Changes on the way to UK drug pricing system

The UK pharmaceuticals market represents just 4 per cent of total drug sales, but where it goes, others follow. UK pricing is influential in countries accounting for 25 per cent of the total revenues of the industry, according to a market study – and suggestions for its reform – published this week by the Office of Fair Trading (OFT).

The study recommends a fundamental reform of the UK drug pricing system. This would see the 50-year-old Pharmaceutical Price Regulation Scheme (PPRS) – under which overall profit levels are controlled – replaced with a value-based approach to pricing.

The OFT says this would deliver better value for money from country’s drug spend and focus business investment on drugs that have the greatest benefits for patients.

Big savings

It’s well known that pharma and biotech R&D activity clusters in those countries that pay the highest prices for drugs. If the suggested reforms are carried through when the current PPRS agreement runs out in 2010, the OFT promises savings of £500 million a year. But presumably there will be a reduction in the country’s share of R&D also.

The UK’s National Health Service (NHS) spends around £8 billion a year on branded prescription medicines. The OFT’s study identifies a number of drugs where it says prices are significantly out of line with patient benefits, including treatments for high cholesterol, blood pressure and stomach acid.

“Specifically, some drugs currently prescribed in large volumes are up to ten times more expensive than substitute treatments that deliver very similar benefits to patients,” says the report.

It says the blame for this lies in the PPRS’s profit cap and price cut scheme, whereby companies are free to set their own prices within very broad profit constraints. Currently companies are entitled to factor a 20 per cent return on capital into their prices.

The OFT says PPRS should be replaced with a patient-focused value-based pricing scheme, in which the prices the NHS pays for medicines reflects the therapeutic benefits they bring to patients.

Countries including Sweden, Australia and Canada have such value-based pricing and reimbursement systems. The OFT says it has drawn on that experience in designing a workable scheme for the UK.

Value for money?

“This would enable the NHS to obtain greater value for money from its existing drug spend. [We] estimate that it would release in the region of £500 million of expenditure that could be used more effectively, giving patients better access to medicines and other treatments which they may currently be denied,” says the OFT.

The OFT argues that over time, value-based pricing would give companies stronger incentives to invest in drugs for those medical conditions where there is greatest need. Because the health services in many other countries base their prices on those in the UK, additional benefits would arise internationally.

John Fingleton, OFT Chief Executive, said, “Focusing prices on the needs of patients rather than on the costs of drug companies would be good for both patients and for business. It would allow more patients better access to more effective treatments, and it would focus drug company innovation and investment on the areas where patients need it the most, creating more valuable drugs in the future.”

Unsurprisingly, the pharmaceutical industry is not enamoured with this suggestion. The trade body, the Association of the British Pharmaceutical Industry said the PPRS has brought stability to an industry that operates in the long term. “It is vital that this is maintained. It is also essential that the UK-based industry’s world-leading record of discovering new medicines – some 20 per cent of the world’s top medicines were developed in the country – is not put at risk.”

Biotech broadly supportive

The UK biotech sector reacted more positively. The BioIndustry Association (BIA), which has long argued that the interests of smaller, emerging bioscience companies are not adequately supported by the current pricing system, said it agrees with the principle of focusing investment on drugs that have the greatest benefits for patients, and reallocating funds to more cost-effective products.

"The OFT has recognised that the current system disadvantages growth of smaller emerging bioscience companies,” said Aisling Burnand, chief executive of the BIA. “Its recommendations are clearly attempting to redress this, and reward innovation, and broadly speaking we are supportive."

However, she cautioned that the manner of implementation and the methodology used for calculating cost effectiveness and value will be critical.

One particular concern is whether the need to demonstrate value would place a significant extra burden on smaller companies, requiring them to generate additional clinical data.

“The OFT's theoretical vision now needs to be developed to understand how it would work in practice,” said Burnand.   If there is to be a wholesale change to the drug pricing system it needs to be much more transparent, with the calculations used to evaluate cost effectiveness open to scrutiny, and appeals being heard in a timely manner.

Further support came from Andrew Jones, an analyst in Ernst & Young’s Pharmaceutical team who said the OFT's recommendations would reward companies appropriately for discovering differentiated products that offer benefits to patients, whilst improving the efficiency of NHS expenditure.

As he pointed out, “Some major pharmaceutical companies have recently been calling for and securing the introduction of value-based approaches to pricing in other European countries.”

Farewell to stability

But he acknowledged the recommendations do create a degree of uncertainty. Since its introduction, the PPRS has been reviewed periodically, providing the industry with five years of stability between reviews – this will no longer be the case.

Furthermore, value-based assessment is still a relatively inexact science and grey areas exist as to the appropriateness of certain valuation methodologies.

“A shift to value-based pricing places greater demands on industry to generate evidence of value to support pricing negotiations. This is very different challenge to producing the safety and efficacy data required to garner marketing authorisation and often requires additional time and investment during clinical development. A shift to value-based pricing could therefore add to the burden of an already costly and lengthy process,” said Jones.

The UK Department of Trade and Industry and the Department of Health now have 120 days to consider and respond to the OFT’s findings and recommendations.