All those involved in the UK supply chain of generic medicines from manufacturers via wholesalers and through to dispensing pharmacists have a simple objective at their core. This is to ensure the right medicine is given to the right patient at the right time.
However, increasingly due to a range of external factors, arguably added to that list is “at the right price”. What constitutes that right price is an emotive subject within healthcare and the cause of some conjecture sometimes based on a lack of crucial facts about how the UK market functions.
Those of us who work in the generic medicines industry have always believed that manufacturers’ selling prices in the UK were amongst the lowest in Europe, if not the lowest. Various studies, based on reimbursement prices, have supported this view. Now we know that they are the lowest in Europe thanks to a report by respected independent economics consultancy Oxera.
Oxera’s report ‘The Supply of Generic Medicines in the UK’ published earlier this summer tells us this, but it also tells us so much more. Based on an extensive data collection and analysis, and interviews with senior industry managers in the UK, among many topics, it explores how low prices are achieved and yet why the market remains attractive for suppliers. It also looks at the portfolio approach of many manufacturers and assesses the risks of Government intervention on individual products.
In order to make any judgement on price and whether it’s right or wrong, it is critical to view all the factors together. It’s too simplistic to say that open market competition achieves the lowest prices in Europe, though that’s right. The same freedom of pricing allows the market to self-correct when there are shocks due to cost changes or shortages of raw materials. High prices encourage other suppliers to enter the market, creating increased competition, leading to lower prices.
The system also allows manufacturers to increase prices or reduce their exposure to an unprofitable market by supplying lower volumes, in effect leaving supply to other manufacturers which may be able to charge a lower price. But that same flexibility works in reverse to allow manufacturers who have reduced supply to ramp up again quickly to meet shortages or when prices increase.
The Oxera report shows that whilst you might expect the UK to be an unattractive market because of its low prices, it is attractive because of these flexibilities and low regulatory barriers, including that the harmonised marketing authorisation application process provides a consistent process for licensing suppliers across EU member states, and facilitates entry within a short period of time.
So, whilst it’s attractive just to focus on whether price levels are high or low in the UK compared with other EU member states, it’s important to understand the reasons for them such as the economies of scale and low regulatory barriers. It is also critical to understand that intervention by the Government on some parts of this ecosystem, or in respect of some products, can undermine the benefits that we all – payer, patient, industry – derive for the current arrangements.
Flexibility is another crucial element in pricing. The Oxera report also showed that, in the majority of occasions when manufacturers have had to increase prices to remain in the market, prices fall to close to their original level within a year.
It concluded that misjudged government intervention, for example, in response to price increases could undermine the flexibility of the UK market and have unintended consequences, leading to a less well functioning environment overall. There are parallels with reductions to Category M prices by the Department of Health and Social Care (DHSC) to claw back overpayment of concessionary prices last year. This led to more concessionary prices this year, which themselves undermine the operation of the market at pharmacy level.
What is also critical to understand is the different elements of the supply chain and their role in price. Community pharmacists are critical for example in delivering competition and controlling price. They are reimbursed at the same price for a generic medicine, irrespective of the price that they paid for it. This means that they naturally seek out the lowest-priced version of the medicine, and it is this competition than maintains low prices. The £800m margin on dispensing guaranteed by the DHSC to community pharmacy provides the headroom within which this competition can operate and is thus a critical part of the system.
To deliver this margin, and cater for distribution costs, the reimbursement price of generic medicines in Category M of the Drug Tariff is set by DHSC at approximately twice the manufacturer’s actual selling price. The retained margin is closely monitored by the Pharmaceutical Services Negotiating Committee and the DHSC, and changes are made to the reimbursement price to ensure that community pharmacy receives £800m.
Warwick Smith is Director General of the British Generic Manufacturers Association.
This article also appears in the October issue of Pharmacy Business.