An expensive drug habit

The price the NHS pays for medicines is set to rise nearly 25%

The price the NHS pays for medicines is set to rise to stop major pharmaceutical companies pulling investment in the UK to avoid Trump’s tariffs. As a result, we are facing a potential 25% increase in the price of drugs used by the NHS.

This is another major headache for Chancellor Rachel Reeves and the Labour government and not a ‘nice’ outcome for taxpayers.

The NHS spends £20bn a year on medicines and medical devices each year, making it the second largest expenditure after its workforce. A 25% price hike would be a significant increase in costs and not surprisingly a dispute over who should foot the bill is believed to be underway between Downing Street, the Treasury, the Department of Health and Social Care and the Department for Science, Innovation and Technology.

Why is the NHS facing a price hike for its drugs?

President Trump is one of the main reasons as he has accused European countries of ‘free loading’ given the US pays much higher drug prices. He has threatened to impose 100% tariffs on drugs imported by the US. Meanwhile, the major global pharmaceutical companies have been involved in talks with the UK government about a clawback tax on their UK sales. When these discussions stalled over the summer some pharma companies such as Merck, Eli Lilly and Astra Zeneca either paused or abandoned investment in new UK life sciences facilities or decided to ramp up investment in the US instead. Over the weekend Astra Zeneca has announced an agreement with the US government to lower the cost of medicines for American patients and a $50bn investment in new US manufacturing facilities to avoid Trump tariffs.

Lord Patrick Vallance, the UK science minister has acknowledged that the NHS ‘needs to pay a bit more for some drugs.’  The main issue appears to be the ‘quality-adjusted life year’ (QALY) threshold used by the National Institute for Health and Care Excellence (NICE). At present, NICE’s upper QALY threshold is £30,000 for a treatment for every healthy year it delivers for a patient. The British Pharmaceutical Industry is saying that this should increase to between £40,000-£50,000.

Given the UK ‘s ageing population and strained government finances, with a ballooning welfare bill, then this latest news about a massive price hike for drugs for the NHS is a major headache. There is only so much money in the pot, so how is this price increase to be funded?

 

What have we been watching?

 

24-hours can seem like a long time in markets these days!

For most of last week, markets had remained unfazed by the ongoing political uncertainty in various countries from the US government shutdown to France. US equities continued to set fresh record highs as the AI frenzy showed no sign of abating despite warnings from the Bank of England, the IMF and Jamie Dimon, head of JP Morgan, America’s largest investment bank. However, gold also hit an all-time high of over $4,000 – the fear of missing out (FOMO), a potential change in US dollar dominance in global trade or concern about US government shutdown? The rise in US equities also spilled over into other markets with the UK’s biggest companies also hitting another new high.    

Then on Friday the chickens came home to roost! The trigger seemed to be the sudden resumption of trade hostilities between the US and China as Trump threatened to impose an additional 100% tariff on Chinese goods after China tightened its rare earth mineral export controls. This prompted a large fall in cryptocurrencies, including a $10,000 fall in bitcoin in just a few hours. This in turn raised fears about US banks as some traders had been borrowing to punt on cryptocurrencies! This fed through into US credit markets which had already looked a bit shakier following the recent collapse of US automotive parts manufacturer First Brands.

As a reminder, Presidents Trump and Xi Jinping are expected to meet on the sidelines of the APEC 2025 summit in South Korea at the end of this month while the higher tariff on Chinese goods expires on the 10th of November. Over the weekend. Trump said ‘Don’t worry about China, it will all be fine!’ Markets have opened relatively calmy today, assuming this is Trump’s typical negotiating stance as seen on previous occasions. However, we will see how events unfold as clearly there is a battle shaping up between the US, with its strategic position in AI chips and China with its control of rare earth minerals.               

On the geo-political front, there was encouraging news in the Middle East as Israel and Hamas had agreed to the first phase of a Gaza peace deal, with a ceasefire and the release of the remaining hostages.

 

In the UK, the Royal Institute of Chartered Surveyors (RICS) pointed to a loss of momentum in the housing market. New instructions to sell took a tumble, while new buyer enquiries edged lower with RICS noting the ‘ongoing uncertainty around potential measures in the upcoming budget.’

 

In Europe, markets continue to focus on the political chaos in France. Sébastien Lecornu was re-appointed as PM at the end of last week to attempt to form a government and have another go at passing a budget! Political betting sites are currently suggesting a 30% chance of fresh elections before the end of this month and a 63% chance by the end of this year.

 

In the US, there appears to be mounting speculation that the government shutdown might drag on into November! This comes as both the Republican and Democrats continue to show no sign whatsoever of shifting their positions.  Meanwhile, the Federal Reserve (Fed) published the minutes from its latest meeting which showed that committee members judged that it would be appropriate to ease policy further over the remainder of this year albeit the mood was still quite cautious on the inflation outlook.

 

In Japan, the governing coalition collapsed on Friday! This is just a week after Sanae Takaichi was elected as LDP leader which, will make radical policymaking more challenging and even threaten her nomination for PM.

 

China’s trade data showed that it is diversifying its exports away from the US towards alternative markets. Exports to the US fell by 27% in September, but global exports increased by 8% to a six-month high.    

Read our latest investment insights from Alpha PM

 

Brent oil dropped to under $64 following the sudden resumption of trade hostilities between the US and China.

Finally, we have highlighted the ongoing errors by the Office of National Statistics in previous Alpha Bites. The latest error to be discovered is in VAT receipts data used in the public borrowing (PSBR) data! This time the bank error is in Chancellor Rachel Reeve’s favour and could reduce the PSBR by £3bn. You couldn’t make it up if you tried!

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