Drug Firms Brush Aside Brexit, Invest in UK

Brexit has not undermined UK’s position as renowned center for scientific research

The UK economy’s better-than-expected performance since the Brexit vote is helping to lift consumers’ confidence and outlook for 2017, with consumer spending and the dominant services industry driving economic growth since the vote to leave the European Union in June 2016. Despite the Brexit fallout in terms of uncertain future medicine regulation, drug approvals, investment climate, and sale of pharmaceutical drugs across borders, it has not undermined the case for the UK’s position as renowned center for scientific research.

Prime Minister Theresa May last week laid out a new industrial strategy designed to propel growth of Britain’s heavily services-based economy after it leaves the EU. Brexit has raised concerns in the life sciences sector, with academics fretting over a potential gap in funding currently provided by the EU and drugmakers concerned over medicine regulation. The European Medicines Agency, which is currently based in London, but likely to move after Brexit, offers a one-stop-shop for drug approvals, thereby facilitating the sale of pharmaceuticals across borders. Given these challenges, some drug company executives have warned that Britain could lose its appeal as a center for research and manufacturing.

Novo invests in UK, undeterred by Brexit

Brushing aside Brexit concerns in the life sciences sector, Danish company Novo Nordisk A/S (NYSE: NVO), the world’s largest insulin producer, is investing £115 million ($145 million) in a new research center in Britain, as reported by Reuters on January 30th, 2017. The Danish company said that it would invest the money over 10 years in the center based at the University of Oxford, which will employ 100 scientists to work on new ways to treat type 2 diabetes. Novo’s move is therefore reassuring, although the bulk of the company’s work in producing new diabetes treatments, including large-scale drug development and manufacturing, will still be done in Denmark.

James Johnson, currently a professor at the University of British Columbia, has been appointed head of the Novo Nordisk Research Centre Oxford. Johnson is an expert on pancreas biology, insulin action and diabetes. The new set-up will allow for daily interactions between academics at Oxford and Novo’s industrial scientists.

Novo Nordisk has built its business over the last two decades by focusing on diabetes, which is a growing problem worldwide, driven by obesity and sedentary lifestyles. More recently, however, Novo has been faced with a difficult pricing environment and other headwinds in its key US market. Novo generates about half of its revenue from the US, which has a diabetic population of over 30 million. This is mainly because payers have become more selective about the drugs included in coverage plans for their clients and competition from cheaper generic drugs have force Novo to cut prices or lose ground to rivals.

The pricing uncertainty is likely to extend into 2018, according to new CEO Lars Fruergaard Jorgensen, who took over in January 2017. Novo acknowledged in August 2016 that it lost a major contract for its top-selling insulin NovoLog, and is rethinking whether or not to proceed with the development of certain drugs in its pipeline. Concern about the increasing competition in the US has caused Novo to lose more than a quarter of its value in 2016.

Intense competition from generics and biosimilars

Generic competition for Novo Nordisk’s diabetes treatments has increased in recent months, a major cause for worry since diabetes drugs account for nearly 80% of Novo’s sales. After reaching a peak of $271 per prescription in 2014, prices for traditional treatments like basal insulin drugs have fallen by more than 20% in the U.S. to $215 per prescription in 2016. Eli Lilly and Co. (NYSE: LLY) and Boehringer Ingelheim GmbH are launching a biosimilar insulin drug called Basaglar, which will compete with Novo’s next-gen diabetes treatment, Tresiba, one of the products that the company is banking on for future growth.

Headwinds in coverage and drug pricing regime

Formulary exclusions and mandatory discounts have pulled in the reins on Novo’s industry-beating growth in recent months. Major insurers such as UnitedHealth Group Inc. (NYSE: UNH), the largest health insurer in the US, CVS Health Corp. (NYSE: CVS), and Express Scripts Holding Company (NASDAQ: ESRX) are increasingly changing reimbursement terms for long-acting insulin drugs to include lower-priced options in their 2017 formulary, in order to reduce costs for their members.

Major drug companies are also preparing for a tougher drug pricing environment in the US in 2017, given that the Trump administration is looking to clamp down on pharmaceuticals companies, even while the rapidly increasing older population is intensifying pressures on the US health system. While the new drug pricing would likely lead to a restructuring of the global pharmaceutical industry, drug makers will have to introduce new pricing models for their top-selling drugs.

AstraZeneca, GSK step up investments in UK

Significantly, Britain’s two big domestic drugmakers have both committed to new investments in the country recently. AstraZeneca PLC (NYSE: AZN) is in the process of completing a $500-million headquarters and research center in Cambridge, while GlaxoSmithKline PLC (NYSE: GSK) pledged £275 million ($361 million) to expand manufacturing in Britain in July 2016, just five weeks after the Brexit vote. GlaxoSmithKline is investing at three drug manufacturing sites in Britain to increase production of next-generation respiratory drugs and biotech medicines, most of which will be exported. The new drug portfolio is expected to soon replace expiring blockbuster medications in the drug major’s portfolio.

Britain accounts for nearly half of GlaxoSmithKline’s worldwide R&D and a third of its manufacturing. Investing in Britain makes sense for GlaxoSmithKline since its sales are boosted from the post-Brexit decline of the British pound. A weaker pound helps GlaxoSmithKline’s earnings because most of the Company’s costs are in pounds, while most of its sales are made in the U.S. Changing currency exchange rates between the British pound and US dollar boosted sales by 7% and added 2.6% value to GlaxoSmithKline’s core earnings in Q2 FY16.

In recent months, AstraZeneca has also been narrowing down its therapeutic focus, shedding non-core assets in externalization deals and building its pipeline in oncology, respiratory disease and cardiovascular/metabolic disease. AstraZeneca announced on December 01st, 2016, that it has signed a collaborative deal with UK-based private biotech firm Bicycle Therapeutics Ltd to develop a novel class of small molecule medicines to treat respiratory, cardiovascular and metabolic diseases. The alliance could potentially be worth more than $1 billion to Bicycle, if all planned programs reach the market.

Bicycle, which raised $32 million from investors in an initial funding round in 2014, was set up to capitalize on research initiated at the MRC Laboratory of Molecular Biology in Cambridge, UK, by founders Sir Gregory Winter and Professor Christian Heinis. Bicycle is headquartered in Cambridge, UK, with a US subsidiary in Cambridge, Massachusetts.

Stock Performance

Novo’s stock stood at $36.69, gaining 1.44%, at the close on Wednesday, February 01st, 2017, having vacillated between an intraday high of $36.71 and a low of $35.65 during the session. The stock’s trading volume was at 3,454,363 for the day. The Company’s market cap was at $73.70 billion as of Wednesday’s close.

GlaxoSmithKline’s stock stood at $39.46, gaining 0.38%, at the close on Wednesday, February 1st, 2017, having vacillated between an intraday high of $39.59 and a low of $39.15 during the session. The stock’s trading volume was at 3,567,110 for the day. The Company’s market cap was at $95.99 billion as of Wednesday’s close.

AstraZeneca’s stock stood at $27.76, gaining 1.95%, at the close on Wednesday, February 1st, 2017, having vacillated between an intraday high of $27.76 and a low of $27.23 during the session. The stock’s trading volume was at 10,005,037 for the day. The Company’s market cap was at $70.23 billion as of Wednesday’s close.

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