Global pharma outlook negative despite solid fundamentals

The outlook for the global pharmaceutical industry remains negative, mainly due to looming patent expirations of top-selling drugs and weakening product pipelines, Moody's Investors Service said in a new report.
"Despite the continuation of good profitability metrics, Moody's outlook for the industry remains negative as global pharmaceutical companies face maturing product portfolios and diminishing product pipelines, resulting in negative pressure that is not likely to abate until after 2012," said Marie Fischer-Sabatie, a Moody’s senior analyst and co-author of the report.
In an effort to boost their pipelines and offset some of the revenue that will likely be lost as patent exclusivity expires, some companies have picked up the pace of acquisitions, especially mega-deals. "Consolidation in the form of M&A or diversification into other health-related businesses, such as consumer health, is likely to persist as companies seek ways to offset the industry's main challenges," said Fischer-Sabatie. "However, these activities usually result in increased leverage and could, in some cases, create downward rating pressure."
Moody's also believes a prolonged economic downturn could result in more pricing pressure and slowdowns in revenue growth as governments seek to ease the healthcare burden, especially in the US. For pharmaceutical companies with a significant presence in the US market, an expansion of healthcare coverage could have a positive effect on volumes.
"However, we anticipate this to be offset by pricing pressures that are expected to develop in coming years, particularly on more expensive biotech drugs, if the measures proposed by the Obama administration are implemented," said Michael Levesque, co-author of the report.
Nevertheless, Moody's believes the industry's financial performance should remain relatively solid over the near term. Companies continue to report good profits, have relatively strong balance sheets and post good cash-flow generation.
Moody's recognises that some companies have undertaken restructuring efforts to reduce costs to help mitigate the impact of current industry challenges. "Furthermore, favourable demographic trends, such as ageing populations, will continue to spur growth, as will burgeoning treatment areas, such as oncology and autoimmune diseases. Companies will also look to emerging markets as a faster source of growth, although these markets still represent a relatively small proportion of sales," added Noriko Kosaka, co-author of the report.
Moody's will continue to monitor the developments in the industry and take appropriate rating action as necessary.
Moody's currently rates 35 pharmaceutical companies with approximately USD230 bln in long-term debt outstanding.