On the 1 April this year, amidst storm clouds gathering above the NHS in the form of staffing strikes, record waiting times and chronic underfunding, the UK's Department of Health and Social Care's (DHSC) Branded Health Service Medicines (Costs) (Amendment) Regulations came into force.[1] Manufacturers and suppliers of branded medicines have two options in the UK: opt to join the VPAS or be subject to the statutory scheme. For those subject to the statutory scheme, the amended regulation fixes the payment percentage (or rebate) that they must pay back to the DHSC on sales of branded medicines to the NHS at 27.5%.[2] The aim behind this rebate is to ensure that the NHS never pays more than 1.1% above what it spent on branded medicines for the previous year.[3] That way, products are supplied to the NHS in a sustainable, cost-friendly manner. But what about the regulation's sister scheme, the VPAS? 

The VPAS operates slightly differently, albeit in a manner that is – according to the DHSC – "complementary" to the statutory scheme, with the shared aim of minimising the NHS's branded medicines bill.[4] However, there are several key differences between the two (unsurprisingly, given that companies need an incentive to join the VPAS in the first place). These include:

• affording greater flexibility by setting the growth cap at 2% (as opposed to 1.1%);

• having the Association of the British Pharmaceutical Industry (ABPI) onside to negotiate and represent their interests over the scheme's duration; and 

• exempting various products from the rebate system.[5] [6]

Yet despite 90% of all branded medicine manufacturers and suppliers signing up to the scheme,[7] the VPAS is, in the eyes of the pharmaceutical industry, broken. Here we take a deeper dive into how the VPAS operates, what it aimed to achieve at its outset and why it has become the subject of such wide-spread criticism. With the VPAS set to end on 31 December this year, we then consider how the next iteration of the VPAS could allay these concerns.

What is the VPAS?

The VPAS commenced on 1 January 2019, stepping into the shoes of the Pharmaceutical Price Regulation Scheme 2014. The DHSC, NHS England and the ABPI are all parties to the scheme, along with those producers of branded medicines who have elected to take part.[8] Supervising the scheme (operationally speaking) is the National Institute for Health and Care Excellence (NICE).[9] 

The purpose of the VPAS is twofold:

• to establish measures that bolster innovation and improve patient outcomes in England. This includes, for example, imposing obligations on the parties to a) track the uptake of new products along with patient outcomes; b) collaborate on developing the NHS's data infrastructure and information-gathering and c) adhere to transparency measures regarding tendering processes.
• to implement a UK-wide "affordability mechanism" (like the statutory scheme) that helps improved access to new medicines, boosts competition and innovation, and ensures that NHS spending on branded medicines is sustainable.[10]

It is worth pausing here to note exactly what constitutes "branded medicines".[11] These include:

• branded generics – those medicines that are free to be sold on a competitive basis by different manufacturers/suppliers under their various brand names once the patent for the original active ingredient has expired (e.g., paracetamol, aspirin, warfarin etc).
• biosimilars – as with branded generics, those new biological medicinal products akin to existing biological medicines and that are free to be manufactured under different brand names after the patent for the original active substance has expired;[12][13]
• in vivo diagnostics;
• blood products;
• dialysis fluids; and
• branded products supplied through a tendering process, or on central or local contracts.

These are the products to which the VPAS applies.

How does the affordability mechanism work?

The rationale behind the affordability mechanism is the same as that underpinning the statutory scheme: to control profit on sales of branded medicines.[14] By signing up to the VPAS, pharmaceutical companies supplying branded medicines to the NHS guarantee that the overall cost of such products will not increase by more than 2% every year: any amount that the NHS has to pay in excess of the 2% cap then has to be "refunded" by the pharmaceutical companies back to the DHSC as a percentage payment of their total branded medicines sales for that year – in the first year of the VPAS, for example, the payment percentage was 9.6%.[15][16] Upon receipt of the rebate, the DHSC then re-invests this back into the NHS.

There are some sales which are exempt from the rebate: sales of branded medicines amounting to less than £5 million, centrally-procured vaccines and new active ingredients are all excluded. We’ll return to the latter category of new active ingredients later.[17]

Why is the VPAS becoming a thorn in the pharmaceutical industry's side?

The problem is that the rebate figure has sky-rocketed over the duration of the VPAS, with the current repayment figure for 2023 set at 26.5% - this, of course, was what prompted the Government to increase the payment percentage under the statutory regime (given that both schemes are intended to be broadly the same).[18]

But why is the rebate figure so high? The Covid-19 pandemic is responsible for soaring NHS demand in branded medicines – a trend which has only snowballed post-lockdown.[19] This has been compounded, according to the DHSC, by an agreement that was reached "on an exceptional basis" with the ABPI back in January 2022 to fix the rebate for that year at 15%.[20] Had the rebate figure not been fixed, the affordability mechanism would have calculated a payment percentage of 19.1% for 2022, which the ABPI considered to be an untenable hike for the industry (given that the rebate figure for 2021 was 5.1%). The shortfall between the fixed rebate figure and the actual rebate figure has, under the agreement, been deferred, increasing the rebate for 2023 from 22.6% to 26.5%.[21] 

The meteoric rise in payment percentages across the life of the VPAS has prompted a wave of criticism across the pharmaceutical industry – one affected company dubbed the affordability mechanism a "penalising rebate" designed with the sole purpose of reducing the NHS' branded medicines bill as it teeters on the edge of collapse.[22] Many manufacturers no longer consider it commercially viable for them to supply the NHS, with supply now "lossmaking" in some instances.[23] Such is the discontent with the scheme that more and more companies are choosing to exit it entirely, as some companies did earlier this year.[24] Of course, a question arises as to what the point is in leaving the VPAS if the rebate under the statutory scheme is even higher, but the concern is that this is the prelude to companies withdrawing from the UK market entirely.[25] 

The problem with products 

The industry also considers there to be a flaw in the products that are subject to the VPAS. Firstly, the British Generic Manufacturers Association (BGMA) (the representative trade body of generic and biosimilar manufacturers) have said that exempting new active substances means that other members of the VPAS effectively must shoulder the costs of "blockbuster" patented medicines, which is both unfair and unsustainable.[26] 

On the other side of the coin, the BGMA is calling for branded generics and biosimilars to be excluded from the branded medicines category (a full report on this has been chaired by Professor Alistair McGuire at the London School of Economics). The reason for this, say the BGMA, is that branded generics and biosimilars are by their very nature "interchangeable" with other branded medicines.[27] This is because, once the original patent has expired, equivalents are launched which naturally encourages competition between manufacturers: this "drives down prices, often leading to a reduction of 90% or more" within a matter of weeks. In turn, this boosts innovation in what the BGMA calls a "virtuous circle": because the producers of the original active ingredient know that the patent will one day expire, they are motivated to focus their endeavours on developing new drugs to remain key players in the market, providing patients with better treatment options.

Because branded generics and biosimilars are already subject to competitive forces, the BGMA considers the affordability mechanism an "additional cost burden [that companies] are less well-equipped to shoulder than other branded medicines." The knock-on effect is that generics and biosimilars will be pulled from the market, decreasing competition, driving up prices further and increasing the NHS's spending on branded medicines even more (which, of course, causes the payment percentage to soar further and so the cycle begins again).[28] The BGMA predicts that if the next version of the VPAS were to apply to branded generics and biosimilars, the net cost to the NHS on purchasing these products could be up to £7.81 billion across 2024-2028.[29] The VPAS is not, according to the BGMA, saving the NHS anything when it comes to these products – instead, it places an unsustainable burden on companies, stifling competition, innovation, and access to medicines in the process. The UK life sciences sector then starts to look far less appealing to those looking to invest in research and development, clinical trials, and manufacturing opportunities.[30] 

What next for the VPAS?

With the VPAS set to end this year, Sir Hugh Taylor has been tasked with leading negotiations amongst the various interested parties on what a successor scheme will look like.

From the perspective of the pharmaceutical industry, it is hoped that the next incarnation of the scheme will address its various shortcomings. The BGMA has of course called for new active substances to be covered by the VPAS, and biosimilars and branded generics removed. In addition, the ABPI has asked (amidst a series of other recommendations in their suggested framework) for the rebate figure to be fixed at 6.88%, enabling the UK to remain "internationally competitive", attract investors and keep the supply of branded medicines at and affordable level. This would align the UK's payment percentage with those adopted in other jurisdictions that utilise similar affordability mechanisms: Ireland has fixed its payment percentage at 9%, Spain at 7.5% and Germany at 12%.[31] 

But this is a tricky, nuanced area: the DHSC has already responded to the ABPI's proposal to fix the rebate figure, calling it "completely unaffordable."[32] Indeed, there are those urging the Government to resist the industry's suggestions, perceiving the ABPI's response as riddled with "doomsday projections" put forth in a greedy bid to achieve greater profit margins and "water down the next deal" in their own self-interest.[33] The negotiations should also consider those who have historically lacked a voice in shaping such schemes, but who nonetheless have a vested interest in it: specifically, the Charity Medicines Access Coalition, Cancer 52 and the Blood Cancer Alliance have issued a joint statement calling for, amongst other key points, better patient involvement in developing the next scheme.

Sir Hugh Taylor therefore has the unenviable task of weighing up these competing interests and somehow forging a sustainable path ahead for the benefit of the life sciences sector. Without careful consideration of the VPAS's failings, any future scheme will continue to see a marked increase in the number of market players opting to leave the scheme, not join it in the first place, or exit the UK market completely.

It is still to be seen how the next iteration of the VPAS will work, but without change, the message across the board is clear – this is going to hurt.

For more insights from DLA Piper’s Life Sciences team, click here to subscribe to Cortex, the sector’s dedicated blog.

Footnotes:

[1] Proposed update to the 2023 statutory scheme to control the costs of branded health service medicines - GOV.UK (www.gov.uk)

[2] Ibid.

[3] Ibid.   

[4] Ibid.

[5] A (New) Tale of Two Pricing Schemes (pharmexec.com)

[6] Pricing of branded medicines: Amendments to the Statutory Scheme - Bristows

[7] https://healthmedia.blog.gov.uk/2023/03/28/voluntary-scheme-for-branded-medicines-pricing-and-access-vpas-media-fact-sheet/

[8] The 2019 voluntary scheme for branded medicines pricing and access: chapters and glossary (publishing.service.gov.uk)

[9] ibid.

[10] Ibid.   

[11] Ibid.

[12] Voluntary scheme for branded medicines pricing and access (VPAS) - media fact sheet - Department of Health and Social Care Media Centre (blog.gov.uk)

[13] NHS England » What is a biosimilar medicine?

[14] [14] The 2019 voluntary scheme for branded medicines pricing and access: chapters and glossary (publishing.service.gov.uk)

[15] Voluntary scheme for branded medicines pricing and access (VPAS) - media fact sheet - Department of Health and Social Care Media Centre (blog.gov.uk)

[16] The 2019 voluntary scheme for branded medicines pricing and access: payment percentage for 2022 - GOV.UK (www.gov.uk)

[17] The 2019 voluntary scheme for branded medicines pricing and access: chapters and glossary (publishing.service.gov.uk)

[18] https://www.gov.uk/government/consultations/proposed-update-to-the-2023-statutory-scheme-to-control-the-costs-of-branded-health-service-medicines/proposed-update-to-the-2023-statutory-scheme-to-control-the-costs-of-branded-health-service-medicines#:~:text=Maintaining%20broad%20commercial%20equivalence%20with%20VPAS&text=The%202023%20VPAS%20payment%20percentage,from%2019.1%25%20to%2015%25.

[19] Pharma sector reels as UK Government doubles VPAS payback rate on NHS drugs - Pharmaceutical Technology (pharmaceutical-technology.com)

[20] ibid.

[21] Ibid.

[22] Subscribe to read | Financial Times (ft.com)

[23] Drug manufacturers propose 7% levy on company profits to replace existing voluntary scheme - The Pharmaceutical Journal (pharmaceutical-journal.com)

[24] AbbVie and Eli Lilly leave UK’s voluntary drug pricing agreement - PMLiVE

[25] U.K.’s Voluntary Scheme For Branded Medicines, Pricing, And Access (VPAS) Faces A Potential Crisis (forbes.com)

[26] BGMA - Safeguard the supply of medicines (britishgenerics.co.uk)

[27] BGMA - About generics (britishgenerics.co.uk)

[28] ibid

[29]  BGMA - Safeguard the supply of medicines (britishgenerics.co.uk)

[30] Finding the right balance in VPAS | Lane Clark & Peacock LLP (lcp.uk.com)

[31] The challenge – the current VPAS is undermining UK life science competitiveness (abpi.org.uk)

[32] Subscribe to read | Financial Times (ft.com)

[33] Time to take on the pharma lobby and get fair pricing for the NHS - Global Justice Now Global Justice Now