A recent report released by Standard & Poor's Rating Services says their rating agency is concerned that Big Pharma's current American pricing flexibility may diminish increasingly over the next few years due to rapidly growing costs of Medicare and Social Security with the aging of the U.S. population, and public and private sector healthcare payers looking to control their medical expenses.
According to the report, up until now domestic pricing flexibility has been an important factor in offsetting revenue losses from patent expirations and supporting the continued stable outlook for U.S. Big Pharma companies.
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"While there will be a material increase of sales of medicines in the U.S. as the population ages and the Affordable Care Act expands insurance coverage to a broader percentage of the population, we expect that falling prices will more than offset this rise in volume," explained Standard & Poor's credit analyst David Lugg in a press release. "In our view, this could well cause significant erosion in drug makers' currently high operating margins and lead to rating downgrades if these companies cannot boost margins in other ways."
Additionally, Lugg said that "growing competition from low-cost generic manufacturers, which are becoming stronger with consolidation in the subsector, will also likely hamper the big pharmaceutical companies' ability to offset the potential revenue and margin deterioration."
The report added that one piece of good news for Big Pharma companies going forward is that the U.S. Food and Drug Administration (FDA) has approved a growing number of new molecular entities (NME) - active ingredients that have never before been marketed - in the past five years. While NMEs provide a foundation for future growth, according to the report, "sales from such products over the next few years will not fully replace the steep sales losses from patent expirations. And although many companies' new products have blockbuster potential, it will likely take years to begin to recapture some of the revenues lost on patents that have expired."
Overall the report says that "despite Big Pharma's general success in withstanding the wave of recent patent expirations with its high margins and ratings intact, the subsector's outlook is increasingly pointing to darkening skies as the end of the decade approaches."
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