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.

Background

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.

Testing Times

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:

  1. 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.
  2. 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.

Differential Rebates

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.

New Normal?

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 CastleBrian Kelly,  Raj Gathani or Dan Spivey.

Photo of Grant Castle Grant Castle

Grant Castle is a partner in London and Dublin practicing in the areas of EU, UK and Irish life sciences regulatory law. He supports innovative pharmaceutical, biotech, medical device and diagnostics manufacturers on regulatory, compliance, legislative, policy, market access and public law litigation…

Grant Castle is a partner in London and Dublin practicing in the areas of EU, UK and Irish life sciences regulatory law. He supports innovative pharmaceutical, biotech, medical device and diagnostics manufacturers on regulatory, compliance, legislative, policy, market access and public law litigation matters in the EU, UK, and Irish Courts.

He is one of the Co-chairs of Covington’s Life Sciences Industry Group and is Head of Covington’s European Life Sciences Regulatory Practice.

Grant regularly advises on:

  • EU and UK regulatory pathways to market for pharmaceuticals and medical devices, including in vitro diagnostics and on associated product life cycle management;
  • Pharmaceutical GxPs, including those governing pharmacovigilance, manufacturing, the supply chain and both clinical and non-clinical research;
  • Medical device CE and UKCA marking, quality systems, device vigilance and rules governing clinical investigations and performance evaluations of medical devices and in vitro diagnostics;
  • Advertising and promotion of both pharmaceuticals and medical devices; and
  • Pricing, reimbursement and market access for both pharmaceuticals and medical devices.

Grant also handles procedural matters before EU, UK and Irish regulators and UK and Irish market access bodies, where necessary bringing judicial reviews for his life sciences clients before the EU, UK and Irish Courts.

Chambers UK has ranked Grant in Band 1 for Life Sciences Regulatory for the last 18 years. He is recognized by Chambers UK, Life Sciences as “excellent,” “a knowledgeable lawyer with a strong presence in the industry,” who provides “absolutely first-rate regulatory advice,” according to sources, who also describe him as “one of the key players in that area,” whilst Chambers Global sources report that “he worked in the sector for many years, and has a thorough understanding of how the industry ticks.” He is praised by clients for his “absolutely first-rate” European regulatory practice. Legal 500 UK notes that he is “highly competent in understanding legal and technical biological issues.”

Photo of Brian Kelly Brian Kelly

Brian Kelly is a partner in the European Life Sciences group and also co-chair of Covington’s Global Food Industry Group. Brian’s practice focuses on EU food and drug regulatory law, public and administrative proceedings, EU procurement advice and challenges, internal investigations, European Union…

Brian Kelly is a partner in the European Life Sciences group and also co-chair of Covington’s Global Food Industry Group. Brian’s practice focuses on EU food and drug regulatory law, public and administrative proceedings, EU procurement advice and challenges, internal investigations, European Union law, and product liability and safety. The Chambers Europe Guide to the legal profession lists Brian as part of our “world-class [regulatory and public affairs] team and describes him as a notable practitioner who is “very ambitious, thorough with a sharp intellect”. The Chambers UK Guide quotes clients saying: “his communication and work ethic stand out, he is very hard-working and dedicated when it comes to his cases.”

Brian’s advice on general regulatory matters across all sectors includes borderline determinations, food classifications, tissue and stem cell regulation, adverse event and other reporting obligations, manufacturing controls, labeling and promotion, pricing and reimbursement/procurement, procurement/tenders (including emergency use tenders, EU-wide tenders, Covid-19-related tenders), product life cycle management (foods and medicines), nanotechnology, and anti-bribery and corruption advice. Brian has also been advising on UK and European “Brexit” related issues including tariffs.

Brian has also advised and co-ordinated international projects on advertising/promotion, clinical research, data protection, the regulatory status of borderline products, food/cosmetic ingredient reviews and advises on regulatory aspects of corporate/commercial deals, particularly regulatory due diligence.

Brian is also experienced in representing clients in administrative and enforcement proceedings before regulatory authorities and in the UK and EU courts.

Brian is an honorary lecturer at University College London.

Photo of Raj Gathani Raj Gathani

Supporting clients in the pharmaceutical, healthcare, medical device and consumer products sectors, Raj Gathani’s practice is built around EU and UK regulatory and strategic advice.

Increasingly, Raj concentrates on post market-launch projects, such as advising on advertising compliance, communications, interactions with healthcare professionals…

Supporting clients in the pharmaceutical, healthcare, medical device and consumer products sectors, Raj Gathani’s practice is built around EU and UK regulatory and strategic advice.

Increasingly, Raj concentrates on post market-launch projects, such as advising on advertising compliance, communications, interactions with healthcare professionals and patients, pricing controls and reimbursement strategies particularly in the UK and the Republic of Ireland.

Healthcare, its structure and delivery are specialist practice areas for Raj, particularly having operated healthcare and pharmacy businesses for eight years prior to joining the firm. This experience enables Raj to provide in-depth advice to healthcare clients –particularly those in the digital health space – as well as other life sciences companies whose work engages medical practice, dispensing and health-services rules.

Photo of Dan Spivey Dan Spivey

Dan Spivey is an associate in the Life Sciences Regulatory team. Dan advises clients in the pharmaceutical, healthcare, medical device, and food and beverage sectors on a range of regulatory matters.