The Pharmaceutical Price Regulation Scheme PPRS

1
The Pharmaceutical Price Regulation Scheme (PPRS)

• David Kullman
• Medicines, Pharmacy and Industry Group
• 7 March 2007

2
Agenda

• Introduction
• Present 2005 PPRS
• Pricing
• Profit controls
• Past From VPRS to PPRS
• Future? Post OFT

3
Introduction

• Controls the prices of branded medicines
  indirectly through regulating the profits that
  pharmaceutical companies are allowed to make on
  their sales to the NHS.
• Sets the NHS list price at which pharmacists
  reimbursed.
• A balance between reasonable prices for the NHS
  and a fair return for industry to enable it to
  develop and market new and improved medicines.

4
Key Features

• Regulates company profits not prices of
  individual products.
• Freedom of pricing for innovative products (new
  active substances).
• Major companies submit annual financial data.
• Significant support for research and development
  (RD).

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Scheme Objectives

• To secure the provision of safe and effective
  medicines for the NHS at reasonable prices.
• To 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.
• To encourage the efficient and competitive
  development and supply of medicines to
  pharmaceutical markets in this and other
  countries.

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Coverage

• All licensed, branded, prescription medicines
  sold to the NHS.
• Not generic medicines nor branded medicines
  available without a prescription (OTC) unless
  prescribed.
• UK wide scheme - 80 by value of medicines used
  in the NHS (some 8 billion).

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Expenditure

• NHS expenditure on drugs - UK 2005
• Branded 8 billion
• Primary Care 6.0 billion
• Secondary Care 2.0 billion
• Generics 3 billion
• Primary care 2.5 billion
• Secondary care 0.5 billion
• Total NHS expenditure 11 billion
• Drugs Bill is around 15 of NHS expenditure.

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Present 2005 PPRS

• New 5 year agreement started on 1 January 2005.
• Negotiated between the Department of Health and
  the pharmaceutical industry, represented by the
  Association of the British Pharmaceutical
  Industry (ABPI).
• A voluntary scheme but backed up by statutory
  powers in the Health Act 1999.

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2005 PPRS

• A 7 price reduction to deliver expenditure
  savings to the NHS of 1.8 billion over the next
  5 years.
• Increased allowances for RD to a maximum of 28
  of NHS sales (up from 23).
• 5 year agreement provides stability for the
  industry.

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2005 PPRS

• All major companies elected to join the 2005 PPRS
  and are complying with its principal provisions.
• All companies reduced prices as required.

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Pricing

• Sets NHS list price at which pharmacists
  reimbursed.
• New Products
• freedom of pricing at launch of new active
  substances.
• Price Changes
• all increases for existing products require DH
  agreement.
• modulation provided that cost neutral to NHS.

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7 Price Reduction

• Options
• Across the board
• Modulation
• Part payment
• Small companies exemption
• The aim is a corresponding reduction in NHS
  expenditure on branded medicines.
• Monitoring procedures to ensure that this is
  achieved.
• The price cut delivered 370 million in primary
  care in England in 2005.

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Profit Control

• Annual Financial Returns (AFR) from companies
  with 25 million NHS sales.
• Audited data on sales, costs, capital assets and
  profits.
• Reconciled to Statutory Accounts.
• Split between NHS business, exports and other
  products.
• Submitted by prescribed date.

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Assessment of profits

• Details required on bases of allocation of costs
  and capital to NHS.
• RD allowance of up to 28 of NHS sales (20
  basic up to 5 for innovation up to 3 for
  paediatrics).
• Limitation to marketing expenditure (5) and
  information expenditure (4).

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Profit Target

• A common return on capital (ROC) target of 21.
• Plus a margin of tolerance (MOT) of 140
  29.4 ROC.
• A common Return on Sales (ROS) target of 6 (plus
  MOT) as alternative for companies with little or
  no capital employed.

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Assessment of profits

• Repayment of profits assessed over target profit
  plus MOT or price reduction.
• Minimal repayments since 1999 as focus moved to
  price cuts.
• Lower allowances for assessing price increases.

17
Past 50 years of regulation

• From 1957 VPRS to 2005 PPRS
• 10 periodic schemes
• Evolution from direct price control of individual
  products to overall profit control.

18
1957 VPRS

• Concerns over rising expenditure in early days of
  NHS.
• Need for a balance between the interests of the
  tax-payer and the pharmaceutical industry.
• June 1957 agreement between Government and the
  Association of the British Pharmaceutical
  Industry (ABPI).
• The Voluntary Price Regulation Scheme (VPRS).

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1957 VPRS

• Direct control of prices in 3 alternative ways
• Export formula where more than 20 of output
  exported, NHS price should not exceed the
  weighted average of the price in 6 most important
  overseas markets.
• standard equivalent formula where generic
  equivalent of branded product available, NHS
  price no greater than the generic.
• trade price formula a form of cost-plus
  calculation, in which a final price built up from
  ingredient costs, a fixed 12.5 on-cost allowance
  and allowances for processing, packaging etc.
• Or direct negotiation of price of a product with
  the Department.
• New products had freedom of pricing for the first
  3 years.

20
VPRS

• 1961 concept of a companys overall
  profitability where the Department exercised
  option of direct price negotiation over products.
  
• 1964 RD allowance.
• 1969 Major change away from regulating prices of
  individual products to regulating overall
  profits.

21
1969 VPRS

• Annual Financial Return with details of sales,
  costs and capital-employed and by implication
  introduced profitability measured by ROC as the
  main means of regulation elements of direct
  price control retained.
• Objectives very similar to today.
• Constraint on Sales Promotion expenditure.

22
PPRS

• 1972 AFRs from major companies only.
• 1978 renamed the Pharmaceutical Price Regulation
  Scheme (PPRS).
• 1986 Generics excluded and direct price control
  features finally dropped.

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1993 PPRS

• Price reduction of 2.5.
• Abolition of the sales promotion fine.
• Margin of tolerance (MOT), above which excess
  profits repayable, halved, from 50 to 25.
• Introduction of a threshold for price increases
  requiring company profitability to fall to less
  than 75 of target.

24
1999 PPRS

• 4.5 price reduction
• Common target profit
• Common RD allowance
• Health Act 1999
• Competition Study

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Future? Post OFT

• September 2005, the Office of Fair Trading (OFT)
  announced a market study of the PPRS.
• Remit 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
  medicines for the future.
• Report published 20 February 2007.
• Government has 120 days to respond to
  recommendations.

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OFT

• Main conclusions
• Neither prescribers nor patients are price
  sensitive.
• Current scheme does not secure prices that
  reflect therapeutic value.
• OFT identified savings of over 500 million by
  setting more value reflective prices i.e.
  brands at the price of generics 50
  (e.g.Lipitor (atorvastatin) at price of
  simvastatin).

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OFT

• Key recommendation
• Government reform the PPRS replacing current
  profit and price controls with a value-based
  approach to pricing which would ensure the price
  of drugs reflect their clinical and therapeutic
  value to patients and the broader NHS.

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OFT

• In-patent brands
• Replace PPRS with ex ante value-based approach
  to pricing
• Fast track assessment of a new medicines
  cost-effectiveness before launch.
• Where insufficient data, option of risk-sharing
  approach pending cost-effectiveness assessment
  later.
• If expected outcomes not realised, prices changed
  and/or repayments made.
• Ex post reviews for existing drugs.

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OFT

• Off-patent brands
• Originator brands for which there is a
  bioequivalent generic, priced at generic price
  plus a maximum of 25 per cent.
• Branded generics for which there is a
  bioequivalent generic, priced at generic price.
• Off-patent brands for which there is no generic
  equivalent, same arrangements as in-patent brands.

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Any questions?

• Further information on regulation of prices of
  medicines in the UK available at
  www.dh.gov.uk/pprs