7 Drug Companies Explain How They Dodged (or Didn't) the Credit Crisis

Drug companies have been the eye of the storm in the recent liquidity crash. High profitability, high cashflow (and making products that people literally can't live without) have left them in a comfortable economic position compared to other consumer-oriented companies.

Here's a selection from recent earnings calls and announcements, from Bristol-Myers Squibb, Pfizer, Bayer, Abbott Labs, Gilead, Wyeth and Genentech, all on the topic of how each company has fared in the crisis. None of the companies is threatened to any serious extent by the stock market tumble.

But not all drug companies have weathered the storm with the same finesse. Some are sitting pretty on giant piles of cash, but others have lost millions in unwise investments in finance stocks.

The irony is that the industry is facing a downturn anyway, due to its patent lapse crisis -- in which dozens of well-known drugs will lose their legal exclusivity and suddenly face devastating cheap competition -- which is completely unrelated to the financial markets. So losing money in addition to that seems, well, careless --

Bristol-Myers Squibb - wrote down $224 million; $811 principal investment reduced to $213 million

An impairment charge of $224 million, $184 million net of tax, related to certain auction rate securities (ARS) was recognized during the three months ended September 30, 2008. The charge was required after an analysis of other-than-temporary impairment factors, including the severity of decline in the securities and current financial market conditions. The carrying value of the $811 million of principal invested in ARS as of December 31, 2007 has been reduced to a remaining amount of $213 million as of September 30, 2008.

CEO Jeffrey Kindler: We have a strong balance sheet, excellent liquidity, high quality credit ratings and substantial operating cash flow. We also have a solid and conservative investment portfolio. In short Pfizer is a financially strong company.

CFO: Frank D'Amelio: Thanks Jeff, good morning everyone. I want to start by punctuating a few items that Jeff mentioned. Pfizer maintains a strong financial position despite challenging macroeconomic environment. We have a strong balance sheet and excellent liquidity that provides us with financial flexibility. We have approximately $26 billion in cash and short-term investment and we continue to expect to generate $17 billion to $18 billion of cash flow from operations in 2008. Our long-term debt is rated high quality and investment grade. We're rated AAA by S&P and AA1 from Moody's. We have and we'll continue to take a conservative approach to our investment; both short-term and long-term investment consists primarily of high quality, highly liquid, well diversified investment grade available for sale debt security. As a result, the credit markets remain open to us and we continue to have ample liquidity.

Other (income) expense, net for the 2008 third quarter primarily included costs associated with our foreign exchange hedging program and investment activity, which were partially offset by royalty income and product divestitures. The investment activity included write-downs of Lehman Brothers and Washington Mutual bonds totaling $68.7 million.

Roughly 80 percent of the Bayer unit's customers are small and medium-sized companies, which need to finance their working capital, Patrick Thomas, chief executive of Bayer Material Science, told a briefing for reporters. "What worries me is access to capital for our customer base," he said. "The one effect we're definitely seeing is destocking, because they have limited credit access." He said his own company did not face problems, however. "We are totally comfortable without financing," he said. "If we had to get money from banks, it wouldn't be hard for us."

Operator: Your next question comes from the line of Yaron Werber with Citigroup. Please go ahead.

Unidentified Analyst: Hi, thanks for taking the question. This is actually Richard asking a question for Yaron. Can you talk about the interest rate on the cash balances in 3Q and give us some predictions for 2009? Thanks.

CFO Robin L. Washington: Okay, the interest rates that we earned I mean varies. We have some that are tax exempt and some that are taxable. But on average, it range between about 4% and 6%. It's hard to predict for 2009. I mean here, we are everybody else, because I can't really predict that.

CFO David A. Ebersman: Our other income expense line item for Q3 2008 shows a net other expense of $58 million versus a net other income of $66 million in Q3 2007. In addition to some smaller investment losses, the biggest single impact on this line item was from impairment charges of $67 million resulting from investments we held in certain financial institution preferred securities.

May-Kin Ho - Goldman Sachs: I have a question about the balance sheet -- in terms of corporate bonds, you have some asset-backed securities in there. Can you give us a little bit more detail on what kind of investments you have and what are the exposures in terms of further impairment?

David A. Ebersman: Sure. So as I said, we have about $8.6 billion in cash and investments. Broadly categorizing them, about -- say about $3 billion of it is invested in government and other -- government agency securities, about $4.5 billion is in money markets, commercial paper, and other corporate bonds. About $400 million is in biotech equities and hedged instruments that we have associated with them, and then the remainder is made up of smaller investments we have in other asset classes, like the auction rate securities we talked about last quarter, or two quarters ago, municipal bonds, and we have a small exposure to some asset-backed securities as well.

Looking forward, we are comfortable with where we are but it doesn't mean there aren't any risks. We are obviously exposed to risks of inflation, changes in rates, changes in spreads, and the underlying credit worthiness of the assets that we own, so we'll continue to monitor that closely.

May-Kin Ho - Goldman Sachs: So for the $4.5 billion in money markets, what are the underlying securities for those?

David A. Ebersman: The $4.5 billion is money markets, commercial paper, and bonds, so it's sort of a big category. The money market securities that we own are safe -- as safe money market investments as we can find. I can't tell you the exact underlying assets of each one of them but we think they are pretty high up on our list of things that are safe to own and not risky but that's not $4.5 billion. That's a piece of that. The rest is in corporate, commercial paper, and corporate bonds.

Lawrence Keusch - Goldman Sachs: Okay. And then one other question, which is as look at your cash balances, obviously lots of challenges out there in the credit markets. Could you just, for the benefit of all of us, just give us a sense of what that cash balance really is sitting in and perhaps any exposures to any securities within some of the subprime mortgages? And I guess along with that question is sort of how has your commercial paper funding been going? Are you getting access to that? And then John, just a quick clarification, the forth quarter sales guidance that you gave for growth, it sounded like that already included the impact of currency, but I just wanted to make sure I heard that correctly.

CFO: Thomas C. Freyman: On the credit market situation, as you know, we are very conservatively managed from a financial perspective. The deposits we have and the cash we have invested are in very, very high quality instruments. And we've even obviously become even more cautious in the last few months in terms of selecting where we put our money. We have absolutely no exposure to any of the types of exotic instruments that you talked about, and there is absolutely no issue there. And as a very strong credit [ph], we have been really unaffected by the turmoil in the credit markets. We've had no problems whatsoever issuing commercial paper at very attractive rates. And I think we are the type of credit, the way I read into this is we are the type of credit people are looking for in this type of market. And we've got a $4 billion essentially unused backup credit line. We have no plans and have not drawn anything on that because we have great access to the commercial paper market. So we are in great position from a credit perspective and have been really unaffected by the turmoil in the market.