S&P Lowers Outlook on Concordia International (CXRX) to Stable; Ratings Affirmed

August 23, 2016 3:33 PM EDT

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S&P Global Ratings affirmed its 'B' corporate credit rating on Concordia International Corp. (Nasdaq: CXRX) and revised the rating outlook to stable from positive. At the same time, we affirmed our 'B+' rating on the company's senior secured credit facilities and our 'CCC+' rating on the unsecured debt.

The recovery rating on the senior secured debt remains '2', indicating expectations for substantial (70%-90%, at the low end of the range) recovery in the event of a payment default. The recovery rating on the unsecured debt remains '6', reflecting our expectation for negligible (0%-10%) recovery in the event of a payment default.

"The outlook revision on Concordia International follows the recent weak quarter characterized by heightened competitive pressures and the impact of Brexit," said S&P Global Ratings credit analyst Kim Logan. The company faced the launch of an earlier-than-expected generic competitor to Nilandron, a treatment for metastatic prostate cancer, in July 2016, which we expect will hurt second-half 2016 volumes. Increased competition in the treatment for irritable bowel syndrome resulted in a 31% decline in Donnatal sales and an additional generic competitor to Plaquenil caused significant price erosion. This led Concordia to take a $567 million impairment charge to reduce the carrying value of Nilandron® and Plaquenil. In addition, Concordia reported lower revenues in its international business as a result of the Brexit vote and the associated change in foreign exchange rates. As a result, we have revised our 2016 and 2017 EBITDA forecast down and now expect 2016 leverage of 6.9x compared with our previous expectation that leverage would decline to about 6.0x this year.

Our corporate credit rating on specialty pharmaceutical company Concordia International Corp. reflects the company's still relatively small size and limited ability to raise prices and grow organically, offset in part by its high margins and focus on niche markets that do not attract much competition.

Concordia's portfolio consists of a mix of products that, while often no longer benefiting from patent protection, enjoy some barriers to entry, such as having a well-known, long-established brand with prescribers or in some cases facing difficulty getting a generic approval. Its international business also focuses on acquiring drugs with some barriers to entry, such as those that are difficult to manufacture or are in small market niches with limited competition.

The stable outlook reflects our expectation that leverage will remain above 6x over the next two years despite our projections for solid free cash flow generation. It also reflects our expectation that Concordia's international businesses will continue to grow and that the company will maintain EBITDA margins above 50%.

We could lower the rating if Concordia's leverage rises above 9x. This would likely be the result of a combination of a large debt-financed acquisition and operational difficulties such as increased generic competition on key products, pricing pressure, or a lack of growth from new products or line extensions which causes organic revenue growth to stall or decline and results in a 500 basis point or more drop in gross margins.

We could raise the rating if the company demonstrates a track record of executing on its strategy, which is acquisition driven, while maintaining leverage below 6x. In order for the company to accomplish this, we believe Concordia has to generate solid, sustainable organic revenue growth.

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