On February 20, 2007, the UK Office of Fair Trading (OFT) published a market report on the Pharmaceutical Price Regulation Scheme (PPRS), the voluntary scheme agreed to every five years between the Department of Health (DOH) and the Association of the British Pharmaceutical Industry, which regulates the prices charged by pharmaceutical companies to the National Health Service (NHS). The UK is unique in that its legislation allows the OFT to initiate market investigations to identify potential market failures even where there are no obvious competition law breaches by individual companies.

The OFT is highly critical of the current PPRS, citing £500 million which could be saved, and advocates total reform of the PPRS to both increase value for NHS drug expenditures and to direct pharmaceutical investments to those drugs delivering the highest therapeutic value to patients. The main components of the current PPRS are maximum and minimum profit controls, price controls for increases on the initial pricing of new drugs, and negotiated overarching price cuts. The OFT (a) found that drugs with similar clinical effects diverge significantly on price (as much as 500 percent for close substitutes); (b) identified £500 million in 2005 NHS expenditures that could have been used more effectively; and (c) observed that £65 million could be saved with respect to off-patent brands with chemically identical generics.

For the 2011 to 2016 PPRS, the OFT recommends replacing the current scheme with a flexible value-based pricing scheme directed towards pricing drugs according to their clinical and therapeutic value to both patients and the NHS as a whole, based on ex post and ex ante value pricing. In particular, pharmaceutical companies would initially set the prices of new drugs, and ex post reviews would then take place on the cost effectiveness of individual or classes of drugs, with the aim of setting maximum prices based on the clinical benefits of the drugs.

The PPRS would also have a fast track ex ante assessment during drug trials on the cost effectiveness of new drugs, whereby a maximum price could quickly be agreed to when cost effectiveness data are available. In limited circumstances, where such data are not available (e.g., because the effectiveness of certain (therapeutic) drugs may only be assessed in the longer term), drug manufacturers could agree on reimbursements with the NHS dependent on whether, in practice, cost effectiveness claims were proved to be true (i.e., a risk sharing arrangement). The UK Department of Trade and Industry and the DOH have 120 days to consider and respond to the PPRS Report. If the UK government accepts the OFT’s recommendations, pharmaceutical companies may lose the commercial freedom to determine the initial prices of new drugs, particularly if the new PPRS is shifted towards a value-based pricing approach dependent upon clinical and therapeutic results. Pharmaceutical companies will need to consider (i) how the PPRS review is likely to impact their businesses and (ii) what processes to put in place to ensure their views are considered and applied by the relevant governmental organizations and representative trade associations in the future review and negotiation stages.