Navigating the Impact of VPAG: Opportunities, Challenges, and Strategic Considerations for Pharmaceuticals
Navigating the Impact of VPAG: Opportunities, Challenges, and Strategic Considerations for Pharmaceuticals
Article written by Steven Lin and Myrto Vouga , Windrose Consulting Group
Situation Overview
A new, non-contractual voluntary agreement has been implemented in the UK since the start of January 2024 and is set to run for 5 years, between the Department of Health and Social Care (DHSC)*, NHS England, and the Association of British Pharmaceutical Industry (ABPI) [1]. The new Voluntary Scheme for Branded Medicines Pricing, Access and Growth (VPAG) replaced the older 2019-2023 Voluntary Scheme for Branded Medicines Pricing and Access (VPAS), to manage spending on branded medicines, support the attractiveness of the UK pharmaceutical market, and promote financial sustainability for the NHS.
Background
In the UK, manufacturers and suppliers of branded medicines must comply with price control mechanisms, by participating in either the Statutory Scheme or a Voluntary Scheme. The Statutory Scheme applies to all NHS-branded medicines that do not participate in the Voluntary Scheme by mandating a payable rebate every quarter, among other cost containment features. Voluntary schemes, on the other hand, have been directly negotiated between the UK government and the industry, and should manufacturers opt in, they are subject to a set of arrangements for price and profit control. Despite some differences mainly around price and exemption-related incentives within the voluntary scheme, the government aims to maintain a “broad commercial equivalence” between the two schemes, by adjusting permitted sales growth rates and repayment percentages within the statutory scheme [2].
Under the 2019-2023 voluntary scheme (VPAS), if the actual total NHS sales growth of branded medicines (across all branded drugs including branded generics and biosimilars) was above 2% per year, scheme members would pay the DHSC the difference in overspending to offset anticipated growth above the 2% limit and maintain overall financial sustainability (see Fig 1). Sales growth was relatively stable between 2019-2020 (<2%) but spiked considerably in 2021 (9.44%) and 2022 (7.61%), hence increasing the payback rate to 26.5% in 2023**[3]. Key member companies (e.g., AbbVie, Eli Lilly) subsequently exited the scheme warning that such extreme revenue claw-backs threatened the UK’s life sciences ecosystem. Other manufacturers have also expressed the intention to initiate drug withdrawals and reconsider the strategic positioning of their pipeline products in the UK market [5].
Revamping Market Access: VPAG's New Sales Growth and Rebate Framework
In response to these prominent challenges, the new 2024-2029 VPAG introduces major adjustments to projected sales growth to manage NHS spending and the associated claw-back structure and to directly address concerns from manufacturers. Specifically, the government plans to implement sales growth adjustments gradually, starting from 2% in 2024 and increasing to 3.75% in 2025–2026, and further to 4% in 2027–2028 (see Fig 1) [1]. This phased adjustment to the growth rate baseline aims to mitigate unusual sales fluctuations encountered in previous years and to provide stability and predictability in pricing.
In conjunction with the sales growth adjustment, VPAG introduces a revamped rebate framework that significantly diverges from VPAS. Unlike VPAS where uniform rebate percentages are applied across all scheme members, the rebates under VPAG will depend on the specific product characteristics, leading to variations in the aggregate rebates paid by different manufacturers [1]. Specifically, VPAG outlines rebate rules based on whether a medicine is classified as "newer" or "older."
Newer medicines, defined as branded drugs within their first 12 years of the initial marketing authorization or the expiry of a Supplementary Protection Certificate (“SPC”), will be subject to dynamic rebate rates similar to the previous VPAS system (i.e., calculated mainly based on the overspend between sales growth rate and actual NHS spending). From 2019 to 2023, the rebate rate varied from 5.9% to 26.5%.
Older medicines, encompassing all other branded medicines, will be subject to a flat rate rebate of 10%, augmented by a top-up payment based on historical price erosion, where a maximum of 25% is applied. For instance, if the price erosion remains below 10% for an older product, a maximum top-up of 25% is applied and will result in a total rebate of 35%. As the level of price erosion increases beyond 10%, the top-up rate gradually tapers down until it eventually diminishes to zero.
Notably, the transition to the new rebate mechanism will commence with a fixed rebate percentage of 19.5% applied to both newer and older products for the first quarter of 2024, and then the differential rebate mechanism will begin from April 1st where a 15.1% for newer medicines will be applied for the remaining quarters of 2024 [1].
Fig. 1: Sales Growth and Rebate Framework for VPAS and VPAG
Windrose’s Take
The new update on the voluntary scheme is expected to save the NHS approximately £14 billion [6] over the next 5 years, yet it has key implications for manufacturers seeking market access in the UK. Sales rebate rates are projected to fall to 7.2% for newer products by 2028, as a result of savings from the updated rebate mechanism, and the scheme is expected to provide more financial predictability and transparency for the pharmaceutical industry [4]. The VPAG has committed to bolstering the attractiveness of the UK pharmaceutical ecosystem through an additional £400 million provided by scheme members on top of rebates to facilitate clinical trials, manufacturing, and health technology assessments. Furthermore, the scheme will also provide additional funding for NICE in order to facilitate timely market access and prompt incorporation of health technology recommendations within clinical guidelines and their adoption within local NHS jurisdictions. Moreover, NHS England has signalled that commercial arrangements will be considered to explore more flexibility for the recommendation of new medicines. This will support a streamlined inclusion of Advanced Therapy Medicinal Products (ATMPs) into the NHS, with the possibility to increase the budget impact test threshold to £40 million (currently set at £20 million), further supporting a “fast-tracked” review process for these medicines [1]. The suite of measures underscores NHS’s commitment to fostering a pro-innovation pharmaceutical sector in upcoming years.
Despite its promised benefits, the VPAG-introduced differential rebate mechanism may pose significant threats to some manufacturers’ profitability and willingness to engage in the scheme. Companies with portfolios primarily comprising older, off-patent medicines that have not seen significant price reductions may face heightened financial burden due to elevated rebate rates imposed by the VPAG - considerably higher than those imposed by other countries like Germany (12%) [4]. Supply of older medicines and biosimilars may result economically unviable, with subsequent drug shortages and reduced competition, potentially hindering patient access to safe and effective medicines in the UK [7]. As a result, the value delivered by the generic and biosimilar sectors may be negatively impacted, accompanied by the looming loss of profitability for those drugs. Moreover, though the rebate rate will gradually decrease over the next few years, a prolonged period of elevated rebate rates will likely not return to pre-COVID levels (~5-10%) until 2027-2028; as such, manufacturers must strategically navigate the evolving access and reimbursement landscape, ensuring efficient resource allocation to mitigate any revenue implications effectively. This includes adapting cross-portfolio pricing strategies, optimizing product positionings based on drug characteristics, and fostering close collaborations with the NHS and local stakeholders in this new environment. Finally, manufacturers should strategically assess how joining one scheme over the other might impact commercial opportunities and profitability.
While the new VPAG presents opportunities for investment, stability, and improved patient access, it also introduces significant restrictions across stakeholders, ultimately impacting the market access potential of the UK’s life sciences sector. Manufacturers should adapt their pricing and access strategies to mitigate these risks, ensuring a balance between innovation, growth, and financial sustainability within the evolving UK market access landscape.
*Representing the UK government, the government of Scotland and Wales and the Northern Ireland Department of Health
**Equivalent to £3.3bn in sales revenue and up from £0.6bn in 2021 and £1.8bn in 2022
Navigating the Impact of VPAG: Opportunities, Challenges, and Strategic Considerations for Pharmaceuticals
Article authored By Steven Lin and Myrto Vouga, Windrose Consulting Group