Of oil prices and Japanese pharma... - Views on News from Equitymaster

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Of oil prices and Japanese pharma...

Sep 9, 2008

Markets rally
Indian stock market closed with strong gains yesterday as the NSG waiver and the US government's bailout of Freddie and Fannie converged to buoy sentiments among the investors. The NSG waiver is a huge positive for the Indian economy and will attract much needed investments in the country's deficient power sector. Furthermore, the US government's takeover of the two US mortgage giants fired up the Asian and European indices. According to Bloomberg, Treasury Secretary Henry Paulson said that the government will provide short-term funding to the two mortgage-finance companies and purchase debt backed by home loans.

In the meanwhile, oil prices continued to dance to the tunes of the hurricane season. After Gustav, it is hurricane Ike, which has delayed the resumption of crude production in the Gulf of Mexico. This led crude prices to rise by US$ 2 a barrel.

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    Gulf is in a dilemma
    While markets across the world are breathing a sigh of relief at the fall in crude prices, the OPEC is not necessarily gung-ho about these developments. Oil prices have fallen considerably after the high of US$ 147 a barrel reached in July and are expected to fall below the psychological US$ 100 barrel for the first time since March. Fall in consumption is one of the major factors contributing to this decline. An economic slowdown is weighing heavy on the Americans, who are cutting back on their fuel consumption and given that US is the largest consumer of oil, a slowdown in this country is certainly contributing to the meltdown in crude prices.

    Oil producers are in a quandary. Some of them do not want prices to drop below US$ 100 a barrel, as it would greatly undermine their revenues. If they cut production to support the high prices, they stand the risk of being perceived as profiteers. At the same time, leaving production unchanged may trigger the decline in prices at a time when oil demand is slowing. The International Herald Tribune states, "Venezuela and Iran, the leading price hawks within the group, said they did not want oil to fall below US$ 100 a barrel, a price Iran's oil minister recently said was a minimum level. Both countries signaled that members of the OPEC needed to reduce their output to prevent prices from dropping further. Other OPEC members, like Algeria or Kuwait, fear that high-energy costs could jeopardize their exports as the global economy slows down and consumers reduce their consumption. Saudi Arabia, the world's top oil exporter, has not said what would be a fair price, although King Abdullah has said that US$ 100 was too high".

    Japan making strides in pharma
    The Japanese pharmaceutical industry is witnessing a flurry of activity especially in the merger space. After acquisitions made by Eisai and Daiichi Sankyo, the latest entrant in the M&A club is Shionogi, a strong player in the antibiotics space, who has acquired the US based company Sciele Pharma for US$ 1.1 bn. This is the fourth big overseas deal in nine months by Japanese drug makers. Infact, already in the year so far, overseas acquisitions from Japan have totaled US$ 42 bn, which is nearly double the figure for all of 2007. Japan, in recent times, is also being afflicted by the challenges facing other developed nations, namely rise in the aged population, increasing healthcare costs and pressure on the government to reduce these costs. Given the fact that the R&D pipelines of major global innovators including the Japanese companies are drying up, many of them are looking to augment their product portfolios by either acquiring small innovators or generic companies.

    In recent times, the Japanese government has been laying increased stress on reducing the healthcare burden and has started introducing some healthcare reforms, which have been pro-generic. This is a huge step for a nation, where generic penetration was very low, despite being the second largest pharma market in the world, as generics were perceived to be 'inferior'. Indian companies have also been making some progress in the Japanese pharma market. While the Ranbaxy-Daiichi combine will strengthen the former's presence in the Japanese market, players like Lupin and Cadila have also identified Japan as in important market to bolster revenues from generics.

  • Also read - The Japanese market is waiting to be tapped...

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