With important patents set to expire and existing drug development pipelines proving disappointing, large cap U.S. pharmaceutical companies are likely to make more acquisitions down the road to shore up their vulnerable product stables.
But unlike in the past, these companies will be forced to use more debt to make their purchases, which likely means falling dividend payout ratios across the sector, says Barbara Ryan, Deutsche Bank analyst.
"Historically, pharma companies have had high dividend payout ratios owing to strong cash flows, long product life cycles, and underleveraged balance sheets," Ms. Ryan said in a note to clients, adding their relatively high P/E's allowed them to use stock to fund large acquisitions.
"Today, things are far different; profit life cycles are shorter, new product development has been disappointing, and P/E's have fallen dramatically. Much‐needed acquisitions must now be funded with relatively low‐cost debt. With increased leverage, we expect payout ratios to fall into the 30's versus their historical mid‐40's."
To demonstrate her point, Ms. Ryan noted that Pfizer Inc. recently cut its dividend by 50% to help fund its purchase of rival drug maker Wyeth.
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