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OFT makes recommendations to Government on UK medicines distribution

173/07    11 December 2007

The OFT has today published its market study into medicines distribution in the UK.

Download Medicines distribution: an OFT market study (pdf 732 kb).

See the market study page.

The market study looked at new and proposed medicine distribution arrangements - known as 'direct to pharmacy' (DTP) schemes. The OFT considered the impact on the sector of Pfizer Limited's exclusive DTP scheme using only UniChem, and the likely impact of other manufacturers introducing DTP schemes and/or reducing the number of distributors they use. The study finds that there is a significant risk that such arrangements will result in higher costs to the NHS potentially running into hundreds of millions of pounds. The OFT also found that such schemes could affect services to pharmacies and patients through, for example, longer waiting times to receive medicines.

The NHS spends around £6 billion a year on branded prescription medicines dispensed by retail pharmacies, and until recently these medicines were distributed through a number of competing wholesalers.

DTP schemes allow manufacturers to increase the prices paid by pharmacies and to control the delivery for the distribution of their medicines. However, such schemes may also give rise to efficiencies in distribution. The market study recommends that the Department of Health makes further changes to the Pharmaceutical Price Regulation Scheme (PPRS) to ensure that NHS medicines costs do not increase as a result of changes in distribution, and follows on from OFT recommendations to reform the PPRS in February (see press release 29/07).

The OFT is also recommending that, if the Government is concerned about reductions in service standards to pharmacies, it should seek the agreement of manufacturers to adopt minimum service standards. Government should ensure that it pays less if service standards are reduced.

The OFT also found that any future widespread use of exclusive distribution arrangements might lead to longer-term competition concerns and it will monitor the situation with the prospect of future investigation, if appropriate.

John Fingleton, OFT Chief Executive, said:

'The changes to the distribution of medicines in the UK are among the most significant for many years and have given rise to real concerns. Building on our suggested reform of the PPRS, further action is needed to prevent increases in NHS medicines costs and to ensure service standards pharmacies to patients are of a satisfactory standard. Our recommendations give manufacturers the freedom to use the distribution models that suit them, while ensuring protection for patients and the NHS.'

NOTES

1. Several manufacturers - including Pfizer, and AstraZeneca - have implemented or will soon implement substantial changes to the way they distribute their medicines. Their changes include the introduction of DTP schemes and/or using fewer wholesalers.

2. The traditional wholesale model for the distribution of branded medicines involves manufacturers supplying to wholesalers, typically at the industry's conventional discount of 12.5 per cent to the list prices. Wholesalers then compete to supply pharmacies and offer discounts from the list prices to attract business. The average discount to the list prices is around 10.5 per cent.

3. Under DTP schemes, manufacturers set the prices paid by pharmacies, and pay wholesalers a fee for delivering their medicines according to their required service standards. There is no conventional discount that applies to the discount manufacturers give to pharmacies.

4. The PPRS is the method by which the UK Government seeks to constrain the prices of branded medicines. It is a voluntary scheme negotiated every five years between the Department of Health and the Association of the British Pharmaceutical Industry. The current scheme runs from 2005 to 2010. In February the OFT recommended that the PPRS should be reformed to deliver better value for money from NHS drug spend and to focus business investment on drugs that have the greatest benefits for patients.

5. The OFT recognises that that the PPRS is in the process of being renegotiated, presenting a key opportunity to incorporate changes. To prevent an increase in NHS costs, the OFT has offered two options i) to reduce list prices in the PPRS framework by an amount equivalent to the average discounts received by pharmacies and ii) pharmaceutical suppliers offering a minimum list price discount to pharmacies. This would accommodate both DTP and the traditional wholesale model.

6. Government has 90 days to respond to these recommendations. This process will be led the Department for Business, Enterprise and Regulatory Reform who will consult with stakeholders before outlining its response.

7. The OFT market study into the distribution of medicines was launched on 4 April 2007. Its remit was to assess: the motivation for the DTP model and its impact on competition and choice in wholesaling the motivation for exclusive arrangements; their long term impact on competition; the incentives created by sector specific regulations; the potential impact of the different distribution models on the appropriation of the discounts secured by pharmacies and the NHS; and service levels provided to patients.

8. In undertaking this study, the OFT has: consulted widely with stakeholders from across the industry, sent surveys to 1700 pharmacies/dispensing doctors and to all full-line wholesalers to determine the impact of the distribution changes, visited pharmacy and distribution businesses to consider at first hand how the changes affect stakeholders, discussed the case for reform with key stakeholders in Government and industry, considered medicine pricing and distribution systems in other countries, including France, Germany, Sweden and the Netherlands.

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