OREANDA-NEWS. Fitch's stable sector outlook for the US corporates healthcare industry in 2016 reflects an operating environment geared for growth but presenting secular challenges that were crystallized in a recent public debate about drug pricing.

Along with health insurer consolidation activity and growing consumerism, the drug pricing debate validates concern about the longer-term maintenance of the industry's profitability. Fitch believes it is increasingly critical for companies to articulate a value proposition and demonstrate success executing that vision to avoid becoming a target of political scrutiny and pressure from payors and consumers.

While drug pricing recently became a high profile topic of media coverage and political debate, the evolution towards a value-based environment for healthcare companies is nothing new. Industry management teams have focused on adjusting business models to shore up pricing power and preserve profitability in response to the dynamic operating environment. Merger and acquisition activity has so far been an important part of the industry's response to the value debate, and Fitch expects another busy year for M&A in healthcare in 2016.

The Rating Outlook has been revised to Stable from Negative, despite the pressure debt financed M&A can cause on the financial profile. The change partly reflects more room in the ratings, as several companies have already been downgraded because of M&A related deterioration of the balance sheet. It also reflects Fitch's belief that the long-term business profile benefits of M&A in the healthcare industry often outweigh the short-term stress on the financial profile.

The biggest risk to the Stable Rating Outlook in 2016 is headline risk to stock prices during debates leading up to the presidential election. Volatile or falling equity valuations could lead to more aggressive capital deployment, particularly since Fitch expects credit market conditions to remain accommodative for healthcare issuers.

The risk that the sector outlook is revised to negative before the elections next November is small but possible if it appears that the regulatory environment in the US will be much less favorable for the industry under a new administration.