How will Brexit affect the strategies of US biotechs already in the UK, in Europe, or about to cross the Atlantic?
Dwight D. Eisenhower and Charles de Gaulle didn’t necessarily see eye to eye on many things, but both understood the strategic advantage the UK could provide to the US to set foot in Europe.
What was true from a military or political standpoint in the XXth century was still very relevant from a business point of view in the XXIst century until, on June 23rd, 2016, the UK electorate voted in favour of leaving the European Union, or in short, Brexit. As per the timelines of article 50 of the Lisbon Treaty, describing the procedure to exit the EU, Brexit will become effective on March 29th, 2019.
Current state UK for US biotechs
For the time being, the UK offers a quite favourable environment for US biotech’s: a large English-speaking population (65M+ inhabitants) with access to a performant healthcare system (NHS budget of ~170B€ in 2015-2016 [1]), supported by the lowest Corporate Tax in the G20 (20% [2]) and generous tax deductions on work related to R&D (SME may get up to 230% of R&D expenditure in deduction from their profit [3]). Furthermore, it provides access to the Single Market: 500+ Million people with a 14 Trillion €GDP [4] ($16 Trillion).
The risks and uncertainties that come with Brexit
While Brexit will impact all interactions between the UK and EU, from innovation and its funding to trade and tariffs, four areas of particular relevance for US biotechs will be covered here.
Innovation at risk
The UK is currently the main beneficiary from the European Research Council grants [5], with most projects involving intra-European collaboration [6]. Exiting EU with no deal to maintain participation to European funding would certainly hinder academic research. Interestingly, it would harm also R&D in the private sector, as there is a positive correlation between government and private R&D spending [7]: a poorly negotiated Brexit would reduce the attractiveness of the UK R&D ecosystem.
R&D occurs where ideas, money and talented people meet. The UK currently provides access to high-quality infrastructure, and world-class educational institutes that attract current and future leading scientists: about 16% of STEM academics are non-UK EU nationals [8], and their employment or even stay could be at risk upon Brexit.
Such factors may ultimately impact the decision on where firms will establish their research centres.
Fewer, costlier Clinical Trials
The UK is consistently in the top three countries in Europe for the number of clinical trials in Phase I, II or III and this premium spot could be threatened as the UK leaves the EU: to simplify management and increase efficiency & transparency of clinical trials across Europe, the European Commission has designed the Clinical Trial Regulation (EU No. 536/2014 [9]). As the UK pulls out of the EU, it might be easier for companies to set up clinical trials across Europe and leaving the UK aside.
Trickier Intellectual property protection
The EU is trying to simplify IP protection with unified patents and a unified patent court imposing jurisdiction in all EU member countries (Unified Patent Court Agreement (16351/12) and regulations 1257/2012 and 1260/2012 [10]). Being outside of the EU, the UK would not fall under this court jurisdiction. Whilst the UK may offer easy and quick access for local patent submission, the work to get IP protection in both the UK and EU would still need to be duplicated.
Delays in Drug Approval
At the moment, CE marking for medical device offers marketability across EU, and European Commission marketing authorization, after EMA evaluation, is valid in all countries in the European Economic Area (EEA), which is currently comprised of 28 EU countries, including the UK, plus Norway, Lichtenstein, and Iceland. Approval could become more complex and be delayed depending on the outcome of the ongoing negotiations.
Possible negotiation outcomes
After the June 23rd vote, Theresa May became the new prime Minister and the British Government invoked article 50 of the Lisbon Treaty on the European Union on March 29th, 2017, setting the UK on a course to leave the EU on March 29th, 2019. Since then, negotiations have been afoot and three possible scenarios have been discussed:
EEA membership (like Norway, Lichtenstein, Iceland)
- Enforce the “four freedoms”: Free movement of persons, goods, services and capital within the European Single Market (ESM).
- Contribute financially to access the ESM and to support other EU programs (eg ~800M€ for Norway in 2016 [11]).
- Implement most EU legislations including Marketing Authorization after EMA evaluation, and free marketability of CE labelled medical devices – excluding agriculture and fisheries.
This would be the solution with the least impact and most activities would continue as they do now.
Given that Theresa May vowed to exit the Single Market in January 2017, and that this status would not guarantee the UK pays less money to Europe, it would be politically difficult for the current UK government to promote this option. The Association of the British Pharmaceutical Industry however is pushing to reach an agreement to secure the ongoing cooperation between UK and Europe as fast and clearly as possible [12].
EFTA only (like Switzerland)
- Participate with the ESM (four freedoms) but not to the European Union Customs Union
- Switzerland is the only one of four EFTA members that is not an EEA member: instead of using the rules defined under the EEA membership, it has a set of bilateral agreements with the European Union.
- EMA evaluation and EC marketing authorization do not apply here, approval must be obtained from SwissMedic (Swiss Agency for Therapeutic Products) before being commercialized locally.
The UK would retain access to the Single Market.
However, the UK would need to locally approve drugs. This would cause delays as the MHRA is not staffed to handle this extra burden. This would also double the regulatory burden for US companies, as they would need to file once with EMA and once with MHRA, both agencies not having necessarily the same requirement, timelines and dossier format.
WTO (like the rest of the world)
- Default model: need to negotiate bilateral trade agreement on everything including trade and customs.
- EMA evaluation and EC marketing authorization do not apply here, approval must be obtained locally.
The UK would no retain access to the Single Market: trade agreements would have to be negotiated, which would hinder drug movement, both those produced in the UK and exported to continental Europe, and those produced in Europe trying to reach UK patients. Although a 0% tariff on pharmaceuticals is most likely (under the Most Favoured Nation status), other goods could experience tariffs (esp. medical devices). GMP certifications would also be subject to bilateral agreement.
The UK would need to locally approve drugs with the same consequences as the EFTA only scenario.
As negotiations progress at a pace slower than expected, some companies have already activated their contingency plans to mitigate the WTO scenario: Eisai and AstraZeneca have started exploring approval and testing procedures outside of UK. Others, like GSK, are about to invest money to develop their own contingency plans [13].
Conclusion:
While the UK would remain an attractive market, it is currently hard to foresee which version of the three scenarios will materialize: entry to Europe and UK will become a more complicate, prompting for expertise at the regional level to optimize market entry strategies in a timely manner.
As the UK may put some space between itself and the EU, there is hope that ties with the members of the Commonwealth of Nations, (especially Australia, Canada, and India), could be strengthened. In this case, UK could shift from a US foothold in the EU to a US foothold in other high-growth areas of the globe.
References
1° http://www.bbc.com/news/health-38887694, Accessed Nov 08th 2017
2° https://www.gov.uk/government/publications/why-overseas-companies-should-set-up-in-the-uk/why-overseas-companies-should-set-up-in-the-uk, Accessed Nov 08th 2017
3° https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief, Accessed Nov 16th 2017
4° https://en.wikipedia.org/wiki/European_Single_Market, Accessed Nov 08th 2017
5° https://ec.europa.eu/unitedkingdom/news/european-research-council-10-%E2%80%93-uk-top-beneficiary_en, Accessed Nov 17th 2017
6° https://royalsociety.org/~/media/policy/projects/eu-uk-funding/phase-2/EU-role-in-international-research-collaboration-and-researcher-mobility.pdf, Accessed Nov 16th 2017
7° https://www.kcl.ac.uk/sspp/policy-institute/publications/SpilloversFINAL.pdf, Accessed Nov 16th 2017
8° http://www.sciencecampaign.org.uk/asset/F50CF4C1-93C7-4F38-89E55D6BDBB70ED6/, Accessed Nov 16th 2017
9° http://www.ema.europa.eu/ema/index.jsp?curl=pages/regulation/general/general_content_000629.jsp, Accessed Nov 08th 2017
10° https://www.unified-patent-court.org/, Accessed Nov 08th 2017
11° https://infacts.org/norwegians-pay-same-brits-eu-access/, Accessed Nov 08th 2017
12° http://www.abpi.org.uk/media-centre/Documents/BARNIER_DAVIS_Joint_Association_Pharma_Letter_12_July_2017.pdf, Accessed Nov 08th 2017
13° https://www.economist.com/news/britain/21731409-industry-long-production-timelines-cannot-afford-wait-any-longer-pharmaceutical-firms Accessed Nov 17th 2017
