A key element of an effective national innovation strategy is the ability to capture the creative value of invention to support the growth of the economy. We have previously discussed the risk of the UK becoming an Incubator Economy where the downstream value of new business is lost to the economy due to a failure to scale, either through poor commercialisation strategy or as a result of investors being too eager to cash out too soon, allowing others to acquire the business and potentially shift the value capture overseas. But this is not the only issue the UK faces in developing an effective growth plan – it also needs to align with the needs of more mature industry and attract their investment. The pharmaceutical sector is a case in point, with 2025 becoming an annus horribilis in terms of industrial focussed investment.
Back in 2020 Merck, known as MSD in Europe, announced a £1 billion ($1.31 billion) investment to a build an early research hub in London’s Knowledge Quarter located around Kings Cross Station. The centre was expected to be operating in 2025 with a staff of 800 including 120 new hires. At that time David Peacock, MSD managing director for the UK and Ireland told the Financial Times “We currently view the UK as a world leader in developing science, driven by the long-term emphasis on building a strong research and development infrastructure”. Yet abruptly in September 2025, the company announced it no longer planned to proceed with the centre with the loss of 125 jobs. So, what drove the change of heart? UK science, the foundation for the original investment decision has not suddenly gone bad – indeed UK universities continue to perform highly in global league tables. A terse statement from the company provides at least some of the explanation which “reflects the challenges of the UK not making meaningful progress towards addressing the lack of investment in the life science industry and the overall undervaluation of innovative medicines and vaccines by successive UK governments". Sadly, Merck is not alone in expressing this view; earlier in the year AstraZeneca announced it would no longer be investing £450M in expanding a vaccine manufacturing plant in Merseyside, blaming reduced government support. It also paused plans to make a further £200 million investment in its Cambridge research site and Eli Lilly stated that it is was reconsidering a planned investment into an R&D facility in the UK, with its CEO commenting that the UK is “probably the worst country in Europe” for drug pricing and that England is “not an attractive environment for investment". The UK government has expressed its disappointment at these decisions arguing that the Merck decision was "a commercial decision for them" and that it had made a "significant offer" of support to AstraZeneca to support the Merseyside investment, but doing more "simply didn't add up for the taxpayer".
To be fair, the UK is not alone; the Pharma industry is making large cuts in R&D across the globe and is also feeling political pressure to invest in its bigger markets, notably the US which is seeing significant investment from the very same companies that have cancelled investment in the UK. Large pharma companies can allocate R&D investment globally to optimise their business operations. The UK therefore needs to do more to make the country more commercially attractive to the pharmaceutical industry and to anchor R&D and manufacturing investment here. It cannot just rely on good science to achieve this; instead, it needs to develop a more active dialogue with the industry and explore what value proposition it can offer to appeal to these companies. In doing so, it needs to consider a number of headwinds for the industry in the UK including:
- Drug Pricing
Data from a study of 2022 data suggest that that the US is paying more than 4 times the average price paid by 7 other counties including the UK, France, Germany, Japan and Mexico. The data also suggest that UK pricing is not that dissimilar from the non-US companies in the study. But these data are for list prices for drugs and do not reflect the discounts that might be negotiated. The UK has agreed a rebate with leading pharmaceutical companies on drugs bought by the US of 23.5% and 35.6% of their revenues. Rebates exist for other countries but are less than 10% - the disparity here is hard for pharma companies to digest. Great for the healthcare costs, but a threat to investment. - Adoption of New Drugs
Although the UK does well in terms of speed of approval of new drugs, uptake lags behind many other countries with 58 eligible UK patents getting the same treatment for every 100 in comparator countries, one year after launch. - Spend on Pharmaceuticals
Compared to many of its peers, the UK spends a low proportion of its healthcare budget on medicines; around 9%, compared to 18% for Spain and 17% for Germany. To its credit this reflects a rigorous process to assess the cost effectiveness as well as clinical effectiveness of new medicines. The UK is also a leader in the uptake of biosimilar versions of innovative medicines, post patent expiry which can save cost as well as increase patient access due to higher cost effectiveness. - Regulation
After Brexit the UK has had to develop its own regulatory approval process for medicines, increasing the burden for pharma companies looking to launch in the UK, as this creates additional work for them over what they need to do in Europe. It is still quite early to establish how, Brexit has slowed down the approval of medicines in the UK but for sure it will increase the cost of doing so. It has been argued that the UK can exploit this regulatory freedom to get faster approval but evidence to support this has yet to emerge and, in the end, the UK will probably have to stay aligned with EU regulation to avoid more significant duplication of effort for companies looking to get drugs approved here in the UK.
So, what does the UK government need to do to win back the confidence of the pharmaceutical industry. First and foremost, it needs to establish a much better dialogue with the pharmaceutical industry. Rather than resorting to frosty or laissez-faire commentary, it needs to understand industry needs and challenges better, so that it can offer approaches that drive mutual benefit. It also needs to apply joined-up system thinking across its functions and in developing UK policy. Although the rebate help keeps the healthcare costs lower at a time when we see intense pressure on the NHS, it does not incentivise investment in the UK by the pharma industry, and without constructive dialogue, a case of Taxation Without Representation. A key aim of the government’s growth strategy is to expand the economy and in doing so, to raise more revenue through taxation, that can in turn fund the services, infrastructure and living standards of the nation. Although a cut in the rebate might be the right decision to keep pharma companies invested in the UK, a better approach might to consider how it can be better linked to making the UK more attractive to the industry, especially in downstream activities such as faster approval and commercialisation of new medicines as well as more efficient and cost-effective manufacturing. Although the UK is a relatively small market for medicines with only around 3% of the global market, it can offer comparative advantage to the industry for example around access to science, initiatives such as the UK biobank as well as via the NHS being one of the largest integrated healthcare systems globally. But a final word of caution, is that focusing purely on science as a lever will not be enough - it risks being another manifestation of the incubator nation challenge and, as we have seen, it does nothing guarantee commercial investment in the UK.
In summary, UK government needs to hear the wake-up call from the past 12 months. By taking a systems thinking approach across the relevant government departments and developing a more proactive industry dialogue to establish key industry priorities the basis for a better commercial environment for the pharma industry can be established. Funds from the rebate can then be redirected and enhanced with other government support and investment, to drive a growth partnership for the sector that benefits industry, the economy as well as society through better access to the right medicines.