Moody's has never been the most cheerful of outfits -- somehow its name seems particularly fitting -- and its latest missive to the drug industry is perfectly in keeping with its dour, green-eyeshade image. In short, pharmaceutical makers need to brace themselves, because their credit problems are only going to get worse, according to the rating agency.
I haven't been able to find the agency's semiannual report on the drug industry online, but according to Thomson Financial, Moody's says that the outlook for the industry is going to keep getting darker thanks to looming patent expirations on best-selling drugs (and subsequent generic competition), low research productivity and scarce new-drug approvals, and the likelihood that any healthcare reform enacted in the next few years will undercut current business models.
The WSJ Health Blog weighs in with another disquieting tidbit from the report:
The adjusted debt level for the nine biggest companies in the sector rose to $94 billion at the end of '07 from $75 billion at the end of '06, Moody's says. Among the debt drivers cited by the report: Schering-Plough's Organon acquisition, J&J's higher level of share repurchases, Pfizer's big share repurchases and high dividend and Genentech's Tanox acquisitionCash held in overseas subsidiaries is a problem for Moody's because it's not earmarked for debt service, apparently.
The companies still have plenty of cash and investments, but a lot more of that cash is being held offshore. At the end of '06, the companies held $58 billion in the U.S. and $27 billion offshore; a year later, that had basically flipped, with $29 billion in the U.S. and $63 billion offshore.
Moody's didn't immediately issue any further pharma downgrades, although last September it lowered the industry's overall credit rating to "negative" from "stable." Since then, the agency has downgraded two companies -- Amgen and Mylan -- and seems likely to follow suit with others before too long. Another cheery note: Moody's thinks the outlook may not improve until the current wave of patent expirations passes, possibly not until 2012.