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Moody’s: Outlook For Global Pharmaceuticals Stable Despite Growing Anger

Published 12/15/2016, 02:13 AM
Updated 05/14/2017, 06:45 AM

Moody’s expects global pharmaceuticals to be stable in 2017, as cost pressures neutralize gains from rising demand, and modest price increases in U.S. offset single-digit declines in rest of the world and despite growing anger over increasing drug costs. The outlook for the medical device industry and for-profit hotel chains was also rated stable.

Healthcare will account for a larger share of GDP in most countries, as demographics, including aging populations, continue to drive rising demand for pharmaceuticals, notably in emerging markets. However, the growth is creating severe budgetary pressures in most parts of the world, and pricing scrutiny in the U.S. creates political risks.

Still, successful product launches in oncology and other complex diseases, and ongoing cost-reduction programs will help drive earnings growth of 2%-3%,” the ratings agency said.

A potential repeal of Obamacare – as pledged by president-elect Donald Trump – is seen as negative for two of the three segments. While hospitals would be adversely affected by the expected rise in the number of uninsured, the devices industry would face increased pricing pressure. The outlook for pharmaceuticals was seen to be stable, as reduced fees would be offset by modestly lower drug volumes.

Pfizer (NYSE:PFE) rated A1 stable among global pharmaceuticals

Among top pharmaceutical companies, Pfizer was rated A1 stable based on its scale and diversity, with low single-digit growth driven by the cancer drug Ibrance. Astrazeneca's (NYSE:AZN) (A3 stable) sustainable growth will depend on successful launches from late-stage pipeline as patent expirations subside, while Allergan (NYSE:AGN) (Baa3 stable) faces a drag on account of larger shareholder payouts. Valeant (B3 negative) is expected to face “significant pricing pressure” on PBM formularies, “very high financial leverage” and “unresolved legal exposures.”

Emerging markets and introduction of new products, particularly in cardiology and orthopedics are key drivers for the medical devices industry. Among top device-makers, Abbott was rated A2 with review for possible downgrade because of regulatory challenges in pending St Jude Medical Inc (NYSE:STJ) and Alere Inc (NYSE:ALR) acquisitions, besides limited free cash flow. Zimmer Biomet Holdings Inc (NYSE:ZBH) (Baa3 negative) was cited for LDR Holding Corp. acquisition delay and supply chain problems. Boston Scientific (NYSE:BSX) (Baa2 stable) is expected to bolster top-line growth via new product launches while litigation risks remain on account of IRS tax dispute and pelvic mesh cases.

Earnings at for-profit hospital chains are estimated to grow between 2.5% and 3.0%, with increasing costs from higher wages and pharmaceutical prices a drag. Assuming the Affordable Care Act is not repealed, bad debts will rise on account of cuts in deductibles and co-payments. Moody’s expects the company to accelerate development of new reimbursement models and changes in healthcare delivery methods.

HCA (Ba2 stable), the largest for-profit hospital system by revenue, is expected to outpace peers in EBITDA growth and cash flow performance. Community Health Systems Inc (NYSE:CYH) (B2 negative) faces declining EBIDTA, challenges from shifts to smaller, rural markets after Quorom Health spinoff and other planned divestitures, and has only limited opportunity for improvement. Moody’s expects review of strategic alternatives to cause “near-term uncertainty.”

Tenet Healthcare (NYSE:THC) Corp. (B2 negative) suffers from “very high leverage” with limited opportunity for meaningful improvement. Its USPI acquisition was seen as indication of “interest in outpatient services beyond existing hospital markets” and joint ventures revealing a “growing strategy of partnering with not-for-profit hospitals.”

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