The Pharmaceutical Price Regulation Scheme

The Pharmaceutical Price Regulation Scheme (PPRS) is a self-regulatory scheme covering branded medicines supplied to the National Health Service (NHS). Companies in the scheme account for about 90% of branded medicines supplied to the NHS. The PPRS sets out to cap the NHS branded medicines bill at a time of severe financial pressure on the health service.  It does this principally by requiring life sciences companies to make payments ‘back’ to the NHS if growth in NHS spend on branded medicines supplied by PPRS members exceeds an agreed percentage. This is combined with price and profit restraints.  The PPRS’s stated aim is to strike a balance between keeping the NHS drugs bill affordable and encouraging investment in research and innovation. Members therefore have more freedom of pricing in relation to products containing new active substances (although they are expected to follow NICE guidelines), and sales of products containing new active substances are excluded from the sales on which the payment back is calculated. The current PPRS runs from 01/01/14 to 31/12/18 and supersedes all previous PPRS schemes. It differs substantially from previous schemes, which imposed price adjustments but did not include a payment mechanism of the kind described above. The PPRS has not been as successful as the Government hoped in delivering savings to the NHS and legislation is now being introduced to address this issue (please see our earlier piece about the new legislation here).

A voluntary scheme
The PPRS is negotiated between the Department of Health (the Department) and the Association of the British Pharmaceutical Industry (ABPI), representing the innovative biopharmaceutical industries, but it is also open to non-ABPI members. Members join by consent and may leave by giving three months’ notice. Although it is a voluntary, non-contractual scheme, members are subject to directions and regulations issued by the Secretary of State, who may exclude a member from the PPRS, for example if it has entered into arrangements designed to reduce the amount of sales subject to the scheme or has otherwise failed to comply. The PPRS is currently reported as having about 160 members. 

Medicines covered
The PPRS applies to branded health service medicines supplied by scheme members. ‘Health service medicine’ refers to any medicinal product used to any extent for the purposes of the NHS in any part of the UK, including services provided pursuant to the public health functions of the Secretary of State. This includes, for example, medicines prescribed by GPs, medicines used in hospitals and medicines used in vaccination and screening services.   A ‘branded’ medicine is an authorised medicine which has a brand name that identifies the product without reference to the generic title, INN or equivalent and includes, for example, branded generics. Exclusions include private prescriptions and other non-health service use, dental anaesthetics and over-the-counter (OTC) products except where OTC products are prescribed on the NHS.

The PPRS payment mechanism
The PPRS payment mechanism is at the heart of the scheme. It aims to ensure that growth in NHS spend on branded medicines supplied by PPRS members does not exceed an agreed percentage (the ‘allowed growth rate’) in each year of the PPRS. It does this by requiring PPRS members to pay an amount corresponding to the excess back to the Department.

The allowed growth rates for each year were agreed at the outset (see below list). 

Allowed growth rates:

  • 2014: 0%
  • 2015: 0%
  • 2016: 1.8%
  • 2017: 1.8%
  • 2018: 1.9% 

Calculating the total payment back
NHS spend on branded medicines purchased from all PPRS members is measured for each year of the scheme (‘Measured Spend’). Measured Spend includes spend on products already on the market at the start of the current PPRS – i.e. products launched pre 01/01/2014 – as well as spend on new products launched after 01/01/2014. However, certain types of purchases are not counted when calculating Measured Spend. These include brand equalisation deals, parallel imports, exceptional central procurements, centrally supplied vaccines and purchases from smaller companies (defined as companies with sales of PPRS products of less than £5million in the previous calendar year).

The difference between the actual Measured Spend and the allowed Measured Spend (based on the allowed growth rates) constitutes the total amount to be paid back to the Department in any year by the members of the PPRS collectively.

Calculating the amount to be paid back by each company
Members each pay a percentage of their own sales included in the Measured Spend, but with the exception that sales of new products are excluded – no payment back is made in respect of sales of new products.  This reflects one of the objects of the PPRS, which is to encourage innovation.  For these purposes ‘new products’ are defined as new active substances introduced after 31/12/2013.  Biosimilars and line extensions of pre 31/12/2013 products do not count as new products.

However, although new products are excluded from the sales on which a company’s payment back is calculated, the total payment back by all PPRS members together is intended to reflect overall growth in spend on both ‘old’ (pre-01/12/2013) and new products.  A calculation is therefore made taking new products into account and a percentage (the PPRS Percentage) worked out which, when applied to all members’ sales of ‘old’ products will produce a total payment back which is equal to the difference between actual and allowed spend.

This can be represented as follows:

PPRS Percentage = (total actual spend – total allowed spend)  x 100
                                        total sales of old products

The PPRS Percentage is applied uniformly to each individual PPRS member’s ‘old’ products regardless of the actual growth (or indeed decrease) in their own sales. As new products are excluded, companies which do not have many new products bear a greater burden. 

Forecasts and adjustments
In practice, members pay on the basis of forecasts which are then revised in the next year, resulting in adjustments. No adjustment will be made at the end of the final year.

Current PPRS Percentages
The table below shows the PPRS Percentage for 2014, 2015, 2016 and 2017 and the range within which it is expected to fall in 2018. These figures incorporate revisions agreed  between the Secretary of State and the ABPI in December 2016 clarifying the way in which spending under the Cancer Drugs Fund is treated by the Scheme:

  • 2014: 3.74%
  • 2015: 10.36%
  • 2016: 7.80%
  • 2017: 4.75%
  • 2018: 2.38%-7.80%

It can be seen from these figures that the percentages are falling whereas the initial estimates suggested that these percentages would rise steadily as an increasing proportion of Measured Spend is accounted for by new products in the later years.

Pricing of products
The PPRS also includes a wide range of specific rules about the pricing of individual products. PPRS members may not generally increase the NHS list price of a PPRS product without Department approval, which will only be given if the member’s profits are below certain thresholds. The main exceptions to the need for approval are the ‘flexible pricing’ and modulation options described below. By contrast, members may price new active substances as they wish, although it is assumed that they will keep to NICE guidelines. Such ‘freedom of pricing’ also applies to line extensions of new substances based on abridged applications submitted within five years of the grant of the original marketing authority. The price of other new products requires Department approval.

Modulation provides a mechanism for PPRS members to increase or decrease prices provided that the overall effect across the member's portfolio is neutral. Price neutral modulation across a member’s portfolio of PPRS products on the market at 01/01/14, including line extensions of those products, is permitted subject to Department approval of the price changes and the provision of pricing and sales information to show that modulation has delivered price neutrality. Modulation is subject to a large number of conditions.  These include: no substitution of discounts in force for six months prior to the date of a proposed modulation; list price reductions resulting from patent or Supplementary Protection Certificate expiry may not justify a price increase on other presentations; and brand equalisation sales may not be included in the calculation for modulation.

Flexible pricing and patient access schemes
As part of the 2009 PPRS the Department and ABPI agreed to introduce two pricing flexibilities: flexible pricing and patient access schemes. These are still available under the current PPRS.

Under the flexible pricing arrangements, PPRS members may apply to NICE to increase or decrease the NHS list price if there is significant new evidence that changes the value of the product to NHS patients or if a significant new indication is proposed. It appears, however, that there were no applications for flexible pricing under the 2009 PPRS.

Patient access schemes are designed to improve the cost-effectiveness of a medicine, typically allowing patients to have access to high cost drugs that might not otherwise be available.  The Department recognises the benefit of such schemes but emphasises that they “should be the exception rather than the rule”. They are subject to independent assessment by NICE and should be easy for the NHS to operate. Simple discount schemes are preferred.

Profit controls
The PPRS sets limits to the profits members may make from the supply of branded medicines to the NHS. Target profits are set by reference either to return on capital (ROC) or, if sales are very high compared to capital employed, by reference to return on sales (ROS). The allowances that may be claimed in respect of R&D costs, among other things, and the way capital is allocated are controlled. The profit targets referred to above are associated with a margin of tolerance (MOT): PPRS members may generally retain profits of up to 150% of target. If the Department’s assessment shows profits above this margin it will negotiate one or more of the following: repayment of the excess, price reductions in the following year or a delay in any price increases agreed. 

PPRS members will not be granted price increases unless they are forecasting profits of less than 50% of target. If a member exceeds its target profit for a year in which it has received a price increase, the margin of tolerance will not be available to it for that year and all the profits above the target will be repayable. If the Department agrees a price increase in the second half of a year, the margin of tolerance will not be available for the following year.

Information requirements
Any PPRS member with total home sales of NHS medicines of £50 million or more in its financial year must provide an Annual Financial Return (AFR) to the Department detailing sales, pricing and other financial information. The Department selects 20% of qualifying PPRS members for submission of a full, independently reviewed AFR; others are required to provide short form data. Members with total home sales of NHS medicines of £50 million or less are exempt from supplying financial information, although the Department may call for a full AFR if circumstances appear to warrant it, for example if they apply for a price increase.

All members with sales of PPRS products to the NHS of £5 million or more must also provide information to the Department on their sales to retail pharmacies.

Members must notify the Department at least four months in advance if they intend to change their overall distribution arrangements during the lifetime of the PPRS scheme. If there are reasonable and objective grounds to believe that the changes will have an adverse net impact on NHS expenditure in purchasing from that member, the department and the scheme member will discuss and agree adjustments. If the member has influence on the pharmacy discount, it may have to make a payment to the Department equal to any additional costs to the NHS. 

Fines are payable for contravention of the directions and regulations issued under the voluntary scheme.

Dispute resolution
Disputes under the PPRS may be referred by a PPRS member, the Department or the ABPI to the Dispute Resolution Panel. The ABPI may refer matters that span the interests of the broader membership rather than just an individual member. The parties do not lose the right to pursue other legal remedies.   The procedure involves the exchange of written statements and an oral hearing, and the parties are free to decide how they wish to be represented at the oral hearing. The panel consists of a chairman appointed by the Secretary of State subject to the agreement of the ABPI and two members, one appointed by the Secretary of State and the other by the ABPI.  The PPRS documents specify that the chairman should ideally be a solicitor or barrister qualified to practise in England and Wales, Scotland or Northern Ireland with at least seven years’ experience of ‘heavyweight’ mediation or dispute resolution. The panel’s costs in respect of the dispute are shared equally between the parties, and the parties are responsible for their own costs. Recent panel decisions have included a finding (February 2016) that Novartis’s Ultibro Breezhaler, a fixed dose combination product, was not to be regarded as containing a ‘new active substance’ and was, therefore, to be included in the sales on which the PPRS percentage payment was due, and a finding (April 2015) that Pfizer was not entitled to repayment of an over-payment under the 2009 scheme or to carry this forward into the 2014 scheme.

Anticipated future developments
The PPRS has not been as successful as hoped in delivering savings to the NHS and the Government is now introducing legislation to address this issue. The legislation will enable it to amend the alternative statutory scheme to ‘level the playing field’ between this statutory scheme and the PPRS in a bid to try to stop companies moving out of the PPRS and into the statutory scheme. (Please see our earlier piece about the new legislation here.)

Further information
If you wish to discuss pricing regulation or any other life sciences issues do please contact any of the following or your usual contact at Stevens & Bolton, who will be happy to discuss:

Charlotte Tillett, Intellectual Property Partner and Head of Life Sciences

Gustaf Duhs, Competition Law Partner

Astrid Arnold, Professional Support Lawyer