The hostile bid by Roche for Genentech announced today follows on from the Pfizer bid and is another sign of confidence in the pharmaceutical sector. The bid will be partially funded through the bond and commerical paper markets. Roche made the bid after calling around the banks and, presumably, being told that the bankers were confident that funds were available in the markets.
Monthly Archives: January 2009
Pfizer’s announcement that it is to buy Wyeth for $68 billion with a big slug of borrowed cash is a striking vote of faith by the markets in the drug development sector in the current financial drought. If nothing else it demonstrates that the drug development sector is going to be one of the more resilient sectors during the recession. The sector’s not totally impervious to the downturn, but it’s a lot safer than, say, motor manufacturing. As they say on the street: ‘You need your meds even if the repo man is knocking on the door‘.
The sector will, nevertheless, come under some pressure from cash squeezed insurance companies, HMOs and health payers. We are already hearing about non-essential operations being canceled due to cut backs at leading hospitals and health-related charities are finding it very difficult to raise funds. This pressure will feed all the way back down the healthcare supply chain to impact drug, medical device and diagnostics companies.
Wyeth was advised by Evercore, a small boutique, and Morgan Stanley. Pfizer financed the deal by borrowing $22.5 billion from a consortium of five banks: Goldman Sachs, Bank of America, JP Morgan Chase, Barclays and Citigroup. Each bank is ponying up $4.5 billion. More details about the deal can be found here and here.
Analysts point out that the poor credit market has enabled Pfizer to purchase Wyeth at a lower price than it might otherwise have had to pay had competing bids emerged. The squeeze on credit means there are unlikely to be any other contenders for Wyeth. Pfizer’s purchase comes with strings attached. Should the deal fail Pfizer will have to pay a $4.5 billion break up fee, almost double the amount expected in better economic times.
As a result of the Pfizer deal, Wyeth withdrew from talks to buy Dutch vaccine firm Crucell. Crucell shares fell 12.6%.
As a side note Everecore’s website was down when we went to have a look at it this morning. The weight of unemployed bankers trying to submit their CVs perhaps?
One issue that has interested us for some time is the following question: to what extent does a positive or negative overall impression of an alliance partner or another company result in the company being positively or negatively perceived across all factors? This cognitive bias has been termed the ‘halo effect’ and was first identified by Edward Thorndike. From Wikipedia:
In a psychology study published in 1920, Thorndike asked commanding officers to rate their soldiers; Thorndike found high cross-correlation between all positive and all negative traits. People seem not to think of other individuals in mixed terms; instead we seem to see each person as roughly good or roughly bad across all categories of measurement.
In order to assess the degree to which partner or image ratings are subject to a halo effect we recently tested our database of partnership ratings. In the database we have more than 1,000 question sets where the respondent has been asked to rate a company overall and then to rate the company on up to 50 different individual factors. We took a random subset of 57 ratings.
If the halo effect is present we should find that respondents rating companies very positively rarely rate the company poorly on each individual question. Equally respondents rating companies very poorly should show a considerable bias against giving the company very high ratings on specific questions.
In fact we found that 10% of the ratings given by respondents rating the company very favourably overall were poor (n=1,335). Nearly 40% of the ratings given by respondents rating the company very poorly overall were high (n=412). This leads us to conclude that respondents are able to maintain a view of companies that is nuanced and that they are able to differentiate between different aspects of a company’s capabilities.