TEXT-Fitch:Pure pharmaceuticals players,such as AstraZeneca,most under pressure

Mon Apr 30, 2012 4:21am EDT

Apr 30 - Fitch Ratings says pharmaceuticals companies which focus on pure pharmaceuticals, such as AstraZeneca ('AA-'/Stable), Bristol Myers Squibb Company (BMS; 'A+'/Negative) and Eli Lilly & Co.'s ('A'/Stable) are likely to show the highest pressure on sales and EBITDA over the next three years compared to more diversified pharmaceuticals players, such as Johnson & Johnson ('AAA'/Stable) or Bayer ('A-'/Stable).

"With the challenging economic environment and government cost-containment expected to continue, the pressure for pure pharmaceuticals is expected to remain high," says Britta Holt, a Director at Fitch Ratings in London. "As the key factor to success for pure pharmaceuticals players is the R&D product pipeline, cash rich companies with a relatively weak R&D pipeline, such as AstraZeneca might be tempted to acquire," adds Holt.

Fitch expects the ongoing period of drug patent expiration to significantly erode revenues and earnings from the rated pharmaceuticals companies over the next three years, with the pure pharmaceuticals players Eli Lilly, BMS and AstraZeneca belonging to those most affected by patent expiration. The agency calculates that Eli Lilly and BMS stand to lose more than a third of their sales and AstraZeneca more than 20% of their sales in the US sales due to US patent expiration over the next three years.

Sales of US prescription drugs and consumer-confidence-sensitive sales of branded over-the-counter (OTC) products are expected by Fitch to suffer from lower demand in 2012. Pressure on drug manufacturers' profitability is also expected in the US as the drug coverage gap - known as the "donut hole" - will continue to be closed by 50% in 2012 (implying a continued 50% discount on brand-name drugs in the coverage gap) while the industry's annual fee (leading to payments for individual manufacturers allocated according to individual US market shares) of USD2.5bn, which had to be paid for the first time by the industry in 2011, will be increased to USD2.8bn in 2012.

The negative impact on sales and profit from cost-containment policies in Europe, such as reference pricing, and restrictions on prescriptions and reimbursement in major European markets, is likely to continue in 2012.

As government authorities, particularly in Europe and the US, are increasingly looking to reduce drug costs and are not willing to reimburse drugs with uncertain clinical evidence at launch, pharmaceuticals companies are likely to continue responding by offering conditional pricing deals. These deals take place between pharmaceuticals companies and payors, such as those executed between Pfizer Inc. ('A+'/Stable) and US drug-benefit plans with regard to Lipitor. To encourage continued use of branded Lipitor and to maintain its market share to some degree after its genericization, Pfizer offered rebate deals to drug-benefit plans and provides discounts to patients. In general, arrangements like this can reduce costs and risks for the health payor and have the advantage for the drug manufacturer that it is able to sell its medicines - albeit with lower profitability compared to a traditional reimbursement situation.

In 2012, four of the 10 best-selling US medicines (ranking based on IMS Health data) are likely to lose market exclusivity. Already in Q112, Pfizer's cholesterol-lowering treatment Lipitor (the best-selling medicine in the world in 2010) in November 2011 and Eli Lilly & Co.'s Zyprexa have lost patent protection in the US. During 2012, major patent losses are BMS' and Sanofi SA's ('AA-'/Negative) anti-platelet drug Plavix (number three in terms of 2010 US sales) in May; AstraZeneca's Seroquel IR (number six in terms of 2010 US sales) in March; Merck & Co's (A+/Stable) Singulair (number seven) in August; and Takeda's (not rated) and Eli Lilly & Co.'s diabetes treatment Actos (number nine in terms of 2010 US sales) in August.

For further information, see '2012 Outlook: Global Pharmaceuticals' at www.fitchratings.com.

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