The international phama industry will see profits eroding for some more time to come, according to the Moody's Investors Service. The noted credit rating agency issued a negative opinion on the industry last week, saying drugmaker credit ratings will be under pressure until early 2012.
Patents are expiring on blockbuster drugs like like Pfizer's Lipitor and Sanofi-Aventis and Bristol-Myers Squibb's blood thinner Plavix - and less expensive generic versions will enter the market, ending the monopoly of the giants, thus cutting into their profits.
Their pipelines of experimental drugs aren't strong enough to make up for revenue that will be lost to looming patent expirations. For AstraZeneca, for example, "patents expiring over the 2010-2013 period represent sales of about $12 billion - compared to total sales of $29.6 billion in 2007," the report says.
A tough U.S. regulatory environment that makes it harder to get new drugs to market adds to the worries.
The majors are trying to offset the lost sales through acquisitions, and it expects similar - but smaller - deals to continue. The agency said that cash burn could put their credit ratings under pressure.
Of course vaccines and treatments for H1N1 flu are "providing a nice boost to earnings in 2009 and also possibly in early 2010" for players that include GlaxoSmithKline, Roche and Novartis. But Moody's adds the swine-flu business is unpredictable and the upside may prove temporary.
Only solace is that the pharma companies look like they have dodged the worst-case scenarios under the U.S. health-care overhaul. While the costs to the industry are still being sorted out, "we currently do not believe reform measures will be extremely onerous for the industry," Moody's says.
From the point of view of the industry's creditworthiness, another concern is big pharma's habit of dropping lots of cash on biotech companies that don't produce much revenue (at least in the short term).
Since July of last year, when Moody's put out its last report on the subject, there have been no upgrades and four downgrades, largely because of big acquisitions (in the case of AstraZeneca and Novartis) and share buybacks (GlaxoSmithKline).
All the same, the "industry remains profitable, with robust cash-flow generating ability and solid liquidity. Prospects for growth remain good as well, with remaining unmet medical needs as well as an aging population in key markets."