The latest CSO Industrial Production & Turnover figures appear frightening. Production for manufacturing Industries for September 2012 was 13.9% lower than in August 2012. On an annual basis production for September 2012 decreased by 13.7% when compared with September 2011. The seasonally adjusted volume of industrial production for Manufacturing Industries for the quarter period July 2012 to September 2012 was 4.5% lower than in the preceding quarter (see above and table 4). But the most worrying change was in basic pharmaceutical products and preparations with a decrease of 35.2% on August.
This fall is likely to be reflected in the export figures for September or October. The figure below charts the dynamics of the seasonally adjusted volume of industrial production index and the chemicals and related products exports index (indexed to June 2005). Although the relation is far from perfect, strong falls in the industrial production index tend to be followed (sometimes with a small lag) by falls in external trade.
Is this then further evidence of the start of the impact of the patent cliff? Many drugs enjoy a period of patent protection, during which the originator company can charge a high price for its product. When the patent eventually lapses, the market is opened to generic competition which seriously reduces the value of the product. As it happens, many blockbuster drugs are coming off patent in a concentrated period between 2011 and 2013. Six of the ten main blockbuster drugs coming off patent in this period are at least partially produced in Ireland. The patent cliff is therefore expected to have a strong impact on Irish exports.
However, the expected impact is, as yet, not fully borne out in the data. A couple of month ago I interpreted the strong H1 2012 fall in Chemicals exports to the US as the first concrete evidence of the impact of the patent cliff on Irish exports (see here). This was an unusually large drop. But the July and August exports to the US are well up again from the H1 low. Although I am in no doubt that the current fall in the industrial production index is partly linked to products coming off patent, I am not convinced that this is the start of a steep downward trend. First of all, pharmaceutical industrial production and export figures tend to fluctuate strongly (see here). In November 2011 the index dropped by 25%, although then falling from a high peak in September. During the next ten month the trend was up again. Clearly the patent issue is not the only driver of production dynamics. There is a lot more going on. More importantly, recent developments in the pharmaceutical industry make me believe that the impact will be less severe than originally thought. The patent cliff was believed to have a strong impact because a number of blockbusters were due to come off patent in a concentrated period. However, companies have been fighting tooth and nail to retain their valuable IP and some were successful in their application for patent extensions. One example is Enbrel, a 7.5bn blockbuster, that was due to come off patent in 2012. As a result, not all patents are expiring in the concentrated period. Such developments may result in a more smoothed-out hill, rather than a cliff.