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Brexit and the pharmaceutical industry

Experts have expressed serious concerns about the impact of leaving the single market on UK life sciences, but should pharma and biotech investors be feeling nervous?
November 10, 2016

The four and a half months that have passed since Britain voted to leave the EU have been a time of uncertainty and turmoil for many of Britain's biggest industries. However, it wouldn't be unfair to assume that pharmaceutical companies could make it through Brexit relatively unscathed. Big hitters including GlaxoSmithKline (GSK) and AstraZeneca (AZN) witnessed rising share prices in the wake of the referendum, their high dollar-based earnings serving them well as the pound crashed.

But aside from the short-terms gains for big pharma, the country's future departure from the EU presents long-term challenges for the entirety of the sector which were outlined in a recent report by think-tank Public Policy Projects. Former health secretary Stephen Dorrell, who led the report, thinks life sciences - as one of the nation's biggest industries - should play a prominent role in Brexit negotiations. He warned that leaving the EU could have a damaging influence on the country's contribution to science as well as its pharma and biotech companies.

Collaboration is key

Lifesciences are "not merely a core British interest but a global industry", according to Mr Dorrell, and international and commercial collaboration has been key to the sector's growth in recent years.

For large pharmaceutical companies collaboration has become a rising influence in keeping drug pipelines well stocked. AstraZeneca, for example, made three large acquisitions in 2015 to widen its work in cancer treatment, while GSK recently swapped its oncology division for Novartis's (ch: NOVN) vaccines business. In research, cross-border collaboration is increasingly relevant. Tiziana Life Sciences (TILS) plans to add to its knowledge of genetics by studying a biobank from Sardinia and OptiBiotix (OPTI) operates some of its research and development out of Spain.

Granted, Brexit is not going to stop M&A activity, but a reduction in the freedom of movement could diminish prospects for future listed biotech companies. Britain's biotech market is thought of as one of the most exciting in the world because of the country's strength in scientific research. But no leading academic institution in the UK operates without collaboration. Around 17 per cent of researchers are EU nationals and 72 per cent of UK-based researchers have spent time honing their skills at non-UK institutions. Exiting the single market and restricted freedom of movement for scientists could therefore reduce university scientific output and with it the research reputation of UK biotech and pharma companies.

  

  

Funding crisis

Aside from brains, the EU provides the UK with cash for research, too. In 2015 the UK attracted a total of €8.8bn (£7.8bn) in research and development funding from EU projects such as Horizon 2020. Although Theresa May's government has promised to make good the loss in scientific funding, Mr Dorrell voiced concerns that unless the UK remains involved in European scientific programmes, "that €8.8bn is money badly spent".

However, the greater concern for small-cap biotech and pharma is recent market turbulence which has caused many an investor to shy away from high-risk companies. It hasn't been impossible to raise new money; Oxford BioMedica (OXB) and Verona Pharma (VRP) have demonstrated this. But Motif Bio (MTFB) has struggled to top up the bank balance it requires to get its new antibiotic off the ground, while industry experts have said that several biotechs have had to abandon plans to join the public market since the referendum.

  

  

Drugs Approval

For big pharma, a significant concern is the regulatory process in the UK for new drugs. At present the European Medicines Agency (EMA) is responsible for regulation across all EU member states and works in close collaboration with the Medicines and Healthcare Products Regulatory Agency (MHRA), the UK's own regulator. But if the UK moves away from the single market, the EMA, currently headquartered in London, will undoubtedly think about leaving. This is likely to create two key hurdles for pharma companies.

First, access to the EMA itself. For UK-headquartered pharma companies, close collaboration with the EMA is very useful for drug approval. Several Japanese pharma companies with research outlets in the UK have already said they will move to where the EMA does. Second, companies will have to gain regulatory approval for the UK and EU separately and choose which market to apply to first. In turn this could have a negative impact on healthcare provision in the UK; the EU with 500m patients to the UK's 60m would undoubtedly be the priority for companies for drugs approval which could leave UK patients waiting longer for medicines.

But the long-term picture isn't all doom and gloom. In fact, some scientists have welcomed the prospect of Brexit as an opportunity for more liberal regulatory structures which could see more drugs launched quicker than allowed by the EMA.

Plus, the UK is a net importer of drugs, with the national healthcare system making it one of the most attractive markets in the world for drugs sales. This means the EU isn't going to want to stop trading with the UK and may be willing to exchange enduring collaboration with the right to trade.

 

IC VIEW:

Led by behemoths AstraZeneca and GlaxoSmithKline, many pharma companies have cited concerns for the future of UK science post-Brexit. But most have also reassured that the current political situation in the UK is having no effect on the short- and medium-term outlook apart from to levy sterling denominated profit.

It's still too early to comment with confidence on the impact of Brexit on pharma and biotech companies, but those with strong cash profiles and innovative technology are likely to be best prepared for any potential obstacles. With that in mind, there could be a good opportunity to pick up a few bargains in the sector which has fallen by a quarter since mid-2015.

 

Favourites

High dollar earners GSK, Astra and Shire (SHP) are relatively sheltered against the turbulence caused by Brexit. Plus as key national interests, they're in a good position to lobby the government before Brexit negotiations to ensure a good outcome for life sciences. Andrew Witty and Pascal Soriot, chief executives at GSK and Astra respectively, currently co-chair a life sciences Brexit committee. Between the three we consider Shire to offer the best value due to its long-term growth prospects. We also like Astra for its innovative pipeline of drugs. Among smaller companies we like cash-rich Vernalis (VER) and Verona, and also consider pharma investment group PureTech (PRTC) an undervalued opportunity.

 

Outsiders

Companies that repeatedly require cash injections are likely to suffer amid the market turbulence - which is likely to endure as Brexit negotiations get under way. Oxford BioMedica and Motif Bio are just two examples of companies which will undoubtedly require more capital before long. But the real life sciences outsiders in terms of Brexit are the universities and research bodies and therefore any future biotech and pharma companies. The market as a whole could be in danger of losing some of its strength if the UK fails to demonstrate the scientific capabilities it has prided itself on previously.