Moody's Gets Moody With Drugmakers

European businesses probably wish they could cut back on their imports of bad news from the U.S. this month. Earlier in September, ratings agency Moody's announced a negative outlook for the near-term future of European pharma.

Moody's issues these sectorwide reports to help guide its ratings of a company's and industry's creditworthiness. However, the reports also make interesting reading for anyone seeking a general idea of a particular sector's trends and outlook. In the case of the European large-cap pharmas, Moody's is worried about three negative trends that will hit many such companies in the coming year.

As any Pfizer (NYSE: PFE  ) or Eli Lilly (NYSE: LLY  ) investor can tell you, many drugmakers, including large-cap European pharmas, will face patent expirations in the 2010 to 2013 timeframe. GlaxoSmithKline (NYSE: GSK  ) , for instance, stands to lose patent protection on Advair, its asthma treatment, and Avandia, a diabetes drug. As a result, these companies will probably experience huge revenue declines from their top drugs.

These two compounds alone accounted for nearly one-quarter of Glaxo's pharmaceutical sales last year. Many of the other European pharmas, such as AstraZeneca (NYSE: AZN  ) and Novartis (NYSE: NVS  ) , must also find new ways to fill in sales for blockbuster compounds facing expected generic competition in the 2010-2013 time frame.

If there were a renaissance in drugmakers' pipeline activities, new drugs being developed could easily make up for the lost sales. But as the Moody's report points out, European drugmakers' late-stage pipelines are weaker today than they were even just a couple of years ago.

Combine both of those issues with what appears to be a stricter and more safety-conscious FDA in 2008, and you have a triple whammy of negative variables expected to beat down European drugmakers over the next 12 to 18 months, according to Moody's.

The negative outlook for European pharma means that Moody's will be more likely to downgrade these companies' credit ratings in the future, especially if they continue to leverage their balance sheets. "Large debt-financed acquisitions or share buybacks have somewhat weakened the liquidity profiles of companies involved in these transactions," it writes.

A credit downgrade could mean that European pharmas will pay more interest on any new debt they issue. It might even prevent some of the more conservative-minded drugmakers, or the ones with the shakiest credit ratings, from participating in trends like the recent push to acquire biopharma assets.

All in all, it's a sobering report on the near-term future for European pharma. As we've seen in the financial sector recently, investors should be careful around any company that lets its balance sheet become overleveraged.

Motley Fool Rule Breakers is always on the hunt for hot drug stocks and other cutting-edge picks. See all of our latest discoveries with a 30-day free trial subscription.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. GlaxoSmithKline, Pfizer, and Eli Lilly are active Income Investor picks. Pfizer and Moody's are Inside Value selections, and Moody's also makes the cut at Stock Advisor. The Fool has an A+ disclosure policy.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 741329, ~/Articles/ArticleHandler.aspx, 12/22/2014 10:48:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement