Moody's: Stable outlook for global pharmaceuticals, M&A event risk is rising

The global pharmaceutical industry will see annual earnings growth of 1%-2% over the next 12 to 18 months, supporting a stable outlook on the sector, Moody's Investors Service says in its just-released report. The rating agency's stable outlook and modest EBITDA growth reflect solid underlying fundamentals, including rising utilization of prescription drugs, expansion in emerging markets and positive pricing trends in the US in many therapeutic areas.

Among the diverse group of pharmaceutical companies rated by Moody's, those focusing on cancer drugs will see the highest EBITDA growth of more than 10%, while companies with a strong portfolio of products treating rare diseases will see solid growth in the 6%-10% range. Nevertheless, earnings growth will likely decline for a number of rated companies facing various pressure points including patent expirations, declining hepatitis C treatments and declining trends in generics and opioids.

"Despite near-term downward earnings pressure for some companies, the industry is undergoing a period of strong innovation as reflected in a record number of recent new drug approvals, particularly in the field of oncology, helping to fuel industry growth," said Michael Levesque, a Moody's Senior Vice President. "And while the record 46 drug approvals in 2017 will be hard to beat, we're projecting approximately 40 new approvals during 2018, continuing the general upward trend we believe represents the global picture for innovation."

The pharmaceutical industry's late-stage pipeline is similarly strong, with 2017 year-end pipeline quality still good despite declining from 2014's peak. Looking ahead over a longer time horizon, Moody's analysts anticipate that the industry will continue to replenish its late-stage pipeline using a combination of internal projects supplemented by acquisitions and collaborations. Such collaborations include Amgen's erenumab, through a collaboration with Novartis, which is one of a number of pipeline products currently undergoing regulatory review for the treatment of migraines.

Moody's says that biosimilars will become a growing threat to biotech companies like Amgen and Roche as the pace of biosimilar launches and commercial uptake accelerates over the next 12 to 18 months. And even as the biosimilar market remains in its nascency, capturing only a small fraction of the overall global pharmaceutical market, the market is expected grow, given the large number of major biotech products reaching the end of their patent lives and the number of biosimilars under development for years.

"Biosimilars have been widely available in Europe for several years and will continue to gain share, and while the US biosimilar market is less mature, with only three launches to date, approvals will increase as the FDA strives to meet its goal of reviewing 90% of biosimilar applications within 10 months," said Levesque. "We expect biosimilars to be increasingly adopted because of their potential cost savings to the healthcare system."

Global pricing pressure is expected to continue in key markets, with net prices on most branded drugs in the US continuing to rise, but at a slower rate compared to the recent past. Meanwhile, branded drug prices in the large pharmaceutical markets of Europe and Japan will see the year to year downward pricing trend continue, reflecting the policy approaches taken by many national governments, which are typically the largest payers of prescription drugs under national health insurance programs. Generic pricing is expected to remain similarly pressured, with customer base consolidation and a growing number of generic approvals increasing competition.

Moody's says that industry consolidation will continue, with acquisition activity remaining high, driven by a combination of rising exposure to healthcare cost containment efforts, industry fragmentation, desire for scale in specific segments or therapeutic areas and the goal of supplementing internal R&D by purchasing companies with promising pipeline drugs or newly launched products.

Acquisition strategies will also be shaped by patent expirations, as many companies face near-term patent cliffs on some of the largest drugs in their portfolios during the 2022-2026 period, according to Levesque. These include Merck's Januvia, AbbVie's Humira (US market), Celgene's Revlimid, Biogen's Tecfidera, and Eli Lilly's Alimta.

Notwithstanding the number of favorable industry signals, Moody's cautions that pharmaceutical industry M&A event risk is rising, as pricing pressure, consolidation of health insurers and pharmacy benefit managers, regulatory and legislative threats and patent expirations affect pharmaceutical companies' acquisition strategies.

"All of these trendspricing pressure, insurer/PBM consolidation, regulatory and legislative threats and patent expirationsreflect longer-term pressures that will have a growing impact on many companies beyond the 12 to 18 month outlook period," noted Levesque.

Powered by Capital Market - Live News