The Influence of Brexit on Operations of Global Companies in the Pharmaceutical Industry: the Cases of GlaxoSmithKline and AstraZeneca

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GOVERNMENT OF THE RUSSIAN FEDERATION

NATIONAL RESEARCH UNIVERSITY

HIGHER SCHOOL OF ECONOMICS

FACULTY OF WORLD ECONOMY AND INTERNATIONAL AFFAIRS

MASTER OF INTERNATIONAL BUSINESS PROGRAM

MASTER THESIS

The Influence of Brexit on Operations of Global Companies in the Pharmaceutical Industry: the Cases of GlaxoSmithKline and AstraZeneca

Student

Anna Zaysteva

Research Advisor

Alexandra A. Zhukova

PhD

Moscow 2018

Table of Contents

Introduction

1. Theoretical aspects of Brexit

1.1 Internal and external environment of global companies

1.2 Internal and external environment of global companies in the pharmaceutical industry

1.3 Impact of Brexit on operations of global companies in the pharmaceutical industry

2. The case studies featuring GlaxoSmithKline and Astrazeneca

2.1 Landscape of the pharmaceutical industry in the UK

2.2 Case study: GlaxoSmithKline

2.3 Case study: AstraZeneca

3. Findings and Recommendations

Conclusion

References

Appendices

pharmaceutical industry environment

Intoduction

United Kingdom is one of the leading countries in pharmaceutical industry.

Being a member of the European Union it has an access to the European single market where a single regulatory and legal system applies.

In 2016 Theresa May, a prime minister of the UK, declared that the UK is leaving the EU in 2019. This process was called Brexit.

Brexit may force the UK change the laws and regulations for pharmaceutical companies' operations, as this industry is highly regulated by governments, as well as, by health associations and other health organizations. At the same time there is a lack of academic research on Brexit as an influencing factor on the pharmaceutical industry, making this paper novel and relevant.

The object of our research is an internal and external environment of global companies.

The subject is an internal and external environment of global companies in pharmaceutical industry.

The purpose of the paper is to analyze the influence of Brexit on operations of leading companies in the pharmaceutical industry.

In our research, we put forward the following hypotheses:

Hypothesis 1. Changes in the regulation due to Brexit forces the UK -based pharmaceutical companies to relocate manufacture to one of the remaining EU countries.

Hypothesis 2. Changes in the regulation due to Brexit forces the UK -based pharmaceutical companies to relocate R&D (clinical trials) to one of the remaining EU countries.

Hypothesis 3. Changes in labour agreements regulation due to Brexit decreases the number of EU employees in the UK.

To prove our hypotheses, we use the examples of two global pharmaceutical companies GlaxoSmithKline and AstraZeneca.

To do it, the following tasks were set in the framework of the research:

1. To analyze existing research on internal and external environment for companies in general, and specifically in pharmaceutical industry. (Chapter 1).

2. To review existing research on companies' companies' operations in general and in the pharmaceutical sector. (Chapter 1).

3. To analyze existing research on aspects that can help define Brexit. (Chapter 1.).

4. To review existing research on “uncertainty” and how it influences the company's decision-making process. (Chapter 1).

5. To assess the landscape of the pharmaceutical industry in the UK. (Chapter 2).

6. To study a case of how Brexit influenced GlaxoSmithKline's operations. (Chapter 2).

7. To analyze a case of what impact did Brexit have on AstraZeneca's operations. (Chapter 2).

8. To give recommendations regarding the global companies in the pharmaceutical industry as well as to the future researchers. (Chapter 3).

The list of sources includes Porter, Duncan, Knight, Hague, McGrath and other scholars. We also used government analytical reports, as well as, analytical reports from consulting firms, such as PricewaterhouseCoopers, Deloitte and KPMG. Moreover, we used database of OECD, industry review by Euromonitor, and finally, for the case study we used annual and analytical reports from companies' websites, video and written interviews from companies' officials.

Regarding the methodology, libraries, Internet, database search were used and a case study.

1. Theoretical aspects of Brexit and its influence on companies' operations.

1.1 Internal and external environment of global companies

Duncan, as an organizational theorist, highlighted that organizations should adapt to their environment to continue operations. (Duncan, 1972). Before the researcher, the concept of “environment” existed, yet there were no specifications on organizational environment.

In his research, the environment is all the physical and social factors that are split into specific decision -making units that directly influence the decision-making behavior of an organization. (Duncan, 1972). Same author suggests, then, to differentiate internal and external environment.

Below we look at both in more detail.

Internal environment.

The internal environment consists of all the physical and social factors within the boundaries of an organization that directly influence the decision-making behavior of an organization. (Duncan,1972).

There are different aspects of internal environment and many frameworks created like Cultural Web (Johnson and Scholes, 1988) or Supply chain management framework (Meyr, Wagner and Rohde, 2004), but the first and well-known is Porter's Value Chain framework (Porter, 1990).

This framework shows all the activities of a company, dividing them into two types of activities.

Primary activities - inbound logistics (movement of raw materials from suppliers to manufacturing), operations (conversion inputs into outputs), outbound logistics (movement of a finished product from production site to the storage), marketing and sales, service(all the post-sale activities to keep a product working). (Porter, 1990).

Secondary activities - firm infrastructure (legal, finance, general management), HR management (recruiting, hiring, training, dismissing employees), technology, procurement (products or services outsourced in a company). (Porter, 1990). The main idea of the framework is that a product is moving through the chain of activities and at every step it gains some value. Below you can see a full graph of the framework. (Please, refer to graph 1).

Graph 1. Porter's Value Chain Framework

Source: Garrett, K. (2015), Value chains, value networks and supply chain management. - www.accaglobal.com.

Next we should take a closer look at external environment.

External environment.

The external environment consists of all the physical and social factors outside the boundaries of an organization that directly influence the decision-making behavior of an organization. (Duncan, 1972).

There are many researchers that looked at external environment of a company. Porter's Five Forces framework, for example, helped companies to understand how customers, suppliers, existing and potential competitors affect the decisions of a company. (Porter, 1989). However, this particular framework is focused on the market and its players, while there are forces that influence the market itself. The framework that has in it an entire encirclement of those factors is a PESTL framework. (originally Aguilar, 1965). This framework divides an external environment into the following factors: Political, Economic, Social, Technological and Legal.

To start, we should look at Political factors, that global companies consider for their decision-making. A company makes a full analysis on stability of a country, where it operates: “government stability, taxation policy, foreign trade regulations, social welfare policies”. (ACCA Business Analysis P3 Study text, ed. 2017-2018). One of the main factors that may stop a company from entering a market are corruption within the country, poor property protection laws and other laws relative to businesses (Sharan, 2011). The same is applicable to existing companies, which need to take into consideration those factors.

Second type of factors is Economic. Every company that operates on the market is influenced by the economy of government, where it operates. These are the factors that either make a country or an industry attractive to foreign investors and new entrants or, on the contrary, discourage them from doing it. Economic factors include: “business cycles, GNP trends, interest rates, money supply, unemployment rates, disposable income, government policy on trade and inflation”. (ACCA Business Analysis P3 Study text, ed. 2017-2018). When a country has a high inflation, interest rates also grow, thus, the cost of a loan is getting higher, while the purchasing power parity (PPP) of a currency falls, making foreign exchange risks also higher for a company (Kyrikilix, Pantedilis, 2003), that has at least a part of production outside the home country, let aside, for a global company. Finally, when companies are searching for economic stability, they are looking at labour and materials availability. The most common economic indicators to analyze the economic situation in the country are GNP and GNP per capita. (Gupta. 2007).

The third category of factors are Social ones. In general they include: “population demographics, income distribution, social mobility, lifestyle changes, attitudes to work and leisure, consumerism, levels of education.”(ACCA Business Analysis P3 Study text, ed. 2017-2018). Such factors can influence customers' choices on which products they prefer. It has been over time a reason for failure for many firms. Researchers especially point out a product not being cohesive with customers' preferences and taste. (Harrison, 2011).

Besides those, there are Technological factors. Fast development in technology has been effecting many organizations. (ACCA Business Analysis P3 Study text, ed. 2017-2018). A more technological product or way its of production help a company to gain a competitive advantage, producing with lower costs a higher quality product. (Karlsson. et al., 2015). We can include the following technological factors: “government spending on research, government and industry focus on technological effort, new discoveries/developments, speed of technology transfer, rates of obsolescence.” (ACCA Business Analysis P3 Study text, ed. 2017-2018).

Finally, there are Legal factors, where usually can be added regulations. A company that runs its business in many countries, should make sure it operates in accord with the existing laws and regulations of those countries. (Lewis, Richardson, 2001). The main areas to consider for companies are: “competition law, employment law, health and safety, product safety.” (ACCA Business Analysis P3 Study text, ed. 2017-2018).

To sum up, there are two types of environment: within an organization's boundaries (internal) and outside an organization boundaries (external).

Though, both types of environment were researched by many scholars, for our research we chose Value chain framework for analyzing internal environment of a company, since our research is linked to operations of global companies, where as for external environment we chose a PESTL framework (originally Aguilar,1965), because our research is linked to an external factor - Brexit.

1.2 Internal and external environment of global companies in pharmaceutical industry

In this paragraph we would like to look further at internal and external environment, but now specifically of a global pharmaceutical company.

To begin, we should give a definition to the pharmaceutical industry. Pharmaceutical industry is a part of life sciences industry. According to the 2017 report to the House of Commons Committee the life sciences include: “the application of technology and biology for the health improvement, including biopharmaceuticals, medical technology, genomics, diagnostics and digital health” (www.parliament.uk).

Furthermore, the report by PwC, using a standard industrial classification, provides a table of segments of life sciences industry.

Table 1. Segments of life sciences industries.

Segments	SIC groups
Pharmaceutical development and manufacture	· Manufacture of basic pharmaceutical products · Manufacture of pharmaceutical preparations · Wholesale of pharmaceutical products · Manufacture of other chemical products not elsewhere classified · Manufacture of other inorganic basic chemicals · Manufacture of other organic basic chemicals
Medical technology manufacture	· Manufacture of medical and dental instruments · Manufacture of irradiation, electromedical and electrotherapeutic equipment · Other manufacturing n.e.c. · Manufacture of electronic components · Manufacture of electronic industrial process control equipment · Manufacture of electronic instruments and appliances for measuring, testing, and navigation, except industrial process control equipment · Manufacture of medical and dental instruments and supplies · Manufacture of metal forming machinery · Manufacture of optical precision instruments · Manufacture of other electrical equipment · Manufacture of other fabricated metal products not elsewhere classified · Manufacture of other general-purpose machinery not elsewhere classified · Manufacture of other plastic products · Manufacture of other special-purpose machinery not elsewhere classified · Other business support service activities not elsewhere classified · Repair of electrical equipment · Repair of electronic and optical equipment
Life Sciences research	· Research and experimental development in biotechnology · Other research and experimental development on natural sciences and engineering · Other professional, scientific and technical activities (not including environmental consultancy or quantity surveying) not elsewhere classified · Other human health activities

Composed by the author using PwC' report “The economic contribution of the UK Life Sciences industry”.

According to this division, we also can see, that more than a third of all the SIC groups are occupied by the pharmaceutical industry. To summarize, pharmaceutical industry researches, develops, manufactures, and sells pharmaceutical products.

Referring to an international aspect of this paper, we should emphasize that pharmaceutical industry, being a part of life-sciences industry, operates globally and covers all the activities from research to manufacturing and distribution. (EFPIA, 2016). To explain the globality of the industry we use the example given in the CRA report prepared for the EFPIA, it shows that a new type of drug can be originally researched by the US team of researchers, who worked in collaboration with the UK and French academic centers, but then apply for a patent by a Belgium chemical company and after that it is sold to the Swiss pharmaceutical company, which manufactures its drugs in China, has a packing center in Germany, and finally this Swiss company has marketed the drug in collaboration with a UK company to be sold on the EU market. (EFPIA, 2016). This example proves that the industry is, indeed, global.

This fact can also be confirmed statistically: the Association of the British Pharmaceutical Industry (ABPI) that has 54 full member companies has only 6 companies with their headquarters in the UK, all the other members are headquartered in the EU and in the rest of the World. (ABPI member list).

Internal environment of global pharmaceutical companies.

Next to understand an internal environment, we examine existing research on this subject for pharmaceutical industry. Chand, Gupta and Gera proposed a common functional structure of a pharmaceutical company, where activities of a pharmaceutical company are divided into finance, research and development, purchases, human resources, production and marketing. (Chand, Gupta, Gera, 2014). Another approach was taken in the research conducted by Oracle, where R&D and production are shown in a more detailed way. Oracle, proposed a division of these two operations into R&D, clinical trials, and production, packaging (Heine, 2014). Finally, Aitken proposed a modified value chain framework that specifically targets a pharmaceutical company. (Please, refer to Graph 2). He explained that all pharmaceutical company's activities should be divided into three main components: manufacturing of a medicine, distribution and dispensing to the end user.

If in Porter's Value chain operations meant conversion of inputs into outputs (Porter, 1990), Aitken argues that since pharmaceutical company is very technological industry and to produce a medicine is a complicated task, operations or manufacturing is divided into: initial research, development (clinical trials), achievement of regulatory approvals to be marketed in a market. (Aitken, 2016). Finally, R&D includes methods of raising capital to perform research and development of a new product. (Mebius, Boykov, 2014).

Table 2. Value chain framework of a pharmaceutical company

Source: Aitken, 2016

According to this data, we can split our analysis of operations of a pharmaceutical company into the same categories.

Research and Development.

As it was already mentioned, research and development in any company, including a pharmaceutical one, starts from finding an appropriate funding. (Mebius, Boykov, 2014). Since pharmaceutical industry is a high-technology industry, many investors are funding R&D. There are four main sources of funding R&D, described for the first time in the “Frascati” Manual, also on the basis of these sources' funding of R&D quantifiable indicators were created:

1) Business enterprise (BERD)

2) Higher education (HERD)

3) Government, which includes research councils (GovERD)

4) Private non-profit organisations (PNP).

These indicators (each of which we would explain below), then, together are known as gross domestic expenditure or GERD. (Please, refer to Table 4).

To begin we should look at funding by business enterprises. According to the “Frascati” Manual, business enterprise sector is accountable for the largest share of R&D expenditures. Referring to the same source, business enterprise sector composed of:

· “All resident corporations, including not only legally incorporated enterprises, regardless of the residence of their shareholders. It includes both private business enterprises(both publicly listed and traded, or not) and public business enterprises (government-controlled enterprises).

· The unincorporated branches of non-resident enterprises deemed to be resident and part of this sector because they are engaged in production on the economic territory on a long-term basis.

· All resident non-profit institutions (NPIs) that are market producers of goods or services or serve business. “ (“Frascati” Manual, 2015, p.32).

Looking specifically at pharmaceutical industry, OECD data suggests that for five years (2011-2015) there was a large increase in BERD, especially in China, where BERD grew almost three times from 5 to 13 billion dollars. (Please refer to Table 2).

Table 2. BERD performed in pharmaceutical industry (millions $).

Country	2008	2009	2010	2011	2012	2013	2014	2015
United States	48 131	44 936	49 415	45 949	48 146	52 426	56 612	58 675
Japan	11 088	10 364	11 431	11 446	12 526	14 186	14 510	14 185
China	3 255	4 297	5 035	6 026	8 038	9 805	11 113	12 693
United Kingdom	6 158	6 243	6 6045	6 869	5 994	5 869	5 618	5 990

Created by the author using OECD data.

However, if we look not at absolute numbers, but at the percentage of Businesses' investments in pharmaceutical industry, leaders are United States and United Kingdom, with the only difference, that there was a steady growth in BERD in the US from 2011-2015, while in the UK there was a decrease of 7% in the same period of time. (Please refer to Table 3).

Table 3. Percentage of BERD performed in pharmaceutical industry.

Country	2008	2009	2010	2011	2012	2013	2014	2015
Japan	9,50	9,96	10,62	10,02	10,73	11,32	11,01	10,65
United Kingdom	27,18	28,37	28,84	27,86	24,59	22,12	19,69	20,00
United States	16,56	15,91	17,71	15,62	15,93	16,25	16,62	16,49
China	3,04	3,17	3,21	3,21	3,61	3,83	3,88	4,06

Created by the author using OECD data.

Secondly, higher education funding councils can invest in pharmaceutical industry, and in R&D specifically. There is a positive tendency in the growth of funding by Higher education (HERD). According to Euromonitor, there is a shift towards universities partnerships with big pharmaceutical companies. In the UK funding is provided by higher education funding councils for England, Scotland, Wales, Northern Ireland and other seven UK research councils. (GDP on R&D UK, 2016 - (https://www.ons.gov.uk).

Thirdly, since pharmaceutical industry is highly regulated by government, government and research councils are also investors in the sector. The UK government is making commercial investments, moreover the UK, being a part of European Union, received large amounts of money on R&D, for example Horizon 2020. (Academy of medical sciences, British Academy, Royal Academy of engineering, Royal Society, 2017 - https://royalsociety.org).

Finally, private non-profit institutions have been funding pharmaceutical industry: charities, trusts, specializing in medical research.

To conclude, there are two main sources of funding R&D in a pharmaceutical company: businesses (BERD) and higher education (HERD). Though BERD has the largest part, there is a tendency to HERD growth. Finally, as pharmaceutical industry is a matter of public health, it has many government support programs.

After analizing sources of R&D funding, we continue and assess R&D deaper. In the “The Frascati Manual”, firstly adopted in 1963 and prepared by the experts from OECD, proposed the most common and wide used definition of R&D, highlighting the creation and novel use on knowledge. (Frascati Manual, OECD. 2015.) According to Frascati the process of research and development can be split into three activities: basic research, applied research and experimental development. (The Frascati Manual, OECD, 2015).

To be more precise, basic research means theoretical or exploratory work that is assembled principally to gain new knowledge of the underlying basis of phenomena and observable facts, without any specific application or use of it. (The Frascati Manual, OECD, 2015). Applied research has the same characteristics as a basic one, but has a particular role to be used in specific case, while experimental development is “systematic work, drawing on existing knowledge gained from research and/or practical experience, that is directed to producing new materials, products or devices; to installing new processes, systems and services; or to improving substantially those already produced or installed.” (The Frascati Manual, OECD, 2002).

For our research we would look at the third mentioned type of R&D, that has a purpose and is dedicated to production of new goods. Pharmaceutical industry is a research-based industry. International Federation of pharmaceutical manufacturers and associations in its report gives a detailed structure of R&D process, precisely, R&D is divided into three steps:

1) research (drug discovery, preclinical testing) - it takes about 3-6 years with 21,5% share of budget spending and less than 0,01% chance of success.

2) development (clinical trials) - duration o 6-7 years with the share of budget expenditure up to 65% and 40-65% success chance, based on phase of clinic trials.

3) approval (regulatory review, scale-up to manufacturing) - takes about 0,5-2 years with 3,5% share of total budget. (IFPMA, 2017) The approval step can also be called a transfer of technology, defined by the World Health Organization as “a logical procedure that controls the transfer of any process together with its documentation and professional expertise between development and manufacture or between manufacture sites”. (Annex 7. WHO guidelines).

Main source of pharmaceutical R&D operations are OECD countries. Looking at the GDP share for the R&D spending in the industry, Japan has a leading position in the percentage of spending on R&D, followed by the United States and China, with are both important players on the pharmaceutical market. (Please refer to Table 4).

Table 4. Gross domestic spending on R&D (total, % of GDP, 2006-2016)

Country	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Japan	3.278	3.340	3.337	3.231	3.137	3.245	3.209	3.315	3.400	3.278	3.141
United States	2.550	2.627	2.767	2.819	2.740	2.770	2.689	2.725	2.734	2.740	2.744
China	1.369	1.373	1.445	1.662	1.710	1.775	1.906	1.990	2.021	2.067	2.118
EU	1.683	1.692	1.758	1.836	1.835	1.877	1.913	1.922	1.948	1.959	1.936
UK	1.586	1.627	1.631	1.691	1.669	1.675	1.603	1.648	1.666	1.674	1.688

Created by the author using OECD data.

However, we should also consider absolute number of dollars spent on the R&D by every country. (Please refer to Table 5).

Table 5. Gross domestic expenditure on R&D - GERD (millions $)

Country	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
United States	353328	380316	407238	406405	410093	429792	434348	454821	476460	496585	511089
China	105564	124199	146114	185300	213485	247808	292196	334116	370589	407415	451201
EU	249479	266706	290710	297063	308001	328461	340937	355322	371185	383907	392202
Japan	138738	147487	148719	137341	140619	148389	152325	164656	169554	169673	168644
United Kingdom	33284	35204	36542	36424	37573	38778	38490	41532	43811	45344	47244

Created by the author using OECD data.

The United States is a leader in spending on R&D, referring to the Table 5, spending grew almost two times in 10 years. The global pharmaceutical research-based industry had invested about 150 billion dollars in R&D of pharmaceuticals in 2015. (IFPMA, 2017). Consequently, the pharmaceutical industry had spent billions of dollars on R&D, even during financial crisis and economic turmoil: comparing pharmaceutical with other high-technology industries, the annual expenditure is 5.5. times higher than in aerospace and defense industries, 5 times greater than in chemicals industry, and 1.8 times larger than in software industry. (IFPMA, 2017). In 2014 there were registered 7 691 patents in pharmaceutical industry by the World Intellectual Property Organization and no other industry has such high levels of research and development intensity (IFPMA, 2017). The US, as a leader, expends on R&D more that any other industry, the R&D intensity in the pharmaceutical industry there was 17,1%, while in the EU it was 13,3%. (IFPMA, 2017). Moreover, the Evaluate Pharma 2016 report showed that from 2011 to 2015 the global spending grew from 138 billion dollars to 150 billion dollars with an increase of about 5% in R&D spending in 2015 compared to the previous year. (Evaluate Pharma report, 2016).

The spending on R&D also grew in Asian markets, such as Chinese and Japanese: especially there is a rapid growth in Chinese market, that grew by 10%, compared to an average market growth of 5% in EU and US. (EFPIA, 2016).

However it is noticeable, that there is a very insignificant change and absence of innovation in the medicines approved. (Shehwar, 2016). The main tendency in the industry is an increased focus on generic research (“Generics are usually produced by a manufacturer who is not the inventor of the original product, and are marketed when intellectual property protection rights are exhausted.” - EFPIA, 2016). The process of registration a generic pharmaceutical product is much easer and cheaper for companies, however, the selling price is also lower. (Kumar Badjatya, 2013).

In the UK this industry has been successful in terms of research on the development of new drugs due to its laws on regulation, academic strength of researchers and industrial strategy. (EFPIA, 2016), that is why United Kingdom became one of the scientific research leaders in the world, at the same level as the US and China. (Galsworthy, Davidson, 2016). About 10 percent of global pharmaceutical R&D is performed in United Kingdom's laboratories. (Deloitte, 2018). The growth of generic medicine is noticeable also in the UK, market share of generics has doubled over ten years and is still growing, moreover the UK government encourages to prescribe generics, if possible to reduce delays and low the cost of medicine. (Deloitte, 2018).

After the development of a new product, and cost analysis of a product production, a new medicine should be scaled-up to mass manufacturing. It is crucial to understand that the transfer of product from development to production is a part of operations of a global pharmaceutical company, especially vital part of this process is to follow all the regulatory requirements of the countries. First of all, after successful clinical trials, pharmaceutical product receives a marketing authorization, and only after that it is allowed for human use. (Bueno, 2017).

Manufacturing.

Common manufacturing operations of a pharmaceutical company can be divided into several processes: dispensing, counting, manufacturing and packaging. (Please refer to Table 6).

Table 6. Typical layout of a secondary pharmaceutical manufacturing plant scheduling

Created by the author using table from Production scheduling in pharmaceutical industry by Venditi, 2010.

Dispensing is a process of preparing all the needed materials to manufacture a pharmaceutical product (Venditi, 2010): finding supplier, finding a location to store raw materials. This type of operations can also be called purchases.

After a company secured and prepared raw materials, the process of manufacturing starts. Since the original development of a pharmaceutical product is very complex and expensive, production specialists should provide an economically adaptable process for mass manufacture. (Pharmaceutical and Medicine Manufacturing Industries - https://collegegrad.com). The manufacturing in pharmaceutical industry is very automated, and most production employees are responsible for quality checks to ensure the quality of products.

After the manufacture of medicine, packaging starts, there the main thing considered by a company is to prepare packages according to the international standards, taking in mind special requirements of different countries. (WHO report, 2002).

To conclude, value chain in a pharmaceutical industry differs from the original framework, suggested by Porter, as well as operations in a pharmaceutical company consist of many more parts, that in the original framework. The main parts of operations of a pharmaceutical company are research and development, receipt of regulatory approvals, manufacturing of a medicine.

After we assessed internal environment of a global pharmaceutical company, especially operations its operations, we move on to the assessment of external environment.

External Environment of global pharmaceutical companies.

Since in the beginning of our research, we chose a PESTL framework (originally Aguilar,1965) to analyze factors of external environment, we continue using this approach to the pharmaceutical industry. As the focus of the paper is on the pharmaceutical industry in the EU, we will look at it in a more detailed way.

Political aspects.

As pharmaceutical industry is one of sectors that are interlinked with public health, it is regulated by governments and, thus, there is a political impact on operations of a company, especially a global one. (Pharmaceuticals Sector Fiche, 2011).

First of all, governments are introducing tariff and non-tariff barriers to enter the market, that influences research and development (please, refer to “legal and regulatory” aspects), manufacturing (please, refer to “legal and regulatory” and “economic” aspects) and trade (please, refer to “economic” aspects).

Another political factor that also has an economic and financial side is a dedicated budget to each industry by government. In the EU exists budget for funding of academic research, including research of new pharmaceuticals and about 16% of that budget for all the EU research and development is spent in the UK, including the pharmaceutical industry (PwC report). (please, refer to “technological” espects). (http://www.europe-economics.com/).

To summarize, we can see, that the main operations influenced by politics, are R&D with regulations that control patents, manufacture because of trade barriers set by governments, financial due to impact of government funding for companies.

Economic aspects.

Any pharmaceutical company, that operates globally, is exposed to economic issues, that may arise. Main type of operations that need to take into consideration economic aspects are technology transfer and manufacturing. Main components here are imports of raw materials and ability to export finished goods.

In 2015 pharmaceutical goods were one of the most exported and imported products from the UK to the European Union, with the exports valued 15 billion pounds, when the total exports with the EU were 229 billion pounds. (House of Commons Library - Statistics on UK-EU trade, 2017). Currently European Union and UK, being a part of it, has a pending market authorisation, meaning, that product can be shipped directly to or from the EU without any further approvals. (PwC report). For products manufactured outside the EU, there are tariff (duty rates on active ingredients and finished products) and non-tariff trade barriers (full testing by the EU authority to be marketed) and if the first type is almost eliminated in the EU, US and Japan from 1993 and enforced by the WTO pharmaceutical agreement, the registration barriers are the most common ones to affect operations of a company. (Pharmaceuticals Sector Fiche, 2011).

Commonly trade barriers lead to the change in prices and, thus, make a country less able to compete according to comparative advantage, which lowers efficiency and size of output. (D. Ricardo, 1817). Those trade costs can also reduce the choice of products and losing economies of scale, leading to increase in prices. (Krugman, 1979). For the country itself, though sometimes the trade barriers are used to protect a particular industry or a company, they lead to a decrease in the welfare of the country. (D. Ricardo, 1817).

However, since the pharmaceutical industry is linked directly to public health, it is highly regulated by governments, also in terms of price. In the EU each member state sets a price level for each pharmaceutical product. So, if there are high costs to sell a product on a market because of high trade barriers, a company may just stop entering that market or production itself. Other consequence of it, is a parallel importation, meaning that a non-EU companies can buy pharmaceutical products from EU-member country where the price is lower, and then resell it to a more expensive EU member country with a profit. (Norton Rose Fulbright. Impact of Brexit on life sciences and healthcare. 2016). The example that was researched by Ganslandt and Maskus was the trade of pharmaceutical products in the Sweden before and after it joined the EU. The results showed that parallel imports in Sweden reduced the prices on the domestic market upon joining the EU.(Ganslandt, Maskus, 2001).

To conclude, we can say that trade barriers influence technology transfer speed and cost, they have a negative impact on manufacturing, making it more expensive, while setting a tough regulation on price.

Technological aspects.

As pharmaceutical industry is connected to public health, it is highly regulated by governments, thus, government is a very influential figure in amount of spending on the R&D and new discoveries.

In the EU there is a budget for funding of academic research of new pharmaceuticals and more than 15% of that budget for all the EU member-countries is spent on the UK, including the pharmaceutical industry (PwC report). (http://www.europe-economics.com). EU also provides for country-members access to the Horizon 2020 program. It is a European R&D pharmaceutical funding program, that is developed by the Innovative Medicines Initiative (IMI), funded by the EU. The first step of the program started in 2007 and funded pharmaceutical research for more that 2 billion euros, the second step of the program started in 2014 and will continue till 2024 with the budget of 3.3 billion euros. (http://www.europe-economics.com).

Though the EU has many support programs for faster development of new medicine, its many layers of regulations, can make a process of creating a finished pharmaceutical product lengthly.

To conclude, we can say that pharmaceutical industry has a technological aspect and R&D operations are influenced by the amount of government funding on R&D and its regulatory side in terms of technology transfer's speed.

Legal and regulatory aspects.

As pharmaceutical industry is a highly regulated, legal aspects penetrate all the types of company's operations. Currently it is regulated by industry codes of practice, laws, regulations that are different in different countries. (Ancevka, Grozdanova, Dabovic, 2015). These regulations and laws operate at national and state levels.

The main authority that controls pharmaceutical industry is the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA, 2016), having its own global Code of practice, that is empowered in every market it operates, even if there are no legal controls on the national level. Many global pharmaceutical companies are members of this agency, meaning that these companies would be bound by the Code of practice, while local companies may not be obliged to follow them. (Ancevka, Grozdanova, Dabovic, 2015)

When we look at laws and regulations on pharmaceutical products in the EU, there is a network of 31 EEA countries with more than 50 regulatory authorities, that control the EU pharmaceutical market. The main idea of this network of authorities is that all country-members follow the same set of rules. (EMA, 2016). These rules have an impact on operations of companies that wish to market their goods on the EU market.

The first type of operations that are influenced by regulation is Research and development:

Firstly, the EU pharmaceutical products are covered by the Unitary Patent, created to protect new medicines and medical devices. (Clariton Solicitors Limited-).

Secondly, all the medicine should be tested and certified in accordance with Global Manufacturing Practice (GMP) and receive the marketing authorization to enter the EU market. (EMA, 2016).

Finally, every business that will under the General Data Protection Regulation (GDPR), including the life science and pharmaceutical industry would be affected by the Brexit, as under this regulation the data can only be transferred outside the EU to the countries that are approved by the European Commission and provided the evidence that they have an “adequate” level of personal data protection, and since the UK will no longer be a EU country in 2019, it may become a barrier for the UK pharmaceutical industry, as it uses personal data. (Greenall, 2018).

To receive the marketing authorization, the Agency's Committee for Medicinal Products for Human Use (CHMP) or Committee for Medicinal Products for Veterinary Use (CVMP) performs an analytical assessment of a pharmaceutical product, after that the European Commission carries out a final decision on whether or not to authorize the product. (EMA, 2016). If authorization received, it is valid across the EU.

If, however, medicine was produced outside European Union in order to import it to the EU, it has to be fully tested again in the EU, with the exception of countries, that have a mutual recognition agreement (MRA) with the EU. (EMA,2016).

After receiving marketing authorization, financial operations of a company are in motion, as all the decisions about price are made there. In the EU this aspect is also regulated, however on a state level. (EMA, 2016).

After the development of a product, it is manufactured. This process also has many layers of regulations to enter the EU market. The manufacturers of pharmaceuticals, including those outside the EU, that want to enter the EU market, should bypass the inspection, that is accessed by all country members of the EU and is made available for public knowledge across European Union. (licenses are entered into the publicly available European Medicine Agency database).(EMA, 2016 ).

Packaging, being a part of manufacture, is also an aspect regulated on international level, here companies need to follow international standards, but also taking into consideration special requirements of different countries. (WHO, 2002).

Also, the EU has a special court for patent disputes - Unified Patent Court (UPC), that makes the process of patent disputes easier and less costly (Moore et al for PwC, 2018), thus, it has impact on technology transfer operations.

To conclude, the main aspect of an external environment for operations of a global pharmaceutical company are legal and regulatory aspects, as regulations control all the chain of operations and influence its speed and cost.

Finally, there is usually a social aspect, discussed as a part of PESTL analysis (originally Aguilar,1965), however, since our research is focused on influence on companies not countries or people, we decided not to include it in the framework of our research.

1.3 The impact of Brexit on the pharmaceutical industry

In this chapter of our research we would look at the existing papers written by other researches on how Brexit would influence the operations of global companies in the pharmaceutical industry, we will look more deeply at the situation in the EU. Due to the lack of academic papers on Brexit specifically, we used research papers on the subjects that are part of Brexit. The reports of consulting companies, and analytical government reports were used for the overview of Brexit.

First of all, we should look at the definition of Brexit, given by different sources.

The Oxford English Dictionary states, that Brexit is withdrawal of the United Kingdom from the European Union, and the political process associated with it. Sometimes used specifically with reference to the referendum held in the UK on 23 June 2016, in which a majority of voters favored withdrawal from the EU. (OED).

The referendum on UK membership in the European Union, known in the UK as the EU referendum or the “Brexit” referendum, was held in the UK and Gibraltar on June 23, 2016. (https://www.theguardian.com).

During the referendum in 2016, 51.9% voted for the withdrawal of Great Britain from the European Union, 48.1% of voters supported the continuation of membership in the EU, respectively. (R.Schuman, 2016)

The UK is a first country that is preparing to cease being a member of the European Union. This process was called “Brexit”. It increased the level of uncertainty on such issues as trading agreements, regulation and immigration policy between the UK and the EU. (Coulter and Hanckeì, 2016). Also the Brexit brings a legally complex and very unpredictable outcomes, partly due to the fact that there was no pre-planning by businesses. (Barnard, 2017).

As a result Brexit can be defined as a multivalent concept which its implications and meaning are unsettled. (Brown, LinÞares Zegarra, and Wilson, 2018).

Since we understood that the main problem of Brexit is that it brings uncertainty in what approach will be taken by the UK government, we should analyze which particular uncertainties it brings.

To do this, we should first give a definition to the uncertainty itself. It “is “\used by economists to refer to any situation in which a set of alternative outcomes is not fully predictable”. (J. Gould & W. L. Kolb Dict. Social Sci. 606/1, 1964). However, the word “uncertainty”“ is widely used in everyday speech, and some times inappropriately.

F. H. Knight proposed that there should be a separation of two terms: risk and uncertainty. The main difference there is that uncertainty is not measurable and, thus, is used to the non-quantitative information. Risk, on the other hand, is a situation where a set of different outcomes can be identified and their probabilities can be measured. (F. H. Knight,1921). Situation of uncertainty is also called a non-insurable risk (D. C. Hague, 1969), meaning that uncertain situations lack insurance, while risky ones don't. Therefore, in a situation of risk, even though it is “uncertain”, there is more information available.

McGrath suggested a theory of Real Options should be used to deal with uncertainty. To be more precise, it stated that there were two types of uncertainties: one, that can be reduced by an investment, and the other, that remained unchanged whether investing in it or not. (McGrath, 1997, p 102)

In the paper two examples are given,

1) A “technical” uncertainty, it should be reduced by an investment.

2) An “external” uncertainty, where it is suggested a “wait and see” approach. (McGrath,1997, p 102).

These examples mean that in the situation of uncertainty one should first “invest” a small amount and postpone a full decision until more information appears. (Atkins and Anderson, 1999).

In McGrath's view, then the uncertainty is a situation where there are different outcomes that may arise, but no one has any information which one. And if so, a decision-maker should return to the decision later, when more information is available on the issue. (Atkins and Anderson, 1999).

Researchers from different backgrounds, such as strategic management, economics and phycology have been trying to understand how uncertainty influences decisions of companies. (Duncan, 1972; Dequech, 1999; Wiltbank, Dew, Read and Sarathvath, 2006; Jurado and Ludvigson, 2015).

The approach “wait and see” is quite common in management of a company, however argued is not always enough for making a right decision, thus, introducing a new possibility to fail despite the use of the mentioned approach. (Atkins and Anderson, 1999, p 39).

Another important issue risen is the diversity of decision-makers. (Diamond and Stiglitz 1974, p 337). The problem with McGrath's view is that it is assumed that decision-makers are neutral to risk. (McGrath, 1997). However, it is clear that some are more risky than others. A “risk-adverse” decision-makers would be more satisfied with a lower, but guaranteed, return on their investment (decision) than on a higher, but with uncertain probability. (Atkins and Anderson, 1999).

As we can see, the approach that is suggested for the companies to deal with the uncertainties, is a “wait and see" approach. We also understood that Brexit is a complicated process and that the problem with forecasting any consequences of Brexit is the lack of historical precedents, similar to it. There were countries, that left the EU ( Algeria in 1962, back when EU was the European Communities, and Greenland in 1985). However, none of them were similar to the UK leaving the European Union.

Politicians talk about two post-EU arrangements of how Brexit may go: Soft and Hard Brexit.

Soft Brexit is a term used for explanation of the UK's relationship with the EU after the UK is no longer a member, but the UK would still “retain economic ties, make budgetary contributions, and allow free movement of people.”( Cambridge Dic).

Where as, hard Brexit is a term used for explanation of the UK's relationship with the EU after the UK is no longer a member and “stops being a member of the European single market and gets a full control of its own law-making and immigration”. (Cambridge Dic). As a result, Hard Brexit means that the UK will follow World Trade Organisation (WTO) rules for trade with the remaining EU countries. (Sims, 2016).

In our research, we would focus on a scenario of a “hard” Brexit and its impact on business operations of global pharmaceutical companies.

In order to do it, we should divide all the possible implications of Brexit for operations of global pharmaceutical company into logical parts. To do it, we will use a modified by the author PESTL framework (originally Aguilar, 1965), explained in a previous subchapter, taking out a social factor, leaving us with the division into: legal and regulatory, political, economic and technological.

Political aspects.

Some experts argued that for the UK government the decision of leaving European Union could become a waste of about thirty years (became a member of EU in 1993) (https://europa.eu - the UK) of hard work to be present at the single European Union Market, yet not to be a part of Schengen or Euro Zone. (R. Boyer, “Brexit: the day of reckoning for the non-functionalist paradigm of European Union”).

As a member of European Union the United Kingdom has an unlimited access to the European Market of goods, services, capital and labour without any entry barriers. Britain's withdrawal from the European Union was the main political goal of the conservative opposition and some individuals (nationalists and euro skeptics) in Britain. (https//csef.ru).

European Union provided for the UK and its other members' common rules, enforcing, for example, intellectual property protection for all industries and if a company received such a patent it was legitimate across the EU. The best thing about it was that the rule could be amended in a single legislative process, thus, saving time and making a process cheaper. However, since the UK will no longer be a part of the EU in 2019, some experts believe, that it will have to negotiate a conditions of trade on every topic with each and every countries, as it did Switzerland, having 120 different treaties with EU. (Bruton, 2017). Such scenario of renegotiating every deal for every industry, including pharmaceutical, is a lot of work. Fairobserver, that investigated this issue, believes, it would take from both countries a very big effort in a political sense. (Bruton, 2017).