For the eighth consecutive year, the credit outlook for the pharmaceutical industry is negative and more drug makers should expect that their credit ratings may fall this year, according to a new forecast from S&P Global Ratings.
The ratings agency cites three key reasons for the downbeat view. The first is the expectation that mergers and acquisitions will continue apace as drug companies seek to bolster their pipelines. But deals are often paid for, at least in part, with debt. And as S&P sees it, more debt “nearly always outweighs the incremental benefits.” In the past, M&A has been the chief contributor to downgrades, which numbered 20 between 2014 and 2020, compared with three upgrades.
Another issue is pricing, since drug makers remain under pressure to avoid the sort of price hikes that previously bolstered bottom lines but have since become huge political liabilities. The Biden administration and Democratic-controlled Congress are widely expected to pursue legislation, especially given strained federal and state budgets due to the Covid-19 pandemic.