US, UK announce deal on pharmaceutical tariffs and drug pricing

The Trump administration has reached an agreement with the U.K. to allow tariff-free imports of pharmaceutical products in exchange for a significant reduction in rebates drugmakers pay to Britain's National Health Service. 

The U.S. agreed to "exempt U.K.-origin pharmaceuticals, pharmaceutical ingredients, and medical technology from Section 232 tariffs," the Office of the U.S. Trade Representative announced Monday. The U.S. will also "refrain from targeting U.K. pharmaceutical pricing practices" in certain trade investigations during President Donald Trump's term, according to the statement.

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While the U.S. and U.K. had agreed to a trade framework earlier this year that set a broad tariff rate on British goods, the two countries had yet to sort how key products would be treated, including pharmaceuticals.  

The U.K. will increase the net price it pays for new medicines by 25%, according to USTR. Some of the world's biggest drugmakers have long criticized the British government over its approach to pricing and the clawback mechanism used to control costs in the state-run NHS. The deal reduces the rebate on medicine sales to the NHS to a maximum of 15%, from the current level of about 23%, people familiar with the matter said ahead of the announcement. 

The Times newspaper first reported the U.K. is preparing to announce the deal. The Department for Business and Trade didn't respond to a request for comment.

The U.K. uses a complex program to put a limit on NHS spending on medicines. Called the voluntary scheme for branded medicines pricing, access and growth, or VPAG, if a level of spending on medicines is exceeded, drugmakers pay money back to the government via a rebate on sales of its medicines.

This has been a key complaint among drugmakers, who say they are paying back much higher amounts in the U.K. than in other European countries.

Trump has similarly offered relief to pharmaceutical makers from other large trading partners, including an agreement to cap the rate applied to drugs from the European Union at 15%.

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Trump has used powers under Section 232 of the Trade Expansion Act, which allows the U.S. government to tariff goods seen as critical to national security, to target numerous sectors, including pharmaceuticals, in a bid to force companies to reshore production to the U.S. and secure lower prices on imported medicines for Americans.

The administration is also using Section 301 of the Trade Act to investigate drug costs, an effort to pressure countries on their own prices.