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Drug-Price Decision Threatens U.K. Investment, Industry Says

Drug-Price Decision Threatens U.K. Investment, Industry Says
The Novartis AG logo is seen on the company's headquarters in Basel, Switzerland. Switzerland’s Novartis AG and New York-based Pfizer Inc., two of the world’s biggest drugmakers, said this year they plan to scale back U.K. operations. Photographer: Adrian Moser/Bloomberg

Pharmaceutical companies are protesting a U.K. government decision on drug pricing that their lobbying group says may prompt more of them to scale back operations in Britain.

The Department of Health told drugmakers May 19 it was ending a deal that allowed some of them to increase prices to make up for money they lost when a previous agreement was suspended in 2007. The Association of the British Pharmaceutical Industry objected to both the decision on the accord, known as the Pharmaceutical Price Regulation Scheme, and the refusal to share information showing how it was reached.

Switzerland’s Novartis AG and New York-based Pfizer Inc., two of the world’s biggest drugmakers, said this year they plan to scale back U.K. operations. Prime Minister David Cameron said in January he personally called the heads of pharmaceutical companies to urge them to continue investing, pointing to tax breaks he was offering. The ABPI said the Department of Health’s move undermined that effort at a time when the government aims to replace the 54-year-old drug-pricing system.

“It’s critical that any future schemes uphold the principles of trust and fairness in order to achieve the partnership that will benefit patients,” the London-based group said in an e-mailed statement. “Instabilities caused by disruption to the PPRS do not reflect well on the financial stability and predictability of the U.K. environment, factors which historically have been a positive contribution to global decisions to invest in the U.K. pharmaceutical industry.”

$15 Billion

The state-run National Health Service spends about 9 billion pounds ($15 billion) a year on brand-name drugs, and since 1957 has used its buying power to negotiate a series of agreements with the industry under the PPRS. This stipulated that, over the period of each deal, each manufacturer would aim to meet a certain overall discount target by modulating their prices. If the companies failed to meet it, they had to pay the difference.

The Department of Health suspended a deal that took effect in 2005 two years later, leaving some companies ahead of their discount target -- 7 percent in that period -- and some behind. After negotiations with the ABPI, the government reached an accord in 2009 allowing those companies who were out of pocket from the 2007 suspension to recoup their losses, so long as the companies that hadn’t discounted enough repaid at least 75 percent of their excess profits.

It was the failure of pharmaceutical companies to meet that 75 percent goal that led the government to make its May 19 decision, the Department of Health said in an e-mailed statement.

‘No Adjustments’

“After a detailed process of calculation for resolving over-deliveries and under-deliveries of price cuts for medicines from the previous PPRS in 2005, there will be no compensating adjustments for companies in the 2009 PPRS,” the department said. “This is because we did not receive the 75 percent of repayments for under-deliveries.”

While the ABPI negotiates the PPRS agreement on behalf of its members, each company must reach its own accord with the government over prices of individual products and in some cases submit annual reports on sales. Because those agreements are confidential and vary by company, the amounts of the overpayments and underpayments aren’t publicly available.

Pfizer, Novartis and GlaxoSmithKline Plc, the U.K.’s biggest drugmaker, are among the more than 150 participants in the 2009 pricing agreement, according to the Department of Health’s website.

New Pricing System

“We are committed to ensuring the U.K.’s position as a global leader in pharmaceutical research and development, and to providing stability for companies to invest here,” the department said in an e-mailed statement today. “That is why the government is committed to honoring the terms of the 2009 Pharmaceutical Price Regulation Scheme.”

The industry is in the midst of negotiations on a new pricing system set to take effect in 2014, part of an effort to limit overall government spending. Weeks after Cameron’s coalition government took power last year, Health Secretary Andrew Lansley told industry representatives that the prices of new medicines would be lower than companies wanted, according to the minutes of a June 7, 2010, meeting with the ABPI.

The Department of Health published its proposal in December, saying that it would set a basic price for new drugs that reflected how well they prevented hospitalizations and other costs in the NHS. The ABPI submitted comments on the proposal in March, saying that “an integrated and consistent negotiation process between government and industry is central” to integrating the old and new payment systems.

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