At one level, the UK medicines supply chain – from manufacturer to wholesaler to community pharmacies – is a relatively simple one. The originator of a drug is its sole manufacturer at first, protected by a patent for typically 15 years. During this time, it is the sole supplier of that medicine to the NHS. It charges comparatively high prices to recoup its research investment. The price is controlled by government and NHS intervention in the market.

When the patent expires, competition is introduced from other manufacturers that results in generic versions of the medicine introduced, based on the same active ingredient and achieving the same clinical outcome. The prices of the vast majority of these generic medicines are controlled not by government intervention, but by competition, as multiple suppliers seek market share, competing on the basis of price to sell their products to community pharmacy. With freedom of pricing and an open market approach, manufacturers’ prices can often be slashed quickly by up to 90%. The role of the community pharmacist is critical in controlling prices in this way.

However, underpinning that process is a sometimes complex system that can often be unseen at best or misunderstood at worst. Successive English governments have created and overseen a system that operates in this way and which, in doing so, creates the lowest generic prices in Europe. It is based on complex interactions and the ability of players in the market to respond to changes.

GPs in the UK are taught to write prescriptions by their international nonproprietary name – the generic name of the medicine. This means that when a patent ends, prescriptions are already being written using the generic title, which helps quickly drive uptake and therefore savings as well as increasing patient access.

Community pharmacies are reimbursed at the same price for a generic medicine, irrespective of the price they paid for it. This means that they naturally seek out the lowest priced version of the medicine, and it is this competition than maintains low prices. The £800 million margin on dispensing guaranteed by the Department of Health and Social Care (DH) to community pharmacy provides the headroom within which this competition can operate, and is thus a critical part of the system.

To deliver this margin, and cater for distribution costs, the reimbursement price of generic medicines in category M of the drug tariff is set by the DH at approximately twice the manufacturer’s actual selling price. The retained margin is closely monitored by the Pharmaceutical Services Negotiating Committee and the DH, and changes are made to the reimbursement price to ensure that community pharmacy receives £800m. Where excessive margin has been given, that excess is clawed back by the DH reducing reimbursement prices, which can itself lead to an increase in the number of concessionary prices, as we have recently seen.

An independent report by economic consultancy Oxera in June, commissioned by the British Generics Manufacturers Association (BGMA), has recently concluded that the UK generic medicines market works well in this way and delivers the lowest prices in Europe. Critically, the report shows that it is possible for manufacturers to offer low prices in the UK because of the size of the market within a single European one, low levels of intervention by government, and the inherent flexibility of the UK market, which allows manufacturers to respond to economic changes or challenges, sometimes by increasing prices.

The report also shows that, in the majority of occasions when manufacturers have had to increase prices to remain in the market, prices fall to close to their original level within a year. The report concludes that misjudged government intervention, for example, in response to price increases, could undermine the flexibility of the UK market and have unintended consequences, leading to a less well-functioning market. There are parallels with changes to category M prices leading to more concessionary prices, which themselves undermine the operation of the market at pharmacy level.

The conclusion of Oxera’s report is essentially simple: the UK generic medicines market is a well-functioning process, delivering low prices, underpinned by competition and flexibility with high volumes. Inappropriate intervention by government could impact one or more of the features which underpins the market, leading to negative unforeseen consequences.

Warwick Smith is director general of the BGMA