In the run-up to the United Kingdom’s referendum on European Union membership, leaders from Big Pharmas, biotechs, academic groups and regulatory agencies based across the region warned repeatedly of the risks of Brexit. Now, two years out from the scheduled EU exit date, the tenor of the debate has shifted. Uncertainty and concerns remain, but the life science sector is increasingly confident about its post-Brexit prospects.
Many people in life sciences in the U.K. and on mainland Europe remain skeptical about the merits of Brexit for the British economy and society overall. However, nine months on from the vote on EU membership, the industry is more sanguine about its own prospects.
Concerns Brexit will make it harder to hire staff from overseas, hinder cross-border collaboration, affect access to venture capital and complicate regulation linger. But, buoyed by the attention of a government that sees life science research as a core strength, many people think industry-specific headwinds will be less severe than feared.
Maintaining the science base
Confidence in the future of U.K. academic and industry life science research is undergirded by the government’s singling out of the sector for special treatment and a belief its fundamentals are strong enough to weather any Brexit-related volatility.
“The U.K. has real momentum in the life sciences. If you look across the globe, the U.K., in terms of the golden triangle, has started to establish itself as the third biotech hub,” said Tim Haines, managing partner at life science investment group Abingworth.
EU membership was seen by many, Haines included, as a boost to the U.K.’s bid to establish itself as a rival to Boston and San Francisco. The U.K.’s academic strength and favorable policies for life science research act as a magnet to talent from across the EU. Today, there are no barriers to the flow of talent from France, Germany and the rest of the EU to the U.K.
The Brexit sought by the U.K. government is likely to erect a barrier to the flow of talent. What is less clear is whether the barrier will stop U.K. biotechs and universities from hiring highly-skilled people from the EU, or simply add a minor amount of paperwork to the process. Many people are optimistic the government won’t kill the golden goose by severely restricting access to talent.
“I suspect there will be ways to ensure we can continue to recruit people and bring students, high-caliber scientists and managers into the U.K.,” Haines said. Others share Haines’ optimism, despite Politico reporting in January that Prime Minister Theresa May plans to control immigration in “every sector and every skill level.”
Attracting talent
The process of obtaining a work visa for EU hires is just one potential recruitment challenge, though. The U.K. must also remain a place where people from mainland Europe want to work. And, on that front, Brexit may already be doing damage.
Access to Horizon 2020 and other EU research programs is one concern. U.K. researchers receive billions of pounds in funding and opportunities to collaborate with their peers on the mainland through the schemes. With access to EU funds now threatened, the U.K. government has sought to allay researchers’ fears by underwriting pre-Brexit Horizon 2020 grants after it leaves the EU.
What happens beyond that to funding levels and collaborative opportunities is unclear. The government wants to enable continued collaboration, but the outcome is uncertain. If the U.K. loses access to Horizon 2020, universities may establish outposts on mainland Europe to stay in the scheme, contributing to a brain drain as top-tier academics relocate to further their research.
The desirability of the U.K. to overseas researchers is also affected by broader issues. Changes in the Euro-Sterling exchange rate amount to a significant pay cut for anyone sending their earnings from the U.K. to the Eurozone. And continued uncertainty over the status of EU nationals who are in the U.K. today or planning to relocate soon is another negative created by Brexit.
“I think the conditions for continental Europeans became a bit more unattractive overall,” said Peter Pack, CEO of Crescendo Biologics.
Pack is broadly optimistic for the U.K. biotech sector. But as a fast-growing employer of EU nationals—including some who have received “bad comments on the streets” on the grounds of their nationality—he is concerned the atmosphere, uncertainty and exchange rate are affecting the desirability of British businesses to candidates from the mainland.
Access to capital
The desirability of British businesses to investors from the mainland and beyond is affected by some of the same forces but in different ways. The weak pound means investors and strategic buyers from the EU and U.S. get more bang for their buck in the U.K. today than pre-referendum. For the moment, Pack sees the fallout from Brexit as a net positive for U.K. biotech from a business development and financing perspective.
Whether this remains true in the years to come depends on currency exchanges and the resolution of uncertainty regarding the European Investment Fund (EIF). Many major EU venture capital firms receive money from EIF—an EU vehicle for supporting small businesses—in return for committing to invest most of their fund within the region. As such, the U.K. being classed as ex-EU by EIF could affect inward investment.
“It would put the bar higher for us to consider a U.K.-based investment, as opposed to an EU investment,” said Sander Slootweg, managing partner at Dutch VC shop and EIF investment recipient Forbion Capital Partners.
U.K. VC firms have a different set of concerns. EIF committed €2.3 billion ($2.4 billion) to 144 U.K. private equity funds from 2011 to 2015, making it a cornerstone of many British VC firms. Brexit threatens access to further EIF funds. The U.K. could reach an agreement that enables continued EIF investment, but for now the potential for disruption exists.
“If we're not able to continue to access monies that get recycled through EIF, there will be some impact on the U.K. life sciences industry,” Haines said.
Life after EMA?
The U.K.’s relationship to institutions other than EIF is similarly uncertain. For life sciences, the tie between the U.K. and the European Medicines Agency (EMA) is one of the biggest concerns about the whole Brexit process.
Politicians in the U.K. have given out mixed messages about the relationship they want with EMA post-Brexit. But given Prime Minister May’s resolve to free the U.K. from the jurisdiction of the European Court of Justice, it is likely the country will leave EMA. The prospect of the U.K. having a separate regulatory system and approval pathway is a worry for the industry.
“The biggest threat is the regulatory framework,” said Francesco De Rubertis, partner and co-founder at Anglo-Swiss VC firm medicxi.
De Rubertis, who isn’t worried about the impact of Brexit on operational aspects of medicxi, sees the regulatory threat as more of a concern for pharmaceutical companies than investors. While separate approval pathways for the U.K. and the EU could create complexity for pharma and delay access to new drugs in the U.K., De Rubertis thinks the impact on investors will be marginal.
A split between the U.K. and EMA could have some impact on the European regulatory landscape. The U.K. is a big contributor to EMA today. And, in some people’s view, it has played a significant role in the adoption of early access schemes and new thinking on cell and gene therapies. Steve Bates, CEO of the UK BioIndustry Association, thinks losing this influence may harm EMA.
“If you take the U.K. out of the European system, that system may not move as fast and as scientifically as it has done,” Bates said.
The European Federation of Pharmaceutical Industries and Associations declined to comment on Brexit for this feature beyond saying its main focus in ensuring regulatory continuity across Europe.
Seizing freedoms outside the EU
The shift in outlook on Brexit from pre-referendum doom and gloom to today’s cautious optimism is partly a result of the soul-searching triggered by the Brexit vote. This has stimulated talks about how life sciences in the U.K. can improve—and made the increasingly-interventionist government more open to using its power to support the sector.
Industry leaders are currently working on proposals for how the government can help. Some of the suggestions will likely be ideas the U.K. could enact as a member of the EU. But the industry is also looking to take advantage of freedoms the U.K. will gain after Brexit. Notably, rules designed to prevent distortion of competition within the EU will stop applying to the U.K.
“It may give us some flexibilities and freedoms to operate new policies [and] to make us globally competitive against the likes of Singapore or other parts of the world that have specific industrial policies to support the biopharma sector,” Bates said.
An interventionist government operating without the constraints of state aid rules—and keen to show the U.K. is making a success of Brexit—could be a powerful ally to biotech. The government has mooted slashing corporation tax to 10% and is open to providing other forms of support. Closer regulatory, research and business ties to the U.S. are another possibility.
The promise and the pitfalls
If the government follows through on its strategy while also mitigating the potentially-damaging effects of Brexit on VC funding, research collaborations, hiring and regulations, the U.K. life science sector could get a boost in the coming years, even if the country as a whole suffers.
Yet, while the government has made encouraging noises about continuing to participate in some EU schemes—offering hope to those reliant on EIF and Horizon 2020—and has spoken of the need to secure access to talent and the status of EU nationals already in the U.K., nothing is certain at this stage.
This leaves scope for bearish readings of the situation. If negotiations between the U.K. and EU sour following disagreements over the size of the Brexit divorce bill or another sticking point, today’s level-headed analyses of the mutual benefits of ongoing collaboration and recognition of existing migrants could lose currency. The risk of the U.K. behaving irrationally is magnified by the political pressure May faces domestically from pro-Brexit hardliners.
Greater clarity on the fine details of Brexit will emerge as the terms are debated and ratified over the next two years—and beyond that if a transitional agreement is struck to smooth the exit.
Between now and then, the industry will lobby and keep its fingers crossed that cool heads prevail.