Pharmaceutical - Life Sciences- Industry Services, Globalization & Consultants

The Rise of the Chinese Mega Pharmaceutical Company

2011-09-10T21:31:00.000-04:00

If there was any doubt that the growth of the pharmaceutical industry is moving to Asia, there is nothing more concrete than the following showing Harbin Pharmaceuticals new Headquarters building shown in this link:

http://ibankcoin.com/news/2011/09/10/shock-photos-china-rubs-transfer-of-wealth-in-americas-face/

While controversial in its opulence, there is no mistaking the increase in both demand and meeting this demand with home grown Chinese businesses, for example, here is some interesting information from Harbin's website which amply demonstrates that this is a serious competitor on the horizon both in the region and potentially globally:

Harbin Pharmaceutical Group Co., Ltd. is a state-owned joint venture after restructuring through capital and stock increases in 2005. It sets up two public companies listed on Shanghai Stock Exchange (i.e., Harbin Pharmaceutical Group Holding Co., Ltd. and Harbin Pharmaceutical Group Sanjing Pharmaceutical Co., Ltd.), and 27 wholly-owned, holding and joint-stock companies. The registered capital totals 3.7 billion yuan, the total assets amounts to 14.65 billion yuan, and the ownership interests reach 8.96 billion yuan. Staffed with total 18, 382 employees, the Group has 12 affiliated pharmaceutical companies.
　　Harbin Pharmaceutical Group Co., Ltd. integrates pharmaceutical manufacturing, trade, and scientific research as a whole, covering the seven industrial fields of antibiotics, chemical pharmaceutical preparations, non-prescription drugs and health-care products, traditional Chinese medicines, bioengineering medicines, animal vaccines and veterinary drugs, and pharmaceutical circulation. Its products are of more than 1,000 varieties, over 20 kinds of dosage formulations, and 7 major series, involving antibiotic bulk drugs and powder for injection, Chinese patent drugs, Chinese medicine powder for injection, and comprehensive preparations. The Group has an annual output capacity of 13,000 tons of antibiotics and intermediates, 3 billion of western medicine powder for injection, 400 million of point injection, 20 billion of tablets, 12.5 billion of capsules, 3 billion of oral liquid, and 45 billion of animal vaccines. The affiliated manufacturers of the Group have all passed GMP certification, the main circulation enterprises, GSP certification, and General Pharmacy Factory, Sanjing Medicine Co., Ltd., and some other subordinated enterprises, the certifications of ISO9001, ISO14001 and OHSAS18001. Harbin Pharmaceutical Group Co., Ltd. has established more than 130 sales offices spreading over 30 major cities in the country and 200 retail chain pharmacies to form the marketing network with wide coverage and strong functions.

Source: http://www.hayao.com/Corporation/hpgc.asp?cInfoId=194&dInfoId=259

More to come as we discuss the inferences for the industry

Harbin Pharmaceuticals New Headquarters Building

Fellow Travelers

2010-10-03T04:56:00.002-04:00

After several weeks of visiting various websites for pharmaceutical companies and their front organizations, I’ve gotten a little tired of reading the same old, same old over and over again. To recap for those of you joining late, I’ve been out on the cyberhighway visiting Big Pharma’s and their trade groups’ websites looking for any sign of their being aware of the impending financial disaster about to overtake them. Needless to say, I haven’t found much.

I’ve always thought that I was reasonably knowledgeable about what goes down in the life sciences industry. But, I’ve been shocked by the sameness of the various sites that I’ve been visiting and the total lack of any sense of awareness of the industry’s impending problems.

I spent some time with Larry this week going over the results to date. We feel that we’ve done sufficient research so far and don’t think that blogging about additional site visits are going to add much at this time and we don’t want to run the risk of boring our readers. So, we’re going to change our approach a bit. We’d been planning this anyway but we’re going to speed things up a bit. (But, if any of you out there are aware of any pharmaceutical sites that we should visit, please send them in.)

Starting this week, we’re going to start looking for the analysts and other industry pundits are saying. We also want to go back and do something that we haven’t done for a while – live interviews with some people whom we’ve met with before.

This week while doing my research, I came across Derek Lowe’s Seeking Alpha website (http://seekingalpha.com ) and an article that he wrote titled Big Pharma’s Future Death Spiral (http://seekingalpha.com/article/162227-big-pharma-s-future-death-spiral ). The author summarizes and comments on a presentation called The Pharma Titanic: It's Time to Root for the Iceberg given by Stefan Loren of Westwicke Partners, a Baltimore based financial firm. (What’s with all these Titanic analogies?) Stefan does a very good job of hitting on the major issues confronting Big Pharma. In particular, he not only discusses the vanishing product pipeline issue but goes into how poorly new product research and development have been managed. Derek’s comments are also very good. I recommend visiting the site and reading the article.

I came across another interesting link to Stefan’s work (http://www.chemoutsourcing.com/ChemOutsourcing08final.pdf ). The link shows a Powerpoint presentation entitled Is the Pharmaceutical Industry Exposing Itself to Unacceptable Risk by Expanding Offshore Outsourcing? The presentation is a very good summary of current trends and future outcomes. And, while not all gloom and doom, Stefan hints at a very different future.

I’m encouraged by articles like these because some people connected with the industry don’t have their heads in the sand. (Although, they generally don’t work for pharmaceutical companies.) We’ll continue to seek out these folks and hope to visit with some of them in the future.

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

The Journey Continues – Down the Rabbit Hole

2010-09-26T19:04:00.002-04:00

After several weeks of visiting Big Pharma’s websites or those of their agents, I’m still shaking my head over what I’ve been finding. Namely, nothing. Last week I used the overused analogy about the Titanic. This week, I followed the Avandia story and thought maybe I would finally find a company that I might be on the cusp of finding a company, GlaxoSmithKline (GSK) in this case, finally having to recognize reality. Well, with apologies to Lewis Carroll, I was wrong and went down the rabbit hole.

First, a quick recap. This past week, the FDA placed serious restrictions on GSK’s diabetes drug, Avandia, while, the EMA instituted a recall. (Details can be found at the website Avandia Recall News (http://avandiarecallnews.com/ ).) So, in my innocence, I thought that maybe GSK’s website (http://www.gsk.com/index.htm ) might have some insight and reflection on what’s going on. As you’ve probably guessed by now, I got that one wrong.

At GSK’s website, I found contact information for patients, medical professionals, investors and the media. There was also a statement and video from Dr. Ellen Strahlman, GSK’s chief medical officer. (I wonder where their CEO, Andrew Witty, is in all this.) It had the air of being slapped together. In fairness, I guess that would be the first reaction. But, as I went over the website, I found what I’d found earlier at other Big Pharma websites and that was a complete lack of concern over where the industry is going.

GSK’s three strategic priorities (http://www.gsk.com/mission-strategy/index.htm ) are plastered all over their website. But, I find them to be the usual corporate fluff that doesn’t seem to be focused on the industry’s problems. The website is not as well laid out as some of their competitors and its message was confusing to me.

For me, my journey has, so far, not been very encouraging. This week’s visit is the capstone of this trip. Here’s a major drug company facing a global recall on one of its major products and it’s being treated like a minor appliance recall would be in another industry. Sure, I get the fact that for legal and regulatory reasons many things cannot be said. But, where’s the awareness that a very different regulatory climate is forming out there and this is even before U.S. healthcare reform kicks in. Where’s the leadership? Either at a company level or in the industry? I don’t see it.

I don’t mean to be an alarmist but I believe that we’re seeing another major industry preparing to roll over and go to the bottom. I’ll continue with this blog stream for a while longer because I want to learn if anyone in the industry is thinking about this.

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

I Now Understand Why the Titanic Hit the Iceberg

2010-09-19T06:04:00.001-04:00

Since I began this journey across the Internet looking for Big Pharma’s story about how they’re viewing and dealing with the issues coming at them. To date, what I’ve found has not been very encouraging. The industry seems oblivious to the threats heading its way. I’m reminded of the RMS Titanic sailing along in the dark, oblivious to the lurking iceberg until, wham! , impact, and we all know what happened eventually to Leonard DiCaprio.

Larry suggested that I visit some of the smaller firms to see if the same lack of concern is prevalent. That’s where we’re going this week.

I started with one of the generics, Teva Pharmaceutical Industries Ltd. (http://www.tevapharm.com/ ). OK, they’re one of the threats, but, I wanted to see what their view is. Interestingly, it’s not terribly different from the larger pharmaceuticals’ and industry associations’ websites that I’d visited earlier.

There is one significant difference between Teva’s website and the others visited. That’s a page (http://www.tevapharm.com/about/generic.asp ) that gives a fairly good summary of what the generics industry is all about. But, nothing gives a clue about the competitive threat that generics present to Big Pharma. It’s almost like they’re embarrassed to bring the subject up. So, what gives?

Next, I went to Amgen’s website (http://www.amgen.com/ ). I found this site to be a bit more focused on the science behind drugs and in particular their approach to research. Their pipeline page (http://www.amgen.com/science/pipe.html ) presents the molecules (sounds scientific right?) under study and which modalities are being used. But, again, there’s not a lot about the future of the industry. The closest I came to an industry overview was a presentation to financial analysts (http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzk2MzUyfENoaWxkSUQ9NDAyMjU0fFR5cGU9MQ==&t=1 ) that hints at some of the issues that I’ve been railing about for months. But, that’s about all that I get.

I understand that publically traded companies have stock exchange and SEC rules about what they can say, how they say it, and when they say it. Yet, the cookie cutter approach that I’ve seen across various websites visited so far is inexplicable to me. I’ve heard the joke about how large corporations all use the same consultants hence they’re all alike. I just never thought that it would be true. If their websites are all alike then what about their strategies and business models?

Everything that I’ve seen so far only reinforces to me the storm which is waiting to break over Big Pharma. Momentum, or, is it inertia, seems to be drawing the pharmaceutical industry into a Black Hole from which there will be no escape.

I’ll be looking for more behind this story in future blogs and continue looking for evidence of coming demise of Big Pharma.

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

Still on the Cyberroad

2010-09-11T06:30:00.000-04:00

I’m still on the cyberroad looking for Big Pharma’s story. Larry made a very telling observation when I sent him my last blog for his editorial review (You didn’t really think he lets me post a blog without some form of adult supervision now did you?). He found it interesting that these companies weren’t talking about their survival.

He’s right. That’s what’s been missing here for me. Big Pharma isn’t showing any evidence that they think they are in trouble. Despite what has happened to the U.S. mainframe computer and auto industries, to name just a couple of recent, high profile examples, Big Pharma seems oblivious to what’s going on around them. I once read that Hegel, the German philosopher, had said that history repeats itself as tragedy reenacted as comedy. In which case, Big Pharma may be getting an Emmy soon for the sit-com that they’ve got in the works.

What I’ve seen so far on my journey reminds of the teams in the NFL. The team colors, the players’ names, and the hometowns are different but they’re all playing the same game by the same rules and everything always looks vaguely familiar. That’s what is most unsettling for me in this blog series.

This week, I visited Bristol-Meyers Squibb’s (BMS’s) website (http://www.bms.com/pages/default.aspx ). Another nicely done coding job, doesn’t have some of the flash of Merck’s (http://www.merck.com/ ), but, it does the technical job. I just didn’t get a sense of anything being amiss. I know I’m not the only one who feels that there’s trouble brewing in the pharmaceutical industry. (And, there are others too besides Larry who agrees with me.) Here’s another example of that complacency.

BMS’s pipeline (http://www.bms.com/research/pipeline/Pages/default.aspx ) looks like they’re keeping busy. I can’t comment on the specifics. But, I do promise that I’ll come back at some future date and look at these pipeline pages and see what it all means. Like for example, how much redundancy is there across all these pipelines? Another question, what types of markets are there? Finally, who’s going to pay for all these drugs?

When I look at sites like these, I see buzz words like big and small molecules, and biopharma. Everyone wants to take care of everyone and make them all well again. The altruism is stifling.

Please don’t get me wrong. I’m not writing this blog to be negative. I started out in search of originality and so far I’m coming up empty.

In future blogs, I’m going to visit a few more pharmaceutical companies before I go down a different path and look for some of the analysts and other commentators on the industry to validate my findings and see if I’ve missed something somewhere. Likewise, my beloved readers, please send me any links that you feel I should check out as I continue my journey looking for Big Pharma’s story.

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

On the Cyberroad

2010-09-04T06:30:00.005-04:00

I think that I’ve finally managed to break away from Pharmaceutical Research and Manufacturers of America (PhRMA) (http://www.phrma.org/ ) and its world view. Now, I’m continuing my journey across the Internet looking for Big Pharma’s story.

This week I wanted to move away from Big Pharma’s lobbyists and other front organizations. I went to the websites of two large pharmaceutical companies, Merck and Pfizer. These are two major players in the industry and seemed like a good place to start.

I’ll start with Merck (http://www.merck.com/ ). The usual trappings of a Fortune 500 company were there along with what I’m coming to expect at a large pharmaceutical company. Looking at the site, one could get the impression that this is an altruistic organization worried about patients, the environment, and helping small businesses. (Alright, I admit it, I’m a little bit cynical.)

But, I found what I came looking for, Merck’s pipeline (http://www.merck.com/research/pipeline/home.html?WT.svl=content ). I have to admit from a purely technical perspective, this was done very nicely. Now, let’s talk about the content.

Phase II, Phase III, and Under Review drugs are listed in addition to research areas. Three categories of drugs can be highlighted, biologics, small molecule, and vaccines. Clinical trial results can be linked to for drugs in Phase III and Under Review.

I’m the last guy who can say what’s a good drug or a bad drug from a financial perspective. And, Merck’s site doesn’t include financial forecasts for these potential drugs probably for very good SEC and FDA reasons. Although, I’m probably not going too far out on a limb here by saying that internally Merck is forecasting the financial potential of these drugs.

But, except for a mention to now looking at biologics, there’s nothing about what their philosophy is or why they are doing what they do. Yes, they talk about doing good things and saving lives and that’s about it. I just don’t see an exciting story that tells me that these guys are going to be tomorrow’s breakout story.

Let’s take a quick look at Pfizer’s site (http://www.pfizer.com/home/ ). Here we have all the state of the art social media, Facebook, Twitter, YouTube, and LinkedIn. When I went looking for their pipeline I found a twenty-two page PDF document (http://media.pfizer.com/files/research/pipeline/2010_0127/pipeline_2010_0127.pdf ). (They really could learn something from Merck.)

Like at Merck’s site, I couldn’t find any reference to where Pfizer saw it’s future heading. From both sites I came away with a picture in my mind of countless lab techs all over the world mindlessly droning away at testing compounds for some vague end. I’m reminded of players at a roulette wheel in a casino. Play enough numbers long enough and sooner or later, you’ll win. Didn’t this get Wall Street in trouble a while back?

My journey so far hasn’t shown me any insights yet into why Big Pharma will turn around. If they have any, they should bring them to the fore better than they’ve done so far. Come back next week to see what I’ve found.

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

First Stop – Hey, I Didn’t Get too Far

2010-08-29T06:21:00.002-04:00

As our readers may recall, I’ve begun a journey across the Internet looking for evidence from Big Pharma that there really is a good story out there for them and that they’re just going through a slump right now like everyone else. Well, imagine my chagrin when I found myself back at where I first started, Pharmaceutical Research and Manufacturers of America (PhRMA) (http://www.phrma.org/ ), one of Big Pharma’s lobbying groups.

On Wednesday, August 25, 2010, I caught a segment about drug prices on ABC World News with Diane Sawyer (http://abcnews.go.com/WN/cost-brand-drugs-soars-hurting-elderly-americans-fixed/story?id=11478210 ). The story was based on a recent AARP report (http://assets.aarp.org/rgcenter/ppi/health-care/i43-watchdog.pdf ) which stated that the prices of brand name drugs used by elderly Americans were increasing more rapidly than inflation. The correspondent cited that such drugs rose in price by 41.5% in the five year period from 2004 to 2009 while the Consumer Price Index rose by 13.3%.

Now, here’s where it starts to get interesting. ABC asked for an interview with PhRMA and was refused. Submitted written questions were ignored. But, PhRMA did issue a statement, and I’m quoting directly from ABC here, “called the AARP report "distorted and misleading" for not including cheaper generic equivalents which account for 75 percent of prescriptions filled.” Did you get that? Big Pharma’s lobbyists are taking credit for lower drug prices because of generics! You can’t make this stuff up.

I went to PhRMA’s website to see this for myself (http://www.phrma.org/news/news/phrma_statement_aarp_report ). One thing I want to do is to thank ABC for clarifying PhRMA’s statements because I had to read it about half a dozen times before I understood what they were trying to say. The report even claims that increases for drugs were the lowest since 1961. I didn’t go back and check their sources and I can only speak anecdotally about what I hear going on around me with family and friends and I have a hard time with that.

This is where I start to question the long term viability of Big Pharma as well as their ability to get out of their own way. I’ve blogged before about the threat of generics to Big Pharma’s brand name drugs. Check on Google and you’ll find many links to this topic. This was a factor in Big Pharma’s future even before there was a World Wide Web. Now, when their backs are to the wall, they justify themselves by citing the lower prices of generics. Are we seeing a shift here? Is Big Pharma moving to a commodity type model? Might we see more consolidation in the pharmaceutical industry? Could possibly Big Pharma not realize this themselves? Follow my journey for the next several weeks and we’ll see.

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

Pharmservices Blog Named among Top 10 Pharmaceutical Blogs in the World!

2010-08-23T17:59:00.003-04:00

We have been informed that the blog "Pharmatching" based in Germany had selected our blog included on their “Best Pharma Websites List”, the 10 top sites in their opinion. This marks the second time in two years where our blog has been cited as among the best in the world - we are truly humbled.

The entire list can be seen at https://www.pharmatching.com/blog/2010/08/the-best-pharma-life-sciences-biotech-websites-part-1/ . Pharmatching wrote of us:

This Blog discusses issues related to the politics, finance and technology and their impact on the industry. Always great thoughts and interesting views.

We would like to thank both Pharmatching and you, our readers, for following us and letting us know that we’re adding some value. Additionally, much of the credit for the high quality of our blog is due to my colleague, Guy de Lastin. Guy has continued to provide thought provoking, well researched articles that have attracted many to our blog.

We’ll continue to write about Big Pharma and the challenges that the entire life sciences sector faces. Stay tuned as we go out onto the Web to see what Big Pharma is actually saying about themselves in our next series of blogs.

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

Larry

More Visits to Big Pharma

2010-08-22T06:14:00.001-04:00

In my last blog, I went looking for Big Pharma. I came across one of their lobbying groups, Pharmaceutical Research and Manufacturers of America (PhRMA) (http://www.phrma.org/ ), and didn’t find much of a story. So, I decided to head over to the other major Big Pharma lobbying group, Biotechnology Industry Group (http://www.bio.org/ ), and see what they had to say.

I found another site without content, at least relevant to an explanation of how an industry will grow out of its slump. The site is busy with all the de rigueur flash for a modern website. Although, I didn’t see Twitter, Facebook, or any other social media application. (But, I’ll bet they’ll be there soon.)

Like PhRMA’s site, there’s a lot going on but no general theme. One link looks suspiciously like a paid advertisement. Overall, this site reminds me of the saying that a horse is a camel designed by committee. There’s something for everyone. The prerequisite “green” sections are even there but don’t seem to tie together.

This is what I think is wrong with Big Pharma today. There is no direction. Everything is reactive, trying to please whomever the particular gods of the moment happen to be. Let’s hope they don’t get the idea that human sacrifice is needed. Nope, sorry, it’s been done. Just look at the layoffs of all the talent from many major pharmaceutical companies over the past several years. They’ll soon find that their best and brightest have been sacrificed to false gods as others have found throughout history.

I’m starting on a journey with this series of blogs. I’ll be traveling around the Web looking for Big Pharma’s story in its own words. But I want to get past the publicists’ hype. If you read the blurbs coming out of the executive suites, everything is fine. Pipelines are strong, healthcare reform is a non-issue, and on and on. I’m reminded of what IBM dispensed from Armonk when John Akers was still in charge.

My trip will go past the type of sites that I’ve been to lately. I’ll be looking for the real story because I know it’s there. Big Pharma is an industry in a state of flux as this blog has been reiterating since its inception. I believe that time is running out for Big Pharma. They’re going to hit the proverbial “tipping point”. Yes, the coffers are still full of cash, but revenue is beginning to sputter, and while cost cutting can keep the bottom line looking healthy for a while even a first year investment analyst knows that game gets played out eventually.

So, keep an eye on this blog as I go in search of Big Pharma’s future.

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

Visiting Big Pharma

2010-08-15T16:26:00.002-04:00

For those of you who have been following my blogs (and Larry and I are grateful to all of you, feel free to refer us to your friends), you know that I talk about “Big Pharma” a lot. Sometimes I think I get a little carried away and give folks the impression that Big Pharma is a group of people who get together in Starbucks for a latte every once and again.

I’m not sure anyone has an exact definition of who or what is in Big Pharma and it’s probably a lot like the one for art – I’ll know it when I see it.

So, I went looking for Big Pharma. Who knows, I thought to myself, maybe I’ll end up with a latte.

Stopping at one of my favorite Web research tools, Wikipedia (http://www.wikipedia.org/ ), to see what I could find I went looking for this nebulous group. Well, it turns out that there’s an entry and I’m happy to say Big Pharma is alive and well if not drinking lattes. Interestingly, keying in “Big Pharma” in the Wikipedia search field yields, drum roll please, the “pharmaceutical lobby.” I have to admit that for the all the advertising money that Big Pharma spends they’re really ought to look for some better talent if this is the best that they can get for their money. (Larry, maybe you should think about coming out of retirement, there’s money to be made here.)

According to Wikipedia, the top twenty pharmaceutical companies are represented by two trade groups, an expensive way of saying lobbyists. Being the wanderer that I am, I visited one of these trade groups’ websites. I selected Pharmaceutical Research and Manufacturers of America (PhRMA) (http://www.phrma.org/ ). I must admit I was somewhat underwhelmed. Here’s why.

The site has all the requisite bells and whistles that are expected these days, Twitter, RSS syndication, electronic newsletters, even Facebook. What I couldn’t find a lot of was content. Oh, sure, there were many words. But, I couldn’t escape the sense that this was a very defensive site. (Spoiler alert – here’s where I go into my spiel about Big Pharma going away.)

PhRMA’s mission statement on the site says their goal is “is to conduct effective advocacy for public policies that encourage discovery of important new medicines for patients by pharmaceutical/biotechnology research companies.” What does that mean? Seriously, I’m not playing dumb here. I feel that they are trying to be all things to all people with this site.

If Big Pharma is really introducing new products and driving for revenue growth then why all the self justification? Does Big Pharma know something that we don’t?

Tune in next week for the next installment of my blog.

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

Big Pharma – More Doubts

2010-08-14T05:27:00.001-04:00

If you’ve been following my blogs lately then you know that I’ve announced the end of Big Pharma as we know it and since I’ve been trying to prove it. When I started this series, I thought that this might prove controversial but as I’ve been researching and blogging, I’ve come to realize that I’m probably not alone here.

Another point that I’m realizing is that some of these warning signs have been around for awhile. Maybe not with billboards and newspaper advertisements but the signs are there if you look closely enough. (Larry does say that I have too much time on my hands.)

For example, while researching, a fancy way of saying surfing the Net, I came across a report on the Federal Trade Commission’s (FTC’s) website (http://www.ftc.gov/reports/pharmaceutical/drugexsum.shtm ) entitled The Pharmaceutical Industry: A Discussion of Competitive and AntitrustIssues in an Environment of Change. The report is dated June 25, 2007 and is meant to address possible antitrust practices but I believe is a clue to how Big Pharma’s practices will work against it in the long term. Also, note that this is over two years before healthcare reform legislation was passed and even before most people even thought that Barack Obama had a chance of becoming President of the United States.

The report notes four changes in the pharmaceutical industry and discusses them from an antitrust perspective. I don’t wish to blog about that but what these changes mean to an industry that’s going through a period of elimination and consolidation.

First, the report notes that information technology is becoming a driver of competitive advantage for drug companies. My take is that early innovators who can make the big investments here will pull ahead of their competitors.

Second, the authors make the point that pharmaceutical companies could then segment their pricing strategies to different categories of users because of this technology. Here’s where I feel that since these buyers will be either the government or medical insurance providers that this will work against the drug companies. As I’ve blogged before many times, the drug companies can’t squeeze their suppliers and employees for cost reductions without the same ultimately happening to them. What goes around comes around.

The final two points discuss the antitrust implications of vertical and horizontal consolidations. These points are indications of an industry going through shake-out and consolidation. There’s no rocket science here. Go back to the nineteenth century when the first trusts were being established in the railroad and oil industries to see some of the first examples.

These points are interesting and I’m not the report’s authors thought about it the way that I am. But, I feel my points are valid. Please check the report out for yourself and let me know your thoughts.

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

Big Pharma – Why the Doom and Gloom?

2010-08-07T05:11:00.004-04:00

OK, last week, I announced the end of Big Pharma. CNBC and the Wall Street Journal haven’t called me yet. (And, if they ever do, you’ll know that it’s been really slow week in the markets.) I suspect that many of my readers (you’re out there somewhere) probably dismissed me as either a crank or a sensationalist. But, for that faithful minority who have kept the faith, I can say that there is a method to my madness. In this blog, I’ll write about some of my reasons for taking this position.

First, I’d like to return to GlaxoSmithKline’s problems with Avandia. Shelley DuBois has written an interesting article about this at CNNMoney.com (http://money.cnn.com/2010/07/13/news/companies/avandia_fda_panel.fortune/index.htm ). In particular, she raises the point of what does it mean for future drug investments if after eight (8) years on the market a drug can be pulled by the FDA, not to mention the potential for litigation. This is important because it hits right at the heart of today’s drug business – making money. If a reliable cash flow can’t be forecast, investors will seek a higher return to offset the risk. However, potential returns aren’t infinite. I make the point to reinforce that business as usual is over for the pharmaceutical companies.

Next, here’s another interesting blog (http://www.alternet.org/story/146471/8_invented_diseases_big_pharma_is_banking_on ) by Martha Rosenberg at AlterNet.com. She has two points that in particular stand out for me. She notes the move of Big Pharma away from its current big molecules to vaccines and biologics and the resistance being encountered from the anti-vaccine movement and how it may be returning to inventing new diseases for the drugs that it’s just happened to have developed. Martha then proceeds to list and describe eight new diseases that we may soon see being advertised on television soon. ( I also like how Martha snuck in the fact that a former CDC director, Julie Gerberding, is now the president of Merck vaccines.)

I’m using these two sources to substantiate my case that Big Pharma’s revenue model is dead and future growth will be unsustainable. If greater risks without offsetting higher returns are to be the future then new private sponsorship of drug development will wither away. Healthcare reform will act as a ceiling to potential returns.

Healthcare reform will also act as a brake, or at least introduce uncertainty, into “new” diseases being introduced for reimbursement anytime soon. A move to prevention as opposed to treatment on the part of the public could cause new drugs to be less successful upon introduction than in the past.

In closing, I see much turmoil ahead for pharmaceutical companies. Let’s watch earnings announcements over the next several years and see what happens.

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

Big Pharma – When Will the Music Stop?

2010-07-31T05:08:00.001-04:00

My recent blog series on Barron’s article on Big Pharma (The article is available online only for subscribers, a short preview is available at http://online.barrons.com/article/SB50001424052970203296004575320891909686872.html .) got me thinking about what’s going on with Big Pharma. Looking at the company level gives one picture, the day to day struggles of individual companies. Sometimes looking at that level misses the bigger picture.

Stepping back from the company, we arrive at a level where the seismic forces at play with Big Pharma can be observed. Geologists are fond of saying that North America and Europe are slowly moving towards each other again. And, if we all live long enough, say a couple of hundred million years give or take, then we can see it. (Larry won’t be able to get all those frequent flyer miles anymore.) Fortunately, or unfortunately if you’re either Big Pharma management or its shareholders, we’re not going to have wait nearly as long to see the end results in the pharmaceutical industry.

Whatever comes out of this process on the other end will be very different from what came in at the beginning. I’m predicting the end of Big Pharma. Yep, you heard it here first folks. Big Pharma is going away. No, pharmaceutical companies will still be around. But, the corporate behemoths that strode the Earth invoking hope and fear among all who laid eyes on them will be gone like the Olympic gods of yesterday.

I have two observations about this.

First, many are still in denial about what’s going on. Like Andrew Bary in his Barron’s article, they’re not seeing the big picture. Moody’s recent downgrading of its earnings expectations to negative for Eli Lilly (http://www.fiercepharma.com/story/moodys-cuts-outlook-eli-lilly-negative/2010-05-24 ) recognizes the current problem but still misses the future ones. The myth of long term earnings improvements is based on the myth of the future drug pipeline. It never ends! Whatever happened to provocative business journalism and rigorous financial analysis?

Next, what replaces Big Pharma? I still believe that fragmentation and geographic dispersal will result from the changes that are underway. There is historical precedent for this. Remember IBM and DEC? Once upon a time they dominated the computer industry. In fact for one brief, shining moment, IBM had it all. Then the personal computer and local area networks came along and, poof, the magic was gone. Not only that, but many of the personal computer players came and went even more quickly. And, now? Now, Lenovo sits in China with the remnants of IBM’s personal computer division. All that in about a generation.
Take a look at a blog (http://stocks.investopedia.com/stock-analysis/2010/playing-big-pharma-with-cros-crl-prxl-ppdi-mrk-kndl-cvd-iclr0706.aspx ) about contract research organizations (CRO’s) that I’ve come across recently and you may see some of the same trends unfolding with pharmaceuticals.

So, how long do you think it will be before some of those big, corporate campuses owned by Big Pharma in New Jersey are going to be subdivided and leased out to the start-ups of their now unemployed corporate occupants?

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

Big Pharma – Corruption? Say It Ain’t So

2010-07-24T07:28:00.002-04:00

To prepare for these blogs, I do research. That’s a fancy way of saying that I sit in front of my laptop and do a lot of Google searches (my preferred engine of choice). And, I’m noticing a few things lately.

First, there’s not a lot of good news out there for Big Pharma. OK, sure there’s a lot of marketing hype and spin meistering going on but not any really positive trends. Talk about biotechnology and its promise but not much on delivering on those promises.

Second, the usual bad news stories, patent expiration, generic competition, cost models out of whack, diminishing pipelines, and I’m sure I missed a few are still there. These stories go back for years, the beginning of the decade in some cases with more coming every year.

So imagine my chagrin when I came across a recent article from Natural News written by David Gutierrez posted on Kevin Trudeau’s website (http://www.ktradionetwork.com/health/who-issues-warning-about-big-pharma-corruption/ ) discussing the release of a fact sheet from the World Health Organization (WHO) discussing corruption and unethical practices in the pharmaceutical industry. These guys just can’t catch a break.

We seem to be moving from a period of public perception of an industry under siege to one that’s preying on the public. I suspect that except for BP’s current contribution to the public image of multinational corporations, Big Pharma might be getting more heat than they have been lately.

Now, let’s get back to that WHO report. WHO Fact Sheet No. 335 was first released back in December 2009. The actual report can be viewed at http://www.who.int/mediacentre/factsheets/fs335/en/index.html . The authors looked at what they call the medicines chain which included all steps in the development, marketing, and consumption of drugs and they claim that there is corruption in every step of the chain. In fact, they’ve included a pretty nifty chart (http://www.who.int/mediacentre/factsheets/images/medicines_20091209.gif ) diagramming each of those steps and the corresponding types of corruption that occur. (Rest assured, there will be future blogs about what’s going on here.)

The fact sheet states that all countries regardless of their developed status have issues. Developed countries are estimated to lose $23 billion US annually to dishonest healthcare practices. Certain practices would seem to lend themselves to certain countries and companies. I’ll hazard a guess and say that research and development and clinical trial fraud are probably more likely in the developed countries where much of this work occurs than with the less developed ones. Likewise, counterfeit drugs are a bigger for less developed countries lacking the necessary infrastructure to examine the drugs. And, I’m sure there are examples which contradict both scenarios.
In closing, I’m getting the sense that Big Pharma’s troubles are far from over and if anything they’re entering a new stage which may presage new ones coming soon.

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

A Shot Across the Bow III

2010-07-19T18:43:00.003-04:00

This week, I’ll be finishing my commentary on Andrew Bary’s recent cover story in Barron’s (The article is available online only for subscribers, a short preview is available at http://online.barrons.com/article/SB50001424052970203296004575320891909686872.html .) about the future prospects for drug stocks.

I started this series of blogs because after reading the article for the first time I was astonished at the lack of analysis of what simply appeared to be regurgitations of pharmaceuticals’ public relations flacks. The other interesting aspect of the article is the long term view that I takes. When the dates that Andrew is writing about finally come around no one’s going to remember either this article or him. I wish I could get writing gigs like that.

Last time I left off just as Andrew was about to tackle Roche. He quotes unnamed “bulls” as saying that this company has the best potential of the nine companies he’s writing about. He assumes the stock could rise 30% simply from earnings growth in the next several years. OK, why? Or, better yet, given all that we know that is out there working against this industry why should we expect earnings to simply “increase”? Especially since maybe $1 billion in annual revenues could be at risk if the FDA reconsiders its previous approval of the breast cancer drug Avastin. Check out the Bloomberg Businessweek article for more details (http://www.businessweek.com/news/2010-07-16/roche-avastin-trials-not-as-good-as-early-tests.html ).

Next up, Andrew tackles GlaxoSmithKline. This one is going to be easy. (You can tell that I’m enjoying this can’t you?) Now, Andrew couldn’t have known that the Avandia story (http://www.cbsnews.com/8301-504763_162-20010767-10391704.html ) would have broken so soon after he wrote his article. In fairness, his comments about the drug are probably his most insightful in the entire article. But, once again, he misses the obvious to follow lemming-like the unnamed bulls that he appears to be so enamored with. What gives here?

Andrew reviews three more companies in his article, Lilly, Bristol Meyers Squibb, and Astra-Zeneca. I won’t prolong the torture by going through these one by one. But, the same themes are there. A long term look at 2015, the current dividends are good, or yeah, there’re problems but there’s always tomorrow. (I’m expecting Annie to get some credits here.) Can this guy really believe all this?

I think Barron’s and Andrew really missed an opportunity here. I’m also disappointed with Barron’s, they typically run tougher pieces that challenge the conventional thinking.

It’s not like this hasn’t happened before in the U.S. economy. The auto and banking industries are good current examples. The personal computer industry is a slightly older example and the mainframe computer industry in the Sixties is another good example. How many of you out there remember Snow White and the Seven Dwarves? (Larry will tell you, I’m a serious student of history.)

One more thing, I’ll take a look back on this article in 2015 and see just well Andrew called this one.

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

A Shot Across the Bow II

2010-07-17T06:28:00.003-04:00

This week, I’ll be continuing my commentary on Andrew Bary’s recent cover story in Barron’s (The article is available online only for subscribers, a short preview is available at http://online.barrons.com/article/SB50001424052970203296004575320891909686872.html .) about the future prospects for drug stocks.

I have taken a somewhat contrarian position to Andrew’s. Here are the rest of my comments.

Andrew chides the bears’ position about drug stocks and then proceeds to review a number of pure drug play stocks. Along the way he nods toward the bulls by telling them to take Warren Buffet’s (whom I think is living on his reputation for a while now, be careful of financial advisors who raffle off lunch with themselves for charity). But, honestly, every racetrack in the country has touts giving the same advice on how to play the ponies.

Andrew’s comments about Merck don’t really provide any insight on why there should be hope for a change anytime soon there. He talks of “promising” drugs acquired in the Schering-Plough acquisition and Merck’s “historically…productive labs”. Again, no new insights. Every stock prospectus ever issued (at least since the SEC’s been around) says that past performance is no guarantee of future performance. So, why should any of this make Merck a better investment. Then there’s the projection of a potential stock price in the mid-40’s from today’s 36 per share “if the pipeline pans out”. That’s a nice, safe, long term projection that is so far out that it should be perfectly safe to make. Also, it doesn’t do too much for an investor today.

Next up, my man Andrew tackles Sanofi. He gets it right about this being “underappreciated” but it’s where he goes from there that I disagree with. His faith in their drug pipeline seems to be based primarily on the CEO’s blandishments. Again, Andrew gets it right about the immediate challenges that this company faces but looking past 2013, he thinks things could be wonderful. Why? Because of their “vaccines and insulin products”. What type of margins will these products have? They sound like the type of products that national healthcare programs would pay for. The same programs that are playing hardball on pricing. I don’t know where Andrew plans on being a few years from now, but, I’ll wager it won’t be at Barron’s.

Pfizer and Novartis are the next drug stocks reviewed by Bary. He’s not as optimistic about the former, reality has to set in sometime, and with the latter, he gives a rosy forecast for 2015.

I’ll have more to blog about this article in my next blog. I find it rather disappointing that a major publication like Barron’s can expend as much printer’s ink as they did for this article and it doesn’t really add anything new to the debate.

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

A Shot Across the Bow

2010-07-05T07:56:00.001-04:00

I don’t often get worked up over other writers’ work but a recent cover story by Andrew Bary in Barron’s about the rosy prospects for drug stocks set me off. (The article is available online only for subscribers, a short preview is available at http://online.barrons.com/article/SB50001424052970203296004575320891909686872.html . By the way, a subscription to Barron’s online edition is a very cost effective, environmentally friendly thing to do. Both Larry and I subscribe.) Here’s what got me going.

Andrew’s premise is that far from being dead, Big Pharma is on the cusp of a resurgence that could see some stocks rise by 30%. OK, now, those of you who have been faithfully following this blog know that I think anything but that about Big Pharma. The article was to me nothing more than a compilation of Big Pharma press releases. Sorry Andrew.

Let me explain why I feel this way. And, in fairness to Andrew, I’m not disputing his facts, I just see things differently, very differently.

First up, Andrew writes of the shift to vaccines and biologics. No argument there but will the profit margins be there? Also, given where healthcare reform is headed in this country and the budget shortfalls for many governments around the world (e.g., Greece, Ireland) how much money can actually be made here? Then there’s competition. What will happen when all the major pharmaceutical companies pile on? Profit margins will only get thinner. Biologics sound expensive and with their apparent manufacturing complexity can manufacturers really handle this and still make a profit?

Next, the writer quoting an analyst implies that drug stocks may be at their lows. I’ll admit that contrarianism would make the case that a buying opportunity may exist here but I don’t believe so. Contrarianism can’t trump fundamentals. (There’s a PhD dissertation in here somewhere.) And, the fundamentals aren’t good here.

Then, the dividend argument is played. (The older I get the more I can’t believe how these old bones keep getting gnawed.) Yes, dividend payouts are high for some of these companies. The argument is given that cash flows are strong. Yes, they are today but what about tomorrow when they dry up and cash balances are drawn down. Unless of course, some bright spark decides to borrow to continue paying those dividends. Shareholders of General Electric, and General Motors once used to look forward fondly to those quarterly dividend checks which don’t come anymore or are far smaller than they once were.

I’m not finished here. I’ll be back in the next several blogs to continue to dissect this article because I feel it needs to be put into perspective.

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

Europe – Big Pharma’s Next Big One?

2010-07-03T06:57:00.001-04:00

Lately, Big Phama hasn’t had much in the way of good news. And, I’m afraid that this week’s blog won’t do anything to improve that impression.

The European Union’s (EU) recent problems with its Euro currency and fiscal problems in Greece and other smaller countries will only continue to put pressure on the profits of drug companies.

A recent article by Stephen G. Brozak and Lawrence F. Jindra, MD, How the Euro’s Woes Could Impact Health of Biotechnology, the Pharmaceutical Industry and the Average American, (http://wbbsec.com/index.php?option=com_content&view=article&id=140:how-the-euros-woes-could-impact-health-of-biotechnology-the-pharmaceutical-industry-and-the-average-american&catid=58:news-articles&Itemid=80 ) highlights the impact of foreign exchange losses on overseas revenues in addition to lower sales because of straining national healthcare systems. One point that I disagree with them about is when they say that life sciences companies will have to raise prices in the U.S. to offset foreign losses. I don’t think it will be that easy. First, American insurance companies and government providers won’t roll over and take price increases without a fight. Next, the U.S. consumer is still having a rough time. Household and disposable incomes are recovering (some economists would argue that they are in a cyclical downward trend with no end in sight) so those price increases may only drive more customers away.

I suspect that the various EU national healthcare systems will probably take advantage of their control over drug and other medical products to not only reject price increases but to roll prices back. At a minimum, they may just decide to restrict the quantities purchased. Even the Indian Ministry of Commerce is forecasting difficult times ahead for its country’s drug industry (http://pharmexcil.org/data/media_files/Indianpharmaexp_media_file_266.pdf ). Not a good outlook for the global healthcare industry.

Another interesting point from Brozak’s and Jindra’s article is that the number of small biotechnology companies, the engines of new drug development, have decreased from 400 in 2009 to 300 in 2010. They hint at the impact on future revenues when the pipeline is drying up.

Unfortunately, for a while now, I’ve been somewhat negative about prospects for the life science’s industry. We are continuing to see fundamental changes in this industry as it downsizes after at least a generation of outsized growth which wasn’t sustainable. I’ll continue to blog about what’s happening and where this all may be going.

Flashback: I just want to reference back to a prior week’s blog on Offshoring – Gone Too Far? Recently, MSNBC carried a story by Christopher Bodeen of the Associated Press (http://www.msnbc.msn.com/id/37624923/ns/business-world_business/ ) about ongoing labor unrest in China by workers seeking higher wages. Apparently, some are seeking pay increases up to 20%. Let’s see what that does to the offshoring trend! I’ll keep an eye on this developing story.

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

A Cautionary Tale

2010-06-26T07:09:00.001-04:00

I’m going to run off the reservation a little today. (OK, maybe more than a little, but, I think the point is important.) The media has been full of stories for most of this year about several, large corporations (e.g., Toyota, BP, Massey) that have gotten themselves into a lot of trouble. (Check out Matt Krantz’s USA Today June 4, 2010 article, http://www.usatoday.com/money/markets/2010-06-04-disasterstocks04_ST_N.htm .) Now, you’re probably wondering why I’m blogging about these companies and what’s the relationship with Big Pharma?

The connection is cost cutting. Relentless cost cutting to the exclusion of all else. I’m not implying that these companies are alone in this. The mantra of cost cutting to enhance shareholder value has been around for at least a generation. It sounds seductively simple, unnecessary costs should be eliminated. The good costs are those that enhance productivity and everyone goes home happy. Right?

Here’s where I’ve always had a problem with this rather simplistic view of things. What’s a good cost? The financial analysts and media tend to look at earnings per share (EPS) and year over year profits. The fact that routine maintenance costs, expert staff, and training costs for the remaining employees have been reduced, if not outright eliminated, seems to be glossed over. And, let’s not forget about research and development expenditures which might go a long way to explaining the drying up of the product pipelines at drug companies lately.

Corporations have been becoming increasingly complex for a long time. Managing complexity as many of our readers know from firsthand experience is no simple matter. So, how can a simple measure like how much less have we spent than last year be used while the business is not exactly simplifying?

Product recalls may prove to be leading indicators in the long run of underlying problems. Of course, that assumes the products are being recalled in the first place. Take a look over at the FDA’s website for drug recalls (http://www.fda.gov/safety/recalls/default.htm ) and ask yourself how can these things happen to companies like Pfizer?

Where I’m going with all this is what should we expect to see with Big Pharma and their smaller brethren? I’ve blogged before about how large life sciences companies are collections of products and services that are almost impossible for one executive to manage.

The argument of synergy is often trotted out, but, I have yet to see a consistent track record for that one. In fact, I can’t even think of a good stand alone example of one. (I invite the readership to post with any that they may be aware of.)

In closing, I believe that we are seeing the start of a new trend for business and especially in the life sciences sector and that is, large, complex businesses struggling to understand what expenditures are necessary and which aren’t. Since figuring this one out is tough, I expect that we’re going to see declining profits for some time.

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

Offshoring – Gone Too Far?

2010-06-06T17:15:00.002-04:00

One question that Larry and I get all the time is when do we think the offshoring trend will reverse and all those jobs will start coming back home to the U.S.?

Well, we don’t have a date but we think we’re seeing some signs that we’re close to the high tide mark.

Earlier, we blogged that when the cost differential between manufacturing in this country versus overseas begins to narrow the offshoring incentive will begin to disappear. We may be getting close to this event.

Recently, the media have been full of stories about worker suicides at manufacturing facilities in China because of low wages and poor working conditions. In particular, Foxconn Technology, manufacturer of iPhones and iPads among many other globally recognized brands has been receiving a lot of attention. See Elaine Kurtenbach’s Associated Press article from MSNBC for a good write-up (http://www.msnbc.msn.com/id/37436341/ns/business-world_business/ ).

Even the Chinese Communist Party (CCP), never particularly worried about the status of its own downtrodden masses, seems to be concerned about the current state of affairs.

I’ve always been of the opinion that global offshoring and outsourcing has been based on a fallacy. That fallacy being that global companies could always find increasingly cheaper, educated pools of workers to happily provide world class products and services. The early adopters profited from this. Latecomers either had to pay more or move onto labor forces that were further removed both geographically and culturally from consumers.

I know of one global company whose outsourcing/offshoring teams are simultaneously chasing lower wage costs eastward across Europe and westward across Asia. They’ll probably collide somewhere in Kazakhstan sometime in the next few years. And then what? (Am I the only reminded of the “greater fool theory” from Wall Street?)

The game’s over folks or it soon will be!

I predict that the United States will begin to start bringing jobs back home. There will also be hiring to offset the additional job cutbacks in the pursuit of greater profits. China and other offshore destinations are not the only ones having to deal with a troubled work force. Eve Tahmincioglu, an MSNBC contributor, wrote an article this week concerning the rise in workplace suicides in the U.S. (http://www.msnbc.msn.com/id/37402529/ns/business-careers/ ). Economic problems are blamed. But, could what we’re seeing here in this country simply be the flip side of the coin that we’re seeing in China? What happens when American workers stop fretting about their economic situation, taking it out in themselves and decide to do something about it? Unions and confrontation with management have a long history in the U.S.. Maybe that 9.9% unemployment number may start to come down.

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

Medical Devices – Sideshow Marginalization?

2010-06-05T07:18:00.004-04:00

One morning the other day, I was rushing to prepare to leave for work (Yes, I do have a real job.) when I stopped to check The Weather Channel (http://www.weather.com/ ). Impatiently waiting for commercials to go by, I suddenly saw Andrew Thicke of Growing Pains fame (http://www.imdb.com/name/nm0005484/ ) touting diabetes testers for CCS Medical (http://www.ccsmed.com/english/index.asp ). There was something about the commercial and Alan’s spiel that reminded me of other commercials highlighting powered wheelchairs (I still can’t get that tune out of my head.) and Lee Majors’ Bionic Hearing Aids (https://www.hearingaidtv.com/ ).

If you’ve been following my recent blogs concerning what’s been happening in the life sciences industry, in particular its slowing momentum, you’ve probably noticed that I believe the wheels are starting to come off the industry’s bus. Commercials like these, admittedly not from the industry leaders, highlight this trend for me.

The direct-to-consumer (DTC) advertising campaigns of recent years seem to a new phase or maybe it’s a new low. What started as Sixties-like art films morphed into light, romantic comedy skits with side effects voice over’s thrown is as an afterthought and, now, appear to be moving into a new phase more like the Home Shopping Network (http://www.hsn.com/ ).

For me, another sign of commoditization of an industry is mass marketing on the cheap. No disrespect to either Alan Thicke or Lee Majors, but I doubt that they are earning from these product endorsements what they used to in their salad days.

I also think that this is a sign of worse to come for television viewers. In a variation of Gresham’s Law, ‘Bad commercials drive out good.’ (If there was ever anything like a good commercial.) For those requiring proof just look at what reality TV has done to television.

Once upon a time, Stryker (SYK, http://www.stryker.com/en-us/index.htm ) had television commercials that were what one might call high brow. I wouldn’t call them exactly community service but you get the idea. I haven’t seen these for a while. Maybe they’ve been pulled or I’ve lowered the standards of my television watching. Something tells me that Stryker wasn’t getting the desired bang for their buck.

So where could this trend lead? Will we one day see a cable channel dedicated to pharmaceuticals and medical devices? Will we see the television favorites of years past hyping products? Would Sally Field suit up as the Flying Nun again? (http://www.webmd.com/osteoporosis/guide/sally-field-osteoporosis-story ) Lee Majors has great brand potential with the Bionic Man. Lindsay Wagner (http://www.imdb.com/name/nm0905993/ ) could even make a comeback!

OK, maybe I’m pushing the edge of the envelope here but you get the idea. Standards are continuing to drop in the life sciences area.

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

Big Pharma – Back to the Future

2010-05-31T17:19:00.002-04:00

One of my favorite quotations has always been from George Santayana, “Those who do not remember the past are condemned to repeat it.” You may ask why am I suddenly so philosophical?

Well, while preparing to write this blog (yes, contrary to popular belief, I do research for my blogs, it’s not all just flow of consciousness) I googled “pharmaceutical companies issues” and received back the usual gazillion replies.

As I started to go through the list one by one from the top (I really hope that my readers, assuming I have any, appreciate what I do for them) I noticed two things.

First, we’re not alone. The topics that we’ve been blogging about for several years now, declining profits, stagnating product pipelines, and an industry in crisis are being written about by many people. And they’re writing a lot.

Next, and this surprised me, people have been writing about this for a long time. I mean years.

Larry and I have been talking about these issues for a while now. But, it was only about when we started this blog that our thinking began to coalesce around these issues. But, there were people out there before us. Long before us.

One writer in particular, Bianca Piachaud, wrote a particularly good article (http://findarticles.com/p/articles/mi_m2242/is_1634_280/ai_85370544/?tag=content;col1 ) all the way back in March 2002 for Contemporary Review on the issues facing the pharmaceutical industry which is still relevant today. Think about that. That’s over eight years ago!

Dr. Piachaud made one particularly prescient observation that the past eight years has borne out. She noted that the unsustainability (I may have made up a word here) of pharmaceutical profits because of increasing competition from generics, government policies, and the increasing costs of finding new drugs. There is even a reference to the cost cutting programs being put into place (and which may have gotten some pharmaceutical companies into recent trouble) to try to fend off the inevitable.

I also found in this article, the first rational explanation of why the product pipelines are stagnating. Dr. Piachaud highlights the increasing diminishing returns from research as technology with its costs becomes a larger part of the work undertaken. She also notes the contributions of administrative inefficiencies and increasing bureaucracy (think of Sarbanes-Oxley and healthcare compliance costs) in lowering profits.

The unsettling aspect of Dr. Piachuad’s article is that there doesn’t appear to be any good news soon for the pharmaceutical industry. We may be moving through the middle game preparing for the end game.

Dr. Piachuad has a doctorate from the Aberdeen Business School, the Robert Gordon University, Aberdeen. She is also has written Outsourcing of R&D in the Pharmaceutical Industry published by Macmillan (http://us.macmillan.com/author/biancapiachaud ).

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

Pharmaceuticals - How Much Excess Capacity Is Too Much?

2010-05-29T07:06:00.002-04:00

Scanning news headlines earlier this week, I came across an article about Pfizer (PFE) laying off another 6,000 employees as part of its post-Wyeth acquisition cost cutting program. (See Melly Alazraki’s blog at http://www.dailyfinance.com/story/company-news/pfizer-plans-manufacturing-job-cuts/19481620/ .) Being a curious sort of guy, I went onto Google and searched for references to Pfizer layoffs. I found many other links to layoffs all over the world. Durham, NC; NYC; Plattsburgh, NY; Collegeville, PA; Ireland; and Puerto Rico were just a few of the locations that I found where layoffs were taking place.

Pfizer originally announced layoffs approximating 20,000 jobs from its Wyeth acquisition. (http://blogs.wsj.com/health/2009/10/15/pfizer-wyeth-deal-wraps-up-layoffs-to-follow/ ) This week’s announcement in addition to the layoffs announced eight plant closures and reduced operations in six others. (http://www.thestreet.com/story/10759832/1/pfizer-wyeth-combo-leads-to-more-layoffs.html?puc=tscmarketwatch&cm_ven=tscmarketwatch ) Obviously, a lot of extra capacity is being wrung out of the industry. Which could make one wonder what sort of career opportunities might exist in pharmaceuticals in the future?

Clifford S. Mintz, otherwise known as the BioJobBlogger (http://www.biojobblog.com/promo/about/ ) has written a very interesting and relevant blog (http://www.biojobblog.com/2009/11/articles/biojobbuzz/pfizerwyeth-layoff-update/ ) about what’s been happening in the pharmaceuticals industry. He maintains that the traditional vertically integrated industry model is coming to an end with new drug development coming from outside Big Pharma with only marketing and distribution functions remaining.

The points made are good ones. Previous blogs here have echoed similar feelings. What I can’t stop thinking about is where does this all lead? Recent history has taught us that the twin phenomena of the twenty-first century, globalization and the Internet, are driving out middlemen. I remember my old Economics 101 professor teaching that perfect markets require perfect knowledge resulting in zero profits. (Professor, apologies, it’s been more years than I care to remember. All errors in restating your lectures are my fault.) Aren’t the pharmaceutical companies transforming themselves into middlemen?

In my simplistic view of the world, there will be manufacturers and sellers. In order to survive middlemen will have to become large enough to take advantage of economies of scale. There probably won’t be a need for many players in this space. In fact, economic reality may dictate that will only be a small number of global players. (Oligopoly, anyone?)

Consolidation and closure of manufacturing plants with the consequential elimination of jobs is a sure sign of excess capacity in an industry. And, once those plants and jobs are gone, they won’t be coming back any time soon, particularly in the United States. Here’s why. Given local zoning and environmental ordinances in many American communities, building and running a modern manufacturing plant is an expensive and time consuming proposition.

I’ll continue to follow this theme going forward. I suspect that we’ll see more signs of an industry undergoing consolidation.

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

“The 4E Principal” for Determining an Outsourcing Partner

2010-05-10T07:28:00.003-04:00

As a member of the Scientific Advisory Board of Sciformix (www.sciformix.com), the management team thought it would be useful if we were to describe the case for doing business with their company, the value proposition and the practical reasons that accounts for the success of their business. I thought it may be useful to our readership to republish this and share some of our thoughts.

Describing why outsourcing/out-tasking is such a huge success is a straightforward challenge. It is rooted far more deeply than labor arbitrage which is the core reason most companies choose to use an outsourcing “partner”. There are unprecedented shifts in the way Bio-pharmaceutical companies are conducting their business today, partially forced by macroeconomics, politics, population growth and aging and the “flattening” of the globe that provides opportunity and challenge unknown before today.

There is an enormous pressure on management to perform the concurrent miracle of significant cost reductions coupled with simultaneous productivity improvements in order to thrive in our business. While workloads are inexorably increasing, there are daily headlines describing massive layoffs and facility closings in our industry. No corner of the business, regardless of the geography is immune from these pressures.

One of the few growth areas for budgets is the amount of outsourcing/out-tasking/off shoring that the Bio-Pharmaceutical Industry has undertaken. While the industry has been late out of the starting blocks, the lost time is being rapidly made up. Variations on the theme are diverse and include captive centers, joint ventures with global outsourcing companies, the major expansion of use of Clinical Research Organizations (CRO's), use of diverse geographies and any other creative aspects companies can create.

Our point here is to outline four key areas of consideration for outsourcing the drug safety and adjacent functions to a company such as Sciformix. We call it “The 4E Principal” which encompasses the “whys” of doing business together, each company's priorities will differ. The 4E's are Effectiveness, Efficiency, Economics and Employees and we will describe what we mean by each of these:

Effectiveness: In the area of drug safety, effectiveness encompasses results that are of high quality, compliant with appropriate regulations, consistent from batch to batch and well documented. With the large variation in the number and kind of testing that needs to be done and the education updates that are required, it is a significant challenge for the sponsor company to comply effectively. As Sciformix is focused on this area, day after day, the effectiveness we bring to your company is likely to be significantly better than you experience today.

Efficiency: Ideally your lab is running at or near 100%, however the reality is such that “peaks and valleys” are the norm profoundly impacting productivity and increasing unit costs. As a specialized outsourcing partner, companies such as Sciformix provide a predictable, attractively priced alternative to the classic in house staff-many companies tend to adapt a hybrid model that couples both in house expertise with external capability and bandwidth.

Economics: The economics of external drug safety capability are driven by labor arbitrage, that is to say that if external costs are less than 50% of that of in house capability and quality is equal to or better than current models, than the decision is very straightforward. As with investment policies in the financial world, 90% of the value is achieved with the initial decision, further incremental economic benefits are possible, but not as compelling once the major decision to go external is made. Currently, Sciformix can demonstrate cost benefits of greater than 50% compared with either in house or on shore based providers while providing a superior result.

Employees: The key driver for having an external provider for drug safety functions is based on the cost and upkeep of employees-including non-productive time, continuing education, vacations, holidays, benefits, etc. all of which add up to high overhead costs that are virtually eliminated when working with Sciformix.

Pharmaceuticals – Under Siege?

2010-05-08T05:04:00.003-04:00

Lately, I’ve been blogging about the general malaise that life sciences, and in particular, Big Pharma, are finding themselves in. Last week, I even compared poor Mike Huckman to a canary in a mine. (Apologies there, it seemed like a good idea at the time.)

The recent full court press by the Federal government against Goldman Sachs, first a civil suit, then a criminal investigation, got me wondering what the Beltway Gang was up to with their another one of their favorite bête noirs, Big Pharma. Seems that the Federal Drug Administration (FDA) has decided to breathe new life into its Office of Criminal Investigations. A recent article by Alicia Mundy in the Wall Street Journal (http://online.wsj.com/article/SB10001424052748703862704575099942109582112.html ) outlines the FDA’s plans to re-energize itself and the focus of its prosecutions.

Are we seeing yet more evidence of an industry under siege? There’s definitely a more activist administration in Washington, D.C. these days. And Big Pharma has all the characteristics of a great target. Unpopular with the public, aging business model in need of an overhaul, and recipients of large amounts of public largess (i.e., Medicare). Makes me think of the financial services industry. I wonder if we’re going to see Big Pharma’s chairpersons appearing before Congress en masse anytime soon?

But, maybe we won’t see everyone trooping down to the Capitol anytime soon. Here’s why. First, Congress is enjoying themselves too much with the financial services industry. (Big Pharma should consider themselves fortunate in not having a poster child for egregious behavior like Bernie Madoff.) Next, Big Pharma hasn’t provided a lightning rod for public outrage yet. Sure, they’ve had the occasional Vioxx but they haven’t tried to melt down the economy or anything comparable yet.

In ancient China, there was a form of execution cum torture known as the death by a thousand cuts. I won’t go into the details (there are other blogs for that) but you get the idea. This is what Big Pharma is experiencing now. Every day seems to bring another cut/issue. Nothing big by itself but cumulatively they have an effect. Resources are drawn away from things like research and development. Innovation is throttled because of a risk adverse culture developing. Management attention is distracted from running the day to day business let alone forward looking strategic planning.

Once upon a time, Big Pharma was one of the glamour industries. Overtime, they became one of the last men standing. Now, Big Pharma is on the cusp of being another also ran. Globalization and commoditization are bringing down another industry.

I’ll continue to pursue this line for awhile. Unfortunately, I don’t see any significant changes anytime soon.

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

Good By Mike! (Canary in the Mine?)

2010-04-26T20:01:00.002-04:00

I learned this week that Mike Huckman of CNBC and Pharma’s Market (http://www.cnbc.com/id/15837675 ) is leaving for a PR firm. His last day is May 7th. I’ve always enjoyed reading his blog which set a very high standard and was always topical. Unfortunately, since his blog is part of a corporate website, we probably won’t see his past blogs much longer. I encourage readers to check out his blog before it disappears. Mike, good luck and thank you for all your past journalistic contributions!

OK, now, what’s on with my aside about Mike being a canary in the mine? In the old days, really old, like before black and white television without remotes, coal miners would take canaries with them into the mines to give early warning about the buildup of dangerous gases. Canary falls over dead, miners skedaddle, you get the idea.

Don’t worry. I’m not suggesting that anything that drastic is going to happen to Mike. But, what I am suggesting is that when a journalist of his caliber who has been covering the pharmaceuticals industry for the last several years for a major media outlet to go into another line of work, you have to ask yourself what’s going on.

Lately, I’ve been blogging about the lack of momentum and direction in Big Pharma. Mike’s departure seems to me to be yet another sign of an industry in trouble. (No, I’m not talking about the media industry. I don’t cover that. For more on that industry, check out Julia Boorstin’s Media Money blog (http://www.cnbc.com/id/15892686 ) on CNBC.) Mike covered an important industry for a major news network. Now, he’s going off to join the corporate rat race. (Yes, I know that CNBC has its own corporate rat race but you get the idea.) There may be a replacement but somehow I suspect that it’ll be a young wannabe on a part time basis.

Less newsprint, no new products, declining revenues and profits, and no drama don’t make for a good situation for Big Pharma. The auto industry is in a lot of trouble but everyone wants to know what will happen next at General Motors. Will the Chinese, or won’t they, buy Hummer? Will Toyota survive? Soap operas are made of this stuff. Ratings will thrive. Phil LeBeau (Behind the Wheel (http://www.cnbc.com/id/16008341 ) at CNBC) won’t be leaving anytime soon. Big Pharma lacks that kind of plotline.

I’m starting to feel a little lonely out here. To say nothing of trying to divine where this industry is going. But, I enjoy this and Big Pharma is certainly a challenging assignment. Good luck to Mike and everyone else out there covering life sciences!

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

FDA Recalls Pfizer's Antipsychotic Drug Geodon due to Overdosing in Clinical Trial

2010-04-25T17:43:00.005-04:00

Our colleague, Lee Howard of "The Day" newspaper in Connecticut wrote the following article that appeared in his newspaper this week (http://www.theday.com/article/20100421/BIZ02/304219875/-1/BIZ). He was kind enough to ask for our view and we in turn are publishing that article:

"Pfizer Inc. has received a warning letter from the U.S. Food and Drug Administration reproaching the company for failing to monitor properly studies of its antipsychotic drug Geodon that led to excessive doses being administered to 13 children and at least 20 adults.

The letter, addressed April 9 to Martin Mackay, president of Pfizer's PharmaTherapeutics Research & Development division and first reported Tuesday by the Reuters news service, said the FDA had found an internal company report dated Nov. 7, 2006, that indicated "dosing errors" had occurred.

The initial seven overdoses, for a medication trial in 2006 that the FDA redacted in its warning letter but which Pfizer confirmed was Geodon, were blamed on a lack of proper training. But six more children in another study more than a year later received excessive doses as well even after personnel were retrained, according to the FDA.

One patient received overdoses for 30 days, and others reported tremors and other side effects from the mistake, the agency said in its letter, available online at www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm208976.htm.

"We conclude that you did not adhere to the applicable statutory requirements and FDA regulations governing the conduct of clinical investigations," the agency added.

Among the FDA's findings:

• Pfizer failed to officially designate someone sufficiently trained in medical issues to answer questions that would lead to informed consent, as required by regulations.

• Pfizer monitors visited one of the studies nine times but never picked up on the overdoses; instead, a company data management unit made the discovery.

• Pfizer failed to keep study investigators informed about new observations regarding reactions to the drug, especially about adverse effects and safe uses.

Pfizer said in a statement through its director of worldwide communications, Kristen E. Neese, that it is "committed to fully addressing FDA's concerns."

Neese pointed out that many of the FDA's insights about the drug-trial problems were first uncovered and reported by Pfizer itself, as part of its monitoring and quality assurance processes.

"Since that time, Pfizer has instituted several new measures designed to improve monitoring and execution of clinical trials, including our oversight of clinical investigators," Neese said.

Neese said Pfizer will identify to the FDA in the next two weeks several clinical-trial enhancements that the company believes will present similar issues in the future.

Larry Rothman, a blogger on the drug industry and chief executive officer of Pharma Flex, a temporary staffing firm in Fort Lauderdale, Fla., said warning letters regarding clinical trials are rare. Generally speaking, he said, trials are very closely monitored both because of potential hazards to patients and because drug companies must show rigor in their administration of the experimental medications to get statistically meaningful results.

"This is a very unusual event," he said, "but it looks like Pfizer did their best to fix it."

The warning letter to Pfizer followed at one-month investigation last year by two FDA inspectors. Pfizer subsequently acknowledged problems with its clinical investigations, but a July 2009 response letter to the investigation "did not contain a detailed outline of procedures or processes that would be implemented to present future occurrences," according to the agency.

The FDA also noted that the failure to properly monitor its investigations was a repeat violation, since the agency had sent a similar letter to the company after a 2005 inspection that showed widespread overdosing of study subjects."

Big Pharma – Will It Get Any Better?

2010-04-22T19:50:00.003-04:00

I’m still on this kick that life sciences and Big Pharma, in particular, are stuck and aren’t getting better anytime soon. I’ve been out trolling the Net looking for any hints of anything that might indicate either I’m wrong or there’s a turnaround coming soon. And, guess where this is going, I’m not finding much. In fact, I’m not finding anything. (I’m not counting spin doctoring materials churned out by Big Pharma. If you read those you’d run out and load up on their stocks.)

What I am finding tends to support what this blog has been saying for a while, Big Pharma’s not going anywhere anytime soon but down. I’d like to call out a blog which I recently came across whose author, Pharmboy a member at Phil’s Stock World, has recently posted a blog entitled “The Calm Before the Storm – Big Pharma Is Gonna Have Big Problems and Pfizer is the Biggest” (http://seekingalpha.com/instablog/6284-philip-davis/60352-the-calm-before-the-storm-big-pharma-is-gonna-have-big-problems-and-pfizer-is-the-biggest ) that gives a detailed analysis of the trends affecting the industry.

Pharmboy (that’s a great name for a blogger isn’t it?) predicts that Big Pharma revenues will stop growing by 2014. He notes as this blog has that growth will have to come from acquisitions and explains how picking the right science will be essential for making the right investments. This is an important point, because some of the larger pharmaceutical companies are run by what I call professional managers, MBA types with a good handle on numbers, marketing, branding, and the like but who really don’t have a clue about the basic sciences let alone the complex, advanced theories that are behind modern drugs. The recent financial meltdown on Wall Street shows what happens when senior management loses touch with their products.

The blog also lists the major drugs coming off patent in the next several years and estimates that these represented $49.9 billion in 2009 revenues. One point where Pharmboy differs from this blog is that he believes some of the pharmaceutical companies, Novartis (NVS) and Merck (MRK) actually have good drug pipelines while Abbott’s (ABT) is weak but could be augmented by acquisitions.

Pfizer (PFE) is singled out for criticism for paying too much for Wyeth (WYE) and not keeping an eye on the science. He also writes about the inefficiencies and lack of innovation in a larger organization like Pfizer.

I’ve called out Pharmboy’s blog because it’s a very good summary of the issues facing Big Pharma today. What I want to know is when will the main stream media begin to take a closer look here as well? Finally, how about the financial community? When will they begin to challenge the valuations of Big Pharma?

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

Life Sciences Industry – What’s Going On?

2010-04-18T11:55:00.004-04:00

Maybe I’m numb or going through withdrawal after the passage of the Patient Protection and Affordable Care Act but things seem to be awfully quiet in the life sciences industry lately. I look at other industries, financial services, automotive, and things are hopping. Even railroads have mergers and acquisitions going on.

While I can’t admit to exhaustive research in the life sciences industry, I just haven’t seen a lot of momentum behind anything lately. There are no blockbuster products, no big mergers and acquisitions, or no big research ideas. (I apologize to all those researchers slaving away but they really need to get better publicists.) Business seems to be atrophying. What’s going on?

Are we looking at an industry that’s going away? Now, I’m sure some of you are wondering what I’m rambling about this time. Am I maybe overreaching here? I don’t think so. History’s on my side. Remember the personal computer industry? That went through a similar cycle of boom and bust, if somewhat more accelerated. Once upon a time the media was full of stories about new products, companies, and ideas. Not to mention the personalities? Anyone remember Adam Osborne? (In case you’re curious, he died back in 2003 in India.) Today, the industry’s products are commodities manufactured in China. Some might even argue that with new innovations like iPads or PDA’s personal computers are going the way of the buggy whip.

When I visit Mike Huckman’s blog (http://www.cnbc.com/id/15837675 ) I don’t see any trends developing. (No criticism of Mike is intended, whose blog is one of my favorites (I wonder if he will continue as he is rumored to be leaving CNBC for a PR firm this month), he can only write about what’s out there.) There almost seems to be a defensive posture in the industry. Products are being recalled, regulators are becoming more aggressive, and healthcare reform weighs on the industry.

So what does this mean? If the personal computer industry is any example then consolidation, lower prices, and possible business failures are safe guesses. Maybe this is life science’s high water mark. Or, maybe not. One thing’s for sure, the life sciences industry is in a state of flux. Big time.

All the old rules seem to be changing now. At least as far as life sciences go. The challenge will be identifying what will be the clues to the turnaround, if there is a turnaround.

I’m going to make another one of my predictions. The life sciences industry is going to go way for a while. A long while. The industry’s business fundamentals are askew. Globalization isn’t helping. The regulators are struggling. My blog last week about Myriad Genetics (MYGN) and its legal problems is another piece of evidence. Healthcare reform is beginning in the States. A new generation of companies and managers are needed. I’ll be following this one.

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

Oracle Spends Big to be a Leader in Pharmaceutical/Biotechnology Clinical Software

2010-04-17T21:40:00.001-04:00

On Friday, April 16, 2010 Oracle (ORCL) announced that it would pay $685 million to acquire Phase Forward Incorporated (PFWD) and integrate it into the Oracle Health Sciences Global Business Unit. This seems to be a carefully considered strategy to dominate clinical development software and provide a one stop superstore of this software when integrated with the previous acquisitions by Oracle of Siebel and its eClinical Suite as well as Relsys a key provider of drug safety and risk management solutions with advanced analytics for the life sciences industry. This may very well be the oft described clinical ecosystem that many senior Pharmaceutical R&D executives have been seeking a way to improve efficiencies and lower costs.

This acquisition does not come cheap—a premium of 30% over the prior day market price and a price that represents over 3.1 times 2009 revenues of $213 million or an astonishing 61 times net profit of $11.2 million-suggests that Oracle sees significant synergies in its product lines.

In our opinion this is a win-win combination for Oracle and Phase Forward since the extraordinary marketing power that Oracle brings should boost Phase Forward Sales while the Phase Forward products fill in significant gaps that Oracle has. Additionally, the concept of Software as a Service (SAAS) has been furthered within Oracle based on Phase Forward's Integrated Clinical Research Suite (ICRS) which could be the glue between Siebel eClinical and the Relsys Product Suites. The possibility of a full service “cloud computing” offering is a distinct possibility in our thinking. The challenge of seamless integration of all this can be problematic and articulation of the value proposition to their clients will need to be clearly defined.

The other questions left to ponder is what will key competitors such as Microsoft and SAP do to be competitive in this space and what acquisitions will come next. One further issue to consider is the enormous potential for consulting and support services and what moves the market leaders (IBM, Accenture, TCS, Infosys, Capgemini, etc.) and more specialized players will do to garner parts of this business.

Myriad Genetics – A Sign of the Future?

2010-04-04T18:24:00.000-04:00

I’m going to step away from my recent blogs about the Patient Protection and Affordable Care Act because I think time is needed to see what happens next and there is so much else to blog about in life sciences these days. And, thanks to Federal judge Robert Sweet of the U.S. Circuit Court in New York City, I’ve got a great topic for this blog.

You may have heard about this one already. Seems that Judge Sweet threw out the practice of patenting human genes by invalidating patents held by Myriad Genetics (MYGN) relating to breast and ovarian cancer. The American Civil Liberties Union (ACLU), the American Medical Association (AMA), the March of Dimes, and a slew of other interested parties got together and ganged up on Myriad. Talk about having a bad day. Obamacare’s passing probably didn’t make the mood at Myriad’s headquarters any better. (See Scott Canon’s article at The Kansas City Star for a very comprehensive summary http://www.kansascity.com/2010/04/02/1853748/court-ruling-puts-human-gene-patenting.html .) While I may be over-dramatizing a bit here, I suspect that the emotional issue of access to affordable women’s health care probably contributed to Myriad’s misfortunes. Also, Myriad’s lack of a legal war chest as compared to more deep pocketed bio-tech players probably didn’t hurt either.

Given the American Idol winner-take-all nature of the U.S. legal system, we’re far from a final verdict here until we finish with the U.S. Supreme Court. (Listen to or read the interview between National Public Radio’s (NPR) Ira Flatow and Dr. Robert Cook-Deegan for more information on this aspect of the story http://www.npr.org/templates/story/story.php?storyId=125502332 .) Until then, there will be uncertainty in the bio-tech industry. For about two decades, there has been an assumption that human genes could be patented just like any other good idea. The little exception about naturally occurring substances didn’t seem to bother anyone except those dismissed as marginal extremists or socialists.

Well, guess what? Looks like the extremists and socialists weren’t so marginal after all. What we may be seeing here is a fundamental shift in how this country views, not all only healthcare, but fundamental research and science as well. Maybe the recent financial meltdown which many view as the result of greedy investment bankers on Wall Street has caused people to be doubtful of free market solutions for important matters like healthcare and who owns intellectual property like the human genome. I’d like to point out how in the final push for the passage of healthcare reform, supporters took aim on healthcare insurers. Rather effectively, too, I might add.

As for Myriad, check out Adam Feuerstein’s blog on TheStreet.com (http://www.thestreet.com/story/10715426/1/biotech-stock-mailbag-myriad-genetics.html?cm_ven=GOOGLEFI ) for a financial overview of the company and its market value. This will be a company and a topic that we’ll becoming back to a lot in the future.

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

Healthcare Reform: Now What?

2010-03-28T15:34:00.003-04:00

The Patient Protection and Affordable Care Act has passed. Twice. Healthcare reform, sought after since Teddy Roosevelt, has arrived in the United States. Now what?

The run up to this historic (I don’t use that word often or lightly) moment began maybe a year before the 2008 Presidential election and supplied increasingly higher drama as the election receded into the past and the first year of the Obama administration progressed. Everyone seemed to be caught up in the debates that were taking place in Washington, D.C.. Well, the legislation has passed and as President Obama said, ‘Armageddon didn’t occur, nothing fell from the sky on me, and it turned out to be a pretty nice day’. But, not all the bill’s provisions happen right away. Some of its key provisions don’t occur until 2014, for example, prohibiting excluding healthcare insurance coverage because of preexisting conditions by insurers. Others won’t kick in until 2018, coverage of preventative procedures and examinations without copayment requirements as another example. (See the Wikipedia article on the bill for a summary of the bill, http://en.wikipedia.org/wiki/Patient_Protection_and_Affordable_Care_Act .)

I expect that some time will need to pass before we’ll begin to understand what happens out there with this legislation. Yes, more people will be covered and that’s good for healthcare companies. But, as I’ve blogged before, the government and insurance companies will eventually use their enormous purchasing power to keep costs down. The conservatives’ concerns over rationing of healthcare may have some basis for these fears. After all, how many neurosurgeons are there in the country? More basic services may not be as affected but there could be some disruptions to the provision of care in the early days.

Could Patient Protection and Affordable Care Act provide a stimulus to the economy? Possibly. More facilities and care providers will be needed. The population is aging and the Baby Boomers will be around requiring care for about another forty years or so. With the funding model being worked out, there’s a reasonable chance that this will be positive for the economy. I use the U.S. Interstate Highway System proposed by President Eisenhower as an example of the indirect benefits of government legislation.

Possible winners from healthcare reform are the outsourcers. Taylor Barnes (http://taylorkbarnes.wordpress.com/home/ ) has written an interesting article for the Christian Science Monitor that is available on Yahoo! News (http://news.yahoo.com/s/csm/20100325/wl_csm/290215 ) about Indian outsourcers and the potential for new business for them. I’ll return to this particular point in the future because it’s part of the whole healthcare story that Larry and I have been following.

Likewise, we’ll be blogging and inviting others to join us as this story continues to unfold. We won’t be lacking material.

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

Healthcare Reform: Endgame?

2010-03-21T18:27:00.001-04:00

Finally. We seem to moving to closure on the seemingly unending national debate over healthcare in the U.S.. Tomorrow, Sunday, March 21, 2010, in an unusual Sunday session, the U.S. Congress will put healthcare reform to the vote. I predict that the Democrats will get the necessary votes and the legislation will pass. Then it’s over and we can all go home, right?

We may all go home but this is far from over. Let’s not forget that august body, the U.S. Senate which would still need to put its imprimatur on the proposed legislation. The Republicans are preparing a desperate, last ditch defense there that would make John Wayne’s Alamo look like a tea party (and I don't mean the one in Boston Harbor nor the current anti-Republican/Democrat Party) If the Senate can’t pass the legislation before the spring recess we could be in this state of affairs for a while longer. (Am I the only one who’s reminded of Waiting for Godot?) Various governors and state legislatures are promising to challenge the constitutionality of government mandated healthcare reform. Their positions are based on the old states’ rights arguments. (Somebody should tell those guys that those arguments didn’t work very well for the Confederacy.)

CNBC’s Patti Domm wrote a piece (http://www.cnbc.com/id/35956840 ) yesterday about the potential short term negative impact of healthcare reform on stack prices. I’m still convinced that most people still unsure about what healthcare reform means for business, especially in the life sciences sector. I’m excluding the Republicans and Tea Party members from this because they’re just opposed in general to the whole idea.

Tomorrow, we may have the unusual situation of most of the country sitting around their televisions, computers, PDA’s, whatever to follow the final debates in the Congress. I can’t wait to see the audience ratings. (Another prediction, they may rival the recent Olympics.)

After all that has gone on before now, the present moment seems somewhat anticlimactic. If the past is any guide even if the legislation passes not much may change immediately. But, changes will be put into play that combined with the law of unintended consequences will change many things. (Nobody ever thought that when Congress put through a minor piece of legislation for something called a 401k plan would become the primary financial tool for retirement planning and practically shut down employer funded pensions as generations knew them.) What will we wake up to on Monday morning if healthcare reform passes?

No one knows what the future holds for healthcare reform. I can predict passage but that’s just one person’s opinion. But, passage is just one point in time. It’s binary – yes or no. What happens after that is much more complicated and the stakes are very high. Let’s see what happens.

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

Healthcare Reform: Watching Paint Dry

2010-03-16T19:10:00.001-04:00

I’m fascinated by the healthcare reform debate that’s currently underway in the U.S. both inside the Houses of Congress and without. Last week, everyone in the country became experts in the arcana of the Senate’s reconciliation rules. This week, we’re all becoming familiar with President Obama’s travel schedule. Oh, and, let’s not forget the furies that have been unleashed at the health insurance providers. (I loved that move on the part of the President. A friend of mine who is a rabid opponent of healthcare reform rallied to that one. As he said, “Who doesn’t hate the health insurance companies?”)

The absence of Big Pharma from this debate is obvious. As I blogged last week, they appear to be in the President’s camp but their silence is deafening. Given all that’s at stake here I find that response, or, more accurately, lack of one, puzzling.

Maybe, just maybe, healthcare reform is not all that it’s knocked up to be for Big Pharma. The argument advanced by some (see Janet Adamy’s and Greg Hitt’s article in the Wall Street Journal, http://online.wsj.com/article/SB125590875879693189.html?mod=rss_whats_news_us ) that the drug companies will profit from all the sales to customers who couldn’t afford their wares reg Hitt, previously. That assumes Big Pharma has something to sell. This blog has noted previously the struggling new product pipelines at many drug companies. Now, the generic manufacturers may have something to crow about but I doubt their more upscale brethren will.

OK, you don’t buy the drying up pipeline argument. You say that new product development is not a straight line always headed up. You believe that research and development is a fitful, creative process with long dry spells frequently the result. I buy that. There is historical precedent. Now, let’s stop and think who’s going to be footing the bill for all this. The Federal government and the insurance companies. Am I the only one who thinks that these august institutions won’t figure out a way to squeeze volume purchase discounts from the drug companies? The drug companies are doing it to their own suppliers and even their own employees. Or, the Federal government could fall back on their old standard – price controls.

Here’s where I’m going with this. I don’t believe that healthcare reform will be beneficial to Big Pharma and other life sciences companies. Yes, more products may be sold to more people but at lower prices. Doctors will probably be second guessed over treatments. Stories have been around for years of nurses paid by health insurers second guessing physicians over treatments and medications. These practices will only continue and grow in all likelihood.

I’ve stuck my neck out now and given my position. There may be a vote on healthcare reform in the next week. If it passes, and the jury’s still out on this one, then I think we’ll see an interesting time for Big Pharma in the next several months.

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

Healthcare Reform: Reconciliation?

2010-03-07T19:08:00.000-05:00

I have to admit to being a bit distracted lately in my blogging because of the recent debates over healthcare reform. (Actually, Larry’s been politely suggesting that I get back on track about Big Pharma.) Here’s my dilemma – I’m not really sure what happens next. Now, coming from someone as highly opinionated as myself this is something.

President Obama’s announcement this week that he expects the Congress to push through healthcare reform despite Republican opposition. Larry Kudlow called this a “declaration of war” on the National Review’s website (http://article.nationalreview.com/427062/one-giant-government-leap-backwards/larry-kudlow ) this week. The Democrats will probably be forced to use an arcane legislative rule called reconciliation to make this happen. The seemingly unending gridlock in Washington, D.C. may be coming to an end one way or the other. The whole country, if not the world, will be on the edge of its seat for several more weeks until this is over. And, then, then the next round begins.

What can anyone make of this? More to the point, how does Big Pharma or any of the other players in the healthcare industry plan around this? And, let’s not forget all the other problems that Big Pharma is facing – poor new product pipelines, increasing competition from generics, and more aggressive FDA enforcement.

Consensus doesn’t seem to exist on whether or not passage of healthcare reform will be good or bad for Big Pharma. While Big Pharma still seems to be in the President’s camp supporting healthcare reform, I’m still looking for a simple, cogent argument about why healthcare reform is good for Big Pharma. (If any of our readers would refer me to any such links, I’ll be forever in your debt.) Likewise, while gloom and doom prognosticators abound about the impact of healthcare reform on Big Pharma, no one seems to have a straightforward analysis of why.

Now, maybe the problem is the state of the healthcare reform legislation itself. The Senate bill is supposedly about 2,700 pages. I guess trying to sort all the possible implications is a bit daunting.

Or, maybe, just maybe, the healthcare reform debate is irrelevant to Big Pharma. Why do I say that? Not just to be provocative. (OK, OK, I do want to be provocative.) When there’s a lack of consensus, no obvious ways forward, something’s going on. Sure, healthcare reform will change many things but does it mean that the fundamentals of Big Pharma’s business will necessarily change? I’m beginning to think not.

Sure, Big Phama has many issues and challenges to deal with. But, their businesses which have grown to their current size and power by learning to respond to these. Healthcare reform may only be a distraction from the real problems which Big Pharma is facing.

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

Healthcare Reform: What Did We Learn from the Healthcare Summit?

2010-02-28T10:04:00.002-05:00

OK, President Obama trooped everybody into Blair House the other day and I don’t know what he was expecting to achieve but unless he’s a lot more cynical than he’s letting on, I don’t think he got what he wanted.

I caught some of the U.S. Healthcare Summit on the evening news and I found it worrying for three principle reasons. First, the theatricality of it all was discouraging. I lost track of the number of copies of proposed healthcare legislation that had been trucked into the conference room by the Republicans to make some point or other. (I wonder if the environmentalists will calculate how many trees were killed to make those points.) Next, the lack of seriousness by many of the participants seemed obvious to me. Yes, there were many pious sounding talking points and other sound bites but too many participants were there only to be seen in front of the cameras. Finally, the lack of any obvious solution or solutions was apparent to me. There seemed to be even a lack of agreement as to what the problem is. Overall, President Obama’s Healthcare Summit, however well intentioned, was a bust in my view.

But what did we learn from this meeting other than how not to throw one of these shindigs? Plenty, in my opinion. However, I will only focus my comments on points which I feel are relevant to the healthcare industry.

One topic that seemed to be coming out as more of an issue is the rising cost of health care itself. One commentator this week said that healthcare costs are rising at twice the annual rate of inflation. (Sorry, I didn’t record the attribution.) Healthcare insurance providers such as WellPoint justify their recent premium increases with this argument. (See http://www.nytimes.com/2010/02/25/health/policy/25health.html?sudsredirect=true ). I’ve also noticed that the media is giving more coverage to this topic as well. CNN’s Dr. Sanjay Gupta had an interesting piece yesterday where he went through the costs of the materials used in his operating room. (See http://www.cnn.com/video/#/video/health/2010/02/24/gupta.medical.cost.breakdown.cnn ). As Dr. Gupta shows, seemingly minor objects quickly become very expensive and it all adds up.

Different reasons are given for rising healthcare costs. Some cite the rising cost of malpractice insurance for doctors and hospitals. Others talk about the rising costs of research and development, in particular, the costs and time associated with getting new drugs through the FDA’s regulatory process. Like most things in life, there’s probably no one answer here. All the points noted here and many more not are going to be responsible.

As I’ve blogged recently, I believe that something more fundamental going on here with healthcare in the United States. The validity of the free market system in dealing with these issues is at stake here along with the government’s role in the lives of its citizens. I’ll be blogging more about this as we go through this year.

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

Healthcare Reform: What’s Next?

2010-02-21T17:55:00.001-05:00

I’m finding the current spate of political infighting over U.S. healthcare reform to be probably the most fascinating that I’ve ever seen. What’s more, I think that we could see fundamental changes in this country unlike any before in our history. Here’s way.

First, healthcare costs are spiraling out of control. I’m not sure why. I know that my primary care physician knows that he’s not profiting. A very competent professional in his early fifties, he claims to be making only 60% of what he expected to when he graduated from medical school. He blames rapacious health insurers. Recent health insurance increases (http://www.marketwatch.com/story/health-care-shocker-policy-premium-goes-up-69-2010-02-19?reflink=MW_news_stmp ) by some providers were justified because of healthcare costs, such as excessive testing by physicians, were rising. Some providers said that the loss of premium paying customers because of tough economic times caused them to raise the rates of their remaining ones. That kind of beggar thy neighbor (or, customers in this case) never works long term. Interestingly, on last evening’s news, one provider told a correspondent that they were running at a loss and angry about being lumped by a critical President Obama in with firms earning record profits and still increasing rates. My ignorance in this matter doesn’t bother me, I’m obviously in good company. What does bother me is the complete lack of any understanding by anyone as to what the root cause of the problem is. The resources that are consumed here won’t be available to reinvest in the economy.

Next, the growing U.S. national debt is going to limit the government’s options in addressing the problem. Check out the U.S. Debt Clock (http://www.usdebtclock.org/ ) to see some really scary numbers. A Federal government unable to afford any sort of healthcare reform, even smaller, affordable, initiatives may find itself thrown back on policy reforms only, or, even marginalized. Worse case, the U.S. standard of living could begin an irreversible decline for the first time in history.

Finally, the coming conflict between free enterprise and the public welfare as represented by a national healthcare policy. With limited resource available, the public will begin to resent for profit organizations (i.e., businesses) taking away monies which could have been used to provide healthcare services. Big Pharma will eventually have to explain why when they use volume purchasing to drive down suppliers’ profits, it’s capitalism, but, when the government tries to do it with prescription medicines it’s socialism.

So, there’s a lot going on here. Unfortunately, no silver bullet exists for this situation. I don’t believe that this is just a simple government funding debate going on here like we’re seen before. We may be seeing some fundamental changes to the American way of life coming out of this. And, the healthcare industry is going to have to figure out how to deal with this.

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

Healthcare Reform: Where’d It Go?

2010-02-15T06:28:00.005-05:00

I’ve been a little distracted lately (busy Holidays, snowstorms, colds) but I stopped the other day and U.S. healthcare reform was gone. Poof! Not there anymore. Now, Larry always kids me (you are kidding Larry, aren’t you?) that when distracted I can miss a lot. But, I must’ve had one heck of a lot better New Year’s Eve than I’d realized.

I went to my usual haunts to see if anyone had any perspective on this. Mike Huckman at CNBC (http://www.cnbc.com/id/15837675 ) and Pharmalot (http://www.pharmalot.com/ ) didn’t mention it. (My apologies if they did and I missed it.)

OK, don’t worry, I’m not going to drag this out. I had heard about Scott Brown’s (http://www.brownforussenate.com/ ) election in Massachusetts. (Ted Kennedy’s old seat no less.) The irony of that victory has not been lost on me. I wasn’t as much surprised by Brown’s victory as how the national discussion on healthcare reform has practically shut down. Despite some noises from Nancy Pelosi and other supporters, there’s virtually nothing compared to prior to Congress’s late Christmas Eve recess.

What’s going on here? Further, what does it mean for Big Pharma? I’m going to go out on a limb here with my views.

First, the Democrats obviously couldn’t arrive at a consensus within their own party about what healthcare reform was all about. (I’m not going to go into the political missteps that cost them Ted Kennedy’s seat.) There were no killer ideas. What began as a high minded crusade to overhaul healthcare in America became a mad, undignified dash for the finish line replete with all sorts of cloakroom deals to make it all happen. No one had any reason to cross the aisle or to worry about why they hadn’t. I suspect that President Obama is probably relieved that he no longer has the Supermajority for this one. We just don’t have any good ideas to implement major healthcare reform. Consensus on smaller issues like tort reform or health insurance regulation may be possible but that’s going to be it for now. We may see this happen as the November midterm elections draw near.

Next, what about Big Pharma? I don’t think that the current status quo concerning healthcare reform is good for them. The topic isn’t going away. Both sides are going back into their corners to get ready for the next round. Uncertainty prevails. The Tea Party movement will play the role of spoiler this year possibly foretelling what will happen in the 2012 Presidential election. Decisions on future drug development not to mention how capital markets will value these companies are only several of the possible issues here.

I’ll be blogging on this theme for a while. With the Congressional elections coming and the White House trying to find common ground with the Republicans, there will be plenty of good material here.

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

The $1000 Genome

2009-09-30T22:35:00.002-04:00

Our esteemed colleague, Dr. Joel Studebaker writes today about The $1000 Genome

The $1000 genome, referring to the cost of sequencing all 3.2 billion bases in a human’s DNA, has long been the goal of new developments in sequencing technology. The cost per base pair for sequencing has been dropping rapidly, almost following a Moore’s Law for genetics. Many believe that the $1000 price will make it attractive to sequence the genomes of many people and that, with many more genome sequences available, analysts will be able to gain new insights into how sequence variations influence health and disease. A recent announcement from a laboratory at Stanford appears to have brought the cost for a human sequence below $50,000.

Since the human genome effort started, the hope has been that comparison of the genomes of patients with particular medical conditions to those of suitable control groups would provide several benefits to pharmaceutical therapy.

1. Genetic variations that occur in DNA coding for proteins or in DNA that regulates production of proteins will point to new targets for therapy.

2. The variations will identify subgroups of patients who would benefit from a drug that would not show a statistically significant effect in a more general population. As in the case of Herceptin, diagnostic tests would be necessary to find the members of these subgroups.

3. The variations will identify patients whose genetic makeup make them more susceptible to adverse side effects that might lead to discontinuation of development if those patients were part of a clinical trial population. The hypersensitivity reaction of patients with a particular HLA type to abacavir is an example. Again, diagnostic tests would identify these patients.

Points 2 and 3 are clearly aspects of personalized medicine, which is a double edged sword for the pharmaceutical industry in that it may lead to more narrowly defined markets as well as to approval of drugs that might not be approved otherwise.

These three considerations were among the reasons for the effort to identify the genetic variations known as single nucleotide polymorphisms (SNPs) in laboratories sponsored by the SNP consortium and in the more recent HapMap (Haplotype Map) project. Despite the availability of over three million SNPS that provide good coverage of the genome, correlation of SNP genotypes with disease conditions has not yet had a wide impact on pharmaceutical development. After several years of SNP studies, the view has emerged that many rare genetic variations may contribute to susceptibility to disease (or efficacy of therapy or to increased risk of adverse reactions). If that view is correct, complete DNA sequences represent a more efficient way than SNP assays to find multiple rare variations that have predictive value.

Why has Outsourcing Gone Mainstream in the Pharmaceutical-BioPharmaceutical Industry

2009-09-16T13:15:00.004-04:00

Gil Roth the Editor of Contract Pharma magazine invited several people to comment about the outsourcing trends in the industry in honor of the magazine's 10th anniversary. I sent him my thoughts and wanted to share them here as well (along with a few additional details):

At a macro level, the largest changes in the last 10 years that have occurred in the Pharmaceutical/Bio-pharmaceutical outsourcing-contracting-consulting space is how it has become totally main stream and in many ways regarded as a necessity to being competitive in a world where the classic Pharmaceutical Industry model no longer works. Layer on top of that what Thomas Friedman of New York Times fame labeled as “The Flat World” and it is no wonder that the outsourcing band wagon is so much the order of the day.

The way Wall Street would put is that this trend is a result of a “secular change”. That change is rooted in failed pipelines, lower R&D productivity, the rapid ascent of generic drugs (over 70% of US prescriptions in 2008), increased government regulations, the acknowledgment about the effectiveness of the sales force, extraordinary expense profiles, a public who will not or cannot appreciate the value of the product, a hostile congress and the advent of significant health-care reform from the Obama administration. By the way, Wall Street has acknowledged these secular changes by stripping much of the "P/E premium" from large pharmaceuticals stock prices and turned them into relatively poor performers.

When you combine those challenges with the enormous advances in technology and communication that enable global research and development and supply chains, an outsourcing strategy is not only prudent, it is a requirement. It is indeed a very straightforward way to lower the costs of doing business. When one adds on the acknowledgment of the demand generated by the rising wealth and demand for health-care from very rapidly developing countries including India and China, the requisite of using outsourcing as a way to enter those markets is on the top agendas of many senior executives in the industry.

While the Pharmaceutical/Bio-pharmaceutical Industry has been a notoriously slow adapter of change (yes, there are lots of reasons, not the least of which are regulatory) compounded by risk adverse cultures, the one thing they are not is naive. Gone are the days of “top line revenue” is the only thing that is of concern of management. Today there is a focus on “The Bottom Line” which includes unit costs, effectiveness and efficiency among the tactics. Sure there are other strategies being deployed, for example we have identified two camps in the industry, the consolidation camp and the diversification camp. The “consolidators” would include the big pharma mega-mergers (Pfizer-Wyeth, Merck-ScheringPlough, etc.) and include even some of the consolidation seen by several large biotechs. When you couple a parallel path by the big CRO's, contract manufactures, consultants, etc., the appeal of awarding large pieces of business functions in either long term contracts and/or joint ventures becomes attractive. In a similar fashion, the “diversifiers” (Sanofi, Novartis, etc.) want to focus on their new business endeavors such as animal health, consumer pharmaceuticals or diagnostics and therefore are far more likely to look at an outsourcing strategy as a natural way to allow management focus to be aimed at their new strategies.

The outlook, in my opinion even more to come with innovative joint ventures, terms and conditions and capabilities which will aid the industry to continue its path toward attractive business results.

The Great US Healthcare Debate—Is There a Rational Solution?

2009-08-31T22:53:00.003-04:00

While this blog normally discusses issues affecting the Pharmaceutical and allied industry sectors, I think that the health care reform being “discussed” in the US is worthy of some focus. It is quite unfortunate that at least to my mind, we in the US are in the midst of a most difficult debate that goes to the very core of what our country and our values are. What is very clear to me is that the “Health care Reform” effort by the Obama administration is an enormous challenge, coated with many mistruths by both sides, wrapped around powerful special interests who are dead set against it, layered with good intentions and poor management and execution. My point is to put a perspective on what I think is going on and what the potential benefits and problems are in solving this enormous problem.

As best as I can tell the following “facts” are known:

Healthcare is expensive consuming arguably between 17-20% of GDP
Healthcare costs are growing disproportionately higher than economic growth
Value for money received as measured against other countries is well below many developed and emerging countries
The quality of service is very uneven with a shortage of primary care physicians and a disproportionately higher concentration of providers (physicians and hospitals) in urban centers
There are over 650,000 doctors serving our population of about 300,000,000 people (1:460)
There are somewhere between 40-50 million uninsured people and several times that number who are underinsured.
Due to the litigious nature of our society, much “defensive” medicine is being practiced and insurance rates for practitioners are very, very expensive and contribute to high healthcare costs.
There is significant fraud and inefficiencies in our current healthcare systems
Healthcare will be rationed by a government based system and the government can't run anything efficiently and furthermore it's more “socialization” of our great country.
The pharmaceutical industry is viewed as gouging the public and making obscene profits
Most of the developed world has a “single payer” systems and while there are many horror stories, by and large the systems work “better” and are more cost effective
There is an enormous concern with the American people about losing existing benefits, excessive costs of a newer system and is it “fair” to provide healthcare to all on an equal basis.

Some issues to consider, at least in my opinion are:

While we vociferously argue about what healthcare is currently like and what it may be, there is no single proposal that is available for discussion.
As an ENT physician in Haymarket, VA said to me, who says that 17-20% is a bad number-if my practice bills $1 million/year, there is 4-5 times that created in goods and services including laboratory tests, hospital visits, diagnostics, etc. Isn't that a great way to stimulate the economy?
Assuming a way was found to include on a somewhat equal basis the 40-50,000,000 uninsured and the multiple of that in underinsured, how do we find the provider capacity (doctors, clinics, hospitals, testing facilities, etc.), the administrative capacity to process the additional workloads and the technology and smarts to manage all of these moving parts?
The thought that healthcare will be rationed is a red herring in that to a large extent, existing insurance companies are determining level and quality of care today. I wonder if they are any more effective and/or efficient than the government would be. By the way as I understand it, the government today does run a world class healthcare business called the Veteran's Administration (VA) which provides outstanding service and has implemented an excellent electronic patient record system (EPRS).
Notably absent from the discussions I have heard is the lack or absence of discussions about reforming malpractice suits and other associated legal issues-could that be because of the previous career choices of many of our Congress and Executive branch.
The Pharmaceutical Industry and its adjacent industry sub-sectors are in the rifle sites of congress, however as we have stated before, with 40-50 million new covered lives and an average spend of $800/year (even $500/year if there is the 40% reduction in spend many discuss), there are billions in incremental revenue available, and in my opinion actually enhanced by the Comparative Effectiveness Scheme.

Your thoughts are as always welcome at larryrothmansblog@gmail.com

Pharmaceutical Industry Shows Signs of Turning Around—Look at the Good News and Strategies Taking Place in July-PART 1

2009-07-31T22:22:00.002-04:00

In my opinion, this past month or so marks somewhat of a turning point for the Pharmaceutical and Biotechnology Industries. Both macroeconomic and market conditions contributed to the optimism. Since there is much to say, I'll initially focus on some of the move by Big Pharma in Europe. In the next few days, we'll discuss the US based companies and then Biotechnology.

A headline grabbing contributor to the optimism from the Big Pharmaceutical players in Europe are the numerous reports about revenue enhancement resulting from Swine Flu Medicines (mostly Vaccines) resulting in billions of incremental revenue.

This trend was especially helpful to GlaxoSmithKline who are quoted in FT.com (July 23 by Andrew Jack) as “GlaxoSmithKline moved yesterday to become the pharmaceuticals company with the broadest range of products to tackle swine flu. The group unveiled plans to add masks and diagnostics to its vaccines and antiviral medicines business.” Interestingly enough, Andrew Witty, CEO of GSK had to make a public pronouncement about the company's ability to meet demand-certainly a different issue than the company had to deal with in the past. The UK company signaled a strong upsurge in demand from governments for its swine flu vaccine and Relenza, its antiviral drug, as the infection spreads, with plans to expand manufacturing capacity sharply.

Roche of Switzerland was also quite positive with JP Morgan indicating that additional sales of $4.3 billion for 600 million doses are being booked for its antiviral, Tamiflu and its pandemic vaccine. Reportedly, a further 340 million+ doses worth $2.6 billion are anticipated-quite a windfall. Roche threw the US Pharmaceutical Trade Group, The Pharmaceutical Research and Manufactures Association (PhRMA) into quite a tizzy as well by announcing it will drop out of that organization and aligning itself to another trade group, the Biotech Industry Organization (BIO). This was attributed to Roche's acquisition of Genentech and the acknowledgment that most of Roche's Pipeline was coming out of Genentech.

Sanofi-Aventis (SNY) was making good on CEO Chris Viehbacher's announced strategies. In rapid succession, he announced that preclinical research may be dropped in half and use the money to partner with smaller companies in early stage development. He was quoted earlier in the WSJ.com Health Blog as saying: “Part of the reason the Pharma model didn’t work is we just kept throwing money at things and hoping the next blockbuster would come along.” SNY also announced a major restructuring (closing down and consolidation) of its R&D operations. Sanofi continues to be the leader in Flu Vaccine accounting for between 25-33% of worldwide supply and certainly stands to have significant revenue and profit increases from Swine Flu Pandemic Vaccine sales. Additionally, this week Sanofi made a major acquisition to buy out the other 50% of Merial the animal health business that it jointly owns with Merck. It also acquired a $9.25 billion call option to combine Merck's new animal health business when it acquires Schering Plough in the 4th quarter. But wait, it doesn't stop there, as previously stated by Viehbacher, Sanofi wants to go further into vaccines and emerging markets, well the company started that in a big way by buying a 78% share of Indian Vaccine maker Shantha Biotechics for $615 million. What is particularly noteworthy is that unlike other big pharmaceutical companies, Sanofi chose to buy rather than partner- a strategy we believe that will pay large dividends.

TO BE CONTINUED

A Step Forward for Personalized Medicine--First Annual BioIT Alliance Meeting and Conference

2009-07-27T22:01:00.005-04:00

Although a bit afield of our normal focus area, we thought the following might be of some interest as we start to see more active convergence of biopharmaceuticals and technology companies-especially around Personalized Medicine. We think Microsoft has some vision with this sponsorship.

Microsoft Announces Call for Presentations for First Annual BioIT Alliance Meeting and Conference

Life sciences influencers and member companies to come together to accelerate realization of personalized medicine.

REDMOND, Wash. — July 16, 2009 — Microsoft Corp. today announced a call for presentations for the first annual 2009 BioIT Alliance Meeting and Conference, where member companies will come together to share best practices and discuss the shared vision of driving collaboration, integration and interoperability among organizations to shorten the time between the discovery of new biological data and its application to human health. The meeting will be held at the Microsoft New England Research and Development Center in Cambridge, Mass., on Oct. 8 and 9.

The BioIT Alliance is an industry consortium of pharmaceutical, biotechnology, medical device, laboratory, diagnostics, hardware and software companies working together to realize the promise of personalized medicine. Presentations, accepted from member companies, will focus on case studies demonstrating collaboration and integration among members and new and innovative technologies that relate to the Alliance’s shared vision.

“With most drug discovery organizations relying on paper and nothing electronic and sharable outside the small lab workgroup, the BioIT Alliance formed with the vision of promoting integration and collaboration between these organizations to accelerate the realization of personalized medicine,” said Les Jordan, U.S. life sciences industry chief technology strategist at Microsoft and executive director of the BioIT Alliance. “With more than 100 member companies today, the Alliance has made great strides in promoting this vision, and our first annual conference will serve as an opportunity to share best practices and discuss the state of the industry.”

The call for presentations will close Aug. 28. More information, including details about deadlines and eligibility, is available at http://www.bioitalliance.org.

Also at the conference, members will vote on the 2009 BioIT Alliance board of directors. In June, the BioIT Alliance announced the formation of the board of directors, made up of seven individuals representing vendors, the biopharmaceutical industry and related industry standard boards. Led by Executive Director Les Jordan, the board of directors will provide guidance and direction to help the BioIT Alliance fulfill its vision.

Venture Capital – Anything Happening?

2009-06-25T20:51:00.003-04:00

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 larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Big Pharma – First Cracks Appearing?

2009-06-23T20:43:00.005-04:00

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 larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

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

2009-06-22T22:37:00.008-04:00

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.

Comparative Effectiveness Research--Blessing or Curse for Life Sciences Industry?

2009-05-29T10:05:00.006-04:00

We welcome a new author to our blog, Dr. Joel Studebaker who discusses an issue that is certain to have an impact on the entire Life Sciences Industry assuming the Obama administration is able to get this legislation passed. Joel's biography is appended the end of this article.

Comparative Effectiveness Research:

The $1.1 billion in funding for comparative effectiveness research (CER) in the federal stimulus plan has considerable significance for the pharmaceutical and medical device industries. This funding will support studies of the effectiveness of alternative therapies – pharmaceutical, device, or medical procedure – for particular medical conditions. The studies will focus on outcomes like improvements in patient status or adverse effects but they will not currently consider the costs of treatment. Proponents of CER assert that it provides opportunities to control health care costs without sacrificing quality and to give physicians systematic, unbiased data about outcomes for competing therapies. Opponents believe the results will determine which therapies receive reimbursement from government and private insurance and thus effectively dictate medical decisions to physicians. In addition, there is concern that CER studies may lead to studies that do consider cost, with the result that treatments that are effective but relatively expensive will not qualify for reimbursement. In the United Kingdom, the effectiveness studies of the National Institute for Health (NIH) and Clinical Excellence (NICE) currently take cost into account.

Clinical trials represent the most rigorous approach to CER, and pharmaceutical companies sometimes publish the results of trials demonstrating that their products produce better outcomes than competing alternatives. The expense of clinical trials limits the number of patients they can include and the length of time they can cover, however. A second approach is to compare the reported results of clinical trials of products aimed at the same clinical condition. The major challenges in this approach are that different studies may use different methods and significantly different patient populations. A third approach is to analyze data available in medical and pharmacy claims. The data in medical claims submitted to insurers, managed care organizations, and government programs includes codes identifying the patient’s diagnoses, the procedures carried out, and the provider for each claim. Pharmacy claims submitted to pharmacy benefit managers provide data on drugs a patient is taking. Some private plans and government programs cover millions of members, and thus they have data on larger populations than a clinical trial can enroll. When membership in these programs is relatively stable over time, it’s possible to study long term effects. Large populations also make it possible to study sub-populations, preserving a measure of personalized medicine in CER.

Referring to studies based on claim records, a 2007 paper from the Congressional Budget Office noted that “A central difficulty in such studies, however, is accounting for the differences in patients’ health status that play a role in determining which treatment they get… Insurance claims typically do not include any information about health status.” To overcome this difficulty, one may use a software package that classifies individuals by health status on the basis of their claims. One should recognize, however, that there are limitations to using claims for CER. Unlike a clinical trial, a study of claim data lacks demographic data beyond age and gender, results from laboratory tests (though diagnoses may reflect laboratory results), or medical charts. Precedents for using claim data in comparative research include a Lilly study of cost effectiveness for the antipsychotic olanzapine and a Pfizer study comparing patients taking Lipitor® to patients taking Merck’s Zocor.

Currently, it’s not clear what new insights future CER activity will produce or what impact they will have on health care. It is possible that a body similar to NICE will come into existence in the US or that the FDA will begin to consider CER comparing products submitted for approval to products already on the market. One observer has suggested that CER results may eventually be the only way for a particular product to succeed in the marketplace in competition with less expensive alternatives.

Dr. Joel Studebaker's – Biography

After finishing graduate school, Joel Studebaker began his career at the IBM Watson Research Center in Yorktown Heights, NY. He then moved to IBM Biomedical Systems, a small division that made centrifuges for separating blood into components, where he established the laboratory for chemistry and hematology. After IBM sold that division, he worked on an IBM project at Princeton University for three years and then worked with Larry Rothman at the IBM Engineering/Scientific support center and the Pharmaceutical Industry Center.

Since leaving IBM in 1992, he has worked as a developer and project manager in databases and software development for several small systems integration firms. His pharmaceutical/biotech experience has included two tours of duty with the American Red Cross Blood Banks, an assignment managing the discovery software support group at J&J PRD in Raritan, NJ, and a position as Associate Director of Informatics at Orchid BioSciences. More recently, he has worked in medical and pharmacy claim analysis at CareAdvantage and Integr-eCare.

His current interests include comparative effectiveness research and single nucleotide polymorphisms in personalized medicine. He holds a BS in chemistry from Stanford and a PhD in chemical physics from Harvard.

Medtronic – Harbinger for the Industry?

2009-05-27T20:05:00.000-04:00

These days, I enjoy blogging because there’s a lot going on. First, the global economy is in a tailspin which only recently has been showing signs of pulling out. Next, the financial services industry which holds the global economy together is under strains not seem since the Great Depression while causing the US’s dominant global financial position to be called into question. Finally, potentially seismic changes in the US healthcare system arising from a new administration in Washington, D.C. and an American public simultaneously becoming increasingly more fearful and angry about the cost of healthcare poses serious challenges to the long, dominant healthcare industry, again, particularly in the US.

With this in mind, I read a recent article in the May 18, 2009 edition of Barron’s written by Neil A. Martin about Medtronic (MDT), the medical device manufacturer. The article is well written and fairly balanced. Neil goes over the issues facing the company and what its chances are going forward. He quotes several analysts who follow the company and who seem favorable. Although, I had a feeling of déjà vu reading their comments. We’ve heard it all before from other commentators for other companies. What’s different this time? We don’t get into the fundamentals. New products are good. But, will there be a risk of more recalls? How will these be paid for? Will patients continue to postpone surgeries judging it elective if they can’t afford it?

My purpose in this blog is not to hammer Medtronic or Neil A. Martin. What I’m about is how the fundamental issues seem to be being missed here. The financial industry is looking at healthcare companies like it has for years. Like it used to look at the US automobile industry for years. The proverbial ostrich with its head in the sand.

I want to go back to one of my recurring themes, the overcapacity in the US healthcare industry. Martin’s article contains a chart listing Medtronic with its major competitors, St. Jude Medical (STJ), Boston Scientific (BSX), Johnson & Johnson (JNJ), and Abbott Laboratories (ABT). I’ve blogged about the latter earlier this year. I think enough has already been said about the long suffering Boston Scientific. And, the remaining two go about their business. This is my point.

If I stick my neck out and forecast President Obama being reelected in 2012 then the world we’ll all inhabit when he finally leaves office in 2017 will be very different than the one we live in today. It has to be. The economic and social problems that we’re currently experiencing will only get worse with outside help (OK, OK, I’m really not a laissez-faire kind of guy, so, sue me). Also, I tend to be an optimist, things will get better. So, today’s players need to change, or, they will be changed. Now, the question is what will those changes be? Stay tuned, Larry and I hope to explore those changes.

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

Coincidental Indicators

2009-05-26T19:53:00.005-04:00

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

Another Sign of Big Pharma’s Demise?

2009-04-08T19:29:00.005-04:00

I couldn’t let this one go by. Andrew Jack wrote an article in the February 6, 2009 edition of the Financial Times about how scientists don’t lead pharmaceutical companies anymore. Andrew pointed out that only Lilly’s (NYSE: LLY) CEO, John Lechleiter, had trained as a scientist. He did note that Daniel Vasella, Novartis’ (NYSE: NVS) CEO had been a doctor.

Now, am I the only one who’s drawing a connection between the dwindling pipelines of large pharmaceutical companies? After all, what are professional managers all about? Optimal solutions. Squeeze every cent out of everything that you’ve got and don’t a cent anywhere else unless you have to. Doesn’t lend itself to developing many new drugs does it?

Remember Jack Welch? Hopefully, it hasn’t been that long. And, while I’m not a complete fan of the man, give the devil his due, he knew how to get results. Anyone care to remember Jack’s academic background? A doctorate in chemical engineering from the University of Illinois. Doesn’t sound very sexy does it? But, Jack sure got his money’s worth when he rose to head GE Plastics and made his career there. The rest is history as they say.

I believe that there are two things at work here. First, only scientists can truly appreciate pure research and development and understand what can be done. Next, only scientists can understand the values that pure science can bring to society. This is my opinion, I have no empirical data to back this up. If anyone from the Harvard Business School is reading this, they’re cringing. Now, I know what everyone is saying, Guy’s a Marxist. He’s going soft on capitalism. But, wait, just hear me out.

Anyone remember Bell Labs? When it was a true scientific establishment and developed things like lasers and transistors? Or, how about when Big Auto was run by engineers and designers and hung around with manufacturing types? Bill Gates was a college drop out. (OK, it was from Harvard, but, you get my point.)

The Industrial Revolution wasn’t started by a bunch of quant’s from business schools. They didn’t even graduate from high school! Some were even home schooled! It was all about a bunch of guys, sorry ladies, this was a long time ago, who saw that things could be done better and did something about it.

OK, the baton had to be passed. Even Edison could only go so far without calculus. Pure science and research was made possible funded by the early successes. Somewhere along the way, we lost our way. No one solves problems anymore, no one stretches, and, that’s why Big Pharma will follow Big Auto onto the dustbin of history. (With apologies to Trotsky.)

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

Where’d Everybody Go?

2009-04-05T18:33:00.004-04:00

I know that I’ve been a little distracted lately and been off the wire a bit, but, when I resurfaced I was surprised at how quiet everything had suddenly become in the life sciences sector, Big Pharma especially. I e-mailed Larry asking where everybody had gone (except for Mike Huckman, who’s out in LA chasing a story on Dendreon. Check it out at http://www.cnbc.com/id/30033861 .). He replied with his characteristic wit and insight asking that wasn’t this supposed to be my job? Larry did have a point.

A short while ago, everyone was talking about Merck (NYSE: MRK) and Schering-Plough (NYSE: SGP), and Johnson & Johnson (NYSE: JNJ); Roche (SWX Europe: ROG) and Genentech (NYSE: DNA); Pfizer (NYSE: PFE) and Wyeth (NYSE: WYE); and, Abbott Laboratories (NYSE: ABT) and Celera (NYSE: CRA). Now, nothing.

OK, the wise guys out there may say, ‘Isn’t this enough?’ (I won’t get into that maybe it was too much. I’ve flogged that poor horse too much already.) One day, we’re all merging and going to dominate the industry. The next, there’s not enough players around for a pickup game of stick ball. Something’s up.

The media aren’t really covering these deals or other possible outcomes presently. Maybe the other news stories are pushing Big Pharma into the back pages, or, off altogether. I have to admit last Sunday’s purported story about President Obama calling General Motor’s (NYSE: GM) CEO, Rick Wagoner, at home and firing him made for a heck of lot better copy than the purported value of Schering-Plough’s pipeline. The stock market’s recent rally has certainly been another distraction, probably, also throwing some deals economics into question. Finally, Treasury Secretary Timothy Geithner’s plans for toxic bank debt haven’t hurt neither has his rock star boss’ concert tour of Europe.

My point, the markets and the media are digesting a lot of new news. Much of which will change the rules that Big Pharma had been playing by until recently. First, share prices will rise. Those deals won’t be looking so good to shareholders. Next, government is getting more involved with American business management. Industries and their companies should be expecting their own phone calls from Washington if they get into trouble. Or, maybe executives’ pay will just seem too exorbitant when politicians are just trying to make more drugs more affordable to more people who can’t afford them. Finally, Big Pharma has nothing new to say. As Larry and I have blogged repeatedly, this is an industry that could be the next Big Auto.

So, where has everybody gone? I believe that they’ve gone to ground looking for cover. First quarter earnings are due out soon. Annual shareholders’ meetings will be taking place. I still don’t think that there will be much good news. You can only get away with saying that you’re doing better than General Motors for so long.

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

Our Blog named to “The Top 50 Pharmaceutical News and Research Blogs”

2009-03-27T13:34:00.000-04:00

We generally don't believe in self promotion of our blog, but were recently humbled to be named as one of “The Top 50 Pharmaceutical News and Research Blogs” by “The Pharm Tech Blog” (http://www.pharmacy-technician-certification.com/?page_id=51 ). It is indeed gratifying to be recognized as #9 in this category and to appear with some very well respected other blogs.

We suggest you take a look at their blog which takes the following perspective:

“The Pharm Tech Blog aims to enlighten readers to important information and resources related to medicine, health, and the pharmaceutical industry, from the perspective of a pharmacy technician. This blog serves as an open forum for the exchange of ideas, resources and information related to health, health care and medicine, so feel free to contact us with feedback, article submissions and ideas.”

We also thank them very much for the recognition and pledge to continue our efforts at putting together our independent view of this industry. Thanks go to our chief writer Guy de Lastin for his tireless efforts.

Bio-tech - Is this the Life Science’s Innovation Engine?

2009-03-19T18:00:00.000-04:00

Larry and I have been blogging a lot lately about the tsunami of mergers and acquisitions that has been rolling over the pharmaceutical industry recently. We’ve been amazed at how traditional Big Pharma has been collapsing its own excess capacity back on itself.

Let’s talk about two recently announced deals, Merck (NYSE: MRK) and Schering-Plough (NYSE: SGP), (I won’t join the speculation about Johnson & Johnson (NYSE: JNJ) mixing it up with them) and Roche (SWX Europe: ROG) and Genentech (NYSE: DNA). (Regular readers can probably guess what I’m going to say next.) Which one of these deals makes the most sense from an investment perspective?

If you guessed Roche and Genentech then you’re correct! $46.8 billion is a nice piece of change for Genentech. The usual arguments of synergy, efficiency, etc. were given by management.

Roche gets the immediate benefits that come from such deals, improved revenues, earnings, and cashflow. But, what differs from a deal like Merck’s and Schering-Plough’s is that Roche is buying something new. (Alright, alright, I know that Roche already owned 56% of Genentech, but, at least they’re going in the right direction.) Bio-tech is the business differentiator here.

I haven’t had a chance yet to sit down and review the numbers between this deal and Merck’s but supposedly it’s more expensive. Given the future value of Genentech’s drugs, particularly the cancer treatments, that’s to be expected. The question is has Roche overpaid? I believe that’s it’s too soon to tell.

The hard part will now be making this deal work. Different cultures, national as well as corporate, and products are always hard to mesh together. Keeping key employees, particularly Genentech’s in this case, will be crucial. Given the amount of financing involved, Roche will be under significant pressure to produce results. Today’s markets are very unforgiving of missed expectations. Also, should this very expensive acquisition fail, what’s Roche’s chairman, Franz Humer going to do for his next trick? I’m assuming that Genentech’s chairman, Art Levinson, would be long gone by then.

Right now, the Roche and Genentech deal is the one to watch this year. This one’s the outlier. Something has to give in the pharmaceutical industry. The merging of companies with shrinking pipelines in an era of hostile government healthcare policies does not bode well as a good long term strategy for growth. Oh, for sure, there will a survivor. Just as in the auto industry, there will be a shakeout. I’m not ready to guess who that may be. But, I do feel confident that the bio-tech firms will be in a class by themselves. In the future, I’ll blog about why I believe bio-tech will be the engine driving innovation.

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

Big Pharma’s Wanna-be’s

2009-03-17T20:53:00.004-04:00

I’ve been blogging for awhile about the life sciences industry and things have started to get lively. Between the economy and its impact on the financial markets and the recent spate of mergers, Larry and I haven’t been lacking for blogging topics.

While following the industry and researching for my blogs, I’ve been noticing that the industry’s excess capacity is slowly merging itself away. A recent article in Barron’s described Bristol-Myers Squibb (NYSE: BMY) as a mid-sized pharmaceutical company. This got me thinking, who’s in Big Pharma now? Don’t worry, this blog won’t become a tedious list of company names designed to fill space. (BTW, I personally use CNBC’s Pharma Watch List at http://www.cnbc.com/id/15837675 for those of you who really enjoy lists of company names.) Pfizer (NYSE: PFE) and Wyeth (NYSE: WYE) are merging. So too, are Merck (NYSE: MRK) and Schering-Plough (NYSE: SGP), unless Johnson & Johnson (NYSE: JNJ) have something to say about it. Roche (SWX Europe: ROG) and Genentech (NYSE: DNA) are finally getting together. Jim Cramer of CNBC was speculating about Abbott Laboratories (NYSE: ABT) and
Celera (NYSE: CRA) getting together awhile back. (I wonder if I really need to say “Jim Cramer of CNBC”. Is there anybody on the planet who doesn’t know Jim especially after Jon Stewart got finished with him the other night? But, I digress.) Hey, wait a second, this is starting to turn into one of those tedious lists I was griping about several sentences ago.

Let’s pull out two of those names, Johnson & Johnson and Abbott Laboratories and talk about them for a few minutes. They get tossed in everybody’s list of Big Pharma companies but are they really pharmaceutical companies? Yes, they do research and development, market drugs, and go cap in hand to the FDA like the Merck’s, Pfizer’s, and Lilly’s. But, what about all those other things that they do?

First, both companies have significant businesses in the medical devices sector. Definitely healthcare related. Complicated products with healthy (no pun intended) gross margins, I’ll bet. But, don’t they have similarities to drugs? Insurance companies and Medicare pay for them. Hospitals and similar healthcare providers don’t want a lot of vendors’ similar products with just different enough procedures cluttering their storage rooms and confusing their staffs. Product risk? Remember heart defribulators? I’ll bet Boston Scientific does. That one made Vioxx look a sandlot stickball game.

Next, Johnson & Johnson has a consumer products business, mostly high end goods or their own highly respected brand name products. But, many businesses are finding that highly respected brands are not as recession proof as they once were. Then, there’s what I call the Wal-mart effect. Consumer products companies have been resigning themselves to having to deal with the likes of Wal-mart and the few other remaining retail distributors in this country. Also, consumer products have competitors, names like Proctor & Gamble (NYSE: PG) and Colgate-Palmolive (NYSE: CL) which don’t normally appear in blogs like ours.

Finally, let’s talk about management. Johnson & Johnson has Bill Weldon and Abbott has Miles White. How do they manage the complexity and challenges of such disparate businesses? How are their successors developed and chosen? Anyone of the three business lines described require long careers to master and are different enough to be fairly brutal with newcomers who dabble. Anyone who doubts this should check with Bob Nardelli, formerly of Home Depot, who now works for $1 a year at Chrysler. (I can even get a better rate than that.)

Some argue that buying shares in companies like Johnson & Johnson and Abbott Laboratories is liking buying shares in a mutual fund. I don’t buy it. Mutual funds have administration fees and not the corporate overheads that these companies have. Investors thinking of investing in the life sciences sector should be looking at either specific stocks or actual mutual funds.

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

Pharmaceutical Industry Consolidation-And the Winner is Pfizer, Merck or Roche????

2009-03-16T22:16:00.004-04:00

And the Winner is Pfizer, Merck or Roche????

We promised our view on the potential results of the 3 "super-mega-global-mergers" that have taken place in the last 60 days and we don't wish to disappoint. As we don't want to keep you in suspense, we think that Roche is getting the most “bang for the buck”, BUT it is highly dependent on the non-integration of Genentech.

Let's start with the contenders-first Pfizer-Wyeth. No surprise here, we think PFE vastly overpaid to get a potpourri of businesses with a dog's breakfast of vaccines, biotechs, consumers and some underwhelming pipeline potential. It seems to us that the major drive here is “synergy”, that is reducing workforce size by nearly 20,000 while plugging some of the $11-13 billion hole that Lipitor going off patent in 2011 creates. The stock market has not exactly been “irrationally exuberant” about Pfizer's 10 year $258 billion spending spree for Warner Lambert, Pharmacia and now Wyeth and has inversely rewarded share holders with a nearly 70% reduction in market capitalization from the day of the Warner Lambert deal close (Pfizer's market cap about $300 billion) to this week's $95 billion. Need we say more?

Merck strikes as a version of more of the same. Paying a 30%+ premium (about $41 billion) to combine 2 feeble pipelines and some redundancy (maybe another 20,000 people reduced), "diverse" and/or non-intersecting cultures doesn't strike us as “happy days are here again”. In fact while Pfizer-Wyeth pretends to be a “diversification” play as opposed to a "consolidation", Merck-ScheringPlough doesn't even try to excuse itself with such rhetoric. There is Dick Clark's (Merck's CEO) trying to convince us that Schering Plough is somewhat of an international powerhouse (try telling that to executives of any of Europe's Big 3 pharmaceutical houses), and that Remicade will drive sales of several billion more-can you spell J&J? The reverse acquisition route seems spurious at best-we're no lawyers but can't imagine the transparency of this shenanigan and how it may play with the legal eagles of J&J in New Brunswick. Can we forget about potential in fighting between Fred Hassan (Schering's CEO) and the aforementioned Mr. Clark?

So, back to Roche-Genentech. Sure $95 a share is rich and many a scientist in South San Francisco is going to feel more like a Microsoft Millionaire from the 1980's and therein may lie Roche's opportunity and challenge. Genentech's pipeline is deep and rich with well over two dozen promising candidates and more to come. Much of this has been attributed and rightly so to a combination of brilliant scientists and a laissez faire culture with heralded beer blasts, parties and freedom to explore favorite projects, some of which have become major drugs. The trick is whether Roche's CEO, Franz Humer and his merry band from Basel can convince Art Levinson and Genentech's San Francisco based minions that it's business as usual and that things can only get better from here. We're going to guess that while this is a classic consolidation play, the boys of Basel will do it right.

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

Contributed by Larry Rothman

Big Pharma’s Dividends – How Safe Are They?

2009-03-15T20:53:00.005-04:00

Recently, several large companies, Pfizer (NYSE: PFE), General Electric (NYSE: GE), and PNC (NYSE: PNC) have cut their dividends. This got me wondering, what might happen to Big Pharma’s dividends? After all, their share prices have been slammed like everyone else’s lately. (Although, admittedly, not all to the same degree.) I’ve always been suspicious that Big Pharma are not early adopters but followers. And, why not here? All that cash going out to greedy shareholders could be kept in the coffers, and, what do you do with all that cash? Why, either buy somebody else’s company or buy back your own stock. I didn’t say that this would be logical.

The Dow Jones was down about 52% from its 2007 high before its recent comeback. Buying stocks now could produce double the dividend yield from just two years ago. I’ll bet many recent purchasers of Pfizer and General Electric felt that way. But what about companies like Merck (NYSE: MRK), Bristol-Myers Squibb (NYSE: BMY), or Johnson & Johnson (NYSE: JNJ)? Decent returns now, but what about tomorrow?

What impact will Merck’s announced takeover of Schering-Plough (NYSE: SGP) have on its future dividends? I haven’t read of any changes yet but this may only be a matter of time. The media are speculating about Johnson & Johnson making a counteroffer for Schering to preserve its interests with Remicade. What might that do to Johnson & Johnson’s longstanding, unbroken record of annual dividend increases? Or, for that matter, might they have to go back a few years?

Interestingly, after Standard & Poor’s March 12th downgrade of General Electric’s credit rating from AAA to AA+, of the five remaining U.S. companies retaining their coveted AAA rating, two are Big Pharma, Pfizer and Johnson & Johnson. And, Pfizer is on Standard & Poor’s watch list because of its forthcoming acquisition of Wyeth (NYSE: WYE). I’m always amused at the herd mentality exhibited by Big Pharma.

First, everybody went after blockbuster drugs followed by direct to consumer marketing (DTC). Acquisitions came along next, and, now dividend decreases may be the next fad. Lowered credit ratings are just the unintended consequences of doing this.

OK, where does this all lead, you may be asking. (If you own Big Pharma stocks, you’d better be.) Remember several themes that Larry and I have been hammering away at for awhile.

Drug pipelines are drying up. President Obama will do “something” to U.S. healthcare. (Maybe only something easy like authorizing Medicare to negotiate volume discounts on prescription medications.) Unemployment is rising and many of the newly unemployed are foregoing their COBRA plans and other medical expenses until they find new jobs. All of this means that revenues could soon begin to disappear. Cash flow contracts and, well, you get the idea.

For now, everyone’s dividends seem safe. But, so did Big Auto’s and General Electric’s shareholders.

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

The Pharmaceutical Industry Merger Mania-”The Consolidation Camp” vs. “The Diversification Camp”

2009-03-13T23:27:00.002-04:00

The Pharmaceutical Industry Merger Mania-
”The Consolidation Camp” vs. “The Diversification Camp”

Consolidation in the Pharmaceutical and Biotechnology Industry has been grabbing headlines lately and of course we have a strong point of view about how this may shape or mis-shape the industry going forward. While the biggest headlines involve the Pfizer-Wyeth, the Merck-Schering Plough and Roche-Genentech consolidations, we feel compelled to discuss these and alternatives that may have been considered and the landscape that may develop as a result of these moves.

Let's look at some of the alternative strategies that can be deployed given that most CEO's would acknowledge that the combination of low ROI from R&D investments, patent expirations, demise of the blockbuster model, ineffectiveness of the sales force armies, excess manufacturing capacity, increased regulatory oversight, significant pricing pressures, and the lack of success (failure?) of large consolidations wreak havoc with long term direction.

Chris Viehbacher, the new CEO of Sanofi characterized two strategic camps in a recent interview with Bloomberg News-they are the “Consolidation Camp” and the “Diversification Camp”.

To us, Pfizer is the prime example of the Consolidation Campers with expenditures of nearly $200 billion in the last several years to acquire Warner Lambert and Pharmacia along with several other smaller acquisitions, only to have its stock market cap for the consolidated company reach under $100 billion despite loads of restructuring, re-engineering and synergy targets. It appears that once synergy targets are met (1-4 years), company values as measured by stock market capitalization seem to wane quickly and the quest/thirst for more consolidation continues at a frantic pace.

For us the leaders of the Diversification Campers are Johnson & Johnson and Abbott. Both companies have major lines of business outside traditional large molecule pharmaceuticals with significant and growing businesses in consumer healthcare and medical devices and diagnostics. Their acquisition strategy seems to be small to mid size chunks, notably J&J's $16 billion+ acquisition of Pfizer's Consumer Healthcare Businesses as well as numerous biotechnology companies, while Abbott has acquired Advanced Medical Optics (AMO), Guidant's Vascular Intervention and Endovascular businesses and Kos pharmaceuticals.

Both J&J and Abbott seem to have incremental “bite sized” acquisitions, all meant to provide a portfolio of “health care” lines albeit balanced among multiple sub segments of the industry. Both companies seem to have accelerated the success of these acquisitions by leveraging existing franchises and/or management and infrastructures. Notably one wonders why they haven't or if they might look at generic pharmaceuticals and/or animal health to round out their portfolios.

We will next discuss our opinions of the recent merger wave and who were the smart ones (could it be Pfizer, Merck or Roche??). Stay tuned and we will look at other alternatives we think may be developing.

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

Contributed by Larry Rothman

Hunter & Williams – Thoughts About Satyam, After Satyam (Pt. III)

2009-03-05T18:00:00.000-05:00

Larry and I recently had an opportunity to talk with Randy Parks and Jim Harvey, attorneys at Hunton & Williams LLP and co-chairs of its Global Technology and Outsourcing practice about the impact of the Satyam affair on global outsourcing. Hunton & Williams has 1,000 attorneys in nineteen offices worldwide. The Black Book of Outsourcing (http://theblackbookofoutsourcing.com/ ) ranks them as the number one outsourcing law firm in the world. Randy and Jim focus on the customer side of outsourcing deals although they have done some suppliers. This is the third and final of three blogs from this interview.

Jim said that there will be significant costs to add controls posing Indian outsourcers with a choice, either pass through the costs to their customers or reduce margins. A balance will have to be struck. I asked if the Indian outsourcers would be losing a key differentiator by adding these controls and their related costs. Jim reiterated that everything would be done with a balance. He didn’t feel that India would kill the golden goose.

With regard to immediate impact to Satyam, Jim pointed out that it has lost contracts with Caterpillar and State Farm. But, Satyam also wrote fifteen new outsourcing contracts during this past January. So, the jury may still be out on what their customers do. As Jim explained, the reasons for going to Indian outsourcers, labor arbitrage, expertise, and fantastic COE’s are still there.

We then asked Randy and Jim what a company should do if presented with a Satyam situation with its outsourcer. First, the customer should pull every operational risk mitigation lever in the contract. (Which assumes the customer had their attorneys include them in the first place.) Next, pay more attention to the deal in the early stages, send in a security team to review all key components of the contract. Do a triage, a risk adjusted decision process and identify what can be left, taken away, and what would it all cost. If there is no other way, then the customer should just buy its way out of the contract and move to existing providers.

Note that Randy’s and Jim’s advice is based on work that is done before. Another example of preparing in advance for outsourcer problems is the inclusion of financial covenants in outsourcing contracts. Examples of such provisions are change of control and deterioration in financial ratios covenants, the latter should be treated like high yield debt covenants. They indicated that vendors have been careful to avoid such covenants. Also, customers should build ongoing monitoring into future contracts.

As we wrapped up our interview with them, they summarized by saying that the Satyam affair would increase anxiety for sourcing relationships in the short term. There would be a broad brush taken temporarily and unfortunate conclusions drawn about geography and outsourcing in general. There are extremely talented resources at fairly competitive rates available in India. The value proposition is still in place. Specifically, Satyam could benefit from the economic timing. Business decision making is in paralysis right now. This matter could be finished for Satyam right now. A data point for when the markets recover. (Although, Satyam’s board of directors has announced a solicitation of bids for the company in the near future.) And, don’t forget those very high customer satisfaction scores that Satyam has consistently had.

Larry and I would like to thank Randy and Jim for taking the time to speak with us and appreciate their candid comments about the impact of Satyam on the outsourcing markets.

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

We Talk with Some Renowned Attorneys about the Satyam Scandal, India and the Future of Outsourcing (Part II)

2009-03-03T19:36:00.006-05:00

Larry and I recently had an opportunity to talk with Randy Parks and Jim Harvey, attorneys at Hunton & Williams LLP and co-chairs of its Global Technology and Outsourcing practice about the impact of the Satyam affair on global outsourcing. Hunton & Williams has 1,000 attorneys in nineteen offices worldwide. The Black Book of Outsourcing (http://theblackbookofoutsourcing.com/ ) ranks them as the number one outsourcing law firm in the world. Randy and Jim focus on the customer side of outsourcing deals although they have done some suppliers. This is the second of three blogs from this interview.

Randy and Jim both emphasized that “serious deals need to be done seriously.” They noted that in the early days of outsourcing/offshoring deals there was a great deal of anxiety and tension along with less care than now. Satyam is a good reminder of the need for attention to detail and care.

Since www.pharmservices.blogspot.com also serves the interests of the consulting community supporting the life sciences industry, Larry and I naturally asked about their involvement in outsourcing transactions. Randy and Jim replied that for sophisticated transactions there is a role for both professional advisors and law firms. Communications between them should be open. Their roles are complementary. They felt that consultants have superior research facilities to do the empirical analysis.

We returned to the Satyam affair and asked if they thought that might be other occurrences in the future. “Who knows?” , they replied. Human nature being what it is, sure, recurrences are possible. The hope is that regulatory changes that will inevitably arise from this will prove effective. Satyam is regrettable but shouldn’t be repeated.

Randy and Jim declined to speculate on what other outsourcers may have problems in the future and were unaware of any such circumstances.

Jim noted that there were no public events that rise to the extent of what happened at Satyam. He added that moving data overseas exposes it to the risk of theft. But where data theft has occurred, it has been in the developed world, not in India or the Philippines. Jim was reluctant to feed the fear because these incidents are isolated not systemic with what we know today. He cited Enron as an example. Just because Enron had problems doesn’t mean that every energy company is run that way. Enron was only one company with many lessons learned. Similarly, Satyam will cause India to look at the regulatory oversight of its companies. Information security laws have already moved quickly because of the Satyam incident.

Larry asked about Indian regulatory impacts. Jim suggested that the interlocking boards of directors across Indian companies would be looked at. He speculated that as with the Enron aftermath, the regulatory reaction will be strong, swift, severe, and, perhaps, overdone.

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

The Impact of the Obama Health Plan on Pharmaceuticals-The Final Nail in the Coffin or a New Beginning-Our Thoughts

2009-03-02T18:29:00.005-05:00

It seems as if the economic world is in collapse and the Pharmaceutical/Biotechnology Industry is not being spared. In fact the headlines suggest the industry is in for very rough sliding - witness the collapse of share prices for major Pharmaceutical and Biotechnology companies this week after President Obama unveiled his new health care initiatives. The President has proposed greater rebates to Medicare from Pharma which will significantly impact profitability (and by extension the incentives for R&D and new drugs). The administration is pushing for bio-equivalent biotechnology compounds to lower the costs to the consumer for these generally targeted, expensive compounds (and once again making the biotechnology companies far less attractive). Add to this the administration's proposal to make reimportation of drugs far easier (again to supposedly benefit the consumer) and layer on top of that the already existing problems of low pipeline productivity, the demise of the blockbuster model, decreased effectiveness of the sales force, excess manufacturing capacity, bloated administrative expenses and it is easy to conclude that the industry could be headed for disaster.

BUT WAIT, is it possible that despite these significant challenges, management may indeed have the opportunity for a classical transformation resulting in a leaner, more adaptive and focused business. While we don't want to be presumptuous and suggest this would be an easy move, several combination's of existing models and processes can be deployed to make the transition. Concepts such as the virtual company, focused R&D based on pharmaco-economics, better use of information management, highly targeted marketing and sales, rational out tasking, staff leasing, and/or global outsourcing and myriad more can be deployed for competitive advantage and profitability. The dilemma may very well be a management that is either too risk adverse, complacent or (hopefully not) incompetent.

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

Contributed by Larry Rothman

We Talk with Some Renowned Attorneys about the Satyam Scandal, India and the Future of Outsourcing

2009-03-01T18:00:00.003-05:00

We have discussed our thoughts about the outsourcing business and its viability over the last few months and had a real opportunity to have two highly regarded attorneys discuss their point of view about the global outsourcing business in general and the impact of the Satyam financial scandal in particular.

Larry and I had a wide ranging discussion with Randy Parks and Jim Harvey, attorneys at Hunton & Williams LLP and co-chairs of its Global Technology and Outsourcing practice about the impact of the Satyam affair on global outsourcing. Hunton & Williams is a very large and well respected law firm with over 1,000 attorneys in nineteen offices worldwide. The Black Book of Outsourcing (http://theblackbookofoutsourcing.com/ ) ranks them as the number one outsourcing law firm in the world. Randy and Jim focus on the customer side of outsourcing deals although they have done some suppliers. This is the first of three blogs from this interview.

We asked Randy’s and Jim’s about their impressions of the Satyam affair. Interestingly, Randy started by saying that he was disappointed by Satyam's behavior. Satyam had been a fantastic story, from nothing to a star in the globalization outsourcing market in ten to fifteen years and now to have to take a big black eye over this. He continued by saying that many Indian firms get higher customer satisfaction scores than firms based in the U.S. and emphasized that one bad apple doesn’t spoil the whole industry-he specifically pointed out that Enron was a single company disaster that did not permeate the entire energy industry.

We next moved onto what the warning signs were at Satyam, if any. First and foremost from our discussion was their reply that it would have been very difficult for a client to detect the fraud that was occurring-so we infer that best defense is a good offense-see their recommendations below. Jim stated that on a chronological time line (retrospectively) there were signs at a corporate level that some things were amiss. First, there had been rumors of a data breach at the World Bank, later found to be baseless, followed by the attempted sham real estate transaction. Randy also asked how they managed to keep $700 million in a bank without earning any interest and noted that the CFO deflected a reporter's query on this matter.

They explained to us that it wasn’t reasonable to expect customers to have the visibility to an outsourcer’s business to permit the type of transparency necessary to detect a fraud such as Satyam’s. Further, additional protection costs a significant amount of money and effort, and, then, would they work?

Randy and Jim agreed that developing a theoretical business model to protect against this type of situation would be an interesting intellectual exercise but wouldn’t be practical.

The next topic that we discussed was the lessons learned from the Satyam affair. Randy and Jim stressed operational execution of contract terms with outsourcers was and is the key to protecting a client from such issues, and even these are not entirely fool proof. They gave five recommendations that would be of use to our readers:

• Diversify the vendor pool-have a minimum of 3 suppliers.
• Take care of the data by offsite backups, assume catastrophic failure.
• Have source code drops.
• Manage the vendor relationships-enforce and exercise the contract terms.
• Take possession of dedicated machines.

Now, the caveat with these approaches is that they lower the anticipated savings expected from outsourcing deals. For example, the last point talks about dedicated machines which would cost more than shared machines. Randy and Jim noted that many contracts have these terms included but customers don’t exercise them. (I was polite and didn’t point out that such customers lose a second time because they’ve also paid their attorneys to draft such contracts and don’t use them properly.)

TO BE CONTINUED.

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

Abbott Labs – Back to the Future

2009-02-26T19:56:00.003-05:00

When I blogged recently about Abbott Laboratories (NYSE: ABT), I hadn’t expected to come back for a while. But, as I’m learning in the Blogosphere, things change.

Abbott is increasing its quarterly dividend 11%, its thirty-seventh annual increase (www.smartmoney.com/news/on/?story=ON-20090220-000734-1120 ). This was an opportunity to return and blog some more. Miles D. White, Abbott’s CEO, was upholding Guy’s Eighth Rule of Being a CEO, when in trouble, talk about the dividend, better yet, increase it.

The old saw about those who do not remember the lessons of history being doomed to repeat will really come into play here. What we’re seeing here is another of the large pharmaceuticals (does Abbott really even qualify as Big Pharma?) trying to keep up the pretense that it’s business as usual. Unfortunately, I’m only reminded of those recently unemployed who struggle to maintain their standard of living in order to convince their families and neighbors that everything is alright. One has to ask are they only really kidding themselves.

Monies that will be needed in the future are being dispensed today to keep the shareholders complacent. I still don’t see any reasons why Abbott Labs, along with several other pharmaceutical companies, won’t be traipsing up to the Hill in Washington in a few years looking for a bailout. Finding someone to blame other than themselves could be hard, especially by then. Big Auto blamed the banks. The banks blamed their borrowers. Giving that the drug industry will looking to the government for help, I suspect that they won’t be blaming Washington. But, hey, dumber things have happened.

I keep harping on companies like Abbott and Pfizer and issues like acquisitions (i.e., Wyeth), pursuit of the next “blockbuster” drug, and dividend increases because these are all busted strategies. Other industries like Big Auto and financial services have tried some or all of these and have come to naught. Why should things be any different this time?

A friend of mine (contrary to what Larry says, I do have some) once said that the definition of insanity was doing the same thing over and over expecting a different result. Get the picture. I know that I’m using up my quota of clichés in this blog but isn’t that what they’re for, right?

We’re looking at an industry that’s on the cusp of changes that will be seismic in nature. There will be winners and losers. So far, I’ve been focusing on the behaviors that will signify the losers. Shortly, I’ll begin to blog about the characteristics of the winners. This is an industry in transition and we won’t be lacking things to blog about.

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

Pharmacaeutical Outsourcing - Another Shot Across the Bow

2009-02-24T19:52:00.002-05:00

I admit freely that I have been fascinated by the topic of outsourcing in the life sciences sector, especially the pharmaceutical group. (Larry actually thinks it’s unhealthy, but, I think he worries too much.) So, when the New York Times (NYT) recently published a report (http://www.nytimes.com/2009/02/19/business/19clinic.html?emc=eta1 ) discussing an article (http://content.nejm.org/cgi/content/full/360/8/816 ) in the latest issue of The New England Journal of Medicine (NEJM) about the outsourcing of clinical trials offshore and the issues that are raised by this.

The NEJM and the NYT focus more on the ethical and safety concerns raised by these practices. I won’t rehash what they wrote, Natasha Singer’s article in the latter is an excellent piece of reporting and when you have the time, read the original NEJM article. Despite being written by several medical academics at Duke University, it’s a very readable article for the layperson. (I offer myself as proof.)

I want to focus on the economic and business aspects of this practice. (OK, I admit it, I’m a capitalist.) While there are some questions about the statistics used, there is definitely a trend to move clinical trials offshore. Despite protests to the contrary, I suspect that pharmaceutical companies feel that there is less FDA oversight and other forms of government regulation when they move offshore. Also, some of the countries selected may prove to be somewhat less litigious than American trial lawyers tend to be.

Lower costs, the perennial reason for outsourcing and offshoring is certainly another good reason for doing so.

But, what are the long term implications for the US pharmaceutical industry? Once again, we see a key US business differentiator that contributed to past American supremacy in the global drug industry being packed up and sent offshore. Besides the jobs lost, the early access to innovative treatments lost to Americans and the potential to enhance these differentiators are gone.

The major long term consequence is that US pharmaceutical manufacturers are assisting in the development of future competitors. The FDA should also stop and think about this for a bit. Once the genie is out of the bottle and new drugs are being developed, tested, and marketed abroad in a big way, the FDA is not going to be able to control policy as they have in the past.

In my recent blogs, I’ve been talking about changes in the life sciences sector and their long term implications. In particular, I’ve been hammering Big Pharma about the similarities to Big Auto. We’re seeing more evidence with this NEJM article. By itself, it’s not earth shattering. But, taken with everything else that’s going on, the future doesn’t look good for Big Pharma.

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

Pfizer-Wyeth Redux--We Can't Help It!

2009-02-19T20:00:00.000-05:00

I’m back on the Pfizer-Wyeth again. I can’t help myself. I feel as if l’m in that dream we’ve all had of being in a slow motion crash again and again. Here’s why.

Let’s start with the overall economy. Since last autumn, we have CEO’s either being excoriated in the press or by Congress. Obviously, there have been some serious shortfalls in abilities here. Now, let me ask a question, just because Big Pharma hasn’t been dragged up to the Hill yet by Congress doesn’t mean that they won’t be. (Doesn’t mean that they will be either, but old Guy’s sticking his neck out again.) Honestly, there’s some good potential here. Have we seen anything yet from Big Pharma’s CEO’s to distinguish them from their colleagues in banking or automobiles? This is where I’d really like to get some reader feedback.

Next, let’s talk about sticking the collective heads in the sand and hoping that problems will go away. Let’s face it. Barack Obama has won the election. He took the oath of office (twice) and he’s now the President of the United States (POTUS for you acronym freaks out there). Despite some Republican protests, President Obama’s stimulus package has been passed and signed. So, anyone who doesn’t think healthcare reform isn’t coming soon to a hospital near you had better wake up and smell the coffee. Especially, if they’re in the drug or medical device businesses.

Another one of my favorite gripes about the healthcare industry, and most other industries as well, is it’s fascination with mergers and acquisitions. Don’t get me wrong in the right circumstances, with the right reasons and for the right price, these types of deals can make a lot of sense. But, please notice the qualifiers that I listed. There generally aren’t too many deals that meet those criteria and then, if there happens to be a bidding war then any value goes right out of the window. How many M&A deals over the last thirty years, in any industry, have lived up to their oft overhyped potential?

Finally, let’s get down to basics. Business is all about making things and then selling them. Good products and services with good customer service attract customers who pay their bills and come back to buy more. While you’re at it, hire good employees, treat them right, and improve your productivity as a consequence. But, Big Pharma seems to be ignoring this model. Many of them are moving to a portfolio model of buying new drugs, outsourcing everything that they can, and making their profits on the resulting margins. Not bad business if you can get it, but how many companies can be in that kind of a business. Possibly a few, but, certainly not as many as are in the pharmaceutical industry today.

Oh, and let me add that with few exceptions they are optimizing the "blockbuster" model that no longer works. And, has anyone explained the law of large numbers to these people--combining two multi -10's of billion dollars business into one, taking on "synergy targets" has been at best short on results albeit high on promises.

So, let’s see what happens this year. If I’m wrong, I think I’ll find out soon enough.

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

What Does Barron's See in Abbott that We Don't?

2009-02-17T20:40:00.003-05:00

We’re well into the second month of the year, the world hasn’t fallen apart as some had predicted. But, then things haven’t taken off as others had hoped. Things are kind of, please excuse the technical term, blah.

Yet, some people are still back in the good old days, or, wish that they were. I found an example in this week’s Barron’s. Neil A. Martin penned an article about Abbott Laboratories (NYSE: ABT) entitled “Abbott Labs: a Prescription for Success”. He paints a very optimistic picture for Abbott. Yet, somehow, I couldn’t help but think that I’ve heard this all before.

Much is made of Abbott’s drug pipeline and how, unlike its competitors, they aren’t about to have any patents expire soon on their key products such as Humira, Niaspin, and Similac. OK, but, don’t patents eventually expire? (OK, I know some of you are snickering out there in the Blogosphere and saying to yourselves, “Not if you’ve got good lawyers.” I don’t buy that and will deal with you in a future blog.) They do. In some parts of the world, like India, they don’t care about your patents and if you try to introduce your products there, you’re going to run into the buzzsaw called ‘generics’.

Much is made of Xience, Abbott’s drug eluting stent acquired from the late Guidant Corporation. Between stents, drug eluting or otherwise, becoming a commodity and the risks from government healthcare reform, I’m not so sure that I’d get too excited about this.

Now, I don’t want to appear to be too critical. Neil does mention Wall Street’s concerns about Abbott’s growth being unsustainable. Though, he does try to minimize their arguments.

CEO Miles D. White is quoted as saying that Abbott if done with acquisitions for a while thereby violating Guy’s Third Rule of Being a CEO, always talk about the possibility of acquisitions. I suspect that White realizes that he can’t do acquisitions anymore for a variety of reasons ranging from financial to organizational.

Here’s why I’m harping on this article and poor Martin. Things have changed in the life sciences sector significantly over the last few years and will continue to do so. Pipelines come to an end. Companies without strong intellectual capital and lengthy track records of scientific achievement, not necessarily resulting in new products, cannot achieve these overnight. Companies with these assets are led by PhD’s in the sciences, MD’s, and similar credentials not MBA’s from Stanford University accomplished in the legerdemain of corporate finance.

The recent lessons from Wall Street and the American banking industry should be sufficient proof that there’s more to running to running a successful business than just a mindless shell game of assets shuffling.

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

Healthcare Reform – Will Big Pharma Get a Reprieve?

2009-02-11T20:17:00.003-05:00

Has Big Pharma gotten a temporary reprieve from threatened reforms from President Obama? Last week’s withdrawal by Tom Daschle from consideration as the Secretary of Health, Education, and Welfare and his office’s admission that there was no immediate replacement doesn’t bode well for quick reform.

Also, given the problems President Obama is having gaining bipartisan support for a stimulus package that everyone agrees is needed, think what will happen when he tries to push healthcare reform through the Houses of Congress.

A cynic might say that Treasury Secretary Timothy Geithner was approved despite his tax problems because everyone felt that he was the man and this was his moment. The same cynic might also say that Tom Daschle knew that Congress wasn’t ready for him and this was certainly not his moment.

What does this mean for Big Pharma? One pending issue that some of us have been writing about is what happens when President Obama gives the go ahead to Medicare to negotiate volume purchase discounts for prescription drugs with the pharmaceutical companies. Revenues will certainly contract. I don’t think volume increases will offset the price decreases unless there is a new, national commitment to really overmedicating the country.

Now, if the Obama Administration is too distracted to go after healthcare reform then Big Pharma may get a temporary reprieve this year. This will be a good thing for Big Pharma. Many drug companies have major patents expiring this year and their replacements are not exactly setting the world on fire. Getting pounded on their remaining products would not have been a good thing.

I’m going to stick my neck out and say that this year’s, 2009’s, revenues will probably be safe from Federal tinkering. Going a little further out, 2010 and beyond, I think the risks increase significantly. Here’s why. First, the economy is not going to improve any time soon. The Republicans are on the defensive and when their constituents start screaming about government assistance because they’ve lost their jobs, homes, savings, etc. then we will really start to see bipartisan support. Especially, as we start to draw closer to the midterm elections in 2010. Next, once the Federal government really lets loose and starts to spend, someone’s going to realize that we’re spending too much. That means other someone’s are going to start finding places to save money. Medicare spending for prescription drugs is a great place to start. Even John McCain hates Big Pharma. I recently saw an article which indicated that the Obama Administration is reviewing the U.S. nuclear arsenal. They’re getting serious. The sacred cows are going to be gored.

Big Pharma’s going to have a tough year in 2009. President Obama’s current troubles may buy them a little time but it will come back with a vengeance next year.

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

Wow - What a Week for Pharma M&A and Our Opinions on What's What

2009-02-08T12:11:00.003-05:00

Larry and I have been blogging a lot recently about the Pfizer/Wyeth merger and some other possibilities. I want to spend a little more time because I think that it’s fundamental to what’s happening in Big Pharma right now. Also, with Tom Daschle dropping out of consideration for a Cabinet post, President Obama won’t be able to start his agenda for U.S. healthcare policy for a while, so we have some time to focus on M&A activity in the BioPharmaceutical Sector.

While I’m still not a big believer in the sense or economics of mergers in the drug industry, they sure generate a lot of ink in the press. (Or, are they are electrons in the age of blogs? I’m having a difficult time adapting my metaphors to the Internet age.) I get the reasons, falling stock prices, lots of cash on drug company balance sheets, and CEO’s desperate to do anything to appear to be adding growth to the top line. Also, the lack of any real news seems to engender a lot of wishful thinking out there in the media.

Here’s one example. Jim Cramer over at CNBC recently blogged (http://www.cnbc.com/id/28813740 ) about the possibility of a merger between Abbott Laboratories (NYSE: ABT) and Celera (NYSE: CRA). Seems that Abbott’s CEO, Miles White, has been talking about the possibility of acquisitions (But then don’t CEO’s always talk about this? This is Guy’s Third Rule of Being a CEO.), and they are both already working together in the area of personalized medicine. Jim admits freely that he is only speculating here, but, given the article in Barron’s which came out today chiding him about his track record in making predictions, I don’t think I’ll put much into this one. I did find Jim’s summary of personalized medicine interesting and I’ll return to this in a future blog.

Meanwhile, Mike Huckman is keeping hopes alive over at his blog (http://www.cnbc.com/id/29014145 ) about the possibility of Roche (SWX Europe: ROG) acquiring Genentech (NYSE: DNA) in a hostile takeover. This was his second prediction for the pharmaceutical industry in 2009. Now, I’m not picking on Mike. I have a lot of respect for him. But, looking at his photo on his blog, I think I can safely say that I’m a few years older than him. OK, maybe more than a few years. Anyway, my point is that since 1976 when Robert Swanson and Dr. Herbert Boyer launched Genentech, I’ve been hearing people talk about a hostile takeover. It’s a perennial. Also, as I’ve blogged before, this kind of deal doesn’t make sense to me.

This week, Merck's (NYSE: MRK) CEO, Richard Clark stepped back from their long standing high and mighty point of view against mergers and "hinted" (http://blogs.wsj.com/health/2009/02/03/as-sales-slump-merck-ceo-clark-looks-to-acquisitions/ ) by saying “I don’t think any CEO in this environment can categorically rule out any transaction,” Clark said, according to Dow Jones Newswires. “There are opportunities across the whole spectrum we would look at.” We're not that clear on the position Andrew Witty, Glaxo's new CEO is taking first saying that there will be no acquisitions, and then suggesting "bolt-ons" and then suggesting that acquisitions will take a prominent role as Glaxo looks to back away from the traditional big pharma "Blockbuster" model and move further into consumer, vaccine and emerging markets (http://www.natap.org/2009/newsUpdates/010909_05.htm ). It may be of some interest that almost simultaneously and representing only about 1% of the value of the Pfizer-Wyeth deal, Glaxo acquired UCB's emerging market business for $687 million. In the meanwhile, Astellas launched a $1 billion hostile tender for CV Therapeutics (http://www.dealmakersforum.com/) and rumors continue to abound about a potential BristolMyers-Squibb-Sanofi hook up. Quite a week!

Other possibilities exist including Carl Icahn's continuing pursuit of "enhancing shareholder value" (e.g. sale to a Big Pharma company) at Biogen-Idec . That’s the fun thing about this kind of market, anyone can speculate about anything, even me. Let’s see what happens, I think that this is going to be a very interesting year.

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

FDA Section 912 -- A Bonanza or Distraction to Big Pharma??

2009-02-06T06:00:00.000-05:00

Larry and I have repeatedly blogged about the declining state of Big Pharma’s pipeline and their poor future prospects. I’ve been curious, what happens next? Where does Big Pharma go to keep its revenues and earnings growing? There is an obscure FDA amendment that may potentially provide a net incremental revenue source for the industry.

Recently, the National Health Alliance (NHA), a nutritional health community political organization, published an article entitled Stealing Nature’s Thunder, Will Big Pharma be allowed to monopolize natural nutrition? (http://www.nha2004.com/index_res.asp?w=1280&h=800 ) expressing concern that large pharmaceutical companies could stake out exclusive turf in natural compounds and food supplements by simply conducting clinical trials. This move is not without precedence already and likely can be expanded so that "everyday" remedies become prescription and/or more regulated. To a public already suspicious of the drug companies this is just adding fuel to the fire.

Section 912 is contained in the Food and Drug Administration Amendments Act of 2007 and is viewed with considerable suspicion by the health food industry, their customers and supporters because it could permit natural compounds to be treated, and regulated, like drugs. The article mentions substances like oat bran fiber, fish oil, probiotics, CoQ10, and various vitamins, minerals, and herbal products which could move into the captive orbit of Big Pharma.

This article caught my eye because I’ve been trawling the Web and media for ideas about what pharmaceutical companies could do next to supplement their vanishing pipelines. Section 912 could be used by drug companies to extend their reach, or is it grasp, over substances traditionally viewed as natural remedies.

Companies with strong research and development groups and marketing, not to mention legal staffs, would probably benefit most from this type of move. Of course, if traditional purveyors of these natural products could find themselves at a disadvantage if they find themselves in the cross-hairs of the Food and Drug Administration (FDA). Not having the aforementioned resources would place natural remedy providers at a considerable disadvantage.

I think that we’ll see more activity in this area as we move into the next decade. The usual practices of buying up competitors, after having their purchase prices driven up in bidding wars, laying off workers, consolidating operations, and then rolling jobs offshore will probably be in use.

OK, now here’s the catch, what does Big Pharma know about natural remedies? Not a lot, I’ll wager. Some of the cynics out there among you may say that they don’t know much about the drug industry either. This will turn out to be yet another distraction from Big Pharma’s core businesses. Further, given the new administration in Washington, D.C., rolling over a successful, American industry, wrapping it up, and then rolling it offshore probably won’t make many new friends there. So, maybe this won’t come to play, but, the moths can’t seem to help themselves as they are drawn to the flame.

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

If Pfizer-Wyeth is Absurd, What do you think about BMS-Sanofi or BMS-Biogen-Idec or even BMS-Amgen or Sanofi.....?

2009-02-04T11:02:00.005-05:00

It's no secret that Guy de Lastin and I feel very strongly that the Pfizer-Wyeth merger is a train wreck about to happen.

However, as long time members of the Life Sciences Industry, we know better than to think that this merger will be the only one to occur this year despite our earlier views (see our multiple blog articles on this subject over the last few months) that
there is no rational and compelling reason for these companies to consolidate.

So, let us speculate about what could happen next. Many Wall Street analysts and august financial papers suggest that BristolMyers Squibb (NYSE:BMY) is a maiden in distress and is being dressed up by its "savvy" management team to be taken to the alter.

If BMY is acquired, the leading contender may very well be Sanofi-Aventis (NYSE: SNY) of Paris. There was an extensive article in yesterday's Financial Times on this subject http://www.ft.com/cms/s/0/27be6860-09a-1dd972c0000779fd2ac,_i_email=y.html) and the truth be told, there is some merit in their thinking. SNY has lots of cash, a new CEO Chris Viehbacher, ex-Glaxo and runner up to Andrew Witty for that CEO job who is anxious to make a mark for himself by "expanding and diversifying" their business. And, oh lest we forget they share rights to PLAVIX, both companies' largest blockbuster and one that is beset by potential generic competition.

Let's suppose BMY want to be the acquirer, not the "acquiree". BUT, wait a minute, didn't BMY very recently get outfoxed by Eli Lilly (NYSE:LLY) in a very expensive acquisition of Imclone Systems and its blockbuster oncology pipeline known as Erbitux? It seems to us that BMY's strategy was a combination of expanding its oncology franchise, diversifying into large molecule (e.g. Biotechnology) science and hanging onto some potentially massive blockbuster extensions? If you believe that and BMY's management has learned a lesson,why not think that BMY looks at Biogen-Idec (NASDQ: BIIB) as an alternative or parallel version of its Imclone thinking. With a market cap of $14 billion or so, it could be affordable-NOT cheap, but very attractive with marketed and developing drugs in the areas of oncology, neurology, immunology, and cardiology in the United States and internationally. Its product set includes AVONEX for the treatment of relapsing forms of multiple sclerosis (MS); RITUXAN for the treatment of relapsed or refractory low-grade or follicular, CD20-positive, B-cell non-Hodgkins lymphomas, or B-cell NHLs; TYSABRI for the treatment of relapsing forms of MS; and FUMADERM, an immunomodulator for the treatment of severe psoriasis (http://finance.yahoo.com/q/pr?s=BIIB). This would be a very interesting fit with BMY's marketed products and pipelines. However, THE SAME COULD BE ALSO SAID FOR SNY!! Think of the fun, merriment and mirth that the bidding war could become!

Now, just for the pure joy of it, let's suppose that Amgen (NASDQ:AMGN) were thrown into this mix. What a powerhouse of a company despite some near term challenges. An attractive mix of marketed therapeutic products in supportive cancer care, nephrology, inflammation, and oncology. The company's principal products include Aranesp and EPOGEN that stimulate the production of red blood cells to treat anemia; Neulasta and NEUPOGEN, which selectively stimulate the production of neutrophils, a type of white blood cell that helps the body fight infections; and ENBREL that blocks the biologic activity of tumor necrosis factor by inhibiting TNF, a substance induced in response to inflammatory and immunological (http://finance.yahoo.com/q/pr?s=AMGN) and a potentially "golden" pipeline in each of these areas. One small challenge, AMGN's market cap at almost $60 billion dwarfs BMY at about $45 billion which at best suggests a merger of "near-equals" albeit some potentially very reluctant management and shareholders who may very well question the "synergies" and "value creation". Again substitute SNY (market cap over $75 billion) and does it make any more sense-we don't think so-do you?

As always, we are interested in your comments, please send them to larryrothmansblog@gmail.com

Contributed by Larry Rothman

The Pfizer-Wyeth Merger - We Were Wrong – They are WRONGER

2009-01-31T16:12:00.002-05:00

OK, I was wrong, but there is no mea culpa needed. The Pfizer (NYSE: PFE) and Wyeth (NYSE: WFE) deal has been announced and somehow financing was arranged. The hubbub in the media seems to support my opinion that this a bad deal for Pfizer’s shareholders, especially if you’re one of the 19,000+ employees who will likely lose their job in this deal. (Wanna bet that after President Obama gets through bashing banks for paying out $18 billion in TARP funds for bonuses, he’ll be setting his sights on Big Pharma.) Although, Jeff Kindler may still be trying to put a positive spin on things. Jeff better be good at spin meistering with a 50% reduction in Pfizer’s dividend-anyone notice that after an initial run up, both PFE and WYE retreated rather significantly based on some on Wall Street who don't view this merger as a layup after all.

Mike Huckman’s been busy doing the post-game review on this deal. Check out his blog (http://www.cnbc.com/id/15837675 ), in particular, his January 27th and 28th blogs. He offers some interesting perspectives and also links to a Wall Street Journal analysis of the deal. Other than the companies themselves and their hired flacks, I haven’t come across any serious commentators who think that this is a good deal.

I’m going to keep sticking my neck out on this one though. The virulent press reaction and Kindler’s ability to keep the financing together for this deal are my two main reasons.

First, the press reaction. Pfizer is simply buying revenue (at a very high price we add) to offset its looming loss of Lipitor to the generics. Kindler’s been trying to keep his job and has been shuffling assets around in a corporate finance version of three card monte. More people are going to be looking at this deal and start questioning it. I don’t expect anyone to be riding to the rescue with a counteroffer. Anybody remember Boston Scientific (NYSE: BSX) and Guidant? Let’s see, how many billions in overvalued assets did Boston write off the other day? Many pundits (and we agree) think that Pfizer would have been far better off buying several biotechnology companies (e.g., Biogen-Idec, Gilead, Genzyme or as we have advocated Amgen all would have helped) and why justify re-entering the Consumer business when two years ago, Kindler and company claimed they were selling the Pfizer Consumer business to J&J (NYSE: JNJ) so they could "focus' on Pharmaceuticals.

Next, let’s talk about that bank financing. I haven’t come across any details about which financial institutions or investors are behind the $22.5 billion in external financing or its terms. In these times of credit crisis, I’m sure that they are very interesting. By the way, another $47.5 billion will come from internal financing. One commentator noted that Pfizer would probably have to repatriate offshore cash to help with the deal. I suspect that this could mean paying US corporate taxes. Again, not a great deal for shareholders. Given the lack of value that deal produces along with the job losses noted above, I wonder if banks might start rethinking their loan arrangements. Sooner or later, Washington, DC is going to start asking what’s happening with all the money being forked over to the financial services sector. Executive bonuses and job losses don’t seem like a good return for taxpayers’ money. Somebody’s going to start paying attention here.

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

Wrapping Up the Indian Outsourcing Industry – For Now

2009-01-28T06:00:00.001-05:00

I’ve been blogging about the Indian outsourcing sector for the last few blogs and I’m going to wrap it up with this one, at least for a while. I'm sticking with my point of view that all this questionable business will have an impact on Life Sciences companies considering and/or using these companies in conjunction with their outsourcing/globalization programs. I want to wait until after second quarter earnings come out and see where the big four Indian outsourcers are at before I continue blogging.

I have a few reasons for wanting to conduct a temporary cease fire about the outsourcers:

First, I want to write about other topics. A lot’s happening in the world right now, especially in the life sciences sector, and one thing I like about this gig is being able to research and write about different topics.

Second, some of the events that I’ve been blogging about are still unfolding. Satyam is a case in point. There’s a new board of directors trying to figure out how to plug the hole left in the balance sheet after over a billion dollars or so disappeared from it. Then there’s trying to figure sort out all the potential suitors circling Satyam like sharks around an overboard sailor. According to Business Line, iGate Corp is purportedly interested. Given the current state of the global banking industry, Satyam may have trouble obtaining short term financing. If clients beginning to leave then the cash needs will become even more desperate. I think by early summer something’s going to have to give on that one.

Next, the expanding global recession is going to start hurting the customer base. Large outsourcing deals are expensive. Positive payback, either return on investment or discounted cash flow, generally takes two to three years at best for large projects. So, new large projects probably won’t be coming down any too soon. That means that future revenue growth will be off. Throw in stiffer competition squeezing profit margins and here’s another industry in trouble. Don’t be so smug sitting there, thinking that I don’t know what I’m talking about. I’m old enough remember the computer timesharing business. That was pretty hot for quite a while before it imploded. Sure, different times, different circumstances, but, the end is the same, highflyers streak across the sky like shooting stars and burn out as quickly.

Finally, with every major economy on the planet struggling to put their unemployed back to work, shunting jobs offshore won’t be viewed as a patriotic duty. I’ve blogged earlier about President Obama campaigning on keeping jobs here in the US. He may actually agree with the Republicans on this, or, at least enough in the Houses of Congress to pass his legislation. But, this too will take some time. Also, those healthcare executives who will suddenly rediscover their patriotism may also be worried about the risk arising from terrorism and be somewhat reluctant to move too many jobs overseas for the time being.

So, these are my reasons for leaving India for a few months. I’m confident that will be a lot more to write about in the six months or so.

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

Pfizer and Wyeth – What’s in for Pfizer’s Shareholders?

2009-01-26T06:00:00.002-05:00

This week stories began circulating about a potential merger between Pfizer (NYSE : PFE) and Wyeth (NYSE: WFE). Larry’s already written about what it could mean for the pharmaceutical industry if it happens. I’d like to focus on what it means to Pfizer’s shareholders. Personally, I think that it’s nothing more than a defensive ploy on the part of Pfizer. I refer my readers to my January 5th blog of this year for my thinking on large life sciences mergers and acquisitions given the current financial climate.

In this week’s Barron’s, correspondent Jacqueline Doherty writes in the Follow-Up section about the proposed deal and she offers an interesting analysis. I find one point particularly interesting. Acquiring Wyeth would give Pfizer the over-the-counter products Advil and Robitussin. Didn’t Pfizer recently sell off some very valuable consumer products to Johnson & Johnson (NYSE: JNJ)? Sounds like management is a bit confused if you ask me.

Acquiring Wyeth will probably dilute Pfizer’s earnings for some time. How long? I don’t know and I haven’t seen anything published yet. But, it’s a reasonable expectation. Doherty suggests that a combined firm would still have Pfizer’s earnings down by 11% from the prior year. I suspect that we have yet another management buying earnings. Why it should work here when it hasn’t anyplace else, I don’t understand.

Pfizer’s dividend yield is respectable (Barron’s states 7.2%), but, two things about this. First, above normal dividend yields, especially in times like these, normally indicate some sort of market risk. Next, how much longer will this dividend continue? Even General Electric (NYSE: GE) has had to cut its dividend! Depending on how Pfizer finances this deal, the dividend might be at risk. Normally once safe healthcare brands are not as recession-proof as they once were. Johnson & Johnson is learning this to its own chagrin. Of course, there’s the possibility of good things to come from Wyeth’s pipeline. Just how realistic is that though?

Pfizer’s CEO, Jeffrey Kindler, appears to be struggling with what to do. I don’t want to criticize him. He’s in a tough spot like every Big Pharma CEO today. A big acquisition would build momentum and excitement in the press and buy time in the hopes that something, anything, happens outside in the real world. Kind of like what the Federal government and Big Auto are doing, huh?

I’m still not convinced that deals like Pfizer and Wyeth are nothing more than hype being churned by people anxious for a story, any story, to add some pizzazz to what is an otherwise bleak market situation. From a shareholder perspective, this isn’t a god long term play. No, I really don’t think that we’ll see these deals happen. (And, even if announced, completing the financing is another story for another blog.)

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

Pfizer-Wyeth-Are We Kidding? If Not, Who and What is Next??

2009-01-23T07:55:00.004-05:00

A Pfizer Wyeth Merger—Are We Kidding? If not, Who's Next??

This morning, January 23rd, The Wall Street Journal “speculates” that there have been talks between Pfizer and Wyeth about a combined company, although they quickly point out that there is nothing imminent. My colleague Guy de Lastin recently wrote in this blog that there isn't a rational business reason for big pharmaceutical company mergers this year and has been notably supported in The Journal with "The record of big mergers and acquisitions in big pharma has just not been good. There's just been an enormous amount of shareholder wealth destroyed," said Gary Pisano, a Harvard Business School professor who has written about the issue.

Admittedly there are contravening forces at play here-Pfizer among others has been notably non-productive in its R&D sector spending over $7.5 billion a year with little tangible payoff—in fact they announced 800+ layoffs for this particular group in the last week or so. On the other hand, Wyeth has had a bit more success with a newly re-engineered R&D organization—having said that, both companies have major blockbusters, Lipitor and Enbrel come from acquisitions, not in house development. Clearly there are enormous “synergy targets” should two such massive businesses merge. Combine these factors with an investment community that is pushing for consolidation, and a lower market cap this year than last mixed together with a cash position of over $25 billion for Pfizer and a market capitalization of just over $50 billion for Wyeth—maybe, just maybe this could happen.

If Pfizer-Wyeth becomes a reality, we enter a new realm of what we call “Super-Mega-Global” Pharmaceutical giants. This may force other merely mega-globals into a merger frenzy. Europe's big 3, Glaxo, Novartis and Sanofi may view the world in a different way and look in their backyards at the likes of AstraZeneca, Bayer and even Roche as feeding fodder. How about the likes of Merck, J&J, Abbott or BristolMyers looking over the landscape at each other or such potentially delectable morsels as Amgen, ScheringPlough or others or each other or some large generics, or...... You get the point, in an industry known for follow-the-leader mentality, the investment bankers, lawyers and our friends the consultants are in for some major paydays.

Contributed by Larry Rothman

Tata, Last Man Standing?

2009-01-22T20:24:00.001-05:00

Recently, I’ve blogged about the issues at Satyam and Wipro, two key suppliers to the Life Sciences industry. I’ve also written about the implications for Indian outsourcers. I’ve suggested that there may be a consolidation coming in the sector. The question that I kept asking myself is who could be among the survivors? We think this can be a crucial issue for the Life Sciences Industry as they seek lower costs, equal or better quality of services and trustworthy/ethical partners.

One potential candidate could be Tata Consultancy Services (TCS). So far, they have avoided the scandals associated with its competitors. (At least so far, who would ever have thought that Goldman Sachs would become a mere commercial bank?) In fact, Tata recently announced the acquisition of Citibank Global Services Limited for a cash price of $512 million US. In addition, TCS gained a contract worth $2.5 billion US for nine and a half years providing process services to Citigroup. The deal was announced in late December. Looks like someone is coming up a winner.

By no means do I think Tata will be the sole surviving large Indian outsourcer. I divert momentarily to mention one of India's premiere companies, Infosys. A very recent article in Motley Fool (http://www.fool.com/investing/international/2009/01/13/3-reasons-to-love-infosys.aspx ) endorses the longer term viability of Infosys with the following commentary: "While accounting scandals at Satyam (NYSE: SAY) and Wipro (NYSE: WIT) are making Indian IT consulting firms look like Enron in a sari, Infosys carries the torch with a steady hand. The third quarter of 2009 saw sales grow 8% year over year to $1.17 billion, and earnings per ADS jumped from $0.55 to $0.58. Of course, nobody would call the entire nation corrupt, but you have to admit that the steady-as-she-goes success of Infosys makes the Foolish heart beat a bit more strongly". More about Infosys another time, so for now let's get back to Tata (TCS).

Could TCS be the last man standing in the Indian outsourcing sector? We give it a definite perhaps/maybe. Picking up some of the better pieces from the US financial meltdown is one way to expand market share. Some of Satyam’s customers might be swept up by TCS in the fall out that sure to come. While Wipro’s misdeeds might seem like venial sins (OK, I admit it, I went to parochial school.) by comparison, I think clients, especially "ethical" pharmaceutical companies may be looking for a new outsourcer might be a little reluctant to get mixed up with another vendor evidencing signs of ethical lapses.

Hence, Tata. Satyam’s existing clients, if they decide to switch, or, are forced by a financial collapse, would have to move quickly to replace their service provider. There is a question as to whether or not TCS would have the capacity to take on all of Satyam’s existing business. Or, would the usual suspects, IBM and Accenture or an Infosys be rolled out. Rest assured, they’ll be trying to move in, hard and fast.

2009 will probably be the crucial in determining if Tata will be the last man standing in Indian outsourcing. First, we have to see how Satyam comes apart and how fast. Next, we have to see where the pieces go. Finally, we have to learn whether Indian outsourcers were a brief moment in the history of outsourcing and offshoring that fell victim to the large multinational outsourcers when they could no longer sustain themselves.

Against this backdrop, other factors need to be considered, terrorism, the standoff between India and Pakistan, and the eventual shrinkage in the cost of doing business between India and the rest of the world, primarily, the United States. The time difference alone will ensure that absolute savings will not be the only factor.

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

President Obama and US Jobs – What Happens Next?

2009-01-19T20:01:00.002-05:00

We have a new President, Barack Obama. “Things” have changed and will continue to do so. What I want to blog about today is what this could mean for US jobs, in particular, in the life sciences sector.

Big Pharma has been offshoring the jobs of its employees for years now. Sometimes, to third party vendors, sometimes through the fiction of captive centers. Either way, jobs have left the country. Also, let’s not forget all the cash that some of them keep offshore to avoid US taxes. A lot of investment and jobs could be funded with it.

President Obama ran and was elected on keeping and creating jobs in America. The details still need to be worked out, but, I suspect that some combination of tax policy and government spending will be used. Other less formal methods of persuasion may be used as well. For example, how much longer will President Obama continue to meet the CEO’s of large corporations who are sending jobs overseas and laying off Americans here at home. I’ll wager that Democrats in both Houses will be raising the same point themselves soon.

The continuing global recession will impact the life sciences sector as well as the rest of the economy. Unfortunately, for life sciences, it’s going to get involved in government policy and funding just like the auto and financial services sectors. (Please see my earlier blogs comparing life sciences to Big Auto.) The old line firms, Big Pharma, have only been deluding themselves for some years now. Cost cutting has maintained profit levels but once patents expire with no new blockbusters to replace them and generics begin to erode market share then some of those companies will start to go away.

Here’s where we may see Big Pharma starting to find ways to hire more people here in the States. Either that or they may begin to break up. Given that CEO’s and their staff are the last ones to realize that the game is over, we’ll probably start to see other desperate measures. Remember that overseas cash that I mentioned earlier? We may see Big Pharma lobbyists trying to get some tax breaks in Washington promising jobs creation or return from abroad in exchange. Of course, the question is what would these people do? Hiring back office people doesn’t add to the bottom line although it may improve employee morale among the existing overworked staff. Hiring sales rep’s only works when there’s something to sell. Hiring R&D types to produce something to sell is not a bad idea, but, given how long it takes to develop new drugs and then do trials, there won’t be any immediate relief here.

In closing, maybe Big Pharma may add jobs to curry favor with a new administration desperate to put people to work, I just don’t think they’ll last.

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

After Satyam, Is Wipro Next?

2009-01-17T19:08:00.002-05:00

What’s going on in India? Specifically, with its outsourcing businesses. First, there was Satyam and their little bookkeeping problem. (What’s a billion dollars more or less among friends?) Now, Wipro is announcing (http://www.wipro.com/news/NewsDetails.aspx?id=1172 ) that it had been banned by the World Bank from bidding on business for four years because of inappropriate dealings with its employees. Since we are focused on the pharmaceutical and biotechnology businesses and its service suppliers, a question that immediately comes to mind is what is the impact of such seemingly unethical practices by key suppliers to the "ethical" pharmaceutical industry. Does this have the kind of collateral damage that makes the industry question this aspect of their "globalization" and/or "outsourcing/out-tasking" strategies. More to come on this as the situation unfolds.

In the meanwhile, a few questions about the WIPRO situation. First, why is the announcement made now? Compared to Satyam’s problems, this is the proverbial parking ticket. A cynic might say this was a great smoke screen for what otherwise might have been a serious ethical violation. Second, do these ethical violations indicate more substantial problems in the Indian outsourcing sector? Third, could these ethical lapses impact growth possibilities especially in the United States with its holier than thou attitude in these matters? Finally, could legislation like the Foreign Corrupt Practices Act (FCPA) or Sarbanes-Oxley preclude Wipro from actually bidding for work?

Back to the first question, why make the announcement now? OK, take advantage of the confusion, but could there be more? Either more transgressions or more firms? I don’t know, I’m just asking.

Second the question of fraud and questionable payments. While Bernie Madoff has proven that the Western world doesn’t have a lock on ethical behavior, India’s problems could be the tip of the iceberg. What other controls could be compromised? Information privacy is important to companies that outsource and offshore, especially the health care/pharmaceutical industry. How can anyone be sure that their information and their secrets are safe? Might there be HIPAA violation if such privacy concerns surface?

Third, growth for the outsourcers could be affected in several ways. One way is by potential customers staying away from the affected companies. Another could be new competitors arising, playing on the Indian companies’ weaknesses. Maybe Singapore is more expensive but has a much higher ethical rating. (Remember an American teenager getting caned for vandalism? Think what they’d do to Bernie.)

And, last but not least, what’s the potential for fines and liability in the United States? Or, look at it another way. How many government agencies and other quasi-government bodies might ban these companies from bidding on work? Could we see policy decisions preventing work from going offshore? Let’s not forget that the US government is slowly acquiring the US financial services industry while I’m writing this blog. The new administration might have an opinion about these Indian companies doing work there. Should such events occur, what is the spillover effect to the Pharmaceutical and allied businesses?

So, let’s summarize. I believe that the Indian outsourcing industry after a good run that began with the Y2K work of the Nineties is going to go through a period of consolidation. Unfortunately, combined with the recent tragic events in Mumbai, foreign companies may begin to have second thoughts about doing business there. The stronger Indian players could acquire the business of the faltering firms and be stronger than before. Proactive responses to the problems in the industry could provide opportunity. However, more spending may be required to put the controls and processes in place that large, multinational companies are expecting. There are still good reasons to outsource to India, but, India will have to work harder to keep what it has and gain new business.

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

Satyam: Are the Outsourcers Melting Down Next?

2009-01-10T18:39:00.003-05:00

Lately, I’ve been a little frustrated that I couldn’t blog about the Bernie Madoff scandal. (Actually, I could have but Larry said I’d just have to find another blog to do it at. He’s a stickler for staying focused.) Of course, I can look at poor Mike Huckman over at CNBC standing outside Federal court houses in the cold and rain during the Holidays waiting for a glimpse of the accused and console myself with being inside warm and safe. But, now, I may have a fraud of my very own to blog about. Granted, Satyam is a not a life sciences company but it does service them and there may be implications here.
Let’s start with the fundamentals of outsourcing. Essentially, commodity functions that are considered to be non-core activities are transferred to an outside vendor. The idea is that a vendor can take advantage of economies of scale and through continual process improvements to become best in class or the next best thing and make its money by spending far less to perform these services than is coming in. The problem is that classic economic theory teaches us that unusually high profits bring in more competition driving down prices and profits. And, this is where the fun starts. (And, this is where the hedge funds got into trouble.) It becomes increasingly difficult to post those double digit profit gains year over year when there’s more competition. Also, there’s one other aspect that most commentators miss. The early outsourcers got the easy deals, simple processes, large volumes, and low capital investment required. Those salad days are long gone now. So, a firm which is trying to support its stock price either to maintain executive compensation or values for future acquisitions starts to look at questionable practices for what they justify will be a short time. But, once down that slippery slope as probably happened to Bernie Madoff, there’s no going back. It takes a lot to avoid this temptation. Unfortunately, for Satyam, B Ramalinga Raju couldn’t resist temptation. Apparently, Raju overstated Satyam’s to 20 per cent from 3 per cent. I’ll hazard that the latter is more the norm for outsourcers than not these days.
One writer has described this financial scandal cum crisis as “India’s Enron”. What will happen to all those customers who have outsourced those back offices to Satyam? Now, I don’t know if any significant percentage of Satyam’s business came from life sciences, but, I think this could put a chill on future outsourcing deals. Looking at their website (http://www.satyam.com/industries/life_sciences/index.asp ) they appear to offer a fairly broad array of services in the life sciences sector. Coming so soon after the Mumbai terror attacks back in November this won’t be good for the Indian outsourcers. I also suspect that life sciences companies who had been planning to outsource their operations and reduce their costs while they were at it will now be having some second thoughts.
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

Contrarianism Lives!

2009-01-09T20:30:00.002-05:00

There seems to have been a lot of writing recently about the lack of merger activity and what may be possible. Amgen seems to be getting a bit of ink too, but, then that one always seems to. First, Julie MacIntosh of the Financial Times published an interesting piece (http://www.ft.com/cms/s/0/57ccbec6-db91-11dd-be53-000077b07658.html ) concerning this subject on their website this January 6th. Her take was that the mergers and acquisitions market would be slow in coming back as companies assess risks and investment advisors want to appear cautious in recommending deals. Earlier in the week, Andrew Jack, also of the Financial Times speculated (http://www.ft.com/cms/s/0/20d8f19e-da8a-11dd-8c28-000077b07658.html ) about Pfizer entering into a large acquisition of a rival and what it might lead to in a pharmaceutical industry shying away from the large deals that spawned many of today’s Big Pharma companies. His musings were based on comments by Jeff Kindler, Pfizer’s CEO. He noted debates in the investment community about Pfizer acquiring Amgen. (CNBC had also reported this story.) As I wrote earlier, that’s an old story heard many times before.
What I find interesting here is how from very substance, a lot of speculation is going on. As I blogged earlier, I don’t think there is much of a market for large deals in the pharmaceutical industry right now. I find myself more in agreement with Julie MacIntosh about deal prospects in the industry. That is, the length and breadth of this recession will determine people’s willingness to return to the deal markets. Like I wrote earlier, she quotes Mark Shafir, the global mergers and acquisitions head at Citibank, who believes that bankrupt or near bankrupt companies will provide the first wave of opportunities. He goes further saying that cash rich companies may then begin to prowl for values. But, all this will take time. While these activities may start this year, I don’t think that they will culminate in any significant deal activity until 2010 at the earliest.
I know that some people have been writing about 2009 being the big year for drug company acquisitions. I’m just not buying into it. Let’s see what comes of these vaunted pipelines. Let’s see what happens when a President Obama instructs Medicare to negotiate drug prices with the drug companies. (I’ve always found it interesting that when corporations squeeze their vendors for lower costs, it’s capitalism; when the government does it, it’s Marxism.) As this blog has repeatedly said over the last year, there is too much capacity in the drug industry. Whatever deals happen this year will be restructurings designed to handle this fundamental problem.
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

Being Contrarian

2009-01-05T20:02:00.002-05:00

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 (http://www.cnbc.com/id/27911250 ). 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 larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Happy New Year!

2008-12-31T16:21:00.000-05:00

Happy New Year! Larry and I would like to thank all our faithful readers who have been reading and following our blog during the last year. We appreciate your loyalty and your feedback.
This year has been a wild one for the economy and the markets. Most of us haven’t seen anything like this before (there’s probably some old trader left from 1929 running around out there somewhere) and probably won’t again in our lifetimes (hopefully). The Presidential election back in November gave us a clear and clean call to action by the electorate. The last thing the country needed right now was another hanging chad escapade. Personally, I had expected a more active year for the healthcare industry. I suspect that I was premature in my calls. My last series of blogs comparing Big Pharma to Big Auto had indicated several cyclical trends which are inevitable to me. Of course, I’m leaving myself open to the charge that given enough time, any prophet will be proven right. But, the fundamentals can’t be changed.
As for our blog in the New Year, Larry and I are looking to increase the frequency of posts and to recruit additional bloggers (hint, hint). We are also planning to increase our interviews.
Larry and I are expecting the New Year to be a wild one whichever way it plays. The U.S. government, along with most of the industrialized nations, is getting ready to throw a lot of money at the financial crisis. On the other hand, we have yet to see the other shoe drop from the recent poor retail season, and, it’s not just about retailers. Watch what happens to the REIT’s when shopping malls start to have more vacancies than occupancies. The world political and social situation is still unstable. I have many friends from Mumbai and have visited its streets. I was horrified by what happened there. But, I don’t want to put too negative a spin on things. There are always opportunities in life. And, Larry and I will be there blogging about the healthcare industry.
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

Are Pharma Companies Headed Down the Same Path as Automotive? Part 3

2008-12-14T11:16:00.000-05:00

Last time, I blogged about what may happen to Big Pharma’s outsourcers after the financial crisis catches up with them. This time in my final blog in the trilogy I’ll write about what may happen to the consultants.
Actually, I believe that the consultants are already experiencing a downturn. Over the last several weeks, I had opportunities to meet with friends who work for the consulting firms. What I heard was that layoffs are already occurring. While I’m told that limited hiring can occurs for the right opportunity, this is the exception more than the rule.
The consulting firms are also experiencing the fallout from the financial service sector which is cutting into their projected revenues.
The growth drivers of the last decade are either long gone or fading fast. Y2K, e-commerce, ERP implementations and outsourcing are played out. There’s really nothing immediate that can help out. I’ve noticed the senior executives of the major consulting firms spending more time at their clients, looking for new business, and making “investments” to do so. I don’t sense panic yet but if current trends continue then that might change as we go into 2010.
The pharmaceutical industry is generating media and anecdotal evidence of spending cutbacks for next year. Expensive consultants usually are among the first to go. I predict that after the second quarter of 2010, we’ll see more layoffs at the consulting firms particularly at the senior levels.
What might be areas of opportunity in the future? One could be International Financial Reporting Standards (IFRS). This is the adoption of common generally accepted accounting principles (GAAP) by global businesses. The recent business failures in the U.S. financial services sector seem to have added some impetus to this initiative as there is a fear that failure to do so could keep U.S. firms from accessing global capital markets.
At a recent IFRS seminar that I attended in NYC, one Big Four accounting firm partner said that IFRS could be even bigger than Sarbanes-Oxley. (And, we all know how the accounting firms made out on that one.) Unfortunately, other than education and some planning activities, there won’t be much here until maybe 2013 or 2014. Also, Ernst & Young, PriceWaterhouseCoopers, Deloitte, and KPMG could play well in this space with their hordes of accountants. IBM Global Services and Accenture may not be able to offer the same services given their more technical focus.
Like in the auto and drug industries, the consulting industry is experiencing excess capacity. And, regrettably, cutbacks are the only way to go here when there is no new growth to absorb it. I don’t expect this industry to go to Washington, D.C. looking for bailouts.
In these three recent blogs, I’ve tried to summarize Larry’s and my thinking about the next year will bring for Big Pharma and the outsoucing and consulting firms that have been making their livings from it. 2009 will be a tough year for all of them. President-elect Obama will dominate the media after his inauguration next month. The quiet story behind the scenes will be the drug industry and its suppliers slowly following in the footsteps of the U.S. auto industry
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

The Convergence of Two Perfect Storms—The Drug Industry and The Outsourcing Businesses

2008-12-08T12:39:00.000-05:00

The Convergence of Two Perfect Storms—The Drug Industry and The Outsourcing Businesses

by Larry Rothman

We like and fear the term “Perfect Storm”, it conjures up severe disruption if not destruction. We wonder if the drug industry is in the midst of not just one but perhaps a double perfect storm and here's why we think so.

Severin Schwan recently named Chief Executive for Roche Holding AG was quoted in the December 8th issue of the Wall Street Journal saying: “As the global pharmaceutical market gets tougher, some drug makers probably will fail because they won't have enough innovative medicines that health insurers will be willing to pay for”. He goes on to say “Some drug makers might be forced into bankruptcy in coming years. Others could be forced into mergers, or to diversify into other businesses.”

The Perfect Storm causing this is a combination of rare circumstances coming together simultaneously including, but not limited to:

1.Researcher productivity as measured by number of new drug entities approved is at or near an all time low.
2.Discovery and development of new, novel, cost effective compounds is not happening despite great advances in technology as well as all the supposed process improvements made by spending hundreds of millions on outside experts (e.g consultants).
3.Stricter regulations and enforcement (and the promise of more to come) from regulatory authorities, much emanating from the US FDA, but certainly not limited to this country, rather a global phenomenon.
4.The likelihood that in the US (based on President-elect Obama's promises) that the government will soon step in with some form of price controls and the increasing pressures by PBM's and insurance companies to be unwilling to pay for newer drugs without clear benefit and the compounding of the strong push toward generics and there is challenge on the horizon.
5.Oh yes, let's add a global economic downturn that promises to be the worst in 30-70 years.

We do have great respect for the industry and its attempts to focus on these issues, so to suggest a failure of management similar to the US Auto Industry would not be totally fair. However, one of the major tools for cos reduction that the drug industry has deployed is outsourcing and that business is itself facing challenges of the same magnitude as the pharmaceutical industry.

The Outsourcing Industry has its own perfect storm in the making including:

1.The recent tragic events in Mumbai will cause a natural reluctance to place mission critical work in what is perceived as “harms way”, in other words, offshore from the US.
2.Clinical trials have been viewed as an area of great promise both as a globalization vehicle and certainly as a way to lower drug development costs. HOWEVER, there is a perception that despite lower costs and faster recruitment for clinical trials in developing countries that the results may not be “at standard” or even worse as clinicians eager to please their sponsors may “unintentionally” skew results. (We will follow-up separately on this issue and to be fair—suspicions and perceptions are just that, there may be no factual basis to these claims).
3.Talent pools are getting scarcer and their cost is escalating so that many of the outsourcing companies are trying to find the optimum mix of geographies, skills, costs and capabilities. This is easy to describe but very difficult to manage.
4.Finally, at least in the US, there is a political backlash to sending “US jobs” overseas.

So where do they go from here. We'll discuss our opinions in the coming weeks. What do you think?

Are Pharma Companies Headed Down the Same Path as Automotive? Part 2

2008-11-26T07:52:00.001-05:00

Last week, I blogged about what may happen to Big Pharma after the dust settles from Big Auto and the rest of the financial crisis. I think that I made a pretty good case for revenues being off in the future. (I never said that I was humble.) In this blog and the next, I’ll write about what might happen to Big Pharma’s partners, the outsourcers and consultants.

This week’s blog will focus on the outsourcers. The whole idea behind outsourcing is to lower costs through economies of scale and price differentials (arbitrage). With either a stable revenue base requiring efficiencies or growing revenues that could be managed better, drug companies have used outsourcing, in particular, offshoring, to reduce their costs. But, what happens if those revenues decline dramatically? An article published this week (Sports Business Journal, November 17, 2008) suggested that drug companies’ revenues could decline by as much as $10 billion (10-20% we think) next year because of expiring patents and perhaps significantly more if the Universal Health Care promise from the Obama campaign platform occurs. Research and development spending could be greatly reduced as well.

For example, recently, Mike Huckman in his CNBC blog, (http://www.cnbc.com/id/27576321 ), noted that Charles River Labs’s pre-clinical laboratory business is off because small biotech firms aren’t spending there now. He implies that this problem with early stage testing could indicate more trouble further out. Mike also talks about how the credit crunch is curtailing these firms ability to finance drug development. My point is that as the business is shrinking, expenditures will fall, and fast, to preserve profitability. If there is no business activity then there’s nothing to outsource, right? Not to mention that outsourcing requires a financial outlay up front to start off which probably won’t be happening in 2009. If we are correct in our presumption that revenues and expenditures decrease next year, big Pharma is sure to revisit its outsourcing strategy. Deloitte’s decision earlier decision to close its outsourcing operations in the Asia/Pacific seems to indicate that the salad days of outsourcing may be drawing near.

I think that the train has already left the station for many outsourcers. Rates have been rising and companies have been becoming less enamored about the limitations of working with outsourcers. The traditional outsourcing meccas of India and China are being challenged by other emerging locations such as the Philippines, other Southeast Asia countries, Central and South America, Eastern Europe and even some areas of the US. This adds to the challenges these suppliers are confronting. While I’m not suggesting that the outsourcing industry will crater anytime soon, I believe that the rapid growth is over and there may be some consolidation to come.

The global recession and changes in public healthcare will affect the pharmaceutical industry adversely and probably for some years to come. The ripples will go beyond the industry itself. The outsourcing companies, whether they supply clinical trials, payroll, or other backroom functions, and who have profited from the drug companies’ growth in the latter part of the twentieth century are going to have to recede with them.

Next week, I’ll finish this series with my blog on how consulting companies will deal with Big Pharma’s coming downturn.

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

After Big Auto, Is Big Pharma Next?

2008-11-16T10:36:00.001-05:00

The election’s over and I have to admit I feel a certain sense of vindication. I called it. OK, so did just about every political pundit worth their salt. I’ve waited a few days before I wrote this blog because I wanted to see what would happen in the markets and in the nation after Obama’s election. I also had an opportunity to read some of the other blogs and media to see what was going on.
In this blog, I’m going to write about what could happen to Big Pharma in the future. Everyone is focused on Big Auto and what little time they have left goes to the financial services industry. Well, I write about the healthcare industry, drug companies in particular, and their fellow travelers, outsourcing and consulting firms and I’m sticking with it. The reason for my stubbornness is that what certain sectors are experiencing right now will inevitably overtake Big Pharma.
Gene Epstein, the Barron’s columnist, asked in his November 10th column, Economic Beat, how long the slump would last. He focuses on real consumer spending and suggests that a recession could be more serious and last longer if it deteriorates. This would not be good for retailers or auto makers. Layoffs are continuing to rise. People are losing their medical benefits. Anecdotal evidence in the media suggests that people are deferring or going without their drugs because of hard times. Not a good sign. Let’s move over to one of my favorite topics, the pharmaceutical industry’s lagging drug pipeline. Lagging revenues, and no new products to help out, sooner or later, cash flows are going to be affected. Isn’t this what happened to the auto industry? Selling products nobody wants (toenail fungus doesn’t seem like a priority when the sheriff is repossessing your home) and having none of the products that people want or really need hasn’t been a winning strategy for the auto industry and it’s not going to work for Big Pharma.
One of my favorite industry bloggers, Mike Huckman over at CNBC posted a blog last Thursday (http://www.cnbc.com/id/27698475) concerning the impact of the global financial crisis on the drug industry. He summarizes the results of study on the health of the industry conducted by Ernst & Young. The end of the blockbuster era and the struggle to figure out what happens next are put forward. Mike does his usual superb job in outlining the issues. (If you follow the drug industry, you have to check in with Mike regularly. Right after you’re finished here.)
Now, don’t get me wrong. I’m not predicting the next Great Depression. Unless people really lose their heads down in Washington, D.C. and elsewhere, we’ll come out of this on the other side. But, I’m not saying that we’re not going to have a recession like we haven’t seen for a long time.
In my next blog, I’m going to write about the outsourcing companies and what’s going on over there. That’s going to be an interesting story in 2009.
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