We project a relatively balanced mix of upgrades and downgrades given our expectation for healthy revenue growth, moderate mergers and acquisitions (M&A), and notwithstanding modest further pressure from drug price reform in the U.S. This is consistent with the current distribution of ratings with positive and negative outlooks.

Big Pharma's Revenue Growth Will Remain Healthy Through 2027

We expect healthy organic revenue growth of at least low- to mid-single-digit percent on average for the large, global, typically investment-grade, branded pharmaceutical companies (Big Pharma). This is primarily due to advances in medical science leading to new products, especially in the therapeutic areas of:

• Oncology, such as antibody drug conjugates, bispecifics, and combination products;
• Autoimmune disorders (immunology), despite competition from biosimilars;
• Neuroscience (including psychiatric and neurodegenerative indications); and
• GLP-1-based treatments for obesity.

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

Supporting our expectations for growth are a healthy wave of new drug approvals by the Food and Drug Administration (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

Our revenue forecast incorporates relatively flat trends in net prices in the U.S. because companies are no longer able to raise prices annually (see chart 3). In addition, we are seeing an uptick in the cadence of products losing exclusivity over the next few years (see chart 4) and increasing biosimilar competition in the U.S. (see chart 5).

Headwinds from the Inflation Reduction Act (IRA) legislation are also pressuring pricing trends. These include the implementation of Medicare negotiation on certain products, which is first effective January 2026 (see tables 2 and 3), and the impact of the Medicare redesign (which reduces out-of-pocket costs to patients but increases the portion of costs pharma companies have to concede to Medicare for patients with "catastrophic" costs) that went into effect January 2025 (see chart 6).

The extent of debt-financed M&A activity (which has been the primary driver of downgrades for Big Pharma over the past decade) and the potential for further reforms on the U.S. drug industry are the risk factors most likely to influence our ratings. We discuss these considerations and our expectations for those below.

Chart 3

Chart 4

Chart 5

Table 2

Table 3

Chart 6

Moderate M&A Activity In 2025

We believe M&A is an essential feature of the pharmaceutical industry because a substantial portion of innovation occurs at small biotech companies that are not equipped to manufacture and market blockbusters products as effectively as Big Pharma. Moreover, we believe maintaining healthy revenue growth is a high priority for Big Pharma and companies with stagnant or declining revenues are likely to pursue acquisitions to achieve robust revenue growth.

Indeed, many big pharma companies have demonstrated a willingness to increase leverage over the last decade to achieve revenue growth in line with industry peers, even at the expense of ratings downside. In fact, most of the downgrades to Big Pharma in recent years were the result of debt-financed acquisitions. See "Lessons Learned: What Leads To Rating Changes For Investment-Grade Pharmaceutical Companies " published Jan 22, 2019.

We expect M&A to moderately increase in 2025, back in line with the average levels over the past decade (see chart 7). We view the new U.S. administration and Republican majority as more supportive of business interests (in contrast to the intense scrutiny of M&A, particularly in the pharmaceutical industry by the Federal Trade Commission, under the prior administration).

On the other hand, we expect the appetite for M&A to be tempered by already robust organic revenue growth for most companies over the next three years, a significant increase in borrowing costs, and debt leverage that is still near historically high levels at many companies (see chart 8). See Appendix 2 for the estimated debt capacity for Big Pharma companies.

Chart 7

Chart 8

Proposed Reforms Only Modestly Increase Downside Risk

After a short-lived improvement during the height of the COVID-19 pandemic, the pharma industry's reputation has declined again in the U.S. (see chart 9), which we believe increases the industry's susceptibility to further drug price reform. Indeed, there is bipartisan support for further drug price reform, and a variety of regulations and laws are being proposed and considered, including some focusing primarily on pharmacy benefit managers (PBMs; which act as middlemen, often owned by health insurance companies).

Although we believe passage of the IRA indicates the industry's influence over lawmakers has waned, we believe most U.S. lawmakers significantly value the societal 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.

For example, Medicare price negotiation legislation in the IRA is constrained to a limited number of products that have already been marketed very successfully for many years. Similarly, the IRA provisions relating to the redesign of Medicare part D, which increases the portion of costs drug companies have to concede for patients with "catastrophic" costs, also includes offsetting provisions that are favorable for drugmakers, namely reduced out-of-pocket costs to patients, which provide a tailwind for volumes.

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

Chart 9

That said, there are a variety of outstanding drug price reform proposals (see table 4). We expect some of the more moderate ones that have bipartisan support may pass. We expect they will likely affect some companies more than others. We also believe pharma companies will adapt and continue to prioritize investment in R&D and M&A to support revenue growth, even if industry conditions become less favorable, albeit potentially at the expense of margin pressure, increased debt leverage, or a need to lower shareholder returns.

Table 4

Stable Industry Outlook Is Consistent With The Rating Outlook Distribution

Given our expectation for healthy revenue growth, only moderate (i.e., average) levels of M&A in 2025, and moderate pressure from drug price reform, we expect a relatively balanced mix of upgrades and downgrades. This is consistent with the relatively balanced distribution of positive and negative outlooks (see chart 10). We expect upgrades will often stem from deleveraging following leveraging transactions in recent years, while downgrades will often result from debt-financed M&A.

Chart 10

This stability is consistent with the industry dynamics in 2024, but a notable departure from trends over the decade ending December 2023, 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. We believe this contributed to 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 changes to the tax laws in 2018 that provided Big Pharma access to foreign cash balances without adverse tax consequences, an extended period of very low interest rates that ended in 2022-2023, and scientific advances that created investment opportunities in areas with prospects for high growth and profits.

Table 6

Chart 11

Appendix 1: Key Dynamics Of Pharma Subindustries (Branded, Generic, and Branded-Generic)

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 $800 billion in revenue in 2024 (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 40%-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 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 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 to focus on products in late stages of development or early stages of commercialization, with prospects for a trajectory of revenue growth. They are also typically financed with debt. These acquisitions tend to weigh on credit ratings because the increase in debt leverage usually more than offsets the incremental improvement to 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've recently seen similar activity in the areas of neuroscience (both for psychiatric and neurodegenerative indications) and GLP-1-based products that address obesity.

In recent years, Big Pharma companies have shifted more of their external investments to partnership and collaboration agreements with smaller start-up companies. These agreements generally involve lower upfront capital investment and are less harmful to debt leverage (albeit often with subsequent milestone or royalty payments). These agreements allow for greater diversity across investments than large acquisitions, 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.   This stems from the essential life-extending nature of prescription drugs, high barriers to entry, robust profit margins, and relative insensitivity to the business cycle. It's 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 about 22 Big Pharma companies, the pharma industry includes:

• About 10 branded drugmakers that are smaller, more highly concentrated, and more highly leveraged, with speculative-grade ratings;
• About 23 generic drugmakers, including those selling biosimilar products and branded-generic products;
• About 11 contract development and manufacturing organizations (CDMOs) that support pharma companies; and
• About four animal health companies in the broader pharmaceutical industry.

Speculative-grade branded pharma companies

The pharmaceutical industry is split between Big Pharma 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 ratings on these companies are often less sensitive to acquisitions because their 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 PBMs, which manage the drug benefits for health insurance companies, generally focus their attention 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 the above factors, as well as an FDA initiative to clear the backlog of generic products seeking approval and exposure to opioid liabilities. Pricing trends were severely negative in the U.S. generics subsector in 2017-2018, with annual price declines exceeding 10%, but that gradually improved to the more typical low- to mid-single-digit percent area in subsequent years. This pressure contributed to a decline in both revenue and profits, a wave of downgrades, and several defaults 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 annual price erosion to remain at a more normal pace going forward, supporting rating stability for the generic companies in 2025, in line with the improved operating performance 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 and table 8 below). This comes even as that opportunity is attracting many participants and branded drugmakers cut prices to preserve market share once their products lose exclusivity, which reduces the potential profit margins on biosimilars.

Table 9

Notwithstanding improved market conditions, generic drug companies still need to constantly develop and launch new products to offset persistent price erosion on launched products and sustain or grow revenues. 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 2023, will be better positioned to maintain robust organic revenue growth over the long-term than peers with lower levels of reinvestment, such as Viatris Inc. (5.2%), and Teva Pharmaceutical Industries Ltd. (6%).

We also view companies with a focus on biosimilars and complex-generic drugs as more favorable because those products generally benefit from higher barriers to entry, less competition, and stronger gross profit potential compared with companies focusing on 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 competition in some larger biosimilar markets and a continued increase in FDA inspections of foreign manufacturing facilities as potential risks in 2025.

Outlook for branded-generic products

More than a dozen of the companies we rate are exposed to the "branded-generic" drug market, including leading branded and generic companies such as Sanofi, Viatris Inc., Organon & Co., 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 significant in emerging markets including Brazil, Russia, India, China, and other geographic regions 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. 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 competing generic products effectively interchangeable and commodity-like. This market has support from a steady stream of new products and a rapidly expanding middle class in emerging markets.

We believe revenues for branded generic products often erode over time (typically gradually) as patients or health care systems seek to transition to lower-cost options. We believe there can also be more acute pressure in specific geographic regions driven by changes to government reimbursement. China implemented a volume-based procurement 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 pressures. These regulatory risks can also be partially mitigated by product and geographic diversification.

Outlook for contract development and manufacturing organizations

Some CDMOs focus on the earlier phases of drug discovery and development, while others focus more on the later stages of development and the commercial stage of the product life cycle. Those focused on the earlier stages tend to be more volatile because they are subject to the cyclical swings in venture capital funding for pre-revenue biotech ventures, including higher cancellation risk on existing programs.

Indeed, CDMOs experienced some weakness in 2022-2024 due to a soft biotech environment, a decline in COVID-related revenue, and vulnerability in nutritional supplements. Moreover, certain large drugmakers have been shifting some investment away from early-stage development programs toward products in later stages that are less risky and offer a quicker return on investment. Despite this softness, capacity for the manufacturing of complex products requiring more advanced technologies remains constrained, in part due to strong demand for GLP-1 products ( including the acquisition of three manufacturing sites by Novo Nordisk for $11 billion, as part of its immediate parent's, Novo Holdings A/S, $16.5 billion acquisition of CDMO Catalent Inc. in December 2024).

Although biotech funding and the number of investigational new drug (IND) applications modestly improved in 2024, relative to a particularly weak 2023, prospects for revenue growth in 2025 remain uncertain given that the number of newly formed biotech companies declined about 30% in 2024 following a 20% decline in 2023.

Separately, the proposed BioSecure Act legislation in the U.S. appears to be influencing drugmaker contracts with CDMOs despite it not yet having been signed into law. The proposed bill effectively requires U.S. pharma companies to stop contracting with biotech companies linked to the government of China (or of other countries the U.S. deems a foreign adversary) due to the perception of security concerns. The proposed bill specifically includes China-based CDMOs Wuxi AppTec and Wuxi Biologics, which had nearly 50 facilities combined in 2024 spread across the globe. To mitigate industry disruption, the proposed bill gives companies a handful of years to address existing contracts with these entities.

In December 2024, Wuxi AppTec announced an agreement to sell its cell and gene therapy business (which had five facilities) to U.S.-based private equity company Altaris LLC. In January 2025, Wuxi Biologics announced the sale of a facility in Ireland to Merck for about $500 million. We expect these companies may sell additional assets if the proposed bill is signed into law.

Table 11

Chart 12

Appendix 2

Table 12

Table 13

*Table 13 data as of Jan. 7, 2025.

Related Research

• Issuer Ranking: Global Pharmaceutical Companies: Strongest To Weakest, Jan. 9, 2025
• How Business Strength Varies Across Top Branded Pharmaceutical Companies (2024 Update), Aug. 6, 2024
• How Business Strength Varies Across Speculative-Grade Branded Pharma Companies, Jan. 24, 2022
• Medicare Drug Price Negotiation Holds Long-Term Implications For Pharma, Aug. 22, 2022
• Lessons Learned: What Leads to Rating Changes For Investment-Grade Pharmaceutical Companies, Jan. 22, 2019
• Why We View Health Care Service Companies As Generally Riskier Than Pharmaceutical And Medical Device Companies, Jan. 11, 2018