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Happy days

Despite the tough economic environment, cash-rich pharma has reason to smile

As I write this, I have the BBC evening news on in the background. The reports could not be worse. There are job cuts, lay-offs, closures and redundancies. The banks want more money and the only company making a profit is the factory mixing the ink for the Bank of England to print more money.

According to a psychologist friend, at times of crisis, humour can provide a vital outlet for frustration at a baffling situation. So, let's give it a go.

Q: What do you call 12 investment bankers at the bottom of the ocean? A: A good start.

The banks are coming in for some terrible stick. I doubt their reputations will recover in my lifetime. Q: What's the difference between investment bankers and London Pigeons? A: The pigeons are still capable of making deposits on new BMWs.

It gets worse. Q: What's the difference between an investment banker and a large pizza? A: A large pizza can feed a family of four. Ouch!

How about this scenario? An elderly lady received an e-mail from the son of a deceased (but wealthy) African general, asking whether he could transfer millions of pounds into her bank account in return for a 20 per cent cut of the funds. All the son needed was the sort code and account number. Not realising she was the victim of a Nigerian 419 fraud, she e-mailed back the details. A couple of minutes later she received a response from the general's son: "Icesave? What is this, some sort of scam?"

Mind you, the last time Iceland had a crash, the checkout in isle three was closed all day.

Sometimes the situation can be put to good use, however. Resolving to surprise her husband, an investment banker's wife calls into his office. She finds him in an unorthodox position with his secretary sitting in his lap. Without hesitation, he starts dictating, ". . . and in conclusion, gentlemen, credit crunch or no credit crunch, I cannot continue to operate this office with just one chair!"

One office I know of has started a sweep to see how many times in a week they hear the words: "In the current climate". For me, the quote of the week was from a trader: "This is worse than a divorce. I've lost half my net worth and I still have a wife."

I talked to my bank manager the other day and he said he was going to concentrate on the big issues from now on. He sold me one outside Boots yesterday! Feel better? 

If you want a real laugh, try the Department of Health's website and have a look at the new NHS Constitution. Apparently we will have a right to make choices about care and to access information to help exercise that choice – I thought we had that already. If not, why did we spend a fortune on the NHS Choices website?

And we are going to have a new right; an entitlement to drugs and treatments that have been recommended by NICE for use in the NHS. They seem to have overlooked the fact that it is the drugs that NICE has not approved that people want.

We could cheer ourselves up with our new 'clear and comprehensive right' to complaint and redress. Personally, I'd rather have a no-win-no-fee lawyer.

For goodness' sake, is there any good news? Well, funnily enough, there is, and it's all about pharma.

FierceBiotech – the biotech industry's online daily monitor, reported that the key impact of the credit crunch on the corporate world is the abrupt loss of cheap debt. Companies have used easy access to cheap debt to amplify, or 'leverage', their return to investors. However, the credit crunch put paid to that and the banks have no choice but to protect their own capital and stop lending. Hence our present mess.

This leaves those companies that have built up debt in the tricky position of having to either rapidly pay off their debts – 'deleveraging' – or resecure new debt at much higher interest rates, potentially threatening the viability of the firm.

Datamonitor believes that large pharmaceutical companies have wisely stayed out of the cheap debt game and, as a result, the credit crunch will actually play out as a net positive for an industry much in need of good news. According to Datamonitor head of company analysis, Dr Chris Phelps: "Pharma companies are not only expected to weather the financial storm successfully, but to also use this period to exploit their unique cash strength by embarking on an acquisition spree."

Negative issues are already priced into pharma valuations. FierceBiotech says what we know already – the pharma industry's stock market performance has been faltering compared to other sectors, mainly because pharma has failed to develop high-value new drugs. They also face unprecedented loss of drug sales to generic competition over the coming years. Datamonitor forecasts that between 2007 and 2012, the top 50 pharma companies will face patent expiration on $115bn-worth of drugs and, in 2007, the FDA approved just 19 new products – the lowest level for over 20 years.

The cost of developing new drugs keeps rising, reaching an average of $800m to bring a drug to market, which is 15 times higher than it cost in the 1970s and more than three times higher than it cost in the 1980s.

Pharma, however, is cash-rich and has not taken on significant debt. The average net debt as a proportion of capital employed for the top 20 pharma companies is just six per cent, while the average net debt carried by financial institutions is 95 per cent.

So that's alright then. Feel better now?

The Author
Roy Lilley is a (sometimes controversial) healthcare author and broadcaster.
To comment on this article, email

26th February 2009


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