Moody's Affirms Endo's (ENDP) CFR, Ba2-PD PoD; Changes Outlook to Negative
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Moody's Investors Services affirmed the ratings of Endo Health Solutions Inc. (Nasdaq: ENDP) including the Ba2 Corporate Family Rating and Ba2-PD Probability of Default Rating. At the same time, Moody's revised Endo's rating outlook to negative from stable. Moody's also affirmed Endo's senior secured bank facilities at Baa3, senior unsecured notes at Ba3 and the SGL-2 Speculative Grade Liquidity Rating.
Ratings affirmed:
Ba2 Corporate Family Rating
Ba2-PD Probability of Default Rating
Baa3 (LGD2, 19%) Senior secured revolving credit facility
Baa3 (LGD2, 19%) Senior secured Term Loan A
Baa3 (LGD2, 19%) Senior secured Term Loan B
Ba3 (LGD5, 71%) Senior unsecured notes
SGL-2 Speculative Grade Liquidity Rating
The outlook revision to negative from stable reflects rising exposure to vaginal mesh product safety litigation as well as continuing challenges in restoring organic growth rates. Endo disclosed approximately 5,100 mesh lawsuits as of February 2013, compared to 2,960 lawsuits as of October 31, 2012. Meanwhile, growth challenges will persist beyond the upcoming introduction of a Lidoderm generic expected in September 2013 because of various pressures and uncertainties affecting key Endo products. These include the recent launch of generic, non-tamper resistant (non AB-rated) Opana ER, the potential for a second generic competitor to launch Lidoderm, and challenges in growing women's health sales. Amidst these uncertainties, Endo recently underwent a change in the CEO position. Although it is too early to assess the implications of the transition, Moody's believes that shifts in strategic direction cannot be ruled out.
RATINGS RATIONALE
Endo's Ba2 Corporate Family Rating reflects its modest size and scale relative to larger pharmaceutical peers, partially offset by the company's solid market positioning as a niche player in the pain market and by its revenue diversity across branded drugs, generic drugs and medical devices and services. Endo's expertise in pain drugs and its good compliance with US Drug Enforcement Agency (DEA) regulations act as high barriers to entry, also a credit strength. However, the ratings also reflect limited geographic diversity with a substantial majority of Endo's sales derived in the US. Concentration in Lidoderm is high at over 30% of net sales (albeit declining as a portion of the total), a constraint on the rating given a generic entrant will enter the market in September 2013 per a settlement agreement with Actavis. Debt/EBITDA of approximately 3.1 times is somewhat high given Endo's revenue concentration in Lidoderm and its exposure to litigation including the unresolved Department of Justice (DOJ) investigation into promotional practices for Lidoderm and a rising number of vaginal mesh product liability cases.
Moody's expects Endo to continue deleveraging towards its publicly stated target of debt/EBITDA of below 2.5 times, calculated on a basis that nets $250 million of cash.
Endo's SGL-2 speculative grade liquidity rating reflects Moody's expectation for good free cash flow, an undrawn $500 million revolving credit facility, and adequate cushion under financial covenants that tighten during 2013. Liquidity will be negatively impacted in 2013 by a $102 million payment to Impax Laboratories, and potentially by the DOJ investigation into Lidoderm marketing practices. Endo recently increased its reserve related to this matter from $53 million to $194 million.
Although not expected in the near term, Moody's could upgrade Endo's ratings if the company substantially increases its size, scale and diversification while sustaining conservative credit metrics including gross debt/EBITDA below 2.5 times. Further, uncertainties related to the impact of vaginal mesh litigation would need to be more clear. Conversely, Moody's could downgrade Endo's ratings if gross debt/EBITDA is sustained above 3.0 times. This scenario could occur if Endo ceases debt repayment, performs debt-financed M&A, or faces substantial litigation cash outflows.
Headquartered in Malvern, Pennsylvania, Endo Health Solutions is a U.S.-focused specialty healthcare company offering branded and generic pharmaceuticals, medical devices and services. Endo's key areas of focus include pain management, urology, oncology and endocrinology. In 2012 Endo reported net revenues of approximately $3.0 billion.
The principal methodology used in this rating was the Global Pharmaceutical Industry published in December 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Ratings affirmed:
Ba2 Corporate Family Rating
Ba2-PD Probability of Default Rating
Baa3 (LGD2, 19%) Senior secured revolving credit facility
Baa3 (LGD2, 19%) Senior secured Term Loan A
Baa3 (LGD2, 19%) Senior secured Term Loan B
Ba3 (LGD5, 71%) Senior unsecured notes
SGL-2 Speculative Grade Liquidity Rating
The outlook revision to negative from stable reflects rising exposure to vaginal mesh product safety litigation as well as continuing challenges in restoring organic growth rates. Endo disclosed approximately 5,100 mesh lawsuits as of February 2013, compared to 2,960 lawsuits as of October 31, 2012. Meanwhile, growth challenges will persist beyond the upcoming introduction of a Lidoderm generic expected in September 2013 because of various pressures and uncertainties affecting key Endo products. These include the recent launch of generic, non-tamper resistant (non AB-rated) Opana ER, the potential for a second generic competitor to launch Lidoderm, and challenges in growing women's health sales. Amidst these uncertainties, Endo recently underwent a change in the CEO position. Although it is too early to assess the implications of the transition, Moody's believes that shifts in strategic direction cannot be ruled out.
RATINGS RATIONALE
Endo's Ba2 Corporate Family Rating reflects its modest size and scale relative to larger pharmaceutical peers, partially offset by the company's solid market positioning as a niche player in the pain market and by its revenue diversity across branded drugs, generic drugs and medical devices and services. Endo's expertise in pain drugs and its good compliance with US Drug Enforcement Agency (DEA) regulations act as high barriers to entry, also a credit strength. However, the ratings also reflect limited geographic diversity with a substantial majority of Endo's sales derived in the US. Concentration in Lidoderm is high at over 30% of net sales (albeit declining as a portion of the total), a constraint on the rating given a generic entrant will enter the market in September 2013 per a settlement agreement with Actavis. Debt/EBITDA of approximately 3.1 times is somewhat high given Endo's revenue concentration in Lidoderm and its exposure to litigation including the unresolved Department of Justice (DOJ) investigation into promotional practices for Lidoderm and a rising number of vaginal mesh product liability cases.
Moody's expects Endo to continue deleveraging towards its publicly stated target of debt/EBITDA of below 2.5 times, calculated on a basis that nets $250 million of cash.
Endo's SGL-2 speculative grade liquidity rating reflects Moody's expectation for good free cash flow, an undrawn $500 million revolving credit facility, and adequate cushion under financial covenants that tighten during 2013. Liquidity will be negatively impacted in 2013 by a $102 million payment to Impax Laboratories, and potentially by the DOJ investigation into Lidoderm marketing practices. Endo recently increased its reserve related to this matter from $53 million to $194 million.
Although not expected in the near term, Moody's could upgrade Endo's ratings if the company substantially increases its size, scale and diversification while sustaining conservative credit metrics including gross debt/EBITDA below 2.5 times. Further, uncertainties related to the impact of vaginal mesh litigation would need to be more clear. Conversely, Moody's could downgrade Endo's ratings if gross debt/EBITDA is sustained above 3.0 times. This scenario could occur if Endo ceases debt repayment, performs debt-financed M&A, or faces substantial litigation cash outflows.
Headquartered in Malvern, Pennsylvania, Endo Health Solutions is a U.S.-focused specialty healthcare company offering branded and generic pharmaceuticals, medical devices and services. Endo's key areas of focus include pain management, urology, oncology and endocrinology. In 2012 Endo reported net revenues of approximately $3.0 billion.
The principal methodology used in this rating was the Global Pharmaceutical Industry published in December 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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