Several major players in the pharmaceutical industry recently acknowledged having lost millions in last month’s stock market rollercoaster. Bristol-Myers Squibb wrote down $300 million on auction-related securities, Wyeth lost $70 million on the collapses of Lehman Brothers and Washington Mutual, and Genentech took a $67 million hit on its investments in financial institution preferred securities. Bayer reports that 80% of its material science unit customers are having problems accessing credit, which has led to destocking, according to Patrick Thomas, chief executive of Bayer Material Science.
Despite these losses, Moody’s assessed the liquidity profile of 9 major pharmaceutical companies in mid-October as relatively safe. The rated companies include Johnson & Johnson, Pfizer, Eli Lilly, Merck, Genentech, Bristol-Myers Squibb, Amgen, Wyeth, and Schering-Plough, whose cumulative cash and investments totaled $105 billion as of June 2008. Pfizer CFO Frank D’Amilio goes a step further than Moody’s, describing Pfizer’s financial health as “strong,” with $26 billion in cash and a “conservative investment portfolio.”
One reason pharmaceutical companies have not been dragged down as far as other consumer-oriented businesses in the US stock market nosedive is that most have accumulated the bulk of their liquid assets overseas. International sales of drugs remain strong compared with domestic sales, which have declined right along with the Dow. In addition, for many consumers, these products are all that stand between them and death and therefore do not fall into the category of discretionary purchases. Medications also tend to enjoy high profit margins.
Still, it is not all roses and petunias for the pharmaceutical giants: the patents of many leading drugs face expiration in the United States. To keep profits strong, companies appear to be looking increasingly toward more mergers and acquisitions. These transactions require cash, but few are willing to incur the nearly 30% tax hit for repatriating capital from overseas. Companies have instead taken to borrowing the funds, a trend Michael Levesque of Moody’s expects will continue. “You’ll see gross debt levels continue to rise over time, unless there’s some change to the tax code here,” Levesque said. “The cash is likely to keep growing and the debt is likely to keep growing.”