Tuesday, May 26, 2009

Coincidental Indicators

Lately, I’ve been wondering about where we are in the economy and its long expected recovery. We all know it’s going to come back, it’s just a matter of when. Big Pharma has more reason than most to wonder when the turnaround will occur. For them, the question is do they get their legs under them before the Obama administration pulls the carpet again.

As I’ve been noting in the business press there appear to be signs of continual slowing down for Big Pharma. The most recent indicator was in the May 25, 2009 issue of Barron’s. The staff writer, Michael Santoli penned a piece on Thermo Fisher Scientific (TMO), a leading manufacturer of laboratory equipment and supplies. While reviewing the economy’s negative impact on Thermo Fischer’s operating results, he noted that the consolidation underway in the pharmaceutical industry could reduce spending for research materials. Although, he didn’t expect this to be a major consideration for Thermo Fischer. But, this got me thinking. If the drug companies are cutting back on their expendables what’s going on? Yes, one reason for these mergers is to leverage purchasing power and unnecessary facilities. But, I doubt that all of these research and development programs are pursuing the same drugs. Are we beginning to see the long heralded cutback in pure research by pharmaceutical companies?

Another article that I came across recently in this same vein was in the May 25, 2009 issue of BusinessWeek. In Michael Mandel’s column, Mandel on Economics, he writes about the increasing productivity being experienced by US industry which could negatively affect future growth. One statistic caught my attention. Michael (beats me why all these guys are called Michael) noted an 11% decrease in research and development at Johnson & Johnson (JNJ).

Now, when I think about Big Pharma’s pipeline problems, I see what I think are coincidental indicators of cutbacks in new drug development. If they’re buying fewer research supplies and cutting back in professional staffs as Mandel implied in his article, then what is the future for these companies? How much overcapacity is there in the industry?

Larry and I have blogged about this theme before and drawn parallels with Big Auto. Now, today, this may seem a bit extreme. But, how long ago were General Motors (GM), Chrysler, and Ford (F) considered viable investments? For that matter, anyone remember American Motors Corporation?

We would be interested in hearing from our readers about what coincidental indicators they are seeing in the healthcare industry or which ones we should be watching. We’ll follow up on these in future blogs.

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

Contributed by Guy de Lastin

1 comment:

David Avitabile said...

Interesting post Guy. I believe that the reason there have been cuts in R&D expenditure is that Big Pharma is coming to terms with the fact that what it does best is sales and marketing. And that R&D is being done better and more efficiently by smaller specialty pharma companies. Therefore Big Pharma are spending less on in-house R&D and more on in-licensing, co-promotional deals and, in some cases, acquisitions--witness J&J's recent purchase of Cougar Biotechnology as an example.

I also believe that this recession has been particularly devastating to the pharmaceutical and biotechnology industry simply because these sectors have been pretty recession proof in the past. I don't recall any of the previous economic downturns of the past 20 years really hitting pharma or biotech all that hard. This one has been brutal. Companies that have experienced consistent growth with little interruption have had to cut thousands of jobs as a result of the economic tsunami that has hit them. Because they've never seen anything like this before--not to mention the added uncertainty provided by pending healthcare reform--recovery for pharma and biotech may lag other industry sectors.

The good news is that there are signs of life returning.