Britain's drugs industry is suffering withdrawal symptoms, and it could prove costly

When it comes to the drugs industry, Britain is suffering withdrawal symptoms.

This year, three of the world's biggest pharmaceutical companies - Merck, AstraZeneca, and Eli Lilly - have pulled or paused UK investments worth almost £2bn, diagnosing that market conditions, specifically the NHS drugs pricing regime, make the UK a "contagion risk".

The issue will be highlighted this week as Donald Trump begins his state visit, with executives called to give evidence to a parliamentary select committee on Tuesday, along with science minister Lord Vallance, a veteran of the pandemic, when government worked closely with pharmaceutical companies to speed up vaccine development.

How has this come about?

The UK pharmaceutical industry is one of those caught in the crossfire of Trump's trade war.

In the trade deal agreed by the president and Sir Keir Starmer in May, the prime minister committed to "improve the overall environment for pharmaceutical companies in the United Kingdom".

Four months later, those companies - under pressure from Trump to charge US consumers the same as those in Europe, and to invest in US production and research - say the opposite is the case.

They argue the British market is becoming unviable to pharmaceutical investors, at a cost to patients, jobs, and the economy.

Data from the Association of British Pharmaceutical Industries bear this out; R&D investment growth has fallen below the global average and foreign inward investment has declined almost 60% since 2020.

Why the corporate backlash?

To understand why an industry long regarded as a domestic strength has turned against the UK, it is necessary to understand the complexities of medicines pricing.

The NHS is one of the largest "single buyers" of medicines in the world, a position that has long given it clout when it comes to negotiating prices. In the last two decades, however, strict conditions on what drugs are approved for use, and at what price, have brought down the price of the medicines but eroded the value of the UK to the companies that provide them.

Simply put, the industry believes the NHS has been getting too good a deal for too long and argues the terms are no longer sustainable.

In the last decade, the proportion of the NHS budget spent on medicines has fallen to just 9%, below the EU average of 13%. Meanwhile, the amount of revenue returned by companies to the government under complex "clawback" arrangements has jumped to more than 23%, more than three times the EU average.

Under these complex rules, a form of price control that offers a uniform discount to the health service, manufacturers return revenue equal to the value of any overspend by the NHS on its total medicines budget.

The figure has risen rapidly in the UK in the last five years as the NHS has exceeded its medicines budget faster than it has risen. This year it was supposed to be 15%, already double the EU average, but has already risen to 23.5%.

Can this all be resolved?

The industry is demanding a commitment to return to single figures by the end of this parliament. Emergency talks with the health department broke up in the summer, and it is unclear when they will resume.

It also wants the threshold at which new drugs are admitted to the NHS marketplace, currently £20,000-£30,000 and unchanged since 1999, increased. Had it risen in line with inflation, it would be £40,000-£60,000 today.

As a consequence of these downward pressures on price, the industry says the number of new and innovative medicines offered to patients has fallen, with only 37% of available drugs accessed by the NHS, compared to 90% in Germany.

Why so much is in the gift of the chancellor

Paying higher prices to hugely profitable pharmaceutical giants was not part of Labour's electoral promises for the NHS, and Health Secretary Wes Streeting says he is committed to getting the best deal for patients, but the UK discount may no longer be sustainable.

The issue also highlights a tension between the government's desire for economic growth and greater efficiency in its key public service.

As one executive put it, as the UK accounts for only 2.5% of the global medicines market, which meant for a long time the lower margins doing business in Britain could be swallowed. With Trump demanding price parity for the US, which accounts for 40%, that is no longer the case.

Read more from Sky News:
UK and US firms announce nuclear deals
PM urged to up pressure over Trump tariffs

Life sciences are at the heart of the government's new industrial strategy and the UK still has much to commend it, with world-leading research and skills and a track record of spinning biotech innovation into the private sector. But the withdrawal of big pharma investment tells a different story.

Johan Kahlstrom, country president of Novartis UK and Ireland, said: "The UK is fast becoming uninvestable for life sciences companies.

"High clawback taxes that take almost a quarter of revenues, combined with outdated cost-effectiveness thresholds that haven't changed in over 25 years, are eroding the UK's position as a global life sciences hub."

Resolving the pricing row will require compromise and money, with the health secretary's room for manoeuvre ultimately resting on the Treasury, and the balance between losing jobs and investment from a growth industry, and a drugs budget the NHS has long taken for granted.

(c) Sky News 2025: Britain's drugs industry is suffering withdrawal symptoms, and it could prove costly