Last week’s ruling by a US District Court judge banning federal funding of human embryonic stem cell (hESC) research is negative for life science companies that provide products and equipment to laboratories that rely on federal funding, particularly from the National Institutes of Health (NIH).
Many of the earliest stage, most groundbreaking scientific work is funded by the NIH, and if the ban is upheld, it could ultimately cost the industry hundreds of millions of dollars in lost revenue as research projects go unfunded. Life science companies provide specialized containers, reagents, and instruments to grow and analyze stem cell cultures at research institutions.
In the near term, we see the ruling having little credit impact on the companies we rate in the life science industry.
Of those companies, Life Technologies (LIFE) and Millipore (now part of Merck) likely generate the most revenues from stem cell-related research. Others include Thermo Fisher (TMO), Sigma Aldrich (SIAL), and Charles River (CRL). However, these are all large, well-diversified companies, for which government-funded embryonic stem cell research represents a small piece of their overall business. Smaller, unrated companies with a stronger focus on stem cells may be more profoundly impacted by the ruling.
We estimate that approximately 20% of the life science industry’s revenues are derived from sales to researchers whose projects are dependent on NIH funding. However, at this point, hESC research remains a very small part of the overall NIH budget. In 2010, prior to Monday’s ruling, the NIH planned to award $200 million in grants to fund hESC research, which equates to less than 1% of its total annual budget of approximately $30 billion.
Excerpted from : Stem Cell Ruling Ripples Through US Life Science Industry
Guest Post by Oxford Analytica.
Multinational corporations (MNCs) are facing an increasingly competitive landscape. An uncertain economic outlook, as well as cultural and regulatory differences, creates a challenging scenario for such firms.
International expansion has a number of advantages for corporations, including higher growth potential and access to cheaper resources and labour. However, organisational theorists have drawn attention to the challenges associated with the management of MNCs. For example, cross-cultural differences create important barriers to intra-firm communication, negotiations and product standardisation.
Business environment. MNCs are facing a much more turbulent, dynamic and heterogeneous business environment than was the case not long ago:
- Global growth patterns. Developing countries are no longer merely a source of cheap labour. With their vast pool of consumers with increasing purchasing power, emerging markets offer more attractive opportunities for growth compared with OECD economies.
- Developing countries. A number of suppliers in developing countries have upgraded their productive capabilities. As a result, they are climbing up the value chain, offering more complex and technologically sophisticated products and services.
- Financial crisis. Investors remain cautious and financial markets relatively illiquid. More importantly, the attitude of investors towards risk has changed. In the post-crisis period, financiers realise that unexpected events with a high impact may occur more frequently than normal probability models suggest.
- Regulation. Although some organisations, such as the EU, advocate globally homogeneous regulatory frameworks, little progress has been achieved beyond the area of international trade. In fact, there is a trend towards increased heterogeneity as national governments devise idiosyncratic responses to deal with the aftermath of the financial crisis.
- Consumers and social movements. The production processes of MNCs are being put under scrutiny by consumers, especially in OECD economies. Social movements, such as those defending fair trade and higher environmental standards, generate additional requirements for transparency in international operations.
Operations and supply chain management. The upgrading of suppliers’ industrial capabilities in emerging economies requires the development of global-scale production and distribution capabilities:
- In the past, strict hierarchical control of suppliers was necessary. Yet MNCs now need to operate as integrators of a loosely-coupled, autonomous and geographically dispersed system of production.
- Successful coordination of disintegrated value chains enables MNCs to focus more on innovation and the highest value-added segments of production.
- Regulatory diversity also requires the reconsideration of location decisions. MNCs are now able to take full advantage of government incentives or other opportunities as skill shortage becomes less of an issue.
Marketing and sales. In major developing countries, such as India, China and Brazil, a new generation of consumers is emerging that seeks access to a variety of industrial goods. Capturing these market segments is crucial for MNCs’ growth and survival, necessitating successful marketing strategies and distribution networks.
However, due to the lack of adequate infrastructure and reliable transportation services in many developing countries, MNCs need to find partners with knowledge of the local market and its idiosyncratic characteristics.
Research and development. As developing countries upgrade their industrial capabilities, they are becoming important exporters of technological innovations. MNCs benefit not only from the low-cost advantages of such locations, but also from the resulting diversity brought from the internationalisation of innovative activities. However, synergistic relationships among globally dispersed R&D units require integrative capabilities and flexible organisational structures. In addition, countries have different intellectual property protection regimes, although variations are largely limited by the WTO agreement on Trade-Related Aspects of Intellectual Property Rights.
Outlook. A firm’s success today is largely determined by its ability to manage the increased complexity associated with the governance of global value chains. Developing-country markets are key to their success but also present challenges.
The low-yield environment that is projected to persist over the near term will likely exacerbate underfunded pension positions and expand the claim on issuer cash flows, according to this complimentary download from Fitch Ratings via the Alacra Store. This could force issuers to more aggressively manage these liabilities, Fitch says. The Special Report ranks the funding status of some 200 companies, including four with funding levels below 50%: Nalco (NLC), Omnicom Group (OMC), Delta Air Lines (DAL) and Moneygram International (MGI).
These risks are heightened by a potentially deflationary environment through the effect on asset returns and valuation of liabilities, further stressing the importance of managing underfunded positions through enhanced contributions over the near term.
Recently enacted pension relief will defer payments to some extent, but as ample evidence has shown, allowing issuers to defer funding can lead companies to dig even deeper holes that can result in putting both pensioners and bondholders at greater risk.
Companies will be challenged to achieve the assumed return targets incorporated into their accounting statements given 2010 year-to-date equity returns and current fixed-income yields. This situation could encourage yield chasing and a shift in asset allocation to higher risk asset classes, including leveraged loans, real estate, private equity funds, and equities.
Although alternative asset classes are considered more volatile and higher risk, the current yield environment is likely to cause a reevaluation of the risks/rewards of various asset classes and could result in some migration away from fixed income assets. Companies most at risk from the current yield environment would be those with a materially underfunded position, a high fixed income allocation, and high current benefit payouts. The report ranks 220 companies based on these factors.
The potential for deterioration on both sides of the equation – lower returns plus a lower discount rate – presents the potential for further onerous jumps in liability measures. U.S. corporations in general have improved their liquidity positions and maintain cash balances well in excess of the recent practices, allowing for some flexibility in managing this issue. Pension funding requirements will lay increasing claims to corporate cash flows over the near term, which may require application of these cash holdings in the event of pressured or insufficient operating cash flows.
US Corporate Pension Plans: Deflationary Risk and Asset Allocation – Where’s the Yield?’ has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $275.
For additional free research reports from the Alacra Store click here.
Excerpts from U.S. Commercial And Residential Property Markets May Have Seen The Worst Of Their Slumps
The slump in the U.S. commercial property market didn’t quite plumb the depths of the downturn in residential real estate, but although we see signs that home prices are nearing the bottom, commercial real estate could fall further.
Despite a surge in foreclosures in the U.S. commercial real estate market, there were fewer defaults in commercial mortgage-backed securities (CMBS) than Standard & Poor’s Ratings Services originally expected. We still see fundamentals in the market declining—if at a slower pace—and we might see more delinquencies in CMBS. In the first quarter of 2010, foreclosures totaled $3.6 billion, the most since 2001 and 48% higher than in the fourth quarter of last year.
At the same time, we’ve seen some CMBS issuance—a fraction of the peak in 2007, but already exceeding 2009’s total—with most deals involving less-risky, lower-leveraged loans in pools that are much smaller.
The problem is severe but not quite as bad as in the residential market, and at this point it doesn’t look quite as bad as we thought it might be. – Standard & Poor’s Chief Economist David Wyss.
Although lenders’ losses haven’t been as severe in commercial real estate as they have in the residential markets, small and midsize banks have been hurt most because they made the bulk of construction loans and held the mortgages on strip malls and suburban office parks, where prices have dropped more than in city commercial space. Still, we believe new issuance of CMBS is unlikely to return in earnest until fundamentals in the commercial property markets stabilize further.
Plunkett Research provides a ready-reference guide to the Biotechnology and Genetics Industry in 2011 in this complimentary download from the Alacra Store. Trends analyzed range from the convergence of nanotechnology and biotechnology, to the evolution of breakthrough new drug delivery systems, to the abounding ethical issues connected with biotech. Topics include: biotechnology funding and investments, FDA, gene therapies, personalized medicine, systems biology, clinical trials, stem cells, therapeutic cloning, nanotechnology, agricultural biotechnology (GM seeds), drug delivery systems and ethical issues.
Plunkett cites the following global factors boosting biotech today:
- A rapid aging of the population base of nations in the E.U., as well as Japan and the U.S., including the 76 million surviving Baby Boomers in America who are entering senior years in rising numbers and needing a growing level of health care.
- A renewed, global focus on developing effective vaccines.
- Vast research investments by major pharmaceuticals firms.
- A growing global dependence on genetically engineered agricultural seeds (“Agribio”), with farmers in 25 nations planting at least some genetically modified seeds as of 2010.
- Aggressive investment in biotechnology research in Singapore, China and India, often with government sponsorship—for example, Singapore’s massive Biopolis project.
- A government-subsidized emphasis on renewable energy such as bioethanol and other biofuels as substitutes for petroleum.
- Promising research into synthetic biology.
- Continuing computer-related progress in biotech areas such as gene sequencing.
Plunkett also mentions several “companies to watch,” including Piramal Healthcare, Ranbaxy Laboratories, Dr. Reddy’s Laboratories and StemCells (STEM).
Biotech and Genetics Industry Trends, Statistics and Analysis 2011 (Summary) has been made available free of charge to Research Recap users for 30 days by special arrangement with Plunkett Research, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $199.99)
Plunkett reports on other industries and companies can be purchased from the Alacra Store.
For additional free research reports from the Alacra Store click here.
Deal activity involving US commercial banks has surged this year as private equity firms seize opportunities to turn around and recapitalize struggling banks, according to PitchBook.
Deal activity held steady from 2008 to 2009; there were 23 completed deals in 2008 and 21 in 2009. The deal count this year has already reached 21 completed deals with 12 deals still in play and still more than 4 months left in the year.
The median deal size has also recovered this year at $100 million from $79.55 million last year. The industry has attracted 53 investors since 2008, 33 of which have completed an investment in a commercial bank this year.
The most active investors include Stone Point Capital (7 deals), Lightyear Capital (5) and J.C. Flowers (4).
The Moody’s/REAL All Property Type Aggregate Index measured a 4.0% price decline in June. This is the first monthly decline since March, and the third monthly price decline in 2010.
The index currently stands at 112.51, which is a slight decrease since the beginning of the year. In the first half of 2010 the CPPI is down 0.9%. Commercial property prices are 41.4% below the peak that was recorded in October 2007, but still 4.2% above the recession low from October 2009.
We expect property prices to remain choppy for some time as commercial real estate markets and the broader economy continue their slow recovery from the recession. Sovereign debt problems, lingering unemployment in the United States, and heightened concern about a double dip recession and even deflation, operate as a drag on investment activity, notwithstanding historically low interest rates.
Excerpted from Moody’s/REAL Commercial Property Price Indices, August 2010
Business Monitor International sees signs of cracks in China’s economy in this complimentary download courtesy of BMI and the Alacra Store. In addition to a detailed short-term economic and political forecast, the 47-page report includes a 10-year forecast for China’s economy and special sections on China’s IT and Metals industries. Selected excerpts:
We believe that cracks are beginning to appear in the Chinese economy, which should grow in magnitude over the coming months. Manufacturing surveys suggest economic activity slowing sharply, while fears of falling property prices are leading to rising stress in the banking system.
Despite these negative developments, and amid an increasingly uncertain outlook for external demand, the People’s Bank of China has allowed the yuan to appreciate mildly against the US dollar.
With domestic economic activity slowing and rising wage pressures indicating brewing inflationary expectations, the stage is set for a slowdown of both domestic and external demand.
Recent strikes at Japanese carmaker part suppliers suggest that the days of cheap labour in China could be nearing an end. How the government reacts to worker demands for higher wages and the right to form trade unions could signal the extent to which the Communist Party of China will allow meaningful restructuring of the economy.
We expect China’s manufacturing sector to record a contraction over the next few months as measured by the HSBC purchasing managers’ index (PMI) as the combined impact of a fading domestic investment boom and a decline in exports hits home. Prior to the release of the May HSBC PMI figure, we argued that the peak in the manufacturing recovery was behind us and warned that an outright recession in China should not be overlooked. Following this report, May’s PMI fell from 55.4 to 52.7, and the 50.4 print in June shows China’s manufacturing sector (which represents just under half of the entire economy) is barely expanding.
This signals that China’s major growth driver is waning fast and we expect the index to slip below the crucial 50 level (which denotes the line between expansion and contraction) over the coming months.
China Business Forecast Report is available for free download by Research Recap users for 30 days by special arrangement with Business Monitor International, an Alacra content partner. After 30 days the report will revert to its regular Alacra Store price of $330.00. Business Forecasts from BMI for other countries are available here.
For additional free research reports from the Alacra Store click here.
The credit ratings of banks with large mortgage origination businesses could come under threat if Fannie Mae and Freddie Mac succeed in forcing them to increase the amount of bad loans they repurchase.
Fitch Ratings is undertaking a review to assess whether investors such as the GSEs have expanded their interpretation of what constitutes a mortgage that would be eligible to be repurchased by the originating bank under existing representation and warranty provisions.
Fitch is concerned that a more aggressive request for loan repurchases could potentially expose banks with large mortgage origination operations to future losses that have not been previously incorporated into Fitch’s existing exposures, and effectively into current ratings. As of June 30, 2010, the housing GSEs combined had troubled mortgages (delinquent mortgages and real estate owned) of $354.5 billion.
In assessing potential exposure, Fitch is concentrating on the four largest U.S. banks – JP Morgan (JPM), Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) – which service approximately 50% of the GSE’s portfolio. But any bank or other entity that has been actively engaged in mortgage lending could feel the impact of this development, and to some degree on a relative basis, could be affected to a greater degree.
In assuming an extremely adverse scenario where all of the existing GSE’s troubled mortgages were at risk of being repurchased based on market share, it is conceivable that the pool of “at-risk” loans eligible to be repurchased by the four largest banks could total about $175 billion-$180 billion.
Fitch anticipates that a focal point of repurchase requests will be reduced documentation loans (sometimes known as Alt-A loans).
- Under a mild loss scenario, where the GSEs collectively and successfully put back 25% of the current outstanding inventory of seriously delinquent loans, and assuming recovery rates of 60%, Fitch believes the expected loss for the four largest banks could be about $17 billion.
- Using a more moderate loss scenario, whereby the put-back rate goes to 35% and recovery rate drops to 55%, Fitch believes losses could come in around $27 billion.
- Finally, under a more adverse but less likely scenario, if repurchase requests were to run at 50% of delinquent loans, and recovery rates fall to 50%, then losses are about $42 billion.
- To put these figures in perspective, these institutions had annualized pre-provision net revenues and net income of $390 billion and $54 billion, respectively, in aggregate and $391 billion of tangible common equity.
Fitch believes that any of the scenarios listed above is a possibility; however, for purposes of current bank rating analysis, Fitch is assuming the more moderate cases are the most likely outcome.
Fitch will also consider other mortgage investors such as private mortgage insurance companies and private-label MBS investors. If these investors are successful in putting back a sizeable portion of the troubled loans presently in inventory, Fitch believes the existing bank Individual and Issuer Default Ratings (IDR) not already at their Support Floor (Bank of America and Citigroup are the only two U.S. banks active in mortgage lending that are currently at their Support floors) could be susceptible to a downgrade in the future.
Over the intermediate term, assuming investors are successful returning the problem loans to the originating banks, Fitch says it will have to give further consideration to its existing analytical approach to assessing returns, capital, and liquidity for U.S. banks.
Edited excerpts from Large U.S. Bank Ratings Vulnerable to GSE Mortgage Loan Repurchases
See also Banks Face Fight Over Mortgage-Loan Buybacks (WSJ)
A new paper from NERA Economic Consulting’s Marcia Kramer Mayer and Paul Hinton advocate the use of crowdsourcing to prevent future Ponzi schemes.
The magnitude and duration of Bernard Madoff’s Ponzi scheme establish the compelling need to dramatically improve the Security and Exchange Commission (SEC)’s ability to detect financial fraud. Perhaps Wikipedia can help or, more precisely, some of the ideas behind it.
Fraud detection is a tedious task that can involve sifting through large amounts of data seeking a signature pattern of discrepancies. This is where crowdsourcing, the chief concept underlying Wikipedia, may be quite useful. In the context of fraud detection, crowdsourcing entails making the relevant data available online and inviting the public to access it and report suspected irregularities.
This approach has already been used in Britain, where The Guardian newspaper created an online database of 700,000 expense claims by UK members of Parliament for anyone to search; the erroneous and outrageous expenses identified by some 20,000 participants fueled a national scandal.
How could crowdsourcing be used by the SEC? Assessing investment advisor performance claims and reviewing tips are two of the major tasks on Chairman Mary Schapiro’s plate that lend themselves to this approach. The investment community possesses crucial skills and information that could be brought to bear in getting the job done. These private sector resources go far beyond what is available to the SEC and would likely be volunteered in a suitably designed Internet application.
For more see:
Crowdsourcing Fraud Detection: Using Collective Wisdom to Expose the Next Madoff
Kramer and Hinton discuss the paper at the HBR blog.