Glaxosmithkline UK Ltd v Department of Health

A voluntary pharmaceutical pricing scheme may be contractual and binding once a manufacturer has entered it. Its provisions must be construed according to the limits and mechanisms expressly chosen by the parties. Where the scheme requires an overall reduction in manufacturers’ list prices, the court should not replace that mechanism with an unexpressed requirement to achieve an equivalent saving for the NHS.

Branded medicines remain within the scheme when supplied by a manufacturer to a pharmacist and later dispensed against generic prescriptions, unless the scheme expressly excludes them. An implied term will not be inserted into a detailed negotiated agreement unless it is necessary and so obvious that it goes without saying.

Glaxosmithkline UK Ltd appealed under section 69 of the Arbitration Act 1996 from a reasoned opinion of the Pharmaceutical Price Regulation Scheme Arbitration Panel dated 2 August 2006.

The dispute concerned the 1999 Pharmaceutical Price Regulation Scheme. GSK used volumes of branded products supplied under brand equalisation deals in calculating whether it had achieved the required 4.5% reduction in list prices. Some of those products were later dispensed against generic prescriptions.

The Department of Health argued that those volumes had to be excluded because the scheme was intended to produce equivalent savings for NHS expenditure. It also argued that the court lacked jurisdiction and, alternatively, that such an exclusion should be implied. The central issues were whether the scheme and its arbitration provisions were binding, and whether the products fell within the price-reduction and modulation provisions.

1. Jurisdiction. The PPRS 1999 was a commercial contract. Although participation was voluntary, that meant only that a manufacturer could choose whether to enter the scheme. Once entered, the scheme created binding obligations. The statutory framework, including section 33 of the Health Act 1999, and the wording of the PPRS referred to obligations, price limits and profit limits. The arbitration agreement was likewise binding. The appeal therefore fell within section 69 of the Arbitration Act 1996.
2. Construction. Section 33 identified price limitation and profit limitation as the mechanisms by which the statutory objectives were to be achieved. The PPRS expressly required a 4.5% reduction in NHS list prices, subject to modulation. It did not require an equivalent percentage reduction in NHS expenditure.
3. Chapter 7 applied to all branded licensed NHS medicines subject to stated exceptions. Neither Chapter 7 nor Chapter 21 excluded branded products supplied to pharmacists which were subsequently used to fulfil generic prescriptions. The product remained branded product when sold by GSK. The pharmacist’s later choice of prescription route was irrelevant.
4. The references to cost-neutral modulation meant that modulation had to produce the same aggregate list-price reduction as an across-the-board 4.5% reduction. They did not introduce a separate requirement to prove net NHS savings. The court also noted that calculating hypothetical net savings would involve substantial uncertainty because of market responses, prescribing, dispensing and competing products.
5. Implied term. The proposed exclusion was not necessary to give business efficacy to the PPRS and was not obvious in the relevant contractual sense. The detailed negotiations, the absence of any provision for the information required to operate the proposed exclusion, and the Department’s repeated approval of GSK’s calculations all contradicted the alleged obvious intention. The approach in Shirlaw v Southern Foundaries [1939] 2 QB 206 was not satisfied.
6. The court was fortified by the reasoning in R v S/S Health ex p BAEPD [2001] EWHC Admin 183, which recognised that price reductions against generic competition outside the specified patent-expiry periods could be included in modulation calculations.
7. GSK’s appeal succeeded. The question of law was answered in the negative: under the 1999 PPRS, GSK was not prohibited from including the relevant volumes in its list-price reduction calculation. Costs were to follow the event, subject to consequential matters.

The judgment states that GSK appealed under section 69 of the Arbitration Act 1996 from the Pharmaceutical Price Regulation Scheme Arbitration Panel’s reasoned opinion dated 2 August 2006. The High Court allowed the appeal and answered the question of law in GSK’s favour.