Moody's assigns negative outlook to pharmaceutical industry

Moody's Investors Service said it assigned a negative outlook to the pharmaceutical industry, citing heightened attention to drug safety and subsequent U.S. Food and Drug Administration delays as operating and credit risks, particularly for companies with high exposure to patent expirations such as Pfizer, Merck and Bristol-Myers Squibb.

Other setbacks over the last 12 months have included products not meeting clinical endpoints, new drug applications withdrawn from the FDA, non-approvable letters and "approvable letters," which often indicate a delay because full approval may be contingent upon supplying additional clinical data.

Although there may be some downgrades, Moody's said the industry should maintain its high rating level based on the strong and consistent demand for pharmaceutical products, high profitability and strong liquidity.

However, continuing to contribute to the negative outlook is a high exposure to patent expirations, intensifying competition and comparatively few near-term blockbuster launches.

Another important emerging trend, Moody's noted, is an acceleration of consolidation in the generic drug industry, which is strengthening some players but increasing the risk of debt-financed acquisitions for smaller generic companies that may feel obliged to keep up in size.

There is also the impending implementation of Medicare Part D at the start of 2006, which provides prescription drug access to Medicare beneficiaries.

Short term, Moody's expected the implementation to lead to a modest 5% increase in drug use, but the agency said long-term implications are likely to be negative, as greater buying power of the payers may require drug companies to offer larger discounts and rebates or face steerage away from their products toward lower-cost drugs.

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