OFT to continue study into drug pricing scheme

59/06 23 March 2006

The OFT will continue its study into the Pharmaceutical Price Regulation Scheme (PPRS), the system used by the UK Department of Health to control the price of branded drugs prescribed in the NHS.

The decision to continue with the study rather than make a reference to the Competition Commission reflects the positive levels of cooperation received to date from Government and industry. However, the option of a reference to the Competition Commission remains open, for example if current access to information and good levels of cooperation are not maintained.

The study, which was launched in September 2005, aims to assess whether the scheme is the most effective means of securing value for money for the NHS, whilst offering appropriate incentives for pharmaceutical companies to invest in new and useful drugs for the future. The NHS spends about £8 billion a year on branded medicines for prescription in the hospital and community sectors.

Work to date has focused on gathering data about understanding the markets affected by the scheme. In the next phase, the focus will shift towards assessing the effects of the scheme and comparing it to other potential alternatives. This will involve both analysing market outcomes in the UK and drawing lessons from international experience. The final report is due to be published in the first quarter of 2007.

John Fingleton, OFT Chief Executive, said:

‘Our objective is to ensure that PPRS supports vibrant competition that delivers value for money and medical benefits to patients both now and in the future through stimulating innovation. We’re very happy with the positive cooperation we’ve received from both Government and industry so far and will look to maintain that as we move forward with the study.’

NOTES

1. The PPRS is a voluntary scheme negotiated every five years between the Department of Health of the UK and the Association of the British Pharmaceutical Industry. The current scheme runs from 2005 to 2010.

2. The scheme comprises two main components:

the profit cap (of 29.4 per cent return on capital) and floor (of 8.4 per cent return on capital) that applies to all the branded products sold by a company to the NHS and associated features (e.g. cost allowances for certain types of expenditure such as R&D expenditure); and
a range of price controls: freedom to set the initial price of new active substances (NAS) but restrictions on subsequent increases to the list price; controls on the pricing of non-NAS; and the one-off price cuts periodically agreed at the time of scheme renegotiations.

3. The OFT Market Study into the PPRS was launched on 13 September 2005 (see press release 171/05). Its remit is to assess whether the PPRS provides the most effective means of meeting the stated aims of the scheme, which are to:

secure the provision of safe and effective medicines for the NHS at reasonable prices
promote a strong and profitable pharmaceutical industry capable of such sustained research and development expenditure as should lead to the future availability of new and improved medicines
encourage the efficient and competitive development and supply of medicines to pharmaceutical markets in this and other countries.

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