Generic business takes off... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Generic business takes off... 

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In this issue:
» Generic companies in demand
» India's moral degradation
» Increasing dislike for US treasury
» Buffett's opportunistic move
» and more!

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00:00 Generic cos. no more the untouchables
Global pharma innovator companies are on a buying spree these days. And the targets that they are eyeing are not necessarily innovator companies like themselves. Infact, the latest fad that seems to be catching up is the acquisition of generic companies. Some notable deals that have happened this year include Fresenius Kabi's acquisition of the promoter stake in Dabur Pharma, Daiichi Sankyo's acquisition of promoter stake in Ranbaxy and the latest deal that has been concluded is Sanofi-Aventis' buyout of Zentiva, a Czech based generics company.

The reasons for the same are manifold. Generic companies were initially anathema to global innovators as the former were very aggressive in launching generic versions of the latter's blockbuster drugs and more importantly challenging patents. But the landscape is now changing. As opposed to the nineties, these innovator companies now do not have an unviable pipeline that they can boast about. The governments in their respective countries are also not making things any easier preferring to go in for generic drugs in a bid to reduce healthcare costs. The US FDA has become very stringent in approving new drugs after the debacles of 'Vioxx' and 'Avandia', which were cited to have major side effects post their launch.

Thus, innovator companies have had to rethink their strategy and to keep their revenue streams flowing are buying stakes in generics companies to have a wider product portfolio. The same is also expected to give them access to semi-regulated markets, where most of the top generic companies have a strong presence. Looks like the industry has become one of the hottest ones around.

00.55 Destructive capitalism and airlines: A life long relationship
There is a connection between the airlines industry and the credit crisis and this link is AIG. The insurer, which was teetering on the edge just last week before the US government bailed it out, had a subsidiary ILFC, which is a market leader in aircraft leasing. Had AIG sunk into oblivion the Lehman way, airlines across the world would have been hit hard. Besides this narrow escape, the cooling of oil prices also seems to have eased the pressure on airline companies. But is this relief for long?

According to the Economist, at least 30 airlines have gone bust this year and the IATA, the industry's trade body expects that its 230 members will lose about US$ 5.2 bn in total following US$ 40 bn of losses since 2001, the rare exception being a total profit of US$ 5.6 bn in 2007. The financial crisis and soaring fuel bill is also weighing heavy on the industry with new airlines suffering the worst.

The airlines industry in India is also in a state of turmoil. Rising crude prices have hiked up the prices of aviation turbine fuel (ATF) and are considerably hurting domestic airline companies. While the government had announced a slew of measures, which included the investment of foreign airlines in domestic airline companies, the implementation of the same will be the key.

01.40 Economically upgraded but morally degraded
The above title sits rather lightly on India's shoulders as the nation strives to achieve even greater heights. If the latest corruption perception index of the global watchdog, Transparency International is any indication, then India's prayers are likely to be answered very soon. Because as per the index, the country has slipped further down and is now agonizingly close to the status of "rampant corruption". Any score below 3 in the 10-point scale is defined as rampant corruption and India currently is at 3.4, compared with 3.5 the previous year. What more, we are now ranked even lower than China. While the country has never been known for its clean administration, the rapid economic growth in the past few years and its ascendance on the global stage has made its bureaucracy and political class fight even more fiercely in order to corner a larger pie. Indeed, the media and the civil society have their tasks cut out.

2.12 End of an Empire?
Do you know that the US Federal debt after accounting for the recent US$ 700 bn package would mount to a colossal US$ 11.2 trillion? To put things in perspective, that figure is more than 10 times India's total GDP. And as per an expert, sooner or later, the world's largest economy is likely to crush under the weight of its own debt spiral. The expert in question is none other than CLSA consultant Russell Napier, author of the much acclaimed, 'Anatomy of a Bear'. In a short interview with a leading daily, Napier has gone on to state that "Years from now, when you look back on these times, you will see this as the birth of the Asian century". Napier was also critical of the US government's bail out of Wall Street firms and termed it as a move highly unexpected from a free market economy like the US. Infact, he has praised many of the Asian countries' response to the financial crisis of 1997 where they let many banks go bankrupt. Napier's optimism on Asia stems from the quality of assets the region carries currently and also its relatively underleveraged balance sheets.

02:48 US to borrow US$ 700 bn. Who's lending?
While the US government and Federal Reserve are trying their best to rescue the over-leveraged financial system from the brink of a collapse, they may only be pushing the dust under the carpet. The US may have to borrow an extra US$ 700 bn to US$ 1 trillion to fund the bailout of its crippled financial system. However, the same may not be easy as it sounds with Asian and European investors having lost appetite for US bonds. Investors outside the US currently own 56% of the US$ 4.8 trillion in marketable treasuries outstanding, up from 42% of the US$ 3.4 trillion outstanding in 2003. The Treasury Secretary Henry Paulson's proposal, which seeks funds to rescue banks by purchasing the devalued securities, would drive the US' debt to more than 70% of the country's GDP. According to Bloomberg, the last time US taxpayers owed as much was in 1954, when the country was paying down costs from World War II. Also, economists believe that interest rates in the US may shoot up by as much as 1% if foreign investors refuse to buy US securities, in the event of which the bonds currently floating in the markets may lose some value.

03:28 In the meanwhile...
Investors in Asia cheered Warren Buffett's vote of confidence to Goldman Sachs Group as most Asian indices including India edged higher today. The fact that the crude prices declined for the first time in a week helped prop up sentiments further in early morning trading. The Indian benchmark however, came off substantially from the day's highs as investors opted to book profits at higher levels. In the end, it managed modest gains. Most European indices are also trading strong currently. In the US markets yesterday, stocks were hammered yet again as heated arguments in congress squashed whatever little hopes investors had of a quick response to the financial crisis.

03:52 Buffett strikes Gold (man)
In a classic case of buying a great business in times of trouble, Warren Buffett has picked up a stake in Goldman Sachs. Buffett's Berkshire Hathaway will buy US$ 5 bn worth of preferred stock with a 10% dividend. Berkshire will also receive warrants to purchase US$ 5 bn of equities at a price of US$ 115 per share within 5 years. Goldman will additionally raise at least US $2.5 bn through the sale of equities. Buffett's move comes as a much needed vote of confidence for the investment-banking giant.

The legendary investor said, "Goldman Sachs is an exceptional institution. It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of out performance." It may be noted that Buffett has gone on record saying that he finds 'value' in the stock market amidst the current financial turmoil.

It may be noted that Buffett has a history of picking strong financial franchises during financial strife, starting with American Express when it was hit by the salad oil scandal in the early 1960s. As such this move comes as no surprise for true investors, who rejoice at lower market levels and the opportunities they provide.

04:33 Singur Imbroglio: Writing is on the wall
Talking of troubled firms, none could be more troubled in India currently than Tata Motors. In an indication that it must have finally run out of patience, the company has begun dismantling and moving out equipment from its controversial plant site at Singur in West Bengal. As per reports, a few activists manhandled the company's security guards last night and this seemed to be the last straw that eventually broke the camel's back. Although the company has not come forth with an official announcement, we, for the time being, will put our weight behind the adage, 'Actions speak louder than words'.

04:54 Today's investing mantra
"I'm sure a crash like 1929 will happen again. The only thing is that one doesn't know when. All it takes for another collapse is for the memories of the last insanity to dull."" - John K. Galbraith
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