Brexit's Impact On The Global Pharmaceutical Industry: Future Access To The EU Common Market

By Yulia Privolnev, manager, global market access, Decision Resources Group (DRG)

On June 23, 2016, the voters of the United Kingdom voted to leave the European Union in an advisory referendum colloquially referred to as the “Brexit” (British exit) vote. The aftermath of the vote has been chaotic — from financial troubles that have seen the British economy and currency plummet, to political bedlam that has led to a number of political casualties, including the Prime Minister and his heir apparent. While analysts, journalists, and the public all discuss the impact of Brexit on the UK and the path forward, few realize the implications that the vote will have on healthcare, and the pharmaceutical industry in particular.

The pharmaceutical industry in the UK generates over 10% of the country’s gross domestic product (GDP) and employs 70,000 people. Any impact by Brexit on the UK pharmaceutical industry — domestically or internationally — will not be a trifling matter. Though it is impossible to predict the exact consequences Brexit will have on the industry, we do know that the consequences will be far-reaching. Every stage of drug development and commercialization will likely be affected, from the earliest stages of research to pricing and reimbursement throughout the world.

It should be noted that many political analysts and journalists are increasingly speculating that Brexit may not happen at all. The referendum was strictly advisory, and the UK does not formally begin the process of leaving the EU until Article 50 of the Lisbon Treaty is triggered. The article will begin two-year exit negotiations, by the end of which the new UK-EU relationship will become clear.

Prime Minister David Cameron had initially promised to trigger Article 50 as soon as the results were confirmed. However, he did not do so and instead resigned on the morning of June 24, leaving the actual departure and subsequent negotiations to his successor. The new prime minister should be in office by September 2 and will presumably trigger the article then. Many hope that the subsequent chaos of the vote will cause the successor to backtrack on the advisory referendum, or that a majority of members of parliament will block his actions. Though retaining the status quo is likely the best option for the pharmaceutical industry, this possibility remains unlikely, and thus it is crucial for members of the pharmaceutical industry to understand what implications the referendum will have on them.

UK Life Sciences Funding

The UK receives more grants from the European Research Council than any other country, and leaving the EU would make it ineligible for the vast majority of these going forward. Furthermore, British scientists would likely lose priority access to other European research facilities, and a wide range of EU public-private partnerships would find themselves in danger. The UK is also likely to lose access to the EU program for research and innovation — the Horizon 2020 program — which includes the Innovative Medicines Initiative (IMI). Horizon 2020 is the largest life sciences public-private partnership (PPP) in the world and has over 50 live projects that provide funding for many organizations and researchers around the UK. With Brexit, British research councils and universities will likely be excluded from the IMI network and its funding. It is estimated that £8.5 billion ($12.3 billion) of funding and investment in the next four years alone is now in jeopardy.

Later-stage clinical trials are also likely to be affected. A planned reform will introduce a single EU portal for clinical trials in 2018, allowing industry to apply centrally and receive approval to conduct trials in all EU member states. If the UK is excluded from the new clinical trial reform, the UK clinical trial market will likely become an afterthought, as it will be too costly and complex to apply and conduct clinical trials there after having already received approval from the much larger and more lucrative EU market.  

The life sciences industry will not be the only one to suffer from the impact of Brexit, as these same implications will also be felt by the healthcare system and British patients.

EU Common Market Access

The long-term implications of Brexit for the pharmaceutical industry largely depend on what kind of relationship the UK chooses to establish with the EU, and what kind of relationship the EU would be willing to entertain. It is in the UK’s — and the pharmaceutical industry’s — best interest for the UK to have continued access to the European common market, but this may not be politically feasible.

The UK has three main routes to EU market access: the European Economic Area (EEA), the European Free Trade Association (EFTA), and the World Trade Organization (WTO). The UK could join Norway, Iceland, and Liechtenstein and sign the EEA Agreement. This would allow the UK to participate in the common market, but would require the UK to maintain many EU regulations, including those related to the freedom of movement of persons, a clause particularly unpopular among many of those in the UK who voted to leave the EU.

For the pharmaceutical industry, the benefits of the UK joining the EEA are clear. It would mean that most legislation related to the drug industry would remain unchanged, resulting in the greatest stability. While the UK would lose some ability to influence EU regulations, as EEA countries are usually only awarded “observer” status, this route would leave the UK and the pharmaceutical industry in a situation most like the current one.

The next option is the EFTA, which the Leave campaigners often promoted for the UK pharmaceutical industry post-EU, specifically because of Switzerland. Switzerland is a signatory of the EFTA — but not a member of the EEA — and is seen as a shining example of a European pharmaceutical industry thriving outside of the EU. EFTA would require the UK to negotiate bilateral free trade agreements with the EEA and EU but without the additional “burden” of adopting EU regulations and laws. Signing EFTA would allow for the UK to enjoy access to the EU single market without many of the sacrifices required by EEA or EU membership.

However, data suggests that comparing Switzerland’s pharmaceutical market to the UK’s is disingenuous. Despite better industry incentives and an intellectual property environment that is considered friendlier than the UK’s, Switzerland receives half the R&D funding that the UK does. In order to even begin competing, the UK would have to change its policies to better embrace industry, like Switzerland’s.

Lastly, the UK could reject the whole European premise entirely and build a relationship with the EU similar to the rest of the world — through the established trade rules and norms of the WTO. In fact, the UK will automatically revert to this status once Article 50 of the Lisbon Treaty is triggered and exit negotiations begin. During negotiations, the UK would be responsible for all trade duties and tariffs with the EU, like any other country lacking a bilateral trade treaty. Assuming that the UK does not want to pay duties forever — which is likely — then bilateral trade treaties would be the next step. The UK could follow Canada’s lead and sign a treaty similar to the 2013 EU-Canada Comprehensive Economic and Trade Agreement (CETA), which eliminated 98% of tariffs between Canada and the EU. The downside is that the British pharmaceutical industry and system would be entirely separated from the EU system, even with such a treaty.

It is impossible to say which system would be best for the global pharmaceutical industry in the long run, though common sense would tell us that it is the EEA route. However, it is first necessary to consider which options are even politically feasible — within the UK and outside it.

The UK, Leave campaigners included, have made it clear that they would like continued access to the common market. However, the EU has made it clear in recent days that such a compromise would be very difficult to reach without sacrifices and concessions from the UK. Whether the UK, and the electorate that voted for Leave, are willing to make those sacrifices and concessions remains to be seen.

Click here to read Part 2 of this series, which explores the UK’s future relationship with the EU after exit — and its potential effects on the worldwide pharmaceutical industry, from marketing authorization to global pricing trends.

About The Author

Yulia Privolnev is a senior analyst on the Global Market Access Insights team at Decision Resources Group (DRG). She is responsible for monitoring and analyzing global market access through the production of DRG’s Global Market Access Solution (GMAS) and Access & Reimbursement products. Yulia’s specific focus is on all aspects of market access in Western and Eastern Europe, as well as external reference pricing (ERP) and managed entry agreements (MEAs) on a global scale. Yulia holds a BA from the University of Toronto and an MA from the London School of Economics.