[Ip-health] the 1999=2000 EC/Korea dispute over drug prices

[James Love]

http://trade-info.cec.eu.int/doclib/docs/2003/april/tradoc_112198.pdf

Notice of initiation of an examination procedure concerning obstacles to
trade within the meaning
of Council Regulation (EC) No 3286/94, consisting of measures imposed by
the Republic of Korea
affecting trade in pharmaceutical products
(1999/C 218/03)

...........
On 16 June 1999, the Commission received a complaint under
Article 4 of Council Regulation (EC) No 3286/94 (1) (hereinafter
=C2=91the Regulation=C2=92).

1. Complainant
The complaint was lodged by EFPIA (European Federation of
Pharmaceutical Industries and Associations) on behalf of
Community member firms exporting or wishing to export to
the Republic of Korea the products covered by the complaint.
...

3. Subject
The complaint concerns obstacles to trade allegedly caused by
Korean practices involving discrimination in pricing and reimbursement
practices, excessive regulatory requirements and
intellectual property issues. The complainant also claims a
lack of transparency of the Korean system regulating trade in
pharmaceuticals.


(a) Discriminatory regime for the determination of reimbursement
prices

The complaint alleges that there exists in the Republic of
Korea discrimination in law and practice concerning reimbursement
prices for pharmaceutical products, including
unfavourable treatment of innovative products (which are
in most cases non-Korean) compared to generic products
(generally Korean) and privileges in the reimbursement
regime reserved for Korean products.

EFPIA claims that these practices are in breach of Articles
III(4) of GATT 1994. Article III(4) stipulates that products
of a WTO member country imported into the territory of
another member are not to be accorded less favourable
treatment than that accorded to similar products of
domestic origin as regards the sale, putting up for sale or
distribution of those products on the market of the
importing country.

In the light of the information available, the Commission
considers that there is sufficient prima facie evidence that
the Korean system for the reimbursement of pharmaceutical
products discriminates against imported
products and therefore is contrary to Article III(4) of
GATT 1994.

(b) Other alleged obstacles to trade
The other alleged obstacles to trade are: excessive
requirements for the registration and marketing for new
product; the prohibition of contract manufacturing
between a foreign producer not established in Korea and
a Korean manufacturer, and, as regards intellectual
property, the discrimination of foreign producers
concerning patent terms.

The complainant has not at this stage presented sufficient
evidence of the existence of WTO violations in respect of
these other issues. However, if further information
concerning these issues or others arising from the
changing legal and regulatory environment in Korea is
submitted, the Commission may also take it into account
in connection with any decision taken in this case.


....

The main evidence of adverse trade effects of the Korean
discriminatory legislation and practices in the low and falling
share held by the European pharmaceutical industry on the
Korean market. Sales of pharmaceuticals by EU companies to
the top 50 countries in 1997 show that, in all but two industrialised
markets, one of which is Korea, EU products hold a
market share of more than 20 %; in Korea this is just 10,8 %.
This appears to indicate that the practices described above
effectively impede the establishment and consolidation of
Community pharmaceutical producers on the Korean market.
In addition, in 1997, the Korean pharmaceuticals market was
the tenth largest in the world and had been growing at a rate
of 10 to 15 % annually. However, the annual rate of growth of
Community exports to Korea fell from 20 % in 1994 to 8 % in
1997.

The complaint has been lodged by an association representing
the entire Community industry, which would appear to imply a
material impact on the economy of the Community within the
meaning of Article 2(4) of the Regulation.

....

http://trade-info.cec.eu.int/doclib/docs/2003/april/tradoc_112200.pdf

COMMISSION DECISION
of 25 October 2000
suspending the examination procedure concerning obstacles to trade in
pharmaceutical products
on the market of the Republic of Korea
(notified under document number C(2000) 3098)
(2000/679/EC)


A. PROCEDURAL BACKGROUND
(1) On 15 June 1999 (EFPIA (European Federation of Pharmaceutical
Industries and Associations)lodged a
complaint under Article 4 of Council Regulation (EC)No
3286/94 (hereinafter the Regulation)on behalf of those
of its members which have an interest to market their
products in Korea.
(2) The complainant alleged that Community sales of pharmaceutical
products in Korea are hindered by a number
of obstacles to trade within the meaning of Article 2(1)
of the Regulation, i.e. =E2=80=98a practice adopted or maintained
by a third country and in respect of which international
trade rules establish a right of action=E2=80=99. The alleged
obstacles to trade were:
=E2=80=94 discrimination in pricing and reimbursement practices,
=E2=80=94 excessive regulatory requirements,
=E2=80=94 intellectual property issues.
The complainant also claimed a general lack of transparency
of the Korean regulatory system.
(3) At the time the complaint was logded the Korean regulatory
system governing pharmaceuticals was undergoing
a period of change. This made it difficult to assess
whether there was sufficient evidence in the complaint
of the existence of WTO violations in respect of some of
the issues. However, the Commission decided that the
complaint contained sufficient evidence to justify the
initiation of an examination procedure on the grounds
of discrimination in pricing and reimbursement practices.
In order to make a proper assessment of the new
legal and regulatory environment the Commission
decided that it would also take into account any information
discovered during the investigation that related
to other issues raised in the complaint. A corresponding
notice was published in the Official Journal of the
European Communities (3).

B. REACTION OF THE KOREAN GOVERNMENT TO THE
INITIATION OF THE EXAMINATION PROCEDURE
(4) Following the initiation of the investigation a note
verbale was sent to the Korean authorities requesting
that they respond to a questionnaire on the alleged
barriers to trade in pharmaceutical products. The Korean
Governement replied by note verbale informing the
Commission of the changes and planned changes to the
Korean legislation governing the pharmaceuticals
sectors. The changes concerned all the issued contained
in EFPIA's complaint.

Pricing and reimbursement issues
(5) The complaint alleged discrimination against foreign
products regarding both the method for determining
reimbursement prices and the system for reimbursement.
The rules introduced during the investigation
appear to have eliminated the discriminatory elements
previously existing. Imported products were admitted
for the first time on the list of reimbursable pharmaceuticals
(i.e. those pharmaceutical products that are eligible
for reimbursement by the State health care system)on 1
July 1999. Imported products are now reimbursed
according to the same rules as domestic products and
the unfavourable treatment of innovative products
should have been removed by the new rules for price
calculation agreed upon by the task force for pricing.


(6) Furthermore, on 15 November 1999 the Korean authorities
introduced the actual transaction price (ATP)system
of reimbursement for pharmaceutical products. This is
intended to eliminate the discounts previously
demanded by the purchaser of pharmaceuticals, which
represented a problem for international industry as it
was claimed that domestic producers had an advantage
as their products were reimbursed at a price level that
allowed them to offer substantial discounts. The system
includes the introduction of a complex electronic data
exchange system.

(7) However, both on the issue of reimbursement at actual
transaction price and on the pricing of innovative products
the new rules have entered into force very recently
and have not yet been fully implemented.
.....


Intellectual property issues

(9) On data protection, although it appears that the system
still does not guarantee full protection to data submitted
to obtain marketing authorisation, no case of unfair use
of confidential data was reported in the context of the
investigation.

As for the issue of patent term restoration the change in
the rules concerning clinical trials has been taken into
account in the latest amendment to the Regulation on
patent term extension. That text says that, for medicines
developed abroad and exempt from clinical trials in
Korea, the extension period includes both the period
spent in clinical trials abroad and the time taken by
KFDA to examine the file and give approval to the new
medicine. That now removes the scope for discrimination
of foreign products.

..........

D. RECOMMENDATIONS

(11) The Commission considers that the system ruling pharmaceutical
products in Korea has undergone substantial
change since the lodging of the complaint under the
Regulation and that these changes have improved the
possibility for the Community industry to enter the
Korean market. However, most of the new legislation
introduced has not yet been implemented and there are
indications that implementation may be delayed or that
the legislation may be interpreted in a trade restrictive
way. These concerns are confirmed by the latest developments.

(12) The industry's main concerns lay with the implementation
of the ATP reimbursement system. During the
investigation the Korean authorities informed the
Commission services that the full implementation of the
ATP system would be completed by 1 May 2000.
However, subsequently the Korean authorities have
stated that this will not take place until May 2001 as the
electronic exchange of data, essential for the operation
of the system, foreseen for the reporting of the transaction
prices will not be fully in place until that date. This
will become an even greater concern after 1 July 2000 if
the planned introduction of separation of prescribing
and dispensing of pharmaceutical products takes place.
There are approximately 20 000 pharmacies that would
then be required to report on the prices of pharmaceuticals
and the delay in introduction of the electronic
reporting system makes it likely that no accurate assessment
of prices can take place.

(13) The Commission considers therefore that it would be
appropriate to monitor the effect of the changes in the
Korean legislation for a period of not less than six
months from the date of entry into force of this
Decision given that some of the changes have not been
fully introduced and others have not yet been introduced.
Such monitoring would give an indication
whether the changes have in fact improved the situation
with regard to the barriers to trade in pharmaceutical
products in Korea alleged in the complaint.

(14) The examination procedure concerning the Korean regime governing
the pharmaceuticals sector
should therefore be suspended and the Commission should supervise the
situation in accordance
with Article 11(2)(b) of the Regulation.

(15) A report on the enforcement of the new regulations will be issued
after six months from the date of
the suspension. Any further action which might appear necessary will be
proposed on the basis of
that report.

HAS DECIDED:
Sole Article

The examination procedure concerning obstacles to trade in
pharmaceutical products on the market of the
Republic of Korea is hereby suspended.
Done at Brussels, 25 October 2000.