PPRS : An Overview

1. PPRS : An Overview Maxwell Noble RFW Associates Mobile 07768843546 Email: max@rfwassociates.com June 2012

2. AGENDA • Background, Objectives and Framework • How it works • The Statutory Alternative • Pricing under the Scheme • Modulation • Current Issues

3. Why WE NEED REGULATION Disconnect between payer (NHS) and purchaser (PCT) Evidence (albeit decreasing) re lack of price sensitivity on part of prescribers Impact of brand and patent protection Need for economic as well as clinical considerations in a state funded system UK Drugs bill in excess of £11 billion per annum (11% of NHS spending); so a big ticket item Pharmaceutical spend increasing at >RPI, as new medicines are more expensive than old ones

4. The Disconnect OF MEDICATION between NHS, DOCTOR and Patient

5. Why WE NEED REGULATION Disconnect between payer (NHS) and purchaser (PCT) Evidence (albeit decreasing) re lack of price sensitivity on part of prescribers Impact of brand and patent protection Need for economic as well as clinical considerations in a state funded system UK Drugs bill in excess of £11 billion per annum (11% of NHS spending); so a’ big ticket’ item Pharmaceutical spend increasing at >RPI, as new medicines are more expensive than old ones

6. RECENT PPRS Schemes • Voluntary Price Regulation Scheme to 1978 • Recent Pharmaceutical Price Regulation Schemes • 1999 • 2005 • 2009 (current scheme to end in 2013) http://www.dh.gov.uk/en/Healthcare/Medicinespharmacyandindustry/Pharmaceuticalpriceregulationscheme/index.htm

7. Objectives The objectives of the Scheme are…….. • Deliver value for money • Encourage Innovation • Promote access and uptake for new medicines • Provide stability, sustainability and predictability However a balance of interests: • Patients • NHS • Industry • Taxpayer

8. Unique Globally • Freedom of pricing at launch for New Chemical Entities • No prior price approval required  faster availability  faster launch • Regulates overall profits on NHS sales, not individual drug prices • UK was first launch market • Springboard for global success • Over 25 countries referenced the UK for price

9. Strategicallybrilliant ? • Highly innovative companies prosper • Innovative companies are supported over the years consistent with R&D timescales of the industry but … • Companies with very low innovation ultimately “wither on the vine” • 5 years of stability – unlike other EU markets

10. Key positive features of PPRSAgreed with ABPI/DoH, August 2010

11. 1. Conceptual Appeal • Designed to deliver a balance between investment in R&D and innovation and secure reasonable prices for the NHS • A voluntary scheme, negotiated by both parties promotes government – industry relationship and mutual understanding. Quintessentially British!

12. 2. Stability • 5 year term provides a stable regulatory environment for the industry • Certainty for business planning and supports industry investment decisions

13. 3. Flexibility • Clear framework, but with flexibility to negotiateprecise terms between Department of Health (DH) and individual companies • Modulation allows for market responsiveness • Adapted over the years to take account of changes in the NHS and elsewhere

14. 4. Access • Freedom of pricing at launch of new medicines means early introduction which supports normal commercial decision making and quicker access for patients • New flexible pricing provisions enable supply of medicines at lower initial prices to promote uptake, with the option of higher prices linked to new indications or new evidence at a later date • Provides for a more systematic use of patient access schemes which reduce the effective cost of a medicine to the NHS

15. 5. Low bureaucracy • “Light touch” regulation • Low staffing and costs for DH (n=5 c.f. National Lottery Regulator n>30) • Low staffing for industry. Exemptions for Small and Medium sized Enterprises (SMEs) e.g. No AFR<£35m sales to NHS. • Minimises disruption in commercial operations and supports “business as usual”

16. 6. Promotion of innovation • R&D allowances designed to reward innovation: the highest allowances are achieved by those companies that supply the NHS with innovative new medicines • Includes a specific number of measures aimed at promoting uptake and innovation

17. Basic Workings • Control on prices indirectly through control on company profits • Mandatory repayment of excess profits and possibly price reductions • Based on rewarding assets employed (ROCE) • Up to 29.4% • Provisions for companies with low UK assets, who are allowed a return on sales (ROS) • Up to 8.4% plus Transfer Price profit • Nearly ALL companies are now ROS (maybe 3-4 ROCE) • Reasonable expense allowances granted - except for promotional spend

21. Prices • No price increases unless 60% • BELOW target ROCE/ROS. • No price cuts/paybacks unless 40% • ABOVE target . • “Keep the submarine in the water”.

22. THE STING IN THE TAIL – Price CUTS! • 2009 SCHEME • 2005 SCHEME – 7% CUT • 1999 SCHEME – 4.5% CUT

23. APPLICATION • Companies must apply to join the PPRS. The default otherwise is the Statutory Scheme • Companies supplying licensed, branded, reimbursable NHS ethical medicines regardless of size must be in either PPRS or Statutory Scheme. • Devices, generics, P, GSL and sales to other Pharma companies are outside of the scheme calculations but indirectly affect the PPRS profitability. Also any reimbursed P and GSL products are in the PPRS if they are branded • Two key components: • Control on profitability through full ANNUAL FINANCIAL RETURN (AFR) reporting if sales >£35M • Optimising enforced price decreases and cost neutral price changes through modulation. This is a SEPARATE issue to the Annual Financial Return

24. Key issues to get the AFR right • Transfer Pricing • Friction with tax planning (often DH think profit too high, when HMRC think profit too low – arises because DH limit deductibility of promotion spend) • Subsidies from parent company (to reduce excess promotion, and increase HMRC profit to acceptable levels) • R&D recognition • If someone in your group is spending R&D in the UK, it needs to be captured for AFR even if not in PPRS entity • Reallocation of expenses to optimise expense categories • Note – DoH increasingly challenging marketing reallocations into, for instance administration expenses!

25. STATUTORY SCHEME • Alternative to PPRS – default if you don’t join PPRS • Has the full force of the law with penalties for late submissions or non compliance • Only control list prices NOT profits • Some useful exemptions for low cost presentations, being PCA England sales <£450,000 pa, or SKU cost <£2 • Who has joined: • Companies with 2005 PPRS exposure • Companies with a portfolio of older products • Companies that don’t value modulation • Companies with average selling prices significantly below list price • Companies with non POM products • Disadvantages • Lacks flexibility (e.g. no cash repayment option) • No modulation • No automatic freedom of pricing for New Chemical Entities • Detailed pack reporting • Little experience to date, but DoH appear to be somewhat “flexible” in enforcing rules!

26. Pricing

27. Launch Prices • All new product prices have to be approved by the DoH • Automatic approval under PPRS: Freedom of pricing on new active substances post regulatory approval (but does NOT guarantee any sales!) • Other “new” products may get pricing freedom but this is subject to DoH assessment against criteria • If not “new” DoH explicit approval neededRequirement to submit forecast sales for products with anticipated annual sales in first 5 years exceeding £20M • Issues other than the DoH may affect “real life” pricing, such as: • The competition • NICE, SMC etc. • EU pricing corridors – parent company may set target prices

28. New Formulations/Line extensions • Rule of thumb is pro-rata pricing but a carefully argued case can achieve a premium, via (e.g.): • Improved compliance • Improved delivery • Cost per patient treatment day • New indication post R&D investment • NHS cost as a whole • This is not a NICE submission but carefully argued, can often work

29. Modulation

30. Modulation • Modulation allowed to achieve enforced price reduction – meaning differential price cuts to achieving an overall 5.5% saving for 2012 compared with 2008 prices • Gives scope to react to market conditions • Gives some scope to cut list prices on products already discounted in the market, however controls now exist on “brand equalisation” deals to exclude them from savings calculation. Drug Tariff Category (M, C etc. may be important here to see whether sales should be excluded) • Cash payment of 2% (or more by concession) of NHS Home sales can contribute to savings • Need to pay 100% of list price • Expensive if products are heavily discounted • PCT’s will not get the benefit of modulation cash payments

31. Modulation: EXAMPLE

32. Secondary care monitoring • New factor in the 2009 scheme, to ensure a company has not squeezed discounts in secondary care • Based on ASP (not List) • Only where the company controls prices • Q4 2008 = reference average selling prices • Calculate this carefully! • DoH is determined to get savings in hospitals, and if Secondary Care saving is less than overall saving, it will assess a shortfall in the modulation calculations • This is a widely misunderstood area of the 2009 PPRS

33. Modulation – Key Issues • Don’t leave money on the table at the end of the Scheme - the DoH don’t have a cheque book! • Ad hoc re-modulations must be cost neutral to the DoH • Increases of more than 20% per product per scheme need careful negotiation, as in theory they are not generally allowed • Supply issues an acceptable argument • Products changing ownership – new owner responsible for the price cut delivery (i.e. 5.5% in 2012) • Parallel imports and exports an issue re volume calculations

34. Issues Potpourri

35. Current ISSUES • Under’s and Over's from 2005 Scheme Modulation • Increasingly Dispute Resolution Panel (DRP) involved, as the PPRS was so badly written, particularly in the modulation calculations chapter! • Supply shortages (Pex) • The Future….. • New PPRS • Value Based Pricing?

36. Acknowledgement: Richard Williams Email: richard@rfwassociates.com Mobile: +447860295153