The Impact of the Patent Cliff on Pharma-Chem Output in Ireland

By Enright, Shane; Dalton, Mary | Journal of the Statistical and Social Inquiry Society of Ireland, Annual 2013 | Go to article overview

The Impact of the Patent Cliff on Pharma-Chem Output in Ireland


Enright, Shane, Dalton, Mary, Journal of the Statistical and Social Inquiry Society of Ireland


1. INTRODUCTION

Given the weight of the pharmaceutical sector in Irish GDP, this paper seeks to assess the impact of the current 'patent cliff' in the pharmaceutical sector on the Irish economy. The paper begins with an overview of the sector both at a global and national level. The second section examines recent trends in export and output data to assess the formal impact of the patent cliff on economic and fiscal activity. The third section models the potential impact on GDP, with the final section taking a more qualitative approach to the future of the sector in Ireland.

2. OVERVIEW

a. Global pharmaceutical sector

The global pharmaceutical sector was valued at just under 750 billion [euro] (2) in 2012. The sector is highly concentrated, with the top ten companies in the world accounting for about a third of global sales. Currently, North America and Europe account for almost two thirds of the global market2. (3)

The sector is facing a number of challenges at present relating to over-capacity, significant R&D costs, a weak pipeline of new products and downward pricing pressures from healthcare payers. (4) However, the focus of this paper is the impact of the expiration of patents in the sector in Ireland.

Figure 1 shows the lifecycle of an innovative medicine. For every 5,000 to 10,000 compounds that enter the R&D pipeline, the pharmaceutical industry reports that only one receives approval. (5) To compensate for the high costs involved in researching and developing a new drug, companies may file a patent which protects them from competition for a specified period of time. Of the typical 20 year patent period--firms typically only get 8-10 years of effective patent protection before facing generic competition. (6) The average cost of researching and developing a new medicine is claimed by the pharmaceutical industry to be approximately 1.4 billion. [euro] (7) It is estimated that only three out of ten marketed medicines produce revenues that match or exceed R&D costs before they lose patent protection. (8)

[FIGURE 1 OMITTED]

What is known within the industry as a 'blockbuster' drug is a drug that generates more than a billion US dollars in revenue each year. Only a small number of drugs become blockbusters. Typically, companies are able to price well above the marginal cost of output due to patent protection. This is designed to allow companies to recoup the cost of research and development and in practice to cross-subsidise unsuccessful R&D. The current 'patent cliff' refers to a number of blockbuster drugs with about 200 billion [euro] in total global annual sales, which are set to go off patent between 2011 and 2016, the majority of which are concentrated up to 2013. (9) Taken as a percentage of global sales, the patent cliff impacts between a quarter and a third of the value of the sector.

b. Pharmaceutical industry in Ireland

Up until the 1960s there was little or no pharmaceutical production in Ireland. This was altered significantly following the targeting of the fine chemicals industry, which included pharmaceuticals, by the IDA in the 1970s and the subsequent location of a number of foreign multinationals to Ireland. (10) The sector continued to grow and in 2012 Ireland's share of global trade SITC (11) codes 51 and 54 was particularly high at around 4 per cent. While the majority of these are involved in active pharmaceutical ingredients (API) and finished products in small molecules (chemical pharmaceuticals), Ireland has a strong and increasing capability in larges molecules (biopharmaceuticals). (12) A number of factors have led to this growth:

* Demonstration effect--Ireland has built up a cluster of pharmaceutical companies over the past thirty years. The demonstration effect of a few successful early leaders is likely to have contributed to this growth, resulting in the top ten global companies locating in Ireland. …

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