With predictions of an additional £10bn hole in NHS finances and recession before 2020, the UK government should reassure pharma that a post-Brexit Britain is worth investing in

When stock markets plummeted in the wake oftheUK's decision to leave the EU, pharma companies largely avoided the rout. Investors reasoned that, in the short term at least, parts of the sector may even benefit from the UK's economic turmoil. Yet in the long term, the risks and uncertainty of Brexit are just as real as they seemed in the run-up to the referendum.

There are a few good reasons why the share prices of many pharma companies stayed strong in the wake of Brexit. GlaxoSmithKline (GSK), for example, actually saw its share price rise slightly on Friday June 24th, while all around it tumbled. In times of economic trouble, pharma is a defensive investment: even if there is a recession, people will still need drugs. Moreover, many UK pharma companies (including GSK) earn much of their revenue in dollars, so a plummeting pound will boost their results this year – although AstraZeneca, which reports in dollars, will see less of a headline benefit. Even AstraZeneca, however, will benefit from the increased export competitiveness that a weak pound brings, particularly for products produced in the UK and not requiring expensive inputs from abroad.

Yet Project Fear was not a fake. In the run-up to the referendum, everyone from the Minister of Health to the Association of the British Pharmaceutical Industry, as well as GSK and AstraZeneca, warned about the possible effects Brexit would have on pharma trade, on access to medicines, on funding for the National Health Service (NHS), and on innovation in the UK. Now, after the decision has been taken, the first words from the health and life sciences sectors have been much more reassuring, but that is largely to avoid making a bad situation worse.

The most threatening aspect of Brexit is the effect it will have on the broader UK economy. Given the political and economic effects of the UK's seismic decision, The Economist Intelligence Unit expects the UK's GDP to be 6% lower in 2020 than it would otherwise have been, thanks partly to an expected recession in 2017. The problems will not be restricted to the UK, either: we have also trimmed our forecast for global GDP growth from 2.3% to 2.2% in 2016 (at market exchange rates), and from 2.6% to 2.4% in 2017, with Europe particularly hard-hit.

Leaving a bloc that accounts for nearly half the country's exports was always going to be extremely risky, and no-one yet knows what trade deal will replace EU membership. As with pharma, some companies may benefit from the weakness of the pound in the first year or so, yet the longer-term prognosis remains poor. In the meantime, there are already signs that companies will slow or cancel investments amid the uncertainty, which will in turn have an effect on output, profits, jobs and tax revenues. Calls for a new government to counter that trend through drastic cuts to corporate tax rates would carry their own fiscal risks.

As we have seen from previous economic shocks, healthcare spending is partly protected in such circumstances, but not entirely. Any savings made from the UK's net contribution to the EU budget will be small in comparison, and as Nigel Farage, the former head of UKIP, has now admitted, there is no guarantee those savings can be allocated to healthcare. As a result, and bearing in mind all the possible scenarios facing the country, we now expect overall UK health spending to be 4.8 percent lower in 2020 than it would otherwise have been. That's around £10bn lower, on top of the £22bn in efficiency savings that the NHS is already supposed to deliver.

The NHS will also face a far greater challenge in terms of recruitment. According to the Health & Social Care Information Centre, the NHS currently employs 9,814 doctors (8 percent of the total) and 18,783 nurses and health workers (6 percent) who come from other EU countries. Although the UK is unlikely to send them home, some will choose to go anyway and the supply of new recruits will thin. Limits on global recruitment could be lifted to compensate, but the UK will have to compete with other countries (such as Australia) in trying to lure these staff. In the meantime, higher recruitment costs and an increased reliance on agency staff would add to the NHS wage bill, exacerbating the squeeze on funding.

As a result, pharma will again bear much of the pressure for cuts. In terms of pricing agreements or greater use of generics, there is now less leeway than there was after the global financial crisis, not least because the patent cliff is waning. Yet the Competition and Markets Authority is likely to step up its efforts against those companies attempting to push through particularly high price rises. Although the UK is likely to keep its market-driven approach to generic drug pricing, there will be a greater focus on ensuring real competition. In the meantime, there may need to be hard choices about which innovative drugs the NHS can afford to use, particularly if those drugs have to be imported from countries with a stronger currency. That in turn may affect companies' own choices about which drugs they now choose to launch in the UK, particularly given the market uncertainty.

That uncertainty is partly over trade agreements, politics and the economy, but also (even more crucially for pharma) over regulations. For the next two years, the current pharma regulations are likely to hold but there will have to be a gradual shift in the UK's relationship with European regulators. The biggest question mark is over the London-based European Medicines Agency (EMA), which is the largest EU body in the UK. Sweden and Italy are among the countries lobbying to be its new home. The UK, meanwhile, will have to work out a new marketing authorisation system, probably involving the Medicines and Healthcare Products Regulatory Agency (MRHA). Most people expect the MRHA to align itself closely with the EMA, but the shift in regulations, processes and expertise will be disruptive. At the moment, the MRHA simply doesn't have the people to cope.

Similarly, the UK will have to work out a way of aligning the CE mark for medical devices with a UK-only procedure, without disrupting companies' ability to sell abroad. Even where regulations are currently national, rather than EU-led – such as reimbursement and IP protection – there are questions. It is in the pharma industry's interests to keep rules here aligned with those across the EU, but the UK will lose its influence over the future direction of policy. The UK will also likely lose its chance to host part of the EU's planned Unified Patent Court – only EU members are eligible to join – although again it is in the country's interests to keep ties as close as possible.

Finally comes the effect on pharma research and development in the UK. The ABPI has already warned about the possible effect of Brexit on the clinical trial industry in the UK, if results generated here no longer count across the EU. The UK could well lose its pole position as the EU's most popular location for phase I trials. It also ranks second for phase II trials (after Germany) and third (behind Germany and Spain) for phase III studies. There is also the small problem that UK researchers will no longer be eligible to apply for EU grants or participate in EU-wide projects. That is one reason why the city of Cambridge, for example, voted so heavily for Remain. Even if the UK government manages to find the money to plug that gap, the country will lose opportunities for international collaboration. Venture capital funding, too, could well be affected as the risks become that
much higher.

None of this is yet enough for pharma companies to threaten to leave the UK. For now, it is very much business as usual, boosted by that one-off benefit of a weakened pound. Yet it does mean that the UK government will need to move swiftly to persuade companies that it is still worth investing in the country's life sciences industry. That will mean keeping regulations aligned with the EU as far as possible, except in those areas where it is now possible to boost our competitiveness. Lower corporate tax rates may be a step too far at this risky time, but there are plenty of business leaders who are pushing for weaker workers' rights and less red tape. The difficulty will be meshing that with the public grievances (some justified) that led to the Brexit vote in the first place. Above all, however, it means quickly re-establishing the kind of stable business environment that has underpinned the UK's success so far.

The Author:
Ana Nicholls is chief healthcare analyst at the Economist Intelligence Unit