While most big businesses are getting pounded on the stock market, pharma appears to be fairly stable according to a handful of analyst reports. Datamonitor, last week, released a report stating that although pharma hasn’t been as bright a star on Wall Street in recent years—due to a drop in new approvals and a bevy of blockbusters facing patent expiration— the drug industry is still cash rich, and doesn’t need to take on cheap debt in order to purchase new assets or boost returns to investors.
“Pharma companies are not only expected to weather the financial storm successfully, but also to use this period to exploit their unique cash strength by embarking on an acquisition spree,” said Datamonitor analyst Chris Phelps.
The report reveals interesting data, including the fact that the average top 20 pharma company has approximately $7.5 billion in cash available for investments. This also explains how Bristol-Myers Squibb, Lilly, and King Pharmaceuticals can make huge offers to companies such as ImClone and Alpharma at a time when most are counting their pennies.
“Under the cover of the credit crunch, Big Pharma will swoop in to acquire substantial biotech targets,” Phelps said. “Perhaps the clearest example of this intent is that Pfizer currently holds well over $25 billion in cash and short-term investments. It may well be that the credit crunch provides Big Pharma with exactly the opportunity it needs to rebuild ailing pipelines.”
Deutsche Bank analyst Barbara Ryan told Pharm Exec on Tuesday that, of late, smaller pharma companies have seen their stock prices decline more on average than larger companies. This could be a problem for biotechs holding out for bigger acquisition offers.
“In the current economic environment, pharma can make acquisitions of companies at more attractive levels than they could six months ago,” Ryan said. “And they don’t need to tap into the capital markets to finance those transactions because they have their own cash.”
For the most part, Moody’s agrees that pharma companies have a decent amount of cash available for deals, acquisitions, and mergers. However, a sizeable chunk of that cash is overseas, and therefore expensive to bring to the States.
“A large portion of the industry’s cash flow comes from overseas subsidiaries—some 75 percent by our estimates, including investments,” stated Moody’s senior vice president Michael Levesque, in a report. “That cash is accessible for US needs; however, under most scenarios, companies can access it only if they are willing to incur significant tax charges.”
If they want to act now, pharma companies have the choice of either using the money for offshore purchases or importing the cash to the US at a significant tax hit. The report notes that both scenarios are unlikely. More likely, companies will sit on the cash and wait for the (slim) chance of another tax holiday, or see if the new president makes any new policy changes.