Fitch Ratings says that pharmaceutical companies will face significant operating challenges during 2011, as the expiration of significant drug patents is set to erase record levels of revenues and earnings, coupled with pressure from government cost containment in the US and Europe. The agency’s outlook for the sector in 2011 is negative.
Fitch expects that despite an improvement in the industry’s R&D productivity since 2007, the additional sales from newly launched products will not completely fill the sales gap emerging from the accelerating patent cliff.
To mitigate the effect of the looming patent expiries while also positioning themselves in high growth potential areas and to ensure some stability in sales and profit, Fitch anticipates that pharmaceutical management’s focus in 2011 will continue to be toward risk-diversifying strategies including investments in technology and in-incensing, and expansion into emerging markets and healthcare businesses beyond ethical pharmaceuticals.
Fitch expects that companies will continue with restructuring measures and capture integration synergies, which served to drive strong EBITDAR margins for the industry in 2010.
Share-holder friendly activities have moderated over the past few years as share repurchases dwindled given the focus on capital preservation in light of difficult macroeconomic conditions. In 2011, Fitch anticipates an uptick of share buybacks as well as dividend payments for many pharmaceuticals companies. Fitch believes that the rated pharmaceutical companies will sustain M&A activities during the year directed to filling R&D pipelines and portfolio gaps, but does not anticipate major consolidating activities like those seen in 2009.
Despite the operating headwinds in 2011, the global pharmaceutical industry is expected to remain one of Fitch’s highest rated industries due to its superior cash flow generation, large cash balances, strong liquidity and solid growth prospects – driven by high unmet medical needs, favourable demographics, technology advances and the existence of chronic diseases.