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All things Pharma

The Price isn’t Right

The OFT has recommended significant reforms to the current Pharmaceutical Price Regulation Scheme, provoking a mixed reaction from industry representatives. Pf examines the OFT report.

THE OFFICE OF FAIR TRADING has recommended that the Pharmaceutical Price Regulation Scheme (PPRS) be replaced with a value-based approach to prices, which assesses pharmaceutical products based on their therapeutic value to patients.

However, the pharmaceutical industry has questioned the need for reform and emphasised that a new scheme must not delay patients’ access to new medicines or discourage future investment in innovative therapies.

The current scheme

The OFT’s study of the PPRS was launched in September 2005 to assess whether it is effective in meeting its objectives or if there is a case for reform. The NHS spends around £7 billion a year on branded prescription medicines. The PPRS is used by the UK Health Departments to control this expenditure, and aims to provide value for money for the NHS while giving pharmaceutical companies the incentives to invest in drugs for the future.

The scheme has two main components: profit controls set the maximum level of profits that a company can earn from the supply of branded drugs to the NHS, and price controls impose restrictions on increasing the price of a branded drug and set agreed price cuts. The OFT expresses concern that neither of these controls help secure prices that represent the therapeutic value of the drugs. The report argues that imposing restrictions on the level of profits a company can make, without reference to the value of the drugs supplied, does not encourage innovation in the industry. Furthermore, one-off price cuts mean that companies all have to reduce their prices by the same percentage regardless of the value of their products. The danger is that companies will try to anticipate price cuts when setting prices, resulting in a guessing game between DH and the industry as each tries to second-guess the other.

The current scheme means that drugs with similar clinical effects have widely different prices. The report mentions a variance of 500% or more for very close substitutes. In 2005, for one drug alone, the OFT estimates that £350 million could have been potentially saved by using more value-reflecting prices; and in the case of off-patent brands where generics are available, £65 million could have been saved. The study said that some treatments for cholesterol and blood pressure, in particular, have price tags that are “significantly out of line with patient benefits”. The effect of this is that PCTs may have to restrict access to more innovative drugs due to lack of financing, and this has been seen in NICE’s recent rejection of drugs on the basis of cost.

Inefficient pricing also means that there is no incentive for drug companies to invest in the drugs that will be most beneficial to society. The report comments: “To restrict access to new treatments while ignoring inefficiencies in current expenditure is not an efficient use of resources. Nor is it in the interests of patients.’”

The OFT’s recommendations

In the light of these shortcomings, the OFT recommends the PPRS be reformed so that pricing is based on the clinical value of drugs. This would mean that the NHS budget is spent more cost-effectively, so more money can be invested in newer, innovative drugs, and this would give the pharmaceutical industry the incentive to invest in those drugs that are most beneficial to society. This reform is felt to be of particular importance due to the influence of the UK market: the report estimates that around a quarter of the world’s pharmaceutical market is influenced by UK pricing.

The OFT favours the second option, but suggests that if there is not enough information available, some sort of risk-sharing agreement could exist between the company and payer whereby drugs would be reimbursed, but which could be changed later if the expected clinical outcomes are not met.

The report suggests that NICE and the SMC should play a central role in whichever of these schemes is chosen.

Two options are suggested for the pricing of on-patent branded drugs:

Ex post value-based pricing would maintain freedom of pricing for companies for new drugs, but would replace profit controls and price cuts with ex post reviews of the cost-effectiveness of drugs or drug classes. These reviews would set a maximum price for a product based on its clinical benefits, and would coincide with major events such as new drugs entering the market or comparators going off patent.

Ex ante value-based pricing would involve a fast-track ex ante assessment of a new drug’s cost-effectiveness during the licensing process, which would decide the maximum price and whether to reimburse.

Industry reactions

The ABPI has strongly refuted the claim made by the OFT that the NHS pays too much for drugs. The Association pointed out that the current PPRS has produced £1.2 billion savings to the NHS according to National Audit Office figures, that prices are 21% lower than they were 10 years ago and that new medicines often attract a lower price in the UK than in other major European markets. Dr Richard Barker, Director General of the ABPI, said, “These facts clearly demonstrate that the UK gets its life-improving and – saving medicines at a fair and reasonable price, and that the broad assertions that the OFT has made in launching its study are wrong. It is important that any new system does not delay patients’ access to new medicines and that it should not lead to major increases in costly bureaucracy.”

While the report acknowledges the concerns that the second suggested scheme could result in protracted negotiations and delays to the launch of a drug, it points out that most other countries in the world have a system where drug prices are assessed up front. It also argues that some prescribers will feel more confident in using a drug if they know it has already been judged as cost-effective.

The report agrees with the view of some companies that the assessment of a drug should take on board incremental benefits and relevant patient benefits, but disagrees with the argument made by the ABPI that comparing onpatent brands against generics in terms of costeffectiveness will reduce incentives to invest in new drugs.

The OFT argues the view that new treatments must demonstrate their benefits in relation to generics to receive higher prices, and this will encourage companies to target areas of unmet patient need. It concludes by saying: ‘Companies that are successful in producing drugs that make major improvements to patients’ lives will prosper.

In our view, that is the essence of effective competition.’

The DH has commented: ‘’We recognise the importance of the pharmaceutical industry to healthcare and the development of medical advances and it is in all of our interests to encourage research and reward innovation.”

For further information on the OFT’s recommendations, and to download the market study visit: http://www.oft.gov.uk/shared_oft/ reports/comp_policy/oft885.pdf
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