2006: A mixed blessing for Midwest life science companies

03 Jan 2006: A mixed blessing for Midwest life science companies

The Dow Jones Industrials had a fabulous year and outperformed the NASDAQ Composite index, which itself had a very solid year, by a large margin. The two key biotech indices, the NASDAQ and the Amex, trended differently, mostly because the different composition of each.
The NASDAQ Biotech Index, which holds many more companies’ stocks and represents a greater spectrum of the biotech industry (larger and smaller companies), was flat for the year, with no growth. The AMEX Biotech Index, to the contrary, showed a robust 11 percent growth, reflecting the performance of the largest biotech companies.
I have also added, for the first time, the AMEX Pharma Index which includes many of the largest U.S. and some of the largest European pharma companies and the largest Israeli company, Teva, as well as a few U.S. specialty pharma companies, Forest Labs and King Pharmaceuticals, and one biotech company, Amgen. This group also was up a robust 11 percent (Amgen overlaps in both indices).
Midwest Life Science Industry and the U.S. Stock Market
Stock Market Indices 2006

Source: Yahoo, 12/31/06
*Includes 15 pharma companies: Abbott, Amgen, AstraZeneca, Bristol-Myers Squibb, Johnson & Johnson, King Pharmaceuticals, GlaxoSmithkline, Forest Labs, Eli Lilly, Merck, Pfizer, Schering Plough, Sanofi-Aventis, Teva Pharma, Wyeth.
Let’s take a look at how the large-cap Midwest life science companies did during 2006:
Midwest Large Cap Life Science Company Stock Performance – 2006

*Stock split on 7/31/06
**Acquired in a merger by a consortium of private equity companies (see below)
Stock Price Leaders – 2006
Company, % Growth
1. AllScripts, +99%
2. Monsanto, +34%
3. Archer Daniel Midland, +29%
4. Stericycle, +29%
5. Abbott Labs, +23%
6. Stryker, +23%
7. Sigma-Aldrich, +23%
8. Baxter Int., +19%
9. Zimmer, +16%
10. Perrigo, +16%
11. KV Pharmaceuticals, +15%
12. Biomet, +13%
13. P&G, +10%
Note: The stock price leaders include companies that performed at least as well as the NASDAQ Composite Index (as the DJI performed so well that it would exclude many of the companies); laggards either declined or performed lower than the this index.
Stock Price Laggards – 2006
Company, % Decline
1. Abraxis Bioscience, <30%>
2. St. Jude Medical, <27%>
3. Hospira, <23%>
4. Invacare, <22%>
5. Dow Chemical, < 9%>
6. Medtronic, < 8%>
7. Eli Lilly, < 7%>
8. Cardinal Health, < 6%>
9. Dade-Behring, < 2%>
10. Techne, <1%>
11. 3M, 0%
12. Steris, 0%
13. Walgreen, +3%
14. MGI Pharma, +6%
2006 was an interesting year, to say the least, as several companies substantially reconfigured and M&A appeared to be the name of the game:
• Guidant disappeared as it was swallowed up a combination of Abbott Labs and Boston Scientific (Abbott bought a chunk of Boston Scientific as part of the transaction).
• Biomet, founded in 1977 by four entrepreneurs, put itself out for sale as the founders were looking for a way to cash out; instead of attracting the likes of another major orthopedic device company, a private equity consortium consisting of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts, and TPG, paid $10.4 billion.
• 3M sold off its worldwide pharma business into three different pieces: the U.S., Canada, and Latin America went to Graceway Pharmaceuticals, while the European business went to Meda Ab, and the Asian piece went to Ironbridge Capital and Archer Capital, for a total of about $2.5 billion. Note that 3M still retains its drug- delivery business, including both transdermal and controlled-release technologies.
• Hospira made two major Asian acquisitions to build its international business, but investors felt that Hospira overpaid for these acquisitions.
• Abbott Labs, itself, was acquisition active, not only acquiring a significant portion of Guidant, but a number of smaller device companies and, of course, KOS Pharmaceuticals at year’s end for its cholesterol drugs.
• Monsanto also aggressively pursued acquisition of ag-biotech and seed companies to consolidate its leading position in this market.
• AllScripts substantially raised its valuation, not so much by acquisition but by gaining significant new business from a number of hospital groups.
• Abraxis Bioscience suffered, in spite of the successful launch of its new cancer drug Abraxane, as a result of the merger of the publicly-traded American Pharmaceutical Partners into the privately-held company for what many investors deemed to be outrageous terms that seemed to only benefit founder Dr. Patrick Soon-Shiong. Even changing the name of the combined companies didn’t seem to help!
• P&G Pharmaceuticals, with operations in 22 countries, is focused on women’s health, musculoskeletal diseases, and gastrointestinal diseases. Although no acquisitions were made this year, several key licensing deals and strategic alliances were done to increase the product pipeline of this company around the world. P&G doesn’t breakout sales of this division from its overall Healthcare Group, but it is a large and growing part of P&G. Healthcare showed sales of $7.9 billion for 2006, up 29 percent over 2005 – part of this due to the integration of Gillette’s oral healthcare business into this business segment. Healthcare Group earnings were $1.2 billion and were up 44 percent over the prior year. My estimate is that the pharma piece of this business has to be at $2 billion or more in annual sales.
2007 will continue to be a year of heavy M&A for Midwest life science companies, as it is rumored that Medtronic might make a play for orthopedic device major player Zimmer.
Musical notes
Over the holidays, I acquired two new CDs with great expectations for listening pleasure during the final days of 2006 and early days of 2007: Yusuf Islam’s “An Other Cup,” and the JJ Cale–Eric Clapton collaboration “The Road to Escondido.”
For those to whom the name Yusuf Islam does not ring any bells, try this name: Cat Stevens.
As we have heard a lot from Clapton over the last number of years, and virtually nothing for almost 30 years from Cat Stevens, I will focus my comments on the latter in this article and catch up on Clapton-Cale in a future article.
During my Midwestern college years in the early 1970s, the height of the anti-Vietnam War movement in the U.S., Cat Stevens’ music seemed to be a dominant force in our lives, along with the Grateful Dead, Jesse Colin Young, the Youngbloods, Jerry Jeff Walker, Country Joe, The Fish, and others. During this period of time, the “Flower Power” movement (“Make Love Not War”) of the 1960s was transformed into the greater anti-war efforts of the 1970s, which became known as the “Peace” movement. The music of Cat Stevens epitomized this movement with its anthem “Peace Train.”
Cat Stevens (59) was born as Steve Georgiou in London, England on July 21, 1947. His father was from Cyprus (Greek Orthodox) and his mother from Sweden (Baptist background), but he grew up primarily with British culture in post-World War II London, and with a Roman Catholic orientation. He worked as a boy in the family restaurant, and was influenced by the Merseyside beat, the Beatles, and British pop.
Like many British youngsters, he picked up the guitar and began singing and writing. Early on he changed his performing name to Cat Stevens, had his first hit records, and was touring by the time he was 18 years old. His first record album, “Matthew & Son,” was released in 1967 when he was about 20 years old. A second album, “New Masters,” followed that same year.
Comeback Cat
During 1968, Stevens was afflicted with tuberculosis and took off a few years from his music career to recover, re-emerging in 1970 with a new album, “Mona Bone Jakon,” and the popularly acclaimed album “Tea for the Tillerman” that same year. The next year also was a good year for Stevens as he released “Teaser and Wildcat,” which included two hits: “Peace Train” and “Morning Has Broken.”
This last album sustained me in 1972 and 1973, when I was spent a year in Latin America, initially living and studying at the University of Costa Rica. Cat Stevens was, surprisingly, well known to the Costa Rican family I was living with. Later during this period, as I worked as an English language teacher in Cali, Colombia, and then hitchhiked around South America for another six months, Cat Stevens’ music accompanied me throughout the journey and was prevalent in many of the Latin American countries.
Stevens followed these successful albums with several more: “Catch Bull at Four” in 1972, “Foreigner” in 1973, and “Buddha and the Chocolate Box” in 1974.
During the latter part of the 1970s, with the impeachment and subsequent pardon of Richard Nixon, and the termination and wind-down of the Vietnam War, the U.S. Peace movement waned and the interest in Cat Stevens’s music also dissipated (with only one additional album “Back to Earth” in 1978). But not before he made a final appearance and performance as Cat Stevens in 1979 at the UNICEF benefit concert.
Soon thereafter, Stevens became a Muslim and changed his name to Yusuf Islam. For the next 10 years, Islam disappeared from the music scene, and supposedly asked the record companies to not sell his music as Cat Stevens, as he immersed himself further in the Muslim faith. During the 1990s, he recorded Islamic children’s music in 1995. Yusuf Islam re-emerges once again with his first new (non-musical) album, “The Life of The Last Prophet,” which is about the life of the prophet Muhammad.
During the first years of the new century, post- 9/11, Islam/Stevens was in the news again when in 2004 he was refused entry into the U.S. and his flight to the U.S diverted, as his name, erroneously, showed up on a U.S. terrorist watch list. In September 2006, Stevens/Islam signed with Atlantic Records and recorded his first music album since 1978: “An Other Cup” (released this November). He was named songwriter of the year by the U.K.’s ASCAP annual awards. He has once again, after a 29-year hiatus, begun to play in the U.S. music scene using the name Yusuf.
The critique
Having said all of the above, I had a real thirst to hear something new from Cat/Yusuf. The album clearly has a religious and Islamic slant to it. The first song, which starts simply with a conga drum and simple rhythmic line and that marvelous Cat Stevens’ voice, sounds promising until a whole horn group comes in. When did Cat Stevens ever have a horn group backing him up?
The song disappoints because it is over-orchestrated and not particularly noteworthy. I am getting worried – what has happened to this musical genius? The next song “Heaven/Where True Goes” immediately gratifies with acoustic guitar and piano accompaniment. Now this is a memorable song in the classic Cat Stevens mode! “Maybe There’s a World” continues with the acoustic guitar and bass combo that made Stevens’s music so recognizable.
Yusuf/Cat has written all of the songs on this album. except for “Don’t Let Me Be Misunderstood” written by Bennie Benjamin, Gloria Caldwell, and Sol Marcus, and was first made famous by Nina Simone in 1964. Most of us probably remember the version performed and recorded by the Animals in 1964. This song, also over-orchestrated, seems out-of-place in this album; nevertheless, it is an interesting rendition of this classic rock song.
The song that has left perhaps the biggest impression on me is “Whispers From A Spiritual Garden” because it makes you feel that you are with Yusuf in the mosque with Islamic musical strains, voices, and rhythms, and yet it is also classic Cat Stevens.
Finally, the album is recorded in London, Los Angeles, Istanbul, and Johannesburg, and reflects several musical directions. After listening to this album more than 10 times, I am, in general, satiated, and glad to see, once again, the re-emergence of this unique folk-rock musician, who has traveled different spiritual and musical paths over the last 30 years!
The album is successful when it employs musical simplicity (acoustic guitar, piano, bass, and limited percussion) to accompany his warm and engaging voice. It fails when too many musical instruments are added that distract and cloud over this talented musician’s marvelous voice! Cat/Yusuf: it is good to have you back – we missed you!
Happy New Year everyone!
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