A new deal reached today between the Government and the pharmaceutical industry means that more patients will benefit from a wider range of innovative drug treatments at a fair price to the NHS. The flexible pricing scheme agreed will ensure that medicines fairly reflect their value to patients, branded drugs will see their price cut, and industry innovations will be encouraged and rewarded. As a result, patients will have faster access to new medicines that are clinically and cost effective. The deal may adversely affect British Asian pharmaceutical companies reliant on making generic drugs or those focussed on parallel imports - as branded drugs become cheaper, the demand for generic products may wane.

Today's agreement with the pharmaceutical industry meets commitments set out both in Lord Darzi's review of the NHS earlier this year and the National Cancer Director's review of access to medicines. It also reflects the Office of Fair Trading's recommendation that value should be better reflected through the PPRS.

The headline agreements with industry include:

* a cut in the cost of drugs sold to the NHS: a 3.9 per cent price cut will be introduced starting in February 2009.

* a further price cut of 1.9 per cent will be introduced in January 2010;

* Subject to discussion with affected parties, the Department of Health will also introduce generic substitution from January 2010. There would be further price adjustments on January of each year aimed as the proportion of savings from generic substitution varies with time;

* action to support innovation so patients have faster access to new medicines that are clinically and cost-effective;

* a new non-contractual voluntary scheme providing stability and predictability in Pharmaceutical Pricing for the next 5 years;

* new and more flexible pricing arrangements that will enable drug companies to supply drugs to the NHS at lower initial prices, with the option of higher prices if value is proven at a later date; and

* the more systematic use of patient access schemes by drug companies to allow access to medicines which have not initially been assessed as cost or clinically effective by NICE.

Alan Johnson said: "A more flexible approach to pricing is in everyone's interest. It gets clinically and cost effective drugs to more patients - providing cheaper options where clinically appropriate - delivers value for money for the NHS and the tax payer, and creates a better market for the pharmaceutical industry while supporting research and innovation.

"Patient access schemes together with flexible pricing of pharmaceuticals will also enable the NHS to offer more patients a wider range of more expensive drugs as recommended by the National Cancer Director Mike Richards in his recent Report on improving access to medicines for NHS Patients."

Dr Richard Barker, Director General of the ABPI said: "This landmark deal marks a turning point for patients, the NHS and the pharmaceutical industry. For the first time, the PPRS is much more than a simple economic agreement that looks at price alone.

"It is an all-encompassing package that encourages the discovery of new, more effective medicines, while at the same time allowing NHS patients to access these treatments more quickly.

"With the Department of Health, we have developed a solution that addresses the immediate needs of patients and their families, and the NHS.