22/03/2005 - 21:00

Tim Treadgold: Briefcase - PWC moves may prove portentous

22/03/2005 - 21:00


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Pricewaterhouse-Coopers, the accounting and consultancy firm with the silliest name in the world, is recruiting staff.

Pricewaterhouse-Coopers, the accounting and consultancy firm with the silliest name in the world, is recruiting staff.

Nothing unusual about that, you might say. But, what if you discovered that PWC is recruiting staff for its insolvency division. That would be different, wouldn’t it.

That is precisely what is happening in London, because one of the world’s biggest accounting firms can smell a downturn in the air.

Perhaps the signal from London is unique to that city and its massive banking and credit markets. Briefcase, however, has a nagging doubt about whether Australia will be immune from a few chilly puffs of wind from tighter bank lending rules.

These things have a habit of spreading faster than a new strain of the flu virus.

Loose lending has been a common feature of banking around the world for the past five years.

As interest rates rise, and some borrowers struggle to meet repayments, the banks move, and the accountants crank up their bankruptcy departments.

It was while contemplating the London angle, which focused mainly on the big end of town, that Briefcase started looking around for other tell-tales that might be pointing to a change in the wind.

It was a sobering experience because there is a case to argue that Australia is living in a bit of a fool’s paradise, because after you digest the news from PWC and a long list of other insolvency experts contacted by The Financial Times newspaper, you must factor in the following.

• Oil at $US55 a barrel (and more) which is crushing household and company budgets.

• A flood of so-called ‘cash-box’ floats around the world, a sure sign that markets have peaked and deal-makers are running out of ideas.

• Soaring unemployment in Germany (a 12 per cent rate versus Australia’s 5 per cent) the one-time engine-room of Europe.

• Falling house prices around the world, a trend which makes everyone feel poorer (even if they’re not really) and dries up retail spending (along with the price of petrol).

Some readers will dismiss this list of negatives as irrelevant because Australia is immune from the forces of world markets thanks to its close and growing relationship with China – a sort of ‘we are different’ argument because the world is truly in a super-cycle of ever-rising commodity prices.

Perhaps this belief in a never-ending boom will prove to be correct, but Briefcase doubts it. China is important, but it is by no means that biggest game in town. North America, Japan, and Europe make China look like an economic minnow, and if demand from those regions dries up under the weight of rising fuel costs, and rising bankruptcies, then China might not matter.

However, of all the issues which should be keeping investors awake at night it is the question of falling quality, both on the stock market and in the credit market.

Cash boxes, a sort of vehicle which sells itself on the basis of ‘give me your money and I’ll have a bright idea’, are an enormous worry simply because the number of bright ideas available has dried up.

There is an awful sense of urgency among the cash-box operators and the investment banks to keep doing deals (any deal). To grasp how serious this situation is becoming consider these final words on the subject of rising risk from a London banker talking to FT last week.

“Some funds believe they have to invest the money even if it’s not a smart investment. They think the people that gave them the money expect them to invest it. But it’s madness.”

Madness, possibly; heading for Australia, certainly – like the latest flu virus, which has so seriously affected most of the Northern Hemisphere because of a slightly imperfect vaccine recommended by the World Health Organisation.

It was while contemplating the somewhat hit-and-miss nature of the current vaccine that Briefcase thought it time to look at who’s in the business of developing flu vaccines, because it is undoubtedly one of the growth areas of medicine given the forecasts of widespread infection (called a pandemic by the experts) from bird flu.

More important than just looking, there is the far more important question of who’s going to make a profit from flu, and what stock is worth looking at.

It was while contemplating some of the better-known players in the flu game – such as Biota with its Relenza drug – that Briefcase came across a potentially more interesting company called BioDiem.

BioDiem is going right back to basics when it comes to tackling flu, but has suffered the indignity of being an especially poor stock market performer.

Since floating last year at $1.25, BioDiem has sunk to around 45c, largely because it is doing most of its best work far from home, and because so few people have taken the time to understand what it is doing and its potential.

This is a surprise because former WMC chief executive, Hugh Morgan, is a big buyer of the stock, and it is chaired by Rod Unsworth, the founder of Delta West, one of Australia’s most successful pharmaceutical stocks which was acquired by the US major, Upjohn.

Without boring readers with too much detail about differences in flu strains, the essential value of BioDiem lies in its relationship with Russian medical research institutes, and a deal by which it is seeking to commercialise some of the seriously smart medicines developed in Russia.

With virtually no fanfare earlier this year the situation for BioDiem changed materially when the Dutch pharmaceutical company Akzo Nobel joined the BioDiem flu game by signing up for a licence to make the Russian/BioDiem flu vaccine and potentially take it to the world via a cell culture production system. This will dramatically accelerate the rate at which vaccine can be made.

As ever, Briefcase does not give investment advice but merely suggests the addition of the BioDiem name to the black book of names worthy of further investigation.

“One of the greatest delusions in the world is the hope that the evils of the world can be cured by legislation.”  Thomas Reed.


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