Healthcare Benefits from Credit Crunch
Posted on: July 20, 2008 - Email Article - Printable Version
The credit crunch is here and has reared its ugly head causing chaos in the financial markets worldwide for a year. The healthcare industry seems to be reaping the benefits though. Smaller start up biotech firms are finding it hard to obtain funding and are now giving themselves up to larger firms who have large cash reserves from their blockbuster products.
The most recent acquisition is related to Swiss Novartis [NVS: 54.70, -0.04 (-0.07%)] reaching to grow itself buying Speedel for less than $900 million. Sitting on a solid balance sheet, Novartis effectively acquired a close ally that helped develop Tekturna a heart drug expected to bring billions of dollars in revenues. Along with Tekturna, Speedel opens up a strong pipeline of products that can generate large cash flows for Novartis. This acquisition should prove to be profitable with Novartis’ favorable liquidity positions and profitability. Lets take a look at key financial metrics as of early 2008 (All data used is from Reuters Online):
- Quick Ratio: 1.18
- LT Debt/Equity: 1.52
- ROI (5 year average): 13.37%
- 2007 EPS: $2.80
- Price/FCF: $9.18
In this scenario, Novartis was in a position to acquire a small firm with potential for great future cash flow and executed accordingly to follow it’s responsibility to shareholders. In the current conditions, smaller firms that are strapped for cash will find suitors amongst the large pharma companies seeking to expand their pipelines and boost their offerings using products that are in later stages of development. Increasing pressure from generics and a longer approval process are requiring companies to keep the pipeline stoked with ideas to keep profitability up. This activity has kept select bankers busy by advising and financing such mergers and acquisitions as we see appetite from larger companies. We have seen the likes of Bristol Meyers Squibb [BMY: 25.89, -0.07 (-0.27%)] go out and buy promising biologic shops and others are following suit to harness the strengths of biologic development that will help focus on areas of interest and also keep up with competition.
It is interesting see how the financial markets have been driven down in the past year by the lack of credit, yet large healthcare companies are reaping the benefits as smaller corporations seek strategic solutions to address their financial issues.
- Santosh Sankar
Disclosure: Author has no positions in NVS, Speedel, or BMS
The Following Stocks Were Mentioned In This Article: BMS, NVS, SPPN.EB
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