The Journey Continues – Down the Rabbit Hole

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

Big Pharma – Why the Doom and Gloom?

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

A Shot Across the Bow III

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