[Ip-health] USITC on Korea FTA

[Sean Flynn]

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The U.S. International Trade Commission released its report on the Korea
FTA.



http://www.usitc.gov/publications/pub3949.pdf



SNIP





Assessment

U.S. pharmaceutical companies exporting products to Korea would likely
benefit from the

U.S.-Korea FTA. The agreement addresses three issues that the U.S.
industry has identified

as having hindered U.S. pharmaceutical exports in the past: lack of
intellectual property

protections for pharmaceutical products, lack of transparency in Korea's
national health-care

system, and unethical business practices. The reduction of Korean
tariffs for pharmaceutical

products may also provide a small positive effect for U.S. exports. The
FTA is unlikely to

have any effect on U.S. imports because U.S. pharmaceutical imports are
currently free of

duty on an MFN basis364 and U.S. intellectual property protections
already meet or exceed

the intellectual property standards included in the FTA.

The size of the Korean pharmaceuticals market makes it attractive for
U.S. pharmaceuticals

companies. Korea's pharmaceutical market is ranked among the world's top
12

pharmaceutical markets and is worth approximately $8 billion
annually.365 Sustained growth

in the market is expected as the Korean population ages.366
Approximately 30 percent of

Korea's health-care spending goes toward pharmaceuticals, which is
higher than the average

of 16 percent for OECD countries.367 Foreign-based companies account for
about 30 percent

of the pharmaceuticals market in Korea, or an estimated $2.4 billion.368
U.S. exports of

pharmaceutical products369 to Korea were valued at $351 million in
2006.370 In that year, the

United States accounted for 15.8 percent of Korea's imports of
pharmaceutical products.371

According to a representative of the Pharmaceutical Research and
Manufacturers of America

372 May, testimony before the USITC, June 20, 2007, 185.

373 Ibid., 186.

374 For additional information on the intellectual property provisions
of the FTA, see ch. 6 of this report.

375 USTR, "Final - United States - Korea FTA Texts," 2007, Article
18.9.4.

376 Ibid., Articles 18.9.1-18.9.3.

377 Ibid., Article 18.8.6.

378 USTR, "Korea," 2006 National Trade Estimate Report on Foreign Trade
Barriers, March 31, 2006,

415. See also Lee and Lee, "Feasability and Economic Effects of a
Korea-U.S. FTA," December 30, 2005,

66, and Schott, Bradford, and Moll, "Negotiating the Korea-United States
Free Trade Agreement,"

June 2006, 10.

379 The Korean central government provides universal health-care
coverage through its National Health

Insurance system, which covered 96 percent of Koreans in 1999, and the
Medical Aid Program, which covers

the remaining population. Most provision of health care, however, is
performed by private health-care

institutions. See EIU, "Industry Briefing, South Korea: Healthcare and
Pharmaceuticals Profile,"

January 5, 2007. The Medicaid program in the United States is explicitly
recognized as a regional health-care

program, not a health-care program of the central level of government.
See USTR, "Final - United States -

Korea FTA Texts," 2007, ch. 5, footnote 3.

380 May, testimony before the USITC, June 20, 2007, 189.

381 USTR, "Korea," 2006 National Trade Estimate Report on Foreign Trade
Barriers, March 31, 2006,

416; and USKBC and the AMCHAM in Korea, U.S.-Korea Free Trade Agreement
Position Paper, 2006, 20.

382 May, testimony before the USITC, June 20, 2007, 287-8.

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(PhRMA), however, U.S. pharmaceutical companies currently have limited
access to the

Korean market due to nontariff market access barriers.372

According to the PhRMA, Korean government's current lack of strong
intellectual property

rights protection for pharmaceuticals reportedly discourages U.S.
companies from marketing

patented medicines in Korea.373 The FTA would expand the intellectual
property protections

for pharmaceuticals in three important areas.374 First, it would require
the implementation of

measures to prevent the marketing approval of a generic drug by drug
regulators while the

patent on the original drug is still in effect, a so-called "patent
linkage" system.375 Second,

the data-exclusivity provisions would preclude third parties from
relying on the safety or

efficacy data submitted by the originator to obtain marketing approval
for a pharmaceutical

product for 5 years for a new product and 3 years for a previously
approved chemical

entity.376 Third, the patent extension provision would allow companies
to request an

extension of the patent term for a pharmaceutical product as
compensation for unreasonable

delays in the patent or marketing approval processes.377

The USTR has previously recognized that the lack of transparency in the
Korean health

regulatory and reimbursement systems may be an impediment to U.S.
companies.378 The

FTA would increase transparency for health-care programs administered by
the central level

of government in the two countries.379 The provisions of the FTA chapter
5 aimed at

increasing transparency in the marketing approval and pricing of
pharmaceutical products

are summarized in appendix D of this report. These provisions are
expected to give

stakeholders a meaningful opportunity to participate in the development
of rules and

regulations in the pharmaceutical sector.380

In 2006, the USTR found that Korea's complex distribution system for
pharmaceuticals and

lack of transparency in regulation and reimbursement may have
contributed to unethical

business practices that have harmed U.S. companies.381 In testimony at
the Commission's

hearing, PhRMA said that the code of conduct that multinational
pharmaceutical companies

adhere to in their work with health-care professionals is not being
applied and enforced in

Korea's generic industry.382 According to the USTR, the FTA would
promote ethical

business practices by requiring appropriate measures and enforcement in
both countries "to

383 An analysis of the effects of the FTA on the market for medical
devices is presented in a separate

section of chap. 3 of this report.

384 USTR, "Final - United States - Korea FTA Texts," 2007, Article 5.5.

385 May, testimony before the USITC, June 20, 2007, 288.

386 Global Trade Information Services, World Trade Atlas Database.

387 Ibid.

388 WTO, Trade Policy Review Body (TPRB), "TPR, Republic of Korea,
Report by the Secretariat,"

September 17, 2004.

389 Sung, "Korea's Cosmetic Market Brief," September 2005, 2.

390 USTR, "Korea," 2007 National Trade Estimate Report on Foreign Trade
Barriers, April 2, 2007, 359.

391 May, testimony before the USITC, June 20, 2007, 185.

392 PhRMA, "PhRMA Statement on the U.S.-Korea Free Trade Agreement
(April 3, 2007)."

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prohibit improper inducements by pharmaceutical or medical device
manufacturers or

suppliers to health-care professionals or institutions for the listing,
purchasing, or prescribing

of pharmaceutical or medical device products383 eligible for
reimbursement under health-care

programs operated by its central level of government."384 PhRMA
expressed a similar view,

indicating that the provisions of the FTA would help to ensure a level
playing field for U.S.

companies in terms of ethical business practices.385

Given the relatively low tariff rates applied by Korea on imports of
pharmaceutical products,

the phasing out of Korean tariffs on pharmaceuticals would likely have a
small but positive

impact on U.S. exports to Korea. Korean tariffs on pharmaceutical
products (HS chapter 30)

currently range from 0 to 8 percent ad valorem with 54 of 148 Korean
tariff lines for

pharmaceuticals having free MFN rates of duty. If the FTA is
implemented, 68 additional

tariff lines for U.S. pharmaceutical products would have duties
eliminated immediately.

Duties on the remaining 26 tariff lines would be phased out over a
period of 3 years. The

tariffs that would be phased out include the tariff provision with the
highest level of Korean

imports from the United States in 2006, "Medicaments in Measured Doses,
Other," which

currently has a duty of 8 percent ad valorem. This category accounted
for 32.0 percent of

U.S. pharmaceutical exports to Korea in 2006.386 Korean imports for all
tariff lines subject

to 3-year staging were 49.7 percent of imports from the United States in
2006.387

In addition to traditional pharmaceutical products, the Korean Food and
Drug Administration

also administers preapproval testing and registration requirements for
the relatively new,

"highly functional" cosmetic products.388 These products, often called
"cosmeceuticals,"

include antiaging treatments, sunscreens, and other cosmetics that are
marketed as having

druglike benefits.389 The ability of U.S. companies to compete in the
Korean market for

cosmeceuticals is currently impeded by burdensome requirements and a
general lack of

transparency in the regulatory system.390 The FTA requirements for
transparency in

regulatory approval processes may provide U.S. cosmetic companies better
access for their

cosmeceutical products in the Korean market.

Views of Interested Parties

The U.S. pharmaceuticals industry generally supports the FTA, especially
the provisions

addressing nontariff issues. According to hearing testimony, U.S.
pharmaceuticals firms have

faced a range of market access impediments in the Korean market.391
Industry representatives

specifically mentioned the importance of the strong protections provided
by the intellectual

property rights of the FTA.392 In testimony before the Commission, a
representative of

PhRMA expressed support for the transparency provisions of the
Pharmaceuticals and

393 May, testimony before the USITC, June 20, 2007, 186. For additional
information on the summary of

provisions for FTA chap. 5, see app. D of this report.

394 ITAC (3) on Chemicals, Pharmaceuticals, Health/Science Products and
Services, Advisory Committee

Report, April 24, 2007, 7-8.

395 IGPAC, Advisory Committee Report, April 24, 2007.

396 Flynn and Palmedo, "Initial Response to the U.S.-Korean FTA
Pharmaceuticals and IP Chapters,"

May 25, 2007; and KPI, "Policy Brief," February 7, 2007. A member of the
ITAC 3 representing the Generic

Pharmaceutical Association states that "this agreement blatantly
excludes provisions to ensure affordable

access to safe and effective generic medicines." ITAC (3) on Chemicals,
Pharmaceuticals, Health/Science

Products and Services, Advisory Committee Report, April 24, 2007, 16.

397 KPI, "Policy Brief," February 7, 2007.

398 May, testimony before the USITC, June 20, 2007, 248. In his
testimony, Mr. May references in support

of his statement the report USDOC, ITA, "Pharmaceutical Price Controls
in OECD Countries,"

December 2004.

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Medical Devices chapter because lack of transparency in Korea's
reimbursement decisions

has been a long-standing issue for U.S. companies.393

The ITAC on Chemicals, Pharmaceuticals, Health/Science Products and
Services (ITAC 3)

stated that it had encouraged provisions that increase the transparency
of the Korea

regulatory system and that a "more objective process for establishing
the guidelines and

conditions under which drugs can be reimbursed would improve access to
innovative

medical discoveries that are developed abroad and would benefit Korean
patients

significantly."394 The Intergovernmental Policy Advisory Committee
(IGPAC) stated that it

commends the FTA for eliminating uncertainty about the Medicaid program
by specifically

classifying it as a regional health-care program excluded from the
provisions of Chapter 5

of the FTA.395

Several observers criticized the intellectual property protections for
pharmaceuticals in the

FTA. Several contend that these provisions would delay the introduction
of generic drugs

to the Korean market and increase health-care costs in Korea.396 A
critic of the intellectual

property provisions for pharmaceuticals notes that the Korean National
Health Insurance

Review Agency has a goal of reducing the percentage of health-care costs
due to

pharmaceuticals, relying on generic drugs to keep costs low, and claims
that "because the

proposed FTA is poised to result in greater restrictions on generic
drugs through extending

its patent expiration and limiting drug information, the FTA is likely
to drive up the cost of

health care in South Korea."397 A pharmaceutical industry representative
responding to this

criticism said that if Korea, as well as other nations, adopts policies
like the ones in this FTA

"it would provide an incentive for even greater expansion of innovation
in pharmaceuticals,

the discovery of even more enhanced cures, and that, in the end,
rebounds to the benefit of

all patients, globally, in Korea and otherwise."398