On 1 December 2025, the UK Government announced a “landmark” UK-US pharmaceutical deal.   Under the deal, the UK claims to be (so far) the only country to secure zero-percent tariffs on pharmaceuticals exported to the US for the next three years.  In return, the UK has committed to increase its spending on medicines and revise some of the most controversial aspects of the UK pricing and reimbursement system.

Although details as to the implementation of the deal are still unclear, it is clear this will involve major changes to the landscape for commercializing innovator drugs in the UK, after months of attritional and sometimes fractious wrangling between the industry and UK Government.

Deal Headlines

• The zero-tariff rate for pharmaceuticals exported to the US will remain in place until 2028.

• The UK claims to have “secured mitigations” under the US “Most Favoured Nation” (“MFN”) drug pricing initiative, though it is unclear what those are.

• The UK also plans to increase the thresholds at which the UK National Institute for Health and Care Excellence (“NICE”) judges new drugs to be cost-effective for use in the NHS from between 17% and 25%.  In principle, these measures would see more drugs receiving positive reimbursement recommendations in the UK at prices that better reflect the sizeable R&D outlay that innovative drug companies face when developing novel therapies.

• The deal also includes a cap on the rebates payable by pharmaceutical companies to the UK Government for newer medicines to 15% of net NHS sales under the so-called “VPAG” scheme in 2026 to 2028. 

• The UK Government will increase its spending on new medicines from 0.3% to 0.6% of GDP over the next 10 years.  

We discuss below how these changes might affect the pricing landscape for innovator medicines in the UK.

US MFN “Mitigations”

The UK Government announced that it has “secured mitigations” under the US’ MFN drug pricing initiative.  The announcement does not specify what these mitigations are. 

This may refer to Section 3 of the Trump Administration’s MFN Executive Order, in which the President instructed the Secretary of Commerce and the US Trade Representative (“USTR”) to take “all necessary and appropriate action to ensure foreign countries are not engaged in any act, policy, or practice that may be unreasonable or discriminatory,” including by “suppressing the price of pharmaceutical products below fair market value in foreign countries.” That might include investigations leading to potential trade-related retaliation against foreign governments that unfairly suppress pharmaceutical prices and/or burden or restrict U.S. commerce. 

The structure of the UK’s pricing and reimbursement regime, coupled with tough NHS negotiations, have faced criticism for driving too hard a bargain, giving industry little choice but to agree to heavily discounted net-price deals or else face the prospect of a product not being funded by the NHS.  Many were concerned about the potential impact of these arrangements upon MFN pricing in the US and also the potential for trade-related retaliation.  The US Government press release indicates that “[i]n exchange for [the UK’s] commitments, the United States has agreed to exempt U.K.-origin pharmaceuticals, pharmaceutical ingredients, and medical technology from Section 232 tariffs and will refrain from targeting U.K. pharmaceutical pricing practices in any future Section 301 investigation for the duration of President Trump’s term.”  It may be that the UK Government refers to the mitigation of those risks.

Increased UK Government Spending on Medicines

Under the deal, the UK Government commits to increase spending on new medicines from 0.3% to 0.6% of GDP over the next 10 years.  Relative to comparable economies, the UK’s spending on medicines has been historically low. The announcement would bring it closer to peer countries, albeit still at the lower end, and goes some way to addressing a decade of falling health spending on medicines.  Increased funding would, in principle, support the NHS being able to fund more treatments (including higher-cost treatments).

Increased NICE Cost-Effectiveness Thresholds

The commercial success of a new drug in the UK almost entirely hinges on whether the NHS will fund it.  Funding is usually subject to a positive recommendation from NICE.  NICE carries out clinical and cost-effectiveness assessments of a new medicine, with positive recommendations reserved for medicines that fall within NICE’s ICER cost-effectiveness thresholds. 

These thresholds have remained fixed for over 20 years and have failed to keep up with inflation, the cost of conducting R&D, and the growth in NHS budgets.  This has been a significant concern for pharmaceutical companies bringing novel therapies to market in the UK.  Certain innovative, potentially life-changing therapies have been denied entry to the NHS because their cost does not fall below NICE’s fixed and outdated thresholds.  Alternatively, in order to be recommended for NHS funding, companies have had to enter into net pricing deals that do not appropriately reflect a pharmaceutical company’s R&D investment.  This has led to calls by some that the UK does not pay a fair share for global pharmaceutical innovation.

Following the deal, the UK will ask NICE to increase the thresholds at which NICE assesses new drugs to be cost-effective for use in the NHS from between 17% and 25%.  NICE will also implement new ways of valuing health-related quality of life.  The baseline ICER thresholds will therefore increase from £20,000-£30,000 to £25,000-£35,000 respectively.  In principle, the means that more novel treatments could receive a positive NICE recommendation at a price that is more sustainable for companies continuing to innovate.

While the increase in NICE’s thresholds is welcome, many in the industry would argue that it is modest when compared with inflationary pressures over the past two decades or the increase in the NHS’s budget.

It seems the uplift in thresholds will affect new treatments only.  Pharmaceutical companies and the clinical community will rightly raise concerns about treatments that have not been recommended in the past due to not meeting the thresholds, as well as drugs that have received a recommendation in the past at prices that, now, would be unnaturally low.

VPAG Rebate Rate

Branded (and therefore mostly innovator) medicines are subject to price-control regulation in the UK, often through an opt-in scheme called “VPAG.”  Under VPAG, companies must pay the UK Government a rebate calculated as a percentage of the net sales of their branded medicines supplied to the NHS in a given period.

Historically, these rebates were in the single digits and considered to be a “cost of doing business” to the NHS.  Following the COVID-19 pandemic, rebate rates soared to upwards of 20% of net NHS sales.  The 2025 VPAG rebate rate for newer medicines (i.e., medicines that are typically between three and twelve years post marketing authorization) was 22.9% of net NHS sales, with projections for later years rising sharply up.

VPAG rebates became a significant concern for industry, both due to their size and upwards trajectory.  These rebates apply to branded medicines but not generics; many commentators regard them as major impediment to innovation.  Moreover, they have proven to be highly unpredictable, making it increasingly difficult for innovators to set a commercial strategy for the UK.  The pharmaceutical industry and the UK Government unsuccessfully attempted to re-negotiate rebates over Summer 2025, with talks ending acrimoniously.  The subject became a key issue in trade discussions between the US and UK.

Under the UK-US deal, VPAG rebates for newer medicines will be capped at 15% until 2028.  Following this, there may be talks to agree a new scheme from 2029 that is more sustainable.

This is a significant measure to ensure that the industry does not, effectively, self-fund the Government’s increased spending commitments.  It also gives the pharmaceutical industry much-needed stability and predictability in the medium term when it comes to pricing and commercialization.  Nonetheless, a 15% rebate remains high relative to peer countries.

Comment

Over recent months, the pharmaceutical industry had become increasingly disillusioned with the UK as a market to commercialize novel therapies.  Some viewed the UK as no longer fit for investment, with the UK missing out on notable new drug launches or falling down the pecking order.  The deal is clearly an effort to win back the pharmaceutical industry.

Implementing the deal will require major changes to pricing and reimbursement rules in the UK, including changes to NICE’s methodologies and reform of drug pricing mechanisms. 

Next Steps

This deal is of considerable importance to the pharmaceutical industry and the environment for commercializing medicines in the UK, with the potential to address aspects of the deeply controversial VPAG rebate arrangements and bring the UK’s health technology appraisal threshold more closely into line with international equivalents.  Legal and commercial teams in pharmaceutical companies will keep a close eye on the details, as they emerge, with a particular focus on the implications for new product launches. While the mood music is quietly positive, whether or not the deal has done enough to win over the industry will depend on its implementation.  Covington will continue to follow developments closely and provide updates. 

If you would like to discuss the latest developments and what they may mean for your company’s operations, please contact: Grant Castle, Raj Gathani or Dan Spivey.