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A Recession Proof Pharmaceutical Industry?




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Video title: A Recession Proof Pharmaceutical Industry?
Released on: December 04, 2008. © PharmaVentures Ltd
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Alan Oster, Group Chief Economist at the National Australia Bank, talks to Fintan Walton about the global economic situation. Although the future seems uncertain Mr. Oster explains his predictions for the crisis as a whole before focusing in on the biopharma industry. His overall message is promising, especially for the well-established pharmaceutical companies, although he stresses the need for government support and strong collaborations within the industry to help biotechnology survive.
The global economic situation.
Fintan Walton:
on this show I have Alan Oster, who is Group Chief Economist at the National Australia Bank. Welcome.
Alan Oster:
Thank you.
Fintan Walton:
Alan Oster, I want you to talk about the global economy. We are in October 2008. We are living in interest times and the key thing here based on your observations of the global economy people are clearly very concerned about what's actually happening. What is actually happening?
Alan Oster:
Well I think what's -- what you are seeing is a slowdown in domestic part of the US economy. You are seeing it's flowing on to Europe in particular and Japan. So I think what you are seeing is most of the major economies in the world are now starting to enter a recession period. So I think if you look at say the US we expect it to be essentially going backwards for the next six months. The UK I think is already gone into a recession, Europe looks to me as if it's -- all the parts of Europe already clearly in recession. But others will continue to go down. People are very scared about how far it will go.
Fintan Walton:
Yeah.
Alan Oster:
And so there I think there is an over sell, people talk about the depression et cetera, et cetera, to me it doesn't look like that. To me it looks like it's a nasty period that the Central Banks are really trying to stop any systemic problem occurring in financial institutions so that would have the potential of turning the current situation to something much worse.
Fintan Walton:
Right.
Alan Oster:
But I don't see that happening. So think of the US is a repeat of 1990.
Fintan Walton:
Yeah.
Alan Oster:
I think of Europe is not quite as bad as that and then in the developed world or developing world the China et cetera. I think they are gonna slow to something like 7.5% but particularly China it's got its own momentum.
Fintan Walton:
Right.
Alan Oster:
So of the 9% growth we currently got in China 8 is coming from internal.
Fintan Walton:
Right.
Alan Oster:
And so I think people are just scared, in the financial sector itself. The other issue is you got something you haven't seen it before, ever.
Fintan Walton:
Right.
Alan Oster:
And so people would think if that's happening therefore the economy is gonna be worse anything that you have ever seen before. I don't think that's true.
Government's intervention in banking system.
Fintan Walton:
Right. But one of the reason for that fear has been the way governments have to intervene in the banking system?
Alan Oster:
Well what government's do know is that is not if banks are to be defiled it's just that if you let them file people will then stick money under the bed.
Fintan Walton:
Sure.
Alan Oster:
And you will get a reaction that basically brings everything down and so you could look at someone like [Indiscernable 0.02.55] and he made his name as an academic essentially studying the great depression and so you know this argument about well it was done on Wall Street forget about Main Street, when Wall Street falls over Main Street does do.
Fintan Walton:
Right.
Alan Oster:
And so what the governments are trying to do is to settle everything down. At one stop the second round effects of the destruction of what's that occurred in the equity markets et cetera and house process.
Fintan Walton:
But I suppose the key thing here is that people looking for you know were looking at the credit position, were looking at liquidity.
Alan Oster:
Yeah.
Fintan Walton:
The issue is that banks, interbank lending?
Alan Oster:
Yeah.
Fintan Walton:
Is tough at the moment and that's part of the fear. Have governments done enough to help overcome this? And when are banks themselves going to settle?
Alan Oster:
I wish on you. In terms of the interbank market yeah you look at the US normally 10 to 15 basis points between what banks can borrow money for 90 days at visibly what the government sets the rate at. In the US its 350 points, its 200 in Europe and the UK. In Australia it's around about 80. So it's not getting better. It's getting worse if anything. Our hope is that once these packages that inject capital and inject liquidity actually get up and running then hopefully over the next six months things will ease back a bit.
Fintan Walton:
Right.
Alan Oster:
But at present it's still fair to say that the markets essentially are not operating. And so it's all very well for the fed to cut rates to 1.5 or to 1% but the 90 day bank funding costs are still 5 and so no bank is going to essentially evolve the rates.
Fintan Walton:
Right.
Alan Oster:
In that environment.
Alan Oster forecast on recovery of global economy and the significance of china....
Fintan Walton:
So when you look at your own forecasts of the global economy and how it's going to perform you discussed how it probably is not going to be as bad as the 1990's. But clearly what we are seeing at the moment we are seeing the equity markets continue to drop and I suppose the question is when do we bottom out on that and when do we actually start to see confidence coming back?
Alan Oster:
Well I suppose my bottom line would be when does the economy bottom [ph]. And then go back a couple of months before that when the markets might start to think about that. So our forecasts basically say that the global economies, the big economies anyway bottom around about the middle to the later part of next year. So I would afford that the markets could still be very volatile for another three to six months and whenever you get any data that looks at all bad then I think you get an excess problem. If I was going to look at one economy globally to watch carefully in this it will be China.
Fintan Walton:
Sure.
Alan Oster:
And China I am still recently optimistic because I see China is going quite well. People I think are overly pessimistic about China. A lot of us are, a lot of the international markets essentially located in Hong Kong and Shanghai and they are watching the exports deteriorate, they are not watching the fact the business investment in China is growing at 30%.
Fintan Walton:
Right.
Alan Oster:
So at the end of the day the growth that you get -- we our global growth forecast this year is 2.5 of the next year 2.5. The IMF a few weeks ago came out at 3, few years ago we were 5.
Fintan Walton:
But lot of that's in China rather than (indiscernable)?
Alan Oster:
Yeah well basically the problem is the big economies, the Europe's, the Japan's, the US essentially over the next 12 months are going to contribute nothing.
Fintan Walton:
Sure.
Alan Oster:
so if it's very unbalanced growth. So if there something goes wrong in China, in Russia and et cetera then nobody else is growing and so then you get a real -- real problem.
Fintan Walton:
Right.
Alan Oster:
So that's why look at China a lot.
Fintan Walton:
So China is going to be an important part of the recovery?
Alan Oster:
China is a very important part of the recovery.
Government fundings in biopharma industry and the need for strong collaborations within the industry.
Fintan Walton:
Right. So, again as an economist looking at the economy you often and I know you analyze and forecast against different sectors within the economy?
Alan Oster:
Yeah.
Fintan Walton:
And of course with the pharmaceutical and biotech sectors are two components now one is pharmaceutical sector which is selling products into the healthcare systems and the second are biotech companies or the venture capital packs. So what's your view of what's going to happen over the next 18 months or two-years?
Alan Oster:
Well, if you talk about selling the material you've already got, I think broadly those sectors are pretty recession proof. People will basically do a lot of things before they give up their health.
Fintan Walton:
Right.
Alan Oster:
And so I think broadly it's like food. people got to eat, you might not have the fancy versions so you are gonna be more into generics.
Fintan Walton:
Yeah.
Alan Oster:
But broadly you are still gonna be okay. I think where you get a lot more nervous is in this environment investment dollars are gonna be really hard to come by
Fintan Walton:
Sure.
Alan Oster:
They are gonna be a lot more expensive and people are not going to do very much about it. So when we look around the world when you get into periods like this that are essentially a moderate recession's business investment always dries up.
Fintan Walton:
Sure.
Alan Oster:
So I think private equity is going to be very difficult to fund further research as you go forward. In some countries like Australia and essentially away from if you like to call big economies you are also going to have the problem that the big corporates that are located inside the US are going to take the money home.
Fintan Walton:
Right.
Alan Oster:
And so you are going to find it harder to do research or get research funded out of the major corporate centers.
Fintan Walton:
So for a biotech industry whether it's global or here in Australia is going to be more dependent on government funding?
Alan Oster:
Yeah, one of the nice things, hopefully one of the nice things we are going to see is you are going to see the government spending a lot more money. We have already seen the US announce that they are going to spend 200 billion additional of fiscal package. In Australia we are going to see a lot more. I think in Europe they are gonna break all their Maastricht treaty's or they gonna redefine them and broadly you are going to see a lot more money, now hopefully there in the argument will be, will we put them in infrastructure or things that will help you going forward. So to the extent that you in biotech I would basically be hoping that the government is basically gonna be funding because you are not gonna be able to find the private sector money there.
Fintan Walton:
Right. And there of course the pharmaceutical sector itself is a funder as well.
Alan Oster:
Yes.
Fintan Walton:
So hopefully pharmaceutical sector will still come back and find it.
Alan Oster:
Well they will invest in their own as they go forward.
Fintan Walton:
But also hopefully do more deals with biotech companies?
Alan Oster:
Yes.
Fintan Walton:
We are looking for.
Alan Oster:
Yes.
Government contributions and the future of the industry.
Fintan Walton:
So somebody like yourself who plays very important role in the major bank here in Australia you've had experience with the OECD and so forth so looking back over history and the ups and downs that we've had even in the last 50-years are you optimistic about where we can go after this?
Alan Oster:
I think we, well I am reasonably optimistic. When I give talks to the public et cetera either locally or internationally they -- sort of typical reaction is ah, you are more optimistic than I thought even though I am thinking I'm giving really pessimistic outcomes. So I don't see a great depression. I don't really see 1982 again. And some countries like the US domestically I can see 1990. But generally I think the markets in terms of equity markets and commodity markets have probably gone too far.
Fintan Walton:
And is that because society is more or governments are more sophisticated?
Alan Oster:
Governments know what not to do. So the first thing they do is they go and try fix up the banking system, so that at least it operates. Secondly they cut rates very aggressively. And then thirdly if they need to they'll spend a lot of money because I think the focus goes on to stopping essentially armageddon and what you've seen I think has surprised a lot of us in the last few months in terms of what's actually happened in terms of the government responses.
Fintan Walton:
Right.
Alan Oster:
So I am optimistic because I don't think that the governments, they are all gonna contribute to the negative side. I think they are gonna contribute to the positive side.
Fintan Walton:
But it's also important how China performs?
Alan Oster:
It's very important how China performs and the I would think I probably should say as well. I think China can perform okay if the rest of the world is sort of stay or basically flat. If the US gets into a serious recession that will bring China down too.
Fintan Walton:
Right.
Alan Oster:
So provided it doesn't get too bad then I think China is gonna give you enough momentum to keep going and India.
Fintan Walton:
Right. So we need some sort of turnaround happening in the US?
Alan Oster:
You need. I think you need to see the US stabilizing or flattening out.
Fintan Walton:
Sure.
Alan Oster:
Around about the middle of next year.
Fintan Walton:
Right, okay. Well Alan Oster , thank you very much indeed for coming on to the show. Thank you.
Alan Oster:
Thank you Fintan Walton . My pleasure.
Alan Oster
Chief Economist
Alan Oster joined the Bank in 1992 from the Federal Treasury where he worked for 15 years - his special field being economic forecasting and monetary policy. He grew up in Newcastle and graduated (with first class honours) in economics from Newcastle University. He also holds a Masters degree in economics from the Australian National University. Immediately before joining the Bank, Alan Oster was the Senior Adviser in Treasury responsible for economic forecasting and modelling. In 1987 he was seconded for nearly four years as Counsellor-Economic and Financial with Australia's delegation to the Organization for Economic Co-operation and Development in Paris. As Group Chief Economist, Alan Oster is responsible for NAB's global economic and financial forecasts. He is also a highly respected and much quoted commentator on Australian and global economic trends and policy issues.
National Australia Group
National Australia Group is an international financial services organization that provides a comprehensive and integrated range of financial products and services. The Group is structured around regional banking and wealth management operations and an international capital markets and institutional banking business. It is governed by a Board of Directors and led by a Group Executive Committee. The Group's businesses are supported by a streamlined Corporate Centre which comprises service teams, including group finance, legal, treasury, group risk management, group strategic investments, people and culture, investor relations, corporate affairs, corporate secretariat and the office of the CEO.