Moody's: Outlook stable for global pharmaceuticals as patent cliff recedes

The outlook for the global pharmaceutical industry is stable as the "patent cliff" recedes and several promising new products enter the final stages of development, says Moody's Investors Service in "Global Pharmaceuticals: Receding Patent Cliff and Growth in New Products Keep Outlook Stable."

Moody's expects modest EBITDA growth of 2% to 3% for the industry in 2014, which should accelerate slightly in 2015. The industry lacked earnings growth in 2013.

"Our view reflects solid underlying fundamentals including rising utilization of prescription drug products, expansion in emerging markets, and positive pricing trends in the US market," says Michael Levesque, a Moody's Senior Vice President.

Acquisition activity will remain high, driven by a variety of factors including costs-saving opportunities, the addition of high-potential pipeline drugs, and the desire of some companies for greater scale and diversification. Companies divesting non-core businesses will usually require a buyer on the other end of a transaction.

The quality of drugs in the late-stage pipeline has been improving. Moody's expects a number of promising and innovative drugs will drive new sales growth in 2014-15, including new treatments for hepatitis C and cancer.

Also supporting the stable outlook is the fact that compared to previous "patent cliffs", upcoming blockbuster patent expirations are relatively modest. However, a number of blockbuster drugs do face generics, which will drag down earnings growth.

Moody's describes the loss of patent protection on branded drugs as the primary negative factor that dampens earnings growth. Secondarily, pricing pressure driven by government price reductions and US formulary strategies will continue to offset otherwise stronger earnings growth.

In response to these challenges, many companies will continue to initiate cost reduction programs, which include plant closings and workforce reductions.

The outlook reflects Moody's expectations for the fundamental business conditions in the industry over the next 12 to 18 months. Moody's has had a stable outlook on the pharmaceutical industry since September 2012.

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