Brexit: Market Predictions for the Pharmaceutical Industry

THE STORY

The UK’s historic decision to leave the EU has been the leading economic and political topic trending this summer. The Brexit has thrown British politics and world markets into a frenzy and everyone around the globe is closely following how the English government will execute the separation. The Brits epic vote to leave the EU has left the international community questioning power structures that have been in place for decades and has made the business community very apprehensive of how exactly the Brexit will affect the global economy and certain industries. The EU referendum isn’t legally binding until the prime minister triggers Article 50 of the Lisbon Treaty. Once this is declared, negotiations concerning immigration, trade tariffs, and financial regulations will officially be underway.

THE AFTERMATH

In just less than one month, the UK has voted to leave the EU, experienced an economic meltdown, and appointed a new prime minister. All these changes bear consequences, some instantaneous and others that are looming on economic horizons. Immediately after the vote was announced, the pound hit its lowest level since 1985¹ and $2 trillion disappeared from world markets². However, economic leaders around the globe have already been proactive in mitigating Brexit’s potential negative impact on markets. The Swiss central bank intervened to weaken the Swiss franc³, the Bank of Japan signaled its readiness to intervene in currency markets in order to stem yen strength⁴, and even the Bank of England’s President Mark Carney pledged to allocate $345 billion to fund primary Brexit defense⁵. However, just this week the Bank of England voted 8-1 in favor of keeping interest rates the same even in the wake of Brexit. The decision to keep interest rates steady was almost as surprising as the fact that Prime Minister David Cameron announced to resign last month. Yesterday, Secretary Theresa May officially became the UK’s new PM. She plans to lead Britain to its independence from the EU with a newly balanced cabinet supporting her along the way.

IMPLICATIONS FOR THE FUTURE

So the golden question—how does Brexit affect American businesses and the U.S. economy? It’s still too early to discern the exact effects of the Brexit, but we can expect to see the dollar continue to strengthen. This will lower profits for multinational companies with UK exposure. We may also see a lower demand for U.S. goods if Europe potentially falls into a recession. Stay tuned for more macroeconomic ramifications of the Brexit.

WHAT IT MEANS FOR PHARMA

While central bankers and politicians across Europe are hard at work handling the EU referendum, so too are Big Pharma executives and their financial staffs. They also will be working overtime to monitor their cash reserves and scrutinize their corporate financial structures. Pharmaceutical companies that are UK entities such as AstraZeneca and GlaxoSmithKline depended on the EU-UK in FY 2014 for more than 25% of their revenues⁶. The newly uncertain markets will negatively influence pharma companies in three foreseeable ways: R&D budget cuts, low profit generating operations getting shut down, and the excessive use of “Brexit” as a fallback excuse for any corporate reshuffling. That’s just the beginning. Steve Brozak, author of Forbes’ article “Brexit Will Be Bad for Pharma”, outlines four major areas that have to be considered when analyzing Brexit’s impact on the pharma industry. His key points speculate that Brexit will cause Big Pharma’s balance sheets to suffer, cement the poor performance of healthcare capital markets, continue to distill uncertainty in healthcare/medical markets (as the European Medicines Agency (EMA) is headquartered in London), and could challenge the favorable tax structure underpinning U.S. corporate inversions into the EU (i.e. Pfizer’s pursuit to merge with Allergan). Read Brozak’s article to gain deeper insight into how Brexit could destabilize the pharma industry.

1. Kottasova, Ivana. “The pound is crashing on U.K. vote for Brexit.” CNN Money. 24 June 2016.   Date Accessed: 15 July 2016.
2. Wearden, Graeme and Fletcher, Nick. “Brexit panic wipes $2 trillion off world markets – as it happened.” The Guardian. 24 June 2016.   Date Accessed: 15 July 2016.
3. Franklin, Joshua. “Swiss central bank confirms FX intervention after Brexit.” 24 June 2016. Web. Date Accessed: 15 July 2016.
4. Kajimoto, Tetshushi and Funakoshi, Minami. “Japan signals readiness to intervene as Brexit boosts yen.” 24 June 2016. Web. Date Accessed: 15 July 2016.
5. Hamilton, Scott. “Carney Pledges $345 Billion to Fund First Line of Brexit Defense.” 24 June 2016. Web. Date Accessed: 15 July 2016.
6. Brozak, Steve. “Brexit Will Be Bad for Pharma.” 25 June 2016. Web. Date Accessed: 15 July 2016.