With the expiration of patents on more blockbuster drugs in the offing, what is the future of the sector in Ireland and what impact could any change have on the wider economy?

In order to understand the potential for change, the evolution and sheer scale of the industry needs to be appreciated.

Over the course of its expansion, the sector has gone through a number of distinct phases. At the beginning of the Celtic Tiger era in the middle of the 1990s, the industry accounted for a considerably smaller share of manufacturing output than it does today – generating less than €7 billion annually in export earnings.

In 1998, the sector really took off, as multinationals’ new plant capacity came fully on stream. In the four years to 2002, exports exploded, to reach €40 billion annually.

This was a doubly fortuitous development. Not only did the expansion contribute to growth in the wider economy, it helped offset the effects of the bursting of the dotcom bubble in the early months of the new century, which, among other things, heralded the collapse of Irish IT hardware manufacturing and exports – companies like Dell, Gateway and Seagate.

Export growth
But if the growth of the industry up to 2002 had been spectacular, it then went into a half-decade period of stagnation, albeit a very high levels of output and exports.

The industry’s second growth spurt was again highly fortuitous, coming as it did just as the property crash was unfolding.

The volume of output produced by the sector (which excludes price effects) jumped by almost half between the end of 2008 and 2011.

The value of exports (which includes change in prices) increased much more modestly, but still added an extra €12 billion in the three years to 2011, accounting for most of the goods export growth during that period.

At €56 billion, this was equivalent to more than one-third of gross domestic product (for perspective: there are many economies in which exports of all goods and services combined do not reach such a share of GDP).

Just as eye-catching, if not more so, is Ireland-based manufacturers' share of the global market. According to United Nations trade figures, 7-8 per cent of the world's annual consumption of pharmaceuticals has been made in Ireland since the middle of the last decade, making it the fifth-largest exporter of pharmaceuticals in the world.

This is a grossly disproportionate global share given the size of the economy and its population. That has given cause for concern for some time about its long-term sustainability.

Given that almost all production is accounted for by foreign companies, there is further reason to be concerned that changing cost structures in the industry globally could see firms move more readily to developing economies.

But the most immediate threat comes from the patent cliff, which is already impacting output and exports. While fears that the Irish pharmachem sector was heading over a patent cliff have been around for some time, the expiration of Pfizer’s Viagra patent has again throw the issue into the spotlight.

These concerns are well founded, in theory at least. When an industry is highly dependent on patents to protect its intellectual property, there is a clear risk that, unless the industry generates and obtains new patents, it will go into decline.

There is little doubt that the patent affect is being felt. As the second chart shows, the sector’s output declined from its peak over more than a year to the first quarter of 2013, while exports fell even further in the first months of the year.

Enfeebled economy
Chris Van Egeraat of the National University of Ireland Maynooth is a leading scholar on the industry. In a forthcoming paper he writes that the effects of the patent cliff will continue to be felt in 2013, but that the impact on the 30,000 people employed in the industry should be modest.

If anything, he believes that a greater threat is posed by the incipient outsourcing and offshoring of activities by chemical pharmaceutical companies to low-cost suppliers in Asia.

All industries face risks, and big changes can occur, as the collapse of the IT sector proves. In 2001, hardware exports were worth more than €21 billion annually. Last year earnings had fallen to just €3.7 billion.

Given the economy’s much enfeebled position, a similar decline in the pharmachem sector would have much more serious consequences.