(Sorry I haven’t written much lately, dear readers. I’ve been awfully busy at work, and pretty burned-out by the time I’m home. But I’ll wrap up most of it today, and then Amy & I are off on a mini-vacation. More later! Meanwhile, here’s this issue’s From the Editor column.)
Idiots’ Alchemy
Making money out of nothing at all
In keeping with last issue’s Hollywood-themed editorial, I’ve decided to write a sequel! This month, we move from blockbusters to bombs. In Hudson Hawk, my favorite terrible movie, the archvillains plot to demolish the world banking system by flooding it with alchemically produced gold. At least, I think that’s the plot. It’s tough to follow, what with the implausible action sequences, candy-bar code-named CIA operatives (with David Caruso as Kit Kat!), a nun-as-love-interest, and musical numbers featuring Danny Aiello and Bruce Willis.
The action revolves around Darwin and Minerva Mayflower — campily played by Richard E. Grant and Sandra Bernhard — and their reconstruction of a lead-to-gold machine designed by Leonardo Da Vinci. Says Minerva, “After a couple of years of steady production, we’ll flood the market with so much gold that gold itself — the foundation of all finance — will lose its meaning.”
Of course, Nixon ended the gold standard 20 years before Hudson Hawk came out, rendering the Mayflowers’ plot moot. And yet it’s also eerily prescient. After all, gold qua gold doesn’t mean so much anymore, not as a “foundation of all finance.” Now it’s just another commodity in which to invest.
What we’re left with is money itself. Funnily enough, while we’re free of gold, we haven’t gotten over alchemy. Instead of la machina oro, we have “quant funds,” those hedge funds that employ statistical models so sophisticated that they can “find winning trade strategies,” as the Wall Street Journal puts it. From equations to money, like magic!
Turns out one of these winning trade strategies was investing in financial instruments that were based heavily on subprime mortgages (that is, the practice of giving large loans to people who have poor credit). Some of these sophisticated investing models managed to underestimate the risk of — repeat after me — giving large loans to people who have poor credit.
Finding themselves pummeled by margin calls and investor redemption requests (that is, investors trying to get their money out of these fabulous funds before it all disappeared), some funds required massive bailouts from their parent institutions. Outspoken financial personality Jim Cramer made the YouTube rounds by ranting about how the government needs to step in with an interest reduction, ostensibly to save the homes of subprime mortgage holders, but also to save the jobs of hedge fund managers.
Evaluating risk — the true foundation of finance — lost its meaning. For a while.
So how does this tie into pharma? Well, first there’s the direct impact of this credit shakeup on private equity firms. Many of these groups employ leveraging techniques to (partially) fund acquisitions of public companies. We’ve seen several contract manufacturers acquired by PE firms this year, but with money less easy to borrow, will further acquisitions be back-burnered?
But the other pharma tie-in is potentially more damaging, and that’s the bizarre talk about a new round of mega-mergers in the drug industry. First we heard rumors of Novartis’ interest in buying Bayer, and then an analyst floated the idea that Pfizer should acquire Wyeth.
Regarding the former, you can learn more with Derek Lowe’s In the Pipeline excerpt on page 40. As far as the latter? Well, I think the argument for a Pfizer/Wyeth hookup is far more flawed than that which guided Pfizer’s Warner-Lambert and Pharmacia buys earlier this decade. In those instances, Pfizer could point to its co-marketing agreements for major drugs and show how 100% control of those products would lead to greater sales. You may recall that I disagreed with those moves, not that I take any joy in how that turned out.
Now? Pfizer’s key motivation (says our analyst) is the acquisition of Wyeth’s biologics program, which she compares to AstraZeneca’s MedImmune acquisition. Which cost more than a dozen times MedImmune’s earnings. In cash.
But I’m starting to think that the point of these rumors — and there’ll be more this year — isn’t to push for those particular mergers. Rather, it’s to incite any sort of big merger activity, because the banks that took a bath this summer need to boost their financing and underwriting businesses this fall.
Let’s hope the new CFOs are smart enough to keep the industry’s recent merger history in mind. Otherwise, we could be looking more upheaval. Or, as Darwin Mayflower put it in Hudson Hawk, “History, tradition, culture: these are not concepts! These are trophies I keep in my den as paperweights! The chaos we cause the world with this machine will be our final masterpiece! Go, team, go!”
