UPDATE 2-UK caps state drugs bill under new deal with industry
* NHS spending on branded drugs to remain flat for two years
* Firms pay for extra costs; 3.74 pct rebate seen in 2014
* Spending can rise just under 2 pct in 2016, 2017 and 2018
* Follows similar tight rein on drugs bill in Germany
LONDON, Nov 6 (Reuters) - Britain has struck a tough five-year deal with drugmakers to keep a lid on the more than 12 billion pounds ($19.25 billion) the state health service spends on branded medicines each year.
The cost to the National Health Service (NHS) of these drugs will be held flat for two years under the latest version of the pharmaceutical price regulation scheme, or PPRS, the Department of Health said on Wednesday.
Pharmaceutical companies will be required to rebate the difference between the allowed growth in the drugs bill and the estimated actual increase in the cost of treatments, which is expected to be 3.74 percent in 2014.
Costs will be allowed to rise by 1.8 percent in 2016 and 2017, and by 1.9 percent in 2018.
The pharmaceutical industry said the new arrangement would be difficult for companies and was based on a "myth" that Britain paid a high price for its drugs.
It is the first time that Britain has set a fixed limit on NHS drugs spending and the government argued there would be significant savings for taxpayers, since medicine costs have increased by around 5 percent annually in recent years. The cost of branded drugs tends to rise faster than off-patent products, where competition drives down prices.
Governments across Europe have been taking a tough line on drug costs as stagnant economic growth hits their healthcare budgets.
In Germany, Chancellor Angela Merkel's conservatives and the centre-left Social Democrats agreed on Monday to maintain a similar tight rein on prescription drug costs via legally mandated price discounts.
The deal struck between the British government and the Association of the British Pharmaceutical Industry (ABPI) follows several months of negotiations, which the ABPI described as the most complex ever.
It also includes a statutory price cut of 15 percent for any companies that do not sign up to the voluntary PPRS scheme.
"This agreement ensures NHS patients will receive the best and most advanced medicines in the world while managing the cost," said Jeremy Hunt, Britain's health minister.
But ABPI President Deepak Khanna said it should not be underestimated how tough the deal would be for companies.
"The negotiations were built on a myth that medicines are expensive in the UK, which is not true. The UK already spends amongst the lowest on medicines as a percentage of GDP and has some of the lowest prices in Europe," he said in a statement.
Pfizer Inc's British arm said the deal was "a missed opportunity for patients, industry and the UK economy", arguing that the over-riding focus on managing costs represented a short term and damaging approach.
Britain's biotech industry association said the deal would "stifle life sciences investment in the UK".
Drugmakers have long complained about low prices and the slow uptake of new medicines in Britain, which they argue undermines the case for investment in the country.
Pharmaceuticals are an important industrial sector in Britain, although recently there have been significant site closures by a number of companies.
The ABPI represents British companies such as GlaxoSmithKline Plc and AstraZeneca Plc, as well as the UK units of multinationals like Pfizer and Novartis AG .
Alongside the PPRS deal, the government also said that a new process of value-based pricing, under which prices will be adjusted according to objective measures of value offered to the healthcare system, would now be introduced in autumn 2014. It had originally been slated to start in January 2014.