Increased M&A in European Pharma to Hit Credit Metrics of Large Firms

Europe’s six-largest pharmaceutical companies will face increased credit quality risks from mergers and acquisitions this year, while any benefits to operating performance are also likely to take a hit, according to a new report by Moody’s Investors Service.

These firms include: GlaxoSmithKline, AstraZeneca, Roche Holding, Novartis and Novo Nordisk. "While the 2018 guidance from the larger European pharma companies is modestly more upbeat than for 2017, this is unlikely to translate into any major improvement in credit quality, mainly because of the impact of recent M&A transactions and the risk of possible future deals," said Knut Slatten, vice president and senior analyst at Moody's.

Moody’s cites as an example Novartis’s $3.9 billion debt-funded acquisition of Advanced Accelerator Applications, which will surpass the company’s 2018 free cash flow and is likely to dampen any recovery of its credit metrics as a result.

Sanofi’s acquisitions of Bioverativ and Ablynx for more than 13 billion euros will see its Moody’s adjusted debt/EBITDA increase to about 2.8x from 2.1x at the end of 2017, depending on how much debt is raised for the two purchases, analysts said. Also, GSK may have to pay Novartis GBP8.6 billion for their common consumer health joint venture.

European pharmaceuticals are also anticipating in 2018 regulatory decisions or important data readouts on drugs “that will be important cornerstones in driving revenue growth over the next 2-3 years,” Moody’s said. “However, this year the focus will be more on line extensions of already approved drugs rather than on approvals of new, high-profile drugs as was the case last year.”

– Nicholas Stern, managing editor

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