S&P Lowers Outlook on Endo Int'l (ENDP) to Negative; Ratings Affirmed

S&P Global Ratings affirmed its 'B+' corporate credit rating on pharmaceutical company Endo International PLC (Endo) (Nasdaq: ENDP) and revised the outlook to negative from stable.

"The negative outlook reflects disruption to the company's 2016 free cash flow generation and slower deleveraging than we expected as a result of the sudden weakening of its generic franchise, increased litigation costs, and other negative developments," said S&P Global Ratings credit analyst Kim Logan. We now expect adjusted leverage to remain around 8x (including litigation charges) in 2016 with no material reduction until after 2017. At the same time, we see increased risk to our base-case projections as a result of increased competitive pressures and the possibility of additional legal settlements.

The company previously faced a higher-than-expected number of claims for mesh cases, which resulted in an $834 million accrual in the fourth quarter. There is risk that legal expenses could significantly increase, further challenging the company's free cash flow generation.

Our negative outlook reflects the weakened generic franchise and our view that the company's deleveraging pace will be slower than we expected as a result of our expectation for negative free cash flow in 2016. While we are expecting free cash flow to rebound to over $200 million in 2017 due to nonrecurrence of certain costs, the risks to our base case are that legal expenses could significantly increase, further challenging the company's free cash flow generation, while accelerated pressure on generic pricing and volume from increased competition and further volume pressure on the pain relief segment could result in underperformance.

We could lower the rating if the company's cash flows weaken materially beyond our expectations as a result of increased competitive pressure or significant litigation costs. Operating performance deterioration that results in revenue underperformance and margin erosion (such as flat revenues with a 300 basis point to 400 basis point margin decline) and or minimal free cash flow (under $100 million) could also lead to a lower rating.

We could revise the rating back to stable if we gain confidence that management can navigate the competitive challenges in the generics industry and achieve our base case expectations with organic revenue growth and stable margins, reducing adjusted leverage to under 7x.

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