UK Healthcare Reform Bill and Pharma Tax Incentives: Is the Business Environment for Big Pharma Improving?

23 Mar 2012 Milena Izmirlieva

I've been pondering this question in light of three things which happened in quick succession in the past few days:

  • First the country's much-debated healthcare bill was finally approved by Parliament late on Tuesday night (20 March).
  • Secondly, Chancellor George Osborne offered a substantial tax incentive for originator pharma companies in his budget announcement on Wednesday.
  • Thirdly, GlaxoSmithKline (GSK) - the UK's largest drug maker - unveiled plans to build its first factory in the UK in more than 40 years - just a day after the tax change was confirmed.

The first two of these events signal a change in the operating environment for pharmaceutical companies in the UK. The third shows that Big Pharma are not blind to the signals.

UK Healthcare Reform Bill Passes Despite Fierce Opposition
The United Kingdom's healthcare reform bill was approved by MPs on 20 March. The bill has some direct implications for Pharma - as it clears the way for the introduction of Value Based Pricing. But just as importantly the passing of the bill removes a huge level of uncertainty for Big Pharma. The bill was much debated, much criticised and in recent months publicly opposed by several medical associations which urged the government to send it back to the drawing board. Approval by parliament came despite a last minute call by Labour and a few Lib Dems to delay voting until the Department of Health published a register of risks related to the bill. Labour has - predictably - announced plans to repeal the bill at the first opportunity.

And yet, the bill was passed and by next week will most likely be granted Royal Assent and turn into law. The wheels will be set in motion - and despite potential opposition from front line medical staff - the changes it triggers in the country's healthcare system will be hard to undo - even if Labour were to regain power sooner rather than later. Implementing reform may be harder when it comes to efficiency improvement targets and private providers participating in the provision of NHS services but the main aspect of the bill affecting Pharma - the introduction of Value Based Pricing - is unlikely to be slowed down or derailed.

With VBP, the pricing and reimbursement decision making process will become intertwined in a way never seen in the UK before. This is not necessarily good for Pharma as pricing pressures will increase, but then it is not necessarily bad either: instead of giving a "yes" or "no answer on a drug's cost-effectiveness and, thus, eligibility for reimbursement NICE will tend to say "yes" in virtually all cases but at a price it considers reasonable. There is still uncertainty about exactly how this "value based price" will be arrived at, but at least reimbursement is expected to be guaranteed under government plans to introduce a NICE compliance regime.

The Pharma Tax Cut as an Incentive
Having seen several pharma companies downsize operations in the UK - and in some cases completely close down R&D or manufacturing sites in recent years, the country's coalition government has at the same time been looking for a way to encourage them to stay. Its newest strategy - first conceived by Labour - is to encourage high-value-added manufacturing in the country by offering a reduced tax rate of 10% (instead of the general rate of 23%) on profits attributed to patents and similar types of intellectual property from April 2013. This incentive is a clear benefit for originator pharmaceutical companies. At less than half the normal tax rate, profits from the sale of innovative patent-protected medicines are suddenly much better protected.

Pharma Sees the Signs
In a clear indication that the tax incentive is appreciated, the country's largest drug maker GSK yesterday announced it will build a new manufacturing facility - its first in the UK in more than 40 years. The plant, to be based in Ulverston, Cumbria, will cost £350 million to build, but GSK said it could increase its investment in the facility to £700m, depending on "continued improvements in the environment for innovation in the UK". Separately the company launched £50 million venture capital fund to support early state healthcare companies and academic spinoffs in the UK. Several other GSK manufacturing facilities will benefit from a £150 million investment, with 1,000 new jobs created between the latter and the Ulverston facility.

It is the tax incentive clearly that has encouraged GSK to invest - in fact the company has already indicated a UK investment was on the cards when plans for a tax break - or the so called "patent box" were first mooted last year. But the passing of the healthcare reform bill would also boost confidence by removing some of the uncertainty surrounding the future of the country's healthcare system.

GSK's investment is likely to the first of many - as Big Pharma start to see the UK as an increasingly pharma-friendly place (or perhaps a less pharma-unfriendly one) - especially against the background of drug price cuts gripping much of the Eurozone.


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