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Drug giants remain addicted to high profit margins
By: Rory Godson
The Sunday Times, March 26, 2001
The pharmaceutical industry likes the warm glow that comes from doing good. Drug-company executives like to believe their medicines make a genuine contribution to human health, not just pots of money for them and their shareholders.
So it was distressing for them to be cast as villains last week by Oxfam's highly effective Cut the Cost campaign. Oxfam's accusations are simple: millions of people will die of Aids in Africa because they cannot afford the expensive drugs produced for the wealthy West. Worse still, the drug industry is asserting its intellectual property rights to prevent the supply of cheaper copycat medicines.
The industry complains the attacks are unjustified. The problems of Aids, and African healthcare in general, are much more complicated. Grinding poverty is only part of a lethal mix that includes lack of infrastructure, frequent outbreaks of war, corruption and lack of political will.
Oxfam recognises all of this but none of it will get the drug industry off the hook. A series in the Washington Post has outlined how the industry's initiatives to offer cut-price drugs have been characterised by fuzzy logic and token gestures.
The industry's nervousness is understandable. Making cheap drugs available in Africa risks their re-export to developed nations, threatening prices and profits. But that is the moral dilemma faced by so-called ethical pharmaceutical companies.
Long term, it is hard to see how the drug industry can protect its handsome profit margins. High returns are necessary to encourage companies to undertake the risks of research and development, the industry says. But why should those risks justify net profit margins of 30% or more? Profits will have to fall an awfully long way before Glaxo decides to turn itself into a retailer or a textile manufacturer.
Charities such as Oxfam are not alone in seeing the huge discrepancy between the price of medicines and their cost of production. Cash-strapped health services will also keep pressing for a better deal.
Baltimore blues?
THIS WEEK analysts will dissect full-year figures from Baltimore Technologies looking for signs of a slowdown in corporate spending on security applications. The former FTSE 100 starlet has endured a turbulent 12 months in which its market value has slumped by more than 60%, but even at these low levels investors cannot make up their minds about the prospects for the company.
Since the start of the year Baltimore's shares have traded as high as 425p, having shaken off a negative report from Deutsche Bank that dragged them to 285p. Unlike Autonomy's Mike Lynch, Baltimore's chief executive Fran Rooney is unlikely to engage in a public war of words with City institutions, but he is known to harbour similarly jaundiced views on the analytical capabilities of certain investment houses.
This corporate version of "my wife doesn't understand me" cannot disguise the fact that it has been all downhill for Baltimore since it announced the acquisition of Content Technologies last September. Back then Baltimore was trading at 720p, but the reaction to the deal was such that by the time it came to closure in late October the shares had fallen to 440p. This meant that a questionable all-share deal originally valued at £655m ended up costing £400m instead, but even at this lower level the deal has failed to win friends.
Content's shareholders now sit on 91m shares that have lost more than 25% of their value and the agreed lock-up period, which ranges from five to 24 months, opens in March. Rooney will need to pull a rabbit out of the hat to turn market sentiment in his favour. Friday's sharp fall in technology stocks will not have helped his cause.
AorTech's heart
UNDETERRED by its tiny market value of £210m, AorTech is pushing
ahead with plans to raise £64m despite disappointing shareholders with news that the launch of
Trucomms, its long-awaited continuous cardiac output monitoring system, has been delayed. That is not a lot of money to swallow, even in a nervous equity market, but shareholders are being asked to take much on trust.
Last December Gordon Wright, the chairman, was in bullish mood, describing the prospects for Trucomms as "excellent", but that has been the case since news of this breakthrough product filtered into the market in August 1999. The dilutionary nature of the issue, coupled with uncertainty surrounding plans for the new money, means the shares will probably remain weak between now and the company's move to a full listing in mid-March.
AorTech has serious ambitions and, with Morgan Stanley on board, promotion to FTSE 250 status is the target. The company may yet prove to be a world-beater but its shares, unlike its products, are not for the faint-hearted.
Funny old game
MANCHESTER UNITED and Celtic are scoring where it matters, but they are testing the patience of the City.
In extending their brand across national boundaries, the Red Devils are pushing the envelope to new extremes, as evidenced by their puzzling alliance with the New York Yankees. With more than a billion Chinese citizens waiting to be
colonised, it is only a matter of time, surely, before Peter Kenyon announces a partnership with the Beijing ping-pong champions.
The on-field success of both British clubs has not been replicated on the stock market, raising questions once again about the validity of football clubs as investment vehicles. The uncertainty regarding transfer fees for players is a continuing drag on the sector, but the cost of achieving success is equally worrying.
Pay negotiations at United will set the standard for other Premiership clubs, which face the prospect of meeting American-style demands from leading players. The link between expensive talent and success has never been more apparent and was reinforced last week when free-spending Celtic reported lower profits at the half-way stage. Brian Quinn, chairman, says the prospect for a full-year profit after tax "will depend on the disposal of certain players". We can think of clubs that may pay £15m for Henrik Larsson, but this seems a drastic way of proving football clubs can be good investments.
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