phase III clinical trials until the source country Certificate of Free Sales (CFS) is available. All other required information is available much earlier, so this requirement imposes a 2-3 year delay in the time to availability to Korean patients of novel treatments for their diseases. The same requirements prevent Korean clinical trial institutions from participating in international Phase III clinical development programs to gain access to new technology and experience in the science of clinical assessment.
Recommendation: The CFS should not be a prerequisite for the review of a new drug submission and should not be required to be submitted until the Product License is ready for issue. Similarly, the regulations should be changed to enable Korean clinical trial institutions to participate in multinational Phase III clinical development programs, without first presenting a CFS. To make this a practical reality, the documents required by Customs for the import of clinical trial supplies should also be simplified to exclude the CFS.
C. Multiple Sourcing.
Currently, KFDA will only issue a single license per product and that license must be uniquely associated with a specific manufacturing site. This is incompatible with modern pharmaceutical manufacturing strategy, where to ensure continuity of supply, more than one site will usually be designated for each product/country combination. It is also unnecessary among sites owned/contracted by the product's proprietor, which are each GMP approved and for products that are made to a common formula/process and quality standard.
Recommendation: KFDA should accept that products made by a specific GMP approved manufacturer, by a common method and to a common formula/process and quality standard can all be represented by a single Product License.
D. Inspection of Imported Non-Biological Products.
Despite earlier commitments to the contrary, KFDA still requires testing of each shipment of imported drugs. This is expensive and inefficient as the products are made to well characterized, approved and accepted standards and are accompanied by the manufacturer's Certification of Quality Assurance.
Recommendation: Imported products, manufactured in compliance with GMP guidelines, which are stricter than the GMP guidelines of Korea, should only require to present a Certificate of Quality Assurance from the country of manufacture.
E. Requirement for 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 local testing performed 3 or more times by the local importer - as well as the results of overseas testing by the foreign manufacturing company.
Recommendation: The obligation of local importers to submit local test results on every batch, as well as results from the overseas manufacturing site should be abolished, provided the importer has demonstrated KGMP compliance for the manufacturing process/site used and the results of the overseas testing are compliant with the Product License specification.
5. Liberalization of Toll Manufacturing
Under the regulations, only companies having manufacturing facilities satisfying "KGMP" are allowed to hold the Product License for a drug, which is to be manufactured in Korea. Hence in Korea "toll manufacturing", the contractual relationship allowing one firm to manufacture another Product License holder's product, is permitted only between manufacturers. Such toll manufacturing is also restricted to only 11 manufacturing processes, including the process for production of penicillin preparations.
Given the unproven nature of the Intellectual Property Laws applying to pharmaceuticals, this is a serious barrier to entry into Korea for international companies, who have historical reasons to be concerned over the transfer of product registration rights to Korean companies,. The current regulations have also led to substantial over-capacity in the manufacturing sector of the industry. The complete liberalization of toll manufacturing between Product License holders and GMP approved manufacturers would benefit local manufacturers, as well as foreign manufacturers, by creating opportunities to fill spare capacity which is unlikely to be filled in other profitable ways.
Recommendations: Pharmaceutical companies without manufacturing facilities in Korea should be permitted to register locally manufactured products of all pharmaceutical forms, under toll manufacturing agreements with GMP approved manufacturers.
Potential Exports/Foreign Sales
The aforementioned trade barriers in Korea cost the U.S. industry over US $ 500 million per annum.
For all the aforementioned reasons, PhRMA believes that Korea should be listed as a Priority Foreign Country under Special 301 in 1999.