It is now ten years since the start of the global financial crisis ended a golden era of economic growth across the developed world. Since 2007, major European economies, including France, Italy and Spain, have witnessed recession while populist parties have moved from the fringes of the political spectrum to being on the cusp of power.
The success of centrist Emmanuel Macron in the French presidential election, as well as the likely re-election of Angela Merkel in Germany this month, has provided some relief for politicians and businesses across Europe. However, Theresa May’s narrow victory over left-wing populist Jeremy Corbyn and the increased prominence of right wing parties like the Front National and Geert Wilders’ Party for Freedom in the Netherlands show an underlying fragility in the political foundations of some of Europe’s biggest economies.
This uncertainty paints a confusing picture of the future of the European regulatory environment for the life science industry. Pharmaceutical companies are now making strategic decisions in an environment characterised by short-term policy continuity amid longer term political instability. Across Europe, this has led to a deteriorating commercial environment that has proven consistently resistant to positive policy change. There are two major issues shaping the future operating environment for the life science sector. The first is a continued period of austerity across Europe’s biggest health economies. The second is the threat to regulatory upheaval caused by the Brexit.
Brexit process now far more uncertain following UK General Election
Brexit has the potential to completely change the life science regulatory environment, creating considerable commercial challenges. Business leaders have been clear with the UK Government that change in itself is not a barrier as long as they have adequate time to make preparations and revise their operations. However, the surprising outcome of the 2017 General Election has undermined the Prime Minister and her Brexit strategy. Standing on the steps of Downing Street in April, Theresa May called on the country to give her a decisive mandate to deliver her vision for a post-EU future. Instead, she lost her majority and has thrown the process into chaos. Conversely, Macron’s victory has revived the Franco-German alliance and the EU integration project, strengthening their position in negotiations with the UK.
Five significant challenges ahead for UK business
The UK’s political instability during the Brexit process presents significant challenges for business as they seek to plan for the future. There are five overarching issues to be aware of:
Theresa May’s political authority has been damaged beyond repair (which EU negotiators will use to their advantage). The issue is not whether May can hold on to power but how long she holds it for – it is plausible that the UK has another General Election during the Article 50 negotiations, which could result in a new Government with a different set of policy priorities and an alternative approach to Brexit. All life science companies should be scenario planning for Brexit and trying to understand how different outcomes will affect their unique business needs (from the location of manufacturing plants to the applicability of existing and future commercial contracts). However, these plans might have to change as the political and policy environment does.
The UK no longer has a clear vision for Brexit and this is creating even more uncertainty. May and the supporters of a hard Brexit are adamant that the UK must control immigration, end the jurisdiction of the European Court of Justice (ECJ) in UK affairs and leave the customs unions and the single market. However, the Chancellor, Philip Hammond, welcomed the CBI’s call for an ‘indefinite’ transition period following the expiration of Article 50, which would almost certainly require the UK to make budget contributions and remain within the control of the ECJ. It would also provide more certainty and time to prepare for change. The problem is that there’s an incoherence between the UK Government’s stated vision for Brexit, the actions of leading Ministers and, increasingly, with what Parliament is willing to vote for. This is not a sustainable position and UK needs to resolve this sooner rather than later.
UK Ministers recognise some of the challenges facing the life science sector but it’s not all about licensing. Alongside this, the UK Business and Health Secretaries, Greg Clark and Jeremy Hunt, have outlined a plan to allow the MHRA to participate in EMA scientific assessments following Brexit with authorisation following a recommendation being agreed separately by both organisations. This is an innovative solution which would allow the UK to remain aligned with the EU medicines licensing process while operating outside of the ECJ’s jurisdiction. However, it isn’t immediately clear why the EU would accept this solution and this also doesn’t tackle wider issues around manufacturing quality assurance or patient safety measures, as well as the wider complexity that new customs rules could introduce.
Brexit is going to take much longer than two years. In fact, businesses should be regarding it as a ten-year process. Even if the UK and the EU are able to reach an agreement on the terms of UK’s departure, transitional arrangements and the principles of a future free trade agreement, the actual date of departure is likely to be in the early 2020s. Furthermore, while some politicians, including Donald Trump and Theresa May, insist that the UK will be able to offset any loss of EU membership by signing trade deals, experts have warned that the UK risks walking into a ‘bear hug’ with more experienced trade negotiators. Being realistic, securing free trade deals with major economies such as the US, Japan and China could take a decade or more. The political and economic consequences will be felt for years to come.
Brexit is now the dominant prism through which all major economic and business investment decisions will be considered and this will fuel political debate. When a global pharmaceutical company divests an operation from the UK or sets up a new headquarters in France or Germany, this will be seen as a zero-sum proposition; either a win for the UK or a win for Europe. Politicians and the media will be keeping score.
The wider issue is that the political and policy uncertainty, largely a concern for businesses operating in the UK, could spread beyond national boundaries to the Continent. While the election outcome in France and the expected result in Germany suggest a period of relative stability, Brexit presents a contagion risk which is a threat to wider European unity.
Prolonged austerity means policy continuity
Where political instability is creating an uncertain regulatory future, long-standing economic challenges are providing a measure of certainty. Healthcare systems across Europe are feeling the impact of 10 years of austerity budgets, affecting service delivery and leading to downward pressure on medicine pricing.
The UK, France and Germany have all adopted measures to address the challenge of delivering innovative medicines within constrained financial packages. The Act on Strengthening Pharmaceutical Supply in the Statutory Health Insurance (AMVSG) was passed by the German Bundestag in March. While the initial plans to introduce a €250m volume pricing threshold have been dropped, proposals to keep negotiated prices confidential were also set aside. The AMVSG also extends the medicines price freeze, put in place in 2010, until the end of 2022, although it does provide compensation for increases in line with inflation. There are some potential positives for industry, including maintaining free pricing at launch and greater flexibility in multiple indication pricing. The challenge for pharmaceutical companies is that these mechanisms will be used to drive down prices. With Merkel now likely to attract around 40% of the vote, the signs point to a continuation of current personnel and policies after the election. This might be better than the alternative: Social Democrat leader Martin Schulz is unlikely to promote access to innovation over increased pressure on the pricing of medicines. Regardless, the direction of travel within healthcare systems is to compensate for the funding pressures created by ageing populations by demanding access to innovation at cheaper prices.
During the French Presidential election campaign, Macron was clear that he wanted to have an open dialogue with pharmaceutical companies. Despite this, it is expected that he will continue to target the life science industry when making efficiency savings in the healthcare budget while also ensuring that the pricing of new treatments is scrutinised more closely. On one hand, the success of pro-business Macron is welcome news, especially considering that Le Pen would have brought significant political uncertainty to the entire European project but also unpredictable policy interventions. Furthermore, his plans to invest €5bn in innovative digital technology suggest a constructive approach towards the sector. However, Macron has promised to maintain planned annual cuts in healthcare spending, which include savings of €1.7bn from the pharmaceutical sector for 2017. As pressure within the health system is only expected to grow, extracting further concessions from the life science industry is the only politically feasible option.
The trend towards introducing additional affordability barriers can also be seen in the UK. In April 2017, NICE and NHS England introduced affordability measures to manage the uptake of innovative treatments, including a £20m budget impact threshold for all new medicines. The ABPI has pursued legal action, arguing that this contravenes the NHS Constitution, which legally entitles patients access to NICE-approved treatments. It also undermines the Pharmaceutical Price Regulation System (PPRS), designed to address the affordability of medicines while improving uptake through a system of budget control and rebates. Furthermore, the 2017 Conservative Party election manifesto promised to ‘implement the findings of the Accelerated Access Review to make sure that patients get new drugs and treatments faster while the NHS gets best value for money and remains at the forefront of innovation’. Despite failing to get a majority of seats in Parliament, the Conservatives now have a mandate to deliver this, which will be used as a justification to place further pressure on the sector to support the ‘medicines affordability’ agenda. Of particular concern is the lack of a commitment to improve the uptake of new medicines, a departure from the 2015 manifesto.
The truth for the pharmaceutical sector is that, across major European markets, the commercial environment is deteriorating. This is despite the fact that countries across Europe are dependent on securing investment from the sector to provide jobs, boost growth and save lives. This is the paradox of austerity. Political instability combined with hostile policy interventions creates less attractive commercial environments at the very time that governments need to be securing additional investment and driving growth in a key strategic sector. These challenges are only going to become more severe; the sector needs to plan for political uncertainty while also adopting coordinated, and robust, pan-European and national responses to growing affordability barriers.