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Last Updated: Tuesday, 20 February 2007, 01:39 GMT
NHS 'pays too much to drug firms'
Robert Peston
By Robert Peston
Business Editor, BBC News

Image of medications
The OFT will announce its findings on Tuesday
The NHS is paying drug companies hundreds of millions of pounds too much for branded medicines, according to the Office of Fair Trading.

Since September 2005, the competition watchdog has been investigating the system by which the Department of Health buys 7bn of branded medicines.

It has concluded the Pharmaceutical Price Regulation Scheme (PPRS) should be overhauled, the BBC has learned.

The OFT has found the scheme does not allow the NHS to get the best prices.

The OFT will present its conclusions to the Department of Health and the prime minister on Tuesday.

Because they are likely to affect the share prices of the UK's leading drug companies, they will be released to the Stock Exchange at 0700 GMT.

Cap on profits

The Department of Health does not have to accept the OFT's recommendations, but it is highly unlikely to reject them, given that hundreds of millions of pounds of public money are at stake.

However there is likely to be a blazing row with the major drug companies, who frequently complain that the NHS does not spend enough on their products.

The PPRS sets a cap on the profits that each drug company can earn on its annual sales of branded medicines to the NHS.

It is a voluntary scheme negotiated every five years between the Department of Health and the Association of the British Pharmaceutical Industry.

The price paid by the NHS for drugs is used by as a benchmark by health services in other countries, but they frequently insist on paying less than the NHS pays.

Expensive research

But a dire warning is likely to come from the pharmaceutical industry.

UK drug companies are world beaters, which is not true of all British business.

Those drug companies are likely to argue that their continued success depends on their being properly rewarded for very expensive and risky scientific research.

A statement from the Department of Health said: "It is important that we have fair prices which give value for money to the taxpayer."

"However, we recognise the importance of the pharmaceutical industry to healthcare and the development of medical advances and it is in all of our interests to encourage research and reward innovation."

Determining the profit that drug companies can make

Probe into cap on drugs profits
17 Sep 05 |  Health
NHS medicine cost control urged
28 Jul 05 |  Scotland

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