Drug Blockbusters Coming Off Patent – Ramifications for Ireland

Ireland is the largest net exporter of pharmaceuticals and medical products in the world, according to Dublin-based industry group PharmaChemical Ireland. However, as discussed in a recent Bloomberg article, the Irish drug manufacturing industry is facing a new set of challenges as many of the blockbuster drug patents have expired or are set to expire in the near future. This has resulted in some well-publicized factory closures, including Pfizer’s announcement in May that it was leaving its plants at Dun Laoghaire and County Cork. The manufacturing site in Cork was dedicated to Lipitor formulation, which will come off patent in the U.S. on Nov. 30, 2011. Likewise, Johnson & Johnson closed its Cashel manufacturing plant with the loss of 133 jobs.

Additional ramifications for Ireland include the following:

1. Five of the world’s top-selling dozen medicines are produced in Ireland, and their sales will fall 52 percent to $13 billion by 2013 from $27 billion in 2010 as their patents expire. (Data compiled by Bloomberg based on analysts’ estimates).

2. The Irish Exporters Association (IEA) on Nov. 4 cut its 2012 growth forecast to 1.6 percent from 2.5 percent. It predicted that exports would grow by 3.8 percent next year, compared with an April forecast of 5.7 percent, based largely on the decrease in exports already seen YTD in the pharma/chemical sector. This will likely hinder Ireland’s prospects of exporting its way out of the economic crisis affecting all of Europe.

3. Drugs companies in Ireland paid just over €1.0 billion of tax in 2010, a figure that is likely to decrease if Ireland maintains its business-friendly 12.5 percent corporate tax. See Table 1 below for comparative European area corporate tax rates.

4. Ireland is fighting to keep its drug-manufacturing stronghold by pitching its low corporate tax rate and relatively cheap labor. According to the European Commission, Irish unit labor costs have declined strongly. In 2010, unit labor costs fell 4.9 percent. They are seen falling 2.5 percent in 2011 and 0.9 percent in 2012.

Some of the ramifications for the pharmaceutical industry include the following:

1. A surplus of manufacturing throughput in all of the EU and continued health care pricing pressure from single-payor negotiated national agreements for treatment procedures, fee structures and rate ceilings are resulting in tougher operating conditions for drug manufacturers in Europe.  According to Washington Monthly, Europe’s pharmaceutical businesses make one-third of their profits in the U.S. market because they can charge five times as much in the U.S. for the same pill made in the same factory.  If the U.S. moves to a more regulated health care system similar to the European model, the entire pharmaceutical industry including drug manufacturers will likely feel the effect.

2. Increased drug manufacturing competition from areas outside of the EU (see India and China – low labor costs and growing throughput; Singapore – low taxes). In India, generic-drug companies are investing heavily in large state-of-the-art manufacturing and development facilities to meet the anticipated generics demand, which is further discussed here. In Singapore, Merck has invested an estimated $1.5 billion, including a commitment to invest an additional $250 million over the next 10 years for new manufacturing, marketing, and research activities. A recent survey by Eric Langer of Pharmaceutical Technology (Volume 35, Issue 8, pp. 78-80) shows Asia gaining quickly among the potential biomanufacturing outsourcing destinations. See Chart 1 below.

TABLE 1: CORPORATE TAX RATES

CHART 1: POTENTIAL BIOMANUFACTURING OUTSOURCING DESTINATIONS

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About Bourne Partners

As a healthcare-focused merchant bank, Bourne Partners provides financial advisory, direct investment, alternative assets and management consulting services to our client-partners. We play an active role in helping businesses grow by creating long-term, profitable relationships that extend beyond single transactions. It is our focus on relationships and long-term results that has yielded us an impeccable track record of client satisfaction . Our direct and indirect investments in sector-leading companies – often through our relationships with top-tier Private Equity funds – allow us to learn about the best-of-the-best from the inside and apply that knowledge to the companies we serve. At Bourne Partners, we operate within a specific set of core boundaries: integrity, accountability, teamwork, loyalty and commitment are the driving forces behind everything we do.
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