Britain - Drug companies and the NHS - 60 years of guaranteed profits

Sept/Oct 2008

This August, NHS patients with advanced cancer of the kidney were confronted with the news that the NHS would no longer pay for the latest and most effective drugs available to treat their condition. They were told that the treatment was not "cost effective", since it might only prolong life by a few months.

It is simply outrageous that a price should have been placed on these people's lives. But nevertheless, this was the decision made by the government's "National Institute for Health and Clinical Excellence", or, ironically, "NICE" for short.

NICE is the "independent" body set up by the government in 1999, to approve drugs and other clinical treatments for funding by the NHS, in England, Wales and Northern Ireland. (Scotland has its own body, although it usually conforms to NICE guidelines).

NICE is also meant to have ended the so-called "postcode lottery" whereby a drug available and paid for by the NHS in one part of the country is refused to patients in another part. But instead, this has turned into another bureaucratic failure, as, although NICE's rulings are meant to be adhered to by Primary Care Trusts to ensure that all patients throughout the country are treated equally, PCTs make the final decision in line with their budgets. So the "postcode lottery" continues.

What a NICE "QALY"

Today it is generally accepted as a fact that no national health service in any country can offer patients all the many new treatments coming on stream. The argument goes, that this would be far to expensive and no state budget could bear it. So it is also accepted as fact that some rationing of treatments and NHS facilities is inevitable.

This is the real reason for the existence of NICE - to justify the rationing of NHS treatments. And if it can use what sound like "scientific" excuses for this, all the better. So NICE bases its advice regarding the acceptability of new drugs, which NHS organisations are expected "to take fully into account", on a formula - which it also claims is "internationally recognised".

The units of measure used, are called "QALYs" or "quality-adjusted life years". A new treatment is compared with the existing standard treatment, and assessed according to the QALYs which would be gained - extra years multiplied by the quality of life measured on a scale of 0 to 1 - as a result of using the new treatment. Then the difference in cost between old and new treatments is divided by the QALYs gained, to arrive at a particular sum of money per "quality-adjusted life year". If a treatment costs more than £20,000 to £30,000 per QALY then it is not considered to be cost effective and NICE will expect the NHS bodies not to pay for it.

So for instance, in the case of the anti-kidney cancer drugs, the clinical director of NICE, Professor Peter Littlejohns said that although they had "the potential to extend progression free survival by 5 to 6 months, at a cost of £20,000 to £35,000 per patient per year [...] regrettably the cost to the NHS is such that they are not a cost-effective use of NHS resources". In fact that translated into a cost per quality adjusted life year of between £71,500 and £171,300, according to NICE's calculations, well above the £30,000 threshold that it uses in its decisions.

While NICE judgements are meant to be followed by the Primary Care and Hospital Trusts, under pressure of the doctors responsible for the patients and the patients themselves, who have access to an appeals procedure, they can decide to fund treatments which have not yet been decided upon by NICE or, exceptionally, which NICE has ruled against. But of course a patient with only a few months to live, once denied a drug, hardly has the time to deal with a bureaucratic appeals procedure.

The crude "QALY" formula which NICE uses to calculate whether it is worth treating a patient or not, is reminiscent of the calculations made after rail privatisation by Railtrack, the now government-subsumed track and signals company, when it decided not to invest in state-of-the-art signals safety technology to prevent trains colliding. Such investment, weighed against the potential loss of life it was deemed not to be cost effective.

But while it is quite "normal" for a profit-making company to weigh up human life against pounds and pence, when public institutions begin to act in the same way, it understandably comes as a bit of a shock. And all the more so, when it is the one public institution - the National Health Service - which is meant to be dedicated to saving lives and alleviating suffering. Since when was cost supposed to come into it?

Is it all about blind profiteering, then?

At more or less the same time as kidney cancer patients' premature death was decided to be "cost effective" by NICE, attention was drawn by patient groups, eye specialists and the media, to another aspect of NICE's intervention against patients' interests and the practical consequences thereof.

The BBC's Panorama devoted a programme to the "Postcode Lottery" on the 18 August, highlighting the problem of availability of the drug sold under the brand name of Lucentis.

The discovery of this drug, in 2005, was described by eye specialists as a "quiet revolution", and in fact it was a dramatic breakthrough in the treatment of the most common cause of age-related, progressive blindness. This is known as neovascular (or "wet") age-related macular degeneration or AMD. Not only did the drug stop the progression of the disease but it even improved sight - in over a third of patients, to driving level!

As soon as Lucentis was licenced for use in the eye (almost 3 years ago, already), specialists wished to give their patients its benefits immediately, rather than await NICE approval. But at a cost of £1,050 (plus VAT!) for one dose it was not easy to get Primary Care Trusts to agree to pay for the required monthly injections - which might come to £28,000 (for both eyes). Nevertheless some patients were lucky. But others were not, living in areas covered by Primary Care Trusts which were more cash-strapped, for instance in Manchester, which refused funding - and thus they became victims of the so-called "post code lottery".

After prevaricating for over two years, NICE decided last December that the NHS could pay for Lucentis to be used, but only in one eye! But even this lousy concession scarcely helped matters, because of the high cost of treatment which had to come out of PCT's budgets. The postcode lottery carried on.

In Scotland Lucentis was approved fully this year and in June the Welsh Assembly put aside £5m specially for AMD patients. This caused a huge outcry from patient groups in England, which no doubt was a contributory factor in the making of the Panorama programme.

In fact just one week after the programme, NICE finally announced it had done a special deal, whereby the drug manufacturer would fund the cost of any treatment costing above £10,000 per eye.

There is a twist to this tale, however, which was also revealed by Panorama, which says a lot about the drug industry, but also about NICE. Another drug called Avastin, which is related to Lucentis and made by the same company, Genentech, is just as effective against AMD and has been used for some time, achieving equivalent results (and without significant side effects) at a fraction of the cost. Its cost is so much less that it is worth citing a 2007 paper from the British Journal of Ophthalmology which estimated that with 25,000 cases of neovascular AMD eligible for treatment each year, the cost using Lucentis would amount to £300m. But with Avastin this would be around £8m, that is just 2.6% of the projected cost of Lucentis!

The problem is that Avastin is not licenced for use in the eye. It was licensed some years ago for use against cancer of the bowel. Genentech, the company responsible for making both these drugs, obviously does not wish to start the procedure for licencing Avastin for ophthalmic use - not while it still has the potential of making huge profits from Lucentis, given the high price along with a high incidence of neovascular AMD.

The giant pharmaceutical company, Roche, recently took a major share in Genentech and between them they now control half of the world market in the category of new biotechnological treatments to which Avastin and Lucentis belong. Which means that Roche/Genentech can really do what they want for the time being, that is, as long as NICE and the NHS are willing to play along. In fact it seems that many of these new biological agents have multiple uses, as is also shown by another of their controversially expensive products, Herceptin, which NICE initially ruled against, except in late stages of breast cancer, until publicly challenged.

This means that a lot of these agents would need to be re-licensed for other uses and therefore would have to undergo new clinical trials for this purpose, which is both costly and time-consuming under the current system. The companies can afford to do this, of course. But why should they, if all they are after is profit?

In the meantime, doctors can go on using such drugs to treat conditions for which they are not licenced, on the basis of their own clinical judgement and at their own risk, but they may not be able to get their Trusts to fund the treatment. If this is the case, patients have to find the money themselves, pay privately for the drugs, or go without.

Or, perhaps they will soon be allowed to "top up" NHS treatment, by making co-payments, similar to the system in countries like the US where private health insurance does not fully cover the cost of a treatment. This kind of system is currently being considered, despite the implications it would have for those unable to make such co-payments. What is more, this would set a precedent which could open the door for "co-payments" for all kinds of other NHS facilities which are "too costly" to be made generally available. Maybe patients could be asked to help pay for MRI scans under certain circumstances, for instance.

So it's all down to "perverse incentives"... like profit?

The apparent irrationality of NICE's decisions may be explained when one places them in the context of the 60-year old relationship between the NHS and the drug companies. A relationship which, what is more, looks as if it is about to change, for the first time. But first, a few more words about NICE itself, starting with the what has been said recently by its non-executive chairman, "Sir" Michael Rawlins, himself.

Just before the Panorama programme was broadcast on the "post code lottery" which exposed the apparent craziness of NICE regarding Lucentis, Michael Rawlins was interviewed by the Observer newspaper. He was said by the interviewer to have blamed the drug companies for the whole shoddy affair.

Said he, "We are told we are being mean all the time, but what nobody mentions is why the drugs are so expensive."(...) "Part of the problem is that the pharmaceutical industry is looking at a very bad period in the future because a lot of their big earners are going off patent [allowing rivals to make cheaper versions] and many companies are looking at a 30 or 40% reduction in the next 5 years unless they come up with new drugs, and so part of the cost is cushioning against that. The other thing, of course, is that share price is very important to a pharmaceutical company."

Rawlins then continued by explaining: "Share prices are driven by profits. [!] Pharmaceutical companies have enjoyed double-digit growth year on year and they are out to sustain that, not least because their senior managements' earnings are related to the share price. It's not in their interests to take less profit, personally as well as from the point of view of the business. All these perverse incentives drive the price up."

Maybe it should not be too surprising to hear the normal operation of the capitalist system described as being driven by "perverse incentives", coming as it does from a scientist, rather than an economist. But this man has spent 9 years at the head of NICE, dealing precisely in "pharmaco-economics", with the biggest capitalist giants of all, the major pharmaceutical companies, so he, of all people should surely know the score!

Rawlins argues that the pharmaceutical industry should no longer expect to be able to charge what it thinks the market will bear and that "perverse incentives" should be halted. But in fact he has already made other interventions (like at the beginning of 2007) arguing that the companies need to prove that they are producing "value for money" and be paid accordingly. His long standing denunciations of the drug companies have had not the slightest effect on NICE's dealings with the drug industry nor its decisions preventing patients access to drugs they need.

Of course, what he and the government will never put into question is that rationing of healthcare in some shape or form, is "necessary" - on the grounds that health care is getting more costly and "we don't have a bottomless pit of money to pay for innovative new products." However, if one extrapolates from past data, this "bottomless pit" is by no means unavoidable. And certainly not when one takes into account that the NHS more often than not balances its books and that this financial year it is set to announce a £1.75bn surplus!

In Britain, according to the Association of the British Pharmaceutical Industry (ABPI), while the overall cost of the NHS is rising steadily, the medicines bill remains at less than 10% of the total. Apparently more than 912 million prescriptions were dispensed in 2007, at an average cost of £10.37 each. If anything this exposes the claim that the NHS "cannot afford" certain treatments and NICE's pseudo-scientific rationing of medicines as a fraud. The truth of the matter is not the size of the drugs bill, but the fact that the government wants to cut the cost of the NHS budget overall.

Subsidising profits

It is as a result, seemingly, of a report published in February 2007 by the Office of Fair Trading (the government's competition quango) that the 60-year old Pharmaceutical Price Regulation Scheme (PPRS) has finally been put into question.

This is the scheme which has shaped the relations between government and pharmaceutical industry over the past decades. It is a voluntary agreement to which drug companies sign up in order to sell their branded products to the NHS. This includes drugs still under patent, i.e. drugs protected against copying, and all the other "branded" drugs sold to the NHS. It excludes the so-called "generic" drugs which are (cheaper usually, but not always) copies of the original drug discoveries, manufactured after the 20-year long patent expires, by companies which either specialise in the production of generics or, more recently, by subsidiaries of the pharmaceutical originators.

The OFT report found that there could be a difference in pricing of as much as 500% between similar "branded" drugs made by different companies and bought under the PPRS or, more likely, bought as generics outside of the PPRS!

Of course, the drug companies would argue that since it can take hundreds of millions of pounds to develop just one drug successfully (and many drugs which have been developed fail to reach the market) that they should be entitled to recoup these costs by charging high prices. At present, it takes an average of 10 years from discovery of a potential molecule, passing through a series of toxicity tests, followed by preclinical and clinical trials before it gets to the stage of licencing. The drug would then be protected for a further 10 years by a patent, before it can be copied and sold at a cut price.

For these companies to justify high prices by the cost of research is a plain lie, since so much this cost is actually offset from the tax they pay on their profits. The fact is, that this "life cycle" of a drug has never prevented these companies from recouping their costs many times over - as is shown by their super-profits (see next section).

It is also a fact that successive governments have never used the statutory instruments at their disposal to reduce the cost of drugs to the NHS. But after all, this is just being consistent with the overall relationship they have with big business.

The workings of this PPRS scheme are complex. It has never really had much to do with actual regulation of the drug industry, despite its title. In summary, (and this is a simplification), it relies on two main "controls".

Firstly, the control of profits: it sets a maximum level of profits that a company can earn from the supply to the NHS of its own raft of branded drugs (taken collectively). The current profit margin allowed is a 21% return on capital employed or 6% of the company's total sales to the NHS, whichever is higher. But each company's maximum profit is set at 140% of target in practice. If this level is exceeded, the Department of Health can demand repayments. The OFT report says that in reality, costs are hard to determine and these days, repayment demands are rare. Besides, it is an open secret that companies are experts in massaging their accounts according to their interests, thanks to the array of City accounting firms which live off such activities. The long and short of it is that the PPRS has more or less given up trying to regulate profitability, if it ever really did. Indeed, having been guaranteed a stable income from the NHS for many decades, the industry has had it particularly easy over the past 10 years or so.

The PPRS relies therefore chiefly on its second set of controls, price controls, to try to keep NHS costs down. Companies are free to set the initial price of a new product, but there are restrictions imposed on any subsequent price increases. Over the years - the scheme has been renegotiated almost every five years, with nine successive agreements since the birth of the NHS - levels of price cuts have also been negotiated, so that for instance, the last scheme (negotiated in 2005) stipulated price cuts of 7%. However, companies were allowed to choose which drugs they wanted to target for the price cuts, to minimise the impact, and of course they no doubt put up the prices of their new drugs to compensate for any real loss.

Today, the OFT recommends fundamental reforms to the PPRS. However, there is no guarantee that the main flaw of the current system will be ended - that is, its focus on guaranteeing the profits of the pharmaceutical industry at the expense of the NHS. The "new criterion" for paying the price demanded for a drug would be its proven "value" - or cost effectiveness. In other words, the same QALY criteria used by NICE to ration medicines! The gist of the OFT proposal is however, that the state would intervene to help along the process of arriving at "value for money" in the first place. And it proposes new ways of subsidising the companies' research and development so that they can get new drugs onto the market faster!

After the OFT report came out, however, and in the context of so many unpopular decisions by NICE, the Department of Health imposed an interim revised PPRS, which came into effect in September this year and which will last until September next year.

This allows the Secretary of State to specify a maximum price for a new product, based on the expected volume of supply to the NHS, the cost of "therapeutically equivalent medicines", the cost on other markets in the world, and the cost of manufacture, of research and development. Of course there is an allowance made for exceptions and for appeals by companies for price increases. But if the final negotiation over Lucentis is anything to go by, this interim PPRS is hardly going to be a blow to the drug industry. Indeed, as was mentioned before, the government has always had statutory instruments to control the price of drugs if it wished to do so (one dates back to WW2), but it has never dared to use them, for fear of upsetting the industry.

Helping pharma do its R&D

The new agreement with the drug companies, based on "value", is supposed to save the NHS 5% of its £11bn-a-year drugs bill. How exactly it will work, still has to be decided. But its primary aim is bound to be to help rather than constrain the profiteering of the pharmaceutical companies. Especially when it comes at a time when the pharmaceutical companies also need to make big changes in the way that they develop new drugs, if not fundamental changes in direction, towards the biotechnology sector. This is why the supposed criticisms voiced by NICE's chairman are worth taking with a big spoon of salt. Not least because the industry is represented on the committee of NICE!

The patents on many of the best-selling "blockbuster drugs" will expire within the next 5 years, or earlier, and there is a shortage of new drugs coming on stream. Some companies complain that they are in fact "running out of molecules". Maybe. But in fact the biotechnology companies, many of which spun off directly from university research departments (one of which eventually mapped the human genome) are not short of potential new biological drug discoveries along the lines, for instance, of Lucentis, Avastin and Herceptin. In other words the new drugs are going to be drugs which are able to target specific cells, for cancers and less common diseases, perhaps diabetes and especially diseases linked to inherited and other genetic disorders.

Of course the Big Pharma (pharmaceutical companies with over $3bn revenue) can swallow the small biotech companies if these companies are willing. And if the price is right, they are likely to accept a buyout, because many of them have been struggling to make a profit. Roche recently bought 44% of one of the biggest biotech companies, the already-mentioned Genetech - which has put it in a position of jointly "owning" almost half the market in a particular type of "biological" drug derived from white blood cells.

But the pharmaceutical giants also expect the state to step in on their side. Already there have been big concessions made to cushion the old regulatory PPRS regime, by way of the government's ever-increasing support for research and development. But recently this has been a real priority. £67m was agreed only this year for a new Molecular Biology Laboratory in Cambridge, for the Medical Research Council (MRC). In July, the MRC, the government's Technology Strategy Board, and representatives from across the pharmaceutical industry met for the first time to form the new "Pharmaceuticals Forum" which will "oversee all of our collaborations and interactions with drug and biotech companies", according to the chief executive of the MRC. The government has also been engaged in the setting up of the UK Clinical Research Collaboration, which is supposed to co-ordinate support to the industry, especially with regard to clinical trials - the later stages of a drug's development, and often the most costly.

After all, the NHS (as long as it is centralised enough) remains the best supplier of "guinea pigs" for drug trials - especially, for example, when it comes to the need to collect a big enough group of patients with relatively uncommon cancers. It is no co-incidence that R&D facilities are being organised by new government-appointed bodies as a carrot to the drug companies and as a help to the biotech industry in particular.

So what looks as if it is a new "regulatory" framework is in fact a great big helping hand from government - basically taking on board a substantial proportion of the cost of drug development, to be funded by taxpayers.

Brown's pride and joy

Today the pharmaceutical industry in Britain has become the country's leading manufacturing sector, outstripping the power generating machinery sector and specialised machinery sector, which used to be first over recent years.

In fact Britain is host to the headquarters of the world's second biggest pharmaceutical company, GlaxoSmithKline - (GSK) whose profits in 2006 were £5bn and which had sales of almost £19bn last year. GSK has a 5.6% share of the world market. By way of comparison, the USA's Pfizer is the world's leading drug company, with profits in 2006 of £9bn, sales in 2007 of £22bn and a 6.7% share of the market. Astrazeneca, the world's number 5, (2006 profits:£3bn) also has its headquarters in Britain. (Number 3 is Switzerland's Novartis and number 4 is France's Sanofi Aventis).

British pharmaceutical companies exported £14.6bn worth of goods in 2007 and brought in a trade surplus of £4.3bn. The sector is clearly dearly beloved of the government's "Department for Business Enterprise and Regulatory Reform" (DBERR) - as Brown renamed the Department of Trade and Industry in order to dispel any lingering doubts as to his deregulatory convictions.

Thus DBERR explains that "the UK [pharmaceutical] industry has discovered and developed more leading medicines than any other country apart from the USA and as much as the rest of Europe combined. Some 15 of the world's current best-selling drugs were discovered and developed in Britain. In world terms the UK industry has 9% of pharmaceutical R&D expenditure; only the USA (49%) and Japan(15%) are ahead. The UK is the largest European recipient of pharma R&D, accounting for 23% of the European total; followed by France (20%), Germany (5%) and Switzerland (11%)."

It is this series of facts and figures that has been used time and again by health ministers as an argument against regulating the industry's profits and prices, when it comes to new drugs, or even older unpatented drugs still sold on brand. They warn that if the drug industry is too regulated, it will stop investing in Britain. And naturally, the drug companies have played to this gallery by threatening to leave Britain if the government decides to enforce its regulatory system. Of course the fact that the NHS is a huge and secure source of revenue which it could not forego is one obvious reason to disregard these threats.

The other reason to ignore the industry's complaints is the existence of the research and development environment that allows the government to make its nationalistic boasts in the first place. This is a legacy that is difficult to quantify and in fact which is under threat by the government's own "reform" programme: that is, the radical cuts and privatisation which have targeted universities and the NHS as whole. Because it was precisely the centralisation and commonality of both of these spheres which tremendously facilitated the type of research required for drug development in the past.

However, the fragmentation which has accompanied the last period of NHS and educational privatisation, trustification, accompanied by commercialisation is hardly conducive to the provision of the large, similar, samples of patients required for clinical trials, for instance. It was precisely the centralisation of the NHS, currently under threat, which allowed it to recruit the largest number ever of cancer patients into clinical trials of anti-cancer drugs, something which all the literature cites when promoting Britain's R&D facilities.

The government claims optimistically that the national project for computerisation of NHS data will now become the main attraction for drug companies' trials. But in fact the hitches and failures of this project have become one of the government's major embarrassments.

The profit system is the problem

It would be no bad thing if research and development of drugs was taken over and put entirely into "public hands". Rather, of course, than only part of it, as is the case, and rather not in the drug companies interests, as is also the case.

Such "nationalisation" would allow another significant problem which is highlighted by the OFT and even by NICE to be solved. Because treatments which are unlikely to spin a high profit, even if there is a great clinical need for them, have never been a priority for development by pharmaceutical companies. The irony is that one of the arguments being made in favour of the new agreement to be negotiated between the NHS and drug companies over cost-effective pricing, is precisely that it would give incentives for drugs to be produced on the basis of clinical need. But in the case of the pharmaceutical giants, the NHS is only a fraction of their market, and they are likely to see their priorities in a different light!

Moreover, the drug industry is going to be overseeing its own regulation in this new system, and in fact is likely to be the main decision-maker in the new collaborative research environment. So it is somewhat unlikely that there will be vast new benefits on the horizon for illnesses without known cures. Not to mention a solution for those who are currently unable to access life-saving new treatments!

Indeed, how can anyone put a value on a drug which is going to save even one person's life, or give them a precious few more months on this earth? If ever there was an argument against the profit system, surely the pharmaceutical industry provides it?

As for those who argue that some form of rationing has to be necessary because "no system" could afford the ever increasing cost of new discoveries, this is self-evident nonsense. Because there is no reason why new discoveries should involve "ever-increasing costs". Certainly not if the competition between companies and profiteering is taken out of the equation, by placing medical research under public control.

Under the present system, companies compete with each other by expending huge effort and spending huge sums of money producing new "blockbuster" drugs (drugs which have a big market, like anti cholesterol, anti-clotting, anti-depressant or blood pressure-lowering drugs), but which are all similar. This is obscene waste.

Their efforts could instead, be organised not by the capitalist market but according to need. If this was the case, maybe today there would be drugs and/or vaccines for malaria, the resistance to tuberculosis would have been overcome and it would be possible to direct research on a worldwide scale using the collective intellectual resources of all countries instead of placing these resources in the straightjacket of "intellectual property rights" - i.e., the patent system. It was and is this very system of private property rights in drug discoveries which has prevented poor countries from accessing drugs against HIV. After taking the South African government to court for threatening to breach patent laws, and losing, even now the big drug companies are not actually providing anti-retro viral drugs (against HIV) at really affordable prices. As a result, only a small percentage of HIV positive patients can access these drugs - in countries where up to 20% of the population is infected, like Zimbabwe, Malawi, South Africa. How many millions of people could have been saved and could still be saved, if only these companies were not run for profit?

The examples of international collaboration, via public funding (like the Hadron Accelerator looking for the particles created after the Big Bang), for projects in basic sciences which do not (yet) provide obvious profitable spin-offs are there to show just what would be possible (but multiplied infinitely!) if the present resources of the pharmaceutical industry were pooled and organised rationally.

There are no limits to the development of knowledge and therefore no limits to the development of new treatments. Or rather, if there are limits, these are the result of a crippling social organisation - capitalism - which puts the profits of the wealthy before the needs of the sick and the dying!