Is Pharma recession-proof?

I confess I am no financial expert. My knowledge about the current credit crisis can be summed up in six words: 'debt is bad; cash is good', which was pretty much the limit of my understanding about money before it all began. But you don't have to be a financial expert to recognise the panic sweeping through the financial system, petrifying investors, CEOs and employees alike — nor to know that the paralytic effect it is currently exerting on global commerce must eventually pass. The banks will lend money again. Normality will return.

Jacky Law

Meanwhile, however, a major recession seems inevitable. The good news is that it couldn't have come at a better time for pharma — at least, that is, for those companies that aren't dangerously reliant on borrowing. As one pharmaceutical analyst from a leading investment bank told EvaluatePharma's news service, EP Vantage: "It's a sector not without problems, but still a safe haven, as pharma is clearly less exposed to the macro environment. Go back three recessions and downward revisions in earnings for pharma are half of what you see for the rest of the market."

In the so-called crash of 2008, pharma is performing well or, more accurately, less badly than anyone else. Since the beginning of June, the Dow Jones STOXX Healthcare Index had lost 4.5% by mid-October. The Dow Jones STOXX 50 Index, meanwhile, went down 26% during the same period. The largest companies have done particularly well, outperforming the FTSE index by 32% since early June. Stocks in AstraZeneca have actually risen 4% since June, flaunting advice from Goldman Sachs a week or so before the Lehman Brothers crash. On 11 September, the US investment bank was advising people to sell shares in the company.

Pharma's problems (patent expiries, few new drugs, and so on) may not have vanished, but companies have two things going for them they didn't have before the crash: they are a better bet for investors than the consumer sector and, unsettled times tend to work in their interests by raising the general level of demand for medicines.

The bad news, as EvaluatePharma CEO Jonathan de Pass points out, is that governments have less money to spend. "We are in uncharted territory, but one thing we do know is that government finances are shot to pieces," he says. "And that will affect health budgets. The ramifications of the banking crisis extend everywhere. No one can escape unscathed."

State-run health services will have to make their limited funds go further. Fred Hassan, CEO of Schering-Plough, told the Wall Street Journal healthblog last month (2 October) just what this means in Europe, where his company sells more Remicade (J&J's rheumatoid arthritis drug that Schering-Plough sells outside the US) in Sweden, with a population of just 9 million, than in Italy, which has a population of 58 million. "When it comes to health budgets, a nation's doctors, hospitals and pharmacists have political pull," he said. "That means there's a tendency to squeeze drugs a little harder."

The good news of the credit squeeze (timing and greater demand for drugs), in short, could ultimately be overwhelmed by the bad news (less money to pay for drugs) and greater public approval of government regulation. Amidst all this uncertainty, it is hardly surprising that most commentators concentrate their thoughts on advising the companies with decent balance sheets to start snapping up all those debt-ridden biotechs with decent products and little bargaining power because they are in danger of folding. The trouble is that no one can say which companies they are exactly. Where confidence is the real casualty, only companies that have proven success, such as ImClone, seem remotely attractive.

Finally, anyone feeling sorry for Sir Tom McKillop, former CEO of AstraZeneca whose banking career ended abruptly on 13 October, may be interested to know that he is not on the scrap heap. Far from it. Although forced to resign as Chairman of the Royal Bank of Scotland after shares fell to a quarter of their value in early 2007, he remains, according to Wikipedia, a Non-Executive Director at BP, Chairman of the British Pharma Group, Pro-Chancellor of the University of Leicester, Vice President of the European Federation of Pharmaceutical Industries and Associations, Chairman of the North West Science Council and, since January 2007, President of the Science Council. One wonders how he found the time to run a bank.