Why Moody's Upgrade Of CVS Caremark (CVS) Heralds Pharmaceutical Giants' Woes

 @AlexCKaufman
on September 24 2013 5:17 PM
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CVS Caremark is offering more generic drugs, and that means it can negotiate better rates than it could with branded big-name pharmaceuticals. REUTERS/Mike Segar

Big pharmaceutical companies’ woes are CVS Caremark Corporation’s (NYSE:CVS) win.

Moody’s Investors Service upped the retailer’s senior unsecured rating one notch to Baa1 on Monday, placing it three levels into investment grade. The rating raise comes a year after the so-called “patent cliff,” when patents on many branded drug offerings expired, opening the market to cheaper generic equivalents.

“The margins that retailers get on generics are generally better than on branded products,” Damien Conover, an analyst at Morningstar, told International Business Times on Tuesday. “Usually, you have multisource on the generic, as opposed to single source on the branded drug, so retailers can negotiate better terms on generics.”

Moody’s rated CVS’s outlook as stable and said it believes operating income will continue to grow.

“CVS Caremark’s earnings will continue to benefit from numerous positive industry trends including solid growth in specialty pharmacy, increasing generic utilization rates, further branded drugs coming off patent and the high growth in the U.S. population over the age of 65," Maggie Taylor, a senior credit officer at Moody’s, said in a note.

Going forward, Conover said even more patents will expire in 2015, further stabilizing CVS’s outlook.

“There are still significant patent losses, 2015 is the next big year,” he said. “But it will not be as big as the patent cliff that everyone had been talking about last year.”

So far, big-brand drug manufacturers from Eli Lilly & Co. (NYSE:LLY) to GlaxoSmithKline PLC (NYSE:GSK) have consistently sued to buy extra time on their licenses -- figuring, it would seem, they they’d lose less on legal fees than on ceding their exclusivity in certain treatment markets.

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