Sector Licks Its Brexit Wounds

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Includes: AZN, BAYRY, CSSPF, GSK, MKGAF, OXBDF
by: EP Vantage

In confronting the unknowns facing biopharma and medtech in the wake of the UK’s unprecedented vote to withdraw from the European Union, the sector has already passed the denial and anger stages of grief, and appears well into the bargaining phase.

In expressing a willingness to work with the government as it negotiates its EU exit, the sector is recognizing the need for a stable uncoupling given that issues from regulation to capital access have been knocked off balance by the outcome of the plebiscite. UK biotech has been the star of European fund-raising in the past five years. Its standing, along with that of London as a place to seek backing for drug development, has been thrown into doubt – companies and financiers are looking for a stable path to a post-EU Britain (see tables).

Capital flight

Not surprisingly, publicly traded UK biotechs have taken a pounding along with most of the rest of the London-traded market today, with names like Circassia (OTC:CSSPF) and Oxford Biomedica (OTCPK:OXBDF) initially seeing double-digit losses.

Continental EU-based big pharmas like Bayer (OTCPK:BAYRY) and Merck KGaA (OTCPK:MKGAF) suffered more than their British counterparts, as worries spread about more countries leaving the EU. GlaxoSmithKline (NYSE:GSK) and AstraZeneca (NYSE:AZN) were seen as a safe harbor in a stormy investment environment, as they have limited sales in their home country.

As a place to raise money from the public equity markets in the EU, the UK has been rivaled only by France in the past five years.

UK IPOs

Count

Total ($m)

Average ($m)

Largest ($m)

2010

1

1.8

1.8

1.8

2011

0

-

-

-

2012

2

41.8

20.5

24.8

2013

2

52.7

26.4

47.9

2014

8

476.2

59.5

211.0

2015

5

281.7

56.3

191.3

France IPOs

2010

4

91.9

23.0

36.4

2011

0

-

-

-

2012

3

105.6

35.2

53.9

2013

1

23.0

23.0

23.0

2014

5

175.6

35.1

55.9

2015

7

271.7

38.8

92.4

In 2014, the peak of the biotech boom, UK company IPOs in the aggregate were twice as valuable as French ones.

Privately-held UK biotechs are the undisputed champions of raising venture capital rounds in Europe. One third of the VC funds raised in Europe in 2015 went to British companies.

UK VC rounds

Total Investment ($m)

Count

Average ($m)

Largest ($m)

2015

750.8

15

50.1

320.0

2014

526.1

21

25.1

80.4

2013

256.9

24

10.7

32.0

2012

260.1

22

11.8

56.0

2011

231.2

20

11.6

42.0

2010

330.9

26

12.7

100.0

It is, of course, too soon to say how, if at all, this flow of money will be affected in the long term by a British adios. But the message sent by voters is not one that industry leaders appear comfortable with, and Mike Thompson, chief executive of the Association of the British Pharmaceutical Industry, said in a statement that steps had to be taken “to send a strong signal that the UK is open for business.”

European VC rounds (including UK)

Total Investment ($m)*

Count

2015

2,119

57

2014

1,380

67

2013

1,212

89

2012

864

81

2011

792

73

2010

1,152

97

“About three months ago in the run-up to Brexit we started to see companies choose not to invest future sums in the UK, and we’ve also seen clinical trials which were due to start in the UK suddenly get switched to other countries,” he told EP Vantage in an interview. “That trend will continue until we do something different.”

Saving EMA

Making sure that the open sign is prominently displayed will not be made easier by uncertainty over how drugs and devices will be approved and regulated as the UK distances itself from a Europe-wide framework.

Ironically, the European Medicines Agency calls London home – likely necessitating a move of the entire agency to the mainland – and leans on the UK’s Medicines and Healthcare Products Regulatory Agency (MHRA). The MHRA is the lead European regulator in 40% of “decentralized” drug reviews and is the lead party in 15% of centralized reviews conducted by the EMA, according to Elisabethann Wright, a partner with the law firm Hogan Lovells.

“If the UK is not in the EU any more, the MHRA may have to step out of this process,” said Fabien Roy, a senior associate at Hogan Lovells. “That may also have huge consequences, not only for UK manufacturers but also for other manufacturers. It may delay the process for marketing authorization.”

This is an outcome that could be avoided, Mr. Thompson said. “They don’t want to lose us. How can we come to a creative arrangement that could in some way retain some of the benefits we have there?

“The worst outcome would be to end up with a European process and a UK process. The reality is that the UK process would come second,” he added. “A rational decision from a pharma company would be to get registration in a market which will give 500 million patients access to the medicine versus 60 million patients.”

CE marks the spot no more

As with pharmaceuticals, the medical device industry relies on mutual recognition within the EU for regulatory purposes. All but the very simplest devices must be awarded CE mark certification by a notified body – a commercial organization registered with the government of the country in which it is based – to be sold in the EU.

There are five UK notified bodies for medical devices, the most famous of which is BSI Group, home of the Kitemark. Post-Brexit, UK-notified bodies would no longer be entitled to assess devices for conformity with EU medical device directives, and hence would be unable to issue the CE mark. They would essentially become redundant.

Some non-EU countries such as Switzerland and Turkey have separate mutual recognition pacts with the EU. The UK could negotiate such an agreement, but naturally, this would take time and money.

The changes would directly affect medtech companies themselves. To sell their wares in the single market, medtech companies based outside the EU must appoint a European Authorized Representative established in an EU member state. EARs serve as a neutral contact point between the device manufacturer and the EU member state’s competent authority – the government organization that polices CE marked devices. The UK’s competent authority is the MHRA.

Currently, UK companies do not need an EAR: they may deal with the MHRA directly. Thus, Brexit will mean another layer of complexity for UK medtech groups. EU-based EARs, however, like EU-based notified bodies, will be quids – or rather euros – in.

Both the UK biopharma and medtech industries now face a period of uncertainty. They will hope that they can negotiate a path forward with as little disruption as possible – but this might now be down to Europe, rather than the UK.

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