Korea

While the Korean Government has followed through on several sectors on its commitment to deregulation and structural reform that began in 1997 in response to the country's financial crisis, the progress has been slow in the pharmaceutical sector. A strong need for deregulation, trade liberalization and harmonization with the international community has existed for many years, particularly in the pharmaceutical regulatory and pricing systems under the control of the Ministry of Health and Welfare (MoHW). While some important steps such as the listing of imported pharmaceuticals have been made, barriers to market access for innovative pharmaceuticals remain in place, due to discriminatory, non-transparent reimbursement pricing methodologies making Korea an exceptionally difficult 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 and USTR in efforts to resolve the industry's issues. In addition, a WTO level trade action has been initiated by the European Commission and the U.S. industry is considering requesting the initiation of a Super 301 investigation of Korea's policies, practices and acts related to the pharmaceutical sector.

Market Access Barriers

The lack of equal treatment of imported finished products had been a major trade issue for over five years. Korea's health insurance reimbursement policies blatantly discriminated against foreign manufactured and imported medicines, violating WTO/GATT regulations on discrimination and national treatment (Part II, Article III Paragraph IV of 1947 test). Discrimination was applied through the (1) inability of foreign manufacturers to have their products listed on the reimbursement schedule; (2) inability of foreign manufacturers to give equal hospital margins; and (3) requirement that hospitals, clinics and pharmacies provide additional administrative measure when dispensing imported drugs.

The Korean Government has responded by implementing a new pharmaceutical pricing policy on August 1 allowing imported products to be listed on the national reimbursement schedule for the first time. However, the methodologies used to determine prices of imports are highly discriminatory and disadvantage foreign products in the Korean market. The proposed Korean formulae, in most cases, set prices below the cost of producing and marketing an innovative medicine, and thus fail to compensate for research and development expenditures associated with breakthrough drugs.

In addition, implementation of Actual Transaction Pricing (ATP)1 for all pharmaceuticals was promised and eventually delivered with removal of margins on locally manufactured products on November 15th 1999. However, accompanying ATP implementation and the removal of transparent margins is a clear issue of enforcement and the need for additional measures to prevent corrupt practices that translate into market advantages for companies that indulge in them.

This, in turn, exaggerates the manner in which 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 giving extra margins and other incentives to hospitals, the ATP system may have the ironic effect of encouraging excessive dispensing of older, less effective products, versus new, innovative, more cost-efficient (albeit foreign) medicines provided by PhRMA member companies. In addition the Korean Government is itself providing hospitals with financial incentives to use a list of generic "essential drugs."

The prices of innovative pharmaceuticals are, in contrast to generic prices, relatively low compared to world prices, and the revised new pricing system enacted by the MoHW during 1999, is seriously flawed, containing a mechanism for therapeutic category comparison that can be applied in a discriminatory fashion. The industry has requested the support of the U.S. Government to ensure that the new pricing system for innovative patented products ensures that the actual price in Korea recognizes the value of innovation, is reflective of the product's true global value, particularly for innovative and all patented products, whether imported or locally manufactured. Under the ATP system, the medical insurance reimbursement price should be the same as the ex-manufacturer price to medical institutions and also should include a mechanism to address foreign exchange fluctuation to counter the negative effects of major currency devaluation.


Elimination of Planned Generic Substitution Policies

Arrangements planned for the separation of prescribing and dispensing in Korea have been submitted to the Korean National Assembly for passage into law. These include permission for pharmacists, within certain limits (same substance, strength and dosage form), to substitute alternate generics to for brand-name medicines prescribed by the doctor. PhRMA is concerned that this practice is a clear effort to promote the use of domestic generic drugs over brand-name foreign products. Furthermore, in the absence of rigorous generic bioavailability testing in Korea, public health issues could ensue. Citizens groups have publicly demanded the re-testing of all generic substitutes, but the KFDA (Korean Food and Drug Administration) plans only limited testing of the B List from the US PDI (321 products, 31 different ingredients) and considers that there are not enough institutions available to do more extensive testing before the planned separation in July 2000. The research-based industry seeks more rigorous and extensive bioequivalence testing for generics.

Concern for the lack of proven bioequivalence of generics is exacerbated by 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 (e.g., journal publications relating to the originator's brand) and which do not necessarily relate one to the other. Furthermore, the samples may not bear any relation to the final product that the manufacturer will eventually manufacture on a large scale. There is a concern that KFDA 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.

KFDA asserts that they test 3000 products every year and that this is the upper limit of their testing capability. They also assert that standards and testing methods for manufactured products are reviewed before approval and after manufacturing samples are collected and re-tested and failure rate is only 1.2%. However, PhRMA believes that, given the Korean Government's plan to allow generic substitution, in the interest of public health all generic products to be used for substitution should have up-to-date bioequivalence testing data and should be re-tested if such data are not available. As KFDA does not plan comprehensive testing, generics that do not have such data should not be permitted for substitution purposes. In addition, as the current test requirements to show bioequivalence for a product are minimal, testing should be upgraded to more internationally acceptable levels.

Furthermore, if generic substitution of brand-name prescriptions is to be permitted by the Korean Government, the prescribing doctor should have the option of ensuring the patients consistency of treatment for medical reasons by checking a box on the prescription indicating no substitution. Under such conditions, substitution should not be permitted.


Data Protection

In order to develop new products for marketing, the research-based industry invests substantial resources of approximately 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, as 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 four to six 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 raised. 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 remains highly likely.

Apart from the protection related to Drug Re-examination, the Korean Government never made any regulatory provision to honor the TRIPs protocol with regard to pharmaceuticals. In 1997, even the indirect protection provided via the Re-Examination route, was rendered ineffective by the elimination of the appropriate Enforcement Provision of the Pharmaceutical Affairs Law. Furthermore, this obligation was ignored by the Korean Food and Drug Administration (KFDA) in the recent licensing of generic products related to certain patented medicines from PhRMA and other international companies which raised concern in the industry that Korea may be reneging on its treaty obligations with regards to intellectual property.

The KFDA position is that the elimination of the provision was not a major issue as similar provisions exist at other (lower) levels of the administrative regulations. In practice, re-examination now appears to have been reinstated, however KFDA has no plan to revoke licenses given to second entry generic products that should have been prevented by data protection, unless patent infringement itself is proven in the Korean Court system. Given past and recent failures by Korean courts to uphold intellectual property protection in pharmaceuticals, and the time it takes to settle these disputes, which may be several years, this provides little solace to PhRMA member companies in Korea. Also it does not address the issue that data protection should have prevented these generic products' registration in the first place. Korea should comply with TRIPs Article 50 and provide for immediate resolution of issues and enforcement of data protection.

The KFDA has a clear obligation to ensure that data provided to it in pursuit of Regulatory Review are secure from misuse by third parties. Unfortunately, when there are instances in which the originator's technical data has apparently been used by generic competitors of the file sponsor to gain registration, the injured party is disinclined to pursue legal proceedings against the KFDA, relying as he does, on 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.

In addition, there seems to be a misunderstanding by the KFDA of its obligations under TRIPs Article 39.3. In a recent case, for example, data from a published journal article were used by generic competitors to gain registration even though the data in the studies cited were the property of the originator. In their defense, the KFDA claims that the TRIPs protection prevents use of publicly disclosed data for "commercial purposes". PhRMA member companies in Korea, however, assert that registration is for a commercial purpose. Therefore, there continue to be serious issues to raise with the Korean Government in the area of the implementation of the TRIPs protocol.

The KFDA has proposed an amendment to stipulate the protection of data by government officials, other than in public interest, which is pending before the National Assembly. Under the amendment, companies are supposed to request the protection of the data when they submit it to KFDA. While PhRMA appreciates any measure by KFDA to improve data protection, this amendment does not ensure full and complete data protection. PhRMA believes that further measures and clear acceptance of the obligations under TRIPs are needed.


Administration of Patent Protection

The absence of any direct linkage between KFDA and KIPO (Korean International Patent Office) is another area of concern. KFDA, while assuming responsibility for safety and efficacy review, apparently has abdicated any responsibility for patent protection and there is no link between them and KIPO. U.S. and other international companies must seek recourse retrospectively in the Korean Court System. Given past instances of failure of companies to receive adequate protection by the Korean courts, our industry would like to see a prospective system also introduced in Korea, such as that used in the USA where a registration applicant must make a declaration of no infringement at initial filing of their application with FDA. Currently the Korean Government plans no such prospective system. Without direct communication and linkages between KFDA and KIPO, the Korean Government cannot meet its TRIPS obligations. PhRMA asks that the U.S. Government should ask the Korean Government to reaffirm that WTO TRIPS obligations bind the government as a whole, not just the patent office, and to implement appropriate safeguards to prevent patent infringement.


Harmonization of New Drug Registration Requirements

Unlike U.S. and European regulators, KFDA has required traditionally 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 will be changed to be in line with ICH-5 guidelines by January 1, 2000. However, the new draft regulations are not in adequate compliance with the key tenants of ICH-5 regarding acceptance of foreign data.

The KFDA recently has indicated that it will consider a modification to the previous draft to include a revised flow diagram that includes an approval route that clarifies the exemption of Korean bridging data or bridging study when a drug has demonstrated "ethnic insensitivity". In such a case, KFDA would accept data for the main ethnic groups including Asians, but not require a specific bridging study on Koreans unless there are differences between the ethnic groups. This approach is a significant improvement but is divergent from a basic tenant of ICH-5 that most drugs are considered to not be ethnically sensitive unless a product's characteristics are such that differences would be expected, and these show in the studies with different ethnic groups in the foreign data package. The industry is concerned that the Korean interpretation of ICH-5 will lead to unnecessary bridging studies and registration delays. Dialogue with KFDA to resolve the differences in a timely manner is needed.


Border Testing

KFDA 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. At this time KFDA has no plan to accept foreign test data due to mutual recognition issues between Korea/USA and Korea/Japan.


Submission of Test Results of Biological Products by Local Importer

When examining the specification and test methods of vaccines and other biological preparations, health authorities require results from the local test performed 3 or more times 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. KFDA insists that both they and importers must have and use local testing facilities in Korea. The only exception is made under the "Orphan drug" system for products with annual sales of less than 500 million Won (approximately US $ 400,000) or under 20,000 patients.


Potential Exports/Foreign Sales

PhRMA estimates that its member companies in Korea forego US$500 million in sales each year, due to the aforementioned trade barriers. Given the strong resurgence of the Korean economy, this represents a market with tremendous growth opportunities for PhRMA member companies, but for the trade barriers outlined above.


Notes

1 ATP refers to a process by which medicines would be reimbursed at their Actual Transaction Price, with some consideration given within a mechanism to take account of changes in currency fluctuations.

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