In Autumn 2006, Pfizer announced that it intended from the following Spring to sell prescription medicines in the UK direct to pharmacies. This would be a fundamental departure from the traditional model of selling drugs to distributors who then re-sell to pharmacies as principals. Under the new structure, known as “Direct to Pharmacy” or DTP, an existing distributor, Alliance, would act as “Logistic Service Provider” or LSP, with the contractual sale being made by Pfizer direct to the pharmacy. Initially, it was intended that Pfizer appoint Alliance as LSP on an exclusive basis for the UK.
This provoked a storm of protest The UK Office of Fair Trading (“OFT”) received a total of 483 complaints mainly from pharmacies and dispensing doctors, and 48 complaints from Members of Parliament. The pharmacies requested that the OFT take protective action on an interim basis to prevent implementation of Pfizer’s DTP structure. When the OFT declined to do so because it could not see the irreparable harm that would be done by allowing DTP to proceed, the pharmacies went to court and applied for an injunction. However, the pharmacies had waited around too long for the OFT to make up its mind, and the Court refused to grant the injunction on the ground that the pharmacies had not acted expeditiously.
The OFT still had to decide what to do with the inundation of complaints it had received. The fact that they concerned health care suited the OFT well, as it had identified this sector as a priority area in its current annual plan. The OFT became interested in the general effect of DTP schemes on drug distribution in the UK, particularly as it appeared that other manufacturers were looking at introducing them. Rather than launch an investigation into Pfizer’s particular structure, the OFT therefore decided to take a more rounded and flexible approach. It launched a so-called “Market Study,” aimed at assessing whether there were reasonable grounds to believe that DTP in general would be anticompetitive.
The OFT has now reported the results of its study, identifying two principal concerns with DTP. These concerns essentially relate to how DTP will affect the working of the UK Pharmaceutical Price Regulation Scheme (“PPRS”). As the PPRS works currently, the government negotiates a list price at which it will reimburse pharmacies who fill National Health Service prescriptions for patients. Manufacturers typically sell to wholesalers/ distributors at a discount of 12.5 percent off-list. Pharmacies negotiate with wholesalers/ distributors the discount off list at which they in turn buy, and the service level the pharmacies receive. At the point of reimbursement, the government also claws back some of the profit the pharmacy has made, in order to get its share of the discount obtained by the pharmacy from the wholesaler/distributor. The OFT is concerned that DTP may result in lower discounts to pharmacies, as the manufacturers take direct control of sales to them, and also lower service levels if the result of DTP is that the pharmacies’ choice of LSPs becomes limited.
The OFT’s recommended fix for these perceived ills is essentially to throw the ball back to the government. On pricing, the OFT suggests that the government should restructure the PPRS so that either a further discount is built in to the PPRS list price, or a minimum level of discount is specified for sales to pharmacies. On service quality, the OFT favours the government setting down minimum service standards, but also says that it wants to keep the market under review to monitor concentration and exclusivity at the LSP/ wholesaler/distributor level.
The OFT’s decision to look at DTP as a wider industry issue, rather than pursue a case against an individual agreement, has enabled the OFT to propose action by the gGovernment as a response to risks to competition perceived in the DTP model. This has highlighted the counterbalancing role of the government as an effective monopsony purchaser. We will see whether the Government exercises that power effectively to promote the general interests of the industry and patients.