The outlook for the global pharmaceutical industry will remain stable over the next 12-18 months, reflecting the expectation of the sector returning to earnings growth this year, says rating agency Moody’s, in a new Industry Outlook report.
“The global pharmaceutical industry is likely to experience a return to earnings growth in 2013 as fewer top-selling drugs lose their patent protection compared with last year,” says the report’s author Marie Fischer-Sabatie, a vice president – senior credit officer in Moody’s Corporate Finance Group.
The firm is projecting growth in earnings before interest, taxes, depreciation and amortisation (EBITDA) for rated drug companies of around 1% in 2013 on average, she says, adding: “we also anticipate further acceleration in earnings growth in 2014 as the negative effectives of the patent cliff recede.”
Although generics-focused companies will continue to benefit from patent expirations in 2013, these will not be to the same extent as in 2011-12, when a slew of blockbuster drugs came off patent. While generic drug use is rising globally, ongoing price erosion and higher costs associated with producing more complex drugs are likely to cut into profits, Moody’s forecasts.
It also notes that the quality of late-stage drug pipelines is improving overall. A number of promising and innovative drugs could drive new sales growth in 2013-14, including oral treatments for hepatitis C, easier-to-administer drugs for multiple sclerosis and drugs that are more efficacious in the treatment of certain forms of cancer.
However, US deficit reduction efforts plus persistent pricing pressures from health care reforms – in Europe in particular – will continue to weigh on the revenues of pharmaceutical companies, the report warns. Moody’s is expecting ongoing health care reforms in Europe to result in sales declines of around mid-single-digit percentage points for big pharma companies this year, but it also notes that further weakness in southern European markets would be unlikely to result in ratings pressure on drug manufacturers, as these markets account for a relatively small portion of their total sales and receivables.
Turning to biosimilars, the report expects the regulatory pathway for these copies of biotechnology drugs to become clearer in the US, opening the door to regulatory filings this year. And within Europe, the creation of such a pathway for copies of more complex biotech drugs could lead to at least one biosimilar being ready for launch when the patent expires on Remicade (infliximab) in Europe in August 2014. Remicade – which is used to treat rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis, Crohn’s disease, plaque psoriasis and ulcerative colitis – is marketed in Europe by Merck & Co, while Johnson & Johnson markets it in the US.
Moody’s is also projecting that merger and acquisition (M&A) activity is likely to pick up this year. Some companies, including Roche, Pfizer and Novartis, have now deleveraged following large transactions and could resume acquisitions, as they have built up large cash balances. However, the report also expects that such acquisitions will generally be small to mid-sized rather than transformational.
Moody’s points out that it could change its outlook to positive if it believes that EBITDA growth will exceed 4%, which could happen if sales of new products grow quickly and if pricing pressure in the European Union (EU) abates – although the ratings agency views the latter prospect as unlikely over the next few years.
Conversely, Moody’s could shift its outlook to negative if legislative changes in the US are significant or if emerging-market growth falters, as sales in emerging markets are important offsets to the sales declines that pharmaceutical companies face in developed markets from pricing pressure and patent expiries.
Such developments would cause the rating agency to revise lower its expectation for EBITDA growth to below 1%, but it adds, it views such a scenario as unlikely in the next few years.
