On PIGS on Drugs

An interesting article in the Swiss press this morning regarding the big Swiss drug companies, Roche (RHHBY.PK) and Novartis (NVS).

Apparently the PIGS are not paying their drug bills. The numbers are big. The bills have been unpaid for years. Some excerpts from the article:

Hospitals in Portugal, Italy, Greece and Spain are delaying paying for drugs by up to three years.

Three years??

According to the European Federation of Pharmaceutical Industries and Associations (EFPIA), European states owe €12-15 billion (SFr14.4-18 billion) to the pharma industry, which includes groups like Roche and Novartis.

$20 billion of unpaid drug bills??

A number of public hospitals and state insurance schemes are close to bankruptcy. But before being unable to pay staff salaries they stop paying suppliers,” Ignazio Cassis, vice-president of the Swiss Medical Association.

Hospitals and state managed health insurers are bankrupt?? This came as a bit of a shocker to me:

The number of unpaid bills from Spain, Portugal and Italy increased last year, while those from Greece fell as a result of ‘zero coupon bonds’ issued by Athens, Roche spokeswoman Claudia Schmitt said.

WHAT?? Greece is issuing zero coupon bonds? Bonds, not trade payable debt? To pay for drugs? How many zero coupon bonds has Greece issued? What are the terms for these bonds?

This whole story blows me away. I’m not surprised that the bankrupt PIGS are late payers. But three-years? That's ridiculous. If the PIGS are stiffing drug companies, who else are they stiffing? Are they paying for the oil they use? Food? How big are these trade IOUs?

Nearly every day we get some story about the progress being made to address the financial ills of the weak European countries. Last week it was the phony Greek restructuring deal (it won’t happen). This weekend the talk is for Trillions of dollars from the IMF. Complete rubbish. The USA has said it will not put up a dime, so there is no IMF option.

You have guys like Tim Geithner saying silly stuff like this over the weekend:

"I hope that we're going to see, and I expect we will see  continued efforts by the Europeans ... to put in place a stronger, more credible firewall."

"Firewalls" indeed. Tim boy is worried about the sovereign bonds issued by the PIGS. He knows that if the Sov. bonds go tapioca, the lights will go off in the USA. But the reality is that the problem has extended far beyond bonds; the PIGS are not paying trade creditors. Timmy is just making noise about ring fencing debt.

Where does this go? Can the drug companies keep up the charade? If one of the big pharmas breaks, and says, “No more IOUs, we want cash”, then they all will. At that point, things come apart very quickly. From the article:

Swiss pharmaceutical giants Roche and Novartis are examining whether to limit supplies.

This is a very sensitive issue. If the drug companies cut supplies, there will be hell to pay. These companies do not want to take a public position on this issue, they could become a target by demonstrators in the PIGS. The Swiss druggies avoid the publicity problem by having their trade group SMA, do the talking for them. I thought there was a very blunt tone to these words:

Pharma companies are private. In a liberal, democratic society respect for private property is a fundamental value. Private firms are the only ones able to weigh the pros and cons of stopping the supply of certain medicines.

Really? The drug companies are the only ones with a vote? Wanna bet?

If the drug companies do limit supplies, there will be consequences. The question of whether or not the PIGS are, in fact, liberal democratic societies, will be put to the test. In the process, I wouldn’t be surprised if the issue of whether the drug makers are public or private is also tested.

Note #1
I was part of the problem (and part of the solution) for the Latin American debt crisis of the 80’s. I had a front row seat with each central bank as they went bust. Every effort was made to kick the financial can down the road. In the end, it all blew up.

For every country, the death march was the same. When big trade creditors finally balked, and said, “No mas IOU”, debt default followed within weeks.

Note #2
Novartis and Roche have the PIG “trade receivables” and those Greek “Zeros” on the books at 100% of par. The other global drug companies who are sitting on the rest of the $20b of IOUs have it booked the same. These debts are not worth par. One day these drug companies will have to write them off. I do wonder what other big EU companies are sitting on chunky IOU’s from PIGS. None of this is “money good”. Novartis had this to say:

Deteriorating credit and economic conditions and other factors in these countries may require us to re-evaluate the collectability of these receivables in future periods.