Patrick Artus aux rendez-vous de Blois: Euro; vers la sortie ?

Black is black?

The book of Patrick Artus, Economist at Natixis, which underwent a round table meeting of the history of Blois copresented  by Jean-Marc Vittori, appears, despite its title, as a plea and a hope for the Euro.

Except that, as the conference progressed , feeling was exactly the contrary : euro is a hopeless and that we must leave as soon as possible...

Report and comments:

The impossible coordination

"Countries that do not have the same currency need not strong coordination. Wages policies and different tax policies are corrected by proportional devaluations of the currencies. Countries that have the same currency have on the contrary need to coordinate as in the case of a country's deficit, all others affected.

Between the countries of the euro area, all that creates the heterogeneity is bad. Without having the same tax and social security rules, there is a real problem of dumping. But how to harmonise the labour markets? Countries that have wages got 4 times lower that we...They should be out  . It will be very  be difficult to correct it is certain...

That is why institutional progress must concern the euro area if you want it to work. An economic and monetary union has many drawbacks: same interest rates, inability to devalue... resulting in a loss of freedom of economic policies.  On the other hand, there is an economic advantage: large domestic market with major corporations more competitive (because economies of scale) in the rest of the world. »

 Comment: Well Yes, let’s dream !. Except that when the Germany proposed (in a way so utopian a kind of franco-German Government that it is doubtful whether they even believe in it)), France said no... And now, France returns to the subject, but Germany is no longer in the mood to... Nor any other country, especially those who fear a Franco-German condominium

The impossible convergence, the  forced specialization

 But how the single market has really boosted domestic trade? Surveys of economists show that actually it is especially the Germany and England who took advantage of the single market (the France little). We were unable to create a large European company in the field of renewable energy, and it is the Chinese who have done so.

The disappearance of exchange risk allows specialization of the countries of the area (each makes it what it is best at). This disappearance also facilitates the movement of capital and invest with savings accumulated in another country. But it is in theory. In fact things went less well...

Initially the specialization has seems to be working. Electronics: region Rhône-Alpe/Austria, agriculture: Spain, France... Today it would be inefficient to manufacture everything everywhere (whatever say the catalans). The savings has much circulated: the surpluses of the Germany and the low countries were used to lend money to the Greece, Spain... between 99 and 2008: the Germany lent 3000 billion euros to the countries of the South.

But at the end of the 2000s, we saw the  emerging consequences of  this 1st reflection deficit: if countries specialize in excess, their economic structures become very different. This causes a difference in levels of income between countries... predictable and inevitable. It was naïve enough to believe that as long as we have the same currency, we will have the  same economy... This is a terrible mistake of not having considered heterogeneity caused by the specialisation of Member nations.

 Comment: So the main benefit expected from the euro, the single market, worked very badly, and only for the benefit of the Germany. The Euro, it's like the Germany and football once, everyone plays,  at the end, Germany wins.

Patrick Artus, as I recall,  was even more severe; the sold idea by proponents of the euro as it would cause a convergence of the economies was just a scam, belied by the strongest economic theories. A single currency for savings heterogeneous trained on the contrary a divergence and a specialization of economies. So what was predictable, with the Euro, Germany strengthens its industrialization, Spain and the Italy's desindustrialized  and specialized _ in what ?: tourism and low cost vegetables and fruit... And France in what? Tourism, wine, gastronomy, some public services, a bit of agriculture-(cf Houellebecq)

This was  not announced to the Europeans, and it's not what people wanted.  So, now, when asked to vote for Europe, , they said, say, and  wiill say logically  : No!  (Auguste Comte: If people do not know what they  need, they know what they want, and no one should want it for them - notice to European technocrats!)

Solidarity : needed and less accepted

Addressing heterogeneity caused by the specialization of economies, within a monetary union, needs a high dose of federalism, which allows to transfer funds from the richest to the poorest areas, in a automatic way. Implied without having the richest countries  to give their agreement every time since obviously, solidarity between States is not sustainable...

It's exactly what we see in the United States where transfers between States are huge. There, if a State loses one euro, the federal system transfers 60 cents (in Europe, for a lost euro, one cent only...).  In the US, there is actually much more solidarity than we. There must be structural contribution of rich countries and rich areas to automatically transfer funds to poor areas. Otherwise, the poor will always be pooredr and the wealthy, wealthier. In the United States, despite the huge federal budget, disparities remain huge. This is the limit of the specialization.

Eoropean Policiy was suppose d to be  built as such: If one country has a debt problem, other countries in the area will come to help her... This was not the case, or one time only. For more, if inflation has been uniform throughout the area, because of the heterogeneity of the economies, standards of living begins to vary from one country to another. Clearly, a major brake to the prosperity of the euro area  is the selfishness of the rich nations who want to enjoy the benefits of the single market without suffering the disadvantages. This lack of solidarity is observed also within countries, evidenced by Catalunia in Spain.

The great crisis for Europe was from 2011 to 2014, when Germany has stopped lending to the countries of the South. Abruptly, the external deficit of these countries was no more funded, which forced them to reduce domestic spending. Austerity is in fact a consequence of the sudden stop of the German funding.

Europe has tried a few defensive reactions: creation of the European stability mechanism = + ultra-expansionniste economic policy, with interest rates at zero. But if we've developed these defensive mechanisms, we  have not solved the origin of crises in Europe.

Comments: not real need! Spain and Catalunia, which cause cold sweats at our Eurocrats, are good excuses, but, as far as I know, Germany is no longer very willing to pay.  To make the Euro work, Germany, should continuously agree to transfer to other European countries several times (2.3?)  the equivalent to the effort for the integration of the East Germany. . You only have to believe !And pray that Catalonia does not give ideas to Scotland, Padania,Flanders, Bavaria...

Black is black, euro is dead, the af ter euro ?

And yet, Mr Artus showed enough contemptuous towards the supporters of the exit from the euro, except that he did not even try  to oppose them serious arguments, repeating, for example, that the debt is in euros and not in national currency, which has been disputed; "the euro will not burst because European countries are intertwined by their debts" (while acknowledging that most of the debt is compensated - Spain is lending money to Germany!, and that net debt represent only a tiny part of the total debt) ;  that the coexistence of one  common EU currency and a national currency is extremely complicated and baroque (while acknowledging that China works, and not too badly on a similar mechanism..)

At the end of this conference, which was meant to be optimistic about the euro!, the conclusion seems to be: black is black, and the euro  is ruined. It's perfectly predictable, it will explode just as broke the Latin Union franc, and any sensible economist should worry about the euro “after” , to at least keep some  European organization...

 

Pharmaceutical research: the sky is red - sunrise or sunset

A singular article is on a very wry tone that John J. Baldwin sums up his career in pharmaceutical research (Annual Reports in Medicinal Chemistry, Vol49). A therapeutic chemist by training, he has worked thirty years for Merck Labs and is responsible for the discovery of several major drugs, including two anhydrase inhibitors, an antithrombotic carbon for the treatment of glaucoma (Trusopt and Cosopt) (Aggrastat), one of the first anti-viral hanger AIDS (Indinavir, protease inhibitor). Having had to leave Merck, he then launched a Biotech, Pharmacopeia, who was among the first to exploit the possibilities offered by the new high throughput screening techniques, and then he was involved in the development of the Chinese Wu-xi contract research firm. I reproduced here the fact that it gives quite unusual tone in a tribute to a scientific journal article.

In brief - pharmaceutical companies abandon gradually what amwas considered as  their core business, pharmaceutical research, which has becamed more and more expensive and risky - As the discovery of new drugs is the main source of value, they will not save themselves by becoming sellers of generic drugs considered as commodities, and there will be no miracle in emerging countries - Outsourcing of research with shared risk/reward models between biotech and Big Pharma (where the biotech take risks and the Big Pharma profits...) will not address the slowdown in new drug discovery - This outsourcing has helped the development of Asian competitors for research itself, and the weakening of Western countries - These developments have had a clearly negative impact for all those working in therapeutic research, and for all those who wish to enter this career.

To say otherwise, and perhaps more bluntly than Mr. Baldwin, today, I would not dare advise anybody to dream of a career in in pharmaceutical research.

End of an era; failure of mega-merges

In 1993, Merck began to prepare for the twenty-first century and the predicted patent cliff which lay ahead. One step was to decrease staff througha retirement incentive plan. Cut-backs not only pose difficult decisions for management but impose difficult decisions on the people affected as well. Such actions by Merck and other companies marked the disappearance of the lifelong commitment of an employee to a single company and the belief that the commitment of the company to this contract would also be honored. A new era in the company/employee relationship had begun.

This new reality became even more apparent over the past decade, and it must be considered by professionals and students alike as they make choices about employment. I adjusted to this apparent evolutionary change by deciding not only to take Merck’s offer but to start a new company, Pharmacopeia, which was based on cutting-edge technology not being practiced in BigPharma. Ja Chabala, also from Merck, and Larry Bock of Avalon Ventures joined me in launching the new company around encoded combinatorial chemistry and high-throughput screening. This technology played a key role in exploiting the genomic revolution and the target-specific approach to drug discovery….

Looking back to the start of the biotech era, it is clear that start-up companies continue to be a high-risk exercise. Whether the company is large or small, it still takes years and over a billion dollars to discover and develop a New Chemical Entity (NCE). This forces the small biotech firm to be in a constant search for financing and for a viable exit strategy. Recent years have not been easy ones, especially for the major pharmaceutical companies, which faced a slowing rate of discovery, major products going “off patent” into the generic class, higher R&D costs, and longer approval times. To combat this, a range of new survival strategies has been developed and adopted, including a series of mega-mergers with the resulting cut-back in employment. Since NCEs are the main factor in raising valuation, it is unlikely that the merger strategy will increase value to the pharmaceutical industry. Mergers like Merck/Schering-Plough, Pfizer/ Wyeth, Bayer/Schering, and Sanofi/Aventis will, at best, produce only short-term stability. History teaches us that such merges simply do not increase the productivity on which valuation is based. Such retrenchment stimulated an outsourcing trend that has accelerated over the past decade. The layoffs from merges and outsourcing reached 130,000 between 2005 and 2008, with the total number now well over 300,000 people. Few companies were spared: the top 10 pharma layoffs in 2011, in rank order, were Merck, Pfizer, Novartis, Abbott, Astra Zeneca, Teva, Sanofi, Johnson & Johnson, Eisai, and Bayer.  WuXi Pharma Tech, one of the first to recognize the growth in outsourcing and profit from it, went public on the New York Stock Exchange in 2000 and now has over 6000 employees.

Negative impact for those who have worked as scientists on drug R&D

 

Along with the outsourcing of science, there has been growth in alliance among large pharmaceutical companies themselves as well as with academic institutions, all with the idea of sharing both cost and risk. With the Westernmarkets mature, Big Pharma has turned to the evolving economies as part of its growth strategy. However, emerging markets have shown resistance to patented medication and a greater interest in improving health through the availability of low-cost generic drugs. To overcome the generic competition, Big Pharma has turned to“branded generics.” Even with cost only somewhat above the local generic equivalent, pricing remains a problem for Western companies. The cost of patented Western drugs in these economies is being countered by price controls and forced licensing. Considering both of these marketing issues, fast growing evolving economies may not be the answer for the problems of today’s pharmaceutical companies.

With the uptick in new FDA approvals in the past 2 years (2011–2012), it has been suggested that the worst may be over for the productivity decline we have seen in the pharmaceutical industry. However, considering that programs for these approvals were initiated in the late 1990s to early 2000s, it is reasonable to predict that the decrease in productivity expected from the bcut-backs will not be felt for at least another 10–12 years.

Things have changed in the pharmaceutical industry since I first walked the halls of Merck. These changes and the resulting strategies discussed here have had a negative impact for those who have worked as scientists on drug R&D and even those who hope to join the exciting adventure of drug discovery. The sky is red, but it is difficult to tell whether it is the sunrise o sunset. Looking to the future, it is certain that there are many road blocks along the road to recovery.

For synthetic organic chemists, the path ahead is not bright but should stabilize as the cost advantage of outsourcing to India and China decreases. In the USA, there will be fewer opportunities for chemists than there will be for biologically trained scientists as the revolution in biotechnology continues. Many of these opportunities will be in industry sponsored academic laboratories, although the productivity of this industrial/ academic strategy may decline over the next decade as Big Pharma increasingly depends on licensing new products from non-U.S. biotechs. Government laboratories, such as the National Institutes of Health and the National Cancer Institute, are unlikely to replace the industrial discovery machine that gave the world new drugs. Therefore, society will become increasingly dependent on generic medications as new drugs constitute a smaller percentage of total sales. With government budget pressures, generic drugs will become commodities with low profit margins. This may create the kind of shortages seen recently due to deteriorating production facilities and poor quality control, which leads to forced closings and recalls by government agencies.

The introduction of biosimilars will be slower than expected, and their price will not decrease as dramatically as in the case of small-molecule drugs.

The high prices for niche drugs will come under increasing pressure, as demonstrated by the Sloan-Kettering Cancer Center’s experience with the anticancer drug Zaltrap. Similar forced pricing and licensing decisions by India and other countries on expensive, patented drugs will be a growing problem for the Western pharmaceutical industry. Companies will begin to rethink whether it is worth pursuing low-volume drugs where high prices are needed to recover cost. Similarly, society must decide whether it is willing to pay high prices for drugs that extend the life of a very ill person for just a short period of time. These questions pose ethical issues that are difficult to solve.

A Personal Essay: My Experiences iin the Pharmaceutical Industry John J. Baldwin