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06 Dec 2004
MOODY'S: REPORT DETAILS KEY PHARMACEUTICAL RATING FACTORS
New York, December 06, 2004 -- U.S. pharmaceutical companies as a group face significantly
greater risk from impending patent expirations than do their European
and Japanese counterparts, a new report from Moody's Investors Service
shows. The difference largely explains why the ratings outlook
for the U.S. pharmaceutical companies is negative,
while it is stable for their European and Japanese peers.
Moody's recently released rating methodology report for the global pharmaceutical
industry quantifies the difference in this risk, as it does other
key rating factors of pharmaceutical industry credit quality.
"The primary goal of the methodology is to improve the transparency of
the ratings process and to demonstrate global consistency in our ratings
approach," says Moody's Vice President/Senior Analyst Michael Levesque,
lead author of the report.
In all, Moody's rates 36 pharmaceutical companies, with approximately
$100 billion of rated debt and credit facilities.
The report discusses the key considerations and financial ratios used
by Moody's to determine a rating for a pharmaceutical company.
Moody's has identified six key rating factors such as quality of product
portfolio and robustness of cash flow, which it uses to assess a
pharmaceutical company's credit profile.
The rating methodology discusses the expected rating category, for
example, Aaa, Aa, or single A, that applies to
a specified range of risk for each of the key rating factors. For
example, the report identifies the ratio of free cash flow to debt
that is generally acceptable for a Aaa credit compared with a Aa credit,
and the level of product concentration risk that is acceptable for a single
A credit compared with a Baa credit.
The report maps a value or range of risk for each of the six rating factors
to Moody's rating categories and reports those values for 18 leading global
For example, the report shows that the 2003 revenues concentrated
in the top 3 products for Eli Lilly and Merck were approximately 44%
and 46%, respectively. Such product concentration
by itself would suggest a rating in the Baa category, or low investment
By way of contrast, Aa2-rated GlaxoSmithKline's top 3 products
only constituted 24% of total 2003 revenues, which by itself
would indicate a top Aaa rating.
Eli Lilly's Aa3 rating, however, benefits from what Moody's
considers a strong pipeline of new products. To assess the quality
of a pipeline, Moody's develops a ratio equal to estimated peak
sales of drugs in Phase III or later, divided by 2003 revenues.
For this rating factor, Eli Lilly excels with a figure of 40%,
which alone would map to a Aaa rating.
In addition, the percent of Eli Lilly's 2003 revenues facing expiration
through 2007 equals 6%, another Aaa attribute.
Such a low exposure to patent expirations is more typical of the European
manufacturers. Only 14% of Aa2-rated AstraZeneca's
2003 revenues face patent expiration through 2007, as does 11%
of Aa2-rated GlaxoSmithKline's 2003 revenues, both indicating
a Aaa rating.
Japan's Aa2-rated Astellas (the pending combination of Yamanouchi
and Fujisawa) also faces relatively little patent expiration risk,
with 9% of its pro forma fiscal 2004 revenues facing expiration,
mapping to a Aaa rating.
In the U.S., expiration levels are generally higher,
and hence the negative ratings outlook for the industry overall.
Pfizer faces 33% of its 2003 revenues expiring and Bristol-Myers
Squibb faces 32%, which correspond to below-investment-grade
Ba ratings. Merck faces 28% of its 2003 revenues expiring
through 2007, which maps to a low-investment-grade
An offsetting factor for some U.S. companies is a healthy
level of cash and investments relative to debt levels, and this
ratio could be enhanced in 2005 if companies repatriate off-shore
cash to reduce debt.
Among other important rating factors, Moody's also quantifies the
degree of exposure to litigation and other contingencies. It does
so by comparing the estimated potential cost of resolving outstanding
litigation to shareholders' equity.
"We note this type of measurement is extremely subjective," says
Levesque, adding that "product-safety litigation is particularly
worrisome, since these liabilities may represent large amounts that
are difficult to predict."
The measure, however, singles out the uncertainty that overhangs
certain ratings. Moody's estimates that Wyeth could face losses
that surpass half of its 2003 equity book value, which explains
its Baa1 rating despite most of its other attributes being high investment
grade. Merck could potentially face losses of up to half of its
2003 equity book value, which, taken alone without other offsetting
factors, would suggest a single-B rated company, or
low investment grade.
In all, the six key rating factors are (1) quality of the existing
product portfolio, (2) ability to offset patent expirations with
new product development, (3) capital structure and cash coverage
of debt, (4) profitability and return, (5) cash flow relative
to debt levels, and (6) exposure to contingencies.
The selected measures do not reflect additional key rating factors that
cannot be quantified. These include liquidity, the role of
corporate governance, and external support.
NOTE TO JOURNALISTS ONLY: For a copy of this report, please
contact New York Press Information +1-212-553-0376;
London Press Information +44-20-7772-5456;
Louisa Pearce-Smith in Paris +33-1-5330-1073;
Juan Pablo Soriano in Madrid +34-91-310-1454;
Henry Macnevin in Milan +39-02-58-215-580;
Hector Lim in Sydney +612 9270 8102; Detlef Scholz in Frankfurt
+49-69-707-30-700; Adel Satel in
Limassol +357-25-586-586; Tokyo Press Information
+813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635;
Hong Kong Press Information +852-2916-1150; Luiz
Tess in São Paulo +55-11-3443-7444;
Benito Solis in Mexico City +5255-9171-1817; or
Reynold Leegerstee in Johannesburg +27-11-217-5471
or visit our web site at www.moodys.com
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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