Glaxosmithkline UK Ltd v Department of Health

JurisdictionEngland & Wales
JudgeTHE HONOURABLE MR JUSTICE COOKE,Mr Justice Cooke
Judgment Date21 June 2007
Neutral Citation[2007] EWHC 1470 (Comm)
Date21 June 2007
CourtQueen's Bench Division (Commercial Court)
Docket NumberCase No: 2006 FOLIO 859

[2007] EWHC 1470 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN's BENCH DIVISION

COMMERCIAL COURT

Before

The Honourable Mr Justice Cooke

Case No: 2006 FOLIO 859

Between
Glaxosmithkline UK Ltd
Claimant
and
Department of Health
Defendant

Mr D Anderson QC and Mr J Dawid (instructed by Simmons & Simmons) for the Claimant

Mr J Herberg (instructed by Treasury Solicitor) for the Defendant

Hearing dates: 12–13 June 2007

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

THE HONOURABLE MR JUSTICE COOKE Mr Justice Cooke

Mr Justice Cooke

Introduction

1

This is an appeal from a Reasoned Opinion of the Pharmaceutical Price Regulation Scheme (PPRS) Arbitration Panel (the Panel), dated 2 August 2006 (the Award) on a question of law, namely “whether under the terms of the 1999 PPRS, Glaxosmithkline (GSK) was prohibited from including volumes of sales of products sold to fulfil generic prescriptions in the calculation of list price reduction that it had delivered”.

2

Permission to appeal was given under section 69(2)(b) of the Arbitration Act 1996 on 12 December 2006 because of the importance of the issues.

3

At a late stage, an issue of jurisdiction was taken by the defendant (the Department) which it is necessary to determine. Before doing so I shall however set out the nature and effect of the PPRS 1999, which I take from paragraphs 3–23 of GSK's skeleton argument. Whilst this doubtless has a GSK “slant” with its stress on “prices”, it represents a reasonably fair summary of the PPRS and I did not understand the Department to take serious issue with it.

“THE PPRS 1999

3. The PPRS 1999 was an agreement negotiated between the Department (pursuant to powers conferred upon it by s33 of the Health Act 1999) and the ABPI. Membership of the PPRS 1999 was not compulsory. However, in practice, most or all manufacturers and suppliers of branded licensed NHS medicines consented to its application and thereby became “scheme members”. These included Glaxo Wellcome UK Limited, SmithKline Beecham plc and Stafford-Miller, the predecessor companies of GSK.

4. The Scheme governed sales of branded medicines to the NHS worth approximately £7 billion p.a. for each of the five years that it operated (1 October 1999 to 31 December 2004). It has now been replaced by the PPRS 2005, which is a similar type of agreement. The relevant background to the PPRS 1999 appears from the judgment of the Administrative Court in R v S/S Health ex p BAEPD [2001] EWHC Admin 183.

5. Although the Department is a “monopoly payer” where NHS purchases are concerned, it is not a monopoly buyer: the decision to initiate the purchase of individual medicinal products is made by individual medical practitioners (and, in the “secondary” sector, individual hospital trusts or the NHS Purchasing and Supply Authority). The operation of the relationship between buyer and seller is thus very different to that in an ordinary market.

6. The products covered by the PPRS 1999 were specified in its Chapter 7.1 as “all branded, licensed NHS medicines”. Generic (i.e. unbranded copies of out-of-patent products) were excluded from the Scheme, as were branded medicines sold to the public without a prescription (e.g. over the counter), or sold predominantly on private prescription: Chapters 7.3 and 7.4. However “branded generics”—defined as “products” which are copies of an out-of-patent product but bear a brand name” were expressly included within the Scheme (chapter 7.5.1), as were branded products supplied through tendering processes and on central or local contracts (chapter 7.5.6).

7. The objectives of the PPRS 1999 were summarised in its Chapter 1. They were to secure the provision of safe and effective medicines for the NHS at reasonable prices, to promote a strong and profitable pharmaceutical industry and to encourage the efficient and competitive development and supply of medicines.

8. The instruments chosen for achieving those objectives were “rules to determine the maximum prices which may be charged by any scheme member in respect of health service medicines, and the maximum profits to be made from the sale of medicines covered by the scheme”. Chapter 5.2) This is consistent with s33 of the Health Act 1999, which provides for voluntary schemes to be entered into for the purposes only of:

“(a) limiting the prices which may be charged by any manufacturer or supplier to whom the scheme relates for the supply of any health service medicines, or

(b) limiting the profits which may accrue to any manufacturer or supplier …”

9. Profit control (chapters 10–17) took the form of an allowable return on capital from home sales of NHS medicines (chapter 11), subject to a margin of tolerance (chapter 12) and controls on allowable costs (chapters 14–16) and transfer pricing (chapter 17).

10. Price c ontrol…..took the form of a requirement on all companies with NHS home sales above £1 million p.a. to reduce by 4.5%, from 1 October 1999, the NHS list price of medicines covered by the Scheme (Chapter 18 and Annex C). Prices were then to remain unchanged at the level of the cut until 1 January 2001, after which Scheme members could apply for price increases under the rules in Chapter 19.

11. ……..Chapter 18 and Annex C required the 4.5% reduction to be achieved by reference only to list prices. The Department was well aware that manufacturers and suppliers conventionally give discounts on their sales to pharmacists; and that when selling to the hospital sector, they will often respond to invitations to tender for the supply of particular medicines at levels below list price. Chapter 18 (and Annex C) however took no account of discounts, or the level at which tenders were made. In calculating its 4.5% reduction, GSK claimed (and was given) credit only for reductions in the list price.

MODULATION

12. The price reduction (Chapter 18) and price restraint (Chapter 19) provisions were moderated by the rules on modulation (Chapter 21). These rules allowed Scheme members to “modulate” individual list prices (i.e. to reduce them by an amount other than 4.5%, to leave them unchanged or, from 2001 only, to make limited increases) so long as list price reductions equating to an overall level of 4.5% were achieved.

13. Modulation mitigated the pain that would have been caused to the companies by a 4.5% across-the-board list price reduction, by allowing each company a degree of commercial flexibility. Thus, a company might choose to reduce the list price of a product by more than 4.5% in order to compete more effectively with:

(a) parallel imports (i.e. its own medicines, imported from markets where they were on sale for a lower price);

(b) competing branded products (within the same therapeutic class); or

(c) generic products.

Having “banked” a list price reduction of more than 4.5% on one product, the company was free to make a lesser reduction or no reduction at all on another product which was not subject to such keen competition (classically, a patented product in respect of which there was no branded or generic alternative).

14. The Administrative Court found in the BAEPD case that the power to modulate was regarded by the companies as a critical aspect of the PPRS 1999, and that the ABPI would probably not have agreed to a 4.5% list price cut if modulation had not been part of the deal.

Modulation against parallel imports

15. One use of modulation is to help manufacturers of branded NHS medicines compete with shipments of their own products, brought in by parallel importers from other, lower-priced markets within the European Economic Area. Pharmaceutical prices are controlled in most European markets, sometimes by direct governmental decree. This opens the way for parallel traders (or arbitrageurs) to purchase the drug in a low-priced market (e.g. Spain) and re-sell it in the UK, often at a very great profit.

16. The BAEPD case was brought by parallel importers, who contended in essence that the modulation provisions were contrary to EC law because they were capable of being used only for the purposes of competing against (parallel) imports. Whilst that contention was rejected, it was not in dispute that the modulation provisions were capable of being used for that purpose, and that they were in fact so used.

17. By reducing the list price of a drug by more than 4.5%, to a level equal to or only slightly greater than the price of the parallel imports, the manufacturer could achieve the double benefit of:

(a) safeguarding market share, at least in part, against parallel imports; and

(b) “banking” a relatively large list price reduction, thus enabling smaller reductions than 4.5% to be made to the list prices of goods not subject to so much competition.

Modulation against generics

18. As was found in the BAEPD case, parallel imports were not the only legitimate target for modulation. The Administrative Court dismissed the claim on the basis that in addition to the scope for modulation against parallel imports, “there is, in practice, material scope for the modulation provisions to operate against generic competition” (para 88), that modulation was also possible for other reasons and that the PPRS was accordingly not “targeted at parallel imports” (para 98). The Court of Appeal determined the appeal on other, shorter, grounds but did not dissent from these propositions.

19. The scope for modulation provisions to be used against generic competition may be explained as follows. When a branded product goes off-patent, it is liable to face competition from generic manufacturers of copy products. Generic manufacturers have in general not incurred significant research and development costs for their copy products....

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  • Branded Generics Included In PPRS Calculation
    • United Kingdom
    • Mondaq United Kingdom
    • 2 July 2007
    ...sold to fulfil generic prescriptions in any calculation of list price reductions. Glaxosmithkline UK Ltd v Department of Health [2007] EWHC 1470 (Comm) Queen's Bench Division (Commercial Court) Cooke J 21 June This article was written for Law-Now, CMS Cameron McKenna's free online informati......

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