Thursday, June 25, 2009

Venture Capital – Anything Happening?

If you’ve been following this blog (and, if you haven’t, you’re welcome to check out our archives) then you know how Larry and I feel about Big Pharma. We believe that they’re in more trouble than they or their supporters are letting on and will eventually follow many other large American companies that were once beacons to the free world of what capitalism could be and are now embarrassments. General Motors (GM), Citibank (C), General Electric (GE), and Merrill Lynch are just a few examples.

OK, that’s the bad news. But, what happens next. I’ve never felt that we’d all end up back in the caves fighting over the scraps of past glories in some sort of a post-apocalyptic future. (Apologies to Winston Churchill.) And, yes, I know this is how Larry sometimes describes consulting before he retired. But, stay with me here people, I’m talking on a grander scale. If Big Pharma tanks then where do our drugs come from? Who will the generics knock off from? Get the picture?

This is where the venture capitalists come in. Earlier, I had predicted that private capital would be a major player in the healthcare industry. Then, 2008 happened and I began to wonder about that. What with Cerberus tied up with Chrysler and everything else, I was wondering what next?

I came across an article in BusinessWeek’s June 1, 2009 edition, These Angels Go Where Others Fear to Tread, about the current state of venture capital written by Spencer E. Ante. The article focuses on venture capital (VC) and the technology industry but since bio-tech is a component of the technology sector and has always been close to the VC gang I thought that it would give me some guidance about what we may see in the bio-tech sector.

Ante’s premise is that the traditional, larger VC firms such as Sequoia Capital and Kleiners Perkins Caufield & Byers are caught in their earlier investments and are forced to curtail new investments. He cites VC investment as being off by 61% in the first quarter of this year with only a small portion of that being for first stage seed money.

The author sees a return to the early roots of VC investing with a focus on truly small startups that are getting lost in the shuffle of the bigger firms. He cites firms such as First Round, Baseline Ventures, Maples Investments, and Felicis Ventures as examples of this new trend, or, is it part of the retro fad currently underway?

Now, again, I want to caution everyone because I’m making a stretch here that these companies will be looking at bio-tech and other healthcare startups. Over the next few months, I’ll be reaching out to see what’s happening here and is this a trend for the healthcare sector as well.

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

Contributed by Guy de Lastin

Tuesday, June 23, 2009

Big Pharma – First Cracks Appearing?

Larry and I have been blogging for a while about the health (no pun intended) of Big Pharma. Earlier, we had even drawn comparisons to Big Auto. We’d left the theme for a while – there’s never a shortage of stories about this industry. But, a couple of weeks ago, I came across an interesting article in Barron’s and I felt that I was no longer a lonely voice crying in the desert. There may actually be fellow travelers!

In the June 1, 2009 issue of Barron’s, Vito J. Racanelli in his column, The Trader, questioned the supposedly solid financial results of the pharmaceutical industry. He cited analytical work done at First Global by Kavita Thomas which reported that the superior return on equity (ROE) recently at large pharmaceutical companies was not a result of improved operating results but of also of charges to equity and stock buybacks. The types of charges noted arose from foreign exchange losses and pensions. Vito cited examples of Pfizer (PFE), Eli Lilly (ELI), Johnson & Johnson (JNJ) and Merck (MRK) where these activities took place.

Vito cites Kavita’s work as a potential leading indicator for the health of the pharmaceutical industry. He’s right. While I’ve been blogging about product pipelines and government intervention, Kavita has supplied the financial analysis that can be used to see where the industry is going. Interestingly, Vito comments on pharmaceuticals’ debt levels implying that they are not excessive although debt ratios are rising, again, because of falling equity numbers.

Both Thomas and Racanelli ask how long will the pharmaceuticals use creative financing and expense reductions to support their earnings. As we’ve seen in other industries as of late, it won’t last.

So, what next? I expect that we’ll probably see more creative accounting and attempts to reduce costs. But, it’s a zero sum game. Many of the pharmaceutical companies are sitting on large cash reserves and probably have access to other sources of funding. There won’t be a dramatic deterioration overnight in the financial situation of Big Pharma overnight. Possibly, some of the vendors supplying outsourcing and similar services may have a temporary surge until the money lasts and all cost cutting avenues have been exhausted.

One final word, watch those cash reserves at Big Pharma. Ford (F) is still alive, barely, but alive, because it had the foresight to arrange for lines of credit before they needed them. General Motors (GM) and Chrysler didn’t and had to go cap in hand to Washington looking for money. If the Obama administration succeeds in reducing drug costs in this country then Big Pharma may be having to follow the same path. Hopefully, they’ll leave their corporate jets at home.

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

Contributed by Guy de Lastin

Monday, June 22, 2009

The Pharmaceutical Industry Gives the Obama Health Care Initiative $80 Billion and Can Come Out with a Bigger Prize—Who are the Winners??

The Obama administration's push to drive healthcare costs down may not be all bad news for the Biopharmaceutical Industry. While the industry today announced/agreed an $80 billion reduction over 10 years ($8 billion/year) in cost reductions to Medicare, they may be able to recoup a piece of that assuming the uninsured population become covered under a plan that encompasses prescription drug costs.

Incremental revenues could jump by $6-50 billion/year based on the assumptions one uses in per capita spend on pharmaceuticals and number of people whom would actually be covered under the plan. Taking a very conservative midpoint of 20 million incremental increase in covered people and a midpoint spend of $750/year per consumer on pharmaceuticals yields an additional $15 billion per year in revenues which equates to $150 billion over the 10 year life of the program that the industry (generously?) proposed.

Predicting he winners in such a scenario becomes an interesting exercise. As generic drugs account for about 2/3 of total prescriptions (by volume) and have growth rates in the 14-15% range in the US (versus flat or perhaps slightly negative growth of branded pharmaceuticals), one immediately has to focus on them both as a pure play and as part of the diversification strategy of large pharmaceutical companies.

On top of my list would Teva (NASDAQ:TEVA) followed by Mylan (NASDAQ:MYL) and Watson (NYSE:WPI) as near pure play generic manufacturers.

TEVA is rumored to be looking for additional acquisitions in both generics and specialty pharmaceuticals, is extremely well managed and positioned for growth both in the US and globally. Watson's recently agreed acquisition of Arrow Group which gives it a more global reach at a good price.

In the traditional large pharmaceutical space, my top pick would be Novartis (NYSE:NVS)-through its Sandoz unit as well as numerous European and emerging market generic initiatives and a strong piepline. We would then suggest that to a lesser extent, GlaxoSmithKline (NYSE:GSK) -with its numerous acquisitions, especially Ranbaxy agreement recently announced and Sanofi-Aventis (NYSE:SNY) with its broad base, generic and emerging market strategies are likely to thrive in this highly cost controlled, regulated, competitive environment.

We would be remiss to leave out Johnson & Johnson (NYSE:JNJ), not for its generic capabilities (near zero) or its eroding pharmaceutical product base, but more for its business model based on enormous diversification broadly across healthcare including branded pharmaceuticals, biotechnology, medical devices, diagnostics, consumer health and health informatics suggests that it is well positioned for the future. Finally, Shire (NASDAQ:SHPGY) is intriguing based on its business model of being a “virtual” pharmaceutical business that has decoupled itself from many of the overheads of R&D.