Article preview from "IN VIVO" December 2, 2008
Find out why Pharma's fiscal prudence is paying off as it skirts the worst of the credit crisis, but even its strongest players are likely to be affected as the turmoil drags on.
Article preview from "IN VIVO" December 2, 2008
Credit Woes Hit Pharma
Pharma's fiscal prudence is paying off as it skirts the worst of the credit crisis, but even its strongest players are likely to be affected as the turmoil drags on.
The biggest pharmaceutical companies are least affected by the credit crisis due to their strong balance sheets and hefty piles of cash, yet even they are finding debt is more expensive and harder to obtain.
Big biotechs also have billions of dollars in cash and marketable securities. Smaller, more fragile, development stage companies, however, are more fragile because their existence depends on their ability to raise money to fund their R&D.
Specialty pharma falls in between big pharma and biotech: the group is vulnerable, but not as much as biotech. The lack of access to capital makes doing deals tougher and more expensive.
The pharmaceutical industry may take risks with R&D, but its disciplined approach to the balance sheet has helped insulate it from the rapidly spreading global credit mess. Even pharma is not completely shielded, however.
The industry traditionally shies away from using debt for financing-- particularly the largest global companies that constitute "Big Pharma" but also smaller manufacturers. Why should a company sitting on a pile of cash turn to outside lenders for help, when borrowing is expensive and comes with restrictive covenants?
Strong balance sheets and cash flow stand the industry in good stead, but the current turmoil is so fluid and complex that analysts say that generalizations are tough to make. Even Big Pharma is facing more hurdles to borrowing—and it may have to revise how it uses its cash. Mid-sized to small specialty pharmaceutical companies, including those with cash on hand, find their market caps are down and lenders' doors are almost closed.
For development-stage companies, which include most biotechnology firms, the crisis could be the nail in the coffin; with equity markets dried up for the better part of a year, and credit gone, they'd better have deep pockets or be prepared to do deals on unfavorable terms. In short, for deal-makers, what had been a seller's market is rapidly transforming into an opportunity for buyers.
Because the situation is fast moving bankers and analysts say that the threshold at which lenders are willing to put up money varies case-by-case and is continually changing, depending on each company's strengths, the size of the deal, and the timing. Moreover, the crisis has different implications for each kind of company-issued debt. Since bankers seem increasingly convinced that the turmoil could be protracted, with no model for when it might end, they're being super-cautious about due diligence, even for companies with A-list balance sheets.
Pharma Relatively Insulated From the Credit Crisis – for Now
In general, the biggest pharmaceutical companies are less affected by the credit crisis due to the nature of their business and their extremely conservative financing relative to the rest of the market, says Arthur Wong, the credit analyst specializing in pharmaceuticals at Standard & Poor's (S&P), the credit ratings agency. Historically, these companies stockpile huge amounts of cash to ensure that their R&D gets funded. As a result, they traditionally are under-leveraged and often have little to no net debt, he noted. Their stellar credit ratings enable them historically to keep their borrowing costs low.
Data supports his observations. The top 20 pharmaceutical companies have an average net debt as a proportion of capital of 6%, compared, say, to the financial services industry, which has an average net debt of 95%, according to a new Datamonitor survey. The percentage of debt to capital may be rising slowly, as companies grapple with challenges such as increasing generic competition and R&D productivity lags. Even so, the upward trend is slight and hasn't affected their ability to borrow money, Wong says.
Read the rest of this article now. Purchase this 3333-word article as a PDF, for $125
Related Companies
Alpharma Inc.
Amgen Inc.
AtheroGenics Inc.
Barr Pharmaceuticals Inc.
Biogen Idec Inc.
Celgene Corp.
Cephalon Inc.
Eli Lilly & Co.
ImClone Systems Inc.
Endo Pharmaceuticals Holdings Inc.
Forest Laboratories Inc.
Genentech Inc.
Genzyme Corp.
Gilead Sciences Inc.
King Pharmaceuticals Inc.
Merck & Co. Inc.
Merck KGAA
Mylan Inc.
Mylan Laboratories Inc.
Merck Generics Group
Pfizer Inc. Roche
Shionogi & Co. Ltd.
Sciele Pharma Inc.
Teva Pharmaceutical Industries Ltd.
