Replies to post #50591 on Biotech Values

[Biopharm investor]

The R&D productivity of pharma has been relatively weak for an extended period of time, more recently due, in part, to a risk-adverse FDA. Pharma's in-licensed products are not having any more success navigating the regulatory minefield than is their internally-developed pipeline. Add to the struggling R&D productivity the increasing threat from generics, together with increasing pricing pressure and threats of price controls from a democratic congress, and you end up with a sector that is struggling and not very healthy.

Pharma's cost reduction efforts is a reaction to all of the above, not just the generic threat.

As one sign of how weak the sector is, consider the following list I compiled using the help of Dew and Biowatch. Here is a list of pharma companies that have announced or implemented headcount reductions.

JNJ - 3-4% of workforce announced August 1, 2007
AZN - 10% of workforce announced July 26, 2007
BMY - amount not known but headcount reductions announced July 26, 2007
PFE - 20% of salesforce announced November 28, 2006
MRK - 11% of global workforce announced November 28, 2005
LLY - 8% reduction in global workforce from 2005 to January 2007.
SGP - 1100 positions eliminated, primarily in manufacturing announced June 1, 2006
ABT - amount not known but sales force trimmed following the completion of their acqusition of Kos Pharmaceuticals

And for those the felt that "now is the time to own small biotech companies because of the above", the situation in biotech isn't any better. Consider the following, most of which occurred in response to biotech's own regluatory setbacks (again, compiled with the information furnished by Dew and Biowatch.

OSIP - slashed retirees healthcare plan annnounced July 30, 2007
POTP - 60% of workforce announced May 31, 2007. Also, senior management team laid off on July 27, 2007
DNDN - 15% of workforce announced May 17, 2007
GENR - 30% of workforce announced April 10, 2007
RNVS - 40% of workforce announced January 23, 2007
TELK - 25% of workforce announced February 13, 2007
GNTA - 35% of workforce announced December 20, 2006
COLY - 25% of workforce announced January 22, 2007
ASPV - 25% of workforce announced July 25, 2007
ENCY - 70% of workforce announced June 25, 2007
HEPH - 25% of workforce announced April 27, 2007
CRA - 33% of workforce announced January 10, 2006
NABI - 5% of workforce announced July 23, 2007
LGND - 76% of workforce announced February 1, 2007
AVN - 16% of workforce announced September 9, 2006
TGEN - 27% of workforce announced January 25, 2006
NEOL - 20% of workforce announced December 27, 2006
EPIX - 50% of workforce announced January 2006
AGIX - 50% of workforce announced May 24, 2007
TRMS - amount not disclosed, other than to say it included the Company's CEO, announced November 14, 2006
AVNR - 16% of workforce announced November 9, 2006
MATK - 15% of workforce announced October 29, 2006
EXAS - 50% of workforce announced October 17, 2006
NTMD - percentage not announced but a series of layoffs has eliminate almost all employees.
NTEC - 25% of workforce announced September 5, 2006 (this co. had previous layoffs too)
VLTS - 60% of workforce announced August 8, 2006
ARDM - 36% of workforce, inclduing CSO and VP Operations, announced May 15, 2006
DSCO - 34% of workforce announced May 4, 2006
MLNM - ongoing series of heacount reductions over the last two years
CNVX - >50% of workforce announced October 3, 2005
BIIB - 17% of workforce announced September 8, 2005
ISIS - 40% of workforce announced January 10, 2005
HGSI - 20% of workforce announced March 25, 2004
CVTX - magnitude not disclosed, announced July 30, 2007

Regards,
BI

[DewDiligence]

Is the response of Big Pharma to generics not to in-license more but to resize their operations? And to move horizontally - also into generics, diagnostics, [etc]

This was an astute 2007 post on your part. Certain Big Pharma—most notably GSK and SNY—have done exactly what you posited, moving aggressively into emerging markets where the emphasis is on unpatented “branded generics.” PFE has moved in this direction to a lesser degree. Meanwhile, NVS and ABT, who were already far from “pure” pharma companies a few years ago, have used large acquisitions to diversify even further away from branded prescription drugs (NVS with the Alcon deal, and ABT with the Guidant and Advanced Medical Optics deals).

This is not to say that Big Pharma has given up on biotech in-licensing—far from it. However, I think it’s reasonable to conclude that the recent diversification actions of GSK, SNY, PFE, NVS, and ABT have resulted in fewer biotech deals than we would otherwise have seen.

[DewDiligence]

Addendum re Big Pharma’s diversification trend:

After listening to yesterday’s ABT CC for the Solvay acquisition, I see that this deal is squarely aligned with the Big Pharma diversification trend you cited two years ago. Why? Because 70% of Solvay’s drug sales come from selling “branded generics,” largely in emerging markets. Thus, the ABT-Solvay deal is consistent with the way such companies as GSK, SNY, NVS (and ABT itself) have been reconfiguring their companies.