Prescription drugs deal to cut NHS bill by £1.8bn

The Government has squeezed a 7 per cent cut in prescription drug prices in a new five-year deal with the pharmaceuticals industry that aims to cut the National Health Service's annual £11bn drugs bill.

The Government has squeezed a 7 per cent cut in prescription drug prices in a new five-year deal with the pharmaceuticals industry that aims to cut the National Health Service's annual £11bn drugs bill.

The one-off price cut will take effect at the start of next year, but was sweetened by a raft of measures to encourage pharmaceuticals companies to site research and development work in Britain. But the major drug companies complained that a price cut was unnecessary since prices have already fallen in real terms, while some smaller drug companies said they would suffer a disproportionate blow.

John Reid, the Secretary of State for Health, said the agreement would save the NHS £1.8bn over the next five years. The deal forms the central plank of a new Pharmaceutical Price Regulation Scheme (PPRS). The scheme regulates prices of branded drugs and the profits manufacturers are allowed to make on sales to the state health service.

The last two agreements resulted in price cuts of 4.5 per cent and 2.5 per cent respectively, and the size of the latest reduction shows the ability of governments across Europe to squeeze tougher deals from their suppliers.

Major pharmaceuticals companies have been examining ways to cut costs as they adjust to the downward pressure on drug prices across the developed world, now that governments must act to ease the financial burden of providing healthcare to an ageing population.

The details of the new PPRS include a modernised range of allowances for drug suppliers, including a higher ceiling on the research and development allowance. The amount of R&D spending that firms can offset against their permitted profits is increased to 28 per cent of sales to the NHS from 23 per cent.

The Association of the British Pharmaceutical Industry, which negotiated the agreement, said it was the best settlement available. Vincent Lawton, the ABPI president, said: "The price cut is unnecessary given the fact that medicines prices have fallen in real terms by some 15 per cent over the past 10 years. However, because it is a five-year agreement, it offers a degree of stability that is important to an industry that works very much in the long term."

Some of the ABPI's smaller members had argued they would be disproportionately hit by a big one-off price cut, since it was harder for them to make efficiency savings.