Credit Crisis Bites Big Pharma

Apparently, I was wrong to say that big pharma companies were relatively recession-proof if they invested their cash like Bristol-Myers Squibb (NYSE: BMY) does. In its year-end financial conference call today, Bristol-Myers announced that it had lost at least $275 million in investments made in certain securities, as a result of the crisis in the secondary credit markets.

Like most companies with strong free cash flow and nowhere else to put it, Bristol-Myers invested its extra cash. Unfortunately, BMS chose to stash some of its more than $3 billion in spare cash in auction-rate securities, and ended up losing money with the collapse of the secondary credit markets. 

The credit market losses helped turn what would have been a quarter of positive GAAP earnings per share for BMS into a $0.07-per-share loss. On its fourth-quarter conference call yesterday, BMS said that the losses in its investment portfolio wouldn't affect its "liquidity" or "financial flexibility" in any significant way. I'd sure like to be in a position where a writedown of a few hundred million dollars doesn't affect me.

At the end of the year, BMS had $811 million invested in various auction-rate securities, including collateralized debt obligations including subprime mortgages. The estimated market value of these securities is now only $419 million. The $275 million writedown BMS took this quarter only covered what it considers an "other-than-temporary decline in value" of these securities, and I bet there will be more writedowns to come if the securitization markets remain in the dumps.

I doubt that losses of this magnitude would have no effect on the company's financial flexibility. Of course, Bristol-Myers won't go anywhere near bankrupt, or have to cut back operationally because of these losses, but that kind of cash goes a long way in the pharma sector.

BMS could easily have bought multiple solid mid-stage pipeline drugs, or even a promising development-stage drugmaker like Array BioPharma (Nasdaq: ARRY), with that kind of cash. Genzyme (Nasdaq: GENZ), for instance, just paid $325 million upfront to collaborate on a late-stage cholesterol drug from Isis Pharmaceuticals (Nasdaq: ISIS) that could have blockbuster potential.

Losses owing to the collapse of the secondary credit markets have popped up in some weird places, such as investment funds for rural counties in Florida, and now Bristol-Myers. Now that BMS let the cat out of the bag, I bet all the big pharmas with huge investments on their balance sheets (like Pfizer (NYSE: PFE), with more than $25 billion in short- and long-term investments) will start getting questions about collateralized debt obligations and where they've stashed their cash. This is probably a good sign of just how far-reaching the credit crisis has become, and it proves that the monoline insurers such as MBIA (NYSE: MBI) and big banks aren't the only ones feeling the credit market pains.