The impact of Brexit on the pharmaceutical sector Contents

2Tariff barriers

10.The Government’s EU Exit Analysis Cross-Whitehall Briefing identifies pharmaceuticals as the sector for which UK/EU market access is the most important.21 In 2016, the UK exported £24.9 billion of pharmaceutical products, of which £11.9 billion (48 per cent) went to the EU,22 a market of more than 446 million potential patients and consumers.23 At the same time, the UK imported £24.8 billion of pharmaceutical products, of which £18.2 billion (73 per cent) were from the EU, giving a trade deficit of £6.3 billion.24 In oral evidence, the Association of the British Pharmaceutical Industry (ABPI) told us this reflects “45 million packs of medicines that leave the UK every month and go to Europe, and 37 million packs of medicines that leave the continent and come to the UK”.25

Impact of No Deal

11.Whilst the successful conclusion of phase one negotiations and further progress on the withdrawal agreement makes an orderly withdrawal from the EU more likely, the Prime Minister has asserted that “no deal for Britain is better than a bad deal for Britain.”26 For as long as this remains a possibility, the pharmaceutical industry in both the UK and the EU have no choice but to prepare for this scenario, and are doing so. On the UK’s departure from the EU, the Government has committed to depart from the customs union and single market. In the absence of a new agreement on trade, this would mean a reversion to World Trade Organisation (WTO) tariffs. The WTO’s Pharmaceutical Tariff Elimination Agreement means that for signatory states, such as Japan, the United States, Canada, Australia and member states of EU, finished pharmaceutical products and certain components are subject to zero per cent tariffs; however, for other states such as Brazil, China and Russia there are tariffs of between one and fifteen per cent.27

12.Whether or not the UK becomes a signatory to the Pharmaceutical Tariff Elimination Agreement after it leaves the EU, it will still be able to trade with the EU on the basis of a zero tariff for pharmaceutical products. In written evidence to the House of Lords EU External Affairs Subcommittee in February 2017, the Government confirmed that

The Pharmaceutical Agreement is extended on a Most-Favoured Nation (MFN) basis. This means that signatories extend the tariff eliminations to all WTO members. So, all WTO members enjoy the benefits of tariff free trade to signatory countries irrespective of whether or not they themselves are members. The UK will therefore continue to benefit from the tariff eliminations of negotiating parties and in line with our technical rectification approach, the UK will continue to place zero tariffs on pharmaceutical goods covered by the Agreement.28

In the absence of access to free trade agreements previously negotiated by the EU or of replacements for them, the pharmaceutical sector would still face tariffs if continuing to trade with countries who are not signatories to the Pharmaceutical Tariff Elimination Agreement.

13.Not all pharmaceutical products are covered by the Pharmaceutical Tariff Elimination Agreement, which is based on a negotiated list of finished products and ingredients. The agreement included a commitment to update the list of products and ingredients every 3 years;29 however, it has not been updated since 2010, which we were told was due to negotiations being held up by reservations of the USA.30 It has been estimated that, as a result, up to 1,000 finished products and 700 ingredients are not currently included in the list and would therefore be subject to tariffs when traded on WTO terms.31 AstraZeneca, the UK’s second largest pharmaceutical company, told us that for active pharmaceutical ingredients and intermediates they could still face duties of between 4 and 6.5 per cent in all countries including the EU, estimating a cost to them of $30.5 million for exports and a $5 million duty on exports.32 The ABPI and Bioindustry Association (BIA) indicated a tariff of 6.5 per cent for the EU, highlighting the challenges for products crossing borders three or four times during manufacture.33

14.In the Government’s written evidence to the Committee, they accept that the view of the pharmaceutical sector is that relying on WTO rules would potentially disrupt closely integrated supply chains.34 We have heard the same message from industry. Swiss-based pharmaceutical company Roche expressed concerns that WTO terms may be outdated for companies that rely on the movement of medicines across multiple borders, creating serious risks for patients in cases where medicines reach them via fragile supply chains.35 Johnson & Johnson, the world’s largest diversified pharmaceutical company and largest foreign investor in UK life sciences,36 told us

The imposition of tariffs with the EU would lead to a “double charge” being placed on imports and exports, disproportionately affecting companies that use the UK as a hub within their global supply chain. This would make it extremely challenging for business to maintain existing supply chain routes or to continue to prioritise the UK in any future supply chain planning.37

Lilly UK, a longstanding subsidiary of a US-based pharmaceutical company, told us they relied on tightly integrated supply chains, including across the Ireland-Northern Ireland border for international shipping, and that “additional customs burdens could disrupt the supply of medicines to patients across the UK and EU” as well as risking considerable costs to UK-based companies.38 Merck, the world’s oldest pharmaceutical company, estimated additional annual costs of £1.59 million for their life sciences imports, based on an average tariff of 3.76 per cent, with costs expected to be borne by both the pharmaceutical industry and public institutions.39

15.Access to medicines is a public good, as well as a being good for UK and EU businesses. Research by the World Health Organisation shows little benefit or justification for tariffs on pharmaceutical products, indicating that such duties generate less than 0.1 per cent of global GDP and, with a few exceptions, tariffs generally do not appear to be structured to protect local pharmaceutical industries.40 The global nature of the industry, with complex supply chains and public and political pressure for access to new and innovative medicines, means we heard no evidence to support a protectionist approach or for any tariffs being levied on these products. For UK patients, branded and generic medicines are almost entirely subject to the purchasing decisions of the National Health Service, a body with finite resources. In 2017, the NHS spent almost £16 million on prescribed medicines, a 7 per cent increase on the previous year.41 Companies have told us that tariffs will lead to higher costs42 which could lead to an increasing NHS medicines bill or a reduction in access to medicines. The Government have confirmed their desire to see zero tariffs for the trade in goods,43 and now must deliver on this.

16.The World Trade Organisation’s Pharmaceutical Tariff Elimination Agreement means that relying on WTO rules in the event of a ‘no deal’ scenario would not have as significant impact on the pharmaceutical sector as for other sectors that Committee has considered. However, there are still significant concerns that it could injure the UK’s position as a manufacturing base, a global supply hub and as a manufacturer and recipient of new and innovative medicines. The Government should pursue a trade agreement with the European Union, and with other trading partners, that includes all finished and component pharmaceutical products, and is not limited to those currently listed under WTO rules.

17.The extended delay in adding new pharmaceutical products and ingredients to the World Trade Organisation listing is already harming global access to medicines and offers no benefit to the industry or nations. It is for World Trade Organisation negotiations rather than Brexit negotiations to resolve this; however, falling back onto WTO rules could mean harmful tariffs for new and innovative medicines and components being traded between the UK and EU. As a global leader in the pharmaceutical industry, the Government should work internationally to ensure that the WTO updates the list of pharmaceuticals and components covered by the Pharmaceutical Tariff Elimination Agreement.

21 Exiting the European Union Committee, EU Exit Analysis: Cross Whitehall Briefing, 8 March 2018, p10

22 House of Commons Library, Brexit and medicines regulation, Number 8148, 20 November 2017, p27

23EU population up to almost 512 million at 1 January 2017, Eurostat press Release, 10 July 2017

24 House of Commons Library, Brexit and medicines regulation, Number 8148, 20 November 2017, p27

25 Q17 [Mr Thompson]

27 AstraZeneca, BRP0019

28 House of Lords, Supplementary Written Evidence from Lord Bridges of Headley MBE, Parliamentary Under Secretary of State for Exiting the European Union, Department for Exiting the European Union, and Lord Price CVO, Minister of State for Trade Policy, Department for International Trade on the future trading relationship between the UK and EU in goods and services, EU External Affairs and Internal Markets subcommittee, FTG0027, 24 February 2017

29 World Trade Organisation, Trade in Pharmaceutical Products, 25 March 1994

30 AstraZeneca, BRP0019

31 The Association of the British Pharmaceutical Industry and the Bio-Industry Association BRP0001

32 AstraZeneca, BRP0019

33 Q25 [Mr Thompson]

34 Department for Business, Energy and Industrial Strategy, BRP0018

35 Roche BRP0004

36 Johnson & Johnson, BRP0015

37 As above.

38 Lilly BRP0013

39 Merck BRP0005

41 NHS England, NHS Five Year Forward View: Funding and Efficiency, (accessed 17 April 2018)

42 Roche BRP0004

43 Department for Business, Energy and Industrial Strategy, BRP0018

Published: 17 May 2018