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The industry feels that it has been treated with indifference bordering on contempt in this whole exercise. Why did the Government choose to handle things in this way? If they had wanted to they could have laid an initial regulation implementing the price freeze covering only the period to 1 January. Then, later, they could have laid a further regulation, as they originally promised to do, to underpin the new voluntary PPRS, taking effect from that point. They knew that an interim voluntary scheme would be needed before the fully fledged scheme took effect, so why did they not mirror that two-step process by having two sets of regulations which would have allowed the industry proper time to respond to the consultation as it had a right to expect? Once again, the Government were acting within their legal powers—I have no doubt that the Minister will make that point—but I cannot view it as anything other than abuse of process.

That abusive attitude, I am afraid, extends to the regulations. We see in them a power given to the Secretary of State to specify the maximum price of products from 1 September 2008 to 1 September 2009. It is important for the House to understand that the power goes completely against the principle of free pricing which for more than 50 years has underpinned the PPRS and been a key driver for industry in deciding to invest in the UK. For those caught by the scheme, all new product prices will be set by the Secretary of State by reference to two new benchmarks: therapeutic and international reference pricing; in other words, prices of therapeutic equivalents and prices in other countries. This provision represents an unprecedented change in government policy and is completely anathema to the industry. The Minister may well answer that the industry has an alternative—it can sign up to the voluntary scheme—but she may not sufficiently appreciate the effect of the regulations in the boardrooms of international pharma companies, which read the regulations and interpret them as a statement of UK government policy. The very fact that the Government are actively endorsing therapeutic reference pricing could prove highly damaging to UK and non-UK pharma companies alike in international markets. It is important to note in particular that the regulation does not differentiate between new active substances, line extensions or otherwise; it applies across the board. The Explanatory Memorandum makes mention of free pricing for new active substances, but there is nothing about that in the regulation, and, in any case, “new active substances” are not defined.

We are left a number of key questions. Why have the Government, by publishing a regulation in this form, chosen to depart from more than 50 years of established policy and the principles that have underpinned the PPRS during that time? Why have they undermined

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the principle of free pricing by introducing therapeutic reference pricing and international price comparisons when they must know that they are guaranteed to act as a complete block on new investment in R&D in this country?

The words of the consultation document, where we see repeated mention made of encouraging and rewarding innovation, ring hollow. For a company caught by the regulations, innovation is for the birds. When pharma companies both here and overseas are presented with these two diametrically conflicting position statements from the UK Government, they will ask what exactly Ministers believe and what exactly they want. When companies read words in the consultation document about promoting,

and then the heading in the Explanatory Memorandum which states:

“Benefits: prevention of increased profits in the pharmaceutical industry”,

their bewilderment would perhaps be doubly understandable. I could go on in this vein. It is clear that from the letter of intent to renegotiate the PPRS in August 2007 to the serving of notice on 29 February, right through to the tabling of the regulation on 21 July, the Government have conspired to do everything in their power to send a message of “we could not care less” to the pharmaceutical sector.

The Minister has a chance tonight to put some assurances on the record. She will, I hope, give an undertaking to repeal this statutory instrument and return to the House with one which coincides with the commencement of the new voluntary five-year PPRS. That was what the consultation document promised and what the industry justifiably expected. She will also, I hope, undertake to ensure that any such SI enshrines the principle of free pricing of new active substances and remove therapeutic reference pricing and international reference pricing from price-setting criteria. We need to see the negotiations on the new PPRS brought to a swift conclusion on a basis which restores predictability and stability for the pharma industry and which bolsters international confidence in the UK as a country that genuinely supports and rewards innovation over the long term. I look forward to the Minister’s reply on these important issues and beg to move.

Moved, That an humble Address be presented to Her Majesty praying that the Regulations, laid before the House on 21 July, be annulled (SI 2008/1938). —(Earl Howe.)

Baroness Barker: My Lords, I thank the noble Earl, Lord Howe, for giving the House an opportunity, perhaps somewhat belatedly, to examine briefly the vexed matter of reform of the PPRS. I have said often in this House that one of its functions should be to stick up for people whose causes are not always popular. I congratulate the noble Earl, Lord Howe, on going in to bat for the pharmaceutical industry, which is not always one of the most popular industries.

Before I turn to the matters immediately before us, I shall make an observation which might help to explain why we find ourselves in this unsatisfactory position.

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The PPRS is a voluntary agreement which has stood for more than 50 years. It is an agreement between two significant parties. First, there is the Government, who control the budget for probably the most significant pharmaceutical contract in the world. Pharmaceutical companies will argue that other markets, such as the USA, are larger; and they are. However, the NHS contract sets a benchmark throughout the world, so it has an added value beyond the total of UK domestic sales.

The other party is the pharmaceutical industry, which in 2004 spent £3.2 billion on UK-based research and development. It is an industry which brings evident benefits to the UK, not just in terms of medical developments, for which we are grateful and from which citizens benefit, but in the development of research capacity and revenue for the Treasury. It is an industry with an almost unique bargaining power, a fact which is evident from the trenchant tone of its briefings. It is also an industry which is mindful of its duty to patients and it has legitimate concerns about the cost and length of time that it takes to develop new molecular entities.

If one looks back over a decade, it is evident that the renegotiation of the PPRS is a periodic opportunity, one which both sides exploit to the full, to battle over the pricing of medicines. In 1998, the Government announced plans to reform the PPRS and, on 17 November 1998, the ABPI warned that any attempt to cut profits could drive manufacturers away and damage business. That is a warning which is by no means idle, and which the pharmaceutical industry repeatedly presents to government. The noble Earl echoed it this evening.

Those are the antecedents of the current dispute, and it is against that background that a neutral observer—as I believe myself to be—must weigh the claims of each side. It is important in all this to remember that the OFT report recommended that the then existing arrangements in 2007 should be overhauled from a complex system of controls on profits and post-launch price changes to one based more on the value of individual medicines, based on economic evaluation of their benefit to patients. The Government propose to introduce a settlement based on an across-the-board price cut. It does give stability and predictability for the next five years—the statutory scheme will be reviewed annually—but in practice it appears to be a polishing of the existing regime, sweetened by a commitment to speed the uptake of newly registered medicines, rather than a fully thought-through and thorough reform. That is unsatisfactory. I agree with the noble Earl that the reference to continued free pricing for new active substances is a very important matter and should not be mentioned in passing in the Explanatory Notes. It should be in the regulations, as it is a legitimate and very important point for the industry.

It is regrettable that the Government have responded to the High Court ruling, among other matters, with this somewhat ad hoc proposal, when there could have been a much more strategic, thought-through approach to medicines, which is a key issue for the NHS. It is regrettable because value-based pricing is something

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that deserves full consideration. It has been successfully implemented in many other countries, including Switzerland, Australia and Canada. There have been successful pilots in the United Kingdom, such as Velcade, but to change the system in such a fundamental way, one needs to look very carefully at how appropriate it is for our system, given that we have a National Health Service.

The noble Earl is right. Clearly there is an issue about consultation. Page 4 of the Explanatory Notes, in paragraph 7.17, states:

“The consultation started on 18th June and terminated on 15th July 2008. Ministers agreed a short consultation period in order to maximise the opportunity for both the Department and the industry to conclude negotiations on a new voluntary scheme”.

With whom did Ministers make that agreement? Was there a contemporaneous understanding that the regulations would be published in late July and brought into force before Parliament returned from recess—and, therefore, there would be a limited opportunity for scrutiny?

I turn to the issue that the noble Earl raised about timing. The PPRS contains within it a number of very complex factors, such as costs of research, commercial risks, and loss of revenue when similar molecular entities become available from low-cost overseas producers. There is a huge issue of drugs that come off patent and, specifically, the rate at which they decrease over time to 1.5 of the reimbursement price of the generic equivalents. That is a big consideration for suppliers. In addition, this House needs to probe in some depth the claims by the pharmaceutical industry that the proposal that the Secretary of State should take into account prices from other countries would be harmful to the industry.

There is also a short-term problem. Because of the uncertainty about pricing, which has arisen from all these events, wholesale pharmaceutical distributors are winding down their stocks. I am informed by my very good friend, Sandra Gidley, who is my honourable friend in another place and a pharmacist, that pharmacists have their busiest period in December, because GPs and their patients stock up to get people though the holidays. So we are facing a point in winter when we could have problems over immediate supply and availability of drugs at a time of high demand. Furthermore, while not making any particular claim on behalf of the pharmaceutical industry, now is not a good time for any industry to have uncertainty added to that arising from the financial turmoil.

In conclusion, I understand entirely that in the ongoing battle between the industry and the NHS, implementation of directives, High Court rulings and deadlines are all legitimate weapons. Each side has the right to do whatever it thinks necessary to achieve what it believes to be in the best interests of patients. But because of some of the flaws in the regulations as they are drafted and some of the short and long-term consequences, I, too, urge the Minister to consider whether it would be possible to continue the arrangements for the voluntary PPRS to be expanded for a limited and specified time, so that the terms of the new voluntary scheme could be fully consulted on, and some of the issues raised by the noble Earl and myself could be given further consideration. It would be

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naive to believe that further time will lead to an outbreak of harmony, the like of which has not existed for 50 years. Nevertheless, this process has been less than satisfactory and there are some major issues that would benefit from greater investigation over time. If that would be in the best interests of patients, I believe that the Minister would be well advised to consider that as a way forward, to make progress.

Baroness Thornton: My Lords, I thank the noble Earl for introducing this debate on the merits of the regulations, which were laid before the House in July this year.

I hope that I might be able to reassure the noble Earl and the pharmaceutical industry with some of my remarks. As noble Lords will be aware, prices paid by the NHS for branded medicines have been controlled indirectly by the pharmaceutical price regulation scheme—PPRS—in its various forms for a little over 50 years. Those schemes are periodically reviewed and renegotiated and the Government are pleased to have reached a deal with the Association of the British Pharmaceutical Industry on the key components of what will become the 2009 PPRS. The headline deal announced in June will ultimately benefit NHS patients, the pharmaceutical industry and the taxpayer.

The new voluntary agreement aims to balance the interests of all stakeholders. It will not only achieve value for money for taxpayers, but reward innovation. The Government recognise the benefits of a strong pharmaceutical industry in this country, which can continue to deliver medicines to the NHS on reasonable terms for the benefit of all patients. The new agreement will strongly reflect this view.

However, there is, unusually, a gap between the end of the 2005 PPRS and the new agreement. This gap has led to these regulations and a situation in which none of us would have wished to find ourselves. With the understanding of noble Lords, who are already aware of these matters, I shall say a little more about how this gap arose, before moving on to the details of the regulations and answering specific points raised by the noble Earl and the noble Baroness.

In February 2007, the Office of Fair Trading published its report on the 2005 PPRS, which indicated that the NHS could obtain better value for money and that the current agreement should be changed—a matter mentioned by the noble Baroness. The Comprehensive Spending Review also highlighted the need for efficiency savings in the NHS. I need not remind noble Lords that the cost of medicines is the second largest item in the NHS budget.

Also in 2007, one company appealed against a ruling made under the arbitration arrangements in the 1999 PPRS. This concerned the calculation of savings made through the price cut in the 1999 agreement. The company was successful at appeal. That ruling jeopardised the delivery of the savings envisaged under the PPRS. Significantly, the judge also determined that the 1999 PPRS was, and always had been, a contract. The 2005 PPRS, essentially the same as the 1999 PPRS, was therefore also a contract. These agreements were not negotiated as contracts; they were certainly not written as contracts. The intention was to build on the

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mutually agreed objectives of the Government and the pharmaceutical industry through the operation of a voluntary scheme in good faith. The objective was regulation with a very light touch indeed.

The 2005 PPRS was therefore significantly undermined by the court ruling. The effect was that companies could quite legitimately avoid expectations under the agreement and there was no remedy available to the NHS. Any Government would act to put this right, and the only means available under the terms of the agreement was to give six months’ notice of termination. Therefore, the 2005 PPRS came to an end on 31 August this year.

We agreed a four-month non-contractual scheme—the 2008 PPRS—from 1 September to allow further time for the negotiations on the 2009 PPRS to be finalised. This short-term agreement basically freezes prices for four months.

The regulations are designed to achieve much the same as the 2008 PPRS—that is, to protect the position of the NHS until alternative arrangements are in place. That seems to me to be the only course of action open to the Government. These regulations can only apply to companies which choose not to join the 2008 PPRS. Whether a company is affected by this legislation is, essentially, a matter for that company. There is nothing new in this. We introduced similar provisions in the control of prices of branded medicines regulations 2000 to stand alongside the 1999 PPRS. We did it then to protect the position of the NHS and to ensure some sense of equity for the members of the 1999 PPRS. It would have been unfair to them to allow others to avoid the requirements of that scheme. Our motives are the same in this case.

The noble Earl said that the Government should have given notice and should have extended the old scheme—I think the noble Baroness also raised that matter. Giving six months’ notice was necessary as a result of the High Court ruling that the PPRS was a contract. Previously, it had been possible to terminate PPRS agreements by mutual consent when agreement on a new scheme had been reached, on the assumption that it was a non-contractual scheme, so we were in a new situation. Simply extending the old scheme was not possible once the PPRS had become a contract. As a contract, the Government were required to adhere to the details of the scheme which required six months’ notice—not more and not less.

7.15 pm

I turn to the question raised by noble Lords about the time allowed in consultation and the shortness of the consultation period. The Cabinet Office’s code of practice on consultation acknowledges that sometimes a consultation period of fewer than 12 weeks is appropriate. In this instance, the consultation started later than planned because we wanted to make maximum progress in the PPRS negotiations on the voluntary scheme in an atmosphere which was not affected by proposals for statutory controls. We therefore delayed the consultation until we reached agreement with the industry on the key components of the new PPRS. We were not in a position to announce the agreement with the industry until 18 June. We started the consultation

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on statutory provisions at the same time. As legislation needed to be in place when the current scheme expired at the end of August, this unfortunately meant that we could only consult for four weeks before laying the regulations that would apply from 1 September. This approach was discussed with the industry in advance. I can understand that the short timescales have made it very difficult for the industry. We appreciate the speed with which it reacted, but, regrettably, we felt that we had no alternative.

The noble Earl and the noble Baroness asked why have a single statutory instrument and not two statutory instruments for a two-part consultation; and, why have a 25 September deadline but lay regulations in July? The relationship between the two-part consultation and the regulations—and I am pleased to be able to clarify this—is that the regulations will be implemented in two stages, in the same way that the consultation has been carried out in two phases. The first part of the consultation on implementation of the statutory scheme would have had the effect of freezing the maximum prices of medicines. The consultation also covered ancillary provisions that form an integral part of such controls, including information and enforcement provisions and setting out what will occur for new products. We introduced the statutory scheme in July that implemented such a freeze and the ancillary provisions. The second part of the consultation, which ended on 25 September, was limited to the price cuts and the proposals to link the price of out-of-patent medicines to the reimbursement price of any equivalent generic medicines that would apply from 1 January.

Splitting the consultation in this way meant that we were able to run the concurrent consultation on the proposed price cut and measures linking the price of out-of-patent branded medicines to any equivalent generic for more than the usual 12 weeks, as these measures will not take effect until January 2009. That consultation is now closed and the department is considering the responses before reaching a decision on how these issues should be addressed. We will then introduce further regulations that will amend these regulations so that the price cut comes into effect in parallel with the new voluntary scheme due to start in January 2009.

I am pleased to assure noble Lords that although the first part of the consultation has closed, we have not ruled out making further changes to address the views that continue to be raised on issues subject to the first part of the consultation, as we appreciate that the time available was very short. To that end, Department of Health officials will be meeting with the Association of the British Pharmaceutical Industry before further regulations are made to ensure that the industry’s views are better understood and taken into account. So the answer to the questions, “Why not have two statutory instruments and why not withdraw these regulations and replace them with new ones?” is that there will in effect be two statutory instruments—the latter will amend the former. The later regulations will introduce provisions on the price cut required to mirror the voluntary scheme. If, on reflection, further changes are required to the existing provisions, these can also

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be introduced through amending regulations. There is no need to repeal the old regulations when the new amending regulations are laid.

The noble Earl raised the issue of therapeutic reference pricing and international reference pricing. He is referring to regulation 3, which sets out how the Secretary of State should exercise his powers in relation to new products. The National Health Service Act 2006 includes a power to allow the Secretary of State to control the prices of new products by issuing directions after having consulted the industry body. The provisions in these regulations simply clarify how those powers would be used by setting out criteria which would be applied in reaching these decisions. They must also be seen alongside department guidance on how they will be applied. By including additional provisions in the regulations and additionally making a statement of our intent on how we will apply these regulations, our aim was to give companies greater clarity on how the regulations will be applied.

First, I clarify that the regulations will be applied in a way that gives freedom of pricing for new active substances. That means that, for any new active substance, the industry will determine the price at which the product comes on to the market. Secondly, I am pleased to clarify that there is no intention to introduce any form of reference pricing. The regulations set out issues to which the Secretary of State must have regard in setting the maximum price of medicines. The regulations list seven criteria, among other things, which are reasonable for the Secretary of State to take into account; the cost of therapeutically equivalent medicines and the cost of the presentation in other markets, if available elsewhere in the world, are two. However, that does not mean that this is his sole consideration or, indeed, that he will be setting the price of medicines with reference to international prices or, indeed, therapeutic comparator prices.

Indeed, for new active substances, he would not take these criteria into account at all, as freedom of pricing would apply. In this respect, there is no great difference from what occurs already under PPRS for substances. Chapter 12 of the 2008 PPRS sets out what occurs on pricing for new products, and mirrors the arrangements for previous PPRS agreements. It sets out that companies wishing to introduce new products must give the department notice; that the department will confirm where the product is a new active substance; and that, where the product is not a new active substance, the department will confirm whether the price proposed is acceptable, taking into account factors such as the price of other presentations of the same medicine or comparable products, forecast sales and the impact on the NHS drugs bill and exceptional costs. I hope that this helps to reassure the noble Earl of our intent to apply the regulations in a way that is comparable to the voluntary scheme—although he will appreciate that, while similar, there are in effect important differences in the nature of the voluntary and statutory schemes.


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