When it comes to drug spending, there is one 500lb gorilla in the room: America. The US market has long been the heavyweight player — Americans shelled out more than $600bn on medicines last year, almost half the global total.

The country also dominates the research pipeline; its research and development spending accounts for nearly two-thirds of the OECD total. Last year, the US had 10,265 drugs in the works, more than double both China and the EU, and four times as many as the UK.

While this means that US priorities play an outsized role in setting the research agenda, other nations quietly benefit from piggybacking on American innovation. This week’s move by the Biden administration to target 10 top-selling medicines for tough price regulation will rock this global market.

The drive to cut the prices paid for blockbuster heart, stroke, diabetes and cancer treatments will not just trim drugmaker profitability. It could also reshape drug discovery, affecting what medicines are available to patients worldwide.

Americans, who pay three times as much for branded drugs as the OECD average, overwhelmingly support the idea of their government negotiating for price cuts. But policymakers everywhere should be on their guard against subsequent market distortions. There is now a risk that R&D switches focus from the drugs that are most needed, to those that avoid US price controls.

Unlike most of Europe, the US government has not previously controlled medicine prices. Last year’s Inflation Reduction Act authorised Medicare, the taxpayer-funded healthcare system for retirees, to bargain directly with drugmakers. It plans to seek cuts of 25 per cent or more to list prices, focusing on top-selling drugs nearing the end of patent protection. This is expected to save Medicare nearly $100bn over the course of a decade, while reducing out-of-pocket costs for many older Americans.

Drug companies, which must negotiate or pay punitive taxes, have questioned whether this is constitutional; some have sued. They expect private insurers will try to push down what they pay too, sharply cutting revenue. As the list of covered medications expands, the industry warns this will put pressure on R&D budgets and limit the number of drugs in development that it can back.

Price caps may also make it harder to attract venture capital investment because the potential pay-off will be lower. This is particularly concerning because so much early stage drug research is now done by start-ups that later sell out to Big Pharma.

The impact is already starting to be felt beyond America’s shores. “We have decided that we are not going to do certain trials, or that we are not going to do a merger or acquisition or licensing [deal] because it is becoming financially not viable,” Thomas Schinecker, chief executive of Swiss drugmaker Roche, said on a recent media call.

Treatments for the elderly and research into new uses for drugs nearing the end of patent protection are most likely to be affected by the price caps. And manufacturers may prioritise large-molecule treatments, such as gene-therapy drugs or vaccines, over traditional ones simply because the former are exempt from price negotiations for longer.

Much of Big Pharma’s warnings may be scaremongering. The Medicare programme is limited to wildly popular drugs that have already earned back their development costs many times over. And the current system of uncontrolled pricing is not covering itself with innovative glory. Critics say it rewards extremely similar “me-too” drugs that offer little advantage over pre-existing treatments as well as minor reformulations to extend medicines’ patent life. One recent study found that fewer than a third of new drugs approved in Europe and the US between 2007 and 2017 were rated of “high therapeutic value”.

Manufacturers may also benefit from another prong of the IRA reforms that caps out-of-pocket costs for drugs. Some 30 per cent of Medicare patients do not fill new cancer prescriptions because of cost concerns. “They might make up in an increase in volume for the decrease in price,” explains Stacie Dusetzina, a Vanderbilt University professor.

The US has several years to work out the kinks in its new system: the first negotiated prices will not go into effect until 2026. But the upheaval should serve as a wake-up call for both Americans and everybody else.

Sky-high US prices are not the only way to fund global medical progress. Other countries will have to contribute more, but it does not have to be expensive for patients. Governments can give drugmakers a leg up by funding research into the causes of disease as well as the pathways and receptors that can be targets for treatment. They can also reduce risk by helping fund clinical trials and guaranteeing sales. Recent experience with Covid vaccines demonstrates that this can work.

The US drug industry’s size, wealth and scientific prowess mean that it will always play a big role. But it should no longer be the only gorilla in the room.

brooke.masters@ft.com

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UBS’s second-quarter results last week included the effects of its June shotgun wedding with arch-rival Credit Suisse. Its $29bn profit was, by far, the single greatest three-month result earned by a bank.

This apparent “deal of the century” bore an accounting gain that in effect contributed all of those earnings. UBS scavenged the mortally wounded CS cheaply amid its potential collapse, a tie-up effectively demanded by the Swiss government. 

With the books closed on that combination, we now have the official figures from quarterly reports and securities filings on all four of the major bank M&A rescues since the early spring crisis:

-New York Community Bancorp/ Signature Bank (March)

-First Citizens/ Silicon Valley Bank (March)

-JPMorgan Chase/ First Republic Bank (May)

-UBS/ Credit Suisse (June)

In any M&A deal, so-called purchase accounting will require the buyer to allocate the “excess purchase price” to all acquired assets and liabilities. Typically, the purchase price — the present value of future cash flows — will still exceed the revised balance sheet valuation.

That gap is known as “goodwill”. Often thought of as the je ne sais quoi of a company, yet goodwill is ultimately a mechanically-derived arithmetic output to ensure that the pro forma balance sheet does indeed balance.

But with this foursome of deals, the calculation is far more interesting. The transactions were extraordinary, with authorities desperate to find a buyer quickly and prevent broader contagion. As such, buyers could largely dictate the deal terms.

In each of these instances, the buyers took over the targets for an effective purchase price far less than the target’s book equity value, also called net asset value (the fair value of their assets less the fair value of their liabilities).

As such, the buyers did not need to raise their own costly and possibly dilutive equity in order to complete the deals. (In contrast, look at the recently announced merger between PacWest and Banc of California, a regular way transaction that requires a $500mn private equity infusion.) 

The four deals each created the unusual “negative goodwill” since the net asset value exceeded the purchase price. Negative goodwill is the term under IFRS. Per US GAAP, the concept is known as a “bargain purchase gain”. In both instances, a gain is recorded and runs through the P&L to create income and then equity capital boosts at essentially no cost. 

(Note that at the time of the deal announcements, the buyers each shared a preliminary calculation of their expected gains and now final purchase accounting largely confirms those initial figures.)

Here is an example, this one from JPMorgan/ First Republic:



Alphaville has attempted to show the scale of the gains for the four buyers:









Those four green bars of bargain purchases prices/negative goodwill add up to $44bn in collective gain. Next we can see how big those gains were, relative to size of the banks, pre-deal, measured by their shareholder equity recorded in the previous quarter.



JPMorgan paid a relatively hefty price for First Republic, including a $10.6bn cheque to the FDIC and writing off the $5bn deposit it had made into First Republic earlier in the year. Its bargain purchase gain was less than $3bn for a bank with $300bn of shareholder equity.

First Citizens, a relatively small bank, doubled its equity base by getting most of Silicon Valley Bank for just $500mn. 

More precisely, return on equity (profits divided average shareholder equity) shows how efficient these deals were for the buyers.

First Citizens, UBS and NYCB each had RoEs in the previous quarter of between 9 per cent and 11 per cent. Then they each struck gold.



Accounting aside, what may matter most is how shareholders embraced these deals.



First Citizens stock price has almost doubled. NYCB is up 43 per cent and UBS is not far behind. JPMorgan is up just 9 per cent, indicating the small potatoes of FRB, but still is nearly 30 points ahead of the KBW bank index which is down nearly a fifth this year.

Exploiting the desperation of regulators meant mostly easy money for the buyers. The tough losses then have been imposed on previous shareholders of these moribund banks, their non-deposit creditors as well as the deposit insurance schemes that are funded broadly by the banking industry.

These failed banks had viable assets as these acquirers have demonstrated. Why the returns from those assets must be only captured by opportunistic parties remains a public policy question.

You may not have heard of drip pricing — but you will almost certainly be the poorer for it.

Go online to buy a flight, a concert ticket, or even a trip to the cinema and by the time you check out, an array of extra charges and add-ons will have been “dripped” on top of the advertised price, meaning consumers pay more than they bargained for.

The airlines are obviously the masters at this. The advertised price of a flight soars after baggage fees, seating options and access to “fast track” lanes have been added. But many other retail, hospitality and service businesses are borrowing from this price-inflating playbook.

In fact, close to half of all purchases involve the addition of at least one extra (but necessary) fee, according to an independent study published this week by Alma Economics, a public policy consultancy, that analysed over 500 UK websites and apps.

It found the worst examples of drip pricing were associated with buying event tickets (93 per cent of providers), cinemas (69 per cent) and even gym memberships (60 per cent).

One gym chain pumped up prices with a mandatory joining fee that made up 39 per cent of the base price.

It’s also impossible to tell what many hidden charges are actually for, given the catch-all nature of terms like “admin fee”, “processing fee” or “service charge”.

Frankly, “extra profit” would be a more accurate description.

“If you knew the final price up front, the question is: would you have a different decision,” says Nick Spyropoulos, Alma’s managing director.

Overall, drip fees added a median 6 per cent to the advertised base price, according to Alma.

Scale this up across the wider online consumer marketplace, and these small yet annoying charges could add up to £3.5bn of additional annual spending — the last thing we need in a cost of living crisis.

Keen to crack down on the causes of inflation, the Department for Business has launched a consultation about how best to slow the drip, drip, drip of unfair pricing.

I expect they will receive a torrent of replies.

Not all the extra charges people resent having to fork out for relate to online purchases. Consider, for example, being stung by optional” service charges in restaurants of 12.5 per cent or more. Suffice to say, few diners have the chutzpah to ask for this to be removed, even if they receive terrible service.

Ordering food via online delivery apps is another area where extra charges added at the end of the process really sticks in the craw.

And many will have gripes about Airbnb (“the price on the map looks OK, then when you go to book admin fees and cleaning charges are applied”).

Plenty of drivers rage about admin fees charged by digital parking apps. Car hire companies upselling expensive insurance add-ons at the last-minute is another thing that drives people mad.

And even if you haven’t bought a flight, simply dropping someone off at Stansted airport costs an eye-watering £7 for 15 minutes..

These extra charges are clearly something that really annoy people, but the main issue here is transparency. If material pricing information is being withheld, it makes it harder for consumers to compare the true costs, so we risk making a suboptimal purchasing decision.

From a behavioural point of view, it’s no coincidence these extra charges are dripped in very late in the process. By the time the final price is revealed, psychologically, we’re more committed to buying whatever it is, and thus more likely to proceed (albeit through gritted teeth). Abandoning our basket and starting again also costs more of our precious time.

Following the consultation, how might ministers try to remedy this?

There’s certainly scope within the existing regulations for the Competition and Markets Authority to crack down on the worst of these charges, but some argue there are too many grey areas, and the rules need to be properly updated for the digital era.

Citizens Advice, the independent consumer watchdog, wants to see “new fit-for-purpose regulations and clear obligations for retailers” when it comes to website or app design.

Few would agree that the corporate world needs another awards ceremony, but an annual event (The Drips?) to name and shame the most egregious examples is one way consumers could stage a fight back.

Nomination categories could include The Biggest Drip, Most Pointlessly Named Charge and the Droplet Award for multiple extra pricing add-ons.

And there wouldn’t be an admin fee charged for handing out the gongs.

claer.barrett@ft.com

Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com Instagram @Claerb