The NHS is paying drug firms hundreds of millions of pounds too much for branded drugs, according to a report published yesterday.

The long-awaited Office of Fair Trading (OFT) study called for an overhaul of the agreement between the NHS and pharmaceutical companies, known as the Pharmaceutical Price Regulation Scheme (PPRS).

It recommends a system where the price of drugs reflects their clinical and therapeutic value to patients.

The OFT study identified a number of drugs where prices are "significantly out of line with patient benefits".

These include treatments for cholesterol, blood pressure and excess stomach acid.

The report estimates the move would release about £500m which could be used more effectively.

The report said: "In short, the same level of expenditure could be used to produce greater benefits for patients."

According to the study - released on the day a Government report revealed the total debt owed by NHS organisations is slowly increasing - the NHS spends £8bn annually on buying branded prescription medicines.

The current PPRS scheme, which runs from 2005 to 2010, was negotiated between the Department of Health and the Association of the British Pharmaceutical Industry (ABPI).

The Department of Trade and Industry and the Department of Health has 120 days to consider and respond to the OFT's recommendations.

The ABPI said it "strongly refuted suggestions that the NHS was paying too much for its drugs". It said it was willing to discuss how the PPRS should evolve "while avoiding delays to patients' access to new, innovative medicines".

It added: "However, medicines in the UK represent excellent value for money, and prices are on a par - or lower - than those of comparator European countries."