In November 2004, the four UK health departments and the ABPI announced a new Pharmaceutical Price Regulation Scheme (PPRS) for the next five years, starting in January 2005. This scheme is the latest development of an agreement that was set up in 1957 between the ABPI and the DH to limit the profits made by pharma companies on NHS medicines.

Subsequent agreements introduced more sophisticated methods of regulating profits, taking into account the costs of producing NHS medicines outside the UK; generic drugs; and recognising NHS developments such as GP fundholding and the establishment of prescribing financial incentives for GP practices and hospitals to minimise costs.

The last PPRS agreement in 1999 was designed to balance the UK public's interest in fair pricing for medicines and the discovery of better treatments by the pharma industry. This was set against the legislative background of the 1999 Health Act which allowed the government to intervene, if necessary, independently of the PPRS to control NHS drug prices and pharma profits.

The 2004 PPRS is a voluntary agreement between the four UK Health Departments and the pharma industry for the regulation of prices of branded prescription medicines supplied to all sectors of the NHS. The scheme has the following objectives:

• To secure the provision of safe and effective medicines for the NHS at reasonable prices
• To promote a strong and profitable pharma industry capable of sustained research and development expenditure that should lead to the future availability of new and improved medicines
• To encourage the efficient and competitive development and supply of medicines to pharma markets in the UK and other countries

Under the PPRS, companies have the freedom to set a price for new drugs on entry into the market, with the proviso that there is not an unreasonable delay or discouragement of the production of the generic forms, when the patent ends. Companies that don't join the scheme are subject to statutory price or profit controls under section 34 of the Health Act 1999, which includes the power to make price reductions similar to the 2004 PPRS.

Companies supplying branded licensed NHS medicines are eligible to enter the scheme and they do not have to be ABPI members; they are also free to leave the scheme at any time subject to six months notice of termination. Companies not complying with the terms of the agreement will no longer be eligible to be members of the scheme and membership can only be reinstated once a company meets its obligations under the PPRS.

How the scheme works

The new scheme applies to branded licensed NHS medicines, vaccines, in-vivo diagnostics, blood products, dialysis fluids, branded products supplied through tendering processes and on central or local contracts, and biotech products. It does not cover 'standard' branded generics (an out of patent product to which the manufacturer or supplier, who is not the originator company, has applied a brand name and is directly comparable to a true generic that is generally available), in-vitro diagnostics and unlicensed products supplied on a named patient basis.

Under the scheme companies with NHS sales of branded prescription medicines above £1 million in 2004 were required to deliver a 7% reduction in the prices of their products by 1 January 2005 - this compares with a 4.5% price reduction required under the 1999 PPRS. No price increases will be permitted before the end of December 2005 and the price cut applies to the NHS list price of all products on the market on 31 December 2004.

Companies that have NHS sales of £10 million or less in 2004 are allowed to exclude the first £1 million of sales from the price reduction and there are four ways it can be delivered:

• Across the board reduction: the 7% reduction applies to all the products in the scheme.
• Modulation: this allows a variable reduction in the prices of the products under the scheme with the effect of achieving an overall 7% price reduction.
• Part payment: companies can opt to deliver up to 2% of the price cut by making a payment to the DH in advance and making up the balance with a 5% across the board reduction or through modulation.
• Payment (OTC): this applies to a situation where 30% or more of a company NHS sales are made up of OTC products. The company may elect to deliver the 7% price cut by making a direct payment to the DH in quarterly arrears.

Companies are required to state the method by which they will deliver the price reduction when applying for entry into the scheme.

When products are sold on from one company to another the receiving company is required to maintain the price reduction agreed by the first organisation for three months following the acquisition. The only exception to an immediate price increase for that product would be if the acquiring company is forecast to have NHS sales of less than £1 million in the 12 months following the acquisition of the product.

If the company wishes to increase the price of the newly acquired product after the three month period, it is required to seek DH approval and the application will be judged against the overall PPRS position of the company.

If there is a major change in the supply of the products to the NHS, either the pharma company or the DH can request an interim review of the pricing of the medicines after two and a half years into the agreement.

Levels of return on profits

The agreement sets out a mechanism whereby there is a reasonable limit to the profit made by the supply of medicines to the NHS. For example, all companies will have a common return on capital (ROC) target of 21%. Further injections of costs or capital would be permitted if these are based on audited evidence and that this is not duplicated anywhere else in the company's Annual Financial Return (AFR).

There is an associated margin of tolerance (MOT) relating to the ROC. The scheme members will be able to retain profits of up to 140% of the ROC target (the upper MOT limit) and companies forecasting profits less than 40% of the ROC will be able to apply for price increases (the lower MOT limit).

If a company exceeds the upper MOT limit, then they are required to pay the DH the excess or delay or restrict further price increases or both.

Research and development

In recognition of the R&D investment the industry makes in the UK, the ceiling of the R&D allowance has been increased to a maximum of 28% of NHS sales. This has three elements:

• Flat rate: for assessing profits this is up to 20% of the value of NHS sales and for assessing price increase applications, the rate is up to 15%.
• Variable rate: this allows for innovation and the maximum allowance is up to 5% of NHS sales. Where there is no patent, the allowance will be given for a period of up to 10 years after the granting of the first marketing authorisation for a new active substance.
• Variable rate for children medicines: this is 1% of the NHS sales in the year in which the product is available, including a paediatric indication (with a limit of three products per year).

Other allowances

Marketing expenses include the costs of all advertising, selling, sales promotion and administrative support associated with the company's medicines that are sold to the NHS. The allowance for marketing is up to £1 million plus 4% of the company's turnover (for NHS sales) or 2% for assessing price increase applications. There is an additional allowance for each molecule.

Information expenses include the provision and spreading of information on the company's products to the NHS - for example, summaries of product characteristics (SPCs); medical symposia; and information provision to patients. It also includes the provision of information to health professionals and NHS bodies to support the development or implementation of protocols, guidelines and standards.  

The allowance for information expenses is similar to that for marketing expenses (ie, 4% of turnover or 2% for assessing price increase applications).

Information requirements

In order for the DH to justify the price increases under the PPRS in terms of public accountability, companies are asked to submit information to assess the individual company's position. There needs to be a balance between the level of detail required and the costs of producing the information.

The information required includes the company's AFR, together with supporting documentation such as a copy of the audited accounts. Companies are required to submit AFRs if they have a turnover above £25 million, or below that threshold, in the case of a price increase application.

If disagreements arise, then both parties have a right to seek arbitration. This involves both parties presenting their cases before an arbitration panel consisting of a chairman (appointed by the Secretary of State and agreed with the ABPI) and two members (one appointed by the Secretary of State and the other by the ABPI). Throughout the process commercially sensitive information would be kept confidential.

The new scheme has been designed to benefit the industry and the NHS in a number of ways. These include the freedom of companies to price individual products within the limits of the PPRS; the establishment of a single price control mechanism across the whole of the UK and recognition and support of R&D investment.

The ABPI says it considers the 7% price cut unnecessary, as medicines' prices had fallen in real terms by about 15% over the past 10 years and the NHS' drugs budget remained steady at about 12% of expenditure.