The UK Office of Fair Trading (OFT) published a report on its market study into the distribution of medicines on December 11, 2007 (Market Study Report). The OFT recommends further pricing reforms in light of recent changes to pharmaceutical manufacturers’ distribution of medicines, which the OFT views as increasing the risk of higher costs to the National Health Service (NHS).


Following changes to distribution arrangements by Pfizer Limited (Pfizer) and other pharmaceutical manufacturers, the OFT initiated a market study in April 2007. For further detail see the Hogan & Hartson Pharmaceutical and Biotechnology Update “UK Office of Fair Trading Market Study into the Distribution of Medicines”, April 2007.

Traditionally, pharmaceutical companies have distributed their medicines through a number of wholesalers. The wholesalers then directly compete against one another to supply the pharmacies. Pfizer was the first company to introduce a “direct to pharmacy” (DTP) scheme in the UK in March 2007. Pfizer now supplies pharmacies directly and uses Unichem (part of Alliance Boots) as its sole distributor to distribute Pfizer medicines on its behalf. The OFT reports that GlaxoSmithKline, AstraZeneca, Sanofi Aventis and Napp have implemented, or may soon similarly implement, changes to their distribution systems, including: (a) DTP, or (b) generally reducing the numbers of wholesalers.

Market Study

During the course of the market study, the OFT considered the impact of the changes to distribution arrangements on: 

  • Competition 
  • The cost of medicines to the NHS 
  • The level and quality of services that pharmacies are able to offer patients

The OFT reports that the traditional wholesale distribution model involves the following steps: 

  • Manufacturers supply wholesalers at a price which includes a conventional industry discount of 12.5 per cent off of the list price 
  • Wholesalers directly compete to supply pharmacies at prices which include an average discount of 10.5 per cent off of the list price 
  • Pharmacies are reimbursed at list prices 
  • The NHS claws back some of the profits earned by the pharmacies under this model 
  • The net result is that, on average, for medicines the NHS pays list price less claw back. According to the Market Study Report, around 9 percent of reimbursements to UK pharmacies are clawed back by the NHS.

The OFT notes that under DTP schemes, manufacturers set the prices payable by pharmacies, and there is no convention covering any level of discounts. It must be noted that Pfizer has offered assurances to the Department of Health (DH) that DTP will not result in higher NHS cost for Pfizer medicines. However, the OFT is concerned that the DH would not be able to effectively monitor this assurance.

The picture is not all negative, as the Market Study Report concedes that efficiencies and other positive benefits may result from changes in distribution. (Table)

The OFT recommends two options to remedy their concerns on (a) potential increased costs to the NHS, and (b) potential reduction in service provided to pharmacies without commensurate price reduction.

Option One

Reduce price lists within the framework of the UK Pharmaceutical Price Regulation Scheme (PPRS) by an amount which is equal to the average discounts offered to pharmacies under the traditional wholesalers model.

The PPRS is a voluntary scheme agreed between the DH and the Association of British Pharmaceutical Industry which regulates prices charged to the NHS. Following an OFT report on the PPRS in March 2007 recommending a radical overhaul, the PPRS is currently under review. See Hogan & Hartson Updates “UK Office of Fair Trading Market Study on the Pharmaceutical Price Regulation Scheme: Implications for Pricing Drugs in the UK “, March 2007 and “UK Government Responds to the Office of Fair Trading Report on the Pharmaceutical Price Regulation Scheme”, August 2007.

This option would require changes to pharmacy reimbursement schemes. The OFT proposes either (a) direct payment to pharmacies based on prescription numbers from Primary Care Organisations or (b) an established payment mechanism (such as Category M pricing).

This is the OFT’s preferred option.

Option Two

Seek manufacturer’s agreement to offer a minimum discount within the framework of the PPRS. There would then be no need to adjust list prices and fewer changes to the PPRS framework and reimbursement arrangements would be required in comparison to Option One.

Next Steps

The Government has 90 days to respond to the Market Study Report. The Department for Business, Enterprise and Regulatory Reform will consult with stakeholders and lead the response. Industry Input

Whilst the OFT review of PPRS and distribution of medicines will have created regulatory uncertainty for pharmaceutical companies in the short term, the pharmaceutical industry has to date escaped: (a) a cost intensive, lengthy and burdensome reference to the Competition Commission and/or (b) any individual investigation for anti-competitive behavior under the Competition Act 1998. 

It is important for pharmaceutical companies to continue feeding into all Government reviews of pharmaceutical pricing and distribution arrangements and to demonstrate that recent and anticipated adjustments will not result in anti-competitive effects or detriments to consumers and/or the NHS.