2014 saw great progress in Ireland’s economic recovery. Though this may not be apparent to everyone. We benefitted from a resurgent US economy and continued growth in UK and strength in Sterling. The downward slide in global oil prices driven by US shale provides a small stimulus to net income for most of us. Significantly the sclerotic Eurozone and its depreciating currency is good news for Ireland. We’ve benefitted from a mild devaluation which makes our exports cheaper.
Jobs growth has been strong, unemployment is down and start-ups and exports are on good trajectories. The recovery in property prices has been a boon to bank balance sheets, NAMA and to national sentiment. The downside is that Dublin property lunacy is back, driven not by huge demand but by a complete absence of supply. The central banks proposals to mandate minimum equity level for borrowers and maximum loan guidelines for banks is very sensible. How to square adequate rental accommodation levels with affordability is a major conundrum at present in Dublin. Rental costs have escalated too far and too fast driven once again by lack of supply. Moreover though mortgage lending is improving overall rates of new loans are as strong as one would like.
Government capital expenditure levels also have a long way to go. We need more investment in infrastructure before infrastructural deficits themselves become a choke point. The introduction and fiasco around water charges shows how difficult real change is to make. After six years of austerity, many people have rallied to the “Say No to water charges brigade” reflecting the public’s exhaustion with cutbacks and the expectations of relief that better financial news has created.
Ireland inc., still however runs a deficit, we are still borrowing and the cuts in public spending have represented butchery more than surgery. Employment control frameworks, top slicing departmental budgets and creation of a tax burden on employees that disincentives work and overtime is understandable in crisis. Now that we are emerging from crisis a more imaginative approach to spending is required in the biggest spending departments – social protection/welfare, education and health. Public sector reform means more than increasing productivity – it requires introduction of contractual terms and conditions more akin to those operating in the private sector. Jobs for life, guaranteed bonuses, pensions and increments should be abolished and replaced with merit based pay and bonuses, defined contribution pension schemes and a more cerebral approach to talent and performance management. However don’t expect these changes any time soon. There is no political practicality of introducing these changes now and in that sense the crisis has been a wasted opportunity to recalibrate the national attitude to entitlements social and financial.
IDA and Enterprise Ireland both had very good years in terms of performance. The move of mandate for Science Foundation Ireland to support funding in some aspects of applied research is also welcome as the enterprise agencies and national enterprise strategy has become more coherent.
Better co-operation and co-ordination between the Enterprise agencies is welcome. The national changes to local enterprise offices and LEO strategy should bring meaningful performance improvement in supporting start-ups, local businesses and SME’s.
The National competitiveness council of which I am a member identified the necessity of Ireland protecting the competitive gains hard won through the recession. Most of these have not come through government decision but by cost attrition in the business economy, reduced energy prices and cuts to wages and salaries. The notion of wage increases in the public sector in 2015 advanced by labour unions and vested interests should be resisted. This is real cost for us all as it places inflationary demands on benefits for other sectors which feed into bad economic decisions.
It appears as if the European economy may see deflation by the end of Q1’15 unless Mario Draghi secures the option to engage in significant quantitative easing(QE).
Ireland does not need to increase its disparity in existing public sector pay with other Eurozone members, not to mind the disparity between public and private sector pay that already exists nationally. Personally I can live with super Mario failing and some euro deflation in 2015. This supports Irish exports and reduces somewhat our trading currency (weaker euro) and is what we would have done during the crisis if we still had the punt and control of our own exchange rates.
Irish economic growth in 2015 will resist any notion of national deflation. Stand by for better numbers from our Agri-food industry, tourist industry and exporters generally. Agri-food and tourism are major employers in the rural and real economy. A sustained low oil price will add between a half and one per cent to our annual growth rate.
The patent cliff’s impact on Pharma exports has been mostly absorbed. Although more blockbusters lose patent protection in 2015, Ireland’s manufacturing exposure is less affected. Biologics production is increasing in Ireland. Along with Pfizer’s monster site at Grangecastle, new investments from Regeneron, AbbVie and Bristol Myers Squibb in biopharma manufacturing add to the improving large molecule-small molecule ratio and branded-generic mix.
2014 was a year of merger and acquisitions and inversion related activity – Warner Chilcott, Allergan and Shire all featured heavily in new corporate finance driven mergers. AbbVie’s proposed $55Bn acquisition of Shire and Pfizer’s tilt at AstraZeneca forced Uncle Sam to bolt the stable door on future inversions. Consequently Ireland needs to promote its unique concentration and capabilities in manufacturing to global pharma not our tax inversion potential for investment.
Minister Noonan’s changes to the tax code has tightened the tax noose on stateless companies and imaginative but damaging financial structures. The decline of the Double-Irish and Dutch Sandwich will at least allow us negotiate from a position of strength with our European partners on tax harmonisation. The often overlooked point is that Ireland’s effective tax rate is one of the closest in Europe to the headline rate of tax. This is at odds with France, Germany and the USA where companies can lower their real rate of tax through legitimate national escape routes down to single digit percentages. Tax arbitrage will continue and indeed is a valid instrument of value creation in listed companies. Shareholders would expect no less. We’ll have to await future EU pronouncements on Ireland’s and Luxembourg’s handling of state support for foreign direct investors. This one will drag on for quite some time.
In the US pharma market the recent Hepatitis development where AbbVie negotiated an exclusive contract with Xpress Scripts to supply AbbVie’s treatment for Hepatitis C, ahead of a more convenient and tested regimen from Gilead had the Biotech buyers in a tizzy. The Biotech index saw red as commentators pondered the implications of a price war in the lucrative US Hep C market.
One looks on from Europe and is amazed that US legislation enables the present U.S. drug pricing models. This was a record year for new US drug approvals through FDA also. Most are in areas of rare diseases and cancer. It will take time but the pricing flexibility for new drugs will come under severe pressure, even in the USA.
The economics of personalised medicine when it comes to drugs is a fallacy. Premium pricing for biologics, immunotherapies and enzyme replacement is only possible because of the dramatic falling costs of individual treatment for major diseases such as cardiovascular disease, asthma and diabetes which affect far greater numbers of patients. These lower costs have been possible through expiration on patents on R&D based medicines. So one would say the model works and that the health system has benefitted from cheap high efficacy generic medicines some 12 years after these brands hit the market. However most of these branded treatments were never priced at multiple thousands of dollars per individual patient year in the first instance. As population’s age and chronic disease escalates alarmingly, how long before budgetary decisions between purchasing 10 hip joints for active 55 year olds crunch against an option of therapy in advancing cancer in a 75 year old?
We are there already. Small wonder that those thinking 20 years hence see the advent of biosimilar business models that mirror small molecule generics today. The drive to reduce the costs of biologic agents which in the main constitute personalised treatment and cost tens of thousands of dollars annually will become intense.
The new game in Hepatitis C signals only that the Tectonic plates of pricing strategy have started moving. Value based pricing will come to the US market even if government or state negotiated purchase doesn’t mandate it. When it does the business models operating now in Europe will see reflection in the USA.
In medical devices, all manufacturers have seen the providers extract better pricing and the environment has also been M&A heavy. Medtronic’s acquisition of Covidien is creating the sort of behemoth where the integration challenges and internal agenda to achieve performance almost mitigates against effective value creation. It will be interesting to watch developments.
Stryker was mentioned as a possible suitor to an unwilling (one presumes?) Smith&Nephew before the holidays. Broadening product categories, lowering relative SG&A costs over a wider base and streamlining costs through downsizing staff is a legitimate response to consolidated buyer pressure and a US government imposed device tax. Of more concern is the legitimate question of the R&D productivity in medical devices compared to years past. Although the big players are getting bigger through acquisition, it’s debatable that scale here will deliver innovation in products and technology. Undoubtedly it will deliver more products at a marginally lower cost in big markets. Something important to the US health provider customers and big insurers for certain.
I’ve been looking at the under-penetration of medical devices in Asia especially. The ASEAN region has a population bigger than Europe and the US combined and yet its device industry is tiny relatively. Its populations are ageing, growing and becoming more wealthy in major segments.
Omar Israk’s strategy in Medtronic recognised the importance of Asia as a consuming market of scale for the US medical device maker. However how easily an R&D based company can operate a high tech high cost business model in Western healthcare and a high tech low cost business model in Asia is questionable. The airline industry is replete with failures when flag carriers tried to operate low cost operations within the same organisation.
Ryanair demonstrated that an affordable product line would increase consumption by users previously ignored or gouged by the industry majors. There is a major Asian opportunity for western medical devices which are priced to address the mass market of poorer patients. However the price destruction that would be visited on US companies should their premium devices be offered at a discount to access Asian markets make this a tough business proposition for the majors.
All of this is good news for Irish based device companies. The CE certification process of European approval adopted by Irish medical device companies means these products can be sold immediately to many Asian markets aside from China. China insists on a national regulatory approach.
This opportunity has not been fully considered, but this is a viable strategy I proposed some years back in the IDA’s Life Sciences Strategy 2010. Hopefully some developments will arise here in the future.
Ireland’s deepening relationships with Asian markets and their governments is important in this regard. Government trade missions to India and China have been more pronounced in recent years. This is good news and smart. I’m pleased that John Conlon is IDA’s man in Shanghai. John is a great guy and was an excellent director of IDA’s US operations, a job he held previously.
The Medical software industry is watching Samsung and Apple’s smart watches, Fitbits and related smart wearables. The connected health market is much talked about, but is it really a market?
Who will buy and pay for this market? Who exactly who are the customers when one sets aside the gadget lovers who want to wear monitoring equipment every day. There’s certainly a consumer device market but I haven’t yet seen a health system which can integrate mass data from patient populations aside from that which goes to drug consumption and insurance costs. No doubt the market will come but it will take years. Big data does not mean better information.
I have great confidence in devices that support improved patient adherence. One device in this space is Health Beacon. It’s extremely disruptive and the fact the company is Irish is very gratifying. GenCell Biosystems sale to Becton Dickenson earlier this year for a reported $150M, points to the potential of Irish entrepreneurs. Congratulations Kieran Curran and GenCell team.
Oneview a technology I really admire recently completed an additional €7M raise. This company is making major progress with US hospitals systems providing integrated patient entertainment with the Hospital information system all on one console at the patient’s bedside. CEO James Fitter and team are a formidable outfit. Watch this space.
Irish company Maithu solutions built some great medical apps this year. Their medical Eguide to Ebola was a standout. Kerrill Thornhill and Eamon Costello are really building an interesting business from Dublin’s digital Hub.
My good friend PJ Fitzpatrick has just started Educate4health a micro-SME. However the premise of the business is a good one. Educating and empowering patients is a major driver of better performance and health outcomes. I hope to be able to write more on this space in the future.
Finally as 2015 resolutions come to the fore, that old Chinese cliché of crisis also meaning opportunity comes to mind. Our country is emerging from crisis and there are opportunities. One resolution of mine is to continue believing that smart people will find a way to win in the end. Adagio Ventures has been a great vehicle to connect with some exceedingly smart people in 2014. This next year is about deepening collaborations with those smart people to build some very nice businesses and opportunities.
Happy 2015,
Dave
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