On 20 November 2023, the UK Government and the Association of the British Pharmaceutical Industry (“ABPI”) ‒ the industry body representing the innovative pharmaceutical industry in the UK ‒ announced a new 5-year voluntary scheme for branded medicines pricing, access and growth (“VPAG”).
Although the parties have announced agreement upon heads of terms, it is already clear this is very significant news for the pricing and reimbursement of branded medicines in the UK. It is likely to represent a paradigm-shift in the way the innovative pharmaceutical industry will view reimbursement.
Companies who are responsible for the manufacture and supply of branded medicines to the UK’s NHS must by law participate in one of two drug price control schemes: the so-called “Statutory Scheme” or alternatively a “Voluntary Scheme.”
The Statutory Scheme applies to the branded medicines industry by default, through legislation. However, individual companies may choose to opt-out of the Statutory Scheme by instead joining the Voluntary Scheme. The Voluntary Scheme is an agreement between the ABPI and the UK Government.
Both schemes are currently under review. The Statutory Scheme is due to be updated for 2024, with the Government consulting on proposals between July and October 2023. Similarly, the current Voluntary Scheme (“VPAS”) expires at the end of 2023, and the new VPAG will be in place from 2024 onwards.
In recent years, both VPAS and the Statutory Scheme have proved challenging for branded pharmaceutical companies trading in the UK. Historically, the rebates that companies paid back to the UK Government were in the single-digit percentages of their total in-scope sales. These rebate percentages rose sharply after the COVID-19 pandemic to upwards of 25% of total in-scope sales in 2023. These are very significant rebate levels, and the industry was sharply focused on what the new Voluntary Scheme would say.
What do Companies Need to Decide and by When?
With the publication of the heads of terms for the new VPAG, companies must now decide whether to opt-in to the new scheme by the end of 2023.
This does not give companies a huge amount of time to come to a decision, particularly given that neither the final legislation for the new Statutory Scheme nor the final VPAG text are yet published. However, we expect that by around the middle of December both texts will be available for direct comparison. We also understand there may be some flexibility to extend the deadline to make a decision into early 2024, though that is yet to be confirmed.
Rebates under the new VPAG
VPAG has a number of financial and non-financial elements. However, what will likely command the most attention from pharmaceutical companies at this stage is the vexed question of rebates.
There are two headline points in this respect:
- Companies will pay differential rebates, depending on their product mix. Historically, rebates were set as a fixed percentage of a company’s in-scope sales. All scheme members paid the same percentage rate, which was refreshed each year. This entirely changes under VPAG. Rebate percentages are set on a product-group basis (and indeed product-by-product in some cases) and this will vary depending on the types of product a company commercializes. Accordingly, the aggregate rebate that one member company pays will differ from another. This is a marked change from previous schemes.
- Based on projections, rebate percentages are unlikely to drop to pre-COVID levels until 2027 or 2028, and even then for select medicines. The days of double-digit rebate percentages are most likely here to stay for some time.
Under VPAG, the rebates a company pays require a product-wise analysis, and depend on whether:
- The product is a “Newer” medicine;
- The product is an “Older” medicine; or
- An exemption applies.
Subject to the drafting of the final text, drugs are “Newer” medicines for the first 12 years after the grant of initial marketing authorization, or to the expiry of a Supplementary Protection Certificate (“SPC”) if applicable. Any other medicine is “Older.”
Newer medicines will be subject to dynamic rebate rates, in a system that is very similar to the old VPAS. These rates are calculated on the overspend between an agreed NHS growth rate and actual NHS spending. This derives a single annual percentage, payable for all Newer medicines across the scheme.
The allowed growth rate itself is set to increase during the 5-year term. Whilst the rebates for Newer medicines are projected to decrease to 6.9% over the course of the scheme, the allowed growth is projected to increase to 4%. The ABPI indicates that this will accommodate for more growth and reverse the so-called “crocodile jaws” effect, but companies should bear in mind that these are merely projections at this stage.
Older medicines are subject to a flat rate 10% rebate, plus a top-up. The top-up operates on a sliding scale, based on price erosion. Where the price of an Older medicine has eroded by less than 10%, a maximum top-up of 25% applies, resulting in a total rebate of 35% (base rate 10% + top-up 25%). The sliding scale applies where the price has eroded more than 10%, tapering eventually to zero.
Notably, Q1 2024 will see a fixed rebate percentage of 19.5% applied to both Newer and Older products, as part of a transition period for the implementation of the new differential rebate mechanism.
There are various exemptions, including for:
- Medicines containing new active substances, which for the first three years post-launch are not subject to a rebate.
- Certain small and medium-sized companies; and
- Centrally procured vaccine products and exceptional central procurements.
Many companies will find themselves paying varied rates for Older, Newer and exempt medicines. VPAG will clearly affect some companies more adversely than others. Those companies whose UK portfolios largely consist of Older medicines whose prices have remained consistently high will likely be hit hardest by the new deal.
Non-Financial Aspects of VPAG
The VPAG announcement also included certain non-financial features, including that:
- The standard cost effectiveness threshold used by the National Institute for Health and Care Excellence (“NICE”) will remain fixed at its current range (£20,000 to £30,000 per Quality Adjusted Year of Life) for the next five years.
- NHS England and NICE will review the budget impact test (“BIT”) threshold and consult on increasing this to £40 million.
- NHS England will establish a new database for patient support programmes (“PSPs”) in efforts to enhance the visibility and wider use of existing PSPs across the NHS.
- NHS England will commit to commercial flexibility and introducing innovative value-based payment model pilots in respect of advanced therapy medicinal products (“ATMPs”).
- The Investment Facility established under VPAG will support UK health technology assessment (“HTA”) agencies. Proposed projects include: (i) a UK-wide cross-government working group with industry representation to ensure HTA and payer processes remain interconnected with emerging regulatory pathways; and (ii) the development of an end-to-end pathway guide within the first year of VPAG, outlining the routes to market, how regulatory, HTA and commercial pathways align, and the mechanisms for company engagement.
Watch This Space
As noted above, the final legislation of the Statutory Scheme and text of VPAG are expected to be available in mid-December 2023.
At the point of publication of the final text of both schemes, companies will need to act quickly to assess which scheme is the better fit for their businesses and product mix.
Covington will continue to follow developments and provide further updates. If you would like to discuss the latest developments and what they may mean for your company’s operations, please contact: Grant Castle, Brian Kelly, Raj Gathani or Dan Spivey.