Endo Int'l (ENDP) Corp. Rating Affirmed by S&P Amid Par Pharma Deal

Standard & Poor's Ratings Services affirmed its 'B+' corporate credit rating on Endo Int'l (Nasdaq: ENDP). The outlook is stable.

At the same time, we are affirming our 'BB' rating on senior secured debt co-issued by Endo Luxembourg Finance I S.a.r.l. and Endo LLC, subsidiaries of Endo.

We placed our 'B+' ratings on senior unsecured debt co-issued by Endo Finance LLC and Endo Finco Inc., subsidiaries of Endo, on CreditWatch with negative implications, reflecting the dilutive impact of the expansion in overall debt levels on unsecured recovery. We will resolve our CreditWatch once the details of the acquisition financing are announced.

"The rating affirmation reflects our belief that Endo can successfully integrate Par's business, enhance cash flow generation, and deleverage its balance sheet, albeit at a slower pace than we had originally expected," said Standard & Poor's credit analyst Colm Kelly.

The ratings on specialty pharmaceutical company Endo reflect business risk that is characterized by a sizable and diverse high-margin pharmaceutical portfolio offset by increased generic competition to lead product Lidoderm and relatively high leverage.

Endo competes in the specialty branded and generic drug business, and has a growing international presence in select markets. The company's business continues to be in transition. The company's long-standing top products--the branded patented pain medication patch Lidoderm as well as a number of other key branded products--have lost market exclusivity in recent years, and sales and earnings have significantly declined. To offset the lost EBITDA and cash flows, the company has been aggressive on the acquisition front, acquiring or planning to acquire a number of companies in the past year, such as generic drug makers Boca Pharmacal LLC and Dava and specialty pharmaceutical companies Paladin Labs and Auxilium.

Endo focuses on difficult-to-manufacture generics that are less susceptible to competition, steadily launching new generic drugs and capitalizing on pricing opportunities. The company has a solid franchise in pain management medication, which also has relatively more limited competition.

The acquisition of Par will provide Endo with additional scale, product diversification, and research and development capabilities in the competitive generic pharmaceutical market, where cost, reliability, and breadth of product offering are critical, but does not alter our assessment of Endo's business risk as "fair".

Our stable outlook incorporates our expectations that the company will effectively and efficiently integrate its acquired businesses, and quickly realize synergies. Margins should remain steady to improving. However, we also expect the company will remain acquisitive, keeping leverage in excess of the 6x area.

Should Endo encounter a disruption to its current solid free cash flow generation, possibly due to acquisition missteps or a weakening of its generic franchise, we would consider a downgrade.

A sustained decline in debt leverage, to under 5x, would drive a future ratings upgrade. However, given our expectation that Endo will remain acquisitive over the long term, we think an upgrade due to de-levering is unlikely. Instead, an upgrade scenario is more likely predicated on the company achieving a greater presence in the specialty and generic drug markets and a more established product pipeline, factors that would strengthen business risk. This would likely occur over a multi-year timeframe and would be indicated by the company generating incremental generic market share from its existing asset base.

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