With the UK’s referendum on whether Britain should leave the European Union, known as “Brexit”, scheduled for 23 June, the rhetoric on both sides is escalating. While claims and counter-claims have been made, there has been relatively little published on the effect Brexit may have on the life sciences industry. Many major pharmaceutical companies say they favour continued EU membership, and that “the benefits of an integrated yet competitive environment are clear, with access to a single trading market, a skilled talent base [and] common regulatory and IP standards”. However, many also seem to accept that Brexit is “no big deal”, and would have “no material adverse impact” on their financial position. Large companies, at least, can reorganise to service the EU and UK markets separately - you do not need to be based in the EU to exploit it. The real impact of Brexit will depend entirely on what replaces it, and that is currently unknown. The changes may be relatively little if the UK joined the European Economic Area (EEA) in a “Norway model”, but could be much greater if the UK is unable to negotiate a free trade deal with the EU by way of bilateral agreements. What is clear is that the realities of life after Brexit are far from clear, and much is yet to be determined. There will be short-term (possibly long) disruption and uncertainty, and this uncertainty in itself is damaging to investment in this industry in the UK.
This Advisory, therefore, attempts to provide some clarity on the possible implications of Brexit for the industry, by setting out a summary of the legal mechanism for exit, and the possible options for Britain’s continued relationship with the EU from outside it. It then discusses the implications of Brexit on various aspects of the life sciences industry.
Legal Mechanism for Withdrawing From the EU
Formal procedures for leaving the EU were introduced by the Lisbon Treaty, which came into force in 2009; before this, no provision in the Treaties or law of the EU outlined the ability of a state to voluntarily withdraw from the EU, although there are examples of countries leaving its predecessor, the European Economic Community (EEC). A country wishing to leave the EU must notify the EU of its intention, which triggers negotiations between the country and the EU over the withdrawal agreement. Such negotiations will set out arrangements for the withdrawal, taking account of the framework for the country’s future relationship with the EU.
While the Treaty envisages agreement between the EU and the leaving country, there is no guarantee that agreement will be reached, or that if it is, acceptable terms will be agreed from the point of view of the leaving country. Any agreement must be approved by the remaining EU countries by qualified majority voting, and the European Parliament must also consent to the terms. An agreement to leave is, therefore, far from certain, particularly at a time when Member States facing a restless electorate of their own, may not wish to signal that an exit on “good terms” is readily achievable. As a result, the UK must contemplate leaving the EU without an agreement being reached; if that happens, the UK will not be bound by the Treaties, and the EU will have no obligations towards the UK.
The country would officially exit the EU, and the EU legislation would cease to be binding in the UK on the date the withdrawal agreement comes into effect or, if no agreement is reached, two years after the date of notification. Note that this period starts from the date of notification, not the result of the referendum. The first decision would, therefore, be when to notify the EU in the event of a leave vote, particularly given that the EU effectively shuts down over the summer. The two-year period can be extended by the unanimous agreement of the European Council (the remaining 27 Member States). However, this two-year date means a country cannot delay, or be delayed, from leaving. When Greenland left the EEC (as it then was) in 1985, this was three years after the referendum.
During the two-year negotiation period, EU laws would continue to apply to the UK, and little would change immediately. However, there is a question as to how vigorously the UK government would participate in EU legislative procedures, or how diligently it would seek to implement new EU laws or European Court judgments. The government may also decide to unilaterally abrogate its obligations under the Treaties, but this is likely to complicate significantly any withdrawal negotiations.
Overview of Relationship After Leaving the EU
Any withdrawal from the EU would need to determine the future of the UK’s relationship with the EU. The option ultimately adopted would be a trade-off between the sovereignty and independence of the UK on the one hand, and the freedom, ease and cost of trading with EU countries (and the rest of the world) on the other. The options for the UK can be split into three:
(1) EEA/Norway model
The EEA was established in 1994 to give European countries that are not part of the EU a way of becoming members of the single market without being full members of the European Community, as it then was. The EEA comprises all members of the EU together with three non-EU countries: Iceland, Liechtenstein and Norway, which form the European Free Trade Association (EFTA). Members of the EEA are part of the single market, in which the “four freedoms” of free movement of goods, services, people, and capital are preserved, as well as common competition and state aid rules. This model, therefore, would have limited impact on the free market or, for example, funding for research. However, these countries do not participate in the monetary union, the EU’s common foreign and security policy or the EU’s justice and home affairs policies.
While there is free trade within the EEA, EEA members are not part of the EU’s customs union, meaning they set their own external tariffs and conduct their own trade negotiations with countries outside the EU. In addition, EEA members make a payment to be part of the single market. In 2011, Norway’s contribution to the EU budget was £106 per capita, only 17% lower than the UK’s net contribution of £128 per capita. This model, therefore, arguably meets many of the aims of the “leave” campaign, but not the “control of borders” (immigration) issue.
However, since EEA members are part of the single market, they must implement EU rules concerning the single market, such as employment, consumer protection, environmental and competition policy, and accept the “four freedoms”. EEA countries, therefore, have to implement EU law without having a direct influence on agreeing it - EEA countries have “observer” status only. Their observations are taken into account, but they have no vote in relation to its adoption.
If the UK was to adopt an EEA/Norway style relationship with the EU after Brexit, in practice, little would change compared to the current regulation of medicinal products. EEA countries have to comply with EU legislation and implement equivalent legislation into national law. Several pro-Brexit campaigners are on record as saying this model does not go far enough to satisfy those supporting Brexit, and is unlikely to appeal if there is a vote to leave the EU.
(2) Bilateral Trade Agreements/Swiss Model
Switzerland and other countries such as Canada have negotiated a series of bilateral treaties with the EU governing relations on specific issues. The treaties allow these countries to participate in certain EU policies on negotiated terms, meaning they have been able to choose which parts of the EU framework they wish to join. However, as part of these agreements, these countries have no observer status in relation to regulatory decision making. In terms of costs, Switzerland, for example, makes a financial contribution to the EU that in recent years has averaged around £53 per capita.
However, the EU increasingly sees the “four freedoms”, in particular free movement of people, as a fundamental part of entering into agreements with the EU. While Switzerland has agreed to this freedom, in February 2014, a referendum voted to impose restrictions on immigration from the EU, which goes against the terms of its agreement with the EU and meant Switzerland could not take the necessary steps to extend the agreement to cover the newest Member State, Croatia. The EU has refused requests to renegotiate the relevant bilateral agreement and expressed disappointment at the referendum result. Interim arrangements expire at the end of 2016, and the future looks uncertain. On the other hand, Canada has not agreed to free movement of people, suggesting that it is possible to enter into bilateral agreements with the EU without accepting this freedom. Whether this is possible for the UK, a former EU member, remains to be seen.
Given the aims of the leave campaign, if they are successful, it seems likely that some form of bilateral agreement will be negotiated, along the lines of the Swiss model. A key factor will be how long this will take, which is far from clear, and it remains to be seen how far the EU will seek to impose certain obligations on the UK, particularly if the EU wishes to dissuade other EU countries or regions from leaving in the immediate future. What exactly will be covered, and what impact this may have on the life sciences sector, will depend on what agreement is reached. The impact will be different in different sectors, depending on the relative value placed on them and the negotiating position taken by each side. However, it should be remembered that in 2015 the UK exported £223 billion of goods and services to other EU Member States (equivalent to 43.7% of total UK exports). However, goods and services imported from the EU were worth £291 billion (53.1% of the total imports to the UK). Free trade agreements are, therefore, in the EU’s interests, and the UK arguably need not make concessions in return on other significant matters that will have driven a Brexit vote.
The lack of certainty in this area is increased by the lack of precedents. While several former colonies and overseas territories of European countries, such as Algeria in 1962 and Greenland in 1985, left the EEC, no independent European country has left the EU or its predecessor bodies. Therefore, there is no relevant example that can explain all of the implications, or offer guidance on the likely outcome of the process.
(3) WTO/US Model
Where no specific agreements are in place, trade is governed by the World Trade Organization (WTO) rules, assuming the relevant country is a member. As of 2015, the WTO had 161 members comprising all major economies and most minor ones. Under these rules, each member must grant the same “most favoured nation” market access, including charging the same tariffs, to all other WTO members. This is how the US and China currently trade with the EU. The only exceptions are where countries have concluded free trade agreements, as discussed above. As part of this option, it is also likely that the UK would be able to take advantage of historic links to open negotiations with, for example, Commonwealth countries.
Implications for Life Sciences Industry
Under an EEA style arrangement, the UK would still have access to many of the benefits of the EU system, such as the centralised procedure and EU portal for clinical trials. Although Commission decisions arising from the centralised procedure and EU Regulations would need to be implemented by corresponding national legislation, rather than being directly effective, little would change for the industry in the UK, although administrative obligations would undoubtedly increase, and influence arguably decrease.
In contrast, under bilateral agreements, or the WTO model, the relationship with the EU would dramatically alter; it is the prospect of these bilateral relationships that leads to much of the uncertainty about the implications of Brexit. These implications are discussed below, with specific comments on the EEA model where relevant.
The most obvious consequence of leaving the EU would be that the European Court would no longer be the final decision maker. Under the Swiss or WTO models, the UK Supreme Court would be the final arbiter of UK law. From a legal point of view, many argue that this should lead to fully reasoned judgments and more adherence to legal certainty. However, under the EEA model, the EFTA Court is the equivalent body to the European Court of Justice, and monitors the application of EEA law in EFTA countries. This would likely lead to similar tensions with UK sovereignty as criticised under the current EU system.
In relation to the regulation of medicinal products, UK law is primarily determined at the EU level. EU Directives, such as Directive 2001/83/EC governing medicinal products, require the UK to implement relevant legislation into national law. This is done by reference to the European Communities Act 1972 and through the implementation of the Human Medicines Regulation 2012. If the UK leaves the EU, these laws would, therefore, remain in place (subject to relevant amendments being made to the European Communities Act) unless the UK government decided to change them.
In contrast, where the relevant law is set out in European Regulations, such as the Orphan Medicinal Products or Paediatrics Regulations, the provisions are currently directly applicable in the UK without the need for national implementation. As a result, if the UK leaves the EU, these Regulations would no longer apply. This situation would, potentially, leave a gap in UK law, and the UK government would need to pass legislation to cover these areas before any exit. Whether this legislation would simply transpose the current EU legislation, or seek to amend it in order to “correct” some of the perceived difficulties with EU law, is uncertain. If the EEA model is pursued, the UK would be obliged to implement laws in line with EU legislation in any event, and there would be little change in the substance of the law.
In reality, even under the Swiss and WTO models, the substance of the requirements is unlikely to change substantially, as the UK will want to maintain common standards with the EU in order to be able to negotiate free trade agreements. Further, there is an increased globalisation of regulatory requirements, and it is likely that the UK outside the EU would adopt similar regulatory measures to incentivise innovation, and encourage trade with the UK.
Location of Companies
A number of pharmaceutical companies are currently based in the UK, as well as having global R&D and manufacturing sites there (such as AstraZeneca and GSK). Several others have European headquarters in the UK (such as Eisai and Lilly). If necessary, big companies can reorganise relatively easily in order to secure business in the EU market as well as an independent UK market, and companies do not need to be based in the EU to exploit it. Indeed, many companies are already based in third countries, such as Switzerland. However, this is likely to be a much easier process for larger companies that can reorganise personnel relatively easily, compared to smaller companies with few locations where moving may lead to significant investment costs.
In reality, other factors than EU membership often drive choice of location. For example, proximity to the European Medicines Agency (EMA) may be an important factor, and if the UK leaves the EU, the EMA will need to relocate to another country. Sir Michael Rawlins, chair of the Medicines and Healthcare products Regulatory Agency (MHRA), has noted that international companies “like to be close to their regulators”. Similarly, tax is an important consideration, although the UK may seek to become increasingly favourable outside the EU if it wishes to incentivise investment in the UK by lowering corporate tax rates.
Research and Development, Funding, and Investment
The EU funding of research and development is considerable, and is an important factor for the industry. UK companies benefit significantly and many participate in Framework Programmes under “FP7”, which ran to 2014: in terms of funding awarded on a competitive basis in the period 2007 to 2013, the UK was the second largest recipient after Germany, securing €6.9 billion out of a total of €55.4 billion. A similar situation is expected under its replacement “Horizon 2020”, a 7-year programme with €80 billion to provide public/private sector collaborations and encourage innovation. The European Research Council, which awards funds based solely on scientific excellence, gave most awards to the UK, which received €1,665 million in grants from 2007 to 2013; 22.4% of the total budget.
If the UK leaves the EU (and is not part of the EEA), this funding will be withdrawn. The Association of the British Pharmaceutical Industry (ABPI) has recognised the importance of this funding, when stating: “The UK also currently holds an enviable position as one of the premier European destinations for ground breaking research and clinical trials. An EU exit risks the breakdown of international collaboration between scientists, doctors and industry which could slow down access to new drugs for patients in the UK.” Similarly, a recent report from the Treasury places a specific emphasis on the importance of EU membership for adopting innovation and improving productivity. There is also a question mark over whether this funding would be replaced with domestic investment. While it is likely that the UK will fund initiatives in the UK and seek to establish bilateral agreements with third countries to allow access to collaborative funding (as Switzerland did in 1992), this is unlikely to compensate fully. This deficit is likely to have a significant impact on the industry and scientific research in general.
If the UK leaves the EU (and EEA), the Clinical Trials Regulation 536/2014/EU will not apply. If the UK adopts national legislation that is significantly different to the new EU Regulation, this is likely to make the environment very difficult for companies wanting to undertake trials in a number of countries that includes the UK. Under the Clinical Trials Regulation, the EU is seeking to simplify the approval process for clinical trials in order to increase the attractiveness of the EU to conduct clinical research. Differentiation of these rules between the UK and EU will increase the complexities, administrative burden and cost for companies. For example, leaving the EU will mean UK companies will not have access to the single portal for applications for clinical trials (or may do, but at a, possibly substantial, fee), and UK companies will need to appoint a legal representative in the EU to be able to run trials in the EU.
One of the key principles of the Clinical Trials Regulation is to increase the transparency of clinical trial data. There was considerable objection to these proposals during the legislative procedure from the innovative industry, and Brexit would afford the UK a chance to amend these requirements. There is a concern that this may result in less data being made available in the UK, and the UK would not have access to the EU database (or may, but possibly at a substantial fee), although the practical implications of this are unclear if the data are available elsewhere in the EU.
Clinical research is already reducing in the UK, and many view Brexit as “the straw that would break the camel’s back”. The attractiveness of a country for clinical research is often linked to considerations around launch strategy and reimbursement, and the UK may be less attractive for first launch if it is not part of the centralised system. Companies may, therefore, have less interest in conducting clinical research in the UK. This is further complicated by whether scientists will want to move to the UK, if EU research funding is no longer available, even assuming that the UK adopts rules that facilitate free movement of scientific personnel. All of these factors are likely to lead to a further decrease in clinical research in the UK, at least in the short term.
Authorisations and Licences
The most obvious implication of leaving the EU will be the fact that centralised marketing authorisations held by UK companies will have to be transferred to companies established in EU countries, and that separate marketing authorisations will be required for the UK. In this regard, it seems likely that a form of “grandfathering” procedure will be put in place, whereby all centralised authorisations will automatically become national authorisations in the UK, subject to a right for the MHRA to review them during a fixed period. This is similar to the procedure that was used for product licences of right when the Medicines Act 1968 came into force. It seems unlikely that the MHRA will have the resources to conduct a thorough review of all current centralised authorisations before issuing an equivalent national one. However, there are situations where the MHRA has taken a divergent view on the assessment of a centralised product, and it is possible that such authorisations will be subject to compulsory variation procedures, or even be completely revoked, as a result of any re-assessment after Brexit.
A second factor is how future authorisations will be assessed. Clearly, the UK will need to assess all applications for new products in line with the relevant UK law, which for the short term, at least, is likely to have a high correlation to EU law. However, any assessment of a new product will be taken by the MHRA and the advisory committees to the Licensing Authority alone, and there will be situations where the decision will be different to that taken in the EU. Arguably, the fact that the decision is taken by the MHRA only could mean it can be quicker and more flexible, rather than having to reach agreement across 28 Member States. However, for companies, the added regulatory burden of having to apply in the UK is likely to increase market access barriers for international pharmaceutical companies. There are also likely to be increased costs for industry to obtain the separate national authorisations.
In relation to manufacturing and distribution licences, it is likely that the UK will need to maintain quality assurance procedures in line with current EU good manufacturing practices in order to ensure products can be sold in the EU. This should also aid in the negotiation of mutual recognition agreements with the EU and other countries on the basis of those common standards. However, that is not to say that supply chains will not face disruption. From an EU-based customer’s perspective, buying products manufactured or sold by UK companies will become less attractive as it will be viewed as importation of products from outside the EU, which attracts more onerous regulatory obligations in terms of checking that the relevant products have been manufactured and checked in accordance with the relevant EU requirements. Exports of pharmaceuticals are significant, with over half going to the EU, worth £29 million each day. The added regulatory burden may lead to a decrease in trade with the UK.
Patient Access Issues
If the burdens of obtaining approval in the UK increase (or become distinct from the requirements in the rest of the EU), domestic drug access is likely to suffer, as companies will be likely to apply for central authorisations first, and then apply in the UK. Patrick Vallance, head of pharmaceutical R&D at GSK, is quoted as saying that the delay, as compared with the UK being part of the centralised system, is likely to be around 150 days. This is particularly so given the perceived barriers to entry created by the National Institute for health and Care Excellence (NICE) when assessing whether new products will be reimbursed on the NHS.
Industry bodies have also suggested that UK patients are likely to suffer if the UK’s participation in initiatives such as the EMA’s early-access programmes is restricted, although the UK is already considering mechanisms for accelerated access and has developed some of its own rules in this regard, through the Early Access to Medicines Scheme. In addition, as discussed above, any reduced attractiveness of the UK for new launches is likely to have a knock-on effect on the attractiveness of the UK for clinical trials, unless new approaches are developed. The implications could, therefore, be significant.
The EU procurement regime currently forms the framework within which purchasing by UK public bodies (including the NHS) is conducted. While, should the UK leave the EU, the Treaty on the Functioning of the European Union and the EU procurement Directives would no longer apply, the UK Regulations which currently implement the EU Directives in England, Wales, Northern Ireland, and in Scotland, would remain in force. If the UK were to join the EEA following departure from the EU, there would be no reason to amend the existing Regulations and, even if the UK were to opt for bilateral trade agreements or a WTO model, such agreements would include procurement requirements, which might involve some divergence from the current EU requirements, but are likely to be similar to those now applicable.
Effect on Regulatory Authorities
In many respects, the regulatory authorities will be most affected by Brexit. For example, the EMA must be established in the EU, and so would need to relocate if the UK leaves. The EMA is the biggest EU body headquartered in the UK, and currently employees 600 full-time staff (although many of those are non-UK nationals). The EMA has declined to comment on the threat of Brexit, or to say whether it is putting in place contingency plans. However, Sweden has already expressed an interest in relocating the EMA to Stockholm, as has Italy, Spain, and Denmark.
Further, the EMA will be particularly impacted if the UK does not become part of the EEA system. The EMA currently relies substantially on UK regulatory/scientific expertise as part of the assessment of medicinal products. In 2014, the MHRA continued to have the highest number of rapporteur/ co-rapporteur appointments in Europe (31), and remained the preferred reference Member State in decentralised and mutual recognition procedures in which the UK was involved (195, 45%). The MHRA states that “This demonstrates that industry continues to recognise the value of the MHRA’s science and assessment processes”. Removing this expertise has the potential for significant impact on authorisations across the EU, and not just the UK.
For the UK itself, if it alone is responsible for the assessment of all products, Sir Michael Rawlins, chair of the MHRA, has stated that its employee numbers would increase significantly from the 800 or so personnel currently carrying out its regulatory work. Moreover, he says that the loss of application fees paid to the UK for work carried out by the MHRA on EU assessments and supervision would lead to the need for a greater contribution by the UK government to the MHRA’s running costs.
The UK will also lose its influence with global regulators. The EMA increasingly cooperates with the FDA, Health Canada, and the Japanese PMDA. The MHRA will have to “go it alone” with these regulators, and with its advice to companies. However, as common standards are needed to access the free market, and cooperation is strongly linked to those common standards, this may not be a significant additional burden.
Similar considerations exist for other UK agencies, although to a lesser extent. NICE, for example, already has a strong influence internationally, and this is unlikely to change outside the EU, even if it is not part of the European Health Technology Appraisal initiative.
In relation to patents, the unified patent court is currently being finalised, and the division of the court dealing with pharmaceutical disputes is to be based in London. Post-Brexit, there is a question whether the UK could still be part of this system (following Opinion 1/09 of the CJEU), and unless an EEA-style or similar alternative can be found, it seems very likely that the London division of the Court would be relocated, most likely to the Netherlands. Although European Patents are not part of the EU and should not be affected themselves, measures would have to be adopted to determine how EU Trade Marks and Community Designs will apply in a post-Brexit UK.
The implications of the UK leaving the EU are many and wide ranging. Much will depend on the ultimate relationship that the UK has with the EU, which is likely to take the form of negotiated bilateral agreements. Such agreements will have a significant impact on the sector, and it is difficult to foresee what the ultimate outcome will look like. What is clear is that industry dislikes uncertainty, and investment in the UK is likely to stall while companies, and regulators, seek to understand the new situation.