Investors paying price as drugmakers flood bond market

March 14, 2019

Drug companies that have rushed to borrow in the bond market this year are finding out that their actions have consequences for investors.

The repercussions can be seen in spreads, the risk premium investors pay above Treasuries to own bonds in the sector. Health care has underperformed the high-grade market this year, narrowing just 19 basis points since January. The Bloomberg Barclays U.S. IG Corporate Bond Index, by contrast, has narrowed by 32 basis points year-to-date.

“Part of the spread weakness across the investment-grade healthcare sector could be attributed to a fair amount of new issuance in February and March in conjunction with a sizable new issue pipeline,” Bloomberg Intelligence analyst Mike Holland said in an email.

Pharmaceutical companies have sold about $15 billion in new bonds this year, thanks to Indianapolis-based Eli Lilly and Co., Pfizer Inc., and Merck & Co., which tapped the primary market in succession in late February and early March. Including health care companies, the sector has sold nearly $20 billion. That is more than 10 percent of high-grade corporate supply this year, according to data compiled by Bloomberg News.

Health care didn’t see the same kind of underperformance after CVS sold $40 billion last March in the third-largest corporate bond sale on record to fund its acquisition of Aetna Inc. M&A drove a 90 percent increase in health care supply in 2018, yet the sector outperformed the broader market.


Health care is expected to account for some of the largest M&A-related bond deals of 2019, according to data provided by Wells Fargo & Co. analysts led by Winifred Cisar in a Feb. 8 report.

Bristol-Meyers Squibb Co. may issue $25 billion this year to pay for part of its $74 billion acquisition of Celgene Corp. The drugmaker faces a shareholder vote April 12 on the takeover. If approved, it would be the largest biotechnology or pharmaceutical acquisition on record.

Other names in the pipeline include UnitedHealth Group Inc. which may sell as much as $4 billion of debt to fund its $4.9 billion purchase of DaVita Medical Holdings. GlaxoSmithKline may sell up to $2 billion to help fund its acquisition of Tesaro Inc, according to Wells Fargo.

Eroding margins

Drugmaker Mylan NV, which sold $1.5 billion of bonds late last year, is at risk of slipping to junk in part because business pressures—including falling drug prices—are driving margins lower, according to BI analysts Holland and Madeleine Hart.

On Tuesday, February’s U.S. core inflation release revealed that prescription-drug prices fell 1 percent on a monthly basis, the most on record, bringing the annual decline to 1.2 percent—the largest drop since 1972. Possible government action may help perpetuate this slide, as President Donald Trump and the Democratic majority in the House of Representatives have expressed a desire to lower drug prices.

While high leverage is another major concern for Mylan, price pressures and a growing supply pipeline are just two of many things the company—and the broader sector—will need to come to terms with in 2019.


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