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UPDATE 1-UK coalition govt could end free drug pricing

* Government plans to reform way drug companies are paid * Move to “value-based pricing” may bring in price controls

* UK currently one of few markets with free drug pricing

(Updates with Queen’s speech to parliament, paragraph 8-9)

LONDON, May 25 (Reuters) - Britain’s position as one of the few markets in the world where drug companies are free to set prices for their medicines could be under fire from the country’s new coalition government.

A Conservative-Liberal Democrat coalition proposal to move to “value-based pricing” for medicines suggests price controls are now on the horizon, industry analysts said.

Drug prices have been under growing pressure across Europe this year as governments tackle ballooning budget deficits. [ID:nLDE64G20F]

The British proposals may not be an immediate threat to drug company profits, unlike recent price cuts in Spain, Greece and Germany, but promise to ratchet up pressure in the longer term.

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For drug sales graphic see link.reuters.com/ryt84k

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The current UK Pharmaceutical Price Regulation Scheme (PPRS) regulates profits, not prices, on sales to the National Health Service (NHS), while the National Institute for Health and Clinical Excellence (NICE) assesses if drugs are cost effective.

Now that is set to change. In its “Programme for Government” document, released last week, the coalition said it would “reform NICE and move to a system of value-based pricing”.

The government made clear on Tuesday that this would involve changes in the way medicine prices are determined.

“We will ensure everyone, including cancer patients, have better access to drugs and innovative treatments on the NHS,” Queen Elizabeth said in a speech delivered on behalf of the government at the formal state opening of parliament.

“We will do this by reforming the way drug companies are paid for NHS medicines.”

The timing is unclear, since the current PPRS is scheduled to run until January 2014, although the last Labour government surprised the industry three years ago by renegotiating the previous scheme half way through its five-year term.

“A price-control policy has not been fleshed out ... but the fact that it has been mentioned in the context of NICE reform should be considered as the main -- and perhaps inevitable -- threat to the pharmaceutical industry in the UK going forward,” said IHS Global Insight healthcare analyst Milena Izmirlieva.

Analysts at Morgan Stanley described the proposal in a note on Tuesday as a “wolf in sheep’s clothing” with long-term negative implications for the industry.

Loss of free pricing could also have a knock-on impact, since companies can currently use Britain to set a high price point for reference pricing in the rest of the European Union and other countries, such as Japan, they added.

The Association of the British Pharmaceutical Industry said it was keeping an open mind ahead of talks with government.

“Valued-based pricing is one way of doing it,” said spokesman Richard Ley. “We are not opposed to the principle. It is a question of how it is achieved to get it right.”

On the positive side, the government restated a Conservative manifesto promise to help patients get access to pricey cancer drugs not approved by NICE, like Roche's ROG.VX Avastin -- although an earlier Conservative funding pledge of 200 million pounds ($288 million) was not spelt out. ($1=.6951 Pound) (Editing by Louise Heavens and Jon Loades-Carter)

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