When I wrote about a potential Brexit looming over the pharmaceutical industry a few weeks ago, I had hoped that the blog would be a purely theoretical look at the consequences. Remain was leading in the polls, after all, and it seemed hard to imagine that the public would vote for something that experts around the world said would cause decades of economic chaos and instability for the United Kingdom.

Those experts were certainly prescient. Overnight, after the British public voted to leave the European Union on June 23, the United Kingdom was overtaken by France as the world’s fifth-largest economy. Since then, the pound has plunged to its lowest level against the U.S. dollar for over three decades. Standard & Poor downgraded the UK’s credit rating from AAA, citing the referendum’s potential to lead to economic deterioration and belief that the result would “weaken the predictability, stability, and effectiveness of policymaking in the UK.”

The instability did not confine itself to the economic sphere. Prime Minister David Cameron resigned in the wake of the result, the Leader of the Opposition Jeremy Corbyn lost a no confidence vote and faced a mass exodus of his shadow cabinet team, and many of the promises made by the Leave campaign began to unravel. Scotland announced plans to hold a second referendum on independence. Sinn Fein brought Irish reunification back into the headlines. All while the EU began to publicly pressure the UK for a “quick divorce” to bring stability back to the European markets.

Amidst all that chaos, the UK must now find its path, in general and for the pharmaceutical industry specifically. The long-term considerations that the UK will face and the implications of Brexit make it clear that the UK is caught between a rock and hard place. After being told in no uncertain terms that the UK will not enjoy the benefits of EU membership without the sacrifices, the Leave camp is facing a Pyrrhic victory. It won the referendum, but what do they do about it now? Can the UK still have its cake and eat it too?

Logistics

Despite the results of the referendum, 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.

In the event that Leave won, Prime Minister David Cameron had initially promised to trigger Article 50 as soon as the results were confirmed. However, he did not do so on the morning of June 24 and instead resigned, leaving the actual act of leaving and subsequent negotiations to his successor. The new PM should be in office by September 2, and will presumably trigger the article then.

Some hold out hope that by delaying Article 50, Cameron may have saved the UK from Brexit. By killing the momentum and letting the magnitude of the decision sink in, there is hope that the tide can still be turned. The ongoing economic and political chaos is certainly not a strong selling point. It is possible that a majority of Members of Parliament could pass legislation to prevent Article 50 from being triggered. It is also possible that the new Prime Minister will ignore the strictly-advisory referendum. An early election could even result in a pro-EU prime minister, theoretically. After all, a petition asking the government to hold a second referendum has reached almost 4 million signatories.

However, despite these unlikely possibilities, this blogpost assumes that once the new Prime Minister comes into office in September 2016, he or she will trigger Article 50 and the UK will begin to forge its new long-term path.

Relationship with the EU

The long term implications of Brexit depend on what kind of relationship the UK will choose to establish with the EU, and what kind of relationship the EU would be willing to stomach. The UK could follow a number of examples when negotiating its post-EU relationship.

Norwegian Model

It could follow Norway, Iceland and Liechtenstein and sign the European Economic Area (EEA) Agreement member states. This would allow the UK – and pharma companies – to participate in the common market, but would require the UK to keep a considerable bulk of EU regulations, including those related to the freedom of movement of persons. This was a particularly contentious election issue, and it seems unlikely that many Leave campaigners and supporters would be amenable to such an option.

However, the benefits of this option for pharma are considerable – more than the other realistic options (assuming that ignoring the referendum and not leaving the EU is not an option). Joining the EEA would mean that a majority of legislation related to the drug industry would remain unchanged, so this would have the least amount of negative impact on the industry. The main drawback would be an increased authorization burden, where drugs that were centrally authorized by the EMA or will be centrally authorized in the future would require additional national authorization in the UK. However, Liechtenstein does this automatically and Norway and Iceland also have administrative measures to streamline the process, so it is not an overwhelming burden by any means.

Overall, while the UK would lose some ability to influence actual regulatory institutions and progress, this option would leave the UK in a situation most like the current one.

Swiss Model

The example that the Leave supporters often touted for a post-EU UK in terms of pharma was the Swiss example, and that’s the second potential scenario. Switzerland, a signatory of the European Free Trade Association (EFTA) but not a member of the EEA, enjoys a quasi-European status. EFTA requires the negotiation of bilateral free trade agreements with the EEA and EU, but does not come with the additional perceived burden of adopting EU regulations and laws. To the EU’s continued chagrin, the Swiss are able to “cherry-pick” which policies they adopt. Following the Swiss model would allow for the UK to enjoy access to the EU common market, without some of the EU common hassles.

However, it does not come without a price. Under the Swiss model, the UK would be taking on authorization of medicines and clinical trials entirely. The Swiss regulatory agency, Swissmedic, does work alongside the EMA, however, and its sharing agreements are generally seen as quite seamless. This would certainly be an option for the MHRA, which already conducts a significant proportion of authorizations and could certainly use its current close relationship with the EMA to ensure a smooth transition into the new regulatory model. There are also additional ways to ease the process, with other bilateral treaties to ease difference aspects of the pharmaceutical industry, such a good manufacturing practices (GMP).

Overall, there is data to suggest that using Switzerland of an example of a pharmaceutical that’s thriving in Europe but outside the EEA is disingenuous. Despite better incentives for industry and an intellectual property environment that is considered to be friendlier than the UK’s, Switzerland receives half of the R&D funding that the UK does. It may not necessarily pay off for the UK to join the ranks of perennially neutral, the UK may be better off picking a side. At the very least, it will have to change policies to be more embracing of industry, to match Switzerland.

Rest of World Model

The UK could continue to embrace the spirit of the EU by joining the EEA, it could sit on the fence through EFTA or it could reject the whole premise entirely and build a relationship with the EU that much of the rest of the world has – through the established trade rules and norms of the World Trade Organization (WTO). This is the status the UK would automatically revert to once Article 50 of the Lisbon Treaty is triggered, and negotiations for exit begin. While negotiations are underway, the UK would be responsible for all trade duties and tariffs with the EU, like any other country that does not have a bilateral trade treaty.

Assuming that the UK is not willing to accept all applicable import duties, the bilateral trade treaty would be the next step, and would be an arduous process. The UK could choose a similar route to Canada, which signed the EU-Canada Comprehensive Economic and Trade Agreement (CETA) in 2013, an agreement that eliminated 98% of tariffs between Canada and the EU and included a small degree of pharmaceutical regulatory convergence.  Nevertheless, the UK pharmaceutical industry and system would be entirely separated from the EU system, even with such a treaty. The MHRA would be independent and solely responsible for the country’s regulatory system and pharmaceutical supply chain. Canada and the EU did agree on some mutual recognition of things such as GMP certification, and there are international initiatives such as the International Council for Harmonization of Technical Requirements for Pharmaceuticals for Human Use (ICH), but overall, the UK would be going at it alone.

It is impossible to currently say which system would be best for the pharmaceutical industry, or the UK as a whole. It is clear that following the rest of the world would involve the most change and would require the most investment and time. Prior to thinking about which system is best, it’ll be prudent to think about which systems are politically feasible – at home and abroad.

It has always been obvious that UK would like continued access to the common market, but it has become clear in recent days that such a compromise would be very difficult to reach without the UK paying a heavy price. As they would say in Germany, you can’t dance at two weddings at the same time. The UK cannot have access to the common market without agreeing to the necessary sacrifices. The UK can’t dance in the EU and alone. This idea has been dismissed as a “pipe dream” by EU officials and it’s becoming increasingly likely that in order to access the single market, the UK will have to make considerable concessions. Whether the UK, and the electorate that voted for Leave, are willing to make them, remains to be seen.

Impact and Influence

As part of the EU, the UK currently enjoys considerable influence of the global pharmaceutical industry through its involvement and influence over European policy, legislation and procedures. Regardless of how the UK-EU relationship looks at the end of its negotiations, it is unlikely that the same level of influence will ever be recaptured.

Regulatory

Certainly, the EMA would have to move its headquarters out of London, regardless of which path the UK chooses to forge. Judging by the public relations effort put in by a number of countries in recent days, including Sweden and Denmark, to be the new home of the EMA, it seems that there is perceived to be considerable benefit to it. The Association of the British Pharmaceutical Industry, the main pharmaceutical industry group in the UK, has said that the presence of the EMA in London has given the UK’s Medicines and Healthcare Products Regulatory Agency considerable influence over regulatory issues in Europe, stating that “co-location with the MHRA has reinforced and further enhanced the engagement and thought leadership that the MHRA plays in European and global regulatory development.”

This outcome is not likely to come soon, given the administrative and logistical efforts it will take to move the EMA to another country and replace the 900 regulatory and scientific experts it employs – all of whom would struggle to move to the EMA’s new location without the EU’s freedom of movement. Replicating the functionality and talent will not be an easy task.

It is also unlikely that the UK will go against the trend of global harmonization of regulatory matters, a trend that is decades in the making and seen throughout the world. The inefficiency would be staggering. The UK will likely aim for some regulatory convergence, regardless of which post-EU model they follow. Pharmaceutical regulatory authorization was never a hot topic during the referendum campaign, so the continued integration itself is unlikely to prove to be difficult to sell to the British public – the real concern is what the EU will want in return.

Patient Access

If the UK does indeed lose access to centralized authorization, or at least convenient ways to nationalize central authorizations like Norway has, patient access to new medicines could be in trouble. Aside from losing access to European schemes like the adaptive pathways pilot (which the UK has been heavily involved in), the UK may face more basic access issues. The UK represents just 3% of the global biomedical industry, while the European Union represents almost 30%. It is thus very likely that manufacturers may choose to prioritize launching drugs in the EU before the UK, focusing initially on the larger market. This could result in patients having to wait longer to access new drugs, simply because the UK on its own is a lower priority.

Access – at least in the form of clinical trials – would also be affected as investment in the life sciences industry would be changed. The UK is the recipient of the most grants from the European Research Council, and is involved in numerous large-scale public-private partnerships. Depending on the post-EU relationship, it is possible that the number of clinical trials for patients to participate in would diminish considerably, adding to the access burden.

Pricing and Reimbursement

Though pricing and reimbursement will not be significantly affected in the UK explicitly – as all EU countries have their own rules, norms and strategies for pricing and reimbursement – there are some wider implications for P&R.

The 2014 Pharmaceutical Price Regulation Scheme (PPRS) has set UK prices for drugs through to the end of 2018, approximately when Article 50 negotiations are set to end. So while there should be relative pricing stability through to the end of 2018, what will happen with the new PPRS is uncertain. Many predict that the UK will face a period of recession and austerity in coming years as a result of the referendum. Certainly the economic woes less than a week after Brexit – from the UK losing its AAA credit rating to the plunging of the pound – indicate that that there is considerable turbulence to come. The downward trend in the economy could result in cuts to the NHS budget, which would then be reflected in the price of drugs. It is not inconceivable that the UK could see changes to the health technology assessment (HTA) that National Institute for Health and Care Excellence (NICE) performs, including changes in the acceptable incremental cost-effectiveness ratio (ICER) to reflect the new post-EU economic reality. While this is all purely speculation, it is no more inconceivable than the UK leaving the EU was a few short weeks ago.

International Reference Pricing

An area where the UK will not likely see diminished influence is international reference pricing (IRP), where countries use the price of a drug in one or several other countries as a benchmark for their own pricing - also known as external reference pricing.

The UK is referenced by dozens of countries worldwide, from South Korea to Canada – and many European countries in between. It is arguably the most influential country in the world when it comes to IRP, influencing over $325 billion of the global pharmaceutical market. This influence – which largely stems from the UK’s transparency, gold-standard HTA and cost-containment measures – is unlikely to be severely diminished by Brexit. Not many of the things that make the UK attractive as a reference country have much to do with it being a member of the EU.

However, because of this influence, the implications of Brexit will be felt by countries and pharmaceutical manufacturers worldwide through IRP. In the event that the UK chooses a path that will have it outside of the EU’s regulatory system and launch time is affected, the change in drug launch sequencing could impact EU countries that reference the UK – which is most of them. If manufacturers choose to focus on initially launching in the EU, and launch in the UK after, countries that reference the UK will not be able to do so at initial product launch. This could affect prices at initial launch, and will result in an extra wrinkle in the already complicated game theory of launch sequencing and strategy in Europe.

Furthermore, parallel trade – which needs to be considered hand in hand with IRP – will also be affected, as the freedom of movement of goods may no longer be an option for importers and exporters that participate in the arbitrage drug trade across the European Union.

Overall, while the UK’s influence in IRP is unlikely to be affected, its influence will certainly be felt regardless of which relationship model the UK follows. If economic forecasts that predict tough times ahead for the UK are accurate and this is reflected in prices, that downward pressure will spread globally through international web of IRP.

Conclusion

The Leave vote has been described by many as a shock or surprise. It certainly seems like many in the Leave camp were unprepared for the reality of a referendum win for their side. Though the UK is unlikely to trigger Article 50 for a number of months, the EU has rejected any informal talks until then, so the nature of the future EU-UK relationship will not be truly defined until the new Prime Minister takes office. That means that the pharmaceutical industry will have to face months of instability before even having an inkling of what is to come.

The different options come with different advantages and disadvantages. While it is certainly possible to know ahead of time which options will result in the most short-term upheaval and change, it is more difficult to know which option will benefit the industry most in the long run. Common sense would likely indicate that whatever is closest to the current system is the best option. After all – if it isn’t broken, don’t fix it. However, that option – the Norwegian model that requires joining the EEA – could be politically impossible, given the political sacrifices that are likely required.

What is certain is that UK influence will not remain at the level it is now. The market is simply too small compared to EU, and the involvement within EU agencies will not be at the level it is now. Only in international reference pricing will the UK’s influence continue to be felt at similar strength – perhaps to the chagrin of manufacturers everywhere.

Going into the period of uncertainty and negotiations, manufacturers will need to plan for a post-Brexit world. Though we cannot know what that world will look like, we know the likeliest scenarios and their impacts. Though the consequences will certainly not come overnight, they will come eventually. The pharmaceutical industry must now work with the government to agree what steps need to be taken to ensure that the pharmaceutical industry – and patients – are affected as little as possible by the country’s new chapter.

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