6/19/07

Humans are funny creatures. The more they learn about themselves, the more weaknesses they think they have. And the more weaknesses they think they have, the more they scramble for ways to address them, usually with chemicals. And the more they do that, the more conflict emerges between groups advocating their approach as better than everyone else's.

The bunny is too savvy to put his paws into the American healthcare debate (AKA The Morass), but he is curious about the direction of Big Pharma, particularly in the US.

The Democratic-majority Congress, not surprisingly, has declared war on it. The courts have made headlines uncovering all sorts of hanky-panky in cases involving doctors or drugmakers (like the 2005 silicosis case, http://findarticles.com/p/articles/mi_hb268/is_200509/ai_n18878338), doctors have painted drugmakers out to be drug-pushers (check out Elliot Valenstein's Blaming the Brain, http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?z=y&EAN=9780743237871&itm=2)
and then there's the age-old problem of passing costs on to consumers--you lives by de big R&D budget, you dies by de big R&D budget, since the comapny that supplies you with the drugs you may need to stay alive have to keep pace with rising prices too.

Putting aside the prickly points which will doubtless be done to death during the '08 campaign, the bunny sees the big problem as being one of patent rights. All big pharma companies worry about when their product protection expires. Some go to great lengths to hedge against it, others go to ludicrous ones. Take Bristol-Myers Squibb, for which 2007 has been The Year of Digging Out From Bad Decisions Going Back A Decade. Finally emerging from a two-year Federal probation for prior no-no's, and winning a lawsuit to protect the patent on its blockbuster drug Plavix (which the generic competitor, Apotex, is sure to appeal), the company now has to decide if it can get back on its own two feet, or if it would be better off merging with its European partner Sanofi-Aventis (for more on this, check out today's Reuters piece by Ben Hirschler and Ransdell Pierson, "Rumors Fly But hurdles Remain to Sanofi, Bristol Deal"). Litigation is a constant risk for big pharma companies (the bunny figures this is why Warren Buffett never moved to snap up Bristol's battered stock), not to mention the possibility that (besides Federal interference) their product may not work so well (Vioxx, anyone?),

Or the drug dreadnoughts could simply diversify. Johnson and Johnson, for instance, sees about 40% of its revenues coming from drugs, with the balance coming from its highly successful consumer staples. Who says drug companies need make only drugs? The bunny wonders if Big Pharma might borrow a page from the book of Big Manufacturing. 3M makes a variety of drug delivery systems (http://solutions.3m.com/wps/portal/3M/en_WW/DDS/DrugDeliverySystems/), General Electric has moved aggressively into medical imaging and early-detection systems(http://www.gehealthcare.com/usen/products.html).

The bunny figures Big Pharma will feel more Federal scrutiny, not less, though it will not disappear. However, in an election year, with healthcare the perennial issue, the industry will have to come up with new business models to accomodate an increasingly hostile political climate, unending media scrutiny, an army of ambulance-chasing litigators slavering for a payout, and a population that's just sick of it all.

June 18, 2007

The bunny senses trouble on the way.

All the chest-thumping and saber-rattling over a trade war with China (http://www.csmonitor.com/2005/0616/p16s01-cogn.html, http://www.foreignaffairs.org/20050701faessay84407/neil-c-hughes/a-trade-war-with-china.html,
http://www.iht.com/articles/2007/02/02/business/chitrade.php) isn't helping anyone. The massive US trade deficit with China (not helped by prodigious American consumption of Chinese-made goods and a stampede of American investors chasing the dragon), as well as China's enforcement of its currency level despite white-hot economic growth, hardly makes for a level playing field. Then there's the touchy issue of copyright infringement (always a hot topic in an election year), which China is accused of flagrantly ignoring along with other WTO regulations (not entirely a baseless charge, since China's ability to reverse-engineer anything on the planet surpasses even Japan's once-vaunted ability to reverse-engineer anything on said planet).

Then there's the thorny matter of China's trump card--its huge holdings of US public debt. China owns a ton of it. Japan comes close, and any trader with a heart condition likely remembers June 23, 1997, when Japan's prime minister pondered aloud about the consequences of selling some of its US debt holdings, giving the Dow its biggest single-day drop since the crash of 1987. (http://www.thetrumpet.com/index.php?page=article&id=2265) If the US follows through on its tough talk towards the PRC, Beijing may simply decide to dump its US debt holdings. And why not? It's not like they haven't hinted at it already (http://www.chicagotribune.com/business/chi-0703100152mar10,0,4916055.story?coll=chi-business-hed). The impact in the US would be enormous, driving up interest and mortgage rates which would be felt across the board, from buyout/buyback-hungry corporations to anyone carrying debt on a house, car, business, or their education (not to mention the impact on an already weakened dollar).

The bunny thinks this latest slopping-out of Washington rhetoric as being similar to the the latrine full of anti-OPEC litigators. (For more on that lunacy, check out Josef Herbert's 5/22/07 AP filing "House Approves Anti-OPEC Bill", as well as Tina Seeley's Bloomberg dispatch "US Gas Prices Are Due to Outages, Demand, FTC Says" on the same date.) He knows that China has been exporting its unemployment and using its trade surplus to buy other currencies (a process known as "sterilization").

But just as the US cannot maintain its rate of debt increase, so China cannot indefinitely maintain its annual rate of growth (as much as 15%). In time, China's chosen path will force a change in its policies. (The bunny suggests looking at the generation gap in China, between semi-skilled factory workers in living in projects in Shenzhen and their offspring who own--or want to own--cars and cellphones, and who wirelessly surf the Web to brush up on the latest releases from Milan and Hollywood. It's not that wide, and he asks you to consider just how badly the new generations would want to go back to the Good Ol' Days.) But rampant protectionist legislation will only do more harm than good. We should know, we've already tried it. Remember Smoot-Hawley. (http://www.state.gov/r/pa/ho/time/id/17606.htm)