Pharmaceutical price regulation scheme will be replaced by more stringent controls

The UK government is scrapping its existing national scheme for controlling drug prices. The system, called the Pharmaceutical price regulation scheme (PPRS), will be replaced by a newly negotiated agreement on 1 September 2008.

Under the PPRS, companies are allowed to set their own prices when launching new medicines, but in return must keep their UK-earned profit margins within an agreed limit. Any excess profits have to be refunded to the state-run National Health Service (NHS).

The profit caps are re-negotiated at regular intervals, and the current deal was originally intended to run until 2010. But in February 2007, the Office of Fair Trading (OFT), the government’s anti-monopoly agency, revealed that the PPRS had failed to restrain drug prices. Excess profit repayments between 1999 and 2004 came to only 0.01 per cent of industry sales, while some popular branded drugs were still far more expensive than their clinical value warranted.

"The UK is now set to move from being one of the least regulated pharmaceuticals markets in Europe, to one of the most heavily regulated" - Andrew Monro, KPMG

The OFT recommended dumping the PPRS in favour of a new scheme of direct price controls based on a drug’s therapeutic value. Though anathema to drug companies, this could slash half a billion pounds off the NHS’s ?8 billion prescription drugs bill, OFT calculated.

Softly, softly

The government has moved cautiously, offering the industry assurances that it would ’take into account their strong concerns’. But now it has written to all 180 companies who participate in the PPRS, officially terminating the system with six months’ notice.

Details of the replacement scheme have not yet been settled. The government says it would be based on four principles: value for money, reward for innovation, accelerated uptake of new medicines, and sustainability.

’The UK is now set to move from being one of the least regulated pharmaceuticals markets in Europe, to one of the most heavily regulated,’ says Andrew Monro, pharmaceuticals partner at management consultancy KPMG. He adds that pharma companies would be looking for concessions in return - particularly the option to market their full range of products in the UK, instead of the current restricted list of NHS-approved drugs.

Vow of silence

Health ministers have forbidden firms to discuss the negotiations publicly. But the industry is known to regret the PPRS’s demise, regarding the scheme as better than the direct price controls common elsewhere in Europe. Nigel Brooksby, president of the Association of the British Pharmaceutical Industry, has warned that an agreement acceptable to industry was ’crucial’ to retain the industry’s major R&D investments in the UK. 

He suggested that companies might close their UK research facilities if the renegotiated deal presses them too hard on price. And the Biotechnology Industry Association - whose members market some of the very highest-priced new drugs - has even criticised the OFT’s proposed value-based pricing system as ’not workable’.

Ian Oliver, senior manager at pharmaceuticals management consultancy Ernst & Young, says the industry’s main fear was a loss of business certainty. ’The PPRS allowed pharma companies to forecast revenues over a five to ten year period and thus make long-term investment decisions.’

The new pricing model could remove that predictability and ’force the whole industry to change its business model,’ he warns.

Peter Mitchell