Saturday, January 26, 2008

Industry: Will there be a shakeout in the pharmaceutical sector?

In my recent blogs, I’ve been writing about if Big Pharma is in trouble. I think that I’ve made the point that it is and probably will be in trouble for the next decade. The question is what happens next?
Probably what has happened in every other industry with excess capacity since the Industrial Revolution. There will be a shakeout. Strong players will survive and the weaker ones will go by the wayside. OK, that’s simple enough, but, how will this occur? I have some thoughts here.
First, the well documented saga of the drying up of Big Pharma’s new product pipeline should put a premium on companies with strong research and development teams. Differentiation will have to come to those who can produce their own products. The feeding frenzies that result from bidding wars for perceived valuable targets generally result in overpriced acquisitions that rarely pay back in the expected manner. Companies that can’t develop their way out of their difficulties could end up as acquisition targets of Indian or Chinese companies.
Next, those self styled health care companies that are really conglomerates in disguise may begin to be broken up. In the balmy days of easy revenue growth, all sorts of synergy arguments (at the risk of dating myself, I can remember these arguments from the Sixties) could be made for having other product groups like medical devices and consumer products. Reality will begin to set in as the oft promised synergies do not materialize. Once managements realize that they cannot continue to deliver the earnings expected by the markets then those private equity groups I was blogging about last time are going to start sniffing around. Even a company like Tyco that is not a pure health care play has spun off its medical device group. Anyone care to speculate on how long they will remain on their own before someone tries to bring it into play with other device manufacturers?
Finally, my last two observations will result in fewer large players in Big Pharma. The ones that remain will have strong research and development groups and be taking advantage of offshore opportunities in places like India and China. These players will focus on pharmaceuticals solely and not be distracted by devices or products like hair shampoos. Medical devices will probably have a shakeout and consolidation like Big Pharma. The consumer products will get absorbed into that game that’s playing out between major players like Proctor & Gamble and Wal-Mart. Foreign competition from new markets in Asia will arise and put pressure on market share and for those new start ups with new patents requiring funds for clinical testing, FDA approval, and marketing. The inevitable bidding wars for these start ups will continue as always. But, if Big Pharma gets its act together in developing new products then the bidding may not be as frenzied.
Friday’s (January 25th) pounding on Wall Street for Big Pharma (check’s Pharma Watch List for details) probably had more to do with overall market conditions than Big Pharma’s own problems. However, unless something changes soon, Big Pharma might have many more days like that one. Unfortunately, the shakeout I’m predicting is inevitable now. Now, it’s all about who makes the cut and who doesn’t.
I’d be very interested in hearing from you about this subject. Also, what companies do you think will make the cut or not? In future blogs, I plan on looking at specific companies and handicapping them. Something tells me that there will be some really good Big Pharma stories out there for the next few years.
Please contact us at We look forward to hearing from you.

Contributed by Guy de Lastin

Wednesday, January 23, 2008

Industry: Will private equity arise in the pharmaceutical sector?

Following my recent blogs about the trouble that Big Pharma is in, I thought that it would be appropriate to start talking about private equity and what role it might play in the pharmaceutical sector.
First, let me explain something. For some time I’ve believed that private equity would begin to supplant publicly raised capital. Public stock companies came into being a couple of centuries ago because capital was scarce. Markets and regulations developed over time (not always in tandem) to provide and manage these capital flows. Some argue that the West’s ability to raise and guarantee capital was the primary reason for its global dominance. However, lately, we’ve become very good at raising, if not outright creating, larger amounts of capital than anyone else had ever done before. Probably more than we need. Notwithstanding the excesses, the sub-prime meltdown being a good recent example, availability of capital is no longer an issue. Interest rates levels in modern economies for the ten years have not been terribly exciting. Investors’ willingness to throw cash into the late stages of the dot-com and real estate bubbles only proves the lack of decent returns for financial assets. Next, let’s go back to those regulations that I just mentioned. Regulations have become very cumbersome, expensive, and with the addition of Sarbanes-Oxley, very risky. Once upon a time, if a corporation fell afoul of regulations, it was a civil matter. A civil matter that would be settled with fines and penalties. Worse case, senior management would resign and maybe deal with some unpleasant litigation. Now, a CEO and a CFO could find themselves doing the perp walk with serious jail time because of the actions of a few low level flunkies that they didn’t even know worked for them. That changed the game.
I’m proposing that corporations will begin to avoid the expense and personal risk of these regulations by going private, or, at least leaving the U.S. equity markets. Anecdotal evidence from the New York Stock Exchange seems to hint that companies are choosing to list overseas as a consequence of U.S. regulations. The rise of large private equity firms like Cerberus has facilitated the migration of publicly traded companies into private ownership away from the prying eyes of the markets. One last point, have corporations become too large to effectively manage especially when the stock market’s quarterly expectations are added on? How does a CEO continue to meet analysts’ and investors’ expectations in an economy teetering on recession? It’s difficult enough for companies like GE and McDonald’s. How do you do it when you’re in a regulated industry like the one Big Pharma is in?
Let me go back to my earlier posts where I wrote about the decrease in FDA drug approvals, price resistance by national health services, and a changing political environment that may haunt Big Pharma for the next ten years. This is a very challenging environment. When does Big Pharma begin to feel the effects of all this and begin to move away from the publicly traded markets? When does private equity step in to take advantage of depressed market values and excess capacity? Former J&J COO Jim Lenehan joined Cerberus last year. Somehow I don’t think that he’s working on the Chrysler deal.
In closing, I expect to see private equity firms becoming more active in the pharmaceutical sector. The only question for me right now is which of the big companies will begin to break up and spin off their assets.
Please send your comments or questions to

Contributed by Guy de Lastin

Saturday, January 19, 2008

Industry: More Trouble for Big Pharma?

When I blog I normally try to vary my topics from week to week. This week, however, I’m going to stay with last week’s topic. I wrote then asking if Big Pharma was in trouble. I blogged that it was and predicted that the next decade was going to be a difficult one for the industry. After reviewing this week’s media, I decided to stay with this topic for my next several entries because I think that something fundamental is happening out there in this sector.
This week, Mike Huckman in his always topical and excellent blog, Pharma’s Market at, wrote about the problems with clinical trials in Big Pharma. He also had a terrific interview about Big Pharma and its troubles that I encourage everyone to view. I don’t normally use visual aids in my blogs but this one is good and Mike’s blog was kind enough to offer the following code to share the interview. Click on this link, , after you’ve finished reading my blog of course, and hear some really insightful discussion.
Mike’s blog questioned the traditional view of drug stocks as a port in a storm because of the Presidential election and the questions arising about the accuracy of clinical trials. Last week, I blogged about the perfect storm of declining FDA new drug approvals, resistance from national healthcare services to increasing drug prices, and ominous noises coming from the Presidential primaries. The long term nature of these deep rooted problems were the basis for the decade long forecast of industry difficulties that I made. The clinical trials disclosures and the risk of political opportunism from the Presidential candidates are doing nothing to make me rethink my original forecast. Can we expect the U.S. Congress to have hearings and call in pharmaceutical executives? (At least not until they get finished with major league baseball.) Can we expect yet more legislation regarding new drug clinical trials? What impact on the sector’s image will all the above mentioned problems have? Will all these problems being to affect Big Pharma’s financial well being? Will we begin to see a shakeout?
Something has got to give with Big Pharma. If we look at other industries in the United States over the last generation (e.g., auto, airlines, mainframe computers) we see periods of growth followed by a slow as conditions change and then realization of problems leading to a shakeout or consolidation of some sort. Sometimes, new competitors or technologies (Japanese auto makers and Microsoft) arise and overthrow the old model entirely. This is what I want to explore in my blogging with the next few entries. As I was recently telling Larry, I think that we’re about to see major changes in Big Pharma unlike anything that the industry has seen before. These are exciting times!
I’ve been doing all the talking here. I’d really like to hear from you. Larry and I would like to receive your comments and contributions too. Please contact us at We look forward to hearing from you.

Contributed by Guy de Lastin

Saturday, January 12, 2008

Industry: Is Big Pharma in Trouble?

Is Big Pharma in trouble? And, if it is, how bad could it be? Or, maybe I should explain why I’m making such an outlandish statement. I’m looking at three events this week. The first is an article that appeared in the Financial Times indicating that the United Kingdom’s National Health Service (NHS) was seeking a 10 per cent reduction in the cost of medicines that it purchases. A spokesperson for the NHS said that he hoped to have these negotiations completed by June. Next, the Newark Star-Ledger ran an article talking about the slow down in new drug approvals at the Food and Drug Administration (FDA). The writer, George E. Jordan, offered stark proof of what many have known for some time, that new drug research is slowing down compounded by an apparently more careful review process at the FDA. Finally, in this election year, there were the results of the New Hampshire primary. The Republicans still have no clear frontrunner. What does pass for frontrunners don’t appear to be too focused on the issues of concern to Big Pharma. With the Democrats, Hillary Clinton is alive and well with renewed vigor and I think we all know how she feels about Big Pharma. Her rivals can’t be expected to be much friendlier. Now, where do all these leave Big Pharma?
The dangers of undue concentration with only a few customers or one is shown in the United Kingdom, especially when they have the full force and authority of a legislature behind them. Combined with key drugs coming off patent and the threats provided by generics, profit margins will be squeezed. Those margins could come under further pressure if new “blockbuster” drugs don’t come out of the pipeline to offset the older products. The cost cutting and employee layoffs that have been the norm lately in Big Pharma may not be over. And, as if this isn’t enough, the impending U.S. Presidential election does not augur a friendlier environment in the future.

So, going back to my original question, is Big Pharma in trouble? I believe the answer is yes for the reasons that I’ve just given. The next question is how bad could it be? With revenues ready to tank, an inappropriate expense base, and no good prospects ahead I’m predicting that we will see several years of Big Pharma earnings declining under pressure. Some of the players may begin to fall out. My friend, Larry Rothman, in an earlier entry (A Challenge to the Life Sciences Services/ Consulting Industry, December 12, 2007) said that he believed Big Pharma management couldn’t buy their way out of trouble currently because of overly high values yielding poor results. If market valuations begin to fall then acquisitions might start again. But, that would only be bottom feeding and a turn around could still be several years off. Without new products, reduced industry capacity, a more realistic cost base, and a predictable pricing formula for its products then Big Pharma will continue to be in big trouble. There will be no quick or easy answers here. We may be looking at a decade or more before things get better for Big Pharma.

Contributed by Guy de Lastin

Sunday, January 6, 2008

Healthcare: What Are the Implications for the Life Sciences Sector of the Presidential Election?

With Saturday night’s Presidential debates now part of the historical record, the question can be raised, what are the implications for the life sciences sector of the approaching Presidential election? Personally, I don’t think that they look too good. Except for Mitt Romney’s, ‘Let’s leave the drug companies alone.’, there weren’t any strong supporters on the stage that evening.
Until the parties’ respective candidates are clearly seen, and that might be by February, uncertainty will be hanging over life sciences. And, even then, there may not necessarily be a good outcome here for them. The traditional Republican support for business and free enterprise might not be a foregone conclusion if former Governor Mike Huckerbee becomes the party’s flag bearer. What would the implications of his FairTax be on government spending? Or, here’s a scary scenario, how about former Senator John Edwards as the running mate for Senator Barack Obama? Edwards isn’t shy about touting his past experience as a very successful trial attorney that went after Corporate America. He could cause a lot of mischief while serving as Vice-president. Senator Hillary Rodham Clinton’s views on healthcare have long been known and wouldn’t bode well for life sciences companies. Then there are Senator John McCain and former Mayor Rudy Guiliani where there may be more traditional Republican viewpoints but national security and the global war on terrorism are the primary planks in their platforms. I wouldn’t expect much immediate relief for the sector from either of them. Of course, a wild card like New York City Mayor Michael Bloomberg could make a run for the Presidency as an independent and would probably be the safest free enterprise play for business although this is all merely speculation right now.
2008 may not have much relief for the life sciences sector. Each new primary event in the current campaign could be a nail bitter for life sciences executives and investors. The New Year has started with pressure on the stock markets. On those rare occasions when the media is not dissecting the Presidential campaign, they are speculating on the possibility of a recession. The price of oil and the sub-prime meltdown are still hanging over the economy. If consumer spending flags and the economy falls into recession then the life sciences sector may find itself affected as it hasn’t been in prior economic slowdowns. Especially, those with other non-life science revenue streams.

With all the uncertainty surrounding the life sciences sector the 2008 Presidential election looms large, probably than at any other period in its history. I’ll continue to update this blog on this topic as we approach the November election. I would welcome other opinions from our readers on this subject. I look forward to contributing to Larry’s blog in the New Year and hearing from you!

Contributed by Guy de Lastin