Perpetual Preparedness

In April, the European Council granted the UK an extension of the Article 50 deadline to October 31. This averted a no-deal exit whereby the UK would become a “third country” overnight – at least for the time being. Since then, the British Prime Minister, Theresa May resigned, prompting a leadership contest. At the time of writing, we still have little idea how the first stage of the Brexit process will conclude, with deal, no deal, and perhaps even no Brexit, all still on the cards. This means pharmaceutical companies must continue to prepare for the worst case scenario – that the EU Treaties will cease to apply to the UK on October 31.
 
We speak with Frithjof Holtz, an expert in Advocacy & Surveillance in Regulatory Management at Merck Life Science, and head of Merck Life Science’s Brexit mitigation project to find out which issues have troubled Merck the most and what they have been doing – and continue to do – to mitigate the risks.
 

When did your preparedness planning begin?
 
Our colleagues in the UK identified Brexit as a key topic for the company quite early on, so we began monitoring the regulatory and political developments in the UK. At the beginning of 2018, we realized that no-deal was a real possibility, which is when we started to set up more global activities. We created a joint workshop that included the UK organization, experts from the European side and consultancy agencies to discuss what the impact of a no-deal scenario would have for our global operations. The first step was to identify the problems, prioritize them and then work out what we could do to mitigate them.
 
 
What were the main problems you identified?
 
We divided the different issues into a few key workstreams. One of those was regulation – initially our main concern. Would the UK develop its own REACH legislation? Would the rules around the manufacturing or registration of pharmaceutical ingredients change? Obviously, the life science industry is highly regulated and a lot will depend on what the UK does following a no-deal exit. For example, registering APIs separately in the UK could take some time if the registration process was only revealed shortly before the exit date and if it differs from EU27 regulations.
 
We also quickly realized that a no-deal Brexit would have significant trade and supply chain implications. Merck has a complex supply chain and we had to think carefully about how to mitigate new customs checks at ports such as Calais or Dover, both for the movement of finished products and raw materials – those produced in the UK and exported for manufacturing in the EU and vice versa.
 
Many of our products are “drop-shipped” directly from a warehouse in one country to a customer in another country. That is only possible if customs clear the supply before it gets to the customer. With no deal, simple courier shipments become much more difficult as each one would require a customs clearance and using an intercompany invoice. This takes time and money, while hindering any kind of drop-shipment process currently set up. We have worked closely with our freight partners to develop processes to allow collation of group of shipments and then clearing across customs as a single shipment. This will help process shipments quicker and is cheaper but, it is only on offer from certain providers. For some countries and processes (for example, hazardous goods or specially regulated products), even this process won’t work and so we will need to ship to a warehouse in the receiving country to ensure the goods can be cleared, and then ship the product to the customer (restock). This will add cost, complexity and significantly increase lead time. What took 24 hours could take several days or more.

Overall, we expect an increase in the workload required to manage the activities linked to customs clearance (payments of tariffs and taxes, processing of paperwork and so on). Of course, the size of additional resources will depend on the final agreement. There would be additional issues around recuperating VAT too, as well as in tracking profitability of UK-sold products. Dealing with many of these issues will require significant investment in our IT systems.
 
In parallel, we are also monitoring potential challenges for EU citizens currently working in the UK to minimize potential impacts in terms of attraction and retention of high-skilled staff.

How do you plan to mitigate these issues?
 
There are a lot of uncertainties around whether or not there will be a deal by October 31, so we have to prepare for the worst-case scenario – significant port delays. We have already started increasing buffer inventory in our UK and EU27 warehouses. For most stocked and forecastable products, we have increased our inventory on both sides by approximately one month and, for some specific, higher risk products by up to four months. This means that even if there are border delays for these products there should be no or minimal delays in supply to our customers. When it comes to raw materials, Merck keeps sufficient safety stock to cover short-term delays, but we have increased our raw material safety stocks by up to one month in most instances. Of course, there may be some complications with fresh materials, so we have also worked with our suppliers on their preparedness – sending out a questionnaire to ask whether they would consider using alternative suppliers. This was dealt with by our central procurement group, which is connected to our broad global network. We have also increased our internal lead times to factor in potential delays at customs.
 
Changes have also been made to the supply chain (for example, splitting the UK and EU supplies for certain products), where doing so reduces overall risk. Last year, we also announced that we would be investing over €8 million into an expanded UK distribution center. Although this was unrelated to Brexit, it should mean we are well placed for any challenges post-Brexit.
 
When it comes to chemical regulations in the event of a no-deal, our UK legal entities, holding a registration under EU REACH, will lose their registrations. This is of course true for all UK companies. This would mean that many new EU registrations and nominations of Only Representatives (OR, a person or legal entity established physically in the EEA that is responsible for complying with the legal requirements for importers under REACH) will be required within existing supply chains to back up our supplies to our EU customers. It also means that our own EU affiliates would legally change their role in the supply chain from “Downstream Users” to “Importers” overnight if the supplier is a UK based company. As I mentioned, we are working with our suppliers and investing a lot of resources into our REACH preparedness, but we can’t guarantee there will be no disruption. A permanent or transitory continuation of REACH in the UK, as it is foreseen in the event of a deal Brexit, would be helpful to ensure that registrations held by UK companies remain valid and European supply chains will not significantly be affected.

We are also updating our IT systems so that a group of single courier shipments can be cleared as one transaction, as well as ensuring that the data can be sent to our courier via an interface, which is a significant job. Other changes range from simple updates (e.g., ensuring our paperwork and systems reflect the fact that the UK is an “export” country, or setting up new Northern Ireland “routes”) to more complex changes (e.g. ensuring our paperwork is compliant in relation to an Irish branch that we have set up).
 
Finally, we have set up a crisis management team of six people. Experts in supply chain, customs, tax and regulation have been brought together to help deal with any issues that may arise as a result of a no-deal Brexit. In the event of a no deal Brexit, they would be meeting on a daily basis to closely monitor the situation and deal with urgent issues arising with the import or export processes. The team is currently on standby and is ready to go within one hour so that our activities are responsive. They are also connected to our customer service teams who can distribute information.
 
 
Has anything changed after the extension of the March 29 deadline?
 
In a word, no – everything remains constant. We are still preparing for the worst-case scenario. Our life science business has more than 20 manufacturing sites in EU27 and five in the UK. And before the March 29 deadline, we mapped our manufacturing supply chain for risks, placed POs early on our suppliers to ensure forward visibility, and moved delivery dates to build buffer inventory before that deadline. We will have similar plans in place for October 31.
 
Would things change if the deal was agreed? Certainly, some of the plans for a no-deal exit on October 31 would be put on hold, but we still wouldn’t know what the final deal would be. We therefore continue to prepare for the hardest possible Brexit (the UK, minus Northern Ireland, could still leave the EU without a trade deal or mutual recognition agreement in place after the two-year implementation period, for example). The only major change would be if the UK were to have a second referendum and stop the Brexit process entirely.
 
 
As a company, what learnings, if any, have you taken from this process?
 
Our main concerns at the beginning of the process, as I mentioned, were the regulatory impact – especially around raw materials and registration activities. But, considering our expertise and flexibility, we found that the impact on that end is less critical than we first assumed, with supply chain and customs issues, plus IT emerging as the more significant challenges. There were a number of factors that cropped up throughout the process of setting up the risk mitigation workstreams, such as the link between VAT recuperation and IT.
 
More broadly, I think we have also learned more about how to deal with a potential crisis. Proper monitoring of regulatory and political developments is key, as well as bringing in experts together as part of a project and having the commitment of top management. The head of the Brexit mitigation team reports directly to the Senior Vice Presidents for supply chain & production as well as quality and regulatory. We also share weekly updates in writing and meet regularly as a team. This ensures a short decision path from upper management, which allows us to be flexible and responsive. We were ready to go before March 29 and will certainly be ready to go before October 31. Overall, I think we’ve developed skills that could be applied to other challenges in the future.
 
 
What role has communication played in your Brexit mitigation plans?
 
Clear communication is essential – both internally and externally – to mitigate risk. I’ve already mentioned how we’ve put systems in place to facilitate quick decision making from upper management, but we’ve also created feedback loops with our customers and suppliers, so that we’re constantly identifying potential issues and putting in place mitigation plans. To this end, we created a Brexit dossier (1), which has been downloaded more than 1500 times. The dossier went through several development cycles and we plan on publishing a third edition to provide further information on specific topics.