Moody’s Investor’s Service predicts that the outlook for the global pharmaceutical industry remains negative, primarily due to the sector's increasing exposure to major patent expirations.
In a report issued this week, Moody’s notes that pharmaceutical patent expirations will peak in 2011 and 2012, at a time when the quality of late-stage drug development pipelines is, on average, insufficient to offset the trend.
"In addition to the negative exposure towards patent expiries, regulatory hurdles remain high for new drugs, exacerbating the situation for players with fewer innovative drugs in development,” said Marie Fischer-Sabatie, a Moody's vice president and senior analyst and lead author of the report. “Furthermore, ongoing global healthcare reforms aim to limit drug spending. Cutbacks in drug spending is a trend that is accelerating in Europe as governments grapple with massive fiscal deficits.”
The report explores Moody's expectations for the fundamental credit conditions in the industry over the next 12-18 months.
Moody's expects these negative pressures to remain a key feature of the pharmaceutical industry until the patent cliff is over. In late 2011 and early 2012, the industry will face expirations on some of its largest-selling drugs (for example, Lipitor, Zyprexa and Plavix in the United States), heralding a major exposure period that will continue into 2012 and 2013, when several other larger products will become affected.
Fischer-Sabatie said pharmaceutical companies will need to step up their efforts to dilute the negative effects of patent expirations and strengthen their development pipelines to offset future revenue losses in what is likely to be a tougher regulatory environment.
Moody's expects debt-financed consolidation to continue in the near term as these challenges intensify.
"From a credit standpoint, the companies best equipped to deal with these challenges are those with robust pipelines capable of offsetting the impact from patent expiries,” said Fischer-Sabatie. “Diversified players, those which can offset difficulties in one segment or region with better performance in another, are also well placed. However, the expected debt-financed consolidation could exert pressure on some ratings within this sector. Despite the challenges, the industry remains solidly profitable and lowly levered compared with other industries.”