OFT recommends change to current drug pricing system

The Office of Fair Trading (OFT) has released a report recommending changes to the Pharmaceutical Price Regulation Scheme (PPRS), which limits the profits pharmaceutical companies can make from their marketed drugs.

The PPRS, which is re-evaluated every five years, has come under scrutiny from the OFT, which is pressing for a free market approach to reduce drug prices and the cost to the NHS. At the moment, drug firms can set their own prices, which on average are higher than those paid in other EU countries.

For the past 18 months, the OFT has been investigating drug pricing and says that costs are too high. The NHS spends about GBP 8 billion a year on branded prescription medicines. The report identifies a number of drugs where prices are significantly out of line with patient benefits.

The drugs under scrutiny include treatments for cholesterol, blood pressure and stomach acid ñ the most commonly prescribed medications. The report highlights that some of these high-volume prescribed branded drugs are ten times more expensive than generic substitutes, which have equivalent therapeutic effects.

Big Pharma reactsÖ
At a press conference called by the Association of the British Pharmaceutical Industry (ABPI) on 19 February, President Nigel Brooksby, Head of the OHE Professor Adrian Towse and Director General of the ABPI, Dr Richard Barker, defended the prices set by the pharmaceutical industry.

Dr Barker, said: "The pharmaceutical industry supports value for money in healthcare. The PPRS has done a pretty good job over recent years and is constantly evolving and is not a freedom that the industry abuses, as it understands that prices will come under scrutiny sooner or later."

Brooksby added: "Reducing prices of branded drugs will result in less innovation at a time when patients in theUK want increased treatment options. The UK is very efficient at generic prescribing and there has been a 21 per cent decline in the cost of medicines in real terms over the past 10 years. The burden of proof lies with the OFT to prove PPRS has done its job."

Professor Towse concluded: "We have to examine if the OFT has performed a rigorous enough assessment of the PPRS. We are concerned with the relationship between the five-year procurement and market value, as well as R&D validity."

Big Pharma under pressureÖ
The position put forward by the ABPI and pharmaceutical firms is that any attempt to lower the cost of branded medicines will impact revenues, stifle expensive R&D programmes and reduce the number of innovative drugs in their pipelines.

Globally, governments are trying to lower the cost of healthcare by encouraging generic prescribing and stopping ethical firms from blocking the production of generic copycat drugs.

Other threats to Big Pharmaís branded pipelines come in the form of the ìEthical Pharmaceuticalsî model, which works by changing the molecular structure of an existing, expensive drug, turning it into a new medicine no longer protected by a 20-year patent to a multinational drug company, enabling it to be made and sold cheaply.

Drug companies with a global reach put the cost of R&D of a new drug at USD 800 million (GBP 408 million/ EUR 608.8 million). The Ethical Pharmaceuticals model claims to be able to produce a drug for only a few million pounds.

NHS stretched to the limitÖ
The report comes at a time when the NHS is GBP 500 million (USD 977.6 million/ EUR 744 million) in the red by Q4 FY06, which has resulted in severe cuts. Recent media reports have uncovered drastic cost-saving measures, such as leaving service bills unpaid and delaying operations until the beginning of the next financial year. In addition, the past five years of increased funding has now stopped and that present funding levels have been capped, which will put enormous strain on the UKís already stretched healthcare system.

Drug companies justify the present system by citing that the UK pharmaceutical industry is the second most profitable after the financial services sector and that companies must set their own prices to sustain successful R&D programmes and maintain innovation in drug treatments.

According to the ABPI, drug price differentials have narrowed in recent years, and the large market in the UK for generic medicines means that average prices across the board are no higher in the UK than elsewhere. The most recent PPRS negotiation produced a cut of seven per cent across the board, so while non-drug related costs in the NHS went up, drug prices dropped.

Other pricing systemsÖ
The PPRS method used in the UK is not the only way to decide how drugs will be priced. In France, for example, the price of every drug is negotiated individually. However, this process can delay new products because it takes much longer.

The German system groups generic and branded drugs prices together in what is termed as ëjumboí reference pricing resulting in cheaper branded medicines. The disadvantage of this system is that generics are more expensive than in the UK. ABPI added that the German system would discourage competition, adding that the PPRS in its current form was robust and flexible.

OFT recommendationsÖ
The OFT study recommends that the present 'profit cap and price cut' scheme, where companies are free to set their own prices within broad profit constraints, be replaced with a patient-focused, value-based pricing system, in which the prices the NHS pays for medicines reflects the therapeutic benefits they bring to patients. The pricing shift would then allow the NHS to leverage greater value for money from its existing drugs budget.

The OFT estimates that changing the current drug pricing system would release in the region of GBP 500 million (USD 977.6 million/ EUR 744 million), which could be spent on giving patients better access to medicines and other treatments, which they may currently be denied.

R&D on the move anyway?
During the press conference, the ABPI reinforced its position by saying that although the R&D environment in the UK was currently healthy and well supported, if the market became too hostile, the industry would look abroad to cheaper labour markets to conduct its research.

Cost-cutting measures seem to be the industryís way of responding to the current healthcare price controls instituted by governments and increased generic competitions. World number one pharmaceutical company, Pfizer, has closed manufacturing plants and cut 10 per cent of its workforce, while UK number two, AstraZeneca, has shed 3,000 jobs. It could be argued that Big Pharma is already thinking of abandoning established R&D markets, regardless of the outcomes of the OFT recommendations.

R&D was cited by the ABPI as the activity most under threat from any attempt by the OFT to alter drug pricing. The pharmaceutical industry seems already to be shifting its strategy by buying up small biotechnology companies with small molecule, specialised drug delivery technology and protein-based therapies, instead of spending the money on their R&D processes.

The fact that a major trend in Big Pharma is to outsource its R&D, manufacturing and formulation activities to cheaper third parties, which seems contrary to the ABPIís initial reaction.

Indian drug makers are betting big on global pharmaceutical outsourcing for future growth. Dr Reddyís Laboratories is currently focusing on its Custom Pharmaceutical Services (CPS) division and is expecting revenue of USD 100 million (EUR 76.1 million/ GBP 51.1 million) during FY06-07.

India's fourth largest pharmaceutical firm, Nicholas Piramal, has announced a new programme to leverage its global strengths in formulation services, using InformexUSA to set out its integrated formulation development and manufacturing capabilities and likely to announce further investment in new formulation facilities.

Recent data gathered by the Financial Times Research Centre shows that on average, the top 30 pharma firms spent almost 17 per cent of sales on research in 2006. The report also suggests that relying on in-house research and development only has become increasingly complex in terms of budget and resources and it is now almost unviable for companies to have control over all the aspects of drug development.