By Robert Cyran
NEW YORK, May 21 (Reuters Breakingviews) - Big Pharma has three big problems -- its most important drugs are losing patent protection, growth in developed markets is slowing to a crawl, and much of its cash is trapped overseas.
Six of the world's ten biggest drugs are likely to lose U.S. patent protection by the end of 2012. Other major markets in Europe and Asia are on similar timetables. The value of many big franchises will be gutted as cheaper versions of these compounds are introduced. As a result, growth of drug sales in developed countries is likely to be between 3 and 6 percent over the next several years, according to IMS.
Of course, big drugs companies can console themselves with the fact their businesses still generate substantial profits and cashflow. The trouble is that much of this comes from foreign subsidiaries, where it remains stashed away. Repatriating the cash to pay investors dividends or buy back stock would generate a large tax bill.
One way to deal with these myriad problems is to move into the generics business, as Novartis , Sanofi-Aventis and Abbott have. A third response is for drug makers to put their stashed cash to work overseas buying foreign companies. Unfortunately for Abbott, the answer doesn't come cheap. Piramal's sales this year should be above $500 million, according to the company. While Abbott's only paying a chunk of the cash over several years, the net present value is still 6.4 times trailing sales. The typical generic company goes for around 3.5 times, according to Credit Suisse.
What you called a "great article", written by Robert Cyran, is a complete disappointment. In contrast, Brian Orelli used some common sense in his timely report on May 21:
Abbott needed to make moves to balance revenue from its anti-inflammatory drug, Humira, which has quickly grown to be a large fraction of its total revenue. But I would rather have seen it stick with its strong suit, branded drugs and medical devices, rather than exploring overseas.
At this point, it's become hard for investors to find a drugmaker that isn't heading overseas. Just last week at their analyst meeting, Merck (NYSE: MRK) executives were talking up the emerging-market opportunity. Eli Lilly (NYSE: LLY) has been cutting jobs in the U.S., but adding them in emerging markets like China.
… there's only so much capital that pharmaceutical companies have available to deploy. Investing in emerging markets comes at a cost of not investing in higher-reward (albeit higher-risk) licensing of branded drugs.
(Abbott Learns to Say "Low Margin" in Hindi, by Brian Orelli, May 21, 2010)
"At this point, it's become hard for investors to find a drugmaker that isn't heading overseas. Just last week at their analyst meeting, Merck (NYSE: MRK) executives were talking up the emerging-market opportunity. Eli Lilly (NYSE: LLY) has been cutting jobs in the U.S., but adding them in emerging markets like China."
And why might this be Ferma?
Could it be that there are more growth opportunities in developing countries than developed countries? Could it be that developing countries are kinder and more welcoming to capital than developed countries? Could it be that U.S corporate tax policies have rendered our industries at a competitive disadvantage to the point is more profitable, and makes far more sense, to move off-shore? Could it be a combination of all the above?
The "three big problems" that Robert Cyran listed today are actually 3-in-1:
Lack of R&D investments at home in the US, which means a dearth of new products to make up for looming patent expirations, resulting in slowing growth in "developed markets" and around the world.
And, the root cause of lacking R&D investments in America is the WS-driven corporate greed for quick bucks, expressed as the decades-long capital globalization. Abandoning social responsibilities for the people at home, big corporations have outsourced investments overseas, from financial capital to industrial sectors, from tech sector to pharceuticals, from blue-collar manufacturing jobs to R&D white-collar jobs ...
What the big corporations have not abandoned is the western consumer markets from which they make the maximum profits by dumping the foreign-salve-made products. Any idea about the sweatshops overseas? Here’s an example reported by Tim Culpan, May 17, 2010:
IPhone Builder Hon Hai Turns to Monks as Worker Suicides Mount
A worker died from injuries after falling from a company dormitory on May 14, three days after a 24-year-old worker jumped to her death from an apartment block in Shenzhen, according to Hon Hai statements last week.
Excluding the May 14 death, whose cause has yet to be determined, seven Hon Hai employees have killed themselves this year and two workers have attempted suicide, Ding said.
On July 16 last year, 25-year-old Sun Tanyong jumped off a Shenzhen dormitory after one of the 16 iPhone prototypes he was assigned to mail went missing. Apple said at the time that the company was “saddened by the tragic loss.” Jill Tan, a Hong Kong-based spokeswoman for Apple, declined to comment on the recent Hon Hai deaths.
“Recently, there’s been a series of unfortunate events at Foxconn,” Hon Hai said in a May 12 statement. “Although the events aren’t closely connected to the operations and management of Foxconn, we hope to improve our management and increase mental-health counseling.”