Despite the ongoing challenges weighing on the U.S. specialty pharmaceutical sector, companies will steadily resume M&A with a more refined focus, said Moody's Investors Service. The ratings agency said it expects acquisitive specialty companies will increase their focus on products with unmet medical need, companies with pipeline drugs and those providing geographic expansion.
In a new report entitled, "U.S. Pharmaceuticals—Specialty Pharma: After Turmoil, M&A Will Steadily Resume but with a Shift in Focus," Moody's noted that operating challenges, dented equity valuations, and reduced access to the credit markets are making it more difficult for specialty pharmaceutical companies to continue to make large acquisitions. Moody's analysts said that the slowdown in acquisitions, along with the scrutiny on aggressive price increases, will force many specialty pharmaceutical companies to shift their growth strategies.
"In the specialty pharmaceutical space, we expect companies will be moving away from acquisitions that rely on price increases or substantial cost reductions to drive value," said Moody's Senior Vice President Michael Levesque. "To restore investor confidence, companies will seek products that have sustainable volume growth, driving more long-term value through innovative product development focusing on areas of unmet medical need and using less aggressive capital structures."
Compared to large, traditional, R&D-based pharmaceutical companies, specialty pharmaceutical companies are smaller companies with more limited breadth. In recent years, specialty pharmaceutical companies have typically relied on acquisitions for growth, rather than heavy investment in R&D. In some cases, acquisitions were followed by large price increases.
Moody's noted that within the sector, companies like Valeant Pharmaceuticals International (B2 negative) and Concordia Healthcare (B3 stable) —both of which more aggressively pursued some combination of rapid acquisitions, high drug price increases and high financial leverage—now face the biggest challenges.
Additionally, the report noted that the pace of the shift in business strategies would differ across the sector depending on factors including financial leverage. Some, like Valeant, will not be making acquisitions for the foreseeable future, according to Moody's.
"Shifts have execution risks, particularly as companies deal with the challenges at hand, including lower prices on acquired products and government investigations," said Levesque. "But, for the time being, there are quite a few companies—namely Valeant, Endo and Concordia—that are in deleveraging mode, which will give them time to reassess their strategies and long-range plans."