THE PHARMACEUTICAL INDUSTRY IS EXCEPTIONAL

PHARMACEUTIAL “EXCEPTIONALISM” 19TH APRIL 2014

Barbara Arzymanow

Christopher J McCabe, a health economist who has worked closely with NICE in the past, has requested an explanation of what he calls my pharmaceutical exceptionalism.

The pharmaceutical industry has eight features that together make it very exceptional.

  1. The payer (NHS), consumer (patient) and selector (doctor) of products are generally different. As a result many normal economic forces do not apply.
  2. A product often has only one important payer (NHS) and one supplier [the patent holder).
  3. The right choice of product can literally be a matter of life and death.                                                                                        
  4. The industry has an accepted organisation (the ABPI) that can negotiate on its behalf with an authority not normally encountered in other sectors.
  5. A scheme has been agreed between the industry and Government under which patients and doctors can gain access to all drugs for a fixed, affordable total cost.
  6. Patents typically give very strong protection to new drugs whereas in most industries they are much easier to circumvent. New drugs for rare conditions (orphan drugs) often enjoy additional protection.
  7. Most drugs are cheap to manufacture, although there are exceptions. The main reason for paying an attractive price to the industry is to encourage R&D for the future benefit of mankind. Very few new drugs have been successfully brought ro the market withour a commercial partner.
  8. The profile of a drug is not fully known at the time of launch.

 

FIXING OF PRICES IN OTHER INDUSTRIES

Barbara Arzymanow

 

The commonest way in which prices are determined is through supply and demand.

When supply and demand is an inappropriate mechanism price is usually fixed in one of the following ways:

  1. Reimbursement of costs plus an agreed profit, profit margin, return on capital or guaranteed minimum level of sales.
  2. Operation of a formula e.g. hourly rate x number of hours worked + cost of materials.
  3. Comparison with similar situations.
  4. Fixed price contract e.g. a contract car hire firm supplies a car for a fixed monthly charge and bears the cost of maintenance and repairs itself.

Prices are hardly ever set by an analysis of value. This would be like paying the only plumber in a village according to the damage he would prevent by turning up promptly.

NEW RESTRICTIONS ON NICE

Barbara Arzymanow

The potential role of NICE in the value-based assessment of drugs has been significantly affected by the negotiation of a new pricing scheme (the “2014 PPRS”) between the Government and the industry. The agreement effectively fixes the total cost of drugs to the NHS in each of the five years covered by the scheme and restricts the behaviour of NICE in certain ways. The response of NICE is currently subject to public consultation.

The following is an extract from the Heads of Agreement for the 2014 PPRS. 

• An objective of this agreement is to improve patient access and outcomes. NICE will undertake all elements of assessment for a broader definition of value.

• NICE will not negotiate, publicly set or publicly indicate prices.

• The basic cost-effectiveness threshold will be retained at a level consistent with the current range and not changed for the duration of the agreement.

• NICE will consult publicly before implementing changes arising from the DH Terms of Reference for value assessment.

• The Terms of Reference DH sets NICE for value assessment will not prevent NICE Appraisal Committees from applying deliberation in the assessment process. The Terms of Reference state that NICE should “encompass the different valuation of ‘End of Life’ treatments in the current approach within the system of Burden of Illness weights.”

• Companies may request value-based appraisal of their new medicines, and such requests will not be unreasonably refused.

• DH will work with Industry and NICE to support further consideration of issues and potential resolutions around the use of unlicensed comparators and optimising the contribution to NICE’s work of independent Evidence Review Groups.

• Timings for the NICE value assessment process are expected to be comparable with the current timetable for Single Technology Appraisals.

• DH supports the establishment of written ABPI working agreements with NICE and NHS England, a NICE Industry Council and an NHS England Industry Council.

 • The role of NICE is well established in providing guidance and guidelines for medicines use and the NHS will not seek to duplicate this activity nor to further qualify, reinterpret or modify national guidance.