S&P Global Ratings said downgrades in the healthcare sector continued to outpace upgrades in 2018 but by a lesser margin compared to 2017.
Pricing concerns and mergers and acquisitions piled negative pressure on the pharmaceutical industry during the year, resulting in broader-based downgrades, a report published by the rating agency on Dec. 18 said.
On Dec. 6, U.K. pharmaceutical giant GlaxoSmithKline PLC's outlook was revised by S&P to negative from stable after the drugmaker announced it was buying Tesaro Inc. for $5.1 billion.
German drug and crop science company Bayer AG's long-term issuer credit ratings were also lowered by S&P Global Ratings in June by two notches to account for the company's $62.5 billion acquisition of seeds giant Monsanto Co.
The agency also downgraded Mallinckrodt PLC, another U.K.-based drugmaker, in May. S&P lowered the company corporate credit rating to B+ from BB-, citing Mallinckrodt's weaker credit profile, lower-than-expected proceeds from the sale of its generics business and increasing operational risks.
The agency also placed Mallinckrodt's issuer credit rating on CreditWatch with negative implications Dec. 7 after the company's decision to spin off its generics business.
Other factors are also taking its toll on healthcare company ratings, including the U.S. opioid crisis. A separate report by the rating agency in October said drugmakers entangled in the crisis — including Mallinckrodt, Purdue Pharma L.P. and Insys Therapeutics Inc. — are facing declining sales and increasing risk of litigation, putting them at a greater risk for downgrades.
Outlook for 2019
Looking ahead to 2019, S&P said healthcare service companies are likely to lead in downgrades or negative actions, but the pharmaceutical sector is expected to see downgrades as well.
In a separate S&P report on Nov. 15, the agency said the healthcare service agency continues to face reimbursement pressure, an accelerating focus on value-based metrics and greater payor efforts to control utilization.
"This has led to weaker patient volume trends that have contributed to companies' struggles, placing pressure on ratings," S&P said in the report.
The rating agency said its outlook on the pharmaceutical industry remains negative due to pricing pressure on branded and generic drugs, as well as the possibility of major debt-financed acquisitions to support product pipelines.
S&P also said it believes the pressure on the generics sector has eased a bit. "Although the generics subsector remains under pressure, we believe it has lessened, as price erosion is beginning to stabilize, the buying consortia have more or less consolidated, generic players have resumed consolidation or rationalized their portfolios, and the U.S. Food and Drug Administration has made progress through its approval backlog," the agency's November report said.
Meanwhile, S&P said its outlook on the healthcare equipment sector is stable, with companies not facing the same intense pricing pressure as drugmakers and healthcare service companies.
"We believe this may be partially due to the healthcare equipment industry being much smaller relative to the other two subsectors and has not been as fast growing as the pharmaceutical sector in terms of healthcare spending," S&P said.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here and here.