A tussle over medicines pricing is looming in Britain

Even by recent standards, this is not a cheerful week in the UK. Chancellor Jeremy Hunt will announce his tax-and-don’t-spend autumn statement on Thursday. Everyone is going to be asked to pay more, probably for a rather worse time of it.

The pharmaceutical industry knows the feeling. The chief executive of Bristol Myers Squibb said last week he had a “significant concern” about the rising costs of a medicines levy, agreed between government and industry to cap the health service drugs bill from 2019. The scheme, welcomed at the time by the sector as pro-innovation, has ballooned in cost, in a way that the pharma industry says hurts investment.

Industry bleating about UK pricing is hardly new, particularly from US companies used to the peculiar and inefficient largesse of their own system. Getting a new drug on to the UK market rightly involves clearing exacting cost-benefit standards. Then the sector and health department have for decades wrangled over voluntary agreements that aim to balance the medicines bill with the desire to encourage innovation and provide access to new treatments.

When it comes to the latest iteration, however, the sector has a point: the Voluntary Scheme for Branded Medicines Pricing and Access, which runs from 2019 to next year, has gone awry. The agreement limited growth of the NHS budget for branded medicines to 2 per cent a year. Over that cap, the industry would pay a portion of its revenues back to make up the difference. (The “voluntary” bit is rather misleading: a more punitive statutory alternative ensures compliance.)

There are a couple of related issues here. Previous versions of this scheme were expanded to include branded generic medicines or “biosimilar” copies of biologic drugs. Makers of those off-patent medicines consider this an unfair double whammy, as such drugs often face competition that holds down prices.

That isn’t always the case — regulators have recently brought price gouging cases against generic makers facing limited or no competition. But in general, off-patent drugs tend to command a lower margin. The British Generic Manufacturers Association says companies may increasingly choose to restrict supply to the UK rather than incur losses thanks to ever-bigger government rebates. That in turn could reduce competition and push up costs.

The broader problem is that the payments, levied on sales rather than profits, have soared: a 5 per cent rebate in 2020, or about £500mn, has soared to 15 per cent and £1.8bn this year. Next year, on current forecasts, it could jump to 30 per cent, or nearly £4bn.

Part of this is down to more highly priced innovative medicines, which are exempt from the scheme for three years, increasing the overall drugs bill. But more generally, the same surge in post-coronavirus pandemic demand that is putting strain on the health service has increased drug spending but in a very uneven way. Those costs are then distributed across the market.

Against a backdrop of fiscal hole plugging, health service strike action and appalling performance data for care, the pharma industry knows it is unlikely to garner political or public sympathy. The health department, unsurprisingly, considers the scheme successful. There is some suggestion that the sector simply got caught out by a deal inked in the plodding, low-inflation environment of 2018 and has to suck up the consequences.

But the UK at a 15 per cent rebate is already an outlier, with levies internationally around 7-10 per cent. The proportion of the healthcare budget going on drugs also remains relatively low.

And while successive varieties of Conservative government have trumpeted the UK’s life sciences industry as terribly important, the results on the ground are underwhelming. The UK’s share of pharmaceuticals R&D has fallen, from 7.7 per cent in 2012 to 4.2 per cent in 2020. Late-stage trials initiated in the UK, which are a source of funds to the health service, have also nearly halved since 2017, according to industry body the ABPI.

When negotiations kick off next year over a new deal, there is reason for a wholesale rethink. You could hardly imagine a worse time to be having that conversation.

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