Why Global Pharma Profits Should Keep Rising

With  2016 being a U.S. presidential election year, there has been an endless debate over drug pricing and the government’s lack of ability to negotiate with drug companies. If Moody’s is correct, pharmaceutical earnings will keep growing for at least the next year and a half.

A Moody’s report shows that the global pharmaceutical growth will remain steady despite cost containment efforts, with annual industry earnings growth of 3% to 4% over the next 12 to 18 months. The driver is that solid underlying fundamentals will mitigate the effect of the strong U.S. dollar and increasing scrutiny of drug prices.

As such, Moody’s maintained its stable outlook on the global pharmaceutical sector. Moody’s believes that companies that focus on cancer and other complex diseases will see higher earnings growth. However, earnings growth is expected to be more limited for companies with greater exposure to the strong U.S. dollar and those pharma companies with upcoming patent expirations of blockbuster drugs.

Apparently all the fears of cost pressure are overblown. Moody’s sees rising drug prices for most branded drugs in the United States, even amid efforts to curb rising drug costs that have negative implications for the sector.
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Michael Levesque, a Moody’s senior vice president, opined on lower drug prices, legislation and even biosimilars to lower the costs for some of the most popular drugs made by top biotech and biopharma companies. His report said:

Absent a systemic change such as legislation to lower drug prices, we do not expect the US pricing environment to substantially erode. Some categories including respiratory and diabetes face pricing pressure, but most other categories, including those involving specialty diseases, will sustain US price increases.

Compared with traditional drugs, there are fewer competitors for biosimilars, there is less of a pricing differential and there isn’t yet a regulatory framework encouraging automatic substitution of biosimilars.

The view of Moody’s is that patent expirations will be manageable for most pharmaceutical companies through 2017. Biosimilars are expected to become a growing threat to branded pharmaceutical companies, but Moody’s believes that the revenue cliff for biotech products is relatively low.

Another driver for the drug companies ahead is a belief that a steady flow of new innovative drug launches from drug pipelines. Over time, Moody’s believes that biosimilars will have credit negative implications for the largest players offering biotech products, and it named companies such as Amgen, Roche and AbbVie.

One critical view is here for ongoing consolidation and horse-trading among biotech and pharmaceutical companies. Moody’s expects industry consolidation to continue, with large branded Big Pharma companies acquiring companies with attractive pipeline products or newly launched drugs, and as generic companies seek greater scale.