Moody's expects the pharmaceutical sector's overall earnings to grow a stable 2% to 3% over the next 12 to 18 months but believes long-term factors such as pricing regulation and competition could threaten industry gains thereafter.
In an outlook report, the rating agency said that cancer drugs were the best growth products for companies such as Bristol-Myers Squibb Co., Merck & Co. Inc., Roche Holding AG and AstraZeneca PLC, as well as CAR-T developers Gilead Sciences Inc. and Novartis AG.
Immunology was another area where the rating agency spotted room for earnings growth.
"The biggest driver is that there are many products across the industry that are growing, especially those treating cancer, immunological conditions, certain diabetes products, rare diseases," Moody's Senior Vice President Michael Levesque, who led the report, told S&P Global Market Intelligence. "There are basically a lot of blockbusters across the industry that many different companies are marketing that have very strong growth rates based on rising volumes of those drugs and some upside in pricing."
Outside of current blockbusters, Moody's also said that innovation and pipeline quality, as well as strong pharmaceutical growth in China, would likely fuel the next year and a half of stable earnings.
But the industry is not out of the woods and is likely to see fewer gains in the longer term.
"The stable outlook at 2% to 3% growth — that's over a short time horizon," Levesque said. "But there are a lot of increasing challenges in this sector that will play out over the longer term than the 12 to 18 months Moody's analyzed."
Longer-term threats loom
Pricing regulation in the U.S. is a threat to future industry stability, Moody's said, and the political climate around the issue suggests weak points down the road.
"The regulatory risks are rising in our minds, and this is putting greater uncertainty around the longer-term performance in the industry beyond 12 to 18 months," Levesque said. "There are a number of proposals now that relate to drug pricing in the U.S. that could further pressure prices more than what we're seeing in the market today."
Initiatives from the Trump administration to eliminate branded drug rebates and implement an international-pricing model for Medicare-reimbursed drugs, for instance, would have a sweeping effect on the industry if passed, Levesque said.
And even without regulatory or legislative changes, Moody's said, price contraction as a result of pharmacy benefit managers' strategies would reduce the number of price increases to avoid "headline risk" moving forward.
But for now, many companies rely on sales volume as opposed to price, protecting them from the full barrage to come, Levesque said.
"Overall we still believe there's a modest level of price growth in the U.S. market before any regulatory changes would be implemented," Levesque said. "I do believe volume is a bigger driver. For any companies that are posting drug growth it is more driven by volume.
Competition gears up for battle
The next 12 to 18 months portend fewer entering competitive generics and biosimilars on the biggest blockbuster drugs than in the past, Levesque said. But in the early 2020s, biosimilars will begin to join the market with more frequency, eroding sales of branded drugs, he said.
In a concurrent report to the outlook, Moody's analyzed the industry in depth and found companies that were at higher and lower exposure to patent expiration, which gives way to competition.
Those with higher exposure among the top companies were AbbVie Inc., Pfizer Inc., Roche and Allergan PLC. Those with lower exposure to generic risk were Johnson & Johnson, GlaxoSmithKline PLC, Merck and Sanofi.
In the longer term, between 2022 and 2026, companies such as Celgene Corp. — likely to be affiliated with Bristol-Myers by that time — AbbVie, Eli Lilly and Co. and Merck would face more challenging competition issues.
Future threats spawn M&A deals
The regulatory and competitive landscapes are likely to ramp up mergers and acquisitions this year and into the future, as companies look to bolster fading blockbusters with new products developed elsewhere, Levesque said.
On the buy-side, M&A is attractive as a way to improve growth rates, Levesque said. And the kinds of companies to be bought, Moody's reported, are in the still-growing fields of oncology and immunology but also in the relatively new gene therapy space.
"The regulatory risks do create an overhang for long-term growth, so M&A would be a tool to improve longer-term growth compared to what a company otherwise has in house," Levesque said. "At the same time we have a real buildup of cash and investments — the 10 largest U.S. companies hauled about $150 billion in cash investments — so this represents a large amount of dry powder for M&A."