Brexit risks, measures being taken, including estimate of costs of preparation, pharmaceuticals

AstraZeneca PLC – Annual report – 31 December 2018

Industry: pharmaceuticals

Risk Overview (extract)
On 23 June 2016, the UK held a referendum on the UK’s continuing membership of the EU, the outcome of which was a decision for the UK to leave the EU (Brexit). The progress of current negotiations between the UK Government and the EU and the ratification of the outcome of those negotiations by the UK and EU parliaments will likely determine the future terms of the UK’s relationship with the EU, as well as to what extent the UK will be able to continue to benefit from the EU’s single market and other arrangements. Until the Brexit negotiation and parliamentary ratification processes are completed, it is difficult to anticipate the potential impact on AstraZeneca’s market share, sales, profitability and results of operations. The Group operates from a global footprint and retains flexibility to adapt to changing circumstances. The uncertainty during and after the period of negotiation is also expected to increase volatility and may have an economic impact, particularly in the UK and Eurozone. The Group has responded by engaging proactively with key external stakeholders and establishing a cross-functional internal steering and implementation committee to understand, assess, plan and implement operational actions that may be required. Many of these actions are being implemented based on assumptions rather than defined positions so that the Group is able to mitigate the risks arising from variable external outcomes. The Group has adopted a base case planning assumption of hard Brexit/No deal since the time of the referendum and has taken appropriate actions to date based on those assumptions. Currently, many actions have been implemented or are in process including, but not limited to: engagement with government and regulators; duplication of release testing and procedures for products for the EU27 and the UK markets; transfer of regulatory licences, re-design of packaging and labelling, additional inventory builds and changes to logistics plans and shipping routes; customs and duties set up for introduction or amendment of existing tariffs or processes; associated IT systems reconfigurations; and banking arrangement changes. The Board reviews the potential impact of Brexit regularly as an integral part of its Principal Risks (as outlined overleaf) rather than as a standalone risk. The Board most recently reviewed the Group’s Brexit readiness plans at its meeting in December 2018 and continues to assess its impact.

Financial Review (extract)
Brexit readiness preparations and planning
Following the UK referendum outcome in June 2016 for the UK to leave the EU, the UK Government and European Commission have been negotiating the terms on which the UK would leave the EU and the framework for the future relationship. While a draft Withdrawal Agreement has been agreed between the UK government and the EU, at this time it remains unclear whether this will be ratified by the UK parliament in its current form, amended or if the UK will leave the EU without a deal. In the absence of a ratified agreement, it is unclear what trading relationships the UK will have with the EU and other significant trading partners after 29 March 2019 given the range of political and legal options. Until the Brexit negotiation process is completed, it is difficult to anticipate the potential impact on our market share, sales, profitability, cashflows and results of operations.

In response to this situation, the Group has taken the decision to implement appropriate actions to mitigate where possible the potential risk of disruption to the supply of medicines (including potential new medicines currently undergoing clinical trials) including, but not limited to, duplication of release testing and procedures for products based in the EU27 and the UK, transfer of regulatory licences, customs and duties set up for introduction or amendment of existing tariffs or processes and associated IT systems reconfiguration. In addition, the Group has engaged with its major suppliers to assess their readiness and continues to work with them to mitigate the risk of disruption to supply chains.

The costs associated with this and certain other actions directly related to Brexit will be charged as restructuring with the majority of such costs expected to be cash costs. The current estimate of these costs is around $40 million. However, until the Brexit process is concluded by the UK and EU parliaments and the impacts of transition to any new arrangement between them are known with clarity, it is difficult to anticipate the overall potential impact on the Group’s operations and hence the final expected costs to be incurred.