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Expiring patents depress drug companies

The outlook for the global pharmaceutical industry is negative, Moody’s said in an Industry Outlook report published yesterday. The rating agency’s pessimism is based on the upcoming patent expiration on several sought-after drugs.

The patents on a number of the largest-selling drugs will expire in late 2011 and in 2012, which, according to Moody’s, poses increasing pressure on most branded drug companies at a time when the quality of late-stage pipelines remains relatively weak. "Moody's expects earnings growth to continue to slow in 2011 for most of the industry's major players as they come up against the patent cliff," Marie Fischer-Sabatie, the company’s vice president and senior analyst explained. She also added that downward pressure on earnings is likely to increase in 2012, when the impact of many other patent expirations will be more heavily felt, which could result in pressure on some ratings and outlooks.

Many large drug companies are reconfiguring their research and development operations, targeting efficiency savings, productivity improvements and renewing their focus on specialty areas such as oncology and autoimmune diseases. However, Moody's notes that despite several recent high-profile successes and other products awaiting approval, the overall quality of late-stage pipelines remains mediocre.

The negative impact on the revenues of pharmaceutical companies from global healthcare reforms has increased during 2011 as the full-year impact of last year's measures has been felt and additional measures have kicked in. Moody's also expects global drug-pricing pressures to persist and likely intensify in Europe, particularly in countries with large budget deficits.

Still profitable

The European Medicines Agency recently published draft guidelines for biosimilars containing monoclonal antibodies, advancing the pathway to market for copies of more complex biotech drugs, some of which are large-selling. Meanwhile, the Food and Drug Administration has started the process of establishing a pathway for the approval of biosimilars, which is still at an early stage. The adoption of biosimilars presents downside risk for branded biotechnology companies, and upside potential for generic companies. However, Moody's believes that there remain several uncertainties concerning the approval of these products and that the first biosimilars are still some years off in the US.

Nevertheless, Moody's notes that, despite various challenges, the global pharmaceutical industry remains solidly profitable and lowly leveraged compared with other industries. These relative strengths are reflected by the higher credit ratings of pharmaceutical companies.

Moody's outlook for generics-focused companies is more positive because these companies will benefit from many of the negative trends affecting branded drugs.