The Big Question: Are drug companies ripping off the National Health Service?

Why ask now?

The pharmaceutical industry is under attack from Sir Michael Rawlins, chairman of the National Institute for Clinical Excellence (Nice), whose job is to decide which drugs the NHS can afford within the budget the politicians allot. He has accused the pharmaceutical industry of profiteering, saying that "in part, they are overpricing their products".

Haven't we heard this before?

Indeed. The drugs industry was accused of making excessive profits from the NHS after a report by the Office of Fair Trading (OFT) last year ruled that the health service had been over-charged £8bn for large volumes of brand-name drugs which are up to 10 times more expensive than other treatments delivering very similar benefits to patients. It singled out statin treatments for blood pressure and high cholesterol as an area where a massive saving of nearly £400m could be made easily by following the "value-based" pricing systems which have been successfully introduced in Sweden, Australia and Canada.

As well as this massive hidden subsidy to drug companies, there have been reports of more nefarious activities. In 2003, fraud investigators launched a probe into allegations that drug companies had conspired to raise the price of the antibiotic amoxicillin by up to 260 per cent. And just a few months ago the drug giant Reckitt Benckiser was accused of ripping off the NHS with a secret plan to maintain its monopoly in the supply of the lucrative heartburn medicine, Gaviscon.

Although Gaviscon has been out of patent for almost 10 years, no other manufacturer has developed a cheap generic version of the kind which could save the NHS £40m a year. It is sold at almost four times what it costs to produce and makes millions for its Hull-based manufacturer. Leaks of internal emails revealed the existence of Project Eric, a plan to delay the development of a generic version of the drug. One Reckitt executive wrote: "Should we not drag it out as long as possible... nine million pounds of business is at stake." Reckitt raised technical objections to the licensing of a generic version in 2000, 2003, 2005 and 2006.

What do the drug companies say?

That today's profits pay for tomorrow's research. Continued success in research and development depends on the firms – and those who invest in them – being properly rewarded for what can be very expensive speculative scientific investigations.

The industry claims it takes between 10 and 12 years to bring a new drug on the market, with an average cost of around £350m for each one. Indeed, the major drug companies frequently complain that the NHS does not spend enough on their products.

Do we spend too much on drugs?

The total NHS drugs bill has grown by about 7 per cent a year. In part, that is because of more expensive drugs, but also because patients demand more prescriptions. The health service spends around 10-11 per cent of its money on medicines – about the same proportion it spent in 1968. Of the total £11bn bill in 2005 about £8bn went on brand-name drugs, and £3bn on their cheaper generic "out-of-patent" equivalents.

Why doesn't the Government do something?

It does. Years ago, it set up the Pharmaceutical Price Regulation Scheme (PPRS) which sets a cap on the profits that each drug company can earn on its annual sales of branded medicines to the NHS. Some critics say the cap is too generous but the PPRS is negotiated with the drug companies to strike a delicate balance.

On the one hand, it seeks to ensure that safe and effective medicines are available on reasonable terms to the NHS. But it also wants to secure a strong, efficient and profitable pharmaceutical industry in the UK capable of sustained research and development to come up with new and improved medicines. That means value for money for the taxpayer has to be balanced against stability and predictability for an industry which is a major player in the vitality of the UK economy.

After the OFT report last year said the PPRS needed reforming, this year's scheme negotiation has sought a 5 per cent reduction in the cost of drugs sold to the NHS, with a further price cut of 2 per cent if the drugs bill exceeds an agreed threshold.

But it has declined to introduce a cap on the profits of individual drugs, sticking with a formula which limits profits on a company's overall portfolio, not one particular medication.

What do independent experts think?

Professor David Taylor, of the University of London's School of Pharmacy, yesterday accused Sir Michael of creating "propaganda" to draw attention away from recent criticism of a Nice decision not to provide a new drug to treat kidney cancer – criticisms reinforced by the author Terry Pratchett who has recently been diagnosed with Alzheimer's, for which Nice has also refused to fund a new drug.

"The drugs cost story is a great diversion from other areas," said Professor Taylor, who previously worked for the Association of the British Pharmaceutical Industry. "If it wasn't a profitable industry it wouldn't be here, or be able to attract investment."

The drug companies recently received some unexpected backing from the courts. A £40m Serious Fraud Office case accusing five firms of defrauding the NHS by fixing their prices was thrown out of court by a judge last month. And in the House of Lords, law lords recently ruled that price-fixing in itself could not be classed as conspiracy to defraud.

So who is right?

Both sides. Drug companies do need strong profits to invest in research and development. But their marketing budgets now dwarf spending on R&D. And some 80 per cent of their R&D innovation is directed at developing profitable medicines that offer no real therapeutic advance. Drug companies offer myriad products with different combinations of the three main analgesics – aspirin, paracetamol and ibuprofen – all of which are available at a fifth of the price in their generic forms. Some medications add caffeine to "enhance the analgesic effect", though you could get the same effect with a paracetamol and a cup of tea.

We are, increasingly, a drug-taking culture. And even the international medical journals, which provide independent comment on medical matters, depend on advertising cash from the pharma companies.

Also drug companies have been notoriously slow to address the medical problems of the developing world where the ill cannot afford expensive medicines.

The commercial model produces new drugs, the argument goes. That's capitalism for you. You can't have it both ways. But it's tough for those too poor to afford either.

Do we need a windfall tax on drug firms?

Yes...

* Their profits are out of all proportion to the cost of the drugs they provide to the NHS

* They spend more on marketing than on trying to find cures for key diseases

* They do little research on the illnesses that afflict vast numbers of people in the developing world

No...

* Profits on successful drugs counterbalance the cost of researching into failed drugs

* A strong pharmaceutical sector is vital to the overall success of the British economy

* The Government has already established the Pharmaceutical Price Regulation Scheme to cap profits and ensure value for money