The credit ratings company Moody's Investors Services said yesterday that high credit ratings for these companies could soon be a thing of the past, as companies like AstraZeneca and Shire use debt to finance their acquisitions of expensive biotech companies.
What's the catalyst for the Moody's report? Nothing specific as far as we can tell, aside from the acquisitions mentioned above and others, such as Merck KGAA's takeout of Serono last year. Moody's has simply woken up to the facts that a) pharmaceutical companies aren't very good at keeping their pipelines full all by themselves and b) those companies they turn to--the biotechs--have all the leverage in deal negotiations, resulting in top-dollar takeout and alliance prices. Many future deals could, like AZ's Medimmune buy, be financed with debt; that said debt will become more expensive is bad news.
For an industry with generally pristine credit ratings this "moderately negative" outlook isn't going to rock the boat too much. But at the same time as Big Pharma increasingly borrow to buy back their own shares and bulk up pipelines, it's another sign that things aren't what they used to be for several of the industry's blue chips. If borrowing becomes much more expensive and patent expirations tweak cash flow, the decline could accelerate.