Moody’s: Pharmaceutical asset sales could affect credit ratings

New York, May 03, 2011 — While drug-makers face increasing pressure to divest non-pharmaceutical businesses, selling assets may undermine credit ratings by reducing business diversity and scale, according to a new report from Moody’s Investors Service.

As share prices remain depressed some pharma giants may sell assets in order to fund share repurchases and dividends, while others may consider such businesses no longer core parts of their overall business strategy. Recent higher market valuations for consumer-product businesses could also prompt companies to consider divestitures.

However, asset sales are often credit-negative if the proceeds are not deployed to debt reduction. Negative credit implications may result from lower diversity and a smaller business scale in addition to potential loss of more stable revenue streams.

Companies primarily focused on pharmaceuticals but still owning some non-pharma assets include Merck & Co., Inc., Pfizer Inc., GlaxoSmithKline plc and sanofi-aventis. Companies that are considerably more diverse and broad-based in healthcare include Johnson & Johnson, Abbott Laboratories and Novartis AG.

“Beyond assets sales, a more radical and transformative option would be for pharmaceutical businesses to split themselves into two,” said Michael Levesque, a Moody’s Senior Vice President.

A split along growth or geographical lines could unlock value if equity valuations for the two smaller companies are greater than that of the combined entity, according to the report.

“This strategy remains hypothetical, but if undertaken, the credit quality of the two segments could be significantly weaker than that of the whole company,” cautioned Levesque.

The new Special Comment, “Global Pharmaceutical Industry: Asset Sales Come With Risks,” is available on Moodys.com.