A report from Moody's Investor Service has revealed that European drug companies will find it difficult to maintain high credit ratings in the long term over increasingly aggressive acquisition strategies to shore up flagging pipelines and combating generic erosion of profits.
The report highlights a shift toward financing acquisitions through debt, which could bring down the industry's rating. The new strategy differs from the large mergers of the 1990s, which were all-share transactions and thus did not affect analyst ratings.
AstraZeneca (AZ) is cited as an example, with the company running up increased debt in April 2007, when it bought US biotech company MedImmune for USD 15.6bn. Consequently, AZ's debt is expected to increase to USD 7.7bn by the end of 2007, compared with net cash of USD 6.5bn at the end of 2006.
Also mentioned is UK pharmaceutical company Shire, which has issued convertible bonds to refinance some of the bank facilities it used for the USD 2.6bn buyout of US-headquartered New River Pharmaceuticals.
The report advised that pharmaceutical companies could use asset disposals to help mitigate debt incurred in acquisitions, as exemplified by Novartis' sale of its nutrition business to help rebuild its financial flexibility, after acquisitions had augmented the size of its vaccines and generics units. Merck KGaA sold its generics unit for EUR 4.9bn (USD 6.7bn) in May 2007, to reduce the debt resulting from its purchase of Swiss biotech Serono.
Moody's senior vice-president Jean-Michel Carayon said: "The recent increase in the valuation of biotechnology companies, and the growing interest from traditional pharmaceutical companies in biotechnology, contribute to potential sizable acquisitions, which may result in increased leverage for some of the rated companies."
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