Pharmaceutical 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”.

This is the view of analysts at Datamonitor who have issued a report noting that the present financial difficulties has led to “the abrupt loss of cheap debt”. In the last decade, companies in other industries have exploited easy access to cheap debt to leverage their return to investors but the the sub-prime crisis in the USA and the collapse of big name financial institutions means “banks have no choice but to protect their own capital and stop lending”.

However the 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 Chris Phelps. He notes that a lack of innovation, coupled with increased regulatory scrutiny and tougher cost-containment measures from payors to drive down prices, “has made the healthcare environment more difficult to operate in than it has ever been before”.

These negative long-term pressures have already been fully reflected in pharma’s stock market performance, the study notes, and between January 2007 and May 2008, the Dow Jones US Pharmaceutical Index fell by 10%, while the DJ Industrial Average “remained broadly unchanged”. However, the markets “have clearly recognised the balance sheet strength of pharma in the midst of the credit crunch”, Datamonitor notes, and there has been a recent reversal in stock market fortunes.

Biotech vulnerable to big pharma cash
The report also notes that the credit crisis “looks set to change again the balance of power in the pharma-biotech relationship”. Biotechnology companies’ ready access to capital and funding has dried up almost overnight, and while there are few that will struggle immediately, “the funding of their operations in the longer term looks more difficult”.

In terms of licensing deals biotech companies will be forced to accept less favourable terms, the study states, and with the cheap debt supply turned off, “pharma’s cash pile means that it is now the only serious ‘buyer in the room’ – private equity has vanished and small players will lose their own sources of funding”. There really can be only one outcome, Dr. Phelps says. “Under the cover of the credit crunch, big pharma will swoop repeatedly to acquire substantial biotech targets.

“Perhaps the clearest example of this intent is that Pfizer currently holds well over $25 billion in cash and short-term investments,” he concludes. It may well be that “the credit crunch provides big pharma with exactly the opportunity it needs to rebuild its ailing pipelines”.