Irish Economy
Irish Economy: Pharmaceutical patent cliff no growth threat; High exports have low impact
By Michael Hennigan, Finfacts founder and editor
Nov 29, 2012 - 7:06 AM

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Irish Economy: Given the official mantras on export growth in recent years from ministers, the Department of Finance, the Central Bank of Ireland and the semi-official Economic and Social Research Institute (ESRI), coupled with echoing in Troika reports, it may come as a surprise to some that the pharmaceuticals sector, which accounts for more than 50% of merchandise exports, is not critical for economic growth. Therefore the expiration of patents on blockbuster drugs  --  known as the patent cliff, not to be confused with the fiscal cliff! - - should not be a serious concern in Ireland.

Coupled with the highlighting by Finfacts that possibly up to 50% of services exports relate to the global tax strategies of US tech firms - Apple, Google, Microsoft and Facebook - - where revenues are diverted to Ireland, not directly related to their activities in Ireland (44% of Google Inc.'s revenues in 2011 were booked in Ireland) and Dell remaining Ireland's biggest goods exporter (20% of 2011 global revenues were booked in Ireland) despite moving the principal EMEA (Europe, Middle East, Africa) manufacturing plant to Poland, a Reality Check is surely in order.

In seeking a roadmap to the future, think of the Kerryman's advice to the tourist seeking directions.   

Should it be any surprise that jobs in the export sectors (both FDI and indigenous) are at a 12-year low?

On Wednesday, Davy Stockbrokers published a report on the Irish pharmaceutical sector and patent cliff. In 2011, exports of pharmaceuticals were €50bn, around 30% of nominal GDP (gross domestic product). In September, Irish industrial production fell by an enormous 12.7% on the month, driven by a 35% decline in output of basic pharmaceuticals, and in part most likely related to patent expirations on 'blockbuster' drugs. The falls in September have fed speculation that prospects for the key pharmaceutical sector, worth 30% of Irish GDP, may now be depressed by patent expirations, with potentially dire consequences for Irish export and GDP growth.

However, Davy said these fears are largely misplaced. Due to the high import content of pharmaceuticals, specifically royalties and licence counted as imports, the impact on Irish GDP and GNP (gross national product) will be limited. Only approximately one-third of pharmaceutical export revenues contribute to Irish GDP because of the corresponding costs relating to intellectual property.

In 2011, the share of pharmaceuticals in Irish GDP was just 11%, well below exports revenues worth 30% of GDP. The pharmaceutical sector accounts for 1.2% of total employment, and contributed corporation tax revenues worth 0.5% of GDP. So, even if profits in the sector halved, the impact on GDP and tax revenues would be limited, and manageable within the context of Ireland's EU/IMF adjustment program.

Conall Mac Coille, chief economist of Davy, summarised the main points of the report, 'Ireland and the Pharma Patent Cliff' [pdf]:

Pharmaceutical patent cliff evident in industrial production and exports

  • In September, pharmaceutical output fell by 35% and exports of organic chemicals declined by 33%;

  • In 2011, pharmaceutical exports amounted to €50bn, 54% of total goods exports or 31% of nominal GDP;

  • Temporary factors may partially explain the weak September figures, and the impact of the patent cliff on revenues may be more gradual than expected.

But importance of pharmaceutical sector wildly overstated

  • Only around one-third of pharmaceutical export revenues count towards GDP. The value added of the pharmaceutical sector was €13.8bn in 2011 or just 8.7% of GDP;

  • The large gap between revenue and value added reflects high import intensity, principally royalty and licence fee payments related to intellectual property;• So sharp falls in pharmaceutical goods exports also show up in weaker services imports, limiting the impact on GDP.

Pharmaceutical sector employment and tax contribution low

  • Just 22,500 were employed in the pharma sector in 2010;

  • In 2010, €800m in corporation taxes came from pharma companies; if this figure halved, government revenues would fall by 0.25% of GDP;

  • This is small compared with the planned budgetary adjustments of 2.1% in 2013 and 1.8% in 2014;

  • The GNP impact of a reduction in pharma exports would most likely be negligible, but the gap with GDP (net factor payments) could narrow slightly

Also on Wednesday, the Central Bank presented the standard official line in its 'Macro Financial Review 2012: 11' report [pdf]

"Exports have grown steadily since 2007. Growth is led by  services exports, which have trebled as a share of GDP since  1999. Total exports as a share of GDP now exceed the peak of  2001 (Chart 6), reflecting improved competitiveness and positive  exchange rate movements since the beginning of the crisis. Irish export destinations are concentrated in Europe and North America, with little exposure to high-growth emerging markets.  Economic growth fell across many of Ireland’s largest export markets in the first half of 2012 (Chart 7), posing a challenge to a continued export-driven recovery.

In addition, over two-thirds of exports comprise pharmaceuticals,  chemicals and medical goods, computer services and business/financial services. These sectors are dominated by multinational corporations and are vulnerable to structural factors, like the expiry of patents, as well as external demand."

Support for overall activity is coming from the exporting sectors, with services exports becoming an increasingly important engine of growth in recent quarters. This, in no small part, reflects the improvements in price and cost competitiveness that have been evident since the onset of the crisis -- Department of Finance, 'Mid-Term Fiscal Statement,' Nov 2012

This statement is wrong, misleading and against the public interest.

The rise in services exports is related to tax strategies of multinational firms, not price and cost competitiveness. Delusion or deliberate misinformation is hardly going to help to devise credible policies to cut the long-term (continuous for 12 months or more) unemployment total of more than 188,000 -- Michael Hennigan, Finfacts

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