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  • Brendan Shaw

What future from a ‘no-deal’ Brexit for UK life sciences?

Updated: Sep 13, 2020

Brendan Shaw and Sunayana Shah

With the Brexit negotiations between the United Kingdom and the European Union at an impasse and rising tension between the two parties, there is an increasing likelihood that the UK may crash out of the EU at the end of this year in a ‘no-deal’ scenario.

This could raise major issues for the UK’s pharmaceutical and biotech industries and for patients.

Are UK-EU negotiations on a road to nowhere?

The negotiations are about a future trading agreement between the UK and the EU once the UK permanently leaves the EU which is scheduled to occur at 11pm 31 December 2020.

But the negotiations, led by the UK’s David Frost and the EU’s Michel Barnier, have been stalled for some time.

The negotiations have seen little progress in recent months, with suggestions that the respective negotiating teams have hardened their opposition to the each other’s proposals to the point where commentators are suggesting different people may now need to be brought in to break the impasse.

Some of the fundamental issues that have blocked progress include setting out a level playing field, workers’ rights, environmental regulations, fishing rights and, particularly, state aid.

The issue of 'state aid' has become a flashpoint for the entire post-Brexit negotiation process in recent days.

The draft deal binds the UK as a whole to EU state aid rules where any future subsidies “affect trade” in goods between Northern Ireland and the EU. Crucially, the Withdrawal Agreement, and the existing British implementing legislation, binds the entire UK to follow EU state aid rules. (The Financial Times has an excellent video explaining the issue here.)

David Frost recommended to the British government that the UK leaves the EU without a trade deal unless the EU drops its demands on UK aligning with EU state aid rules.

However much the UK government wants to avoid curbs on its ability to subsidise businesses in the trade deal with the EU, Britain may not have complete freedom from EU state aid rules in future. Because the legal reality is that the Withdrawal Agreement that took the UK out of the EU in January makes that impossible.

Most recently, in response to this legal barrier in British and international law, the UK government recently published an internal market bill which overrides aspects of the Withdrawal Agreement relating to Northern Ireland. The Bill also establishes UK’s claim to right of unilateral derogation from international treaties as a potential precedent.

In an extraordinary admission in Parliament, the UK Government has admitted that this plan will break international law. This has been viewed with dismay across the UK, EU and the US.

More explosively, it potentially triggers a constitutional crisis in the UK by virtue of the government actively asserting it will not be bound by the rule of British and international law.

Then there are the fish.

While only a tiny fraction of the overall economy both in the UK (less than 0.1%) and in the EU, fishing rights represent a major problem for both. So, what’s the catch ...?

Put simply, the UK wants to secure greater control of fishing in its waters. Fishing rights are a promise from the Leave campaign during the Brexit referendum, where Boris Johnson played a prominent role, and carry a lot of political symbolism today. Backing down on this would be very difficult for Boris Johnson.

So, will a negotiated deal between the UK and the EU be the one that got away?

The UK Prime Minister, Boris Johnson, has been repeatedly steadfast in saying that the UK will leave the EU on 31 December regardless of whether a deal is negotiated or not.

Most recently, the UK government’s relatively sudden proposed legislative changes to re-interpret parts of the original withdrawal agreement have caused anger on the EU side, putting further pressure on the negotiating process.

Negotiations have now sunk to the point where the EU is threatening the UK with legal action and demanding the UK withdraw its proposed amendments by 30 September.

So, it could be that in a few weeks’ time we will be much clearer on whether there is going to be a ‘deal or no-deal’ Brexit come 1 January 2021.

What would ‘no-deal’ mean for the UK’s pharmaceutical and biotech sectors?

So, would happen to UK's medicines sector if a post-Brexit deal fell over due to unrelated issues like state's rights and fish?

To quote Frodo Baggins from the Lord of the Rings as he becomes lost wandering the dark lands of Mordor, “We have been here before.”

The UK came close to a ‘no-deal’ Brexit before the revised Withdrawal Agreement and Political Declaration were agreed at the European Council in October 2019 and the pharmaceutical and biotech industry already had plans in place to cope with a crash out of the EU.

Some of those contingency plans developed in 2019 are now being dusted off in the event a post-Brexit deal cannot be reached in the next few weeks.

Such an outcome, particularly when the UK and European economies face recession and the continuing Covid-19 pandemic will significantly impact the sector in both the UK and the EU.

Ask any practising community or hospital pharmacist in the UK and they will tell you how much of their day they already routinely spend on handling supply shortages. This is even before the impact of a possible no‑deal Brexit, a second wave of Covid-19 cases and the coming British winter cold and flu season.

A no-deal Brexit could accentuate existing drug shortages with potentially serious delays and new border arrangements at ports which will particularly affect critical and short-life medicines.

Stockpiling is likely be hampered by a mix of limited warehouse capacity in the run-up to Christmas, supply chains being strained by Covid-19 disruption and costs proving prohibitive for businesses faced with a major hit to their cashflow due to the pandemic. Last year the government purchased warehouse space to cope with such issues, but this time around it does not currently plan to do this. This only adds to the complexity.

Supplies of medicines and medical devices built up on government advice last year have already been partially depleted during the Covid-19 crisis. Rebuilding these during the pandemic will be difficult as there is continued disruption in international supply chains and export bans on medicines have been imposed by many countries including the UK itself.

Despite the preparations to date, the substantial amount of new paperwork and regulatory hurdles for imports that a no-deal Brexit would create are likely to compound shortages. Although it is difficult to judge the magnitude of the problem, the contingency planning called Operation Yellowhammerhas identified and emphasised the vulnerability of supply chains in the sector.

Additional burdens could mean manufacturers face higher costs to get their products into the UK and these may be passed on to the National Health Service. An analysis by the Nuffield Trust estimates that these could cost the NHS around £2.3 billion per year across the UK.

As the National Audit Office warned in 2017, in the short term such higher costs would risk shortages of generic medicines even if supply chains remain intact due to the likely price pressures. In addition to post-Brexit regulatory requirements, therefore, if trade barriers push up costs generic drug suppliers might not deem it worth operating in the UK and if prices are too low manufacturers might not be able to supply to the UK.

The UK government has recently provided some regulatory guidance for companies after the end of the transition period on 31 December which the industry has welcomed, but both the Association of the British Pharmaceutical Industry and the UK Biotechnology Association prefer a deal to be reached between the UK and the EU to avoid disruption and uncertainty. The British Generic Manufacturers Association has also warned for some time about the perils of a no-deal Brexit for the UK's medicine supplies.

So, what’s next?

The positioning and sabre rattling between EU and UK negotiators will likely continue over the next few crucial weeks.

The problem for both the UK and the EU is that the time left for all of this palaver is rapidly running out.

Up until this week, the next crunch point laid down by Boris Johnson in the negotiations was 15 October, the date where the government believes that negotiations on a new free trade agreement need to be completed in time for a 31 December exit from the EU.

But with the in the last few days EU laying down an ultimatum for the UK to withdraw its proposed new state aid legislation by 30 September and threatening legal action if it doesn't, the deadline for making progress could be the end of this month.

If there’s no resolution to this in a few weeks we could be heading for a no-deal Brexit come 1 January.

If that happens, Britain would trade under WTO rules essentially as a ‘third country’ that has no formal agreement with the EU like most other countries, with all the regulatory complications and implications for the British life sciences sector.

If a free trade deal between the UK and the EU does emerge, it will most likely be an extremely basic one, just by virtue of the fact that there is so much still to negotiate with so little time left.

We should know the outcome in a few weeks.

Watch this space.

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