Threats of Investment Exodus Loom as Adverse U.K. Governmental Policies Pile Up

A combination of decisions and announcements made by the U.K. government could prompt the pharmaceutical industry to reconsider its investment and business options in the country. First of all, the government is considering a change to taxation on profits made abroad, which would come into force in April 2009, and U.K.-registered companies are worried that this could result in an increase in their tax bill. In addition, the government is considering introducing a tax on intellectual property (IP) licensed abroad, which is currently exempt from taxation. Whether directly linked to those announcements or not, British pharmaceutical company Shire, the country's third largest, has already taken steps to switch tax domicile to Ireland (see United Kingdom: 28 April 2008: Shire Posts 37% Increase in Pharmaceutical Sales During Q1, But Challenges Lie Ahead). Ireland appears competitive as corporation tax stands at 12.5% compared to 28% in the United Kingdom, and profits on foreign operations are not taxed, as reported by The Daily Telegraph. Ever since, there have been rumours that compatriot company AstraZeneca could be following suit, which the Anglo-Swedish giant has not seen fit to deny.

Another area of concern is that the government has served notice on the industry to end the current PPRS halfway through the term of the agreement in order to cut the National Health Service (NHS) drug bill (see United Kingdom: 7 March 2008: Dispensing Fee to Rise by 3.65% in England, Government Notice on PPRS Confirmed). In the Association of the British Pharmaceutical Industry's (ABPI) 2007 annual report, outgoing President Nigel Brooksby revealed that as a result, pharmaceutical companies have lost "business confidence" and have started "to question the integrity of the U.K. investment environment" (see United Kingdom: 24 March 2008: Uncertainty Over PPRS Contributing to U.K.'s Projected Slowdown in Pharmaceutical R&D).

As it stands, the United Kingdom fosters strong pharmaceutical R&D activity. Indeed, over 20% of new drugs originate from the United Kingdom, which makes the country the second most dynamic in the sector after the United States. According to figures unveiled in the ABPI's 2007 annual report, last year the pharmaceutical industry dedicated over £3.9 billion (US$7.7 billion) to drug development in the country. About 25% of all U.K. R&D activity was carried out by the pharmaceutical industry, which in 2007 invested one-third of its sales revenues into research. Nevertheless, a study from the ABPI also shows that the industry has already cut down on collaborations with the academic sphere. A survey of 11 top-pharma players conducted by the industry association showed that a total of 606 Ph.D. studentships and 327 postdoctoral fellowships were carried out in collaboration with domestic universities in 2007, down 14 and 25%, respectively, on 2003 figures. Close collaboration between the industry and academia has been the root of the country's R&D success.

Outlook and implications

In the current challenging global environment, the U.K. government is looking at increasing income through a change in tax rules and cutting spending through the renegotiation of the PPRS. In the case of the pharmaceutical industry, the government's plans will result in a squeeze in profits and greater outgoings. As it stands, the industry finds itself with little retaliation options but to threaten to move business to a more competitive environment, which could very well bear fruit.

On the tax front, an exodus of U.K.-registered companies, whether trading in the pharmaceutical or other businesses, would result in significant income loss for the U.K. government. A U-turn from the ruling party on the issue would not be all that surprising after the sweeping defeat that it suffered in last week's local elections and the change of direction announced on another tax reform, which has left people on lower income worse off. The government has already called to establish a working group featuring representatives from the country's industry heavyweights to look into the matter.

Another matter for consideration is that an R&D exodus would also hit the U.K. economy with lower investments and higher job losses. In addition, the country is unlikely to be willing to relinquish its position at the forefront of European pharmaceutical research just as the European Union (EU) has made a renewed commitment towards restoring the geographic area's status as the "world's pharmacy" (see European Union: 2 May 2008: EU Commission Joins Efforts with Pharmaceutical Sector to Boost R&D).

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