Price war at the pharmacy

Government attempts to reduce the NHS drugs bill have met with an angry reaction from the country's pharmaceutical industry. Tighter controls on drugs pricing could be enough to tilt the balance and lead to an exodus of leading manufacturers overseas, it says.

Profits on drugs sold to the NHS are controlled by the Pharmaceutical Price Regulation Scheme (PPRS), but the Government believes that this gives the industry too easy a ride. Provisions will be introduced in the National Health Service bill in the current parliamentary year to back up the PPRS with reserve powers, enabling the Health Secretary, Frank Dobson, to enforce limits on profits.

"We are quite clear that some [pharmaceutical companies] do not comply [with the PPRS], though most do," said a Department of Health spokeswoman.

The new legislation reinforces a tough line being taken by the department in negotiations with the industry to renew the PPRS. Discussions began in September and, as the last agreement took 14 months to achieve, it is assumed, at least by the industry, that the revised PPRS will not be in place for some time.

Under the PPRS, the sales, costs and capital transactions of pharmaceutical companies are all monitored to limit the profits made on products sold to the NHS. Where a company begins making excessive profits - more than about a 26 per cent return on capital employed - it is obliged either to reduce prices or repay money to the DoH.

It is clear that health ministers want to bring down the size of the NHS drugs bill as part of their efficiency drive in the NHS. This will be reinforced by the establishment of a National Institute of Clinical Excellence, which will give guidance to doctors on what clinical practices and which drugs are the most effective. But the Government's policy direction is worrying the pharmaceutical industry.

"We don't need more regulation of an industry that has been very successful for the country at a time when things aren't as rosy as they were," says Richard Ley, a spokesman for the Association of the British Pharmaceutical Industry. "There have been 7,000 jobs lost in the industry over the last five years. We have been a major contributor to Britain's economy - second only to North Sea oil. If the discussions going on now on the PPRS come out badly, many companies would say, why not move somewhere else?"

A report published this month by the ABPI argues that the supportive environment for the drugs industry in the UK is being eroded. It says that the legal infrastructure recognising and defending intellectual assets remains a strong advantage for Britain, but it is being undermined by the lack of relevant skills in the UK workforce. British universities are not producing sufficiently good science graduates, says the industry.

Other governments, such as Ireland, are offering important financial incentives to pharmaceutical companies, which the British Government is not matching, suggests the report, "The UK Pharmaceutical Industry at a Crossroads". The ABPI also fears that the elimination of animal experimentation in the cosmetics industry could lead to restrictions in their use in the drugs industry - which it says would lead to the same tests being carried out overseas, with some of the companies themselves moving out.

The report adds that there needs to be a nurtured culture of "scientific entrepreneurship", which might be clustered in centres of learning. "Britain could create a `geno-valley' that rivalled Silicon Valley," suggests Dr Trevor Jones, the ABPI's director general. "We could do that here in the Cambridge, Oxford, London triangle. That would require the universities producing a better kind of graduate."

But another key factor in keeping the pharmaceutical companies here, argues the ABPI, is a refusal to introduce tougher pricing restrictions in domestic sales. "Any minister of health must get value for money," concedes Dr Jones. "In a global industry you could argue it is an isolated activity that has little impact on location. But joined-up government should be involved in joined-up policy-making. A board of directors will respond [to tougher price restrictions], why should we accept that?"

The industry's concern is not just related to changes to the PPRS. It is also worried about the impact of the National Institute for Clinical Excellence. The ABPI spokesman Richard Ley explains: "The indications are that the emphasis will be on cost not quality. You can spend more up-front and save money in the long-term."

A more effective solution is obvious, says the ABPI. The strength of the drugs market is such that there is no need for continued price, or profit, regulation. "As competition increases in global markets for new medicines, price will increasingly rival quality in the competitiveness stakes - thus making profit and price controls obsolescent," its report concludes. "The pharmaceutical industry in the UK is highly competitive, especially in terms of prices, and should be a benchmark for other countries when it comes to market-driven competition."

Health minister Alan Milburn and the Health Secretary Frank Dobson appear sceptical about these claims, but they are keeping their own counsel, hoping that quiet but tough negotiations will achieve more than loud denunciations. The industry takes the opposite line. By taking a vocal public position, raising fears about job losses, it hopes that the intended tougher price restrictions will be eased.

It will be fascinating to see how the negotiations proceed. The stakes are high, and neither side is going to make concessions easily.