Watching Big Pharmas' Investments

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The freeze-up in the securitization market has caused collateral damage on the balance sheets of many publicly traded corporations. Often, auction-rate and other securities that companies thought were nearly as good as cash have turned out to be much more risky and illiquid.

As a result, numerous companies have had to write down the marketable securities and investments on their balance sheets. Even companies outside the financial industry, including Panera Bread (Nasdaq: PNRA) and Bristol-Myers Squibb (NYSE: BMY), have taken writedowns or actually realized losses on their investment portfolios.

Why this matters to big pharma
On conference calls this earnings season, analysts did surprisingly little grilling of the big pharmas like Sanofi-Aventis (NYSE: SNY) and biotech giants like Genentech (NYSE: DNA) over the quality of their balance-sheet investments.

I expected more questions on the quality and liquidity of the large drugmakers’ investments. Many of these companies (like Pfizer (NYSE: PFE) and its more than $26 billion in "short-term investments") need to deploy the cash in the future for acquisitions or drug in-licensing deals to bolster failing pipelines or make up for drugs facing patent expiration.

If the liquidity and quality of some pharmas' balance sheets is in question, that will mean more than a one-time hit to their earnings if they have to write these investments down and the losses become permanent. In Bristol-Myers' just-ended fourth quarter, for example, the drugmaker lost $392 million of its short-term investments, partly because of investments in collateralized debt obligations of subprime mortgages.

To its credit, Bristol-Myers still has $2.2 billion in cash, cash equivalents, and short-term marketable securities on its books. Regardless of what it states in press releases, though, the couple of hundred million dollars in write-offs could easily have been enough for a nice mid-stage drug in-licensing or similar deal.

Getting back to Pfizer
While I haven't checked the other large-cap pharmas yet, since Pfizer released its 10-K last week, we know it's probably safe from the securitization meltdown; most of its investments are in much safer securities, like national government debt. That doesn't mean that all drugmakers with large cash and investment balances are safe, though. As we saw with Endo last week, for example, more and more drugmakers are having to reclassify or take paper losses on some of their formerly safe balance-sheet investments.

Scrutinize those balance sheets
As we've seen in the past few months, the securitization market meltdown is hitting all sorts of unexpected places. If you’re an investor owning shares in a drugmaker with large amounts of investments on the "assets" side of its balance sheet, you'd better be checking the company's SEC 10-K filings to be sure there are no toxic investments waiting to be written down.