European pharmaceuticals face challenges despite good growth

With significant amounts of revenue exposed to patent expiries over 2010-2013, European pharmaceutical companies are facing a challenging period ahead, Moody's Investors Service said in its new Industry Outlook for the sector. However, growth opportunities remain good and balance sheets are generally robust, creating a cushion to absorb potential negative events.
"Moody's fundamental credit outlook for European pharmaceutical companies is negative, as patent expiries and generic competition are converging to challenge the strength of product portfolios and, in the medium term, their cash flow generation," said Marie Fischer-Sabatie, a Moody's Assistant Vice-President and author of the report. "For a number of companies, today's pipelines appear insufficient to make up for the expected upcoming revenue loss and, in addition, the regulatory hurdlesfor drug approvals, particularly in the US, seem to have increasedrecently."
In the report, the rating agency says that faced with an aging population and soaring healthcare costs, regulatory authorities in Europe are increasingly becoming more restrictive about which drugs they choose to reimburse and are putting pressure on prices.
However, the industry remains profitable, with robust cash-flow generating ability and solid liquidity. "Prospects for growth remain good, given remaining unmet medical needs and an aging population in key markets," Fischer-Sabatie noted.
Moody's noted that there is a continued degree of event risk in the sector but a number of large M&A transactions were completed or announced over the past year.
"Moody's therefore expects M&A activity to be somewhat more limited in the near term as companies concentrate on integrating the acquired businesses," she added.
Also, as share prices of certain companies have underperformed in line with setbacks in pipelines and non-approvals from the FDA, there has been growing pressure to enact shareholder-friendly strategies. "It is likely that financial policies will continue to be more shareholder-friendly than they were in the first part of the decade, although some companies recently moderated their share buybacks to accommodate large M&A transactions. Moody's cannot rule out that acquisition and share buyback activity could put pressure on some ratings over the next 12-18 months," Fischer-Sabatie concluded.
The negative outlook represents Moody's expectations for the fundamental credit conditions in the industry over the next 12 to 18 months.