DHSC and ABPI agree 2024 voluntary scheme for branded medicines pricing, access and growth (“VPAG”)

United Kingdom

The 2024 voluntary scheme for branded medicines pricing, access and growth (“VPAG”) provides for accelerated growth of the NHS’s annual branded medicines spend, introduces differentiated reimbursement levies for “newer” and “older” medicines, and establishes a new investment facility to fund the development of innovative treatments.

On Monday 20 November, the Department of Health and Social Care (“DSHC”, representing the UK Government, the governments of Scotland and Wales and the Northern Ireland Department of Health), and the Association of the British Pharmaceutical Industry (“ABPI”, representing the UK pharmaceutical industry) agreed the terms of the VPAG, a non-contractual agreement which will run for five years between 1 January 2024 and 31 December 2028.

Successive voluntary schemes have aimed to strike a balance between:

  1. Supporting the financial sustainability of the NHS by offering predictability and stability in medicines expenditure;
  2. Improving patient outcomes by facilitating access to innovative treatments; and
  3. Supporting the UK life sciences industry by incentivising investment in innovation.

Affordability mechanisms

The UK pharmaceutical industry enjoys the right to free pricing of both its branded and generic medicinal products. However, there are two affordability mechanisms in place which contribute to controlling the NHS’s annual medicines spend: the statutory scheme, which is laid down in legislation and therefore applies by default, and the current voluntary scheme for branded medicines pricing and access (“VPAS”), which is negotiated by industry and requires companies to opt in. In practice, the schemes are managed in such a way as to be broadly commercially equivalent.

Both the VPAS and the statutory scheme are due to expire at the end of this year. Whilst the new VPAG will replace the VPAS, the statutory scheme has recently been subject to consultation, with an outcome expected in the coming weeks.

Medicines sales growth cap

The current VPAS sets a cap on the total permitted value of branded medicines sales to the NHS each year. Sales exceeding that cap are reimbursed by VPAS member companies via a levy payable to DHSC. The cap grows at an agreed rate of 2% per annum, which has resulted in an unprecedented levy of 26.5% in 2023.

To redress the balance of risk between health service and industry, the VPAG provides for accelerated sales growth over the next five years. DHSC has announced that the level of annual permitted growth in sales of branded medicines to the NHS will double from 2% in 2024 to 4% by 2027:

ABPI’s forecasts point to a compound annual growth rate of 6.1% between 2024 and 2028, which represents an absolute increase of £3.6bn above what would have been the case under the current 2% growth cap.

Differentiation of “newer” and “older” medicines

In order to distribute the levy more fairly between companies with greater or lesser responsibility for the NHS’s increased medicines spend, the VPAG differentiates between the following categories of branded health services medicines (except parallel imports):

  1. Newer medicines”: Either medicinal products in respect of which the supplementary protection certificate (“SPC”) applicable to the active pharmaceutical ingredient (“API”) is yet to expire, or medicinal products in respect of which no SPC applicable to the API was granted and the first licensed presentation is less than 12 years from marketing authorisation; and
  2. Older medicines”: All medicinal products that do not fall within the definition of “newer medicines”.

The levy applicable to sales of newer medicines will be set each year, as required to maintain the sales growth cap. According to ABPI’s forecast projects, newer medicine payment rates should start to decline, from 19.5% in Q1 2024 (16.6% for Q2-Q4 2024) to 7.2% in 2028.

The VPAG applies a levy of 10% to all sales of older medicines. Older medicines that have seen a price reduction of less than 35% will pay an additional top-up levy of between 1% and 25%, depending on the amount of that price reduction (i.e., a total payment of between 11% and 35%).

The first quarter of the VPAG (1 January to 31 March 2024) will be a transition period, during which a fixed payment rate of 19.5% will apply to all eligible sales. The differentiated payments for newer and older medicines will apply from 1 April 2024. Following the transition period, the government’s forecast indicates that the 2024 headline payment rate for newer medicines will be 15.1%.

Exemptions for SMEs

The VPAG increases the scope of the exemptions available to small and medium sized companies. Whereas the VPAS defined “small companies” and “medium sized companies” as those whose branded medicines sales to the NHS in the previous year totalled less than £5 million and less than £25 million, respectively, the VPAG increases these threshold values to £6 million and £30 million. All sales by small companies will be exempt from the VPAG payment. The exemption for medium sized companies will apply to up to £6 million of non-new active substances sales.

Investment facility

The VPAG introduces a Life Sciences Investment Programme, led jointly by the UK government and the pharmaceuticals industry. The following premium payment rate on eligible sales, which will apply in addition to the sales levy described above, is estimated to raise £400 million over five years:

The resulting investment facility will be used to drive the development of innovative medicines and thereby strengthen the UK life sciences industry. Funding will be allocated to three target areas:

  1. Increasing NHS capacity to recruit to and deliver clinical trials (approximately 75%);
  2. Supporting sustainable and innovative manufacturing (approximately 20%); and
  3. Enhancing Health technology assessment to ensure rapid adoption of new medicines (approximately 5%).

Health and Social Care Secretary Victoria Atkins has described the agreement as “momentous”, whilst Chancellor of the Exchequer Jeremy Hunt has called it a “landmark agreement”. Both emphasise savings for the NHS, increased access for patients to innovative medicines, and significant benefits to the life sciences sector and, consequently, the UK economy. Offering the industry perspective, Richard Torbett, Chief Executive of the ABPI has called it a “tough deal”, recognising the compromise to be struck between delivering transformative treatments for patients in the NHS and increasing the UK’s international competitiveness in the life sciences sector. Their full comments are available in this press release by the DHSC.