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Interim Report: North East Pharmaceutical Industry Engagement

April 2017 – Compiled by John Sandles & Prof Michael Whitaker. Written by John Sandles.

Executive summary

The North East pharmaceutical manufacturing industry enjoys high productivity and has an estimated UK annual GVA impact of £3 billion.  Development of a pharmaceutical manufacturing cluster in the North East of England was incentivised in the late 1960s and early 1970s and the cluster is a product of a successful Government industrial strategy and policy. Within the cluster there is a significant number of drug manufacturers who act as contract suppliers for other countries. These companies manufacture ~15% of drugs in the global drug outsourced manufacturing market. The vast majority of manufactured products are exported, with around 75% going to the US. The industry also imports many of its feedstocks and raw materials. Brexit poses a number of threats to the highly valuable and highly productive industry; namely:

  • Possible changes to the UK’s excellent manufacturing regulation systems which currently assist in placing the cluster’s sites amongst the world’s best.
  • As an industry that imports many raw materials and exports products with very high added value, effective tariff free or low tariff trade is essential.

Senior managers in the NE cluster are forecasting substantial year on year growth.  This highly performing sector will improve the UK economy’s productivity through increased investment and support to the region to ensure its competitiveness. This could be supported in the form of weighted average cost of capital opportunities available to some of the companies in the NE cluster.

KEY FACTS

  • Pharmaceutical manufacturing has a GVA per employee of £154,000, a figure exceeded only by the oil and gas sector; overall GVA contribution by the regional cluster surveyed is estimated to be circa £3 billion
  • Pharma manufacturing sites in the cluster export between 74-97% of their products per annum with approximately 70% going to the United States
  • The North East exports £2.7 billion of pharmaceutical and other chemical products to the EU alone, comparable to the £2.9 billion of cars and other transport products
  • Added value in the manufacturing chain is very high, however many feedstocks are imported and there is an opportunity to increase UK content through associated place-based investment
  • CEOs and site directors see substantial opportunities for continued growth
  • Based on current data, the cluster is expecting to recruit an additional 7% of its current workforce in the coming financial year. This is equivalent to an estimated £150 million increase in GVA based on companies surveyed
  • ~15% of the world’s outsourced manufacturing market for preclinical/clinical drugs is manufactured in the cluster
  • Manufacturing sites and companies in the North East are internationally owned. Owners include US, Japanese and Indian companies and individuals
  • The growth of the North East pharma community is a strong example of successful Government industrial policy and investment in place from the late 1960 and early 1970s
  • There are large opportunities to strengthen the UK’s pharmaceutical manufacturing supply chain integration through utilisation of NE manufacturing sites

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Interim Report for the Office for Life Science – April 2017

Since January 2017 both CPI and First for Pharma have been undertaking a survey to report the pharmaceutical cluster’s senior management views and to demonstrate the economic impact of the North East’s pharmaceutical manufacturing cluster, as well as ascertaining the cluster’s needs in order to remain internationally competitive and continue to significantly contribute to the UK’s productivity. In this brief document, we portray our findings to date with approximately half of the expected industrial engagements completed and a third of those that are planned with pharmaceutical manufacturers.

 

To date we have interviewed 8 companies: 4 contract manufacturing organisations, 3 life science SMEs and 1 multinational pharmaceutical organisation. Our target is to interview approximately 20 companies during the duration of this industry engagement project, including all of the 17 pharmaceutical manufacturing companies in the region.

 

Some key findings are expanded later in the document but are as follows to date:

 

  • The growth of the North East pharma community is a strong example of successful Government industrial policy and investment in place from the late 1960 and early 1970s, though some manufacturing sites date back further, to the 1920s.
  • Pharmaceutical manufacturing has a GVA per employee of £154,000, a figure exceeded only by the oil and gas sector; overall GVA contribution by the regional cluster surveyed to date is circa £0.97 billion.1
  • Extrapolated pro rata, this figure suggests a sum of around £3 billion GVA for the cluster overall
  • Sites have been reliant on exports to secure income. Pharmaceutical manufacturing sites export between 74-97% of their products per annum with approximately 75% going to the United States.
  • The North East exports £2.7 billion of pharmaceutical and other chemical products to the EU alone, comparable to the £2.9 billion of cars and other transport products.2
  • CEOs and site directors see substantial opportunities for continued growth.
  • Based on current data, the cluster is expecting to recruit an additional 7% of its current workforce in the coming financial year. This is equivalent to a £49.7 million increase in GVA based on companies already surveyed and implies an overall increase of around £150 million.
  • ~15% of the world’s outsourced manufacturing market for preclinical/clinical drugs is manufactured in the cluster.
  • The regulatory framework of the UK assists in securing the supply of material, due in large part to the increased focus on documented supply chain origin, when compared with other developed nations’ regulatory guidance. This represents a key differentiator for the region and is a non-tariff barrier disincentive to drug developers contemplating changing manufacturing location.
  • Manufacturing sites and companies in the North East are internationally owned. Owners include US, Japanese and Indian companies and individuals.
  • Contract Manufacturing Organisations (CMOs) often rely on debt financing to reinvest in assets. Access and affordability of debt finance is dependent upon their holding company’s core country.
  • A multinational drug company has recently invested £20 million to set up its first innovative continuous pharma manufacturing plant globally in the region.
  • A drug development company can progress an antibody drug conjugate (ADC) to complete a Phase I trial and beyond through infrastructure and services available from companies North of York.

GVA and Value Metrics

The following information is linked to the numbers derived from Workforce Statistics to date

  • Overall direct GVA contribution by the cluster is circa £285.4 million, rising to £0.97 billion once indirect and induced job creation is included for the industrial engagements to date.
  • The cluster is looking to recruit circa 7% of its current workforce in the next financial year. Latest figures show the GVA for each pharmaceutical manufacturing employee is £154,000; the cluster will increase the nation’s overall GVA by ~£50 million in the next financial year should all positions be filled.[1]
  • The pharmaceutical development and manufacturing industry nationally supports an additional 3.4 jobs in other sectors and related areas such as supply chain and induced services. On our current data, 6300 additional jobs are supported either nationally or in the North East as a result of the regional cluster.1
  • The cluster adds between 20 and 50 times the value to raw materials costs once fully processed depending on the specific drug market in which the company operates.

Manufacturing Metrics to date

  • The cluster holds manufacturing contracts on 138 drugs in preclinical/clinical development, approximately 2-3% of the overall amount of global drugs in development. It is generally accepted that 30% of all drugs in development are outsourced to CMOs worldwide. Thus the cluster is currently working on 15-20% of all drugs in the outsourced manufacturing market.
  • The cluster manufacturers 47+ clinically approved drugs.
  • A multinational drug developer manufacturers 5 out of its top 11 products within the region including its top selling drug which generates ~$6 billion revenue per annum.
  • Efficiency is a key driver for performance with one site reporting 50% increase in profit per FTE over a 4 year period.
  • 74-97% of all material is exported per annum; of this ~70% goes to North America making maintained free or low tariff trade vital to this industry.
  • Depending on scale, the raw material costs per batch are between 20-40% of overall batch value. The Sterling devaluation will have an impact on raw materials purchasing power, but the cluster does not seem unduly concerned due to the advantages a weaker currency has in export markets.
  • The cluster is highly dependent on the ability to procure feedstocks and raw materials from foreign suppliers. An opportunity may exist to facilitate development of and investment in of raw material processing and equipment manufacture for the pharma industry within the UK.

Regulatory & Competition Overview

CMOs in the region rely heavily on the ability to export their products and on the ability to import raw materials as well as other materials required for delivery. The potential to attract business from international clients will be core to the continued success of this industrial cluster. There are numerous planes of competition within the CMO industry such as supply reliability, expertise, regulatory adherence and cost; interestingly there has been a strong reversal of an earlier trend for drug development companies to use countries with lower cost bases, such as India, for outsourced manufacture. There are a number of issues with these lower cost regions, including degree of expertise, regulatory shortfalls and poor quality standards.  This trend reversal places a much increased amount of value on the outsourced manufacturers in the more developed world and shows that the manufacture of drugs is not a commoditised market.

As already stated, our industry engagements to date show that between 74-97% of all material is exported with approximately 70% going to North America. This represents a key market for the cluster and the ability of the North East to continue to attract North American customers will be crucial. Since the Brexit vote, the devaluation of Sterling has eased exchange rate pressure on export heavy industries and our feedback shows this is likely to be a positive for the cluster. However, the possibility of regulatory disruption through Brexit will likely pose the largest cluster threat, particularly with the strengths that the UK’s regulatory framework provides the industry through MHRA and EMA guidelines.

Against the FDA, for example, the MHRA/EMA place more emphasis on the quality standards of raw material manufacturers from which manufacturing sites procure materials and equipment used to manufacture pharmaceutical products. This provides CMOs clients with a much stronger regulatory regime to adhere to, but it ultimately is very effective at guaranteeing supply for the clients as compared to other developed nations and especially those in the developing world. This framework is perceived to be acting as a non-tariff barrier which aids the security of the drug developers’ supply, but also limits the potential to switch sites once a site in the cluster is chosen for manufacture. It is vital the UK’s regulatory strengths are maintained during the Brexit transition.

Funding and Reinvestment

  • The cluster has attracted inward investment from multiple nations throughout its history and continues to draw significant investment from countries such as the United States, Japan, India and the EU as well as the UK.
  • Capital investment or reinvestment is largely done through budget allocation from a larger umbrella company or debt financing.
  • The nation state of the holding company is key in determining the likelihood of the use of debt financing. For instance, obtaining debt financing from a developing nation may yield well into double digit interest rates, but debt financing from some Asian banks in particular make the capital easier to service when measured against UK rates and inflation.
  • Increased investment in the NE pharmaceutical industry is possible and could be supported by debt financing due to the attractive weighted average cost of capital available to some sites in the cluster.
  • Recent examples of large, often Asian, foreign investment within the NE for the automotive and rail transportation industries exhibits the NE’s ability to attract significant, long-term investment.

Workforce Statistics to date

  • Total number of employees: 1853
  • Research & Manufacturing Staff: 1252
  • Male : Female split is 66:34
  • Age demographic:
    • Up to 30 – 22%,
    • 31-50 – 49%,
    • Over 50 – 29%

To be included in the full report:

This is an interim report for the Government as an input to the consultation on its Industrial Strategy. The full report will have an increased focus on pharmaceutical manufacturing companies in the cluster, as these contribute most to GVA and exports.  It will also include the following:

  • Fuller set of anonymised, aggregated industrial engagement data
  • Story of the cluster
  • SWOT/STEEP analysis

Short, Medium, Long-Term recommendations

[1] Data from ‘The economic contribution of the UK Life Sciences Industry’ – PwC/ABPI, March 2017

2 Data from ‘UK regions, the European Union and manufacturing exports’ – Sheffield Political Economy research Institute British Political Economy Brief No. 23, May 2016

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