Examination of witnesses (Questions 60
- 79)
THURSDAY 4 NOVEMBER 1999
MR JON
CLOSE, MR
ANDREW KAY,
MR MICHAEL
WATTS and MR
WALLY DOVE
Dr Stoate
60. I would like to take up a few points which
have been made already and a few of my own. Mr Watts said earlier
that he knew of nobody who was attempting in any way to manipulate
the market and yet in the actual memorandum from the BAPW it says
here, at the bottom of page two: "... everyday brings higher
prices. These price rises have been successfully forecast by traders,
which encourages hoarding and speculation." Over the page
on page three you go on to say, "It is unfortunate that generic
manufacturers still sell large volumes of products to short-line
wholesalers with the full knowledge that they may be profiteering."
You have said so in your own submission.
(Mr Watts) I represent the full-line wholesalers in
the country and we have totally empty shelves of generic products.
As far as collusion is concerned in relation to that, if anybody
did collude, it is a most fiercely competitive market. Full-line
wholesalers make between one and two per cent profit on turnover.
If they charged fractionally higher prices than their competitors
then they would be out of business.
61. Except that if there are genuine shortages
of supply— Earlier Mr Kay said that his members are not
stockpiling drugs in the factory but, on the other hand, we all
know that lack of supply drives up price so all the manufacturers
need to do is to reduce the lines and reduce the speed of those
lines and, guess what happens, there is a shortage and, guess
what happens, the prices go up and, guess what happens, the short-line
wholesalers can then stockpile what supplies they can get and
the price goes up through the roof. Something has to explain why
there has been a 600 per cent increase in some generic drug prices
over the last year.
(Mr Watts) Exactly, and that is why I welcome this
inquiry and others which are taking place.
62. What we are getting is very conflicting
evidence here because, as the Chairman said, the Department has
said one thing in the memorandum but we are hearing something
different.
(Mr Close) I think we need to be careful of being
alarmist. Obviously everybody is concerned that the price is going
up but the one thing that should be borne in mind is that the
generic industry is supplying 50 per cent of the volume and whether
it has gone up from £500 million to £600 or £700
million pales into significance with the other 50 per cent which
costs £5.6 billion. If we are alarmist then we are actually
going to undermine the generic industry in its totality, people
will start moving back to brands and in essence that will cost
two billion pounds. If we did not have a generic industry today,
the extra cost would be two billion. It really hurts to sit here
when I reside over one of the large generic manufacturers and
we are busting a gut to get products into the market place and
we keep on hearing that we are not doing our best. We are really
busting a gut to do so and I welcome anybody from any part of
the Committee or elsewhere in Government to come and spend 24
hours in a generic company and understand what we are trying to
do to put this situation right.
63. Yet something must be wrong somewhere because
if I take the evidence that we have got from your own submission,
from the BGMA, it clearly says what happens here to prices when
there is a shortage. I will quote "When a product is in Category
D, in order for the generic manufacturers to be able to compete
with the brand by giving equivalent profit to the distributor,
the generic manufacturer ..." i.e. you "... needs to
set the list price close to the branded price or lose out...".
In other words, the system is forcing you to push prices through
the roof.
(Mr Close) I will quote here, this was a speech given
at the BGMA annual dinner on May 12 before this became a major
issue. I am quoting from the actual speech: "The current
reimbursement system, I do not know how to be polite on this but
in all honesty it is a mess". What can I say? You have just
highlighted Category D and you were asking questions on it earlier.
We have been saying for over a year now that the Category D system
does not work. I think you asked questions earlier about it is
calculated on five companies but then started to insinuate those
companies must be colluding. I can honestly say none of us is
colluding. Of the five companies concerned three of them are manufacturers
and two of them wholesalers, if you ask (the wholesalers) them,
do not even keep four weeks' stock today. They have far more efficient
systems, they do not need to keep four weeks' stock. So if it
is calculated on four weeks in the first place, that is a crazy
calculation to have in the drug tariff.
64. What you are saying then is that Category
D is completely misguided.
(Mr Close) Absolutely. We have been saying it for
over a year now and we believe that is one of the reasons why
you are forcing prices up artificially, because of the reimbursement
system itself.
65. You are, in fact, agreeing with me because
as far as I can see Category D is a massive incentive to create
shortages.
(Mr Close) Not shortages. You are linking too many
things there. That is not the cause of the shortages. There is
a genuine shortage in the market place of certain products. In
fact, if you look at Category D then at any one moment in time
probably half of those products should have come out of Category
D. The shortages are short lived, they have not come out quickly
enough. One of the shortcomings is they are not coming out quickly
enough. That is not the industry's fault. We do not dictate whether
they come in or out. Equally the ones that are in there, when
they are in shortage, you can see from our model that we put together
there that you are almost forced to go up towards the branded
price in terms of list price in order to be able to compete effectively
with the system. That is not the price we are actually making
in any shape or form, the market price is significantly lower.
66. You said that you do not decide whether
something is in Category D or not but, in fact, you do because
under the current rules all you have to do—I am not saying
you personally but all some of your manufacturers have to do—is
to reduce your stocks to less than four weeks and suddenly it
is in Category D. Once a drug is in Category D that triggers a
chain reaction which you said yourself forces the price of the
generics closer to the branded products.
(Mr Close) Let us look at why products were going
into Category D in the first place and why if this was the case
that has not happened over the years, why is it only happening
now. There are two main reasons for it happening now and one of
them has already been highlighted so I will not go over it again,
which was the Regent situation. Although Regent was responsible
for ten per cent in total of volume on some products it was actually
responsible for 50 per cent of volume, so there were genuine shortages
on those products. The other situation is with Patient Packs.
Every time one of us throughout the industry introduces a Patient
Pack then what becomes in short supply, not the product but bulk
becomes in short supply. You do not have a shortage of product
now, you have a shortage of bulk. That bulk pack can end up in
Category D not because of shortage of product per se but
a shortage of that particular pack. What happens when it goes
into Category D is there is even more motivation then for the
pharmacist to chase that bulk in the market place to find out
where it exists because you are getting a better price for it
in Category D anyway, but do not blame the industry for that.
67. I will to some extent and the reason for
that, as I say, is because it seems to me that there is an incentive
from top to bottom to manipulate Category D in order to make sure
that prices stay higher. The Department actually said in its own
memorandum, "Wholesalers are choosing not to hold four weeks'
worth of stock". In other words, they are choosing to keep
drugs in Category D far longer than they need. The whole system
is driven not only to get a drug into Category D but once a drug
is in there there is no incentive to get it out of Category D
again. That is why the costs have stayed 600 per cent higher than
they were last year despite the fact that these supplier problems
seem to have largely gone away. Somebody has to explain that because
it is a big issue.
(Mr Watts) Dr Stoate, I think you are under a total
misapprehension as far as stocks are concerned. Wholesalers do
not hold stocks related to whether they go in or out of Category
D, they hold stocks in relation to what they need to hold to supply
the market. Two years ago, three years ago, four years ago, four
years ago they held about four weeks' stock. That was when the
rules were set up for Category D. Today most of them hold for
the fast moving products between 12 and 15 days' stock. That is
because of increases in technology and nothing to do with whether
it goes in or out of Category D. We have no feeling about that
at all.
68. Except, of course, that it is enormously
in your favour if it does because, according to Shropshire Health
Authority, the number of drugs in Category D has gone up from
30 last year to 190 this year. That seems to me fairly strange
in itself. It is difficult to believe that so many drugs are in
short supply. It is also a very strange coincidence that once
a drug is in Category D it stays there for a remarkably long time
even when the supply comes back to normal. It is also a very strange
coincidence that everybody in the chain from the manufacturer
to the pharmacist makes a very big profit out of the NHS when
it does so.
(Mr Dove) Perhaps to help the Committee, I think you
are over-focusing, not you personally, but the Committee is over-focusing
on the Category D situation. You missed one important step which
is that the initial shortage is in fact flagged up by a number
of pharmacists, ie, they cannot get stock. It is not for the manufacturers
or the wholesalers to dictate that practical situation. Pharmacists
historically are very efficient buyers of generic products and
they have a lot of proper commercial contacts in the industry,
so they are the people that notice the shortage, ie, they cannot
get the tablet for the patient. You must not over-concentrate
on Category D; it is only a symptom. The Patient Pack initiative
anyway will make the market more expensive and make the supply
mechanism more difficult and I think if you are not careful you
are going to disappear on this two weeks, one week, four weeks
thing because it is not the number of links in the chain, I think,
that are actually dictating the difficulty but it is real, out-of-stock,
bare-shelf problems.
69. I am sorry, but I have got to take issue
with this because the very nature of the huge increase in price,
as we have already heard from the manufacturers, is that when
a drug is in Category D, everybody's antennae go up, everybody
sees a fast buck and we have already heard from the generic manufacturers
that it actually encourages them to bring their prices up towards
those of branded products. Now, you are trying to tell me that
is only a side issue, but it is hardly a side issue when our primary
care groups and health authorities are facing shortfalls of several
hundred thousand pounds or more because of that situation.
(Mr Dove) What I am trying to point out, Dr Stoate,
is that it is not just products in Category D that are rising.
70. It is mainly those and there is evidence
in front of us which shows that. It does seem a remarkable coincidence
that in the very year when the Government has negotiated the PPRS
reduction of 4.5 per cent in drugs, suddenly we find difficulty
in getting hold of any of the alternatives and it just makes me
wonder, and I put this question to anyone who wants to answer
it, whether in fact there is not a connection between the generic
manufacturers and the branded manufacturers which may in some
way account for some of these rather strange happenings in the
market.
(Mr Close) I think the more you look for collusion
on stuff, I think you will de-focus from taking the action that
this Committee needs to take. I think you have highlighted several
things that are important where action does need to be taken.
One is the reimbursement system and I think the other is to realise
that until Patient Packs are fully implemented then you do not
create a level playing field again and there will always be this
disparity because there is an amount of bulk in the marketplace
and there is an amount of Patient Packs and, whichever way the
reimbursement system works, then it is going to favour one or
the other which is crazy. It is the reimbursement system that
really needs to be addressed. Now, we, as an industry, have been
shouting for that and I do not think that shows in any shape or
form that we are people who are deliberately profiteering. We
are reacting to the reimbursement system that exists and it is
not collusion.
Dr Brand
71. I am sure that everybody uses whatever system
exists to the advantage of their business, their shareholders
and everything else because effectively you have gone from a 1
per cent Category D share of generics to 15 per cent. It is like
making a great number of people shop at Fortnum's for their groceries
rather than Tesco's, but they are actually buying the same thing
at highly inflated prices. Now, there may be technical reasons
for that. Did you make any representations to the Department about
the stockholding issue, that the rules from four years ago are
now completely out of date?
(Mr Watts) We have mentioned to the Department at
several meetings we have had recently that we believe that Category
D, the way products go in and out of Category D, is inefficient,
it does not help the industry and it should be reviewed. We agree
that we might make money out of products going into Category D
because the prices are higher, but we make a fraction of the amount
of money that we would make if all the products were available.
72. All of you have mentioned efficiency and
accessing the market and then the point about Regent holding 10
per cent presumably of the NHS generic market. Now, I do not believe
that Thyroxine is prescribed only by the NHS in this country and
to see a price rise from 0.8 pence a day to 3.4 pence a day, there
must be manufacturers outside your particular grouping that you,
Mr Watts, and indeed my Isle of Wight colleague, Mr Dove, could
access. You were quick enough to do so, as I said before, when
my patient started getting Azantac instead of Zantac and various
prescriptions of inhalers which were produced from abroad. Surely
the manufacturing capability is there and I just cannot understand
this argument about shortage. I will accept the argument about
packaging, but information leaflets not because it is fairly easy
to distribute those.
(Mr Watts) It certainly is not.
(Mr Close) I will take it up on the product itself
first of all and try to answer some of the questions there. Thyroxine
as a product is for a serious disease which is under-active thyroid.
You are quite correct, that it has gone up to 3.4 pence per tablet
which, for a pack of 28, is around 95 pence, or just under a pound,
and I think we should keep in perspective here that these are
medicines which are being produced to all of the quality standards
that any company has to react to in their home marketplace. A
tube of Smarties, out of interest, actually costs—
73. Come on! Chairman, that really is an absolute
nonsense. In your submission you say that it is wonderful that
Thyroxine only costs 3.4 pence per tablet whereas treatment for
migraine costs £8 per tablet. That is like saying, "We
are really efficient at cutting ingrowing toenails at £1.50
and, therefore, heart transplants are extraordinarily expensive".
You are not comparing like for like. The Smarties argument is
not one I accept.
(Mr Close) Do not forget the value of that product.
74. But why has it suddenly gone up from 0.8
pence a day to 3.4 pence a day? I do not think that the Smarties
manufacturers would get away with that.
(Mr Close) No, and the reason it has gone up is because
of shortages in demand.
75. No, demand has remained static.
(Mr Dove) Dr Brand, you mentioned Azantac in the parallel
import area and the point you have to bear in mind, of course,
is that not all generics produced worldwide are licensed for use
in this country, so I do not have the power as an individual pharmacist
to buy it from wherever. The other point, I think, is that in
most countries worldwide they do not have necessarily what we
call a true generic market. If you take Europe, they are talking
about branded generics and the prices there, I believe, if you
look at them, would be quite a lot higher than they are in the
UK.
76. Have we got evidence? It would be helpful
to have some evidence on prices from the market outside the UK
and what representations you have made to the Government about
the licensing of alternative suppliers because clearly if you
have got a big hole in your supply chain then you have got to
look for alternative suppliers and it would be nice to see whether
you have taken steps with the Department to see whether you could
cover the shortfall.
(Mr Watts) We have been trying to buy every conceivable
product throughout the world that is licensed and which is at
a reasonable price and, as Mr Dove says, there is not that amount
available. We buy in vast quantities of parallel imports and there
is not that quantity of generic parallel imports that meets the
requirements of the UK.
Chairman
77. Mr Kay, you wanted to come in earlier on
and obviously you have an interest in Thyroxine, I believe. I
am still baffled, and this is the point Peter Brand was making,
at the figures we have had because the cost of supply last September,
1998, was 21 pence and this September it is £1.61. It is
a huge increase and I have not worked out yet quite why this has
happened.
(Mr Kay) I have to support what Mr Close said in response
to that question. Thyroxine, if we go back to before the period
in question, was freely available and in wide supply. I am basing
this upon recollection and if Mr Close has more accurate information
I would suggest that you ask him the question. There are a small
number of major suppliers and one of those major suppliers had
a problem with their sub-contractor. It was not a product they
manufactured themselves but it was manufactured for them under
licence and that sent market demands all over the place. If you
look at our monthly demand normally on a product like that, it
is generally similar, but we were seeing huge fluctuations in
demand and we only have a finite amount of stock at any one time.
We can clearly do our level best to adjust our production planning
to counter that, but it is not something that can be done overnight.
Therefore, against that background, there was a shortage of the
product and the price rose. As I recall the product did go into
Category D, and I do not think it is there now, it has now come
out, and what we are seeing is an overhang effect from that. To
take that particular product as a good example, if you look at
our current levels of demand for our company, they are extremely
low. The amount of material that is actually moving out is quite
limited and that suggests to me that the wild swings in demand
that we saw last year were suggestive—and it is nothing
more than that, it is only conjecture—that the trade was
pulling in stock and the fact that we do not have a demand for
that product now whilst it is still being prescribed suggests
that that stock is moving out.
78. This applies to other drugs that you are
involved in: Frusemide 26 pence to £2.14; Warfarin 82p to
£1.70.
(Mr Kay) I can work through each of them in turn for
you, Chairman, if you wish?
79. Yes.
(Mr Kay) Frusemide: to my knowledge there has never
been a shortage of that medicine per se. What has happened
with Frusemide is we ourselves as a major manufacturer of Frusemide,
which we are, took very seriously our responsibilities under the
labelling and leaflet regulations and we, as a company, were an
early mover towards transferring our products from bulk into Patient
Pack. Now, I cannot quote the exact figures but let us just say
we have a significant share by volume of that particular product.
So if, as we did, we move from supplying bulk to a Patient Pack
more or less overnight that by definition creates a shortage of
the bulk product. What we have done, and I hope Mr Dove will support
me on this—
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