Recession, in-licensing and more... - Views on News from Equitymaster

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Recession, in-licensing and more...

Aug 11, 2008

Falling oil fires up indices
Oil prices falling by US$ 5 a barrel on Friday to three-month lows sparked a rally in the indices in the US with the Dow and the Nasdaq gaining 3% each. The S&P 500 closed 2% higher. Dollar gaining strength against the Euro was also instrumental in bolstering the indices. With recession imminent in many countries of the European region, the Euro has been losing sheen thereby favouring the dollar. Oil has now retreated by around 20% since the high of US$ 147 that it had reached on July 11. Having said that, this optimism is likely to be a short blip on a broader canvas of sluggish growth and impending recession. While oil prices are moving downwards, uncertainty still abounds when it comes to ascertaining any definite direction. And the subprime malaise as of now simply refuses to go away.

  • Also read - Is this the end for commodities?

    Slowdown the world around
    Recession seems to be catching up on the US, Europe and Japan. It has been a year since the credit crisis first made its impact felt and the world is still reeling under it with no immediate respite in sight. Meanwhile, inflation is scaling higher across the countries and central banks are probably busier than ever trying to keep their respective economies from going under. To put things into perspective, Japan's GDP shrunk by 2.3% in the three months ended June and faces the gloomy prospect of its first recession in six years. Britain is also struggling to keep its head above the water. As per reports, recession in Britain is expected to be deeper and last longer than in the US. This is because the country's two main industries namely housing and finance are in a state of turmoil. The problems in the US sparked by the subprime crisis and followed by falling house prices and gargantuan write downs by financial firms are well documented. The developing economies are also facing the heat with China and India struggling to battle the rising inflation.This effectively means that a slowdown in economic growth seems inevitable and realising this, stockmarkets across the world are rapidly losing their sheen. Stocks that were trading at ridiculous valuations earlier have seen their prices crash and long term investors with a three to five year investment horizon can certainly take this opportunity and invest in sound companies with strong fundamentals and good managements. The pessimism prevailing all around should not dissuade serious investors to shy away from stocks and in fact they should capitalise on this opportunity to make some sound investments and reap the rewards in the long term.

    Flavour of in-licensing catching on?
    It is a well know fact that Indian pharma companies in the past had largely been looking to out-license some of their potential candidates in the R&D (research and development) pipeline to global innovator companies in return for milestone payments. This achieved two purposes. One is that it enabled the immediate monetisation of their R&D assets, given the riskiness and the uncertainty surrounding the business and the second is that it provider a breather in terms of curtailing costs. The global innovator's better expertise in doing research was an added advantage. Amongst domestic pharma companies, Glenmark has been the most successful as compared to its peers in this regard managing to find partners for at least three of its molecules.A reversal of roles is likely to slowly catch on and this was demonstrated by Ranbaxy, which in-licensed a molecule in the dermatology space from a Canadian company for development. As per the terms, it will be Ranbaxy that will be doling out milestone payments depending upon the progress of the molecule and bearing costs upto a pre-determined cap. Investors would do well to recollect that post the Daiichi deal, the R&D business of Ranbaxy will not be demerged into a separate company. The R&D efforts of Indian pharma companies are still in the nascent stages and while Ranbaxy's deal could set a trend going forward, it will be a while before these companies can match the resources and the capabilities of global pharma innovators.

  • Also read - Pharma: Why out-license?

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