Recent changes to the pharmacy distribution channels have seen a reduction in the number of wholesalers used in the distribution process and the introduction of 'Direct to Pharmacy' ("DTP") schemes. Under DTP schemes, manufacturers set the prices paid by pharmacies and pay wholesalers a fee for delivering their medicines according to their required service standards. Pfizer have already adopted the DTP scheme using only UniChem and there are suggestions AstraZenica will follow suit by introducing a similar scheme or reducing the number of distributors they use.

Concerns from the NHS, pharmacies and smaller wholesalers prompted the OFT to conduct a market study into the distribution of medicines in the UK, which was launched on 4 April 2007. Its remit was to assess the:

• motivation for the DTP model and its impact on competition and choice;
• motivation for exclusive arrangements;
• long term impact on competition;
• incentives created by sector specific regulations;
• potential impact of the different distribution models on the appropriation of the discounts secured by pharmacies and the NHS; and
• service levels provided to patients.

On 11 December 2007 the OFT published the results of its study. It found there is a significant risk of price increases as a result of the new DTP arrangement. The implication of this could be additional cost to the NHS which could run into hundreds of millions of pounds. One recommendation by the study to combat this effect is that the Department of Health should make further changes to the Pharmaceutical Price Regulation Scheme ("PPRS") to ensure NHS costs do not increase.

The OFT has offered two options to accommodate both the DTP and traditional wholesale model. Firstly, list prices could be reduced in the PPRS framework by an amount equivalent to the average discounts received by pharmacies. Alternatively, pharmaceutical suppliers could offer a minimum list price discount to pharmacies.

The study also found that services to pharmacies and patients could be affected with increased waiting times for medicines being a key concern. The OFT has suggested that, if the Government is concerned about service standards, it should seek agreement from manufacturers to adopt minimum service standards and ensure it pays less if standards are reduced. The OFT has also pointed to competition concerns if there is any future widespread use of exclusive distribution arrangements.

The current PPRS runs until 2010. With evidence of an impending shift to DTP schemes and reduced distributors, the impact of a renegotiated PPRS may arguably be too little too late. In any event, this is only a voluntary scheme and there are no suggestions that any agreement between manufacturers to adopt a minimum service standard would be any different.

The Government has 90 days to respond to the recommendations. This process will be led by the Department for Business, Enterprise and Regulatory reform which will consult with stakeholders before outlining its response.

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