Brexit Bombshell: Turbulence Ahead for Pharma and for Europe

July 5, 2016

The UK's Brexit vote has unleashed turbulence in Europe - not least on its pharma sector. Reflector reports.

A violent thunderstorm rolled across the skies of Brussels throughout the night of June 23, as the prospect of a British exit from the EU became a reality. But it was nothing compared to the turbulence that the outcome of the referendum is already unleashing on the UK, on the EU, and way beyond – including on the pharmaceutical sector.

European drug industry leaders had spoken before the vote of their fears that Brexit would create confusion, particularly over drug regulation and market access. Now those fears have been realised. The UK's main industry association said this "creates immediate challenges for future investment, research and jobs in our industry."

Among the most obvious challenges, the launch and maintenance of medicines on the UK market is likely to require an entirely separate testing and authorization procedure - ironically, just months after the EU celebrated 50 years of the pharmaceutical legislation that today provides one-stop-shop access to the EU-wide market.

The European Medicines Agency and its 800 staff will also have to leave London – just months after it opened its glittering new headquarters there as it celebrated its 20th anniversary.

The international medical technology and diagnostics sectors had been hoping that the new EU rules governing their products, finalised only weeks ago after three years of debate, would remove uncertainties from European business. Now the implementation of the rules will apply only in 27 countries, and the UK will be going it alone.

EU research grants - which have heavily benefited UK scientists and companies - will dry up.

And international drug firms will find the UK less attractive. Mirroring the move by international banks to shift operations out of London because they will lose their "passport" to operate across the EU (J.P. Morgan already announced major job relocations within hours of the vote declaration), pharmaceutical companies will adapt their strategies accordingly when the UK no longer provides a platform for EU market entry, when its government no longer exercises any influence on decisions made in Europe, and when immigration controls and job permits present new barriers to mobility of company staff and to the research community.

There are other less obvious effects, too. Not only will the UK lose the right it had won to host the EU unitary patent court - a key element in the new EU patent system. The UK's broadly pro-industry and pro-innovation influence in all EU decisions on intellectual and industrial property protection will evaporate, leaving the field open to governments with less industry sympathy - and at a time when incentives to drug innovation are under new challenges, even from the current EU presidency.

Brexit will also reduce pro-industry, pro-science and smart-regulation pressure on other issues, including trade and market liberalisation. The UK's departure will mean that only France, Germany and Italy will enjoy the highest number of votes in the Council. Brexit will remove UK officials from the Commission and eliminate voice of the UK in the European Parliament. The UK was scheduled to hold the rotating EU presidency in 2017. Instead, on a wide range of issues that affect the drug industry and very much more, Brexit is likely to relegate the UK to the level of a sort of lobby group in Brussels.

The bid to agree a new EU-US trade treaty, TTIP, for instance, has been strongly supported by drug manufacturers on both sides of the Atlantic, as well as by the UK government. But support was already wavering in protectionist member states, and Brexit is likely to be the final nail in the TTIP coffin. Expanding the market for cross-border information and communications technology applications – notably in e-health and m-health - will similarly be handicapped by the exclusion of UK politicians, officials and company and consumer representatives from EU policy formation.

New challenges will now arise in specific health policy areas of importance to the international drug industry – such as ensuring watertight drug safety monitoring and reporting, or promoting a coherent strategy on personalised medicines, or creating a European network of expertise in rare diseases. Drug manufacturers may take some comfort in the likelihood that the legitimate parallel-importing business could take a hit, since the UK is a big market for parallel traders, but any such satisfaction could be outweighed by new anxieties over additional challenges in combating counterfeit medicines, or efficiently upgrading drug distribution systems. The German Pharmaceutical Industry Association denounced the leave vote, describing Brexit as a blow to medicines research and access in Europe.

Exactly how all this will play out is still to be seen, because it depends on what the UK government now requests as a divorce settlement, and what the 27 remaining member states are prepared to allow it. Technically, the process now is that the departing state must trigger its withdrawal, which opens a two-year window to disentangle it from the EU, including on matters such as pension liabilities, outstanding budgetary questions, or the rights of EU nationals based in the UK and vice versa.

There are very few options. The UK can choose to simply walk away, and rely for its future trading links uniquely on its status as a member of the World Trade Organization - which would severely reduce its access to the market that currently accounts for nearly half the UK's exports in goods and services, and more than half its imports. As Charles Grant at the Centre for European Reform points out, "The UK would then trade with the EU on the same basis as countries like Russia and China." So the UK is more likely to seek some more favourable terms – but the UK can only ask. Whether they get anything is uniquely in the gift of all the other member states, and then only if they agree to special terms within the next two years.

The EU establishment is not keen to give much away, because a majority of UK voters have shown that they are dismissive of the EU's proclaimed values of promoting peace and solidarity, and that they feel no bonds of history, geography or common interests with their fellow Europeans in generating growth or boosting citizens' safety and security or combating climate change. Discussions will be coloured, therefore, partly by a sense of resentment at British obduracy, and partly by fear that easy concessions to the UK would trigger a domino effect across an already fragile EU, provoking bids from other disenchanted member states keen on seeking a better deal. "If you play with fire, you might get burnt,” was a typical comment from German centre-right MEP Markus Ferber, giving the UK an immediate taste of what to expect.

The formal response from the heads of the European Commission, Parliament, Council and Presidency was unequivocal hours after the vote. "There will be no renegotiation", they chorused, and they expect the UK to start the withdrawal process "swiftly", "however painful that process may be." Any delay would unnecessarily prolong the inevitable uncertainty, they underlined.

Leisurely rearrangement of Britain's relationship with Europe in a way that suits Britain better is an illusion that the "leave" campaigners have relied on with their simplistic and imprecise mantras about "regaining control" and "taking back our country". But as Giles Meritt of the think-tank Friends of Europe remarked, "The notion that Britain can neatly cut the links binding it to continental Europe will quickly prove absurd, as will the idea that the surgery will be painless and only local.

There is wider collateral damage too. For the UK, further fragmentation is likely, with a renewed Scottish bid for independence and a resurgent call for a united Ireland. Credit rating agencies have rapidly warned of discouraged inward investment into the UK and of possible reviews of its sovereign debt rating.

For Europe as a whole, Brexit damages the EU's international credibility, and will boost the centrifugal forces that threaten the EU itself, and right now are particularly destabilising Spain. Brexit is feeding the populism driving the extreme right in France and the Netherlands, and the extreme left in Germany. For once, there is little exaggeration in the protestations of the European Union of Federalists that this vote "has the potential to unleash forces of disintegration that could jeopardise the entire European construction and the peace, stability and prosperity it provides." In a world of rapidly-changing geopolitical balance, it is not hard to identify where the greatest benefit would result from an EU meltdown.

Even more widely, there is a challenge - also not without significance for the drug industry - that the UK result poses to societies right across the developed world. The country was split almost precisely in two, with university graduates in the south and Scotland voting predominantly to remain, often on the basis of informed discussion, and white working-class citizens in the north and midlands voting to leave, often on the basis of emotion and uncritically parroted slogans. This cleavage is emblematic of divides in most countries in Europe and beyond. It feeds into many current problems facing them. And just as the bid for better health for all depends on socio-economic conditions as much as on any innovations in healthcare technology, so too does the bid for healthy democracy depend on the broadest and most equitable access to opportunity and education. Without that, societies are increasingly split – and referendums are increasingly dangerous instruments for policymaking.

A footnote. By another fine irony, as the UK vote for isolationism was being counted, the Solar Impulse was landing in Seville after a three-day flight from New York entirely driven by solar power. Hard to imagine a more powerful symbol of innovative and beneficent technology bridging another of the world's historic gulfs and demonstrating what a combination of adventure in cooperation and partnership can achieve to create a better future.