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
Showing posts with label ScheringPlough. Show all posts
Showing posts with label ScheringPlough. Show all posts
Saturday, July 17, 2010
Wednesday, September 16, 2009
Why has Outsourcing Gone Mainstream in the Pharmaceutical-BioPharmaceutical Industry
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.
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.
Sunday, April 5, 2009
Where’d Everybody Go?
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
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
Thursday, March 19, 2009
Bio-tech - Is this the Life Science’s Innovation Engine?
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
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
Tuesday, March 17, 2009
Big Pharma’s Wanna-be’s
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
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
Monday, March 16, 2009
Pharmaceutical Industry Consolidation-And the Winner is Pfizer, Merck or Roche????
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
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
Sunday, March 15, 2009
Big Pharma’s Dividends – How Safe Are They?
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 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
Friday, March 13, 2009
The Pharmaceutical Industry Merger Mania-”The Consolidation Camp” vs. “The Diversification Camp”
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
”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
Friday, January 23, 2009
Pfizer-Wyeth-Are We Kidding? If Not, Who and What is Next??
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
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
Monday, August 18, 2008
Is this the time we all predicted....Transformation of the Pharmaceutical Biotechnology Industry?
Is this the time we all predicted....Transformation of the Pharmaceutical Biotechnology Industry?
Can the Services Industry be of help?
It is fairly obvious to those of us who are involved with the Bio-Pharmaceutical Industry that things could not stay as is. The industry is suffering with a multiplicity of challenges including but not limited to:
1.With dry (or near dry) pipelines despite massive spend on R&D.
2.Negative productivity gain from additional sales force additions (interestingly enough this could be a salvation as the industry consolidates and/or continues buying pipelines or licensing deals from biotech companies).
3.Massive governmental pressure on pricing and a hyper-vigilante, highly politically charged FDA making new drug approvals difficult, costly and lengthy.
4.Significant reductions in value for both Pharmaceuticals and to an extent Biotechnology companies that are traded on the stock exchanges.
5.Throw in for good measure that generic drugs now represent somewhere over 60% of all volume of prescriptions while accounting for under 20% of dollar spend and that there is a concurrent consolidation in that business.
Is this not the making of the perfect storm and is it possible that the service providers can help the industry in this regard?
One doesn't need to look much further than the business press to recognize the enormous change taking place, just look at these 5 deals that have taken place or will that are in aggregate way over $100 billion:
1.Roche wanting to buy the remaining share it doesn't own in Genentech
2.BMS bidding to buy what it doesn't own of Imclone
3.Pfizer's multiple Biotech purchases
4.Takeda's takeover for Millenium
5.AstraZeneca's purchase of Medimmune
There are several other interesting consolidations that are taking place within generics as well:
1.Teva of Israel buying IVAX (US) and now Barr (US)
2.Daichii Sankyo of Japan buying Ranbaxy of India
3.Novartis's earlier adding EON Labs (US) and Hexcel (Germany)
My thinking is that we are rapidly seeing consolidations on at least two concurrent fronts-and both are global:
1.Large pharmaceutical companies paying high premiums to acquire a combination of soon to be commercially attractive pipelines and/or complimentary product lines to add to their existing therapeutic areas.
2.Companies of various size forcing a major global consolidation in the generic space. This becomes a most interesting aspect of the equation as more and more drugs go off patent over the next few years and pricing and reimbursement pressures mount.
3.What about the next targets—it's easy to speculate about Amgen, Genzyme, Biogen-Idec and Gilead as the big fish here—but what about those big pharmas such as Merck and ScheringPlough potentially getting together and what that could mean?
Since part of our target audience are service providers to the industry, the question/challenge I pose is-what can you do to help?
As always your comments are welcome at larryrothmansblog@gmail.com
Can the Services Industry be of help?
It is fairly obvious to those of us who are involved with the Bio-Pharmaceutical Industry that things could not stay as is. The industry is suffering with a multiplicity of challenges including but not limited to:
1.With dry (or near dry) pipelines despite massive spend on R&D.
2.Negative productivity gain from additional sales force additions (interestingly enough this could be a salvation as the industry consolidates and/or continues buying pipelines or licensing deals from biotech companies).
3.Massive governmental pressure on pricing and a hyper-vigilante, highly politically charged FDA making new drug approvals difficult, costly and lengthy.
4.Significant reductions in value for both Pharmaceuticals and to an extent Biotechnology companies that are traded on the stock exchanges.
5.Throw in for good measure that generic drugs now represent somewhere over 60% of all volume of prescriptions while accounting for under 20% of dollar spend and that there is a concurrent consolidation in that business.
Is this not the making of the perfect storm and is it possible that the service providers can help the industry in this regard?
One doesn't need to look much further than the business press to recognize the enormous change taking place, just look at these 5 deals that have taken place or will that are in aggregate way over $100 billion:
1.Roche wanting to buy the remaining share it doesn't own in Genentech
2.BMS bidding to buy what it doesn't own of Imclone
3.Pfizer's multiple Biotech purchases
4.Takeda's takeover for Millenium
5.AstraZeneca's purchase of Medimmune
There are several other interesting consolidations that are taking place within generics as well:
1.Teva of Israel buying IVAX (US) and now Barr (US)
2.Daichii Sankyo of Japan buying Ranbaxy of India
3.Novartis's earlier adding EON Labs (US) and Hexcel (Germany)
My thinking is that we are rapidly seeing consolidations on at least two concurrent fronts-and both are global:
1.Large pharmaceutical companies paying high premiums to acquire a combination of soon to be commercially attractive pipelines and/or complimentary product lines to add to their existing therapeutic areas.
2.Companies of various size forcing a major global consolidation in the generic space. This becomes a most interesting aspect of the equation as more and more drugs go off patent over the next few years and pricing and reimbursement pressures mount.
3.What about the next targets—it's easy to speculate about Amgen, Genzyme, Biogen-Idec and Gilead as the big fish here—but what about those big pharmas such as Merck and ScheringPlough potentially getting together and what that could mean?
Since part of our target audience are service providers to the industry, the question/challenge I pose is-what can you do to help?
As always your comments are welcome at larryrothmansblog@gmail.com
Subscribe to:
Posts (Atom)