TEXT-S&P report: Big Pharma won't fall off a patent cliff

(The following statement was released by the rating agency) Dec 18 - Most global pharmaceutical firms will survive unscathed the spike in expiries ofpatented drugs this year known as the "patent cliff", says Standard & Poor's Ratings Servicestoday in the report card: "Why Global Pharmaceutical Firms Won't Fall Off A Patent Cliff." Industry experts predict U.S. Big Pharma companies will have lost a total of about $21 billion in revenues this year from lucrative drugs coming off patent, while their European peers could lose about $10 billion. However, their third-quarter financial results confirmed that most companies are on track to achieve low-single-digit sales growth this year on a comparable basis. Our base-case scenario predicts the global pharmaceutical market will continue to expand by 3%-5% over the next five years on a compound annual growth rate (CAGR) basis. "We believe a mix of factors will keep the sector resilient to patent expiries," said Standard & Poor's credit analyst Olaf Toelke. "Their pipeline of new molecular entities in late-stage development suggests they can match lost sales from patent expiries with future sales growth if these projects gain regulatory approval. Furthermore, companies are finding growth in high-potential markets such as oncology and diabetes treatments, and in fast-growing emerging markets." To protect themselves from significant sales losses when blockbuster drugs (those with over $1 billion sales) go off patent, they are also increasingly diversifying their product ranges. Companies are furthermore adopting general cost cutting and more flexible R&D organization. As a result, most of the large rated pharmaceutical companies continue to perform within our expectations of low-single-digit growth in 2012, the report says. The exceptions to this in the U.S. are Eli Lilly & Co., Pfizer Inc., and Bristol-Myers Squibb Co., whose sales through the nine months ended Sept. 30, 2012, have declined because of patent expirations of Zyprexa, Lipitor, and Plavix, respectively. The Zyprexa and Lipitor patent expirations occurred in at the end of 2011, while the Plavix patent expired in May 2012. Two U.K.-based companies are also experiencing growth rates lower than the industry average: AstraZeneca PLC is seeing strong generic sales' erosion following patent expiry on the depression treatment Seroquel, while GlaxoSmithKline PLC suffered a strong 9% revenue decline in Western Europe in the first nine months of this year due to price regulation and austerity measures in Southern European countries. "Still, we continue to expect at least stable rating quality for the global pharmaceutical sector over the next 12 months," said Mr. Toelke. "Our ratings on branded pharmaceutical companies that have faced--or are facing--patent issues already incorporate the effect of patent expiries." Most of the ratings have remained stable because pharmaceutical companies have large cash resources, their products are nondiscretionary, and many industry players have adopted successful acquisition strategies. This has put the industry in a good position to overcome its obstacles. In addition, hallmark low leverage and high margins make them well-positioned to weather this period of uncertainty with little, if any, deterioration in their credit quality. Added to this, companies have plenty of time to reduce costs or realign structures well in advance because of the visibility of patent expirations, the report says.