A new pricing deal for the NHS should take the squeeze off new medicines, but is still vulnerable to Brexit risks.

The UK is unusual in having ostensibly free pricing for pharmaceuticals. Most other European countries have introduced international reference pricing systems, and even the US is now thinking of doing so. In practice, however, most UK sellers of new prescription medicines have little choice. The Pharmaceutical Price Regulation Scheme (PPRS), the latest version of which came into force in January, is a voluntary deal, but, with the alternative statutory scheme getting more onerous, most companies will opt in. The result is that growth in NHS spending on new drugs will be capped at 2% a year for the next five years. If Brexit weighs on NHS budgets or pushes up the price of imports and raw materials, however, then pharma companies could face an even bigger squeeze on margins.

The PPRS is, of course, intended to save the NHS money, while allowing some incentive for innovation. The new PPRS is no exception. The deal between the Department of Health and Social Care (DHSC) and the Association of the British Pharmaceutical Industry (APBI) is expected to save the NHS £930 million on the cost of new medicines in 2019 alone. The ABPI, though it promotes these savings as a societal benefit, had been trying to negotiate for a higher cap. It was probably pushed into the deal partly by the government’s announcement, in December 2018, that it would be raising the rebates due under the statutory scheme, which applies to pharma companies that opt out of the PPRS, by 1.1% a year.

Stronger growth

Even so, the new PPRS looks less draconian than the old. As the ABPI points out, the new 2% cap compares with growth of just 1.1% under the previous PPRS, which saw pharmaceutical sales decline in real terms over its five-year term (2014-18). Overall NHS spending rose by 3.3% a year over the same period. Indeed, when the deal was unveiled in November, Leslie Galloway, chairman of the Ethical Industry Medicines Group, expressed relief, noting that the industry negotiating team had achieved “what once looked to be impossible – a rate better than in each and every year of the 2014 PPRS.” The industry will also be buoyed by a promise that cutting-edge and particularly good value medicines will be fast-tracked through the system. Small companies will also benefit from slightly looser price controls.

More broadly, overall pharmaceutical sales in the UK are on an upswing, after nearly two decades of lagging behind health spending. Although growth has slowed since 2015, it is still well above the rates seen in the wake of the 2009 financial crisis. The effects of cost controls have peaked, while waning patent expiries means that there are fewer gains to be made from switching to generics. As a result, The Economist Intelligence Unit expects growth in total UK pharmaceutical sales to be fairly

robust in nominal terms over the next five years, at an average of 4.3% a year, compared with 3.5% for overall health spending. That is despite the promised spending boost for the NHS.

Substantial risks

Yet conditions in the industry are likely to be more difficult than those figures suggest. In part, the growth in the value of sales will stem from higher costs. Brexit will raise non-tariff barriers – particularly if there is no deal or the pound falls again. Imports of medicines, or of ingredients for drugs made in the UK, are likely to become more expensive. Some of this could be offset by a drop in the prices of imports from China, the world’s biggest supplier of Active Pharmaceutical Ingredients, if the trade war diverts its exports from the US to Europe. Even so, Brexit is likely to squeeze pharma company margins.

Moreover, there is a good chance that Brexit could dent the UK economy, with knock-on effects for tax revenues and therefore overall NHS spending. Again, our core forecast for the UK economy is fairly robust, with real GDP growth averaging 1.6% a year in 2019-23. But the Bank of England is not alone in pointing out the substantial risks. Add in higher recruitment and staffing costs, as EU staff leave or stay away, as well as population ageing and sheer demand for healthcare, and there could be a real squeeze. The evidence of the past decade shows that the pharmaceutical industry, along with investment in preventative health, is always first in line for cuts if a squeeze happens. So while the new PPRS seems to offer the industry a stronger basis for growth than the last, it may not keep those promises.

Ana Nicholls is director, industry operations, at the Economist Intelligence Unit.