If austerity has characterised the last decade of economic and fiscal policy across Europe, it would seem that Brexit is destined to define the next ten years. At their heart, both are economic processes that are driven by political instincts. Uncertainty is another defining feature of the UK political and policy landscape. It is the interplay between these three forces which risks leaving the UK health and life science sector environment financially and intellectually poorer, resulting in a commercial environment that will slowly deteriorate over time.
The long-term financial outlook for the UK suggests that austerity will run alongside Brexit
Recently, the news for the NHS has started to look slightly rosier than it has done for some time. The Government, finally, reached a pay deal with the medical profession. An emboldened and unsackable Jeremy Hunt may have won a large funding increase for the health service in a few months’ time and the idea of a new hypothecated NHS tax is gathering steam across all sides of the political divide. Could we have turned a financial corner?
The answer might be disappointing. Watching the Chancellor Philip Hammond deliver his Spring Statement to Parliament, you might be forgiven for thinking that the UK economy was in a strong position ahead of Brexit. While there have been positive steps taken to address the deficit and the national debt, the data indicates that the health of the nation’s finances is a long-term concern. Paul Johnson, Chief Economist at the respected Institute for Fiscal Studies, tweeted: “Growth forecasts dreadful compared with what we thought in March 2016, dreadful by historical standards and dreadful compared with most of the rest of the world.” In summary, the country’s debt stands at around 85% of GDP and growth is expected to remain below 2%; austerity is set to continue for the foreseeable future which means ongoing pressure on the NHS, social care and local government.
The life science sector commercial environment is already deteriorating as a result of prolonged austerity
Despite being in an era of unprecedented innovation, the last five years has seen the slow deterioration of the commercial environment for life science companies. Companies have seen repeated attempts by the Government and NHS England to prevent patients from accessing new medicines, from the controversial reforms to the Cancer Drugs Fund to the ‘run rate’ on hepatitis C treatments and the recent introduction of the Budget Impact Test. From NHS England’s perspective, there is a need to drive down the prices of medicines, increase competition and ensure that the NHS gets the best possible deal. Newer plans to lower the QALY for vaccines to £15,000 should alarm all companies, as it suggests that the QALY for all medicines could also be lowered. Alongside this, rumours that NHS England was planning to include biosimilars on the Accelerated Access Pathway, the flagship policy intervention designed to speed up the use of innovative products, would amount to a huge disappointment to parts of industry. The key point is that this is all happening now; where will the UK be in 2020 when we leave the EU?
Forecasts indicate that Brexit will make the
UK poorer
Despite being promised a ‘Brexit Dividend’, including £350m per week for the NHS, the Government and leading economists expect the UK to be considerably poorer following the country’s departure from the EU. The Government’s own Brexit Impact Assessment was finally published by the House of Commons’ Exiting the European Union Select Committee in March. The analysis concludes that the UK will be worse off under every likely future scenario. Long-term growth is expected to fall by approximately 5% under a Canadian-style free-trade deal with the EU, 2% under a soft Brexit with continued membership in the single market, and by a staggering 8% under a no-deal Brexit.
Healthcare and the life science sector don’t feature much but the analysis did conclude that ‘we expect sectors dependent on trade with the EU (including automotive, chemicals and pharmaceuticals) to see the biggest effect on economic activity in EU exit scenarios’. This is backed by the non-partisan Think Tank, the UK in a Changing Europe, which published a report last month stating that: ‘Even without Brexit, addressing the pressures on NHS funding would likely have required significant tax increases, extra borrowing or diverting more money away from other services. Brexit will make responding to these challenges even more difficult.’
Uncertainty is already affecting business confidence
Life science companies, the ABPI and EFPIA have been clear that the UK and the EU need to provide businesses with ‘certainty’ so that they are able to create contingency plans for Brexit. This is essential. Vaccines are an interesting case study for the post-Brexit world. Complex manufacturing and testing requirements for these products can create challenges when shortages or problems do arise. Having regulatory alignment and open borders across Europe can help mitigate these challenges, keeping products moving and the public safe. Should the UK find itself outside this collaborative approach, the implications could be significant. As the commercial environment for life science companies changes, businesses need time to ensure that their medicines can get to patients. On the face of it, we should therefore welcome the news that the UK and the EU have tentatively agreed to a Brexit transition period – which would largely maintain the status quo – lasting until the end of 2020.
However, it’s not that simple. The transition deal still needs to be agreed as part of the wider Brexit withdrawal package and ratified by both the UK and the EU before it can provide genuine clarity on the future. This will not happen until the end of this year or early 2019 at the earliest. The reality is that the Brexit ‘cliff-edge’ has simply been moved back by 21 months, during which time the UK and the EU will negotiate the terms of their future trading relationship, which
is again subject to considerable disagreement. There are also a number of issues which have the potential to bring this whole process crashing down, including disagreements over the Irish border and Gibraltar. On balance, the only sensible conclusion is that there is no real certainty on what will happen over the next 12 months, which presents businesses with an operational nightmare and raises legitimate questions about whether to invest in the UK or elsewhere. While the Life Sciences Sector
Deal resulted in some positive investment announcements, the reality is that GSK and others have already started to invest in operations outside the UK just in case the Government fails to secure a deal.
Depending on how talks progress over the next six to nine months we should expect other companies to do the same. Lost investment is difficult to measure as a number of factors are usually responsible for determining where sites are built
or where clinical trials are placed. Recognising the potentially negative consequences, the UK Government has moved away from its hard-line position on the EMA and now seems keen to remain in some form of ‘Association Agreement’ with the European regulator. Whether the EU shares that view remains to be seen.
The challenge for UK businesses is that the life science environment is becoming more competitive globally, with developing markets like China, Brazil and India all seeking to attract global investment, at the same time as the UK seeks to break away from the EU market. Of course, the loss is not solely confined to the UK, which provides substantial regulatory and market access expertise to the EU through the MHRA and NICE, as well as a world-leading discovery science and academia base. The European life science scene as a whole loses out when investment is directed towards other regions.
What does the interplay of uncertainty, austerity and Brexit mean for the life science sector?
Austerity, uncertainty and the isolation that Brexit presents should concern patients, clinicians and companies operating in the UK. These are perilous times.
By the time the UK leaves the European Union, the continuous introduction of cost containment measures for new medicines threatens to undermine the aspirations of the Life Sciences Industrial Strategy and the Accelerated Access Review, leaving the UK increasingly uncompetitive as it becomes a smaller and more isolated market.