More Visits to Big Pharma

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

A Shot Across the Bow

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

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

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