On 20 February 2007, the Office of Fair Trading (“OFT”) published a 120 page report on the regulation of the price of branded pharmaceutical products under the voluntary scheme that is periodically re-negotiated between the industry and the Department of Health, the Pharmaceutical Price Regulation Scheme (“PPRS”). The OFT report concludes that the PPRS does not provide value for money for the NHS. The current PPRS basically regulates prices by imposing an overall profit cap on those companies which sell branded products to the NHS - compliance with the profit cap is achieved by price adjustments across a company’s product range and/or refunds to the NHS. The OFT says that there is a compelling case for reform of the scheme towards a value-based pricing system that would relate the prices of products to their clinical value relative to existing treatments.

The report considers in some detail supply- and demand-side factors that affect the pricing of pharmaceuticals, including generic substitution, prescribing practices, price competition in supplies to pharmacies and hospitals as well as parallel trade. It considers three alternatives to the current PPRS scheme and concludes that an ex ante value based pricing scheme, in which there would be rapid upfront negotiation of price prior to the launch of a product, is the preferable. As to establishing the value of a drug under the proposed scheme, the OFT advocates the Quality Adjusted Life Year (“QALY”) measure used by the National Institute of Clinical Excellence (“NICE”). If implemented, the scheme would mean that this type of assessment will be required not only for the purchase of a new drug by the NHS (NICE review) but also for the purposes of fixing a price (DOH price negotiation). This in turn would mean that the development of any new pharmaceutical product should not proceed unless there is a reasonable expectation of achieving a satisfactory QALY measure.