Keeping ahead in an increasingly competitive global market

PHARMACEUTICALS:As fears of the patent cliff subside, the industry can look forward to growth but challenges remain

Global pharma companies won’t fall off the cliff, Standard Poor’s opined recently. It wasn’t the fiscal cliff on the edge of which many believe America still teeters to which the ratings agency was referring but the patent cliff.

Big pharma has been living in dread of the expiry of patents on a generation of blockbuster drugs which have delivered a large portion of profits for the sector in recent years. However, in an industry report card on the sector, SP said most pharmaceutical firms would survive unscathed.

According to the agency, the major US pharmaceutical groups – almost all of which have business in Ireland – were expected to have lost a total of about $21 billion in revenues last year as a result of drugs such as Pfizer’s market-leading Lipitor coming off patent. Their European peers were on course to lose $10 billion.

“However, their third-quarter financial results confirmed that most companies are on track to achieve low single-digit sales growth this year on a comparable basis,” authors Olaf Toelke and Michael Berrian said.

SP expects the industry to deliver growth of between 3 and 5 per cent over the next five years on a compound annual growth rate basis. In the context of the dread over prospective catastrophic losses due to the patent cliff and a wave of consolidation in a sector desperately seeking a more promising pipeline of new drugs, that would seem to be a very promising outlook for the sector.

But challenges remain.

Not least of those is the uneven nature of likely growth in the sector. While North America is pencilled in to report annual growth of between 2 and 4 per cent, the forecast for Europe is much more gloomy, with estimates ranging from stagnation in sales to just 2 per cent. Notably, there is little prospect of drug price increases in the European market as health providers, mostly state-owned, come under increasing pressure and demographics drive healthcare costs ever higher.

So where is the bulk of the growth coming from? Emerging markets, where growth of between 12 and 15 per cent per annum over the next five years is expected. That raises very specific challenges for a country like Ireland with a focus very much on the developed world.

That, in large part, explains the drive by the state development agencies and local pharmaceutical plants to drive Ireland’s pharma cluster up the value chain.

Matt Moran, director of PharmaChemical Ireland, the Ibec-based industry lobby group, explains. “The Bric countries will be asking, almost forcing, companies to set up sites there. That’s how they operate. If you want to sell in Brazil, you need to have a plant in Brazil and that’s a real threat for Ireland. All you can try to do is hold the supply chain. It’s really a question of trying to get the Irish site centre stage so that it doesn’t matter if business goes to China, we can somehow hold the value and hold enough activity.”

While employment in the sector is not likely to increase exponentially, Moran believes we can hold on to much of what we already have by making ourselves “sticky” – less easy to let go. Critical to this, he sees, is identifying key niche areas and working more closely with our primary healthcare sector.

PharmaChemical Ireland has recently published a new strategy document – Ireland: Strategy In Action – which it believes points the way forward.

Among its key recommendations are continual investment in education, maintaining balance in the regulatory burden so that Irish plants do not operate at a competitive disadvantage, building closer links with academia and the front line and ensuring the Irish tax regime remains attractive.

Sacred cow

“[Taxation] is a sacred cow for the industry,” says Moran. “If you look at who we’re competing with for FDI [foreign direct investment] – Singapore, Switzerland. I mean Singapore operates a zero tax rate; Switzerland operates zero; Puerto Rico is still very low. It’s just getting tougher and tougher to attract and hold these investments.

“So the message it sends, if you start to manipulate or change or increase tax rates, is that certainty is gone. And these guys, they plan out way ahead and they’ll think: ‘well, you know, we need to be in the Bric countries; we need to be in Asia’.”

While the debate between the Government and industry over drug prices was led by the Irish Pharmaceutical Healthcare Association (IPHA), he is dismissive of the furore. Letters released recently showed a concerted campaign by leading companies in the sector to lobby Taoiseach Enda Kenny during the drugs pricing row. Moran can’t understand the fuss.

“The view of the industry is very straightforward on that – you can’t expect us to make and develop innovative products in Ireland if you don’t use them. That’s it and they don’t apologise for it,” he says.

“And that’s all that really was said to Enda Kenny and he knows that.”

While the drug companies and the HSE did eventually come to an accord that will cut prices in over the next few years, there has been criticism that much of the benefit will be eaten away by the sanctioning of new, more costly treatments.

Moran demurs. “It is not as simple as reducing the price, reducing the notional drugs budget, is going to necessarily affect the overall healthcare budget; it won’t. Because if people don’t take medicines, they will end up in hospital, which will be a lot more expensive,” he says.

“The industry takes the view that it engages in research and tries to come up with therapies for problematic diseases, and patients deserve to have access to them. Okay, if it is not cost-effective, it’s not cost-effective. But the industry is not stupid; they are not going to produce therapies that are so expensive that nobody can ever afford them.

“There has to be a cost-benefit analysis, they accept that, they mightn’t agree with the assessments but then they will argue their case. But if,having done all that . . . ”

For the year ahead, the industry in Ireland expects a fair amount of capital investment to continue with a number of plants currently under construction.

The elevation of the first generation of Irish plants and Irish managers through the global ranks of Big Pharma is another positive sign, with all Pfizer’s external manufacturing managed from Ireland, for instance.

Still, challenges remain, including Ireland’s backsliding on a project to develop a hazardous waste plant to serve the local industry. For the industry as a whole, there is little room for complacency. Speaking to the Financial Times recently, Merck chief executive Kenneth Frazier summed up a key challenge for the industry.

“You have to fail fast and you have to fail cheaply because our business is mostly about failure,” he said. “We have a few successes but if we can minimise the cost of failure, you are really ahead of the game.”