Government's Response to OFT's Review of Undertakings by Macfarlan Smith Limited
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Government’s Response to OFT’s Review of Undertakings by MacFarlan Smith Limited (MSL) Market Analysis Opium in the UK – Analysis to date March 08 Sections in this report I) Background II) Home Office Undertaking III) Market Structure IV) Conclusions from Previous Market Analysis V) Taking the Analysis Forwards VI) Conclusions To Date Annex A: Copy of text from letter written by the EU Commission to EU Parliament re Opiates Annex B: Summary of responses to Home Office data request. I) Background a) OFT Review In 2006 the OFT published a report: Opium Derivatives, A Review of the Undertakings Given by Macfarlan Smith (MSL)1. This report recommended that the Government should consider competition when setting licensing policy for opium derivatives. b) Government Response The Department for Business, Enterprise and Regulatory Reform (BERR) has a general interest in OFT's market studies and co-ordinates Government responses where those studies make regulatory recommendations. Consideration of regulatory and policy issues is a matter for the relevant Department. In its response to the OFT2, the Government agreed to: Undertake to analyse the effects of MSL’s position as sole supplier on customers and competition, contrasting this with the positions of customers in other countries (both those who impose significant restrictions and those who do not). c) Work Undertaken by ERA & Drugs Liaison & Enforcement Unit (DLEU) BERR commissioned the Home Office to take forwards this market analysis. It was agreed that, at this stage, rather than repeat the OFT’s work a few years on (which was largely based on a survey of MSL’s UK customers) it made more sense to try and take the analysis forwards. 1 Opium Derivatives – A Review of the Undertakings by Macfarlan Smith, OFT 834, 2006. 2Opium Derivatives: Government’s Response to OFT’s Review of the Undertakings by MacFarlan Smith Limited, Sep 2006, URN 06/1873 1 Despite having no formal data collection powers or significant competition analysis experience the DLEU agreed to seek to obtain the necessary information to take the analysis forwards. ERA has been assisting DLEU in its data requests and the subsequent analysis. This note summarises the position to date. II) Home Office Undertaking a) Key Deliverables The Government set up an action plan to take forwards the OFT review. This contained four actions: 1. Review the licensing policy [for opium derivatives] to ensure that the detrimental impact to competition is prevented, or where other objectives intervened, limited. 2. Repeating this process of review every five years [next due in 2010]. 3. Analyse the effect of MSL’s position as sole supplier on customers and competition, contrasting this with the position of customers in other countries; 4. Present the findings of the market analysis to the European Commission as background information. This note is concerned with the last two points. b) HO Approach HO Officials agreed with BERR officials that the key to this analysis was to try and take forwards what the OFT had done rather than repeat that analysis. On this basis HO officials undertook a three pronged approach: I) Continued monitoring of MSL maximum price lists The OFT review considered the maximum price lists of MSL over a period of time. The OFT review noted that “MSL has reacted to our concerns about the lack of customer knowledge about the price list by agreeing to improve compliance and ensure that all bulk customers are kept informed of the maximum price list.” The OFT’s price analysis has been replicated and extended to cover those issued since the OFT’s report. II) Analysis of the data provided by MSL to the OFT. Due to legal constraints generated by the fact that all the information gathered for the OFT review was gathered under the Enterprise Act 2002 the OFT was unable to provide the HO with any of the data it had collated3. 3 Specifically Section 241(1) and Section 244 of the Enterprise Act 2002 states that disclosure of any material disclosed to the OFT under part 9 of the Enterprise Act 2002 cannot be disclosed to third parties without the agreement of the OFT. The OFT had not undertaken the necessary disclosure tests to identify if the information could detrimentally affect the business interests of anyone providing that information. The OFT therefore could not disclose the information to the HO. This position was confirmed by HO Legal Advisers Branch. 2 The HO therefore had to request that MSL provide the HO with copies of the information provided to the OFT. MSL complied with this request and this information was reviewed afresh. III) Collation of cross EU pricing information In order to contrast the UK position with “the positions of customers in other countries” the HO wrote to 15 other Licensing Authorities to collate data on overseas markets for Opium Derivatives (essentially data on the market structure, quantities of opium derivatives traded and prices of those opium derivatives which are traded). The response rate has not been sufficient to facilitate any meaningful analysis. c) Regular Reporting As part of this work BERR is required to provide a regular six-monthly update of progress to Economic Development Committee (Formally EPAC). III) Market Structure a) Overview The principal opium derivatives used within the UK are: • Codeine; • Dihydrocodeine; • Morphine; and • Diamorphine. Of these, codeine is produced in the highest volume, and sold downstream to be incorporated by pharmaceutical companies in a wide range of products, many of which are available commercially. At the other end of the scale, diamorphine is a marginal product, used almost exclusively by the NHS. MSL is the world’s sole manufacturer of diamorphine. The market is worth around £30m per year. Opium derivatives – especially morphine and diamorphine – are highly prized on the illicit market and actively sought by mis-users. It is important that such products cannot be diverted into the illicit market, but also that the guaranteed purity of pharmaceutical products is not jeopardised. b) Licensing System The licensing system, and current Government policy, is rooted in a number of multilateral drug treaties4 which rest on the concept of national control by individual states within the limits of their jurisdiction. These deal with the licensing and inspection of cultivation, production, manufacture and trade (including import and export) in the controlled drugs. 4 The 1961 Single Convention of Narcotic Drugs (which was strengthened by the 1972 protocol amending that Convention); the 1971 Convention on Psychotropic Substances and the 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. The UK is a party to all three conventions. 3 There is therefore a control equation, monitored by the International Narcotics Control Board (INCB), which ensures a balance between legitimate production with legitimate requirements. To enable the functioning of this, the UK Government must provide estimates of our requirements for narcotic drugs to the INCB for confirmation on an annual basis. The UK must not exceed these estimates without good reason and the prior knowledge and acceptance of the INCB. The UK has to provide the INCB with an annual estimate of the narcotics it expects to be consumed (medical, scientific and manufacture of drugs). The HO must agree any upward/ downward revisions to the estimate. The HO bases these estimates on info from manufacturers at the end of the proceeding year. Any manufacturer wanting to produce, supply, manufacture, import or export narcotics requires a license from the HO. In terms of opiates the HO will authorise imports from the EEA if the drugs are readily available from within the UK. Licenses are provided if the imports will not cause the UK to exceed its INCB estimate. Since 1992 the HO has permitted imports of opiates from the EU or EEA. The decision not to import from outside the EEA was upheld in High Court in R v Secretary of State for the Home Office ex parte Arthur H Cox Ltd. In Aug 04 the HO (in response to inc imports of codeine phosphate and fear of exceeding the INCB estimate) apportioned its estimate for 2005 (39.5 tonnes in total): • 35.5 tonnes for the UK market (cutting MSL’s 2004 figure by 4 tonnes); • Importers up to 4 tonnes (Cutting back import licenses in 2005 for just over 9.7 tonnes in 2005). In 2008 the apportionment is to allow importers between 4.5 and 5 tonnes. The most commonly used formulated products using codeine dihydrocodeine and pholcodeine contain only small quantities by weight and can be freely imported without a need for a HO license. Formulated products must comply with the necessary MHRA licensing procedures. c) Market Structure The diagram over is adapted from the OFT & MMC reports. This illustrates how the market for opium derivatives, and in turn, the formulated opiate products (the drugs that incorporate opium derivatives) is structured. 4 Fig 1: Market Structure for Opium Derivatives and Formulated Opiate Products Poppy Straw Raw Material Concentrate of Poppy Straw Opium Chemical Morphine Codeine Derivatives Reaction Morphine Codeine Dihydrocodine Diamorphine Pholcodine Salts Salts Used Formulated For Opiate Analgesics Analgesics (severe) (mild) Analgesics Products Analgesics Antitrussives Antitussives – Antitussives (Moderate) (severe) (mild) (severe) (mild) Note: • Analgesics – Used for the treatment of mild to severe pain. • Antitussives – Used to suppress the cough reflex. 5 IV) Conclusions from Previous Analysis a) EU Commission MSL provided the Home Office with a copy of a letter from the EU Commission to the Vice-President of the European Parliament (Dated Jan 99). This states that: The Commission has during the last ten years repeatedly attempted to obtain from the Member States a definition for a common approach in respect of the controlled circulation of opiates within the Community, as well as the controls on their imports from third countries.