Thursday 21 November 2019

Marc Coleman: Exports will rise from rubble of patent cliff

Slowdown in pharma sector has set alarm bells ringing, but it's just a momentary blip

Both the industrial sector and the pharmaceuticals-dominated modern sector expanded in February
Both the industrial sector and the pharmaceuticals-dominated modern sector expanded in February

Marc Coleman

Once upon a time we called it "Brewer's droop". These days the phenomenon of (ahem) "failure to perform" is less likely to be caused by the presence of alcohol and more likely to be caused by the absence of Viagra. And last week, the economy ran out of Viagra. The good news is that this is a temporary failure. Normal service should be resumed shortly.

The recent ESRI research paper by John Fitzgerald explains why. Entitled The Effect on Major National Accounting Aggregates of the Ending of Pharmaceutical Patents, it is, believe me, as boring as it sounds. But it contains some reassuring information on what has just happened to the economy. Technically, we are back in recession and when the news broke on Thursday it caused a minor storm. The NTMA had just announced the first successful and fully independent foray into bond markets since the bailout ended. The news that GDP was down 0.7 per cent on the quarter and 0.3 per cent down on 2012 was, well, a bit of a downer.

As Fitzgerald's paper explains, it is companies that produce drugs to boost our performance that, in this instance, are the cause of our little problem. To prevent unfair competition – and to reward them for the time and money they put into developing their wonder drugs – companies like Viagra makers Pfizer get something called a patent.

For a limited time – until the patent runs out – they are granted a monopoly on the product they developed so they can cover their costs and earn a decent profit. Only fair. Eventually though, the patent runs out and competitors with cheaper generic versions of the drug enter the market. It just so happens that last year, a number of patents for Irish-based pharma giants ran out. And the impact on our economic performance has been, well, disappointing.

Between 2010 and 2012, Ireland's export performance remained strong despite recession in the domestic economy. A bit like Viagra, that performance was flattered by the pharma sector: for instance, of the €91.7bn exported by Ireland in 2012 roughly half (€44.5bn) was organic chemicals and medical and pharmaceutical products.

The patent cliff caused exports from these sectors to fall to just under €40bn in 2013. This accounts for almost all of the €5bn fall in total exports in 2013 (to €86.9bn).

Most of the rest of the economy is working reasonably well, so far. In sectors unaffected by the cliff, exports are steady. And if Fitzgerald's analysis is right, the cliff should, in terms of its impact on economic growth performance, cease to be a cause of embrassment by the end of this year. It is, as I say, a temporary interruption of normal service.

What about the loss of pharma exports though? As the success of the web summit – and the arrival of firms like Google, Facebook, Twitter and Tripadvisor – shows, for every pharma patent that ends a new success story begins. Ireland's FDI story is one of continual renewal and re-invention and the positive news is that services exports continue to grow.

Having said this, last year was a poor one for exports overall. A good three-year spell of growth was interrupted. And now two things are happening, both of which spell real trouble.

Firstly, with the euro worth $1.39, indigenous exporters are feeling strains from which multinational are more immune.

Secondly, and worse still, is the approach of a cliff far more ominous than the patent cliff: A diplomatic geopolitical cliff over which the EU, US and Russia could tumble if they don't pull back from the brink.

Today voters in Crimea are most likely to have overwhelmingly voted to rejoin Russia. Vladimir Putin is promising to re-absorb them into Russia. But the EU and US are threatening sanctions if he does. Whether they have the mojo to follow through is anyone's guess. But if they do then Russia and its ally in this crisis China have threatened a "symmetric" response.

For a continent that depends on Russian gas, it is a dangerous moment. Even more so for an island like Ireland so dependant on fossil fuels, both for energy consumption and in terms of a relatively high care dependency.

The more serious aspect of this threat is that if there is one thing on which we depend so totally that if it ever disappeared our economic prospects would be permanently damaged, it is a globalised economy.

It is no accident that the best phase of the Irish economy occurred during the era of best relations between the world's major powers. And even though the peace and prosperity of the last quarter century was interrupted by crisis, the regime of global co-operation that saw us through that crisis is not to be taken for granted.

But now is a time of scepticism about the EU. Isolationist and protectionist voices are rising. But as events a century ago in Serbia showed, disunity among key European states has disastrous consequences.

Twenty years ago, renewed conflict in that region was contained and ended because all EU nations were united with Russia and the US. If a conflagration in the Black Sea leads that system to break down it could take with it a system of global trading and co-operation that has transformed the planet and lifted hundreds of millions of people out of poverty. If that happens, the economy that gave the world Viagra could be as impotent as in the days before the Celtic Tiger.

Marc Coleman presents 'The Marc Coleman Show' on Newstalk 106 to 108fm each Sunday from 9pm

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