Through 2027, S&P Global Ratings expects healthy, organic revenue growth of at least low- to mid-single-digit percent for most of the large, global, typically investment-grade, branded pharma companies (Big Pharma). This is primarily due to advances in medical science, especially in the therapeutic areas of:

• Oncology, such as antibody drug conjugates (ADCs), bispecifics, and combination products;
• Autoimmune disorders (immunology), despite competition from biosimilars;
• Central nervous system and neurology, particularly Alzheimer's Disease; and
• GLP-1-based treatments for obesity.

We expect these four therapeutic areas to grow, on average, by at least 8%-10% annually.

Supporting our expectations for growth are a robust wave of new drug approvals by the FDA (see chart 1), as well as Wall Street consensus estimates for the next few years for most of the Big Pharma companies we rate (see table 1) and for the broader industry (see chart 2).

Chart 1

Table 1

Chart 2

We have already seen the industry evolve to relatively flat trends in net price in the U.S. from annual price increases (see chart 3); our revenue forecast incorporates this alongside pressure over the next few years from the cadence of products losing exclusivity (see chart 4) and an increase in biosimilar competition in the U.S. (see chart 5). It also reflects the headwinds from the IRA, including Medicare negotiation on certain products, which takes effect January 2026 (see tables 2 and 3), notwithstanding uncertainty associated with outstanding challenges to the law and ongoing negotiations.

Chart 3

Chart 4

Chart 5

Table 2

Table 3

Only Modest Downside Risk From Additional Proposed Reforms

After a short-lived improvement during the pandemic, the pharma industry's reputation has slid again (see chart 6), and there are now a variety of proposed bills focusing on drug price reform. However, given the existing initiatives to constrain drug prices in the U.S., including advances in biosimilar competition and the passage of the IRA in 2022, we believe the potential impact of further drug industry reforms in the U.S. will be modest.

While we believe the successful passage of the IRA indicates the industry's influence over lawmakers has waned, we believe most lawmakers significantly value the social benefits of advances in medicine and understand the high level of investment needed to generate those innovations. As such, we anticipate legislators will balance potential cost savings with the need for economic incentives required to sustain research and development (R&D) in drug development. Supporting this is the fact that only moderate drug price reforms have passed to date, and in the instance of the IRA, with offsetting provisions that are favorable to drugmakers, namely reducing the out-of-pocket costs under Medicare.

We therefore expect any further drug industry reform would only moderately reduce profit margins no more than a few hundred basis points (bps), which is moderate relative to average industry margins of 30%-40%.

Chart 6

That said, there are a wide variety of outstanding drug price reform proposals (see table 3). We expect some of the more moderate and targeted ones may pass, and that they will likely affect some companies more than others. We also believe that pharma companies will adapt and continue to prioritize investment in R&D and M&A to support revenue growth, even if industry conditions become a little less favorable, albeit potentially at the expense of margin pressure, increased debt leverage, or a need to lower shareholder returns.

Table 4

Moderate M&A Activity In 2024

We expect only a moderate or average level of M&A in 2024 (see chart 7). This is because we expect robust organic revenue growth over the next four years and because many companies already have historically high debt leverage (see chart 8). Furthermore, the FTC has tightened its restrictions on M&A--as communicated in its 2023 merger guidelines--especially in the pharma industry. It believes M&A can be harmful to competition and believes it may lead to reduced spending on R&D and slower drug innovation.

Chart 7

Chart 8

That said, we believe companies with stagnant or declining revenues are more likely to pursue debt-financed acquisitions compared to companies with robust revenue growth, because maintaining healthy revenue growth is a high priority for Big Pharma. Indeed, many big pharma companies have demonstrated a willingness to increase debt leverage over the last decade to achieve revenue growth in line with industry peers, even at the expense of ratings downside.

A Balanced Mix Of Upgrades And Downgrades In 2024

Given our expectation for healthy revenue growth and only moderate M&A, we expect a relatively balanced mix of rating actions. This is consistent with the relatively balanced mix of positive and negative outlooks (see chart 9). In 2024, we expect upgrades will likely stem from deleveraging, following leveraging transactions in prior years, while most downgrades will likely come from debt-financed M&A.

Chart 9

Table 5 

This is a notable departure from trends over the past decade, in which credit ratings on Big Pharma broadly deteriorated, with 29 downgrades and six upgrades. We believe pressure on drug prices in the U.S., including the reduced ability to implement annual price increases--previously an industry norm--made it harder for Big Pharma to maintain organic revenue growth, and was a primary driver of the increase in debt-financed M&A and debt leverage, leading to most of these downgrades. Other factors that likely contributed to the wave of debt-financed M&A included an extended period of very low interest rates that ended in 2022-2023, changes to the tax laws in 2018 that provided Big Pharma access to foreign cash balances without adverse tax consequences, and scientific advances that created investment opportunities in areas with prospects for high growth and profits.

Table 6 

Chart 10

Dynamics Of Pharma Subindustries

Big Pharma Companies

The branded drug industry is significantly consolidated, led by about 20 Big Pharma companies.   The Big Pharma companies we rate generated about $700 billion in revenue in 2023 (including modest amounts of non-pharma revenues), which represents more than half of the approximately $1.1 trillion global drug market. Competitive dynamics, however, occur at a more granular level with a limited number of companies and drug products addressing specific diseases. The U.S. represents about 40% to 50% of global pharma industry revenues and is a uniquely attractive market for branded pharma given significantly higher prices (and margins) than other geographic markets.

M&A is an inherent part of the industry structure and helps big pharma sustain revenue growth even through waves of outsized patent expiration.   While most new drugs are initially discovered and developed by small, often pre-revenue start-up companies, successful products--those with a high-likelihood of generating significant revenue--tend to be acquired by big pharma, often in the late stages of development. This is, in part, because big pharma already has the global regulatory, marketing, and manufacturing capabilities and expertise to effectively commercialize these products.

Big Pharma companies also often resort to M&A to support revenue growth, even at the expense of rating downgrades, when their internally generated products alone can't achieve that. Maintaining revenue growth near that of peers is a key priority for Big Pharma companies. Sizable acquisitions by Big Pharma tend weigh on credit metrics and credit ratings as they are usually funded with debt, offer limited near-term profits (EBITDA), and often only provide incremental improvement to the overall business strength.

Big Pharma companies also utilize M&A to accelerate entry into therapeutic areas they consider attractive. For example, many Big Pharma companies pursued M&A in oncology or immunology, two of the largest and fastest growing therapeutic areas, on the heels of advances in scientific understanding of the immune system and the ability to regulate it to help fight cancer and autoimmune diseases. We see similar activity beginning to occur for GLP-1-based products that address obesity.

That said, in recent years Big Pharma companies have focused more of their external investments on partnership and collaboration agreements with smaller start-up companies. These agreements generally involve lower upfront capital investment, allow for greater diversity across investments than large acquisitions, and are less harmful to debt leverage, though these products are typically in the earlier stages of development when there is still a high risk of failure.

We generally view the branded pharma industry favorably from a credit perspective.   This has support from the essential life-extending nature of prescription drugs, high barriers to entry, robust profit margins, and relative insensitivity to the business cycle. This is only partially offset by the substantial ongoing investment needed (through R&D and M&A) to offset the expiration of product revenues when regulatory or patent exclusivity ends, by the drop in profitability when key products lose exclusivity (occasionally unexpectedly), and by the ongoing pressures to constrain spending on prescription drugs, especially in the U.S.

Aside from Big Pharma, we also rate about 13 branded drugmakers that are smaller, more highly concentrated, and more highly leveraged, with speculative-grade ratings; about 21 generic drugmakers, including those selling biosimilar products and branded-generic products; and about 13 contract development and manufacturing services (CDMOs) to the pharma companies; and four animal health companies in the broader pharmaceutical industry.

Speculative-Grade Pharma Companies

The pharmaceutical industry is split between Big Pharma, which refers to about 20 global entities with good product diversity, relatively conservative leverage, and typically investment-grade ratings; and smaller, less innovative, more highly concentrated, and often aggressively leveraged companies with speculative-grade ratings. We expect industry trends to affect the two groups differently:

• Smaller and more aggressively leveraged companies have less capacity for significant debt-financed acquisitions, but our speculative-grade ratings on these companies are often less sensitive to acquisitions, as leverage is already elevated. Moreover, for many of the companies, especially those owned by private-equity sponsors, we generally factor in an expectation for persistently high leverage.
• Lawmakers and pharmacy benefit managers (PBMs, which manage the drug benefits for health insurance companies) generally focus more on large, blockbuster products--often owned by Big Pharma--that can move the economic needle, whereas smaller specialty drugs often fly below the radar. For example, the provision for Medicare negotiation of drug prices in the IRA effectively limits itself to the highest revenue-generating products. In a similar vein, orphan drugs, which have a relatively small patient base, can often achieve very attractive pricing with less pushback from PBMs.
• Smaller companies tend to be more focused on life cycle management (such as offering moderate improvements like more convenient dosing) and price increases to drive growth, rather than investing heavily in R&D to drive innovation. They can therefore be more vulnerable to scientific advances by competitors.

Table 7

Companies Focusing On Generic Drugs, Biosimilars, And Branded Generics

We believe the more intense price-based competition in the generics market reflects:

• The more commodity-like nature of generic drugs;
• The relatively high fragmentation among generic drug makers;
• Our view that competitors in India have grown in scale and quality.
• Increased negotiating power of buyers from the consolidation of buying groups; and
• Ongoing efforts from the private and public sectors to contain health care costs.

The generic drug industry has been under pressure since 2017, from factors including advancing competition from India-based manufacturers, a wave of consolidation among buying consortia, an FDA initiative to clear the backlog of generic products seeking approval, and from exposure to opioid liabilities. Pricing trends were severely negative in the U.S. generics subsector in 2017-2018, with double-digit percent annual declines, although pressures persisted even as that gradually improved to the more typical low- to mid-single-digit percent annual price declines in subsequent years. This pressure contributed to a decline in revenues and profits and to a wave of downgrades in recent years.

Table 8 

We believe competitive dynamics have stabilized and the leading companies have evolved to focus on higher-value products with at least moderate barriers to competition. We expect price erosion to remain at a more normal pace going forward, supporting rating stability for the generic companies in 2024.

We also expect significant opportunities for revenue growth in the blossoming market for biosimilars (the generic equivalent of biologic drugs) in the U.S. (see chart 5 above, table 9), even as that opportunity is attracting many participants and as branded drugmakers cut prices to preserve market share once their products lose exclusivity, which reduces the potential market opportunity for biosimilars.

Table 9

Notwithstanding improved market conditions, generic drug companies still need to constantly develop and launch new products to sustain or grow revenues to offset persistent price erosion on launched products. We believe companies that invest a higher proportion of revenue in R&D, such as Sandoz Group AG, which invested about 9% of revenue in R&D in 2022, will be better positioned to sustain robust organic revenue growth than peers with lower levels of reinvestment, such as Teva Pharmaceutical Industries Ltd. (5.6%) and Viatris Inc. (4.3%). We also view companies with a focus on biosimilars as well as complex-generic drugs as more favorable, as those products generally benefit from higher barriers to entry, less competition, and stronger gross profit potential compared to the generic version of simpler small-molecule drugs. Some drugmakers have a mix of branded and generic drug products.

Table 10

That said, we expect outstanding price-fixing litigation, intensification of competition in some larger biosimilar markets, and a potential increase in FDA inspections of foreign manufacturing facilities as potential risks in 2024.

Outlook for branded-generic products

More than a dozen rated companies are exposed to the "branded-generic" drug market, including leading branded and generic companies such as Sanofi, Viatris, Organon, and Abbott Laboratories.

Branded generics are drugs for which the patent has expired but are marketed under a brand name. Typically, it's the brand used by the original patented product, though in some markets, there are brands other than the original product. The brand implies higher quality, safety, and efficacy than an unbranded generic. These products are priced at a premium over unbranded generics--substantial in percentage terms but still low enough to appeal to middle-class patients paying out-of-pocket.

Demand for branded generics is meaningful in emerging markets including Brazil, Russia, India, China, and other geographies where there is patient concern about the quality of unbranded generics. The market characteristics vary across countries, but these markets generally offer doctors and patients a product choice. Patients often pay for these drugs out-of-pocket. In some markets, such as small countries, there might be no valid alternative to a branded generic, at least for some period. Companies invest in marketing their branded generic products, typically to doctors, to support demand, similar to products on-patent.

Branded generic businesses are not exposed to the sharp drop in revenue that occurs with on-patent drugs, nor the intense price-based competition of unbranded generic drugs in the U.S., where regulatory assurance of high quality makes them interchangeable and commodity-like. This market has support from a steady stream of new products and a rapidly expanding middle class in emerging markets, increasing demand.

We believe revenues for branded generic products often erode over time (typically gradually) as patients (paying out-of-pocket) or health care systems seek to transition to lower-cost options. We believe there can also be more acute pressure in specific geographies driven by changes to government reimbursement. China implemented a volume-based procurement (VBP) policy in 2019 that included several rounds of drug sourcing bidding aimed at increasing products sourced from China and reducing pharmaceutical spending. As a result, branded generic products from foreign manufacturers were subject to significant competition in the country's hospital channel. We believe foreign products with strong brand recognition in the region can somewhat mitigate the loss in sales within the hospital channel by increasing volume in the fast-growing retail channel, in which patients can choose to pay a premium for the brand-name drug. Sales volume in the retail channel is aided by a growing middle class in China that can pay cash for branded drugs, which can limit revenue declines here. These regulatory risks can also be partially mitigated by product and geographic diversification.

Chart 11

Related Research

• Medicare Drug Price Negotiation Holds Long-Term Implications For Pharma, Aug. 22, 2022
• How Business Strength Varies Across The Top Branded Pharmaceutical Companies, June 17, 2022
• How Business Strength Varies Across Speculative-Grade Branded Pharma Companies, Jan. 24, 2022
• Lessons Learned: What Leads to Rating Changes Among Investment Grade Pharma, Jan. 22, 2019
• Why We View Health Care Service Companies As Generally Riskier Than Pharmaceutical and Medical Devices Companies, Jan. 11, 2018