The price of drugs should be based on the value that they provide to patients, the Government said yesterday.

Announcing plans to renegotiate the Pharmaceutical Price Regulation Scheme (PPRS), which sets the prices paid for drugs by the NHS, ministers said that changes would give greater value for the £10 billion a year that the NHS spends on medicines.

The Government’s response to a report by the Office of Fair Trading, as revealed yesterday by The Times, said that it agreed with the OFT that changes were needed. However, it gave no indication of what model of value-based price regulation it was seeking, nor of the timescale, and it did not signal that it was terminating the agreement.

In February the OFT said that it believed that the PPRS, which has been in force in various forms for 50 years, needed reform. It called for prices for drugs to be set by reference to their value to patients. The existing scheme allows companies to set their own prices when a drug first reaches the market, but subjects them to limits on the overall profits they can make.

The industry values the freedom this gives it and says that drug prices in the UK are about average for comparable European countries. However, the OFT said that it believed that a saving of £500 million a year could be made by a keener pricing regime.

In its response, which by law it was obliged to make within 120 days, the Government said that it will continue to analyse the OFT proposals, and will discuss this analysis with the industry.

It did not, as it is entitled, give six months’ notice of termination of the existing PPRS deal, which is due to run until 2010. The Department of Health explained that this was because it had not yet decided on what basis to proceed.

It is assuming that the industry will be willing to negotiate without a formal notice of termination, even though the drug companies have made clear that they back the PPRS and do not believe alternative methods would work better or save money.

The OFT recommended two possibilities. One, ex post value-based pricing, would enable the industry to set its own prices for new drugs, but would allow these prices to be changed in later years on the basis of how effective the drugs proved to be.

The other, ex ante value-based pricing, would include the regular reviews but would also fix the opening prices on the basis of assessments of a drug’s value before launch.

The first, which is roughly equivalent to the system in Germany, could be applied to the UK relatively simply. Instead of profit controls, companies would be subjected to price comparisons after launch, with substitute drugs used as benchmarks. The second system would come closer to the system that prevails in Australia, where prices are determined both at launch, and later, by comparison with substitutes. What the UK drug industry fears most is a price scheme that lumps together branded and generic drugs, which it says makes new branded drugs uneconomical to develop.

Shares in Pozen Pharmaceuticals, GlaxoSmithKline’s US development partner on Trexima, a new combination migraine medicine, plunged by 45 per cent yesterday after the US Food and Drug Administration refused for a second time to approve the drug (Robin Pagnamenta writes). Glaxo, Britain’s largest pharmaceutical company, said that the FDA has requested further information about Trexima, amid concern that it could damage patients’ DNA. The pill, made from the painkiller naproxen sodium combined with Glaxo’s migraine drug Imitrex, also faced delays after Pozen first filed a New Drug Application with the FDA in 2005.

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