Five years after giving the pharmaceutical sector a negative rating, Moody's Investors Service has revised its outlook to stable in a report entitled "the worst is over".

The influential ratings service claims that earnings are expected to rebound in 2013 as patent expirations ease from their peak. It notes that although some major companies, including Bristol-Myers Squibb (rated A2 stable) and AstraZeneca (A1 negative), will still face year-over-year declines in earnings during the remainder of 2012 and into 2013 due to lingering effects of the patent cliff, "the next 12 months will be less onerous".  

Moody's adds that the figures will look healthier compared to the past 12 months when the world's top two bestsellers - Pfizer's cholesterol drug Lipitor (atorvastatin) and Sanofi/B-MS' blood thinner Plavix (clopidogrel) - went generic. However, it warns that the industry "remains challenged by a difficult regulatory approval environment for new products, and by areas of research that are still seeing limited success, such as Alzheimer's disease".

Big pharma is also "pressured by global cost containment efforts that seek to reduce healthcare spending", Moody's adds, noting that the use of generics is rising and will benefit companies such as Teva Pharmaceutical Industries (A3 stable), Watson Pharmaceuticals (Baa3 stable) and Mylan (Ba1 stable).

However, generics companies face ongoing price erosion "and stringent manufacturing compliance requirements that will cut into profits", says the report. Michael Levesque, a Moody's senior vice president, stated that "the stable outlook reflects our view that the worst of the industry's blockbuster patent expirations has passed".

He added that although profits will still be affected by very recent patent expirations, "earnings for large, branded players will reach a trough point in late 2012 and rebound in 2013".