AstraZeneca’s plan to build a $350m pharmaceuticals factory in Ireland rather than the UK was 100% predictable. And it’s not just a tragedy for Britain’s life sciences. As a paper published by the Centre for Brexit Policy in November showed, the long-term failure of UK pharma highlights how UK policy discussion is light years behind our competitors when it comes to understanding what drives prosperity.
Offshoring in the UK’s pharma manufacturing is nothing new. The trend kicked off back in 2011, when US-based Pfizer shifted its Viagra-making plant from Sandwich in Kent to Ringaskiddy, near Cork. This event marked the start of a five-year plunge in UK pharma manufacturing and exports, as UK haemorrhaged pharma manufacturing to plants elsewhere in the EU.
The data is traumatising. According to ONS, output in UK pharma manufacturing declined by roughly one-third from 2010 to 2015. Gross value added actually halved. Where did the manufacturing go? Ireland, and elsewhere in the EU. And we know that because while our imports from outside the EU flatlined after 2010, our imports from EU countries rocketed, almost doubling from 2010 to 2017.
We had a mild rally from 2015, but our trade has never properly recovered. In real terms, our pharma exports to the EU peaked back in 2009 – yes, 2009. And since 2017, we’ve regularly clocked up a whacking £10bn deficit in trade in pharma with the EU. And yet, this was our fastest growing export industry from 2000 to 2010, with an annual growth rate of 9-10%.
What’s caused this malady? In a word: taxation. In the Centre for Brexit Policy paper, we identified how corporate taxation levels appear to exert a dominating effect on where pharmaceuticals companies locate their factories. This is not a new discovery in the US, which suffered a similar pharma-shedding trajectory as the UK from around 2006 onwards. And what’s also uncontested in the US is the role Ireland has played in their own offshoring travails.
Ireland’s corporate tax rate fell from 40% in 1996 to 12.5%n 2003, and it has stayed at that level for the past 19 years. Meanwhile, the UK’s corporate taxation rate was 30% 20 years ago, and from 2008 it began a gentle drift downwards to 19% where it will remain until April this year, when it will increase to 25%.
This means, from AstraZeneca’s point of view, the investment equation is a no-brainer. Even if Ireland is forced to raise its rate to 15%, the country will shortly regain its general comparative level of between one-half and two-thirds the UK rate. Add in all the other offsets and tax reduction schemes available in the Republic and there’s every financial reason for pharma factories to skip over to Ireland.
And behold the result! Today, Ireland has one of the biggest pharma industries in Europe. Its pharma exports are now worth 2.5 times the UK’s. In 2021, its exports to the US alone hit US$29.1bn, which is more than double what we export to the entire EU. This is a fantastic success for Ireland – and a catastrophe for the UK.
There are three take-homes from this sad tale.
First, spending on research does not lead to manufacturing, and our pharma history proves it. Nevertheless, Treasury policy continues to emphasise research and development (R&D) tax credits, rather than reducing corporate taxation. Spending on R&D in UK pharma hit 40% of all spending on manufacturing R&D in 2010, according to Make UK. But look what happened next? Turnover and gross value added plummeted. In fact, pharma is still typically the biggest recipient of R&D across UK industry, and yet our exports continue to slide. And why wouldn’t it? Global pharma will manufacture wherever it can make the biggest profit, regardless of where a drug was discovered.
Second, policy makers should spend more time with sectoral analysts and give our economic modellers a well-earned rest. Most of what’s happening today in terms of industrial investment – in cars, in aerospace, in pharma – is the result of long-term trends that transcend Brexit. And the biggest factors that influence trends in investment tend to be unique to each sector. In pharma, it happens to be tax.
Third, Ireland shows what you can achieve if you focus on a strategic industry. Twenty years ago, Ireland’s pharma industry was worth a fraction of ours. Now, they export more than double what we do. They’ve done that despite EU membership, not because of it.
The UK has all the ingredients for a first class pharma industry: the scientists, the institutes, the advanced manufacturing. What we don’t have is the basic insight into what drives a successful pharma industry. Yet an example is staring us in the face from just across the Irish Sea.
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