What would be more detrimental to the bottom line of a global drug company, trade limitations that restrict product distribution or constrictions in the scientific talent pipeline resulting from isolationist policies? Among other things, it depends on the time horizon in question.
Management at UK-based AstraZeneca appears most concerned with the immediate implications of a hard Brexit on the ability to distribute pharmaceuticals across the globe. In fact, the company’s most recent annual report mentions the importance of current trade agreements, which enabled AstraZeneca to earn 42% of 2016 revenue from countries in continental Europe . The report goes on to acknowledge the uncertainty surrounding Brexit and the potential drag on market share, sales, and profitability that could result from barriers to free trade.
However, I believe that AstraZeneca has more to lose over the long-term from the isolationist movement than just trade partners. A recent report from Strategy& argues that companies that are highly dependent on R&D for long-term success are especially susceptible to the negative effects of economic nationalism . AstraZeneca certainly belongs in this discussion as it is expected to spend more than 25% of 2017 revenues on R&D, more than any other company surveyed in Strategy&’s report.
But how exactly could R&D be impacted at AstraZeneca? First, the European Union has provided financial support for research, development and innovation through a number of programs with total aid estimated at €120 billion . This funding is certainly at risk as Brexit continues to take shape. More importantly, immigration policies in the UK and the US are likely to play a major role in the ability of AstraZeneca to attract and retain scientific talent, the lifeblood of drug pipelines.
Restrictive immigration and visa policies will limit intellectual capital produced through academia and through AstraZeneca’s commercial labs, both of which would be detrimental to the company’s long-term prospects. The work of university postgraduate students and researchers has become critical to the drug R&D process. Four years ago, AstraZeneca announced plans to build new R&D facilities at the center of “bioscience hotspots” in the US, UK, and Sweden which facilitate information sharing and collaboration between corporations and universities . Says CEO Pascal Soriot, “The strategic centres will also allow us to tap into important bioscience hotspots providing more of our people with easy access to leading-edge academic and industry networks, scientific talent and valuable partnering opportunities .”
Although the “hotspots” are concentrated in Europe and the US, the pool of scientific talent draws from every corner of the globe. In the UK alone, more than 13,000 scientists and engineers came from outside the European Union . If nationalist policies restrict the supply of talent into the UK and/or the US, the cost of talent acquisition and retention will rise. In addition, the talent pool at AstraZeneca would become more homogenous, limiting the benefits that come from a diverse R&D workforce.
To mitigate these risks, management at AstraZeneca should join forces with other R&D-focused, UK-based organizations to lobby the government against labor-focused economic nationalistic policies. By explicitly presenting the array of organizational costs that will accumulate across the economy, they can illustrate the impact on GDP, tax revenues, and ultimately societal welfare. Efforts to this end are already bearing fruit as the US and UK governments have come to an agreement on relaxing travel restrictions on scientists post Brexit .
To the extent that isolationist policies inhibit employment of foreign nationals or business travel is severely limited, AstraZeneca should consider establishing subsidiaries or separate legal entities in progressive countries. By “offshoring” R&D centers in hospitable jurisdictions, AstraZeneca can minimize the risk of disrupting the R&D pipeline. This strategy would certainly increase costs and hamper communication across borders. The company budgeted about $500 million to build its new research and development facility in Cambridge, UK in 2013 . I presume that new facilities built outside of Europe or the US would be similarly expensive. In terms of communication challenges, the dependence of commercial drug research on wet lab facilities makes physical colocation of scientists at the research center important. However, given technological advances, I wonder if physical presence of R&D scientists at the lab is imperative?
Among the many questions to be answered, I’m most curious to about the role that technology might be able to play in the drug R&D process. Is something like “virtual R&D” in the pharmaceutical industry possible?
1 AstraZeneca, 2016 Annual Report, p. 153, https://www.astrazeneca.com/investor-relations/annual-reports.html, accessed November 2017.
2 Strategy&, “The 2017 Global Innovation 1000 Study,” https://www.strategyand.pwc.com/innovation1000#VisualTabs1, accessed November 2017.
3 The Royal Society, “UK research and the European Union. The role of the EU in funding UK research,” https://royalsociety.org/~/media/policy/projects/eu-uk-funding/uk-membership-of-eu.pdf, accessed November 2017.
4 AstraZeneca, “AstraZeneca to establish strategic R&D centres to enhance innovation and pipeline productivity,” https://www.astrazeneca.com/media-centre/press-releases/2013/astrazeneca-research-development-centres-innovation-pipeline-18032013.html#, accessed November 2017.
5 Martin Turner, “Immigration: Keeping the UK at the heart of global science and engineering.” January 2016. A report by the Campaign for Science and Engineering. January 2016. Accessed November 2017.
6 Pallab Ghosh, “UK strikes research deal with US in run-up to Brexit.” BBC News, 20 September 2017, http://www.bbc.com/news/science-environment-41340971, Accessed November 2017.