Moody's Lifts Outlook on Akorn (AKRX) to Positive; Ratings Affirmed

Moody's Investors Service, ("Moody's") affirmed the B1 Corporate Family Rating and B1-PD Probability of Default Rating of Akorn, Inc. (Nasdaq: AKRX). Moody's also affirmed the B1 rating on the senior secured term loan, which constitutes the vast majority of the debt in the capital structure. Moody's also revised the Speculative Grade Liquidity Rating to SGL-1 (signifying very good liquidity) from SGL-2 (good liquidity). Concurrently, Moody's revised the outlook to positive from stable.

The rating actions follow Akorn's filing of its restated 2014 10K and 2015 10K, along with its most recent 10Q. The company is now current on its SEC filings, following a year-long restatement and audit committee investigation into accounting practices.

The positive outlook reflects the company's strong growth in earnings and cash flow over the last year. The positive trends have been fueled by reduced competition on certain products leading to gains in volume and price increases, as well as some new product launches. The company's low leverage and strong cash flow positions the company well to invest in long-term growth, both through organic investment and acquisitions.

The improvement in the liquidity rating reflects the expectation for strong cash flow from operations, full availability under its $150 million ABL facility and minimal covenant constraints.

Ratings affirmed:

Corporate Family Rating, B1

Probability of Default Rating, B1-PD

Senior secured term loan rating, B1 (LGD4)

Ratings upgraded:

Speculative Grade Liquidity Rating, to SGL-1 from SGL-2

The outlook is positive.

RATINGS RATIONALE

The B1 rating is constrained by Akorn's modest size and its niche position in the highly competitive generic drug industry where it competes against significantly larger companies. The ratings are also constrained by Akorn's concentration of profits in a limited number of products, which can lead to operating volatility when competitors enter or leave the market. The rating is also constrained by the company's history of financial reporting and internal control weaknesses. Further, Moody's expects that Akorn will return to making acquisitions, now that its financial restatements appear complete, which will likely lead to higher leverage and integration risk.

The B1 rating is supported by Akorn's credit metrics, which are currently very strong, including low adjusted debt/EBITDA of around 2.0x and free cash flow to debt of around 27%. The ratings are also supported by Akorn's specialization in alternate dosage form drugs, including injectables, ophthalmics and topicals. Many of Akorn's products have relatively high barriers to entry versus typical oral solid generic drugs. This allows Akorn to garner and sustain higher profitability versus peers.

The ratings could be upgraded if Akorn establishes a track record of timely SEC filings and an acquisition strategy that balances shareholder and creditor interests. Specifically, if Moody's expects adjusted debt to EBITDA will be generally sustained below 3.5 times and free cash flow to debt to be sustained above 15%, the ratings could be upgraded.

Large debt financed acquisitions or share repurchases such that adjusted debt to EBITDA is expected to be sustained above 4.5 times could lead to a downgrade. Further, any significant adverse change in the competitive landscape or a material regulatory or supply issue at one of Akorn's manufacturing facilities could also lead to a downgrade.

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