Consultation on a Statutory Scheme to Control the Prices of Branded NHS Medicines

Celebrating the 60th anniversary of the NHS

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Consultation on the Government's use of statutory powers to introduce a scheme to control the prices of branded NHS medicines from 1 September 2008 to apply to companies who do not sign up to a new voluntary scheme or in the event of failure to reach an agreement with the pharmaceutical industry.

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Consultation on a Statutory Scheme to Control the Prices of Branded NHS Medicines

Medicines Pharmacy and Industry Group

London SE1 6LH

456D Skipton House

pprscontact@dh.gsi.gov.ukor PPRS ConsultationMrs E Barnor

Consultation on a Statutory Scheme to Control the Prices of Branded NHS Medicines

© Crown copyright 2008 First published 18/06/08 Published to DH website, in electronic PDF format only. http://www.dh.gov.uk/consultations

Contents Executive Summary 7 1. Background 10 2. Statutory Price Control 13 3. How to respond 17 Annexes

Annex A – Summary of consultation questions 20 Annex B - Impact Assessment 22

Annex C – Equality Impact Assessment 37 Annex D - Proposed Information Requirements and Penalties 38

Annex E - List of stakeholders consulted 40

Executive summary The National Health Service (NHS) spends about £9 billion a year on branded prescription medicines in the UK. The Pharmaceutical Price Regulation Scheme (PPRS) is the mechanism, which the Department of Health (on behalf of the UK Health Departments) uses to control the prices of these medicines by regulating the profits that companies can make on these sales. It is a voluntary agreement made between the Department of Health and the branded pharmaceutical industry – represented by the Association of the British Pharmaceutical Industry (ABPI). The PPRS seeks to achieve a balance between reasonable prices for the NHS and a fair return for the pharmaceutical industry to enable it to research, develop and market new and improved medicines for the benefit of NHS patients. The Government is currently renegotiating the PPRS with the ABPI with the aim of reaching agreement on a new voluntary scheme. The current PPRS agreement expires at the end of August 2008 after the Government gave six months’ notice on the agreement at the end of February. The Government and the ABPI have reached agreement on key components of the scheme, though further discussions are required before agreement is finalised and a new voluntary scheme can be implemented. The Government would prefer to reach agreement on a voluntary scheme, but if it appears that a voluntary scheme will not be in place by that date, the Government intends to introduce statutory measures to replace the current PPRS from 1st September 2008. If agreement on a voluntary scheme were to be reached, the statutory scheme would still be introduced so that it can apply to any company that did not sign up to this new PPRS agreement. This consultation is on the Government’s use of statutory powers to introduce a scheme to control prices – which will apply to companies who do not sign up to a new voluntary scheme or in the event of failure to reach an agreement. The proposed scheme would include:

(i) a price freeze from 1st September 2008 until 31st December 2008 (ii) the introduction of a price cut of 3.9 percent on 1st January 2009 (iii) from 1st January 2009, measures to link the price of out of patent branded medicines

to the prices of any equivalent generics (where a generic equivalent exists).

The Government expects that the upfront price cut and the implementation of measures on pricing of branded medicines post loss of exclusivity will deliver savings equivalent to a price cut of 5.0 per cent.

The arrangements would be reviewed within a year. The scheme would include requirements for provision of information and penalties in the event of failure to comply. The scheme would also include an appeals mechanism. The Government intends to lay regulations implementing the price freeze at the end of July in order to have statutory measures in place for 1st September. Regulations implementing the

Celebrating the 60th anniversary of the NHS

price cut and measures to control the price of out of patent branded medicines would be laid in the autumn to come into effect on 1st January 2009. The proposed statutory price regulation needs to be seen in the context of the ongoing negotiations with the industry on a new voluntary scheme; the four principles outlined in the Government’s interim response to the Office of Fair Trading (OFT) Report on the PPRS (see chapter 1 below); and in the context of the Government’s support for research and development, uptake of medicines and innovation, including: • The Government is committed to supporting research and innovation in the UK. Much

progress has been made in recent years in promoting research and development in the UK. This has included a large increase in funding for NHS R&D, the development of the UK Clinical Research Collaboration (UKCRC) and its clinical networks and a number of other changes following Sir David Cooksey’s report on health research including the creation of a new health research strategy and the establishment of the Office for Strategic Co-ordination of Health Research (OSCHR).

• Progress has also been made in promoting the uptake of cost-effective innovative products

in the NHS, particularly since the creation of the National Institute for Health and Clinical Excellence (NICE) in 1999. The NICE process has also been shortened with new topic selection arrangements and the creation of the Single Technology Assessment (STA) process. Uptake of NICE appraisals is covered by a three month funding direction and is a core NHS standard. This has led to improved uptake in the NHS of NICE approved treatments.

• However, the Government believes further progress is needed which is why the Health

Innovation Council (HIC) has been created as part of the NHS Next Stage Review. This will oversee the innovation agenda in the NHS and social care and will make proposals for how we can further support innovation as part of the NHS Next Stage Review final report.

The Government believes that the impact of work in these three areas has strengthened the environment in which medicines discovery and development can take place, to the benefit of both industry and the NHS. It is also of benefit to patients as they gain better access to cost-effective innovative treatments and improved health outcomes. Chapter 2 and Annex A set out the particular questions on which we are seeking views. Comments are also invited on the analysis of costs and benefits in the Impact Assessment attached at Annex B. This consultation will be taken forward in two time frames:

(i) Consultation from 18 June to 15 July 2008 on a statutory freeze of prices from 1 September 2008. This is a shorter period than the standard 12 weeks for written consultation in order to maximise the opportunity for both the industry and the Government to conclude negotiations on a new voluntary scheme. The deadline cannot be extended, as new arrangements must be in place when the current scheme expires at the end of August 2008. The shorter consultation period has been agreed by Ministers and was discussed in advance of consultation with the industry.

(ii) Consultation from 18 June to 25 September 2008 on the price cut and

measures to limit the price of out of patent brands since the Government does

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not propose to introduce a price cut and measures to limit the price of out of patent brands until January 2009 The deadline for submitting views on the timing and level of the price cut and measures to limit the price of out of patent brands will allow more than 12 weeks of consultation.

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1. Background The Pharmaceutical Price Regulation Scheme The Pharmaceutical Price Regulation Scheme (PPRS) controls the prices of branded prescription medicines and the profits that manufacturers are allowed to make on their sales to the National Health Service (NHS). It has existed in various forms in the UK for over 50 years but has been renegotiated every five years or so and the terms of the scheme have changed over time to reflect developments in the NHS and the pharmaceutical industry. The scheme seeks to achieve reasonable prices for the NHS, whilst recognising that the industry needs to be profitable to enable it to develop and market new and improved medicines for the benefit of NHS patients. The PPRS is a voluntary scheme made between the Department of Health, on behalf of the UK Health Departments, and the branded pharmaceutical industry, represented by the Association of the British Pharmaceutical Industry (ABPI). The National Health Service Act 2006 gives Government powers to impose statutory price and profit controls on those companies, which elect not to sign up to the voluntary scheme. The current scheme negotiated with the ABPI commenced on 1st January 2005 in succession to the 1999 scheme. Its objectives, as stated in the agreement, 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 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. The PPRS covers all licensed, branded, prescription medicines sold to the NHS. It does not cover products without a brand name (generics) nor branded products available without prescription (over the counter (OTC) medicines) except when prescribed. It is a UK wide scheme and covers around 80 percent by value (some £9 billion) of the medicines used in the NHS in both primary and secondary care. Renegotiation of the PPRS The current PPRS provides for the scheme to operate for five years from 1st January 2005 subject to six months’ notice of termination of the scheme by either party (which cannot take effect before 1st July 2007). At the beginning of August 2007, the Government announced its intention to renegotiate the PPRS1. The three reasons for the Government concluding that it is necessary to renegotiate the PPRS are: 1 http://www.gnn.gov.uk/environment/fullDetail.asp?ReleaseID=304805&NewsAreaID=2

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• In February 2007, the Office of Fair Trading (OFT) published a report on the PPRS2, which recommended that the scheme should be reformed. The OFT concluded that the pricing system should have a more value-based approach in order to deliver greater benefit to patients and that reform could deliver better value for money for the NHS. A more value based approach would also ensure that the production of clinically and cost-effective innovative products is properly incentivised and rewarded.

• The NHS will be required to make significant efficiency savings3 over the next three

years as part of the Comprehensive Spending Review (CSR). The Government has concluded that it is reasonable for pharmaceuticals as the largest element of NHS expenditure after pay to make its contribution to the efficiency savings that need to be delivered. Therefore, the Government is seeking a cut in the price of branded pharmaceuticals.

• In June 2007, a High Court ruling undermined crucial parts of the PPRS and put in

jeopardy the effective operation of the scheme and the delivery of savings from the 7 percent price cut agreed in 2005.

The Government published its interim response to the OFT report on 2nd August 20074 at the same time as the Government announced its intention to renegotiate the PPRS. This set out the principles, which Government would take into account in discussing proposals with the industry and making further proposals as part of the renegotiation of the PPRS:

• Delivering value for money • Encouraging and rewarding innovation • Assisting the uptake of new medicines • Providing stability, sustainability and predictability

The Government advised the ABPI in July of its intention to start renegotiations in the autumn of 2007, with a view to reaching agreement on a new voluntary scheme to start as early as possible in 2008. On 29th February, the Department of Health gave six months’ notice to the ABPI and to scheme members in accordance with paragraph 5.1 of the scheme to terminate the current agreement. Giving six months notice was necessary as a result of the court case, which ruled that the PPRS was a contract. Previously it had been possible to terminate PPRS agreements by mutual consent when agreement on a new scheme had been reached (on the assumption that it was a non-contractual scheme). This means that the 2005 PPRS will terminate on 31st August 2008. Introducing statutory measures The Government would prefer to reach agreement on a new voluntary scheme with the industry. The Government and the ABPI have reached agreement on key components of the 2 http://www.oft.gov.uk/shared_oft/reports/comp_policy/oft885.pdf 3 value for money reforms realising annual net cash-releasing savings of at least £8.2 billion by 2010-11. Source: 2007 Pre-Budget Report and Comprehensive Spending Review Para D2.6 http://www.hm-treasury.gov.uk/media/4/7/pbr_csr07_annexd2_197.pdf 4 http://nds.coi.gov.uk/environment/fullDetail.asp?ReleaseID=304783&NewsAreaID=2

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scheme, though further discussions are required before agreement is finalised and a new voluntary scheme can be implemented. However, the Government also needs to safeguard the financial position of the NHS by ensuring that a statutory replacement to the current PPRS is in place when the current scheme ceases

• for all companies in the event of there being no agreement on a new voluntary scheme or

• in the event of agreement on a new voluntary scheme, for companies who choose not to sign up to that new voluntary scheme.

The Government, therefore, intends to introduce statutory measures to replace the 2005 PPRS from 1st September 2008. These statutory measures would apply to those companies who chose not to sign up to any new voluntary scheme or in the event of failure to reach agreement. Statutory measures would not apply to any company that was a member of a voluntary scheme. This consultation, therefore, seeks views on the statutory measures applying to branded pharmaceuticals that the Government would implement from 1st September 2008. The statutory measures include a price cut that will apply from 1st January 2009 and measures to link the price of out of patent branded medicines to the prices of generic equivalents (where a generic equivalent exists). Prices would be frozen from 31st August 2008 and arrangements would be reviewed within a year. The scheme would include requirements for provision of information and penalties in the event of failure to comply. The scheme would also include an appeals mechanism. Further information on the proposals is set out in Chapter 2. The Wider Innovation Agenda It is vital that innovation is promoted to the benefit of the NHS, patients, and industry. The PPRS complements Government action on other fronts aimed at ensuring that clinically and cost-effective innovative medicines are available and used by the NHS for the benefit of its patients. Promoting research and innovation whilst ensuring value for money for taxpayers, delivers benefit to patients in terms of availability and accessibility to cost-effective innovative medicines. This consultation is on use of the Government’s statutory powers to introduce a scheme to control prices to safeguard the financial position of the NHS on expiry of the current scheme. However, it also needs to be seen in the context of Government action on other fronts aimed at ensuring that clinically and cost-effective innovative medicines are available and used by the NHS for the benefit of its patients. These issues are being taken forward independently of the statutory scheme. The Government is also keen to work with industry in promoting research and innovation in the UK. The Ministerial Industry Strategy Group, co-chaired by Government and industry and including Ministers from four Government departments is unique internationally in its nature and has led to a number of pieces of joint working, including the Long-Term Leadership Strategy, which included recommendations on increasing uptake of innovative cost-effective medicines in the NHS.

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Uptake is a key issue and although great progress has been made since the creation of the National Institute for Health and Clinical Excellence (NICE) in 1999, much remains to be done. That is why the Prime Minister announced the establishment of the Health Innovation Council and a new innovation challenge fund as part of the NHS Next Stage Review. The fund will support the discovery and development of new technologies and the Council will focus on adoption of new technologies. It is vital that patients benefit from new cost-effective medicines and devices and we are delighted that industry is represented on the Council. The Council’s recommendations will feed into the final report of the Next Stage Review and the Council will then oversee the implementation of these recommendations. The Government is committed to ensuring that patients get the best possible treatment on the NHS and we are committed to continue to work together with industry and others to ensure that patients benefit from cost-effective innovative technologies. However, Government also has a responsibility to get value for money for the taxpayer. The NHS is unusual in the size of its purchasing power and it is right that the NHS should be paying a fair price for new medicines at a time when efficiency savings are being made across Government and industry.

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2. Statutory Price Control Price Control The current PPRS expires at the end of August 2008. Without any control of the price of medicines, companies could increase prices, which could erode savings from the price cut and make the NHS drugs bill unaffordable. The Government must ensure that there are measures in place from 1st September 2008 to control the price of medicines covered by the PPRS. The Government therefore proposes to introduce statutory measures to control the price of all medicines covered by the PPRS with effect from 1st September 2008. Subject to the exceptions set out below, no price increases will be permitted from 1st September 2008 and maximum prices will in effect be frozen at the reference price. The reference price is the NHS list price on 29th February 2008, the day that the Department gave six months’ notice of the termination of the 2005 PPRS. For medicines placed on the market after 29th February, the reference price is the NHS list price on 31st August 2008. Freezing prices would not allow modulation, as occurs under the current voluntary scheme. These statutory measures would apply to those companies who chose not to sign up to any new voluntary scheme or in the event of failure to reach agreement. The arrangements will be reviewed after a year as required by the Transparency Directive. Price Cut The Government proposes to introduce a price cut of 3.9 per cent from 1st January 2009 on all medicines covered by the new PPRS agreement. It would apply to all such medicines on the market on 31st December 2008 marketed by companies with PPRS sales of £5 million or more in 2007. For companies with sales of £25 million or less in 2007, the first £5 million sales will be exempt from the price cut. The reference price from which this price reduction will be made is the NHS list price on 29th February 2008, the day that the Department gave six months’ notice of the termination of the 2005 PPRS. For medicines placed on the market after 29th February, the price reduction will apply to the NHS list price on 31st December 2008. This percentage price cut will apply equally to all branded medicines used by the NHS in the UK. The Government also proposes that from 1st January 2009 where there is an equivalent generic, the price of out-of-patent branded medicines will be limited to a maximum price of 1.5 times the reimbursement price of the equivalent generic medicine as set out in category M of the Drug Tariff. The prices of all products that lose patent protection after 1st January 2009 and for which there is a generic equivalent will also be limited to a maximum level that is 1.5 times the reimbursement price of the equivalent generic. The aim of these two measures (i.e. price cut of 3.9% and linking the prices of generic medicines to the price of any generic equivalents) when combined is to achieve a price cut of 5 percent overall. Although an exact calculation is not possible because of changes in purchase behaviour following the price reduction, the expected reduction in NHS expenditure on branded medicines is in the order of £310 million per annum in primary care, given current expected annual expenditure of £9 billion in the UK. The effect of these measures will be kept under review to ensure that they deliver the expected savings. Further adjustments might be made in

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future so as to ensure that these measures have the intended effect, or to take account of changes that result from the terms of a voluntary scheme. 1. Views are invited on the proposed level of price cut and the date from which it would

apply. Should the level of price cut be equivalent to 5 per cent? Should it apply from 1st January 2009?

2. Should the prices of out of patent branded medicines be set at a price that is 1.5

times the reimbursement price of the equivalent generic price? If not, should the level of the price cut be adjusted to compensate for loss of savings?

Please note that although the deadline for responses to this consultation is 15 July 2008, there is an extended deadline for these particular questions and responses to questions 1 and 2 can be submitted until 25 September 2008. Exemptions The Government recognises that the proposed scope of application is broad and that there may be a case for exemptions from the statutory price control, for example, to ensure that there is continuity of supply of medicines for NHS patients. The Government proposes that products may be exempted from the effect of regulation either on the election of the Secretary of State or in response to an application from the relevant manufacturer or supplier on the grounds that the supply of that medicine may be jeopardised. Any decision of the Secretary of State may be subject to appeal. 3. This consultation, therefore, seeks views on whether exemptions from the price cut

and freeze should apply in given circumstances:

• Should there be an exemption from the price cut or freeze on the grounds that the supply of that medicine may be jeopardised? If so, what should the criteria be?

• Should there be a mechanism for exempting medicines during the life of the

scheme on other grounds? If so, what should the criteria be?

• Should GSL (general-sales-list), and P (pharmacy) medicines be excluded from the price freeze or the price reduction? That is to say, should the price cut and freeze be limited to prescription-only medicines (POM)?

• Should inexpensive medicines, say less than a defined cost per packet, be

exempt from the price cut and freeze? If so, what should this defined cost be?

• Should small companies or medicines on which the NHS spends comparatively little be exempt from the price cut and/or freeze? If so, what annual expenditure should define exemption? For companies with sales of £25 million or less, should the first £5 million of sales be exempt?

• Should the overall percentage price reduction be increased to compensate for

any exemptions? Price Increases

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There may be circumstances in which a price increase is necessary to ensure that production and supply of a medicine to the NHS is financially viable. The Government therefore proposes that a manufacturer may apply for a price increase for all or any of its products and that the Secretary of State would give a direction on whether such an increase was allowed. The following criteria, set out in Regulations, might be taken into account in reaching this decision on whether to allow a price increase:

• the sales for health service purposes; • any sales promotion costs in respect of those medicines; • any costs of research into, and development of, those medicines; • any non-recurring operational costs; • any other costs; and • total profit after interest charges and taxation.

Any decision of the Secretary of State maybe subject to appeal. 4. What should the mechanism be for price increases? What considerations should the

Secretary of State take into account in deciding whether to grant an increase? Discounts Traditionally, manufacturers of branded medicines offer discounts to wholesalers. These discounts cover the costs of wholesale / distribution but a proportion is passed on to retail pharmacies and the aggregate level of these discounts is used in determining the sums reimbursed by the NHS. Similarly, the price of branded medicines used in hospitals may be discounted by manufacturers or may be supplied as a result of a commercial tender. This means that the actual costs of acquisition of NHS medicines is usually below the prices listed by the manufacturers of those medicines. The proposed price controls should take account of these discounts lest the value of price cut be jeopardised by reductions in discounts. Alternatively, the price control could apply to the factory gate price rather than the NHS list price. 5. Views are also sought on the following questions:

• Should the price control apply to the list price or the factory gate price? • What should be done in cases where the NHS procures medicines outside the

traditional wholesaler route such as through tenders or contracts? • Should a minimum discount be set? Alternatively, should the revised prices take

account of discounts and further reduce the price? • Given that discounts offered by manufacturers affect the cost of acquisition for

the NHS, what further information should be collected on levels of discount and how often?

Information The Government proposes to seek information to monitor the proposed price controls and their impact. The information required will be based on that required in the Health Service

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Medicines (Information Relating to Sales of Branded Medicines etc) Regulations 2007 although additionally sales in respect of each pack size and strength of a branded product would be required. Amongst other things, this information will allow the Government to determine whether the benefit of the price reduction to the NHS is eroded by a reduction in discounts, which would otherwise have to be compensated under the new pharmacy contract. 6. What information is required to monitor the price reduction and freeze? Pricing of new products As well as freezing the price of existing products, the Government proposes that there should be controls on the maximum price of new products. New products that are new active substances would have freedom of pricing on entering the market. However, the Secretary of State will be able to set the maximum price of products that are not new active substances by issuing a direction. In deciding the maximum price, he would take the following factors into account:

• the expected level of sales of the new product to the NHS, • the cost of therapeutically similar medicines, • the cost of the new product in other markets if it is available elsewhere in the world, • the cost of manufacture of the new product, • the cost of research and development of the new product, • whether any need on reasonable terms for the product will be met at the maximum

price. Any decision of the Secretary of State may be subject to appeal. 7. This consultation invites views on the proposed criteria for setting the prices of new

products introduced during the price cut and freeze. Should major new products i.e. new active substances retain freedom of pricing?

Timescales The Government proposes to deal with applications for the maximum price of new products, exemptions from the effect of these regulations and price increases within 90 days of receiving all the necessary supporting information. Penalties The statutory scheme will be introduced under the powers contained in sections 263 to 266 and 272 of the National Health Service Act 2006. It includes a requirement for a manufacturer or supplier to provide information and provisions for penalties to be imposed in cases of contravention. The proposed information requirements and penalties are at Annex D. This consultation seeks views on the proposed information requirements and penalties. 8. What penalties should be imposed for failure to meet the requirements of the new

regulations? Should they be related to turnover? Appeals

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The Government proposes to offer manufacturers the right of appeal against any decision made by the Secretary of State and any enforcement decision made under these price controls. Impact Assessment and Equality Impact Assessment An Impact Assessment covering the impact of the proposed statutory scheme is attached at Annex B. Comments are welcome on the Impact Assessment in particular the analysis of costs and benefits. Comments are also invited on the Equality Impact Assessment attached at Annex C.

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3. How to Respond The consultation process This consultation document is accessible on the Department of Health’s web site at www.dh.gov.uk/consultations The Department seeks comments on the proposed statutory price cut and freeze, in particular, to the questions at annex A. Responses entitled ‘PPRS Consultation’ should be emailed to: pprscontact@dh.gsi.gov.uk or posted to:

PPRS Consultation

Mrs E Barnor Department of Health Medicines Pharmacy and Industry Group 456D Skipton House 80 London Road London SE1 6LH

All responses to this consultation, with the exception of responses to questions 1 and 2 (which ask for views on the price cut and measures to limit the price of out of patent brands)] must reach the Department by 5 pm on 15 July 2008. Responses to questions 1 and 2 must reach the Department by 5 pm on 25 September 2008. The Department is consulting with a wide range of interested parties. A list of those organisations that have been invited to respond can be found in Annex E. However, the Department welcomes comments from all interested parties and invites respondents to advise the names of other stakeholders not on the list who they feel might be able to contribute to the consultation. The Department intends to publish a summary of responses to this consultation as soon as is practical, and in any case within three months of the closing date. This summary will be available on the Department’s website at the following address: www.dh.gov.uk/consultations/responsestoconsultations/fs/en

Consultation Criteria The Cabinet Code of Practice on Consultation sets out the criteria to be followed in written, public consultations:

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• Consult widely throughout the process, allowing a minimum of 12 weeks for written consultation at least once during the development of policy (but see below)

• Be clear about what proposals are, who may be affected, what questions are being asked and the timescale for responses

• Ensure that your consultation is clear, concise and widely accessible

• Give feedback regarding the responses received and how the consultation process influenced the policy

• Monitor their effectiveness at consultation, including through the use of a designated consultation co-ordinator

• Ensure consultations follow better regulation best practice, including carrying out a Regulatory Impact Assessment, if appropriate

The Code of Practice recognises that there will sometimes be circumstances that require a consultation period of less than 12 weeks such as where there is an urgent requirement for the introduction of new measures. Ministers have agreed a shorter written consultation period on introduction of controls on the prices of branded medicines from 1st September 2008 in order to maximise the opportunity for both the industry and the Department to conclude negotiations on a new voluntary scheme. Implementation of those measures cannot be delayed later than 1st September 2008 because the Government needs to safeguard the financial position of the NHS. This shorter consultation period has been discussed in advance of consultation with the ABPI and industry negotiating team. Otherwise, this consultation has been conducted in accordance with the above criteria. Those elements of the statutory scheme that will not be implemented until January 2009 will be subject to a full consultation of more than 12 weeks. The full text of the code of practice is on the Cabinet Office website at: www.cabinetoffice.gov.uk/regulation/consultation/code.asp. Comments on the consultation process itself The Code invites respondents to ‘comment on the extent to which the criteria have been adhered to and to suggest ways of further improving the consultation process.’ If you have concerns or comments that you would like to make relating specifically to the consultation process itself, please contact:

Consultations Co-ordinator Department of Health Room 3E58 Quarry House

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Quarry Hill Leeds LS2 7UE Email: consultations.co-ordinator@dh.gsi.gov.uk

Please do not send consultation responses to this address.

Confidentiality of information

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004). If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals, amongst other things, with obligations of confidence. In view of this, it would be helpful if you could explain to us why you regard the information that you have provided to be confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on the Department. The Department will process your personal data in accordance with the DPA and, in most circumstances, this will mean that your personal data will not be disclosed to third parties.

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Annex A Summary of consultation questions

Please note that although the deadline for responses to this consultation is 15 July 2008, there is an extended deadline of 25 September 2008 for responses to questions 1 and 12.

Price Cut 1. Views are invited on the proposed level of price cut and the date from which it would apply.

Should the level of price cut be equivalent to 5 per cent? Should it apply from 1st January 2009?

2. Should the prices of out of patent branded medicines be set at a price that is 1.5 times the

reimbursement price of the equivalent generic price? If not, should the level of the price cut be adjusted to compensate for loss of savings?

Exemptions 3. Should any exemptions from the price cut and freeze apply in given circumstances :

• Should there be an exemption from the price cut or freeze on the grounds that the supply of that medicine may be jeopardised? If so, what should the criteria be?

• Should there be a mechanism for exempting medicines during the life of the scheme on

other grounds? If so, what should the criteria be?

• Should GSL (general-sales-list), and P (pharmacy) medicines be excluded from the price freeze or the price reduction? That is to say, should the price cut and freeze be limited to prescription-only medicines (POM)?

• Should inexpensive medicines, say less than a defined cost per packet, be exempt from

the price cut and freeze? If so, what should this defined cost be?

• Should small companies or medicines on which the NHS spends comparatively little be exempt from the price cut and/or freeze? If so, what annual expenditure should define exemption? For companies with sales of £25 million or less, should the first £5 million of sales be exempt?

• Should the overall percentage price reduction be increased to compensate for any

exemptions? Price Increases

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4. What should the mechanism be for price increases? What considerations should the Secretary of State take into account in deciding whether to grant an increase?

Discounts 5. Views are also sought on the following questions:

• Should the price control apply to the list price or the factory gate price? • What should be done in cases where the NHS procures medicines outside the

traditional wholesaler route such as through tenders or contracts? • Should a minimum discount be set? Alternatively, should the revised prices take

account of discounts and further reduce the price? • Given that discounts offered by manufacturers affect the cost of acquisition for the NHS,

what further information should be collected on levels of discount and how often? Information 6. What information is required to monitor the price reduction and freeze? Pricing of new products 7. This consultation invites views on the proposed criteria for setting the prices of new

products introduced during the price cut and freeze. Should major new products i.e. new active substances retain freedom of pricing?

Penalties 8. What penalties should be imposed for failure to meet the requirements of the new

regulations? Should they be related to turnover? Impact Assessment and Equality Impact Assessment 9. An Impact Assessment covering the impact of the proposed statutory scheme is attached at

Annex B. Comments are welcome on the Impact Assessment in particular the analysis of costs and benefits. Comments are also invited on the Equality Impact Assessment attached at Annex C.

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Annex B Impact Assessment

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Summary: Analysis & Evidence Policy Option: Statutory measures

Description: A Statutory Scheme to control the prices of Branded NHS Medicines

ANNUAL COSTS

One-off (Transition) Yrs

£

Average Annual Cost (excluding one-off)

Description and scale of key monetised costs by ‘main affected groups’

Cost saving to the NHS, leading to greater spending on health services and benefits for NHS consumers.

£ -£310m Total Cost (PV) CO

STS

Other key non-monetised costs by ‘main affected groups’

Effect of parallel imports – drugs purchased abroad – which would be shielded from the price cut.

ANNUAL BENEFITS

One-off Yrs

£

Average Annual Benefit (excluding one-off)

Description and scale of key monetised benefits by ‘main affected groups’

Shareholders in the global pharmaceutical industry lose part of their UK profits due to price cut.

£ -£280m Total Benefit (PV) BEN

EFIT

S

Other key non-monetised benefits by ‘main affected groups’

Reduction in spending on Sales & Marketing, which will partially offset loss of revenue.

Key Assumptions/Sensitivities/Risks There are uncertainties around the impact of the proposals, in particular the impact of the link of out of patent brands to category M generic prices (where there are generics available), and the impact on the hospital sector.

Price Base Year 2008

Time Period Years

Net Benefit Range (NPV) £

NET BENEFIT (NPV Best estimate)

£ What is the geographic coverage of the policy/option? UK On what date will the policy be implemented? 1 September 2008 Which organisation(s) will enforce the policy? Department of Health What is the total annual cost of enforcement for these organisations? £ 0 Does enforcement comply with Hampton principles? Yes Will implementation go beyond minimum EU requirements? No What is the value of the proposed offsetting measure per year? £ N/A What is the value of changes in greenhouse gas emissions? £ N/A Will the proposal have a significant impact on competition? No Annual cost (£-£) per organisation (excluding one-off)

Micro

Small

Medium

Large

Are any of these organisations exempt? Yes Yes N/A N/A Impact on Admin Burdens Baseline (2005 Prices) (Increase - Decrease)

Increase of £nil Decrease of £ nil Net Impact £ nil Key: Annual costs and benefits: Constant Prices (Net) Present Value

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Evidence Base (for summary sheets) Introduction

The NHS spends about £9 billion a year on branded prescription medicines in the UK. The Pharmaceutical Price Regulation Scheme (PPRS) is the mechanism, which the Department of Health (on behalf of the UK Health Departments) uses to control the prices of these medicines, by regulating the profits that companies can make on these sales. It is a voluntary agreement made between the Department of Health and the branded pharmaceutical industry – represented by the Association of the British Pharmaceutical Industry (ABPI). The PPRS seeks to achieve a balance between reasonable prices for the NHS and a fair return for the pharmaceutical industry to enable it to research, develop and market new and improved medicines for the benefit of NHS patients. It complements Government action on other fronts aimed at ensuring that clinically and cost-effective medicines are available and used by the NHS for the benefit of its patients. The current PPRS scheme expires at the end of August after the Government gave six months’ notice on the scheme at the end of February. The Government and the ABPI have reached agreement on key components of the scheme, though further discussions are required before agreement is finalised and a new voluntary scheme can be implemented.

Purpose and intended effect

Objective

The Department proposes to introduce statutory measures to control the prices of branded medicines from 1 September 2008 when the current scheme expires in order to safeguard the financial position of the NHS. These would apply to those companies who chose not to sign up to a new voluntary scheme or in the event of failure to reach agreement.

Background

At the beginning of August 2007, the Secretary of State for Health announced the Government’s intention to renegotiate the PPRS. The three reasons for the Government concluding that it is necessary to renegotiate the PPRS are:

• In February 2007, the Office of Fair Trading (OFT) published a report on the PPRS, which recommended that the scheme should be reformed. The OFT concluded that the pricing system should have a more value-based approach in order to deliver greater benefit to patients and that reform could deliver better value for money for the NHS. A more value based approach would also ensure that the production of clinically and cost-effective innovative products is properly incentivised and rewarded.

• The NHS will be required to make significant efficiency savings over the next three years as part of the Comprehensive Spending Review (CSR). The Government has concluded that it is reasonable for pharmaceuticals, as the largest element of NHS expenditure after pay, to contribute to the efficiency savings that need to be delivered. Therefore, the Government is seeking a cut in the price of branded pharmaceuticals.

• In June 2007, a High Court appeal ruling undermined crucial parts of the PPRS and put in jeopardy the effective operation of the scheme and the delivery of savings from the 7% price cut agreed in 2005.

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The Government published its interim response to the OFT report on 2nd August 2007, at the same time as the Department announced its intention to renegotiate the PPRS. This set out the principles, which Government would take into account in discussing proposals with the industry and making further proposals as part of the renegotiation of the PPRS:

• Delivering value for money

• Encouraging and rewarding innovation

• Assisting the uptake of new medicines

• Providing stability, sustainability and predictability The Secretary of State for Health advised the ABPI in July of the Government’s intention to start renegotiations in the autumn of 2007 with a view to reaching agreement on a new voluntary scheme to start as early as possible in 2008. On 29th February, the Department of Health gave six months’ notice to the ABPI and to scheme members in accordance with paragraph 5.1 of the scheme to terminate the current agreement. This means that the 2005 PPRS will terminate on 31st August 2008. (Whilst on previous occasions, it has been possible to terminate PPRS agreements by mutual consent, it is the Department’s view, following the court case, that six months’ notice is necessary to terminate the current agreement.) The Government would prefer to reach agreement on a new voluntary scheme with the industry. The Government and the ABPI have reached agreement on key components of the scheme, though further discussions are required before agreement is finalised and a new voluntary scheme can be implemented. However, the Department also needs to safeguard the financial position of the NHS by ensuring a replacement to the current PPRS is in place for all companies when the current scheme ceases. There may be companies who choose not to sign up to the new voluntary scheme, or the Government and the ABPI may not reach agreement before the current scheme expires. The Department therefore intends to introduce statutory measures to replace the 2005 PPRS from 1st September 2008. These statutory measures would apply to those companies who chose not to sign up to any new voluntary scheme or in the event of failure to reach agreement. Statutory measures cannot apply to any company who is a member of a voluntary scheme. This consultation, therefore, seeks views on the statutory measures applying to branded pharmaceuticals that the Government would implement from 1st September 2008 (the price freeze). The statutory measures include a price cut of 3.9% per cent and measures to link the price of out of patent branded medicines to the prices of any generic equivalent from 1st January 2009. Together these measures are expected to deliver savings equivalent to a 5.0% price cut. Prices would be frozen from 1st September 2008 and arrangements would be reviewed within a year as required by the Transparency Directive. Further adjustments might be made in future so as to ensure that these measures have the intended effect, or to take account of changes in any voluntary scheme.

Consultation

Since September 2007, the Department has been meeting with the ABPI as the appropriate representative industry body under section 261(7) of the National Health Service Act 2006 to negotiate a new voluntary scheme. Those discussions continue. The Department of Health is consulting on the proposed statutory measures set out in this impact assessment. The consultation document is available at http://www. dh.gov.uk/consultations

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Options

The Department has identified two options: Option 1: No change - in which case the effective expiry of the PPRS will leave the NHS exposed to price increases Option 2: Introduce statutory measures to control the prices of branded medicines from 1 September 2008 in place of the current scheme in order to safeguard the financial position of the NHS. These would apply to those companies who chose not to sign up to a new voluntary scheme or in the event of failure to reach agreement. The measures include a price cut of 3.9% per cent and measures to link the price of out of patent branded medicines to the prices of any generic equivalent from 1st January 2009. There is no additional administrative burden from these proposals compared to the current PPRS.

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Analysis of Costs and Benefits

This section identifies the major expected impacts of the intended cuts in the price of branded pharmaceuticals, and the measures linking prices of off-patent brands to Category M generic prices (where a generic equivalent exists). The magnitudes of some of these impacts are calculated in this preliminary assessment, to support the consultation exercise. The impacts are most conveniently described and evaluated by comparison with a counter-factual situation in which prices are frozen at current levels. However, it must be recognised that companies may actually increase prices, if no mechanism is implemented to replace the PPRS. In this case, all the costs and benefits described here would increase. With regard to the proposed price freeze from September 2008 – the net impact is assessed to be zero compared to the current position, except for the fact that this measure guards against price increases in the absence of agreement being reached with the industry. It is not possible to quantify what companies would do in the absence of measures to control prices, but some billions of pounds are potentially at risk for the NHS. The rest of this document therefore focuses on the proposed price cuts to take effect from January 2009.

Summary of Costs and Benefits

Reducing the prices of branded pharmaceuticals should lead to a direct cost saving in the NHS – with no loss of health benefits – as less expenditure is incurred in providing the medicines currently purchased. Pharmaceutical companies are expected to suffer an equivalent loss of revenues, and a corresponding loss of profits. However, this loss may be partially offset by two factors:

i) the NHS is expected to spend some of its savings on more medicines, replacing some of companies’ lost revenues

ii) companies are expected to incur lower sales and marketing costs after the price cut, partially offsetting the loss in profits

These offsetting effects mean that the gains of the NHS will outweigh the profit losses of industry, implying a net beneficial impact. To the extent that pharmaceutical companies lose profits, there will be a redistribution between shareholders in these companies and patients in the NHS. The price cut only applies to current medicines. The possibility of an indirect effect on R&D via future prices has been considered, but it is thought unlikely to be significant, because:

• it is unclear whether companies’ expectations of future prices will actually change;

• a new pricing scheme where current prices are unlikely to significantly influence future prices, is currently being negotiated;

• the UK only represents a small proportion of the global market for pharmaceuticals. The Office of Fair Trading5 and NERA6, conclude that pricing has little or no impact on UK R&D investment That said, NERA found that firms often have a number of alternative locations for investment assets that are broadly equal in other dimensions, and in these situations market conditions can be an influence on the ultimate choice7.

5 http://www.oft.gov.uk/advice_and_resources/resource_base/market-studies/price-regulation 6 http://www.nera.com/Publication.asp?p_ID=3277 7 However, it should be noted that OFT were sceptical of this view.

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Costs: Cost savings in the NHS8

Annual spending on branded pharmaceuticals The NHS in the UK is expected to have spent over £9bn in 2008 on branded pharmaceuticals9. However, the price cuts will not be effective on all of this spending, as explained below.

Price cuts are not effective on spending accounted for by the distribution margin Generally manufacturers allow the supply chain a 12.5% discount from the list price of branded pharmaceuticals10. This enables wholesalers to cover their costs for distributing medicines. Some of this discount is passed on to pharmacies who in turn have an amount deducted through the discount clawback scale.

Cost savings The price cut is only effective on the set of currently approved branded medicines. In time, these products will lose patent protection, after which generics are expected to take the bulk of market share, and generic prices are determined by other arrangements, which will not be affected by the price cut. Therefore, the impact of the price cut will diminish as the current product set loses patent protection. However, the linking of out of patent branded medicine prices to those of Category M will deliver increased savings over time, as products lose patent protection. The proposed price cut and linking prices of out of patent brands to Category M prices is expected to deliver savings equivalent to a five per cent price cut in the community sector11. Further adjustments might be made in future so as to ensure that these measures have the intended effect, or to take account of changes in any voluntary scheme. In particular, the impact of the Category M link is expected to change with time. The savings are estimated to be in the region of £310m (UK) per year in primary care12. The effect of these measures will be kept under review and adjustments may be made to ensure that they have the intended effect and deliver the expected savings.

8 By convention, impacts affecting government spending are reckoned as costs. In this case, the impact is a cost saving to the NHS – i.e. a negative cost. 9 PCA (Net Ingredient Cost) and Pharmex data, 2007, projected to 2008. 10 Although recent developments in the supply of medicines means that this may be changing 11 Note that savings in the hospital sector are more difficult to predict because of existing contracts for in patent medicines (which can include discounts on the NHS list price), and because the hospital sector has separate arrangements (e.g. tendering) for out of patent medicines. 12 Normally benefits (and costs) would be valued over a longer time frame and expressed in Net Present Value terms. As these arrangements are intended as an interim measure subject to review, a net present value over, say, ten years, would not be very meaningful.

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Benefits: Negative impact on profits in the pharmaceutical industry13

Overview of benefits It is assumed that the price cut will not result in companies selling at below production costs so pharmaceutical companies will continue to supply products after the price cut – see below. This means that there is no loss of health benefits to patients in the NHS due to withdrawal of medicines currently supplied. The major benefit of the price cut is, in fact, a net negative effect on the profits of pharmaceutical companies, as they receive less revenue for the medicines they supply. The loss in revenue to the pharmaceutical industry may be partially offset by two factors: increased spending on medicines (using the cash released from the price reductions); and lower sales and marketing costs.

Impact on supply of pharmaceuticals In patent medicine prices will remain significantly greater than the cost of their manufacturing and distribution, it is therefore assumed that pharmaceutical companies will continue to supply products following the price cut. This means there will be no resulting loss of health benefits for the NHS. While this assumption is likely to hold true for the great majority of pharmaceuticals, it is possible that the price cut will make supply uneconomical in the case of some niche products, particularly those with low demand volumes. It may be considered appropriate to take special measures in respect of these products, to assure continued supply. Views on exemptions from the price cut are sought in the attached consultation. For out of patent products subject to the link to Category M prices, it is proposed that the price premium be 50% above the Category M price. This should be sufficient to safeguard supply. However, in cases where the originator company no longer supplies, an alternative source of supply will exist.

Direct reduction in company revenues due to price cut Companies will lose sales revenues equal to the savings in the NHS – after taking account of the pharmacy distribution margin.

Extra sales due to NHS spending savings from the drugs bill It is assumed that the NHS reallocates the savings it makes on its drugs bill in the same way it allocates its current budget – that is, a proportion will be spent on additional prescriptions of branded pharmaceuticals, at the new price level. It may be that these additional sales will be more profitable, on average, than current sales. This is because any additional drugs purchased by PCTs are likely to be new branded products – such as those for which NICE guidance has been issued. However, this calculation makes the conservative assumption that the additional sales will generate average levels of profit. After accounting for the distribution margin, the NHS spent 8% of its budget in 2007 on branded pharmaceuticals14. It may therefore be estimated that 8% of savings resulting from the

13 By convention, all impacts beyond effects on government spending are reckoned as benefits – in the case of the impact on the industry these are negative benefits. 14 Chief Executive’s report 2007; PCA data.

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proposed price cuts will be spent on pharmaceuticals. This factor is adjusted downwards to 7% to allow for the costs of manufacturing this additional volume of products15.

Reduced sales and marketing costs Companies have the objective of maximising the profits they are able to return to shareholders. Profit is the difference between revenues and costs. Pharmaceutical company revenues are expected to reduce, as described above. The costs of production and distribution for existing sales should not be affected by the price cut. However, there is one type of cost that is expected to change – sales and marketing (S&M). Pharmaceutical companies spend significant proportions of their income on S&M, in order to make prescribers aware of their product, and grow market share. If the market value of pharmaceutical sales is reduced with a price cut, it is reasonable to suppose that companies will have less incentive to spend on S&M (in particular in supporting out of patent brands: if the value of sales is less, there must be lower returns to S&M expenditure). This reduction in spending on S&M would reduce company costs, and partially offset the loss of revenue after the price cut. The magnitude of this effect has not been calculated. It is therefore currently included as a “non-monetised” impact. On the basis of the savings figure estimated above, The loss to the pharmaceutical industry in lost profits is therefore estimated to be £280m per year.

Net benefit

The net benefit of the price cut is calculated as +£30m per year. This net benefit represents a mixture of consumer and producer surplus from the purchase by the NHS of an increased volume of branded drugs.

Redistributive effects

There will be some redistribution of wealth from shareholders to the NHS (and ultimately either patients or taxpayers). However it is difficult to quantify such an effect as we would require equity weights that relate to the gainers and losers, and the latter will be represented by UK and foreign shareholders, making such a calculation difficult.

15 This implies marginal manufacturing costs of 12.5% of sale price

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Enforcement sanctions and monitoring

Option 2 would be enforced under sections 263 to 266 and 272 of the National Health Service Act 2006. Companies would have a right of appeal in accordance with regulations under section 265(5) of the National Health Service Act 2006. The statutory measures to control the prices of branded medicines from 1 September 2008 would apply to those companies who chose not to sign up to a new voluntary scheme or in the event of failure to reach agreement.

Implementation and Delivery Plan

Staff in Medicines Pharmacy and Industry Group will be responsible for the implementation and enforcement of this policy. The statutory measures include a price cut of 3.9% per cent and measures to link the price of out of patent branded medicines to the prices of any generic equivalent from 1st January 2009. Together these measures are expected to deliver savings equivalent to a 5.0% price cut.

Competition Assessment

Overview

This section provides analysis of the potential impact of the proposed price cut on competition in the market for branded pharmaceuticals. First, the structure of the branded pharmaceutical market is described. It is argued that an important basis of competition in this market is spending on sales and marketing (S&M) – rather than price, or quality, both of which cannot be changed in the short term. This means that conventional assessments of competition may not be applicable. To determine whether the price cut is likely to influence competition, an OFT filter identifying likely competition impacts is used. It is shown that a socially undesirable effect is unlikely.

Competitive structure of the branded pharmaceuticals market

The total market for branded pharmaceuticals is divided into many sub-markets, based around disease states. Within an individual disease market there may be many additional sub-markets reflecting different stages of disease progression, variations in characteristics of patients and other factors. Manufacturers of branded pharmaceuticals hold patents, which prevent competitors from supplying the same product. Nevertheless, for many disease markets there are substitute products available. This means that competition is heterogeneous: some markets may be served by many substitutable brands, while other markets may be dominated by a single product, if it is the only treatment available.

Competition among in patent pharmaceutical products is based more around sales & marketing, rather than price

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In the long run, competition on quality provides incentives for investment in R&D and new product development. Companies compete to bring to market new innovative medicines that can provide health improvement relative to existing medicines and generate returns, and to be first to market where a number of companies may be carrying out R&D in similar areas. Therefore, there are strong incentives, largely driven by the intellectual property regime, to compete in the R&D process. Prices in this market are subject to arrangements under the Pharmaceutical Price Regulation Scheme. Firms are able to influence the price of their product, particularly at launch, but the final level is set within the scheme. Moreover, purchasers of branded pharmaceuticals – usually prescribing physicians – are not very aware of relative prices of products (except to the extent that they are generally aware that generics are usually considerably cheaper than brands). These characteristics of the pharmaceutical market mean that pricing is generally not competitive – in the traditional sense. Consistent with this notion it is observed, and generally accepted, that prices far exceed marginal production costs for virtually all branded pharmaceuticals. Without price competition, consumer choice in markets for branded pharmaceuticals is largely determined by two factors:

i) the performance or quality of the product ii) sales and marketing

In the long run, competition on quality provides incentives for investment in R&D and new product development. But in the short term, firms are unable to substantially change the quality of existing products. This means that the most important basis of competition for existing products is S&M. The social impacts of S&M are complex. While initial spending on S&M is likely to have a socially beneficial effect, as consumers/purchasers gain information to help them make choices, excessive levels of S&M can have a social cost, as companies gain market share by exploiting asymmetry of information. In pharmaceutical markets, it is likely that competitive spending at the margin on S&M has a negative social impact16.

Assessment of price cut using OFT criteria for identifying potential competition issues

The OFT has developed a filter to determine whether a regulatory proposal is expected to have an impact on competition. It consists of the following questions: Would the proposal

a) Directly impact the number or range of suppliers? b) Indirectly impact the number or range of suppliers? c) Limit the ability of suppliers to compete? d) Reduce suppliers’ incentives to compete vigorously?

Impact on the number or range of suppliers Manufacturers of branded pharmaceuticals are multi-national companies operating in global markets. The number and range of suppliers is determined by revenue streams and production economics on a global scale. The UK comprises approximately 3.5% of this market, and any change in UK pricing will have a negligible effect on the viability of these global businesses.

16 Gonul et al., 2001. “Promotion of prescription drugs and its impact on physicians’ behaviour choice.” J Marketing 65:79-90. References therein describe results of other studies.

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Moreover, the present price cut is directly targeted at existing products, whose marginal cost of production will still be far exceeded by their price. As described above, it is not expected that the price cut will have a significant effect on companies’ expectations for profits from future products. This means there will be no significant effect on decisions to employ capital in the pharmaceutical industry. For these reasons, it is considered highly unlikely that the number or range of suppliers will be affected, directly or indirectly, by this price cut.

Impact on the ability of suppliers to compete As described above, a major basis of competition in branded pharmaceuticals is S&M. A price cut will reduce the profits available from spending on S&M. It may therefore reduce the ability and incentives of suppliers to compete vigorously, inasmuch as it constrains their spending on competitive S&M. However, this would very likely be a beneficial effect, as S&M is probably socially undesirable at the margin. Reducing the price of out of patent medicines closer to the price of Category M generic medicines (where an equivalent generic exists) is unlikely to have a significant impact on the ability of branded medicines to compete. In theory, this could have a beneficial impact as firms will need to rely on developing new innovative medicines in order to generate revenues, and be less reliant on sales of out of patent medicines. Also, this may engender more competition in the out of patent sector. However, there is the danger that reducing the price of out of patent brands to close to the price of generic equivalents may have a detrimental impact on the generics market, in particular if prescribers switch to originator products. The Department will keep these arrangements under review and take corrective action if this occurs. Overall, the price cut and linking the reimbursement price of out of patent brands to Category M prices is not expected to have any socially detrimental effect through an impact on competition.

Other Specific Impact tests

Small Firms Impact Test The proposed price cut is not expected to impose additional regulatory burdens on companies – so there is not expected to be a differential effect on small firms. Measures in the consultation are designed to identify and address specific issues for small firms. Legal Aid The proposals will not introduce new criminal sanctions or civil penalties.

Sustainable Development The Department does not envisage any impact on sustainable development from the proposals.

Carbon Assessment

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The Department does not envisage any change in emission of Greenhouse Gases resulting from the proposals.

Other Environment The Department does not envisage any other adverse environmental impacts from the proposals.

Health Impact Assessment The proposals are expected to have an overwhelmingly positive impact on health, as the savings from current pharmaceutical expenditure are used to fund additional treatments and services. As over £300m per year will be released for the health service to spend on additional health interventions, this will result in increased health for the UK population.

Human Rights The Department does not envisage any adverse impacts on human rights.

Rural Proofing The Department does not envisage any different impact on rural areas.

Equality Impact Assessment The Department has also carried out a DH Equality Impact Assessment, which is annexed to the consultation document.

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Celebrating the 60th anniversary of the NHS

Specific Impact Tests: Checklist Use the table below to demonstrate how broadly you have considered the potential impacts of your policy options. Ensure that the results of any tests that impact on the cost-benefit analysis are contained within the main evidence base; other results may be annexed. Type of testing undertaken Results in

Evidence Base? Results annexed?

Competition Assessment Yes No

Small Firms Impact Test Yes No

Legal Aid No No

Sustainable Development No No

Carbon Assessment No No

Other Environment No No

Health Impact Assessment Yes No

Race Equality No No

Disability Equality No No

Gender Equality No No

Human Rights No No

Rural Proofing No No

Annex D

Proposed information requirements and penalties The proposed information requirements for manufacturers to capture potentially eroded discounts would be: (a) the sales income in respect of each pack size and strength of a branded product sold by it to wholesalers, including the total number of products sold; (b) the sales income in respect of each pack size and strength of a branded product supplied by it to retail pharmacists, including the total number of products sold; (c) the sales income in respect of each pack size and strength of a branded product supplied by it to—

(i) dispensing doctors or where that doctor is part of a partnership or is employed by a person or body to provide primary medical services to that partnership, person or body; (ii) GMS contractors; or (iii) PMS contractors,

including the total number of products sold; (d) the sales income in respect of each pack size and strength of a branded product supplied by it to health service hospitals, including the total number of products sold; and (e) information about discounts given by it to wholesalers, retail pharmacists, dispensing doctors, GMS contractors, PMS contractors or health service hospitals which cannot be specifically attributed to a specific branded product or pack size or strength of a specific branded product. The Department would collect this monthly for the first year. Penalties for not supplying the data on time would be as follows. Daily penalty for first 14 days £5,000 and £10,000 thereafter. The information to be provided for the price of new products would be as follows:

• Whether the product is a new active substance; • The costs of manufacture, research and development, and marketing; • The anticipated usage by the NHS.

Information for the review of existing prices of products would be as follows:

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Audited accounts for the latest accounting year for which audited accounts are available including the figures showing for that year in respect of each branded health service medicine – (a) the sales for health service purposes; (b) the cost of manufacture; (c) any sales promotion costs in respect of those medicines; (d) any costs of research into, and development of, those medicines; (e) any non-recurring operational costs; (f) any other costs; and (g) total profit after interest charges and taxation. The proposed penalties for failure to comply with the price cut and pricing decisions would be as follows. National health service sales of manufacturer or supplier

Daily penalty for first 14 days Daily penalty for subsequent days

Less than £5 million £250 £500

Less than £10 million but not less than £5 million

£500 £1,000

Less than £100 million but not less than £10 million

£2,500 £5,000

Not less than £100 million £5,000 £10,000 Plus a recovery of excess NHS expenditure arising from the infringement multiplied as follows. The difference between the amount which would have been spent on the product had the product been sold at the maximum price and the amount actually spent assuming identical volumes sold at each price. This sum to be multiplied as follows. First contravention 5 per cent Second contravention 15 per cent Third contravention 25 per cent Fourth contravention 35 per cent Fifth or subsequent contravention 50 per cent

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Annex E

List of Stakeholders to be Consulted Association of the British Pharmaceutical Industry (ABPI) Bio Industry Association British Generics Manufacturers Association British Association of Pharmaceutical Wholesalers Ethical Medicines Industry Group NHS organisations Pharmaceutical Services Negotiating Committee Proprietary Association of Great Britain PPRS Scheme Members

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