What the U.S.–UK Drug Pricing Agreement Reveals About How MFN Drug Policy Could Impact the UK and EU

As reported here, on December 1, 2025, the Office of the United States Trade Representative and the UK Government announced an agreement in principle regarding the pricing of pharmaceutical products. The headlines include (i) an agreement on 0% tariffs on UK pharmaceutical exports to the U.S. and assurance that UK pharmaceutical pricing practices will not be targeted under Section 301 of the Trade Act of 1974; and (ii) a cumulative 25% increase in the UK’s investment in innovative drugs delivered through increases in the UK’s thresholds for valuing cost-effectiveness of new drugs, and reduced clawback payments on sales of innovative drugs. But what is the deeper context of this agreement and what does it tell us about the wider potential impact of U.S. MFN policies in Europe? In this Update, Sidley’s transatlantic drug pricing team provides their views and look ahead to the potential impacts for manufacturers in the UK and EU.

U.S. Government Policy aimed at reducing the cost of prescription drugs is already having an impact on the price of U.S. drugs within scope of recent agreements between manufacturers and the administration (e.g., see White House Fact Sheet) and initiatives such as the Centers for Medicare & Medicaid Services (CMS) voluntary initiative to introduce the option of MFN pricing to the Medicaid program under the so-called GENEROUS Model (Generating cost Reductions for U.S. Medicaid Model), as we reported, here. We expect a continued focus on MFN and other drug pricing policy initiatives through the first half of 2026. Industry stakeholders also continue to closely monitor the lawsuits winding through U.S. courts challenging the Medicare Drug Price Negotiation Program implemented under the Inflation Reduction Act.

Impact of U.S. MFN and Tariff Policies in the UK

The UK was a clear candidate for an early drug pricing deal with the U.S., as the UK was particularly exposed to U.S. drug pricing policies as a consequence of the UK’s relatively low drug prices and comparatively low investment in medicines – which account for only 9% of the UK’s healthcare spend, compared with 14% in Germany and 17% in Spain, has created a difficult commercial environment for UK investment.

The UK has been able to achieve low prices because of the powerful negotiating position of the UK’s single centralized payer for the majority of UK healthcare (the NHS), its deeply embedded health technology appraisal processes (through NICE) which acts as the gatekeeper for the reimbursement of drugs, and through long-standing price-control mechanisms which effectively cap the NHS’s spend on innovative medicines – the most recent iteration of which is the Voluntary Scheme for Branded Medicines Pricing, Access and Growth (VPAG), and a fall-back Statutory Scheme. The current VPAG scheme requires UK manufacturers to pay an effective clawback rate of 23.5% to the UK Government on “newer medicines” (22.9% clawback plus a 0.6% investment programme funding, excluding new active substances) – far higher than comparators such as France (5.7%), Germany (7%), and Spain (7.5%).

Following the breakdown in negotiations between industry and the UK Government on a new “Voluntary Scheme” (seeking to resolve the issues from the current scheme), the freezing – or complete withdrawal – of a number of high-profile pharmaceutical company investments in the UK, and in view of the UK Government’s announcement that it was committing to investing in life sciences as a key pillar for UK growth, all the indicators were pointing at a requirement for significant change to UK drug pricing policy and negotiations with the U.S. administration.

The subsequent U.S.-UK agreement in principle appears to resolve a number of these issues and is being reported as good news for UK patients and the UK life sciences by the pharmaceutical industry. Not only does the agreement secure 0% tariffs on UK exports of pharmaceuticals to the U.S. for at least three years – heading off fears of punitive exports tariffs which could have been the final straw for UK life science companies – but it will also partially address the issues of clawback payments, by capping the repayment rate for newer medicines at 15% for the next three years. Furthermore, for the first time in 20 years, the UK’s baseline cost-effectiveness threshold will be raised from £20,000-£30,000 to £25,000-£35,000 per QALY (Quality-Adjusted Life Year). Combined with new value set for judging health states, the agreement is set to increase UK investment in innovative medicines by a much needed 25%. These measures are an important first step that should help improve UK patient’s access to innovative treatments, but UK life sciences will require sustained ongoing investment if the UK is to achieve its goal of being the third most important Life Sciences economy globally (behind the U.S. and China), by 2035.

Impact of U.S. MFN and Tariff Policies in the EU

As we discussed here, U.S. MFN drug policy is raising the stakes in the final stages of the negotiations of the so-called EU “Pharma Package” – the largest revision of EU pharmaceutical law since 1965. This is because the Pharma Package proposals (in a range of positions being negotiated in “trilogues” between the European Parliament, the Council of the European Union, and the European Commission) would, at their most extreme, pressurise pharmaceutical manufacturers who want to access the EU market to launch their products in all EU Member States that require it. Consequently, the net prices of such products that fall within the scope of U.S. MFN policy – including in qualifying “low price” EU countries – could be used as U.S. benchmarks.

Whereas manufacturers have previously had control over launch sequencing which takes into consideration factors such as patient need, pricing and commercial viability, the combination of U.S. MFN policy, and the current Pharma Package policy is causing manufacturers to carefully evaluate the timing of their product launches in the EU.

As U.S. MFN policy intends to benchmark against net prices (i.e., after discounts) rather than manufacturers’ published list prices, the use of confidential discounts in EU countries may not provide an effective mitigation strategy for manufacturers. Indeed, there is a risk that MFN’s reliance on net prices could undermine and jeopardize the use of confidential discounts, which is a vital tool that enables manufacturers to negotiate confidential discounts with payers. The effects could destabilize the well-established and carefully calibrated pricing and reimbursement systems across the EU, potentially leading to delays or decreased access to medicines in Europe – directly contrary to the stated objective of the Pharma Package. All that said, the U.S. has yet to announce how it would determine or validate reported MFN pricing in other countries.

The stakes could conceivably be raised even higher if, in the event of medicines shortages, the EU were to deploy newly proposed compulsory licensing laws on the basis that medicines shortages were leading to a cross-border crisis or emergency in the EU (further details on this proposal should be available soon; the Council and the European Parliament reached a provisional agreement on the regulation on compulsory licensing for crisis management purposes in May this year, and the Parliament is expected to vote on the text at second reading imminently).

As in the UK, the EU is also concerned about the risk of manufacturers transferring investments to the U.S.; earlier this year 18 international large and medium-sized innovative companies identified that as much as 85% of capital expenditure investments (approximately €50.6 billion) and as much as 50% of R&D expenditure (approximately €52.6 billion) was potentially at risk. This provides further impetus for the EU to carefully consider the impact of the proposed Pharma Package in light of the new geopolitical landscape.

Looking ahead

The UK Government has identified life sciences as one of eight high-growth sectors and has set ambitious goals for the UK to be the third most important Life Sciences economy globally by 2035. However, industry has found the commercial environment unsustainable, and there has already been flight of life sciences investment to the U.S. Therefore, out of necessity, the UK has been relatively quick to negotiate drug pricing with the U.S. – becoming the first country to secure 0% tariffs on pharmaceuticals exported to the U.S. – and is taking an important step to update cost-effectiveness thresholds to improve the commercial environment.

The UK has also announced a package of investment for UK life sciences in its Sector Plan including £600 million investment in a UK Health Data Research Service, and the MHRA – the UK’s medicines regulator – has demonstrated increasing willingness to invest in innovative and forward looking approaches to accelerate patient access to new treatments.

To have any chance of achieving its goals, it will be necessary for the UK to maintain this new commitment and investment in life sciences, continue to take advantage of MHRA’s status as a sovereign regulator, and remove roadblocks that overcomplicate the establishment and scale up of pharma companies in the UK.

Similarly, the EU is at an inflexion point as negotiations on the EU Pharma Package (and other key legislative proposals including the Compulsory Licensing Regulation, Critical Medicines Act and Biotech Act) enter their final stages. The EU will – and indeed, must – have in mind that it faces a dramatically different geopolitical environment today compared when the EU Commission first published its Pharma Package proposals in April 2023. It is vital that the EU adapts its proposals to ensure the EU remains an attractive market for life sciences investment and for the launch of innovative medicines. There is a risk that if the Pharma Package fails to support innovation, EU patient’s access to innovative medicines could be delayed or reduced, contrary to the clear objectives of the Pharma Package.

In terms of negotiations with the U.S., the Office of the United States Trade Representative highlighted Ambassador Greer’s statement that “The Trump Administration is reviewing the pharmaceutical pricing practices of many other U.S. trading partners and hopes that they will follow suit with constructive negotiations.”

Sidley will continue to closely monitor these developments.