Eurodebt Woes for the European Drug Sector
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Sovereign debt woes continue to plague European economies and markets. Investors are just coming to grips with some of the wide-reaching effects of European debt. Some of these effects are ones that would not come to investors' minds at first. Take, for example, the healthcare sector in Europe.
Governments in Greece, Portugal, Spain and Italy are struggling to repay billions of euros worth in outstanding debts to the healthcare sector, particularly the pharmaceutical sector. Several regions in Spain, for instance, are more than 800 days late with their payments.
Most current estimates for what is owed to drug companies come in around the 12 billion euro range and climbing quickly. This has put European drug companies into crisis mode as they scramble to find a way to recover what is owed them by modifying their business plans on the fly.
These European drug companies include some which are traded here on U.S. exchanges such as Novartis ADR (NYSE: NVS), AstraZeneca ADR (NYSE: AZN), Novo Nordisk ADR (NYSE: NVO), GlaxoSmithKline ADR (NYSE: GSK) and Sanofi ADR (NYSE: SNY).
One method currently being implemented to cut their losses is being used by most European drug companies. This was pointed out by the chief financial officer at AstraZeneca, Simon Lowth. He said the entire European pharmaceutical industry is negotiating with governments to offset recently implemented drug price cuts against unpaid debts.
Another broad-based tactic being put into place by the European pharmaceutical companies is an effort to switch customers away from purchasing drugs from the worst offenders – the smaller hospitals that often rely on regional governments as their primary source of funding – and toward buying their needed drugs at individual pharmacies which have a much better payment track record.
Meanwhile, individual companies are trying out some tactics of their own. Some companies like Novartis have changed the way they pay their sales staff. Its pharmaceutical sales reps in much of Europe are no longer paid commissions based on sales, but rather paid commissions based on collecting cash from the buyers of their drugs.
Other companies including Sanofi and Novo Nordisk have stopped shipping their latest, innovative, higher value drugs to these countries. Instead, they are supplying to Greece and others older, less convenient and cheaper medicines. This strategy lowers their possible losses, but may adversely affect patients, although these companies say they will still ship newer medicines when medically necessary.
This problem with debt owed by governments is not exactly a new one for the European pharmaceutical companies. They faced similar problems during in the 2008-2010 period in Greece. That was resolved in 2010 when the money owed them was paid through the issuance of new Greek government bonds which are still being held for the most part by these companies.
Obviously, that solution will no longer work.
Luckily for now, for most of the major drug companies the amount owed to them by governments across Europe is still relatively small on a percentage basis. But it is turning into a much more serious problem as each day passes and the receivables mount. Until the European debt problem is solved, it will be a festering problem for drug companies doing business in Europe.
This situation has definitely caught the attention of pharmaceutical companies' executives. Investors should be happy that the management at these firms are paying increasing attention to the debt situation. Andrew Witty, CEO of GlaxoSmithKline, could have been for most executives when he said recently. “We are a lot more focused on debt than we were two years ago.” The CEOs had better be if they want to keep their jobs.
Investors are already displeased with management. The stocks of these drug companies have not exactly been healthy performers over the past few years, even though some do pay a decent dividend. The debt situation in Europe and the money owed to the pharmaceutical companies gives traders another reason not to like these stocks.
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