Moody's Assigns 'B1' Corp. Family Rating to Lannett (LCI); Outlook Stable

Moody's Investors Service assigned a B1 Corporate Family Rating and B1-PD Probability of Default Rating to Lannett Company, Inc. ("Lannett") (NYSE: LCI). Moody's also assigned a B1 rating to the proposed $1.285 billion senior secured credit facility, including a $1.160 billion term loan and a $125 million revolving credit facility. The proceeds of the term loan, along with cash on hand, will be used to fund the pending acquisition of Kremers Urban ("KU") for $1.230 billion in cash. KU is currently a wholly owned subsidiary of UCB S.A. Moody's also assigned a Speculative Grade Liquidity Rating of SGL-1, signifying very good liquidity. The outlook is stable. This is the first time that Moody's has rated Lannett.

Ratings assigned:

Corporate Family Rating at B1

Probability of Default Rating at B1-PD

$1.160 billion senior secured term loan at B1(LGD4)

$125 million revolving credit facility at B1(LGD4)

Speculative Grade Liquidity Rating at SGL-1

The outlook is stable.

RATINGS RATIONALE

The B1 Corporate Family Rating reflects Lannett's modest size -- despite doubling its revenue with the KU acquisition -- in the rapidly consolidating generic drug industry. The rating is also constrained by Lannett's rapid growth over the past several years which has been driven largely by opportunistic price increases. Moody's believes that, given significant recent scrutiny on generic drug prices, these types of price increases will be harder to achieve going forward. In addition, large price increases on generic products tend to draw more competitors into a market, potentially making Lannett's very high profit margins unsustainable. The rating also reflects the company's revenue concentration in a relatively limited number of drugs and its reliance on third party manufacturers. The rating also reflects Lannett's limited experience in acquiring and integrating companies of significant size.

The ratings are supported by Lannett's moderate leverage with debt/EBITDA of under 3.5x. The B1 rating incorporates Moody's expectation that adjusted debt to EBITDA will generally be maintained below 4.0x even if Lannett faces margin pressure resulting from increased competition on key products. The ratings also incorporate Moody's expectation that the company will generate consistently positive free cash flow. Excluding some temporary expansion capital expenditures in 2016-2017, Moody's anticipates free cash flow/debt of greater than 5%. The rating is also supported by Moody's view that the company will use free cash flow to repay debt and will not pursue other large acquisitions in the next 12-18 months, although some smaller (<$200 million) deals are likely.

The Speculative Grade Liquidity Rating of SGL-1 (very good liquidity) is supported by Moody's expectation that Lannett will maintain at least $100 million of cash and generate positive free cash flow over the next 12 months. The liquidity assessment is also supported by the presence of a $125 million revolver which Moody's expects will be undrawn at the close of the KU acquisition. There will be no covenants on the term loan and the revolver will have a springing leverage covenant which is only tested when more than 30% of the facility is drawn.

The stable outlook reflects Moody's view that the company's relatively moderate financial leverage will allow it to absorb potential operating set-backs that could occur as a result of new competitive entrants on key products.

Moody's could upgrade the ratings if Lannett successfully integrates KU and demonstrates the ability to generate sustained organic growth through new products launches. Further, if Moody's expects the company to maintain adjusted debt to EBITDA below 3.0x the ratings could be upgraded.

Moody's could downgrade the ratings if the company's revenue or profit margins deteriorate due to increased competition or other challenges on key products. Specifically if adjusted debt to EBITDA is expected to be sustained above 4.0x Moody's could downgrade the ratings. Further, material weakening of liquidity, rising legal or regulatory risk or acquisitions that materially add debt could also lead to a downgrade.

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