Pharmaceutical & chemicals: highly specialised export champions

Pharmaceutical & chemicals: highly specialised export champions

Sector Overview

  • Gross Value Added: £21 billion[91]
  • Jobs: 322,000[92]
  • Exports: £53 billion
  • Exports to EU: 56% of total
  • UK exports as % of Global exports: 4.0%[93]
  • UK Turnover: Chemicals £60 billion[94]

The chemicals and pharmaceuticals sector represents 15% of total UK manufacturing output.[95] With exports of £53 billion, the sector is one of the UK’s largest exporters, accounting for 18% of the UK’s goods exports.[96]

In life sciences, the UK is a global leader, ranking second in the world after the US with a 10% share of global exports.[97] In chemicals, the UK is home to a wide range of companies from around the world. The UK has a particular focus on speciality chemicals and is the fourth largest chemicals producer in the EU.[98]

Both sectors have become extremely globalised, helping a number of UK companies to emerge as international players and attracting significant investment into the UK.

However, while some parts of the sector have flourished, the UK has lagged behind many of its main competitors in recent years. A number of major chemical plants in the UK have closed and several research laboratories have moved to other countries.

Global Trends

The chemical and pharmaceuticals sector is highly regulated. More than 500 pieces of national, EU and transnational pieces of environmental legislation affect the industry in the UK.

In pharmaceuticals, the number of new drug approvals has declined significantly over the past five years. Despite attempts to streamline processes, new medicines take an average of 12–15 years and cost on average £1.2bn to develop. As a result only one in five new medicines recoups its costs.[99]

The drive to develop new chemical compounds and new techniques of making them is putting increasing pressure on the sector to invest in research and development. In the UK, the sector invests over £5 billion in R&D every year. This represents more than 28% of total industrial R&D spend in the UK. [100]

The cost of energy is rising in importance to the global chemicals industry based on the availability of cheap shale gas and chemical feedstocks in the US. Energy costs can be up to 60% of the production costs for many of the industry’s common products.[101] Cheap shale could give the US a "profound and sustained competitive advantage" in chemicals, plastics and related industries. As a result, US chemical output is expected to double by 2020. [102]

Emerging markets are becoming increasingly large sources of demand and competition. In the chemicals sector, it is estimated that emerging economies in Asia will represent a third of speciality chemicals and half of plastics demand by 2030. Similarly, in pharmaceuticals, while developed markets account for 90% of healthcare spend today, it is estimated that Asian markets will represent almost a third of all healthcare spending by 2030.

Case Studies: the UK exports chemicals and pharmaceuticals export all over the globe

Croda: A global leader in specialty chemicals, Humber-based Croda exports most of its UK production and overseas sales are now 95% of global turnover. In 2012, 62% of sales were outside Europe and sales in the US rose by 5% with a 4% growth in overseas markets.

Astra Zeneca: The UK’s second-largest pharmaceutical company, employing around 50,000 people worldwide. The company are present in over 100 countries across the world, manufacture in 16 and spend over billion on research across 3 continents. It has been particularly successful at entering emerging markets and is currently the second largest pharmaceutical company in China by sales, with revenues in China rising by 17% in 2012.

PZ Cussons: Africa now accounts for 40% of profits for PZ Cussons and Nigeria is now the largest single market for the manufacturer of soaps and toiletries. Similarly, the company’s expertise in entering new markets has given it a 40% of the market in the emerging babycare toiletries market in Indonesia.

Advantages of EU membership: harmonised EU regulations have helped drive economies of scale

Harmonised legislation for the approval of medicines through the creation of the European Medicines Agency (EMA) has greatly simplified the procedures for approving new medicines across the EU, by introducing a single approval process for the whole of the EEA. The decision to locate the EMA in London has boosted the attractiveness of the UK to FDI in the pharmaceutical sector. [103]

The EU has played a key role in harmonising intellectual property processes that create incentives for innovation in the pharmaceutical and chemical sector. Additionally, the EU has been a powerful actor in pushing for the protection of intellectual property for innovative compounds in developing countries.

The creation of the Single Market has enabled the UK to operate as part of a pan-European supply chain of chemical products. The removal of tariffs has enabled the UK to specialise in the production of high-value chemicals for which the UK alone would not represent a sufficient market.

Pan-European research funding through programmes such as the Innovative Medicines Initiative (IMI) has contributed to the UK’s competitiveness in the pharmaceutical sector. Across member states, UK organisations have so far won the largest proportion of IMI funding (€140 million), with the greatest number of participants. [104] The UK has therefore secured substantial value from IMI.

Challenges of EU membership: regulations such as REACH can be costly.

The EU is the most regulated chemical market in the world. Since chemical manufacturers operate at a global level, EU legislation has in some cases put EU-based companies at commercial disadvantage when it comes to supplying non-EU. For the UK, where over 90% of companies in the sector are exporters, [105] the impact of regulation goes significantly further in this sector than in many other areas of the economy.

The REACH directive on chemical safety is the most high-profile example. It is the largest environmental regulation ever produced by the European Commission and many companies, especially smaller producers, are struggling to deal with the requirements. Overall, the UK Chemical Industries Association, further supported by the Association of the British Pharmaceutical Industry, stated that they see REACH as a positive development and support its principles but that “interpreting the legislation is proving extremely complex, more than it needs to be, and there would be some benefits in considering how the guidance that has been produced to help companies comply could be simplified.” [106]

18 %

The sector accounts for nearly a fifth of UK goods exports

Forward Agenda: UK chemical and pharmaceutical producers need the EU to address the energy challenge and sign a trade agreement with the US

The needs of ‘Energy Intensive Industries’ must be integrated within the EU’s post-2020 energy and climate change framework. The EU needs to ensure that its transition to a low-carbon economy works for all businesses, including for those industries that rely heavily on energy to support jobs and growth in the sector.

The average price of natural gas in the US is a quarter of the price in the EU due to the exploitation of shale gas. However, the very different circumstances in the UK and EU to the US mean that this situation is unlikely to be fully replicated here. The EU has a far more stringent and comprehensive regulatory framework than the US through which unconventional exploration can take place safely. Within this existing framework, member states are also looking at how to remove barriers to shale gas exploration to ensure that industry can extract shale gas commercially. The EU should not, therefore, seek to legislate further in this area.

The Transatlantic Trade and Investment Partnership (TTIP) offers the potential for increased regulatory convergence and harmonisation between the UK and US for pharmaceuticals, with huge potential benefits for the industry. This – alongside the improved alignment on protection of Intellectual Property Rights and their enforcement - would be particularly relevant given the success of UK companies in the global market.


References

[91] Haver Analytics UK database/ONS

[92] ELMR.

[93] BIS, ‘Economics Paper No. 18: Industrial strategy: UK sector analysis’, 2012

[94] BIS, ‘Economics Paper No. 17: UK trade performances across markets and sectors’, 2012

[95] Haver Analytics UK database/ONS

[96] ONS Pink Book 2012

[97] BIS, ‘Economics Paper No. 17: UK trade performances across markets and sectors’, 2012

[98] Gilbert, Roeder & Thornley, The Chemical Industry in the UK – Market and Climate Change Challenges, Tyndall Centre Manchester, May 2013

[99] Association of the British Pharmaceutical Industry, Delivering Value to the UK: the contribution of the pharmaceutical industry to patients, the NHS and the economy, March 2013

[100] AMA Research, ‘Pharmaceutical and Biotechnology Construction Sector Report – UK 2012-2016 Analysis’, 2012

[101] BSAF website, ‘Resource conservation’, accessed September 2013, available at

[102] IHS, ‘America’s New Energy Future: The Unconventional Oil & Gas Revolution and the US Economy’, 2013

[103] ABPI, ‘Submission to the Review of the Balance of Competences between the United Kingdom and the European Union: Health’, 2013, available at

[104] Source needed

[105] Vince Cable speech to Chemical Industries Association, ‘Our competitive advantage in the chemical industry’, 2010, available at

[106] CIA response to call for evidence, ‘Tackling EU red tape’, 2013