Whatever one thinks of former Secretary of Defense Donald Rumsfeld, one has to be intrigued by his famous discourse on “known and unknowns.” Specifically, at a press briefing in February 2002, Sec. Rumsfeld made the following statement, which I’ve shortened to make more succinct:
- There are known knowns . . . things we know we know.
- There are known unknowns . . . things we know we don’t know.
- There are also unknown unknowns . . . things we don’t know we don’t know.
- [The things in] the last category tend to be the difficult ones.
Of course, he was talking about Iraq, weapons of mass destruction, and terrorists. But I think that set of phrases is also applicable to the drug development industry. Indeed, I couldn’t help thinking of the concept as I read the recent comments of several pharma and outsourcing executives.
All of the following facts were, by definition, unknown to the investment community before management expressed them. But were they known unknowns (facts about which investors were concerned and about which they had a strong suspicion), or unknown unknowns (facts that really did represent unpredictable surprises)?
In the old days, managements might have tried to quietly and discreetly leak this type of information to knowledgeable industry analysts, believing they would help communicate the implications of the news to the broader investor community as soon as the headlines were made public. But too many people abused the situation, and Sarbanes-Oxley put a stop to that practice. Executives are now forced to surprise all investors at the same time on their quarterly conference calls with both unusually good and unusually bad information.
So was it really a surprise to hear the following facts disclosed in recent investor presentations?
- Covance will have to increase significantly its spending on IT infrastructure.
- Sanofi expects profits to fall as much as 15% this year due to patent expirations.
- Eli Lilly is instituting a salary freeze, due to the impact of patent expirations.
- The board of directors of Lonza fired the chief executive officer after the company again reported disappointing results.
- Patheon’s turnaround will take more time than investors had hoped several months ago.
- GlaxoSmithKline is again adjusting the composition and nature of its Discovery Performance Unit model, as it creates some DPUs, closes others, and reallocates capital among them.
- GSK is also bringing certain development work in-house, a move that might yield some cost-savings but definitely will protect some jobs.
- AstraZeneca is instituting another reduction in force and increasing its use of outsourcing.
- AMRI’s 2012 royalties from Allegra could be 8% lower or 6% higher than last year’s $35 million.
- Both ICON and PAREXEL are still experiencing incremental costs in advance of generating the revenue anticipated from their strategic relationships with Pfizer.
Long-time readers are well aware that I will not try to answer my own question. Neither will I suggest certain other “predictable surprises” about “unknowns” — whether known or unknown — that might be announced in the industry’s 2Q12 reports. But I bet there will indeed be some interesting disclosures.
Michael A. Martorelli is a Director at the investment banking firm Fairmount Partners. For additional commentary on the topics covered in this column contact him at Michael.firstname.lastname@example.org or at Tel: (610) 260-6232; Fax (610) 260-6285.