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_Are NHS Tax Clawbacks on Medications Affecting the Competitiveness of the UK Life Sciences Industry?

An assessment of the 2019 Voluntary Scheme for Branded Medicines Pricing and Access
October 12, 2023

Ben Anderson – Associate within the Knight Frank Life Sciences advisory team

Synopsis

When NHS spending on medications exceeds a certain threshold (current threshold being a 2% year on year cap on the growth in sales), the surplus must be repaid by pharmaceutical companies. This rebate is paid in exchange for supplying medications (branded, branded generics, and biosimilars) to the NHS.

The current rebate rate is 26.5% of sales – a high percentage that is normally associated with Romania and Greece (two countries that have struggled with drug shortages and withdrawals due to high clawback tariffs). The UK’s rebate rate might increase to as high as 30% by the end of the 2023.

What does this mean for the pharmaceutical industry? 26.5% of sales this year equals an industry repayment figure of £3.3bn. In 2019, when an agreement known as VPAS (Voluntary Scheme for Branded Medicines Pricing and Access) was signed between government and industry – with the aim of increasing patient access to innovative medicines and to act as an affordability mechanism for the NHS – the repayment figure totalled £845m. Is a 4-fold increase over such a short time sustainable?

The soaring costs of clawbacks has prompted some in pharmaceutical circles to label the UK ‘increasingly innovation unfriendly’. My ongoing conversations with industry are certainly suggesting that the rebate rate is too high, particularly when comparing the UK to many other countries in Europe; however, when it comes to whether the UK is innovation friendly or not, the answer is a resounding yes! Of course, it is. The persistent saturnine observations being expressed about VPAS are often overlooking the many factors that makes the UK an attractive market for conducting R&D and for launching new products.

Introduction

The tax clawback on branded medications is a vogue topic at present due to ongoing negotiations between government and industry on a new rebate scheme that will succeed the 2019 VPAS program in January 2024. The matter is frequently being raised during my conversations with developers and investors in Life Sciences, many of whom are eager to find out more; this piece has been written as a response to these discussions.

Controlling Pharmaceutical Spending in the UK

The UK applies two main mechanisms to control pharmaceutical spending:

  1. A voluntary agreement between the government and the pharmaceutical industry
  2. Appraisals on the clinical and cost-effectiveness of new health technologies conducted by the National Institute for Health and Care Excellence (NICE)

Voluntary Agreement

An agreement between the government and the pharmaceutical industry was first introduced in 1957 and has been subject to many changes since its founding. VPAS is the latest iteration – a non-contractual voluntary agreement between the Department of Health and Social Care, NHS England, and the Association of the British Pharmaceutical Industry.

VPAS has two main objectives:

  • Increase access and uptake in the UK of innovative, transformative, and (where possible) cost-effective medicines to enhance patient outcomes.
  • Act as an affordability mechanism for the NHS. The scheme guarantees that the NHS branded medicines bill will not grow by more than 2% year on year between the period Jan 2019 – Dec 2023, regardless of the volume the NHS purchases.

Exceeding the 2% Cap

When the NHS’s total branded drugs bill exceeds the 2% cap, pharmaceutical companies have to pay back the extra revenue. These payments – which are levied on sales, rather than profits – are, however, soaring. In 2020, the rebate rate was 5.9% (£594M) – a competitive rate and one that the pharmaceutical industry was reportedly comfortable with. This increased to 15% in 2022 (£1.8B). Worryingly, the Health Department’s clawback scheme has risen to 26.5% in 2023 and may reach 30% by the end of the year (£4B).

Why VPAS is a Hot Topic at the Moment – the Crux of the Matter

The original VPAS idea of supporting innovation and patient access to new medicines while ensuring financial predictability for the NHS was judicious; however, industry is arguing that these soaring rebate costs are unsustainable and could threaten the aspirations of the UK Life Sciences industry by making the UK uncompetitive on the global stage. Two drugmakers (AbbVie and Eli Lilly) have gone beyond rhetoric and have officially pulled out of the voluntary scheme in protest.

Across Europe, rebates are typically c.10%, with Germany being slightly higher at c.12%. The UK’s current rebate rate is now on par with Romania and Greece – two countries where punitively high clawback taxes have contributed to sustainability problems, leading to drug withdrawals and shortages.

Some in the Life Sciences industry have presaged that if such a high clawback rate were to persist, it could have a negative impact on the competitiveness of the UK as a Life Sciences leader.

This is an intricate matter involving many factors, all of which require cogitation before reaching a conclusion on the merits of VPAS and on how competitive the UK currently is on the global Life Sciences stage. I explore these factors below, but before doing so, we must touch on what makes a new medicine valuable.

The Value of New Medicines to Both Pharmaceutical Companies and UK Patients

The Life Cycle of a new medicine includes both the on-patent period and the off-patent period.

When a pharmaceutical company successfully develops a new medicine and launches it to market under a new patent, it is able to market and sell that medicine exclusively for a number of years (usually c.20 years). During this time, no other company can manufacture that medicine. The cost of the medicine tends to be higher during this period as the pharmaceutical company aspires to recoup the investment it made during the drug development process. When the patent period ends, other manufacturers can generically manufacture the medicine; this competition usually leads to the cost falling.

The value of a new medicine over its life cycle is typically broken down into two categories:

  1. The health improvements it provides patients
  2. The financial value generated for the pharmaceutical company in the form of sales revenue

The importance of number two must not go unnoticed (as is sometimes the case). These revenues help to fund future medical innovations; pharmaceutical companies typically invest in R&D projects based on expected future profits.

Balancing Act

Balancing the interests of the NHS and the pharmaceutical industry is complex – industry’s objective of increasing sales revenue often conflicts with the NHS’s aim of promoting affordability and improving health outcomes. Keeping that balance is important.

The pharmaceutical industry is claiming that the right balance is not being struck, taking particular umbrage at the soaring VPAS rebate rate. Commentators are warning that such a high rebate rate could have unintended consequences for the UK Life Sciences sector, namely that:

  • Pharmaceutical companies will reduce their footprint
  • There will be a fall in R&D activity
  • The UK will see limited/delayed availability of new medicines

Although the UK’s rebate rate (on balance) appears too high, many of the recent bleak observations overlook the many factors that make the UK an attractive market for conducting R&D and launching products. A selection of these are below, starting with a VPAS related factor that does not get enough exposure:

  • To support innovation, manufacturers who introduce new active substances (NAS) – i.e., new medications – in the UK market are exempt from paying the VPAS rebate applied to the sales of these for the first 3 years.
  • The UK’s national health system provides universal healthcare coverage. This means companies seeking to release a new product to the market need only negotiate with the NHS as the single payer. It is not as easy in many other countries where companies need to negotiate with multiple payers, creating administrative burdens and access hurdles.
  • The Accelerated Access Collaborative (which brings together industry, government, regulators, patients, and the NHS to remove barriers and accelerate new treatments) has created the Rapid Uptake Products program, with the purpose of identifying and promoting propitious new technologies that address important unmet needs in the NHS.
  • NICE appraises all new products, a high percentage of which receive a positive recommendation. Another area that is under reported is that medicines that receive a positive recommendation are given a funding mandate in the NHS. In other words, the NHS is legally obliged to fund and resource medicines and treatments recommended by NICE’s appraisals.
  • NICE has become one of the UK’s most successful health policy exports. Countries worldwide are launching their own independent bodies based on NICE to help them decide what new medications they should pay for/provide.
  • The Medicines and Healthcare Products Regulatory Agency (MHRA) is one of the fastest regulators worldwide.
  • The MHRA has an international recognition framework, which acts as an accelerated approval pathway, allowing the speedy sign-off of medicines already approved by regulatory authorities in other high-income countries, giving certain new medicines faster routes to market.

These examples show that the UK has a range of system-level determinants that make the country an attractive market to conduct R&D and launch new medical products in. The speed to market of the Covid vaccine is proof of the UK’s expertise and efficiency.

In addition to these determinants, the UK has access to leading talent in many Life Sciences disciplines, a renowned research capability (due to the strong performance of the country’s universities), and fantastic healthcare communications agencies. The UK finding itself in a prime position to capitalise on the technology-driven convergence that is accelerating innovation in the Life Sciences is a further reason for buoyancy.

Concluding Remarks

The UK must not get complacent. Pharmaceutical companies have a choice on where they conduct research and launch new medicines, and it should be a priority for government to encourage pharmaceutical companies to conduct their R&D and launch new products in the UK, especially if they want the ‘UK Life Sciences Superpower’ vision to be realised.

The increasing rebate cost is a concern and government should look to make the UK’s rebate rate more competitive with VPAS’s successor in January 2024. Notwithstanding these points, the bleak remarks surrounding VPAS from commentators and industry have tended to overlook the many factors that make the UK an attractive destination for conducting pharmaceutical R&D and launching new products. The UK is in an enviable position with regards to the country’s Life Sciences offering; ‘innovation unfriendly’ the UK certainly is not.