After voters in the United Kingdom decided to leave the European Union last night, global stocks are dropping dramatically. The decision by the U.K. creates major economic uncertainty, but should investors in healthcare stocks rush to buy or sell? Let's consider more closely what Brexit may mean for the biopharma industry.
Brexit and biopharma
As part of the European Union, the U.K. follows the lead of the European Medicines Agency (EMA) in matters regarding the approval of new drugs.
Up until now, the U.K. has benefited from some EMA influence owing to the fact that the agency is headquartered in London. The EMA employs hundreds of regulatory and scientific experts in London, though the vast majority of those experts aren't from the U.K. Because the U.K. is leaving the EU, it seems likely that the EMA will pack its bags and head to France, Germany, or somewhere else on the continent. Italy and Sweden have already begun to lobby their cases for housing the agency.
Regardless of where the EMA hangs its hat, the U.K. has to make some big decisions quickly regarding its drug approval process, and those decisions could have an impact on biotech and pharmaceutical companies.
The U.K. could continue taking its cues from the EMA, like non-EU country Norway does, or it could bring its approval process in-house, like the United States. Given that autonomy was a key tenet of the Brexit campaign, it would be no surprise if the U.K. decided to cut ties with the EMA. The country already negotiates pricing directly with drugmakers, and the U.K.'s Medicines and Healthcare Products Regulatory Agency (MHRA) already works closely with the EMA on industry oversight. If the U.K. does take control of drug approval decisions as part of the Brexit, then that responsibility would likely fall to the MHRA.
However, that responsibility isn't what MHRA leaders wanted.
In May, MHRA chairman Sir Michael Rawlins warned of the "complexity and uncertainty" that would come with Brexit. In making those comments, Rawlins joined the CEOs of the U.K.'s AstraZeneca (NYSE:AZN) and GlaxoSmithKline (NYSE:GSK) in support of remaining in the EU in order to avoid roadblocks that could delay drug approval and patient access to medicine.
AstraZeneca and GlaxoSmithKline can't be faulted for their desire to stay in the EU. Every drugmaker on the planet prefers the low costs associated with centralized decision-making. If the MHRA gets in the drug approval business, then it will become more expensive and time-consuming for drug companies to get treatments on the market in the U.K. Worse, if the Brexit inspires other countries to lead the EU, then the drug approval process in Europe could unravel.
Earlier this year, GlaxoSmithKline CEO Sir Andrew Witty made the case for remaining in the EU by saying, "Europe has gone from 27 fragmented, independent, not-talking-to-each-other regulatory authorities in the healthcare space to one. That's a big deal." Clearly, fragmentation is not what Witty wants for his company.
AstraZeneca CEO Pascal Soriot seems to agree. Previously, Soriot has said that "Britain would be better off staying within the EU than outside of it." Ostensibly, that means it would be better for AstraZeneca, too.
The Brexit also jeopardizes the money that's flowing into the U.K. from the EU for biopharma research and development, so more research funds may be destined for other life sciences hubs.
Buy or sell?
Although uncertainty is rarely a good thing for stocks, it may be unwise to sell shares in healthcare stocks. Historically, investors embrace healthcare stocks when markets tumble, rather than abandoning them, because demand for treatment is not as closely tied to the economy as demand for other goods and services.
Additionally, while the costs associated with additional regulatory hurdles in the U.K. may dent future earnings at some companies, the U.K. market is far less of a needle-mover than the U.S. Therefore the Brexit's impact on the industry could be far smaller than some worry.
Investors should also remember that currency exchange doesn't affect all U.K. drugmakers the same way. For example, GlaxoSmithKline's financial results have enjoyed a tailwind as the pound has weakened against other currencies like the U.S. dollar. In Q1, GlaxoSmithKline's sales and EPS growth were 3% and 6% greater, respectively, because of currency exchange. Because the Brexit is causing weakness in the pound, those tailwinds could increase.
Overall, investors are usually best off when they employ long-term thinking. It's far better to focus on the rising healthcare demands of a larger and longer-living global population than it is to panic over the Brexit.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter where he goes by the handle @ebcapital to see more articles like this.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.