Financial Analysis

Baseless Speculation

By Michael A. Martorelli | July 9, 2010

Guessing can be fun

Every once in a while it's fun to be naughty. It's summertime, so I'm going to give it a shot.

Throughout my career as an investment analyst, I followed the dictum, "Never engage in or comment on raw speculation." My mentors taught me that analysts were supposed to analyze, not comment on unsubstantiated rumors, groundless speculations, or gossip. I still follow that guidance today. Maintaining a high awareness of the chatter occurring throughout the outsourcing industry is indeed important to me and my colleague Neal McCarthy as we continue to compete for investment banking business. But I do not pepper my Contract Pharma columns or my periodic Outsourcing Industry Monitors (e-mail me at the address below for more info on that) with comments on any juicy rumors from the Internet, the blogosphere or the unwritten signals of the outsourcing industry's jungle drums.

In this column, I want to bend my rules just a bit by floating some ideas about outsourcing developments, which may or may not be far-fetched. I must admit that my inspiration for this idea was a recent Wall Street Journal column by Fred Barnes noting the totally groundless rumor that President Obama might want the Republicans to take control of one or both houses of Congress in November. In his opinion, such a development would help Mr. Obama pivot to the center, thus allowing him to wiggle free of a Democratic Congress that seems bent on leading the country over a left-wing cliff. Mr. Barnes noted the success of President Clinton in using the 1994 Republican congressional victories as a foil for blunting his own party's left-wing agenda, and for helping that President achieve a remarkable degree of success in his final six years in office. So here goes nothing.

Several outsourcing companies are about to tap the market for Initial Public Offerings (IPOs)

It's been about two years since we heard the rumblings about several large to mid-sized outsourcing firms considering the IPO option. Lawyers, investment bankers, and company executives know the identification of Company A, Company B, Company C, and even the XYZ unit of Company D. Those rumored filers haven't acted yet, but that doesn't mean they might not be getting ready to act.

Some diversified health care companies are going to divest their CRO units

You would recognize the name of Company E, Company F, and Company G; but again, I'm going to be just a little bit bad by planting the seed, but not identifying the firms. As a reminder, there is no basis for my suggestion that these divestitures will happen - but they could!

The major American, British, and European drug companies soon will become as diversified as certain Indian and Japanese firms

If Company H and Company I develop drugs, manufacture APIs, monitor trials, and sell both brand-name and generic products, why shouldn't a larger group of major firms do the same? (By the way, it seems to me that the major U.S. drug companies actually did operate like that several decades ago.)

Many outsourcing firms will begin seeking to generate a revenue stream from the successful products they help companies develop

Of course, they probably could not survive if they did not also continue to generate revenue from providing services involving compounds that do not become commercial products. Why shouldn't these service providers "eat some of their own cooking?" Isn't Congress about to mandate a similar scheme for many financial services firms?

Many healthcare service companies are about to enter the business of clinical research

They operate facilities, employ physicians, and provide medical and/or insurance services to consumers. Why shouldn't they also help drug companies develop new products?

Remember, the above-noted, bold-faced "facts" come from my imagination, not from any confirmed source. They're not really rumors, just the speculations and ramblings of a fairly well-behaved guy who occasionally gets tired of staying on the straight and narrow. Or are they . . . ?

Michael A. Martorelli is a Director at the investment banking firm Fairmount Partners. For additional commentary on the topics covered in this column, please contact him at, or at Tel: (610) 260-6232; Fax (610) 260-6285.

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