Brexit Report: What's Next for the Industry?

On June 23, 2016, the United Kingdom voted to leave the European Union. In the days that followed, the pound cascaded against the dollar, and economies across the globe braced for what is expected to be a long period of negotiations and uncertainty. Many UK citizens on both sides of the debate were surprised by the outcome. Perhaps they shouldn’t have been: in recent years, debates about economic policies and border control issues have gained significant political capital in many Western democracies. Brexit will serve as an important case study, particularly for the remaining members, on the challenges and opportunities associated with formally renouncing EU membership.         

One of the most beguiling aspects of the UK’s referendum vote has to do with the definition of “exit,” or lack thereof. Does the vote mandate eliminating freedom of movement and repatriating foreigners, for example, or does it merely suggest that certain restrictions on movement are needed, and access to the single market retained? Following David Cameron’s resignation as UK Prime Minister, incoming PM Theresa May promptly made a spate of cabinet appointments and departed on a European tour intended to set the stage for future negotiations with EU member countries and others global economies. But until Article 50 of the Lisbon Treaty is triggered and formal exit proceedings begin-May has said it won’t happen until 2017 at the earliest-the long-term nature of the UK’s future relations with the EU will remain uncertain. Now is an ideal time for companies to take an active role in shaping the future state of the relationship.

Shaping the exit strategy

The UK is a leader within the EU for science and innovation, and has focused on key public health issues, including antimicrobial resistance and brain diseases. The UK has consistently invested in research; projects such as Genomics England and Generation Scotland seek to catalogue and analyze thousands of human genomes to help discover and produce tomorrow’s new therapies. The Francis Crick Institute funds thousands of scientists and researchers working on fundamental scientific questions, with a strategic priority to accelerate translation efforts and help set up new businesses around promising new discoveries. 

Two of the 10 largest biopharma companies in the world have headquarters in the UK, and roughly a seventh of the top 100 drugs in use today originated from research in Great Britain, according to the Association of the British Pharmaceutical Industry (ABPI). The UK’s history in pioneering clinical research has made it a go-to destination for multinational studies and complex trials. Enacting policies that protect the scientific enterprise will be critical as the UK exits from the EU.     

PwC is supporting an effort to provide the script that will inform governance of key pharmaceutical and life sciences business areas in the UK. The ABPI and the UK BioIndustry Association (BIA) have developed a UK EU Life Sciences Transition Program, which will serve as a playbook for discussions with UK government officials. The transition program will cover six areas-regulation, people, manufacturing and supply, R&D, IP, fiscal and trade-and will be presented this month to a group of UK government officials across seven departments, including the HM Treasury, Medicines and Healthcare Products Regulatory Agency (MHRA), NHS England and 10 Downing Street. The steering group is co-chaired by GSK CEO Andrew Witty and AstraZeneca CEO Pascal Soriot.

The long and winding road

The importance of educating new UK cabinet members and government officials on the complexities inherent to drug and medical device development and commercialization can hardly be overstated, since the pathway forward may include tradeoffs that will impact different sectors in different ways. Brexit negotiations will most likely be informed by four potential exit scenarios: membership in the European Economic Area (EEA) and continued support of the EU’s four freedoms of labor, capital, goods and services; the establishment of a limited free trade agreement with the EU; entrance into a bilateral integration treaty with the EU; or absent a new trade agreement with the EU, membership in the World Trade Organization as a “most favored nation.” The UK may also pursue a solution that selectively blends together these elements. 

Speaking with her counterparts in Slovakia and Poland in late July, May rejected an “off the shelf” model for trade previously negotiated with countries such as Norway, Switzerland and Canada. “We should be driven by what is in the best interests of the UK and what is going to work for the

European Union, not by the models that already exist,” May said , according to a report in The Guardian.    

Trade deals struck between the UK and non-European countries, including markets like China and India, also may impact the pharma/life sciences sector. Switzerland’s free trade deal with China was “particularly favorable to China, largely because Switzerland doesn’t have a large amount of manufacturing to worry about,” said Nigel Driffield, professor of international business at Warwick Business School. “If the UK were to do the same sort of deal with China that Switzerland did, then an awful lot of the low-value manufacturing that the UK still has in pharma would disappear overnight.” 

Trade deals notwithstanding, the UK should maintain its status as an attractive market for foreign investment. The UK was the biggest recipient of foreign investment in the EU, receiving 46% of the foreign direct investment stock originating from the EU in 2013. After the Brexit vote, incoming Chancellor of the Exchequer Philip Hammond has taken a more circumspect approach than his predecessor, George Osborne, who floated plans to lower the UK’s corporate tax rate to 17% by 2020. 

Perhaps more important than the corporate tax rate to research-heavy industries like pharmaceuticals are allowable deductions made for investment in R&D or license fee payments. “The UK needs to look at what other incentives it can put in place that will perhaps outweigh any additional costs of sitting outside the EU,” Driffield said.

Four key issues

As Ian Powell, PwC’s former chairman of the UK firm has said, “History has taught us that UK business is adaptable and innovative when confronted with new challenges and opportunities.” PwC analysis predicts that the UK economy will return to steady annual growth of around 2%, once the initial shock of Brexit has faded. As negotiations begin and new ministers get up to speed, four important issues for the pharmaceutical and life sciences deserve immediate attention: regulatory issues; market authorization, workforce and funding.

Regulation and legislation

Pan-European drug regulatory issues covering the full life cycle of a drug will come into play as the UK decides how it will regulate drugs and devices. These include the European Medicine Agency’s (EMA) accelerated assessment program and conditional marketing authorization, the Clinical Trials Directive (soon to be replaced by the EU Clinical Trials Regulation), data security, manufacturing inspections and post-market surveillance requirements. While the UK’s regulations are governed by the MHRA, they largely mirror their EU equivalents. Currently, the UK has a significant impact on shaping EMA regulations and carries out 30% of the EMA workload. 

Disharmony between EMA regulations and the UK could lead to additional expenses for manufacturers. The EU Clinical Trials Regulation is slated to come online beginning in 2018, with the goal of facilitating larger pan-European trials. UK involvement in these trials may become more difficult and costly if the UK is excluded from discussions about implementation and regulatory compliance. Pharmaceutical companies should review regulatory and clinical trial strategies to determine if they will work under different Brexit scenarios and timescales.  

Another noteworthy pan-European project is the Unified Patent Court (UPC), which aims to create a single patent court and a single unitary patent covering 25 countries. The European Federation of Pharmaceutical Industries and Associations (EFPIA) supports the effort. Alexander Ramsay, chair of the UPC preparatory committee, told Pharm Exec that for now, “the UK is still a member state of the EU and it’s perfectly possible to move on with the ratification [of the UPC agreement].” Pharmaceutical companies will need to think carefully about whether to take advantage of blanket EU validation for specific patents, or opt-out in favor of national patent systems to protect intellectual property.    

Market authorization

The EMA, currently based in London, is responsible for the centralized authorization procedure for medicines that is valid in all EU and EEA countries. The UK’s leadership role in helping the EMA develop regulatory policy will change as a result of Brexit. The UK also serves on the European Committee for Standardization (CEN), which grants CE Mark certification for medical devices. If the MHRA becomes the arbiter for UK drug approvals, new resources and capabilities may be needed, and an additional authorization process could slow UK patient access to medicines. 

On an investor call to discuss second-quarter earnings, GSK’s Witty said that the No. 1 issue regarding Brexit is the UK regulatory system, with parallel trade as the second-most important issue. “If the UK leaves [the EMA], you could articulate a whole bunch of negatives,” said Witty. But the UK could leave and create “the best agency in the world, with the fastest and most innovative way to assess value for money…that could create a very interesting, competitive dynamic in the way in which innovation is assessed globally,” he said. For products in earlier stages of development, pharmaceutical and life sciences companies will need to consider the implications of a separate UK approval process, and what it could mean for launch sequencing and reference pricing for new drugs.

Free movement of people 

Clarity on the policy of freedom of movement is vital. The pharmaceutical and life sciences industries employ 73,000 people in the UK; 7% are non-British EU citizens. As part of an overall agreement, work permits could mitigate potential restrictions on freedom of movement, but those permits would need to be issued seamlessly and without delay. If pan-European firms are faced with additional costs associated with doing business in the UK, they may begin to examine alternative options for future investments in manufacturing sites and R&D facilities. Investments could shift to other EU member states if the UK is seen as a less efficient host for business. 

Efforts to lessen the impact of a possible brain drain as a result of any potential change in freedom of movement policies will benefit organizations operating in the UK. Many academics and senior pharmaceutical staff who frequently move around Europe could be affected. EU law allows for permanent residency applications after living for five years in member states. Companies should communicate with their non-UK nationals to reassure them that they are valued, and consider sharing guidance on applying for permanent residency.

Funding and the UK economy

UK life sciences organizations and researchers have access to significant funding initiatives in Europe, including Horizon 2020-which is focused on primary research-and the European Investment Fund. While a loss of access to these funds would affect university research and start-ups disproportionately, those groups represent the starting point for the UK’s reputation as a leader in biotechnology and biomedical science. 

If EU funding dries up in the UK, it could also impact the investment decisions larger pharmaceutical companies make; the UK contributed €5.4 billion to EU research, development and innovation activities between 2007 and 2013, but received €8.8 billion in EU funding for the same activities during that period, according to a Royal Society report. The UK government announced in August that it has committed to underwrite Horizon 2020 funding to 2020. While the announcement is welcome and provides stability in the medium term, longer-term solutions post-2020 will be required.

In the past, pharmaceutical and life sciences companies based in the US and Japan, for example, have invested in the UK with a view to entering a wider European market. Brexit will render the UK a less useful platform for accessing Europe. Companies should be prepared to answer questions from investors, such as how existing funding may be affected and what alternative funding sources are in place. 

Living with uncertainty

The only real certainty about Brexit in the short term is that the period of uncertainty will continue. Pharmaceutical and life sciences companies should plan for uncertainty and potential opportunities in light of new structures. Consideration needs to be given to Brexit scenarios across regulatory, workforce, funding and investment and fiscal issues, among others, and risk mitigation strategies identified. Ask yourself: “Are we prepared?” 

Michael Swanick is Global Pharmaceuticals and Life Sciences Leader. He can be reached at michael.f.swanick@pwc.com; Jo Pisani is UK Pharmaceuticals and Life Sciences Consulting Leader. She can be reached at jo.pisani@strategyand.uk.pwc.com; Tamora Saunders is Director, Pharmaceuticals and Life Sciences Strategy Consulting. She can be reached at tamora.saunders@strategyand.uk.pwc.com; Ben Comer is Senior Manager, PwC’s Health Research Institute. He can be reached at benjamin.comer@pwc.com