How much influence does the state have over the pharmaceutical sector? Jim Kinnier Wilson, partner and head of the life sciences group at Penningtons Manches LLP, considers the extent to which governments can regulate prices set by pharmaceutical companies.

ARE THERE CIRCUMSTANCES WHEN A GOVERNMENT COULD INTERVENE TO CONTROL THE PRICES OF CERTAIN PHARMACEUTICAL PRODUCTS?

Governments generally agree pricing or reimbursement of medicines on approval or periodically thereafter but they will only rarely intervene.

However, in Europe, a competition authority may challenge the price of a medicine if it considers the price so excessive as to be an abuse of a dominant market position. In August 2015, the UK’s Competition and Markets Authority (CMA) issued a Statement of Objections to Pfizer and Flynn Pharma alleging breach of EU and UK competition in relation to their pricing of phenytoin sodium capsules, an anti-epilepsy drug.  

In 2012, Pfizer sold the UK distribution rights to Epanutin to Flynn Pharma, having previously marketed the anti-epilepsy drug itself. Flynn Pharma de-branded the drug for UK sale, making it a generic. Pfizer continued to manufacture the drug and, following the deal, sold it to Flynn Pharma at prices between eight and 17 times higher than those previously charged for Epanutin. Flynn Pharma then sold the drug on to its customers at prices between 25 and 27 times higher than those historically charged by Pfizer. As a consequence, the NHS spend on phenytoin capsules increased from £2.3 million prior to 2012 to just over £50 million in 2013 and over £40 million in 2014.  

The CMA’s provisional view, set out in its Statement of Objections, is that Pfizer and Flynn Pharma each abused their dominant market positions by charging excessive and unfair prices in the UK for the drug. Pfizer and Flynn Pharma now have the opportunity to make representations to the CMA before it reaches its final decision. If the CMA decides that there has been a breach of competition law, it is likely to impose a substantial financial penalty. Pfizer and Flynn Pharma may also face damages claims from the NHS and other purchasers of the drug.

IF PRICE CONTROL WERE NOT AN OPTION, COULD A STATE DECIDE TO CIRCUMVENT OR DISREGARD THE PATENT/LICENSING OF THE DRUG AND ALLOW A RIVAL TO PRODUCE THE DRUG?

Again, such actions tend to be rare. The World Trade Organisation (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) allows for compulsory patent licensing. This is when a government allows someone other than the patent owner to produce the patented product or process without the consent of the patent owner, usually where there is insufficient supply in that country. 

Compulsory licensing could be used by a government to grant a licence without the consent of the patent holder to one or more other manufacturers, provided that the patent holder is given adequate remuneration and the other conditions set out in Article 31 of TRIPs are met. Normally, the entity requesting the licence must first have attempted to negotiate a voluntary licence with the patent holder on reasonable terms. In the cases of national emergency or extreme urgency, the requirement to negotiate first is waived and the compulsory licence can be granted straightaway. This is provided at S48A Patents Act 1977.

The threat of compulsory licensing has successfully been used by governments as a bargaining tool. In the late 1990s, TRIPs was invoked by the South African government to import generic drugs to deal with its HIV epidemic. However, US trade representatives at the WTO took action against the South African government to challenge the compulsory licences. The case was subsequently withdrawn in 2001 when an agreement on the availability and pricing of the branded drugs was reached. Nevertheless, it did allow for the supply of these drugs, just at the time they were most needed.

Although not really the object of these provisions, compulsory patent licensing, while still comparatively rare, is increasingly being seen as a way to make medicines more affordable. In December 2014, the Indian Supreme Court upheld a compulsory licence granted by the Indian courts to a generics company for sorafenib tosylate, a cancer drug. The court had held that the price of the drug, sold under the brand name Nexavar, was too high.

HOW DOES THE PRICE OF PHARMACEUTICALS AFFECT THE DELIVERY OF HEALTHCARE IN THE UK?

The NHS buys the majority of drugs sold in the UK. While generic medicines are relatively inexpensive, new branded prescription medicines can be very expensive. For example, Kadcyla, a drug to treat advanced breast cancer, costs in the region of £90,000 for a course of treatment.

Since unrestricted prescribing would be unsustainable within the NHS, rationing decisions need to be taken. The National Institute for Health and Care Excellence (NICE) determines whether a particular drug should be available within the NHS in England and Wales through a programme of appraisals. NICE looks at the likely increase in health that would be derived from the increased expenditure on the new drug. To do this, NICE calculates the cost per ‘quality adjusted life year’ (QALY). 

Treatments that cost more than £30,000 per QALY are not usually recommended by NICE. Since NHS budgets are fixed and the NHS has a duty to fund NICE recommended drugs, there is an opportunity cost to NICE’s decisions. In order for the NHS to fund expensive new drugs it needs to make savings by cutting other treatments or services.

One reason for the rising costs of medicines is that a significant number of new treatments (particularly those for the treatment of cancer) are manufactured from biological sources. This includes monoclonal antibodies (MABs) such as Trastuzumab (Herceptin) and immunotherapies such as Olaparib (Lynparza).  Such biologicals are more expensive to manufacture than other small molecule drugs as they are made with living organisms rather than chemicals. This has resulted in a number of cancer drugs being rejected on the basis that they are not cost-effective, including Lynparza earlier this year. NICE calculated that the cost of Lynparza was £49,000 per QALY, so significantly higher than its upper threshold of £30,000.

The Cancer Drugs Fund (CDF) was set up in 2010 to fund cancer drugs not yet approved by NICE as well as cancer drugs not recommended by NICE as cost-effective. The fund was set up following a report prepared for the Secretary of State that showed the UK to be lagging behind some comparable countries in its use of innovative new cancer drugs. At around the same time, the UK government announced its intention to introduce a value-based pricing system, under which NICE would determine the maximum price that the NHS can afford to pay for branded medicines having regard to the value the drug offers. Under the current system, pharmaceutical companies set the price of drugs, which NICE then assesses. 

The CDF was intended to be a stop gap on the basis that, once value-based pricing was established, it would capture the wider benefits of end-of-life treatment and the cancer fund would no longer be needed. Despite several rounds of consultation on the value-based approach proposed by NICE, agreement could not be reached. The NICE methods of assessment of new drugs remain as they were prior to the consultation. The CDF is due to end in March 2016 and its future is currently being discussed by the NHS. Current projections suggest that spending by the CDF would rise to around £410 million for this year, an overspend of £70 million. This has led to a number of drugs being removed from its funding list, with a further 23 courses of treatment being formally removed in November 2015. 

DOES THE POWER OF BODIES SUCH AS NICE HAVE ANY IMPACT ON THE PRICING OF PHARMACEUTICALS?

The NHS is limited in the amount that it can spend on branded medicines by two schemes: the Pharmaceutical Price Regulation Scheme (PPRS) which is voluntary; and the statutory scheme embodied in the Health Service Branded Medicines (Control of Prices and Supply of Information) Regulations (the Price Regulations).

PPRS is a voluntary agreement on pricing negotiated between the Department of Health and the Association of the British Pharmaceutical Industry (ABPI). The 2014 PPRS came into effect on 1 January 2014 and is agreed for a fixed five year period. It controls pricing by restricting the profits that can be made on sales to the NHS. Those suppliers who choose not to join PPRS are subject to the Price Regulations, which control the maximum price of prescription-only branded medicines supplied to the NHS.

Obtaining an NICE recommendation is central to a drug’s success in the UK, not least because the NHS is legally obliged to fund the medicines recommended by NICE. Since the practical uptake of a branded drug is dependent on an NICE recommendation, NICE’s assessment of cost-effectiveness will be a consideration for pharmaceutical companies when price setting. 

By contrast, in the US there is no government regulation of pharmaceutical pricing and no equivalent of NICE to contain pharmaceutical pricing. 

COULD GOVERNMENTS LEVERAGE THEIR POWER AND INFLUENCE AS FUNDERS OF EARLY RESEARCH TO LEGALLY CONSTRAIN THE PRICE OF DRUGS RESULTING FROM THAT EARLY RESEARCH?

A number of commentators, particularly in the US, have argued that drugs resulting from publicly funded research should be reasonably priced since their development has been government funded. There are consequences, however, of constraining the price of drugs that may be to the detriment of the university or other publicly funded institution which conducted the research.  

A chemical compound, for example, discovered through university research may be licensed to the pharmaceutical company on terms negotiated with the institution. If the terms include a royalty payment based on future sales revenue, restricting the price would reduce the royalties received by the institution. There is also the risk that restricting the price of drugs resulting from government funded research will discourage pharmaceutical companies from commissioning such research. 

An alternative to restricting the price of the resulting drugs is to allow governments to recoup profits from branded drugs that are at least partly developed under publicly funded research. This approach was considered but not included in the US’s Bayh-Dole Act 1980 (Patent and Trademark Law Amendments Act 1980). Since then the issue has been raised a number of times, most recently by Hillary Clinton in her 2016 presidential campaign.  

Clinton’s proposal, which is part of a package of measures to control rising drug prices, would require pharmaceutical companies that benefit from federal support to invest a proportion of their revenue in research and development (R&D) and, if they do not meet targets, to boost their investment or pay rebates to support basic research. This principle is based on a provision of the US Affordable Care Act that requires insurance companies to pay rebates to consumers if their profits and administrative costs were an excessive share of the benefits actually paid out to consumers. 

WHAT DOES THE FUTURE HOLD FOR THE RELATIONSHIP BETWEEN HEALTHCARE PROVIDERS (BOTH STATE AND PRIVATE) AND THE PHARMACEUTICAL SECTOR IN TERMS OF THE LEGAL STRUCTURE AROUND PHARMACEUTICAL PRODUCTS?

The controversy surrounding Turing Pharmaceutical’s decision to increase the cost in the US of Daraprim, a drug used by HIV patients, from $13.50 a pill to $750 has made rising drug prices a key political issue. Drug pricing is set to come under increasing scrutiny as budgets are stretched due to the demands of an ageing population, the rise in chronic disease and the costs of innovation in treatments. It seems likely that governments will continue to seek to curtail pharmaceutical spending through pricing and re-imbursement legislation. 

Where governments are willing to reward innovative drugs with premium pricing, they are likely also to seek reduced prices for less innovative, generically substitutable, or otherwise older, products. Pharmaceutical companies are coming under increased pressure to move towards new pricing models based on outcomes for patients, as well as value-based pricing, and some have begun to look at ways to address rising costs. For example, some of the companies developing expensive immunotherapy drugs are also developing diagnostic tests so that treatment can be targeted at those who are most likely to benefit. 

In the UK, the Department of Health is looking at a number of schemes to address the funding of medicine. It is developing a five year strategy for cancer services aimed at proposing a system that accords with existing NICE process and will offer patients access to cancer treatments in a more sustainable manner than that offered by the CDF.  

Future changes to the mechanism for drug pricing and appraisal are likely to include the increased use of data analytics to inform decisions on the cost-effectiveness of drugs rather than just relying on the profit margin test of the PPRS. More outcome-based schemes such as the Multiple Sclerosis Risk Sharing Scheme, set up to deliver access on the NHS to clinically effective treatment while data is collected on the treatment’s cost-effectiveness, are likely to be included. 

The government is also looking at ways to speed up access to innovative medicines. This includes the MHRA’s Early Access to Medicines Scheme, which gives patients with life- threatening or seriously debilitating conditions access to medicines where there is a clear unmet medical need. In addition, the European Medicines Agency (EMA) is undertaking an adaptive licensing pilot, under which a restricted patient population would have access to new medicine before it has been fully authorised for the market.  Iterative phases would then allow the authorisation to be extended to a larger patient population.  

This article was published in Lexis®PSL In-House Adviser in October 2015.