Brexit negotiations between the UK and the European Union have moved onto phase two after the EU Council concluded that “sufficient progress” has been made on the three main issues: citizens’ rights, the Irish border, and the financial settlement. Despite this, we still know little about what the future arrangement will actually look like. A soft landing – continued membership of the single market via the European Economic Area (EEA) – has been repeatedly ruled out by the British government, but there’s been little talk of walking away without a deal in recent months, perhaps signaling that the hardest possible Brexit is “incredibly unlikely,” as UK Brexit negotiator, David Davis, said in January (1).

A key feature of the phase one agreement was the UK government’s commitment to avoiding a “hard border” in Ireland, including “physical infrastructure or related checks and controls” (2). Critically, the UK committed, in the absence of agreed solutions, to fully “align” its regulations with the EU’s so as to avoid such a border. Exactly what “full alignment” means should become clearer once the phase one agreement is transposed into law. As it stands, if the UK is serious about eliminating the need for physical infrastructure at the Irish border, while simultaneously ruling out trade barriers between Northern Ireland and the rest of the UK (which the government also did as part of the phase one agreement), the final relationship will likely be very close – which will be a relief for the European pharma industry. “The closer the better!” was the call that came from several global pharmaceutical companies and industry organizations in their submissions to the UK Business, Energy and Industrial Strategy Committee’s recent inquiry into Brexit and the implications for UK business (3). The industry was united in its desire for Brexit negotiators to agree a deal that would keep the UK closely aligned to the EMA’s regulatory sphere – and, if possible, continuing to participate in the agency.

Operation Stack The Channel Tunnel and the Port of Dover handle 90 percent of freight traffic between the UK and mainland Europe. Around £119 billion of goods pass through Dover every year – about one sixth of British trade by value. On average, around 10,000 freight vehicles pass through Kent every day and the demand is predicted to rise by over 50 percent in the next decade. There is a real concern that new customs checks at the border could cause lengthy delays, with severe consequences for pharma supply chains. The flow of goods through the busiest ferry terminal in Europe is currently “frictionless,” yet delays are not uncommon. Bad weather, operational problems, industrial action, and more recently, migrant action at Calais, have caused delays. And in cases of severe disruption, Operation Stack is implemented. Operation Stack is a procedure used to park (or “stack”) lorries on the M20 motorway in South East Kent. The system has been implemented 74 times in the past 20 years. On 24 June 2015 Operation Stack was enacted due to industrial action taken by French employees of the MyFerryLink company. This was the first time “Phase 4” of Operation Stack was used, which involved clearing 30 miles of parked Heavy Goods Vehicles. Between January and November 2015 Operation Stack was implemented on a record 32 days, including three five-day stints. The UK Freight Transport Association (FTA) estimated the cost of the delays to the UK International Road Freight industry at £750,000 per day. The FTA has estimated, based on Border Force KPIs, that passport checks alone cost £1 per minute. “It is therefore highly probable that costs related to customs checks being performed at the border would be much greater due to time spent by customs officials to check goods against documentation,” they said (1). In an interview with The Times, Tim Waggott, the Port of Dover chief executive said, “We will see [Operation Stack] every day of the year in perpetuity if we don’t get this sorted” (2).

References FTA, “Written Evidence submitted by the Freight Transport Association (UKT0033)”, (2017). Available: bit.ly/2EqEvCr. Accessed 24 January, 2018. The Times, “Dover fears hard Brexit as election approaches”, (2017). Available: bit.ly/2EqEvCr. Accessed 24 January, 2018.

Save our supply chains

The number one concern for pharma companies is being able to deliver medicines to patients, without delays, after the UK leaves the EU. Pharma supply chains are fragile and highly dependent on frictionless trade, a point well made by many of the submissions to the Committee. For example, according to Merck KGaA, around 12 percent of their products are “dropshipped” directly to customers from Germany “within 24 hours of an order being placed,” so any delays at UK ports would have a “significant impact” on the company’s ability to meet the needs of its clients. Merck KGaA also highlighted that products that must be kept cold during transportation; they point out that the refrigeration system is maintained by the running engine of the vehicle in which they are transported. “If delays at ports become consistent, the whole sector will have to develop new ways of transporting and storing goods and medicines to mitigate the risk of a product overheating and becoming unusable,” said Merck KGaA. They went on to explain that several customers have “already stated their intention to seek alternative suppliers based in the EU.”

Importantly, any delays at borders run the risk of disrupting patient supply of medicines.

Johnson & Johnson raised similar concerns, warning that “ingredients and products can cross the border multiple times in the manufacturing and distribution process [...] Systems must be put in place to ensure that this can continue without the need for Border Inspection Post Personnel checks and tariffs.”

As one example, a company that manufactures products in the North West of England identified four occasions where its products cross UK/EU borders before reaching the end user. They added, “Currently this is frictionless, so there is a high risk that any new arrangements will add cost and/or bureaucracy, changing decision-making about both ongoing and future manufacturing.”

Eli Lilly’s Kinsale site in Ireland is one of the company’s major centers for API manufacturing. “As a measure of the integrated nature of our supply routes, products manufactured in Kinsale cross the border from Ireland into the UK before being exported to Europe and beyond,” says Chris Lowry, Public Affairs Manager at Eli Lilly. “The fact that these products cross between the UK and the EU multiple times evidently leaves them particularly exposed to any potential customs and border controls. We would be extremely dismayed to see such impediments put in place. Importantly, any delays at borders run the risk of disrupting patient supply of medicines.”

“We are a global industry, and Merck Sharpe & Dohme (MSD) is a great example of a multinational operation, working across complex environments that change over time,” says Virgina Acha, Executive Director of Global Regulatory Policy at MSD. “Biopharma discovery, development, manufacture and supply chain arrangements take many years to undertake and many years to change. There are long cycles in planning schedules, with some speciality biological products, for example, only having a production run every one to two years. Supply is carefully allocated in this global planning. The relatively sudden, exceptional and across the board changes that Brexit seems likely to generate will profoundly challenge biopharmaceutical businesses.”

Lowry concurs, adding, “Imposing barriers would levy substantial cash flow costs to companies and disrupt the close intertwining of trade and regulation. Mitigating these impacts may require us to explore and validate new supply routes, which given the distribution and storage requirements of some products, is not a simple task.”

The Association of the British Pharmaceutical Industry pointed out the challenges associated with cell and gene therapies, which tend to be extremely time sensitive. Novartis’ Kymriah, for example, is set to launch in the EU next year. The therapy involves removing the patient’s own white blood cells, freezing them, and shipping them to a Novartis site within 24 hours. The T-cells are then treated, before being transported back to the patient for reinjection, again within 24 hours. “The turnaround time is very tight,” says Sascha Sonnenberg, VP Commercial Operations Americas and EMEA at Marken – a company that specializes in supply chain solutions for clinical trials. “These are life-saving medicines, and any customs delays – even a six hour delay at the border – could mean you miss the turnaround time and the treatment cannot be used. We’re talking about late-stage cancer treatments where the patient might not be in a position to donate additional cells.”

To prevent customs delays, the pharma industry is relying on Brexit negotiators to agree a deal that covers the entire economy – delays for other industries could indirectly impact the pharma industry. The Institute for Government, a UK-based think-tank, published a report on Brexit and customs (4); one of if its senior researchers, Joe Owen, points out that the need for new customs checks could severely disrupt the flow of traffic from the UK to the EU, and vice versa. “If the UK is treated in the same way as any other third country, there could be severe border delays. Take Agri-food for example: between 20 and 50 percent of shipments of beef and lamb imported from outside the EEA must be checked at the border. The capacity is not there to cope with the volume of beef and lamb that would need to be checked,” he says. Not only is capacity lacking, but there also isn’t enough space to build the capacity, argues Owen. The result could be queues of traffic in motorways leading up to the UK’s borders with the EU. Not only would this impact exports from the UK to the EU, but any EU to UK exporters would end up stuck in the same queue when trying to get back to the continent – a nightmare scenario for pharma supply chains.

We’re actually in the countdown phase to the rocket launch now and there comes a point where we’re beyond the no-go period. For matters like batch release, we need to make decisions relatively soon – but we’re already spending money.

Calls for clarity

Though the UK has committed to doing what is required to avoid customs checks between the UK and EU – allowing pharma supply chains to operate as-is post Brexit – nothing is set in stone. The uncertainty over the future relationship means that companies must take action now to ensure their medicines can continue to reach their destination post-Brexit – regardless of what happens in April 2019.

When the UK leaves the EU, it will become a “third country.” And so, aside from supply chain issues, another area of concern for UK-based pharma companies is the impact of Brexit on current quality control testing and Qualified Person (QP) batch release systems. Each production batch of medicinal products imported from third countries must undergo “qualitative analysis, a quantitative analysis of at least all the active substances and all the other tests or checks necessary to ensure the quality of medicinal products in accordance with the requirements of the marketing authorization,” in an EU Member State (5). In other words, companies exporting from the UK to the EU after Brexit would, therefore, have to carry out additional batch release testing in an EU member state.

“You’re looking at new premises and distribution; and when you add in the possibility of having to transfer your marketing authorizations to the EU, for us the overall cost will be in the region of £5 million,” says David Jefferys, Senior Vice President for Global Regulatory, Healthcare Policy and Corporate Affairs for Eisai Europe, and Chairman of Eisai’s Global Regulatory Council. “We’re actually in the countdown phase to the rocket launch now and there comes a point where we’re beyond the no-go period. For matters like batch release, we need to make decisions relatively soon – but we’re already spending money.”

Jefferys’ concerns were mirrored by Lisa Anson, president of the ABPI and chairman of AstraZeneca. “If we look at the frictionless trade, AstraZeneca is already looking at contingencies to duplicate the quality control release processes in the UK and in Europe, because we can’t afford to wait to know if there’s going to be customs tariffs or any other sort of barrier,” (6).

In their submission to the Business, Energy and Industrial Strategy Committee, J&J estimated that the company would have to conduct 50,000 additional tests every year, with a combined cost of almost £1 million per year.

A Mutual Recognition Agreement (MRA) between the UK and the EU would allow companies to base their contract testing laboratories in the UK, but that isn’t the default – and there are some concerns over whether an MRA would do what it’s supposed to do in practice. “We see that the MRAs between Switzerland or the US and the EU are supposed to eliminate the need for QP testing on the EU side for imports from these countries,” says Sonnenberg. “But what I have seen in clinical supply is that there tends to be a simplified release by an EU-based QP in addition to the testing done in the exporting country – even with an MRA in place.”

There are also concerns that the EU won’t be able to cope with the demand for testing facilities, post-Brexit. “Today, 1,300 products produced by EFPIA members are batch released or tested in the UK,” says Acha. “Forty percent of these EFPIA members anticipate challenges to ensure that there is sufficient capacity in the EU27 to replace this infrastructure.”

The scale of the work that would need to be done is significant. The EFPIA also revealed that 70 percent of all investigational medicinal products (IMPs) in ongoing EU trials are QP-released from the UK; and more than half of EFPIA members have 100 percent of their IMPs in ongoing EU trials QP released from the UK.

“We see major companies already investing in the EU, building up additional storage and lab capabilities – the larger companies are quite well prepared,” says Sonnenberg. “But some smaller companies, especially Asian and American companies, do not have Brexit on their radar. I worry about a bottleneck on the EU side – especially human resources like QPs – as companies rush to make sure they’re ready to carry out QP in the EU once the UK leaves. This could potentially delay or endanger ongoing trials.”

The Keys to Frictionless Trade Regulatory alignment Preserving the integrity of its internal market is of vital importance to the EU. If the UK is able to diverge from single market standards, there is a risk it might loosen its regulations and begin importing faulty toys, diseased animals, or counterfeit medicines from other countries, which could then make their way from the UK to the EU. The EU cannot allow the free movement of goods with the UK to continue after Brexit without an agreement on regulatory alignment – at least for product standards. Surveillance and dispute resolution Any agreement on regulatory alignment will have to include appropriate surveillance mechanisms and dispute resolution procedures to ensure that the UK continues to align its regulations with those of the single market. The EFTA court, via the EEA Joint Committee, performs this function for Norway, Liechtenstein and Iceland. Whereas for Switzerland’s bilateral agreements with the EU, a Joint Committee (made up of Swiss and EU officials) resolves disputes diplomatically – not legally. It remains to be seen whether a third way can be found. A customs agreement The UK and EU will need to enter into a customs agreement if Rules of Origin checks are to be avoided. Rules of Origin are used to determine the national source of a product. To take advantage of preferential tariffs agreed in trade agreements, for example, UK exporters must prove that their goods come from the UK or have had sufficient work – any amount of processing above a certain threshold – done on them in the UK. Border officials check Origin documents at the border, which requires physical infrastructure. Such checks will allow the EU to ensure that countries trading with the UK after Brexit – perhaps with lower tariffs on certain goods – do not use the UK as a means of circumventing the EU’s Common External Tariff. The UK could agree to maintain the Common External Tariff or enter into a customs union agreement with the EU to eliminate need for Rules of Origin checks. And though such checks are unlikely to be a direct issue for the pharmaceutical industry (the WTO Pharmaceutical Tariff Elimination Agreement reduces tariffs to zero percent for many pharmaceutical products), the effect on other products could indirectly impact pharma supply chains, if only by causing port and road congestion.

Hope for the best, plan for the worst

Companies are optimistic that the final deal will facilitate the continued free movement of goods post-Brexit (see The Keys to Frictionless Trade for the main elements of such an agreement), but that doesn’t (and perhaps shouldn’t) stop them preparing for the worst. “We need to be prepared for all eventualities, and this includes a ‘no deal’ scenario,” says Acha. “Our objective is to undertake the investment and changes needed to ensure that following Brexit, regardless of the outcomes of the negotiations, on March 30, 2019, MSD can provide its medicines to patients across Europe as if it were any other day. We are working across our business to meet this objective. However, industry cannot resolve all of the issues on its own.”

In phase two, UK and EU negotiators will begin discussions over the transition period. The European Council is proposing a period of two years, in which the UK would lose all EU voting rights, but would continue to participate in the Customs Union and Single Market (7) – potentially providing some continuity for businesses.

“We welcome the recent agreement to progress to phase two of the talks,” says Laura Collister, the UK Bioindustry Association’s (BIA’s) Brexit Lead. “It is now crucial that the UK and EU agree a transition period to ensure that the supply of medicines to patients in the UK and across Europe is not affected.” Collister’s initial reading of the proposals put forward by both sides is that medicinal products that have been tested and released prior to the Brexit date should continue to be freely available in the EU even if that testing and release is carried out in the UK and the goods are shipped to other EU countries after the UK withdraws. “This is an important detail for global companies deciding how, and crucially when, to progress existing Brexit contingency plans,” she says.

Another important factor is whether or not the UK will have access to the EU’s trade and mutual recognition agreements during the transition period. As things stand, unless Article 50 is extended, the UK will leave the EU on March 30, 2019 and drop out of several hundred EU agreements – including free trade agreements with Canada, Switzerland and Turkey (7). However, if the UK is bound by the rules of the single market and the customs union during the transition, it will likely be bound by the obligations of the EU’s trade deals. Canadian or Korean exporters should be able to sell to the UK as though it was an EU member during the transition, but UK-based exporters would not be able to benefit from the EU-Canada or EU-Korea FTAs (8).

Could the UK roll over the EU agreements on March 30, 2019 or agree a legal fudge whereby the UK continues to be covered by the EU’s external trade policy as a non-EU member for the transition period (the so-called “Guernsey option,” (8))? Well, that remains to be seen. And the uncertainty, both over the nature and length of any transitional arrangements, as well as the future relationship, is an ongoing problem for pharma – forcing companies to defer investment decisions.

“When companies are thinking about investing in the UK, the uncertainty is definitely having a negative impact,” says Jefferys. “And I would say the choice isn’t just between London and Frankfurt or Milan, for example. It’s London versus New York versus Singapore versus Tokyo, and so on.”

When it comes to the final arrangement, Sonnenberg just hopes the negotiators understand what is at stake for those who rely on the life-saving medicines produced by pharma industry. “We are talking about patients’ lives,” says Sonnenberg. “Particularly when it comes to clinical trials, oftentimes these drugs are the only option for patients. There are so many uncontrollable events that could lead to drug shortages; if we make Brexit one of those, then I think we all fail.”