Managerial Economic Market Analysis.

Tasks for submission

(a) Construct a graph of the real GDP business cycle for Ireland and EITHER the US or the UK between 1982-present, and indicate changes in the business cycle. (Source: European Statistical Annex) (5 marks)

(b) Graph the growth in export trade in the Medicinal and pharmaceutical sector in Ireland and compare this to the growth in total Irish exports between 2000 and 2016. (Source: CSO) (5 marks) (c) Construct a graph of the effective exchange rate between the British Pound or US Dollar (depending on your choice in part (a)) and the Euro for the previous 7 years (annual data). (Source: Eurostat; OECD)

  1. d) Choose one key macroeconomic relationship from the list below and estimate it empirically for EITHER the US or the UK (depending on your choice in part (a)) between 1982 and present. (5 marks)
  • Okun’s law: ∆U = α – β(%∆real GDP)
  • The long run Phillips Curve: (∆πt = β – αU)
  • Interest sensitive expenditure: (I = β + δr) (5 marks)

 

(e) Using your macroeconomic empirical estimates (part a – part d), key macroeconomic concepts and theories covered on the module, and with reference to additional reading, assess the short term external macroeconomic conditions for Pfizer’s Irish produced pharmaceutical exports to either the US OR the UK, and how any change in the magnitude of these exports may affect the Irish economy. (100 marks)

(Strict 3,000 word limit) (Hint: Key concepts and theories should include monetary policy linked to aggregate demand/aggregate supply and exchange rates, interest rate normalisation and QE tapering, exchange rates and capital flows, multiplier effects, trade protection and tax harmonisation.)

 

Sources of interest: OECD; IMF; WTO

A total of 12 references can be used in this Macroeconomics assignment.

A total of 5 table/Figures can be used, in addition to those produced in part (a) – (d).

 

Case study: Pfizer and the Patent Cliff

 

Despite the very real impact of the patent cliff, the pharma industry in Ireland has been boosted by a stream of significant new investments in recent years, particularly in the biopharmaceutical space. According to Matt Moran, director of Ibec group PharmaChemical Ireland, an estimated €3bn in capital expenditure is currently going into the ground in the sector here. The statistics underpinning Ireland’s pharma sector are impressive with nine of the world’s top 10 pharma companies operating here and Ireland is the fifth largest exporter of pharmaceuticals globally.

Pharma-chemical products make up a sizable portion of the total goods exported from Ireland ensuring that the sector is critical from an external trade perspective, and any negative effects caused by the patent cliff would ‘certainly put a dent in the GDP numbers,’ according to Dermot O’Leary, economist with Goodbody Stockbrokers. Despite this, Conall Mac Coille, economist with Davy Stockbrokers, argues that the impact of the patent cliff is overstated as the pharma sector accounts for just 1% of employment and the value added to the economy from the sector is less than export figures suggest. ‘Falling pharma export revenues also push down on services imports, which are typically royalty fees paid to these multinational companies’ head office – limiting the impact on to Irish GDP,’ he says.

Pfizer is one of the largest pharmaceutical companies globally, and a major operator in the Pharma sector in Ireland. The company’s fortunes have been mixed as of late, in part due to the spate of patent expiries, dubbed the ‘Patent Cliff’ that have affected the sector globally. It is just over a year ago that Pfizer admitted defeat in its hostile pursuit of AstraZeneca, another global Pharma company giant.

The factors that led the company to launch its raid – the need for new drugs and greater efficiency – have since spurred a wave of deals and mergers across the pharmaceuticals sector. Pfizer itself has delayed potential merger deals pending clarity on whether the Trump administration can deliver on its pledge to overhaul the US tax code enabling Pfizer to free up cash and repatriate billions of dollars of cash amassed outside the US without incurring a 35% tax bill, freeing up capital to spend on deals. Pfizer has been facing tougher competition from makers of generic drugs in crowded markets, and increasing pressure on pricing from budget conscious health systems.

Andrew Baum, an analyst at Citigroup, says Pfizer has sent a clear signal that it is looking at ‘transformative deals or material acquisitions’. However, following a US Treasury crackdown on inversions, which allow companies to slash their tax rate by taking over a rival in a lower-tax country and moving its headquarters there, Pfizer’s options are limited.

‘They’ve got to find a non-US company where the Government is not going to be protectionist,’ says Mr. Baum. Following the AstraZeneca rejection, Ian Read, a Pfizer lifer who became chief executive in 2010, switched back to his ‘Plan A’: returning $12billion to shareholders in share buybacks last year, while exploring the merits of breaking up the group. He is effectively running Pfizer as two companies – one focused on innovative drugs, the other on slower-growing medicines that are no longer patent protected. It is the latter operation that dominates production in Ireland, and Pfizer has reported mixed fortunes for two of its key off-patent drugs which are made here. 4 Viagra, Pfizer’s most famous drug for treating erectile dysfunction hit the market in 1998 and become a worldwide sensation.

The discovery of Viagra was the result of expensive research and development investment and an arduous approval process through various Health regulation bodies. In 2013, Pfizer’s lost its protection for its blockbuster drug from generic rivals due to the expiry of its patent. The drug has not been as resilient to competitors, Pfizer’s vice president of external supply Mr Duffy said, having now gone off patent. ‘We have downsized a number of operations in Ireland to cope with the downturn in demand caused by drugs coming off patent,’ says Mr. Duffy.

Pfizer shut a large manufacturing facility in Cork, put another plant up for sale and cut hundreds of jobs in response to the sharp drop in demand. However, during this time, Pfizer did announce that it would build a $30 million facility in Ringaskiddy, which can make drugs in smaller volumes that suit a new pipeline of more niche medicines. Pfizer’s experience with another of its blockbuster drugs – Liptor, used as an anti-cholesterol treatment – following the expiration of its patent in 2014, has been different. Pfizer is now making more Lipitor in Ireland than ever before.

The drug has defied expectations, company executives revealed, meaning factory closures and hundreds of potential job losses were prevented. There was widespread expectation that the patent expiry would cause a huge fall off in demand for Lipitor, whose active ingredient is produced in Cork. The plant where it is made at Little Island, was earmarked for closure in 2013.

But growing demand in emerging markets has helped to offset this, said Mr. Duffy. ‘On the Lipitor case, it is a very big product expanding globally – especially in China.’ Cost savings in the manufacturing process have also been developed which rely more heavily on water and make it cheaper to produce, said Newbridge site leader Dave Cagney. “What Pfizer have developed for Lipitor is a very innovative manufacturing process that has really brought costs down, and it’s good for Ireland.”

Companies like Pfizer which would have once abandoned a drug like Lipitor after it lost its patent are increasingly sticking with them, according to industry expert Matt Moran of PharmaChemical Ireland. “In the past what used to happen was the drug company would move on to a new product, but because there’s less and less new drugs available for discovery now – because treatments have already been discovered for most easy to cure diseases – they are deciding to stay in the market and bring costs down instead, competing with generic manufacturers.

The darker side of Pfizer’s approach to maintain revenue and profits was recently brought to light in their UK operations. Britain’s competition watchdog has fined Pfizer £84 million for ‘charging excessive and unfair prices’ for an epilepsy drug previously branded as Epanutin whose capsules contain phenytoin sodium. In 2012 Pfizer passed on the distribution of the branded drug to Flynn Pharma who then sold it as a generic unbranded product. Because branded drugs are subject to price controls and generics are not, the change allowed the companies to raise the price significantly.

Annual NHS spending on the drug shot up from £2 million to £50million. The estimated 48,000 patients taking the epilepsy treatment were advised not to switch to other products, so the NHS had no alternative but to pay the higher prices the Competition and Market Authority (CMA) in the UK said. The price for 100mg packet of pills increased from£2.83 to £67.50, a rise of almost 2,300% overnight.

The CMA’s Philip Marsden, chairman of the case decision group for the investigation said Pfizer and Flynn ‘deliberately exploited’ the loophole that allowed the price increase. ‘Businesses are generally free to set prices as they see fit but those holding a dominant position should not abuse the situation and set prices that are excessive and unfair,’ he said.

There is no justification for such rises when phenytoin sodium capsules are a very old drug for which there has been no recent innovation or significant investment. This comes as Pharma companies have been put under the spotlight and are incurring public outrage over unfair pricing practices in the US. America was in shock last year when a drug called Daraprim that’s used by some AIDS, transplant patients and cancer patients skyrocketed overnight from $13.50 to $750 a pill. Hillary Clinton, during the US presidential campaign, tweeted that the 5,000% spike was “outrageous” and amounted to “price gouging.”

Nothing about the drug itself had changed except that a new company – Turing Pharmaceuticals – had bought the rights to distribute it. Outside the US, where Turing do not own the distribution rights, Daraprim still only costs $1 or $2 a pill. The CMA is probing four other cases involving anti-competitive behaviour by pharmaceutical companies. Warick Smith, director general of the British Generic Manufacturers Association described Pfizer’s behaviour as ‘cynical’, flying in the face of the virtuous circle between innovator and generic companies.

‘When originators put their resources into artificially increasing the commercial value of their older products by extending their monopoly, they not only cost the NHS more money, but fail to live up to their promise to society to deliver much needed medicines. However, David Fakes, Flynn chief executive said, ‘we believe that left unchallenged, the CMA’s decision would stunt investment in generics, eventually leading to a reduction in supply and less choice for doctors and patients.’ Global market share of leading pharmaceutical companies in 2016 5.56% 5.25% 4.88% 4.32% 4.14% 4.11% 3.68% 3.42% 3.15% 2.69% 2.62% 2.37% 2.22% 2.17% 2.04% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% Pfizer Novartis Roche Merck & Co Sanofi Johnson & Johnson Gilead Sciences GlaxoSmithKline AbbVie Amgen AstraZeneca Teva Lilly Bristol-Myers Squibb Novo Nordisk

Additional Quantitative information

 

The Food and Drug Administration in the US recently granted Pfizer and Eli Lilly an accelerated review for tanezumub, a non-opioid drug that is being tested to treat people with a type of arthritis and chronic back pain. This is at a time when the US is grappling with an opioid epidemic and where sales have grown by almost fourfold from 1999-2014, and the rate of overdose deaths involving opioid painkillers climbed 200%. A non-opioid painkiller like tanezumab would be less addictive but equally as effective in fighting pain and would be advocated for use by Food and Drug Administration.

The estimated marginal cost of a dose of tanezumab if approved and brought to mass production would be $30 in the US or £22 in the UK. Pfizer’s economic advisors have estimated a simple Demand equation for tanezumab of P = -0.040 + 440 in the US and P = -0.068 + 310 in the UK based on current macroeconomic conditions, with an associated price elasticity of demand of -0.128 and -0.177 respectively. The cross price elasticity estimated competitor opioid drugs is 1.2.

 

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Ireland Nominal GDP 18.8 22.2 23.7 25.9 28.5 29.5 29.8 32.1 35.8 38.9 40.3 43.2 44.4 48.2 52.9 59.8 73.1 80.5 92.7 108.4 121.9 136 145.6 156.1 170.2 185.1 197.3 187.7 169.7 167.1 173.1 175.8 180.2 193.2 255.8 265.8 279.7 293.6
UK Nominal GDP 520 565 593 634 700 661 699 830 905 929 996 978 972 1027 1009 1097 1356 1449 1550 1773 1802 1865 1795 1923 2017 2135 2237 1964 2705 1833 1876 2066 2048 2261 2580 2367 2357 2441
US Nominal GDP 2876 3414 4087 5121 5696 4664 4219 4442 5135 4696 4982 5038 5874 6144 5859 6379 7591 8107 9064 11135 11860 11609 10176 9866 10525 11035 10564 10008 10338 11288 11148 12574 12568 13092 16256 16774 18160 18988
Ireland Deflator 17.50% 15.20% 10.80% 6.40% 5.30% 5.80% 2.20% 3.40% 5.10% -0.30% 1.80% 2.80% 5.20% 1.70% 2.90% 0.70% 4.00% 7.00% 4.10% 6.40% 6.10% 5.60% 3.30% 0.50% 3.10% 2.70% 2.70% -0.50% 5.30% -3.50% 3.60% 2.70% 1.40% -1.20% 4.90% -1.20% 1.20% 1.30%
UK Deflator 12.30% 7.80% 5.50% 5.10% 5.60% 4.50% 5.30% 5.90% 7.70% 8.00% 6.50% 3.00% 2.60% 1.20% 2.40% 4.10% 2.00% 1.20% 0.90% 2.00% 0.90% 2.20% 2.40% 2.40% 2.70% 2.90% 2.50% 2.80% 1.50% 1.50% 2.00% 1.50% 1.90% 1.60% 0.60% 1.70% 1.60% 1.90%
US Deflator 9.30% 6.20% 3.90% 3.50% 3.20% 2.00% 2.60% 3.50% 3.90% 3.70% 3.30% 2.30% 2.40% 2.10% 2.10% 1.80% 1.70% 1.10% 1.50% 2.30% 2.30% 1.50% 2.00% 2.70% 3.20% 3.10% 2.70% 2.00% 0.80% 1.20% 2.10% 1.80% 1.60% 1.80% 1.10% 1.30% 1.90% 2.20%
Ireland Unemployment 10.8 12.5 13.9 15.5 16.8 16.8 16.6 16.2 14.7 13.4 14.7 15.4 15.6 14.3 12.3 11.7 9.9 7.5 5.7 4.3 3.9 4.5 4.6 4.5 4.4 4.5 4.7 6.4 12.0 13.9 14.7 14.7 13.1 11.3 9.4 7.9 6.4 5.9
UK Unemployment 8.8 10.1 10.8 10.9 11.2 11.2 10.3 8.5 7.1 6.9 8.6 9.8 10.2 9.3 8.5 7.9 6.8 6.1 5.9 5.4 5.0 5.1 5.0 4.7 4.8 5.4 5.3 5.6 7.6 7.8 8.1 7.9 7.6 6.1 5.3 4.8 5.0 6.6
US Unemployment 7.6 9.7 9.6 7.5 7.2 7.0 6.2 5.5 5.3 5.6 6.8 7.5 6.9 6.1 5.6 5.4 4.9 4.5 4.2 4.0 4.7 5.8 6.0 5.5 5.1 4.6 4.6 5.8 9.3 9.6 8.9 8.1 7.4 6.2 5.3 4.9 4.5 4.4
Ireland Interest Rate (Nominal S-T) 16.7 17.5 14.0 13.2 12.0 12.4 11.1 8.1 9.8 11.4 10.4 12.4 9.3 5.9 6.3 5.4 6.1 5.5 3.0 4.4 4.3 3.3 2.3 2.1 2.2 3.1 4.3 4.6 1.2 0.8 1.4 0.6 0.2 0.2 0.0 -0.3
UK Interest Rate (Nominal S-T) 14.2 12.2 10.1 10.0 12.2 11.0 9.7 10.4 13.9 14.8 11.6 9.7 6.0 5.6 6.8 6.1 6.9 7.4 5.6 6.2 5.0 4.1 3.7 4.6 4.8 4.9 6.0 5.5 1.2 0.7 0.9 0.8 0.5 0.5 0.6 0.5
US Interest Rate (Nominal S-T) 14.0 10.6 8.7 9.5 8.4 6.8 7.2 8.0 9.3 8.3 6.0 3.8 3.3 4.8 6.0 5.5 5.7 5.6 5.4 6.5 3.8 1.8 1.2 1.6 3.6 5.2 5.3 2.9 0.7 0.3 0.3 0.4 0.3 0.2 0.3 0.7
Ireland Inflation Index 100.00 115.20 127.64 135.81 143.01 151.30 154.63 159.89 168.04 167.54 170.56 175.33 184.45 187.58 193.02 194.37 202.15 216.30 225.17 239.58 254.19 268.43 277.29 278.67 287.31 295.07 303.04 301.52 317.50 306.39 317.42 325.99 330.55 326.59 342.59 338.48 342.54 346.99
UK Inflation Index 100.00 107.80 113.73 119.53 126.22 131.90 138.89 147.09 158.41 171.09 182.21 187.67 192.55 194.86 199.54 207.72 211.88 214.42 216.35 220.68 222.66 227.56 233.02 238.61 245.06 252.16 258.47 265.71 269.69 273.74 279.21 283.40 288.78 293.40 295.16 300.18 304.99 310.78
US Inflation Index 100.00 106.20 110.34 114.20 117.86 120.22 123.34 127.66 132.64 137.54 142.08 145.35 148.84 151.97 155.16 157.95 160.63 162.40 164.84 168.63 172.51 175.09 178.60 183.42 189.29 195.16 200.43 204.43 206.07 208.54 212.92 216.75 220.22 224.19 226.65 229.60 233.96 239.11
Ireland Real GDP 18.80 19.27 18.57 19.07 19.93 19.50 19.27 20.08 21.30 23.22 23.63 24.64 24.07 25.70 27.41 30.77 36.16 37.22 41.17 45.25 47.96 50.67 52.51 56.02 59.24 62.73 65.11 62.25 53.45 54.54 54.53 53.93 54.51 59.16 74.67 78.53 81.65 84.61
UK Real GDP 520.00 524.12 521.41 530.41 554.57 501.13 503.26 564.29 571.29 543.00 546.63 521.12 504.79 527.03 505.66 528.11 639.99 675.78 716.43 803.44 809.30 819.56 770.31 805.90 823.07 846.67 865.48 739.16 1003.00 669.62 671.89 729.01 709.18 770.61 874.09 788.52 772.82 785.44
US Real GDP 2876.00 3214.69 3703.95 4484.09 4832.92 3879.70 3420.60 3479.61 3871.48 3414.18 3506.40 3466.09 3946.53 4043.03 3776.19 4038.64 4725.64 4991.95 5498.75 6603.27 6875.08 6630.13 5697.76 5378.95 5560.31 5654.45 5270.79 4895.47 5016.76 5412.82 5235.73 5801.05 5706.97 5839.79 7172.23 7305.79 7761.98 7941.18

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