Corporates Outlook 2019/Pharmaceuticals

Patent expiry is the pharmaceutical sector’s perennial problem. Sales of blockbuster drugs can fall off a cliff in the face of generic competition, but the next patent cliff may prove less severe, a factor in the European sector’s stable credit outlook

Scope Ratings says that the biotechnology behind the latest, chemically more complex new drugs offers pharmaceutical companies a degree of extra protection against losing what could be up to an average of USD 50bn in annual global sales to low-cost competitors between 2018 and 2024, according to EvaluatePharma.

“We expect the difference between pharma market total sales and actual sales to be larger than what we would expect for the introduction of generic traditional (small molecule) drugs,” says Olaf Tölke, sector analyst and head of corporates research at Scope Ratings.

“Biosimilar drugs are much harder to replicate and don’t necessarily represent an identical copy of the original,” says Tölke. “Doctors and patients may be unwilling to run the risk of accepted a perceived lesser degree of safety or effectiveness compared with the original medicines,” he says.

The stakes are high. Top-selling drugs garner multibillion-dollar revenue streams for their developers. Take Abbvie’s Humira treatment for rheumatoid arthritis with annual revenue of around USD 18bn or Roche’s cancer treatments Herceptin, Avastin, and Rituxan with revenue of around CHF 7bn each. In the past, the patent cliff has proved steep. Pfizer’s Lipitor generated less than a fifth of sales in 2014, at USD 2.1 billion, than it did five years before, with annual declines of 10%, 59%, 41%, and 9% after the cholesterol treatment lost patent protection.

“Market expectations are for around a 20% replacement rate for biosimilars on average,” says Tölke.

Scope Ratings sees Roche, Novo Nordisk and Bayer as the most exposed companies in Europe, with all having blockbuster drugs losing exclusivity in the relatively near future.

The sector does face other pressures which could potentially squeeze cash flow, among them persistent downward pressure on prices from health authorities, notably in the US where drugs makers have typically retained greater pricing power.

But underlying fundamentals remain favourable, with the demographics of ageing populations in advanced companies set to help sustain sales growth as, longer term, should the R&D pipeline, with the FDA approving 55 new drugs in 2017 compared with Scope’s expectation of just 40.

“Balance sheets of the main pharma players are characterised by high operating margins and ample cash-flow generation after several years of growth, so credit metrics remain at high levels with some players like Novo Nordisk holding net cash,” says Tölke.

Download the full 2019 outlook on the pharma industry.