Ireland’s recently adopted four-year recovery plan promotes an export-led strategy. The idea is to introduce measures to assist the export sector. These measures will assist export recovery through enhanced competitiveness and sector specific initiatives. Export growth will in turn deliver high value employment and act to stimulate the domestically trading sectors of the economy. These developments will in turn boost consumption, reduce unemployment and increase tax revenue. Confidence in this strategy is supported by the recent performance of the internationally traded sector. The government estimates exports have grown by over six percent in 2010.

Given the importance of the pharmaceutical industry to Ireland’s economy and its large share in Ireland’s exports, it is useful to take a closer look at the developments of this sector and their implications for the recovery plan.

The Irish pharmaceutical industry is performing strongly throughout the economic crisis. CSO external trade data show that exports in the combined chemicals and pharmaceuticals sector (which is dominated by the pharmaceutical sub-sectors) grew from €44.2bn in 2008 to €49.4bn in 2009 (+12%). The most recent CSO release shows further export growth by 4% in the first eight months of 2010 (compared to the first eight month in 2009). This compares with falling exports in other important manufacturing sub-sectors, notably the office machines sector (computer hardware), which experienced a drop of 32% in exports. As a result the combined chemicals and pharmaceuticals sector now accounts for 60% of Ireland’s manufacturing exports.

Now let’s take a look at the employment figures of the CSO. Between Q4 2007 and Q4 2009 employment in basic pharmaceutical products and pharmaceutical preparations (NACE 21) dropped by 9%, from 30,800 to 27,900.  How can we explain this apparent paradox?

Part of the job losses are related to corporate merger activity and the concomitant reorganisation of global manufacturing capacity. Other job losses are related to pharmaceutical companies losing markets when some of their products reach the end of their patent life. I discussed the implications of this “patent cliff” issue for Ireland in a previous IAN post. These processes were responsible for the recent high profile job-losses and plant closures at Pfizer and GSK in Cork. But one would expect these processes to translate in a drop in pharmaceutical exports, not an increase.

After talking to some pharmaceutical company managers, I believe the answer to the puzzle lies in a parallel development which may be termed “fat pharma going lean”. Traditionally, because of obscenely high pharmaceutical prices, pharma companies’ main concern was to have a sufficient supply of product. Pharma companies paid little attention to production efficiencies. However, product prices have come under serious pressure due to increasingly stringent price controls in many markets, as well as increased competition. In addition, changes in the regulatory environment have significantly increased the cost of bringing a drug to the market. In response, following the example of the electronics industry, most pharmaceutical companies are now introducing more efficient processes. As a result, Irish plants are starting to produce significantly more output, while at the same time reducing their head count. In some Irish plants, staff numbers have been reduced by over 10 per cent, completely under the radar of the media.

One might argue that this development will make the plants more efficient and put them in a better position to attract future investments by the parent company. However, efficiencies are implemented globally, not only in Ireland.

The recent growth in Irish pharmaceutical exports has not been job-less, it has been job-shedding. At least in the context of the pharmaceutical industry, the Government’s export-led recovery strategy may be problematic. In this sector, in the short term, increased exports are unlikely to lead to significant number of new jobs. Without new jobs, there will be no boost to consumption, no boost to the domestic sector, and no boost to income tax. Pharma is, of course, a specific case. The increasingly important internationally traded services sector may lend itself better to the export-led recovery plan.

Chris van Egeraat

Yesterday 785 workers were told they may lose their job at Pfizer. This time the job losses are occurring in a sector that was generally believed to be relatively insulated from the effects of the global recession. Should we worry? I would say yes, if it was only for the fact that yesterday’s announcement is just the first step in a larger Pfizer restructuring programme. Last year, at the time of the mega-merger with Wyeth, the company announced that this restructuring programme will involve 19,000 job cuts. Yesterday’s announcement dealt with 6,000 of these. So far, the company has evaluated the sites that manufacture injectables, solid dose, biotechnology medicines and consumer health care. The evaluation of the active ingredient sites, of which Cork also has a few, is still to come. These are the sites that employ the most highly skilled workers.

But there are other reasons to worry, not only for Pfizer workers but for Pharma workers in general. Tánaiste Mary Coughlan has told the Dáil that the job losses at Pfizer have nothing to do with the Irish economy, but were caused by the overcapacity generated by the company’s merger with Wyeth. On the face of it, the Pfizer job losses could be interpreted as a one-off global restructuring of a company that faces over-capacity due to recent merger activity.  However, I believe we are dealing with a more structural issue here. The Pfizer global restructuring is partly driven by a lack of new products to replace a number of blockbuster drugs that are coming off patent. The first one, in 2011, is Lipitor but the next one, Viagra, is not far behind.  Think about it: Loughbeg, one of the plants to be closed, was the global manufacturing site of  Lipitor. Loughbeg  manufactures all of the active pharmaceutical ingredients (the few micrograms of substance with the actual pharmacological effect) and eighty per cent of the formulation (the actual tablet) in Ireland.

Mr. Ricciardi, Pfizer’s global manufacturing president, is quoted saying that “we are not announcing closures, we’re announcing exits”, citing hopes that Pfizer will be able to sell some of the plants to other pharma companies. But what if other companies are starting to develop similar plans for “exits”? Pfizer is not alone. Many other companies are facing the drying up of their drug pipelines with little to replace the blockbuster drugs. Companies are frantically looking for replacement drugs. However, chemical synthesis, the core capability of the traditional big pharma companies is reaching its limits for new drug development. Many diseases will require large molecule drugs that are too complex to produce via chemical synthesis. The hope is that the biopharmaceutical subsector will be able to fill the gap. The IDA has acted with their usual great foresight and has very successfully attracted a number of large biopharmaceutical plants to Ireland. The problem is that this may not create enough jobs to offset the losses in the chemical synthesis subsector and the skills requirements of the two subsectors are different.

From 2011 a lot of drugs come off patent and this will have a big impact on the industry in Ireland. The current value of export is 44 bn. 26% of that is patent protected. It is improbable that this will continue to be manufactured in Ireland. This market will be taken over by specialized generics companies, many of which are located in India. Research undetaken by Frank Barry (TCD) and I shows that local subsidiaries in Ireland and their parent companies have started planning for this over the years. The local plants have changed their role in the global production networks, developing into strategic launch plants and flexible multi-product plants, capable of producing niche-products and the downstream, higher value added elements of the synthesis cycle. An increasing number of companies are beginning to outsource the early, less skill intensive, steps of the active ingredient synthesis cycle to fine chemical companies. Very few processes are outsourced to companies in Ireland. Pharma companies are increasingly using low-cost suppliers in India and China. Until now Pharma companies remain hesitant to outsource the later stage synthesis to companies in India and China, doubting whether these companies have the requisite technical knowledge and can meet the health and safety standards required to supply the highly regulated EU, Japanese and North American markets. This perception is changing, however.

Ireland`s rapidly rising wage levels of the Celtic Tiger era provided an extra incentive to use the Irish facilities for the higher value added elements in the manufacturing chain, notably for new product introductions and late stage synthesis. In principle, such upgrading activity is a healthy development. But this will be of little comfort to the Pfizer and pharma workers affected. I would worry.

Chris van Egeraat