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Focus on Regulation

The future of pharmaceutical price regulation: A valuable new regime?

Green pillsOn 6 November 2013, the Department of Health (“DoH“) and the Association of the British Pharmaceutical Industry (“ABPI“) announced Heads of Agreement for the new Pharmaceutical Price Regulation Scheme (the “2014 PPRS“).  Entering into force on 1 January, the 2014 PPRS will replace the existing scheme (the “2009 PPRS“), which began in 2009 and is due to expire on 31 December of this year.

Key to the 2014 scheme is the agreement to keep the National Health Service (“NHS“) total spend on branded drugs flat until the end of 2015, with subsequent comparatively small increases until 2018.  The proposed introduction of value-based assessments (“VBAs“), and the opportunity to launch new and innovative products that this will entail, is also likely to arouse considerable interest on the part of pharmaceutical manufacturers.

This article sets out a summary of the key provisions of the new PPRS, the full text of which is expected to be published later this year.

What is the PPRS?

The PPRS is a voluntary negotiated agreement between the Government (through the DoH) and the pharmaceutical industry (through the ABPI, although PPRS participants need not be members of the ABPI).  It applies to branded medicines supplied to the NHS and typically runs for a period of five years.  The underlying purpose of the PPRS is to control the costs to the public purse of branded drugs purchased by the NHS.  Under the 2009 PPRS, this is achieved partly by restricting the profits made by companies that sell branded medicines to the NHS by identifying the relevant capital employed by those companies, restricting the associated costs and limiting the allowed return.  Those manufacturers choosing not to sign up to the PPRS are subject to the alternative statutory scheme, explained below.

Key provisions of the 2014 PPRS

The rebate

According to the 2014 Heads of Agreement, the purpose of the new scheme is to “provide Government with surety on the level of NHS expenditure on all branded medicines supplied by companies in the voluntary scheme.”  Thus, whereas under the 2009 PPRS there was no upper limit on NHS expenditure on branded medicines, the 2014 PPRS provides that the growth rate of NHS spending on branded medicines will be capped as follows:

  1. The permitted increase in expenditure on branded medicines as compared to the previous year (the so-called “Allowed Growth Rate of Measured Spend”) will be set at 0% for the first two years, increasing to just under 2% for years three to five.
  2. The actual NHS expenditure on branded medicines at current prices is forecast to increase year-on-year by between 2% and 4% over the lifetime of the 2014 PPRS.
  3. To compensate for the difference between the allowed growth rate and the actual growth rate, participants in the scheme will, subject to certain exemptions (which, for example, exclude new drugs in an effort to encourage innovation), be required to make quarterly payments in arrears to the DoH.  The first payment is set at 3.74% of net sales, with this percentage to increase to an estimated 7.13% for year two and 9.92% for years three to five, although these percentages will be adjusted based on the actual spend in each year.

Companies with sales of less than £5 million in the previous year will be exempt from these payments.  Sales of new products (that is, products introduced to the market after 31 December 2013 after receiving marketing authorisation) will be excluded from the sales used to calculate the rebate owed by each company.

New products: pricing and the role of NICE

Upon the launch of a new product, companies will remain free under the 2014 PPRS to set the list price at their discretion.  According to the Heads of Agreement, “[t]he assumption is that prices at launch will be set at a level that is close to [the product’s] expected value as assessed by [the National Institute for Health and Care Excellence (“NICE“)].”

Contrary to the Government’s previously stated expectation, NICE will not play a role in the setting of prices.  Indeed, there is no specific reference to “value-based pricing” (VBP) – outlined as a key commitment in the Coalition Agreement and expected by many to feature in the 2014 PPRS.  NICE will, however, according to the Heads of Agreement, “undertake all elements of assessment for a broader definition of value,” referred to as VBA.

It is understood that such “broader” VBAs will encompass an analysis of wider societal benefits (WSBs) and burden of illness (BoI) in the assessment of quality adjusted life years (QALYs), the method currently used by NICE to produce its technology appraisals (recommendations by NICE on the use of new and existing medicines within the NHS).  The results of those appraisals are key to manufacturers, since the NHS is legally obliged to fund and resource medicines and treatments recommended by those appraisals.

While the Government has issued broad terms of reference on the conduct of such assessments, NICE is expected to carry out a full public consultation prior to implementing methods for wider VBA in autumn 2014.  Participation in, and shaping the outcome of, that consultation will be of key strategic significance to manufacturers.

Fixed, yet flexible, pricing for existing products

The 2009 PPRS prohibits any price increases in respect of the list prices of products on the market before 1 January 2014, although the principle of “flexible pricing,” introduced in the 2009 PPRS, will continue to apply.  Companies will be free to increase or decrease the original list price of products where either:

  1. there is significant new evidence that changes the value of an existing “indication” (ie the purpose for which the medicine is used); or
  2. a major new indication is proposed.

This will only apply, however, to medicines subject to a NICE appraisal, and NICE will conduct a review to determine whether the proposed new price provides value to the NHS (as above, how “value” is actually assessed is not yet certain).

Subject to the DoH’s agreement, companies will also be able to “modulate” prices; that is, increase the list price of certain products provided there is an equivalent decrease across the wider portfolio, and on the condition that there is no overall impact on the NHS (taking appropriate account of the discounts often applied in the secondary care setting).

Manufacturers will still be able to agree Patient Access Schemes with the DoH (with input from NICE) in order to improve the cost-effectiveness of a particular drug with the aim of enabling a positive NICE recommendation where this may not yet have been forthcoming based on available evidence.

Profit controls

The profit controls, introduced by the 2009 PPRS will, with some minor adjustments, remain in place.  In particular, the allowable “Return on Capital” target (which is based on the historical value of average capital employed) will remain at 21%; however, the Margins of Tolerance will be increased to 50% (from the existing 40%).  This means that, if the scheme member’s assessed profit exceeds the 21% target by more than 50%, it will be required to repay the excess or reduce prices by an equivalent amount.  If a scheme member’s profit is more than 50% below the 21% target, then it will be entitled to apply for a price increase.

The alternative statutory scheme

Companies that do not participate in the PPRS are governed by the statutory scheme under the auspices of the Health Service Branded Medicines (Control of Prices and Supply of Information) (No 2) Regulations 2008, which is understood to apply to around 10% of branded medicines.  At the same time as announcing the 2014 PPRS, the DoH published the response to its consultation on a revised statutory scheme.  Amongst other things, the amended statutory scheme, also due to come into force on 1 January 2014, will introduce a 15% price cut on branded medicines sold by companies governed by that scheme, remove the exemption on price adjustment in relation to products costing no more than £450,000 in a calendar year, and (like the new PPRS) set an exemption from the provision of information and from price adjustments for companies whose sales of branded medicines are less than £5 million in a given year.

Next steps

Reaction to the PPRS announcement has been mixed, some parties claiming that the proposals are a barrier to innovation and will stifle investment in the UK pharmaceutical industry.  The DoH, on the other hand, has declared that the new scheme will “provide stability and predictability…supporting the [pharmaceutical] industry’s global competitiveness.”  However, the long-term impact of the 2014 PPRS remains to be seen.  In particular, much will depend on how exactly the VBA mechanism functions, and whether this truly allows issues such as wider societal benefit to form part of the assessment of new and existing products.  In the meantime, manufacturers will await the publication of the full scheme with interest and will surely see the upcoming NICE consultation as a real chance to shape the meaning of “value” in the UK healthcare market.