The battle over European drug pricing

A clash between drugmakers and UK and EU governments over drug pricing is coming to a head. The head of Bayer’s drugs business warned this week the German company was shifting its pharmaceutical arm’s focus to the US, and away from Britain and European countries that were making “big mistakes” in managing health budgets. AbbVie and Eli Lilly became the first drug groups to pull out of a voluntary UK pricing agreement they said punished innovation. Governments cannot simply bow to corporate browbeating. But they must balance the need to restrain health costs with their ambitions to lure life sciences investment.

Drug companies are irked by big clawback payments they are facing after drugs spending bust healthcare budgets in the past couple of years — in large part due to Covid-19 and the post-lockdown demand surge. This is reducing net prices for pharma groups’ products even as they grapple with cost inflation — and when life sciences ingenuity produced the vaccines that tamed Covid.

There is annoyance that the UK is sticking firm to a voluntary cap agreed from 2019 that limited growth of the NHS bill for branded medicines to 2 per cent a year, however much it buys. If growth in the bill exceeds the cap, drugmakers pay back the extra. Pharma groups say this was never designed to cover a once-in-a-century health emergency; this year they will have to pay back £3.3bn, or 26.5 per cent of sales — up from 5 per cent two years ago.

This clawback rate is more than twice that under a German system, for example. But this is not just a UK issue. Berlin last October passed a law tightening its drug pricing and reimbursement rules. There is speculation drugmakers may pull out of similar voluntary schemes in France. And though the huge but inefficient US healthcare market is by far the most lucrative for pharma companies, the Inflation Reduction Act introduced price negotiation on some drugs.

AbbVie and Eli Lilly’s stand is a largely symbolic gambit ahead of renegotiation of the voluntary UK scheme which expires this year. They will now have to pay clawbacks at a similar level through a statutory mechanism. UK and EU health systems will rightly argue acute pressure on budgets gives them little political leeway to hand more cash to drug companies. Factors such as the strength of the science base also influence life sciences investments. The fat margins long available in the US have not stopped drugmakers ploughing money into the EU, UK and Switzerland.

The highly profitable pharma industry, moreover, is hardly on its uppers; Covid boosted returns from innovation for the biggest groups in 2021, though they fell back last year. But a recent report for a European trade body found pharmaceutical R&D spending was growing faster in the US and China; Europe’s share of global R&D investment, clinical trials and manufacturing output are all falling. It recommended fightback policies including incentivising development of “truly world-class innovation hubs”.

The report did not mention drug pricing. But industry leaders warn the ability to achieve decent returns is bound to figure in investment choices. This covers not just prices, but access and uptake for innovative drugs. The US scores well here, while the UK’s stringent clinical and value-for-money appraisals mean cutting-edge drugs are often made less widely available and take longer to get to patients than in some EU rivals.

There is scope to redesign the UK voluntary pricing system, perhaps offering offsets for capital spending, as far as trade rules permit. For London, Berlin or Paris, pharma industry pressure is a further complication as they juggle the costs of overburdened health systems. But for the wider health of their economies, it is a factor they cannot ignore.