When Is Enough?

In an effort to save around £370 million ($685 million) a year on its soaring drug bill, the UK government has negotiated a new Pharmaceutical Price Regulatory Scheme (PPRS) that cuts the prices of branded drugs by an average of 7 percent. In spite of its name, the PPRS actually regulates pharma companies' profits, rather than the prices of individual drugs directly. The scheme is voluntary, but companies making branded products that decide not to join are subject to a separate, statutory scheme.

Sarah Houlton

The deal is a result of negotiations held every five years between the UK government and the Association of the British Pharmaceutical Industry (ABPI). The 1999 round led to a 4.5 percent cut, which followed a 2.5 percent reduction in 1994. The new agreement goes into effect January 1, 2005. If a company exceeds the level of profit it is allowed, it will have to repay that excess to the government.

Despite the agreement, ABPI President Vincent Lawton says, "The price cut is unnecessary, given that medicine prices have fallen in real terms by some 15 percent over the past 10 years and that the National Health Service's medicines budget is remaining steady at about 12 percent of expenditure. Yet, because it is a five-year agreement, it offers a degree of stability that is important to an industry that works very much in the long term."

The trade organization says it was able to go along with the cuts because of the other measures being introduced as part of the agreement. Companies are currently able to offset 23 percent of their R&D spend against their permitted profits, and that figure will rise to 28 percent. Financial incentives will also be implemented for research into pediatric medicines. "This new deal is a win-win," says UK Health Secretary John Reid, MP. "It is good value for the NHS and the taxpayer, and it is good for the industry because it provides an incentive for research and innovation."

The companies must decide how the price cuts will be applied, because they do not necessarily have to be 7 percent across the board. Rather, the companies can skew the reductions toward different products, as long as the overall reduction is 7 percent. That means if a company has a product that is about to go off patent, it can enact a large price cut for that brand to stave off generic competition and still offset the loss by applying smaller price reductions to newer drugs.

In another change, the sales promotion allowance will be replaced by a marketing allowance. Although the companies can spend as much as they like on marketing, they will be able to write off £1 million ($1.8 million) of those expenses, plus 4 percent of sales and a small additional allowance for each molecule. The amount of "information expenses" that can be itemized has also risen, to 4 percent of sales from 1.6 percent, and this can now include the provision of information to government bodies such as the National Institute for Clinical Excellence.

Some financial assistance has been provided for smaller companies as well. The threshold at which they routinely have to report their financial data was raised to £5 million ($9.2 million) from £1 million ($1.8 million), which eliminates some smaller companies from the process altogether. The BioIndustry Association, however, is concerned that the price cuts will disproportionately penalize the smaller companies because their fixed costs are proportionally higher and their range of products is smaller. ABPI has also come under pressure from some of its smaller members, who are unhappy that the balance is too far in favor of Big Pharma.

The price reductions in the UK are not as severe as those instituted in Germany earlier this year, in which the government demanded a 16 percent cut in the prices of many products. But the new agreement is a further indication that drugs prices are under pressure worldwide, as healthcare providers and payers look to rein in costs.

Although the UK represents only 4 percent of global drug sales, it is an important R&D center, and companies are keen for the domestic market to remain competitive for investment. Although the new PPRS will save the UK government an estimated £1.8 billion ($3.3 billion) over the life of the agreement, if it leads to more research emigrating to more friendly financial environments such as the United States, the arrangement may ultimately prove to be counterproductive.

Sarah Houlton, PhD, is Pharmaceutical Executive's global correspondent. She can be reached at sarah@owlmedia.co.uk.