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Cost cutting agenda

Proposals by the OFT could signal aggressive price cuts and jeopardise UK R&D

The new strike from the Office of Fair Trading (OFT) on the price the NHS pays for pharmaceutical products, which threatens the future of research-based industry in the UK, has resulted in many industry observers, including the industry body, questioning if the OFT understands the nature of research and innovation.

While significant changes to pricing formulas such as jumbo reference pricing and increasing out-of-pocket costs for patients have dominated the continental European markets, the UK has enjoyed relatively free pricing.

Historically, the industry has been seen as more of a friend than a foe, and been rewarded for its economic contribution. The Pharmaceutical Price Regulation Scheme (PPRS) entitles companies to a 21 per cent profit margin, measured as the return on net capital employed, with a ceiling of up to 40 per cent. This has made the UK a favourite within Europe for not only R&D investment but also early access to new and innovative drugs.

However, the OFT has always been antagonistic towards the PPRS and it is no surprise that its review was announced without consultation with the Department of Health and its recommendations are ultimately hostile to the pricing scheme.

As was widely anticipated, the report recommends that the PPRS is not renewed - the current scheme finishes at the end of 2009 - and suggests replacing it with `value-based pricing': a system by which the perceived value of an individual drug is set by reference to other similar drugs and its value over its peers.

The OFT envisages the National Institute for Health and Clinical Excellence (NICE) developing the pricing system while the Department of Health pricing unit resolves related pricing disputes between NICE and manufacturers.


Next In the UK
The UK government will have to respond formally to the OFT report later this year, but this is likely to be more of a holding operation given the potential significant implications of the report on innovation and investment in the UK.

The Ministerial Strategy Group (MISG), comprising the Department of Health, the Treasury, the Department of Trade and Industry and the ABPI, will be expected to review such fundamental proposals.

One reason it was set up was to achieve a steady approach to policy and bring all sides together. The adverse impact of such OFT proposals on the future of the industry are significant enough to merit very close examination.

The government will also need to look closely at the legislative implications (the PPRS is defined by statute) and will be unlikely to want to make any decisions close to the general election, which is widely expected to be held between May 2009 and May 2010. All this suggests that the current PPRS, like previous ones, will be allowed to continue uninterrupted.

There are also major science implications. The pharmaceutical industry contributes more R&D to the UK economy than any other sector, and the science community would not like to see this jeopardised. Even the Treasury will be wary of adopting a policy that would undermine its own target of increasing R&D over the next five years.

The real danger to the industry, however, may be more insidious. If the government is seen to be toying with any adverse OFT proposals, or if the Treasury comes up with its own alternatives, such as a further price cut or a much wider Selected List, then the UK environment will be seen as increasingly hostile and new pharma investment will shift further towards the US or the Far East.

In the past
Past recommendations of scrapping the PPRS have largely fallen on deaf ears. While the scheme is by no means viewed as perfect, it is considerably more palatable than rigid individual product pricing systems. However, the OFT report released on February 20 may destabilise the delicate balance between industry and government in the UK. The report makes a series of recommendations, including value-based pricing. These suggestions will likely resonate with a cost-conscious Treasury that already feels it has been overly generous to the industry.

The OFT report also reflects the Treasury's desire to curb drug expenditure, but the real news will be how much of an impact this has on innovation in the UK and pharmaceutical pricing abroad.

While more autonomous than its European counterparts, the UK is no longer isolated from these trends. It too has faced the demands of price cuts and has the most cost-benefit based health technology assessment agencies.

The last PPRS was accompanied by a 7 per cent across-the-board price cut, although companies can modulate the list price of their PPRS products through reductions that equate to an overall level of 7 per cent.

Meanwhile, positive recommendations by NICE are often not implemented. Foremost among those responsible for the failure to implement NICE guidelines are health authorities, which are increasingly looking at ways of cutting their drugs budgets as they frantically seek to balance their books and prepare for a reduced rate of health expenditure growth from April 2008.

The Treasury has traditionally been sceptical of the pharma industry because it believes drugs costs are rising too fast. However, this misplaced perception of value is on cost, not cost-effectiveness. Hospital costs for ulcers, mental health and tuberculosis are a fraction of what they used to be thanks to innovative new medicines. The same goes for many new medicines in other disease areas. The Treasury position will be boosted by the report from the OFT on the PPRS.


In context
If the government were seriously to consider the OFT's recommendation for value-based pricing, or even to adopt it in the longer-term, there might be a number of unintended consequences in Europe.

Thanks to the liberal pricing system in the UK, pharma firms have generally launched their products first in the UK, then Ireland, Germany and so on. Upsetting this trend could make another market a launch favourite, especially in countries where physician uptake of new medicines is more rapid.

Likewise, a UK value-added system raises serious methodology questions, similar to those that have plagued traditional health technology assessments; namely what value do you place on health? In addition, if the OFT assumes correctly that value-added pricing will reduce costs, pharma will take a hit in those markets that use international prices in their pricing models.

Traditionally, pharma pricing departments have been under significant pressure to obtain the highest price possible in order to help pricing negotiations in other markets, including the French, Italian and Spanish markets.

European Pricing
Continental Europe has led the drive to reduce the costs of individual drugs. While each market has its own unique system, respective governments have been using the same language: budget cuts, generic substitution and technology assessments. These tools, coupled with the introduction of reference pricing, have significantly reduced pharmaceutical price margins, while putting powerful pressure on the ability to demonstrate cost-effectiveness.

In the past year, European ministries of health have announced a slew of budget cuts. In October, French Health Minister, Xavier Bertrand, said he would enforce price cuts of up to 20 per cent on vasodilators prescribed for cognitive disorders, and reduce support for 41 other prescription drugs where the government currently reimburses a third of the cost.

MutualitÈ Francaise, one of France's biggest insurers, echoing the minister's comments, said that it would also reduce coverage of the drugs listed. More recently, Spain introduced a new reference pricing system that is expected to reduce drug expenditure by 7 per cent. Even wealthy countries like Switzerland are considering budget cuts.

Expenditure control is also, and with greater effect, taking place through substitution. While generic substitution is allowed in France, Germany and Spain, Germany is the most aggressive in its pursuit to replace branded drugs with generics. Last spring, the government in Germany announced a goal to shift 70 per cent of all drugs prescribed to generics.

While pharmacists are generally required to inform and receive permission from patients before substitution, this does not always happen, particularly in countries where pharmacists are given financial incentives and/or are subject to generic conversion quotas. Physicians are hesitant to prescribe non-reimbursed drugs in order to avoid out-of-pocket costs to patients.

Pricing and reimbursement in Europe is now largely determined by economics. Patients will have access to medicines if the medicines have sufficient supporting cost-effective data. The UK, France and Germany have the most established health technology assessment agencies: NICE, the Commission de la Transparence and the German Institute for Quality and Efficiency in Health Care. NICE is leading the trend towards pharmacoeconomics and is the most developed in measuring cost-effectiveness.

Hard times
The realities are stark for the pharma industry. While the singling out of pharma budgets is an inefficient and ineffective attempt to curb the rising rate of healthcare expenditure growth, the trend looks set to continue. This is reinforced by the damning OFT report made all the more painful as it was issued in an historically industry-friendly market.

Pharma's health outcomes departments and pricing experts will have to work even harder to justify the cost of new and innovative drugs.

Meanwhile, executives in the sector will have to better communicate the value of not only their products but also their investment into the regional economies.

The Authors
Morgan Long is a senior consultant and Chris Mockler is a senior policy adviser at Fleishman-Hillard's Healthcare Public Affairs Practice in London, and FrÈdÈrique Meriaux Hall is an account director at Fleishman-Hillard's practice in Paris

13th March 2007


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