How Does Brexit Impact Healthcare Stocks?

Now that the UK has decided to leave the EU, the global market is in turmoil leaving everyone jittery about the impact of this decision. Some of the immediately pressing concerns are a possible recession in the UK, unemployment woes, a plunging pound, and uncertainty regarding M&A deals in the UK among others.

A big question is how will Brexit impact drug companies?

The first thing that comes to mind is the impact of Brexit on the drug approval process in the UK and EU. Currently, the European Medicines Agency (EMA) looks into the approval process under a centralized authorization procedure which allows drug companies to submit a single marketing authorization application to the EMA. Under this process, the companies are able to market their medicines throughout the EU on the basis of a single marketing authorization thereby saving cost and time.

But with Brexit, a lot now depends on whether the UK will remain within the ambit of the EMA the way countries like Norway are or whether the UK will set up its own regulatory authority for drug approval. If the first scenario prevails, the approval process will continue as it is. However, if the UK sets up its own regulatory agency, the approval process could end up being lengthier as well as more expensive for companies seeking UK and EU approval for their drugs.

Meanwhile, the EMA, which is based in London, will now have to look for new headquarters.

Another factor that could be impacted by Brexit is the flow of research funds into the UK from the EU. With Britain exiting the EU, more of these funds could be diverted to other countries or research hubs.

On the other hand, the falling pound should prove to be a tailwind for companies like GlaxoSmithKline plc GSK. Moreover, most of the drug companies generate a major part of their revenues from the U.S. though companies like Alexion Pharmaceuticals, Inc. ALXN, Vertex Pharmaceuticals Incorporated VRTX, Celgene Corporation CELG and BioMarin Pharmaceutical Inc. BMRN among others do generate quite a bit of revenues from Europe. Nevertheless, that should not be a cause for concern in the long-term as factors like an aging population, growing medical needs, and easier access to medical products will continue driving demand for healthcare products.

While Brexit does create economic uncertainty and there could be some near-term volatility in the sector, the general verdict is that Brexit’s impact on drug stocks will be limited. What could end up being more concerning is the exit of additional countries from the EU.

Glaxo, Celgene and BioMarin are all Zacks Rank #3 (Hold) stocks, while Alexion is a Zacks Rank #4 (Sell) stock and Vertex a Zacks Rank #5 (Strong Sell) stock.

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