Wednesday Moody's Investor Services downgrades the pharmaceutical sector's outlook from "stable" to "Negative" for the next twelve months.
Citing a tough regulatory climate, lagging pipelines and upcoming patent expirations, Moody's senior vice president and credit analyst noted that large pharma companies have been buying up biotech companies and making more developments deals to try and compensate for lagging research and development.
Merck's (NYSE:MRK) buyout of biotech firm Sirna Therapeutics for the price of $1.1 billion and Abbott Laboratories' (NYSE:ABT) $3.7 billion takeover of Kos Pharmaceuticals are just two examples of large acquisitions over the last year. Pfizer Inc. ( NYSE:PFE) and Bristol-Myers Squibb (NYSE:BMY) have teamed up to work on Apixaban, a stroke drug.
"The buyouts will probably accelerate as we get closer to 2010 and 2012," Levesque said in a phone interview. While the industry as a whole has high levels of cash relative to debt to fund these kind of deals, the rate of cash burn is still a concern.
Add in the high-profile safetey issues such as Merck's Vioxx problem, which slows down the FDA's approval process, Merck's AIDS vaccine failure in trials, the recall of Novartis' Prexige and other problems and the pharma future doesn't look too rosy right now.
The Moody rating has been "Stable" for the last 12 months but Levesque believes this downshift accounts for all the factors influencing the pharmaceutical market.
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