The Serious Fraud Office suffered a huge defeat yesterday with the collapse of its £25 million, six-year investigation into alleged price fixing among drug manufacturers.

The Court of Appeal in London rejected the SFO’s appeal against the striking out of its indictment in July this year against five pharmaceutical companies.

The decision, reached in less than 1½ hours, raises a question mark over the future of such lengthy and complex investigations by the SFO.

The investigation dwarfs any other undertaken by the office. At one stage it involved every lawyer and every accountant at the SFO, its entire forensic computing unit and 100 police officers from the National Crime Squad as well as the entire Metropolitan Police fraud squad.

The SFO’s new Director, Richard Alderman, has indicated that he would prefer to focus resources on preemptive and preventative measures.

Prosecutors had alleged that the defendants – Goldshield, Ranbaxy, Norton Healthcare, Kent Pharmaceuticals and Generics UK – conspired to defraud the NHS of £120 million by fixing the price of drugs, including the blood thinner warfarin and antibiotics. Criminal charges were brought after raids on 30 homes and offices in 2002.

Price fixing was not a specific offence until the Enterprise Act 2002. Because the allegations referred to the period 1996-2001, the charges were brought instead under the common law offence of conspiracy to defraud. However, the law lords ruled this year that price fixing alone did not amount to conspiracy to defraud.

The SFO returned to the Crown Court seeking to amend and represent its case in the light of the House of Lords ruling that cartels were not illegal at the time of the alleged offences. This was rejected in July.

Douglas Day, QC, for the SFO, said in the Court of Appeal that cartel activity, when aggravated by other features, could amount to a “conspiracy to defraud”. The appeal judges – Lord Justice Latham, Mr Justice Andrew Smith and Mr Justice Macduff – yesterday rejected that argument.

The total costs both of the SFO and of the companies is estimated to have run to more than £50 million.

The Court of Appeal’s decision was a victory for the companies and executives targeted by the SFO’s investigation, codenamed Operation Holbein, which began six years ago.

Keith Hellawell, the chairman of Goldshield, said: “This judgment provides the company with certainty that the allegations are now in the past.”

The SFO said: “This means that the prosecution comes to an end. The SFO will fully consider the implications of the ruling in due course when it receives the reasoned judgment.”

Anthony Barnfather, head of regulatory investigations at Pannone LLP, who played a lead role in the case, acting for John Clark, of Kent Pharmaceuticals, said: “This is the final hammer blow for the SFO in this much derided prosecution.”

Mr Alderman said last night: “I am not surprised at the decision. I thought long and hard about whether to appeal. What turned it for me were the victims, who would have wanted a final authoritative judgment from the Court of Appeal before we abandoned the case.”

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