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Insider Interview: BGMA Director Warwick Smith disputes recent generic price increase claims

Published on 22/02/17 at 10:36am

Warwick Smith, Director of the British Generic Manufacturer’s Association (BGMA), discusses the recent data suggesting generic drug prices in the UK are on the rise, and offers strong criticism of the current pricing system.

Research presented by the University of Liverpool at the European Cancer Conference in January revealed that generic cancer drug prices have risen sharply over the past five years, now costing the NHS millions. You were keen to stress the distinction between the list prices for drugs and the price which trusts actually pay – can you elaborate on this?

For products used in secondary care, in the hospital environment – and of course that’s most oncology products – the Department of Health Commercial Medicines Unit conducts competitive tenders to determine the price that hospital trusts will pay. That price is set by tender; the published price lists of the companies are entirely separate from that, and I think to even call them an aspiration would be an exaggeration; like any sort of negotiation you have to start somewhere. One drug that we looked at, that was mentioned in that research, was 10mg tamoxifen and the price that Liverpool mooted at the conference was £1.21 per tablet; actually, the contracted price is 16p, so the difference is very significant.

What happens is that manufacturers produce these price lists as nothing more than putting something out there; frankly, some manufacturers don’t even produce price lists, and the drug tariff for lower volume products show the price that they’ve put on those price lists, but they’re never the price that actually gets charged.

So would you say that those list prices are merely nominal and serve very little functional purpose?

Absolutely. Ten or a dozen years ago all reimbursement prices for pharmacy were based on list prices, and to some extent, competition between manufacturers to sell their product was then based, not on the actual price they sold, but the difference between the actual price and list price, because that was the margin that the pharmacy made. Traditionally list prices were set high to give a greater reimbursement margin to pharmacy, and a dozen years ago we all agreed that that was really a bit silly, so we created a new system, Scheme M, under which for all of the high volume primary care products, generic manufacturers give their volumes sold and actual selling prices to the Department of Health; they set the reimbursement price on the basis of the actual price charged, so they create an £800 million margin that they’ve committed to giving the community pharmacy of real, actual price data.

From then on for the vast majority of products the list price became absolutely irrelevant. There are a small number of primary care products where the list is still used to set the reimbursement price for community pharmacy; we and the Department are committed to changing that and bringing all primary care reimbursement prices to the level where they are based on actual prices. In secondary care, products of any sort of volume at all are always tendered by the Commercial Medicines Unit so the list price is wholly irrelevant.

When you have the claim that these drugs are now costing the NHS millions, how does that stand up this argument?

It doesn’t. I do understand that this is not the most obvious or transparent system while we are changing it to something more transparent, but that needs agreement from the Department of Health and indeed, for all those products used in primary care, the Pharmaceutical Services Negotiating Committee.

The data presented by the University of Liverpool claimed that some drugs in the UK today cost up to twenty times more than they do in India. Given your argument, could that feasibly be the case, and what justification could there be for such a gap in price?

I don’t believe that is the case. India is typically a branded generic market, but also a very loosely regulated market, so for the majority of appropriately regulated medicines, their prices, I believe, are not lower. If anything, they may be higher at market level. But it is also important to understand that Indian regulatory standards for products not being exported are lower than the regulatory standards we apply in Europe, so the quality of the product may well be less. So it’s a very different market with less quality assurance and less concern for patient safety. Those who argue that if they can do it more cheaply in India, we can do it more cheaply in the UK, well only if you want to reduce the quality of the product and the safety for the patient.

The thinking behind generic drug pricing is that competition will drive prices down – do you think that this happens in reality?

The reason that the price drops for the vast majority of generics is that there’s competition. The originator while on-patent has no competition; they can hold their price wherever they can persuade the government they should set it. Once the patent expires there is normally significant competition from a range of suppliers and the price drops. For high volume generic medicines where there are no unusual factors, market price will normally drop by 90 or 95% from the originator.

Where there are other issues, like it’s a complicated product to make, there are enhanced pharmacovigilance measures that you need to put in pace, the patent position may be unclear; all of those issues will produce less competition, so the price will drop less. However, where there is high competition, the margin, product by product, is not high enough to sustain production, so then the smaller number of products where the price drops less actually subsidise the broader range of products where the price drops more. If you start looking at profit margin product by product, you end up having to increase the price of the majority of products to reduce the price of the minority, and that actually won’t work in anybody’s interests.

Does this hold true in the oncology space?

Tamoxifen is a very good example where the price dropped to the extent that it is now used to prevent the onset of breast cancer because the NHS can afford it, rather than treating pre-existing breast cancer. So when we talk about price-decay improving access for patients, that’s a classic example.

In the UK, to what extent does the NHS’ limited budget affect pricing decisions on generic drugs?

The pricing decision of generic manufacturers is almost wholly driven by competition, but even if there is only one generic manufacturer, if they’re going to sell it, they have to undercut the brand originator; even if competition is weak, the cost will reduce, therefore the NHS drugs bill reduces and they can user that saving to treat more patients. The difficulty in this debate is that people try to look at it drug by drug, and there are always going to be exceptions at either end. If you look at Viagra or sildenafil, whilst it was still on patent, NHS guidance was to only prescribe the product for erectile dysfunction when it was causing severe psychological trauma to the patient. Since the patent has expired, the price has dropped so much that the NHS is now able to use the product to deal with erectile dysfunction even if it isn’t causing psychological trauma, so there’s not just a theoretical but a real expansion in availability to patients.   

So you feel that a key strength of generic drugs is that they enable the NHS up to treat patients in an expanded number of indications?

Yes. We used to talk about price reduction; now we very much talk about increasing access to patients. It’s a real benefit, this reduction that allows that to happen. Though I’ve used the tamoxifen and sildenafil examples, I wouldn’t necessarily just do that product by product; if you are reducing the overall cost of the drugs bill, that money can be used for other products or indeed other treatments.

Do you think the pricing of cancer drugs presents a greater challenge than that of other drugs?

You know, I don’t really think it does, because the majority of oncology products will be used in a hospital setting, and therefore they’re tendered. I’m bound to say we do have some concerns over hospital tendering where there is a risk that in an all-or-nothing market mechanism, it creates so much competition that manufacturers will sometimes charge unsustainably low prices and end up having to withdraw from the market, and we have seen that before. So competition: good, untroubled competition: sometimes bad.

Parliament is currently processing the Health Services Medical Supplies Costs Bill, meaning price increases with no clear justification could face fines – what does this mean for UK drug pricing in the future, and how do you think it will affect pharma companies?

The voluntary arrangements we have with the Department of Health provided that we should have freedom of pricing where competition works to protect the NHS. Where competition didn’t work to protect the NHS, they have the ability to intervene. They have done that in the past successfully. We understand that they now feel they don’t have the powers to do that effectively, therefore they’re taking these powers in the bill. The mental concept that the government is standing behind is that the government has no intention of intervening in the market where competition works to protect the NHS, but will want to intervene where competition doesn’t work; this is nothing new per se – the bill takes it from a voluntary agreement and puts down a statutory footing.

Where do you stand on the generic pricing debate? Do you agree with Warwick? Tweet us your thoughts @Pharmafocus!