Monday, January 5, 2009

Being Contrarian

Well, it’s the New Year and I’m looking around at the debris left over from last year. Over the Holidays, I took some time off, wrote my last blog for the year, and caught up on my reading. One of the pieces that I read was Mike Huckman’s nine predictions for 2009 in the pharmaceutical industry ( ). Mike was at his usual, insightful best but I did differ with him on one key point. (Not only that, I was disagreeing with Barbara Ryan over at Deutsche Bank as well. I’m really going out on a limb here.)

Where I differed from Mike was his prediction that 2009 would see large Pharma acquisitions and mergers after none in 2008. I disagree here for several reasons:

First, the fundamentals are wrong. There is too much capacity in the global drug industry presently and little compelling reason to combining large companies (I'm at a loss to find a compelling example from the last Pharma industry mega-mergers). Despite low market valuations, what would any of the Big Pharma gain by merging? Pipeline? I don’t think so-where's the productivity advantage? Sales forces? Layoffs have hit these heavily at many drug companies, so there isn't much advantage to be found here. Current products? Aren’t many of these coming off patent, which two companies would have really complimentary pipelines? As we've seen with Big Auto, where many predicted mergers among the Big Three for many years, similar reasons prevented these from occurring. They just didn’t make economic sense! When somebody like an American Motors went under, then, yes, vultures moved in and bought the pieces at fire sale prices. So, this my first reason why I don’ think we will see any Big Pharma deals this year.

Next, the fallout from last year’s Wall Street debacle hasn’t been fully factored into the mergers and acquisitions business that could fuel a pharmaceutical merger. Goldman, Sachs and Morgan Stanley are no longer investment banks. Merrill Lynch is now just a fond memory for those of us who used to work on the Street. My point is that many of the facilitators of the large, and I mean really large, deals are either no longer around or are preoccupied with their own survival. Yes, I know there are other players there, but, I don’t think we’re going to see any of yesterday’s feeding frenzies anytime soon.

Finally, I believe that Big Pharma has to get itself organized to face the new realities of the global economy. As drug patents continue to run out cash will be drawn down to meet operating expenses. Assets will have to be sold off. These may be the non-pharmaceutical businesses owned by some or what valuable drug related ones that may still be marketable. As I blogged last year, Big Pharma could very well be where Big Auto was several years ago. And, this is where I think the opportunity is for Big Pharma in 2009. Breaking up and selling off of the large, pharmaceutical companies could be the real driver. Overcapacity and shrinking pipelines aggravated by developing cash flow pressures could be the catalyst for this activity. Let’s see what happens.

As always, we welcome your feedback. Please contact us at We look forward to hearing from you.

Contributed by Guy de Lastin

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