But the other elements of the new PPRS bring some benefits to the industry as well as to Government, and the ABPI is recommending that its member companies should accept the new voluntary scheme as the best available to industry.
The shared goals of the scheme, agreed between Government and the ABPI, have the threefold aim of securing the provision of safe and effective medicines for the NHS at reasonable prices; promoting a strong and profitable pharmaceutical industry capable of sustained research and development expenditure; and encouraging the efficient and competitive development and supply of medicines to pharmaceutical markets here and abroad.
Benefits of the scheme include the continued freedom of individual medicines pricing within the PPRS's overall constraints; the stability it brings for at least the next five years; the fact that it applies to the whole of the UK as the single price control mechanism, and that it continues to recognise and support the R&D investment of the pharmaceutical industry.
"The price cut is unnecessary given the fact that medicines prices have fallen in real terms by some 15 per cent over the past ten years and that the NHS's medicines budget is remaining steady at about 12 per cent of expenditure," said Vincent Lawton, President of the ABPI.
"However, other aspects of the PPRS make the overall agreement one which the ABPI is able to recommend to its member companies. 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 - it takes some 10-12 years and costs £550 million to develop a single new medicine."
Under the new agreement, the prices of branded medicines covered by the PPRS will be reduced by seven per cent from January 1, 2005. The price cut will apply to the NHS list price of all products marketed by companies with NHS sales above £1 million. As an alternative to an across-the-board price reduction, companies can elect to modulate prices - that is by differential reductions between individual products equivalent to an overall company price cut of seven per cent.
But other aspects of the new PPRS will help enable the UK-based pharmaceutical industry to continue to build on the success that has seen it develop around a quarter of the world's top-selling 100 medicines, investing nearly £10 million every day in the search for new, innovative medicines.
"The PPRS is a large package containing many different elements, and the ABPI believes that the overall impact of the scheme provides several benefits for the industry," said Vincent Lawton. "In particular, the Government has recognised the role of the industry in providing information about medicines to a wide variety of people and organisations, and this is reflected in the agreement."
There have been major changes to the structure of the NHS in recent years, and the various allowances that companies can claim under the PPRS have been modernised to reflect these changes. For example, the old Sales Promotion allowance has been replaced by a more appropriate Marketing allowance, and the Information allowance now includes provision of information to health professionals, Government and health technology assessment bodies, including NICE and the Scottish Medicines Consortium (SMC). There is also an increase in the ceiling on the Research and Development allowance.
Help for smaller companies has been given by increasing the turnover level at which companies routinely have to report financial data from £1 million to £5 million, thus eliminating some smaller companies from the whole process. The new scheme also expressly states that smaller companies will be dealt with more flexibly in terms of the application of limits and allowances and also specifies that for companies with NHS home sales of less than £10m, the first £1m will be exempt from the price cut.
Note to editors
Summary of PPRS follows:
Summary of Pharmaceutical Price Regulation Scheme 2005
The objectives for the Scheme are that it should continue to:
1. Secure the provision of safe and effective medicines for the NHS at reasonable prices.
2. 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.
3. Encourage the efficient and competitive development and supply of medicines to pharmaceutical markets in this and other countries.
The Scheme will commence on 1st January 2005 and run for five years unless terminated by either party, and is subject to a mid-term review.
The Scheme will apply to all medicines that (a) are the subject of a UK or EC market authorisation and are identifiable by a brand name, without reference to an approved name, and (b) are supplied to the NHS.
Entry to the Voluntary Scheme
Participation in the Scheme will be open to companies (usually market authorisation holders or those that discharge the obligations of market authorisation holders) supplying products as defined in "Scope" above.
All suppliers will be required to reduce the prices of all products covered by the Scheme on the market as at 31 December 2004 by 7%. Thereafter, no price may increase before 1st January 2006 ("Stage 1"). Differential reductions will be allowed provided that the company can show that the total effect is equivalent to a general reduction of 7%.
New Product Pricing
New products, as now, will continue to be priced at the discretion of the supplier at launch.
All companies will have a common ROC target of 21%. Those scheme members to whom a Return on Sales option applies will be assessed on an alternative formula that achieves a comparable effect.
Research and Development
Each company's R&D allowance will comprise:
a. for assessing profits, 20% of total Home NHS turnover, or
b. for assessing price increase applications, 15% or total Home NHS turnover,
plus, in either case, for each in-patent active molecule with Home NHS turnover of £300,000 or more, 0.25% of total Home NHS turnover, to a maximum of 20 such molecules. There will be an additional allowance for children's medicines.
Each company's Marketing Expenses (including advertising and sales promotion) will be restricted to £1m, plus 4% of turnover (2% for assessing price increase applications), plus a small additional allowance for each molecule.
Information Expenses (including the provision of information to health professionals, Government and health technology bodies and, where appropriate, non-product specific information to patients and the public) will be restricted to 4% of turnover (2% for assessing price increase applications).
Recognition of UK Fixed Assets and Costs
7.5% of the net value of non-R&D fixed assets and of manufacturing infrastructure costs will be allocated to Home NHS before the balance is apportioned between Home and Export.
Margin of Tolerance
The upper margin of tolerance will be 140%.
The lower margin of tolerance will be 60%. Where a company's profit falls short of 50% of target, it may apply for a price increase to take it to 65% of target.
Companies may provide an analysis of the breakdown of their transfer prices from overseas affiliates. If they cannot, but can confirm that the prices have been reported to be at arm's length for tax purposes, a standard breakdown will be applied.
Allocation of Costs and Capital
In the audited AFR, companies will be required to indicate for each costs and class of asset the basis or bases of allocation between Home, Export and Other.
Limitation of Costs and Assets
As in previous Schemes, the DoH will be required to satisfy itself that the costs incurred and assets employed by companies are reasonable in all the circumstances.
Products Sold On
Where a company transfers a PPRS product to another, the vendor must inform the DoH. The acquiring company may not increase the price for three months. Thereafter, it may apply for an increase, although this may have to be phased.
Companies with relevant turnover above the threshold of £25M will be required to submit AFRs.
Companies below the threshold may be required to submit an AFR when it appears to be necessary, and generally will be required to do so in the event of a price increase application.
Disputes between a company and the DoH (on such matters as agreeing an AFR outturn) may be referred by either party to an independent arbitration panel. The decision of the arbitrator will not constitute a precedent for future referrals.
Exit from the Scheme
A company may resign from the voluntary scheme at any time. A company that is clearly non-compliant, or that fails to implement a decision of the Arbitrator, will cease to be subject to the voluntary scheme. A company will be eligible to re-enter the voluntary scheme provided all its obligations under the Scheme have been fully discharged.
Other provisions, including price restraint, freedom of pricing of new products, and the nature of the AFR, are broadly similar to the 1999 Scheme.
Companies that are not currently members of the voluntary scheme will be subject to the price and profit control provisions of the Health Act 1999. This includes the power to make regulations to make price reductions such as apply in the voluntary scheme.
PPRS: Glossary of terms
R&D: Research and Development
ROC: Return on Capital
ROS: Return on Sales
AFR: Annual Financial Return
Upper Margin of Tolerance: The area in the agreement where companies can retain additional profit where this is strictly based on innovation, efficiency and competitiveness
Lower Margin of Tolerance: Conversely, there is a Lower Margin of Tolerance whereby profit levels need to drop below a threshold before price rises will be considered
Transfer Prices: Charges for products, ingredients or other services made by an overseas affiliate to a UK-based company.
For further information, please contact: ABPI Press Office 020 7747 1410