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

AstraZeneca PLC – Annual report – 31 December 2020

Industry: pharmaceuticals

Financial Review (extract)

Brexit readiness preparations and planning

Following the UK referendum outcome in June 2016, the UK Government and European Commission negotiated the terms on which the UK would leave the EU and the framework for the future relationship. The UK left the EU on 31 January 2020 with a transition period running to 31 December 2020.

On 24 December 2020, the UK Government and European Commission agreed the terms of a Trade and Cooperation Agreement which sets out the relationship between the UK and the EU following the end of the transition period. The agreement comprises a Free Trade Agreement, rules on governance and dispute resolution, and security cooperation. The Free Trade Agreement: provides for zero tariffs and quotas on all goods that comply with the appropriate rules of origin; maintains a level playing field in areas such as environmental protection, social and labour rights, tax transparency and state aid, with enforcement and a binding dispute settlement mechanism; and maintains air, road, rail and maritime connectivity but with new customs and passport checks and limitations on haulage operations. It is still too early to judge the full impact of the Trade and Cooperation Agreement between the UK and EU on our market share, sales, profitability, cash flows and results of operations.

In response to the UK referendum outcome, the Group decided 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 duplication of release testing and procedures for products based in the EU27, transfer of regulatory licences, new freight routes between the UK and European mainland avoiding the short straits, customs and duties set up for the introduction or amendment of existing tariffs or processes, and associated IT systems reconfiguration. In addition, the Group engaged with its major suppliers to assess their readiness and continues to work with them to mitigate the risk of disruption to supply chains due to new border processes and potential port congestion. The costs associated with this and other actions directly related to Brexit are charged as restructuring, with the majority of such costs being cash costs. The costs incurred since the referendum are approximately $47 million of which $7 million was incurred in the year (2019: $28 million).

Risk Overview (extract)

Brexit

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). Following Royal Assent of the European Union (Withdrawal Agreement) Act on 23 January 2020 and ratification of the Withdrawal Agreement by the European Parliament on 24 January 2020, the UK left the EU on 31 January 2020 and became a third country with a transition period which ran to 31 December 2020.

On 24 December 2020, the UK Government and European Commission agreed the terms of a Trade and Cooperation Agreement which sets out the relationship between the UK and the EU following the end of the transition period. Entering into this agreement was provisionally approved by the European Council on 29 December 2020 and the associated UK legislation received Royal Assent on 30 December 2020. The European Parliament is due to scrutinise the agreement formally in the coming months prior to providing its consent to it. The agreement comprises a Free Trade Agreement, rules on governance and dispute resolution and, security cooperation. The Free Trade Agreement provides for zero tariffs and zero quotas on all goods that comply with the appropriate rules of origin; maintains a level playing field in areas such as environmental protection, social and labour rights, tax transparency and state aid, with enforcement and a binding dispute settlement mechanism; and maintains air, road, rail and maritime connectivity but with new customs and passport checks and limitations on haulage operations.

Until the European Parliament has consented to the European Commission entering into the agreement, there is no clarity on how the new agreement will operate in practice. It is therefore 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 continuing uncertainty on the impact of the practical implementation of the Trade and Cooperation agreement is expected to increase volatility and may have an economic impact, particularly in the UK and Eurozone.

Since the time of the referendum in 2016, the Group has responded to the evolving situation 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 to mitigate risks associated with a no deal Brexit.

These actions have already been implemented based on an assumption that the UK would have left the EU without a deal or extension to the transition period under the Withdrawal Agreement on 31 December 2020 such that the Group has been able to mitigate the risks arising from variable external outcomes to the negotiation. Actions undertaken in this regard include, but are not limited to: engagement with governments and regulators; duplication of release testing and procedures for products for the EU27 in the EU; transfer of regulatory licences; redesign of packaging and labelling; additional inventory builds; changes to logistics plans and shipping routes; customs and duties set up for introduction of or amendment to 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 an update on the Group’s Brexit readiness plans at its meeting in December 2020 and continues to assess its impact.