The announcement of a Brexit transition deal at the March EU summit was a positive step for business. But since then, there has been little progress made on resolving the key items on the withdrawal treaty, including a plan for customs and governance arrangements during transition.
The recent vote in the House of Commons defeating the amendments from the House of Lords has taken the option of remaining in the customs union off the table, leaving politicians to continue debate between the customs partnership and the “maximum facilitation” model. Both options represent a significant change for businesses moving products across the UK/EU border and, worse still, there remains a small possibility of a Hard Brexit which would see a default to WTO terms if the joint withdrawal and transition treaty is not agreed in October.
There is temptation for businesses to adopt a “wait-and-see” – however, it is clear that there will be insufficient time for companies to transfer licences, adapt supply chains and reconfigure people, processes and systems in the period of time that will be available once there is more clarity.
Besides, even without the final trade deal being in place there are plenty of challenges that are known and that can be prepared for today. Where uncertainty still remains, it is possible for businesses to build agility into the operations and planning processes to be able to quickly adapt to other issues as they emerge. Therefore, waiting on a final trade deal will only serve to delay the inevitable changes that companies will be required to make. We clearly know that exiting Europe and the customs union provides the UK with third country status, providing predictable impacts on the ability to sell, move and maintain products on the UK and EU markets.
The most fundamental impact for pharmaceutical companies is the validity of European Marketing Authorisations (MAs) that are held by UK entities. UK-based entities will no longer be able to be the Marketing Authorisation Holder of EU MAs after the transition period (subject to its approval). This could potentially impact the availability of life-saving medications for patients in the UK and EU. Companies are acting now to transfer EU MAs to EU-based entities but the window for completing this in time is closing. With the sheer volume of MAs being transferred and the added complexity of the European Medicines Agency (EMA) moving from London to Amsterdam, the EMA is facing significant work effort. Beyond this, companies will also need to secure Marketing Authorisation for the UK market, for which the timelines and regulatory processes are currently unclear.
There is a similar issue for medical device businesses using UK-based Notified Bodies (NB) to provide their Conformité Européene (CE) mark, a legal requirement for medical devices sold in Europe, as UK-based NBs will no longer be authorised to do so. Companies are looking for alternative NBs on the continent to continue to legally provide CE marked products on the EU market. This is against the backdrop of companies and NBs implementing their Medical Device Regulation plans. This additional workload and influx of requests is causing NBs to refuse requests to assess new products, as there is no legal imperative for them to do so.
A key question concerning the movement of drugs is whether there will be mutual recognition of standards between the UK and the EU. The UK aims to become an associate member of the EMA, which would provide a means to continue mutual recognition across the border. However, this is still under discussion so companies should develop plans under the assumption that no mutual recognition will be in place in the short term and so product batches will need to be retested and released by a Qualified Person (QP) upon entering the EU from the UK. This will require duplication of testing facilities and QPs in the EU and the UK; impacting timelines, costs and requirements for services and working capital.
As the UK is the current point of entry to the EU for many global organisations, further consideration is needed to prepare a new point of entry with another EU based entity. The new EU importing entity will require the appropriate Manufacturers/Importers Authorisation or ensure that any existing licences cover this new activity. Due to these requirements, some companies are changing their supply routes to avoid the UK and import directly into the EU from other third countries (e.g. the US).
Regardless of the supply model, there will be a physical border in place between the UK and the EU which brings an end to the four freedoms of movement: people, capital, goods and service. This provides additional complexity in the form of tariffs and customs declarations which will have a direct impact on the Cost of Goods Sold impacting on margin and profitability. This is particularly true for Medical Devices which have a 2.8 percent tariff applied to them under WTO rules (whereas pharmaceutical products do not). High margin products will likely be able to absorb additional costs whereas lower margin products (e.g. generics) will need to understand how this impacts the commercial viability of their portfolio. Additionally, the border processes will require additional time to clear customs. Companies with Authorised Economic Operator status will be able to minimise this impact but will still need to be clear on arrangements with freight forwarders to ensure that shipments are not held up if they are part of mixed consignments (i.e. with non-AEO stock).
Finally, the separation of the UK from EU jurisdiction will have consequences for how companies maintain products on the market. Regardless of the final Brexit scenario, MA holders are obliged to maintain good pharmacovigilance (PV) practices for their products globally and complete periodic reporting through the EU’s Eudravigilance system. However, Brexit may prevent UK entities from accessing such systems so additional reporting and new EU-based PV staff may be required (Including the Qualified Person for Pharmacovigilance (QPPV) which the EU regulation requires to be resident of an EU member state).
In summary, the UK leaving the EU will impact the status of UK-entities under EU regulation such that personnel and activities of UK entities will no longer be valid to satisfy EU requirements and an economic border between the UK and the EU will be established. This will have the effect of slowing down and increasing the cost of supply across the UK and EU border and will require a variety of new processes, people and systems (and working capital to support them) in order to allow companies to continue their commercial activity in the UK and Europe.
Johnathon Marshall is a partner at PwC
