Shailesh: Welcome, everyone, thanks for joining us today for this discussion. This week our discussion is about Brexit and its impact on biopharma. Let’s start with “What is Brexit?” Derek?
Derek: I think it took everyone by surprise, everyone thought it wouldn’t happen. It’s mostly about immigration; by doing this, they have more control over the rate of immigration into the country. We could have the same thing happen next year with the Netherlands and the dissociation of the EU. The strong governments are saying to get rid of Britain now, they are not interested in negotiating terms with Britain and are taking quite a hard line to discourage others from doing the same thing.
Shailesh: You’re right, it’s primarily about immigration and some economic anxiety, but also, I think it’s the trend of nationalism. We’ve had this idea of one Europe and globalism since the end of WWII, but sometimes we forget the real purpose of the EU post-WWII was to prevent hostility towards Europe because they’ve been fighting with each other for the past 500 – 600 years, and the success of the EU has been to allow trade with each other so countries don’t go to war with each other. And in that perspective, it’s been hugely successful.
Derek: You’re right, that’s why Germany and France has been doing so well. That’s the source of their national security and prevention of going to war again. I think Germany benefited the most economically by having this market available to them, but they also enjoyed the sense of security as well.
Shailesh: Yes, and the other thing is that there is quite a bit of incentive for the European family to stay together; but you talked about this before, now that the UK has made a decision to leave, the timeline for this is short, they want this to happen quickly, but first Britain has to officially withdraw by declaring Article 50, which they haven’t declared yet. And they won’t until they have a new PM, which won’t be Boris Johnson, and post-PM it will take two years until they officially get out of the EU, so this will be a slow play.
Derek: Yes, it will be slow and difficult. I also think that they’re going to pick the right time, they’re not going to declare Article 50 until they have the right situation – either a new PM or a better economy. Scotland is having a new referendum to leave the UK, so that influences the timeline as well. The price of oil is what’s keeping Scotland in the UK now, but this might be justification for them to have a referendum in 2016.
Shailesh: There’s a couple risks here, the contagion effect: the disintegration of Great Britain – Scotland was clearly one of the provinces that voted to stay in the EU quite strongly, except for London who also voted to stay in the EU, and the main reason Scotland stayed with Great Britain in 2014 was because of the EU. And Scotland has already been invited to stay in the EU if they secede, and Ireland has a similar situation. We don’t hear much about terrorist groups such as the IRA anymore, ever since 1999 when we had the common currency, primarily because Northern Ireland has been getting a lot of economic development funds from Brussels. And now all of that is going to stop, so now Northern Ireland is talking about leaving Great Britain as well and reuniting with Ireland. So even in Great Britain, it’s a big issue, and Frexit (France Exit) is also an issue. So that’s probably the biggest risk from the market perspective, because it’s not just Britain here, Britain is the world’s 5th largest economy and it will do just fine, but if the EU disintegrates, it will be a big deal.
Derek: I mean, I couldn’t even imagine how Ireland would be able to reunite, and the concern to the US is in terms of security, e.g. terrorism. So I think it’s an important concern for the next POTUS. And the impact is far reaching, Spain has made a play to take over Gibraltar, and all these ridiculous distractions like that mean you can’t properly focus on what Brexit means. You don’t want someone to do the nuclear option of leaving the EU. In the UK, 49% of the people aren’t getting what they want, so it’s possible they could elect someone who is a bit more radical.
Shailesh: I agree with you, I think that there’s some risk there. I think that was a good overview, so thank you for that. Let’s turn our focus to what Brexit means for the biopharma industry. As we know, the EMA is located in London, and a lot of the processes and sub-processes are subcontracted out to other places. But this consolidation of the EMA being one market instead of twenty markets has really been a big improvement for pharma. Do we think that Brexit will affect how the EMA functions?
Mark: When you think about the EU, you think about economic issues, and from a regulatory standpoint, I don’t know how much that’s incorporated into what’s happened. Granted, having the EMA in London causes significant issues, but we don’t know what type of concessions will be built into the actual agreement of their leaving the EU. So we don’t know if they’ll try to pull out of those types of areas. One of the key issues is that pharmaceuticals can move freely throughout the EU. There’s significant parallel importation, there’s an affect that occurs on the overall cost of biopharmaceuticals in the UK that drives the prices down ~5 – 10%, and that is driven by the idea of parallel importation. So if you look at the affect Brexit will have, it will affect the national health system, and the cost of medicines will go up by 5% and other countries that were buying drugs and parallel importing will now lose the ability to bring in large amounts of drugs to get certain discounts, such as Italy and Spain. So those are potential issues that would raise the cost of pharmaceuticals in those regions.
Shailesh: Yes; Derek, do you think that this will affect the regulatory climate at all?
Derek: Yes, the pharmaceutical industry doesn’t like uncertainty, there’s a lot of choices they have to make. Plus, there’s the worry of other countries leaving one by one. The EU Pharmacopeia is published by the director of medical healthcare; we’re not going to see a UK Pharmacopeia. The MHRA is probably going to have to introduce a national marketing authorization, similar to what Norway does. So that means there is going to have to be a change of ownership and legal entity; if one company is only in the UK, they’ll probably also have to have another one in the EU. In that approach, companies will probably begin moving away from the UK quite quickly. If you follow the money, legislation regarding marketing authorization is where we’ll first see these changes.
Shailesh: Those are really good points.
Derek: Right now, it’s very easy for the Germans or French to come in and get mutual recognition, so long as the MRA is established or the ACAA is agreed upon in the EU, we shouldn’t see too much of a change with regulatory accession. Canada is an example, the UK might get something like that, otherwise we’ll have to have MRA people inspecting EU products, and they don’t have enough people to do that. They’re going to have to set up an MRA or ACAA prior to the UK exiting the EU. That should be easy and very logical to do because it’s been done before.
Shailesh: If it’s easy to do and logical, it probably won’t happen!
Derek: Yes, it will take maybe 8 to 20 years, possibly.
Shailesh: Those are good points, and what I’m hearing from you is that not all of this will get reinvented, there are already models and analogs for this like Norway and Canada, so we’ll just use what’s already existing. Let’s keep moving on, what is going to happen to biopharma? The EU is ~25 – 33% of the overall marketplace for pharmaceuticals, do we think Brexit is going to affect the end use of medications? And what will happen to companies based in Europe like AstraZeneca or Novartis, Roche, etc.? Plus, the US-based companies that are marketing to the EU companies, will there be a big change there? Mark?
Mark: I think many companies were anticipating this and had plans in place, and I assume they’ve thought it through, but that’s a big assumption. But I don’t think it will materially change the marketing and accessibility, but the R&D will be affected because there are different ways of investing in mainland EU vs. the UK. From the R&D perspective, they’ll be moving away from the EU, and those benefits done via R&D will be taken away from the UK and that will affect UK startups.
Shailesh: So do you think this will affect investment?
Mark: I definitely think investment will be significantly affected if they don’t figure out some way of being able to allow what was previously done, I think UK-based startups will be significantly affected.
Shailesh: Cambridge has been a success story for biotech, Derek, and there’s been quite a bit of investment in that area in oncology and immuno-oncology; what are your thoughts about the effect on biopharma and the CRO space? Because that’s an important part of the ecosystem which supports biopharma.
Derek: The money part is definitely important, it’s going to be bad for all of Europe, but specific to the UK, the UK has had a very strong pharma history and I think they’re still going to hold leadership in terms of GMP and regulatory guidance. But the MHRA is talking about infrastructure, and knowledge, and leadership, which are all facets. As Mark said, money is important, but so are people and knowledge and skills. The MHRA is still the chairman of the PCS and they’re also still on the ICH, and I don’t think they want to leave that behind. I think that as long as they want to keep it, they’ll probably hold on to that leadership. And again, we have the benefit of language as it is written in English, and the workforce in the UK is highly educated, and those kinds of things should help us (UK biopharma) remain somewhat stable.
Shailesh: Good. Any other thoughts on how smaller biopharma will be affected? Mark, you alluded to this earlier in terms of investment and capital formation, but could you talk about the deal landscape, licensing, M&A, and how Brexit might impact that for smaller CROs?
Mark: Well, when you look at the way small companies are invested in, certain types of venture groups are located in certain areas, so if you have that regionalization in the UK, I don’t know how the money flows in and out, but obviously if you take away and open a channel and put barriers into it, you’ll have a constraint on venture capital moving into the EU or the UK. So I think, from that perspective, there’s potential there that you’ll see some startups not being able to access the types of deals that have been done previously, and that would be a reasonable assumption.
Shailesh: Yes, and Derek, you have a great history on this side and in the finance side and understand how capital formation works, what are your thoughts on the emerging biopharma side? You mentioned markets don’t like uncertainty, any other thoughts?
Derek: I think that London is the finance capital, but I don’t think most biopharma companies in the UK look to London for financing, they look to Boston or San Francisco VCs, so maybe their dollars go a lot further now. I think that as long as things stabilize and there’s some certainty in legislation and commitment from the government to maintain the position of Cambridge and the UK in the pharma industry, that will lead to some security. I think that there also won’t be a closing of the borders like people think there will be with Brexit, I think that’s been overplayed; they’ve been trying to back away from that negative commitment, so you’ll still be able to move money and people back and forth. I think that’s going to stabilize a bit, because, again, the UK wants to do business with the EU and they will have to, they can’t just say
“we won’t match any of your regulations” if they want to do business with the UK. I hope that that leads to more stability, and I wouldn’t be shy about putting money into the UK for a global product, but maybe I would be shy for a national product because you don’t know what the UK consumer buying power will be. But that’s less of a concern for global products.
Shailesh: I think that’s an important distinction between what’s happening in Europe and in the US; if California decided to secede, for example, that would be a bigger impact on the world economy than Brexit. Because you’re right in terms of healthcare, one of the reasons it grows so much is because it’s somewhat immune from market cyclicality because everyone needs medicine and especially in Europe, because in most of these countries, it’s a one payer system. I guess we’ll see what happens. Any final thoughts, Mark or Derek?
Mark: I think there has been an overreaction at the beginning, and now it’s already tempering, but once you crunch the numbers, in the end, hopefully, level heads will prevail and I think that’s where we are at over the next two years; there will be concessions and it won’t be as significant of an issue.
Derek: I have a question for the group: I was wondering if there’s any talk about the UK electing to join the EEA? If they do that, those agreements are already set up between the EEA and the EU, and if they do that, then there’s no changes at all.
Shailesh: That’s a good question. I just listened to an interview with the PM of Norway, and basically what she said was that because of Brexit, the current thinking is that the EU will punish Great Britain for leaving, as a deterrent for everyone else to leave, and they’ll make agreements with Great Britain more complex than if they had stayed in the EU. So they likely wouldn’t allow the UK to join forces with Iceland, as well as Norway. That’s my understanding, that the EU wouldn’t allow that. They’re trying to make an example out of Great Britain. That’s where I think we’re headed. OK, thanks, Mark and Derek. Let’s come back and look at it six months from now, that would be fun to do.
Mark: I think that would be great, and it would be interesting to see if they did make concessions and if changes occur and things level out, or if punishments are inflicted. So, we’ll see what happens in the next six months.
Shailesh: OK, thanks and it was good talking to everyone. Have a great 4th of July weekend!
*Disclaimer: The views expressed during the panel are the opinions of the panelists and do not reflect the views of the organization for which they work.*
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