Finance Committee, 13 Mar 2001

Meeting date: Tuesday, March 13, 2001

Official Report 125KB pdf

---

Proposed Contingent Liabilities

Agenda item 2 is on proposed contingent liabilities, one of which we discussed last week. We have with us today Dr Aileen Keel, who is the deputy chief medical officer; John Aldridge, who is director of finance in the Scottish Executive health department; Angus Macmillan Douglas, who is director of the Scottish National Blood Transfusion Service and Dr Bob Perry, who is director of the protein fractionation centre. Thank you all for being with us today.

I understand that Mr Macmillan Douglas will give an opening statement. No doubt, you will have seen the Official Report of the points that members raised last week.

Yes, I have.

Your written submission has already answered some of our points, but it will be helpful to hear your opening statement.

In our submission, we refer to clinical trials that are essential to allowing the Scottish National Blood Transfusion Service to provide updated products for patients who are being treated under the national health service in Scotland. That is a core business of the blood transfusion service. The clinical trials must be carried out or the product will not be licensed by the regulators for use. It is therefore essential that we carry out clinical trials.

The products that we are discussing are for use by NHS patients in Scotland. If the SNBTS could not update its products, it would not be able to provide a world-class service to Scottish patients. In effect, it would lose its reason for existence. That would disadvantage the NHS in Scotland because, as well as being of very high quality, our products are produced economically.

As the clinical trials are carried out in the UK for the benefit of patients to be treated under the NHS, the blood transfusion service does not normally take out commercial insurance. If members wish, we can discuss that more fully. We can also talk about the level of risk that is involved.

The Official Report of last week's meeting shows that two particular points were raised—on quantifying liability and on sharing risks. To a large extent, the Scottish Executive memorandum that has been submitted by Mrs Sandra Falconer deals with those points. However, Andrew Wilson has previously raised a number of points and, following Mr Macmillan Douglas's statement and Mrs Falconer's memorandum, he may wish to follow up on some of them.

The memorandum helpfully clarifies the issue. The two outstanding issues that I am interested in are not really for today's witnesses. They are more general and concern entering into unlimited liabilities. The committee ought to consider that matter closely, perhaps as a future agenda item. In this particular case—indeed, in any of the cases that we are considering—the risks are not significant; but I wonder whether that is particularly diligent.

On risk, the memorandum mentions "Government Accounting 27.2.6". Is that a rule or a code of practice?

"Government Accounting" is a set of rules on how Government carries out its business.

According to the memorandum, SNBTS does not buy any insurance products.

Indeed. Public bodies do not buy commercial insurance products for their day-to-day businesses. However, commercial insurance is sometimes appropriate when public bodies carry out income-generating activities.

Are the clinical trials income-generating activities?

They are not.

We may discuss that during the next part of this agenda item.

I am sorry, but I was not at the meeting last week. Mr Macmillan Douglas spoke about cost-effectiveness. As far as the health service is concerned, I presume that cost-effectiveness means that a comparable product cannot be sourced at a better price or with a better continuous supply.

That is right.

To what extent do clinical trials develop the skills base in pharmaceutical and biomedical activity? There are questions to be asked. If we are considering risk to the public purse—it is being suggested that there is a risk—we must consider the issues in the round, not only this activity in isolation. Andrew Wilson has raised a point on the cumulative effect of public indemnity across public services. That is an issue, although perhaps not necessarily one for Mr Macmillan Douglas to answer. Can you assure the committee of the long-term effectiveness of the SNBTS's activities?

I can start to answer those points, and I am sure that Dr Perry will be able to go into more detail—especially on the benefits to the Scottish biotechnology industry.

We contributed to an investigation by the UK Treasury about two years ago, which compared our cost-effectiveness with that of our English sister organisation. We were found to be very cost-effective when compared with other suppliers. When considering our own management, we have analysed our return on public assets. Although that return varies from year to year, as it would in any activity, we have a positive return on capital employed, if one judges our products to be priced as competitors' products are.

I would like to take up the point about your sister organisation, as you call it, for England and Wales. Does the Scottish activity have a competitive advantage over the rest of the UK?

We believe that it does for two reasons, which Dr Perry can expand on. First, we produce a lot of our own intellectual property; the service in England and Wales does so, as I understand it, to a lesser degree. Secondly, we are more cost-competitive than the service in England and Wales, so we believe that we are in good shape when compared to it. Of course, without representatives from that organisation being here, the debate is slightly one-sided.

In other words, there is a potential for revenue-raising activity through your activities.

We believe that that is true outwith the UK. Our service offers high quality and is cost effective in an industry in which those two things are key.

So there is an opportunity to sell into the whole UK market, but that would be for profit. Presumably, in future, if that activity took place, you would be talking about commercial insurance, rather than public indemnity.

I said that that was true outwith the UK. At the moment, we do not indulge in competitive sales within the UK against another public sector organisation. That is a matter of policy for people whose position is rather above mine to decide upon. However, we are certainly well positioned to provide products outwith the UK and to provide intellectual property transfers outwith the UK. That is what the Egyptian contract—the next item on the committee's agenda—is about. To answer David Davidson's specific question: yes, we would go for commercial insurance in those cases.

One of the answers in Mrs Falconer's memorandum is a response to a point that Richard Simpson raised last week. He said:

"The Executive should specify the liability for each trial".—[Official Report, Finance Committee, 6 March 2001; c 1149.]

The response states:

"This would involve in its turn setting a limit for clinicians and patients, which is outwith standard industry practice (for example, guidelines from the Association of the British Pharmaceutical Industry do not allow for the specification of a limit)."

Just because the Association of the British Pharmaceutical Industry does not allow for that, would that necessarily stop the Scottish Executive health department from setting a limit?

Strictly speaking, no—it would not prevent the health department from setting a limit. However, we try to stick to the rules of organisations such as the ABPI so that we can achieve consistency throughout the UK.

I said last week that we expected that you might come back to us annually in relation to future clinical trials. However, the memorandum states:

"The list of this year's trials was indicative; it was not the intention to seek approval for clinical trial indemnities on an annual basis."

You have outlined seven such trials. How far into the future are you looking and how many more trials do you anticipate in the next five years?

The seven trials that we have listed are those that are included in the next 12 months of programming.

They begin in the next 12 months, but they could continue for a maximum of three years.

Indeed. They commence within the next 12 months, but some of them last for two or three years, depending on the nature and structure of the trial. Beyond that, we are always subjected to intense regulation by the UK Medicines Control Agency, and we are regulated by the Medicines Act 1968. Periodically, new guidelines come out that require us to make modifications to our products to enhance their safety. That often requires a specific clinical trial to ensure that no adverse events will occur as a consequence of changes to the products. There will be changes and new products will come along, but the list that has been given is of the trials that are within our close vision at the moment.

I am slightly concerned that that is open-ended. I envisage your having to come back to the committee at some stage, rather than your saying merely that we had opened the door for you in 2001. I do not want you to think that there is no requirement to come back in the future.

This question is for John Aldridge. A question was raised last week, and repeated a few moments ago, about the constraints that are placed on contingent liabilities that the health department or the Executive as a whole might enter into. Do you have any written guidance from anybody, including the Treasury, on the rules that govern that and the limits that are placed on you?

Do you mean as regards contingent liabilities?

Yes.

There are rules about when a contingent liability must be entered into or reported. Contingent liabilities can arise in all kinds of different ways. Many arise in the course of normal business and are covered by specific legislation. Some are not covered by legislation and those cases must be reported to Parliament; there is guidance on the circumstances in which that should happen. However, there is no guidance about limiting the number or size of contingent liabilities.

So there is no conceptual limit whatever on that?

No. The argument has been that, when a contingent liability arises or is entered into, because Government, in theory, has access to the whole—

To everything.

Yes, to everything. Because the Government has access to the whole of the country's wealth, so to speak, it is argued that there is no need to put a limit on the extent to which contingent liabilities are entered into. Nevertheless, it is clear that when a contingent liability is entered into, all reasonable steps must be taken to limit the likelihood of that contingent liability coming to fruition, as is done in the case of the SNBTS contingent liabilities.

Fascinating.

I must apologise for being late; my train was somewhat delayed.

When we did not have a devolved Government, entering into unlimited liability against the total wealth of the country did not seem too extraordinary or outrageous. However, given that Scotland has a fixed budget, the question is worthy of further debate and consideration. Is there a similar situation in relation to devolved Governments elsewhere in Europe, such as Catalonia? Are there other devolved Governments that have a similar approach to unlimited liability against a fixed budget?

I am afraid, Dr Simpson, that I do not know the answer to that question.

I am sorry—that was a slightly unfair question, but I wonder whether that matter has been considered. For commercial pharmaceutical trials, some sort of insurance or re-insurance must be entered into, although some companies are now worth more than the gross domestic products of countries, so that may not be the case. Has there been any benchmarking against commercial practice to estimate what it would cost were the Finance Committee to recommend to the Government that there should no longer be unlimited liability without taking out insurance, or at least re-insurance, on that liability?

We have looked at that, and we have one example of such a situation. We are conducting a clinical trial outwith the UK because of a lack of patients in the UK. That trial involves approximately 30 people and deals with similar products and similar risks. The annual premium for that is £4,500.

That is helpful.

Other parameters might be helpful to members. We have been carrying out trials for 30 years without a claim; that does not give guarantees for the future, but it is a fact. The current trial that involves the most patients is the fibrin sealant trial, which involves 90 people. If, due to some catastrophe, all 90 of those people suffered adverse effects—which is unlikely, because all 90 would not be treated at the same time—that would be the worst-case scenario. If one thinks back to the sort of damages that were paid out to people who were infected with HIV through blood products—about £40,000 per person—the amount, updated to £50,000 per person to account for inflation, would come to some £4.5 million in total.

Richard Simpson raised a general point, which was also referred to last week. This question might perhaps be more properly directed at ministers, but now that the Scottish Parliament and Scottish Executive are in existence, has consideration been given to the fact that liability is now much more limited than it was? Of course, the Scottish budget is £19 billion and there would have to be a catastrophe for that budget to be stretched by claims, but has that matter been considered by the Executive's finance department?

I do not know the answer to that question. My colleague, the principal finance officer, would have been involved in any such discussions. I have not been, but I do not know that no such discussions have taken place. However, in the event of an enormous disaster in which the resources of the Scottish Executive were stretched beyond what they could take, there is still scope for access to the UK Treasury reserve in exceptional circumstances.

The committee is going to look at the whole question of the UK reserve and the Scottish reserve, so we shall revisit that point. Thank you for that answer.

Can you give us some comfort by describing the contractual arrangements that you enter into—in advance of their agreement to participate—with those who participate in the trials?

The majority of our trials are carried out in Scotland, or in the rest of the UK if we need access to a wider group of patients. The contractual arrangements amount to a professional relationship with somebody who is described as a principal investigator. In the vast majority of—if not all—cases, the principal investigator will be a senior national health service doctor. That activity is carried out under the umbrella of the national health service.

Vast amounts of documentation are put together to define responsibilities and so on, but there is no contract, as such, between us and those who carry out the clinical trial in the national health service. As part of the national health service, we work alongside our clinical colleagues to carry out the trials of the products. All the safety and quality issues are clearly documented, and the responsibilities of the doctors to their patients are clearly defined in regulatory documentation. However, there is no formal contract between us and the other parts of the national health service that we collaborate with.

I accept that I am asking a fairly generic question, regardless of the specific item that we are discussing at the moment, but it is a matter of principle. I presume that all the patients or volunteers who are involved in trials sign some document to agree to participate.

That is right.

In that documentation, is there a confirmation and definition of risk that is fully explained to patients? Is it also explained that that risk has an indemnity attached to it?

The risk to patients is very clearly expressed before any patient enters into a trial. Because our products are derived from human blood, it would nowadays be extremely rare for us to enter into clinical trials on human volunteers. Healthy volunteers tend not to be part of the constituency from which we draw our patients.

Before a patient enters into a trial, they are fully informed by their treating doctor and by their responsible consultant of the risks and the benefits, which will be carefully explained to them. They will make their decisions based on that information, and that decision is underpinned by a knowledge that they will have access to the same recourse in terms of compensation as if they were participating in a trial with GlaxoSmithKline, for example. That relates primarily to the guidelines and rules of the Association of the British Pharmaceutical Industry.

We operate within an environment and under guidelines and procedures that are broadly comparable to those of the wider pharmaceutical industry. The general view of doctors and patients is that anything less than that would be unacceptable.

Presumably, those patients are given not a limit but an unlimited indemnity, which they have to pursue through the legal system.

I think that they are given an assurance that they would have access to compensation, depending on the nature of the injury. That would be pursued using the standard pharmaceutical industry guidelines. I do not have the relevant document in front of me, but I am pretty sure that there is no open statement that the state would bear unlimited liability. That would be tested through the guidelines.

For most of our trials, there would be a team of what we used to call three wise men and women, who would consider the case and judge what an appropriate settlement might be. Such processes are put in place, but there is no guarantee of unlimited access to funds.

You referred to the ABPI guidelines. Do they infer some limitation?

My recollection is that they do not. That would be seen to be inappropriate. However, they prescribe carefully that the pay-out or compensation should be proportional to the extent of the injury that has been incurred. There are various precedents in the courts, I imagine, on how much that might be.

Are members in agreement that we should approve the minute in the name of the Scottish Executive health department?

Members indicated agreement.

The second minute is on the proposed contract with Egypt. Do you wish to make an opening statement?

Yes, I will make a short opening statement.

Members may recall that we gave evidence to the committee about a year ago on a contract with a company in Turkey. This is all part of an SNBTS policy to make full use of its public assets. In the case of Egypt, those public assets are our intellectual property, to which we have referred.

The Egyptian Organisation for Biological Products and Vaccine, otherwise known as Vacsera, is wholly owned by the Egyptian Government. The organisation makes vaccines and blood products in Egypt. The Egyptian Government wishes to update its medical care, particularly with regard to blood products. Vacsera approached us about whether we could license intellectual property, particularly for coagulation products for haemophiliacs, for albumen for burns and for other products.

We are not the only people whom Vacsera approached—the market is competitive—but we believe that we are the lead organisation. Such contracts are in line with our policy of making full use of the public money that is invested in our service. There is a contingent liability. It is not a manufacturer's liability, because the manufacturer is Vacsera, in Egypt. The liability relates to the design of the product, and we have taken out the insurance to cover that.

The memorandum, which is, again, in the name of Sandra Falconer, says that "VACSERA has … approached SNBTS"—in effect, for SNBTS to tender for the service. Obviously, you were successful.

We were indeed approached. I do not think that there was a completely formal tender process.

But you said that others were also approached—presumably other organisations in other countries.

Yes. Our sister organisation south of the border was approached, as was another European organisation. Vacsera is a prestigious organisation in Egypt, so quite a number of companies would like to enter into partnerships and commercial relationships with it.

I congratulate SNBTS. The contract is exactly the sort of development that we want to see. It is to be hoped that there will be many more such developments—they should be encouraged. I have no negative comments, nor questions.

I echo Richard Simpson's comments. Paragraph 3 of the minute says:

"The potential income from similar contracts is considered to be around £7.5m p.a. or 15% of SNBTS' annual budget."

What do you have in mind? Can you give us any idea of what might flow from that?

The £7.5 million per annum is what we earn at the moment from our contracts outwith the health service. We have a contract with Taiwan, under which we fractionate Taiwanese plasma and return it to Taiwan. We sell surplus products to a company in Turkey, to which, as members will remember, we have referred previously.

May I stop you there? I am pleased to hear that, but the £7.5 million is described as "potential income". Does that mean a further £7.5 million on top of the £7.5 million that you already earn? Perhaps that is too ambitious, but it appeared from the minute that the sum was forward looking, not what was already on the books.

You are absolutely right to mention that. The income is potential. We hope that it will continue and that it will grow in future. The figure of £7.5 million, to be strictly accurate, is what we earn at the moment.

Thank you for clarifying that.

In paragraph 3 of the minute, the £1.7 million is described as the

"Estimated gross income from this contract".

What is the net benefit to the organisation? Do you have a handle on that?

It is £1.2 million. The reason for the high mark-up is that most research and development is a sunk cost. There are some costs in training the Egyptians to use our processes, including a certain amount of teaching. In our business case, the net profit is £1.2 million.

Very good. Like Richard Simpson, I am supportive of your activities in this field.

Thank you.

Are members in agreement that we should approve the minute in the name of the Scottish Executive health department?

Members indicated agreement.

As I have done on previous similar occasions, I will write to the Minister for Health and Community Care to inform her of that. Thank you for taking the time to come to today's meeting and for giving us your evidence.