• The Korean Government is threatening to implement new barriers to U.S. research-based pharmaceuticals on August 1, 1999, which would discriminate against imported pharmaceuticals in violation of the WTO's "National Treatment" principle and further restrict access by Korean patients to innovative life-saving U.S. medicines.
• South Korea is the world's 10th-largest pharmaceutical market, with total sales of $4 billion in 1997. Before the Asian economic crisis, the Korean pharmaceutical market was growing by 10-15% per year. During the crisis, the Korean Government actively sought foreign investment in several sectors, including pharmaceuticals, The research-based pharmaceutical industry responded positively to this request.

• In fact, in the face of Korea's financial crisis, from 1997-1999, research-based pharmaceutical companies invested over $200 million in operations in Korea. In 1999 alone, to date, U.S. companies are responsible for $32 million of $36 million, or 91% of all foreign investment in the pharmaceutical sector.

• The current policies being implemented by the Korean Government directly endanger the ability of U.S. companies to maintain their investments in the Korean market.

• For reference, Korea's Ministry of Health and Welfare (MHW) has long restricted access by U.S. research-based pharmaceutical companies to the Korean market. After Korea agreed in 1986 to provide product patent protection for pharmaceuticals, MHW adopted regulatory and pricing barriers to protect the Korean domestic industry.

• In April 1999, the Office of the U.S. Trade Representative (USTR) cited Korea's discriminatory denial of national treatment for imported pharmaceuticals on the Super 301 "watch list." Deputy USTR Richard Fisher reiterated U.S. market access concerns in a series of high-level letters to Korean officials, stating that "resolution of these issues is a priority on our bilateral agenda with Korea."
• Korea operates a "single-payer" health care system. Under the National Health Insurance (NHI) system, MHW reimburses the cost of approved medicines which are listed on the national Medical Reimbursement Schedule. By refusing to list imported medicines, MHW ensured the imports from the U.S. and EU were ineligible for NHI reimbursement. While some imports could be reimbursed under a separate import-only listing procedure, MHW imposed discriminatory reimbursements and burdensome administrative procedures that severely disadvantaged innovative U.S. and European medicines. Together, these measures ensured that Korean products accounted for about 95% of domestic consumption.

• After strenuous efforts by USTR, U.S. research pharmaceutical companies, and the Pharmaceutical Research and Manufacturers of America (PhRMA), the Korean Government announced on July 1, 1999 that imports would be allowed on the government's national reimbursement list for the first time.
• On July 1, MHW announced that imports were now eligible for listing, but issued a complex and even more punitive reimbursement formula to take effect August 1 that threatens future sales of leading imported medicines and could drive many leading U.S. and European pharmaceutical companies out of the Korean market. Unlike Korean firms, who primarily produce off-patent generic drugs, U.S. and European pharmaceutical companies specialize in innovative products that involve expensive, cutting-edge research and development.

• The new Korean reimbursement formulas require an average 50% reduction in the prices of many innovative U.S. medicines. Many of the proposed reductions are deeper, e.g. 70%, from Korean prices that were already significantly below those prevailing in other industrialized countries. MHW used a concept known as "therapeutic reference pricing" to drive down reimbursements through outlandish comparisons with existing off-patent drugs. For example, MHW set the prices of imported innovative AIDs drugs by comparing them with 15 year-old, off-patent antibiotics that do not treat HIV infection effectively.

• Meanwhile, MHW suspended scheduled price reductions for domestic medicines. It plans to "grandfather" Korean drugs by allowing them to be priced indefinitely under older, more favorable reimbursement formulas. Thus, domestic drugs retain a 24.17% profit margin for hospitals, which does not exist for imported medicines. This provides a discriminatory financial incentive for Korean hospitals to prescribe domestic products in violation of the WTO. In addition, MHW officials are now threatening to drive U.S. and European research pharmaceutical companies out of the Korean market, if they refuse to accept the government's proposed reimbursement formulas.

• The Korean reimbursement formulas openly discriminate against imports in violation of the WTO's national treatment principle. The formulas put innovative U.S. and European medicines at a serious competitive disadvantage, threatening to further access by Korean patients to innovative life-saving medicines developed abroad.

• At a time when the U.S. bilateral trade deficit with South Korea has increased to $7.4 billion--nearly a five-fold increase from 1994-98--and U.S. taxpayers are being asked to contribute to a major bailout, MHW's actions directly threaten a leading U.S. high-technology export.

• We urge Members of Congress and U.S. officials to reiterate USTR's concerns about Korea's discriminatory barriers to imported U.S. research pharmaceuticals, which threaten U.S.-Korea trade relations and the future welfare of Korean patients. We urge MHW to reconsider the proposed pricing system, agree to an appropriate cooling-off period, and enter into urgent negotiations to create a pricing system which supports innovation and provides equal treatment for innovative U.S. pharmaceuticals.

July 1999