Fitch: Steady Demand, Pricing Pressures for US Healthcare in '08

Business Wire, Dec 5, 2007

CHICAGO -- Fitch Ratings expects that the U.S. Healthcare sector will face an operating environment in 2008 that is similar to 2007, with strong demand and cost containment efforts offsetting pressure from pricing and product issues. Fitch's 2008 outlook for the U.S. Healthcare sector is stable.

Healthcare demand in the U.S. remains strong due to the aging demographic of its population along with the industry's growing ability to treat a wide range of health issues with new innovative products and technology. This strength in demand is a key foundation upon which Fitch expects the industry to support steady revenue growth in spite of competitive and regulatory pressures that can have a negative impact on pricing and costs. Pricing pressure remains the largest offset to strong demand growth in driving revenue growth.

While Fitch expects that the U.S. Healthcare industry will generate revenue growth in 2008 at a rate that approximates 2007, many of the same pricing pressures remain. For example, the generic drug industry will experience strong volume growth from the loss of patent exclusivity of branded pharmaceuticals representing greater than $8 billion of annual U.S. revenues. Additionally, the growing popular desire to control healthcare costs is leading to ever greater and more rapid generic drug substitution. Branded pharmaceutical companies have been the most negatively affected by the growth in generics and this trend is expected to continue in 2008 and accelerate in 2010 with the patent expiration of a variety of very popular drugs. Interestingly, the generic drug pharmaceutical companies also face pricing pressure as generics move even more quickly to commodity pricing levels with the increasing legitimacy of low-cost producers in the U.S. market, including foreign manufacturers. Similarly, Fitch expects medical device companies to continue to face pricing and volume challenges associated with drug-eluting stents (DES) and cardiac rhythm management (CRM). These challenges will lead to continued soft revenue growth for those companies in 2008 and make it more important that new product development and acquisitions be successful to meet the profitability void left by DES and implantable cardioverter defibrillators (ICD).

In contrast to the above, Fitch expects that favorable pricing trends and continued acquisitions will offset weak patient volumes and continued problems in uncompensated care in the for-profit hospital segment in 2008.

Fitch anticipates that the U.S. Healthcare industry will produce EBITDA growth in 2008 comparable to 2007. In spite of general pricing pressure, EBITDA margins will be supported by on-going cost containment and various restructuring activities of some participants. Fitch believes that capital spending will be relatively flat in 2008 compared to 2007 and that this will lead to stable free cash flow generation. While shareholder-friendly activities are expected to continue in 2008, Fitch believes that this will continue at a lesser extent due to decreased leverage buyout pressure associated with a tightening credit environment. Acquisition activity is generally high in the U.S. Healthcare industry due to the need to fill product pipeline gaps, acquire manufacturing capabilities, or to scale existing business segments. While acquisition activity was very strong for the sector in 2007, Fitch believes this will continue in 2008 with further industry consolidation and a focus on 'bolt-on' acquisitions. Nevertheless, Fitch expects that debt totals will remain relatively stable for the industry in 2008.

Finally, Fitch notes that sector performance could be significantly affected by the enactment of any regulatory reform. Fitch expects that many topics of interest will receive national attention during the 2008 election year, including: universal healthcare, a pathway for generic biologics, patent reform, and direct government pricing negotiations. However, despite the increased attention to regulatory topics in 2008, Fitch believes that meaningful changes to policy are unlikely to occur until after the presidential election.

Fitch believes that credit ratings for most U.S. Healthcare companies will be stable in 2008. Additionally, Recovery Ratings, which apply to speculative grade operators, should be relatively stable as underlying operational or asset values are expected remain unchanged and debt levels are expected to be steady.

PHARMACEUTICAL MANUFACTURERS:

Fitch expects that the U.S. pharmaceutical industry will see a stable outlook in 2008 and will face an environment characterized by sustained pressure on branded prescription drug pricing while maintaining solid investment toward R&D programs. Companies' efforts to broaden product portfolios will be challenged by increased regulatory agency scrutiny of adverse effects, particularly those pertaining to the heart and kidney. The total of FDA approvals of new molecular entities in the coming year could be near the low experienced in 2007. Prescription drug cost control by managed care and third-party payers, with emphasis on generic substitution, will exacerbate revenue losses and possibly pressure margins for those firms with looming U.S. drug patent expires in the following year, specifically Merck (with Fosamax), Abbott (with Depakote), and J&J (with Risperdal and Topamax). Margin support in 2008 will be derived from the commercialization of higher-margin specialty drugs, especially oncology products, and continued cost containment initiatives. Fitch expects margins for brand-name pharmaceutical manufacturers to hold relatively constant during 2008 despite the difficult industry conditions.