The folks over at the Motley Fool are wondering if big pharma remains a safe haven in challenging investment times or whether its time for investors to jump ship. Writer Brian Orelli notes that some of big pharma's strongest players were down--including GlaxoSmithKline (0.9 percent), Eli Lilly (1.2 percent), Pfizer (3.1 percent), Merck (3.3 percent) and Schering-Plough (3.5 percent)--but not as down as the Dow (4.4 percent) and the S&P 500 (4.6 percent) when the market tanked on Monday.
With giant banks and insurance companies going under, should investors wonder if pharma is next? Not so much, says the Motley Fool.
While the normal not-so-great things are happening in the current down market, such as private investors and larger mutual fund managers selling in moments of hurried dread, the need for drugs is likely one of the most inelastic needs out there. People will keep buying their meds and big pharma will likely remain a safe (or at least a safer) haven compared to other investments.
The little guys, on the other hand, might not fare quite as well. It takes a decent bit of cash for smaller start-ups to take drugs from the development phase to market. While that can eventually work to the shareholders' advantage, the small companies rely on financing and a sturdy credit market; they will likely have to work much harder to secure the money they need to get to market in this economy.
The Motley Fool began to drool, though, when it talked of the downward pressures on stock prices making shares of smaller drug developers cheaper--even when they have great pipelines--thereby making them more accessible to independent investors. This is despite the fact that big pharma is just as likely to buy them later and make the small investors very happy.
In reality, keeping the cash flow up is important for big pharmaceutical companies, too, so they can keep their pipelines funded, and it isn't going to be easy to determine the best companies to invest in. For big pharma, keeping hands off emergency funds whenever possible and forgoing extra investment income from time to time could help them keep their reserves up.
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