Wednesday, November 7, 2012

7/11/2012: A patent cliff or a temporary slide?

In the previous post, looking at the top-line figures for Industrial Production for Ireland, I have promised to look more closely at the dynamics underlying the largest singular exports (goods) driver - the Pharma sector - Basic Pharmaceutical Products and Preparations (BPP&P) sector. Here are some numbers and trends.

An excellent analysis of this is also available from Chris Van Egeraat of NUI Maynooth (link here).

Let's start from the top. Throughout, I use the current figures for September that are subject to potential future revisions.

Production volumes:

  • Index of production volume in Basic Pharmaceutical Products and Preparations sub-sector fell from 165 in August to 107 in September - a decline of 35.15% m/m and down 31.76% y/y.
  • Compared to 2010, the index is now down 29.47%, compared to the peak value for January 2010-present period the index is down 42.41%.
  • Back in September 2011, the index rose 3.36% y/y, so the swing in growth rates is extremely sizable.
  • The declines are much shallower if we look at 3mo MA readings which a more likely to be reflective of the longer trends: for the latest 3 months through September 2012, the index average is down 9.27% compared to the 3 months period through June 2012. The index is also down7.02% compared to 3 months period through September 2011 and 5.93% down on its reading for the period through September 2010. Back in 2011, 3 months average through September rose 0.57% y/y. 
  • Turnover index fell from 136.4 in August to 105 in September 2012 a decline of 23.02% m/m and 27.44% drop y/y.
  • Compared to September 2010, the index is now down 29.72% and compared to the all-time peak activity for January 2010-present period, the index is down 40.10%.
  • Back in September 2011 the index posted a decline of 3.15% y/y.
  • Again, looking at 3mo averages through September 2012 there was a rise in the index of 2.0% compared to 3mo average through June 2012, but a decline of 8.82% on 3mo average through September 2011. Compared to 3mo average through September 2010, current index reading 3mo average is down 11.85%. This contrasts with index 3 mo average through September 2011 declining just 0.9% y/y.

There is clearly a steep drop off in both series. And this falloff has a significant impact on our exports and overall industrial sectors activity. 

However, the series are volatile. For example, for January 2010-present, standard deviation in the turnover index for BPP&P sector is 11.82, against standard deviation for manufacturing sector at 3.41. In terms of volume of activity, index standard deviations are 12.61 and 4.42 for BPP&P sector and manufacturing, respectively.

Nonetheless, the drops in September amounted to 4.6 STDEV in Volume and 2.66 STDEV in Value - both are sizable.

A comparable drop in Volume in November 2011 came in at:
  1. Shallower m/m change of 25%;
  2. Was on foot of historical high (August 2012 was the third highest reading in Volume terms) and
  3. Coincided with a monthly rise, not fall, in the Turnover index activity.
Thus, one has to be cautious when attributing the index moves in September 2012 to either volatility or the specific long-term trend change, such as a patent cliff (again, the note linked above from Chris Van Egeraat is spot on in this point).

However, one must be cognizant of the signifiant positive links between activity in the BPP&P sector and overall Manufacturing activity. Chart below illustrates the strength of that relationship:

One has to be also significantly concerned with the fact that we have coincident drops in Turnover and Volume, so the price effects seem to be going the same direction as the volume of activity. In general, there is virtually no meaningful relationship between sector volume and turnover. Strengthening of the link between turnover and volume can be reflective of a structural slide in the overall activity.

As usual, caution is warranted in interpreting the immediate and provisional figures. However, 'slips' like this do matter - both in terms of their immediate impact on GDP and (less so) GNP, and in the light of what we do anticipate - the reduction in overall sector activity in the near future due to patent cliff.

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