Historically, healthcare stocks such as GlaxoSmithKline (NYSE:GSK) and AstraZeneca (NYSE:AZN) have been considered safe havens in tough economic times because they don't tend to move as violently on economic pops and drops. However, global healthcare companies were sent into retreat by the U.K.'s decision to exit the EU last week. Can the healthcare sector survive the Brexit? Or will the challenges facing the sector be too big?

In this clip of The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by contributor Todd Campbell to discuss the Brexit vote and what its impact may be on this important sector.

A transcript follows the video.

 

This podcast was recorded on June 29, 2016.

Kristine Harjes: You could see, looking across the broader market, that all of the major indices were down on this news. How, specifically, did healthcare fare?

Todd Campbell: What's interesting to me, and I think that investors need to remember, that typically in times of trouble, investors seek out defensive areas of the market. One of the most defensive areas of the market is healthcare. If you need healthcare, you're probably not going to focus too, too much about how much money is in your wallet. You're still going to get that.

There's an inelastic relationship to the economy that provides a little bit of insulation to healthcare stocks. That's especially true in European markets where you have a single-payer system. Theoretically, the impact on each individual patient's wallet is even smaller.

Healthcare stocks, however, didn't climb in the wake of Brexit. They declined. There are a number of different reasons for that. If you look at companies specifically, you had GlaxoSmithKline trade down about 2.9% since the vote. You got AstraZeneca down 1%. You've got biotech stocks overall down much more than that, down 4%. You've got pharmaceutical companies down much more than that, down 2.9%. Healthcare stocks, which are typically viewed as defensive, they still fell.

Harjes: You mentioned GlaxoSmithKline and AstraZeneca. These are U.K.-based companies. Both of their leaders had come out previously saying that they don't think that this is a good idea for Britain to leave. Glaxo's CEO, Sir Andrew Witty, said earlier this year that, and this is a quote, "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!"

AstraZeneca, meanwhile, their CEO said, and another quote, "Britain would be better off staying within the EU than outside of it." These guys make their points pretty clear. They're not going to be happy now.

Campbell: As CEOs in publicly traded companies, what they're really saying is when they say that Britain would be better off, they're saying: "Our company would be better off, too."

I think that, broadly speaking, if you look at the people who wanted to remain in the EU -- the scientific community, including people who are involved in healthcare research and development, overwhelmingly wanted to remain in the EU both for the advantages ... in free trade, but also because there's been a big push over the last decade to turn London into a healthcare powerhouse of innovation on par with, say, Boston in the United States.

Harjes: Yeah, London has absolutely been a hub for a couple of reasons. There's enormous research presence there. That's something that we'll talk about a little bit later in the episode. Another really interesting part of this story is that the EMA, the European Medicines Agency, is based in London.

Campbell: To talk a little bit about this, because there are some implications of the Brexit that are going to impact patient care, or potentially could impact patient care. One of them is the fact that the United Kingdom relies upon the EMA to vet drugs that could be used in U.K. patients. The EMA is charged with either approving or rejecting drug approvals. That's one of the reasons GlaxoSmithKline and AstraZeneca want to remain. It's one single regulatory body. They don't want to have to--

Harjes: For the whole EU.

Campbell: --go ahead and pitch this to three different bodies.

Harjes: They cover the entire EU. in one single marketing authorization application. Now they're going to have to leave. They can't continue to be based in London if they're not part of the EU any more.

Campbell: The EMA is probably going to end up somewhere in France, or in Germany. Sweden would like to have it. Everybody is trying to figure how they can have it. There's a big infrastructure in London, in science, and in healthcare regulation. Hundreds of scientists from all around Europe, including areas that could theoretically -- it could be harder for them to travel to and from.

There's all sorts of implications that could come because of this. Obviously, the U.K. has some infrastructure on its own. It's got a body that negotiates prices directly with drugmakers. It's got another body that's responsible for making sure that manufacturing that occurs in their country is done appropriately.

Theoretically, they could choose to set up a system similar to the FDA here in the United States, or they could just do what Norway does and say, "OK, we're independent. We're not in the EU, but we're still going to cut a deal with you to be able to rely on the EMA to vet the drugs."

Harjes: Yep, those are the two options that they're faced with now. They could go the Norway route. That would be letting it stay largely the way it is now. The other option here, that you mentioned, is if you had an agency like the Medicines and Healthcare Products Regulatory Agency take over, that would probably make drug approval a heck of a lot more costly and time-consuming. 

Of course, this regulatory body also does a lot of work underlying many of the EMA reviews, particularly when it comes to patient safety. If you look at it from the perspective of the EMA, they probably don't want to lose the work that the U.K. does, either.

Campbell: It's going to be very interesting to see how the negotiations play out on this. One of the key tenets of the European Union is the freedom of movement of both goods and people. Brexit was about the restriction of the movement of goods and people. I'm very curious to see how this shakes out. We don't know.

You hinted, or you said actually, that one of the concerns that CEO Witty and these other companies have is that if I have to go out now and I have to apply for approval in multiple countries, independent, no longer using the EMA, that's going to increase my costs, make my drugs less profitable. I also now have to consider if I'm manufacturing drugs in the U.K. and I want to distribute them throughout the EU, what things change now in regard to that? Am I going to have delays in getting product from, say, the U.K. to Germany? Am I going to have to worry about additional border regulatory restrictions on the movement of goods that could also impede my profitability?

Of course, then there's a currency component to this. If the currency in the U.K., or the euro falls, versus other areas of the world, then that could take a short-term toll on revenue and profitability as well. 

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. 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.