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Pharmaceutical companies steadily raising debt

Rising debt in the global pharmaceutical industry amid upcoming patent expirations places the industry's strong credit profile at risk, said Moody's Investors Service in a new report.

Over a three-year period, rated pharmaceutical industry debt rose by 117% to $270 billion at year-end 2009 from $124 billion at year-end 2006, the report said.

"The rise in industry debt leaves reduced cushion in credit metrics, making pharmaceutical ratings vulnerable to ongoing downward pressure," said Michael Levesque, Moody's senior vice president.

Higher debt has led to less cushion for most companies to fund M&A without credit rating consequences, Levesque noted. "However, the trend of rising exposures to patent expirations and declining pipeline quality indicates that M&A is more likely to increase than to abate."

The branded pharmaceutical industry also faces lower earnings and cash flow prospects because of a patent expiration cliff starting in late 2011. A number of companies are more willing to pursue large-scale M&A to help counter this risk, the report said.

The report acknowledges that credit metrics for the global pharmaceutical industry still remain more favorable than those for other industries, thanks to strong profit margins and cash flow. The industry's cash levels have also grown in three years, totaling $233 billion as of December 31, 2009, although this has been outstripped by growth in debt.

The industry still maintains strong credit quality, with 20 companies rated in Moody's "A" range or higher.

But Moody's ratings of the industry have been steadily migrating downward to reflect higher operating risks and financial risks - the median rating for large global drug companies has fallen two notches to A1 in 2010 from Aa2 in 2006. (BBJ Online)