Biotech companies' strong earnings and cash flow reported in the first nine months of 2020 may continue for the rest of the year and 2021, in our view, but the sector has a more aggressive capitalization policy than pharmaceutical and managed-care peers. The sector's credit ratings are also slightly lower than those of pharmaceuticals.
Cash flows offset balance-sheet debt
The biotech companies have an aggressive capitalization policy, highlighted by large amounts of debt on their balance sheets. This is offset to an extent by healthy operating cash flows and cash on hand, especially for larger companies such as Amgen, Gilead and Biogen. Amgen and Gilead have $34.3 billion and $29.3 billion of debt, respectively, comprising about 87% of the total held by the five biggest biotech companies, which also include Regeneron and Vertex. The group's aggregate operational cash flow remained robust at $23 billion in the first nine months of 2020 -- 83% contributed by Amgen, Biogen and Gilead. Near-term debt maturities are low at $4.2 billion, with $1.45 billion and $2.8 billion due in 2021 from Amgen and Gilead, respectively.
Biotech liquidity supports dividends, buybacks
Biotech companies continue to have larger stock-buyback programs and more generous dividend policies than other health-care sectors, with Amgen and Gilead generating $5 billion of dividends year-to-date. Biogen and Regeneron executed more than 73% of the group's total share repurchases of $16 billion, with Amgen and Gilead contributing $8.6 billion combined. The larger biotech companies have about $9 billion of bank lines in total.
Biotech credit ratings tend to be lower than for pharmaceuticals: Amgen and Biogen are rated Baa1/A- by Moody's and S&P, with Gilead a notch higher. While we don't expect ratings to be lowered in the near term, any attempts to increase buybacks or dividends could gain the attention of the credit-rating companies and potentially lead to downgrades.
