Thursday, June 5, 2008

Fall In US Pharma Credit Ratings Likely

According to Moody's Investors Service semi-annual report for the US Pharmaceutical industry, the credit ratings for the industry could drop over the next year.

The reasons cited for the possibility include the upcoming expiry of patents, sluggish rate at which drugs are approved and finally the legislation that wouldn't favor the big brands.

Most patented drugs are scheduled to expire between the years 2010 and 2012. It's not that the companies aren't already in the process of developing new drugs, but even after considering the launch of novel drugs, the forces working against the industry are expected to overshadow any gains made through the new releases. This possibility looms large because the number of new drugs being developed is still less than the rate of expiring patents.

As far as legislation is concerned, in the US the FDA appears to be treading ahead steadily albeit slowly with respect to drug approvals. One instance of its high caution mode is the Sentinel Initiative.

On the one hand the pharma industry has its own challenges to overcome, an additional pressure would originate from the shareholders of pharmaceutical companies. Some are of the opinion, that such a pressure would cause these companies to take up aggressive share buying, achieve much larger acquisitions and even compel them to alter their business models at a more fundamental level.

Further it's also projected that the forces working against the credit ratings would continue to act throughout the period between 2010 and 2012, coinciding with the period when most patents expire.

However, not everything is gloomy about the US pharma industry as its cash flows and profits are still good and the number of suits against them have declined as well. Rather it's the uncertainty that's gripped the industry.

Moreover, the industry also isn't short of cash, the concern is that most of it rests offshore. Hence, this cash can't be considered to pay off the debts, and that it might very well be consumed to purchase shares or carry out aggressive acquisitions. Numerically, the US pharmaceutical companies had US$58 billion in the U.S. and $27 billion overseas in 2006, these numbers changed in 2007, when the companies held $29 billion in the United States and US$63 billion outside it, recounts the WSJ blog.

The new report aside, overall rating had already taken a hit in October 2007, moving the industry's credit rating over a 12-month period from from "Stable" to "Negative."

Now the question arises, how the industry faces the challenges?

Expiring Patents

Perhaps the most fundamental aspect to the sustainability of pharmaceutical industry is the rate at which it is able do innovate newer drugs. Apart from being fundamental, this seems to be an area of concern as well, because the upcoming patent expirations could have an impact on about 40% revenue for a majority of companies. Pricewaterhouse Coopers in their publication "Pharma 2020: The Vision," had declared the industry's drug development model as "economically unsustainable and operationally incapable of acting quickly enough to produce the types of innovative treatments demanded by global markets."

While the present model may lack the efficacy needed by the changing scenario, newer better models of drug development as they are devised would make the industry cope better and enable it to cash in on the opportunities. The PwC report also made a promising forecast that the worldwide sales of pharmaceutical drugs would double by 2020, and reach a US$1.3 trillion mark. An illustration of the pharm industry's market potential is reflected in the results of the latest HIV/AIDS progress report from the WHO, according to which HIV Drugs are yet to reach over 6.7 million people.

Further, as the world's population ages and more people get obese diseases would continue to grow, but the companies would to need include ROI in their R&D budgets as the General Accounting Office report highlighted, some time back.


Another challenge for companies is to keep themselves at bay from litigations, they can cost them a fortune, the case of a leading pain relief drug manufacturer is a glaring example.


Keeping the business strategies well synchronized with international legislations is yet another challenge. A better understanding of the legislation, and proactive and foresighted business operations should go a long way to protect companies against penalties. The recent European antitrust investigations seem to be an apt example.

All in all it seems that the industry may be up against some speed bumps ahead, the overall outlook would be a lot more brighter provided the bumps are tactfully treaded over.

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