Past experience in regulating pharmaceuticals market could spur OFT to investigate new alleged drug pricing concerns, says expert

In recent weeks articles published by the Daily Telegraph and Independent newspapers have alleged that pharmaceuticals have offered pharmacists incentives to increase the price of 'specials' that they invoice the NHS for. Specials are unlicensed medicines that doctors can prescribe to patients under certain circumstances where regular medicines are unsuitable for treatment. Those drugs are not subject to price cap rules generally applicable to NHS prescriptions for patented medicines.

According to the reports the chemists have been offered "backhanders" by pharmaceutical companies to "mark up the prices they charge to the NHS" for those drugs.

In a report late last week, the Telegraph said that the Serious Fraud Office (SFO) was considering launching a criminal investigation into the claims. It also said that the UK's competition law regulator ,the Office of Fair Trading (OFT), has confirmed that it is considering a separate investigation into the apparent price increases of one drug.

Earlier this month the Pharmaceutical Services Negotiating Committee, which represents NHS pharmacy contractors, said that it had concerns about the practice of drug manufacturers selling the marketing rights of divested "niche branded" medicines to other manufacturers to sell as generic products, thus removing those products from the price cap constraints in place in the NHS.

The PSNC said that "questions should be asked of manufacturers to explain significant price increases".

Competition law expert Natasha Pearman of Pinsent Masons, the law firm behind Out-Law.com, said that the OFT could elect to investigate whether drugs manufacturers are acting in line with competition rules. She said that the regulator may be spurred to do so as a result of previous action it has taken in the sector.

Competition law prohibits restrictive agreements or practices and abuse of market power, including excessive pricing and misuse of regulatory procedures, by dominant companies," The consequences of infringing competition law can be serious, including reputational damage, fines of up 10% of worldwide turnover, actions for damages by adversely affected third parties and, in extreme cases, criminal sanctions.

"The pharmaceutical sector has been under increased scrutiny from the OFT over the last few years and, more generally, by competition regulators across Europe," Pearman said. "The OFT has wide ranging investigatory powers which it can use when it commences a formal investigation based on 'reasonable grounds for suspecting that competition law has been breached'. So far, there has been no formal case opening notice so it would appear that the OFT is still in the preliminary stages of an informal investigation. However, given the nature of a potential investigation and the media spotlight on this area it is likely that such a case would be a priority for the OFT," she said.

Previously, the OFT has acknowledged the value of its intervention in generic drug markets and in cases concerning excessive pricing it may be the only authority with the appropriate powers to investigate and address these types of concern.

Pearman said that a case in 2001, in which the OFT found that Napp Pharmaceuticals (Napp) had abused its dominant position in both the hospital and community segments of the market for sustainable release morphine (SRM), showed that OFT enforcement in the market can have real effects on the pricing of drugs.

The OFT fined Napp an initial £3.21m, reduced to £2.2m on appeal, and it was also required to reduce the NHS list price of the relevant products by at least 15% and to sell to hospitals in the UK at a price capped at no less than 20% of the reduced NHS list price so that it was no longer able to cross-subsidise with the profits of its sales to community pharmacists.

An independent report published 10 years after the OFT's decision found that the OFT's intervention had led to an additional 25% reduction in pricing to hospitals, further to the required 15% decrease stipulated by the OFT, and new entry into the SRM market had been stimulated with the result that Napp's market share had been reduced from 95% to 65%..

The report stated that this led to the NHS saving in excess of at least £1.5 million in each year between 2001-2009.

"Whilst excessive pricing cases are notoriously hard to bring successfully, clearly if the OFT were minded to pursue an investigation into pricing, either as an abuse of dominance case or a wider market investigation, it is likely to be buoyed by its past actions and the benefits to the NHS – and ultimately the tax payer – that they can lead to," Pearman said.